SC Administrative Law Court Decisions

This is a contested case brought by W.O. Brisben Companies, Inc. and Catawba Pointe Limited Partnership, d/b/a Catawba Pointe Apartments ("Taxpayer"), against the York County Assessor ("Assessor"), concerning the valuation of an apartment complex for the 1996 tax year. The parties exhausted all prehearing remedies with the Assessor and the York County Board of Tax Appeals ("Board"). Jurisdiction is granted to the Administrative Law Judge Division ("ALJD") by S.C. Code Ann. § 12-60-2540 (Supp. 1996).

This matter was heard on April 22, 1997.

II. ISSUE

Using the income approach, what is the appropriate capitalization rate and per unit expense ratio to utilize in valuing the subject property for the 1996 tax year?

III. 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. The Taxpayer owns and operates Catawba Pointe Apartments, a 144-unit apartment complex located on Springdale Road in York County, South Carolina.

2. The subject property is identified as Tax Map # 669-04-01-022.

3. Using the cost approach, the Assessor originally determined the value of the subject property to be $5,167,100. This assessment erroneously valued all 144 units, instead of only the 72 units and other completed common improvements which were completed and had received certificates of occupancy on or prior to December 31, 1995.

4. The Assessor reduced the assessed value to $2,755,600, again using the cost approach. This assessment values 72 of the apartment units, an office, a recreation building, a pool, and parking lots. The remaining 72 units were completed, but had not received certificates of occupancy, therefore, were excluded for taxation purposes by the Assessor for the 1996 tax year.

5. On September 25, 1996, the Taxpayer appealed the assessment on the ground that the property was appraised at more than its total fair market value.

6. Upon request for review, the Assessor used the income approach to establish an alternate valuation of $2,756,500 for the subject property.

7. On December 19, 1996, the York County Board of Tax Appeals affirmed the Assessor's valuation of the subject property.

8. The Taxpayer asserts that the subject property must be valued at $2,145,560 for the tax year 1996, as reflected in its Post-Hearing Brief.

9. The appropriate values are those scaled to represent 1992 property values, the year when the last reassessment program was conducted in York County. The use of 1992 as a base year ensures that inequities do not result from increases in the millage rates in years subsequent to the base year.

10. The apartment complex is located on a tract of land containing 12.94 acres which was purchased in October of 1994 for a total purchase price of $450,000. The Assessor valued the land at $233,000 for tax purposes, which represents a 1992 tax year property valuation.

11. The Taxpayer derives rental income from the subject property.

12. The existing use of the subject property, as well as the past and intended future use, is as rental property.

13. Rent restrictions are placed on the subject property pursuant to Section 42 of the Internal Revenue Code. At the hearing before the Board, the Taxpayer raised the issue of what effects, if any, the Section 42 restrictions had on the value of the property. At the hearing of this case, the Taxpayer stipulated that this tribunal not consider Section 42 restrictions in its valuation of the subject property.

14. The parties agree that the value can be properly calculated using an income approach. The parties disagree as to the appropriate capitalization rate to be employed, and the appropriate expense ratio to be allocated to each apartment unit.

15. The Assessor asserts that the use of a capitalization rate of 9% and operating expenses of $2,300 per unit is appropriate, including taxes. The Assessor utilized the 9% capitalization rate based on its study and investigation of various locations in North and South Carolina.

16. The Taxpayer contends, through expert testimony, that a capitalization rate of 10% is reasonable. The Taxpayer further asserts that the appropriate amount of operating expenses is $2,100 per unit, excluding taxes and reserves.

17. The Assessor used comparable sales to derive the capitalization rate of the subject property. The following three comparables used by the Assessor were sold in the 1991 calendar year, and reflect the capitalization rates prevailing as of January 1, 1992:

Property& Location Cap Rate Sale Date

Walker's Ridge - Gastonia, NC 9.445% Jan. 14, 1991

Haywood Pointe - Greenville, SC 9.71% Sept. 5, 1991

Ashley Crossing -Charleston, SC 9.76% Dec. 20, 1991

18. The average capitalization rate for the preceding comparables is 9.638%.

19. The Assessor also used the following comparables, not sold in 1991, to arrive at the assessed value for the subject property:

Property& Location Cap Rate Sale Date

Paces Brook - Columbia, SC 9.00% Nov. 13, 1990

The Oaks - Mauldin, SC 8.75% Feb. 28, 1990

Willow Ridge - Pineville, NC 9.2% May 18, 1994

Windsor Square - Matthews, NC 8.99% June 13, 1994

Creekwood - Charlotte, NC 8.42% Feb. 9, 1994

20. The sale of these fives comparables did not occur in 1991, and therefore do not adequately represent capitalization rates for the 1992 tax year.

21. A capitalization rate of 9.638% is appropriate and reasonable for the property here under review as of December 31, 1991.

22. A capitalization rate of 9.638% produces the yield a reasonable purchaser would seek as a satisfactory rate of return.

23. The Assessor included real estate taxes in calculating the amount of expenses to be allocated on a per unit basis. The Taxpayer maintains that the expense figure utilized by the Assessor is inadequate in that it underestimates expenses.

24. Mr. Robert E. Schuler is Vice President of W.O. Brisben Companies, Inc. and a general partner in approximately 30 real estate properties. Mr. Schuler testified concerning the subject property's actual rental history and expenses, the appropriate capitalization rate to be applied, and its proper value for tax assessment purposes.

25. Mr. Frank Headly, a real estate appraiser with the Marshall Dodds Company, was qualified as an expert in the area of commercial real estate appraisals. Mr. Headly testified that a capitalization rate of 9% is unreasonable, while a capitalization rate of 10% would be more in line with what the actual rate should be. With regard to expenses, Mr. Headly testified that expenses for the subject property should range from $1912 to $2112, exclusive of taxes and reserves. He further opined that an expense ratio of $2300, which includes taxes, is too low. Mr. Headly agreed and testified that Mr. Shuler's utilization of $200 per unit per year for reserves was reasonable and consistent with both standards in the industry and standards for appraisers.

26. Mr. Frank M. Allen, York County Deputy Tax Assessor, has been employed with the York County Deputy Tax Assessor's Office for 28½ years. Mr. Allen was involved in the investigation, appraisal, and the income approach valuation of the subject property. Mr. Allen testified that he had subjectively selected a numerical ratio for determining the appropriate amount of expenses to be allocated to each unit of the subject property. He admitted that he had no direct knowledge of whether the appraisals he used included taxes and reserves. Mr. Allen further testified that he referred to the January 1990 edition of The Appraisal Journal as opposed to the 1992 edition to derive an expense ratio percentage, even though expenses tend to increase on an annual basis.

27. The appropriate expense per unit ratio is $2,100, excluding taxes and reserves.

28. The following factors are attributable to the subject property in deriving a value through use of the income capitalization approach:

Gross Annual Potential Rents $439,860

Less Vacancy Rate of 5% $ 21,993

Effective Rent Income $417,867

Miscellaneous Income 1% $ 4,179

Total Effective Income $422,046

Expenses $207,490

Operating Expenses ($2100 per 72 units) 151,200

Reserves Expenses ($200 per 72 units) 14,400

Real Estate Taxes ($582 per 72 units) 41,890

Net Operating Income $214,556

Based on the foregoing Findings of Fact, 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. 1996).

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 § 411 at 793 (1954).

3. S.C. Code Ann. § 12-37-930 (Supp. 1996) provides:

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, 302 S.C. 504, 397 S.E.2d 95 (1990).

5. "The qualification of a witness as an expert in a particular field is within the sound discretion of the trial judge." Smoak v. Liebherr-Am., Inc., 281 S.C. 420, 422, 315 S.E.2d 116, 118 (1984); S.C. Dep't of Highways and Public Transp. v. Manning, 283 S.C. 394, 323 S.E.2d 775 (1984). However, where the expert's testimony is based upon facts sufficient to form the basis for an opinion, the trier of fact determines its probative weight. Berkley Elec. Coop. v. S.C. Public Serv. Comm'n, 304 S.C. 15, 402 S.E.2d 674 (1991); Smoak, supra. Further, a trier of fact is not compelled to accept an expert's testimony, but may give it the weight and credibility he determines it deserves. Florence County Dep't of Social Serv. v. Ward, 310 S.C. 69, 425 S.E.2d 61 (1992); Greyhound Lines v. S.C. Public Serv. Comm'n, 274 S.C. 161, 262 S.E.2d 18 (1980). He also may accept the testimony of one expert over another. S.C. Cable Tel. Assn. v. Southern Bell Tel. and Tel. Co., 308 S.C. 216, 417 S.E.2d 586 (1992).

6. The income capitalization approach is an accepted means for valuing commercial property. S.C. Tax Comm'n v. S.C. 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, at 204.

7. The income analysis is recognized as a proper means for valuing property whose purpose is primarily the production of income from rent. Bornstein v. State Tax Comm'n, 176 A.2d 859 (Md. 1962).

8. 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 at 413 (10th ed. 1992). "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 467.

9. To develop a net operating income estimate for the subject property, the appraiser should compute the potential gross income from the scheduled rent specified in existing leases and other income. This figure should then be reduced for expected vacancy and collection loss. Next, the appraiser should further reduce this figure by operating expenses, the periodic expenditures necessary to maintain the property and continue the flow of income. An operating expense estimate includes fixed expenses. Fixed expenses include taxes and premiums for fire and owner's liability insurance. Fixed expenses, variable expenses, and replacement allowances (reserves) should be added together to calculate total operating expenses. The total operating expenses should then be deducted, and the result is the net operating income. See The Appraisal of Real Estate, supra, at 464-5.

10. To derive expense data for the valuation of investment properties, the appraiser should investigate comparable sales and rentals of competitive income-producing properties in the same market. The Appraisal of Real Estate, supra, at 157.

11. An expense ratio of $2,100 per unit, excluding taxes and reserves, is the appropriate ratio to utilize in valuing the subject property. That is, the total operating expenses include the expenses represented in Finding of Fact #28.

12. The net operating income for the subject property for the 1996 tax year is $214,556.

13. Derivation from comparable sales is one of five accepted techniques used to estimate an overall capitalization rate. The Appraisal of Real Estate, supra, at 467. Further, deriving a capitalization rate from comparable sales is preferred when sufficient data on sales of similar, competitive properties are available. The Appraisal of Real Estate, supra, at 468.

14. It is essential that the properties used as comparables reflect risk, income, expense, and physical and locational characteristics that are similar to the property being appraised. The Appraisal of Real Estate, supra, at 467.

15. After determining the income to be capitalized, a capitalization rate, i.e., the desired yield a purchaser would seek on the capital investment, must be determined. Next, the net operating income should be divided by the capitalization rate to determine an estimated value of the rental income abilities 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). I find a capitalization rate of 9.638% is proper for the subject property.

16. The value of the subject property using the income approach, given a capitalization rate of 9.638% and net operating income of $214,556 calculated using an expense ratio of $2,100 per unit plus taxes and reserves, is $2,226,147.

V. ORDER

Based upon the foregoing Findings of Fact and Conclusions of Law,

IT IS HEREBY ORDERED that the Assessor shall value the Taxpayer's property, identified as Catawba Pointe Apartments, Tax Map # 669-04-01-022, at $2,226,147 for the 1996 tax year.

AND IT IS SO ORDERED.

______________________________________

JOHN D. GEATHERS

Administrative Law Judge

Post Office Box 11667

Columbia, South Carolina 29211-1667

Columbia, South Carolina

June 23, 1997