SC Administrative Law Court Decisions

STATEMENT OF THE CASE

This matter is before the Administrative Law Court (ALC or Court) pursuant to a request for a contested case hearing regarding the valuation of real property (Property) (Tax Map Sheet #’s 0151-15-01-002, 0151-15-01-005 and 0151-11-01-014) owned by Prince of Orange Mall, LLC (Petitioner or Taxpayer) for tax year 2003. A hearing was held before me on September 22, 2005 at the offices of the ALC in Columbia, South Carolina.[1] After carefully weighing all the evidence, I find that the real property is valued at $4,652,500.00 for the tax year 2003.

FINDINGS OF FACT

Having observed the witnesses and exhibits presented at the hearing and closely passed upon their credibility, taking into consideration the burden of persuasion by the parties, I make the following Findings of Fact by a preponderance of evidence:

1. Notice of the date, time, place and subject matter of the hearing was timely given to all parties.

Property

2. The Property collectively consists of three parcels that comprise a shopping mall and retail center known as the Prince of Orange Mall in Orangeburg, South Carolina. The three parcels are identified as follows:

(1) TMS # 0151-15-01-002 which consists of 31.40 acres of land upon which a primary retail mall structure containing 353,141 square feet is located (Retail Center).

(2) TMS # 0151-15-01-005 consists of .70 acres of land which is leased to a fast food restaurant (Church’s Fried Chicken).

(3) TMS # 0151-11-01-014 consists of 11.50 acres of land situated behind the primary mall structure on which a 39,900 square foot building is located. It was previously occupied in part by a Call Center.

3. The Property is rectangular in shape. The majority of the Property is developed with buildings and paved parking. The remainder offers a landscaped buffer.

4. The Property has inadequate drainage and is subject to periodic flooding. Since 1996 the Property has flooded at least five (5) times causing physical damage to the mall area and to the parking lot ranging from minor to severe. The areas uphill from the Property were largely developed after the mall was built and much of that development consisted of small lot construction with little or no consideration for stormwater management. Since the mall is situated on land reclaimed from the swamp of Caw Caw Creek (which lies along the north and west side of the Property), the measures taken by the original developer of the mall for stormwater management have been overwhelmed in recent years by the ever-increasing runoff from upstream development. Stormwater discharges are intense upstream and parking lot flooding with water depths of two feet has become commonplace at the Property notwithstanding continuing efforts by the Taxpayer to ensure that stormwater discharge structures on the Property are kept clear.[2]

5. The Property is located at the intersection of Broughton and Chestnut Streets. It is in an area of recent considerable commercial real estate growth, and is located near Wal-Mart, Office Max, Lowe’s, Ryan’s, McDonald’s, Applebee’s, and other stores.

6. The Prince of Orange Mall has the typical arrangement of many regional malls with the main shopping mall in the middle of a large expanse of parking area. The Prince of Orange Mall is a one-story regional retail shopping mall located in Orangeburg County at 2390 Chestnut Street North East, Orangeburg, South Carolina. The name of the street changes from Chestnut Street to North Street at the Property. North Street is a four-lane road which has turning lanes into the Property. Each turning lane has a 100 foot entrance.

7. The Prince of Orange Mall consists primarily of one building; however, its ownership is split between the Retail Center property and the Call Center property. The Church’s Fried Chicken property is located along the periphery of the parking area. The buildings on the three properties have approximately 393,041 combined total square feet and approximately 349,189 combined total net leaseable square feet. The total combined acreage for the three properties is 43.08 acres. The land to building ratio is 5.63:1.

8. The Property is zoned “B-1 Commercial.” Public water, sewer, electricity and telephone service are available to the Property. Its highest and best use is commercial. Prince of Orange Mall is the dominant mall in the City of Orangeburg and the Wal-Mart store is the dominant retail facility in the city.

9. The building construction of the mall is as follows:

(a) floor: reinforced poured concrete slab with concrete spread footings; some carpet and glaze tile inside the mall area,

(b) frame: steel,

(c) exterior walls: painted veneer brick over concrete block,

(d) interior walls: drywall partitions, painted or wallpapered,

(e) average wall height: 18 feet,

(f) sprinklers: 100 %,

(g) HVAC: 100 %, and

(h) roof: flat built-up, steel roof joist, tar and gravel over metal decking.

10. The building class of the mall structure according to Marshall Valuation Service is Class “C” and its quality grade is “Average.” The mall consists of a common area of approximately 43,852 square feet, with the mall shop areas containing approximately 112,053 square feet. The “anchor store” areas contain approximately 237,136 square feet. The anchor store areas comprise approximately 68% of the leasable area with the mall shop areas comprising approximately 32% of the leasable space. Minor roof repair is needed to the mall structure. It suffers from functional obsolescence. The overage condition of the mall structure is “fair” to “average.”

11. Belk, Sears, and J.C. Penney are anchor stores in the mall. The Belk store location is in “average” to “below average” condition for its age. The improvements inside it have experienced incurable deterioration due to normal wear and tear. Its carpet is worn and stained and some of the ceiling tiles are stained and sagging. The Sears and J.C. Penney store locations are in “average” condition.

12. There is approximately 500,000 square feet of asphalt paved parking on the parcel designated as TMS # 0151-15-01-002 and 200,000 square feet on the parcel designated as TMS # 0151-11-01-014. Parking areas are provided on all sides of the mall. The parking lot needs minor repair. However, the paving is generally in “average” condition. The shopping center has a parking ratio of 5.35 spaces per 1,000 square feet of gross building area.

Property Taxes

13. The Property is subject to city and county property taxes.

14. Taxpayer paid property taxes for the tax year 2002 in the amount of $68,978.59 to Orangeburg County and in the amount of $14,847.41 to the City of Orangeburg.

Valuation by Assessor

15. For the tax year 2002, the parcel designated as TMS # 0151-15-01-002 was valued at $2,055,000.00. The parcel designated as TMS # 0151-11-01-014 was valued at $1,290,400.00 and the parcel designated as TMS # 0151-15-01-005 was valued at $91,500.00. The total valuation of the Property for that year was valued for ad valorem taxation at $3,436,900.00.

16. The Property was assessed at 6% of market value for the tax year 2003. The millage rate for both the City of Orangeburg and the County of Orangeburg for that year was 326.2. The Property was assessed for the tax year 2003 at $12,152,500.00. After receipt of this valuation by the Assessor, Taxpayer appealed to the Board. The Board affirmed the Assessor’s valuation and Taxpayer appealed to this Court.

Taxpayer asserts that the fair market value of the Property for the tax year 2003 was $4,500,000.00. The Assessor asserts that its value for that year was $9,652,000.00.

Appraisals for Taxpayer

17. Douglas C. Brown, MAI, CRE, a state of South Carolina certified general real estate appraiser and the owner of Douglas C. Brown & Associates, Inc., Real Estate Appraisers & Consultants of Columbia, South Carolina, was retained by Taxpayer to perform an appraisal of the Property. He prepared an appraisal report dated July 20, 2004. Mr. Brown testified at the hearing concerning his report and the procedure, history and values he used to make his opinion. He considered the three basic approaches used to estimate market value: the “Sales Comparison,” (Market) “Income Capitalization Approach,” and the “Cost Approach.”[3]

Using the Sales Comparison analysis, he considered the sales price of 42 malls in the southeast. He found that retail sales at the Prince of Orange mall had been declining and that tenants were leaving. Based upon this downward trend and previous and potential flooding, together with all the market data he collected, he estimated the value of the mall per square foot at $12.00. This provided a value of $4,200,000.00.

In the Income Capitalization analysis, he found that the mall had three anchor tenants (J.C. Penney, Belk and Sears) and 23 small tenants. He also noted that the lease of one anchor tenant ended on June 30, 2004 although the tenant agreed to remain until July 31, 2009. He prepared a pro forma statement from all the operating data. He developed an estimated net income and determined that the appropriate capitalization rate should be 12%.[4] Based upon this analysis, he valued the Property at $4,000,000.00.

Using the “Cost Approach,” he estimated the useful life of the property at 50 years and with an effective age of 25 years. He opined that its value using this approach was $7,650,000.00. [5]

In reconciling the value using all three approaches, Mr. Brown opined that the value of the Property for the 2003 tax year was $4,500,000.00.

18. Ashby R. Krouse, III, an MAI with the Krouse Appraisal Company of Hilton Head Island, South Carolina, was also retained by the Taxpayer to appraise the Property. He issued his appraisal report on August 18, 2005. In the report Mr. Krouse concluded that the value of the Property as of January 1, 2003 was $4,550,000.00. Mr. Krouse testified at the hearing concerning his report and the procedure, history and values he used to assist him in preparing his opinion.

He opined that the flooding and the threat of more flooding must be corrected before the mall would be marketable.[6] Mr. Krouse also determined that the effective age of the mall was 19 years and that it’s remaining economic life was 6 to 11 years. He used the Sales Comparison and Income approaches in estimating the value of the Property; he noted that investors do not typically rely on the Cost Approach in determining the value of income producing properties that have extensive functional obsolescence.

Mr. Krouse looked at the sales of five comparable malls (located in St. Augustine, Florida, Florence, Alabama, Shelby and Kinston, North Carolina and Columbia, Maury County, Tennessee). Each of the comparable malls is located in the southeastern United States. Two of the sales were in December 2002, one in September 2002, one in December 1999 and one in June 2004. Using the comparable sales adjusted price per square foot for each sale, he assigned a value of $4,609,000.00 to the Property.

The expense figure used in his model (amount deducted from gross income to arrive at a net income estimate) included charges as follows: (1) 6% for management; (2) $2.00 per square foot for common area maintenance (CAM);[7] (3) a value for real estate taxes based upon a $4,500,000.00 value for the Property together with a slight increase to project the 2003 property tax expense; (4) $0.22 per square foot for insurance; (5) $.50 per square foot for interior and exterior structural maintenance and repair; and (7) $25,000.00 for miscellaneous and contingency expenses. The net expense was $1,462,332 or 73% of the effective income. He noted that this was comparable to reported information from comparable malls.

Mr. Krouse prepared a pro forma operating statement based upon the sales comparison approach. It provided net annual operating income of $534,869.00. By dividing the net annual operating income ($534,869.00) by the capitalization rate (assigned a 12% rate based upon comparable sales extracted from the marketplace), the value indicated was $4,457,242.00.

Averaging the two estimates ($4,609,000.00 and $4,457,242.00) provides a value of $4,533,121.00 or rounded to $4,550,000.00.

Appraisal for Assessor

19. Robert A. Bates, a certified general appraiser in this state, was requested by the Assessor to perform an appraisal of the Property. He appraised the Property as of December 31, 2002 and issued his appraisal report on August 4, 2005. He opined that the market value for the Property for the tax year 2003 was $9,652,000.00. He testified at the hearing concerning his report and the procedure, history and values he used to make his opinion.

In arriving at a value to be assigned to the three land parcels, he used five parcels of land in close proximity to the Property as comparables. They consisted of properties raging in acreage from 3.8 acres to 11.829 acres. Using their sales, he assigned a value of $1.50 per square foot for the land at the entire mall site or $2,803,000.

In applying the Cost Approach, he found a useful life of 50 years with a remaining economic life of 25 years. Based upon a replacement (reproductive new cost) cost of $18,343,262 depreciated 50%, he found the value of the mall structures to be $9,489,130. He also deducted a 30% amount from its net replacement value or $2,846,739 for functional obsolescence to arrive at a cost value of $6,642,391. This provided a value of $9,036,000 for the 31.4 acres mall area. He valued the 11.5 acre tract separately, finding its reproductive new cost to be $1,972,017, which together with an amount allocable for paving ($254,000) provided a value of $2,226,017. After depreciation of half of its 50 year life, its reproductive new cost was $1,113,008. Thirty percent (30%) was deducted for obsolescence which reduced its value to $779,000. After adding back the value for the land ($375,000), Mr. Bates gave an opinion of $1,154,000. Adding the land value of all three parcels, Mr. Bates assigned a value to the Property of $10,342,500 using the Cost Approach.

Next, Mr. Bates valued the Property using the Sales Comparison method. He reviewed sales of the eight malls occurring between April 1996 and December 2002 (one of which was the Prince of Orange Mall sale in April 1996). From his analysis, he assigned a value of $36.00 per square foot to the Property, or $12,184,000. He deducted 25% for the potential for future flooding, potential for greater vacancy rates, and costs associated with maintaining the drainage system and repair costs which reduced his final estimated value to $9,746.000.

Using the Income Capitalization Approach, Mr. Bates determined that the net operating income (arrived from actual rent, other income, CAM recoveries and allowances for vacancy and credit losses minus CAM expenses, insurance cost and general and administration expenses) was $1,132,868. After applying his assigned capitalization rate of 12.4%, he arrived at a value of $9,136,000.

In reconciling his values assigned to the Cost Approach ($10,190,000), the Sales Comparison Approach ($9,764,000) and the Income Capitalization Approach ($9,138,000), he assigned a value of $9,652,500 for the Property.

CONCLUSIONS OF LAW

Based on the foregoing, I conclude as a matter of law:

1. The Administrative Law Court has jurisdiction of this matter pursuant to S.C. Code Ann. § 12-60-2540 (Supp. 2004).

2. The standard of proof in weighing the evidence and making a decision on the merits of a contested case hearing is by a preponderance of the evidence. Anonymous v. State Board of Medical Examiners, 329 S.C. 371, 496 S.E.2d 17 (1998).

3. The trier of fact must weigh and pass upon the credibility of the evidence presented. See South Carolina Cable Television Ass’n. v. Southern Bell Tel. and Tel. Co., 308 S.C. 216, 417 S.E.2d 586 (1992). The trial judge who observes a witness is in the best position to judge the witness' demeanor and veracity and evaluate his testimony. See e.g., McAlister v. Patterson, 278 S.C. 481, 299 S.E.2d 322 (1982).

4. Where an expert's testimony is based upon facts sufficient to form the basis for an opinion, the trier of fact determines its probative weight. See Berkeley Elec. Coop. v. South Carolina Pub. Serv. Comm'n., 304 S.C. 15, 402 S.E.2d 674 (1991); Smoak v. Liebherr-America, Inc., 281 S.C. 420, 315 S.E.2d 116 (1984). A trier of fact is not compelled to accept an expert's testimony, but may give it the weight and credibility he determines it deserves. Florence County Dep't. of Social Services v. Ward, 310 S.C. 69, 425 S.E.2d 61 (1992); Greyhound Lines v. South Carolina Pub. Serv. Comm’n., 274 S.C. 161, 262 S.E.2d 18 (1980). When several expert witnesses testify regarding a matter in controversy, it is incumbent on the trial court to carefully weigh and consider the evidence presented by each. While the credibility of witnesses is always important, when conflicting opinions are offered by experts, the Court must not only make credibility assessments but also carefully examine the underlying basis or foundation for each expert’s conclusion. The Court must also consider the experience, training, and qualifications of each expert to determine the weight to give to their opinions.

5. S.C. Const. art. X, § 1 provides that "fair market value" is the standard for property taxation in this State. S.C. Code Ann. § 12-37-930 (Supp 2004) provides that all property is to be valued "at its true value in money which…is the price which the property would bring following reasonable exposure to the market, where both seller and buyer are willing…" Furthermore, S.C. Const. art. III, § 29 provides that all taxes upon real property shall be based upon the “actual value” of the property taxed.

6. The constitution in this state provides for a “uniform and equal rate of assessment and taxation.” S.C. Const. art. X, § 1. It does not allow the tax assessor to assess property beyond its true value in order to obtain such equality. See Wasson v. Mayes, 252 S.C. 497, 167 S.E.2d 304 (1969).

7. While cost and comparable sales are acceptable means of determining valuation, the income approach is the most common and typically the most reliable means of valuing commercial rental property. Bornstein v. State Tax Comm’n, 176 A.2d 859 (Md. 1962). Under such an approach, one seeks to determine the property’s income producing capabilities. Anthony v. Padmar, Inc., 320 S.C. 436, 465 S.E.2d 745 (Ct. App. 1995). The income producing capabilities of a rental property is best found by applying an appropriate capitalization rate to a stream of future earnings represented by a calculated net operation income. S.C. Tax Comm’n v. S.C. Tax Bd. of Review, 287 S.C. 415, 339 S.E.2d 131 (1985).

8. The date for valuation for property tax purposes is "the thirty-first day of December next preceding" the tax year under consideration. S.C. Code Ann. § 12-37-900 (Supp 2004). In the case at hand, the tax year is 2003. Therefore, the valuation date is December 31, 2002.

9. The Administrative Law Court is not bound by the findings of the County Board of Assessment Appeals but rather is required to conduct a de novo hearing. Smith v. Newberry County Assessor, 350 S.C. 572, 567 S.E.2d 501 (Ct. App. 2002). The County tax assessor’s valuation is only a piece of the evidence to be considered in setting an accurate value for the property, and the court is free to determine the proper amount of weight to give such valuation. Id.

10. Both Mr. Krouse and Mr. Brown hold the designation “MAI,” which reflects their membership in the Appraisal Institute. This national organization is a widely respected and reputable entity which provides education, continuing education, and training for appraisers. Membership requires a significant commitment of time and resources and recognizes extensive skill and expertise in the field of appraisals of real property. Mr. Krouse was qualified as an expert witness in the field of commercial real estate valuation. He has appraised approximately 25 shopping malls for various clients. Mr. Brown was qualified as an expert in the field of the valuation of shopping malls. He is a former President of the Appraisal Institute and has extensive experience appraising and working with shopping malls in South Carolina. Mr. Bates was also qualified as an expert, in the field of general real estate appraisals.

Each of these appraisers appropriately testified that the fair market value of a property is the price which the property would bring following reasonable exposure to the market. The seller and the buyer must be willing parties and must not be acting under compulsion. Furthermore, they must be reasonably well informed of the uses and purposes for which the property is adapted and for which it is capable of being used.

The three appraisers were also in agreement that although there are three widely accepted methods of determining the fair market value of property (cost, income capitalization, and comparable sales), the two better methods for valuing the Property were the comparable sales and the income method, with the income method being the better of these two.[8] Among the reasons cited by the appraisers for using the income approach were their unique uses as well as the relative dearth of comparable sales and construction of like properties in this state.[9] The Court agrees that the income approach is the proper means of valuation in this instance.

However, since each witness used the same methods to arrive at a value, it is critically important to understand the numbers used and the reasons for these numbers. Although each appraiser used substantially the same input data for actual rental income, expenses, and capitalization rate, during cross examination Mr. Bates expressed sharp differences in his understanding of the gross leasable area of the Property, the vacancy rate, and the actual recoveries by the Taxpayer for the common area maintenance, taxes, insurance charges, and fees necessary to operate the Prince of Orange Mall. Mr. Bates overstated the total vacancy area of the mall’s small shop tenant spaces by 16,409 square feet and the anchor tenant spaces by 8,000 square feet. Also, he incorrectly assumed that all leases with tenants occupying space at the Property were triple net leases which allowed the Taxpayer to recover from each of them their proportional share of the mall’s total common area maintenance, taxes, and insurance fees. The credible evidence was that few of the tenants operate under triple net leases; instead, they pay a fixed rental amount each month under a gross rental structure. By correcting these figures in Mr. Bates’ income model and using his same values for rent, expenses, and capitalization rate, the estimated total value of the Property under Respondent’s appraisers’ model reduces his opinion of its valuation from $9,000,000 to about $2,500,000.

Mr. Krouse opined to a fair market value of $4,550,000 relying on the income approach, and a fair market value of $4,600,000 relying on the sales comparison approach. Mr. Brown arrived at a fair market value of $4,000,000 relying on the income approach, and a fair market value of $4,200,000 relying on the sales comparison approach. Both opinions are credible and supported by appropriate application of quality, accurate, and reliable data. There is no evidence of collusion or collaboration between Mr. Brown and Mr. Krouse. Each of them using their unique and respective talents, skills and experience, arrived at an opinion of fair market value within a rage of about 1% of each other. By contrast, Mr. Bates’ appraisal is about twice the highest value presented by Mr. Brown and Mr. Krouse. Once some of the errors in Mr. Bates’ income model are corrected, Mr. Bates’ value is almost half of the value as determined by Mr. Brown and Mr. Krouse.

Since Mr. Bates failed to use correct information and/or follow proper procedures at arriving at the fair market value of the Property, the Respondent’s valuation of $12,152,000 and Mr. Bates’ valuation of roughly $9,000,000 are grossly overstated. The appropriate fair market value is within the range presented by Taxpayer’s experienced, credible expert witnesses. Therefore, based on all evidence the Court concludes that the fair market value of the Property for 2003 is $4,652,500.

ORDER

Based upon the foregoing, it is:

ORDERED that the credible evidence establishes that the fair market value of the Property as of December 31, 2002 was $4,652,500.00; and it is further

ORDERED that the Assessor shall assess the Property for the tax year 2003 at $4,652,500; and it is further

ORDERED that the valuation of $4,652,500 for the Property shall be allocated among the three separate parcels as follows: $152,500 to TMS # 0151-15-01-005 (0.70 acre leased tract), $1,250,000.00 to TMS # 0151-11-01-014 (11.5 acre tract and a 39,900 square foot building) and $3,250,000.00 to TMS # 0151-15-01-002 (31.4 acre tract and the main mall building containing 353,141 square feet).

AND IT IS SO ORDERED.

______________________________

Marvin F. Kittrell

Chief Administrative Law Judge

February 9, 2006

Columbia, South Carolina