SC Administrative Law Court Decisions

The ultimate issue here is the proper value of these properties for ad valorem tax purposes for the tax year 1998.

The matter was heard on March 11, 2002, and based on the evidence presented at the trial, I make the following Findings of Fact and Conclusions of Law. Any issues raised in the proceedings but not addressed in this Final Order and Decision are deemed denied. ALJD Rule 29(C).

II. FINDINGS OF FACT

The categorization of matters as either findings of fact or conclusions of law is not determinative. Accordingly, the mere delineation of a conclusion of law as a finding of fact, or vice versa, does not alter its effect in this order.

1. This division has personal and subject matter jurisdiction.

2. Notice of the date, time and place of the hearing was timely given to all parties, and all parties were present and represented by counsel.

3. Sea Pines is the owner of several parcels of property comprising the three golf courses at issue. The golf course properties contain deed restrictions that require the land to be used as golf courses or open space, so that the properties cannot ever be developed to other purposes.

4. The property at issue is located in Beaufort County, South Carolina, and is identified on the Beaufort County tax maps as follows:

R550 017 000 0304 0000 R550 017 00A 0001 0000

R550 017 000 1098 0000 R550 018 000 0198 0000

R550 107 000 1116 0000 R550 017 00A 0106 0000

5. For the year 1997, gross revenues of the Sea Pine Resort totaled $22,773,911.00.

6. The proper date for the valuation is December 31, 1997. Only real property should be or may legally be valued. Real property is defined as the real estate which is the land and any improvements thereon and also the rights that go with property ownership.

7. There are three commonly accepted methods for the valuation of commercial real estate, including golf courses, for ad valorem tax purposes. They are: (1) the income capitalization method; (2) the sales comparison method; and (3) the cost method. Under the income capitalization approach, a single year's net operating income is divided by a capitalization rate to reach a value estimate. When using the income capitalization approach, only the income of the real estate may be considered when determining the net operating income. As a result, the value of the personal property should be separated from the real estate for ad valorem tax purposes.

8. Golf carts, food and beverages, restaurant equipment, and items sold in a pro shop are personal property. Revenues generated by the pro shop sales and the food and beverage operation are generated from personal property.

9. The golf carts and the revenues generated from the golf carts are already taxed. Sea Pines pays sales tax and personal property tax on the carts themselves. In addition, Sea Pines pays federal and state income taxes on the revenue derived from the cart rentals.

10. In addition, Sea Pines pays state and federal income taxes on the revenues generated from the pro shop sales and the food and beverage operations.

11. The method used to value all of the golf courses in Beaufort County for ad valorem tax purposes must be applied uniformly and equitably. Accordingly, the County must utilize the same methods and apply those methods in the same way in valuing all of the golf courses in Beaufort County.

12. The County ultimately did not consider the revenue from food and beverage sales, pro shop sales, or restaurant sales when valuing the real property for ad valorem tax purposes for any of the other golf courses in Beaufort County.

13. The highest sales price of any golf course in Beaufort County, to date, was $7.1 million. The Oyster Reef Golf Course sold for $7.1 million in the year 2001. The selling price of a golf course normally includes the full going concern value and not just the value of the real property. The going concern value includes real property, personal property, and business value. Accordingly, the value of the real property of the Oyster Reef Golf Course would have been less than $7.1 million.

14. Three expert witnesses testified as to the valuation of the three Sea Pines golf courses. Two experts, Mr. Robert Kuhlman and Dr. James Vernor, testified on behalf of the taxpayer. Mr. Richard Marlow testified on behalf of Beaufort County.

15. Mr. Marlow is a licensed appraiser in South Carolina and obtained a Bachelor of Science in Business Administration. He is presently self-employed as an independent real estate appraiser and is a member of the Appraisal Institute and the Society of Golf Appraisers. He has been a member of the Appraisal Institute since 1979 and a member of the Society of Golf Appraisers since 1995.

16. Dr. Vernor has a Bachelor's Degree with a major in finance, a Master's in business administration with a major in real estate, and a Ph.D. in real estate. He served as a member of the Board of Tax Assessors for DeKalb County, Georgia from 1994 to 2000, and chaired the board in 1997. He was a professor of real estate for twenty-three years at Georgia State University, which has the largest real estate department of any accredited post-secondary college in the United States. At Georgia State he was the Chairman of the Real Estate Department. His academic focus was real estate appraisal with a secondary interest in real estate financing and investment. Dr. Vernor also teaches courses for the Appraisal Institute. Dr. Vernor is a licensed appraiser and is a member of the Appraisal Institute.

17. Mr. Kuhlman is an expert in the field of golf course valuation. Mr. Kuhlman's experience in the golf industry is extensive. He has owned, managed, and brokered golf courses, and has consulted in the golf industry for almost thirty years. Mr. Kuhlman has been a golf professional and the director of golf for several courses. Mr. Kuhlman completed training from the PGA of America and obtained a Class A membership, which is the highest designation a club professional can obtain. Mr. Kuhlman obtained a Bachelor's degree with a major in business administration. He has worked for several banks where he valued and sold golf courses. In 1996, Mr. Kuhlman started a company called Golf Tax, which specialized in the valuation of golf courses for ad valorem tax purposes. The business was later purchased by Deloitte & Touche, and Mr. Kuhlman was retained to manage the business for an additional two years. Mr. Kuhlman has valued hundreds of golf courses and has testified regarding the valuation of golf courses in at least twelve states, including South Carolina. At the time Mr. Kuhlman valued the golf courses at issue, he was registered as a state appraiser under South Carolina law.

18. Mr. Marlow did not perform a complete appraisal. Instead, Mr. Marlow "entered into an agreement with the Assessor's Office to perform an appraisal in which the amount and type of information researched and the analysis applied [would be] less than or different from what would otherwise be required by the Uniform Standards of Appraisal Practice." In his limited appraisals, Mr. Marlow utilized the income capitalization valuation method of commercial real estate. However, Mr. Marlow failed to separate the value of the real estate from the going concern and the personal property in his valuations. Instead, Mr. Marlow included in his calculations all revenues derived from the pro shop operation, the food and beverage operation, the restaurant, and the golf cart rental operation. In other words, Mr. Marlow included all revenues derived from personal property. In so doing, Mr. Marlow calculated the net operating income of the entire going concern. In using the net operating income of the entire going concern in his calculations, Mr. Marlow determined the value of the entire going concern.

19. Mr. Marlow used a management fee in an attempt to back out or separate the personal property value or business value from the value of the real property. In addition, Mr. Marlow used a sales comparison approach to extract the capitalization rate. His capitalization rate was 11%.

20. Mr. Marlow, based upon his version of the income capitalization method, in which he included all revenues derived from food and beverage sales, merchandise sales, and golf cart rentals, calculated the value of the Harbour Town Course for ad valorem tax purposes to be $16,000,000 and the value of the Ocean and Sea Marsh Courses together to be $18,500,000. I find these values to be significantly inflated when compared to the ultimate valuations of other, similar golf courses located in the county. ⁽²⁾

21. Dr. Vernor did not prepare an independent appraisal in this case. Instead, he reviewed the work of Mr. Kuhlman and Mr. Marlow. Using the comparable sales cited by Mr. Marlow to determine his capitalization rate, Dr. Vernor performed the comparative sales approach and calculated the value of the courses at issue here to be $4,425,000 per golf course. While his testimony is credible on these issues, Dr. Vernor's valuations are not reasonable for at least two reasons. One, the comparable sales approach is not the preferred method of valuing unique commercial property. Second, no sales of truly comparable golf course sales were available for comparison purposes. However, the comparable sales approach should be considered in order to check the reasonableness of values calculated by using the other methods.

22. After conducting an analysis of the resort property at issue, Mr. Kuhlman utilized the income capitalization method to determine the value of the real estate alone. To determine the net operating income of the Harbour Town course and the Ocean/Sea Marsh courses so that the capitalization rate may be applied, Mr. Kuhlman used the actual income and expense data from Sea Pines' financial statements. Mr. Kuhlman first calculated the income attributable to the real property of each of the golf courses by subtracting from the total revenues all revenues derived from the golf cart operation, the food and beverage operation, the pro shop, and the restaurant, essentially leaving only revenues derived from memberships and greens fees. Mr. Kuhlman then added in an imputed rent for the pro shop operation, the food and beverage operation, the restaurant, and the golf cart rental operation. This total is what Mr. Kuhlman calls "restated revenues." Mr. Kuhlman then calculated the expenses directly attributable to the real estate, specifically excluding all expenses directly related to the golf cart operation, the food and beverage operation, the restaurant operation, and the pro shop operation. Next, Mr. Kuhlman calculated the unallocated, corporate administrative expenses attributable to the real estate. Mr. Kuhlman then subtracted those corporate expenses from the restated revenues to arrive at a net operating income ("NOI"), to which Mr Kuhlman applied a capitalization rate of 11.49% to determine the values of the golf courses for ad valorem tax purposes.

23. To determine the allocation of corporate expenses, Mr. Kuhlman compared the actual revenues generated by the courses to the total resort revenues to arrive at 28.69% for Harbour Town and 27.89% for the Ocean/Sea Marsh courses. According to Mr. Kuhlman, it was proper to use actual revenues, rather than restated revenues, to determine the percentage of corporate expenses to be allocated to the golf courses because those expenses would be incurred whether or not there is a business value associated with the real property. Consequently, Mr. Kuhlman determined the value of the Harbour Town Course to be $4,627,069 and the value of the Ocean and Sea Marsh Courses combined to be $6,361,764, for a total value of $10,988,833.

24. I find that Mr. Kuhlman's imputed rent approach to income capitalization is a proper method of determining the value of golf courses for ad valorem tax purposes.

25. The County's valuation of the Sea Pines courses is too high. However, the taxpayer's valuation of the Sea Pines courses is too low. Although Mr. Kuhlman's imputed rent approach to the income capitalization method is a proper one, Mr. Kuhlman used an improper allocation of corporate expenses to lower the NOI of the courses. As previously mentioned, Mr. Kuhlman compared the actual revenues generated by the courses to the total resort revenues to arrive at a 28.69% allocation of corporate expenses for Harbour Town and a 27.89% allocation of corporate expenses for the Ocean/Sea Marsh courses. When questioned by the county on cross-examination, Mr. Kuhlman attempted to justify his use of actual revenues in the expense allocation computation by averring that the expenses would exist whether or not there was any business value to the resort. Notwithstanding Mr. Kuhlman's justification, I do not believe that Mr. Kuhlman's allocation of corporate expenses, based on actual, rather than restated, revenues is proper when using imputed rents in an income capitalization approach to valuation.

26. However, at the Assessor's behest, Mr. Kuhlman re-computed the allocation of corporate expenses based on the restated revenues as compared to the total resort revenues, resulting in a much lower percentage of allocation of corporate expenses, thereby increasing the NOI of the courses. As a result, the re-computed allocation of corporate expenses to Harbour Town is 17.03%, ⁽³⁾ while the re-computed allocation of such expenses to the Ocean/Sea Marsh courses is 19.2%. Based on the re-computed allocations, the value of the Harbour Town course is $9,936,345.00 and the combined value of the Ocean and Marsh courses is $10,698,425.00. I find this methodology and value determination to be reasonable. Therefore a reasonable and correct value for ad valorem tax purposes of the three Sea Pines courses at issue is $20, 634,770.00.

III. CONCLUSIONS OF LAW

Based upon the above Findings of Fact, I conclude as a matter of law, the following:

1. The Administrative Law Judge Division has personal and subject matter jurisdiction over this matter. South Carolina Code § 12-60-2540 (Supp. 2001) authorizes the South Carolina Administrative Law Judge Division to hear contested cases in property tax assessment matters pursuant to Chapter 23 of Title 1 of the South Carolina Code, as amended.

2. This proceeding before the Administrative Law Judge Division is in the nature of a de novo hearing. See Blizzard v. Miller, 306 S.C. 373, 375, 412 S.E.2d 406, 407 (1991) ("A trial de novo is one in which 'the whole case is tried as if no trial whatsoever had been had in the first instance.'").

3. "The qualification of a witness as an expert in a particular field is within the sound discretion of the trial judge." Smoak v. Liebherr-Am., Inc., 281 S.C. 420, 422, 315 S.E.2d 116, 118 (1984). However, when the expert's testimony is based upon facts sufficient to form a basis for an opinion, the trier of fact determines its probative weight. Berkeley Elec. Coop. v. South Carolina Pub. Servs. Comm'n, 304 S.C. 15, 402 S.E.2d 674 (1991); Smoak, supra. Further, 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 Co. Dep't of Soc. Serv. 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). He also may accept the testimony of one expert over another. South Carolina Cable Television Ass'n v. Southern Bell Tel. & Tel. Co., 308 S.C. 216, 417 S.E.2d 586 (1992).

4. The taxable status of real property for a given year is to be determined as of December 31^st of the preceding tax year. S.C. Code Ann. § 12-37-900 (Supp. 2001).

5. The proper measure of value for taxation purposes is the fair market value. Lindsey v. South Carolina Tax Comm'n, 302 S.C. 504, 397 S.E.2d 95 (1990). Fair market value is defined in S.C. Code § 12-37-930 (Rev. 2000) as: " . . . the price which the property would bring following reasonable exposure to the market, where both the seller and the buyer are willing, are not 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."

6. The property's highest and best use must be considered in calculating the property's value. "Highest and best use" may be defined as "the reasonable, probable and legal use of vacant land or improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value." The Appraisal of Real Estate, Appraisal Institute, p. 45 (10^th ed. 1992). In this case, it is uncontested that the highest and best use of this property is as a golf course.

7. To determine a fair market price for the subject property, comparisons of the sale price of other properties of the same character may be utilized. See Smith v. Newberry County Assessor, 2002 WL 1159870 (S.C. Ct. App. June 3, 2002); 84 C.J.S. Taxation §§ 410-411 at 785, 797 (1954).

8. While not conclusive, market sales of comparable properties present probative evidence of the fair market value of similar property. 84 C.J.S. Taxation § 411 (1954); see generally Smith v. Newberry County Assessor, supra.

9. Because golf courses rarely sell as real estate alone, any comparable sale should identify and deduct the amount of the intangible assets included in the transfer. Stephen R. Hughes and Kevin K. Nunnink, Appraising Golf Courses for Ad Valorem Tax Purposes, The Appraiser's Journal, Oct. 1993.

10. The income capitalization method is recognized as a somewhat favored means of valuing rental property. Bornstein v. State Tax Comm'n, 176 A.2d 859 (Md. 1962). This method converts net income imputable to the real property into an indication of property value by the use of a capitalization rate or factor. All expenses attributable to the real property are deducted from an effective gross income estimate to arrive at a forecast or applicable net income stream. The net value income streams are then capitalized or discounted into a value by market abstracted rates (i.e., those that would attract a prudent investor to invest in a similar situation with comparable degrees of risk, liquidity and management burdens).

11. All three approaches to valuing real property "should be adjusted to exclude personal property and business value." Appraising Golf Courses for Ad Valorem Tax Purposes, supra.

12. "To arrive at a value for the real estate alone, the value attributable to tangible personal property and 'business value' must be deducted . . . ." Myrtle Beach Hosp. v. Horry County Assessor, Docket No. 97-ALJ-17-0449-CC (S.C. A.L.J.D. 1997)(citing The Appraisal of Real Estate at 412.

13. In determining the "stand alone" value of a golf course that has sold, the factors that may have been included in the purchase price include personal property, business value, and signatures such as Tom Fazio or Robert Trent Jones. Appraising Golf Courses for Ad Valorem Tax Purposes, supra. Since these items are usually included in the sales price of a golf course, but are not real estate, their value should be deducted from the comparable sales price to arrive at a "stand alone" value of the real estate alone for tax purposes. Id.

14. Personal property must be excluded from real estate valuation for ad valorem tax purposes. Minnetonka Country Club Ass'n v. County of Hennepin, 1989 Minn. Tax LEXIS 44 (Minn. Tax Ct. April 7, 1989). "In valuing a golf course for real estate tax purposes we must exclude the value of any non-taxable personal property. This means that any comparable sales used in a market approach must be adjusted to reflect only that portion of the sales price attributed to real property." Id. at *6. ⁽⁴⁾

15. When utilizing the sales comparison approach, "[a]ny sales are most likely transfers of TAB [total assets of the business or going concern value], and all tangible and intangible personal property must be removed in order to isolate the contribution of the real estate to the sale price." The Appraisal of Real Estate p. 643. The Appraisal Institute stated further that:

In the income capitalization approach, because the capitalized income stream will most likely reflect income to TAB [total assets of the business or going concern] all components of net operating income not attributable to the real estate must be removed. The difficulty of these assignments does not relieve the appraiser of the responsibility to treat the tangible and intangible personalty properly. Not to do so produces either use value or the value of TAB [total assets of the business or going concern]; neither is the market value of the fee simple estate in real property. Id.

16. In utilizing the income capitalization approach, a reasonable method of calculating the value of a golf course is by imputing rent to revenue-producing personal property. Imputed rent, although derived from a percentage of personal property revenues, is nonetheless revenue attributable to the real property itself.

17. Real estate of "similar value should be assessed (valued) the same and failure to do so would offend" the State Constitution and deny equal protection under the law. 1977 Op. S.C. Att'y Gen. 4.

18. The taxpayer has proven that the actual value of the property is a value other than that determined by the taxing authority.

Based upon the above Findings of Fact and Conclusions of Law, it is hereby ORDERED that the Assessor value taxpayer's property identified as R550 017 000 0304 0000, R550 017 00A 0001 0000, R550 017 000 1098 0000, R550 018 000 0198 0000, R550 107 000 1116 0000, and R550 017 00A 0106 0000 at a consolidated value of $20, 634,770.00 for the tax year 1998.

AND IT IS SO ORDERED.

____________________________________

C. DUKES SCOTT

ADMINISTRATIVE LAW JUDGE

June 20, 2002

Columbia, South Carolina

1.

⁰ The initial assessment of the Harbour Town Course was $15,867,710. However, the county later amended its assessment to $14,494,800. (Ruling of Tax Equalization Board, dated 12/15/2000).

2. The settled values of several comparable golf courses located in Beaufort county were: $ 2 million (Country Club of Beaufort); $5.8 million (Fripp Island Ocean Point Course); $7.4 million (Golden Bear Golf Course) and $5.5 million (Gibbes Island Secession Golf Course).

3. In their proposed orders and during the hearing, both parties represented that the Harbour Town percentage of unallocated corporate expenses is 16.1%. However, that calculation is incorrect. When the restated revenue of $3,878,429.00 is divided by overall resort revenue of $22,773,991.00, the result is 17.03%.

4. Minnetonka also holds that any income related to golf cart rentals should be excluded. Minnetonka Country Club, supra, at **6-7. However, because I adopt Mr. Kuhlman's imputed rent method of income capitalization, the issue of whether such income should be included shall be reserved for another time.