SC Administrative Law Court Decisions

This contested case results from a disagreement between Leslie C. Rankin, Jr. (taxpayer) and the Jasper County Assessor (assessor) over the value of property owned by the taxpayer for the tax year 2001. The parties exhausted the prehearing remedies within the assessor's office and before the Jasper 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. 2001).

At the outset, one must understand that this case is decided solely on the grounds presented by the parties. For example, no issue was raised below or presented to the ALJ on whether the one acre properties from which the taxpayer derives rental income can be segregated for separate taxation from the larger parcels of which they are joined. In other words, the assessor and the taxpayer presented this case in agreement that the one acre properties here in dispute can be taxed individually and that the only issue disputed is the value of each of the one acre parcels. Indeed, such agreement is consistent with the assessor's actions since the assessor has made no argument that the production of rental income on property attached to agriculture use property will result in the loss of the agricultural use classification or value. See S.C. Code Ann. 12-43-230(a) (If "at least fifty percent of a real property tract shall qualify as 'agricultural real property,' the entire tract shall be so classified provided no other business for profit is being operated thereon."); Jasper County Tax Assessor v. Westvaco Corp., 305 S.C. 346, 409 S.E.2d 333 (1991) ("if a farmer uses eighty percent of his land for agricultural purposes and twenty percent for vacant land, his entire tract would qualify for agricultural use provided no other business for profit is operated on the twenty percent vacant land. If the twenty percent vacant land were used for business for profit, the entire tract would not qualify but only the eighty percent actually used agriculturally."). Accordingly, only the value of the disputed two acres are before the ALJ.

After considering all of the arguments and evidence presented at the hearing, $60,000 is the 2001 tax year value of the one acre portion of real property situated on Jasper County Tax Map Number 087-00-04-001 which is occupied by a "cell" tower and a billboard and $90,000 is the 2001 tax year value of the one acre portion of real property situated on Jasper County Tax Map Number 087-00-09-017 which is occupied by three billboards.

What is the 2001 tax year value of the disputed one acre portion of real property situated on Jasper County Tax Map Number 087-00-04-001 which is occupied by a "cell" tower and a billboard and what is the 2001 tax year value of the disputed one acre portion of real property situated on Jasper County Tax Map Number 087-00-09-017 which is occupied by three billboards?

1. Positions of Parties:

The taxpayer asserts the properties here in dispute have not been appraised at their required "market value" but instead have been improperly appraised by imposing a value based upon the use of the property. The taxpayer has not unequivocally and affirmatively submitted a market value for the properties under review.

The assessor counters that the property is not being valued based upon its use. Rather, the assessor argues the values reached were derived by employing an income approach to market value which approach relies upon the capitalization of a stream of rental income. Under this approach, the assessor has valued at $60,000 the disputed one acre portion of real property situated on Jasper County Tax Map Number 087-00-04-001 which is occupied by a "cell" tower and a billboard and has valued at $90,000 the disputed one acre portion of real property situated on Jasper County Tax Map Number 087-00-09-017 which is occupied by three billboards.

2. Findings of Fact:

I find, by a preponderance of the evidence, the following facts:

a. General

The taxpayer owns two parcels of real estate identified as Jasper County Tax Map Numbers 087-00-04-001 (Property 001) and 087-00-09-017 (Property 017). However, the valuation issue presented here is not one that seeks to value the entire acreage of each property. Rather, as argued, the parties seek only a determination of the value of a single acre of land on each property.

For example, Property 001 consists of approximately 21 acres. Nineteen acres are in agricultural use, one acre is occupied by a mobile home, and one acre is occupied by a "cell" tower, a billboard, and two vacant buildings formerly used for business purposes. The site containing the cell tower and the billboard are on I-95 and US 17 and that is the acre upon which the parties disagree as to value.

Likewise, Property 017 consists of approximately 631 acres. Of these acres, 400 acres are marshland, 227 and a half acres are in agricultural use, one acre is occupied by two mobile homes, one half acre is occupied by a business, and one acre is occupied by three billboards. The site containing the three billboards is on I-95 and SC 27-172. Again, only the single acre occupied by the three billboards is disputed.

Accordingly, since no challenge has been made to the value of any portion of the real property except for the one acre portion occupied by the cell tower and the billboards, the only issue presented (and the only issue decided) is the value of the two acres of real property occupied by the cell tower and the billboards.

The Jasper County Assessor appraised the disputed one acre portion of Property 001 which is occupied by a "cell" tower and a billboard at $60,000 and the disputed one acre portion of Property 017 which is occupied by three billboards at $90,000. The taxpayer disagreed with that value and appealed the determination to the Jasper County Board of Assessment Appeals. After a review, the Board valued the disputed one acre portion of Property 001 at $45,000 and the disputed one acre portion of Property 017 at $67,500. The assessor has disagreed with the Board's value and has now brought this contested case in which she asserts the properties should be valued at $60,000 and $90,000 respectively.

b. Valuation

The assessor valued the disputed property employing a sales comparison approach and an income approach. The sales approach relied upon the sales of three properties with each sale having a billboard site.

Based on these values, the assessor concluded the sales approach establishes a market value of $50,000 for each site available for a billboard or a cell tower.

In addition, the assessor employed an income approach which produced a value of $33,000 under the following method:

Gross Rent 4000

Less vacancy 2% (80)

Effective Gross Income 3920

Less Expenses 0

Net Income 3920

Capitalization Rate 12% 3920 divided by .12

Value 32,666

Rounded 33,000

In arriving at the gross rent, the assessor relied upon rental information from at least five ground lease rentals from Jasper County sites with the sites having an interstate location on I-95. The predominate rental approximated $4,000 gross rental to the landowner.

In the instant case, each of the acres for Property 001 and Property 017 produce rental income under a ground lease. The gross rental income produced by each property for the most recent tax years are as follows:

The ground rent agreements do not require the landowner to expend funds for maintenance or repair. Thus, the taxpayer's gross rent is not reduced by expenses of operation.

3. Conclusions of Law

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

"The proper valuation of realty for taxation is a question of fact to be ascertained in each individual case in the manner prescribed by statute." 84 C.J.S. Taxation § 411 at 793 (1954). The controlling statute that answers the valuation "question of fact" requires determining the property's "true value in money." S.C. Code Ann. § 12-37-930 (Supp. 2001).

"True value in money" is the property's fair market value. ⁽¹⁾ Lindsey vs. S.C. Tax Comm'n, 302 S.C. 504, 397 S.E.2d 95 (1990). In determining market value, our courts and those of other states have relied on the Appraisal Institute's standards for valuation as published and updated in several editions of The Appraisal of Real Estate. See, e.g., South Carolina Tax Commission v. South Carolina Tax Board of Review, 287 S.C. 415, 339 S.E.2d 131 (Ct. App. 1985); Badische Corporation (BASF) v. Town of Kearny, 288 N.J.Super. 171, 672 A.2d 186, 189 (1996).

In particular, valuation of rental property (such as is the case here) often is based on the income capitalization approach to valuation and is an accepted and reliable indicator of true value in money. Appraisal Institute, The Appraisal of Real Estate at 419 (10th Ed. 1992); State of Missouri ex rel. State Highway Commission v. Southern Development Co., 509 S.W.2d 18, 27 (Mo.1974); Northeast Missouri Electric Power Co-op v. Fulkerson, 542 S.W.2d 26, 28 (Mo.App.1976). More precisely, the method commonly employed to arrive at fair market value from rental property is the direct capitalization of income which involves dividing net operating income by an overall capitalization rate. Appraisal Institute, The Appraisal of Real Estate at 467 (10th Ed. 1992). See Anthony v. Padmar, Inc., 320 S.C. 436, 465 S.E.2d 745 (Ct. App. 1995) (the income approach provides an accurate measure of the fair market value and seeks to determine fair market value by examining the property's income producing capabilities); S.C. Tax Comm'n v. S.C. Tax Bd. of Review, 287 S.C. 415, 339 S.E.2d 131 (1985) (The income producing capabilities of rental property can best be found by applying an appropriate capitalization rate to the average of the actual net operating incomes for several years.)

Here, the evidence establishes a valid basis for the expected net income from similar rental properties. For example, the net income from at least five ground lease rentals from Jasper County sites on I-95 establishes a reasonable annual net income of $3,920 per site. ⁽²⁾ Likewise, the capitalization rate of 12% is proper since it is derived by a mortgage equity method that relies upon financing and investor yields in the area. Such is reasonable since in deciding what capitalization rate to use, one should apply the rate that represents the desired yield a purchaser would seek on the capital investment. See South Carolina Tax Commission v. South Carolina Tax Board of Review, 287 S.C. 415, 339 S.E.2d 131 (Ct. App. 1985). No meaningful evidence establishes a rate contrary to the 12% rate presented by the assessor.

Accordingly, an expected annual stream of income of $3,920 at a capitalization rate of 12% produces a fair market value of $32,666. Here, the assessor has chosen to apply a value of $30,000 to each site on the respective properties. Thus, the income approach to fair market value supports the assessor's determination and that value is the proper value for the subject locations.

Based upon the Findings of Fact and Conclusions of Law, it is hereby ordered:

The 2001 tax year value of the one acre portion of real property situated on Jasper County Tax Map Number 087-00-04-001 which is occupied by a "cell" tower and a billboard is $60,000 and the 2001 tax year value of the one acre portion of real property situated on Jasper County Tax Map Number 087-00-09-017 which is occupied by three billboards is $90,000.

AND IT IS SO ORDERED.

____________________________

RAY N. STEVENS

Administrative Law Judge

Dated: June 7, 2002

Columbia, South Carolina

1. I note that the taxpayer argues that the assessor relied upon a "use value assessment" and not a fair market value assessment. I disagree with the taxpayer. A use value is an assessment based upon "the property's value to its present owner" resulting from the present owners peculiar use of the property. See American Exp. Financial Advisors, Inc. v. County of Carver, 573 N.W.2d 651 at 659 (Minn. 1998). Such is contrasted with a fair market valuation method that looks to what a potential buyer would pay for the property irrespective of the present use by the current owner. In the instant case, the value of the disputed locations is not based on any peculiar present use but rather is based on what a willing buyer would pay to a willing seller.

2. Such projected rental incomes are not incompatible with the actual rents received by the taxpayer for the years 1999, 2000, and 2001. With Property 001 producing $10,800 for two sites and Property 017 producing $9,000 on three sites, an average per site rental income is $3,960.