Opinion
Nos. CV02-0171772S, CV03-0179031S
September 15, 2006
MEMORANDUM OF DECISION
After some twenty years of a state legislative moratorium on revaluation in the City of Waterbury, all real property was revalued in 2001. The plaintiff, the Cruess Realty Company, as owner of two parcels of real property located at 71 Plaza Avenue and 77 Plaza Avenue is appealing from the decision of the board of assessment appeals of the City of Waterbury upholding the tax assessment of these properties from the grand list of October 1, 2001 and October 1, 2002.
THE PROPERTIES: 71 Plaza Avenue
Seventy-one Plaza Avenue consists of two structures, with approximately 36,000 square feet on 2.8 acres. One building is the brick convalescent home, known as Oakcliff Convalescent Home, which was built in stages from the 1960s and a second building, an unattached wooden structure, built in 1938. These structures have had multiple uses, to name a few, as a residential care facility, nursing home and adult care facility. These properties are leased to the convalescent home. The convalescent home stopped paying rent to the plaintiff in 2001 and the plaintiff has not paid property taxes for it from 2001 until the present. The property is currently in foreclosure for unpaid taxes and a defaulted mortgage. The residential care home is a detached two and one-half story wood framed building with approximately sixteen residential care beds, all located on the first and second floor with three bathrooms. Thomas Morrow, the stipulated expert and a real estate appraiser, testified that the structure is to be demolished by the state due to its age and extremely poor condition.
The Oakcliff Convalescent Home is a chronic and convalescent nursing home with a daycare component facility known as the Oakcliff Adult Day Care. Based on the testimony of the appraisal prepared by Robert Nocera, the plaintiff's appraiser, the facility consists of four wings with thirty-two patient rooms, which can provide eighty-five licensed beds. This brick structure has had substantial additions, the last built approximately in 1991. It consists of three single one-bedrooms, twelve two-bedrooms, ten rooms with three beds each and seven rooms with four beds each. Bathroom facilities include twenty-eight half-baths, five of which have showers. The occupancy rate began to decline in 2001 and 2002 due to a lower number of private patients in comparison to the Medicaid patients.
The brick structure was evaluated at $1,400,710 in 2001 and $1,495,450 in 2002. The wooden structure was evaluated at $252,960 in 2001 and $269,460 in 2002. The 2.8 acres of land was evaluated at $174,400 in 2001 and $174,400 in 2002. As a result, the market value for the land and buildings in 2001 was $1,828,070 and for 2002, $1,939,310.
77 Plaza Avenue
The real property at 77 Plaza Avenue is located on .18 acres. It consists of a three-family wooden house built in 1909. From the date of the revaluation in 2001 to the present, the residence has been boarded up and has further deteriorated. A retaining wall existed in the back of the house, which has given way jeopardizing the foundation of the house. In 2001, the land was evaluated at $21,120 and the house at $44,900 for a total of $66,020. In 2002, the land was evaluated at $21,120 and the house at $45,300 for a total of $66,420. Raymond Cruess, the plaintiff's owner, testified at the hearing that the Connecticut Department of Health, as a continuation of licensure, has directed that the structure be demolished.
FINANCIAL CONDITION OF CRUESS REALTY, OAKCLIFF CONVALESCENT HOME AND OAKCLIFF ADULT DAY CARE
Federal income tax returns were submitted into evidence as follows:
(1) The 2000 return for Oakcliff Convalescent Home shows income of $39,221.48; the 2001 return, a loss of $277,040.87 and for 2002, a loss of $432,455.47.
CT Page 16970
(2) The 2000 return for Oakcliff Adult Day Care a loss for $11,589.14; the 2001 return, a loss of $11,587 and the 2002 return, a loss of $20,180.89.
(3) The 2000 return for the plaintiff, Cruess Realty, shows a loss of $16,349.31; the 2001 return, a loss of $9,046.36 and the 2002 return, a loss of $6,485.63
METHODS OF VALUATION
"There are three accepted methods of valuation which may be used for the assessment of real property. They are the comparable sales approach, the income [capitalization] approach [and] the . . . cost approach . . . Each of these is an approved method of ascertaining the actual value of real estate for purposes of taxation." (Citations omitted; internal quotation marks omitted.) Sun Valley Camping Cooperative, Inc. v. Stafford, 94 Conn.App. 696, 702-03, 894 A.2d 349 (2006).
The cost approach was not considered by the written reports of the parties' experts nor was testimony adduced concerning this approach.
"[T]he trial court tries the matter de novo and the ultimate question is the ascertainment of the true and actual value of the [taxpayer's] property . . . At the de novo proceeding, the taxpayer bears the burden of establishing that the assessor has over assessed its property." (Internal quotation marks omitted.) Union Carbide Corp. v. Danbury, 257 Conn. 865, 870, 778 A.2d 204 (2001). "In actions requiring . . . a valuation of property, the trial court is charged with the duty of making an independent valuation of the property involved . . . [N]o one method of valuation is controlling and the court [court] may select the one most appropriate in the case before [it] . . . Moreover, a variety of factors may be considered by the trial court in assessing the value of such property . . . [T]he trier arrives at his own conclusions by weighing the opinions of the appraisers, the claims of the parties, and his own general knowledge of the elements going to establish value, and then employs the most appropriate method of determining valuation . . . The trial court has broad discretion in reaching such conclusions, and [its] determination is reviewable only if [it] misapplies or gives an improper effect to any test or consideration which it was [its] duty to regard." (Internal quotation marks omitted.) Sheridan v. Killingly, 278 Conn. 252, 259, 897 A.2d 90 (2006). "A trial court is vested with broad discretion . . . to determine [the] true and actual value [of the property] and has the right to accept so much of the expert testimony and the recognized appraisal methods which are employed as it finds applicable." (Internal quotation marks omitted.) First Bethel Associates v. Bethel, 231 Conn. 731, 741, 651 A.2d 1279 (1995). "If the court finds that the property has been in fact overvalued, it has the power to, and should, correct the valuation." Hutensky v. Avon, 163 Conn. 433, 437, 311 A.2d 92 (1972).
"Ordinarily, a court's decision as to the value of the property is reviewed pursuant to the clearly erroneous standard . . . In some cases, however, on the basis of the substance of the particular claims of a taxpayer, the standard of review is plenary because there is a question of law, such as the construction of a statute." (Citation omitted.) Sun Valley Camping Cooperative, Inc. v. Stafford, supra, 94 Conn.App. 703.
Based on the evidence presented in this case, the comparable sales and the income producing analysis are relevant methods of valuation. These were the two methods utilized by the appraisers.
All three appraisers agreed that the cost approach was not applicable to this type of property. Carbone testified that the reason he did not use that valuation method was because it is based on the replacement cost less depreciation and the subject property is not a new one. Therefore, it would be very difficult to measure any depreciation, whether it was physical or functional.
COMPARABLE SALES APPROACH
"The comparable sales approach has long been an approved method for ascertaining the fair market value of property." Melillo v. New Haven, 249 Conn. 138, 150 n. 22, 732 A.2d 133 (1990). "The best test for the determination of value is ordinarily that of market sales . . . In the absence of such sales, other means are required to be employed." (Citation omitted.) Burritt Mutual Savings Bank v. New Britain, 146 Conn. 669, 674, 154 A.2d 608 (1959).
"[T]he use of an average ratio of sales to assessments is acceptable to establish the unfairness of an assessment and to provide a remedy once a finding of an inequitable and excessive assessment has been made." Newbury Commons Limited Partnership v. Stamford, 226 Conn. 92, 101, 626 A.2d 1292 (1993). "[W]here a claim is made that an assessor had failed to establish a fair valuation, [t]he average ratio technique is useful both as evidence of, and as a remedy to cure, a failure of the assessing authority to follow equitable procedures or the statutory requirements, or to correct its clear error . . . It [is] therefore proper for the trial court to consider the assessment of the plaintiff's expert as evidence that the defendant's assessment did not reflect a fair valuation as required by statute and to adopt that assessment as its own finding of the true and actual value of the property once it had found the defendant's assessment to be inequitable and excessive." (Citation omitted; internal quotation marks omitted.) Id., 101-02.
INCOME CAPITALIZATION APPROACH
"The income capitalization approach is a procedure that appraisers use to develop an indication of market value by applying a rate or factor to the anticipated net income from a property . . . Appraisers arrive at the anticipated net income by considering the property's actual rental income, as well as the rental income for comparable properties in the vicinity, property expenses and allowances for vacancy and collection losses." (Citation omitted; internal quotation marks omitted.) United Technologies Corp. v. East Windsor, 262 Conn. 11, 17 n. 9, 807 A.2d 955 (2002). "The income capitalization approach to value consists of methods, techniques, and mathematical procedures that an appraiser uses to analyze a property's capacity to generate benefits (i.e., usually the monetary benefits of income and reversion) and convert these benefits into an indication of present value." (Internal quotation marks omitted.) Heather Lyn Ltd. Partnership v. Griswold, 38 Conn.App. 158, 162-63 659 A.2d 740 (1995).
One indicator of income is "market rent." "[General Statutes § 12-63b(b)] requires that, in determining a property's `market rent,' the assessor and, therefore, the court, in determining the fair market value of the property, must consider both (1) net rent for comparable properties, and (2) the net rent derived from any existing leases on the property." First Bethel Associates v. Bethel, supra, 231 Conn. 740.
"In any method of property valuation for purposes of taxation, all of the various components which enter into the value of the property are to be considered by the assessors . . . Where more than one asset contributes, in combination, to the production of income, a valuation based solely upon the value of one component asset . . . is improper . . ." (Citations omitted.) New Haven Water Co. v. Board of Tax Review, 178 Conn. 100, 111, 422 A.2d 946 (1979). "It is, moreover, basic appraisal theory that, in a multi-asset valuation formula, net income must be equitably allocated among all of the different assets, ie., land and other capital investments, used to generate that income." Id., 112.
"The value of property may be considered to be that which it has as used and by reason of its use, and it is often a reasonable assumption that it is worth a sum capitalized on the basis of its average income and earning capacity." Somers v. Meriden, 119 Conn. 5, 8, 174 A. 184 (1934). "As a general principle, earning or income producing capacity, as distinguished from actual earnings, is to be regarded as a factor in valuation for taxation purposes, but if the property is devoted to the use for which it is best adapted and is in a condition to produce or is producing its maximum income, the actual rental is a very important element in ascertaining its value." Id., 8-9. "[F]or the purposes of valuation for taxation the average earnings for a reasonable period should be taken, rather than the income at the taxing date or for the current year . . . Prospective as well as present and past earnings are an important element in investment values, and any immediate prospect of an increase or decrease in earnings or earning capacity should be taken into consideration." (Citations omitted.) Id., 12.
THE VALUATIONS COMPARATIVE SALES APPROACH
Revaluation of the properties in the city were performed for the first time in twenty years by an independent contractor for the year 2001. The property record card for 71 Plaza Avenue reflects this revaluation with a modification as a result of a deduction by the board of tax review. All three appraisers, Thomas Morrow, the stipulated expert, Robert Nocera, the plaintiff's appraiser and Armand Carbone, the assistant assessor for the city evaluated the property known as 71 Plaza Avenue using the comparative sales approach.
In preparation for the present case, Carbone testified that first he reviewed the work done by the independent appraisal company and then analyzed the property based on comparable sales of nursing homes with all of its licenses in place for those uses. For his comparable sales analysis, Carbone averaged seven Connecticut nursing home sales from 1999 to 2001 and also compared the assessments of all of the nursing homes in Waterbury as of October 1, 2001. (Defendant's Exhs. BB S.) His value was determined exclusively from the number of beds in the facility and not whether they were private beds, the age of the facility, the quality of construction or the occupancy rates. Pursuant to these nursing home sales from 1999 to 2001, Carbone concluded that 71 Plaza Avenue was worth $49.60 per square foot for a total amount of $1,828,100 for 2001 and $52.62 per square foot for $1,939,300 for 2002.
Nocera originally provided the court with an appraisal of $724,000, comprised of the square footage from that space dedicated to the nursing and residential care facility as 27,847, and without inclusion of the building on that property, which formerly was used as a rest home but now is condemned. (Plaintiff's Exh. 28A.) His appraisal was based on comparable sales of operating health care facilities so that the sales price included not only the acquisition of real estate items but also other components related to the value of the business, such as personal property and business assets. He testified during the trial that the property was in generally "average to good condition" but also suffers from functional obsolescence. In his post-hearing memorandum provided to the court on August 18, 2006, Nocera recalculated his appraisal to reflect the removal of one of the properties which he had included as a comparable facility but, in fact, was an apartment house. Eliminating this sale from the calculation resulted in an adjusted sales price per square toot of $23.76 and by adjusting the total square footage to reflect the accurate number of 36,852 and not merely 27,847 square feet, his comparable sales value for the property became $875,600 for 2001 and the same for 2002.
Morrow was hired by the city to appraise the property at 71 Plaza Avenue for the foreclosure proceeding against the plaintiff. He is an expert appraiser specializing in health care valuation with 95 percent of his appraisals in this field. The purpose of his appraisal was to estimate the fair market value of that property for the foreclosure proceedings. Therefore, his appraisal was based on the premise that the property should be viewed as a "shuttered" facility because its sale would not include the movable property, business license and bed rights.
In his report, Morrow only prepared a sales comparison report and a highest and best use analysis. His appraisal utilized comparable sales of shuttered facilities (closed nursing home facilities) or facilities sold very close in time to the appraisal, sale date, and location of the subject property. He provided a market overview of the sales of convalescent facilities, their fair rental value, as well as a review of the value of the subject property as improved. He determined that the occupancy rates were 80.9 percent as of September 30, 2001 and 71.8 percent for September 30, 2002. He found that the net income for each of those dates was a negative $43,215 and a negative $220,783 respectively. Based on his determination that the property is a shuttered facility, he assessed the value of the property in the amount of $735,000, as of July 12, 2005.
Four out of the five convalescent properties in his report, however, post dated the assessment dates of October 1, 2001 and October 1, 2002. Nevertheless, Morrow explained that his value of the subject property would be the same in 2001 and 2002, as in 2005, since the highest and best use of the property would be for some unspecified alternative use, that is, any use to which these medical facilities could be converted because these shell buildings are not ongoing businesses and their alternative value uses do not alter significantly in value from year to year.
INCOME CAPITALIZATION APPROACH
With respect to his use of the income capitalization approach, Carbone testified: "Actually it is sort of a blended approach. We don't have to use actuals. We are allowed to use market conditions." (Transcript, February 22, 2006, p. 109). Carbone's assessment relied on expenses that he developed from information from the nursing homes in the city based on actual reported occupancy rates, Medicaid reimbursement rates, guidelines for an adjustment of the business value associated with a nursing home operations and the annual revenue generated from the adult day care center. Using this approach, he determined that in 2001 the value of 71 Plaza Avenue, as a going concern, was worth $51.09 per square foot which resulted from dividing the assessment value for 2001 by the total square footage of 36,852, and for 2002, the value per square foot is $51.30 by dividing the assessment value by the square footage of 36,852.
In generating his results for the two years, Carbone looked only at skilled nursing homes. Subsequently on cross-examination, he agreed that if he had considered the mixed use of a residential nursing home facility with a skilled nursing home, like the one at 71 Plaza Avenue, the result would have been a lower profit margin then under his approach. (Transcript, February 22, 2006, p. 118.) In arriving at his valuation, Carbone made no adjustments for any of the functional problems with the building (i.e., location of and lack of full bathrooms with rooms consisting of four beds), nor for the location of the facility in a high crime area and that the self-pay patients had declined substantially to almost nonexistence. Without these additional considerations, Carbone's income approach does not support his valuation per square footage.
Nocera's evaluation of the property under this income approach resulted in an assessed value of $722,000. His calculation was based first upon the overall business value of 71 Plaza Avenue in the amount of $2,756,000, and then a reduction from that amount for the personal property value and residual business assets to arrive at the "real property value." (Plaintiff's Exh. 28.) He relied on the operating performance of the property for the year 2000 with consideration of its performance for the period up to October 1, 2002. Nocera appraised the business as a going concern but considered "low level of occupancy and the resulting low level of operating income."
DISCUSSION
In a tax appeal brought pursuant § 12-117a of the General Statues tax appeals, "the trial court tries the matter de novo and the ultimate question is the ascertainment of the true and actual value of the [taxpayer's] property . . . Once the taxpayer has demonstrated aggrievement by proving that its property was over-assessed, the trial court [will] then undertake a further inquiry to determine the amount of the reassessment that would be just." (Citations omitted; internal quotation marks omitted.) United Technologies Corp. v. East Windsor, supra, 262 Conn. 22-23.
In the present case, the court finds that the plaintiff received an adverse decision from the Board of Assessment Appeals of the City of Waterbury and, therefore, has satisfied the requirement of aggrievement pursuant to General Statutes § 12-117a. Accordingly, the court further finds that as to 71 Plaza Avenue, the plaintiff is aggrieved in the amount of $728,100 for 2001 and $839,300 for 2002. Since the plaintiff provided testimony as to the value of the 77 Plaza Avenue property, only from Raymond Cruess, who stated that he thought the value of the property was $1,000, but provided no appraisal reports for that property, the court cannot make a finding as to its value.
Connecticut General Statutes § 12-117a provides in relevant part: "Any person . . . claiming to be aggrieved by the action of the board of tax review or the board of assessment appeals, as the case may be, in any town or city, may, within two months from the date of the mailing of notice of such action, make application, in the nature of an appeal therefrom . . . to the superior court for the judicial district in which such town or city is situated, which shall be accompanied by a citation to such town or city to appear before said court."
The Court further finds that the facility is structurally and functionally obsolete. It is located in a high crime, deteriorating neighborhood. No nursing home in Waterbury exists in such isolation. The facility was and is in dire financial straits. The possibility of this facility surviving into the future is problematic.
CONCLUSION
The Court finds the fair market value of the subject property to be $1,100,000 on October 1, 2001 and $1,100,000 on October 1, 2002. Judgment, plus costs, shall enter, accordingly.