Frontier Airlines, Inc. v. State Tax Commission

• Decision Date: 08 September 1975
• Docket Number: 58736 and 58752,58723,58720,58719,Nos. 58677--58682,s. 58677--58682
• Parties: FRONTIER AIRLINES, INC., et al., Appellants (Plaintiffs), v. The STATE TAX COMMISSION of Missouri et al., Respondents (Defendants).
• Court: Missouri Supreme Court

Page 943

528 S.W.2d 943

FRONTIER AIRLINES, INC., et al., Appellants (Plaintiffs), v. The STATE TAX COMMISSION of Missouri et al., Respondents (Defendants).

Nos. 58677--58682, 58719, 58720, 58723, 58736 and 58752.

Supreme Court of Missouri, En Banc.

Sept. 8, 1975.

Rehearing Denied Oct. 13, 1975.

Stinson, Mag, Thomson, McEvers & Fizzell, by Dick H. Woods, George E. Gibson, George E. Feldmiller, Kansas City, for Trans World Airlines, Inc., Eastern Airlines, Inc., Frontier Airlines, Inc., Allegheny Airlines, Inc., Braniff Airways, Inc., American Airlines, Inc., Delta Air Lines, Inc. and Host International, Inc. Neale, Newman, Bradshaw & Freeman, by Paul L. Bradshaw, Thomas G. Field, Springfield, for Ozark Air Lines, Inc.

Jack L. Koehr, City Counselor, by James J. Wilson, Associate City Counselor, St. Louis, for City of St. Louis.

Thomas W. Wehrle, County Counselor, Clayton, for respondents, St. Louis County, Missouri, E. J. Pung, Director of Revenue, Frank J. Antonio, Assessor.

John C. Danforth, Atty. Gen., Walter Nowotny, Jefferson City, for respondent, State Tax Commission of Missouri.

Boyle, Priest, Elliott & Weakley, Howard Elliott, Edward D. Weakley, St. Louis, for respondent, Berkeley School District.

HOLMAN, Judge.

This proceeding involves separate appeals by the eight airlines named in the caption, Host International, Inc., and the City of St. Louis. The appeals were ordered consolidated by this court. They were jointly briefed and argued and will all be disposed of in this opinion. The appellants seek a review of real estate assessments for the year 1968 by the St. Louis County Assessor as affirmed by the County Board of Equalization, the State Tax Commission and the St. Louis County Circuit Court. The controversy relates to the proper method of valuation and assessment in respect to 'leasehold interests' or 'possessory interests' of portions of Lambert-St. Louis Municipal Airport occupied by the airlines and Host. The airport is located in St. Louis County and owned and operated by the City of St. Louis. While no tax was assessed against St. Louis City it has opposed the assessments against its lessees apparently on the theory that the added expense to its tenants would adversely affect the amount of rental they would pay the City in the future. We have appellate jurisdiction because construction of the revenue laws of this state is involved. Art. V., Sec. 3, Mo.Const.

In connection with our statement of the evidence it should be mentioned that considerable evidence was offered before the Commission to which an objection was sustained but the evidence was nevertheless heard under the provisions of Section 536.070(7) V.A.M.S. We have considered such of that evidence as we deemed to be admissible.

The airport property embraced an area of approximately 1,700 acres and was improved with runways, taxiways, aprons, instrument landing and communication facilities and a terminal building with concourses, parking lots, cargo hangar, and office buildings.

On January 1, 1968, each of the airlines, as well as Host, occupied and paid rent on certain space in the terminal building for which they had the right of exclusive use. In addition, each airline was allocated and charged rent upon space denominated 'nonexclusive space' which it was deemed to use in common with other airlines and tenants in the terminal building. As of January 1, 1968, the airlines' use of both exclusive and nonexclusive terminal and concourse space was not the subject of formal lease agreements between them and the city; those leases had expired in 1965. As a result of negotiations between the airlines and the city commencing in the spring of 1965, formal lease agreements had been executed and submitted to the city in December, 1967. Those leases, which were for a term of 10 years commencing August 1, 1965, did not become finally binding until December, 1968, when they were approved by the St. Louis City Council. It had been agreed, however, at the time negotiations began that the lease provisions and rental rates finally agreed upon would be retroactive to August 1, 1965. The rental rates paid by the airlines on both exclusive and nonexclusive space in the main terminal were as follows: Upper level,.$9.00 per square foot; middle level, $6.50 per square foot; lower level, $5.50 per square foot; operating area, $3.00 per square foot; concourses, $4.00 per square foot.

On January 1, 1968, Host was occupying almost 32,000 square feet of space in the terminal building. This was under a concession agreement, dated January 31, 1967, under which Host was obligated to pay as rental for such space a percentage of gross annual sales on food and alcoholic beverages.

Under a separate lease, Ozark occupied an office building and hangar complex on a 10 acre site situated in the airport area. In 1968, the lease on these buildings had a remaining period of 24 years together with options for 12 and 10 year extensions. This lease was subject to cancellation by the city upon 12 months notice when, in the city's opinion, the facilities were needed for an airport use of higher priority.

On May 31, 1968, the assessor advised the airlines and Host concerning the amount of their assessments. The amount of the assessments on the space leased totaled approximately $3,000,000. In addition to that the assessor attributed to each one of them a proportionate part of a 72 acre tract called the 'campus area.' A value of $1,300,000 was placed upon this campus area which, as stated, was allocated proportionately to the airlines and Host.

The formula or method used by the assessor in arriving at the foregoing valuations was obtained by him from John L. Vaughn, Jr., of Los Angeles, California, an expert in the field of real estate appraisals. On the other hand, the appellants relied upon the testimony of Walter R. Kuehnle, of Chicago, Illinois, an expert with 47 years experience in appraising real estate and interests therein. These two experts used widely differing methods in arriving at their opinions concerning the valuation of the interests here involved.

Mr. Kuehnle stated that in appraising a leasehold interest of a tenant the proper method is to determine the value of the property, the economic or rental value thereof, and the contract rental of the property as well as the length of the term of the lease and other provisions thereof which are the obligation of the lessee. He stated that 'It's a method accepted by appraisers everywhere. I know of no other way you could do it.' He further stated that by the use of this method one could determine the present value of any bonus to the lessee by the terms of the lease; that if the contractual rental was less than the fair market rental the leasehold would have a value. This method was illustrated by a simple example, as follows: If a store building being rented for $250 a month is worth $500 a month the value of the interest would be the present worth of the bonus for the remaining term of the lease. On the other hand, if the lessee was paying $750 a month for a store worth $500 a month the lease would, of course, have a negative value.

Mr. Kuehnle and his staff made an investigation of the airport properties and concluded that each of the airlines and Host were paying more than the full rental value of the areas leased by them and hence there was no bonus and the leaseholds were of no value. In arriving at the fair rental value of the space occupied by appellants, this witness not only considered the depreciated replacement value of the buildings but compared the premises with a number of other comparable airports in this country.

He further stated that California was the only state in which 'possessory interests' somewhat like that used by the assessor is recognized. He also stated that the method used by the assessor resulted in a valuation of the real estate interest leased and not the leasehold interest.

Frank J. Antonio testified that on the relevant dates he was the assessor of St. Louis County; that he and his staff collected the information necessary to make the valuations in question; that they relied on the advice of John L. Vaughn, Jr. in applying the 'possessory interest' method of assessing these leaseholds. He defined possessory interest as representing the beneficial use of real estate by a tenant where the real estate is exempt by law from taxation as against the owner. Mr. Antonio further stated that in applying the method used in making the assessments he ignored the amount of rental paid by the lessee and the term that the lease would run; that he 'had to in order to establish a uniform method of assessment'; that this method is applied only to tax exempt property.

The method used by the assessor is apparently new and novel. It has been formulated in an endeavor to obtain tax revenue from tax exempt real estate which, of course, must be obtained, if at all, from the tenants. We will attempt to outline this method as we understand it from reading the testimony of Mr. Antonio and Mr. Vaughn, as follows: (1) As indicated, the terms of the leases are disregarded and the assessor assumed an occupancy of 15 years for each tenant, (2) In order to obtain the estimated depreciated value of the buildings as of 1--1--68 he figured the trended replacement cost of the buildings as of 1--1--68 and depreciated it at a rate of 4% per year, (3) Using the assumed 15 year occupancy he estimated the depreciated value of the buildings on 1--1--83. The result is said to be the value of the city's 'right of reversion' on that date, (4) He next calculated the present worth of the 1--1--83 depreciated value of the buildings using a 6 1/2% compound interest factor, (5) The present worth of the reversion (as obtained in the preceding step) is subtracted from the estimated 1--1--68 depreciated value of the buildings and the result is said to be the value of the tenant's possessory interest in the building, ...