ORDERS:
ORDER
I. Statement of the Case
This is a contested case brought by Churchill Common Partners, as the Petitioner (hereinafter referred
to as "taxpayer") against the Aiken County Assessor (hereinafter referred to as "assessor") concerning
property valuations for property tax year 1994. The property owner exhausted the prehearing
remedies with the assessor and the Aiken County Board of Assessment Appeals and is now seeking
a contested case hearing before the Administrative Law Judge Division (hereinafter referred to as
"ALJD"). Jurisdiction is granted the ALJD by 1995 Act No. 60, S. C. Code Ann. § 12-60-2540(A)
(Supp. 1994) with this matter having been heard on September 21, 1995. After considering all of the
testimony and evidence, I conclude the property must be valued at $6,600,000.
Any issues raised in the proceedings or hearing of this case but not addressed in this Order are
deemed denied. ALJD Rule 29(B). Further, the filing of a motion for reconsideration is not a
prerequisite to any party filing a notice of appeal of this Order. ALJD Rule 29(C).
II. Issues
Is the taxpayer's property correctly valued for assessment purposes for 1994?
III. Analysis
1. Positions of Parties:
The taxpayer asserts the property should be valued under an income approach. Further, it asserts the
value should be based upon the actual net operating income for the single year ending December 31,
1993, after applying the actual vacancy rate. The assessor argues that the market sales approach
provides a meaningful valuation. Further, if an income approach is used, the assessor asserts the
value cannot be determined from a single year but instead the historical income should be used. In
addition, the assessor argues a vacancy rate of 8% should be used since that is what her information
demonstrates is an accurate vacancy for this property.
2. Findings of Fact:
I find, by a preponderance of the evidence, the following facts:
a. General
1. The taxpayer is the owner of a parcel of real estate consisting of property used for rental
purposes.
2. The property is located at 1900 Roses Run in Aiken County, South Carolina, and is identified
on the Aiken County Tax Map as Tax Map #00-157-01-269.
3. The Aiken County Assessor appraised the property for the 1994 tax year for $7,450,000.
4. The taxpayer appealed to the Aiken County Board of Assessment Appeals, which concluded
a proper value is $7,305,400.
b. Description of Property
5. The subject property consists of 22.28 acres of land improved with 30 buildings.
6. The 30 buildings house a 240 unit rental apartment complex.
7. The apartments consist of 160 two bedroom, two bath units and 80 three bedroom, two bath
units.
8. The three bedroom units have 1,098 square feet and the two bedroom units have 907 square
feet.
c. Methods of Valuation
9. The assessor valued the property using the cost method form of analysis and derived a value
of $7,100,000.
10. Under the cost method, the assessor valued the improvements at $6,682,015 and the land at
$445,600.
11. An appraisal by the assessor valued the property at $7,300,000 under the market sales
method.
12. The assessor used six comparables in his application of the market sales approach.
13. Assessor's comparable number one is located in Aiken County and is known as Colony at
South Park and, after adjustments to account for differences in the comparable and the subject
property, sold in January 1992, for an adjusted sales price of $30,416 per unit.
14. Assessor's comparable number two is located in Mount Pleasant, South Carolina, and is
known as Montclair and, after adjustments to account for differences in the comparable and
the subject property, sold in February 1992, for an adjusted sales price of $32,208 per unit.
15. Assessor's comparable number three is located in Greensboro, North Carolina, and is known
as St. Croix and, after adjustments to account for differences in the comparable and the
subject property, sold in July 1992, for an adjusted sales price of $30,416 per unit.
16. Assessor's comparable number four is located in Raleigh, North Carolina, and is known as
Coves at Lake Lynn and, after adjustments to account for differences in the comparable and
the subject property, sold in December 1992, for an adjusted sales price of $29,167 per unit.
17. Assessor's comparable number five is located in Raleigh, North Carolina, and is known as
Hamilton Ridge and, after adjustments to account for differences in the comparable and the
subject property, sold in April 1993, for an adjusted sales price of $32,084 per unit.
18. Assessor's comparable number six is located in Greensboro, North Carolina, and is known as
Deerwood Meadows and, after adjustments to account for differences in the comparable and
the subject property, sold in February 1993, for an adjusted sales price of $32,750 per unit.
19. The assessor did not physically inspect the comparables.
20. Of the six comparables, only one is within the Aiken area with the other five being either in
the lower part of the State or in North Carolina.
21. The closest sale in point of time to the December 31, 1993, valuation date is eight months
earlier and the sale of the Aiken property is approximately two years before the valuation
date.
22. The properties identified above as comparables one through six are not sufficiently similar to
the taxpayer's property to be used as reliable evidence of the value of the taxpayer's property.
23. The income approach yields the most reliable value for the subject property.
24. The taxpayer's vacancy rate for 1991, 1992, and 1993 was 17%, 13%, and 17% respectively.
25. The vacancy rate dropped in 1992 due to rent concessions.
26. The Savannah River Site (SRS) and related companies accounted for 60 to 80% of the
employers of the residents of the apartment complex.
27. On December 31, 1993, the employment outlook for SRS and related entities was uncertain.
28. The actual historical net operating income excluding depreciation and interest expense for
1991, 1992, and 1993 was $731,020, $714,910, and $647,301 respectively, resulting in an
average of $697,743.66.
29. A capitalization rate of 10.58% produces the yield a purchaser would seek on the capital
investment needed to purchase the subject property.
30. The value of the taxpayer's property is $6,600,000 for the tax year 1994.
3. Discussion
a. Valuation Method
In the instant matter, the assessor employed the market, cost and income approaches to value the
subject property while the taxpayer relied solely upon the income approach. While the market
approach and cost approach are both viable means of ascertaining value, the income analysis is
recognized as a somewhat favored means for valuing apartments. Bornstein v. State Tax Comm'n,
176 A.2d 859 (Md. 1962). In the instant case, the testimony demonstrated that in the market in
Aiken, South Carolina, a potential buyer would place the greatest reliance upon an income valuation.
Additionally, the comparables used by the assessor do not adequately account for the uncertainty of
the Aiken employment market. Only one comparable sale is of an Aiken apartment complex and that
sale occurred almost two years before the valuation date here. Such a date does not adequately
account for the uncertainty present in the Aiken employment market in December 1993. Accordingly,
I have determined the proper method of valuation is the income approach. The purpose of the
income approach is to determine the present value of future benefits of property ownership with such
value indicated generally by the net income an informed buyer believes the property will produce
during its remaining useful life. See The Appraisal of Real Estate (American Institute of Real Estate
Appraisers 10th ed.). While other factors affect the ultimate value of an apartment complex, two
factors are basic to an income approach: net operating income and capitalization rate.
Net operating income is generally determined in several steps. The apartment complex's potential
gross income is estimated followed by a reduction to compensate for vacancy and collection losses.
The resulting figure is then increased by miscellaneous income such as laundry and other tenant fees.
A deduction is then given for the operating expenses of the complex excluding depreciation and
interest expenses. After these adjustments, the resulting figure is the net operating income of the
apartment complex. The capitalization rate, i.e. the desired yield a purchaser would seek on the
capital investment, is then divided into the net operating income to produce an estimated value of the
property. S.C. Tax Comm'n v. S.C. Tax Bd. of Review, 287 S.C. 415, 339 S.E.2d 131 (1985).
b. Future Value
Since the income approach attempts to predict the net income an informed buyer believes the
property will produce during its remaining useful life, the issue becomes that of predicting the future
performance of the property. The information for such a prediction is only that information a
potential buyer would reasonably have had on December 31, 1993, since that is the valuation date
for the 1994 tax year in controversy. S.C. Code Ann. § 12-37-900 (1976).
In arriving at the income stream to be capitalized, there are several disagreements between the parties
on what a potential buyer would have relied upon. These differences essentially turn upon the number
of years of past income to be used, the method of determining the vacancy rate, and the impact upon
a buyer by the employment outlook at SRS.
i. Years of Net Income to Consider
The actual income of a property is entitled to due consideration in valuation. S.C. Tax Comm'n v.
S.C. Tax Bd. of Review, 287 S.C. 415, 339 S.E.2d 131 (1985). Here, the taxpayer relies upon the
single year ending December 31, 1993. Reliance upon a single year's net operating income is not
reasonable. In fact, a witness for the taxpayer, testifying as an expert, stated that reliance upon one
year's income would not be proper.
ii. Vacancy Rate And Employment Outlook
The vacancy rate and the impact upon the employment outlook at SRS are related matters. The
taxpayer has used its actual vacancy rate in arriving at its net operating income while the assessor
asserts an 8% vacancy rate should be applied. The evidence of occupancy and the potential loss of
SRS employees is conflicting.
The taxpayer presented testimony establishing a relatively high vacancy rate. The taxpayer's witness
testified the taxpayer's vacancy rate for 1991, 1992, and 1993 was 17%, 13%, and 17% respectively,
and that the vacancy rate dropped in 1992 only due to rent concessions. SRS and related companies
accounted for 60 to 80% of the employers of the residents of the apartment complex. Thus, a decline
in SRS employment would have a significant impact upon the future income from the property.
Further, witnesses for the taxpayer presented a picture on December 31, 1993, of a very generalized
view of a potential future decline in employment at SRS.
On the other hand, the evidence from the assessor's appraisal demonstrates other rental properties had
a "vacancy rate of 5% to 8%." In addition, the assessor states she believes there were only 18
vacancies in June 1994. Further, the expert witness for the taxpayer testified that an appraisal he
made in August 1993 on the taxpayer's property was premised upon a vacancy rate no greater than
10%. Thus, at least as late as August 1993, there is evidence that an expert in the field of appraising
felt a 10% vacancy was expected. Indeed, rather than a decline in employment at SRS on December
31, 1993, there was at least the generalized possibility of increased employment due to further
expansion at SRS.
While the evidence is conflicting, after hearing the witnesses and weighing the testimony, I conclude
the actual vacancy rate of the taxpayer should be employed and not the 8% suggested by the assessor
or the 10% used by the expert witness. For this property a potential buyer would have relied upon
the actual vacancy rather than the "norm" for the area. While other rental properties may have had
vacancy rates in the 5 to 8% range, there is no persuasive evidence demonstrating the vacancy at the
taxpayer's property was improper. In other words, no persuasive evidence of improper management
practices was presented that would allow me or a potential buyer to conclude that the vacancy rate
at this property could be reduced to 8% and still maintain the rental rate. Accordingly, a buyer would
have relied upon the actual vacancy.
Further, the uncertainty in the employment outlook in the Aiken area does not warrant any further
adjustment in the vacancy rate. To the extent there was uncertainty in the Aiken market in December
1993 concerning employment at SRS, a buyer would adjust its required return on investment to
compensate for such a perceived risk. Here, both parties agree a capitalization rate of 10.58 % is
appropriate. Thus, no additional change, either up or down, is warranted for the potential uncertainty
in the rental market.
c. Calculation of Income Value
Accordingly, the income to be capitalized is an average of the actual historical 1991, 1992, and 1993
net incomes of $731,020, 714,910, and 647,301 respectively, resulting in an average income of
$697,743.66. Applying a capitalization rate of 10.58% yields a value of $6,594,931, rounded to
$6,600,000, as the value in the instant case for the tax year 1994. Of course, this is the value of 1994
only. Each year's value stands on its own and such may decrease or increase as market conditions
change from year to year.
4. Conclusions of Law
Based on the foregoing Findings of Fact and Discussion, I conclude the following as a matter of law:
1. All property shall be valued for taxation purposes at its true value in money which in all cases
shall be held to be 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 as to 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. 1994).
2. Fair market value is the measure of true value for taxation purposes. Lindsey v. S.C. Tax
Comm'n, 302 S.C. 504, 397 S.E.2d 95 (1990).
3. While fair market value can be determined under the market approach and cost approach, an
income analysis is a reliable means for valuing apartments. Bornstein v. State Tax Comm'n,
176 A.2d 859 (Md. 1962).
4. The income approach seeks to determine the present value of future benefits of property
ownership with such value determined generally by the net income an informed buyer believes
the property will produce during its remaining useful life. See The Appraisal of Real Estate
(American Institute of Real Estate Appraisers 10th ed.).
5. The information used to determine the value of future benefits is only that information a
potential buyer would reasonably have had on December 31st of the year preceding the tax
year since such date is the valuation date for a tax year. S.C. Code Ann. § 12-37-900 (1976).
6. The information used to determine the value of future benefits under an income approach
should be based upon the average earnings for a reasonable period of time rather than the
income for a single year. Somers v. City of Meriden, 174 A. 184 (Conn. 1934); 84 C.J.S.
Taxation, § 411 (1954).
7. The actual earnings from a property are entitled to great consideration in valuation. S.C. Tax
Comm'n v. S.C. Tax Bd. of Review, 287 S.C. 415, 339 S.E.2d 131 (1985).
8. The capitalization rate is the desired yield a purchaser would seek on the capital investment.
See S.C. Tax Comm'n v. S.C. Tax Bd. of Review, 287 S.C. 415, 339 S.E.2d 131 (1985).
9. The value of rental property is primarily based upon the average net operating income divided
by the capitalization rate. S.C. Tax Comm'n v. S.C. Tax Bd. of Review, 287 S.C. 415, 339
S.E.2d 131 (1985).
10. The property identified as Churchill Commons Apartments has a value of $6,600,000.
IV. ORDER
Based upon the foregoing Findings of Fact, Discussion, and Conclusions of Law, the following
ORDER is issued:
The assessor shall value the property identified as Churchill Commons Apartments, Tax Map #00-157-01-269 for the 1994 tax year at a value $6,600,000.
IT IS SO ORDERED.
____________________________
RAY N. STEVENS
Administrative Law Judge
This 28th day of September, 1995 |
