SC Administrative Law Court Decisions

STATEMENT OF THE CASE

This is a contested case brought by the Petitioner E.A. House Family Trust (Petitioner or Trust) concerning an ad valorem real property tax valuation for property located at 21 East Battery. The Charleston County Assessor (Assessor) assigned a reassessment value for the property of $4,200,000. The Trust asserts that the fair market value of 21 East Battery is $2,000,000. Petitioner has exhausted all administrative remedies as provided in S.C. Code Ann. §§ 12-60-2520 through 2530 (2000), including appeal to the Charleston County Board of Assessment Appeals. After notice of the date, time, place, and nature of the hearing was timely given to all parties, a hearing was held at the Administrative Law Court on October 30, 2007.

ISSUE

What is the market value for ad valorem tax purposes of the subject property located at 21 East Battery for tax year 2005?

FINDINGS OF FACT

Having observed the witnesses and exhibits presented at the hearing and taking into consideration the burden of persuasion and the credibility of the witnesses, I make the following findings of fact by a preponderance of evidence:

Background

Petitioner owns real property located at 21 East Battery in downtown City of Charleston, Charleston County, South Carolina identified as tax map number 469-16-04-082. The property is owned by the Trust, and the sole special trustee at the time of the 2005 reassessment was Thomas L. Chrystie. As of June 1, 2005, Roderick P. Duell replaced Mr. Christie as sole special trustee of the Trust.

The E.A. House is a unique property that serves as a residential home, a house museum, and contains a bed and breakfast in the detached carriage house. The property is approximately 17,800 square feet with 85 feet of frontage on East Bay Street. The buildings upon that property total about 11,696 square feet. The main house, fronting East Battery, is a three-story structure known as the Edmondston-Alston House^[1] (E.A. House), circa 1825. It is located on the city’s waterfront, on the high battery looking out at Fort Sumter. The house has three piazzas, or porches, that extend from the south side of the main house. A carriage house, the second dwelling, is located at the rear of the property. The carriage house is currently used as a bed and breakfast.

Beginning in 1976, the then owner of the house, Mr. Duell, opened the first two floors of the Edmondston-Alston House to the public as a house museum under an arrangement with the Historic Charleston Foundation. The agreement provided that, on an annual basis, the revenues from admission fees would first be applied to certain defined expenses and the fees collected above that amount would be split, with two-thirds going to the Historic Charleston Foundation and one-third to the “house account” established to pay restoration costs, exterior maintenance costs and expenses, including taxes, insurance, and upkeep.

In 1990, the operation and administration of the house museum switched from the Historic Charleston Foundation to the Middleton Place Foundation (Foundation). The lease agreement between the Foundation and the owner of the E.A. House was largely the same arrangement as the prior lease agreement with the Historic Charleston Foundation. It required the Foundation to pay to the owner one-third of the fees and charges collected by it. It also specified that the Foundation was responsible for two-thirds of all expenses for ad valorem property taxes, casualty insurance, restoration costs, exterior maintenance costs and expenses and upkeep incident to the preservation and maintenance of the premises in excess of $17,002.

In 1992, Mr. Duell conveyed the subject property to the E.A. House Family Trust, the Petitioner, and assigned the lease with the Foundation to the E.A. Family Trust under the existing terms.^[2] Mr. Duell established the Trust, in part, to keep the property within the lineal descendents of the family. Aside from Mr. Duell’s sale of the Property to the Trust in 1992 at its appraised value, the house has not been sold or passed outside the family in 170 years.^[3]

The lease between the Trust and the Foundation provides for daytime hours of operation 7 days a week, all year, with few exceptions. In addition, the agreement provides that the owner may use the premises during the Foundation’s normal operating hours by giving the Foundation reasonable advance notice of the proposed use and provided that there is no conflict with the Foundation’s program conducted upon the premises. The agreement also authorizes the owner, after normal operating hours, use of the premises for residential purposes.

In 1994, a new lease was entered into between the Trust and the Foundation adding two provisions to the Lease Agreement: the Sale of Property and Execution and Recording of Memorandum of Lease. A Memorandum of Lease was entered into simultaneously therewith between the Trust and the Foundation dated December 21, 1994, and recorded January 3, 1995, in Book G 251, Page 811 in the R.M.C. Office for Charleston County, S.C. The purpose of the Memorandum was to publish certain terms and provisions of the Lease Agreement, which were: the Term, Premises and Owner’s Use, After-Hours Use, Subordination to Mortgage, Sale of Property, and Execution and Recording of Memorandum of Lease.

The 1994 Lease provides, among other things, that the owner and the Foundation agree that if the E.A. House is sold during the term of the lease, then the lease shall be modified such that the right of the owner to use the first and second floors shall terminate. The lease also provides that the rights of any such subsequent owners’ use of the first and second floors (after- hours use) shall cease as to those subsequent purchasers/owners of the E.A. House. Moreover, the lease renews every year for another five-year period unless either party gives notice of termination within a specified period. Giving such notice would cause the lease to expire after the passage of five calendar years.

Accordingly, if the property is ever sold, the purchaser could not use the first two floors at any time during the remaining term of the lease. This prohibition means that a purchaser would not have access to the third floor living quarters through the main stairway in the house, but only through a small staircase near the rear of the house and by means of a small, outdated elevette attached to the exterior of the rear of the house. The purchaser would also not be allowed use of the first two floors after hours for special occasions.

In 2005, Charleston County conducted a county wide reassessment for that tax year. Pursuant to that reassessment, the Assessor using its CAMA (computer assisted mass appraisal) system reassessed the subject property at a market value of $4,690,000. That value was later reduced to $4,405,000.^[4]

General Valuation

An assessment of the value of this property requires consideration not only of the location and condition of the EA House but also of the unique nature of buyers of these types of properties, the cost to repair or restore these properties and the lease encumbering this property. Under the unique facts of this case, I find that the expert that provided the most accurate assessment of the value of this property was not a certified appraiser but real estate agent Helen Geer. Ms. Geer is preeminently qualified in the field of market values of residential properties in downtown Charleston.^[5] In fact, Gary Schwab, a certified appraiser who worked for the Assessor’s Office for five years and later served for ten years as the chairman of the Charleston County Board of Assessment Appeals, explained that there are only a handful of appraisers who have the many years experience and background necessary to render reliable appraisals of historic downtown houses. He acknowledged that he and other appraisers often turn to Ms. Geer to validate their values.

The EA House is situated in an exclusive, prime area of downtown Charleston, south of Broad Street, and has an expansive view of Charleston harbor. While that factor certainly greatly enhances the value of the property, the location also has its drawbacks, principally the heavy traffic and noise. East Battery is a heavily-traveled street, a favorite of tourists and motorcyclists. Many buyers who are able to pay over two million dollars for a home wish to have some privacy and serenity. Nevertheless, though those factors do impact the value of this location, I find that the cost to restore this home to an acceptable level to meet a buyer’s expectations to purchase a home in this price range and the lease encumbering this property greatly impact the home value.

Obviously, the highest value of the EA House is not as a museum but as a residential property. However, the EA House simply lacks many modern amenities. The first two floors have never undergone significant modern renovations and still retain their authentic historical architectural character. Though those two floors reflect the grandeur of beautiful historic Charleston homes, there are significant detractions that would impact the type of buyer that would seek to purchase this property. The first two floors do not have a modern kitchen or modern bathrooms. There is also no closet space on the first two floors. Significantly, neither of these floors has central heating nor air conditioning systems. Moreover, the plumbing and wiring are antiquated.

Furthermore, although the cosmetic appearance of the house is good, there are extensive structural deficiencies that need repair and are damaging the house. Among other structural problems, the house has leaking problems from the cast iron plumbing pipes. The house also suffers from a condition known as “rising damp.” Water is wicking from the ground into the walls and finishes of the first floor keeping the walls moist and causing the paint to peel and the marbled mantles to “sugar.” Neither the cause of, nor the fix for, the chronic problem of the rising damp has been identified.

The external walls of the main house show water intrusion and a need for significant repair. The slate roof likewise needs major repair. The ceiling of the third floor leaks in several places during heavy rains. The piazzas on each of the three floors on the south side of the house are not in good condition. Therefore, the condition of the EA House under the criteria used by the Assessor to classify homes is “fair condition.”^[6]

Finally, though the third floor has been modernized, it too lacks the amenities expected in a multimillion-dollar home. The third floor consists of the living quarters of Mr. Duell and his wife. However, this floor also fails to meet the standards expected of a home in its price range.

Repairs and Renovations

The cost to make the above repairs and renovations to the EA House must take into account and accommodate the historical architectural features and finishes of the interior and exterior. The exterior walls are traditional stucco over brick, the interior walls are plaster, the roof is slate, and the floors are heart pine. There are significant moldings and other woodwork throughout the house that are emblematic of the periods of their installation. The City of Charleston’s Board of Architectural Review requires adherence to the Secretary of the Interior for renovations or repairs of historic houses under their jurisdiction. There is also a limited pool of qualified contractors competent to perform the repairs on historical structures of this nature.

One such qualified contractor, Mr. Marks, estimated that the cost to repair the deficiencies of the main house and accomplish renovations necessary to install a modern kitchen, modern bathrooms, and central heating and air conditioning on the first two floors, as well as an upgrade of the elevette, to be approximately $3,600,000.^[7] Interestingly, the Assessor did not obtain an estimate of the cost of repairs to these quality standards from a qualified contractor. Instead, the Assessor’s appraiser relied on a repair adjustment factor and information from a nationwide standardized manual. However, that manual fails to take into account historical architectural materials and features of repairing this home or the premium demanded of individuals making such repairs and renovations. In fact, the Assessor’s appraiser acknowledged that Mr. Marks is qualified to determine repair and renovation costs for an historic property such as this property.

Market Analysis

Putting the Assessor’s valuation of $4,200,000 in context, as of December 31, 2003, the highest price ever paid for a single family residence in downtown Charleston was for the purchase of the John Ashe house at 32 South Battery on July 31, 2003, for $5,125,000. At the time of its sale, the house at 32 South Battery had been immaculately renovated, was fully modernized, and was in pristine condition. It has approximately 10,756 square feet of enclosed space and is located within a couple of blocks of the subject property. This house also has a view of Charleston Harbor. The second highest sales price for a single family residence was $2,800,000 for a house at 75 King Street in very good condition.

In 2004, a fully restored house in excellent condition at 21 King Street sold for $4,300,000 and was the only house that year to sell for over $4,000,000, after being on the market for over two years. The Calhoun Mansion at 16 Meeting Street, a house much larger and grander than the subject property and which was in good condition and had been fully restored, also sold in 2004 for $3,750,000 after being on the marker for a year and a half.

Furthermore, the valuation of the subject property in the 2005 reassessment was the second highest valuation by the Assessor for a single-family residence in downtown Charleston. The only one valued higher in the 2005 reassessment was the property at 9 East Battery owned by Richard Jenrette that is in superb condition and maintained meticulously by a full time caretaker.

In this case, the most comparable properties are three in the immediate neighborhood – 32 South Battery, 21 King St. and 16 Meeting St. – which all sold within a twelve-month time span in 2003 and 2004. The 21 King St. and 16 Meeting St. properties also have water views from the upper stories. All were large houses like the subject property and were listed on the National Register. These locations also have the noise and traffic issues similar to that of the subject property. However, all three properties were in good to excellent condition. Additionally, none of the properties were encumbered by a lease to a third party.

Using 32 South Battery as the closest comparable property, with the almost identical size of the main house and the existence of a carriage house, Ms. Greer valued 21 East Battery in good condition with all the living improvements that are now lacking at $5,000,000. She then reduced this value by $3,000,000 to take into account the cost of the extensive repairs and renovations necessary to bring the house into good condition and install the basic modern facilities that are essential to command a price of this magnitude. She testified that the impairment of the lease pulled the value back to $1,500,000, but she was willing to go as high as $2,000,000 to give the benefit of the doubt to the higher value and to take into account the expansive water view. Ms. Geer testified that, in her opinion, the fair market value did not change significantly between December 31, 2003 and December 31, 2004.

Museum Lease

Good appraisal practices require that the lease encumbering the EA House be taken into account in determining the market value of the subject property. The Assessor’s Office, however, chose to disregard the lease in their calculation of value based on their determination that it was not an arms length lease. I find that determination to be erroneous.^[8]

The Foundation is a tax-exempt organization under sections 501(c)(3) and 509(a)(1) of the Internal Revenue Code. The initial focus of the Foundation was the enhancement, development, and preservation of Middleton Place, a National Historic Landmark situated on the Ashley River. Over the years, the Foundation has expanded its programs, hired additional employees, and added to its areas of historical cultivation.

The Boards of Trustees for the Foundation consist of thirteen or fourteen trustees. The charter of the Foundation encourages descendants of H.A.M. Smith, an Alston family descendant, to serve on the board to further family stewardship. Nevertheless, such descendants cannot hold a majority of the trustee seats. Mr. Duell, two of his children, and his wife currently serve on the Board. However, they are the only family members serving on the Board. Furthermore, the majority of trustees are unrelated persons, including many distinguished persons such as a former chairman of General Foods, a former chairman of the Evening Post Publishing Company, and a former U.S. ambassador to England. It was an apparent disinterested majority of the board of trustees of the Foundation that approved the decision for the Foundation to take over the administration and operation of the museum house in 1990 in place of the Historic Charleston Foundation. Moreover, the Board’s decision to assume administration and operation of the museum was an extension of the Foundation’s function. There were extensive family connections between the owners of Middleton Place and the E.A. House since its acquisition by Charles Alston in 1837. The historical elements of the urban E.A. House complimented the rural historical elements preserved at Middleton Place.

Conclusion

In sum, the persons qualified to purchase a house costing millions of dollars are generally rigorous in their analysis of potential properties and would require an exhausting inspection of any property in this price range. Although there are exceptions, the persons qualified to purchase a property in this price range generally insist that a property be in good structural condition and have the up-to-date amenities that are obviously lacking in the subject property, such as central heating and air conditioning, modern bathrooms, and a modern kitchen on the first two floors. Furthermore, the areas of physical deterioration as well as the lease would have a significant impact upon the value of the property.

CONCLUSIONS OF LAW

Based upon the above findings of fact, I conclude the following as a matter of law:

1. A taxpayer may appeal a property tax assessment determination of a county board of assessment by requesting a contested case hearing before the ALC. S.C. Code Ann. § 12-60-2540(A) (2000). When a tax assessment valuation case reaches the ALC for a contested case hearing, the proceeding before the ALC is a de novo hearing. Smith v. Newberry County Assessor, 350 S.C. 572, 577, 567 S.E.2d 501, 504 (Ct. App. 2002). The party contesting the county board’s determination generally has the burden of proving the actual value of the property at issue. See Leventis v. S.C. Dep’t of Health & Envtl. Control, 340 S.C. 118, 132-33, 530 S.E.2d 643, 651 (Ct. App. 2000) (holding that the burden of proof in administrative proceedings generally rests upon the party asserting the affirmance of an issue); Reliance Ins. Co. v. Smith, 327 S.C. 528, 489 S.E.2d 674 (Ct. App. 1997) (the assessor bore the burden of proof because the party appealing the decision of the county board of assessment was the assessor).

Furthermore, an Assessor’s valuation is presumed correct and the property owner bears the burden of proving the Assessor’s determination is not correct. 84 C.J.S. Taxation § 410 (1954). Ordinarily, this is done by proving the actual value of the property. The taxpayer may, however, show by other evidence that the assessing authority’s valuation is incorrect. If he does so, the presumption of correctness is removed and the taxpayer is entitled to appropriate relief. Cloyd v. Mabry, 295 S.C. 86, 367 S.E. 2d 171 (Ct. App. 1988).

2. The taxable status of real property for a given year is normally determined as of December 31^st of the preceding tax year. S.C. Code Ann. § 12-37-900 (2000); Atkinson Dredging Co. v. Thomas, 266 S.C. 361, 223 S.E. 2d 592 (1976). However, S.C. Code § 12-43-215 (Supp. 2007) provides in pertinent part as follows:

When a property owner or an agent for a property owner appeals the value of a property assessment, the assessor shall consider the appeal and make any adjustments, if warranted, based on the market values of real property as they existed in the year that the equalization and reassessment program was conducted and on which the assessment is based.

S.C. Code § 12-43-215 (Supp. 2007) (emphasis added). Here, the 2005 county-wide reassessment notices were based on an equalization and reassessment program conducted in 2004, which would arguably make December 31, 2003, the operative date for determining value. To eliminate any question that may arise if the equalization and reassessment program is conducted in a year different from when the Assessor communicates the reassessment notices to land owners, the Respondent Assessor has agreed that the lower value of the two dates will control. Because the Assessor used the date more favorable to the taxpayer, I need not determine the legal issue of whether the statutes are in conflict and which controls. Further, even if the later date, December 31, 2004, were used as the controlling date, there was no material change in the market value of the subject property from December 31, 2003, according to Ms. Geer.

3. In determining the competence of a witness to testify as to the value of property, “it is not required of the witness that he be expert or skilled in the strict sense of those terms. It is universally recognized that opinion testimony of a non-expert who has sufficient knowledge of the value of the property in question, or who has had ample opportunity for forming a correct opinion of it, is admissible.” City of Spartanburg v. Laprinakos, 267 S.C. 589, 595, 230 S.E.2d 443, 444 (1976). In other words, “[i]t is not necessary that a witness have the status of a professional appraiser or dealer in the class of property in question. One who has bought and sold similar property is competent to give an opinion as to the value of the property, provided, of course, that he is familiar with that property.” Id. at 595, 230 S.E.2d at 445.

4. Petitioner contends that the Assessor incorrectly valued his property. S.C. Code Ann. § 12-37-930 (Supp. 2007) sets forth that:

All property must be valued for taxation at its true value in money which in all cases is the price which the property would bring following reasonable exposure to the market, where both the seller and the buyer are willing, are not acting under compulsion, and are reasonably well informed of the uses and purposes for which it is adapted and for which it is capable of being used.

See also S.C. Const. art. III, § 29 (“All taxes upon property, real and personal, shall be laid upon the actual value of the property taxed.”). The proper measure of value of real property for ad valorem taxation purposes is thus the fair market value. Lindsey v. S.C. Tax Comm’n, 302 S.C. 504, 397 S.E.2d 95 (1990). Furthermore, there is no valid distinction between market value for sales purposes and market value for taxation purposes under Section 12-37-930. S.C. Tax Comm’n v. S.C. Tax Board of Review, 287 S.C. 415, 339 S.E. 2d 131 (Ct. App. 1985). Therefore, the issue for determination in this case – the valuation of the property for ad valorem tax purposes – is the fair market value of the property and its improvements.

The appraisal of the value of property “is, of course, not an exact science and the precise weight to be given to any factor is necessarily a matter of judgment, for the court, in the light of the circumstances reflected by the evidence in the individual case.” Santee Oil Co. v. Cox, 265 S.C. 270, 277, 217 S.E.2d 789, 793 (1975). Generally, in determining the fair market price for taxpayers’ property, comparisons of the sale price of other properties of the same character may be utilized. See Appraisal Institute, The Appraisal of Real Estate 399-400 (11^th ed. 1996);^[9] see also Long Cove Home Owners’ Ass’n, Inc. v. Beaufort County Tax Equalization Bd., 327 S.C. 135, 142, 488 S.E.2d 857, 861 (1997) (“The ‘willing buyer/willing seller’ standard in [Section 12-37-930] is hypothetical in nature and may be assumed when no actual market exists for a particular parcel of land”); 84 C.J.S. Taxation § 512 (2001). Additionally, in estimating the value of property, all of the factors which affect market value or would influence the mind of a purchaser should be considered, such as location, quality, condition and use. See 84 C.J.S. Taxation § 410 at 784; § 411 at 794 (1954). In making that analysis, a fundamental concept in determining the value of residential property is the home’s quality/condition, its “amenity features” and even its design. Appraisal Institute, The Appraisal of Real Estate 63, 263 and 413 (11^th ed. 1996). The need for maintenance or repairs is certainly a component of evaluating the property’s quality or condition. Appraisal Institute, The Appraisal of Real Estate 267-269, 413 (11^th ed. 1996). Furthermore, a lease or other similar agreement affects the use of property and must be considered when valuing property. S.C. Tax Comm’n v. S.C. Tax Bd. of Review, 287 S.C. 415, 339 S.E.2d 131 (Ct. App. 1985).

5. The Assessor determined that the lease between the Trust and the Foundation was not an “arms length” transaction. In other words, the Assessor determined that the lease was a sham contract. He based that determination on Mr. Duell’s expressed willingness to change the lease as needed to ensure that it would be considered an arms length transaction that encumbered the property. Moreover, he also based his decision on the fact that four named family members are owners and trustees of the Trust and that, although Duell is not an owner or trustee of the Trust, he is a trustee and the president of the Foundation. However, I do not find that such evidence established that the lease was a sham. To the contrary, no evidence reflected that the Foundation is controlled by Mr. Duell or his family. Rather, as noted above, the Duells constitute a minority of the members of the Foundation’s board. Additionally, the operation of the museum appears to be an extension of the Foundation’s purpose. Though the lease does appear to be a intentional act to devalue the property, voluntary or self-imposed restrictions are nevertheless proper considerations when determining taxation value. See Long Cove, 327 S.C. 135, 488 S.E.2d 857.

6. I conclude that the Trust has met its burden of proving that the Assessor’s valuation is inaccurate. The evidence supports that the best approach to determining the fair market value of Petitioner’s property is using a market sales comparison approach. However, that approach must also include a consideration of the fact that the property is in need of many repairs. The property also lacks the amenities expected of homes in its price range and its design is not the more favored Georgian design of the Assessor’s comparables. The Assessor’s adjustments to account for the deteriorated structural elements of the subject property are inadequate to account for the repairs and renovations necessary to bring this historic house into good condition and to add the modern amenities that are lacking, while preserving the historical integrity of the architectural and structural elements of the structure. Finally, the lease between the Trust and the Foundation should be considered in determining the market value of the property. The encumbrance of that lease upon the property significantly diminishes its value.

I do not find that the Assessor’s comparables were insufficiently similar to the subject property in character, location, and physical characteristics to act as comparables. Rather, I find that, in analyzing all of the comparables, adjustments made by the Assessor did not sufficiently capture the vast disparity between the subject property and the comparables. Finally, though I find Ms. Geer’s testimony persuasive, I also find that though the lease overall has an adverse impact upon the value of the property, it may be a benefit to a subsequent owner as it relates to shifting some of the costs of repairs to the property to the Foundation. Therefore, I find and conclude that the market value of the subject property for tax year 2005 was $2,500,000.^[10]

ORDER

Based upon the above Findings of Fact and Conclusions of Law:

IT IS HEREBY ORDERED that the Assessor value the Petitioner’s property for the 2005 reassessment at $2,500,000.

AND IT IS SO ORDERED.

____________________________

Ralph King Anderson, III

Administrative Law Judge

January 31, 2008

Columbia, South Carolina