Opinion
No. 826 C.D. 2014
01-06-2015
In Re: Appeal of Council Rock School District from the Decision of the Bucks County Board of Assessment Appeals Dated: November 9, 2007 Tax Parcel #29-010-075-004 Municipality: Newtown Township Assessment for Year: 2008 Property of: LMC Properties, Inc. Appeal of: LMC Properties, Inc.
BEFORE: HONORABLE DAN PELLEGRINI, President Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE JAMES GARDNER COLINS, Senior Judge
OPINION NOT REPORTED
MEMORANDUM OPINION BY PRESIDENT JUDGE PELLEGRINI
LMC Properties, Inc. (LMC) appeals from an order of the Court of Common Pleas of Bucks County (trial court) reversing the Board of Assessment Appeals of Bucks County (Board) and designating new assessment values for its property from 2008 through 2013 following a remand by this Court. We affirm.
LMC owns a 52.25-acre office, research and industrial center (Property) for its Commercial Space Systems Division located in Newtown Township, Bucks County. The Property contains three buildings: a 69,500 square foot office building (office building) built in 1974 with a cafeteria that was added in 1997; a 355,127 square foot office, laboratory and manufacturing space (R&D building) built in 1997 that had a small addition built on in 2010; and a conference center which was built in 2010 and was added to the Property market valuation in the 2011 tax year. Council Rock School District (District) appealed to the Board challenging the Property's tax assessment for 2008 and subsequent tax years. The Board denied the appeal, and the District appealed to the trial court.
Before the trial court, Maureen Mastroieni (Mastroieni), a tax appraiser, testified for the District that she had prepared appraisal reports for the Property setting forth her opinion of market value for the 2007 through 2011 tax years. She testified that the present use of the Property, as an office and research and development complex, was the highest and best use. In determining market value, she testified that she considered comparable sales, both of vacant land and other improved, similar properties, but that there were few closely comparable sales. Based on the sales comparison approach value, her opinion was that the fair market value was $72,000,000 for the 2008 tax year.
However, Mastroieni testified that the cost approach method was a more reliable method to value the Property. She testified that based on the factors she took into consideration, she determined that the building and site improvements were valued at $95,142,900 in 2008 based on the replacement method, and that the value of the land alone was $5,225,000. After determining the value of the improvements, she considered depreciation, testifying that the office building was 30 years old and, therefore, had "substantial depreciation, 66.7 percent." (Reproduced Record (R.R.) at 60a, 61a, 309a). She said the R&D building was ten years old and, therefore, depreciation on that building was only 22 percent. (Id. at 61a, 309a). After taking depreciation into consideration and valuing the improvements at $67,563,700, and then adding the value of the land, the cost approach value of the Property was $72,800,000 in 2008. (Id. at 62a, 311a). She indicated that while they were considered, there was "no functional obsolescence and no external obsolescence which would come from a market or specific industry events." (Id. at 61a). As a result, she assigned $0 for each in the accrued depreciation of the Property for 2008. (Id. at 311a).
Section 8842 of the General County Assessment Law provides, in relevant part, that "[i]n arriving at the actual value, the following methods must be considered in conjunction with one another ... [c]ost approach, that is, reproduction or replacement, as applicable, less depreciation and all forms of obsolescence." 53 Pa. C.S. §8842(b)(iii)(A). Specifically, an appraiser is charged with "(1) estimating the value of the land assumed vacant and available for its highest and best use; (2) estimating the reproduction cost or cost new of the facility; (3) subtracting from the latter amount the facility's depreciation; and (4) adding to this depreciated balance the value of the land." Tech One Associates v. Board of Property Assessment, 974 A.2d 1225, 1230 n.8 (Pa. Cmwlth. 2009), aff'd, 53 A.3d 685 (Pa. 2012) (citation omitted).
See In re PP&L, Inc., 838 A.2d 1, 24 (Pa. Cmwlth. 2003) ("The cost approach uses the following formula: 1) the estimated value of the land, which is assumed to be vacant and available for its highest and best use, added to 2) the estimated reproduction cost of the facility less depreciation.") (citation omitted).
Functional obsolescence is either curable or incurable functional obsolescence. "Curable functional obsolescence" is defined as "an element of depreciation; a curable defect caused by a flaw in the structure, materials, or design." DICTIONARY OF REAL ESTATE APPRAISAL, 71 (4th ed. 2002). "Incurable functional obsolescence" is defined as "a defect cause by a deficiency or superadequacy in the structure, materials, or design, which cannot be practically or economically corrected." Id. at 144.
"External obsolescence" is defined as "an element of depreciation; a defect, usually incurable, caused by negative influences outside a site." DICTIONARY OF REAL ESTATE APPRAISAL, 106 (4th ed. 2002).
Mastroieni presented her appraisals for the subsequent tax years which showed that the cost approach value of the improvements was $104,075,400 in 2009, making the total value of the Property $77,000,000 after accounting for the accrued physical depreciation for the office building at 68.9% and at 24.4% for the R&D building, and adding the land value; she also accounted for inflation. In 2010, the value of the improvements decreased to $99,085,300, and accounting for accrued physical depreciation for the office building at 71.1% and 26.7% for the R&D building, the value of the Property, including the land, was $71,100,000. (R.R. at 70a, 431a, 434a). In 2011, the value of the buildings and improvements increased to $116,712,400, and the total value of the Property after considering accrued physical depreciation for the office building at 73.3% and 27.8% for the R&D center and the land were considered was $83,500,000 because of the improvements made to the Property in 2010.
On cross-examination, Mastroieni acknowledged that in her initial report on the Property, she said that it was a special purpose property with a limited market and that there were no similar recent leases in the area, so any estimation as to the market rent would be subjective. She said that this was why she determined that a cost analysis approach was appropriate and more reliable due to the lack of sales to compare. She explained the differences in the values per square foot in the different Property buildings between her estimate and the values provided in Marshall & Swift's Appraisal of Real Estate (Marshall & Swift), a popular assessment treatise, where the treatise provided for $108.83 per square foot, and she adjusted upward to $128.83, noting that the class of building referenced in the manual did not exactly match the Property in all aspects, so she adjusted accordingly to better reflect the Property's true value. She said she did not assess anything that was "peculiar" to LMC, such as furniture and laboratory equipment, and that she eliminated replacement costs of some specific features that an entity replacing the facility would not view as necessary, such as acoustic rooms, vibration floor slabs, special piping and chilling equipment.
THE APPRAISAL INSTITUTE, THE APPRAISAL OF REAL ESTATE (13th ed. 2008). Both parties agreed that Marshall & Swift is an authoritative text in appraisal practice.
William Bott (Bott), another appraiser, testified for LMC and, like Mastroieni, considered the highest and best use of the Property to be "office and industrial development consistent with current zoning." (R.R. at 129a.) He explained that he developed his assessment based on the sales comparison and cost approaches, but considered the sales comparison approach because he felt that provided the best reflection of how the Property would actually do in the market. While Mastroieni considered a more immediate area, Bott considered "the Mid-Atlantic region as well as the adjoining regions of [N]ew England and the upper Midwest." (Id. at 131a). He testified that demand declined because of the market downturn which had an effect of a 5% downward adjustment between 2007 and 2009, and another 5% between 2009 and 2010. Using the comparable sales approach, Bott assessed the value of the Property as $36,500,000 as of August 1, 2007; $35,500,000 as of January 1, 2009; $32,800,000 as of January 1, 2010; and $36,000,000 as of January 1, 2011.
Bott testified that overall, his depreciation estimate on the replacement costs of the buildings and site improvements ranged from 60 to 65% and included "physical, functional and external obsolescence," (R.R. at 125a), and that he based his depreciation determinations on comparable sales. This included a devaluing of 15 to 20% based upon functional obsolescence, which included issues such as excessive ceiling height in the R&D building. Another 20% came from external obsolescence, which included outside matters such as employment and market trends. Finally, about 20% came from physical depreciation of the Property, which "varies slightly because of the age over the four years." (Id. at 127a). Based on his opinion, the replacement cost of the buildings was $66,617,025 in 2007, but after factoring in the 60% depreciation rate based on the cost approach assessment, his opinion of fair market value was $37,100,000. Because depreciation increased slightly in 2009 and 2010, Bott adjusted depreciation to 65%, which he maintained for 2011. However, despite his analysis of the cost approach, he maintained that he believed the sales extraction method he utilized, comparing similar properties in multiple locations, was the most reliable because it involved actual transactions.
His appraisal reports indicate that total depreciation as of August 1, 2007, was 60%; it increased to 62.5% by January 1, 2009; 65% by January 1, 2010; and remained at 65% for the 2011 tax year. (R.R. at 813a-815a).
Paul Griffith, a member of the Appraisal Institute, was called by LMC to give a critique of Mastroieni's report and Michael Samuels, a certified real estate appraiser, was called by the District to critique Bott's report, but the trial court ultimately found their testimony to be "superfluous to this matter." (2/11/13 Trial Court Opinion at 5).
Based on the testimony and evidence presented, the trial court rejected the mixed cost approach and comparable sales approach values suggested by Mastroieni, but found her testimony "that the cost valuation method is the appropriate method to calculate the fair market value of the Property is credible" and accepted her cost approach valuations. The court found Bott's appraisal on the basis of the sales comparison method not credible because the comparable properties were not sufficiently similar to the Property for a credible sales comparison valuation to be made. However, Mastroieni's testimony regarding her exclusion of functional and external obsolescence were deemed not credible and the court accepted Bott's functional obsolescence determination of 15 to 20%, as well as his external obsolescence decrease of 5% from 2008 to 2009 and again in 2010 as credible.
Upon reaching these findings of fact, the trial court determined that "the fair market values" for the tax years under appeal were: (1) $64,428,000 for the 2008 tax year; (2) $66,990,000 for the 2009 tax year; (3) $59,013,000 for the 2010 tax year; and (4) $73,480,000 for the 2011, 2012 and 2013 tax years. (2/11/13 Trial Court Opinion at 5-6.)
The trial court found that the cost method was the most credible method for determining the value of the Property because it best reflected the mixed-use aspects of the Property. While LMC objected to the separate value calculations for each space within a building, the court held that using different values best captured the varying expense of replacing those areas. It further determined that Mastroieni's cost calculations, condition classifications and upward adjustments for finish and upgrades in the R&D building were credible. However, the court further opined that the functional and external obsolescence set forth by Bott were proper, as Mastroieni's depreciation calculations did not sufficiently address these factors.
As a result, the trial court "arrived at the final fair market values by summing the external and functional obsolescence values offered by Bott, and subtracting those sums from the cost valuation calculations offered by Mastroieni, which included depreciation." (2/11/13 Trial Court Opinion at 17). It set the assessment values at $5,862,948 for 2008; $6,297,060 for 2009; $5,724,261 for 2010; $8,009,320 for 2011; $8,303,240 for 2012; and $7,935,840 for 2013, (id. at 18), and LMC appealed.
On appeal, this Court initially noted that Bott's testimony established that he was going to depreciate 55 to 60% of the total value of the Property under his approach based on 20% for physical depreciation, 20% for external obsolescence, and 15 to 20% for functional obsolescence. In re Appeal of Council Rock School District, (Pa. Cmwlth. No. 354 C.D. 2013, filed November 8, 2013), slip op. at 16. However, we explained that with respect to the application of functional obsolescence values, "[w]hile Bott testified that functional obsolescence was 15 to 20[%], the trial court apparently took that to mean 15 to 20[%] went to the 60[%] total depreciation (that is, 15[%] of 60[%] would be 9[%] of the overall value and 20[%] of 60[%] would be 12[%] of the overall value)." Id. We held that because the trial court accepted Bott's testimony regarding functional obsolescence as credible, it was bound to apply 15 to 20% depreciation for this factor against Mastroieni's valuation rather than against the 60% of total depreciation. Id. As a result, we remanded the matter to the trial court to "either recalculate the rate of functional obsolescence on remand or explain its basis for applying the rate that it used." Id.
With respect to external obsolescence, we noted that Bott testified that there were two factors which reduced the Property's value: its size at more than 400,000 square feet and the economic conditions. We explained that while Bott testified that overall, external obsolescence depreciation was 20%, the impact of the recession on the Property's value was 5% between 2007 and 2009 with another 5% downward adjustment from 2009 to 2010. We stated that while the trial court accepted Bott's testimony regarding external obsolescence, it concluded that it only reduced the value of the Property a total of 5% for the 2008 and 2009 tax years, at 2.5% per year, and another 5% in 2010. We found that the trial court only addressed the economic climate in its discussion of external obsolescence and only applied the applicable 5% adjustments and, therefore, failed to take into account the other element of Bott's total external obsolescence deduction. As a result, we stated that "[b]ecause the trial court may have credited Bott's opinion on external obsolescence only with regard to the recession factor, we must remand for the trial court to make findings as to the credibility of Bott's testimony or, alternatively, what portion it deemed credible taking the testimony into consideration." In re Appeal of Council Rock School District, slip op. at 17.
Finally, we noted that the trial court reduced Mastroieni's Property valuations by 11.5% (2.5% for external obsolescence and 9% for functional obsolescence) after depreciation had been factored in for each year to arrive at the fair market value. In re Appeal of Council Rock School District, slip op. at 18. Ignoring the improper functional and external obsolescence rates that would be corrected on remand, we held that the functional and external obsolescence rates should have only been applied to Mastroieni's replacement costs and not to the land value because the valuation of the Property is the sum of the land value and the depreciated value of the improvements. We also held that depreciation and obsolescence should have been considered together, and that the trial court erred in subtracting obsolescence from an already reduced value.
Based on the foregoing, we vacated the trial court's decision and remanded the case for the recalculation of fair market values for the Property for the 2008 through 2013 tax years. In re Appeal of Council Rock School District, slip op. at 19. We specifically directed that "[o]n remand, the trial court is to make a new determination, including credibility determination, as to what economic and functional rates should be based on a correct understanding of Bott's testimony and then add the value of the land to reach the proper fair market value." Id. at 19-20 (footnote omitted).
We additionally noted the following:
Part of the problem is the difference in how Mastroieni and Bott valued the property. Mastroieni's cost approach made separate valuations and separate calculations for each of the component buildings while Bott valued and depreciated all the component buildings at the same value and the same rate of deterioration. This difference in approach creates problems when applying Bott's functional and external obsolescence rates to Mastroieni's cost value. For example, for tax year 2011, Mastroieni depreciated that office building by 73.3[%], and by adding the 35 to 40[%] that Bott found for economic and functional obsolescence would mean the office building would have deteriorated by 108.3 to 113.3[%], making it worth less than nothing under the cost approach.
On remand, the parties agreed that no new evidence was necessary and the trial court considered the record, along with the briefs and argument of counsel. The trial court first found Mastroieni's "all-inclusive method" of calculating the Property's valuation to be credible, noting that it had previously erred in subtracting functional and external obsolescence from her calculations because she testified that they already included depreciation for functional obsolescence and that external obsolescence did not apply to the Property. The court determined that it had previously "improperly subtracted an additional percentage for functional obsolescence because it misunderstood that it was already considered in the total calculations of deduction." The court noted that it originally found credible Mastroieni's testimony of the cost valuation method for calculating the Property's fair market value and, on remand, it found her "entire testimony credible, including her final calculations." (4/15/14 Trial Court Opinion at 8).
The trial court also noted that it originally found not credible Bott's testimony using the sales comparison method for valuing the Property, but applied his obsolescence rates calculated under that approach to Mastroieni's cost method calculations. However, the court held that this resulted in an improper valuation because Mastroieni's cost valuation already included depreciation and considered the effect of external and functional obsolescence. The court cited the foregoing footnote 16 in our opinion noting that a correct calculation would render the Property worth less than nothing. "In light of this realization, and the absurd result, the Trial Court reexamined Bott's testimony in total." (4/15/14 Trial Court Opinion at 9). The court explained that it had already rejected Bott's appraisal as not credible and only looked to his testimony for guidance because of its mistaken belief that Mastroieni had failed to include a calculation for depreciation which rendered the Property worthless. Noting this Court's affirmance of its acceptance of Mastroieni's cost approach valuation, and that accepting Bott's obsolescence proposals would render the Property worthless, the trial court found "Mastroieni's all-inclusive, cost method approach credible in that it already accounts for depreciation and obsolescence." (Id.).
As a result, the trial court found the following fair market values of the Property: $72,800,000 for the 2008 tax year; $77,000,000 for the 2009 tax year; $71,100,000 for the 2010 tax year; and $83,500,000 for the 2011, 2012 and 2013 tax years; and held that the assessed values of the Property are equal to the cost valuation figures submitted by the District which included depreciation. (4/15/14 Trial Court Opinion at 9-10). Accordingly, the trial court reversed the Board's determination and found the following assessed values for the Property: $6,624,800 for 2008; $7,238,000 for 2009; $6,896,700 for 2010; $9,101,500 for 2011; $9,435,500 for 2012; and $9,018,000 for 2013, (id. at 10), and LMC appealed.
The trial court explained that the parties stipulated that its market value determination for the 2011 tax year should apply in 2012 and 2013. (4/15/14 Trial Court Opinion at 10 n.18).
This Court's review is limited to determining whether the trial court committed an error of law or reached a decision not supported by substantial evidence. In re Appeal of Springfield School District, 101 A.3d 835, 841 n.5 (Pa. Cmwlth. 2014) (citation omitted). As we have explained:
An actual or market value must be determined based on competent, relevant evidence. In a tax assessment appeal, the trial court is the fact-finder and has the authority to weigh evidence and make credibility determinations. The trial court's function in a tax assessment is not to independently value the property but to weigh the conflicting testimony and arrive at a valuation based on the credibility of witnesses. The trial court's findings are entitled to great deference, and its decision will not be disturbed absent a clear error.
LMC argues that there is no rational or substantive basis for the trial court to make new credibility determinations regarding Mastroieni's and Bott's external and functional obsolescence evidence in the absence of additional evidence, and that no substantial evidence supports the trial court's new findings based on Mastroieni's newly-credible depreciation evidence because it excludes functional obsolescence and her external obsolescence evidence is inconsistent. We do not agree.
Pa. R.A.P. 2591(a) states, in relevant part, that "[o]n remand of the record the court ... below shall proceed in accordance with the judgment or other order of the appellate court...." A trial court must strictly comply with the mandate of an appellate court on remand. Hanselman v. Consolidated Rail Corporation, 664 A.2d 680, 682 (Pa. Cmwlth. 1995), appeal denied, 673 A.2d 337 (Pa. 1996). As this Court has recently explained, "[w]here a case is remanded for a specific and limited purpose, 'issues not encompassed within the remand order' may not be decided on remand. A remand does not permit a litigant a 'proverbial second bite at the apple.'" Levy v. Senate of Pennsylvania, 94 A.3d 436, 442 (Pa. Cmwlth. 2014) (citations omitted).
As outlined above, in our prior opinion, we initially held that because the trial court accepted Bott's testimony regarding functional obsolescence as credible, it was bound to apply this factor against Mastroieni's valuation rather than against the total depreciation and directed the trial court to "either recalculate the rate of functional obsolescence on remand or explain its basis for applying the rate that it used." In re Appeal of Council Rock School District, (Pa. Cmwlth. No. 354 C.D. 2013, filed November 8, 2013), slip op. at 16. With respect to external obsolescence, we found that the trial court only addressed and applied one of the two factors in Bott's total external obsolescence deduction and remanded "for the trial court to make findings as to the credibility of Bott's testimony or, alternatively, what portion it deemed credible taking the testimony into consideration." Id. at 17. Additionally, we held that the trial court should have considered depreciation and obsolescence together and should have only applied them to Mastroieni's replacement costs and not to the land value. Id. at 18-19. Accordingly, we directed that "[o]n remand, the trial court is to make a new determination, including credibility determination, as to what economic and functional rates should be based on a correct understanding of Bott's testimony and then add the value of the land to reach the proper fair market value." Id. at 19-20.
Based on the foregoing, this Court specifically directed the trial court to reconsider the credibility and weight of Bott's testimony regarding functional and external obsolescence; to consider them together with depreciation; to recalculate the rates to be applied to Mastroieni's replacement costs; and to then add the value of the land in calculating the appropriate fair market value. The trial court clearly had the authority under this mandate to "reexamine[] Bott's testimony in total" and to reverse its initial credibility determinations regarding Bott's and Mastroieni's functional and external obsolescence evidence.
LMC's assertion that the trial court could only reassess its credibility determinations following the reception of additional evidence is specious at best. As indicated, the parties agreed in the trial court that no new evidence was necessary and our mandate did not require the court to consider new evidence while reconsidering the credibility of the evidence already in the record. See, e.g., In re Petition to Contest the General Election for District Justice in Judicial District 36-3-03 Nunc Pro Tunc, 695 A.2d 476, 480 (Pa. Cmwlth. 1997), appeal denied, 729 A.2d 1132 (Pa. 1998) ("Absent direct instruction by the Supreme Court to admit additional evidence on remand, the admission or exclusion of evidence is within the sound discretion of the trial court, and we may reverse only upon a showing that the trial court clearly abused its discretion.") (citation omitted).
Moreover, there is ample substantial record evidence to support the trial court's new fair market and assessed values for the Property based on Mastroieni's newly credible evidence. As extensively outlined above, Mastroieni's testimony and reports demonstrate that she considered both functional and external obsolescence in arriving at the total accrued depreciation to be applied to the improvements under her cost approach and explained why she assigned a zero value for each in arriving at this calculation. (R.R. at 61a; 104a; 105a-106a; 309a-311a; 418a-421a; 431a-434a; 552a-555a). See, e.g., In re Appeal of Council Rock School District, slip op. at 19 ("We agree that it was improper to subtract for obsolescence from an already reduced value, and depreciation and obsolescence should have been considered together."). The foregoing evidence also demonstrates that the accepted fair market and assessed valuations were calculated under the cost approach after taking depreciation into consideration and valuing the improvements and then adding the value of the land in accordance with our remand instructions. (See, e.g., R.R. at 61a; 311a; 421a; 434a; 555a). In sum, on remand, the trial court did not err in accepting as credible Mastroieni's fair market and assessed valuation evidence in whole and rejecting as not credible Bott's functional and external obsolescence evidence; Mastroieni's evidence constitutes substantial competent and relevant evidence to support the trial court's fair market and assessed values of the Property for the relevant tax years; and because the trial court's determinations of fair market and assessed values are based on a credibility determination, they may not be disturbed in this appeal. In re Appeal of Springfield School District, 101 A.3d at 846-47.
The purported inconsistencies in Mastroieni's evidence cited by LMC only go to the weight of this evidence and not its competence to support the trial court's valuations in this case. In re Petition of Viola, 838 A.2d 21, 27 (Pa. Cmwlth. 2003).
Based on our disposition of these claims, we will not accede to LMC's request to have this Court recalculate the Property's fair market and assess values based on the trial court's prior findings of fact. --------
Accordingly, the trial court's order is affirmed.
/s/_________
DAN PELLEGRINI, President Judge ORDER
AND NOW, this 6th day of January, 2015, the order of the Court of Common Pleas of Bucks County dated April 14, 2014, at No. 0709906-26-6, is affirmed.
/s/_________
DAN PELLEGRINI, President Judge
In re Appeal of Council Rock School District, slip op. at 20 n.16.
Id. at 846 (citations omitted). The trial court's determinations of fair market and assessed values may not be disturbed on appeal where they are based on a credibility determination. Id. at 846-47.