STATE TAX COMMISSION OF MISSOURI
| RULE PROPERTIES, LLC | ) | Appeal No. 21-32006 |
| Complainant(s), | ) | Parcel/locator No(s): 14303000100512 |
| ) | ||
| ) | ||
| ) | ||
| v. | ) | |
| ) | ||
| TRACY BALDWIN, ASSESSOR, | ) | |
| CLAY COUNTY, MISSOURI, | ) | |
| Respondent. | ) |
DECISION AND ORDER
Rule Properties LLC (Complainant) appeals the Clay County Board of Equalization’s (BOE) decision finding the true value in money (TVM) of the subject property on January 1, 2021, was $1,787,200, with an assessed value of $571,900. Complainant claims the property is overvalued and proposes a value of $1,200,000. Complainant did not produce substantial and persuasive evidence establishing overvaluation. The BOE’s decision is affirmed.[1]
Complainant was represented by counsel, Brenda Kitchen. Respondent was represented by counsel, Lucas Wallingford. The evidentiary hearing was conducted on February 9, 2022, via WebEx.
FINDINGS OF FACT
- Subject Property. The subject property is located at 8301 N Flintlock Rd, in Clay County, Missouri. The parcel/locator number is 14303000100512.
The subject property consists of an owner-occupied, sit-down restaurant named Corner Café. The building contains 8,000 square feet, built in approximately 2003 on a lot size of 67,083 square feet.
- Respondent and BOE. Respondent classified the subject property as commercial and determined the TVM on January 1, 2021, was $1,787,200, with an assessed value of $571,900. The BOE classified the subject property as commercial and independently determined the TVM on January 1, 2021, was $1,787,200, with an assessed value of $571,900.
- Complainant’s Evidence. Complainant testified the TVM of the subject property on January 1, 2021, was $1,200,000. Complainant submitted Exhibit A and B and the written direct testimonies (WDT) of Julie Rule and Troy Smith. Julie Rule and Troy Smith also appeared to testify at the hearing. Complainant submitted the following exhibits:
| Exhibit | Description | Ruling |
| A | Appraiser Qualifications | Admitted |
| B | Appraisal | Admitted |
Respondent’s objections are overruled and the exhibits are admitted and given the weight appropriate.
Witness Troy Smith is a Missouri licensed appraiser with 30 years of appraisal experience, licensed in Missouri and Kansas. Mr. Smith composed an appraisal report for Complainant in which he developed the sales comparison and income approaches to value and to estimate the January 1, 2021, TVM of the subject property of $1,200,000. Mr. Smith testified the cost approach was considered, but ultimately not developed.
Mr. Smith’s sales comparison approach considered three verified sales of Kansas City properties. Mr. Smith testified the major elements of comparison for an analysis of this type include the property rights conveyed, the financial terms incorporated into a particular transaction, the conditions or motivations surrounding the sale, changes in market conditions since the sale, the location of the real estate, its physical traits and the economic characteristics of the property. Mr. Smith testified he made adjustments based on market condition, size, age, and parking ratio rentable area and no adjustments were made for property rights conveyed, conditions of sale, financing, location or condition. (WDT at 3). The sales comparison is summarized as follows:
| Subject Property | 1041 Burlington St | 8320 N Church Rd | 8250 N Church Rd | |
| Condition | Average | Average | Average | Average |
| Year Built | 1999 | 1970 | 1995 | 1998 |
| Location | Average | Average | Average | Average |
| Adjusted Price per SF | $150.00 | $168.48 | $135.07 | $145.54 |
Mr. Smith’s sales comparison approach to value found an average $150.00 per square foot. Applied to the 8,000 square foot building of the subject property, the TVM he developed for the sales comparison approach is $1,200,000.
Regarding the income approach, Mr. Smith utilized the 2021 Johnson County Cap Rate Study. The reports included overall rates for Class B sit down restaurants to average 8.0% and Class B- to average 8.5%. Given the subject’s location, age, size, quality, etc., therefore, Mr. Smith estimated a reasonable overall rate for the subject to be 8.25% (Exhibit B at 33). The analysis utilized four comparable properties with triple net leases of $13.00 – $16.00 per square foot in and around the greater Kansas City area. Mr. Smith found an NOI of $12.55 per square foot. (Exhibit B at 33).
Mr. Smith’s overall conclusion of TVM for the subject under both approaches to value was $1,200,000.
Julie Rule is an employee and part owner of the business operated within the subject property, Corner Café. Ms. Rule testified she is not an owner of the subject property, but is authorized to answer questions on behalf of the Complainant. Ms. Rule testified she did not believe a buyer would purchase the property for $1,787,000 and COVID had affected the sit-down portion of the restaurant business ran on the subject property. Ms. Rule testified she based her opinion of value on the expert Mr. Smith’s opinion.
- Respondent’s Evidence. Respondent submitted Exhibits 1, 2, 3 and the WDT of Grant Knauff. Exhibit 1 is the Property Record Card and Cost Approach. Exhibit 2 is the appraisal report, concluding the TVM of the subject property on January 1, 2021, was $1,787,200. Exhibit 3 is Rebuttal including maps, photographs, and the lease for the subject property between Corner Café as Tenant and Rule Properties (Complainant) as Landlord. Complainant submitted written objections, which are overruled and the exhibits are admitted and given the weight appropriate.
Exhibits 1 and 2 utilize the income, cost, and sales comparison approaches to estimate the market value of the subject property. Mr. Knauff testified he relied most heavily on the cost approach to value the subject property at $1,787,200, with less consideration given to the sales comparison and income approaches.
- Value. The TVM of the subject property on January 1, 2021 was $1,787,200, with an assessed value of $571,900.
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. Section 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).
- Evidence
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.
- Complainant’s 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. “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).
- Complainant Did Not Prove Overvaluation.
Complainant asserts the subject property’s TVM is $1,200,000. Complainant’s argument in support of this value is based on the sales comparable and income approaches from the appraisal of the subject property presented by Appraiser Mr. Smith.
Sales Comparison
Complainant relies on three properties which sold recently, but have a different use than the subject. The comparable sales approach “is most appropriate when there is an active market for the type of property at issue such that sufficient data are available to make a comparative analysis.” Snider, 156 S.W.3d at 348. For this reason, the comparable sales approach is typically used to value residential property. “The comparable sales approach uses prices paid for similar properties in arms-length transactions and adjusts those prices to account for differences between the properties.” Id. at 347-48 (internal quotation omitted). “Comparable sales consist of evidence of sales reasonably related in time and distance and involve land comparable in character.” Id. at 348. Complainant argues there is a lack of comparables and there is not an active market for the type of property. There is no substantial and persuasive evidence indicating the lack of any market for the subject property as improved. The market may be limited to relatively few purchasers, but a specialized market is still a market. Respondent’s appraisal summary included sales of similar restaurants in Clay County. Complainant contrasts Respondent’s use of those comparables because they are chain restaurants with national backing and in their opinion, less affected by COVID. The record indicates a lack of sufficient comparable sales. Complainant’s comparables are too dissimilar to draw any comparison and Respondent’s comparables are all of higher quality and new age with too many adjustments to properly compare. There was no substantial or persuasive evidence to support a TVM of $1,200,000 under the sales comparison approach. This leaves the income and cost approaches as the only options.
Income Approach
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.
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. Aspenhof Corp. v. State Tax Commission, 789 S.W. 2d 867, 869 (Mo. App. 1990). It is true that property can only be valued according to a use to which the property is readily available. But this does not mean that in order for a specific use to be the highest and best use for calculating the property’s true value in money that particular use must be available to anyone deciding to purchase the property. . . .A determination of the true value in money cannot reject the property’s highest and best use and value the property at a lesser economic use of the property. Snider at 341, 348-349 (Mo. 2005).
Respondent asserts the income approach is less persuasive because the subject is an owner-occupied property that does not generate market based rental income and presents the lease between the parties as evidence of that. The fact the subject is not presently a market based income producing property does not necessarily mean it cannot produce income and cannot be valued with the income approach. However, as Mr. Smith determined, there is sufficient market-based income data for retail properties to estimate the potential NOI of the subject property and utilize the income approach. “Any property that has the potential to generate income can be valued under the income capitalization approach.” Appraisal Institute, The Appraisal of Real Estate 441 (14th ed. 2013). Like the sales comparison and cost approach, the income approach is market-based and is aimed at estimating “the property’s true value in money.” Snider, 156 S.W.3d at 347; see also The Appraisal of Real Estate at 36 n.1 (noting “all three approaches to value are ‘market’ approaches in that they rely on market data”).
The concept of “fair market value is a hypothetical metric that asks what price an informed buyer and an informed seller would agree on when neither must act, but both are willing.” Robinson v. Langenbach, 599 S.W.3d 167, 183 (Mo. banc 2020). One way to estimate fair market value is with an income approach capitalizing the income the real property could generate. Snider, 156 S.W.3d at 347. This does not mean the income approach is always preferable or applicable. Mr. Smith’s income approach did develop a value by superimposing a market-based NOI and capitalization rate on the subject’s real estate to estimate the TVM. Mr. Smith used the physical attributes and a B- grade for three properties located further from Clay County. In contrast, Respondent relied on A or B+ grade of three comparable properties with triple net leases. Respondent’s market rents are of three “in-line” restaurants within a close distance to the subject. The determining difference between their approaches is the grade of the property versus the physical characteristics as the main method to determine value. In the end, Respondent did not develop a final value based on this approach, and thus their analysis does not extend beyond comparables.
The income approach “can be particularly unreliable” in a market “where owner-occupants outbid investors.” The Appraisal of Real Estate at 45. In a market dominated by owner-occupants, such as the single family home market, income data is scarce and the sales comparison approach is preferable. Id. at 645. Here, some caution is warranted because the record indicates the subject would most likely be purchased by an owner-occupant rather than investor. Respondent’s evidence summarizes this point “the County did not feel like we had substantial data to rely on the income approach as free standing restaurants are typically owner occupied and do not sell or lease often. The County is finding that a large number of free standing restaurants are on leased land.” (Exhibit 2). Of course, the subject’s unique attributes interject uncertainty into relationship between value and income. Mr. Smith’s finding of value is ultimately not persuasive due to the lack of comparables that truly parallel the subject property’s potential income and is supported by Respondent’s purported inability to do so. The comparables’ distance from the subject and grade of B- are too distinct from the subject property’s attributes and too many adjustments were made in order to find value. There was no substantial or persuasive evidence to support a TVM of $1,200,000 under the income approach.
Cost Approach
Although not developed by Complainant, the Respondent did present a TVM based on the cost approach. The cost approach may be based on either reproduction cost or replacement cost. The reproduction cost, or cost of construction, is a determination of the cost of constructing an exact duplicate of an improved property using the same materials and construction standards. The replacement cost is an estimate of the cost of constructing a building with the same utility as the building being appraised but with modern materials and according to current standards, design and layout.
The cost approach is most appropriate when the property being valued has been recently improved with structures that conform to the highest and best use of the property or when the property has unique or specialized improvements for which there are no comparables in the market. Here, Complainant argues that the market has few comparables and there are too many unique characteristics of the subject property to form a proper comparison. However, Complainant did not develop the cost approach to value.
Respondent developed, and relied most heavily on, the replacement cost new. Complainant’s main argument against Respondent’s cost approach is the lack of any consideration of functional obsolescence in the analysis. However, Complainant’s expert did testify that functional obsolescence is a method of depreciation, and Exhibits 1 and 2 included depreciation within their replacement cost analysis. Further, Complainant failed to develop their own cost approach to provide support for their argument that functional obsolescence should have been considered by the hearing officer. Thus, there was no substantial or persuasive evidence to support a TVM of $1,200,000 under the cost approach.
Although not required given the burden of proof, Respondent presented Exhibits 1 and 2 and testimony that the data in Exhibits 1 and 2 supported the BOE’s valuation of the subject property. Respondent’s evidence persuasively supports the TVM of $1,787,200.
CONCLUSION AND ORDER
Complainant did not present substantial or persuasive evidence that the TVM is $1,200,000. The BOE decision is affirmed. The TVM of the subject property as of January 1, 2021, was $1,787,200, with an assessed value of $571,900.
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.
Disputed Taxes
The Collector of Clay 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 October 7, 2022.
STATE TAX COMMISSION OF MISSOURI
Erica M. Gage
Senior Hearing Officer
State Tax Commission
Certificate of Service
I hereby certify that a copy of the foregoing has been electronically mailed and/or sent by U.S. Mail on October 7, 2022, to:
Complainant(s) and/or Counsel for Complainant(s), the County Assessor and/or Counsel for Respondent and County Collector.
Noah Shepard
Legal Coordinator
[1] 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.