ORDERS:
FINAL ORDER AND DECISION
I. Statement of the Case
This contested case results from a disagreement between James M. Hull (taxpayer) and the
Spartanburg County Assessor (assessor) over the value of property owned by the taxpayer for the
tax year 2002. The parties exhausted the prehearing remedies within the assessor's office and before
the Spartanburg County Board of Assessment Appeals and now bring this contested case to the
Administrative Law Judge Division (ALJD). Jurisdiction over this matter is in the ALJD under S.
C. Code Ann. § 12-60-2540(A) (Supp. 2002). After considering the arguments and evidence
presented, the property must be valued at $10,215,000.
II. Issue
What is the fair market value of the subject property for the tax year 2002?
III. Analysis
A. Findings of Fact
Based on the preponderance of the evidence, the following findings of fact are entered:
The property under review carries a tax map identification number of 6-20-08-004.01. It is located
at 110 E. Blackstock Road, Spartanburg, South Carolina and is bordered by U.S. Hwy 29, I-26, and
East Blackstock Road. The location is in a highly concentrated area of retail establishments. Indeed,
across from the location is a regional shopping center.
The property consists of 23.36 acres of land plus a primary improvement of a building containing
approximately 171,000 square feet. Susan Yeomans, the fee owner of the land, leases the land to
H/S Super Spartanburg, L.P. (H/S) for $240,000 a year. H/S has constructed a building on the
property and leases both the land and building to K-Mart Corporation for the operation of a Super
K-Mart at the site. The store consists of several departments including a retail merchandise store,
a grocery with a bakery and deli, a pharmacy, a lawn and garden center, and an auto repair service
center.
The lease, executed in 1994, is essentially a triple net lease for a 25 year term followed by ten options
to renew for terms of five years each. The annual rent paid under the lease is $1,347,275 or
approximately $7.87 per square foot.
Net operating income for the current property is determined as follows:
Gross Income Under the Lease$1,347,275
Less:
Vacancy and Loss (2%)<26,946> <26,946>
Effective Gross Income$1,320,329
Less:
Management (2%)<26,407>
Offset for Reserve ($.l0 sq. ft)<17,100> <43,507>
Net Operating Income$1,276,822
A capitalization rate determined from market sales of "big box" Wal-Mart properties in South
Carolina presents a suggested capitalization rate of between 8.52% and 8.57% for 1996. However,
the instant case presents rental income from a K-Mart, not a Wal-Mart and the valuation date is
December 31, 2001, not any date in 1996.
The differences in tenant and date are significant. K-Mart, unlike Wal-Mart, experienced significant
financial difficulties in the late 1990's. In fact, since 1995, K-Mart's stock value dropped from $18.00
per share to $6.00 per share over a six month period. By December 31, 2001, the stock was at a
value of $4.75 with suggestions that bankruptcy was possible.
Accordingly, a higher capitalization
rate is needed to account for the increased risk. Thus, a rate of 12.5% is warranted.
B. Conclusions of Law
Based on the foregoing Findings of Fact, I conclude the following as a matter of law:
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 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 the instant rental property is best found by
applying an appropriate capitalization rate to a stream of future earnings represented by a calculated
net operating income. S.C. Tax Comm'n v. S.C. Tax Bd. of Review, 287 S.C. 415, 339 S.E.2d 131
(1985). Here, an income approach is the proper means of valuation and the Assessor's methodology
(modified for capitalization rate) presents the most persuasive means for projecting a value based on
the property's stream of future earnings.
The long term lease identifies the annual gross income paid as $1,347,275. A modest reduction by
a vacancy and loss rate of 2% to arrive at effective gross income is proper since the building is a one
tenant structure. Thus, little if any potential exists for "turnover" of tenants or a vacancy occurring
for a significant period. Likewise, management expenses are typically incurred for landlord tenant
liaison, administration, rent collection, some accounting, or minor legal costs. However, such
expenses are not likely to be significantly large given the one tenant arrangement. Thus, again, 2%
is proper. Finally, the $.10 per square foot reduction for reserves is not unwarranted and serves as
a means of assuring proper maintenance and upkeep of the facility. Accordingly, the net operating
income to be capitalized is $1,276,822.
The final step for valuation is the capitalization rate applicable to the income stream of $1,276,822.
The Assessor suggested 9% due to the existence of overall rates primarily derived from Wal-Mart
facilities. However, I find the 12.5% suggested by the taxpayer to be more in line with the risks
associated with a K-Mart facility.
First, the superior financial strength of Wal-Mart makes the capitalization rate primarily derived from
such facilities less than comparable when dealing with K-Mart as a tenant. Second, the,
capitalization rate relied upon by the Assessor was determined from data accumulated for 1996
transactions. K-Mart's financial base deteriorated significantly through the late 1990s. For example,
1995's value of $18.00 per share fell to $4.75 per share by December 31, 2001. Such a drop
accompanied by suggestions that bankruptcy was possible would cause a potential buyer to seek a
higher return due to the increased risk. Thus, the taxpayer's use of a 12.5% rate is more consistent
with the evidence produced.
IV. Order
Based upon the Findings of Fact and Conclusions of Law, it is hereby ordered:
The Spartanburg County Assessor shall value the subject property for the tax year 2002 at
$10,215,000 based on capitalizing $1,276,822 at 12.5%.
AND IT IS SO ORDERED.
____________________________
RAY N. STEVENS
Administrative Law Judge
Dated: January 15, 2004
Columbia, South Carolina |
