ORDERS:
FINAL ORDER AND DECISION
I. Statement of the Case
This contested case results from a disagreement between Keystone Legends I (taxpayer) and the
Charleston County Assessor (assessor) over the value of the taxpayer’s property for the 2002 tax
year. Having exhausted the prehearing remedies within the assessor's office and before the
Charleston County Board of Assessment Appeals, the parties now bring this contested case to
the Administrative Law Court. Jurisdiction is provided by S. C. Code Ann. § 12-60-2540(A)
(Supp. 2003).
II. Issue
What is the value of the taxpayer's property for assessment purposes for tax year 2002?
III. Analysis
A. Findings of Fact
Based on the preponderance of the evidence, the following findings of fact are entered:
Taxpayer owns an apartment complex identified as The Legends of Mount Pleasant located at
1100 Legends Club Drive in Mount Pleasant, South Carolina. The property is identified as
parcel identification number 599-00-00-020 by the Charleston County Assessor's Office. The
complex has 200 units containing approximately 234,616 square feet. In addition, the property
has a clubhouse with an office and fitness center, tennis courts, gated access, and garage rentals
on 23.22 acres.
While the assessor’s valuation for tax year 2002 valued 200 units, his valuation for tax year 2001
valued only 158 units. For the 2001 tax year, the assessor determined that 42 units were not yet
complete for their intended purpose. The assessor reached such a conclusion since the taxpayer
in writing stated that under HUD’s view a portion of the units were not complete as of December
31, 2000. Consistent with that position was HUD’s directive to the taxpayer not to lease any
unit until HUD had given the taxpayer a Permission to Occupy certificate for that unit.
The taxpayer submitted several HUD forms to the commissioner of the Federal Housing
Administration asking for certificates of occupancy. The certificates were issued for numerous
specific units prior to December 31, 2000, but 42 units did not receive Permission to Occupy
certificates until March 22, 2001.
The assessor valued the taxpayer's property as of December 31, 2001 for the 2002 tax year under
an income approach and arrived at a market value of $14,000,000. However, based on a desire
to maintain equity valuations for other similar properties, the assessor proposed a value for tax
purposes of $12,450,000.
The taxpayer disagreed with the assessor by asserting that the property should be valued at
$8,445,000. Consistent with a request to lower the assessor’s value is the fact that the rental
market in Mt. Pleasant for the 2001 tax year was highly competitive. To attract tenants, it was
not unusual to find comparable apartment complexes offering 13 month leases with one month
free rent.
In arriving at their values, the parties relied upon an income approach and presented the
following computation of net operating income:
TaxpayerAssessorDifference
Potential Gross Income2,204,1602,146,596 <57,564>
Less Vacancy Rate (10%) <220,416>(10%) <214,660> 5,756
Less Concessions (9%) <198,374> (4%) <85,864> 112,510
Rental Income 1,785,3701,846,072 60,702
Miscellaneous Income (5%) 110,084 (5%) 107,330 <2,754>
Effective Gross Income1,895,4541,953,402 57,948
Less:
Administrative <85,900> <85,900> 0
Utilities <42,900> <42,900> 0
Maintenance <107,300> <107,300> 0
Payroll <171,700> <171,700> 0
Management Fee (4.5%) <99,187> (3%) <64,400> 34,787
Insurance <93,559> <69,600> 23,959
Taxes <193,200> <193,200> 0
Reserves <52,836> <40,000> 12,836
HUD Insurance <77,568> 0 77,568
Total Expenses <924,150> <775,000> 149,150
Net Operating Income 971,304 1,178,402 207,098
After a review by the Charleston County Board of Assessment Appeals, the matter has now
come here.
B. Conclusions of Law
Based on the foregoing Findings of Fact, I conclude the following as a matter of law:
1. Units To Be Valued For Tax Year 2002
The only tax year in this contested case is the tax year 2002. However, to determine the number
of units to be valued for tax year 2002, facts and arguments pertaining to the 2001 tax year are
relevant.
For example, the taxpayer argues that the 200 units in the apartment complex here under review
were all completed and ready for their intended use as of October 2000. From that position, the
taxpayer argues that all 200 units were taxable for the 2001 tax year and that the assessor valued
all 200 units on December 31, 2000 for the 2001 tax year. Next, the taxpayer asserts that since
no new units were added during the calendar year 2001, the value on December 31, 2001 for the
tax year 2002 should remain unchanged from the 2001 tax year.
I am unable to agree with the taxpayer’s view since both the facts and the law require a different
result.
Factually, 200 units were not valued for tax year 2001. First, the assessor’s appraisal for the
2001 tax year unequivocally states that “[t]he subject property is a 158 unit apartment complex.”
Further, when the Charleston County Board of Assessment Appeals reviewed the taxpayer’s
appeal of the assessor’s 2001 tax year valuation, the Board specifically identified the number of
units to be valued as being 158 units. Accordingly, the valuation for the 2001 tax year was based
on 158 units, not 200 units.
Further, the law does not support the taxpayer’s position. On the contrary, 200 units were not
completed and ready for their intended use as of October 2000.
“No new structure shall be listed or assessed until it is completed and fit for the use for which it
is intended.” S.C. Code Ann. § 12-37-670 (Supp. 2003). In deciding when a structure is fit for
its intended use, one looks to the evidence available on the valuation date. See Lindsey v. South
Carolina Tax Com'n, 302 S.C. 274, 395 S.E.2d 184 (1990); S.C. Code Ann. § 12-37-900.
Accordingly, determining when (or if) property is taxable requires determining the
circumstances surrounding the property on December 31 of the year preceding the tax year in
controversy.
Here, in an effort to establish the facts on December 31, 2000 (the valuation date for the 2001
tax year), the taxpayer in an April 15, 2003 letter to the assessor explained that a portion of the
200 unit apartment complex was “not complete, according to HUD, as of 12/31/2000.” Such an
assertion was not a mere unsupported allegation.
Rather, HUD made plain that occupancy for each unit could not take place until the taxpayer
obtained a “Permission to Occupy” certificate for each unit of the complex. In a July 13, 2000
letter referencing the taxpayer’s complex, HUD gave a directive that “lease up on units without a
Permission to Occupy [was to] cease and desist immediately.” Accordingly, no unit without a
“Permission to Occupy” certificate could be leased. Indeed, the taxpayer complied with HUD’s
directive since the taxpayer submitted several HUD forms to the commissioner of the Federal
Housing Administration in which the taxpayer states that “[p]ermission is requested for the
occupancy of”specifically identified living units within the apartment complex.
Here, certificates of occupancy were issued for specific units with many issued prior to
December 31, 2000, the valuation date for the 2001 tax year. However, for 42 units, the required
Permission to Occupy certificates were not issued until March 22, 2001, a date almost three
months beyond the December 31, 2000 valuation date.
Accordingly, on December 31, 2000, a total of 42 units could not be leased and thus were not
“completed and fit for the use for which . . . intended.” Thus, those units were not taxable for
tax year 2001. However, the 42 units were “completed and fit for the use for which . . .
intended” during March 2001. Therefore, on December 31, 2001, the assessor was required to
value all 200 units of the complex for the 2002 tax year.
2. Valuation For Tax Year 2002
Given that 200 units were available for lease, the issue becomes that of establishing the value of
a 200 unit apartment complex. While other approaches to valuation may be employed, the
income approach is recognized as a somewhat favored means for valuing apartments. Bornstein
v. State Tax Comm'n, 176 A.2d 859 (Md. 1962). The income approach seeks to determine the
present value of future benefits of property ownership based upon the net income an informed
buyer believes the property will produce during its remaining useful life. See The Appraisal of
Real Estate (American Institute of Real Estate Appraisers 10th ed.). When applying the income
approach, a reliable method is that of the direct capitalization technique. That technique
primarily relies upon the factors of net operating income and an overall capitalization rate.
Net operating income is typically calculated by beginning with the complex's potential gross
income, adding miscellaneous income, reducing that figure for a vacancy and collection loss,
and deducting operating expenses while excluding depreciation and interest expenses. The
capitalization rate is the desired yield a purchaser would seek on the capital investment. The
estimated value of the property is derived by dividing the net operating income by the applicable
capitalization rate. S.C. Tax Comm'n v. S.C. Tax Bd. of Review, 287 S.C. 415, 339 S.E.2d 131
(1985).
a. Net Operating Income
In arriving at potential gross income, the assessor relied upon the taxpayer’s rent roll for the
month of December 2001. Since the valuation date here under review is December 31, 2001, the
assessor’s determination is a more persuasive indication of value than that of the taxpayer’s
position. Thus, Potential Gross Income of $2,146,596 sets the starting point for valuation.
The assessor and the taxpayer agree that a 10% vacancy rate is proper and, based on the evidence
in this case, I find no compelling reason to disagree. Thus, a vacancy deduction of 214,660 is
proper here.
However, the assessor and the taxpayer dispute the degree of concessions to tenants to be used.
The evidence establishes that the rental market in Mt. Pleasant for the valuation year was highly
competitive. Indeed, throughout calendar year 2000 and 2001, it was not unusual to find
comparable apartment complexes offering 13 month leases with one month free rent. Thus, an
8% concession is supported here. Accordingly, I find that a concession reduction of $171,728 is
proper here.
As to the miscellaneous income, the parties are again in basic agreement. Both assert that 5% of
Potential Gross Income is a proper amount. Again, I find no reason to disagree and thus hold
that miscellaneous income of $107,330 shall be used here.
Accordingly, the effective gross income for the complex here under review is $1,867,538.
In terms of deductions for expenses to arrive a net operating income, several areas of agreement
exist. For example, the parties agree that the allowable expenses for administration (85,900),
utilities (42,900), maintenance (107,300), payroll (171,700), and taxes (193,200) give a total of
$601,000. Again, under the evidence in this case, I find no reason to disagree.
While agreement has been reached on many expenses, some remain disputed. For example,
significant disagreement exists in the areas of expenses for management, insurance, reserves, and
HUD required insurance.
In this case, the cost for management asserted by the taxpayer is based upon a HUD approved
amount of $99,187. Further, the $99,187 figure chosen by the taxpayer for management is the
actual expense incurred. Thus, I find $99,187 is the proper amount for management.
As to insurance, the evidence here shows that coverage along the coast is becoming more
expensive due to rising losses from hurricane damage. Further, the taxpayer established that
quotes from reputable insurance companies exceed the estimated costs relied upon by the
assessor. Thus, I find that $93,599 is a proper expense to arrive at net operating income.
In addition, the expenses for reserves (52,836) and HUD insurance (77,568) are costs imposed
under the HUD backed mortgage agreement. Accordingly, I find these expenses to be more
closely aligned with a proper estimate of operating net income for this complex.
Therefore, in addition to the agreed upon operating expenses of $601,000, the additional
operating expenses from management ($99,187), insurance (93,599), reserves (52,836), and
HUD insurance (77,568) brings the total operating costs for the complex to $924,190. Given
these expenses, the Net Operating Income to which a capitalization rate is to be applied is
$943,348.
b. Overall Capitalization Rate
Since the direct capitalization technique is employed here, to arrive at a proper valuation, the net
operating income must be subjected to an appropriate overall capitalization rate. For such a task,
“[d]eriving capitalization rates from comparable sales is preferred.” The Appraisal of Real
Estate (American Institute of Real Estate Appraisers 10th ed.), p. 468. More specifically, the
overall capitalization rate is derived by “dividing each property’s net operating income by the
sale price.” Id.
Here, I find the assessor’s approach to be consistent with the best practices for valuation
methods under the direct capitalization technique. Thus, I agree with the rate presented by the
assessor.
The assessor examined three sales of similar complexes. The sales prices of each divided by the
net operating income of each property produced capitalization rates of 8.33, 8.51, and 8.90.
Under the facts of this case, an 8.4% rate is proper to apply against the net operating income
since not only is the 8.4% rate within the range produced by the three sales, but also, the
complex that produced the 8.33% rate is one that is located on Mt. Pleasant (just as is the subject
property) and is from a sale made closest to the valuation date for the 2001 tax year. Thus, the
8.4% rate is supported here.
c. Valuation Result
The net operating income of $943,348 divided by 8.4% yields a value of $11,230,333. However,
in this case, a further adjustment is needed since the complex is still in the early years of
development. Therefore, the complex warrants a reduction for loss rental income during the
“lease-up” period.
Again, as with other computations, the taxpayer and the assessor suggest differing reductions for
the lease-up period. The taxpayer seeks to rely upon “experts” who suggest that sales expenses
during the lease-up period will equal 3% of the value of the complex prior to the lease-up period.
I cannot agree.
First, the testimony did not present any experts opining on what percentage of value is proper for
sales expenses during a lease-up period. Thus, I am unable to rely upon the 3% figure. Second,
the more reliable method for assessing lost revenue during a lease-up period is that which was
employed by the assessor; i.e., the present value of the lost revenue derived by utilizing a
reasonable discount rate for the period of lost revenue.
Here, the lease-up period will not likely extend beyond one year, and a discount rate of 11.5% is
not inappropriate. Further, recognizing that a vacancy rate of 10% is more consistent with a
stabilized complex, a lease-up period should allow for a greater vacancy rate. Here, 15% is
appropriate.
Thus, all other expenses and deductions being the same, a 15% vacancy (as opposed to the 10%
utilized for a stabilized complex) will produce a net operating income of $107,329 less than the
stabilized income. Accordingly, allowing a reduction in value for the present value of the lost
revenue provides a diminution in value of $95,630 and results in a value of the complex for the
2002 tax year of $11,134,703, rounded to $11,100,000.
IV. Order
Based upon the Findings of Fact and Conclusions of Law, it is hereby ordered:
The Charleston County Assessor shall enter a value for Keystone Legends I for the 2002 tax
year of $11,100,000.
AND IT IS SO ORDERED.
____________________________
RAY N. STEVENS
Administrative Law Judge
Dated: November 18, 2004
Greenville, South Carolina |