SC Administrative Law Court Decisions

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.

I conclude that the property should be valued at $2.7 Million.

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

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:

1. The Taxpayer is the owner of a 144-unit apartment complex called the North Village Apartments (North Village), located in the City of North Charleston in the County of Charleston, South Carolina. North Village is located near the Dorchester Road gate at the Charleston Air Force Base. The PID number for the North Village is #406-00-00-047.

2. The Assessor valued the North Village at $2.87 Million for the 1995 tax year. The Charleston County Board of Assessment Appeals reduced the Assessor's valuation of the property to $2,371,000.

3. 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.

4. 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. Additionally, there are two capitalization rates used in property appraisals. 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.

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. Respondent Partnership's expenses for North Village Apartments have ranged between 50% and 67%, with the expenses for the 1995 tax year being 67%.

7. 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.

8. 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 North Village, but the 1993 operating statement of that apartment complex showed a property tax payment of $55,806.15.

9. 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. Furthermore, because a purchaser of a property will make his decision on future expectations, the projected vacancy rate is the most significant factor -- not the money the Respondent actually collected.

10. 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 complexes in Charleston County in order to determine if the assessed value exceeded the market value for West Village. The relevant information of those comparable properties is as follows:

The Assessor compared the normal expenses of apartment complexes in the southeast region of the United States, the expenses of above six properties representing the local market, and the information in a local report called "The Charleston Apartment Report" to arrive at the conclusion that expenses for apartment complexes are typically between 42.6% and 45% of the Effective Gross Income (EGI). Using the market approach the Assessor valued the property at $3,752,000.

11. The Taxpayer presented three comparable apartment complex properties. The relevant information presented of properties is as follows:

12. The Assessor valued the property using the cost method form of analysis and derived a value of $2,921,000. The cost data used by the taxpayer in arriving at that value is derived from the Marshall Valuation Service.

13. Using a vacancy collection/loss rate of 15%, operating expenses of 45.56% and an effective capitalization rate of 12.6%, the Assessor contended at the ALJD hearing that West Village should actually be valued $3 Million under the income approach.

14. The appropriate figures in valuing this property under the income approach are a vacancy collection/loss rate of 18%, operating expenses of 52% and an effective capitalization rate of 12.5%. Therefore, the following formula reflects the value of West Village using the income approach:

Potential Gross Income $720,000

Vacancy/Loss(18%) $129,600

Rental Income $590,400

Rental Concessions [$3,240]

Other Income $26,138

Effective Gross Income $613,298

Operating Expenses(52%)- $318,915

Property taxes excluded- [$49,010]

Net Operating Income $343,393

Effective Capitalization Rate(12.5%)

Value $2,747,144

15. Comparing the income and sales comparison approaches and the rates in vacancy/loss, operating expenses and capitalization of similar properties confirms that $2.7 Million is an accurate and equitable reflection of the market value of West Village for the 1995 tax year.

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.

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

ORDERED that the Respondent's property designated as PID Number is 406-00-00-047 shall be valued at $2.7 Million Million for the tax year 1995.

AND IT IS SO ORDERED.

__________________________________

Ralph King Anderson, III

Administrative Law Judge

Columbia, South Carolina

February 26, 1997