In re Owens

• Court: North Carolina Court of Appeals
• Writing for the Court: JOHN.
• Citation: In re Owens, 132 N.C. App. 281, 511 S.E.2d 319 (N.C. App. 1999)
• Decision Date: 16 February 1999
• Docket Number: No. COA98-270.,COA98-270.
• Parties: In the Matter of the Appeal of Charles D. OWENS and John F. Padgett d/b/a Forest City Associates from the decision of the Rutherford County Board of Equalization and Review Concerning Property Taxation for 1994.

511 S.E.2d 319

132 NC App. 281

In the Matter of the Appeal of Charles D. OWENS and John F. Padgett d/b/a Forest City Associates from the decision of the Rutherford County Board of Equalization and Review Concerning Property Taxation for 1994.

No. COA98-270.

Court of Appeals of North Carolina.

February 16, 1999.

County of Rutherford, by County of Rutherford Attorney Laura J. Bridges, Rutherfordton, and Shelley T. Eason, Raleigh, for appellant.

J. Thomas Davis, Forest City, for appellee.

JOHN, Judge.

Appellant County of Rutherford (the County) appeals a final decision of the North Carolina Property Tax Commission (the Commission) appraising certain commercial warehouses owned by appellees Charles D. Owens, Jr. (Owens), and John F. Padgett (Padgett) (jointly "Taxpayers"). The County argues the Commission erred by: 1) rendering findings of fact, conclusions of law and an order "unsupported by competent, material and substantial evidence in view of the entire record;" 2) denying the County's motion for dismissal at the close of Taxpayers' evidence; and 3) "denying the County's motion for discovery sanctions and in ordering the matter to be heard on its merits." For the reasons set forth herein, we reverse the decision of the Commission.

Relevant facts and procedural history include the following: In 1994, the County conducted a reappraisal and reassessment of Taxpayers' small industrial park in Rutherford County. Taxpayers appealed the County's assessment to the Rutherford County Board of Equalization and Review which affirmed the County's appraisal. On 20 October 1994, Taxpayers appealed to the Property Tax Commission and filed required Applications for Hearing 21 November 1994.

At the 26 September 1997 hearing before the Commission, the primary issue was the valuation of nine (9) parcels (the property) in Taxpayers' industrial park upon each of which had been constructed a prefabricated metal warehouse. Taxpayers leased the warehouses to commercial tenants at a rate of approximately $1.50 per square foot per month.

Taxpayers maintained to the Commission that the County's values were too high because they were based upon "replacement cost and the income approach," and that a more accurate valuation would be "what it had cost [the Taxpayers] to build" the buildings. The income approach was inappropriate, Taxpayers continued, because sales of highly comparable properties in Rutherford County were lacking, thus precluding determination of a proper capitalization rate for use of the income approach of appraisal. Finally, Taxpayers concluded, no reasonable person would purchase the property at the County's values because the maximum rent obtainable would not produce sufficient income to justify such a purchase, i.e., unimproved property could be purchased and identical new buildings placed thereon for a sum less than the County's valuation of the property.

The County conceded direct comparable sales evidence was lacking and that the comparable sales approach to valuation "was given the least amount of consideration." Instead, it was the County's position that the property "highly lend[s itself] to a cost approach methodology but [should be] adjusted through the income approach." In its final analysis, and "in reconciling [the] valuation estimate, [the County] placed most emphasis on the income approach because of the nature of the property" as income producing.

In applying the income approach of valuation, the County

capitalize[d the] buildings based upon mortgage equity capitalization principles which [is a yield capitalization method and] takes into consideration typical financing of buildings.

Specifically, County expert witness Charles Long (Long) stated:

We use a 75 percent loan to value ratio with 25 percent of the balance. The equity position that the—the investor will assume will be their portion at a 12 percent equity yield rate.... This is also based on a typical 25-year term at eight and one-quarter percent borrowing rate. And again, one other component to consider in that rate is a 10-year holding period, which is the typical amount of time the investor would hold that building before considering a sale. When you take those elements into consideration, that gives a basis of ten and a half percent (10.5%) for a capitalization rate. Then we added, based on the age of the—of the building... twenty-five one-hundredths of a percent for each age that the building exists. So a brand new building will be ten and a half percent (10.5%), a two to three-year old building 10.75 percent, and then adding one-quarter of one percent for each two years of age that a building existed.

Long further testified on cross-examination as follows:

Q: And that equity capitalization rate requires comparable sales, doesn't it, to determine?

A: You can—you can determine that equity capitalization rate through comparable sales and that must be highly comparable.... They are not required; however, they can be proven in the marketplace as to what the equity yield is. And you can get that information just from lending practices.

Q: Well, are you familiar with what is termed the American Institute of Real Estate Appraisers [and their textbook, The Appraisal of Real Estate]?

A: That's correct.

....

Q: Doesn't it say in the volume that I have—that equity capitalization rates are derived from comparable sales by dividing the pretax—pretax cash flow of each sale by the equity invested?

A: That is what that says in that section, that's correct.

Q: Now, you've already testified though that you had a lack of comparable sales in regard to this type property, isn't that correct?

A: That's correct.

Q: So your capital rate would be distorted in regard to whatever means that you used to get those comparable sales necessary to capitalize—to make your capitalization rate?

A: No, the information that we used was secondary information; and those equity capitalization rates were derived using comparable sales.

Q: ... That means [the information] came from other areas other than Rutherford County, isn't that correct?

A: That's correct.

On 14 November 1997, the Commission announced its final written decision, providing in relevant part that:

5. The County's appraisal of [Taxpayers'] properties substantially exceeded the true value in money of the properties as of January 1, 1994.

6. Of the three appraisal methods recognized by the Commission, cost approach, comparable sales approach, and income approach, the Commission finds that no probative evidence was offered regarding the comparable sales and cost approaches. Even though the Commission considered all three of the appraisal methods, the Commission relied on the income approach to determine the values of the subject properties.

7. Under the income approach method, the value of property is determined by dividing the net income by an appropriate capitalization rate. The Taxpayer presented evidence showing the monthly rental income regarding each of the subject properties.... After accepting the Taxpayer's income as market income and adjusting the annual gross income of the properties for expenses and vacancy, the resulting net income was capitalized into an indication of market value for each of the subject properties.

The following table reflects the Commission's final appraisal of the nine parcels, as well as the corresponding values asserted by Taxpayers and the County.

Bldg # Tax Square Annual County Taxpayer Commission Parcel # Footage Rent in Value in Value in Value in Dollars Dollars Dollars Dollars 23 245-1-1H 60,000 90,000.00 580,700.00 441,000.00 450,000.00 5 245-1-55 30,000 42,999.96 254,700.00 190,000.00 215,000.00 14 245-1-68 30,000 37,500.00 272,300.00 190,000.00 187,560.00 2 245-1-69 20,000 24,999.96 156,200.00 120,000.00 125,000.00 3 245-1-71 20,000 24,999.96 166,200.00 120,000.00 125,000.00 4 245-1-71A 25,000 37,500.00 201,900.00 151,900.00 187,560.00 17 245-1-1F 30,000 45,000.00 296,600.00 210,000.00 225,000.00 15 245-1-1E 67,500 84,375.00 614,000.00 420,470.00 421,867.00 15A 245-1-2C 25,000 30,000.00 231,500.00 155,730.00 187,560.00

The County timely appealed to this Court 11 December 1997.

On appeal, the County in the main asserts that its

substantial rights ... have been prejudiced because the Commission's findings, inferences, conclusions or decisions are ... [u]nsupported by competent, material and substantial evidence in view of the entire record as submitted.

We conclude the County's argument has merit.

Our review of a final decision of the Commission is governed by N.C.G.S. § 105-345.2(b) (1997), which states:

(b) So far as necessary to the decision and where presented, the court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning and applicability of the terms of any Commission action. The court may affirm or reverse the decision of the Commission, declare the same null and void, or remand the case for further proceedings; or it may reverse or modify the decision if the substantial rights of the appellants have been prejudiced because the Commission's findings, inferences, conclusions or decisions are:

(1) In violation of constitutional provisions; or

(2) In excess of statutory authority or jurisdiction of the Commission; or

(3) Made upon unlawful proceedings; or

(4) Affected by other errors of law; or

(5) Unsupported by competent, material and substantial evidence in view of the entire record as submitted; or

(6) Arbitrary or capricious.

Upon challenge to a decision of the Commission under subsection (5) above, we are to review the "whole record." N.C.G.S. § 105-345.2(c) (1997); see also MAO/Pines Assoc. v. New Hanover Bd. of Equalization, 116 N.C.App. 551, 556, 449 S.E.2d 196, 199 (1994). The "whole record" test is not a tool of judicial intrusion; "instead, it merely gives a reviewing court the capability to determine whether an administrative decision has a rational basis in the...