ORDERS:
FINAL ORDER AND DECISION
STATEMENT OF THE CASE
This is a contested case brought by the Petitioner Watermark Associates concerning a
property valuation for the 2001 tax year. Though the Petitioner did not exhaust its prehearing
remedies with the Charleston County Board of Assessment Appeals, the Respondent Charleston
County Assessor waived his right to have this case remanded. See S.C. Code §12-60-2540 (2000).
Therefore, a contested case hearing was held at the offices of the Administrative Law Judge Division
(Division) on February 25, 2003.
ISSUE
What is the appropriate market value for tax year 2001 of a parcel of real property located
in Charleston County, South Carolina, with structures and improvements thereon?
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:
General Findings
1.Notice of the time, date, place and nature of the hearing was timely given to all parties.
2.The Petitioner owns a 2.47 acre tract in Charleston County located at 950 Houston
Northcutt Boulevard. The property is in an established commercial area surrounded by several
businesses. Upon the property is a two-story commercial office building known as Watermark Plaza
(Watermark) and a parking lot for the building. The Assessor initially appraised the market value of
Watermark as of December 31, 1998 to be $2,814,000.00. Afterwards, the Respondent received
various documents from the Petitioner challenging that valuation. Pursuant to the new information,
the Assessor re-appraised the market value of the property to be $2,200,000.00. The Petitioner
argues that the market value for the subject property is $1,615,710.00. Specifically, the Petitioner
contends, in part, that in valuing Watermark, the Assessor:
•Failed to consider the adverse condition of the building, specifically that the roof and
the heating and air units (HVAC) were in need of repair;
•Incorrectly calculated the net rentable square footage of Watermark Plaza;
•Did not reconcile the difference in the rent comparables he used with Watermark
Plaza;
•Incorrectly calculated the Petitioner’s Potential Gross Income (PGI) and its Effective
Gross Income (EGI);
•Failed to include the increased tax rate in its expenses;
•Failed to include a “depreciation reserve” in its expenses; and
•Incorrectly calculated the Petitioner’s expenses.
3.The Assessor valued Watermark using the income capitalization approach. The
Petitioner agreed that approach was appropriate to determine the fair market value of the property.
The income capitalization approach is probably the most useful approach to determine the market
value of income-producing property because it looks at property value through the eyes of a typical
investor and seeks to determine the present value of the income the property will produce during its
remaining useful life. See The Appraisal of Real Estate 413 (10th ed. 1992). When determining the
value of rental property by the direct capitalization approach, the appraiser first determines the PGI,
typically by determining the area rented and the rent and other income derived from that area. This
figure is reduced by expected vacancy and collection loss to arrive at the property’s EGI. The
appraiser further reduces this figure by the annual operating expenses necessary to maintain the
property which establishes the net operating income. Next, the net operating income is divided by
the capitalization rate to determine an estimated value of the rental income abilities of the property.
The capitalization rate represents the desired yield a purchaser would seek on the investment and
includes a measurement of risk.
Square Footage
4.Watermark is a two-story multi-tenant office building constructed in 1986. The
building has a unique triangular shape which presents difficulties in evaluating the square footage of
the building. Within the building is a staircase, elevator and closet areas. These areas are known as
vertical penetrations that are not considered in determining the square footage for appraisal purposes.
In evaluating the square footage for purposes of appraising the property, the net leasable square
footage of the building is considered in the Charleston area. Net leasable square footage is the gross
square footage minus the vertical penetrations and is synonymous with the Petitioner’s term “net
rentable” square footage. The net leasable square footage of Watermark Plaza is 26, 780 square feet.
Income
5.The Assessor presented three comparable properties to reflect the “market rate” of
the rent in the area of Watermark. None of the three comparables are properties that are closely
similar to Watermark. In fact, Comparable 1 is one-third (⅓) the size of Watermark and is 13 years
newer. Comparable 2 has no visible road frontage and is two-thirds (⅔) the size of Watermark.
Comparable 3 is a mixed-use office building with both office and retail space and rents on a different
basis than Watermark. Nevertheless, as the Petitioner agreed, the three comparables are the most
appropriate properties for the purpose of determining the rent charged in the area.
The Petitioner proposes to resolve the disparity between the properties by simply averaging
the rent rates of all three properties and applying that rent rate ($14.50 per square foot) to
Watermark.
Under the income approach, the appraiser should consider comparable
income-producing properties in the same market to derive income data. However, the rental rates
for the comparable properties are just one factor in evaluating the proper rent rate for Watermark and
thereby the Petitioner’s PGI or EGI. The Petitioner’s past statements of his EGI are another factor.
The Petitioner’s average EGI for the last four years was approximately $369,000.00 and for the last
three years was approximately $390,000.00. Furthermore, the average rate of the comparable
properties reflects the current rent rates that the properties are collecting as opposed to the “market
rent rate” which is used for appraising what a buyer would pay for the property. Therefore, the rent
rates of the comparable properties and the Petitioner’s EGI, when considered in light of a net leasable
square footage of 26,780 square feet, clearly support a rent rate of $15.00 per square foot.
Expenses
6.In analyzing the Petitioner’s expenses, the Assessor used the Petitioner’s actual figures
for cleaning, commissions, insurance, legal cost, taxes and utilities. The repairs and maintenance
figure of $23,449.00 was derived by averaging the Petitioner’s 1998 and 1999 repairs and
maintenance costs. The Assessor also determined a miscellaneous cost of $2,619.00. The Assessor
further assumed that a management fee of 4% should also be added. That figure was utilized because
4% is the typical management fee which is assumed in determining the value of property in the
Charleston area. After computing these amounts, the Assessor determined that his calculations of
the Petitioner’s expenses were below the area average of 38%. Therefore, in fairness to the
Petitioner, the Assessor utilized a general expense ratio of the area. I find that an expense ratio of
38% for the area is appropriate.
Nevertheless, the Petitioner also asserts that the increased tax rate for this property as a result
of the assessment would be considered by a potential purchaser of Watermark and therefore should
be included in the expense calculation. In fact, the Appraiser of the property testified that increased
property taxes may effect a buyer’s evaluation of the purchase price. I therefore find that the tax
increase should be considered.
The Petitioner’s approximate property tax based on the calculations
below is $27,500.00 or, in other words, approximately $11,200.00 in additional taxes. That amount,
when considered with his other expenses including a 4% management fee of $14,461.00, exceeds an
expense ratio of 38%.
Furthermore, though Watermark is in good condition considering the age of the building, the
roof is in need of repair and the HVAC units will soon have to be replaced. The cost of the repairs
to the roof will be approximately $60,000.00. The replacement cost of the HVAC units is
approximately $68,000.00. Therefore, a buyer considering purchasing this property would recognize
that there is a $128,000.00 pending outlay of capital expenses. These expenses must be considered
in valuing the property and can be considered as either a capitalized expense over the life of the
property or accounted for by increasing the capitalization rate. I have chosen to account for this
expenditure as the Assessor did when valuing the property by increasing the capitalization rate.
Here, the Assessor’s appraiser testified that the typical capitalization rate for office space in
the area is 10%. The Assessor added a half percent (.5%) in recognition of the age of the building,
thus lowering the value of Watermark approximately by $103,000.00. However, I find that while
the Assessor’s 10% cap rate is supported by the local market, the Assessor’s capitalization rate
increase of .5% fails to sufficiently account for both the age of the building and these above pending
costs. Consequently, I conclude that the unusual nature of the subject property dictates that an
additional three-quarter percentage points (.75%) should be added to the average market cap rate,
making the cap rate 10.75%. This capitalization rate increase will account for a purchaser’s concerns
about the age of the building and the needed repairs. Obviously, when the repairs are made, the
capitalization rate would be adjusted accordingly.
Conclusion
7.Based upon the Findings of Fact above, I find that Watermark taxes should be
calculated as follows:
Potential Gross Income:
26,780 sq. ft. x $15/sq. ft.$401,700
Less 10% vacancy and collection loss$ 40,170
Effective Gross Income: $361,530
Expenses
Cleaning$17,148
Telephone $8,371
Insurance $2,391
Legal and accounting $1,361
Taxes$27,500
Utilities$46,634
Other Repairs & Maintenance$23,449
Miscellaneous $2,619
Management fee (4%)$14,461
Total $143,934
Net operating income $217,596
Divided by total cap rate 10.75%
Value by capitalization: $2,024,148
CONCLUSIONS
Based upon the above findings of fact, I conclude as a matter of law the following:
1.S.C. Code Ann. §12-60-2540 (2000) authorizes the Division to hear this contested
case pursuant to Chapter 23 of Title 1 of the 1976 Code of Laws, as amended. The taxable status of
real property for a given year is to be determined as of December 31 of the preceding tax year. S.C.
Code Ann. §12-37-900 (2000); Atkinson Dredging Company v. Thomas, 266 S.C. 361, 223 S.E.2d
592 (1976).
2.“A taxpayer contesting an assessment has the burden of showing that the valuation
of the taxing authority is incorrect.” Cloyd v. Mabry, 295 S.C. 86, 367 S.E.2d 171 (Ct. App. 1988).
In S.C. Code Ann. §12-37-930 (2000), the legislature set forth how real property must be valued:
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.
Therefore, the measure of value for taxation purposes is fair market value. Lindsey v. S.C. Tax
Comm'n, 302 S.C. 504, 397 S.E.2d 95 (1990). While not conclusive, comparisons of the sales price
of other properties of the same character, location, and physical characteristics may be utilized to
determine this fair market price. See Appraisal Institute, The Appraisal of Real Estate 367 (10th ed.
1992)
; Cloyd v. Mabry, 295 S.C. 86, 367 S.E. 2d 171 (Ct. App. 1988); See 84 C.J.S. Taxation § 411
(1954). Furthermore, 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).
3.While it is impossible to predict with certainty what a particular property will sell for,
utilizing comparable sales is a good indicator of what a potential purchaser will likely pay and it
provides probative evidence of the market value of the subject property, if the comparables are similar
in character, location and physical characteristics. See 84 C.J.S. Taxation § 411 (1954). The income
capitalization approach is also an accepted means for valuing commercial property. S. C. Tax
Comm’n v. South Carolina Tax Bd. of Review, 287 S.C. 414, 339 S.E.2d 131 (Ct. App. 1985). “In
the income capitalization, the present value of the future benefits of property ownership is measured.”
See The Appraisal of Real Estate 81 (10th ed. 1992). Furthermore, because expenses vary from year
to year, “in projecting the probable future expenses, it is necessary to analyze more than one year’s
experience and to confirm the indicated conclusions by comparison with known figures for similar
properties.” Id. at 345-346. Upon ascertaining the net income a property will produce during its
remaining useful life, an appraiser can project the price an informed buyer would pay for the property.
Id at 81. The Petitioner and the Respondent agreed that the appropriate appraisal technique for
arriving at the fair market value of the subject property is the income approach. Therefore, I find that
the income capitalization approach is the best method for determining the market value of Watermark
ORDER
Based upon the above Findings of Fact and Conclusions of Law, It is hereby:
ORDERED that the Assessor value the Petitioner’s property based upon the income
capitalization approach for tax year 2001 at $2,024,148.00.
AND IT IS SO ORDERED.
Ralph King Anderson, III
Administrative Law Judge
May 23, 2003
Columbia, South Carolina |