SC Administrative Law Court Decisions

STATEMENT OF THE CASE

This is a contested case brought by the Petitioner, Ashley River Industries, Inc. concerning a property valuation for the 1995 tax year. The Taxpayer exhausted the prehearing remedies with the Assessor and the Charleston County Board of Assessment Appeals ("Board") and is now seeking a contested case hearing before the Administrative Law Judge Division. A hearing was held at the office of the Administrative Law Judge Division ("ALJD") on June 4, 1996.

ISSUE

What is the appropriate market value for tax year 1995 of a parcel of real property located in Charleston County, South Carolina, with structures and improvements thereon?

BACKGROUND

The subject property is located on the edge of the Ashley River in the northern part of the City of Charleston. The zoning for the property is "heavy industrial." Two large buildings and a full service marina are situated on the property. The property is commonly known as "Dolphin Cove Marina."

One of the buildings currently houses two businesses, the Dolphin Cove Marina office and Mictronics, Inc. In addition, this building has a large banquet/reception hall, a full-service marine repair shop and warehouse storage. The building was constructed in 1975, and added to in 1976. The building's metal exterior was replaced after Hurricane Hugo. Also located on the property is a dry-stack boat storage facility, which can accommodate 250 boats. It was built in two phases, the first phase being completed in 1990, the second in 1991.

Additionally, the property has been improved by a full service wet slip marina, which was rebuilt after Hurricane Hugo in 1989. Finally, the property contains a 2,400 sq. ft. metal storage building and a fourth building.

During oral arguments, both the Petitioner and the Respondent stipulated that the appropriate appraisal technique for arriving at the fair market value of the subject property would be the income approach. Therefore, this Court's analysis is based upon that stipulation.

FACTS

Having observed the witnesses and exhibits presented at the hearing and closely passed upon their credibility, taking into consideration the burden of persuasion by the Parties, I make the following Findings of Fact by a preponderance of evidence:

The Respondent, John R. Lindsey, Charleston County Assessor, initially submitted an Appraisal Report indicating the market value of the subject property as of December 31, 1994 to be $1,100,000. Afterwards, the Respondent received various accounting documents from Ashley River Industries, Inc. (Ashley) pertaining to years ending December 31, 1995 and December 31, 1994. Pursuant to the new information provided by Ashley, the Respondent submitted an additional Appraisal Report dated May 30, 1996. This Appraisal Report fixes the market value of the subject property as of December 31, 1994 at $1,000,000.

The Petitioner argues that the market value for the subject property is in the range of $500,000 to $550,000. The Petitioner relies on his January 8, 1995 letter to the Board of Assessment Appeals. Additionally, the Petitioner relies upon a document introduced at oral argument labeled Pro Forma Income Analysis Based on Actual Numbers Not Generic Assumptions. See Petitioner's Exhibit No. 2.

Mictronics, Inc. leases 8,717 sq. ft. of office/warehouse space in the main building of the subject property. However, Mictronics, Inc. was unable to pay rent for most of 1995 due to a contract dispute with its main client, the United States Marine Corps. The contract is currently being renegotiated and it is felt by Petitioner that either Mictronics will resume paying rent or another tenant will be in place soon. Therefore, the 1995 rental income for the subject property significantly decreased from 1994 due to nonpayment of rents from Mictronics, Inc. for most of 1995.

Mictronics' current lease calls for rent payments of $4,800 per month, or $57,600 per year. This is a "gross lease" except the tenant is responsible for utilities and interior maintenance. This equates to $6.61 per sq. ft., which the Respondent admits is high for the Charleston area. Therefore, the Respondent concedes that a market rent of $3.50 per sq. ft. based on comparables in the area should be used for the rental income as part of the income approach.

As per the Petitioner, only 68 of the 100 wet slips in the marina are presently useable. Until a dredging permit is issued and the dredging is complete, the 32 slips closest to the shore are unusable due to shallow waters. The occupancy level of the marina appears to be recovering but is still low due to negative publicity from explosions and spills at the neighboring Albright & Wilson plant, the last of which was in January of 1993.

The dry dock facility of Dolphin Cove was also affected by the negative publicity about the area as well as a functional loss caused by an Albright & Wilson explosion that rendered the building's rack system difficult or impossible to adjust for different size boats.

The rent and vacancy rate for the wet slips and dry docks are based on information supplied by the Petitioner. The Petitioner estimates the reception area of the building, which is periodically rented out, brings approximately $10,000 of income into the business per year.

Based upon the income statements for Ashley River Industries, Inc. for 1993, 1994 and 1995, the Respondent sets forth a Pro Forma Income Analysis in Exhibit A which is as follows:

The Respondent did not include property taxes in the above Pro Forma Income Analysis; however, those taxes are reflected in the overall capitalization rate which the Respondent urges should be 13.6%. The Respondent develops the overall capitalization rate as follows:

Development of Overall Capitalization Rate

The base cap rate is based on highest overall rate listed in the range of rates in the June, 1995 edition of the Appraiser News, published by the Appraisal Institute (copy attached). The highest rate was chosen to reflect the risk associated with the subject property due to its proximity to the Albright and Wilson plant and other factors. The rates were gathered from the fourth quarter of 1994 and first quarter of 1995.

Added to the base cap rate is the effective tax rate, which accounts for the effect of property taxes on the income stream. The property tax rate is added to the cap rate, rather than having the tax amount included in the expenses since the final estimate of value of the appraisal will determine the tax amount.

The Petitioner urges that an average of the income for 1993, 1994 and 1995, should be used in arriving at a market value based upon income. Further, the Petitioner argues that the capitalization rate should be 16% rather than 13.6%.

I conclude that the Pro Forma Income Analysis used by the Respondent is the correct analysis. I further conclude that it would be inappropriate to average the incomes for 1993, 1994 and 1995 as part of the income analysis because the Pro Forma Analysis used by Respondent already takes into account the negative effects of those years upon the income stream. Instead, I conclude that it is appropriate to use the trends taking into account all factors, including vacancies as is set forth on Page 17 of Exhibit A, attached hereto.

Finally, I conclude that while the 13.6% cap rate is supported by the National Market Indicators submitted by the Respondent, the unusual nature of the subject property (i.e., being located adjacent to a chemical plant which has a history of explosions and other problems) dictates that an additional half percentage point should be added to the cap rate, making the cap rate 14.1%. This indicates an income approach value of $1,002,340, which is still above the Respondent's final estimate of $1,000,000. In so doing, I conclude that the market value of the subject property does not change and that it would remain at $1,000,000.

CONCLUSIONS

Based upon the above findings of fact, I conclude as a matter of law the following:

S.C. Code Ann. §12-60-2540 (Supp. 1995) authorizes the Division to hear this contested case pursuant to Chapter 23 of Title I of the 1976 Code of Laws, as amended. The taxable status of real property for a given year is to be determined as of December 31 of the preceding tax year. S.C. Code Ann. §12-37-900 (1976); Atkinson Dredging Company v. Thomas, 266 S.C. 361, 232 S.E.2d 592 (1976).

In S.C. Code Ann. § 12-37-930 (Supp. 1995) the Legislature set forth how real property must be valued:

All real property shall be valued for taxation 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 buyer are willing, are not acting under compulsion, and are reasonably well informed as to the uses and purposes of which it is adapted and for which it is capable of being used.

An assessor's valuation is presumed correct with the burden being on the property owner to disprove the assessor's determination. 84 C.J.S. Taxation § 410 (1954). It is the burden of the taxpayer contesting an assessment to show that the valuation of the taxing authority is incorrect. Ordinarily, this would be done by proving the actual value of the property. The taxpayer may, however, show by other evidence that the assessing authority's valuation is incorrect. If he does so, the presumption of correctness is removed and the taxpayer is entitled to appropriate relief. Clovd v. Mabry, 295 S.C. 86, 367 S.E.2d 171 (Ct. App. 1988).

As noted above, the Petitioner and the Respondent stipulated that the appropriate appraisal technique for arriving at the fair market value of the subject property is the income approach. The income capitalization approach is an accepted means for valuing commercial property. South Carolina Tax Commission v. South Carolina Tax Board of Review, 287 S.C. 414, 339 S.E.2d 131 (S.Ct. App. 1985). "In the income capitalization , the present value of the future benefits of property ownership is measured." See, The Appraisal of Real Estate (American Institute of Real Estate Appraisers 10th ed.) at 81. The purpose of the income approach is to ascertain the net income an informed buyer believes the property will produce during its remaining useful life Id.

In reviewing all of the documentation and taking into consideration all oral argument, I conclude that the income approach in arriving at the market value of the subject property is the correct approach, and that thes market value of the property is $1,000,000.

ORDER

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

ORDERED that the Assessor value taxpayer's property based upon the income approach for tax year 1995 at $1,000,000.

AND IT IS SO ORDERED.

Honorable Ralph King Anderson, III

Administrative Law Judge

Columbia, South Carolina

August 28, 1996