South Carolina              
Administrative Law Court
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SC Administrative Law Court Decisions

CAPTION:
North Charleston River Place, LLC vs. Charleston County Assessor

AGENCY:
Charleston County Assessor

PARTIES:
Petitioners:
North Charleston River Place, LLC

Respondents:
Charleston County Assessor
 
DOCKET NUMBER:
98-ALJ-17-0194-CC

APPEARANCES:
Petitioners & Representative: North Charleston River Place, LLC, David Summer, Jr. Esquire

Respondents & Representative: Charleston County Assessor, Christine L. Companion, Esquire

Parties Present: Both Parties
 

ORDERS:

FINAL ORDER AFTER RECONSIDERATION

I. Statement of the Case



A Motion for Reconsideration has been granted in this matter in order to determine the proper capitalization rate for the 1997 tax year valuation of the Saint Charles Place Apartments, located at 1920 McMillan Avenue, North Charleston, South Carolina. This Final Order After Reconsideration removes and replaces in totality the original order of February 1, 1999.



This matter is brought by North Charleston River Place, LLC (River Place) against the Charleston County Assessor (Assessor) concerning a property value dispute for the property tax year 1997. River Place exhausted its prehearing remedies with the Assessor and the Charleston County Board of Assessment Appeals and is now seeking a contested case hearing before the Administrative Law Judge Division (ALJD). Jurisdiction vests in the ALJD pursuant to S.C. Code Ann. § 12-60-2540(A) (Supp. 1997). After considering all of the evidence and arguments, I conclude that the testimony of Stephen Everman (Everman), as well as the Assessor's appraisal, are properly included as evidence in this controversy. Further, considering the evidence and arguments, the property must be valued at $5,200,000.



II. Issues



1. Should the testimony of Stephen Everman (Everman), as well as the Assessor's appraisal, be excluded from evidence?



2. For the 1997 tax year, what is the value of the property owned by River Place?



III. Analysis



A. Exclusion of Evidence(1)



1. Positions of Parties



River Place argues Everman's testimony should be excluded since "the supervising appraiser, Mr. [Robert L.] Cale (Cale) is ultimately responsible for the veracity of the appraisal, and therefore only he is qualified to testify as to its contents." River Place's Post-Trial Brief, p. 2. Further, River Place argues the appraisal prepared by Everman should also be excluded since Everman's status as an apprentice appraiser at the time the appraisal was prepared requires exclusion of the appraisal.



The Assessor disagrees. He argues Cale is not the only proper witness. Rather, the testimony of Everman is proper since Everman has personal knowledge of the property in dispute and is not otherwise disqualified as a witness. Further, the Assessor argues the appraisal is proper evidence since Everman operated within his authority as an apprentice appraiser.



2. Findings of Fact:



I find, by a preponderance of the evidence, the following facts:



Everman is an employee of the Charleston County Assessor's Office who performed duties associated with a valuation of real property owned by River Place for the 1997 tax year. The property owned by River Place is identified as Saint Charles Place Apartments located at 1920 McMillan Avenue, North Charleston, South Carolina. The apartments have tax map numbers of 469-07-00-002 and 469-07-00-013.



Two employees of the Assessor had primary responsibilities for valuing the Saint Charles Place Apartments. Everman inspected the apartments; assembled most of the information utilized in calculating the value of the property; prepared, to a significant degree, the final appraisal; and, finally, placed his signature on the appraisal as an apprentice appraiser. Robert L. Cale, a certified residential appraiser employed by the Charleston County Assessor, supervised the appraisal of the property. In his capacity, Cale supervised Everman, reviewed the appraisal, and signed the appraisal as the supervisory appraiser.



3. Conclusions of Law



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



a. No Exclusion of Everman's Testimony



River Place seeks to exclude Everman as a witness related to the appraisal. River Place reasons that "only [Cale] is qualified to testify as to its contents." River Place's Post-Trial Brief, p. 2. Under the facts of this case, Everman's testimony is proper, and Everman is a proper witness.



To a large degree, the admission or exclusion of testimony is within the judge's discretion. See Baber v. Greenville County, 327 S.C. 31, 488 S.E.2d 314, 319 (1997) ("Conduct of trial, including the admission and rejection of testimony, is largely within trial judge's sound discretion, the exercise of which will not be disturbed on appeal absent an abuse of that discretion or the commission of a legal error that results in prejudice for appellant."). The facts of this case show Everman is well qualified to testify as to the contents of the appraisal.



Here, Everman inspected the property that is the subject of the appraisal; assembled most of the information relied upon in the appraisal; prepared, to a significant degree, the final appraisal; and, finally, placed his signature on the appraisal. Certainly, a witness may testify to those matters of which he has personal knowledge. SCRE Rule 602. Under the circumstances of this case, Everman does not suffer from a lack of personal knowledge, and SCRE Rule 602 forms no basis for prohibiting his testimony.



However, River Place further argues that Cale, and not Everman, was required to testify about the appraisal since Cale signed the document as a certified residential appraiser "ultimately responsible for the veracity of the appraisal." I disagree.



The fact that another person may have more information or better training or more experience is not a basis for excluding evidence, but rather is a factor relevant to the weight to be given to such testimony. See 29A Am. Jur. 2d Evidence § 1431 (1994) (The trier of fact determines the weight to be given the evidence). Here, as discussed above, Everman was substantially involved in the preparation of the appraisal and performed his job functions as an appraiser. Accordingly, the fact that another individual could have been called as a "better" witness is not a basis for excluding the testimony of Everman. Thus, Everman's testimony is properly received.



b. No Exclusion of Appraisal



River Place argues that the appraisal prepared by Everman should be excluded due to Everman's status as an apprentice appraiser at the time the appraisal was prepared. The argument is that Everman was not legally qualified to perform the appraisal, and, therefore, the appraisal must be excluded. I cannot agree. On the contrary, Everman was legally capable of performing the appraisal duties assigned to him in this case.



Here, Everman's duties were to assist Cale, a state certified residential real estate appraiser, in preparing an appraisal of the rental property in dispute in this matter. Cale's status as a certified real estate appraiser entitled him to engage in any real estate appraisal activity "which is not prohibited by federal law or the guidelines established by the appraisal subcommittee." S.C. Code Ann. § 40-60-30(B)(3) (Supp. 1997). In performing his appraisal duties, Cale was not prohibited from obtaining the assistance of an apprentice appraiser. Indeed, an apprentice appraiser is specifically authorized to assist a state certified residential real estate appraiser so long as the apprentice is supervised by the certified appraiser, the appraisal is reviewed by the certified appraiser, and the certified appraiser signs the appraisal as the supervising appraiser. S.C. Code Ann § 40-60-30(5)(a) (Supp. 1997).



In this case, the evidence establishes that Everman was supervised by Cale, Cale reviewed the appraisal, and Cale signed as the supervisory appraiser. Thus, Everman properly and legally carried out his duties as an apprentice. Therefore, the alleged lack of authority in Everman has not been proven and is not a basis for excluding the appraisal submitted by the Charleston County Assessor. Accordingly, the appraisal is properly received as evidence.



B. Valuation of Property



1. Positions of Parties



In several important areas, the parties have reached an agreement on matters that would otherwise be contested. For example, the parties stipulated that the proper approach for valuing the disputed property is that of an income approach based upon the capitalization of a stream of income. Therefore, this case is decided by examining the factors pertinent to an income approach to valuation.



Further, not all of the factors pertinent to an income approach are disputed. Rather, the parties have reached a further agreement. Recognizing that a capitalization of income approach requires determining the three fundamental factors of effective gross income, reductions for expenses, and capitalization rate, the parties have agreed on one of these three factors. River Place concedes that the Assessor is correct in his use of an effective gross income of $1,394,440.



However, no agreement has been reached on the reductions to be made for expenses nor on the capitalization rate to be used. These matters are the subject of significant dispute.



River Place argues the effective gross income of $1,394,440 should be reduced by expenses of $1,140,262 so as to produce a net income of 254,773 that is then capitalized at 12.5%. This calculation produces a rounded value of $2,050,000 for the apartment complex. The Assessor, however, argues that a reduction of $822,720 for expenses should be given to produce a net income of $571,720, which is then to be capitalized at a rate of 11%. The Assessor's calculation produces a rounded value of $5,200,000.

2. Findings of Fact:



I find, by a preponderance of the evidence, the following facts:



a. Background Facts



The disputed property, located in North Charleston at 1920 McMillan Avenue, is known as Saint Charles Place Apartments. It consists of 464 apartment units contained within 134 buildings on 41.2 acres of land. The complex was built in 1941. After several changes in ownership, in 1990 the apartments were owned and operated by the North Charleston Housing Authority as part of an assistance program to low income families. However, in the face of a foreclosure possibility, the North Charleston Housing Authority transferred the property in October of 1996 to River Place.



Despite a $7,000,000 repair and renovation to the property in 1991, the units lack many of the normal conveniences of standard apartments, and the age of the property makes the units expensive to maintain. Unlike modern apartments, these units do not have dishwashers, garbage disposals, or washer and dryer connections. Further, the three bedroom units have only one bathroom.



Given the condition of the facilities, actual expenses are relatively high. For example, the actual expenses for the only recent year of operation by a private entity (i.e., River Place for the 1997 year) shows operating expenses of $950,486. In addition, adding expenses for reserves of $300 per unit and taxes of $109 per unit produces an additional expense of $189,776, for a total expense of $1,140,262.



b. Determination of Comparables



The Assessor agrees that expenses are higher than that normally found in the marketplace. To determine the expenses in the marketplace, the Assessor computed a ratio of expenses to income based upon the income and expenses of comparable apartments of significant age. The data demonstrates a ratio of approximately 51 to 55 percent. The Assessor increased the ratio to 59% to account for the higher expenses associated with the taxpayer's property.



As with the expenses, the Assessor selected sales from the marketplace in an effort to establish a capitalization rate appropriate for the taxpayer's property. Four sales demonstrated capitalization rates of 9.79%, 9.8%, 8.7%, and 11.7%.(2) Sale number 2 (the 9.8% rate) was of rental property with a high vacancy rate and a need to refurbish. Similarly, the last sale (the 11.7% rate) required $600,000 in upgrades and repairs and was of a complex having a relatively high vacancy rate of 20%. Since the taxpayer's property has a high vacancy rate and a high expense ratio, the Assessor utilized a capitalization rate of 11% to recognize the detriments associated with the taxpayer's property.



3. Conclusions of Law



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



The income approach seeks to determine the value of property by examining the property's income producing capabilities. Anthony v. Padmar, Inc., 320 S.C. 436, 465 S.E.2d 745 (Ct. App. 1995). The income producing capabilities of rental property can best be found by applying an appropriate capitalization rate to the average of the actual net operating incomes for several years. S.C. Tax Comm'n v. S.C. Tax Bd. of Review, 287 S.C. 415, 339 S.E.2d 131 (1985). Caution must be exercised in relying solely upon actual operating income since other factors may warrant adjusting the actual experience to account for additional elements of value not properly reflected. See Haywood Mall Associates v. South Carolina Tax Com'n, 291 S.C. 411, 353 S.E.2d 890 (Ct. App. 1987) ("We find no error in the appealed order's holding that in the situation before us, the assessor properly added a factor for tenant improvements to the actual rent received.") Here, the first issue is how best to calculate the net operating income.



a. Net Income Determined



While no dispute exists that $1,394,440 is the effective gross income, the taxpayer seeks to arrive at net income to be capitalized by reducing gross income by the property's purported single year actual expenses of $1,140,262. The Assessor seeks to reduce gross income by an expense ratio of 59% with that ratio having been derived from data gathered from comparable properties. For two primary reasons, the 59% ratio is a more reliable indicator of the value of future benefits than is the single year of actual expenses presented by the taxpayer.



First, the value of future benefits under an income approach is best 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); Parkway Village Apartments Co. v. Cranford Tp., 8 N.J.Tax 430, 444 (Tax 1985), aff'd, 9 N.J.Tax 199 (App.Div.1986), rev'd on other grounds, 108 N.J. 266, 528 A.2d 922 (1987) ("It is clear that an appraiser's function is to reconstruct a yearly pattern of expenses. Expenses vary from year to year, and it is important to review operating statements for three or more years in order to determine whether certain expenses are typical or atypical.").



Here, the taxpayer's expenses reflect only a single year. Prior ownership of the property was in the hands of a public entity and, therefore, does not afford reliable data for any past years. Indeed, a single year of private ownership gives some concern that actual expenses for such a start-up year may not provide a true indication of value. See Haywood Mall Associates v. South Carolina Tax Com'n, supra. Thus, under the facts of this case, a single year of income and expense is not entitled to significant weight. On the other hand, significant weight is accorded the Assessor's 59% ratio. That ratio was derived from actual data for similar apartments that have been operating for a number of years. Accordingly, of the two approaches, the Assessor's method better represents fair market value.



Second, while valuation may be based both on what is known and on what is anticipated as of the assessing date, valuation cannot be premised on hindsight. New Brunswick v. Tax Appeals Div., 39 N.J. 537, 545, 189 A.2d 702 (1963). Here, the taxpayer's expenses rely upon data that did not occur until 1997. The valuation date is December 31, 1996. See S.C. Code Ann. § 12-37-900 (1976). Thus, on December 31, 1996, the precise expense data accumulated during 1997 would not have been available. Therefore, the taxpayer's method is less persuasive than the Assessor's 59% ratio. Accordingly, $571,720 is the net income to be capitalized.



b. Capitalization Rate Determined



In general, net income should be capitalized at the rate which represents the return on investment necessary to attract investment capital. Taunton Redev. Assocs. v. Assessors of Taunton, 471 N.E.2d 75 (Mass. 1984); American Inst. of Real Estate Appraisers, The Appraisal of Real Estate 417 (10th ed.1992). Here, the taxpayer asserts 12.5% is needed to attract investment capital while the Assessor argues 11% is adequate.



The Assessor relied upon four sales to derive the capitalization rate in the market. Those sales, which presented rates as low as 8.7% but as high as 11.7%, demonstrated rates generally around 9%. Given the high vacancy, the high maintenance, and the less desirable location of the subject property, the Assessor opted for the high end of the range. Under the facts of this case, I agree the evidence best supports the 11% rate.



First, the evidence indicates and the Assessor recognizes, that the subject property is less desirable than other apartment complexes in the Charleston market. Accordingly, some consideration must be made for that fact. The evidence establishes that the Assessor adjusted the capitalization rate to reflect that fact. Thus, the Assessor included a factor seeking to make the four sales comparable.



On the other hand, the taxpayer, while asserting none of the four sales are comparable, presented no persuasive evidence of sales or data that establish an alternative capitalization rate. Rather, the taxpayer relied upon the 12.5% rate suggested by the Charleston County Board of Assessment Appeals. However, that rate is not supported by persuasive evidence.



Indeed, the evidence here establishes a capitalization rate of 11%. The data is derived from the market, and the conclusion as to rate is adjusted to account for the less desirable aspects of the subject property. Accordingly, the 11% cap rate is proper.



Second, the 11% cap rate is proper since the method chosen by the Assessor relies upon identifiable sales. On the contrary, the taxpayer presented no sales analysis, no appraisal, and no comparable properties. Thus, the taxpayer presents a less reliable basis for setting a capitalization rate.



c. Value Determined



Given a gross income of $1,394,000, a reduction for expenses of 59%, or $822,720, leaves a net income of $571,720. That net income capitalized at 11% produces a value of $5,197,454. Accordingly, the fair market value of the property identified as Saint Charles Place Apartments, located at 1920 McMillan Avenue, North Charleston, South Carolina, for the tax year 1997 is $5,200,000.



IV. Order



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



For the 1997 tax year, the Charleston County Assessor shall place a fair market value of $5,200,000 on the property identified as Saint Charles Place Apartments located at 1920 McMillan Avenue, North Charleston, South Carolina.



AND IT IS SO ORDERED.



____________________________

RAY N. STEVENS

Administrative Law Judge

Dated: April 9, 1999

Columbia, South Carolina

1. At the hearing, River Place moved to exclude both the testimony of Everman and the appraisal of the property prepared by the Assessor. The testimony and the appraisal were proffered as evidence and a ruling on the motion was held in abeyance until the matter was briefed by the parties. Having reviewed the briefs, the motion to exclude is denied for the reasons identified in this Order.

2. The Assessor included taxes as an expense to arrive at net income for the comparables and the subject property. Thus, an effective tax rate was not added to the capitalization rate. Tr. p. 101, lines 21 - 23. See American Inst. of Real Estate Appraisers, The Appraisal of Real Estate 450 (10th ed.1992) ("A capitalization rate derived from a comparable sale property is valid only if it is applied to the subject on the same basis."); see, e.g., Levitz Furniture Corp. v. Paramus Borough, 17 N.J.Tax 483 (N.J. 1998) (no effective tax rate factor was included in the capitalization rate since the real estate taxes were neutralized by being paid by the tenant).


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