Opinion
No. 508 C.D. 2013
12-27-2013
In Re: Appeal of Warren Mall Realty Management, LLC, from a Determination of the Warren County Board of Assessment and Revision of Taxes Appeal of: Warren Mall Realty Management, LLC
BEFORE: HONORABLE BONNIE BRIGANCE LEADBETTER, Judge HONORABLE PATRICIA A. McCULLOUGH, Judge (P) HONORABLE JAMES GARDNER COLINS, Senior Judge OPINION NOT REPORTED MEMORANDUM OPINION BY JUDGE LEADBETTER
Warren Mall Realty Management, LLC (Taxpayer), the owner of a parcel of real property known as the Warren Mall (the property or the Mall), appeals from the order of the Court of Common Pleas of the 37th Judicial District, Warren County Branch (common pleas or trial court) denying its real estate tax assessment appeal, thereby confirming the assessed value determined by the Warren County Board of Assessment and Revision of Taxes (Board) for tax year 2012. In affirming the Board's assessment, common pleas found that Taxpayer failed to overcome the prima facie validity of the Board's assessment record. On appeal, Taxpayer argues that common pleas abused its discretion in failing to consider or determine the fair market value based on the property's most recent sales price and in failing to reduce the accepted fair market value of the property by the cost of a needed new roof. After review, we affirm.
The property at issue, a retail mall, is situated on approximately 25 acres and was built in 1979. Taxpayer purchased the property in 2011 for $720,000. At all times relevant, the Mall was anchored by Kmart, Bon-Ton, and Big Lots. A substantial amount of the Mall's interior space, however, was vacant. The assessed value of the property for 2012 was $783,629. Taxpayer appealed its assessment; the Board did not afford any relief and an appeal to common pleas followed.
The parties stipulated before common pleas that the assessed value was established by the Board in 2010 following an assessment appeal by the prior owner; a further appeal to common pleas was not pursued at that time. Application of the common level ratio of 2.89 to that assessed value rendered a fair market value of $2,264,687.81.
Before common pleas, the Board entered its assessment record into evidence, establishing the assessed value set forth above. Thereafter, Taxpayer presented the expert testimony and report of its appraiser, William Bender, who described the property as "distressed" because of its high risk due to a lack of tenants. Bender testified that after considering the various approaches to valuing real property, he employed the income approach, opining that the property had a fair market value of $1.1 million. See Notes of Testimony (N.T.) at 16; Expert Report at 52. Notably, Bender testified that the property's recent sales price was used to calculate the capitalization rate, a factor in determining market value under the income approach. He also noted that he did not utilize the comparable sales approach to value the property, stating as follows:
Because the case was tried in 2013, the assessment record also established a fair market value of $2,194,161.20 for tax year 2013 based upon a common level ratio of 2.80.
Although not critical to the resolution of the appeal, the trial judge noted in her opinion that Bender testified that the fair market value of the property was $1,032,051.
Bender calculated a capitalization rate by dividing the property's net operating income by the recent (but incorrect) sales price.
[T]ypically, with the sales comparison approach, you are trying to come up with a unit of comparison. Usually, for this type of property, it would be like price per square foot. Problem is, they are all over the place and they are driven by the income of the property. The income potential. So, again, I don't think there is a real meaningful unit of comparison to apply the sales comparison approach. So, therefore, I did not apply it. Again, I don't know of any investors that would look at an income producing property this way [i.e., pay X amount per square foot for an income producing shopping center].N.T. at 21-22.
On cross-examination, Bender admitted that he calculated the capitalization (cap) rate using the wrong amount for the property's sales price. Specifically, he calculated the cap rate using a sales price of $790,000 rather than the correct price of $720,000. Further, it became apparent that even using the incorrect sales price, the capitalization rate set forth in his report for the Mall (28.64%, see Report at 47) was incorrectly calculated. When asked by opposing counsel to calculate the cap rate on the witness stand, Bender's calculation yielded a rate of 14.72%. See N.T. at 44-46. In addition, Bender confirmed that in calculating the capitalization rate for the property, he used the projected net operating income (NOI) rather than the actual NOI even though a buyer would most likely consider a cap rate based upon actual figures rather than projected. See N.T. at 67-73. Bender explained that he used projected figures because he wanted to be consistent with the data used for the two comparable properties he considered in calculating a capitalization rate to determine the property's market value. Finally, Bender also confirmed on cross-examination that the two comparable properties that he considered in determining the overall capitalization rate to estimate market value were properties purchased in connection with a bankruptcy sale, which he found to be similar to the circumstances surrounding the most recent sale of the Mall to Taxpayer. N.T. at 49.
The higher the capitalization rate, the lower the fair market value.
The two properties considered as comparable, malls located in Virginia and North Carolina, are also owned by Taxpayer.
According to the testimony of Steven Zamias, a representative of the prior owner, the mortgage on the property was with Sun America, a division of AIG. The loan had matured and Sun America directed that the property be sold. According to Zamias: "Sun America was making the call, because the loan had expired. They didn't give a dog gone, in a nice way, what they got. They wanted the toxic asset off their books. . . . [T]hey could have accepted a million dollars if an offer had come in . . . . [o]r, they would have accepted a half a million dollars if that was the high offer." N.T. at 105. Zamias indicated that Sun America's direction to sell was related to the federal government's bailout of AIG. When Taxpayer bought the property for $720,000, the prior owner still owed approximately $13 million on the loan. Id. at 106. The property was marketed through a broker and apparently three or four bids were received; Taxpayer's bid was the highest.
It also bears noting that Steven Zamias, the representative testifying on behalf of the prior owner, acknowledged that real estate tax refunds received by the prior owner in 2008 and 2010 were reflected differently in the financial records for the property. Zamias further testified that the prior owner chose not to exercise its right of first offer (also referred to by Taxpayer's counsel as a right of first refusal), which provided it with the opportunity to repurchase the property from Sun America with an offer that exceeded the highest bid received. According to Zamias, the prior owner did not re-purchase the property, because, among other things, it needed a new roof, which he believed would cost approximately $1 million. The Board and Warren County School District did not offer any rebuttal.
These refunds were excluded from Bender's valuation report.
Common pleas ultimately rejected Taxpayer's evidence establishing a $1.1 million fair market value for the property. Noting the above aspects of Bender's testimony, the court found Taxpayer's proffered fair market value to be unreliable and based upon flawed data and calculations. Specifically, the court noted that the capitalization rate for the property was calculated using: (1) projected NOI rather than actual NOI; (2) an incorrect purchase price; and (3) information garnered from two other retail mall purchases, which the court found to be inappropriate comparables. The court's view of the appraisal evidence was also influenced by the fact that the financial reports for 2010 failed to include a real estate tax refund in the amount of $150,000. In light of the circumstances surrounding the most recent sale of the property to Taxpayer, the court also expressed doubt that Taxpayer's purchase price was a fair reflection of market value. Accordingly, the court concluded that Taxpayer failed to overcome the prima facie valuation established by the assessment record and denied the appeal. This appeal followed.
This result did not change after Taxpayer filed a statement of matters complained of on appeal.
Before addressing the arguments raised on appeal, we note the procedural framework and burdens applicable in a tax assessment appeal. The trial court is charged with determining the market value of the property as of the date the assessment appeal was filed before the board of assessment appeals. Section 8854(a)(2)(i) of the Consolidated County Assessment Law (Assessment Law), 53 Pa. C.S. § 8854(a)(2)(i). The market value, also referred to as the fair market or actual value, "is the price which a purchaser, willing but not obliged to buy, would pay an owner, willing but not obliged to sell, taking into consideration all uses to which the property is adapted and might in reason be applied." RAS Dev. Corp. v. Fayette Cnty. Bd. of Assessment Appeals, 704 A.2d 1130, 1134 (Pa. Cmwlth. 1997) (internal quotations and citation omitted). See also Green v. Schuylkill Cnty. Bd. of Assessment Appeals, 565 Pa. 185, 772 A.2d 419 (2001). The burdens and order of proof in an assessment appeal were set forth by our Supreme Court in its oft-cited opinion in Green, wherein the Court stated:
[T]he taxing authority first present[s] its assessment record into evidence. Such presentation makes out a prima facie case for the validity of the assessment in the sense that it fixes the time when the burden of coming forward with evidence shifts to the taxpayer. If the taxpayer fails to respond with credible, relevant evidence, then the taxing body prevails. But once the taxpayer produces sufficient proof to overcome its initially allotted status, the prima facie significance of the Board's assessment figure has served its procedural purpose, and its value as an evidentiary devise is ended. Thereafter, such record, of itself, loses the weight previously accorded to it and may not then influence the court's determination of the assessment's correctness.565 Pa. at 195, 772 A.2d at 425-26 (internal citations and quotations omitted). See also Macy's Inc. v. Bd. of Prop. Assessment, Appeals, Review of Allegheny Cnty., 61 A.3d 361, 364 n.4 (Pa. Cmwlth. 2013). Further, while an appellate court cannot review a trial court's determinations regarding the personal veracity of a witness, it may review a trial court's conclusions based upon the substantive reasonableness of a witness's testimony. Masalehdan v. Allegheny Cnty. Bd. of Prop. Assessment, Appeals & Review, 931 A.2d 122, 126-27 (Pa. Cmwlth. 2007).
The taxpayer still carries the burden of persuading the court of the merits of his appeal, but that burden is not increased by the presence of the assessment record in evidence.
Of course, the taxing authority always has the right to rebut the owner's evidence and in such a case the weight to be given to all the evidence is always for the court to determine. The taxing authority cannot, however, rely solely on its assessment record in the face of countervailing evidence unless it is willing to run the risk of having the owner's proof believed by the court.
On appeal, Taxpayer first contends that common pleas abused its discretion in failing to properly credit the evidence regarding the recent sale of the property for $720,000. In support, Taxpayer notes that Section 8842(b)(1)(i) of the Assessment Law, 53 Pa. C.S. § 8842(b)(1)(i), directs that in arriving at actual value for assessment purposes, "the price at which any property may actually have been sold, either in the base year or in the current taxable year, shall be considered but shall not be controlling." Taxpayer posits that common pleas erred in suggesting that the most recent sales price did not provide a true indication of fair market value because of the circumstances surrounding the sale (i.e., a forced sale by a mortgagee interested only in dumping the property). In this regard, Taxpayer points to all the factors regarding the sale that it believes support the conclusion that the sale was a true arms-length transaction and the various factors supporting the depressed sales price. Notwithstanding that its own expert testified to a higher fair market value, Taxpayer seems to argue that the price it paid for the property in 2011 establishes its fair market value for assessment purposes. This argument lacks merit.
First, the express language of the statutory provision defeats Taxpayer's argument: Section 8842(b)(1)(i) of the Assessment Law states that while the sales price of property shall be considered in valuing the property, the sales price is not controlling. See Section 8842(b)(1)(i). Indeed, the Assessment Law specifically directs that in arriving at actual value for assessment purposes, the Board must consider three approaches to valuation: cost approach; comparable sales approach; and income approach. Section 8842(b)(1)(iii). Consideration of these various approaches would be unnecessary if the issue of actual value were determined solely by a recent sales price, if available. Second, the appellate courts of this Commonwealth have rejected similar arguments. In Appeal of Barry, 353 Pa. 72, 44 A.2d 296 (1945), our Supreme Court stated, in pertinent part:
The appellant would have us adopt the sale price as the proper valuation for tax purposes of the property in question. To do this would make the sale price controlling, which is contrary to the act of assembly and the decisions which hold the sale price must be considered but shall not be controlling. . . .Id. at 74, 44 A.2d at 296 (internal citations and quotations omitted). Accord RAS Dev. Corp., 704 A.2d 1130. Accordingly, the trial court did not abuse its discretion in failing to conclude that the most recent sales price was dispositive of the issue of market value.
. . . Sale price, while an important element of market value, has never been held controlling. [We have held] that the price for which the property sold at a bona fide sale was not controlling where evidence was adduced to show a higher value. The sale price was entitled to great weight as an important item of evidence, but market value was the actual value for assessment uninfluenced by vague theories of actual value. Likewise, a bona fide offer of sale is not solely determinative of market value, but is merely evidentiary.
We also discern no substantive unreasonableness in the trial court's suggestion that the sale price was not a true indication of fair market value because of the circumstances leading to the sale. Specifically, the court noted: "The Court also questions whether the sale price of the mall at $720,000 is an accurate reflection of fair market value of the property. The [Taxpayer] purchased the property only after Troubled Asset Relief Program . . . funds had been used to 'bail out' the remaining $13,500,000 on the loan securing the mall. Testimony indicated that the mortgagee merely wanted to sell the mall to get a 'toxic asset' off its books." Trial Court's March 6, 2013 Opinion at 4. The circumstances surrounding the sale were not disputed and matters, such as financial distress (the property's income was clearly not covering its debt expense), are properly considered in determining the evidentiary weight to be afforded by the trial court, as fact-finder, to the sale price of the property. Moreover, it bears noting that the comparables referenced by Taxpayer's expert were bankruptcy sales; distress sales clearly cannot be said to generate a price which "an owner, willing but not obliged to sell" would accept for his property. --------
Taxpayer next argues that common pleas committed an abuse of discretion in failing to credit the testimony of the prior property owner regarding the need for and cost of a new roof. According to Taxpayer, common pleas should have reduced the Board's valuation by $1.0 million to reflect the needed repair. Specifically, Taxpayer argues:
[T]he lower court justified [its refusal to consider reduction of the market value by the cost of a new roof] because "the estimate was not substantiated by any credible source." The lower court, however, completely failed to make any finding in either of its Opinions that [the prior owner] was in any respect not credible on this issue or with respect to any of his other testimony.Brief for Appellant at 19 (citations to transcript omitted). This too lacks merit.
[The prior owner's] testimony established that he has over 30 years of experience in the ownership and operation of shopping malls and in particular the Warren Mall. Unless the lower court articulated some basis for not finding his testimony to be credible as to the need and estimated cost of a new roof, there was no basis for the lower court to simply ignore that uncontradicted testimony. To do so constituted an abuse of discretion.
It is well established that the trial court hears an assessment appeal de novo and sits in the role of fact finder. Green, 565 Pa. at 195, 772 A.2d at 425-26. Accordingly, the credibility and weight of the evidence are for the trial court and cannot be disturbed on appeal absent clear error. Id. at 196, 772 A.2d 426. Here, common pleas was not required to accept the prior owner's opinion regarding the need for and cost of a new roof simply because it was not contradicted. As the arbiter of the weight and credibility of evidence, the court was free to reject the uncontradicted testimony to that effect. Contrary to Taxpayer's assertion, common pleas articulated a reason for the rejection: the witness was not a credible source regarding that issue. The trial court's conclusion regarding the witness's lack of credibility does not constitute reversible error.
Moreover, "[e]xpert testimony is necessary where the subject matter involves special skill and training beyond the knowledge of a layman." Vrabel v. Commonwealth, 844 A.2d 595, 598 (Pa. Cmwlth. 2004). Here, while the prior owner was clearly experienced in the ownership and management of retail properties, he was not qualified as an expert in roof repair and replacement, a matter clearly beyond the knowledge and skill of an ordinary person. In addition, the witness gave no foundation for the basis of his opinion that a new roof would cost approximately $1 million dollars. Further, no testimony was elicited that estimates for a new roof were solicited or competing bids sought. Accordingly, neither an abuse of discretion nor an error of law was committed.
Finally, Taxpayer contends that in ordering that the "assessed value of the property remains at the figure assessed by the [Board]: $2,264,687.81 for the period from January 1, 2012 through June 30, 2012 and $2,194,161.20 from July 1, 2012 through December 31, 2012," common pleas mistakenly used the word "assessed" when clearly such figures represent the property's market value. Brief of Appellant at 20. As Taxpayer notes, the assessed value reflected in the Board's assessment record is $783,629. Taxpayer requests that the matter be remanded to common pleas so that it may correct its order accordingly. Appellees, the Board and Warren County School District, argue that this request has been waived for failure to raise it before common pleas. Notwithstanding that argument, however, they agree that the court made a "clerical error" in referring to the values as "assessed" values rather than market values. As there is no dispute that the values referenced in the trial court's March 6, 2013 order are market values, rather than assessed values, and correction of the same will not prejudice Appellees, we affirm the trial court's order as modified to reflect that the correct assessed value is $783,629 for the tax periods in question.
Accordingly, common pleas' order is affirmed as modified.
/s/_________
BONNIE BRIGANCE LEADBETTER,
Judge ORDER
AND NOW, this 27th day of December, 2013, the order of the Court of Common Pleas of the 37th Judicial District, Warren County Branch, in the above-captioned matter is affirmed as modified to reflect that the correct assessed value is $783,629 for the tax periods in question.
/s/_________
BONNIE BRIGANCE LEADBETTER,
Judge