NESTLE USA, INC., )
v. ) Appeals Number 00-10006, 00-10007 & 00-10008
MAURICE M. GOGARTY, ASSESSOR, )
ST. LOUIS COUNTY, MISSOURI, )
DECISION AND ORDER
Decision of the St. Louis County Board of Equalization sustaining the assessments made by the Assessor, SET ASIDE, Hearing Officer finds true value in money for the subject properties for tax year 2000 to be as follows:
Appeal No. 00-10006 $1,091,855, assessed value of $363,952.
Appeal No. 00-10007 $1,460,802, assessed value of $486,934.
Appeal No. 00-10008 $3,185,830, assessed value of $1,061,943.
Complainant appeared by Counsel, Thomas L. Caradonna, St. Louis, Missouri.
Respondent appeared by Counsel, Paula J. Lemerman, Associate County Counselor.
Case heard and decided by Chief Hearing Officer, W. B. Tichenor.
The Commission takes these appeals to determine the true value in money for the subject properties on January 1, 2000.
Complainant appeals the decisions of the St. Louis County Board of Equalization (Board) which sustained the valuation of the subject properties in each appeal. The Respondent determined an appraised value in Appeal 00-10006 of $3,388,200 (assessed value of $1,129,400, as personal property – furniture, machinery, tools, manufacturing and office equipment). The Respondent determined an appraised value in Appeal 00-10007 of $5,370,690 (assessed value of $1,790,230, as personal property – furniture, machinery, tools, manufacturing and office equipment). The Respondent determined an appraised value in Appeal 00-10008 of $7,144,050 (assessed value of $2,381,350, as personal property – furniture, machinery, tools, manufacturing and office equipment).
A hearing was conducted on July 25, 2001, at the St. Louis County Government Center, Clayton, Missouri.
The Hearing Officer, having considered all of the competent evidence upon the whole record, enters the following Decision and Order.
Complainant offered into evidence in each appeal the appraisal report (Exhibit A) and written direct testimony (Exhibit B) of Allen D. Bealmear, ASA, CEA, President of MB Valuation Services. Exhibit C, a cost and sales comparison illustration of valuation referenced in the written direct testimony of Mr. Bealmear, was prefiled with Exhibit B. All exhibits were receive into evidence. Mr. Bealmear was cross-examined by Respondent’s Counsel, and that testimony, as well as testimony in response to questions by the Hearing Officer, in redirect examination and in rebuttal, constitute part of the record in this appeal.
Mr. Bealmer presented his opinion of value for the property under appeal in each case. His opinion of value for the individual cases were as follows: Appeal No. 00-10006, $2,999,940; Appeal No. 00-10007, $1,460,702; and Appeal No. 00-10008, $3,185,730.
Respondent offered into evidence the following exhibits in each appeal:
Exhibit 1 Appraisal Report, with Exhibits 1 through 5 attached, of Larry Davis, Revenue Field Auditor for St. Louis County, Missouri.
Exhibit 2 Written Direct Testimony of Mr. Davis.
Exhibit 3 Written Direct Testimony of Richard Haubrick, Revenue Field Auditor Supervisor for St. Louis County, Missouri.
Exhibit 4 The Construction in Progress document for each of the subject properties (Appeal 00-10006 – Exhibit 4A; Appeal 00-10007 – Exhibit 4B; and Appeal 00-10008 – Exhibit 4C).
All the exhibits were received into evidence. Mr. Davis was cross-examined by Complainant’s Counsel and his testimony under cross-examination, testimony in response to questions by the Hearing Officer and in redirect examination, constitute part of the record in this appeal.
Mr. Davis offered his opinion of value for the property under appeal in each case. His opinion of value for the individual cases were as follows: Appeal No. 00-10006, $2,999,940; Appeal No. 00-10007, $5,269,400; and Appeal No. 00-10008, $7,346,390.
FINDINGS OF FACT
Appeal 00-10006 – Affton West Location
1. The subject property in Appeal 00-10006 consists of approximately 585 individual items of furniture, office machines and equipment, machinery, tools and manufacturing equipment. The property is identified by the Respondent’s account number M0007934A for tax year 2000. The property is located at 8064 Chivvis Dr, St. Louis County, Missouri. The facility in which the items of personal property are located is known as the Affton West facility. These individual items of property make up and constitute the manufacturing operation of Complainant. A complete listing of the items of property under appeal is found in Exhibit A – 00-10006, pp. 18-48.
2. Complainant’s appraiser valued approximately 581 of the items of property relying on comparative sales data, and 4 of the items (Items 49, 50, 255 & 371 – Total appraised value of $103,500) relying on a discounted cost analysis or replacement cost new, less depreciation method. Exhibit A, pp. 10-11, pp. 18-48; Exhibit C.
Appeal 00-10007 – Affton South Location
3. The subject property in Appeal 00-10007 consists of approximately 5,146 individual items of furniture, office machines and equipment, machinery, tools and manufacturing equipment. The property is identified by the Respondent’s account number M0029160A for tax year 2000. The property is located at 8155 New Hampshire Ave., St. Louis County, Missouri. The facility in which the items of personal property are located is known as the Affton West South. These individual items of property make up and constitute the manufacturing operation of Complainant. A complete listing of the items of property under appeal is found in Exhibit A – 00-10007, pp. 18-71.
4. Complainant’s appraiser valued all of the items of property relying on comparative sales data. Exhibit A, pp. 10-11, pp. 18-71; Exhibit C.
Appeal 00-10008 – Affton North Location
5. The subject property in Appeal 00-10008 consists of approximately 1,043 individual items of furniture, office machines and equipment, machinery, tools and manufacturing equipment. The property is identified by the Respondent’s account number M0087349A for tax year 2000. The property is located at 8121 New Hampshire Ave., St. Louis County, Missouri. The facility in which the items of personal property are located is known as the Affton North facility. These individual items of property make up and constitute the manufacturing operation of Complainant. A complete listing of the items of property under appeal is found in Exhibit A – 00-10008, pp. 18-76.
6. Complainant’s appraiser valued approximately 1,007 of the items of property relying on comparative sales data, and 36 of the items (Items 238, 244, 245, 246, 247(2), 248, 249, 250, 255, 266, 267, 268, 269, 270(4), 271(4), 276, 277, 278, 280, 284, 285, 286, 288, 289, 291(2), 292(2) & 293 – Total appraised value of $598,450) relying on a discounted cost analysis or replacement cost new, less depreciation methodology. Exhibit A, pp. 10-11, pp. 18-76; Exhibit C.
Factors Applicable to Each Appeal
7. Complainant’s appraiser valued the items of property based on the concept of fair market value – the estimated amount expressed in terms of money that may reasonably be expected for an item of property between a willing buyer and a willing seller with equity to both, neither under compulsion to buy or sell and both fully aware of all relevant facts. Exhibit A, p. 3, 9. Exhibit B, p. 7, Line 12 – p. 8, Line 9. This is the appropriate concept of value to be applied in the valuation of the property.
8. Personal property is valued based upon its true value in money. True value in money is value in exchange, not value in use or value installed. Value in use/installed may be, in a given case, the value in exchange if there is market data to so establish. There was no such market data presented in this appeal from which it could be established that value in use/installed was value in exchange.
9. Complainant’s appraiser conducted a personal inspection of the items of property being valued and confirmed that all of the items valued were at the particular facilities as of January 1, 2000. Exhibit A, pp. 7-8; Exhibit B, p. 6, Line 25 – p. 7, Line 11; Tr. 25, Line 25 – Tr. 27, Line 4; Tr. 34, Lines 8-11.
10. Complainant’s appraiser performed his appraisal in conformity with the Principles of Appraisal Practice and Code of Ethics of the American Society of Appraisers, and in conformity with the applicable standards of the Uniform Standards of Professional Appraisal Practice (USPAP). Exhibit A, p. 4; Exhibit B, p. 22, Lines 10-15.
11. The concept of highest and best use was considered by the appraiser in his valuation of the subject property in accordance with Standard 7, Subsection 3(a) of USPAP. The subject items of furniture, machinery, tools and equipment were being utilized for the purpose designed by the manufacturer, and therefore were being utilized in the reasonably probable and legal use that is physically possible, appropriately supported and financially feasible, and resulted in the highest value in the appropriate marketplace. Exhibit A, pp. 4, 6 & 8; Exhibit B, p. 10, Line 13 – p. 11, Line 13. None of the items of machinery, tools and equipment have any special or unique characteristics which would require that they be valued as a unit or whole rather than individually. Exhibit B, p. 8, Lines 10-23.
12. The principle of substitution is that a prudent buyer will not pay more for a property than the cost of acquiring a substitute property of equivalent utility. The principle can be applied to either an individual asset or to an entire facility. The principle applies in either a cost, sales comparison or income approach. Valuing Machinery and Equipment, Machinery and Technical Specialities Committee of the American Society of Appraisers, 2000, pp. 45, 115; Appraising Machinery and Equipment, Machinery and Equipment Textbook Committee of the American Society of Appraisers, John Alico, Editor, 1989, p. 81; Exhibit 1, p. 7.
13. Complainant’s appraiser relied upon the MB Data Base in his appraisal. The MB Data Base is made up of a multitude of research data sources, including purchase price new from a manufacturer, dealers’ asking and selling prices, auction sales and any other type of transaction which can be gathered. This data base is a large data resource computer program which has sales information posted to it daily of all kinds of equipment from the various sources. The database has the condition of items of sale machinery and equipment when it is known. The database identifies the type of sale, equipment being sold, date of sale, location of sale, and auctioneer from sale brochures on the various auctions. Information from the database can be sorted by categories of equipment type and model. Each equipment category has data posted which can then be retrieved for use in appraising such individual items of machinery and equipment. The sources utilized in the MB Data Base are sources that the appraiser is familiar with and that he has found to be reliable over his years of appraisal practice. The sources used in the data base are sources that are generally accepted by the appraisal community as reliable. Other appraisers use the MB Data Base as a resource in performing their appraisals. Exhibit A, pp. 5 & 17, Exhibit B, p. 18, Line 14 – p. 21, Line 4; Tr. 33, Line 18 – Tr. 34, Line 7;
14. Complainant’s appraiser also utilized recognized pricing guides, sources and catalogues as research data sources. Contacts were made to manufacturers of various items of machinery and equipment being appraised. Exhibit A, p. 17.
Finding of Value in Each Appeal
15. Complainant’s evidence was substantial and persuasive to rebut the presumption of correct assessment by the Board in each appeal and to establish the true value in money of the subject property under appeal as of January 1, 2000, to be as follows:
Appeal 00-10006 $1,091,755
Appeal 00-10007 $1,460,702
Appeal 00-10008 $3,185,730
16. Respondent’s evidence was not substantial and persuasive to rebut the presumption of correct assessment by the Board and to establish the true value in money of the subject property under appeal as of January 1, 2000, to be as proposed in any of the appeals.
17. The value of supplies reported by Complainant as $100, in each appeal, was not at issue.
19. The total true value in money of the subject furniture, machinery, tools, equipment, vehicles and supplies as of January 1, 2000, in Appeal 00-10006 was $1,091,855, assessed value of $363,952.
20. The total true value in money of the subject furniture, machinery, tools, equipment, vehicles and supplies as of January 1, 2000, in Appeal 00-10007 was $1,460,802, assessed value of $486,934.
21. The total true value in money of the subject furniture, machinery, tools, equipment, vehicles and supplies as of January 1, 2000, in Appeal 00-10008 was $3,185,830, assessed value of $1,061,943.
CONCLUSIONS OF LAW
The Commission has jurisdiction to hear this appeal and correct any assessment which is shown to be unlawful, unfair, arbitrary or capricious. Article X, section 14, Mo. Const. of 1945; Sections 138.430, 138.431, RSMo. The hearing officer shall issue a decision and order affirming, modifying or reversing the determination of the board of equalization, and correcting any assessment which is unlawful, unfair, improper, arbitrary, or capricious. Section 138.431.4, RSMo.
There is a presumption of validity, good faith and correctness of assessment by the Board. Hermel, Inc. v. STC, 564 S.W.2d 888, 895 (Mo. banc 1978); Chicago, Burlington & Quincy Railroad Co. v. STC, 436 S.W.2d 650, 656 (Mo. 1968); May Department Stores Co. v. STC, 308 S.W.2d 748, 759 (Mo. 1958).
Standard for Valuation
Section 137.115, RSMo 1994, requires that property be assessed based upon its true value in money which is defined as the price a property would bring when offered for sale by one willing or desirous to sell and bought by one who is willing or desirous to purchase but who is not compelled to do so. St. Joe Minerals Corp. v. State Tax Commission, 854 S.W.2d 526, 529 (Mo. App. E.D. 1993); Missouri Baptist Children’s Home v. State Tax Commission, 867 S.W.2d 510, 512 (Mo. banc 1993). It is the fair market value of the subject property on the valuation date. Hermel, Inc. v. State Tax Commission, 564 S.W.2d 888, 897 (Mo. banc 1978). True value in money is defined in terms of value in exchange and not value in use. Stephen & Stephen Properties, Inc. v. STC, 499 S. W.2d 798, 801-802 (Mo. 1973); Equitable Life Assurance v. Morton, 852 S.W.2d 376 (380) (Mo. 1993).
Complainant’s Burden of Proof
In order to prevail, Complainant must present an opinion of market value and substantial and persuasive evidence the proposed value is indicative of the market value of the subject property on January 1, 2000. Hermel, Inc. v. State Tax Commission, 564 S.W.2d 888, at 897. Substantial evidence can be defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. See, Cupples-Hesse Corporation v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959). Persuasive evidence is that evidence which has sufficient weight and probative value to convince the trier of fact. The persuasiveness of evidence does not depend on the quantity or amount thereof but on its effect in inducing belief. Brooks v. General Motors Assembly Division, 527 S.W.2d 50, 53 (Mo. App. 1975).
Respondent’s Burden of Proof
In an appeal where Respondent presents an opinion of value different from that determined by the Board, substantial and persuasive evidence must be presented to rebut the Board presumption and establish the value proposed. Hermel, supra.
Weight to be Given Evidence
The Hearing Officer is not bound by any single formula, rule or method in determining true value in money, but is free to consider all pertinent facts and estimates and give them such weight as reasonably they may be deemed entitled. The relative weight to be accorded any relevant factor in a particular case is for the Hearing Officer to decide. St. Louis County v. Security Bonhomme, Inc., 558 S.W.2d 655, 659 (Mo. banc 1977); St. Louis County v. STC, 515 S.W.2d 446, 450 (Mo. 1974); Chicago, Burlington & Quincy Railroad Company v. STC, 436 S.W.2d 650 (Mo. 1968).
Trier of Fact
The Hearing Officer as the trier of fact may consider the testimony of an expert witness and give it as much weight and credit as she may deem it entitled to when viewed in connection with all other circumstances. The Hearing Officer is not bound by the opinions of experts who testify on the issue of reasonable value, but may believe all or none of the expert’s testimony and accept it in part or reject it in part. St. Louis County v. Boatmen’s Trust Co., 857 S.W.2d 453, 457 (Mo. App. E.D. 1993); Vincent by Vincent v. Johnson, 833 S.W.2d 859, 865 (Mo. 1992); Beardsley v. Beardsley, 819 S.W.2d 400, 403 (Mo. App. 1991); Curnow v. Sloan, 625 S.W.2d 605, 607 (Mo. banc 1981).
Opinion Testimony by Experts
If specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert on that subject, by knowledge, skill, experience, training, or education, may testify thereto.
The facts or data upon which an expert bases an opinion of inference may be those perceived by or made known to the expert at or before the hearing and must be of a type reasonably relied upon by experts in the field in forming opinion or inferences upon the subject and must be otherwise reliable, the facts or data need not be admissible in evidence. Section 490.065, RSMo; Courtroom Handbook on Missouri Evidence, Wm. A. Schroeder, Sections 702-505, pp. 325-350; Wulfing v. Kansas City Southern Industries, Inc., 842 S.W.2d 133 (Mo. App. E.D. 1992).
Complainant Proved Value
Complainant’s evidence presented an opinion of value based on the concept of fair market value or value in exchange. This concept of value as employed by Complainant’s appraiser presents a methodology which is proper, fair, not arbitrary, not capricious and is lawful under Missouri statutes, Commission regulations and case law. This is the recognized standard under Missouri case law. Section 138.430, RSMo. A listing of recent cases following this standard can be found at the end of this decision (End Note – hereinafter cited as P. D. George et al).
Valuing what a knowledgeable buyer and seller would give in exchange for the individual items of property and totaling the values avoids conjecture and speculation. Complainant’s appraisal clearly demonstrated that there is reliable sales data available on virtually all of the subject items (6734 out of 6774 total items of property – 99.41%). The sales data establishes the prices at which the various individual items of property are selling in the market. From such data, a clear indication of the value for the various pieces of machinery, tools and equipment can be developed.
Mr. Bealmear’s opinion of value is based upon reliable and appropriate data. He correctly valued the property relying upon the value in exchange concept recognized under Missouri case law, statutes, Commission regulations and decisions. His appraisal methodology and resulting final opinion are based upon a reasonable degree of appraisal standards certainty. Therefore, Complainant has met its burden of proof to establish the true value in money for the subject property as proposed in each of these appeals. To each of the value amounts is added $100 for supplies (See, Finding of Fact 17, supra.), to arrive at the total true value in money for the property in each appeal.
The data relied upon by Mr. Bealmear demonstrates that the market for the hundreds of pieces of machinery, tools and equipment that comprise the subject property consists of all types of sales transactions, direct and indirect (direct sale – sale to ultimate end user; indirect sale – sale to used equipment dealer). The fact that some sales, or even a large number of the sales relied upon, are auction sales, either consignment, orderly liquidation or forced liquidation, does not render such sales invalid for developing an opinion of value. Such sales are not the same as forced sales for taxes or mortgage foreclosures in real property cases. The market world for items of machinery, tools and equipment consists of new equipment sales, recondition equipment sales, orderly liquidations, forced (bankruptcy) sales, excess equipment sales and auctions.
This diversity of types of transactions does not render use of data derived from such sales invalid or inappropriate. This market arena, with its mixed information base, is where real transactions occur each day. It is the responsibility of the appraiser when faced with an appraisal problem such as the present one, to explore and analyze this market arena to extract the most reliable data to utilize in his appraisal. It is the responsibility of the appraiser to make the appropriate upward or downward adjustments to such sales data to arrive at an opinion of value for the particular item of property being valued. Such adjustments are made in large part based on the experience which the individual appraiser is able to bring to bear in a given appraisal assignment. Complainant’s appraiser made appropriate adjustments for the various types of sales which were utilized in the appraisal relying upon his education, training and experience. Mr. Bealmear is a well trained and experienced appraiser having more than 28 years of experience in valuing machinery, tools and equipment. Furthermore, his firm is able to rely upon the vast experience of other appraisers (Karen Miles Milan, ASA, 15 years appraisal experience, H. W. Choate, ASA) and their education, training and experience, as well as a trained research staff which provides assistance in data collection and analysis. Exhibit A, pp. 72 & 74; Exhibit B, p. 19, Lines 6-15, 24 – p. 20, Line 16. The staff of MB Valuation Services monitors sales of machinery and equipment by on-site attendance at the sale. Questionnaires are filled out regarding information relating to the number of attendants, number of active bidders, type of bidders (end users or used equipment dealers), conduct of auctioneers, handling of the crowd, and the weather. These are all factors which could affect the results of the sale. The information for sales is entered into the databank in order that relevant factors can be considered when adjustments are made to comparables. Tr. 33, Line 1 – Tr. 34, Line 7.
If there is another market arena where sales of the multitude of individual items which comprise the subject property in this appeal sell together in an assembled manner, then it would, of course, be appropriate for the appraiser to explore, investigate and analyze the sales which occur in that market. It would, in fact, be his responsibility to do so in order to arrive at an appropriate opinion of value. However, there is no evidence in this record of such a market.
In the absence of such evidence, it would amount to pure speculation and conjecture for either the appraiser or this Hearing Officer to attempt to arrive at a valuation of the subject property under such a hypothetical market condition. Accordingly, the evidence of sales brought forward by Mr. Bealmear is substantial and persuasive evidence as to what the hundreds of items of machinery, tools and equipment which make up the subject property are selling for in the only market for which evidence was presented
The experience and record of the Commission in addressing valuation of machinery, tools and equipment in twenty separate appeals (P. D. George, et al, infra) has clearly shown, without any contradictory evidence, that the auction market is a major component of the arena in which used machinery, tools and equipment are bought and sold throughout the United States. Nothing was presented in the present appeal which demonstrates in any way, shape or form that there is another market arena, level of trade for used machinery and equipment, from which Mr. Bealmear should have drawn sales data. The data base which is utilized by Mr. Bealmear in addition to information received from transactions at auctions also includes used equipment dealer’s asking and selling prices.
Willing Seller/Willing Buyer and Machinery and Equipment Auctions
The definition of fair market value (true value in money – Section 137.115, RSMo) utilized by the experts for both parties in this appeal is the estimated amount expressed in terms of money that may reasonably be expected for an item of property between a willing buyer and a willing seller with equity to both, neither under compulsion to buy or sell and both fully aware of all relevant facts. In other words, in attempting to value a given item of machinery, or even an assembled group of machinery and equipment, a hypothetical sale between a willing buyer and seller of the property being valued is assumed. In some minds, this translates to a prohibition against the use of any sales data which does not also involve a willing seller and a willing buyer, or, that per se any auction sale is inappropriate and cannot be used. Such a conclusion is in error.
In the field of real estate appraisal, appraisers do not rely upon tax sales as a comparable sale. In most instances, a mortgage foreclosure sale of real estate would not be utilized as a comparable sale. In both cases the seller is not considered to be a willing seller. In addition, however, there are other factors which weigh against using a tax or foreclosure sale in real estate appraisals. In a tax sale, all that is being sought is recovery of taxes owed and expenses of the sale. In a foreclosure sale, recovery of the outstanding debt and expenses of sale is what is being sought. In tax and foreclosure real estate sales, the exposure to the market is greatly limited, consisting of generally a legal notice in the local newspaper and posted at the courthouse. Furthermore, in real estate appraisal there is generally sufficient market data outside of tax and foreclosure sales from which sales data can be extracted.
In the realm of machinery and equipment auctions there are significant differences from real estate tax or foreclosure auctions. If a machinery and equipment auction involves a bankruptcy, the bankrupt owner is, of course, being forced to sell. However, the trustee in bankruptcy is under an obligation to protect creditors by obtaining the best price possible when assets are sold. The record in this appeal and in other similar cases (P. D. George, infra) which have come before the Commission, clearly and convincingly establishes that vast amounts of various machinery, tools and equipment used in a multitude of manufacturing operations and facilities are bought and sold on a continuing basis throughout the nation in auction sales. This is a recognized level of trade for used machinery and equipment which can be utilized in valuing machinery and equipment. Valuing Machinery and Equipment, Chapter 4 – Sales Comparison Approach, pp. 115-155.
The very nature of a machinery and equipment auction is for the entity conducting the auction to expose the items to be sold to as large a group of buyers as possible through the advertising of the sale. The auctioneer is motivated to obtain the highest sale price possible, since compensation to the auctioneer is based upon a percentage of sale price. This is the case whether the sale involves a forced liquidation or not. In other words, the auctioneer does not seek to get a lower price for sale items simply because there may be a forced liquidation.
In many states, there is a Deceptive Trade Practice Act which prohibits public offerings of machinery and equipment for sale without disclosing everything the seller knows about the property. For the most part, auctioneers and sellers know the equipment being sold and they are aware if there is anything wrong with it. Sellers at auctions disclose if a machine is only a partial machine, without certain components or whether it was considered scrap or in poor condition. Bidders are also aware of such conditions. They do not buy out of ignorance. Tr. 34, Line 15 – Tr. 37, Line 3.
There is no evidence to even suggest that buyers at an auction will bid lower if it is a bankruptcy sale as opposed to a sale of excess machinery or a sale simply due to a plant closing. Basic reasoning establishes that bidding by potential buyers is not tied in any logical fashion to the seller’s motivation or circumstances which brought about the sale. Buyers at an auction, like buyers in any other sales arena, seek to buy at the lowest price. Auctioneers, as the selling agent for the seller, are seeking the highest price. Competing buyers increase the sale price by bidding against each other.
Any sale, auction or otherwise, of a given piece of machinery is valid to use as a comparable sale for a like piece of machinery if proper adjustments are made. Adjustments to comparable sales, whether in real property or personal property appraisals, are what brings the comparable to reflect market value and make the appropriate comparison to the subject. There is no set formula for each type of adjustment which might be made to a sale price for a given piece of machinery. It is not possible nor practical to set up a sales grid for each item of machinery and equipment in which the subject item of machinery or equipment would be compared to 4, 6, 8 or a dozen like items of property and each one adjusted on the various possible points of comparability for machinery and equipment. (See, Valuing Machinery and Equipment, Elements of Comparability, pp. 120-122). The adjustments which are required to be made are a product of the appraiser’s training and experience. Mr. Bealmear made adjustments to bring the sales data to the fair market value standard. Exhibit B, p. 18, Lines 6 – 13; Tr. 32, Line 23 – Tr. 33, Line 17. Exhibit C provides an illustration as to the sales data which would be utilized by the appraiser in conducting his sales comparison valuation. The Bealmear appraisal would be strengthened if some sample illustrations as to the kinds of adjustments which are made during his valuation process were also provided.
The credentials, testimony and other evidence on this record demonstrate that Mr. Bealmear is quite knowledgeable and experienced in the various elements of comparability which would need to be considered for making adjustments and conducting a proper appraisal. His testimony substantiated that in performing his appraisal he made relevant inquiries related to the subject items of machinery and equipment that are ordinarily and properly made. He had available, through his own research or that of his staff, essential and appropriate information relative to the sales used for comparison in the appraisal. In summary, it is reasonable to conclude that the Bealmear appraisal was conducted in such a manner as to be in accordance with the general frame work and guidelines one would expect for such an appraisal. Valuing Machinery and Equipment, supra, Chapter 4.
Principle of Substitution
Sales Comparison Approach
The valuation of the subject property by Complainant’s expert is in accordance with the principle of substitution for these particular assets. A well informed buyer will not pay more for items of property than the amount such property will command in a market with sufficient demand. Mr. Bealmear found sufficient sales to value nearly every single piece of machinery and equipment by the sales comparison approach. His appraisal demonstrates a market with sufficient demand for the various items of manufacturing property being valued in this appeal. The Bealmear illustrations and supporting data (Exhibit C) show that he generally had four or more sales of items of machinery and equipment to use to arrive at an indicated value for each of the 6,734 items of machinery and equipment valued under the sales comparison approach in the three combined appeals. The Hearing Officer concludes from the testimony of the expert that there were in all likelihood a larger number than 4 to 6 sales for many of the individual items, however, the appraiser selected those sales which were most like the subject item being valued. Exhibit B, p. 17, Line 14 – p. 18, Line 5.
The sales information utilized by Mr. Bealmear demonstrates what informed buyers are paying for the various items of machinery and equipment. One of the strengths of drawing from such sales data is that the appraiser is dealing with actual transactions for the purchase of like machinery, whether by an end user or a used equipment dealer for resale. Actual sales data provides a firm foundation from which the trained and experienced appraiser can make appropriate adjustments to arrive at an opinion of what price the item of property being valued would demand in an open and active market.
In those few instances (40 items of machinery) in two of the three appeals, where Complainant’s expert was unable to find adequate sales of machinery and equipment, he arrived at an opinion of value using the cost approach. In developing his cost approach, Mr. Bealmear would obtain the replacement cost new as of the effective date for the appraisal (valuation date – January 1, 2000) from the manufacturer of the particular item of machinery or equipment. If the appraiser was unable to obtain a replacement cost new from the manufacturer, he would attempt to determine the date of acquisition and purchase price and make appropriate adjustments for the difference in time between its original purchase and the valuation date. From the replacement cost new, either obtained from the manufacturer or calculated from original acquisition costs, deductions were made for physical, functional and economic obsolescence. Exhibit A, p. 10; Exhibit B, p. 14, Line 13 – p. 16, Line 22.
The adjustment for physical depreciation is made based upon the actual inspection of each item of machinery and equipment and discussions with plant personnel, if necessary, regarding the physical condition. Functional depreciation can be anything such as a different model from which would be purchased new, difference in speed, capacity, type of controls, energy consumption, technological changes or any other factor which might be considered an obsolescence factor when compared to a new piece of equipment. Economic obsolescence is a deduction that is made for factors which affect the value of an item of machinery outside of the specific piece of property. It could include style of machine, demand for specific equipment or demand for the product which the machine produces, or other factors outside the given machine. The appraiser can contact the manufacturer to investigate demand for a given piece of equipment to determine economic obsolescence. It can also be calculated by looking at equipment of a similar type and comparing the market price for such equipment to the cost new to calculate economic obsolescence where physical and functional obsolescence are known. Information available to Mr. Bealmear through his data sources provides information from the market to assist in adjusting for the three types of obsolescence in performing his cost approach. Exhibit A, p. 10; Exhibit B, p. 14, Line 13 – p. 17, Line 8; The cost methodology employed by Mr. Bealmear for the limited number of items valued under this approach appears to be within the parameters and guidelines for developing a cost approach as applicable in this appraisal problem generally recognized by the machinery and equipment appraisal community. Valuing Machinery and Equipment, supra, Chapter 3, pp. 45-113.
Respondent’s Valuation Not Persuasive
Mass Valuation Appraisal
Respondent’s appraiser, Mr. Davis, elected to perform a mass valuation of the subject property relying on a set of depreciation tables for various categories of the subject property. Tr. 70, Lines 12-13.
In performing his valuation, Mr. Davis relied upon the asset list shown by Exhibit 2 to Exhibit 1 to value the property under appeal. Mr. Davis totaled the acquisition costs for the various categories of property (Furniture & Fixtures, Computer Equipment, and Machinery & Equipment) by year of acquisition and then multiplied each total acquisition cost by a depreciation percentage based upon the year of acquisition. The basic methodology was the same as the appraiser would have used for any taxpayer in St. Louis County under the County’s mass appraisal system. He utilized the depreciation factors set forth on the Personal Property & Manufacturer’s Equipment Declaration (Exhibit 1 to Exhibit 1) for all items except computer and peripheral equipment, and for those items used depreciation factors from a study performed by the NACOMEX company. Exhibit 1, pp. 9 and 11-13; Exhibit 5 to Exhibit 1, p. 3, Schedule 8; Tr. 51, Line 23 – Tr. 54, Line 4; Tr. 58, Line 15 – Tr. 59, Line 19; Tr. 62, Lines 8-20.
In conducting his valuation of the subject property, Mr. Davis did not determine what it would cost to replace each individual item of personal property new as of January 1, 2000, nor what it would cost to replace the assembled furniture, fixtures, office machines, computers, computer peripheral equipment, manufacturing equipment, etc. He did not make a specific analysis and determination of physical, functional or economic depreciation or obsolescence for each item of property or for the assembled items of property. The appraiser did not make an itemized listing of the various items of property for each category and for each year based upon an inspection and inventory of the Complainant’s facility. He did not make any effort to verify whether any of the items on the asset list (Exhibit 2 to Exhibit 1) were at the facility as of January 1, 2000. Exhibit 1; Tr. 58, Line 22 – Tr. 59, Line 19.
Proper Cost Methodology
The proper methodology for developing an estimate of value relying on the cost approach starts with a determination of replacement cost new for an item of property as of the date of valuation. The next step is to address the issue of physical depreciation for the item of property and make an appropriate deduction. Functional obsolescence for the property must then be analyzed and an adjustment made for this factor. Finally, the matter of economic obsolescence must be considered and investigated so that a proper adjustment can be made. Valuing Machinery and Equipment, supra, Chapter 3, p. 45.
This is not the methodology utilized by Respondent’s appraiser. The cost approach relied upon by Respondent starts with original costs and allegedly trends the cost to estimate current replacement cost and then makes deductions for the elements of physical, functional and economic depreciation. All of this is supposed to be contained in the composite factor which is the combination of a trending factor used to develop a reproduction cost new and the remaining economic life, commonly referred to as the percent good after the deduction for depreciation. The composite factor is also called the original cost multipliers. These original cost multipliers are a tool commonly used by assessors in mass valuations of personal property. The original cost multipliers are the percentage factors in the individual depreciation tables used by Mr. Davis in Exhibit 1 and Exhibits 1 and 5 to Exhibit 1.
Under this trending/depreciation of original costs all machinery and equipment purchased in a given year is trended and depreciated at exactly the same rate. This is true irrespective of whether the item of machinery and equipment is a barrel dolly, a ladder, a bandsaw or a shop table (all items of machinery and equipment included in the subject property). Neither the appraisal of Mr. Davis, nor his testimony establishes the trending factor for any given year or the basis, analysis or research to develop the unknown trending factors. Nor does Respondent’s evidence establish the basis, analysis or research to develop the unknown depreciation factors for each year. All of this weighs in on the side of unpersuasive when considering Respondent’s valuation.
Trending in Cost Approach
Respondent’s methodology is further unpersuasive due to its variance from accepted appraisal practice. The trending factor (whatever it may be for a given year) has been applied by Mr. Davis and by Respondent in the original mass valuation to original cost. Trending is applied not to the original cost but to the historic cost. Historical cost is the cost of a property when first placed in service by its first owner. Original cost is the actual cost of a property when acquired by the present owner. In some instances historical and original cost may, of course, be the same. Valuing Machinery and Equipment, supra, Chapter 3, p. 62.
Trending can easily lead to errors in valuation. Trending does not give replacement cost new. It does not provide a means to measure the difference between reproduction cost new and replacement cost new. Trending is to only be applied to historical cost. The appraiser must establish that the cost being trended is the actual historical cost and not a cost resulting from a prior allocation of purchase price or used cost. Historical cost to be trended may not be the typical cost, but may include or exclude cost factors that must be considered and accounted for in a given appraisal problem. Trending of used cost is improper. Trending factors are based on averages, but the specific property being valued may differ from the average. Trending for periods in excess of ten years should not be employed unless confirmation can be made by other methods of estimating cost new. The appraiser should know the basics of how the trending index was developed. Valuing Machinery and Equipment, supra, Chapter 3, pp. 62-64. The record in this appeal provides nothing to demonstrate that any of these concerns are addressed in any manner by the trending/depreciation schedules employed by Respondent and Respondent’s appraiser. This results in the methodology as applied being unsubstantial and non-persuasive to establish the value proposed.
In like manner, the unknown depreciation factors which are contained in the cost multipliers relied upon by Mr. Davis lack in persuasive content for the purpose for which they are employed. The most obvious deficiency is that the factors do not separately identify physical, functional and economic obsolescence. All are simply lumped together for each individual year. This results in all individual items of office furniture and equipment for a given year being depreciated at the same rate for physical, functional and economic factors, irrespective of actual physical condition, functional utility or economic circumstances. The same would be true for each item of manufacturing machinery and equipment.
The appraiser had conducted no market studies to support the depreciation schedules which he relied upon. He had no knowledge of any market studies having been performed by the Assessor’s office to support the depreciation factors employed in his appraisal. Mr. Davis did not independently arrive at the depreciation schedules used to value the subject property. Tr. 63, Lines 6 -20.
Unpersuasiveness of Mass Valuation Methodology in Contested Cases
Mass valuation of personal property under a standard set of depreciation schedules is used for purposes of reassessment throughout the state, especially when dealing with the machinery and equipment which makes up a manufacturing facility. Due to the multitude of items of personal property and the individual personal property accounts in any given county it is not possible, nor practical for the assessor to perform an individual appraisal on each manufacturing facility for purposes of his annual personal property assessment. Therefore, the mass valuation methodology whereby the assessor multiplies the total acquisition costs for a given year times a set depreciation amount (percent good) for each year to arrive at an indicated true value in money is an appropriate tool to use for valuing office furniture, computer equipment and manufacturing machinery and equipment. However, once the issue of valuation has moved to an appeal before the Commission, the mass valuation approach, absent market derived supporting evidence, will generally lack the qualities of substantial and persuasive evidence to establish value. This is especially true in the face of an appraisal of the property under appeal based upon market data in the development of sales comparison and cost approaches.
The mass valuation technique has been presented in various contested cases before the Commission (See, P. D. George, et al, infra). It has failed to reach the level of substantial and persuasive evidence in each instance. The reason the method is not persuasive in a contested case is quite simple. There is no hard market data to demonstrate and support the validity and soundness of the underlying figures used in the mathematical calculations. As has been discussed above (See, Proper Cost Methodology, Trending in Cost Approach, Depreciation Factors, supra, pp. 22-25 ), the critical factors which go into the math equation are unsupported by the market.
The formula for any given year is very basic. The formula is A x B = market value. In the formula A represents acquisition costs. This apparently includes the purchase price for the item of property by Complainant, the original sales tax, if applicable, the original freight expenses and all original installation costs for each given year of acquisition. Exhibit 1, pp. 8-9. The factor B represents the combination trending and depreciation factors for each given year of acquisition. Exhibit 1, p. 8. The process of calculation is fundamental. All of the acquisition costs for a given year from an asset ledger are totaled to arrive at the A factor for the year. The factor A is then multiplied times B which represents the amount trended up for the given year and the amount of depreciation deducted to produce a percent good.
Relying on this elementary formula in a contested case is fatally flawed in the absence of market data to establish the proper foundation for this methodology. Respondent’s exhibits, taken individually or collectively do not provide any indication or supporting documentation which will demonstrate that acquisition costs (A) represents the market cost new as of January 1, 2000. There is nothing within Respondent’s exhibits that establish that the various trending and depreciation factors (B), which were used for furniture and office machines, computers and peripherals, manufacturing equipment and tooling, are appropriate for any of the given items of property or the entire group of items of property which were acquired in a single year to which one trending/depreciation (percent good) factor would apply. The two elements A and B must be supported by market data if Respondent desires to rely upon these figures.
The entire exercise of using a combined factor for trending and depreciation is unnecessary in the vast majority of appeals, since it has been demonstrated time and time again that there is an active user to user (direct), and user to dealer (indirect) market for the vast majority of machinery and equipment that is found in virtually every type of manufacturing facility. (See, P. D. George, et al, infra). Sales from this market can be adjusted to arrive at a market based indication of value. Furthermore, the appropriate and proper methodology, if a party seeks to rely upon the cost approach, is to obtain replacement cost new from the market and then adjust for physical depreciation based upon actual observation of each item of property and adjusted for functional and economic obsolescence derived from appropriate market investigation and data.
Reliance upon acquisition costs, whether historic or original, as the starting point of a valuation exercise in a contested case, and a table of trending and depreciation factors in the face of actual sales data does not reach the level of substantial and persuasive to establish value. It matters little what was paid for an item of equipment five or six years prior to the tax date, when one can go to the market and find a sufficient number of actual sales for the item to demonstrate the present value. This procedure (investigation and research of the present market) eliminates any level of speculation and conjecture as to whether the trended and then depreciated acquisition cost is reflective of market value.
Construction in Progress
The issue of construction in progress must now be addressed. Respondent’s appraiser added an amount for construction in progress in each of the three appeals. The amount of construction in progress was taken from the Complainant’s property declaration in each appeal and then was valued at 65% good. In Appeal 00-10006, Mr. Davis added $472,090 for construction in progress. A total of $340,330, was added in Appeal 00-10007 and an additional $579,240 was included as construction in progress in Appeal 00-10008. Exhibit 1, p.11. It was the position of Mr. Davis that Complainant’s appraisal omitted the value of construction in progress items. Exhibit 2, Q & A 18, p. 4.
Mr. Davis made no independent investigation, inspection or inventory of what items would have constituted construction in progress at any of the three facilities where Complainant’s machinery and equipment were located. He did ask for and received a detailed listing of the items that made up the various figures for construction in progress. This list is Exhibit 4, 4A being the list for Appeal 00-10006, 4B being the list for Appeal 00-10007 and 4C being the list for Appeal 00-10008. When Mr. Davis conducted his plant tour he did not ask to see items of construction in progress because the items shown on Exhibit 4 would have been as of January 1, 2000 and the plan tour wasn’t conducted until December 22, 2000. However, Mr. Davis should have and could have made inquiry as to what items of machinery and equipment were part of or effected by any of the expenditures shown as construction in progress. This he did not do. Mr. Davis came to the conclusion that the Bealmear appraisal omitted construction in progress simply because there was no specific mentioning of construction in process or a specific delineation of any such items. However, no attempt was made whatsoever to identify specific items of construction in progress relating to specific items of machinery and equipment and then determining if such items of machinery and equipment were valued in the Bealmear appraisal. Tr. 45, Line 10 – Tr. 51, Line 22.
Respondent does not establish the failure of Complainant’s appraiser to value an item of machinery, simply because his witness asserts an omission in Complainant’s appraisal report. Respondent, by the assertion of Mr. Davis, raised the issue of omitting construction in progress and therefore must present substantial and persuasive evidence to carry the burden of proof on this particular issue. Mr. Davis’ blank assertion, without even the mere pretense of the most basic and fundamental type of investigation and inventory which an experienced appraiser would have performed, is totally unsupported by any evidence to establish that the Bealmear appraisal failed to value any property at any of Complainant’s three facilities which could have been described as construction in progress on January 1, 2000.
Construction in progress includes projects under construction that have not been completed and capitalized. Valuing Machinery and Equipment, supra, p. 31. This classification or definition must be applied in the context of a valuation of furniture, machinery and equipment only to those items. It cannot be applied to items of construction or remodeling relating to the building and improvements to the land.
Items on Exhibit 4 such as dock and BUB door replacement, resurface plant floor, stockroom/office expansion, installing truck restraints, install sprinklers in office area, remodel QC lab, and relocate tray washer should raise a question in the mind of an appraiser, who would be relying upon a construction in progress list, that these items may not be part of the furniture, machinery and equipment. An experienced appraiser, if he were going to place some reliance on the construction in progress list, would want to identify to what specific items of machinery and equipment the various cost amounts for construction in progress related. Mr. Davis had the obligation in carrying out his responsibilities to fairly and accurately value the Complainant’s personal property to make appropriate inquiries and specifically identify what was being addressed in the various items on the construction in progress list.
The list (Exhibit 4) is apparently a computer generated accounting spreadsheet. It is no doubt for general bookkeeping and accounting purposes and not for appraisal purposes. It is clear from the most elementary review of the list that certain items are replacements for items of machinery and equipment. For example, metal detector replacement, cool exhaust blower replacement, replace nitrogen generation, air compres, replac