Hermel, Inc. v. State Tax Commission

• Decision Date: 24 April 1978
• Docket Number: No. 59824,59824
• Citation: 564 S.W.2d 888
• Parties: HERMEL, INC., Appellant, v. STATE TAX COMMISSION of Missouri, et al., Respondents.
• Court: Missouri Supreme Court

Page 888

564 S.W.2d 888

HERMEL, INC., Appellant, v. STATE TAX COMMISSION of Missouri, et al., Respondents.

No. 59824.

Supreme Court of Missouri,En Banc.

April 24, 1978.

J. Bruce McCurry, Springfield, for appellant.

Theodore L. Johnson, III, Springfield, for respondent.

BARDGETT, Judge.

Hermel, Inc., appeals from the judgment of the circuit court affirming a decision of the State Tax Commission which set a valuation on appellant's property in Greene County, Missouri. This case involves the valuation for 1971 (the valuation date is January 1, 1971; sec. 137.080, RSMo 1969) state and county property taxes of the Battlefield Mall (mall) in Springfield, Missouri. The mall is owned by appellant, Hermel, Inc., (Hermel), an Indiana corporation. Hermel challenges the assessment of the State Tax Commission (commission) as being unlawful, unfair, improper, arbitrary, and capricious. This dispute involves only the valuation of improvements on the land, not the valuation of the land itself.

A brief history of this litigation is in order. The commission rendered its original decision on December 3, 1971, fixing a land value of $1,441,612 and an improvement value of $9,000,000. Greene County then filed a petition for review seeking a higher assessment on the improvements. The circuit court found the decision of the commission arbitrary and not supported by competent and substantial evidence. The cause was remanded to the commission with instructions to reinstate the assessment of the county assessor, who valued the land at $1,441,612 and the improvements at $11,744,909. Hermel appealed to this court.

In Greene County v. Hermel, Inc., 511 S.W.2d 762, 770 (Mo.1974), the judgment of the circuit court was reversed and the cause was remanded for another hearing because the decision (valuation) of the commission was not based on competent and substantial evidence. A second hearing was held and this time the commission in its decision of November 7, 1975, found the true value to be $1,441,612 for the land and $11,744,909 for the improvements. These were the figures originally determined by the assessor to represent the true value of the land and improvements. The circuit court affirmed and Hermel appealed to this court.

Because of the issues presented, it is necessary to review the evidence before the commission. As the transcript of the first hearing was admitted as evidence in the second hearing, a review of the evidence proffered in both hearings is required. A summary of the evidence from the first hearing will be taken as needed from Greene County v. Hermel, supra, without use of quotation marks.

At the first hearing the following evidence was presented: The mall, located in Greene County, Missouri, consists of about 60 acres of land and a building approximately 1400 feet long containing 40 to 50 stores (on rehearing the undisputed testimony was that 60 stores were in operation on January 1, 1971) and an enclosed mall. The mall was opened for business in July of 1970.

Mr. Elliott Freed, Hermel's vice-president in charge of the construction, produced the final request of the general contractor for payment, with credits for previous payments, and testified that Hermel had paid those amounts. The total listed was $7,036,935.25, (the commission found this amount to be $7,072,495.25), but to this Mr. Freed added the amount paid to another contractor and the sum of the amounts allowed and paid to tenants for the completion of their respective stores "in a normal manner," arriving at a grand total of $8,362,884 (the commission found this amount to be $8,305,363.25). This figure, Mr. Freed said, represented the cost of the building. He also presented an exhibit which showed the cost as apportioned by the contractor to separate stores and sections of the building; this exhibit also showed, by way of comparison, the assessment figures (as received from the assessor) on the same stores and sections. The exhibit shows very substantial increases in the assessment of most of the units over their respective costs, but we are dealing here with the improvements as a whole. It is worthy of note, however, that the assessor arrived at his supposed replacement cost by computing it upon each separate unit, with no apparent relation to actual cost. Mr. Freed could not recall that he was ever asked by the assessor for figures on income or expenses; he testified that the annual net income from rents was approximately $1,390,000, with a provision in the leases for an additional percentage rental based on gross income as a "hedge" against inflation; no figure could be given on this latter item, since the stores had not been in operation for a full year as of January 1, 1971. The amounts allowed and paid to the tenants for completion of their respective store interiors were negotiated with the tenants; Hermel did not claim any interest in any property produced by expenditures in excess of these allowances and did not even know what totals were spent. It takes depreciation only upon the amounts allowed and paid. Mr. Freed testified that, "to his knowledge" he was not asked by the assessor for the construction costs; he furnished all of the figures to Mr. Duck of B. W. Duck and Associates who was selected to make an appraisal of the property. This firm had never been used by Hermel previously; after inquiry, Mr. Freed determined that none of the Springfield appraisers had time to do the job for Hermel. The deed of trust on this property contained a provision that the loan should not be more than 75% of the value of the property; the actual loan was $10,125,000. Mr. Freed assumed that an appraisal had been made at the time of the loan but testified that any then valuation was not his.

B. W. Duck of B. W. Duck and Associates of Indianapolis, Indiana, had been engaged in the business of real estate appraisals and management, and allied fields since 1933. He was a member of the American Institute of Real Estate Appraisers, and of various real estate organizations. He had spent a day in Springfield examining the property and making inquiries, had made various telephone calls for information thereafter, and had spent "weeks" in studying the matter and arriving at his computations. He testified: that there are three generally accepted approaches to the valuation of real estate, namely, the reproduction cost less depreciation plus the land value, the income capitalization approach, and the market data approach; that he had seen copies of various records of the assessor; that his computations on the different bases are shown in his report, which was received as an exhibit. He first showed, as the cost approach, a figure of $8,012,108.25 for the improvements after deducting $293,255 for grading and site work which he considered as a land cost; he testified that, since the appraisal was made as of January 1, 1971, and the mall had not been opened until July of 1970, the property had suffered no "Measurable depreciation"; he added a land value, but we are not concerned with that. He next considered the valuation from the income approach; he had examined the income figures in Hermel's office, but since the mall had not been open for a full year, it was necessary to make a projection of the rentals, including possible vacancies. He examined certain of the leases. He arrived at a net annual income figure of $1,394,550. Upon an assumed rate of interest, a consideration of the taxes, and a useful life of 25 years he found a capitalization value of $8,472,691 for the improvements. The third method, the market data approach, was said to be a consideration of the sales or offers for sale of comparable properties. Mr. Duck found no comparable property in the Springfield area and used for comparison properties in Minneapolis, Denver and West Virginia. From these comparisons, first, on a square foot basis, and, secondly, by a "gross rent multiplier" derived from one of the properties and applied to ours, he arrived at a valuation of $8,590,000 for the property involved, on the market data approach. Mr. Duck further testified that upon a consideration of all three approaches or methods, he gave most weight to the income approach, next to the cost approach, and least to the market data approach, arriving at a weighted average value of $9,512,000, including the land. This, of course, would leave a value of $8,100,400 on the improvements. It was Mr. Duck's opinion that "a shopping center today that is 25 years old is gone."

Two representatives of the assessor's office, Hugh Haseltine and Clyde Dusenberry, testified, collectively: that they had worked approximately a month in making this assessment; that they measured every store and each room, and prepared field notes and diagrams; that they arrived at a valuation of $11,744,909 on the improvements, using the replacement cost approach; that they did not have the income figures and that there were no other comparable properties in the area; that building costs had been rising all the time; that they did not "disbelieve" the evidence as to Hermel's overall costs, although they doubted that the hallways were built at the figure indicated; that in arriving at their replacement cost they used the "Kentucky Manual", a publication about ten years old, put out by the State of Kentucky, which consisted of a series of averages of costs; the assessment was based "partially" on this; that to the figures there shown they added 20% "on most items", and in some places more, using the manual as a base; that on some things they used "local costs"; that the Kentucky Manual does not fit any particular building, and there were no shopping centers when it was published; that the three recognized methods of valuation are the cost, market data and income approaches; that they utilized the cost approach and the result was simply their opinion; that at one time Mr. Freed and his counsel had given them a list of figures supposedly showing...