Opinion
HHBCV146024900S
03-15-2018
ELM HILL REALTY, LLC v. TOWN OF ROCKY HILL
UNPUBLISHED OPINION
OPINION
Sheila A. Huddleston, Judge
This is a real estate tax appeal by the plaintiff, Elm Hill Realty, LLC, the owner of a 3.17-acre parcel of land located at 45 Elm Street in Rocky Hill, Connecticut (the property). A related entity, Apple Health Care (Apple), operates a skilled nursing facility (nursing home or subject) on the property. The defendant, the Town of Rocky Hill (town), determined that the fair market value of the property as of October 1, 2013, was $4,563,000. Pursuant to General Statutes § 12-62a, real property is liable for taxation at seventy percent of its fair market value. The town accordingly assessed the property at $3,194,100 as of October 1, 2013. The plaintiff appealed to the board of assessment appeals, which denied relief. The plaintiff then filed this appeal.
On November 15, 2015, while this appeal was pending, the town notified the plaintiff that it had discovered a clerical error and was correcting the assessment to $3,519,390 for the 2013 and 2014 grand lists, indicating a fair market value of $5,027,700. Before trial, the plaintiff amended its complaint to include the grand lists of 2013, 2014, 2015, an 2016. The appeal was tried to the court on March 2, 3, and 6, 2017. Both parties filed post-trial briefs on November 3, 2017, and post-trial reply briefs on November 20, 2017.
Both parties presented the testimony of appraisers at trial. The plaintiff’s appraiser, Courtney B. Lees, concluded that the property’s fair market value as of October 1, 2013, was $3,100,000. The defendant’s appraiser, Krystyna Gut, concluded that the property’s fair market value as of October 1, 2013, was $6,850,000. Both appraisers relied primarily on the income capitalization method, valuing the property as a going concern, because that is how likely purchasers of a nursing home would evaluate it. After determining the value of the going concern, each appraiser apportioned that value to three components of value: the real estate, the business enterprise value, and the furniture, fixtures, and equipment. Both appraisers also performed a sales comparison analysis. Neither appraiser used the cost approach because the age of the building rendered that approach less reliable. For the reasons stated below, the court finds that the plaintiff is aggrieved and that the fair market value of the property as of October 1, 2013, was $3,700,000.
The plaintiff’s appraiser, Courtney B. Lees, is a member of the Appraisal Institute with more than thirty years experience as an appraiser. She has focused exclusively on the valuation of health care facilities for the past twenty-one years. The court found Lees to be a highly knowledgeable and credible witness.
Krystyna Gut is also a member of the Appraisal Institute. She began training as an appraiser in 2004 and was licensed in Connecticut in 2008 or 2009. She works in a senior housing and healthcare industry appraisal practice group. Gerald Rasmussen, an experienced appraiser and a member of the Appraisal Institute, also signed Gut’s appraisal report. Rasmussen did not testify at trial, and Gut’s testimony did not clearly explain Rasmussen’s role in the data collection and analysis reflected in Gut’s report. The court gave little weight to Rasmussen’s approval of Gut’s report.
I
THE PROPERTY
The property consists of a 3.17-acre parcel with two structures. The primary structure is the building in which the nursing home is operated. Built in 1974, it has 31,277 square feet of building area on the first floor, with three wings of resident rooms on that floor, and 16,746 square feet of space on a lower level that includes, among other things, the kitchen for the facility and one wing of resident rooms. There is also a separate residence of 2,291 square feet. The residence was built in 1880 and is subject to a 99-year lease with the property’s prior owners, who retain the right to occupy the house, or to have their descendants occupy the house, for no rent. As a result of the lease, which provides no revenue to the property owner and precludes other use of the residence by the property owner, the residence contributes only nominal value to the real property.
The property is zoned for mixed residential and commercial use. Its use as a nursing home is a legal nonconforming use. If the site were vacant, a special permit from the town and a certificate of need from the state Department of Social Services would be required to develop the land for use as a nursing home.
The building used for the nursing home is considered dated and institutional in character. Most resident rooms are semi-private, with two beds per room, unlike more recently built nursing homes, which tend to have more private rooms with one bed per room. Each resident room has an attached bathroom with a toilet and sink. The bathrooms in the resident units do not have showers; residents are taken to common shower rooms. The common areas such as the entrance and lobby are adequate but dated. Newer nursing homes generally have a more welcoming entrance and lobby for visitors.
The resident rooms generally have old through-wall heating units and window air conditioning units. The management has been gradually replacing these old units with more modern and efficient PTAC style units. The hallways are not air conditioned and are cooled only by fans in hot weather, resulting in uncomfortable conditions for employees. The common areas have window air conditioning units. The property is in average condition for its age and type.
II
APPLICABLE LEGAL STANDARDS
Certain well settled legal principles govern appeals under General Statutes § § 12-117a and 12-119. " Section 12-117a ... provide[s] a method by which an owner of property may directly call in question the valuation placed by assessors upon his property ... In a § 12-117a appeal, the trial court performs a two step function. The burden, in the first instance, is upon the plaintiff to show that he has, in fact, been aggrieved by the action of the board in that his property has been overassessed ... In this regard, [m]ere overvaluation is sufficient to justify redress under [§ 12-117a] and the court is not limited to a review of whether an assessment has been unreasonable or discriminatory or has resulted in substantial overvaluation ... Whether a property has been overvalued for tax assessment purposes is a question of fact for the trier ... The trier arrives at his own conclusions as to the value of land by weighing the opinions of the appraisers, the claims of the parties in light of all the circumstances in evidence bearing on value, and his own general knowledge of the elements going to establish value including his own view of the property." (Internal quotation marks omitted.) Redding Life Care, LLC v. Redding, 308 Conn. 87, 99-100, 61 A.3d 461 (2013).
An appeal under § 12-119, in contrast, examines the legality of the assessment. " In a tax appeal taken pursuant to § 12-119, the plaintiff must prove that the assessment was (a) manifestly excessive and (b) ... could not have been arrived at except by disregarding the provisions of the statutes for determining the valuation of the property ... E. Ingraham Co. v. Bristol, 146 Conn. 403, 409, 151 A.2d 700, cert. denied, 361 U.S. 929, 80 S.Ct. 367, 4 L.Ed.2d 352 (1959) ... [The plaintiff] must [set forth] allegations beyond the mere claim that the assessor overvalued the property. [The] plaintiff ... must satisfy the trier that [a] far more exacting test has been met: either there was misfeasance or nonfeasance by the taxing authorities, or the assessment was arbitrary or so excessive or discriminatory as in itself to show a disregard of duty on their part. Mead v. Greenwich, 131 Conn. 273, 275, 38 A.2d 795 (1944). Only if the plaintiff is able to meet this exacting test by establishing that the action of the assessors would result in illegality can the plaintiff prevail in an action under § 12-119. The focus of § 12-119 is whether the assessment is illegal. Cohn v. Hartford, 130 Conn. 699, 703, 37 A.2d 237 (1944) ... The statute applies only to an assessment that establishes a disregard of duty by the assessors. L.G. DeFelice & Son, Inc. v. Wethersfield, 167 Conn. 509, 513, 356 A.2d 144 (1975)." (Emphasis in original; internal quotation marks omitted; footnote omitted.) Redding Life Care, LLC v. Redding, supra, 308 Conn. 105-06.
It is well established that in a trial to the court, " the trial judge is the sole arbiter of the credibility of the witnesses and the weight to be given specific testimony ... The credibility and the weight of expert testimony is judged by the same standard, and the trial court is privileged to adopt whatever testimony he reasonably believes to be credible." (Citation omitted; internal quotation marks omitted.) Torres v. Waterbury, 249 Conn. 110, 123, 733 A.2d 817 (1999).
There are three generally recognized approaches to the valuation of real estate: the market sales approach, the cost approach, and the income capitalization approach. See, e.g., United Technologies Corp. v. East Windsor, 262 Conn. 11, 18-20, 807 A.2d 955 (2002) (describing three approaches); Abington, LLC v. Avon, 101 Conn.App. 709, 711 n.4, 922 A.2d 1148 (2007) (same).
" The market sales approach is also known as the ‘sales comparison approach’ or the ‘market data approach.’ " United Technologies Corp. v. East Windsor, supra, 262 Conn. 17 n.10. " Under the market sales approach, the subject property’s appraised value is derived from a comparison to recently sold similar properties in the vicinity, with appropriate value adjustments based on the elements of comparison." (Internal quotation marks omitted.) Id. As both appraisers testified in this case, the market sales approach is difficult to apply to appraisals of nursing homes because such facilities are sold only infrequently, making it difficult to find comparable properties in the vicinity that have been sold in the relevant time period.
" Under the cost approach to valuation, the appraiser estimates the current cost of replacing the subject property, with adjustments for depreciation, the value of the underlying land, and entrepreneurial profit." Id., 17 n.8; see also Appraisal Institute, The Dictionary of Real Estate Appraisal (6th Ed. 2015), p. 54. In this case, neither appraiser developed a cost approach because the age of the building made a cost approach less reliable.
" 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." (Internal quotation marks omitted.) United Technologies Corp. v. East Windsor, supra, 262 Conn. 17 n.9. " [T]he income capitalization approach values property on the basis of the property’s income producing potential." (Emphasis in original; internal quotation marks omitted.) Redding Life Care, LLC v. Redding, supra, 308 Conn. 95 n.9.
" For some property types like hotels, car washes, and assisted-living facilities, the real property rarely sells independently of personal property and intangible property." Appraisal Institute, The Appraisal of Real Estate (14th Ed. 2013), p. 704. For such properties, including nursing homes, it may be appropriate to determine the value of the going concern in applying the income capitalization approach to a property. " According to the Appraisal Institute, the value of a going concern is comprised of (1) real property, (2) tangible personal property (furniture, fixtures, equipment and inventory), and (3) intangible personal property, which includes residual intangibles." Redding Life Care, LLC v. Redding, supra, 308 Conn. 95 n.9. " Included in the residual intangible category is capitalized economic profit, or business enterprise value, which is defined as the present worth of an entrepreneur’s economic (pure) profit expectation." (Internal quotation marks omitted.) Id. The going concern method requires an allocation among the component parts of real property and tangible and intangible personal property. See id. " [W]hen a going concern is valued under the income approach, that value pertains to the market value of the total assets of the business, of which real property is but one component. In order to determine the value of the real estate associated with that going concern, the values of the other components of the total assets of the business must be subtracted from the overall value." Id. In this case, both appraisers determined the value of the property as a going concern and then apportioned values to the distinct value components of the going concern.
The goal of all the appraisal approaches is to develop an indication of the fair market value of the subject property. " Fair market value" has been defined as " the price that a willing buyer would pay a willing seller based on the highest and best possible use of the land assuming, of course, that a market exists for such optimum use." (Internal quotation marks omitted.) United Technologies Corp. v. East Windsor, supra, 262 Conn. 25. " Highest and best use" is often defined as " the use that will most likely produce the highest market value, greatest financial return, or the most profit from the use of a particular piece of real estate." (Internal quotation marks omitted.) Metropolitan District v. Burlington, 241 Conn. 382, 390, 696 A.2d 969 (1997). " A property’s highest and best use is commonly accepted by real estate appraisers as the starting point for the analysis of its true and actual value." United Technologies Corp. v. East Windsor, supra, 262 Conn. 25. In this case, both appraisers concluded that the current use as a nursing home is the highest and best use of the property.
III
BASIC ECONOMIC FACTORS AFFECTING NURSING HOMES
Nursing homes provide round-the-clock nursing care for their residents. They are paid for their services at per diem rates. There are, generally speaking, three categories of payors: Medicaid, Medicare, and private pay/other. Medicaid rates are set by the Department of Social Services and are generally the lowest of the three rates. For long-term residents who qualify for. Medicaid, a nursing facility collects a portion of the resident’s available income, such as Social Security or pension income, and the balance of the per diem rate is paid by the state. Although Medicaid rates are based on annual cost reports that nursing homes must file annually, in fact in recent years the state has moved away from cost-based rates and has at times frozen rates altogether. As of September 1, 2013, the Medicaid daily rate for the Apple nursing home operated on the property was $212.44. This rate is significantly lower than the average Medicaid daily rate in Connecticut, which was approximately $230 in 2013.
Medicare, in contrast, bases the daily rate on the relative needs of individual residents who need short-term services, such as rehabilitation after surgery. Per diem payments are adjusted using a resident classification system known as the RUG system. Medicare per diem payments for short-term residents change over the course of the resident’s time in the facility, as the resident’s medical needs change. The labor portion of the federal Medicare rates are adjusted for geographic variation in wages. Medicare generally provides the highest per diem rates for nursing home services. At the nursing home on the property, the average Medicare rate was $474.76 for 2012 and $515.44 for 2013.
" RUG" stands for Resource Utilization Groups, which are based on data from resident assessments and staff time data. See " Skilled Nursing Facility PPS," published by the Centers for Medicare & Medicaid Services, at https://www.cms.gov/Medicare/Medicare-Fee-for-ServicePayment-SNFPPS/index.html, last visited on March 5, 2018.
The third category of payors is " private pay/other," which may include residents who pay out of their own resources and those with other sources of payment, such as private insurance. Each nursing home sets its private pay per diem rates in light of other facilities in its market area. The private pay daily rate at the Apple nursing home on the subject property as of September 30, 2013, was $430 per day for a private room and $386 for a semi-private room. Collection from private payors, however, may be difficult. In 2012, the nursing home on the property collected an average of $301.90 per day for private pay residents, and in 2013, it collected an average of $364.37 for private pay residents. In 2013, its bad debt was $197,064.
Both occupancy rates and payor mix are factors to be considered in predicting the revenues of a nursing home. As of the date of value, the nursing home at the property had an occupancy rate of 87.3 percent. Its payor mix in 2013 was 62.8 percent Medicaid, 15.7 percent Medicare, and 21.5 percent private pay/other.
Staffing at a nursing home includes a licensed administrator, registered nurses, licensed practical or vocational nurses, certified nursing assistants, housekeeping and dietary personnel, a director of activities, and a maintenance director. Services are also provided by specialists such as rehabilitation therapists, including physical, occupational, and speech therapists.
The nursing home on the subject property is one of twenty-six nursing homes operated by Apple. It is one of only two Apple nursing homes that have union employees. Certified nursing assistants, dietary aides, laundry, housekeeping, and maintenance assistants are represented by New England Health Care Employees Union, District 1199 SEIU. According to the plaintiff’s appraiser, union facilities typically have higher labor costs. The union employees at the subject nursing home have enjoyed wage increases over the past several years while employees at other Apple nursing homes have been subject to a wage freeze because the state has not given additional funds for nursing home operations. Nevertheless, the nursing home at the subject property has been able to negotiate employee benefit packages that are comparable to those in non-union facilities. Any potential buyer of the property would consider the impact of the union on the cost of wages because the union contract was in effect as of the date of value. Appraisers for both parties agree that wages constitute the single greatest expense at a nursing home.
The federal Centers for Medicare and Medicaid Services (CMS) publishes a Five-Star Quality Rating system to help consumers and their families compare nursing homes. Ratings are based on health inspections, staffing, and quality measures, each of which is separately rated, and then an overall rating for the nursing home is calculated. The subject nursing home had a one star rating in health inspections, a three star rating in staffing, and a four star rating in quality measures. The subject nursing home’s overall rating was one star. Other nursing homes in the property’s competitive area have higher ratings on virtually all measures.
The appraisers disagreed as to the significance of the nursing home’s one-star rating. The plaintiff’s appraiser testified that the rating as of the date of value likely reflects problems with the quality of the staffing, which would be difficult to address in a unionized facility. The town’s appraiser testified that a prospective purchaser would see it as an opportunity to improve performance, but could not identify specific areas where improvements could be made without increasing costs. The court concludes that a prospective buyer of the subject nursing home as a going concern would want to improve its quality rating and would have concerns about the costs of steps necessary to do so.
In Connecticut, nursing homes are not freely transferable. Under General Statutes § 17b-352, a certificate of need is required to transfer ownership of a nursing home, to add new services or expand existing services, or to terminate or substantially reduce its bed capacity. Over recent years, there has been a decline both in the number of nursing homes and in the numbers of individuals residing in nursing homes. According to the state’s annual nursing facility census as of September 30, 2013, two nursing homes closed and one opened in the twelve months preceding the date of the census, leaving a total of 231 licensed nursing facilities operating in Connecticut. Over the five years preceding September 30, 2013, fifteen nursing homes had closed and three new ones were established. The total number of nursing facility beds declined from 29,801 on September 30, 2004, to 27,497 on September 30, 2013, a decrease of 7.7 percent. The average occupancy rate of nursing homes in Hartford County as of that date was 89 percent.
IV
INCOME CAPITALIZATION AND GOING CONCERN ANALYSES
Appraisers for both parties indicated that nursing homes are usually bought as going concerns and that there is value in having a trained staff, residents, and contracts in place. Accordingly, both appraisers performed an income capitalization analysis that developed the value of the property as a going concern and then adjusted the going concern value to separate out the value of the business enterprise, the furniture, fixtures, and equipment, and the real estate.
In performing their income capitalization analyses, both appraisers relied extensively on information obtained from the nursing home’s annual Medicaid cost reports. They reached similar conclusions about the nursing home’s projected occupancy rates, payor mixes, and forecasted total income. Lees forecasted revenues of $11,222,305. Gut forecasted revenues of $11,170,231, which was only $52,074 lower than Lees’ projection, a difference of less than one percent. Where the appraisers differed most significantly was in their analysis of nursing home expenses. Lees projected expenses that were similar to the property’s historical expenses; Gut projected expenses that were more than 6 percent lower overall, and 10 percent lower in certain categories, than historical expenses.
The Plaintiff’s Analysis
Lees compared the expenses of the subject nursing home in 2013 to expenses at three other nursing homes in the same period. She selected her comparable nursing homes based on similarities in rate structures, bed count, mix of residents, average per patient day revenue, and the presence of union labor. She testified that it was important to use facilities with unions as comparables because those facilities would be subject to wage constraints similar to those of the subject nursing home. She further testified that the union contract, with its specific wage and benefit provisions, would transfer with the facility’s license to a new buyer.
Lees analyzed the salary and wage costs by department and by per patient day costs to determine how the subject nursing home compared with similar nursing homes. She concluded that the average per patient day costs for wages and salaries was in the middle of the range for comparable facilities and that employee benefits at the subject property were actually lower than those at any of the three comparables. Lees also evaluated the staffing hours at the subject nursing home in comparison with the three other nursing homes to determine whether the subject was overstaffed or understaffed. She found that the subject nursing home was slightly higher in average number of hours of care per patient day than the comparables, because the comparables use more contract labor than the subject and the subject has some staff therapy in the hours that the comparables do not have. She testified that when adjusted for contract labor and therapy hours, the comparable facilities were very similar to the subject property.
Lees also analyzed the staffing expenses by department, finding that the average salaries paid by Apple at the subject nursing home are slightly lower than the three comparable facilities. She testified that this was a true test of staffing costs because the facilities compete in the labor market as well as for residents.
Lee also analyzed expenses in each category to determine what expenses were attributable to personnel costs and what expenses were attributable to supplies, such as nursing supplies in the nursing category of expenses, food in the dietary category, and linen in the laundry category. She concluded that the subject nursing home’s non-salaried expenses were similar to or lower than the comparables in most categories and were reasonable.
Lees projected a management fee of 3.5 percent of effective gross income. This projection was in the middle of the subject nursing home’s historical management fees, which ranges from 3.2 to 3.8 percent, and in the middle of the state’s average of 3 to 4 percent. She included $200,000 for bad debt, which was consistent with the subject’s historical experience and the lowest of three years leading up to the date of value.
Overall, Lees projected revenues that were slightly increased from historical amounts and expenses that were consistent with 2012 and 2013 expenses. She did not make significant changes to expenses because she thought the subject’s operations were consistent with the market place. She included a reserve for replacement of beds at $350 per bed and arrived a net operating income of $634,398. She determined that a 12.5 percent capitalization rate was appropriate based on the average capitalization rate for properties in the northeast. She then calculated a tax load for Rocky Hill, which resulted in an overall tax-loaded capitalization rate of 14.1632 percent.
Lees did project increased costs for non-salaried expenses for repairs and maintenance, even though the subject’s costs in those categories had been declining over the three prior years, and she projected increased costs for utilities even though she commented that utility costs had been stable for three years. Lees explained that the subject’s costs in those categories were below or at the low end of the comparables. Nevertheless, the court was not persuaded that these increases over the subject’s historical costs were warranted.
Finally, Lees had to subtract out the business enterprise value and the value of the furniture, fixtures and equipment. She calculated a business enterprise value of 20 percent, consistent with published guidelines of the United States Department of Housing and Urban Development (HUD) for evaluating a nursing home as security for a long-term loan. For furniture, fixtures, and equipment, she used $529,045, the value at which the subject nursing home’s personal property was taxed in the current tax year. The result of all her calculations was an indicated real estate value of $3,100,000.
Lees also used a second method of direct capitalization of income, using the lease coverage ratios for health care real estate investment trusts (REITs). She developed a lease coverage ratio of 1.5 times the net operating income for earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR) and of 2.0 times the net operating income for earnings before interest, taxes, depreciation, amortization, rent, and management fees (EBITDARM). She developed a value of $3,100,000 using the EBITDAR multiple and a value of $3,700,000 using the EBITDARM multiple.
Lees reconciled her various methods of performing the income capitalization approach to arrive at her final conclusion of value of $3,100,000.
The Town’s Analysis
Gut also analyzed the value of the property using an income capitalization approach for the property as a going concern. Her analysis differed from Lees’ analysis, however, in several respects. One significant difference was in the time of the data considered. Lees relied on data from 2011 through 2013, because the date of value was October 1, 2013. Gut, however, relied on the subject’s operating statements from 2012, 2013, and 2014, although she admitted that if she had performed her analysis contemporaneously with the date of value, the 2014 operating information would not have been available.
Gut chose five properties as expense comparables, but admitted that one of the five was inappropriate because it was based on 2014 operating data that would not have been available as of the date of value. The 2014 comparable had the lowest operating expenses of her five comparables and its use may have skewed Gut’s averages in the important categories of nursing costs and employee benefits.
Although Gut said that she chose facilities for comparing expenses based on similar payor mix, she also considered occupancy rates. The occupancy rates at all of her comparable facilities, ranging from 94 to 98.8 percent, were better than the subject’s occupancy rate of 87.3 percent. In addition, based on the revenue information provided in her report, it appears that four of the five facilities she chose as expense comparables had higher reimbursement rates for Medicaid than the subject property, ranging from $218.40 to $267.88 in comparison to the subject’s Medicaid reimbursement rate of $212.44. Only the improperly considered 2014 sale of a nursing home had a lower Medicaid reimbursement rate than the subject.
In projecting expenses, Gut did not separately analyze the cost of labor and the cost of supplies. She did not consider whether a union was present at the facility and, if so, how the presence of a union might affect wages and benefits.
Gut projected significant reductions in expenses, including a 10 percent reduction in nursing costs. She could not explain where such nursing cost reductions could be made. She assumed that the subject would continue to have patients with acuity levels and needs consistent with its historical occupancy, and she admitted that the needs of the patients generally determined the amount of care that has to be provided. Her report indicated that the average number of nurse minutes per day at the subject was below average in relation to its competitors in 2014. Her projected reductions in nursing expenses did not make sense in light of the need to improve the quality of care at the facility in relation to its competitors.
Similarly, Gut projected expenses for ancillary services that were nearly 7 percent less than the actual ancillary expenses at the subject nursing home in 2013. Ancillary services include such services as physical therapy and occupational therapy. Given that Gut assumed a similar patient mix and therefore similar patient needs, her predicted reduction in expenses for such services is inadequately supported.
Gut also projected reductions in dietary costs. Her projected costs in this category were about 7 percent lower than the subject’s 2013 costs and about 10 percent lower than its actual 2014 costs. She did not analyze separately the cost of food and dietary staff wages. She did not project a reduction in patient census. Her reductions for dietary cost are inadequately explained.
Gut projected a reduction in laundry expenses of 6 percent from historical laundry expenses for 2013 and 2014. She explained only that her projected laundry expenses were in the range of laundry expenses at her comparable facilities.
Gut did project increases in certain areas of expense, including housekeeping, plant operations, and activities. For both plant operations and activities, however, her projected increased expenses were still lower than the expenses in those categories at all of the facilities she chose as comparable. Her projected increase in housekeeping expenses was within the range of such expenses at the facilities she chose as comparables.
Gut projected an expense reduction of 2 percent from 2013 expenses in the area of employee benefits. She had stated, however, that employee benefits are usually a percentage of salaries. She did not explain how her reductions in employee benefits related to her projected reductions in other expense categories where salaries constituted the principal expense.
Finally, Gut projected a decrease of $193,040, or about 25 percent, in the category of general and administrative expenses from the subject’s 2013 expenses. Her explanation of this reduction was not clear; she seemed to relate it to the subject’s bad debt expenses in 2012 and 2013, and noted that the subject appeared to recover some of its bad debt in 2014. She did not explain how recovery of bad debt in 2014 could have considered if she had been performing the appraisal as of the effective date of October 1, 2013. Contrary to Gut’s opinion, moreover, Lees opined that some bad debt is simply inherent in nursing home operations, resulting from private pay patients who fail to pay and from Medicaid patients who fail to turn over their applied income. While Gut opined that the subject’s bad debt was higher than average in the market, her opinion that new management could reduce all administrative expenses, including bad debt, by 25 percent seems unrealistic in light of the subject’s historical performance and Gut’s assumption that the subject’s patient mix and payor mix would remain approximately the same.
Overall, Gut projected reductions in expenses by approximately $783,000, which equals about 7 percent less than the subject’s 2013 expenses. When capitalized, this projected reduction in expenses accounted for nearly $5,200,000 in Gut’s opinion of value.
One other area in which her income capitalization was unsupported was in her consideration of projected rental income from the residence on the grounds of the property. Gut attributed $14,319 in annual rental from that residence, which was built in 1880, and further testified that when that rental income was capitalized, it would result in approximately $100,000 in her opinion of value. Lees, however, had testified credibly that the residence is encumbered by a 99-year lease to the family of the prior owner and cannot be used by the current or a future owner for income-producing purposes during the lease period.
Gut’s capitalization rate was close to that used by Lees. Lees’ tax-loaded capitalization rate was 14.1632 percent, while Gut’s tax-loaded capitalization rate was 15.08 percent. When applied to Gut’s projected net operating income of $1,361,198, Gut projected a sale price as a going concern of $9,027,109, which she rounded down to $9,000,000.
Gut calculated the value of the furniture, fixtures, and equipment- including the furnishings for the residents’ rooms and common areas, kitchen equipment, service and maintenance equipment, and other machinery- to be $978,478 as new, and then depreciated that amount by 50 percent to take into account its age. Her final value for the furniture, fixtures, and equipment was $489,239, which she rounded to $490,000. This was lower than the value assigned to the subject’s personal property for purposes of the personal property tax in 2013.
To determine the real estate value, Gut started with the net operating income of the going concern, which she calculated as $1,346,879, excluding the hypothetical income from the rental of the residence. She then divided that by a lease coverage ratio of 1.4 to arrive at a net operating income for the real estate of $962,057, which she divided by a real estate capitalization rate of 14.08 percent, to arrive at a real estate value conclusion of $6,833,273, which she rounded to the nearest $50,000, to equal $6,850,000.
Gut’s conclusion of value for the going concern was $9,000,000, which included $6,850,000 for the real estate value, $490,000 for the furniture, fixtures, and equipment, and $1,660,000 for the business enterprise value.
Discussion
In their post-hearing briefs and reply briefs, each party criticizes the other party’s going concern analysis. The town argues that two of the three properties that Lees used as expense comparables were unreliable- one because it had a bankruptcy in its past and a high percentage of Medicaid patients, the other because it had a high expense ratio. The town claims that Lees should have relied more heavily on her third comparable, a nursing home in Rocky Hill that Gut also used as an expense comparable.
The plaintiff argues that Gut improperly relied on data from 2014 and 2015 in developing the value of the subject as of October 1, 2013. At several points in her cross examination, Gut admitted that it was an " oversight" to use data from 2014 and 2015 in her analysis.
The plaintiff also argues that Gut failed to examine the details of the subject property’s expenses to determine whether they were reasonable in light of the patient mix that the subject facility serves. As Lees testified, the purpose of the comparison of expenses at other facilities is to determine whether the subject’s expenses are reasonable in light of the population that the subject is actually serving. Lees examined expenses for supplies separately from expenses for labor to determine whether the subject’s expenses were reasonable.
As the plaintiff argues, the most substantial flaw in Gut’s income capitalization analysis was her reduction of expenses, which was not well explained and which was implausible in light of the subject’s historical expenses. Nothing in the evidence suggested that Apple was an incompetent manager of nursing homes; it is one of the largest operators of nursing homes in the state and some of its Connecticut facilities are highly rated. Although a prospective purchaser would reasonably search for ways to improve the subject’s CMS quality rating and to decrease costs, Gut did not persuasively identify any measures a prospective purchaser could undertake to reduce costs while maintaining or improving the quality of care.
On the whole, Lees’ income capitalization analysis was more realistic and more credible than Gut’s income capitalization analysis.
V
MARKET SALES COMPARISON ANALYSES
Both appraisers presented market sales comparison analyses, but the properties they viewed as comparable differed significantly, as did the opinions of value derived from their comparisons. The appraisers agreed that it is difficult to develop a sales comparison analysis for nursing homes because they are not frequently sold and it is difficult to find appropriate comparable sales.
The Plaintiff’s Analysis
Lees chose five nursing home sales that closed in the years 2011 through 2013. Only one sale was in Connecticut, a 2011 sale of a nursing home in New Haven. That nursing home was purchased out of bankruptcy and was significantly older and larger than the subject property. It was sold as a going concern for $5,414,318, which equaled approximately $23,957 per bed, a common unit of comparison for nursing home sales. Lees’ other comparable sales included three nursing homes in New York (in Kingston, Elizabethtown, and Corning) and one in Altoona, Pennsylvania, all of which were sold in 2013 as going concerns, with sale prices ranging from $16,500,000, or $64,961 per bed, to $3,000,000, or $25,000 per bed.
To her comparable sales, Lees made a blanket adjustment of 25 percent per sale to subtract out the business enterprise value and the value of furniture, fixtures, and equipment. She then further adjusted the comparables for age, location, occupancy ratios, and square-foot to unit ratio, resulting in adjusted price per beds ranging from $21,561 to $38,976.
The square-foot per unit ratio is not the size of the residents’ rooms, but a ratio of overall square footage, including common areas, to the number of licensed beds. In this case, Lees calculated the square-foot to unit ratio based on a total square footage of 34,787 divided by 120, the number of licensed beds, and concluded that the subject’s square-foot per unit figure was 390. On cross examination, Lees acknowledged that the town’s field card for 2013 showed a square footage of 48,026, and indicated that she might have erroneously relied on the square footage shown on an older field card from a period when part of the lower level was closed for renovation. She contended, however, that the discrepancy did not affect her overall valuation.
Based on her adjusted comparable sales, Lees estimated a value of $26,000 per bed, resulting in a real estate value of $3,120,000, or alternatively $85 per square foot, resulting in a real estate value of $2,956,895. Her final conclusion of value, based on her sales comparison analyses, was $3,000,000.
The Town’s Analysis
Gut also chose five sales as the basis for her sales comparison approach. Her first comparable, in New Britain, Connecticut, sold for $8,945,010 in March 2015. Her second comparable was a portfolio of four nursing homes, located in Cromwell, New Britain, Norwalk, and Waterbury, that were sold for $58,000,000 in a single transaction in January 2015. Her third comparable, a nursing home in Newport, Rhode Island, sold for $9,640,000 in May 2014. Her fourth comparable sold in December 2012, for $12,550,000, in Needham, Massachusetts, and her fifth comparable, in Carney’s Point, New Jersey, sold for $18,500,000 in December 2012. These prices were paid for nursing homes sold as going concerns and included the business enterprise value and the value of the furniture, fixtures, and equipment.
Gut made adjustments to the comparable sales based on the property rights conveyed, market conditions, and location. For the first sale, which was a sale of real estate only, she made a positive adjustment of 15 percent to add the business enterprise value. She made a positive adjustment of 5 percent for both 2012 sales for market conditions, which she testified were generally improving in 2013. She made a negative adjustment of 10 percent to both 2012 sales for location, basing the adjustment on differences in the CMS labor index. Gut testified that the CMS index is based on wage differentials and is essentially a cost of living index. She made a positive location adjustment of 5 percent for the 2014 Pennsylvania sale, again based on the CMS index. Gut considered but did not make any adjustments for age, quality, and condition, for payor mix, and for bed mix, claiming that she felt that she had chosen comparables that were sufficiently similar to the subject property that no adjustments were required. Gut admitted, however, that the sales she used had facilities with a wide range of payor mixes, and despite the importance of payor mix to her analysis, she made no adjustments based on payor mix. Based on her comparable sales analysis, Gut concluded that the value of the subject property was $9,000,000, including the real estate value, the business enterprise value, and the value of furniture, fixtures, and equipment.
Gut’s use of a portfolio sale was not helpful to the analysis. Although Gut claimed that the majority of the beds in the portfolio were in central Connecticut, she also admitted that buyers will sometimes place a premium on portfolio sales. Without any disaggregated data about each of the four nursing homes that made up the portfolio, the portfolio sale provided no realistic basis for comparison.
Gut’s two highest comparable sales differed from the subject property in notable ways. The Massachusetts facility that sold for $12,500,000 is located in the metropolitan Boston area, where real estate values are substantially higher than in Rocky Hill.
The New Jersey facility that sold for $18,500,000 occupies seven acres of land, while the subject property occupies only 3.17 acres. The nursing home on the New Jersey property is somewhat newer and a third larger than the nursing home on the subject property. The New Jersey nursing home is described as the premier skilled nursing facility in its local market.
Discussion
The town criticizes both Lees’ choice of comparable sales and her adjustments. Because the New Haven sale was a bankruptcy sale, the town contends that it was not an arm’s length transaction and should not have been considered. The town also criticizes the business enterprise value adjustment, which it deems unwarranted for troubled assets such as a bankruptcy purchase. It also points out that Lees’ square-foot ratio adjustment was based on her premise that the subject property has 34,787 square feet, or 290 square feet per unit, when in fact the nursing home has 48,026 square feet, or approximately 400 square feet per unit. Although the plaintiff argues that Lees did not base her ultimate valuation on the price per square foot, her square-foot ratio did result in a five percent downward adjustment of all of the comparable sales, an adjustment that might not have been made if she had used the correct square-foot per unit ratio for the subject property.
The plaintiff criticizes Gut’s reliance on sales and other competitive market data occurring after the date of value. Gut’s explanation for using sales that transpired eight, fifteen, and seventeen months after the date of value was unpersuasive. She claimed that such sales would have been in negotiations as of the date of value, but admitted that she was unsure whether information about these sales would have been available then. She made positive adjustments for improving market conditions for sales that occurred at the end of 2012, only nine months before the date of value, but did not make negative adjustments to the sales that occurred in 2014 and 2015, despite admitting that the market was better in 2015 than in 2013. She also admitted that in a 2015 appraisal of the subject property for a bank, she had used a 2013 sale in Connecticut as a comparable, but she chose not to use that comparable in her appraisal of the same property for this tax appeal. The 2013 Connecticut sale that she omitted from her analysis in this case was lower priced than any of the sales she did use.
Although it is not necessarily improper to consider sales occurring after the date of value, appraisers are cautioned that such sales should be used only when market evidence after the effective date is consistent with market expectations as of the effective date. See Uniform Standards of Professional Appraisal Practice (USPAP) (2016-2017 ed.), Appraisal Standards Board Advisory Opinion 34, p. 194, and Frequently Asked Questions No. 142, pp. 276-77. Here, Gut presented no persuasive evidence that the three sales occurring after the date of value were consistent with market expectations as of October 1, 2013.
In relevant part, the Appraisal Standards Board’s Advisory Opinion 34 states: " A retrospective appraisal is complicated by the fact that the appraiser already knows what occurred in the market after the effective date of the appraisal. Data subsequent to the effective date may be considered in developing a retrospective value as a confirmation of trends that would reasonably be considered by a buyer or seller as of that date. The appraiser should determine a logical cut-off for the data to be used in the analysis because at some point distant from the effective date, the subsequent data will no longer provide an accurate representation of market conditions as of the effective date. This is a difficult determination to make. Studying the market conditions as of the date of the appraisal assists the appraiser in judging where he or she should make this cut-off. With market evidence that data subsequent to the effective date was consistent with market expectations as of the effective date, the subsequent data should be used. In the absence of such evidence, the effective date should be used as the cut-off date for data considered by the appraiser."
In the final analysis, neither party’s comparable sales analysis was persuasive as to the value of the subject property. At best, the two sales comparison analyses confirmed the appraisers’ opinions that such comparisons are of limited usefulness in determining the value of real property that is sold as part of a complex going concern.
VI
FINDING OF AGGRIEVEMENT AND VALUE
Neither Lees’ analyses nor Gut’s analyses were wholly persuasive. Both appraisers made certain factual errors, such as Lees’ miscalculation of the square footage, which affected her adjustments to her comparable sales, and Gut’s inclusion of rent from the residence that is subject to a no-rent lease for 99 years. Apart from such errors, there were differences in the quality and credibility of the professional judgments made by the appraisers. Considered as a whole, Lees’ testimony and report were substantially more credible than Gut’s. In particular, Lees analyzed the property’s likely income and expenses in a realistic manner, consistent with its historical experience, while Gut’s projection of expense reductions ventured into the realm of wishful thinking.
In this case, the court has weighed the opinions of the appraisers, the parties’ claims in light of all the circumstances in the evidence bearing on value, and the court’s own general knowledge of the elements going to establish value. The court finds that the plaintiff has proven that it is aggrieved pursuant to General Statutes § 12-117a because the town’s fair market value of $5,027,700 is greater than the property’s true fair market value as of October 1, 2013. Based on all the evidence in the case, the court finds that the fair market value of the subject property as of October 1, 2013, is $3,700,000. This value is higher than the plaintiff’s final conclusion of value because the court has taken into consideration certain valid criticisms of Lees’ analysis by the town, including the square footage error that affected the sales comparison analysis, the questionable choice of a property in bankruptcy as a comparable property, and certain instances where Lees’ projected expenses seemed somewhat higher than warranted. This value is consistent with Lees’ determination of value using the income approach and the alternative EBITDARM multiple.
Although the subject property was overassessed, it does not follow that the town’s assessment was manifestly excessive under General Statutes § 12-119. Evidence presented by both parties demonstrates the challenges of determining the value of a complex ongoing enterprise and then deriving from that enterprise a real estate value. The evidence presented by the plaintiff as to the average price of nursing homes in 2013 by region, by size, and by age of structure indicates that the town’s assessment, although higher than warranted for the subject property, was within the average range of price per bed for nursing homes of its age, location, and type.
VII
CONCLUSION
As to counts one, three, five, and seven, which seek relief under § 12-117a, judgment may enter for the plaintiff. As to counts two, four, six, and eight, which seek relief under § 12-119, judgment may enter for the defendant. The fair market value of the subject property, for the grand lists of October 1, 2013, October 1, 2014, October 1, 2015, and October 1, 2016, is found to be $3,700,000. Judgment may enter accordingly with no costs taxed to either party.
Relying on Advisory Opinion 34, the Appraisal Standards Board responded to a question regarding use of post-value date information in retrospective appraisals in relevant part as follows: " The appraiser cannot include in the analyses the fact that an event subsequent to the date of value in a retrospective appraisal changed the market conditions that existed as of the date of value. Using such information is not consistent with the intended use of the appraisal because buyers and sellers had no knowledge or expectation of that subsequent event as of the date of value." USPAP, supra, Frequently Asked Questions No. 142, pp. 276-77.