ORDERS:
FINAL ORDER AND DECISION
STATEMENT OF THE CASE
This is a contested case brought by Petitioner R.D. Watson, Jr. ("Taxpayer") against Respondent Lexington County
Assessor ("Assessor") to challenge the Assessor's valuation of his apartment complex for the 2001 tax year. Taxpayer
primarily contends that his property was not equitably appraised when compared to the assessment of similar properties in
the area; however, Taxpayer also argues that the Assessor improperly assessed the value of property by relying upon the
sale price listed in his deed rather than upon more accurate methodologies. The parties exhausted all prehearing remedies
with the Assessor and the Lexington County Board of Assessment Appeals ("Board"), and in response to an adverse
decision by the Board, Taxpayer requested this contested case hearing before the Administrative Law Judge Division
(ALJD) pursuant to S.C. Code Ann. § 12-60-2540(A) (2000). After timely notice to the parties, a hearing of this matter
was held on April 30, 2002. Having fully considered the evidence introduced in this matter, I find that, despite some
inadequacies in the Assessor's report, the Assessor accurately and equitably appraised Taxpayer's property.
FINDINGS OF FACT
Having carefully considered all testimony, exhibits, and arguments presented at the hearing of this matter, and taking into
account the credibility and accuracy of the evidence, I make the following Findings of Fact by a preponderance of the
evidence:
1. At the hearing of this matter, the parties stipulated that the Assessor's file and the exhibits exchanged between the parties
would be made a part of the record and included as evidence in this matter.
2. The subject property is 2.62 acres of land addressed as 136 Swartz Road, Lexington, South Carolina, on which a 5-building, 32-unit apartment complex is situated. Taxpayer owns and operates this property as The Oaks Apartments.
3. The subject property is identified as Lexington County Tax Map # 005423-03-005.
4. Taxpayer purchased the subject property in 1995 for $900,000. In his testimony at the hearing, Taxpayer asserted that
this sale price as listed in the deed included other costs involved in the transaction beyond the actual cost of the property.
However, Taxpayer did testify that if he were to sell the property in today's market, he would expect to receive at least
$950,000 for the property.
5. Using the three accepted means of valuing real property, (1) the Assessor arrived at the following valuations of Taxpayer's
property for tax year 2001:
(1) Cost Approach: $903,010
(2) Sales Comparison Approach: $900,000
(3) Income Approach: $920,150
In his final report, the Assessor reconciled these values to reach a fair market value of $903,010 for the subject property. (2)
In its decision on Taxpayer's appeal of the Assessor's appraisal, the Board reduced the assessment of the fair market value
of Taxpayer's property to $874,000. Both the Assessor and the Board relied primarily on the income approach in
determining the fair market value of Taxpayer's property. See Assessor's Report to the Board, Part IV, Income Approach
("Of the three approaches to value, the income approach is considered the most reliable and reflective of actual market
conditions."); Letter from Wooten, Chairman of the Board, to Watson of 1/30/02, at 1 ("This decision was based on your
latest rent figures.").
6. The Assessor derived his income approach valuation by dividing the net operating income of the apartments (potential
gross income minus vacancy and collection losses and operating expenses) by a capitalization rate of 10%. The $920,150
figure was reached using market averages for rents, vacancy rates, expenses, and the like for the year 2000. An income
analysis conducted using Taxpayer's actual net operating income, based on his actual rents and expenses, for the years 1998
through 2000 yielded significantly higher valuations, as follows: $1,141,426 for 1998, $940,471 for 1999, and $1,162,710
for 2000.
7. As no comparable properties were sold in the relevant time period, the Assessor reached the $900,000 valuation of the
subject property under the sales comparison approach solely with reference to the sale price of the property in the 1996
deed. The Assessor determined the $903,010 valuation of Taxpayer's property under the cost approach by adding the
estimated depreciated replacement cost of the buildings and improvements on the property ($601,710) to the estimated cost
of the underlying land ($301,300). The cost of the buildings and improvements was estimated from data held by the
Assessor regarding the size and configuration of the buildings and improvements on the subject property. The cost of the
2.62 acres of land that comprise the subject property was estimated at $115,000 per acre, for a total of $301,300; however,
it is not clear on what basis the Assessor derived this $115,000 per acre figure. The Assessor's Report to the Board
suggests that this figure "was derived using comparable sales of vacant property, which will be further identified and
discussed later in this report." Assessor's Report to the Board, Part I, Estimate of Land Value. However, this further
identification and discussion of sales of comparable vacant properties was not included in the report, nor produced at the
hearing of this matter. Further, evidence presented by Taxpayer indicates that the land of comparable apartment properties
is estimated at far lower values, ranging roughly from $15,000 per acre to $50,000 per acre.
8. In challenging the Assessor's and then the Board's appraisal of his property, Taxpayer principally contends that his
property was inequitably assessed in comparison to similar properties in the area. See Letter from Watson to Warren,
Secretary of the Board, of 1/19/02, at 5 ("[E]ither lower my appraisal or raise the appraisals of my competitors. There must
be equalization."); Pet'r Preliminary Tax Statement ¶¶ 3, 5 (stating that Taxpayer believes the evidence will show that "this
property is not taxed fairly with the equalization of like property" and that this tribunal should conclude that "the tax on this
property is not based on [the] same ratio as [that used on] like property"). In attempting to support this allegation of
inequitable assessment, Taxpayer presented evidence regarding the valuation the income approach would produce for
several other apartment complexes in the Lexington area; this evidence compares the assessed value for the complexes
under the income approach with the "actual value" of the complexes. However, rather than demonstrating a pattern of
inequitable undervaluation, these comparables tend to show the opposite result: the assessed values and "actual values" of
the properties are generally reasonably close to one another and suggest that the income approach is a reliable method of
determining fair market value. Moreover, in several cases, the assessed value under the income approach exceeds the
actual value listed for the properties.
7. The record does not reveal an intentional and systematic undervaluation of certain properties.
8. In addition to his claim that the Assessor inequitably applied the income approach in valuing his property, Taxpayer
secondarily disputes the Assessor's application of the cost and sales comparison approaches to the valuation of the subject
property. Taxpayer contends that the Assessor manufactured the results yielded by these approaches to equal the $900,000
sale price of his property. The Assessor maintains that the appraisal of Taxpayer's property was done accurately and
equitably according to well-recognized methods of valuation.
CONCLUSIONS OF LAW
Based upon the foregoing Findings of Fact, I conclude the following as a matter of law:
1. The Administrative Law Judge Division has jurisdiction over this matter pursuant to S.C. Code Ann. § 12-60-2540(A)
(2000).
2. "Generally, 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 § 510, at 553 (2001).
3. Section 12-37-930 of the South Carolina Code of Laws provides that:
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.
S.C. Code Ann. § 12-37-930 (Supp. 2001).
4. The fair market value of property is the measure of its true value for taxation purposes. Lindsey v. S.C. Tax Comm'n,
302 S.C. 504, 507, 397 S.E.2d 95, 97 (1990).
Appraisal of Taxpayer's Property
5. The income or capitalization of income approach to appraising property is "a process whereby the appraiser assumes that
a purchaser of or investor in commercial real estate buys the real estate with the expectation of earning an annual
percentage of the purchase price (capital investment) of the commercial property." S.C. Tax Comm'n v. S.C. Tax Bd. of
Review, 287 S.C. 415, 417, 339 S.E.2d 131, 132 (Ct. App. 1985). "All income capitalization methods, techniques, and
procedures attempt to consider anticipated future benefits and estimate their present value." Appraisal Institute, The
Appraisal of Real Estate 450 (11th ed. 1996).
6. The direct capitalization formula that applies to this type of valuation is: value equals net operating income divided by
the overall capitalization rate. Id. at 514; see also 84 C.J.S. Taxation § 514, at 558 (describing the income approach thusly:
"an appraiser determines the rental income the property should generate, subtracts expenses, and then capitalizes the net
income at a rate an investor would expect to obtain from the property").
7. The income capitalization approach is an accepted means for valuing commercial property. See S.C. Tax Comm'n, 287
S.C. 415, 339 S.E.2d 131; The Appraisal of Real Estate, supra, at 449-599; 84 C.J.S. Taxation § 514. Further, while fair
market value can be determined under the sales comparison and replacement cost approaches to value, an income
capitalization analysis is recognized as a particularly appropriate way to value property, such as apartment complexes,
whose purpose is primarily the production of income from rent. See, e.g., Bornstein v. State Tax Comm'n, 176 A.2d 859
(Md. 1962).
8. Here, the Assessor used the income capitalization approach to estimate the fair market value of the subject property at
$920,150. The Assessor later reconciled this estimate with valuation estimates derived under the cost approach and the
sales comparison approach to arrive at a fair market value of $903,010 for the subject property. The Assessor's income
capitalization estimate is calculated according to recognized methodologies and is based on reliable figures for rent,
vacancy rates, and expenses and on a reasonable capitalization rate. As such, this income-based estimate of the value of
Taxpayer's property is a valid indication of the fair market value of the property. Further, while Taxpayer is correct that the
consideration recited in a deed, standing alone, is not determinative of the fair market value of a piece of property, the
purchase price of a piece of property is persuasive evidence of the market value of the property and is an important factor to
be considered when assessing the value of the property. See 84 C.J.S. Taxation § 512. Thus, the Assessor was entitled to
take the 1996 sale price of the subject property ($900,000) into account in determining the fair market value of Taxpayer's
property, even if no other comparable sales were available at the time to substantiate the sales-based estimate. See id. Both
the income-based estimate of the subject property's value at $920,150 and the sales-based estimate of the property's value
at $900,000 are valid estimates of the fair market value of Taxpayer's property, and the reconciliation of those estimates to
value Taxpayer's property at $903,010 is a valid and proper assessment of the fair market value of the property in question.
9. The Assessor's estimate of the value of the subject property based on the cost approach is not, however, a reliable
estimate of the fair market value of the property. Neither in his report to the Board, nor in the evidence presented to this
tribunal, has the Assessor justified his valuation of the 2.62 acres that comprise the subject property at $301,300, or
$115,000 per acre. Taxpayer has demonstrated that this per acre value is far greater than that assigned to comparable
properties in the area, and the Assessor has provided no credible explanation for this disparity in land values. See Finding
of Fact #7, supra. As the land value assigned to Taxpayer's property by the Assessor under the cost approach is not
supported by any credible evidence, the estimated value of the property derived under that approach cannot be considered a
reliable indication of the fair market value of the subject property. But, the unreliability of the Assessor's estimate under
the cost approach does not, in turn, affect the overall validity of his appraisal, as the valid, proper, and reliable estimates of
the value of the subject property obtained under the income capitalization and sale comparison approaches fully support the
assessment of Taxpayer's property at $903,010. Cf. Marquette Bank Nat'l Ass'n v. County, 589 N.W.2d 301, 306 (Minn.
1989) (stating that, "whenever possible, the tax court should apply at least two approaches in determining market value")
(emphasis added). Accordingly, $903,010 is a proper estimate of the fair market value of Taxpayer's property.
10. Consequently, the Board's decision to assess Taxpayer's property at $874,000 must be rejected. While the Board does
specify that this reduced assessment is "based on [Taxpayer's] latest rent figures," the Board, in its decision, does not
provide those figures, nor an analysis of how those figures affect the Assessor's valuation of the subject property. See
Letter of Wooten, Chairman of the Board, to Watson of 1/30/02. The mere statement that Taxpayer's latest rent figures
require a reduction of the assessment of his property is not a sufficient basis upon which to depart from the Assessor's fully
supported appraisal of the property under two of the three recognized methods of valuing real property.
Equitable Assessment of Taxpayer's Property
11. However, Taxpayer's primary argument is not that his property is inaccurately valued, but rather that his property is not
valued equitably in comparison to similar properties in the Lexington area. See Pet'r Preliminary Tax Statement ¶¶ 3, 5.
This argument is based upon the Equal Protection clauses of the United States and South Carolina constitutions, see U.S.
Const. amend. XIV, § 1; S.C. Const. art. I, § 3, and the uniformity provision of the South Carolina Constitution. See S.C.
Const. art. X, § 1 ("The assessment of all property shall be equal and uniform in the following classifications[.]"). This
argument must fail.
12. Neither the United States Constitution nor the South Carolina Constitution requires absolute accuracy in property tax
matters. Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 526 (1959) (holding that the Fourteenth Amendment does not
impose an "iron rule of equality" in state tax matters); Owen Steel Co. v. S.C. Tax Comm'n, 287 S.C. 274, 337 S.E.2d 880
(1985). Further, the law recognizes that complete equity and uniformity are not practically attainable in the valuation of
property. Wasson v. Mayes, 252 S.C. 497, 502, 167 S.E.2d 304, 306-307 (1967). Rather, what is proscribed by these equal
protection and uniformity provisions is the intentional and systematic undervaluation of certain properties while other
properties in the same class are valued at the their fair market value. See Sunday Lake Iron Co. v. Wakefield Township,
247 U.S. 350 (1918); Owen Steel Co., 287 S.C. 274, 337 S.E.2d 880; see also 84 C.J.S. Taxation § 43, at 143 (2001)
("[T]he mere overvaluation of specific property, in the absence of proof of a systematic plan, is not sufficient to establish
unfair discrimination.")
13. The burden of proving an intentional and systematic undervaluation rests upon the complaining party. Sunday Lake
Iron Co., 247 U.S. at 353. And, this burden is not met by a mere showing that some properties are undervalued in relation
to the taxpayer's property. See Sunday Lake Iron Co., 247 U.S. 350; Owen Steel Co., 287 S.C. 274, 337 S.E.2d 880.
However, where an assessor explicitly established a county-wide procedure under which all property was assessed
according to the most recent purchase price with the result that petitioner's property was valued between 8 and 35 times
higher than comparable neighboring property for more than ten years, an intentional and systematic undervaluation of
property was found. Allegheny Coal Co. v. County Comm'n, 488 U.S. 336 (1989).
14. Unlike Allegheny Pittsburgh Coal Co., there has been no showing in the instant case that the Assessor has intentionally
and systematically undervalued property in Lexington County. While Taxpayer alleges that some properties in Lexington
County are undervalued in relation to his property, Taxpayer failed to establish such undervaluation, and, even if such
sporadic undervaluation were proven, such evidence would not demonstrate that the Assessor "entertained or is chargeable
with any purpose or design to discriminate" in his appraisals of property in Lexington County. Sunday Lake Iron Co., 247
U.S. at 353. In fact, Taxpayer's own numbers, submitted both to the Board and to this tribunal, suggest that, whatever
errors might lie in the Assessor's valuation of other apartment complexes in Lexington, there is no systematic
undervaluation of those complexes, much less an intentionally systematic undervaluation of those properties.
Taxpayer's equity argument cannot stand. An equity or equal protection claim requires a high burden of proof. Further, it
should be emphasized that the assessment and valuation of property is not an exact science. Accordingly, the law tolerates
errors of judgment and varying assessment ratios with the expectation that periodic reassessments will correct such errors
and variations. These mere errors of judgment or varying assessment ratios are not, in themselves, necessarily tantamount
to a systematic and intentional undervaluation of property by the Assessor. See 84 C.J.S. Taxation § 509, at 551 (2001)
("An error or mistake on the assessor's part is immaterial where it does not result in an excessive or discriminatory
valuation."). Thus, where, as here, a taxpayer can only identify isolated erroneous appraisals of property, there is no ground
upon which to support a finding of intentional and systematic undervaluation of property by an assessor, and therefore, no
ground upon which to overturn an appraisal on a claim of inequitable assessment.
ORDER
Based upon the Findings of Fact and Conclusions of Law above,
IT IS HEREBY ORDERED that the Assessor value Taxpayer's property identified as Lexington County Tax Map #
005423-03-005 and located at 136 Swartz Road, Lexington, South Carolina, at a value of $903,010 for the 2001 tax year.
AND IT IS SO ORDERED.
______________________________
JOHN D. GEATHERS
Administrative Law Judge
Post Office Box 11667
Columbia, South Carolina 29211-1667
May 29, 2002
Columbia, South Carolina
1. See 84 C.J.S. Taxation § 512, 513, 514 (2001).
2. After an initial informal review, the Assessor had valued Taxpayer's property at $921,270. However, following a formal
review of the appraisal, the Assessor reduced his estimate of the fair market value of the property to the $903,010 amount
found in his final report. |