Kargman v. Jacobs, 78-180-A

• Decision Date: 29 February 1980
• Docket Number: No. 78-180-A,78-180-A
• Citation: 122 R.I. 720,411 A.2d 1326
• Parties: Max R. KARGMAN et al. v. Stanley D. JACOBS, Tax Assessor, City of East Providence.
• Court: Rhode Island Supreme Court

Page 1326

411 A.2d 1326

122 R.I. 720

Max R. KARGMAN et al. v. Stanley D. JACOBS, Tax Assessor, City of East Providence.

No. 78-180-A.

Supreme Court of Rhode Island.

Feb. 29, 1980.

[122 R.I. 737] F. Thomas O'Halloran, Providence, Marcus E. Cohn, David Saliba, Boston, for plaintiffs.

Joseph T. Little, East Providence, for defendant.

OPINION

MURRAY, Justice.

The taxpayers Max R. and William M. Kargman filed in the Superior Court pursuant to G.L. 1956 (1970 Reenactment) § 44-5-26 petitions for relief from alleged overassessments on their property as of December 31, 1972, December 31, 1973, and December 31, 1974. ¹ The petitions for each year were consolidated for a jury-waived trial. A Superior Court justice decided that the assessments exceeded the property's full and fair cash value, ² and that the taxpayers were therefore entitled to a refund of their overpayments with interest. The Tax Assessor of the City of East Providence (assessor) raises several assignments of error, which we have consolidated to a few material points.

This case presents the identical parties and property involved in our earlier decision of Kargman v. Jacobs, 113 R.I. 696, 325 A.2d 543 (1974). The taxpayers as general partners in the Kent Farm Company (company) own in the city of East Providence six parcels of land with buildings and improvements all commonly known as Kent Farm. Kent Farm is a privately owned, federally financed apartment complex, constructed in accordance with the terms of § 221(d)(3) ³ of the National Housing Act and regulations thereunder. A regulatory agreement between the company and the Federal Housing Administration (FHA) controls the financial operation of this project and by its terms binds all successors in interest.

At trial, the assessor, who qualified as an expert appraiser, testified that, upon application of the uniform percentage of 80 percent employed in East Providence, he assessed Kent Farm at a valuation of $3,021,420 for each year in issue. Of the total assessed value, he allocated an amount of $139,960 to the land, based on comparable sales. The assessor testified that there were no comparable sales of buildings and improvements, however. He derived the valuation of the buildings and improvements from an appraisal made in 1969 and 1970 by a revaluation firm. That firm had employed the "replacement cost, minus depreciation" approach, ⁴ a recognized method of property valuation, to arrive at its appraisal. Three months prior to trial a fire had destroyed documents containing a breakdown of the revaluation firm's calculations. At trial the assessor admitted that, after the destruction of those documents, previous tax-roll information constituted the only documentary evidence available in support of his assessment.

In contrast, the taxpayers presented testimony of expert appraisers who relied on the "capitalization of income" approach, ⁵ a recognized method of appraising real property, to arrive at a valuation of Kent Farm. Peter A. Laudati, Jr., testified that a prudent buyer would purchase Kent Farm solely for investment purposes. He stated that a buyer would look primarily to the income stream, especially in light of regulatory restrictions, to gauge a fair purchase price. In view of those factors and in the absence of comparable sales, Mr. Laudati concluded that the capitalization of income approach was the best method for valuating Kent Farm.

Mr. Laudati proposed alternative valuations, under the capitalization of income approach, dependent upon treatment of the assessed property tax in his calculations. In the first instance, he included the then-assessed property tax among expenses deducted from potential gross income. Under that analysis, the complex produced a potential net annual income of $96,400. Mr. Laudati then divided that figure by 12 percent, the rate of return which he believed a purchaser would expect from such an investment. That calculation resulted in a capitalized value of $876,400 with the inclusion of the land's net present value.

In his alternative calculations, Mr. Laudati purported to eliminate distortion in net income reflected in his first set of calculations. According to his testimony, that distortion arose from deducting the alleged tax overassessment from gross income. He therefore did not include the property tax then assessed among the expenses he had deducted previously from potential gross annual income. He instead added 4.4 percent to the 12 percent rate of return he had previously employed. That increment represented the tax ratio in East Providence derived from a rate of $44.40 per $1000 assessed valuation. Upon dividing pretax income of $227,300 by the resultant capitalization rate of 16.4 percent, Mr. Laudati obtained a valuation of $1,386,000. Mr. Laudati asserted that for administrative purposes, the city should carry the property on its tax rolls at a full and fair market value of $1,732,500. Under that procedure, 80 percent of full and fair market value would equal $1,386,000. Mr. Laudati testified that an assessment of $1,386,000 would be substantially accurate for each of the three years in question.

Max R. Kargman, who qualified as an expert appraiser also supplied additional testimony concerning the appropriateness of using the capitalized-income approach to valuate Kent Farm. Mr. Kargman employed the same general method with a rate of return different from Mr. Laudati's. His calculations resulted in a proposed full and fair cash value of $1,043,000 for Kent Farm for each of the three years in issue.

The taxpayers presented testimony also of Dr. Arthur Solomon, director of the MIT-Harvard Joint Center for Urban Studies and an expert on federally subsidized housing. Doctor Solomon testified that at least five conceptual problems impaired the utility of the replacement-cost-minus-depreciation approach for valuating such property. According to Dr. Solomon, various effects of applicable regulations on income and expenses would go unrecognized if that approach were applied. He concluded that, for purposes of valuating Kent Farm, the replacement-cost-minus-depreciation approach was "far more speculative" than the capitalization-of-income method.

The trial justice accepted the assessor's valuation of the land but rejected the assessed value of the buildings and improvements upon determining that it exceeded their full and fair cash value. According to the trial justice, the "overwhelming weight" of evidence convinced him that a prudent buyer would purchase Kent Farm solely for investment. He, therefore, determined that the income capacity of the property would certainly affect the property's cash value. That finding prompted him to reject the assessor's testimony concerning the property's full and fair cash value, for the assessor had opted to accord no weight to income in arriving at his valuation. The trial justice determined that petitioners' buildings and improvements should have been assessed at $1,440,000, an amount reflecting 80 percent of a full and fair cash value of $1,800,000. ⁶ Then, adding $1,440,000 to the assessment of $139,960 that he had accepted for the land, the trial justice entered judgment ordering a revised assessment of $1,579,960 for each year in question.

In the litigation leading to our decision in Kargman v. Jacobs, 113 R.I. 696, 325 A.2d 543 (1974), these taxpayers challenged the legality of assessments assessed on Kent Farm in 1971 and 1972. The posture of that case on appeal to this court was the reverse of that of the present, however. There, the taxpayers appealed from a Superior Court decision that upheld the legality of the assessments for those years. ⁷ We characterized the issue on appeal as one of burden of proof. After reviewing the record, we determined that the trial justice had acted well within his capacity as factfinder in rejecting the opinion of value offered by the taxpayers' expert. We, consequently, upheld the trial justice's finding that the taxpayers had failed to establish that Kent Farm was assessed at a level higher than its full and fair cash value. Id. at 703, 325 A.2d at 547.

I

In support of one of his contentions on this appeal, the assessor directs our attention to a portion of a comment we made in Kargman v. Jacobs, 113 R.I. at 705-06, 325 A.2d at 548:

"The gross apartment rental figure used in its (Kent Farm's) appraisal assumes a 100% rental for all units during the year 1971. However, the East Providence enterprise is limited by governmental order as to the amount of monthly rental it can charge. In seeking to establish fair market value, one looks for the fair rental value rather than the actual income received. In using the income approach, the significant element to be established is the realty's capacity for earning income rather than income actually derived from its operation. Springfield Marine Bank v. Property Tax Appeal Board, 44 Ill.2d 428, 256 N.E.2d 334 (1970). At this point there is no credible evidence that Kent Farm's rental was fair rental income."

Pointing to the testimony of Mr. Laudati and Mr. Kargman, the assessor correctly maintains that both experts computed gross annual income in their capitalization-of-income calculations by adding the maximum allowable rents ⁸ obtainable from each apartment. The assessor argues that their calculations yielded lower valuations of the property than would have been derived from incorporating its fair rental value in their calculations. This contention is premised on equating the fair rental value to the earning capacity of Kent Farm in the absence of rental limitations. The assessor claims that Kargman v. Jacobs, supra, requires incorporation of fair rental value. He thus concludes that the judge erred in admitting Mr. Laudati's and Mr. Kargman's opinions of value.

The language cited by the assessor does indeed imply that a capitalized-income appraisal of Kent Farm, computed on the basis of actual rental income,...