Opinion
C.A. No. 92A-12-008-WCC.
Submitted: October 15, 1999.
Decided: November 16, 2000.
On Cross Appellant General Motors Corporation's Appeal from the Board of Assessment Review of New Castle County. Reversed.
Richard G. Bacon, Richards, Layton Finger, Wilmington, Delaware. Attorney for General Motors Corporation.
Dennis J. Siebold, Department of Finance, Wilmington, Delaware. Attorney for New Castle County.
OPINION
This is the Court's decision on the appeal of General Motors Corporation ("GM") from the decision of the Board of Assessment Review of New Castle County ("the Board"). For the reasons set forth below, the decision of the Board is reversed.
I. Facts
GM owns and operates an automobile assembly plant located on Boxwood Road in New Castle County. The plant is situated on an irregularly shaped tract of 122.509 net acres of land. The litigation began with New Castle County's ("the County") 1985 general reassessment of all real property in the County. The GM property, as of 1985, was assessed at $45,486,300, of which $4,433,800 was attributed to land and $41,052,500 was attributed to buildings. Subsequently, between 1986 and 1987, GM significantly improved the subject property by adding 594,697 square feet of building space in order to manufacture a new model Chevrolet. This addition is known as the "L-Car" addition. As a result of the L-Car expansion, the County performed a supplemental assessment of the property. The County's post-expansion appraisal was $82,693,000. This included the same $4,433,800 value for the land, but the building value was increased to $78,259,200.
In order to ensure uniform taxation, New Castle County determines all property values as of a base year, which at the time of this assessment was July 1, 1983. Tatten Partners, L.P. v. New Castle County Bd. of Assessment Review, Del. Super., 642 A.2d 1251, 1254 (1993), aff'd, Del. Supr., 647 A.2d 382 (table), No. 412, 1993, Moore, J. (Apr. 21, 1994) (ORDER).
GM appealed both assessments to the Board alleging that the property was substantially overvalued. Appeals have also been filed for each tax period thereafter. The current appeal involves assessments of the property both before and after the L-Car expansion.
The Board convened a hearing on GM's appeal on August 23, 1985, but the hearing was adjourned at the end of the day by the Board's own motion and inexplicably never resumed. On August 27, 1986, the Board held another hearing on GM's appeal, which again was postponed indefinitely upon the County's motion. The Board finally held a hearing on GM's appeal seven years after it was initially filed.
A detailed recitation of the procedural history of the case is set forth in this Court's earlier opinion and will not be reiterated here. See New Castle County v. General Motors Corp., Del. Super., C. A. No. 92A-12-008, Carpenter, J. (Feb. 5, 1997) (Mem. Op.), rev'd, Del. Supr., 701 A.2d 819 (1997).
The Board met intermittently over a period of approximately one month between October 15, 1992 and November 18, 1992, and heard testimony for approximately fourteen days. GM presented two experts, John J. Coyle, III ("Coyle") and David Houston ("Houston"), who testified in support of GM's contention that the property should be valued at $21,000,000 prior to the L-Car expansion and $34,500,000 after the L-Car expansion. Coyle, an expert appraiser of large commercial properties, submitted a written 170 page appraisal report concerning the subject property and determined the evaluation using two methods of valuation, the comparable sales/market approach and the cost approach. Houston, an expert real estate broker specializing in commercial properties, testified regarding the property's functional and economic obsolescence in determining its valuation.
The County presented three witnesses, including two expert appraisers, Daniel Bubb ("Bubb") and James Belford ("Belford"), who testified in support of the pre and post-L-Car assessments of $45,486,300 and $82,693,000 respectively. At the time of the assessment, Bubb was employed by Property Systems Company, an appraisal company hired by the County to perform a mass assessment of all real property within New Castle County. Bubb relied exclusively on the cost approach in arriving at his assessment value. Belford testified with regard to the post-L-Car assessment, and his testimony was limited to the cost of the additions relating to the 1987 improvements.
Belford was employed by the County as an Accessor III.
After being presented with fourteen days of expert testimony and volumes of exhibits, the Board took only a short recess after closing arguments before rendering its decision. The Board announced that the County's assessment was to be reduced by 30% to account for functional and economic obsolescence. As such, the value of the property was reduced to $34,211,700 before the L-Car expansion, and $61,200,000 after the L-Car expansion. In moving to reduce the assessed value, the Board members stated that "the reduction [is] being made to reflect the property's very substantial functional and economic obsolescence" and that, although the GM figures appeared low, "[t]he County, on the other hand, has in my estimation too high an assessment. They show no functional or economic obsolescence in a plant having an average life of 28 years." After voting unanimously to reduce the assessed value for the post-expansion facility by 30%, the Chairperson of the Board made the following statement:
Tr. Bd. Hr'g at Volume XIV, page 41. References to the record will hereafter be referred to by volume and page number.
XIV at41-42.
GM has presented evidence which supports overvaluation of their property. The County has presented evidence to the best of their ability and knowledge that they have valued the subject property fairly. This Board agrees with both parties. It is felt that the County has, to the best of . . . their ability and the best of their knowledge, valued the subject property equitably. However, it is quite obvious to this Board that there's has [sic] been no functional or economic obsolescence included . . . included in this valuation. This Board therefore supports a 30% reduction on both the original facility and the new L-car facility. The land value . . . the land valuation by the County will remain unchanged. The reduction of 30% for functional economic [sic] obsolescence which when combined results in a $21,500,000 reduction. The Board therefore orders a reduction from $82,693,000 to $61,200,000.
Unfortunately, the Chairperson's statement contained a miscalculation. The assessed value of the buildings alone after the L-Car addition was originally $78,259,200 and the value of the land was $4,433,800. Leaving the land value unchanged, the Board's reduction to $61,200,000 is not a 30% reduction, it is a 27.5% reduction. This error was never corrected by the Board.
After the hearing was completed, the Board filed a Notice of Decision form for both the pre-expansion and post-expansion assessments. Both Notices indicated that a reduction of the tax assessment was granted. However, the final figures were less than the 30% reduction voted on by the Board. The comments section of both forms state in its entirety: "Reduction granted to allow for functional and economic obsolescence."
In re General Motors Corp., New Castle County Bd. of Assessment Review, Notice of Decision (Nov. 23, 1992).
This matter was originally appealed by the County to the Superior Court on December 23, 1992. Due to procedural difficulties, the case has taken a long, and at many times, winding road. The Court originally found that the County did not have a right to appeal and dismissed GM's cross-appeal for being filed untimely. The Supreme Court reversed, finding the Court had retained jurisdiction to consider the cross-appeal. The present decision has also been delayed as this Court has struggled to deal with appraisal issues that reasonably should be remanded to the Board for reconsideration. But, unfortunately, as a result of 1001 Jefferson Plaza Partnership v. New Castle County Department of Finance, what is reasonable and logical is not possible. The Court again encourages the County to seek a correction of this limitation in the General Assembly.
See New Castle County v. General Motors Corp., Del. Super., C. A. No. 92A-12-008, Carpenter, J. (Feb. 5, 1997) (Mem. Op.).
See General Motors Corp. v. New Castle County, Del. Supr., 701 A.2d 819, 820-22 (1997) (finding that, although the County did not have standing to appeal the Board's decision, Superior Court retained jurisdiction over GM's crossappeal even though it was filed beyond the 30 day appeal period.) In an ironic twist, since it appears that GM did not intend to appeal the Board's decision, if the County had not filed its appeal, the decision of the Board would have ended the litigation.
Del. Supr., 695 A.2d 50 (1997) (holding that under 9 Del. C. § 8312 (c), the Superior Court lacks statutory authority to remand case to county board of assessment review).
II. Standard of Review
"A taxpayer aggrieved by the assessment of his property has the right to bring an appeal before the Board of Assessment Review and then to appeal the Board's decision to this Court." The taxpayer faces a "substantial evidential burden at both the administrative and appellate levels." When appealing the assessment to the Board:
Tatten Partners, 642 A.2d at 1256 (citing 9 Del. C. § 8311 (a) and 8312(b) and (c)).
Seaford Assocs. v. Board of Assessment Review, Del. Supr., 539 A.2d 1045, 1047 (1988).
a prima facie case of accuracy is made by the assessment record. The burden of presenting evidence to meet the prima facie case and to rebut the presumption rests upon the property owner. To fulfill the purpose, the owner's evidence must not only be competent; it must be sufficient to show a substantial overvaluation. If rebutted by such evidence, the presumption in favor of the accuracy of the assessment ceases to exist . . . [and] the Board may then hear evidence to support the assessment.
Fitzsimmons v. McCorkle, Del. Supr., 214 A.2d 334, 337 (1965).
On appeal to this Court, "[t]he decision of each board of assessment or Department of Finance . . . shall be prima facie correct and the burden of proof shall be on the appellant to show that such body acted contrary to law, fraudulently, arbitrarily or capriciously." "The reviewing court is not to reverse if it finds that the Board relied in part on incompetent evidence but only if `the Board's findings are clearly wrong and its conclusions not the product of an orderly and logical deductive process.'"
Tatten Partners, 642 A.2d at 1256 (quoting Rodney Square Investors, L.P. v. Board of Assessment Review of New Castle County, Del. Supr., No. 256, 1982, Horsey, J. (April 7, 1983) (ORDER)).
III. Discussion A. GM's Contentions
GM contends that the Board's failure to adopt GM's appraisal of $21,000,000 prior to the L-Car expansion and $34,500,000 following the L-Car expansion was both arbitrary and capricious and contrary to law. GM relies on the following purported errors to support its contention: 1) the County experts failed to employ the recognized standard of fair market value in assessing the subject property; 2) the County experts failed to utilize the sales comparison valuation method and relied solely on the cost approach; 3) the County experts' assessments contained multiple errors and inconsistencies; 4) the Board acted unreasonably both during and after the hearing; and 5) the Board miscalculated the 30% intended reduction, making the final assessment less than a 30% reduction. Although GM is correct that the evidence relied upon by the Board in making its decision was wrought with errors, the Board's error in accepting testimony from the County, which does not correspond with the legal definition of fair market value, is dispositive of this matter, and the Board's decision is reversed on that issue.B. The Fair Market Value Standard
GM contends that the Board acted contrary to law when it relied on the County's valuation of the subject property in calculating the final assessment because the County's expert witnesses used an erroneous standard for fair market value in determining its appraisal of the property. Therefore, GM asks this Court to reverse the Board's decision and order the property to be assessed at the value ascertained by its experts since they offered the only legally competent evidence of fair market value. The County denies that their experts used the wrong legal standard in determining the property's value and asserts that the acceptance of the County's figures was within the Board's discretion.
Real estate tax assessments are to be made at the property's "true value in money." Under Delaware law, this equates to the property's fair market value. Fair market value is defined as "the price which would be agreed upon by a willing seller and a willing buyer, under ordinary circumstances, neither party being under any compulsion to buy or sell." When considering fair market value, one should not consider any value peculiarly personal to the owner in retaining or using the property in question. In determining fair market value, the assessor assumes that the property is being sold at "the highest, best, and most valuable use for which the property is reasonably adaptable and available." Accuracy in valuing property according to the law is essential to promote fairness and uniformity in the assessment process.
New Castle County Dep't of Fin. v. Teachers Ins. and Annuity Ass'n, Del. Supr., 669 A.2d 100, 102 (1995) (citing Delaware Racing Ass'n v. McMahon, Del. Supr., 340 A.2d 837, 842 (1975)).
Seaford Assocs., 539 A.2d at 1048.
Wilmington Housing Auth. v. Harris, Del. Super., 93 A.2d 518, 521-22 (1952).
Fitzsimmons, 214 A.2d at 338.
Seaford Assocs., 539 A.2d at 1048.
Fair market value remains the basic measure of assessing property regardless of which method of valuation is used by the assessor. Although proof of value can be shown by any method generally accepted by the financial community, Delaware courts have specifically recognized three particular methods for determining the value of real property: 1) the capitalization of income method, 2) the comparable sales or market method, and 3) the reproduction cost new method. The three methods were described in Seaford Associates, L. P. v. Board of Assessment Review, in the following manner:
Fitzsimmons, 214 A.2d at 338.
New Castle County Dept. of Fin., 669 A.2d at 103.
Seaford Assocs., 539 A.2d at 1048-49.
Del. Supr., 539 A.2d 1045 (1988).
In the Market Approach recent sales of similar properties are examined and compared to the subject property. Market oriented adjustments are made for any differences between the comparable sales and the subject.
The Income Approach is a method of arriving at the estimated value of the property by analyzing the potential income and expenses from income producing real estate. The net income is then capitalized to indicate the value of the property as an investment. It assumes a return based on that which competitive properties are receiving.
In the Cost Approach, the site and improvements are treated separately for analytical purposes. By means of a market analysis, the site is valued independently as if vacant and ready to be put to its highest and best use.
Next, the reproduction cost new of the improvements is estimated. This represents the most probable cost of building a replica structure. From this estimate is deducted all depreciation or utility loss accruing to the building.
The depreciated cost new is then added to the total of site improvements and land value to arrive at the indicated value from this analysis.
Id. at 1047, n. 1.
The proper use of the above three valuation methods helps the Board reach an accurate valuation. The Seaford Court noted that "it is generally accepted that optimal valuation involves the use of all three [methods] to the extent the circumstances of a specific property will permit." However, the Seaford Court also recognized that "[d]espite the desirability of employing all three valuation approaches, one or two of the methods might be better suited to specific valuation judgments." Both GM and the County agree that the income capitalization method does not apply to the subject property and was appropriately not considered. Therefore, the Court will review the valuation of GM property in light of the other methods.
Id. at 1048.
Id.
The Supreme Court has repeatedly noted that the comparable sales or market method is generally the preferred test to determine fair market value. However, it is helpful only when a broad sample of comparables are available. For example, comparables may not be available where the property in question is a specialty property or is otherwise unique. In that situation, or where an assessor desires to double check the assessment, it is acceptable to use alternative methods, such as the cost method of valuation.
Seaford Assocs., 539 A.2d at 1048; Fitzsimmons, 214 A.2d at 338.
Seaford Assocs., 539 A.2d at 1048.
Id.
Fitzsimmons, 214 A.2d at 338.
Under the cost approach, it is necessary to deduct the amount of depreciation that the property has suffered in order to reach the true market value of the property. Depreciation includes physical depreciation, which is the physical wear and tear on the structure; functional obsolescence, which is deficiencies in the property itself, such as design, that make the property less valuable to others; and economic obsolescence, which is conditions in the surrounding environment that make the property less valuable to others. Done properly, the cost method can be accepted as evidence of fair market value. But, the cost method should not be the sole method of valuation as it tends to seriously overvalue property unless the appraiser has appropriately calculated depreciation and functional and economic obsolescence. It is therefore best suited to be used as a ceiling on the value of the property. As in all valuation methods, when the cost method is used, "the result must qualify as the market value of the property."
Delaware Racing Ass'n., 340 A.2d at 843.
Seaford Assocs., 539 A.2d at 1049.
Texaco Ref. and Mktg., Inc. v. Assessment Bd. of Appeals of the City of Delaware City, Del. Super., C.A. No. 90A-MR-4, Mem. Op. at 6, Taylor, J. (Mar. 27, 1991).
C. The County's Failure to use Fair Market Value
GM, through its experts and documentary evidence, presented competent evidence of the fair market value of the subject property both before and after the L-Car addition. This Court agrees with the Board when it acknowledged that GM presented sufficient and competent evidence of overvaluation necessary to rebut the presumption of accuracy in favor of the assessment. Therefore, the presumption in favor of the County ceased to exist. And, while the County presented evidence to support its assessment, it failed to present competent evidence of the fair market value of the property. First, both of the County experts utilized only the cost approach to valuation. This was done not because there were no comparable properties to compare to the subject property, but because the County did not provide the resources necessary to perform the market approach. Further, all of the experts agreed that, although the GM plant is larger than most properties, it is not a specialty property requiring that the sales comparison approach be ignored. Although the County experts indicated that the comparables used by GM's expert may have been flawed in some respects, they did not deny that the method was properly performed. Therefore, the County erred when it did not perform the market approach and simply relied on the cost approach, which, as noted above, has been consistently criticized by the Courts when it is used as the sole method of valuation.However, the mere use of only the cost approach did not in and of itself make the County's evidence incompetent. Evidence of valuation is not incompetent merely because one approach is used over another provided that fair market value remains the basis for the valuation. Any accepted method of valuation is proper evidence for the Board to consider if it is based on fair market value. However, in the present matter, the County experts, and in particular Bubb, did not employ the correct standard for fair market value. Bubb refused to consider functional and economic obsolescence because, in his opinion, the property was valuable to GM and was being adequately used by that corporation. Therefore, Bubb determined that there was no need to consider the marketplace and obsolescence was not a factor. Bubb obviously did not consider how the property would have faired in an arms-length sale between a willing buyer and willing seller, which is the proper standard for fair market value. Instead, he appeared to consider only GM's subjective use of the property. Likewise, Belford's assessment did not consider obsolescence because he was instructed to value only the cost of the additions and not the property in its entirety. As a result, his cost figures regarding the new construction were merely added to Bubb's previous incorrect figures without any adjustment for obsolescence. Because the County's evidence was based entirely on a standard which is contrary to the law of this State, the evidence is incompetent and should have been disregarded by the Board. The Board's reliance on this incompetent evidence in calculating the final value of the subject property was both arbitrary and capricious and contrary to law. "[T]he Board may not rely solely upon its assessment record, or personal knowledge of its members unsupported by evidence, in the face of countervailing competent and substantial evidence." Rather, the Board has a duty to fairly evaluate the evidence presented and to uphold the law. This, it failed to do.
See New Castle County Dept. of Fin. v. Teachers Ins. and Annuity Ass'n, Del. Supr., 669 A.2d 100 (1995).
See III at 82-83 and IV at 19-20 (testimony in which Bubb indicated that property has a higher value where the owner is currently occupying and using the building regardless of whether a willing buyer can be found to purchase that property).
XIV at 123.
It should be noted that the evidence presented by Belford contained mistakes such as incorrect calculations, inclusion of factors that were not actually present at the construction site, incorrect assumptions, lack of foundation for the selection of numbers from the valuation manual, inability to properly use the valuation manuals, failure to use standard appraisal principles/techniques, and inclusion of certain features twice, and other examples which are far too numerous to present in detail. These mistakes alone could be enough to make his testimony incompetent and thus be a basis for reversing the Board's decision. See Woodlawn Trustees Inc. v. New Castle County Bd. of Assessment Review, Del. Super., C.A. No. 96A-09-005, Alford, J. (July 25, 1997) (finding the County's evidence incompetent because there was no foundation for the selection of certain numbers from the valuation manuals or for the variables used in the calculations performed by the County's expert); Tatten Partners, supra, note 1 (finding that the property owner presented competent evidence that was not rebutted by the incompetent evidence presented by the County, which was based on conclusory opinions and an inability to document figures, and therefore, the Board's acceptance of the County's evidence over the competent evidence of the property owner was arbitrary and capricious). However, because this Court is reversing the Board's decision based on its legal error of accepting evidence based on an incorrect fair market value standard, it is unnecessary to decide whether the mistakes made by the County's expert were so egregious as to constitute incompetent evidence.
See Woodlawn Trustees at 7; Tatten Partners, 642 A.2d at 1258; Three Hundred Delaware Ave. Assocs. v. Bd. of Assessment Review, Del. Super., C.A. No. 5174, 1975, Walsh, J. (May 7, 1976), Let. Op. at 3-4.
Fitzsimmons, 214 A.2d at 337.
This Court concludes that the Board's decision was contrary to law when it used the County's numbers as a basis for the reduction. Further, this Court finds the County's assessment to be unreliable and must disregard it in its entirety rather than use it as a basis for further modification. Therefore, the decision of the Board is reversed and the property is valued based on the only competent evidence of fair market value, that presented by GM's experts.
Finally, it is clear to this Court that the Board did not uphold its statutory duties and was unwilling to accept GM's evidence even when faced with multiple errors in the County's assessment. In the end, despite the fact that the Board acknowledged the sufficiency of GM's evidence and the need for a reduction of the assessment to allow for obsolescence, it merely picked a figure out of thin air and reduced the County's assessment accordingly. The Board did not provide any evidentiary basis for the use of a 30% reduction for obsolescence as opposed to the competent evidence presented by GM, other than the personal opinions of the board members. Such conduct cannot be characterized in any way other than as arbitrary and capricious. Although the Board heard five witnesses over fourteen days and received voluminous exhibits from the parties, the Board recessed for only a few moments before rendering its decision and provided no substantial reasoning for its decision. The Board's only written comment in explanation of its decision to reduce the assessment by more than $21 million was "Reduction granted to allow for functional and economic obsolescence." This indicates that the final decision was not the product of an orderly and logical deductive process as required by law.
See Elsmere Park Club L. P. v. Court of Assessment Appeals of the Town of Elsmere, Del. Super., C.A. No. 90A-JN-8, Gebelein, J. (Jan. 28, 1991) (Mem. Op.) (decision of board of assessment reversed as it was based solely on the opinions of the board members and not based on the evidence presented).
See 1001 Jefferson Plaza Partnership v. New Castle County Dept. of Fin., Del. Super., C.A. No. 94A-11-004, Let. Op. at 3, Babiarz, J. (Nov. 8, 1995), rev'd on other grounds, Del. Supr., 695 A.2d 50 (1997) (holding that the Board's decision was not the product of an orderly and logical deductive process where it completely disregarded vast information presented by the appellant and made its decision based on its own opinions).
The failure of the Board to thoroughly and logically set forth its reasoning in assessment cases places an extraordinary burden upon the Court and makes it extremely difficult to conduct a meaningful appellate review. Unlike other administrative appeal matters, the Court cannot remand an assessment case for clarification or findings consistent with the Court's legal interpretations. Therefore, if the Board fails to appropriately perform its responsibility, the Court has no recourse but to decide the appropriate assessment, an area in which the members of the Board have the expertise, not the Court. This will inevitably, as it has in this case, delay the decision as the Court reviews volumes of records and testimony without the ability to realistically supplement the record or clarify the issues.
See 1001 Jefferson Plaza Partnership v. New Castle County Dept. of Fin., Del. Supr., 695 A.2d 50 (1997).
Of course, the Board was also limited by the evidence that was presented to it, and this case was a clear example of the County being financially frugal to its own detriment. Instead of recognizing the significance of this assessment and taking steps to ensure that the evaluation was professionally unchallengeable, the County treated this case like any other property that was part of the mass reassessment performed in 1985. This was clearly unwise in light of what would obviously be a well financed, aggressive and professionally conducted appraisal by GM's experts. Unfortunately, this has left the Court with a clear overvaluation by the County and the only reliable evidence in the record was that provided by GM. If the Court's discretion was not limited, it would have remanded the case to the Board requiring the County to reassess the property in light of the standards set forth in this opinion. It would have mandated that the County's experts prepare a professional appraisal report unique to this property, something that was not done in this case, and require the Board to reconsider the matter with appraisals that are applying consistent standards and to set forth in detail the reasoning for its decision. Since this recourse is not available to the Court and both parties have requested the Court to decide the matter on the record created before the Board, it has done just that.
IV. Conclusion
For the foregoing reasons, the decision of the Board is reversed and the assessment is reduced to reflect the competent evidence presented by General Motors, namely $21,000,000 prior to the L-car addition and $34,500,000 after the L-car addition.