Reliance Ins. Co. v. Smith

Decision Date06 May 1997
Docket NumberNo. 2694,2694
PartiesRELIANCE INSURANCE COMPANY, as Successor in Interest to United Pacific Life Insurance Company, Appellant, v. Leslie SMITH, Lexington County Assessor, and The County of Lexington, Respondents. . Heard
CourtSouth Carolina Court of Appeals

S. Jahue Moore, of Kirkland, Wilson, Moore, Allen, Taylor & O'Day, West Columbia, for appellant.

Jeffrey M. Anderson, of Nicholson, Davis, Frawley, Anderson & Ayer, Lexington, for respondents.

HOWELL, Chief Judge:

Reliance Insurance Company (Reliance) appeals from the property tax valuation of its Harbison Court Shopping Center (the Property), located in Lexington County. The Lexington County Department of Assessment and Equalization (the Assessor) originally appraised the Property for the 1992 tax year at $9,000,000. Reliance appealed to the Lexington County Assessment Appeals Board, and the Board lowered the valuation of the property to $8,000,000. 1 The Assessor appealed, seeking a contested case hearing before an Administrative Law Judge (ALJ). The ALJ valued the property at $9,000,000, and the circuit court affirmed. We likewise affirm.

I.

Reliance's predecessor in interest purchased the Property in 1991 for $16,610,000. 2 The Property, which is situated on just over 23 acres of land, has approximately 194,000 square feet of rental space located in two structures--a 189,000 square foot shopping center with 146,474 square feet of finished space and 42,460 square feet of unfinished space, 3 and an outparcel with a separate, single-use building with 5,227 square feet of rentable space. At the time of the County's appraisal, the improvements on the Property were approximately one year old, and approximately seventy-five percent of the Property's finished space was occupied.

In preparation for the appeal of the assessment, Smith analyzed the property using various valuation methods--the cost method, the income capitalization method, and the sales comparison method. The appraisal of the Property, which was submitted to the ALJ, describes the various methods of valuation used by the Assessor.

The income capitalization approach "looks at property value through the eyes of a typical investor. In this approach, typical rental income and its relationship to sales price is analyzed by using a capitalization rate which represents the ratio of sales price to net rental income obtained." Using the income capitalization approach, the Assessor valued the Property at $10,300,000.

The sales comparison approach directly compares the subject property with recent sales of similar properties. This approach "closely duplicates the choices available to buyers in the market at the time of the appraisal and assumes that an informed purchaser will pay no more for a property than the cost of acquiring an existing, or substitute property with the same utility." Under this approach, the total subject property is compared directly with recent sales of similar properties. For improved property, the gross sales price is divided by the square footage of building area of improved properties to arrive at an overall value for the land and building combined. The Assessor determined the value of the Property to be $10,940,000 using the sales comparison approach.

The cost approach begins with an estimate of the value of the site as if it were vacant and utilized to its highest and best use. To this figure is added the cost to reproduce the subject improvement at current construction prices, less any accrued depreciation. The cost approach

is based on the assumption that an informed purchaser would pay no more for a property than the cost of producing a substitute property with the same utility. This approach is particularly meaningful for improvements which are new or almost new. Although depreciation in all forms can be extracted directly from the market, extreme care must be taken to select comparables which are similar to the subject in terms of age, condition, size and location.

Using the cost approach, the Assessor valued the finished portion of the main shopping center at $40.00 per square foot and the unfinished portion at $18.15 per square foot. 4 After taking into account the value of the outparcel, the parking lot, and depreciation of the improvements, the County determined the total value of the Property under the cost approach to be $9,000,000, or approximately $46.35 per square foot.

The Assessor then performed an equitable analysis comparing its appraisals of the Property to those of other properties to ensure that the value assigned to the Property was in line with values assessed on similar properties in Lexington County. After analyzing the value of the Property under the methods described above, the Assessor concluded that the Property should be valued at $9,000,000.

At the hearing before the ALJ, Reliance vigorously cross-examined Smith about the appraisal of the Property and the validity of the assessment approaches; however, Reliance did not present an independent appraisal of the Property. The only evidence presented by Reliance was the testimony of Joseph Karol, an expert in the field of commercial appraisals.

Karol's testimony consisted primarily of criticisms directed at the Assessor and each of the methods used to value the Property. According to Karol, the approaches used by Smith to assess the property did "not appear necessarily to be reasonable." Although Karol did not appraise the Property, he stated that a reasonable assessment of the center would be between $7,500,000 and $8,000,000. He reached this figure by taking the assessed value for Harbison Center, a shopping center located across Harbison Boulevard from the Property, and discounting that value to take into account the fact that Harbison Center was fully finished, while the Property had 42,460 square feet of finished space.

The ALJ concluded that the cost approach yielded the most accurate valuation of the Property. The ALJ concluded that use of the income capitalization approach, although generally favored, was not appropriate in this case, because the shopping center, "being only two years old and still seeking to attract tenants, ha[s] not yet reached a stable income level." 5 As to the sales comparison approach, the ALJ concluded that its use in this case was likewise inappropriate, given that there were no sales "similar enough in their state of completion or occupancy to be used as comparables." The ALJ noted that the cost approach is useful for valuing recently constructed properties and is particularly useful in cases where the property "is difficult to value under an income or market approach where the price in the market is indeterminate because of some unique consideration." Therefore, notwithstanding the $8,000,000 value assigned to the Property by the Lexington County Assessment Appeals Board, the ALJ determined that the Property should be valued at $9,000,000 for the 1992 tax year.

II.
A.

On appeal, Reliance first argues that the ALJ's order must be reversed because the ALJ improperly placed the burden of proof of the assessment value on Reliance. Reliance contends that, in a contested case hearing, the ALJ is limited to a restricted review of the record from the hearing before the county board, and that the ALJ is required to adopt the county board's assessment if supported by substantial evidence. Thus, according to Reliance, the ALJ improperly considered Reliance's failure to submit evidence demonstrating the value of the property and its failure to submit an appraisal, and improperly failed to "affirm" the Board's assessment of the Property.

We agree with Reliance that the Assessor bore the burden of proof before the ALJ. The real issue, however, is not which party bore the burden of proof, but precisely what it is that the Assessor was required to prove. Reliance contends that the Assessor was required to prove that the $8,000,000 valuation established by the Lexington County Assessment Appeals Board was incorrect. We disagree.

A taxpayer or county assessor "may appeal a property tax assessment made by [a county board of assessment] by requesting a contested case hearing before the Administrative Law Judge Division in accordance with the rules of the Administrative Law Judge Division." S.C.Code Ann. § 12-60-2540(A) (Supp.1996). The Rules of Procedure for the Administrative Law Judge Division require that the ALJ make independent findings of fact in contested case hearings, see Rule 29(B), Rules of Procedure for the Administrative Law Judge Division, and the Administrative Procedures Act clearly contemplates that the ALJ will make his own findings of fact in a contested case hearing. See S.C.Code Ann. § 1-23-320(d) (Supp.1996) ("The administrative law judge division shall ... enforce by proper proceedings the attendance and testimony of witnesses."); id. § 1-23-320(i) (Supp.1996) ("Findings of fact shall be based exclusively on the evidence and on matters officially noticed."); id. § 1-23-350 (1986) ("A final decision or order adverse to a party in a contested case shall .... include findings of fact and conclusions of law, separately stated."); see also S.C.Code Ann. § 1-23-330 (1986) (discussing the receipt of evidence in contested cases).

Therefore, although a case involving a property tax assessment reaches the ALJ in the posture of an appeal, the ALJ is not sitting in an appellate capacity and is not restricted to a review of the decision below. Instead, the proceeding before the ALJ is in the nature of a de novo hearing. See Blizzard v. Miller, 306 S.C. 373, 375, 412 S.E.2d 406, 407 (1991) ("A trial de novo is one in which 'the whole case is tried as if no trial whatsoever had been had in the first instance.' "). Thus, the Assessor is required to prove the correctness of the valuation he is seeking; the Assessor is not required, as Reliance argues, to prove the incorrectness of the Board's...

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