Jim Paws, Inc. v. Equalization Bd. of Garland County, 86-13

• Decision Date: 27 May 1986
• Docket Number: No. 86-13,86-13
• Citation: 289 Ark. 113,710 S.W.2d 197
• Parties: JIM PAWS, INC., Appellant, v. EQUALIZATION BOARD OF GARLAND COUNTY, Arkansas, Appellee.
• Court: Arkansas Supreme Court

Page 197

710 S.W.2d 197

289 Ark. 113

JIM PAWS, INC., Appellant, v. EQUALIZATION BOARD OF GARLAND COUNTY, Arkansas, Appellee.

No. 86-13.

Supreme Court of Arkansas.

May 27, 1986.

Wootton, Glover, Sanders, Slagle, Parkerson & Hargraves by Richard L. Slagle, Hot Springs, for appellant.

Robert Ridgeway, Sr., Pros. Atty., Hot Springs, for appellee.

HOLT, Chief Justice.

The Velda Rose/Ramada Inn Hotel was reappraised and assessed by the Garland County Assessor at a total valuation of $5,444,700 in June, 1981. The appellant, Jim Paws, Inc., purchased the hotel for $1,000,000 in July, 1981. Appeals of the assessment to the Garland County Equalization Board and the Garland County Circuit Court resulted in a reduction of the assessed value to $4,458,750. Appellant argues on appeal to this court that the method of assessment used by the county appraiser was arbitrary and unreasonable and did not reflect the true market value of the property. Appellant also contends that the circuit court should have excluded testimony by the county's expert witness because it had no reasonable basis. This appeal was certified to the Supreme Court by the Court of Appeals because it involves methods of reappraising property, an issue of significant public interest under Sup.Ct.R. 29(4)(b).

The assessment and appraisal of appellant's property was based solely upon the "replacement cost new, less depreciation", approach. Upon appellant's petition for review, the circuit court reduced the assessment because of incorrect evaluations of the effective age and depreciation of appellant's property. Appellant contends that the reappraisal is arbitrary and unreasonable and grossly exceeds the true market value of the property and that the purchase price of $1,000,000 is its true market value. We agree that the assessment was clearly erroneous and arbitrary and exceeded the true market value of the property.

In reversing the circuit court, we are aware that it is only in the most exceptional cases that an appellate court will grant a reassessment of property. In St. Louis-San Francisco Ry. Co. v. Arkansas Pub. Serv. Comm'n, 227 Ark. 1066, 304 S.W.2d 297 (1957), this court discussed the standard of review in these cases:

The purpose of any Court appeal from an assessment or equalizing agency is to see that the assessment is neither erroneous in figures, nor arbitrary in measuring, nor confiscatory in results. In 84 C.J.S. 1123, the effect of the holdings is summarized in this language: "On an appeal from an assessment, the Court will not disturb the decision of the assessors unless it is clearly erroneous, or, unless, as required by Statute, the assessment is manifestly excessive, fraudulent, or oppressive...."

Nevertheless, property must be assessed according to its "value". Article 16, § 5 of the Arkansas Constitution, as it reads after amendment 59, states that "[a]ll real and tangible personal property subject to taxation shall be taxed according to its value, that value to be ascertained in such manner as the General Assembly shall direct, making the same equal and uniform throughout the State." Prior to amendment 59, the pertinent part of article 16, § 5 read much the same, requiring that all property be assessed according to its value.

Arkansas Pub. Serv. Comm'n v. Pulaski County Equalization Bd., 266 Ark. 64, 582 S.W.2d 942 (1979), held that Act 411 of 1973 and Act 188 of 1969 were unconstitutional in that they violated the longstanding interpretation by the Supreme Court and the legislature that value meant "current market value". That opinion reviewed the Arkansas case law and statutory authority which established the premise by which assessment statutes and methods must be measured. This premise is that property must be assessed according to its "real and true value"; the "true and full market or actual value". In calculating the market value, many factors must be considered, and the type of inquiry will depend on what type of property is involved, but "all of these questions are to be considered for the purpose at last of ascertaining the market value of the tract in question, and that is the value which must be adopted for the purposes of assessment when it has been ascertained." Id., at 76, 582 S.W.2d 942, quoting American Bauxite Co. v. Board of Equalization, 119 Ark. 362, 177 S.W. 1151 (1915).

In the present case, the county appraiser did not consider several factors, particularly the type of property involved, i.e. income-producing property, in determining real and true value. To the contrary, the county appraiser limited its evaluation of appellant's property to the cost of replacement or "new cost" of the hotel, including the restaurant and parking facilities, with the estimated depreciation of the property subtracted.

The appellant, in support of his claim that the reappraisement exceeds the true market value, introduced testimony from C.V. Barnes, an appraiser with more than 40 years of experience, concerning the three different approaches used in appraising this type of property. In addition to the "new cost" approach used by the county appraiser, there are the market data approach and income approach. The market approach compares sales of similar properties in the community and looks at any arms-length transactions involving the subject property. The income approach estimates the fair market rental of the property, determines what the net income for the property would be, and then capitalizes the net income to obtain the dollar value of the property. Although both the county appraiser and the expert witness for the county stated that the Public Service Commission manual, published for use by county appraisers, recognizes all three methods, only the "new cost" method was used in this instance.

Barnes testified that, according to the market approach, using the actual sale of the property as the primary source, the property's estimated value was between $1,150,000 and $1,250,000. Using the facility's historical occupancy rate of 40%, Barnes estimated the value of the hotel to be $1,365,000 based on the income approach. Barnes stated that with this type of property, the income approach is the most reliable, because its value to an owner is determined by the future income the property can produce. He did an estimate based on the cost approach, but did not consider that to be a viable appraisal because it was so out of line with what he concluded from the other two approaches. Although the replacement cost figure used by the county appraiser was reasonable, he said the final conclusion was not because the depreciation figure did not account for the physical, functional and economic depreciation which should have been deducted, and because it did not consider the income and market approaches. Barnes emphasized the economic obsolescence of the property, caused by occupancy rates in Hot Springs dropping from between 70% and 80% twenty years ago to between 40% and 50% now.

The county appraiser who was involved...