STATE TAX COMMISSION OF MISSOURI
|NORWOOD REDFIELD APARTMENTS LTD PTNSP,||)
|and||)||Appeal No. 17-110862|
|HILLCREST APARTMENTS LIMITED PARTNERSHIP,||)
|Parcel/Locator No. 14H520891|
|Complainants,||)||Appeal No. 17-110864|
|v.||)||Parcel/Locator No. 14H520882|
|JAKE ZIMMERMAN, ASSESSOR,||)||Appeal No. 17-110865|
|ST. LOUIS COUNTY, MISSOURI,
|Parcel/Locator No. 14H540527|
DECISION AND ORDER
The decisions of the St. Louis County Board of Equalization (BOE) with regard to these three appeals are AFFIRMED. Norwood Redfield Apartments Ltd Ptnsp and Hillcrest Apartments Limited Partnership (Complainants) did not present substantial and persuasive evidence to rebut the presumption of correct assessments by the BOE.
Complainants appeared by counsel William Waits.
Jake Zimmerman, Assessor, St. Louis County, Missouri, (Respondent) appeared by counsel Steve Robson.
Case heard and decided by Senior Hearing Officer Amy S. Westermann (Hearing Officer).
Respondent set the true value in money (TVM) of the subject properties, as residential property, as of January 1, 2017, as follows:
|Appeal No.||Parcel/Locator No.||Respondent’s TVM|
The BOE subsequently affirmed Respondent’s valuations of the subject properties, as follows.
|Appeal No.||Parcel/Locator No.||BOE’s TVM|
Complainants appealed to the State Tax Commission (STC) on the ground of overvaluation. The STC takes these appeals to determine the TVM for the subject properties as of January 1, 2017.
The Hearing Officer, having considered all of the competent evidence upon the whole record, enters the following Decision and Order.
FINDINGS OF FACT
- Jurisdiction. Jurisdiction over this appeal is proper. Complainants timely appealed to the State Tax Commission.
- Evidentiary Hearing. The issue of overvaluation was presented at an evidentiary hearing on July 11, 2018, at the St. Louis County Government Administration Building in Clayton, Missouri.
- Identification of Subject Properties. The subject properties are identified as follows:
|Appeal No.||Parcel/Locator No.||Address|
|17-110862||14H520891||4602 Redfield Court|
|17-110864||14H520882||4617 Grinstead Court|
|17-110865||14H540527||7401 San Diego Avenue|
- Description of Subject Properties. The subject properties are described as follows:
|Appeal No.||Parcel/Locator No.||Description|
|17-110862||14H520891||Norwood/Redfield Court Apartments (Redfield Court Apartments): 2.94 acres improved by 33,984 square foot, high-rise apartment building built in 1964; 108 living units; equipped with elevators; construction quality grade C; 40,680 square feet of asphalt parking area; 32,000 square feet of concrete paved area|
|17-110864||14H520882||Hillcrest Apartments 1: 5.38 acres improved by 34,104 square foot, garden apartment building built in 1970; 168 living units; construction quality grade D; 33,360 square feet of asphalt parking area; 28,500 square feet of concrete paved area|
|17-110865||14H540527||Hillcrest Apartments 2: 6.54 acres improved by 34,104 square-foot, garden apartment building built in 1970; 156 living units; construction quality grade C; 800 square-foot swimming pool; asphalt tennis court; utility building; fences; 10,050 square feet of asphalt parking area; approximately 30,000 square feet of concrete paved area|
- Assessment of the Properties. Respondent determined a TVM, as residential property, as of January 1, 2017, as follows:
|Appeal No.||Parcel/Locator No.||Respondent’s TVM|
The BOE determined a TVM, as residential property, as of January 1, 2017, as follows:
|Appeal No.||Parcel/Locator No.||BOE’s TVM|
- Evidentiary Objections. On July 9, 2018, approximately 48 hours before the start of the Evidentiary Hearing in these appeals, Respondent filed his Motion to Dismiss the appeals on the ground that Complainants had failed to comply with the orders of the STC and the Hearing Officer, which required the parties to exchange and file exhibits according to the deadline stated in the orders. The deadline was set for March 23, 2018. Respondent specifically alleged that Complainants “failed to comply . . . and have not submitted any documents to the Respondent which would support their position.” Complainants filed their response alleging that they had provided supporting documents to Respondent, including but not limited to rent rolls for the properties. Complainants alleged that they were qualified as owners to provide their opinion of value of the subject property. The Motion to Dismiss was denied.
Immediately prior to the start of the Evidentiary Hearing, counsel for Respondent raised an objection to the admission of all of Complainants’ exhibits on the ground that Complainants had failed to comply with the Hearing Officer’s scheduling order requiring the formal exchange of exhibits by the deadlines stated in the order. The Hearing Officer noted the objection and took it under advisement for ruling with the Decision.
During the Evidentiary Hearing, when Complainants offered their exhibits for admission into the record, counsel for Respondent renewed the objection and asked for a continuing objection to the admission of Complainants’ exhibits. Respondent argued that although Respondent had received some of Complainants’ information at the BOE proceeding and some of the information by email, Respondent had not been able to file any objections or rebuttal evidence by the scheduling order’s due date because Complainants had not formally filed any evidence specifically identified as support for their claims of overvaluation. Respondent argued that Complainants’ witness should not be allowed to testify because the scheduling order required written direct testimony to be prefiled. Respondent argued that Complainant violated the scheduling order and 12 CSR 30-3.060 by failing to file written direct testimony, thereby precluding the admission of his live testimony. Respondent referenced a prior STC Decision and Order, Alfaro v. Zimmerman, Appeal No. 15-13346 (Mo.St.TaxCom., March 2017), as precedent for excluding Complainants’ exhibits and the live testimony of Complainants’ witness.
In response, counsel for Complainants argued that all of Complainants’ exhibits had been provided previously by email to Complainants’ contact person in Respondent’s office, Albert Lincoln (Lincoln). Complainants further argued that it had been made clear “all along” that Complainants’ witness would testify during the Evidentiary Hearing and would be subject to cross examination. Complainants suggested that the remedy for their failure to formally prefile their exhibits and written direct testimony would be to allow the parties to file rebuttal evidence following the Evidentiary Hearing.
The Hearing Officer issued an interlocutory ruling allowing the introduction and admission of Complainant’s exhibits subject to the continuing objection and any specific objections Respondent might make with regard to individual exhibits and given that Complainants’ witness’ live testimony would be subject to cross examination. The Hearing Officer reserved a final ruling on Respondent’s continuing objection for the Decision and Order.
In proceedings before the STC, the admission or exclusion of evidence is within the Hearing Officer’s discretion. Although technical rules of evidence are not controlling in administrative hearings, fundamental rules of evidence apply. Homa v. Carthage R-IX School District, 345 S.W.3d 266, 282 (Mo. App. S.D. 2011); see also Luscombe v. Missouri State Bd. of Nursing, 2013 WL 68899 (Mo. App. W.D. 2013) at *13. When a proper objection is made and preserved, statements in violation of evidentiary rules do not qualify as competent and substantial evidence to support an agency’s decision. Homa, 345 S.W.3d at 282, quoting Dorman v. State Bd. of Registration for Healing Arts, 62 S.W.3d 446, 454 (Mo. App. W.D. 2001). However, Section 536.070(7) allows an administrative tribunal to receive proffered evidence into the record regardless of the merit of any evidentiary objections:
Evidence to which an objection is sustained shall, at the request of the party seeking to introduce the same, or at the instance of the agency, nevertheless be heard and preserved in the record, together with any cross-examination with respect thereto and any rebuttal thereof, unless it is wholly irrelevant, repetitious, privileged, or unduly long . . . .
“Reception of hearsay or other inadmissible evidence does not dictate a reversal unless there is not sufficient competent evidence to sustain the decision.” Homa, 345 S.W.3d at 282 (quotation omitted).
In this case, Respondent’s continuing objection was grounded on a procedural error by Complainant that essentially created a violation of evidentiary rules, i.e., the failure to formally file exhibits and written direct testimony pursuant to the deadline set by the scheduling order left the exhibits at trial without foundation for their admission, making them hearsay. However, after reflecting upon the arguments of the parties and examining the evidence as it was presented under interlocutory order, the facts establish that Respondent was in fact provided with the information contained in Complainants’ exhibits in the months leading up to the Evidentiary Hearing. Notably, Respondent acknowledged that he received some of Complainants’ information at the BOE proceeding and some of the information by email and had the opportunity to review Complainants’ exhibits and evidence before the Evidentiary Hearing. Consequently, Respondent was not prejudiced by Complainants’ technical non-compliance with the scheduling order. Further, given Complainants’ statement that Respondent had been aware that Complainant’s witness would testify and given that Respondent was provided with ample opportunity to cross examine Complainants’ witness during the Evidentiary Hearing and to present Mr. Lincoln’s testimony in rebuttal, it is reasonable to conclude that Respondent was not prejudiced by Complainants’ failure to file written direct testimony.
Respondent could have objected to Complainant’s procedural failures as soon as they occurred in March 2018 rather than waiting until 48 hours prior to trial, which further implies that Respondent was aware of the evidence that Complainants would present during the Evidentiary Hearing. The record contains Complainants’ request for a continuance of the original date of the Evidentiary Hearing filed two months after the deadline for the filing and exchange of exhibits and written direct testimony. Respondent agreed to the continuance but did not raise Complainants’ failure to formally file and exchange exhibits and written direct testimony. Consequently, in light of all of this information and in the interest of fairness to both parties, Respondent’s continuing objection to Complainant’s Exhibits A, B, C, and D is hereby overruled.
- Complainants’ Evidence. Complainants opined that the TVM of the subject properties, as of January 1, 2017, was as follows:
|Appeal No.||Parcel/Locator No.||Complainants’ Opinion of TVM|
To support their opinions of value, Complainants offered the following exhibits:
|Exhibit A||Hillcrest Apartments 1 and 2 Rent Roll||Admitted
|17-110862||Exhibit B||Redfield Court Apartments Detailed Description of Income & Expenses 2014-2016||Admitted|
|Exhibit C||Hillcrest Apartments 1 and 2 Income & Expenses Summary 2014-2016||Admitted|
|17-110864||Exhibit D||Redfield Court Apartments Income & Expenses Summary 2014-2016||Admitted|
Complainants also presented the testimony of Herbert Baumann (Baumann). Baumann testified that the three properties are comprised of two communities. Hillcrest Apartments is comprised of two parcels but operated as one property. Baumann has operated the subject properties for 32 years and 20 years, respectively. Baumann has 42 years of experience in property management and has been appearing before the STC in tax appeals since 1985. Baumann testified that he prepared Complainants’ Exhibits A, B, C, and D.
Baumann opined that Redfield Court Apartments had a TVM of $2 million as of January 1, 2017. Baumann testified that Redfield Court Apartments is 60 years old; near the City of Ferguson; has common utilities and halls; and residents receive free heat, air conditioning, hot water, and elevators. Baumann testified that the rents are equal to the market rate. Baumann testified that he used the income approach and a capitalization rate of 9% to determine an opinion of TVM. Baumann opined that Hillcrest Apartments 1 and 2 had a combined TVM of $6 million as of January 1, 2017. Baumann testified that Hillcrest Apartments is located in the City of Normandy. Baumann testified that he used the income approach and a capitalization rate of 9% to determine an opinion of TVM.
On cross examination, Baumann testified that he is not a certified appraiser or a certified public accountant. Baumann testified that he took classes during college in the 1970s to learn to value property. Baumann has been a certified property manager since 1980 and has the designation of premier property manager. He has had training and courses that include the subject of property valuation and continuing education on the subject of determining capitalization rates. Some of his training was with the Institute of Real Estate Management. Baumann testified that he sits on the board of directors of a bank, a position that requires annual education in property valuation.
Baumann testified that he did not generate a supporting report when developing the capitalization rate for the subject properties. His evaluation was based on an “analysis of the numbers” and a derived value from the operation of the properties. Baumann testified that he is the registered agent for the subject properties and has no ownership interest in them. He offered his opinion of value as the managing agent and the agent of record because he knows the properties’ operation better than the owner or a certified appraiser. Baumann testified that he believes he is an expert in the fields of appraisal and property valuation. Baumann testified that he used a market capitalization rate. He testified that he disagreed with Respondent’s capitalization rate and that the method of backing out the taxes was not appropriate because a potential buyer would not back out the taxes.
Exhibit C showed the 2014, 2015, and 2016 income and expenses for Hillcrest Apartments 1 and 2 and the averages of the three years’ income and expenses:
|2016 Actual Operations||2015 Actual Operations||2014 Actual Operations||Average|
|Collected Rental Income||$2,058,804.51||$1,949,719.51||$1,639,573.65||$1,882,699.22|
|Other Income (includes Forefeited Deposits)||$152,662.43||$110,694.76||$112,109.07||$125,155.42|
|Maintenance & Repairs||$421,880.41||$445,160.87||$466,049.74||$444,363.67|
|Total Operating Expenses||$1,547,328.63||$1,506,179.47||$1,419,749.42||$1,491,085.84|
|Net Operating Income||$664,138.31||$554,234.80||$331,933.30||$516,768.80|
|Value (9% Cap Rate)||$7,379,314.53||$6,158,164.44||$3,688,147.80||$5,741,876|
Exhibit A, the rent roll for Hillcrest Apartments 1 and 2, showed the market rent and the lease rent for each unit. The 2016 total market rent for Hillcrest Apartments 1 and 2 was $219,420.00, the gross potential rent was $201,915.00, and the total lease rent was $170,605.00. (Exhibit A) Of the 324 total units, 47 were vacant, a rate of 14.5%. (Exhibit A)
Exhibit D showed the 2014, 2015, and 2016 income and expenses for Redfield Court Apartments and the averages of the three years’ income and expenses:
|2016 Actual Operations||2015 Actual Operations||2014 Actual Operations||Average|
|Collected Rental Income||$821,937.35||$819,734.15||$789,909.95||$810,527.15|
|Other Income (includes Forefeited Deposits)||$44,439.92||$46,297.40||$35,817.52||$42,184.95|
|Maintenance & Repairs||$236,107.33||$139,661.00||$154,276.88||$176,681.74|
|Total Operating Expenses||$724,729.40||$633,950.14||$634,310.83||$664,330.12|
|Net Operating Income||$141,647.87||$232,081.41||$191,416.64||$188,381.97|
|Value (9% Cap Rate)||$1,573,865||$2,578,682||$2,126,852||$2,093,133|
According to Exhibit B, the 2016 total potential income for Redfield Apartments was $866,572.00, and the total estimated expenses were $582,887.60 (which included real estate taxes, personal property taxes, and property insurance). The 2016 estimated net operating income for Redfield Apartments was $283,684.40. (Exhibit B)
- Respondent’s Evidence. Respondent opined that the TVM of the subject properties were as follows:
|Appeal No.||Parcel/Locator No.||Respondent’s Opinion of TVM|
To support the opinions of value, Respondent offered the following exhibits:
|17-110862 Exhibit 1||Exhibit 1||BOE Findings and Notice of Decision dated September 20, 2017||Admitted|
|Appeal No. 17-110864 Exhibit 1||Exhibit 1||BOE Findings and Notice of Decision dated September 20, 2017||Admitted|
|Appeal No. 17-110865 Exhibit 1||Exhibit 1||BOE Findings and Notice of Decision dated September 20, 2017||Admitted|
Respondent also presented the testimony of Lincoln, who is a state certified appraiser employed with the St. Louis County Assessor’s Office as an appraisal supervisor and STC specialist. He has been employed there since 2002.
Lincoln testified that there are differing methods of the income approach to valuing real property. Net Operating Income (NOI) method is part of income approach, which requires one to establish the market rent and choose an appropriate capitalization rate to derive a value. Lincoln testified that one would develop the capitalization rate using market sales, i.e., known sales with known income and expenses, which must be supported by an appraisal report documenting the sales. The real property taxes would be subtracted from the expenses. Lincoln testified that this method benefits the taxpayer.
Lincoln testified that he believed the subject properties’ assessed values were fair based on a review of their rent rolls. The reported rents were “close” to Respondent’s model. Lincoln further testified that the ages of the subject properties were reflected in the county’s records and that adjustments to expenses had been made for their ages. Lincoln testified that the expenses shown in Complainants’ exhibits were high when compared to Respondent’s estimates. Lincoln testified that Exhibits A and C showed rents for Hillcrest Apartments that were similar to Respondent’s estimates; however Exhibit A did not state the number of one-bedroom units versus two-bedroom units. Respondent estimated the rent for a one-bedroom unit to be $525 and rent for a two-bedroom unit to be $685.
On cross examination, Lincoln testified that he does not write many appraisals “anymore.” Lincoln testified that Respondent’s method of valuing the subject properties took the age of the improvements into account but not specific characteristics because the values were determined through the use of a computer assisted mass appraisal (CAMA).
- Presumption of Correct Assessment Not Rebutted. Complainants did not present substantial and persuasive evidence to rebut the presumption of correct assessment by the BOE. CONCLUSIONS OF LAW AND DECISION
The STC has jurisdiction to hear this appeal and correct any assessment, which is shown to be unlawful, unfair, arbitrary or capricious, including the application of any abatement. The Hearing Officer shall issue a decision and order affirming, modifying or reversing the determination of the BOE, and correcting any assessment that is unlawful, unfair, improper, arbitrary, or capricious. Article X, Section 14, Mo. Const. of 1945; Sections 138.430, 138.431, 138.431.4, RSMo.
Basis of Assessment
The Constitution mandates that real property and tangible personal property be assessed at its value or such percentage of its value as may be fixed by law for each class and for each subclass. Article X, Sections 4(a) and 4(b), Mo. Const. of 1945. The constitutional mandate is to find the true value in money for the property under appeal. By statute, real property and tangible personal property are assessed at set percentages of true value in money: residential property at 19%; commercial property at 32%; and agricultural property at 12%. Section 137.115.5 RSMo (2000) as amended.
Complainant’s Burden of Proof
To obtain a reduction in assessed valuation based upon an alleged overvaluation, the Complainant must prove the true value in money of the subject property on the subject tax day. Hermel, Inc., v. State Tax Commission, 564 S.W.2d 888, 897 (Mo. banc 1978). True value in money is defined as the price that the subject property would bring when offered for sale by one willing but not obligated to sell it and bought by one willing or desirous to purchase but not compelled to do so. Rinehart v. Bateman, 363 S.W.3d 357, 365 (Mo. App. W.D. 2012); Cohen v. Bushmeyer, 251 S.W.3d 345, 348 (Mo. App. E.D. 2008); Greene County v. Hermel, Inc., 511 S.W.2d 762, 771 (Mo. 1974). True value in money is defined in terms of value in exchange and not in terms of value in use. Stephen & Stephen Properties, Inc. v. State Tax Commission, 499 S.W.2d 798, 801-803 (Mo. 1973). In sum, true value in money is the fair market value of the subject property on the valuation date. Hermel, Inc., 564 S.W.2d at 897.
“’True value’ is never an absolute figure, but is merely an estimate of the fair market value on the valuation date.” Drury Chesterfield, Inc., v. Muehlheausler, 347 S.W.3d 107, 112 (Mo. App. E.D. 2011), citing St. Joe Minerals Corp. v. State Tax Comm’n of Mo., 854 S.W.2d 526, 529 (Mo. App. E.D. 1993). “Fair market value typically is defined as the price which the property would bring when offered for sale by a willing seller who is not obligated to sell, and purchased by a willing buyer who is not compelled to buy.” Drury Chesterfield, Inc., 347 S.W.3d at 112 (quotation omitted).
A presumption exists that the assessed value fixed by the BOE is correct. Rinehart, 363 S.W.3d at 367; Cohen, 251 S.W.3d at 348; Hermel, Inc., 564 S.W.2d at 895. “Substantial and persuasive controverting evidence is required to rebut the presumption, with the burden of proof resting on the taxpayer.” Cohen, 251 S.W.3d at 348. Substantial evidence can be defined as such relevant evidence that a reasonable mind might accept as adequate to support a conclusion. Cupples Hesse Corp. v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959). Persuasive evidence is evidence that has sufficient weight and probative value to convince the trier of fact. Cupples Hesse Corp., 329 S.W.2d at 702. 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). See also, Westwood Partnership v. Gogarty, 103 S.W.3d 152 (Mo. App. E.D. 2003); Daly v. P. D. George Co., 77 S.W.3d 645 (Mo. App. E.D. 2002); Reeves v. Snider, 115 S.W.3d 375 (Mo. App. S.D. 2003).
There is no presumption that the taxpayer’s opinion is correct. The taxpayer in a STC appeal still bears the burden of proof. The taxpayer is the moving party seeking affirmative relief. Therefore, the Complainant bears the burden of proving the vital elements of the case, i.e., the assessment was “unlawful, unfair, improper, arbitrary or capricious.” Westwood Partnership, 103 S.W.3d 152 (Mo. App. E.D. 2003); Daly v. P. D. George Co., 77 S.W.3d 645 (Mo. App. E.D. 2002); Reeves v. Snider, 115 S.W.3d 375 (Mo. App. S.D. 2003); Industrial Development Authority of Kansas City v. State Tax Commission of Missouri, 804 S.W.2d 387, 392 (Mo. App. W.D. 1991).
Weight to be Given Evidence
The Hearing Officer is not bound by any single formula, rule, or method in determining true value in money and 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).
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 deemed necessary when viewed in connection with all other circumstances. Beardsley v. Beardsley, 819 S.W.2d 400, 403 (Mo. App. W.D. 1991). The Hearing Officer, as the trier of fact, is not bound by the opinions of experts but may believe all or none of the expert’s testimony or accept it in part or reject it in part. Exchange Bank of Missouri v. Gerlt, 367 S.W.3d 132, 135-36 (Mo. App. W.D. 2012).
Methods of Valuation
Proper methods of valuation and assessment of property are delegated to the Commission. It is within the purview of the Hearing Officer to determine the method of valuation to be adopted in a given case. See, Nance v. STC, 18 S.W.3d 611, 615 (Mo. App. W.D. 2000); Hermel, Inc., 564 S.W.2d at 897; Xerox Corp. v. STC, 529 S.W.2d 413 (Mo. banc 1975). Missouri courts have approved the comparable sales or market approach, the cost approach, and the income approach as recognized methods of arriving at fair market value. St. Joe Minerals Corp. v. STC, 854 S.W.2d 526, 529 (App. E.D. 1993); Aspenhof Corp. v. STC, 789 S.W.2d 867, 869 (App. E.D. 1990); Quincy Soybean Company, Inc., v. Lowe, 773 S.W.2d 503, 504 (App. E.D. 1989), citing Del-Mar Redevelopment Corp v. Associated Garages, Inc., 726 S.W.2d 866, 869 (App. E.D. 1987); and State ex rel. State Highway Comm’n v. Southern Dev. Co., 509 S.W.2d 18, 27 (Mo. 1974).
“For purposes of levying property taxes, the value of real property is typically determined using one or more of three generally accepted approaches.” Snider v. Casino Aztar/Aztar Missouri Gaming Corp., 156 S.W.3d 341, 346 (Mo. banc 2005), citing St. Louis County v. Security Bonhomme, Inc., 558 S.W.2d 655, 659 (Mo. banc 1977). “Each valuation approach is applied with reference to a specific use of the property—its highest and best use.” Snider, 156 S.W.3d at 346-47, citing Aspenhof Corp., 789 S.W.2d at 869. “The method used depends on several variables inherent in the highest and best use of the property in question.” Snider, 156 S.W.3d at 347. “Each method uses its own unique factors to calculate the property’s true value in money.” Id.
The income approach determines value by estimating the present worth of what an owner will likely receive in the future as income from the property. The income approach is based on an evaluation of what a willing buyer would pay to realize the income stream that could be obtained from the property when devoted to its highest and best use.
When applying the income approach to valuing income producing property for ad valorem tax purposes, it is not proper to consider income derived from the business and personal property; only income derived from the land and improvements should be considered. This approach is most appropriate in valuing investment-type properties and is reliable when rental income, operating expenses, and capitalization rates can reasonably be estimated from existing market conditions. The basic steps in the income approach are as follows:
- Estimate potential gross income;
- Deduct for vacancy and collection;
- Add miscellaneous income to get the effective gross income;
- Determine operating income;
- Deduct operating expenses from the effective gross income to determine net operating before discount, recapture and taxes;
- Select the proper capitalization rate;
- Determine the appropriate capitalization procedure to be used;
- Capitalize the net operating income into an estimated property value.
Property Assessment Valuation 2nd Ed., IAAO, page 204.
“In considering the income and expenses of a property, a decision must be made on how to treat the property taxes.” Property Assessment Valuation 2nd Ed., IAAO, page 240. “When property is valued for ad valorem tax purposes, taxes should not be considered an expense item.” Id. Only typical and reasonable expenses can be used because any deduction from gross income directly affects the indicated property value through the income approach. Id. Ad valorem taxes are based upon the value of the property itself; therefore, the practice of using property taxes as an expense item is based on a preconceived value and discredits the whole approach. Id.
In this case, Complainants’ evidence was neither substantial nor persuasive to rebut the presumption of correct assessment by the BOE. Substantial evidence can be defined as such relevant evidence that a reasonable mind might accept as adequate to support a conclusion. Cupples Hesse Corp. v. State Tax Commission, 329 S.W.2d 696, 702 (Mo. 1959). Persuasive evidence is evidence that has sufficient weight and probative value to convince the trier of fact. Cupples Hesse Corp., 329 S.W.2d at 702. The persuasiveness of evidence does not depend on the quantity or amount thereof but on its effect in inducing belief.
Here, the primary point of disagreement between Complainants and Respondent focused on whether the taxes for the subject properties should be included in the calculation of operating expenses to determine the TVM. Complainants included the taxes in the calculations of operating expenses and then applied a capitalization rate of 9%. Respondent argued that the taxes should not be included in the operating expenses but should be loaded into the capitalization rate.
Generally, appraisers do not use property taxes as expenses because the amount of the taxes is based upon the assessed value of the property, which is the determination to be made in an ad valorem appeal. Appraisers calculate the effective tax rate using the tax levy and assessment ratio. If Complainants had performed appraisals of the subject properties, the appraisal reports would have calculated an effective tax rate. An effective tax rate expresses the ratio between property value and the tax amount. However, Complainants did not offer an appraisal report into evidence. Without an appraisal report, the effective tax rate is left to speculation, as is whether Complainants applied the proper capitalization rate. Capitalization is the process of converting the income – anticipated rent payments – into a present value. In other words, capitalization turns the NOI into an indication of the TVM of the property. There is an inverse relationship between the capitalization rate and the indication of value, i.e., as the capitalization rate increases, the indication of value decreases. Baumann used a capitalization rate of 9%. However, Complainants’ evidence did not establish, let alone present a clear explanation, as to why Bauman chose the rate.
In Exhibits C and D, Complainants included the taxes as expenses for each of the subject properties. Given the standards adopted by the International Association of Assessing Officers, which are recognized by the STC, the taxes should not have been included in the calculation of operating expenses for the subject properties. By deducting the taxes from the three-year historic averages of expenses in Exhibits C and D but making no other adjustments, Complainants’ income approach results in an average TVM of Hillcrest Apartments 1 and 2 in the total amount of $7,579,288.67 and an average TVM of Redfield Apartments in the amount of $2,688,842.22. While these average values are lower than the BOE’s determinations of TVM as of January 1, 2017, this single adjustment to the calculation of operating expenses does not take into account some unknowns, such as the actual vacancy rates, actual market rents, and whether a 9% capitalization rate is appropriate. Without substantial and persuasive evidence establishing these elements of the calculations, one would be forced to engage in speculation to conclude that the presumption of correct assessment was rebutted. The Hearing Officer will not engage in such speculation.
The TVM of the subject properties as determined by the BOE is AFFIRMED as follows:
|Appeal No.||Parcel/Locator No.||TVM||Assessed Value|
Application for Review
A party may file with the STC an application for review of this decision within thirty days of the mailing date set forth in the Certificate of Service for this Decision. The application shall contain specific facts or law as grounds upon which it is claimed the decision is erroneous. Said application must be in writing addressed to the State Tax Commission of Missouri, P.O. Box 146, Jefferson City, MO 65102-0146, and a copy of said application must be sent to each person at the address listed below in the certificate of service.
Failure to state specific facts or law upon which the application for review is based will result in summary denial. Section 138.432, RSMo
The Collector of St. Louis County, as well as the collectors of all affected political subdivisions therein, shall continue to hold the disputed taxes pending the possible filing of an Application for Review, unless said taxes have been disbursed pursuant to a court order under the provisions of Section 139.031.8, RSMo.
Any Finding of Fact which is a Conclusion of Law or Decision shall be so deemed. Any Decision which is a Finding of Fact or Conclusion of Law shall be so deemed.
SO ORDERED November 13, 2018.
STATE TAX COMMISSION OF MISSOURI
Amy S. Westermann
Senior Hearing Officer
Certificate of Service
I hereby certify that a copy of the foregoing has been sent electronically or mailed postage prepaid this 13th day of November, 2018, to: Complainants(s) counsel and/or Complainant, the County Assessor and/or Counsel for Respondent and County Collector.
 Descriptions obtained from public records in the St. Louis County Real Estate Information Database.
 The situation in the instant appeal is distinguishable from the situation in Alfaro. In that case, three weeks before trial, the complainants objected to the respondent’s exhibits on the ground that the exhibits had been filed without the required accompanying written direct testimony of the expert witness who prepared the exhibits. The respondent subsequently filed a response to the objection and attached the expert’s written direct testimony in an effort to correct the error. The complainants thereafter replied that they were prejudiced by the late filing of the written direct testimony because the late filing did not allow adequate time to prepare and file a response to the written direct testimony or rebuttal or surrebuttal evidence according to the deadlines set by the hearing officer’s scheduling order. The complainants further alleged that they had served a notice of deposition for respondent’s expert pursuant to Rule 57.03, to which the respondent expressly refused to respond or to produce the expert, a violation of 12 CSR 30-3.060. The day before trial, the hearing officer entered a ruling excluding the respondent’s exhibits from evidence and found that the respondent did not comply with the scheduling order requiring the simultaneous filing and exchange of exhibits and written direct testimony. The hearing officer further found that, without the expert’s written direct testimony, the respondent did not lay a foundation for the admission of expert’s exhibit, which was rendered hearsay. The hearing officer reasoned that the respondent’s attempt to cure the failure to file the expert’s written direct testimony only three business days prior to the evidentiary hearing would have prejudiced the complainants, particularly in light of the fact that the respondent had flatly refused to allow the complainant to depose the expert. Immediately prior to trial, the respondent requested reconsideration of the exclusion of the exhibits. Following argument on the record, the hearing officer denied the request and upheld the exclusion of the exhibits.
 Hillcrest Apartments 1 has 168 (52%) of the total living units while Hillcrest Apartments 2 has 156 (48%) of the total living units.
 Hillcrest Apartments 1 constitutes 52% of the total while Hillcrest Apartments 2 constitutes 48% of the total.