STATE TAX COMMISSION OF MISSOURI
|PRESTIGE HOTEL LLC||)
|Appeal No. 20-79023
Parcel/locator No(s): 20-1.0-12-400-002-072.000
|DAVID COX, ASSESSOR,
PLATTE COUNTY, MISSOURI,
DECISION AND ORDER
Prestige Hotel LLC (Complainant) appeals the Platte County Board of Equalization’s (BOE) decision finding the true value in money (TVM) of the subject property on January 1, 2020, was $2,065,000. Complainant claimed the property was overvalued and initially proposed a value of $1,500,000. Respondent proposed a value of $2,100,000. Complainant did not produce substantial and persuasive evidence rebutting the presumption of the correctness of the BOE’s value and establishing that Complainant’s proposed value was correct. The BOE’s decision is AFFIRMED.
Complainant was represented by counsel Jerome Wallach. Respondent was represented by counsel Stephen Magers. The evidentiary hearing was conducted via WebEx on May 20, 2021.
FINDINGS OF FACT
- Subject Property. The subject property is located at 8230 NW Prairie View Road, Kansas City, Platte County, Missouri. The parcel/locator number is 20-1.0-12-400-002-072.000.
The subject property consists of 100,188 square feet of land improved by a two-story motel/hotel building with 23,644 square feet of gross building area built in 1984. The motel/hotel has 86 rooms, exterior entry to guest rooms, and an outdoor swimming pool. (Exhibit A (Amended); Exhibit 1) The subject property includes an asphalt, surface parking lot with 85 parking spaces. The hotel is a limited-service hotel with a franchise agreement with Motel 6, an “economy” hotel brand. (Exhibit A (Amended); Exhibit 1)
- Respondent and BOE. Respondent classified the subject property as commercial and determined the TVM on January 1, 2020, was $2,065,000. The BOE classified the subject property as commercial and independently determined the TVM on January 1, 2020, was $2,065,000.
- Complainant’s Evidence. Complainant’s witness Reagan Schwarzlose (Complainant’s Appraiser) testified in support of his Appraisal Report (Exhibit A (Amended)) and Written Direct Testimony (WDT) (Exhibit B (Amended)), which concluded the TVM of the subject property as a going concern on the taxation date was $1,790,000 with an “as is” value of the real property only of $1,245,000. Complainant’s Appraiser has been a licensed appraiser in Missouri since November 2020. Complainant’s Appraiser has 35 years of experience in the appraisal industry and holds the MAI designation from the Appraisal Institute. (Exhibit A (Amended)) Complainant submitted the following exhibits:
|A (Amended)||Complainant’s Appraisal Report for Subject Property||Admitted|
|B (Amended)||WDT of Complainant’s Appraiser||Admitted|
Complainant’s Appraiser concluded that the highest and best use of the subject property was continued use as a limited-service hotel. (Exhibit A (Amended)) Complainant’s Appraiser utilized the sales comparison and income approaches to conclude an opinion of value for the subject property’s real property component.
Under the sales comparison approach, Complainant’s Appraiser analyzed four sales of comparable hotel/motel properties. The unadjusted sale prices of the comparable properties ranged from $920,000 to $5,687,500 with sales dates from March 2017 to October 2018. After making adjustments to the comparable properties for quality of hotel, age, number of rooms, and land-to-building ratio, Complainant’s Appraiser concluded a value of $1,890,000 for the subject property. (Exhibit A (Amended)) Notably, no “overall” adjustments were made for Comparable No. 2, and it was the only comparable property rated “Similar” to the subject property. Comparable No. 2 sold in September 2018 for $2,431,600. The other comparable properties were rated either “Superior” or “Inferior.”
Under the income approach, Complainant’s Appraiser utilized the subject property’s statement of income and expenses for 2018. (Exhibit A (Amended)) Complainant’s Appraiser found the “reported expenses were considered inconsistent with industry standards,” so he used the subject property’s 2018 income and deducted average expenses reported in the North Central Column of the Limited Service Hotel expenses table shown on page 60 of the appraisal report. (Exhibit A (Amended), pp. 57-63) Complainant’s Appraiser analyzed occupancy rates and average daily rates (ADR) for comparable hotels and the subject property to estimate an occupancy rate of 50.5% and an ADR of $50.47 for the subject property. (Exhibit A Amended)) Complainant’s Appraiser calculated effective gross income of $805,170; total expenses excluding taxes and reserves of $593,160; estimated reserves for replacement of furniture, fixtures, and equipment (FF&E) of $40,072; and a net operating income (NOI) of $171,938. (Exhibit A (Amended)) Complainant’s Appraiser found the subject property’s NOI to be approximately $30,000 to $60,000 below that of comparable properties listed in the appraisal report. (Exhibit A (Amended)) Based on the subject property’s location, age, condition, and financial performance, Complainant’s Appraiser concluded a loaded capitalization rate of 12.76%. Complainant’s Appraiser then extracted a business enterprise value (BEV) of $215,000 “by averaging both the capitalized management fee and the net decrease in revenue for a branded versus non-branded hotel in the local market.” Exhibit A (Amended))
Complainant’s Appraiser utilized the cost approach to conclude an opinion of value for the subject property’s FF&E component. Complainant’s Appraiser estimated the replacement cost new of the FF&E with 45% depreciation applied was $8,600 per room or $330,000. (Exhibit A (Amended)) During the evidentiary hearing, Complainant’s Appraiser testified that he had made the calculations for FF&E based on information from Complainant regarding “estimated holdings” and not on a specific or itemized listing of inventory. Complainant’s Appraiser did not actually appraise the subject property’s FF&E or use book value but relied upon information from third party industry publications regarding FF&E cost allocations.
In his final conclusion of TVM, Complainant’s Appraiser found the “as is market value of the going concern” was $1,790,000, then deducted $215,000 BEV and $330,000 FF&E, resulting in a final opinion of value for the taxable real property component of $1,245,000. (Exhibit A (Amended)) This calculation was derived from a NOI reduced by the franchise fee and management fee then further reduced by BEV, which also included a deduction for management fee.
- Respondent’s Evidence. Respondent’s witness Tim Keller (Respondent’s Appraiser) testified in support of his appraisal report (Exhibit 1) and WDT (Exhibit 2), which concluded the TVM of the subject property as of January 1, 2019, was $2,100,000. Respondent’s Appraiser is a general certified appraiser licensed in Missouri, Kansas, Nebraska, and Colorado. Respondent’s Appraiser has been appraising property since 1988 and holds the MAI designation from the Appraisal Institute. (Exhibit 2) Respondent submitted the following exhibits:
|1||Respondent’s Appraisal Report for Subject Property||Admitted|
|2||WDT of Respondent’s Appraiser||Admitted|
|3||2019 personal property filing related to subject property||Admitted|
Respondent’s Appraiser concluded that the highest and best use of the subject property was continued use as a limited-service hotel. (Exhibit 1 and Exhibit 2) Respondent’s Appraiser utilized the cost, sales comparison, and income approaches to conclude an opinion of value for the subject property’s real property component. In light of all of the evidence, Respondent’s use of the sales comparison and income approaches are relevant to the determination of the subject property’s real property component.
Under the sales comparison approach, Respondent’s Appraiser analyzed seven sales of comparable hotel/motel properties, some of which were “economy-type brands,” and one of which was a hotel under the same franchise flag as the subject property. (Exhibit 2) The unadjusted sale prices of the comparable properties ranged from $1,350,000 to $3,300,000 with sales dates from August 2016 to November 2018. After making adjustments to the comparable properties for post-sale expenditures, location, design, effective age, amenities, and number of rooms, the adjusted sale prices of the comparable properties ranged from $1,400,000 to $3,465,500. Respondent’s Appraiser concluded a value of $2,400,000 for the subject property under the sales comparison approach. (Exhibit 2)
Under the income approach, Respondent’s Appraiser reviewed historical operating data for the subject property for 2016, 2017, and 2018. Respondent’s Appraiser analyzed occupancy rates and ADRs for comparable hotels and the subject property to estimate an occupancy rate of 63% and an ADR of $48 for the subject property. (Exhibit 2) Respondent’s Appraiser utilized comparable income and expense data from industry reports and from 10 other limited-service hotels in the region to calculate pro forma gross income of $953,534; total expenses including management fees and franchise fees but excluding taxes and reserves of $622,145; and NOI of $331,389. (Exhibit 2) Respondent’s Appraiser deducted replacement reserves of $38,141 to arrive at NOI after reserves of $293,248. (Exhibit 2) Using capitalization rates from comparable sales and using investor surveys, Respondent’s Appraiser concluded a loaded capitalization rate of 13.51% and a “going concern” value of $2,175,000. (Exhibit 2)
The return of investment on the FF&E was accounted for by a 4% replacement reserve. Respondent’s Appraiser relied on the personal property declaration filed by Complainant to conclude an opinion of value for the subject property’s FF&E component in the amount of $81,415. Respondent’s Appraiser made no adjustment for intangible asset value because a franchise fee and a management fee had already been deducted as expenses in the pro forma statement. Respondent’s Appraiser’s final conclusion of value after deducting FF&E was $2,100,000.
- Value. The TVM of the subject property on January 1, 2020, was $2,065,000 with an assessed value of $660,800.
CONCLUSIONS OF LAW
- Assessment and Valuation
Pursuant to Article X, Sections 4(a) and 4(b), Mo. Const. of 1945 real property and tangible personal property is 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. Commercial real property is assessed at 32% of its TVM as of January 1 of each odd-numbered year. 137.115.5(1)(c). “True value in money is the fair market value of the property on the valuation date, and is a function of its highest and best use, which is the use of the property which will produce the greatest return in the reasonably near future.” Snider v. Casino Aztar/Aztar Mo. Gaming Corp., 156 S.W.3d 341, 346 (Mo. banc 2005) (internal quotation omitted). The fair market value is “the price which the property would bring from a willing buyer when offered for sale by a willing seller.” Mo. Baptist Children’s Home v. State Tax Comm’n, 867 S.W.2d 510, 512 (Mo. banc 1993). Determining the TVM is a factual issue for the STC. Cohen v. Bushmeyer, 251 S.W.3d 345, 348 (Mo. App. E.D. 2008). The “proper methods of valuation and assessment of property are delegated to the Commission.” Savage v. State Tax Comm’n, 722 S.W.2d 72, 75 (Mo. banc 1986).
“For purposes of levying property taxes, the value of real property is typically determined using one or more of three generally accepted approaches.” Snider, 156 S.W.3d at 346. The three generally accepted approaches are the cost approach, the income approach, and the comparable sales approach. Id. at 346-48; see also St. Louis Cty. v. Sec. Bonhomme, Inc., 558 S.W.2d 655, 659 (Mo. banc 1977).
For the present appraisal problem, the income approach is the appropriate methodology to apply. The income 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.” Snider, 156 S.W.3d at 347. “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.” Id. “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.” Id. (internal quotation omitted). “When applying the income approach to valuing business property for 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.” Id.
The hearing officer is the finder of fact and determines the credibility and weight of the evidence. Kelly v. Mo. Dep’t of Soc. Servs., Family Support Div., 456 S.W.3d 107, 111 (Mo. App. W.D. 2015). The finder of fact in an administrative hearing determines the credibility and weight of expert testimony. Hornbeck v. Spectra Painting, Inc., 370 S.W.3d 624, 632 (Mo. banc 2012). “It is within the purview of the hearing officer to determine the method of valuation to be adopted in a given case.” Tibbs v. Poplar Bluff Assocs. I, L.P., 599 S.W.3d 1, 9 (Mo. App. S.D. 2020). The hearing officer “may inquire of the owner of the property or of any other party to the appeal regarding any matter or issue relevant to the valuation, subclassification or assessment of the property.” Section 138.430.2. The Hearing Officer’s decision regarding the assessment or valuation of the property may be based solely upon his inquiry and any evidence presented by the parties, or based solely upon evidence presented by the parties. Id.
- Burden of Proof
The BOE’s valuation is presumptively correct. Rinehart v. Laclede Gas Co., 607 S.W.3d 220, 227 (Mo. App. W.D. 2020). To prove overvaluation, a taxpayer must rebut the BOE’s presumptively correct valuation and prove the “value that should have been placed on the property.” Snider, 156 S.W.3d at 346. The taxpayer’s evidence must be both “substantial and persuasive.” Id. If Respondent is seeking to prove a value different than that set by the BOE, then Respondent is required to rebut the BOE presumption with substantial and persuasive evidence. The BOE’s valuation is assumed to be an independent valuation.
“Substantial evidence is that evidence which, if true, has probative force upon the issues, and from which the trier of fact can reasonably decide the case on the fact issues.” Savage, 722 S.W.2d at 77 (internal quotation omitted). Evidence is persuasive when it has “sufficient weight and probative value to convince the trier of fact.” Daly v. P.D. George Co., 77 S.W.3d 645, 651 (Mo. App. E.D. 2002); see also White v. Dir. of Revenue, 321 S.W.3d 298, 305 (Mo. banc 2010) (noting the burden of persuasion is the “party’s duty to convince the fact-finder to view the facts in a way that favors that party”). A taxpayer does not meet his burden if evidence on any essential element of his case leaves the STC “in the nebulous twilight of speculation, conjecture and surmise.” See, Rossman v. G.G.C. Corp. of Missouri, 596 S.W.2d 469, 471 (Mo. App. 1980).
- Valuing Hotel or Motel Property
The STC has long recognized the Rushmore Method under the income approach for the valuation of hotel properties. The methodology has been recognized by state and federal courts, and by hotel owners and assessors’ offices, as the most appropriate approach for valuing hotel properties. The Rushmore methodology has been the leading standard for valuation of hotels for over 20 years. The Rushmore methodology excludes the value of any income derived from FF&E, and adjustments are made for replacement of the property and for a return on the FF&E. The Rushmore Method also deducts the expenses for items such as management fees, franchise fees, and marketing to address the value derived from the business component.
In the real estate appraisal industry, the market value of a hotel is considered to consist of four components (1) value of the land; (2) value of the improvements; (3) value of the business or going concern and franchise affiliation; and (4) value of the furniture, fixtures and equipment (i.e. personal property). John Hancock Mutual Life v. Stanton, 1996 WL 663128 (Mo.St.Tax.Com.); Lesser and Rubin, Understanding the Unique Aspects of Hotel Property Tax Valuation, The Appraisal Journal, January, 1993, p. 17. For appraisal purposes, fixtures such as bathtubs and sinks are valued as part of the real property. Property Appraisal and Assessment Administration, International Association of Assessing Officers, 1990, p. 76.
The return on FF&E to be deducted from a hotel’s income and expense statements can be calculated by (1) using the market value of the personal property as shown on the assessment rolls; (2) actual appraisal of the personal property; or (3) using the depreciated book value of the personal property. Return on FF&E is determined by adding the capitalization rate for the real property to the tax load or effective tax rate per $100 of the personal property and multiplying same by the assessed value of the personal property. In attempting to segregate personal property from real estate, the primary consideration in valuing the personal property is its actual contributory value, not its hypothetical replacement cost new less depreciation. Lesser and Rubin, Understanding the Unique Aspects of Hotel Property Tax Valuation, The Appraisal Journal, January 1993, P. 33, Crown Center, supra, p. 439, John Hancock, supra, p. 396.
Periodic replacement of furniture, fixtures and equipment is essential to maintain the quality, image, and income potential of a lodging facility. An appraisal should reflect these expenses in the form of an appropriate reserve for replacement. Industry experience indicates that a reserve for replacement of 3% to 5% of total revenue generally is sufficient to provide for timely replacement of furniture, fixtures and equipment. The deduction of a reserve for replacement from the stabilized statement of income and expense can therefore be used to account for the return of personal property. Lesser and Rubin, Understanding the Unique Aspects of Hotel Property Tax Valuation, The Appraisal Journal. January, 1993, p. 21, 22. Crown Center, supra, p. 440.
Management companies generally offer their brand names, corporate identities, and reservation systems solely in conjunction with their management expertise. The process of isolating the value of a hotel’s business is based on the premise that by employing a professional management agent to handle the day-to-day operation of the property, an owner maintains only a passive interest, while income attributed to the business has been taken by the managing agent in the form of a management fee. Therefore, deduction of a management fee from the stabilized net income removes a portion of the business component from the stabilized income stream. Additionally, lodging facilities operated with a franchise affiliation provided by a third party are subject to the payment of franchise fees. Deducting the franchise fees from the stabilized net income removes the remaining business component from the income stream. Lesser and Rubin, Understanding the Unique Aspects of Hotel Property Tax Valuation, The Appraisal Journal, April 1984, p. 280-291; Crown Center, supra at p. 438. John Hancock, supra at p. 397.
The business value component of a hotel is accounted for through the franchise fee and the management fee. If these two items are calculated as expense items, no additional calculation is necessary to remove their impact from net operating income. Going concern value can be treated in one of two ways: The appraisers can leave the management and franchise fees in the expenses calculations, in which case no further calculation is necessary OR alternatively, they may remove those fees from the expenses and treat them separately. John Hancock, supra. p. 397. Leaving management and franchise fees in the expense calculations and then making further adjustments for business value results in stating business value twice and understating the value of the real property.
- Complainant Did Not Prove Overvaluation; Respondent’s Evidence Supported BOE’s Value as Correct TVM of the Subject Property.
Although Complainant presented substantial evidence to support its opinion of value, Complainant’s evidence was not both substantial and persuasive to rebut the BOE’s value and to establish the TVM of the subject property on January 1, 2020. Additionally, even though Respondent was not required to present evidence, Respondent presented evidence supporting the BOE’s value.
The STC recognizes the Rushmore Method for the valuation of hotel properties. The Rushmore Method has been recognized by state and federal courts, and by hotel owners and assessors’ offices, as the most appropriate approach for valuing hotel properties. The valuation methodology was developed by Stephen Rushmore, who has been extensively published on the valuation of hotels and motels. The Rushmore methodology has been the leading standard for the valuation of hotels for over twenty years. The Rushmore methodology excludes the value of any income derived from FF&E and adjustments are made for replacement of the property and for a return on the FF&E. The Rushmore method also deducts the expenses for items such as management fees, franchise fees, and marketing to address the value derived from the business component. It is improper to deduct such fees as expenses and then make further adjustments for BEV.
Here, both Complainant’s Appraiser and Respondent’s Appraiser developed the income approach using the Rushmore Method. However, Exhibit A (Amended) established that Complainant’s Appraiser deducted the management and franchise fees twice, first as expenses and then again as BEV in Complainant’s final conclusion of the TVM of the subject property’s real property component, thereby undermining the credibility and persuasiveness of Complainant’s evidence. Respondent’s appraisal report, Exhibit 2, did not make such BEV deductions. Exhibit 2, supported by Respondent’s Appraiser’s testimony, supported the BOE’s determination that the subject property’s TVM was $2,065,000 after management and franchise fees were deducted and the return of and return on FF&E were accounted for.
CONCLUSION AND ORDER
The BOE decision is AFFIRMED. The TVM of the subject property as of January 1, 2020, was $2,065,000 with an assessed value of $660,800.
Application for Review
A party may file with the Commission an application for review of this decision within 30 days of the mailing date set forth in the certificate of service for this decision. The application “shall contain specific detailed grounds upon which it is claimed the decision is erroneous.” Section 138.432. The application must be in writing, and may be mailed to the State Tax Commission, P.O. Box 146, Jefferson City, MO 65102-0146, or emailed to Legal@stc.mo.gov. A copy of the application must be sent to each person 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.
The Collector of Platte 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.
SO ORDERED February 25, 2022.
STATE TAX COMMISSION OF MISSOURI
Amy S. Westermann
Certificate of Service
I hereby certify that a copy of the foregoing has been electronically mailed and/or sent by U.S. Mail on, February 25, 2022, to: Complainant(s) and/or Counsel for Complainant(s), the County Assessor and/or Counsel for Respondent and County Collector.
 The relevant taxation date in this appeal was January 1, 2020. Missouri operates on a two-year reassessment cycle for valuing real property. See Section 137.115.1. Absent new construction or improvements to a parcel of real property, the assessed value as of January 1 of the odd year remains the assessed value as of January 1 of the following even year. Id. However, where the taxpayer does not appeal the value in the odd year but then appeals in the even year, the determination of value for the even year applies only to the even year.
 Complainant timely filed a complaint for review of assessment. The State Tax Commission (STC) has authority to hear and decide Complainant’s appeal. Mo. Const. art. X, Section 14; section 138.430.1, RSMo 2000. All statutory citations are to RSMo 2000, as amended.
 In Complainant’s exhibits and during the presentation of evidence during the Evidentiary Hearing, Complainant proposed that the “as is” value of the real property only was $1,245,000. (Exhibits A (Amended) and Exhibit B (Amended))
 During cross examination of Complainant’s Appraiser, Respondent made an oral motion to strike the statement of income and expenses provided by Complainant on which Complainant’s Appraiser based his income approach on the ground that Respondent was prejudiced in that he had requested the income and expense data during discovery but the data had not been provided. Complainant counter argued that the data had been provided to Complainant’s Appraiser during the course of his preparation of Exhibit A (Amended) and that Respondent had not previously objected to Complainant’s use of the data even though Respondent knew Complainant’s Appraiser was preparing an appraisal report. The hearing officer took the motion with the case. The motion is hereby overruled.