District of Columbia v. Wash. Sheraton Corp., 83-1045.

• Decision Date: 04 October 1985
• Docket Number: No. 83-1045.,83-1045.
• Citation: 499 A.2d 109
• Parties: DISTRICT OF COLUMBIA, Appellant, v. WASHINGTON SHERATON CORPORATION, Appellee.
• Court: D.C. Court of Appeals

499 A.2d 109

DISTRICT OF COLUMBIA, Appellant, v. WASHINGTON SHERATON CORPORATION, Appellee.

No. 83-1045.

District of Columbia Court of Appeals.

Argued November 19, 1984.

Decided October 4, 1985.

Lutz Alexander Prager, Asst. Corp. Counsel, Washington, D.C., with whom Inez Smith Reid, Corp. Counsel, John H. Suda, Principal Deputy Corp. Counsel, and Charles L. Reischel, Deputy Corp. Counsel, Washington, D.C. were on briefs, for appellant.

John R. Risher, Jr., Washington, D.C., for appellee.

Before FERREN, BELSON and TERRY, Associate Judges.

BELSON, Associate Judge:

The Washington Sheraton Corporation brought an action in the Tax Division of the Superior Court that resulted in a substantial reduction of the tax assessment of its hotel property for the 1982 tax year. The District of Columbia appeals the Superior Court's evaluation for that year, and its further ruling that the same assessment should be in force for the 1983 tax year. We agree with the District that the trial court erred in the manner in which it applied the income capitalization method of valuation. Accordingly, we reverse and remand for further proceedings.

I

The dispute here is over the value of improvements rather than land. The Washington Sheraton complex consists of three buildings: the Wardman Towers, completed in 1930, with 308 rooms; the Motor Inn, completed in 1962, with 215 rooms, and the new Main Building, completed in March 1980, with 990 rooms. Extensive renovations of the Wardman Towers and the Motor Inn were completed in September 1982.

The new Main Building, erected between 1978 and 1980 next to the original building, incorporated parts of the original building. The greatest part of the original building was demolished after the new structure was completed. During and after the period of construction of the new Main Building, the hotel also renovated the Wardman Towers and the Motor Inn. Only a portion of each — from 4 rooms to 2 floors — was under repair at any one time. Thus, the hotel remained open during the entire reconstruction period.

An assessor of real estate for the District of Columbia valued the improvements and land of the Washington Sheraton for the 1982 tax year at $78.6 million and $17.6 million, respectively, for a total $96.2 million.¹ The assessor used the construction cost method to value the improvements because he considered the hotel to be a new facility.

Washington Sheraton appealed the assessor's valuation to the Board of Equalization and Review. See D.C. Code § 47-825 (1981). The Board affirmed the assessor's valuation of the land, but lowered the valuation of the improvements from $78.6 million to $62.8 million, for a total including land of $80.3 million. Washington Sheraton paid the assessed tax, as calculated on the Board's valuation, and appealed to the Tax Division of the Superior Court. See D.C. Code § 47-3303 (1985 Supp.).

At a trial before the Tax Division, both parties presented expert testimony. The District's expert witness, William Harps, proposed a new value of $68.3 million for the improvements, and $13.4 million for the land, for a total of $81.7 million. Harps utilized an income capitalization analysis to derive the value of the improvements. The District also presented an official of the Department of Finance and Revenue who testified that its application of the replacement cost method produced a valuation of $96.2 million.

Washington Sheraton's expert, Anthony Reynolds, like the District's expert, Harps, employed an income capitalization analysis, but arrived at a total valuation of $48.2 million: $37.7 million for the improvements and $10.5 million for land.²

The trial court, which has the power to affirm, cancel, reduce, or increase the assessment, D.C. Code § 47-3303 (1985 Supp.), evaluated the land at $13.4 million and the improvements at $48.2 million, for a total of $61.6 million.

The trial court also concluded that the valuation of the hotel for the year 1982 would be the basis for future assessments until the District performed a lawful reassessment. The court later found that the value of the entire hotel was $61.6 million for both tax year 1982 and tax year 1983.

The District appeals from the trial court's valuation of the improvements of the hotel at $48.2 million; there is no issue on appeal concerning the land value. The District also seeks relief from the order maintaining the same valuation for tax year 1983.

II

This court reviews a decision of the Tax Division in the same manner as other civil cases tried without a jury. D.C. Code § 47-3304(a) (1981). We must accept the judge's findings of fact unless they are clearly erroneous, and we will not set aside a conclusion of law unless it is plainly wrong or without evidence to support it. D.C. Code § 47-3304; 17-305 (1981); Rock Creek Plaza-Woodner Ltd. v. District of Columbia, 466 A.2d 857, 859 (D.C. 1983). We may affirm, modify, or reverse the decision of the trial court with or without remanding the case for hearing. D.C. Code § 47-3304 (1981).

The Tax Division has the power to evaluate de novo, D.C. Code § 47-3303 (1981), Rock Creek Plaza-Woodner, 466 A.2d at 859 n. 1, and is "free to make its own independent evaluation of the evidence." Id. at 859. The court may adopt the rationale of one testifying expert over the other, or even disregard the conclusions of both. Id. The court may not, however, arbitrarily reject such expert testimony. Id.

We conclude that the court's valuation of the hotel's improvements here was clearly erroneous and reverse its decision. The court's apparent misunderstanding of the testimony of Sheraton's expert witness resulted in an error of mathematical calculation that substantially skewed the valuation. We are confident that the trial court, when it reconsiders that testimony, will do more than simply correct the mathematical error and change the valuation accordingly. On remand, the court will have the opportunity to compare the valuations the experts derived by the income capitalization approach with other evidence of value. The court will also be in a position to reconsider the methodology of the experts in light of our observations concerning controlling statutes and regulations. On remand, the court in its discretion may conduct such further proceedings as it deems appropriate.

III

We turn first to an explanation of why we deem clearly erroneous the court's decision to value improvement at $48.2 million and the entire property at $61.6 million. The court stated in its written opinion that it evaluated the land at $13.4 million because that figure was derived by Harps' better methodology. On the other hand, the court rejected Harps' valuation of improvements, and expressly stated that "the Court is persuaded that the method [of valuation of improvements] chosen by Mr. Reynolds is more accurate." The court then, however, listed the value of the improvements at $48.2 million when, in fact, Reynolds had concluded that $48.2 million represented the value of improvements plus land. Reynolds estimated the value of the improvements alone at $37.7 million. Given that the court stated that it was relying on Reynolds' calculation of the value of the improvements alone, the court clearly erred by then using Reynolds' value for both improvements and land. In short, the court counted the value of land twice. For the court's guidance on remand, we discuss some of the controlling principles to be applied by the trial court.

IV

The assessed value of property for real property taxation purposes shall be the "estimated market value" of the property on January 1st of the year preceding the tax year. D.C. Code § 47-820(a) (1981). The Code defines the term "estimated market value" as:

100 per centum of the most probable price at which a particular piece of real property, if exposed for sale in the open market with a reasonable time for the seller to find a purchaser, would be expected to transfer under prevailing market conditions between parties who have knowledge of the uses to which the property may be put, both seeking to maximize their gains and neither being in a position to take advantage of the exigencies of the other.

Id. 47-802(4). In determining the estimated market value, the assessment shall take into consideration:

[A]ll available information which may have a bearing on the market value of the real property including but not limited to government imposed restrictions, sales information for similar types of real property, mortgage or other financial considerations, replacement costs less accrued depreciation because of age and condition, income earning potential (if any), zoning, the highest and best use to which the property can be put, and the present use and condition of the property and its location.

Regulation No. 74-35, § 108(a), 21 D.C. Reg. 1643 (Jan. 20, 1975) (codified at 16

DCRR § 108(a); 9 DCMR § 307.1).³ The appraiser may apply one or more of the three generally recognized approaches of valuation when considering the above factors. 16 DCRR § 108(b); 9 DCMR § 307.2. Those three approaches are the replacement cost, comparable sales, and income methods of valuation. 16 DCRR § 108(b), 9 DCMR § 307.3-.5. Usually the appraiser considers the use of all three approaches, but one method may be most appropriate depending on the individual circumstances of the subject property. Rushmore & Rubin, The Valuation of Hotels and Motels for Assessment Purposes, APPRAISAL JOURNAL, Apr. 1984, at 270, 272-73;⁴ accord California Portland Cement Co. v. State Board of Equalization, 67 Cal.2d 578, 432 P.2d 700, 704, 63 Cal.Rptr. 5, 9 (1967).

The replacement cost approach employs the "cost of replacing property with new property of similar utility at present price levels, less the extent to which the value has been reduced by depreciation because of age, condition, obsolescence, or other factors." 16 DCRR § 108(b)(2); 9 DCMR § 307.4. The replacement cost may "be estimated either...