City of Richmond v. Jackson Ward Partners, L.P.

• Decision Date: 07 June 2012
• Docket Number: Record No. 110820.
• Citation: 726 S.E.2d 279
• Parties: CITY OF RICHMOND v. JACKSON WARD PARTNERS, L.P.
• Court: Virginia Supreme Court

726 S.E.2d 279

CITY OF RICHMOND
v.
JACKSON WARD PARTNERS, L.P.

Record No. 110820.

Supreme Court of Virginia.

June 7, 2012.

[726 S.E.2d 280]

Debra L. Mallory (Allen L. Jackson, City Attorney; Brain Telfair, Deputy City Attorney; Taliaferro & Mallory, on briefs), for appellant.

Andrew P. Sherrod (Hirschler Fleischer, Richmond, on brief), for appellee.

Present: All the Justices.

Opinion by Chief Justice CYNTHIA D. KINSER.

The City of Richmond (the City) appeals from a judgment of the circuit court correcting erroneous tax assessments on real property owned by Jackson Ward Partners, L.P. (JWP). Because we conclude that JWP failed to carry its burden to prove the fair market value of the eight parcels of real property at issue, we will reverse the judgment of the circuit court.

FACTS AND PROCEEDINGS

JWP owns real property, designated as Jackson Ward Apartments (the Properties), in the Jackson Ward area of the City of Richmond, which it operates as an affordable housing development.¹ The Properties are

[726 S.E.2d 281]

considered a “scattered site community” and consist of 11 structures with 18 residential rental units situated on eight, non-contiguous tax parcels located on three different streets, West Clay, West Marshall, and North 1st Streets. The Properties consist of various types of dwellings: three parcels contain a single duplex, i.e., one structure with two units, four parcels contain single-family homes, and one parcel contains four attached duplexes with a total of eight units. The parcels are zoned R–6, single family or duplex,² and contain both two-bedroom and three-bedroom units.

In purchasing the eight parcels, JWP agreed to renovate the structures and operate the Properties as affordable rental housing. The required renovations were financed through Virginia Housing & Development Authority (VHDA) loans, the terms of which were pre-negotiated by the Richmond Redevelopment & Housing Authority (RRHA) and United States Department of Housing and Urban Development (HUD) through the Properties' participation in HUD's Section 8 affordable housing program.

The eight, non-contiguous tax parcels are subject to a deed of trust and a regulatory agreement with VHDA. Under that agreement, the parcels are required to be operated as an 18–unit, affordable, multifamily rental housing development for a 40–year period.³ The VHDA treats the Properties as comparable to an 18–unit apartment complex. The regulatory agreement prohibits the sale of individual structures or parcels and requires that the units be rented to persons whose income is 40% or less than the area median income. ⁴ Pursuant to the various agreements, HUD dictates the rental rates on the Properties and conducts periodic inspections to ensure compliance with certain regulatory requirements.

Pursuant to Code § 58.1–3984, JWP filed a second amended complaint in the circuit court for correction of erroneous tax assessments on the Properties for the tax years 2005–2008. In its complaint, JWP claimed the assessments were “clearly erroneous and in excess of fair market value in violation of the Constitution of Virginia, Article X, § 2,” and “lacked uniformity ... with respect to the same class of subjects within the City in violation of the Constitution of Virginia, Article X, § 1.”

At a five-day bench trial, Eugene Joseph, a licensed commercial real estate appraiser, testified for JWP regarding his appraisal of the Properties for the tax years in question. Joseph stated that the “cornerstone of any appraisal” is determining the highest and best use. He explained the “four general areas of the highest and best use”: what is “legally permissible, ... physically possible, financially feasible, and ... maximally productive.” Because the eight parcels were “restricted by an extended use regulatory agreement” and could not “be sold off as a single family [home] or duplex,” Joseph opined that the only legally permissible use, and thus the highest and best use, was a multifamily, 18–unit parcel. According to Joseph, he had “to value the property as what it truly is and that is a scattered site single, multifamily property per what's legally permissible.”

To determine fair market value, Joseph considered the cost, sales comparison, and income approaches to valuing the Properties. Joseph deemed the income approach to be the primary indicator of value but used the sales comparison approach for “some additional support.” According to Joseph, the income approach is more reliable because “typical buyers and investors consider the income potential of a property.” In applying the income approach, Joseph considered the contract rents set by HUD, the typical vacancy and collection losses, typical operating

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costs for such a property, and the historical operating expenses of the Properties to arrive at the net operating income. Joseph then determined a capitalization rate, primarily by “extract[ing] capitalization rates from ... other sales,” and capitalized the net operating income to arrive at his value estimate.⁵ Under the sales comparison approach, Joseph compared the sale of similar properties, which in this case meant multifamily apartment complexes. Joseph then made “lump sum adjustment [s] to account for” the rent restrictions, again because “the property is encumbered and you have to account for that.”

Using these methods, Joseph determined that the fair market value of the Properties as a whole was $600,000 for each of the tax years 2005–2008. Joseph opined that “the overall value of $600,000 should be allocated on a per unit basis to reflect the individual tax parcels as identified by the City.” According to Joseph, “you can simply allocate on a per unit basis to the various parcels and to the various units.” By allocating the $600,000 value equally on a per unit basis to the 18 units, Joseph determined the fair market value of each unit to be $33,333. Joseph then determined the fair market value of each tax parcel based on the number of units located on the parcel.

On cross-examination, Joseph conceded that the parcels could be assessed individually, though only as a “fractional appraisal” because the highest and best use of the Properties was as one multifamily housing development. According to Joseph, “you have to value the property as one” because of the restrictions contained in the regulatory agreement. He further admitted that his appraisal was not a fee simple valuation for the same reason. When asked if his allocation method “was simply a mathematical calculation,” Joseph indicated that it was and opined that the method was “a valid technique.”

Several witnesses who testified for JWP stated that the Properties operate at a loss due, in large part, to the City's tax assessments. According to those witnesses, the Properties could neither generate sufficient income to justify the assessed value nor be sold at the assessed value.

Richard Woodson, the Deputy Assessor for the City and also a licensed real estate appraiser, testified regarding the City's assessment of the Properties for tax years 2005–2008. In contrast to Joseph, Woodson stated that the “true test of highest and best use” is “[w]hat use produces the highest value.” Woodson explained that in the Jackson Ward area of the City, the trend is for “rooming houses” to be converted back to single family dwellings. That factor, along with the applicable zoning and the type of construction on each parcel led Woodson to conclude that the highest and best use of the Properties is as single-family homes and duplexes. Woodson did not consider the Properties to be a scattered site apartment complex because he was required to assess the “fee simple interest [de]void of any encumbrances.” Woodson stated the City's assessment method was not restricted by the deed of trust or the regulatory agreement's treatment of the Properties as a multifamily housing development and, with one exception, he did not consider the restrictions imposed by the regulatory agreement in arriving at the assessed value of the eight parcels. ⁶ Doing so, he opined, would mean assessing a leasehold interest rather than a fee simple interest.

Woodson believed the City was required to assess each parcel individually: “Each parcel gets a separate tax bill, so it has to have a

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separate assessment.” He pointed out that the RRHA has numerous single-family dwellings scattered throughout the City that have similar rent restrictions. Nevertheless, the City assesses each parcel individually under a fee simple valuation. Woodson opined that other than the fact that the parcels are owned by one entity and are rented as a package, they do not resemble an apartment complex.

To determine the fair market value of each of the eight tax parcels, Woodson considered the income, cost, and sales comparison approaches. Unlike Joseph, Woodson utilized the sales comparison approach because it provided “[t]he most readily identifiable and trackable information for single family and duplex houses” that was “readily available” to the City. To apply the sales comparison approach, Woodson used properties “most similar in size, location, condition, quality, land sizes, et cetera.” As Woodson noted, the structures on the parcels have unique “individual characteristics” with respect to setbacks, entries, porches, and square footage. The City assessed the eight tax parcels at the following fair market values for the years in question:

+----------------------------------------------------------------------------+
                ¦Address ¦2005 ¦2006 ¦2007 ¦2008 ¦
                +--------------------------------+----------+----------+----------+----------¦
                ¦509 N. 1st St. ¦$ 150,000 ¦$ 150,500 ¦$ 162,000 ¦$ 186,000 ¦
                +--------------------------------+----------+----------+----------+----------¦
                ¦511 N. 1st St. ¦$ 150,000 ¦$ 133,000 ¦$ 155,000 ¦$ 171,000 ¦
                +--------------------------------+----------+----------+----------+----------¦
                ¦517 N. 1st St. ¦$ 185,000 ¦$ 185,000 ¦$

...