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SC Administrative Law Court Decisions

CAPTION:
Charleston County Assessor vs. Nirenblatt, Nirenblatt and Hoffman

AGENCY:
Charleston County Assessor

PARTIES:
Petitioners:
John Lindsey, Charleston County Assessor

Respondents:
Nirenblatt, Nirenblatt and Hoffman

PID#'s 351-04-00-031, 033, 034, 039 and 037
 
DOCKET NUMBER:
96-ALJ-17-0169-CC

APPEARANCES:
For the Petitioner: Nancy Bloodgood, Esquire

For the Respondent: John von Lehe, Esquire
 

ORDERS:

FINAL DECISION

STATEMENT OF THE CASE


This matter is a contested case brought by John Lindsey, Charleston County Assessor (Assessor), against Nirenblatt, Nirenblatt and Hoffman, a Partnership (Taxpayer), concerning the property valuation for the above-referenced parcels for the property tax year 1995. The Charleston County Board of Assessment Appeals lowered the Assessor's valuation of the property and the Assessor is appealing the Board's reduction in value. This matter was heard by me on August 1, 1996 in Charleston, South Carolina.

ISSUE


Did the Assessor correctly value the property for assessment purposes for 1995?



FINDINGS OF FACT


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:







General Conclusions


1. The Taxpayer is the owner of three apartment complexes, all located in the same general area West of the Ashley River in the City of Charleston (West Ashley). Townhouse Village Apartments II (Townhouse II) consists of 80 units and Townhouse Village Apartments III (Townhouse III) consists of 108 units. West Village Apartments (West Village) consists of 128 units. Townhouse II and Townhouse III are contiguous to each other and West Village is located nearby.

2. The parties stipulated that the income approach to value is the most reliable approach for the apartment complexes in question. Therefore, in evaluating the properties both parties applied the income approach as well as the sales comparison approach. The Assessor also examined the cost approach as a "check" on the income approach.

3. The income approach method attempts to predict the net income an informed buyer believes the property will produce during its remaining useful life. This approach subtracts from the effective gross income (EGI) of the properties, expenses and property taxes in order to arrive at a net operating income, which, when divided by the capitalization rate, results in a valuation of the property. The capitalization rate reflects the desired yield a purchaser would seek on the capital investment. The higher the capitalization rate, the lower the values. The Assessor utilized the market capitalization rate and the effective capitalization rate in making his calculations. The market capitalization rate is a capitalization rate that does not include property tax whereas the effective capitalization rate includes the property tax in calculating value.

4. The Taxpayer and the Assessor presented somewhat equivalent capitalization rates. The Assessor applied an 11.8% effective capitalization rate and the Taxpayer applied an 11.6% effective capitalization rate.

5. A calculation of the income approach to value may be presented as follows:

Potential Gross Income A

Vacancy/Loss B

Rental Income (A-B) = C

Other Income D

Effective Gross Income (C+D) = E

Operating Expenses- F

Exclude property taxes-[G]

Net Operating Income (F-G) = H

Effective Capitalization Rate I

Value H ÷ I

6. The primary difference between the Taxpayer's and the Assessor's valuation of these properties was in the figure used for operating expenses in the application of the income valuation method. The Taxpayer relied primarily on the expenses shown on the 1994 calendar year Income and Expense Statements. In calculating the true expenses, he adjusted the expenses shown on the books and records which he found to be a departure from market estimates or which differed greatly from income and expenses statements of prior years. However, the income and expense statements of the Respondent Partnership Nirenblatt, Nirenblatt & Hoffman, were not the actual income and expense statements and were not particular to each of the apartment complexes, but, rather, a percentage of a compilation of the expenses of all of the properties owned by the Respondent Partnership.

7. The Respondent Partnership owns several apartment complexes and a retail shopping center. The partnership also has a business office that manages these properties. The expenses of the retail shopping center, as well as the business office and all of the apartment complexes, were added together and then divided, to arrive at an average expense figure. Therefore, the figures used as operating expenses for the apartment complexes were averages that the Respondent indicated the Partnership allocated "the best we could," and are not the actual expenses or income of each of the subject properties. Accordingly, the income and expense statements of the Respondent Partnership were inaccurate for the purpose of valuing the Respondent's property. Furthermore, the actual records themselves may be inaccurate. For instance, Charleston County tax records indicate that the 1993 property tax bill was $45,695.27 for one of the apartment complexes, but the 1993 operating statement of the apartment complex showed a property tax payment of $55,806.15.

8. The fair market value is established by determining the price that a willing Buyer would pay to a willing Seller for a certain piece of property. Therefore, in order to ascertain the real value of the property, a Buyer must know the actual expenses and income of a particular property, not the allocated partnership expenses. Though the Respondent Partnership's technique of averaging expenses and income of all the assets of the partnership may be appropriate for income tax purposes, it is not appropriate in ascertaining the value of property for the purpose of imposing property taxes.

9. The market sales approach relies upon the premise that a potential buyer will pay the same amount for the subject property that he would pay to purchase an existing property with the same or similar utility. Using the market sales approach, the Assessor compared similar sales of six apartment buildings in West Ashley and in North Charleston, in order to determine if the assessed value exceeded the market value for West Village and the Townhouses. However, two of the comparables were rejected because the properties had lower rents and were located in a different area of the County resulting in an abnormally low effective gross

income multiplier ( EGIM)(1). Furthermore, due to their location near the Navy Base and recent major renovations to the properties, their vacancy rates were abnormally high. The remaining relevant information for the four comparable properties is as follows:

Complex The Oaks Sedgefield/

Drayton Qtrs.

Plantation

Oaks

Northbluff

Apartments

Location West Ashley West Ashley West Ashley North Chars.
Sale date 10/18/94 7/25/95 12/14/95 3/23/95
Year built 1983 1983 1985 1984
Vacancy/Loss 15% 11.25% 2.6% 10.7%
Operating expenses 46.36% 45.14% 51.35% 49.50%
Market capitalization rate 9.9% 10.27 % 9.42 % 9.8 %
Unit sales price $29,750 $ 30,759 $32,955 $29,528


10. The Taxpayer presented eleven comparable apartment complex properties. These comparables were built between 1965 and 1975. Eight of the eleven had operating expenses of 50%, two had operating expenses of 52% and one had operating expenses of 40%. Furthermore, all but one of the properties had an effective capitalization rate of 12%.

West Village Apartments


11. West Village is located at North Windermere Drive in Charleston and its PID Number is 351-04-00-037.

12. The Assessor valued the West Village property at $2.9 Million for the 1995 tax year. The Charleston County Board of Assessment Appeals reduced the value of West Village to $2.697 Million at a Hearing held March 6, 1996.

13. Using the sales comparison approach of the similar apartments, a value of $3.1 Million was obtained for the West Village Apartments by the Assessor. The EGIM for the four comparables used by the Assessor ranged from 5.17 to 5.40. Using these comparables the estimated gross income for West Village is $600,000. Multiplying the estimated gross income by an EGIM of 5.18 the value of West Village is $3.112 Million under the market approach.

14. Using a vacancy collection/loss rate of 10%, operating expenses of 47.66% and an effective capitalization rate of 11.8%, the Assessor obtained a value of $3.144 Million for the West Village property under the income approach.

15. The Assessor compared the market, cost and income valuation figures with the actual assessment of the West Village Apartment the previous year, which was $2.9 Million, and valued the property at $2.9 Million for the 1995 tax year.

16. The actual vacancy rate for West Village for 1994 was 13%.

17. The appropriate figures in valuing this property under the income approach are a vacancy collection/loss rate of 12%, operating expenses of 49% and an effective capitalization rate of 11.8%. Therefore, the following formula reflects the value of West Village using the income approach:

Potential Gross Income $639,360

Vacancy/Loss(12%) $76,723

Rental Income $562,637

Other Income $25,253

Effective Gross Income $587,890

Operating Expenses(49%)- $288,066

Property taxes excluded- [$51,782]

Net Operating Income $351,606

Effective Capitalization Rate(11.8%)

Value $2,979,712

18. Comparing the income and sales comparison approaches and the rates in vacancy/loss, operating expenses and capitalization of similar properties confirms that $2.9 Million is an accurate and equitable reflection of the market value of West Village for the 1995 tax year.

Townhouse Apartments


19. Townhouse II and Townhouse III Apartments are both located on Ashley Hall Road in Charleston. Townhouse II's PID Numbers are 351-04-00-031 and 039. Townhouse III's PID Numbers are 351-04-00-033 and 034. Townhouse II was built in 1973 to 1974. Townhouse III was built in 1976 to 1977.

20. Although in close proximity to each other, Townhouse II and Townhouse III are in actuality separate properties. However, the Assessor valued these properties as a single unit for simplicity sake.

21. The Assessor appraised Townhouses II and III at a total value of $4.7 Million for the 1995 tax year. The Board of Assessment Appeals considered the Townhouse Apartments separately and valued Townhouse II at $.964 Million and Townhouse III at $2.118 Million, for a total value of $3.082 Million.

22. The same four comparable sales of apartment complexes used to value West Village Apartments were also used by the Assessor to determine the value for Townhouses II and III. Using these comparables the Assessor arrived at an estimated gross income of $925,000 for the Townhouse Apartments. This amount was multiplied by an EGIM of 5.18 to arrive at a value of $4.792 Million for the Townhouses II and III using the sales comparison approach.

23. Using a vacancy collection/loss rate of 10%, operating expenses of 50% and an effective capitalization rate of 11.8%, the Assessor arrived at a value of $4.626 Million for the Townhouse Apartments under the income approach.

24. The income to expense ratio of Townhouse II and III based upon the Taxpayer's books and records as adjusted by the Taxpayer are generally inconsistent with the income to expense ratio found in the market place for comparable properties. The Taxpayer applied a ratio of 57.9% in the application of the income capitalization method of valuation. However, ten of the 11 West Ashley properties show a ratio of income to expenses of 50%. The Respondent's requested variance of 7.9% from market expenses is not supported by the evidence presented for Townhouse II and Townhouse III.

25. Townhouse II and III are two-story buildings commonly called "Townhouses." Townhouses are currently not as popular as single floor apartment complexes. Therefore, the vacancy rate for Townhouse II and III is higher than the comparable apartment properties.

26. The appropriate figures in valuing Townhouse II and III under the income approach are a vacancy collection/loss rate of 14%, operating expenses of 50% and an effective capital rate of 12%. Therefore, the following formula reflects the value of Townhouse II and III using the income approach:

Potential Gross Income $1,008,722

Vacancy/Loss(14%) $141,221

Rental Income $865,501

Other Income $17,269

Effective Gross Income $882,770

Operating Expenses(50%)- $441,385

Property taxes excluded- [$82,872]

Net Operating Income $358,513

Effective Capitalization Rate(12%)

Value $4,368,808



27. Comparing the income and sales comparison approaches and the rates in vacancy/loss, operating expenses and capitalization of similar properties confirms that $4,368,808 is an accurate and equitable reflection of the market value of Townhouses II and III for the 1995 tax year.



CONCLUSIONS OF LAW


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

1. The Administrative Law Judge Division has jurisdiction of this matter pursuant to S.C. Code Ann. § 12-60-2540(A) (Supp. 1995).

2. This matter is a contested case pursuant to S.C. Code Ann. §§ 12-60-2540 and 1-23-310 et seq. (Supp. 1995). As such, an Administrative Law Judge hears and decides this matter de novo.

3. 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.

4. The fair market value is the measure of true value for taxation purposes. Lindsey vs. S.C. Tax Comm'n, 397 S.E. 2d 95 (1990).

5. The income capitalization approach is an accepted means for valuing commercial property. S. C. Tax Comm'n v. South Carolina Tax Bd. of Review, 287 S.C. 414, 339 S.E.2d 131 (Ct. App. 1985). This approach has been specifically accepted as a reliable method for valuing apartment complexes. See Property Assessment Valuation, International Association of Assessing Officers, p. 204. "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. However, 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).

6. 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).

7. A taxpayer contesting an assessment has the burden of showing that the valuation of the taxing authority is incorrect. Ordinarily this is done by showing the actual value of the property. Cloyd v. Mabry, 367 S.E.2d 171 (Ct. App. 1988); 84 C.J.S. Taxation §410 (1954).

8. "The expense statement for any one year can seldom be accepted as typical. Most expenses vary from year to year. Others, which are periodical rather than annual, may not occur at all in a specific year. Accordingly, in projecting the probable future expenses, it is necessary to analyze more than one year's experience and to confirm the indicated conclusions by comparison with known figures for similar properties." The Appraisal of Real Estate (American Institute of Real Estate Appraisers 10th ed.) at 345 to 346.

9. "The appraisal of real property is predicated upon the assumption of competent management; an assumption that might not be supported by historical operating statements. This fact, plus additional complications due to non-typical entries or the omission of items, may pose perplexing problems in the effort to reconstruct a typical expense projection." S.C. Tax Commission Decision 93-102.

10. "Absolute accuracy with respect to valuation and complete equality and uniformity are not practically attainable." Wasson v. Mayes, 252 S.C. 503, 167 S.E.2d 304 (1969). "[I]ntentional and systematic undervaluation by state officials of other taxable property in the same class contravenes the constitutional right of one taxed upon the full value of his property." Sunday Lake Iron Co. v. Wakefield Taxpayer, 247 U.S. 350 (1918). The burden of proving an intentional and systematic undervaluation rests with the complaining party. Id.

ORDER


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

ORDERED that the Respondent's property designated as PID Number is 351-04-00-037 shall be valued at $2.9 Million for the tax year 1995. Furthermore, that the Respondent's property designated as PID Numbers are 351-04-00-031, 033, 034 and 039 shall be valued at $4,368,808 for the tax year 1995.

AND IT IS SO ORDERED.

__________________________________

Ralph King Anderson, III

Administrative Law Judge

Columbia, South Carolina

February 25, 1997













































1. Gross income multipliers are used to compare the income-producing characteristics of properties in the sales comparison approach.


Brown Bldg.

 

 

 

 

 

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