St. Louis BOA Plaza LLC Et al v. Stephen Conway, Assessor City of St. Louis

October 9th, 2018

State Tax Commission of Missouri

ST. LOUIS BOA PLAZA, LLC, et al.,	)
Complainant,	)
	)	Appeal No.	17-20066, 17-20067
v.	)		and 17-20068
	)
STEPHEN J. CONWAY, ASSESSOR,	)
ST. LOUIS CITY, MISSOURI,	)
Respondent.	)

ORDER AFFIRMING[1]

HEARING OFFICER DECISION UPON APPLICATION FOR REVIEW

HOLDING

On October 9, 2018, Senior Hearing Officer John Treu (Hearing Officer) entered a Decision and Order (Decision) setting aside the decision of the Board of Equalization of St. Louis County (BOE). St. Louis BOA Plaza, LLC (Complainant) subsequently filed an Application for Review of Hearing Officer’s Decision and Order. Stephen Conway, Assessor of the City of St. Louis, Missouri (Respondent), filed an Opposition to Complainant’s Application for Review. Complainant filed a Reply.

We AFFIRM the Decision and Order of the Hearing Officer. Segments of the Hearing Officer’s Decision may have been incorporated into our Decision without further reference.

FACTS AND PROCEDURAL HISTORY

The subject parcel consists of three parcels totaling 3.2 acres and is located on Market Street in the City of St. Louis, Missouri. The parcels are improved with a 30 story Class A office building, constructed in 1982. The office building has 734,447 square feet of rentable space. The building also has 288 parking spaces in an underground garage and an additional 258 spaces in an adjacent parking structure. The building is 91% occupied.

The building is in average quality and condition. Complainant contends the property requires capital expenditures of elevator upgrades, building access card system, park area redesign, automated meter reading system, retro-commissioning, replacement of irrigation system, chiller replacement, and paver replacement.

Respondent set a true value in money (TVM) of the subject property at $50,678,200. Complainant appealed to the BOE, which sustained Respondent’s valuation. Complainant appealed to the State Tax Commission (STC) on the issue of overvaluation.

The issue of overvaluation was presented at an evidentiary hearing on June 27, 2018 at 100 South 4^th Street, St. Louis, Missouri. The Hearing Officer reduced the value to $42,872,000[2].

Evidence

Complainant opined the TVM of the subject property was $32,500,000 as of January 1, 2017. To support the opinion of value, Complainant offered the following exhibits:

Exhibit	Description
A	Appraisal Report
B	Written Direct Testimony of Ryan McDonald
C	Recalculated Community Improvement District
F	Five Year Capital Plan

Complainant presented the testimony of Certified General Real Estate Appraiser P. Ryan McDonald (McDonald). McDonald has been an appraiser since 2003. He is a designated member of the Appraisal Institute (MAI).

In developing the income approach, McDonald reviewed the property’s actual income and expenses as well as reviewed the market data. To estimate the potential gross income, he determined the most likely rental income commanded in the open market. McDonald estimated a potential gross income of $11,899,128. McDonald analyzed vacancy rate data and also considered the subject property’s historical vacancy rates. McDonald concluded a vacancy and collection loss rate of 12% was appropriate after comparing the subject property’s vacancy rate and the market vacancy rates. After McDonald analyzed the subject property’s actual expenses as well as comparable property expenses, he used the actual expenses of the subject property. The resulting net operating income (NOI) was $5,414,934. McDonald included no reimbursed expenses as he stated the market rent assumes a base year with no reimbursements.

Respondent opined the TVM of the subject property was $47,400,000 as of January 1, 2017. To support the opinion of value, Respondent offered the following exhibits:

Exhibit	Description
1	Appraisal Report
2	Tax Bills
	Written Direct Testimony of Ryan Brennan

The Respondent presented the testimony of Ryan Brennan (Brennan). Brennan is employed with the Assessor’s Office of the City of St. Louis. Brennan’s report is subject to the exception to licensure of appraisers in Section 339.501.5(3) RSMo.

Brennan considered all three approaches to value. He developed the sales comparison and the income approaches. In developing the income approach, Brennan reviewed the property’s actual income and expenses as well as reviewed the market data. The indication of value under his income approach was $47,400,000. In developing the sales comparison approach, Brennan reviewed sales in the subject’s market. The indication of value under the sales comparison approach was $49,200,000.

CONCLUSIONS OF LAW

Complainant’s Points on Review

The Decision is erroneous, arbitrary, capricious, unreasonable, constitutes an abuse of discretion and is contrary to Missouri law in that the Hearing Officer failed to consider the “known and budgeted capital expenditures.” (Application for Review p. 2) The expenditures would be considered by market participants and therefore a deduction is appropriate and required to opine the true value in money; and

The Decision is erroneous, arbitrary, capricious, unreasonable, constitutes an abuse of discretion and is contrary to Missouri law in that the Hearing Officer included pass-through income in net operating income for the income approach to value and therefore valued the property as leased fee valuation rather than fee simple.

STC’s Ruling

For the reasons that follow, the STC finds Complainant’s arguments to be unpersuasive. The STC, having thoroughly reviewed the whole record and having considered the Hearing Officer’s Decision, the Application for Review of Complainant, Respondent’s response opposing the Application for Review and Complainant’s Reply, affirms the Hearing Officer’s decision.

Standard of Review

A party to a Decision and Order of a Hearing Officer with the State Tax Commission (STC) may file an application requesting the case be reviewed by the STC. Section 138.432 RSMo Cum. Supp. 2015 The STC may then summarily allow or deny the request. Section 138.432. The STC may affirm, modify, reverse, set aside, deny or remand to the Hearing Officer the Decision and Order of the Hearing Officer on the basis of the evidence previously submitted or based on additional evidence taken before the STC. Section 138.432.

Complainant’s Burden of Proof

The taxpayer in a STC appeal 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.” See, 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); Industrial Development Authority of Kansas City v. State Tax Commission of Missouri, 804 S.W.2d 387, 392 (Mo. App. W.D. 1991). Such must be proven by substantial and persuasive evidence. 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).

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 reasonable 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. Sercurity Bohomme, 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)

Fee Simple Interest v. Leasehold and Leased Fee Interest

The assessor values property in fee simple interest. An estate in fee simple is ownership of all the rights in a property. A lease conveys property rights to another. The tenant receives a leasehold interest that allows the tenant the right to use and occupy the property under conditions. The fee ownership remains with the owner of the property. For ad valorem purposes, the property to be assessed consists of the land and improvements and the possessory interests in the property. Section 137.115.1 RSMo. In most cases, the value of the leased fee and the value of the leasehold should approximate the value of the fee simple unencumbered by a lease.

Income Approach to Value

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. This approach is most appropriate when valuing investment-type properties and is reliable when rental income, operating expenses and capitalization rates can be reasonably estimated from existing market conditions.

Pass Through Income

Commercial real estate lease agreements may contain terms in which, in addition to rent payments, the tenant agrees to pay expenses. Terms may include the tenant paying the expenses or paying an additional amount based upon increases in the expense items from the initial lease period. The subject property had actual expense reimbursements in 2014-2016 of $1,863,209, $1,767,408, and $1,663,485 respectively.

Complainant’s appraiser developed the income approach to value. The appraiser testified that he did not include expense reimbursements or pass through income for office tenants because he estimated rental rates as of January 1, 2017, which would mean it is the base year with no reimbursements. The appraiser included a nominal amount for retail leases.

In analyzing the appropriate lease rate for office space, the appraiser reviewed five comparable leases. Three of the comparables were renewals and two of the comparable leases were new. The new leases had start dates of April 2015 and February 2016. The renewals occurred in February and June 2016. The appraiser made no adjustments for market or other economic conditions. No expense reimbursement was included for office space.

For the retail space, the appraiser reviewed four comparable leases. Three of the leases were new with start dates in May and December 2016. One was a renewed lease with a new start date of August, 2015. In developing his effective gross income, the appraiser projected $9,674 of expense reimbursements or pass through income from retail tenants.

Respondent’s appraiser calculated pass through expense income of $302,315 or $0.50 per square foot. Respondent’s appraiser reported that the actual pass through expense income for the subject, which he determined ranged from $1,923,038 – $2,273,419 (for years 2014-2016; approximately $3.31 per square foot), is well above market possibly due to the leases in place.

The Hearing Officer, as the trier of fact, has the authority to weigh the evidence and 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 may accept it in part or reject it in part. Beardsley v. Beardsley, 819 S.W.2d 400, 403 (Mo. App. 1991); Curnow v. Sloan, 625 S.W.2d 605, 607 (Mo. 1981); Scanlon v. Kansas City, 28 S.W.2d 84, 95 (Mo. 1930). The Hearing Officer found certain conclusions in the respective appraisals to be more credible and persuasive.

The Hearing Officer found a nominal $0.50 per square foot of pass through income for office space appropriate when applied to rental rates which were based upon comparables from 2015-2016. STC finds that a reasonable mind could have conscientiously reached the same result as the Hearing Officer based on a review of the entire record. Hermel, Inc. v. STC, 564 S.W.2d 288 (Mo. 1978); Black v. Lombardi, 970 S.W.2d 378 (Mo. App. E.D. 1998).

Expenditures

After developing his sales comparison and income approaches to value, Complainant’s appraiser made an adjustment to the indications of value for capital expenditures. The adjustment made was a negative $8,196,000. According to the appraiser, this adjustment represents the cost for elevator upgrades, building access card system, park area redesign, automated meter reading system, retro commissioning, replacement of irrigation system, chiller replacement and paver replacement.

The Hearing Officer was not persuaded as to the actual costs of the items or the need for such items in order to make the subject improvements marketable. Complainant’s appraiser testified that the condition, quality, and functional utility of the improvement are typical for their age and location. Complainant’s appraiser did not identify any major items of deferred maintenance. Complainant’s appraiser did not review the list of items or the cost of the items listed. The list of items claimed as deferred maintenance necessitating repairs are the same items presented to the STC in a 2013 appeal in which Complainant’s claimed necessity to remediate.

The Hearing Officer, as the trier of fact, has the authority to weigh the evidence and 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 may accept it in part or reject it in part. The Hearing Officer found that the property does not appear to suffer any adverse market impact from the list of items claimed as items of necessary capital expenditure as the occupancy has been increasing even without the repairs being made.

Summary and Conclusion

The Hearing Officer determined the TVM based upon all the evidence presented at hearing. STC finds that a reasonable mind could have conscientiously reached the same result as the Hearing Officer based on a review of the entire record.

However STC finds that the Hearing Officer made mathematical errors in his calculation. The correct calculation is:

Effective Gross Income	$11,072,404
Pass-Through Expense Income	*$302,315*
Expenses	$5,718,504
NOI	$5,656,215
Capitalization Rate	13.17%
Indicated Stabilized Value	$42,947,722
	Say $42,948,000

ORDER

The Decision and Order of the Hearing Officer, including the findings of fact and conclusions of law therein, is incorporated by reference, as if set out in full, in this final decision of the STC. The Assessed value of the subject property is set at $13,743,360 ($42,948,000 TVM).

Judicial review of this Order may be had in the manner provided in Sections 138.432 and 536.100 to 536.140 RSMo within thirty days of the mailing date set forth in the Certificate of Service for this Order.

If judicial review of this decision is made, any protested taxes presently in an escrow account in accordance with this appeal shall be held pending the final decision of the courts unless disbursed pursuant to Section 139.031.8 RSMo.

If no judicial review is made within thirty days, this decision and order is deemed final and the Collector of St. Louis City, as well as the collectors of all affected political subdivisions therein, shall disburse the protested taxes presently in an escrow account in accord with the decision on the underlying assessment in this appeal.

SO ORDERED this February 19, 2019.

STATE TAX COMMISSION OF MISSOURI

Bruce E. Davis, Chairman

Victor Callahan, Commissioner

Will Kraus, Commissioner

Certificate of Service

I hereby certify that a copy of the foregoing has been sent electronically or mailed postage prepaid this19th day of February 2019 to: Complainant(s) and/or Counsel for Complainant(s), the County Assessor and/or Counsel for Respondent and County Collector.

Jacklyn Wood

Legal Coordinator

[1] A review of the Decision and Order of the Hearing Officer found a mathematical error and a scrivener’s error. On page 18, the indicated stabilized value should reflect $42,947,722, say $42,948,000. The assessed value should be $13,743,360.

[2] The TVM is corrected to $42,948,000.

STATE TAX COMMISSION OF MISSOURI

ST. LOUIS BOA PLAZA, LLC	)	17-20066 & 17-20067
ST LOUIS PLAZA, LLC	)	17-20068
	)
Complainant,	)
	)
v.	)
	)
STEPHEN CONWAY, ASSESSOR,	)
CITY OF ST LOUIS, MISSOURI,	)
	)
Respondent.	)

DECISION AND ORDER

HOLDING

The decision of the St. Louis City Board of Equalization (BOE) is SET ASIDE. Substantial and persuasive evidence was presented to establish the true value in money (TVM) for the subject properties on January 1, 2017, was $42,872,000. The classification of the subject properties is commercial. The subject properties’ assessed value for tax years 2017-2018 is set at $13,719,040.

St. Louis BOA Plaza, LLC and St. Louis Plaza, LLC (Complainants) appeared by counsel Peter Corsale.

Stephen Conway, Assessor, St. Louis City, Missouri, (Respondent), appeared by counsel Megan Bruyns.

Case heard and decided by John Treu, Senior Hearing Officer (Hearing Officer).

ISSUE

Respondent set the true value in money (TVM) of the subject properties at $50,678,200, as commercial property, as of January 1, 2017. Complainants appealed to the BOE. On July 28, 2017, the BOE valued the subject property at $50,678,200 total. Complainants appealed to the State Tax Commission (STC) on the ground of overvaluation. STC takes this appeal 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.

EVIDENCE

Complainant’s Evidence. Complainant opined that the TVM of the three parcels valued together which compose one economic unit (subject property), was $32,500,000 as of January 1, 2017. To support the opinion of value, Complainant requested admission of the following exhibits:

Exhibit A	Appraisal Report	Admitted
Exhibit B	Written Testimony of Ryan McDonald	Admitted
Exhibit C	Recalculated CID	Admitted
Exhibit D	Johnson Controls Proposal	Not Offered
Exhibit E	-No Exhibit-	Not Offered
Exhibit F	Five Year Capital Plan	Admitted
Exhibit G	8760 Engineering Proposal	Not Offered
Exhibit H	Otis Elevator Proposal	Not Offered
Exhibit I	Johnson Controls Software Support Agreement	Not Offered

The property is a 30-story Class A multi-tenant office building built in 1982 located on three parcels. It is located at 800, 898, and 900 Market Street and considered to be in the Central Business District (CBD) of the City of St. Louis. The property has 734,447 rentable square feet. It has 288 parking spaces in an underground garage with an additional 258 spaces, pursuant to a master lease, in an adjacent parking structure. As of January 1, 2017, subject property was 91% occupied.

McDonald considered all three approaches to value. McDonald did not develop the cost approach due to the age of the building. McDonald developed the sales comparison and the income approaches. McDonald analyzed vacancy rate data for both the general St. Louis Metropolitan region and the CBD. McDonald also considered the subject property’s historical vacancy rates.

In developing the income approach, McDonald reviewed the property’s actual income and expenses as well as reviewed the market data. To estimate the potential gross income, he determined the most likely rental income commanded in the open market. McDonald reviewed rents within the CBD. The rates were reviewed for comparable office leases most relevant to the subject in terms of location, building class, size, and transaction date. The rents ranged from a minimum of $13 to a maximum of $18.65 per square foot. McDonald made adjustments for quality, age/condition, and parking resulting in an adjusted range of $13 to $17.60 per square foot. McDonald also reviewed retail space lease rates which ranged from $15.50 to $22.55 per square foot. McDonald made adjustment for expense structure and access/exposure resulting in an adjusted range of $15.50 to $16.67 per square foot.

Using the lease rates, McDonald estimated a potential gross income of $11,899,128. McDonald analyzed vacancy rate data for both the general St. Louis Metropolitan region and the CBD. According to CoStar, an authoritative source for appraisers, vacancy for the Central Business District Submarket was 10.02%, while the regional average was 7.54%. McDonald also considered the subject property’s historical vacancy rates. McDonald concluded a vacancy and collection loss rate of 12% was appropriate after comparing the subject property’s vacancy rate and the market vacancy rates.

After McDonald analyzed the subject property’s actual expenses as well as comparable property expenses, he used the actual expenses of the subject property. The resulting net operating income (NOI) was $5,414,934. McDonald included no reimbursed expenses as he stated the market rent assumes a base year with no reimbursements.

McDonald then developed a capitalization rate to estimate the value of the subject property. McDonald’s capitalization rate was developed utilizing comparable sales, investor surveys, and the band of investment method. McDonald reviewed eight sales that showed capitalization rates from 8.8% to 10.1% with an average of 9.37%. McDonald selected a capitalization rate of 10% with an original effective tax rate of 3.29%, which included a Community Improvement District (CID) fee. After a recalculation of the effective tax rate McDonald concluded on a new effective tax rate of 3.17%, resulting in a loaded capitalization rate of 13.17%. McDonald’s indication of value under the income approach was $40,696,000.

McDonald also developed the sales comparison approach. He reviewed sales in the subject’s market. He selected four sales that occurred from July 2015 to May 2016. McDonald made adjustments for size, quality, age/condition, economic conditions, and parking. The indication of value was $44,096,000.

The indication of value under both the income and sales comparison approaches was adjusted for deferred capital improvements of $8,196,000 included in Complainants’ budget. The resulting indications of value were $32,500,000 and $35,900,000. The appraiser reconciled the valuations to form an opinion of TVM of $32,500,000.

Respondent’s Evidence. Respondent opined that the TVM of the subject property was $47,400,000 as of January 1, 2017. To support the opinion of value, Respondent offered the following exhibits:

Written Direct Testimony	Ryan Brennan	Admitted
Exhibit 1	Appraisal Report	Admitted
Exhibit 2	Tax Bills	Admitted

The Respondent presented the testimony of Ryan Brennan (Brennan). Brennan is employed with the Assessor’s Office of the City of St. Louis. He has been employed there since 2009. Brennan is not a licensed appraiser. Brennan provided his appraisal report pursuant to the exception to licensure of appraisers in Section 339.501.5(3) RSMo.

Brennan inspected the exterior and interior of the property as part of his appraisal. Brennan utilized data from appraisal reports on other properties authored by various appraisers not employed by Respondent.

Brennan considered all three approaches to value. He did not develop the cost approach due to the age of the building. He developed the sales comparison and the income approaches. To develop a vacancy rate Brennan considered surveys from Cushman and Wakefield, CoStar, Newmark Grubb Zimmer, Gundaker Commercial, and Jones Lang LaSalle. The vacancy reported in such ranged from 8.9% to 16.4%. Brennan also took into consideration the vacancy rates of seven comparable properties which ranged from 3% to 24% with an average of 15%. Brennan also considered that the subject property’s vacancy rate was 9%. Brennan concluded vacancy rate of 15% was appropriate.

In developing the income approach, Brennan reviewed the property’s actual income and expenses as well as reviewed the market data. To estimate the potential gross income, he determined the most likely rental income commanded in the open market. Brennan reviewed seven leases for buildings with leased spaces ranging from 2,162 to 156,418 square feet. The range of rates was from $14.00 to $22.50 per square foot. The subject’s rent roll averaged $15.06 per square foot. Brennan used $17.50 per square foot for office space, $12.50 per square foot for retail space and $8.00 per square foot for storage space. The estimated potential gross income was calculated at $10,743,515.

Brennan reviewed vacancy and collection loss and expenses for the market and the subject’s actual. The subject is 9% vacant. Vacancy rates in the downtown area were 10.3% to 16.4%. Brennan used a vacancy and collection rate of 15%. He reviewed the actual expenses of the subject property and looked at office expense surveys. Brennan determined the market median expense ratio of comparable properties was 45.4%. Based upon the subject’s past performance and the expense comparables, Brennan concluded on an expense of $7.97 per rentable square foot. Brennan accounted for pass-through income of $302,315 and a reserve for replacement of $.32 per square foot. The resulting NOI was $5,773,639.

Brennan then developed a capitalization rate to estimate the value of the subject property. He utilized the mortgage/equity technique and reviewed the market. Brennan utilized a rate of 12.17%. The rate included a capitalization rate and an effective tax rate without including a CID charge. The CID charge was included in the expenses. The indication of value is $47,400,000.

Brennan also developed the sales comparison approach. He reviewed sales in the subject’s market. He selected five sales that occurred from October 2014 to April 2017. Brennan made adjustments for location, size, parking, and economic characteristics. The indication of value was $49,200,000.

FINDINGS OF FACT

Jurisdiction. Jurisdiction over this appeal is proper. Complainant timely appealed to the State Tax Commission.
Evidentiary Hearing. The issue of overvaluation was presented at an evidentiary hearing on June 27, 2018, at 100 South 4^th Street, St. Louis, Missouri.
Identification of Subject Property. The subject property consists of three parcels, parcel/locator number 0189-00-0015-0, 0189-00-0025-0, and 0196-00-0015-0 respectively. It is further identified as 800, 898 and 900 Market Street, St. Louis, Missouri respectively. (Complaints for Review).
Description of Subject Property. The subject property parcels total 3.2 acres improved by a 30-story Class A office building built in 1982 in the Central Business District of average quality and condition. The subject property has a gross building area of 759,608 square feet, with 734,447 rentable square feet. It has 288 parking spaces in an underground garage with an additional 258 spaces, pursuant to a master lease, in an adjacent parking structure. As of January 1, 2017, subject property was 91% occupied.
Assessment of the Property. Respondent set the true value in money (TVM) of the three parcels (subject property) at $33,277,800, $761,300 and $16,639,100 respectively ($50,678,200 total), as commercial property, as of January 1, 2017. The BOE determined a TVM for the subject property of $50,678,200 total; thereby sustaining Respondent’s value.
BOE Presumption Rebutted. Complainant and Respondent presented substantial and persuasive evidence to rebut the presumption of correct assessment by the BOE and establish TVM of $42,872,000.

CONCLUSIONS OF LAW AND DECISION

Jurisdiction

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).

Respondent’s Burden of Proof

Respondent, when advocating a value different from that determined by the BOE, must meet the same burden of proof to present substantial and persuasive evidence of the value advocated as required of the Complainant under the principles established by case law. Hermel, Inc., 564 S.W.2d at 895; Cupples-Hesse, 329 S.W.2d at 702; Brooks, 527 S.W.2d at 53.

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).

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.

Comparable Sale Approach

“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 348. “Comparable sales consist of evidence of sales reasonably related in time and distance and involve land comparable in character.” Id. (quotation omitted). “This approach is most appropriate when there is an active market for the type of property at issue such that sufficient data [is] available to make a comparative analysis.” Id.

Implicit in this definition are the consummation of a sale as of a specific date and the passing of title from seller to buyer under conditions whereby:

Buyer and seller are typically motivated.

Both parties are well informed and well advised, and both acting in what they consider their own best interests.

A reasonable time is allowed for exposure in the open market.

Payment is made in cash or its equivalent.

Financing, if any, is on terms generally available in the Community at the specified date and typical for the property type in its locale.

The price represents a normal consideration for the property sold unaffected by special financing amounts and/or terms, services, fees, costs, or credits incurred in the transaction.

Real Estate Appraisal Terminology, Society of Real Estate Appraisers, Revised Edition, 1984; see also, Real Estate Valuation in Litigation, J. D. Eaton, M.A.I., American Institute of Real Estate Appraisers, 1982, pp. 4-5; Property Appraisal and Assessment Administration, International Assoc. of Assessing Officers, 1990, pp. 79-80; Uniform Standards of Professional Appraisal Practice, Glossary.

Both appraisers developed the sales comparison approach. McDonald reviewed four sales and Brennan reviewed five sales. McDonald’s comparable sales 1 and 3 do not appear to be arms-length transactions and comparable sale 4 lacks sufficient reliability as such is a Class B, six story building with no off-street parking, which is less than 10% the size of the subject property and which is almost 75 years older than the subject property. Brennan’s comparables 3, 4 and 5 are located in St. Louis County and not within the CBD. However, given the likelihood the purchaser of subject property would be utilizing the property for income purposes, the income approach was given more weight by the appraisers.

Income Approach

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 NOI before discount, recapture and taxes;
Select the proper capitalization rate;
Determine the appropriate capitalization procedure to be used;
Capitalize the NOI into an estimated property value.

Property Assessment Valuation, IAAO, page 204.

Both McDonald and Brennan performed these basic steps. To estimate potential gross income, McDonald reviewed rents from market comparables and the subject’s leasing history. Using rental rates of $17 per square foot for office space and $16 per square foot of retail space, McDonald calculated potential gross income of $11,899,128. Brennan also reviewed market comparables and the subject’s past performance. He calculated potential gross income of $12,639,430 based upon $17.50 per square foot for office space, $12.50 per square foot of retail space and $8.00 per square foot of storage space.

The appraisers then determined the vacancy and collection loss. McDonald estimated a vacancy and collection loss at 12% after considering both market data the particularities of the subject property. Brennan calculated vacancy and collection loss of 15% essentially contending that a single market vacancy rate should apply to all Class A office buildings in the CDB.

After determining vacancy and collection loss, the appraisers estimated miscellaneous income. McDonald estimated miscellaneous income on historical data. However, while the actual budgeted expense reimbursements were $1,907,170, his miscellaneous income estimated $9,674 for projected expense reimbursements from its retail tenants. His final conclusion of miscellaneous income was $592,658. Brennan included three categories of miscellaneous income based upon the median income of 2014, 2015 and 2016 in the categories. Parking income was estimated at $461,655, pass-through income was estimate at $302,315; and general of miscellaneous income was estimated at $417,957 for a total of $1,181,927.

McDonald and Brennan calculated effective gross income at $11,072,404 and $11,925,442 respectively. The appraisers then looked to expenses for the calculation of the NOI.

McDonald projected expenses of $5,414,934 based upon actual expenses of the subject property. Brennan calculated expenses of $5,855,746 based upon market expenses. Brennan also included an expense of $61,034 for the CID expense. Brennan also included a replacement reserve of $235,023 based upon the Pricewaterhouse Cooper 1^st quarter 2017 replacement reserve average for the CBD.

The resulting estimates of NOI were $5,414,934 (McDonald) and $5,773,639 (Brennan). The appraisers then developed capitalization rates to convert the income into an indication of value.

The appraisers’ utilized different capitalization rates. Capitalization is the process of converting the income – anticipated lease 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. McDonald used a capitalization rate of 10%. Brennan used a capitalization rate of 9%. McDonald’s opined capitalization rate of 10% was based upon sales comparables, national indicators, the band of investment method, and the risk factors of the subject property. McDonald’s review of property sales indicated a range of capitalization rates from 8.8% to 10.1% with an average of 9.37%. Brennan opined a capitalization rate of 9% based upon reviewed national surveys, market surveys, and comparable sales and developed a rate using the band of investment method. The national survey indicated a rate of 8.9%, with a rate of 7.1% for the St. Louis CBD. Integra, a source relied upon by appraisers, indicated a rate of 9.5%. Brennan calculated a rate of 9.13% using the band of investment methodology. Finally, Brennan’s review of sales provided a range of rates from 7.25% to 9.04% with an average of 8.01%.

Both McDonald and Brennan agreed that an effective tax rate of 3.17%^[1] was correct. McDonald initially calculated an effective tax rate of 3.29%. His calculation of the effective tax rate included an assessment for the CID. However, a CID may not be based upon the property’s valuation as determined by the assessor. Section 67.1401 et al. Rather, an area of property owners may agree to pay an amount based upon the size of their properties as is the situation for this property. Since the assessment for the CID is not based upon the valuation or assessed

valuation of the property, the CID should be treated as an expense and not part of the effective tax rate. McDonald subsequently recalculated an effective tax rate of 3.17%.

Therefore, McDonald’s loaded capitalization rate was 13.17% and Brennan’s loaded capitalization rate was 12.17%. McDonald and Brennan applied their respective loaded capitalization rate to their calculated NOI’s. McDonald’s indicated TVM using the income approach was $40,733,919. Brennan’s indicated TVM using the income approach was $47,400,000.

McDonald then made an adjustment to both his sales comparison and his income approach indications of value. He made a negative adjustment of $8,196,000 for capital expenditures to conclude on a TVM as-is of $32,500,000 rounded.

Discussion

Each appraiser made a thorough analysis of the property and the market. Each appraiser found the income approach to be the most reliable indication of value. Each income approach is subject to critique. McDonald did not include pass-through income in his calculations although office rental properties include such income and the subject property has history of such income. McDonald based his lack of estimate of pass through on his opinion that the market rent assumes a base year with no pass-through expense reimbursements.

Under the income approach a buyer is not simply purchasing the components of the physical building, but instead is purchasing an income stream. All rights to the property are being purchased. To portray economic reality McDonald considered the subject property’s specific attributes (e.g. vacancy rate, lease rates, expenses, etc.); however, McDonald failed to portray economic reality by failing to include pass-through expense income. Both McDonald and Brennan acknowledged that pass-through income is the economic reality of similar type properties to the subject. Recoveries of pass-through income are treated as separate revenue items. The Appraisal of Real Estate, Eleventh Edition, Page 477, 1996.

Brennan also calculated pass-through expense income of $302,315, which calculation Complainants did not dispute. This item is appropriate to include in development of the income approach.

The greatest difference in the estimates of TVM was the negative adjustment of $8,196,000 made by Complainant based upon actual budgeted capital expenditures. These capital expenditures include elevator upgrades, building access card system, park area redesign, automated meter reading system, retro-commissioning, replacement of irrigation system, chiller replacement, and paver replacement. There was no evidence other than the appraiser’s testimony as to the need or cost of such expenditures.^[2]^. Further, McDonald stated that “on balance the condition, quality and functional utility of the improvements are typical for their age and location.” He further stated “[w]e did not identify any major items of deferred maintenance during our inspection and ownership indicated there were none.”

Maintenance “[a]lterations may be considered capital expenditures and, therefore, are not included as a periodic expense under repair and maintenance.” Id. at 494. If a replacement for reserve is utilized “[t]he scope of items to be covered in a replacement allowance is a matter of appraisal judgment based on market evidence.” Id. at 496.

On January 1, 2017, the subject property was 91% occupied and no objective evidence exists that a buyer in the market would demand a reduction in the sales price for items which are not impacting Complainants’ ability to lease the subject property. Simply because an appraiser opines that an owner may budget for or desire modernization of a property does not provide substantial and persuasive evidence that such expenditures would be demanded by a buyer in an arm-length transaction.

Conclusion

Each appraiser provided substantial and persuasive evidence and each appraiser is subject to critique. Using all the evidence presented, an indication of value utilizing the income approach can be developed.

The recalculated TVM includes the pass-through expense income, adding the CID expense, applying the correct capitalization rate and no adjustment for capital expenditures:

Effective Gross Income	$11,072,404
Pass-Through Expense Income	*$302,315*
Expenses	$5,718,504^[3]
NOI	$5,656,215
Capitalization Rate	13.17%
Indicated Stabilized Value	$42,871,791
	Say $42,872,000

ORDER

The TVM for the subject property as determined by the BOE is SET ASIDE. The Assessed value of the subject property is set at $13,719,040 ($42,872,000 TVM).

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

Disputed Taxes

The Collector of St. Louis City, 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 October 9, 2018.

STATE TAX COMMISSION OF MISSOURI

John Treu

Senior Hearing Officer

Certificate of Service

I hereby certify that a copy of the foregoing has been sent electronically or mailed postage prepaid this October 9th, 2018, to: Complainants(s) counsel and/or Complainant, the County Assessor and/or Counsel for Respondent and County Collector.

Jacklyn Wood

Legal Coordinator

^[1] McDonald initially included the CID expense in his capitalization rate but then removed it after later consideration.

^[2] The estimates, Exhibits D (November 2016), G (May 2013), and H (March 2013) were not offered into evidence.

^[3] $5,657,470 plus $61,034 CID expense.

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St. Louis BOA Plaza LLC Et al v. Stephen Conway, Assessor City of St. Louis

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