Opinion
NO. 2011-CA-000546-MR
02-22-2013
COLLEGE HEIGHTS CORPORATION (COLLEGE HEIGHTS APARTMENTS, LTD.) APPELLANT v. KENTUCKY BOARD OF TAX APPEALS; KNOX COUNTY PROPERTY VALUATION ADMINISRATOR (BILL OXENDINE); KNOX COUNTY BOARD OF ASSESMENT APPEALS (J.M. HALL); AND KNOX COUNTY CLERK (MIKE COREY) APPELLEES
BRIEFS AND ORAL ARGUMENT FOR APPELLANT: Jane D. Lollis Louisville, Kentucky Bixler W. Howland Louisville, Kentucky BRIEF AND ORAL ARGUMENT FOR APPELLEES: John W. Dixon Barbourville, Kentucky
NOT TO BE PUBLISHED
APPEAL FROM KNOX CIRCUIT COURT
HONORABLE JOHN KNOX MILLS, JUDGE
ACTION NO. 10-CI-00285
OPINION
REVERSING AND REMANDING
BEFORE: ACREE, CHIEF JUDGE; CLAYTON AND DIXON, JUDGES. DIXON, JUDGE: This is an appeal from the Knox Circuit Court. The trial court affirmed the decision of the Kentucky Board of Tax Appeals (the "Board") in determining the fair market value of ninety-six (96) low income apartments which is the property at issue. The Appellant argues that this determination lacked substantial evidence of probative value to support it. For the following reasons, we reverse and remand for proceedings consistent with this opinion.
BACKGROUND INFORMATION
The Appellant, College Heights Corporation/College Heights Apartments, Ltd. ("College Heights"), owned the apartments on property leased from Union College in August of 1982, for a period of 99 years. These apartments are limited to low-income elderly residents pursuant to a 20-year lease College Heights has with the U.S. Department of Housing and Urban Development (HUD). Each unit receives a rent subsidy from Section 8 Housing Assistance through HUD. In order to receive this rent subsidy, eligible tenants are restricted to only those with income of less than 50 percent of the area median income. College Heights has no guarantee that HUD will continue to renew the agreement at its expiration.
On January 1, 2008, a property tax assessment was made on the property by the Knox County Board of Assessment. The amount assessed was $2,135,000. College Heights disputed this assessed amount and appealed to the Kentucky Tax Board.
Hearing Officer Lanola Parsons held a hearing as to the proper amount of assessed value and, thereafter, tendered proposed findings of fact and conclusions of law to the Board in which she recommended they assess the value based on a "modified comparable sales approach." Using this approach, she valued the property at $1,440,000. College Heights then filed exceptions to the Hearing Officer's recommended findings and conclusions. The Board nevertheless adopted the Hearing Officer's findings and conclusions, whereupon College Heights filed a petition for judicial review with the Knox Circuit Court. Affirming the Board's decision, the Knox Circuit Court held that the Tax Board had not abused its discretion. College Heights then appealed to this court.
STANDARD OF REVIEW
In reviewing the decision of an administrative agency, a reviewing court does not perform a de novo review, but must uphold the decision if there was substantial evidence of probative value upon which the agency could base its decision and the agency applied the correct rule of law to the facts before it. Kentucky Unemployment Ins. Comm'n v. Murphy, 539 S.W.2d 293, 294 (Ky. 1976). A reviewing court may "not substitute its [own] judgment for that of the agency as to the weight of the evidence on questions of fact." Kentucky Revised Statutes (KRS) 13B.150(2).
If the agency relied on substantial evidence in making its determination, the reviewing court must uphold it. Brown Hotel Co. v. Edwards, 365 S.W.2d 299, 302 (Ky. 1963). "'[S]ubstantial evidence' means evidence of substance and relevant consequence having the fitness to induce conviction in the minds of reasonable men." Owens-Corning Fiberglas Corp. v. Golightly, 976 S.W.2d 409, 414 (Ky. 1998). With this standard in mind, we will examine the record before us.
DISCUSSION
In upholding the Board's findings and conclusions, the Knox Circuit Court held as follows:
This Court finds that the [Board's] decision was not an abuse of discretion nor arbitrary, but was based upon the evidence and witness testimony presented at the hearing. In support hereof, this Court relies upon the decision of the Hearing Officer, specifically, the consideration given to the testimony of both appraisers, as well as, the explanation given by the Hearing Officer as to why she chose Mr. Sizemore's appraisal method, as well as, why Mr. Sizemore's appraisal was modified. The fact that the Hearing Officer chose one of two disparate methods of appraisal, and later modified the findings of the original appraiser due the absence of factors such as flood, limitations on rent, and the project's age demonstrates to this Court that the Hearing Officer fully reviewed and relied upon the evidence and testimony presented prior to arriving at her ultimate conclusion.Circuit Court Opinion at 2-3.
The Hearing Officer heard testimony from Bill Oxendine, the Knox County Property Valuation Administrator ("PVA"), Roy Sizemore (a real estate appraiser hired by the PVA) and M.A. Allgeier (a real estate appraiser hired by Appellant). After hearing this testimony, the Hearing Officer chose to base her findings and conclusions on Sizemore's comparable sales approach to appraisal of the low-income multi-family development. College Heights takes issue with this appraisal for several reasons.
College Heights contends that Sizemore's appraisal contained serious errors substantially affecting its validity. First, it argues that the appraisal was outside of the guidelines of the Uniform Standards of Professional Appraisal Practice (USPAP) because of its date. The effective date of Sizemore's appraisal was March 2, 2009. College Heights argues that this date was over a year after the date of the assessment at issue (which occurred on January 1, 2008), some 14 months prior to Sizemore's appraisal, and well beyond USPAP guidelines.
Next, College Heights argues that the property right being appraised was a leasehold interest, but was characterized as fee simple in Sizemore's appraisal rendering the appraisal inaccurate. It further maintains that: Sizemore included tax credits when there were none; he repeatedly ignored the Uniform Standards of Professional Appraisal Practice ("USPAP") standards; and most significantly, that the projects he relied on as comparables were not comparable properties in Knox County.
In its Order, the Board made the following relevant findings of fact:
The Knox Co. PVA, hereinafter (PVA) has obtained an appraisal from a seasoned and well respected commercial appraiser, Roy Sizemore. Because of his experience his opinion is entitled to considerable weight.Order No. K-20808 at 1-2.
The Appellant obtained an appraisal from a well-qualified and experienced appraiser, M.A. Allgeier, equally qualified and experienced. Also entitled to considerable weight.
We conclude that both appraisers are within the bounds of possibility, even given their disparate findings. However, there are other things to consider. The PVA
fails to take into account the age of the project and the fact that it is limited by law in how much rent it can charge. Neither does it consider what is apparently an undisputed probability of flooding over time. The Appellant fails to give sufficient weight to the guaranteed rent that is being collected and the increasing desirability of the project.
The Appellant using the income approach finds the value at $940,000. The taxpayers, using the "I don't want an increase approach" originally set the value at $770,411. Sizemore, using an approach that gives great weight to construction and it's [sic] costs finds the value at $2,200,000.
We find that because of the limit on rent and the age of the structures, it is inaccurate to set the assessment at what comparable new units would be worth. However, it is a very nice little development and worth more than the Appellant would urge.
We specifically in making these findings do not consider anything that might have been alluded to but not made of record.
We find the value of the property in question to be $1,440,000. This is based upon what each apartment would be worth from a sales approach and aggregating all units and taking into account the location of the units.
As set forth above, the standard of review in this case is that there must be substantial evidence upon which the Board could base its decision. Pursuant to the holding in Evans Oil & Gas Co. v. Draughn, 367 S.W.2d 453, 454 (Ky. 1963), in order to overturn an agency's decision regarding a tax assessment, the taxpayer needs to present evidence that would be so strong that a trier of fact would be compelled to agree with him. As set forth in Jefferson County Property Valuation Adm'r v. Ben Schore Co., 736 S.W.2d 29, 30 (Ky. App. 1987), citing Fayette County Bd. of Supervisors v. O'Rear, 275 S.W.2d 577, 579 (Ky. 1955): "It is our opinion that an assessment cannot be held invalid merely because of the method employed in making it, so long as the method is fairly designed for the purpose of reaching, and reasonably tends to reach, an approximation of the fair voluntary sale price." (Emphasis added). It is this issue which is most troubling regarding Sizemore's appraisal.
The Sizemore appraisal is solely based upon comparable sales. However, none of the sales Sizemore included in his appraisal could be called "comparable." Significantly, not one of Sizemore's comparables was a low-income property. Moreover, not one of the comparables was near Knox County. Five of these properties were located in Lexington and one was in Richmond. Clearly these properties were far more urban than the College Heights property. Yet Sizemore's appraisal made no adjustment for these factors--a violation of USPAP guidelines. But perhaps most glaring is the fact that not one of the "comparables" was a leased property as is College Heights. Even Sizemore acknowledged that a downward departure would be necessary but he provided no evidence as to what this figure might be. While the Hearing Officer maintained that she had not "consider[ed] anything that might have been alluded to but not made a part of the record," in making her determinations, clearly she must have done so. Absolutely no evidence was presented as to what appropriate downward dollar departure to Sizemore's appraisal was necessitated by the leasehold issue. Consequently, to do so was nothing more than speculation not supported by facts.
Moreover, this was not the only instance where the Hearing Officer determined values for factors not supported by the record. Neither Sizemore nor Allgeier assessed values for each of the factors used to calculate their ultimate conclusions as to value. Nevertheless, the Hearing Officer "modified" Sizemore's assessment and substituted her judgment on several aspects of Sizemore's appraisal. For example, she noted that Sizemore had not taken the age of the project, the limitations on rent, and probability of flooding, into account in his assessment. While all of these factors were appropriate for consideration, there was absolutely no evidence of what value should be assigned to each. Yet, the Hearing Officer determined the property's value was $1,440,000, "based upon what each apartment would be worth from a sales approach and aggregating all units and taking into account the location of the units." Nowhere does she indicate how she arrived at this valuation. There simply is no substantial evidence to support the Hearing Officer's conclusions.
Furthermore, given the aforementioned errors regarding the Sizemore appraisal, we conclude it was erroneously accepted as evidence. The appraisal is inaccurate, even according to its author's testimony. Moreover, as it purports to appraise comparable property yet contains nothing remotely comparable without any adjustment for obvious dissimilarities, it provides no relevant evidence. Additionally, Sizemore provided no information within the text of his appraisal (or by testimony) as to how, if at all, the date of his appraisal compared with the actual date of the PVA's assessment of the College Heights property.
We do not consider PVA Bill Oxedine's last-minute testimony sufficient to cure this defect.
Consequently, we reverse the Board of Tax Appeals and the Knox Circuit Court's order affirming the Board's decision. We remand this matter with instructions that College Heights tax assessment must be determined from the remaining evidence presented to the Hearing Officer in this matter.
ACREE, CHIEF JUDGE, CONCURS.
CLAYTON, JUDGE, DISSENTS AND FILES SEPARATE OPINION.
CLAYTON, JUDGE, DISSENTING: I must respectfully dissent from the majority opinion.
The standard of review in this case is that there be substantial evidence upon which the Board could base its decision. Kentucky Unemployment Ins. Comm'n v. Murphy, 539 S.W.2d 293, 294 (Ky. 1976). Pursuant to the holding in Evans Oil & Gas Co. v. Draughn, 367 S.W.2d 453, 454 (Ky. 1963), in order to overturn an agency's decision regarding a tax assessment, the taxpayer needs to present evidence that would be so strong that a trier of fact would be compelled to agree with him. Jefferson County Property Valuation Adm'r v. Ben Schore Co., 736 S.W.2d 29, 30 (Ky. App. 1987) (citing Fayette County Bd. of Supervisors v. O'Rear, 275 S.W.2d 577, 579 (Ky. 1955)). The Court held that "[i]t is our opinion that an assessment cannot be held invalid merely because of the method employed in making it, so long as the method is fairly designed for the purpose of reaching, and reasonably tends to reach, an approximation of the fair voluntary sale price." The weight which should be given to expert testimony is within the province of the fact-finder. In my opinion, the hearing officer properly admitted Sizemore's appraisal and considered the testimony of the Appellant's appraiser, M. A. Allgeier.
College Heights argues, and the majority agrees, that the date of the assessment must be as of January 1, 2008, that it must be for fair cash value, and that it be what it is worth in money as determined in a voluntary cash sale. It also asserts that the age and depreciation of this subject property makes the replacement cost method inappropriate. Finally, College Heights argues that none of the witnesses at the hearing relied on this method.
What College Heights does not mention in its argument, however, is that the Board made specific findings as to the age and depreciation of the property. As a result, they found the property was not worth the $2,000,000 that Sizemore had testified to and, instead, determined that $1,440,000 was a more appropriate assessment. In Schore , 736 S.W.2d at 30, a panel of our Court set forth that "[w]hen the taxpayer appeals, the question on appeal is whether, under all the evidence, the taxpayer's claim was so strongly proved that a reasonable and fair-minded trier of the facts was compelled to find in the taxpayer's favor." I do not find this to be the case in this action.
In this case, the Board found that, due to the property being Section 8 housing and the age of the property, it was worth $1,440,000. I believe that the assessment was based upon substantial evidence and that the Board was correct in its deviation from the original assessment by Sizemore. Thus, I would affirm the decision of the Knox Circuit Court. BRIEFS AND ORAL ARGUMENT
FOR APPELLANT:
Jane D. Lollis
Louisville, Kentucky
Bixler W. Howland
Louisville, Kentucky
BRIEF AND ORAL ARGUMENT
FOR APPELLEES:
John W. Dixon
Barbourville, Kentucky