Opinion
No. 354 C.D. 2013
11-08-2013
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 ANNE E. COVEY, 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 from 2008 through 2013. For the reasons that follow, we vacate and remand.
LMC owns a 52.25-acre office, research and industrial center (Property) for its Commercial Space Systems Division located in Newtown Township in southeastern 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 to the rear of the building 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. On May 4, 2007, Council Rock School District (District) filed an appeal 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.
The trial court determined that:
[T]he proper assessment value of the Property is as follows:(Trial Court Opinion dated February 11, 2013, at 18.)
[1.] The assessed value for 2008 is $5,862,948.
[2.] The assessed value for 2009 is $6,297,060.
[3.] The assessed value for 2010 is $5,724,261.
[4.] The assessed value for 2011 is $8,009,320.
[5.] The assessed value for 2012 is $8,303,240.
[6.] The assessed value for 2013 is $7,935,840.
Before the trial court, Maureen Mastroieni (Mastroieni), a tax appraiser and President of Mastroieni and Associates, a real estate appraisal firm, testified on behalf of 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, either occupied by single or multiple tenants, was the highest and best use. She said the buildings were modern, well designed, functional and in demand. In arriving at her opinion of market value, she stated that she considered comparable sales, both of vacant land and other improved, similar properties, but that closely comparable sales of similar properties were few in number. Mastroieni testified that the next step was considering functional utility of the Property, considering the operating costs and adaptability of the Property's use in light of the office and industrial use markets, and in 2007, the markets were rising and vacancy was decreasing; moreover, potential buyers' industries — especially telecommunications and other research-based industries, such as pharmaceuticals — were enjoying growing employment numbers. Thus, the functional utility of the Property was good as well. 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, because comparable sales in the area "were not super-comparable," (Reproduced Record [R.R.] at 24a), Mastroieni testified that the cost approach method was a more reliable method to value the Property. Based on the factors she took into consideration, Mastroieni testified that she determined that the building and site improvements were valued at $95,142,900 in 2008, and the value of the land alone was $5,225,000. After determining the value of the improvements, she considered depreciation. To that end, she testified that the office building was 30 years old and, therefore, had "substantial depreciation, 66.7 percent." (Id. at 19a.) She said the R&D building was 10 years old and, therefore, depreciation on that building was only 22 percent. After taking depreciation into consideration and then adding the value of the land, the cost approach value of the Property was determined to be $72,800,000 in 2008. She said "no functional obsolescence and no external obsolescence which would come from a market or specific industry events." (Id.) Mastroieni presented her appraisals for the subsequent tax years, which evinced 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 depreciation and adding the land value, because while vacancies in similar properties had gone up, revenues of potential buyers had gone up as well; she also accounted for inflation. In 2010, the value of the improvements decreased to $99,085,300, and the depreciated value of the Property, including the land, was $71,100,000. In 2011, the value of the buildings and improvements increased to $116,712,400, and the total value of the Property after depreciation and the land were considered was $83,500,000 because of the improvements made to the Property in 2010.
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, ___ Pa. ___, 53 A.3d 685 (2012) (quoting Appeal of Property of Cynwyd Investments, 679 A.2d 304, 308 n.2 (Pa. Cmwlth. 1996)).
Mastroieni testified that she valued the improvements based upon the replacement method, which "looks at it a little bit more like the market looks at it," (R.R. at 18a), considering each section's individual use. The other method, the replacement method, looks at the cost of exactly replicating the improvements.
Mastroieni said the depreciated value of the improvements and buildings was $67,563,700. (R.R. at 20a.)
For 2009, the physical depreciation was 68.9 percent for the office building and 24.4 percent for the R&D building.
Depreciation for 2010 was determined to be 71.1 percent for the office building and 26.7 percent for the R&D building.
Depreciation was 73.3 percent for the office building, 27.8 percent for the R&D building, and did not apply to the new conference center.
On cross-examination, Mastroieni testified that in determining the value of the Property, she looked at it as if it were vacant and for sale, not taking LMC's machinery and other removable fixtures into consideration. She said that she did not take the profitability of LMC or the Property's contribution to LMC's profits into account when determining the value. In reviewing 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 because there was a lack of sales to compare. She explained 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), a certified real estate appraiser, testified for the taxpayer as to his opinion and, like Mastroieni, Bott considered the highest and best use of the Property to be "office and industrial development consistent with current zoning." (Id. at 72a.) He explained that a downturn in the market "and shrinking demand for properties similar to the subject" led to the decreased values for 2009 and 2010. He said 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. However, 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 74a.) He testified that demand declined because of the downturn in the market, which had an effect of a five percent downward adjustment between 2007 and 2009, and another five percent 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 percent and included "physical, functional and external obsolescence," (Id. at 68a), and that he based his depreciation determinations on comparable sales. This included a devaluing of 15 to 20 percent based upon functional obsolescence, which included issues such as excessive ceiling height in the R&D building. Another 20 percent came from external obsolescence, which included outside matters such as employment and market trends. Finally, about 20 percent came from physical depreciation of the Property, which "varies slightly because of the age over the four years." (Id. at 70a.) Based on his opinion, the replacement cost of the buildings was $66,617,025 in 2007, but after factoring in the 60 percent depreciation rate based on the cost approach assessment, his opinion of fair market value was $37,100,000. Depreciation increased slightly in 2009, and in 2010, Bott adjusted depreciation to 65 percent, 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.
Bott's appraisal reports indicate that total depreciation as of August 1, 2007, was 60 percent; it increased to 62.5% by January 1, 2009; 65 percent by January 1, 2010; and remained at 65 percent for the 2011 tax year. (R.R. at 912a-914a.)
On cross-examination, Bott testified that there were notable differences between the comparable sales; for example, one of the properties, located in a Detroit, Michigan suburb, was approximately 79 percent office space, which is more than the Property contains. While there were differences, he said the properties were physically and functionally comparable. His gross adjustment between the Property and comparable sales ranged from 60 percent to 140 percent, taking into consideration market conditions, location, improvement quality, functional utility and land-to-building ratio, among other issues. With respect to his cost approach estimate, Bott said that he excluded "[a]nything that was process specific" from his assessment. (Id. at 104a.) In reviewing Marshall & Swift, Bott admitted that it advised not to utilize comparable sales from one's sales comparison assessment in calculating the cost approach assessment, which Bott had done in his assessment; however, he disagreed that this approach caused redundancy in the analysis.
Paul Griffith (Griffith), a member of the Appraisal Institute, was called by LMC to give a critique of Mastroieni's report. He testified that in addition to reviewing both Mastroieni's and Bott's reports, he inspected the Property and did an external inspection of the comparable sales within the reports. With regard to Mastroieni's report, her Class C designation of the office building should have been Class A, and the conference center should have been identified as a Class D building rather than Class C. He said that designation increases the cost. He agreed that the office building was in good or very good condition, but he did not believe that her upward adjustment in the values per square foot in the different Property buildings between her estimates was proper. Griffith further testified that he believed the price per square foot should have actually been $76.18, taking the number provided by Marshall & Swift and decreasing it by 30 percent because the Marshall & Swift valuation considers an "excellent" subject and he considered the property "good." (See id. at 120a.) He agreed, however, that determining whether a property should be considered good, excellent or in between is subjective and up to the appraiser. He also said that doing a cost analysis of each individual section of a building is only appropriate if additional adjustments are made, noting:
[W]hen you look at Marshall and you look at that $108.83 a square foot, essentially you're building a four-sided building with a roof and all the improvements that would go with that specific building. So when you do it five times you're creating ... 16 extra walls ... four extra heating systems ... and all those things become duplicated.(Id. at 121a.)
Griffith testified that Mastroieni evidently did not take this into consideration in her assessment. He further said that he did not know why Mastroieni made a downward adjustment in the per-square-foot values of multiple areas of the Property, as it was not detailed in the report. He also noted that an inefficient heating system in the office building was not accounted for and that there should have been discussion on functional obsolescence of the high-bay area and clean space in the R&D building, as those features may or may not hold value to another owner. Griffith further testified that he viewed Mastroieni's determination that no external obsolescence existed "illogical relative to the previous statements in the report which talked about soft demand," (Id. at 127a), and the economy and its effect on the real estate market should have been considered; if external obsolescence was considered, it would have decreased the assessment. He referred to Mastroieni's analysis under the comparable sales method as "suspect," noting that most of the sales involved multi-tenancy when she had concluded that the best use of the Property was a single user with the possibility of two. (Id. at 129a.)
On cross-examination, Griffith testified that where the office building should have been deemed Class A, rather than Class C, the change in designation would result in an increase in value of $2,741,775. He also said that while the total square footage was correct in Mastroieni's cost analysis of the buildings, it still appeared to treat different sections within a single building as multiple buildings. He also agreed that the appraisers may make adjustments to the values provided in Marshall & Swift, but noted that there was no explanation for the adjustments within the report.
Michael Samuels (Samuels), a certified real estate appraiser, was called by the District to critique Bott's report and noted "a lot of issues." (Id. at 137a.) First, he said that the report is described as a self-contained appraisal report, but that it did not meet the definition of such a report as it was defined by the Uniform Standards of Professional Appraisal Practice. This, he said, made review difficult because the report failed to provide adequate information in several areas. Samuels further testified that the comparable sales were not consistent with the highest and best use as determined by Bott, and he characterized adjustments made in the comparisons as "extreme." (Id. at 138a.) He said that the locations were not comparable except for three properties in the suburban Philadelphia area, and the appraisal failed to address "variations in economic obsolescence that might have existed between the location of the improved sales and the subject property." (Id.) Moreover, an appraiser cannot adjust for highest and best use in a sales comparison like he can for physical and functional differences. With regard to Bott's cost analysis, Samuels testified that Bott erroneously eliminated a number of elements that he deemed process-related without fully disclosing what he had eliminated in his calculations. He further said that accrued depreciation is overstated either because of the bad comparable sales used or because depreciation was calculated on replacement costs based upon the bad comparable sales. Samuels also testified that Bott's assessment should not be accepted because "he produce[d] a report that says [he] ... looked at assessment records and [] talked to a bunch of people, and this is my conclusion. That would violate every standard ... in the book." (Id. at 141a.) Finally, he said Bott should have relied on the cost approach or at least found better sales to compare.
On cross-examination, Samuels testified that there was "a lot of leeway" with regard to how precise a report must be worded, but that he did not believe that Bott's determination that the highest and best use of the Property "includes but is not limited to continued use as an office/testing/production facility and other uses, such as lab and research and development," (Id. at 142a), because it indicates that alternative uses might suffice, but those uses could devalue the property and are not, therefore, the highest and best use. He agreed that over the past few decades, there has been a decline in demand for manufacturing properties over 300,000 square feet in size. Finally, he testified that while he noted numerous deficiencies in Bott's appraisal, he had no input as to the true market value of the Property.
Based on the testimony and evidence presented at trial, 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. (Trial Court Opinion dated February 11, 2013, at 4.) 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 percent, as well as his external obsolescence decrease of 5 percent from 2008 to 2009 and again in 2010 as credible. The trial court further deemed Samuels' and Griffith's testimony "superfluous to this matter." (Trial Court Opinion dated February 11, 2013, at 5.)
In a tax assessment case, the trial court's role is to independently determine a property's market value based on competent, credible and relevant evidence. Gilmour Properties v. Board of Assessment Appeals of Somerset County, 873 A.2d 64, 66 n.3 (Pa. Cmwlth. 2007). The trial judge is not to independently value the property, but rather weigh conflicting testimony and values set forth by experts "and arrive at a valuation based on the credibility of their opinions." Macy's, Inc. v. Board of Property Assessment, Appeals and Review of Allegheny County, 61 A.3d 361, 365 (Pa. Cmwlth. 2013).
Upon reaching these findings of fact, the trial court determined that "the fair market values" for the tax years under appeal are as follows:
1. Tax year 2008: $64,428,000.(Id. at 5-6.)
2. Tax year 2009: $66,990,000.
3. Tax year 2010: $59,013,000.
4. Tax year 2011: $73,480,000.[]
5. Tax year 2012: $73,480,000.
6. Tax year 2013: $73,480,000.
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 functional and external obsolescence set forth by Bott were proper, as Mastroieni's depreciation calculations did not sufficiently address these factors.
The trial court, therefore, concluded that it "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." (Id. 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. This appeal followed.
Our scope of review in an appeal of a tax assessment is limited to determining whether the trial court abused its discretion, committed an error of law, or whether its decision is supported by substantial evidence. Westinghouse Electric Corp. v. Board of Property Assessment, 539 Pa. 453, 459, 652 A.2d 1306, 1309 (1995). While the weight of the evidence is before us for review, the trial court's findings of fact are entitled to great weight and should only be reversed for clear error. Chatfield v. Board of Revision of Taxes, 346 Pa. 159, 161, 29 A.2d 685, 686 (1943).
I.
LMC argues that the trial court improperly employed a "value-in-use" in making its determination in violation of our Supreme Court's holding in F&M Schaeffer Brewing Co. v. Lehigh County Board of Appeals, 530 Pa. 451, 458, 610 A.2d 1, 4 (1992) ("Value-in-use, therefore, is not a reflection of fair market value and is not relevant in tax assessment cases because only the fair market value (or value-in-exchange) is relevant in tax assessment cases.") (emphasis in original). Specifically, it contends that Mastroieni based her replacement cost estimations on how LMC was using parts of the Property.
F&M Schaeffer involved a case in which the appraisers calculated replacement costs, including machinery and equipment, then "estimated a one-third real estate to two-thirds machinery and equipment ratio." 530 Pa. at 459, 610 A.2d at 5. The Court determined that the "experts postulated a hypothetical model production plant with the only similarity to the subject property being its 3.5 million barrel per year capacity ... without any pretense of replicating the same physical characteristics of the actual real estate being assessed because their only aim was to value the property based on its use." Id. at 460, 610 A.2d at 5.
In this case, however, Mastroieni estimated replacement costs by category, such as manufacturing, high bay manufacturing, laboratory and so on, assigning each category a dollar-per-square-foot replacement cost value and did not consider any machinery or equipment. As the trial court pointed out, her calculations did not consider the value of things such as acoustic rooms, vibration floor slabs, special piping and chilling equipment because those features were specific to LMC's use of the Property, and she did not consider the company's profits. Where F&M Schaeffer considered replacement costs for the exact same brewery use with the same capacity, Mastroieni's valuation of the Property considered replacement costs in line with the Property's highest and best use as an office complex and research and design facility and valued the "major components of the property" in their current condition. Id. at 460 n.3, 610 A.2d at 5 n.3. Accordingly, the trial court did not err in accepting Mastroieni's cost method for determining the Property's fair market value.
LMC also objects to the trial court's acceptance of Mastroieni's calculation of different values per square foot depending on the use areas of the building, alleging that separating sections of the building creates additional walls, heating systems, elevators and so on. However, as the trial court emphasized, calculating these different values for the different areas best captures the varying expenses to create the different spaces. Both appraisers testified that the highest and best use of the Property was a mixed use of office space and research and design facilities; it logically follows that since the different components would face different replacement costs, a mixed-use building such as the R&D building would be broken into separate components. LMC now suggests that the same value per square foot should be applied uniformly for the R&D building; however, the trial court's decision to accept Mastroieni's methodology was supported by substantial evidence in the form of extensive testimony, lengthy exhibits and values provided by Marshall & Swift, which both parties accepted as authoritative.
II.
The primary issue in this case is whether the trial court, in accepting Bott's calculations as to functional and external obsolescence, erred by not applying those factors against Mastroieni's cost approach, which includes physical deterioration.
Regarding those factors, Bott's testimony clearly states that he arrived at the 15 to 20 percent number as being 15 to 20 percent of the total value, not 15 to 20 percent of the total depreciation fraction, which is shown in the following exchange between the trial court and Bott:
THE COURT: ... What I want to know is what makes up the remainder of the 60 percent ...
THE WITNESS: It's composed of physical depreciation, functional obsolescence which I said was 15 to 20 percent and then external obsolescence [which was determined to be 20 percent].
THE COURT: What's physical depreciation, what percentage?
THE WITNESS: Around 20 percent. That varies slightly because of the age over the four years.(R.R. at 70a.) Adding these numbers — 20 percent for physical depreciation, 20 percent for external obsolescence, and 15 to 20 percent for functional obsolescence — establishes a total of 55 to 60 percent that Bott was going to depreciate the Property from the value of his cost approach.
A. Functional Obsolescence
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.
While Bott testified that functional obsolescence was 15 to 20 percent, the trial court apparently took that to mean 15 to 20 percent went to the 60 percent total depreciation (that is, 15 percent of 60 percent would be 9 percent of the overall value and 20 percent of 60 percent would be 12 percent of the overall value). Because it accepted Bott's testimony as credible regarding functional obsolescence, the trial court was bound to apply 15 to 20 percent depreciation for this factor against Mastroieni's cost approach value rather than against the 60 percent of total depreciation. Accordingly, the trial court must either recalculate the rate of functional obsolescence on remand or explain its basis for applying the rate that it used.
B. External Obsolescence
"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).
The trial court accepted Bott's testimony as to external obsolescence and, applying that testimony, concluded that external obsolescence depressed the value of the Property 5 percent in tax years 2008 and 2009 and another 5 percent in 2010, and LMC argues that external obsolescence accounted for an approximately 20 percent depreciation in the Property's value.
The Court resolved this by deducting 2.5 percent from the 2008 value and another 2.5 percent from the 2009 value.
Bott testified that the impact of the recession on the Property's value "was five percent between 2007 and January 1st, 2009 and another downward adjustment of five percent from 2009 to 2010." (R.R. at 62a.) This adjustment was reflected in the trial court's opinion. However, Bott later testified that the "overall ... external obsolescence depreciation is about 20 percent." (Id. at 70a.) He explained that there are two factors which reduced the Property's value with regard to external obsolescence: the size of the Property at more than 400,000 square feet and the economic conditions at the time of the valuations. It appears from the trial court's opinion that it failed to take the former element of external obsolescence into account; in its discussion of external obsolescence, it discusses only the economic climate and utilizes only those 5 percent adjustments. Because 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.
C. Land Cost Depreciation Calculation
LMC next argues that the trial court improperly included the land value within the values to which it applied the depreciation ratios and made deductions for functional and external obsolescence on replacement cost values which were already reduced for depreciation.
As discussed supra, Mastroieni concluded that the value of the Property after depreciation was factored in was $72,800,000 in 2008, $77,000,000 in 2009, $71,100,000 in 2010, and $80,700,000 in 2011; this included the value of the land, which was set at $5,225,000 each year. The trial court reduced the 2008 value by 11.5 percent — 2.5 percent for external obsolescence and 9 percent for functional obsolescence — to arrive at the fair market value of $64,428,000 for the Property for 2008. The same methodology was applied for the following years. Setting aside the improper rates used for functional and external obsolescence which must be corrected on remand, the depreciation amounts should not have been applied to the value of land. "Using the cost approach, the value of a property is determined by estimating the construction cost, subtracting accrued depreciation, and adding the estimated land value." Lancaster v. County of Lancaster, 599 A.2d 289, 293 (Pa. Cmwlth. 1991), appeal denied, 530 Pa. 634, 606 A.2d 903 (1992). Mastroieni's report also advances this application, noting that "[t]he replacement cost of the improvements is estimated and then reduced by the amount of physical depreciation and functional and economic obsolescence in the property on the valuation date. The current value of the property is the sum of the land value and the depreciated value of the improvements." (R.R. at 200a.) Thus, the functional and external obsolescence rates should have only been applied to the replacement costs advanced by Mastroieni and not land value.
Depreciation and obsolescence are considered together. See Jackson v. Board of Assessment Appeals of Cumberland County, 950 A.2d 1081 (Pa. Cmwlth. 2008).
Additionally, LMC contends that the trial court applied its functional and external obsolescence rates to values to which depreciation had already been applied. It stresses that Marshall & Swift provides that total depreciation is the sum of physical deterioration, for which Mastroieni accounted, as well as functional and external obsolescence. We agree. "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." In re: PP&L, Inc., 838 A.2d 1, 24 (Pa. Cmwlth. 2003) (citing Springdale Township v. Allegheny County Board of Property Assessment, Appeals and Review, 467 A.2d 74 (Pa. Cmwlth. 1983)). PP&L notes that the depreciation includes "all forms of obsolescence." Id. 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.
III.
Accordingly, the trial court's decision is vacated and this matter is remanded for recalculation of fair market values for tax years 2008 through 2013. On 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.
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 percent, and by adding the 35 to 40 percent that Bott found for economic and functional obsolescence would mean the office building would have deteriorated by 108.3 to 113.3 percent, making it worth less than nothing under the cost approach. --------
/s/_________
DAN PELLEGRINI, President Judge ORDER
AND NOW, this 8th day of November, 2013, the order of the Court of Common Pleas of Bucks County, dated February 11, 2013, is vacated and this matter is remanded for recalculation of fair market values for tax years 2008 through 2013 in accordance with this opinion. Jurisdiction relinquished.
/s/_________
DAN PELLEGRINI, President Judge