Opinion
No. CV 05 4002476
June 26, 2007
MEMORANDUM OF DECISION
This is a real estate tax appeal taken pursuant to C.G.S. § 12-117a from the assessment of property on the Torrington Grand List of October 1, 2004. While the appeal was pending, two new assessment years began, namely October 1, 2005 and October 1, 2006. The pleadings have been amended to include these years in this appeal. This action is also brought pursuant to C.G.S. § 12-119 for wrongful assessment based upon unequal treatment. The matter was tried before this court on April 17 and April 18, 2007, and the parties submitted briefs within 30 days thereafter.
I. Facts
Since before October 1, 2004, Twin City Real Estate LLC has been the owner of the land and improvements located at 28 East Elm Street ("the property") in Torrington. Since before October 1, 2004 the plaintiff, Walgreen Eastern Co., Inc., has been the lessee of the property by virtue of a lease dated April 17, 2001 between Lincoln Torrington, LLC (the prior owner) under which the plaintiff is obligated to pay real estate taxes.
The Torrington Tax Assessor determined that the fair market value of the property was $2,999,300 on the assessment date of October 1, 2003. The assessor then assessed the property at 70% of its fair market value, resulting in an assessment of $2,099,600 The plaintiff appealed to the Torrington Board of Assessment Appeals which declined to hear the appeal. The plaintiff then appealed to this court.
Beginning in 1999 Lincoln Torrington, LLC began assembling parcels to create the 1.934 acres which comprise the property. Total acquisition expense was about $1,488,000. Torrington Lincoln demolished the structures on these smaller parcels and constructed a building in the design of a Walgreen's Pharmacy. The construction costs were about $2,277,000. On April 17, 2001 Lincoln Torrington, LLC leased the property to the plaintiff pursuant to a written 75-year lease at the annual rent of $440,000 ($36,666.67 per month and $29.10 per square foot of leased building area). An unusual feature of this lease is that the rent remains constant for the entire term except for the possibility of increases based upon gross sales. On February 5, 2002 Twin City Real Estate, LLC acquired the property from Lincoln Torrington, LLC for a price of $5,176,500. The sale included the assignment and assumption of the lease with the plaintiff.
The defendant has not raised the issue of the court's subject matter jurisdiction on the ground of the plaintiff's standing to sue. The plaintiff alleges in its complaint that the lease obligates the plaintiff to pay the real estate taxes on the property and that a notice of the lease was recorded on the Torrington Land Records. The defendant admits this allegation. Therefore, the plaintiff has standing to challenge the assessment. C.G.S. Section 12-119; See, Walgreen Eastern Co. v. Town of Southbury, Superior Court, judicial district of Waterbury, Docket No. 06. 4010531 (April 13, 2007) [43 Conn. L. Rptr. 244].
II C.G.S. § 12-117a A. Standard of Judicial Review
The plaintiff's first claim is based upon C.G.S. § 12-117a. "In § 12-117a tax appeals, the trial court tries the matter de novo and the ultimate question is the ascertainment of the true and actual value of the [taxpayer's] property . . . At the de novo proceeding, the taxpayer bears the burden of establishing that the assessor overassessed its property . . . Once the taxpayer has demonstrated aggrievement by proving that its property was overassessed, the trial court [will] then undertake a further inquiry to determine the amount of the reassessment that would be just . . . The trier of fact must arrive at [its] own conclusions as to the value of [the taxpayer's property] by weighing the opinion of the appraisers, the claims of the parties in light of all the circumstances in evidence bearing on value, and [its] own general knowledge of the elements going to establish value . . ." (Citations omitted.) Cadlerock Properties Joint Venture, L.P. v. Ashford, 98 Conn.App 556, 560 (2006).
"If the trial court finds that the taxpayer has failed to meet his burden because, for example, the court finds unpersuasive the method of valuation espoused by the taxpayer's appraiser, the trial court may render judgment for the town on that basis alone." Ireland v. Wethersfield, 242 Conn. 550, 557-58 (1997). "If, however, the trial court finds that the taxpayer, in light of the persuasiveness, for example, of his appraiser, has demonstrated an overvaluation of his property, the trial court must then undertake a further inquiry to determine the amount of the reassessment that would be just." Id. at 558.
B. Overassessment
The determinative issue in this case is whether the plaintiff has met its burden of proof that the Tax Assessor overassessed the property. For the reasons that follow, I find that the plaintiff has met its burden of proof on this issue.
C.G.S. § 12-63b (a) provides:
"The assessor, or board of assessors in any town, when determining the present or true and actual value of real property as provided in section 12-63, which property is used primarily for the purpose of producing rental income, and with respect to which property there is insufficient data in such town based on current bona fide sales of comparable property which may be considered in determining such value, shall determine such value on the basis of an appraisal which shall include to the extent applicable with respect to such property, consideration of each of the following methods of appraisal: (1) Replacement cost less depreciation, plus the market value of the land, (2) the gross income multiplier method as used for similar property, and (3) capitalization of net income based on market rent for similar property."
The Tax Assessor never testified. However, the complaint alleges, and the defendant admits, that the Town found the fair market value of the land to be $1,438,800 and the building to be $1,560,500. Also, the plaintiff's appraiser, Roy L. O'Neil, Jr., testified that it appeared to him that the Town's land value was the collective price paid for the ten parcels assembled to make the subject lot. He also testified that the depreciated building valuation was $97.61 per square foot of building area.
The plaintiff relies upon the testimony of its appraiser Mr. O'Neil, Jr. who is well-qualified and experienced. He valued the property using the three accepted methods of valuation: the cost approach which resulted in a value of $1,825,000; the income approach which resulted in a value of $2,128,009; and the sales comparison approach which resulted in a value of $2,195,000. See, Sun Valley Camping Cooperative, Inc. v. Stafford, 94 Conn.App. 696, 702 (2006). He considered all three approaches to be of equal value and arrived at a reconciliation value of $2,050,000.
The defendant's appraiser, Christopher Kerin, is also well-qualified and experienced. He used the same three approaches to valuing the property. His income approach value was $5,980,000, his sales comparison approach value was $5,720,000, and his cost approach value was $5,170,000. He gave little weight to the cost approach. He reconciled the other two approaches for a final opinion of $5,850,000.
It is puzzling that the tax assessor could have valued the property at $2,999,300 while two qualified appraisers arrived at values of $2,050,000 and $5,850,000. This extreme disparity is unusual, even in the highly contentious valuation disputes which arise in various forms in this court. In analyzing the opinions of the experts I have come to the conclusion that Mr. Kerin's opinion is not credible and should not be given any weight. There are several reasons for this which will be discussed by reviewing each of the three approaches taken by both appraisers. On the other hand, the opinion of Mr. O'Neil, while much closer to the mark, has a weakness which prevents the court from accepting it without modification.
The comparable sales approach is an unreliable measurement tool for this land. Mr. O'Neil used five sales in Torrington, made adjustments and reached a value of $2,195,000 using this approach. The five sales are so unlike the subject property, and the adjustments made by Mr. O'Neil were so large and subjective, that I do not find $2,195,000 to be an accurate measure of fair market value. Mr. Kerin recognized this problem of lack of comparable sales, but solved it by using three out-of-town sales: one in New Haven, one in Meriden, and one in Waterbury. These sales must be rejected as not representative of the Torrington market. The use of out-of town sales also violates the dictates of § 12-63b(a) which specifically provides that if there is "insufficient data in such town based on current bona fide sales" (emphasis added) the assessor shall use the cost approach or one of the income approaches.
The cost approach contains two elements: the market value of the raw land, and the cost to replace the building less depreciation. Mr. Kerin's does not use Torrington property sales to value the raw land. He uses three sales: two in Danbury and one in Waterbury. I find this to be unreliable. Mr. Kerin's opinion may reflect values in Danbury or Waterbury but it does not reflect the value of the land in Torrington. He was unable to justify this departure from customary appraisal practice of using comparable sales in the subject's same general market. Mr. O'Neil, on the other hand, found eight Torrington land sales which he used as comparables. One can argue with his selection and his adjustments, but there is no doubt that he was at least attempting to value the raw land based upon the local market. His value for the land is $440,000. This value is far less than the total acquisition expense for the land of $1,488,000. But, it is well known that the cost of assembling several small pieces is usually greater than the value of the whole.
Mr. Kerin's replacement cost less depreciation for the building of $3,038,913 is padded with extremely questionable figures such as $500,000 for the "site work, rough grading etc." and $506,485 for "entrepreneurial profit." Mr. O'Neil's figure of $1,385,000 is unrealistically low in light of the evidence that it actually cost about $2,277,000 to prepare the land and construct the building. When added to the land value of $440,000, Mr. O'Neil's cost approach result is a total of $1,825,000. This figure must be rejected in light of the inaccuracy of his construction cost. In the final analysis, the replacement cost approach is not the most appropriate method to value this income producing property as will be discussed below.
Because the parties agree that the highest and best use of this property is for commercial rental, the income capitalization approach is the most appropriate method to measure the fair market value of this property. In First Bethel Associates v. Bethel, 231 Conn. 731 (1995) the Supreme Court discussed the proper application of the income capitalization approach. The court began with this definition and statement of the essential problem at hand: "The income capitalization approach to value consists of methods, techniques, and mathematical procedures that an appraiser uses to analyze a property's capacity to generate benefits (i.e., usually the monetary benefits of income and reversion) and convert these benefits into an indication of present value. It follows that the higher the contract rent, the higher the property valuation. When, as in this case, the contract rent differs significantly from the estimated rent that the property would command on the open market, the relative weight given to either has a potentially significant impact on the calculation of the true and actual value." Id. at 739.
The court then pointed out that C.G.S. § 12-63b(a)(3) requires the use of "market rent" as the indicator of income and that § 12-63b(b) provides that: "[T]he term market rent means the rental income that such property would most probably command on the open market as indicated by present rentals being paid for comparable space. In determining market rent the assessor shall consider the actual rental income applicable with respect to such real property under the terms of an existing contract of lease at the time of such determination. Thus, the statute requires that, in determining a property's market rent, the assessor and, therefore, the court, in determining the fair market value of the property, must consider both (1) net rent for comparable properties, and (2) the net rent derived from any existing leases on the property. This legislative approach makes sense because it reflects the reality that a willing seller and a willing buyer — whose ultimate judgments are what we mean by "fair market value" — would themselves consider in arriving at a price for the property that is subject to leases that do not closely approximate current rentals for similar properties." (Emphasis in the original; citations omitted; internal quotation marks omitted.) Id. at 739-40.
Mr. Kerin relied upon the subject lease with Walgreen of $29.10 per square foot. He then purported to give consideration to the "rent being paid for comparable space." This would have required him to seek out comparable rents. What he did instead was to consider the rent paid at five out-of-town Walgreens in Plainville, Monroe, Vernon, Bridgeport, and Hamden. He then used a capitalization rate of 7% to arrive at a value of $5,980,000. I give no weight to Mr. Kerin's figure. The properties chosen by Mr. Kerin are not comparable to the subject property because they are so far out of the Torrington market. There are numerous comparable rentals in Torrington which could have been used. Furthermore, the capitalization rate of 7% is unrealistically low.
Mr. O'Neil used eight comparable rental properties in Torrington to arrive at a rent for comparable properties of $19 per square foot. He also claims to have "considered" the Walgreen's actual rent of $29.10 per square foot. But instead of giving actual consideration to it, he reduced it by $5 for "build to suit" and another $5 for "flat rate" to arrive at an adjusted rate of $19.10. This bit of fancy footwork is the weakness in his appraisal. It is simply too convenient for Mr. O'Neil to just "zero out" the premium of $10 above the rental paid at comparable properties. In essence, he gave no consideration to actual rent being paid at the subject property. The final figure of $19.10 just happens to be within ten cents of the market rent for comparable rentals. He reconciled these figures at $19 per square foot. He then used a capitalization rate of 11.5% to arrive at a value of $2,130,000.
Mr. O'Neil states in his report that the rent paid by Walgreen's must be reduced by $5 per square foot because it reflects a compensation the developer for his work, and because the unique features of the Walgreen's building may not be of value to the retail market generally.
Mr. O'Neil also reduces the Walgreen's rent by $5 per square foot because of the flat rate nature of the Walgreen's lease.
This case presents the same facts as First Bethel Associates v. Bethel, but with a twist. In First Bethel, the property in question was subject to a lease at a rent which was below the present rental rate being paid for comparable space. Here, the subject property is subject to a lease at a rental rate which is above the rate being paid for comparable space. This twist in the facts is a distinction without a difference. The same principles of appraisal should apply. A true measure of the fair market value of the property using the income approach must consider both the actual rent being paid for the subject premises as well as the present rent being paid for comparable rental space. I have considered both the actual rent being paid of $29.10 per square foot as well as the present rent for comparable rental space of $19 per square foot and have concluded that the "market rent" for the subject premises is $24 per square foot.
The calculation of net operation income, using all of Mr. O'Neil's expense deductions, is as follows:
Gross operating income = $15,120 X $24 = $362,880 Less brokerage commission of 3% = $10,886 Less asset management of 5% = $18,144 Less legal and professional of 1.5% = $5,443 Less reserves for replacement of $0.15 = $2,268 Net Operation Income = = $326,139 I accept Mr. O'Neil's capitalization rate of 11.50%. Therefore, I find that the fair market value of the property is $326,139/.1150= $2,835,991. The property is currently over assessed by the assessor.III. Unequal treatment
The second count of the complaint is based upon CGS. § 12-119 and alleges that the assessment is manifestly excessive and could not have been arrived at except by disregarding the method for determining the valuation of real property. "Cases in this category must contain allegations beyond the mere claim that the assessor overvalued the property. [The] plaintiff . . . must satisfy the trier that [a] far more exacting test has been met: either there was misfeasance or nonfeasance by the taxing authorities, or the assessment was arbitrary or so excessive or discriminatory as in itself to show a disregard of duty on their part. Only if the plaintiff is able to meet this exacting test by establishing that the action of the assessors would result in illegality can the plaintiff prevail in an action under § 12-119. The focus of § 12-119 is whether the assessment is "illegal." (Citations omitted; internal quotation marks omitted.) Second Stone Ridge Cooperative Corporation v. Bridgeport, 220 Conn. 335, 341 (1991).
In support of its claim, the plaintiff offered the testimony of Mr. O'Neil. He testified that he had done a comparative assessment analysis of the subject property and eight other business properties in Torrington. His analysis indicated that the subject land and building were assessed at substantially higher square foot values than the other properties. In his opinion there was no valid reason for this discrepancy. This testimony was not refuted by the defendant.
The plaintiff argues that Mr. O'Neil's testimony establishes a claim of illegality under § 12-119. I am not convinced. The evidence does not support a finding that the defendant used a different method in assessing the subject property than it did in assessing the other business properties. The cases relied upon by the plaintiff require proof of a disparate assessment methodology. Here, the defendant assessed each business property using what amounts to the cost approach. Mr. O'Neil simply found the assessed value per square foot was higher per square foot than the other properties and that he could find no valid reason for it. This is not a claim of illegality but of overvaluation. That claim has been addressed by the court's decision on the § 12-117a claim.
IV. Conclusion
The fair market value of the property is $2,835,991. The assessed value is equal to 70% of $2,717,000 or $1,985,194. Therefore, the assessed value for the lists of 2004, 2005, and 2006 is reduced to $1,985,194.