Beach Properties, Inc. v. Town of Ferrisburg

• Decision Date: 28 February 1994
• Docket Number: No. 92-478,92-478
• Citation: 161 Vt. 368,640 A.2d 50
• Parties: BEACH PROPERTIES, INC. v. TOWN OF FERRISBURG.
• Court: Vermont Supreme Court

Page 50

640 A.2d 50

161 Vt. 368

BEACH PROPERTIES, INC. v. TOWN OF FERRISBURG.

No. 92-478.

Supreme Court of Vermont.

Feb. 28, 1994.

Patricia E. Dilley of Downs Rachlin & Martin, Burlington, for plaintiff-appellee.

Donald R. Powers of Powers, English & Carroll, Ltd., Middlebury, for defendant-appellant.

Before ALLEN, C.J., and GIBSON, DOOLEY, MORSE and JOHNSON, JJ.

JOHNSON, Justice.

The Town of Ferrisburg appeals from a decision of the State Board of Appraisers that reversed the decision of the Ferrisburg Board of Civil Authority and declared that the taxpayer's property should be listed in the 1991 grand list for $3,850,000, rather than $4,806,000. We reverse.

The subject property is the Basin Harbor Club, a summer resort and convention center on 584.3 acres of land along the easterly shore of Lake Champlain. The property has 136 guest cottages and rooms, restaurants, a developed waterfront, airport runway, tennis courts, swimming pool, 18-hole golf course, conference and banquet facilities, as well as other recreational facilities. It has approximately 4,000 feet of shoreline on Lake Champlain and about 10,000 feet of frontage on public highways in the area.

The taxpayer, Beach Properties, Inc., is wholly owned by members of the Beach family, who have owned and operated the property as the Basin Harbor Club since 1886. In 1990, Robert H. Beach, Jr. and Ann P. Beach Morris, who are managers of the property and employees and stockholders of the corporation, became its sole owners by acquiring all of the stock of the corporation then owned by other family members. The purchase price for the acquired stock was derived from a theoretical sale price for the entire property.

To determine the property's value, the Town relied on a combination of the cost approach and market sales comparison approach. The cost approach adjusted for time, location, physical characteristics and depreciation, to determine the contributory value of buildings and improvements. The market sales comparison approach developed a schedule of land values and Lake Champlain shore frontage values derived from actual sales data. The Town also contended that its valuation of $4,806,000 was confirmed by a consideration of potential and prospective uses of the property. Specifically, the Town argued that the property's existing waterfront cottages could be sold to individual owners through various forms of ownership without affecting the core resort's viability as a commercial enterprise.

In response to the Town's assessment, the taxpayer had the property appraised. The taxpayer's appraisal supported a property value of $3,850,000, which reflected a value of the Basin Harbor Club of $4,600,000 minus $750,000 for furnishings, fixtures and equipment. The appraiser arrived at this value by using an income capitalization analysis, derived from the net income for a single year, 1990, the sale price of the intra-family stock transfer, and a market sales comparison analysis, using two out-of-state resort sales as comparables.

The Board of Appraisers found for the taxpayer, concluding that the intra-family sale price of the stock and the income capitalization method provided the most compelling indication of the 1991 fair market value. The Town appealed, claiming the Board of Appraisers erred by making findings that were so devoid of evidentiary support as to be clearly erroneous.

I.

In the present case, all issues were hotly contested. Serious questions were raised by the Town about the validity of the methodology used in the taxpayer's appraisal report and the lack of any indicia of reliability about the income figures that were at the heart of the taxpayer's analysis. The taxpayer, in turn, questioned the Town's cost approach on the ground that the Town did not adequately assess depreciation of the buildings. The taxpayer also took issue with the speculative nature of the Town's proposed scheme for division of the property.

Before addressing the Town's substantive attack on the evidence, we briefly review the role of the Board of Appraisers in contested hearings. Appeals to the Board of Appraisers are hearings de novo, 32 V.S.A. § 4467, and the Board is required to make findings of fact supporting its ultimate determination. Manganelli v. Town of Proctor, 144 Vt. 451, 453, 479 A.2d 155, 156 (1984). Where conflicting evidence has been presented, the Board must state clearly what evidence it credits and why, so that the parties and this Court will know how the decision was reached. Corrette v. Town of St. Johnsbury, 140 Vt. 315, 316, 437 A.2d 1112, 1113 (1981). Although a tribunal may accept the testimony of specific witnesses or specific requests for findings and adopt the content of that testimony or those requests as the findings of the court, Bonanno v. Bonanno 148 Vt. 248, 250, 531 A.2d 602, 603 (1987), "[a] recitation of the testimony is not a finding of fact, and such a recitation will not support a judgment." Corrette, 140 Vt. at 316, 437 A.2d at 1113-14. Unless the Board's determination of value is supported by adequate findings, it will not be affirmed. Sondergeld v. Town of Hubbardton, 150 Vt. 565, 570, 556 A.2d 64, 67 (1988).

In finding for the taxpayer, the Board made virtually no findings of its own, but rather described and summarized the dispute between the parties. The Board's mere reference to the documentary submissions of each of the parties as its findings does not support its judgment. New England Power Co. v. Town of Barnet, 134 Vt. 498, 502-03, 367 A.2d 1363, 1366 (1976). While the Board's decision is reversible for lack of findings alone, this is not a case in which a remand for adequate findings would cure the errors below because we also hold that the Board's conclusions are insupportable on the evidence presented.

II.

A.

The Board's determination of fair market value relied on taxpayer's income capitalization method. The capitalization, or income approach, "restates market value by converting the future benefits of property ownership into an expression of present worth." International Ass'n of Assessing Officers, Property Assessment Valuation 231 (1977). On a purely theoretical basis, income capitalization is probably the most accurate way to establish value, at least as to commercial properties, because it values property on the basis of what income it will yield to the purchaser--and income is the very reason for the purchaser to acquire the property. Id. at 253. We have accepted the use of this approach as a means of determining fair market value. New England Power Co., 134 Vt. at 505, 367 A.2d at 1368. But the methodology used to calculate the capitalization rate in this case was so flawed that it rendered the taxpayer's evidence on this point meaningless.

The income approach is based on the proposition that a rational investor would pay the fair market value for a piece of property, which is the price (P) that, when multiplied by the rate of return available from alternative investments of comparable risk (the capitalization rate or R), is equal to the property's expected net income (I). In other words, if the known factors are capitalization rate and net income, the price of the property may be calculated by dividing the net income by the capitalization rate: P = I/R. ¹ International Ass'n, supra, at 231-34.

In application, however, income capitalization has serious, inherent difficulties. As noted above, there are two figures to the price calculation. The first is the appropriate capitalization rate or the expected rate of return on investment. It is derived from an analysis of factors external to the investment for which fair market value must be determined. Thus, the validity of the capitalization rate depends on an adequate analysis of the market. Since "[a] rate that indicates the return required to attract investment capital is the connection between the future income and a value indication, ... selection of [the] rate is of paramount importance in the capitalization process." Id. at 231. Relatively small variations in the rate will significantly change the fair market value. ² The key is comparability, and economists and other experts will frequently differ, at times widely, as to what comparable investments will yield, even where there is agreement on what constitutes comparability.

An even greater difficulty may attend the calculation of the second component of the calculation, the expected net income. Unlike the capitalization rate, it is derived from the internal numbers of the investment under appraisal. In a property such as the Basin Harbor Club, income depends on a wide variety of factors, ranging from the competence of management to the economic climate experienced by the establishment's customer base to the weather. Because relatively small adjustments to net income will significantly alter the resulting fair market value, it is important that expenses leading to net income be subject to scrutiny by the trier of fact. ³

In this case, the taxpayer's evidence as to both the capitalization rate and the property's expected net income was insufficient to provide the basis for a valid income capitalization calculation. First, there was no external validity, by comparison with the rate of return of similar businesses, to the capitalization rate the taxpayer suggests. The taxpayer's capitalization rate was determined wholly with reference to "internal" numbers. It was derived by dividing...