Seaford Associates, L.P. v. Board of Assessment Review, 1651987

• Decision Date: 03 December 1987
• Docket Number: No. 1651987,1651987
• Citation: 539 A.2d 1045
• Court: United States State Supreme Court of Delaware
• Parties: SEAFORD ASSOCIATES, L.P. and David Cordish & Associates, Appellants, v. BOARD OF ASSESSMENT REVIEW, for Sussex County, Appellee. . Submitted:

Page 1045

539 A.2d 1045

SEAFORD ASSOCIATES, L.P. and David Cordish & Associates, Appellants, v. BOARD OF ASSESSMENT REVIEW, for Sussex County, Appellee.

No. 1651987.

Supreme Court of Delaware.

Submitted: Dec. 3, 1987.

Decided: March 17, 1988.

Rehearing Denied April 20, 1988.

William E. Manning, and John L. Olsen, of Duane, Morris & Heckscher, Wilmington, for appellants.

Robert V. Witsil, Jr., Legal Counsel to Sussex County, Georgetown, for appellee.

Before CHRISTIE, C.J., HORSEY and WALSH, JJ.

WALSH, Justice:

This is an appeal from a Superior Court affirmance of a decision of the Board of Assessment Review of Sussex County (the "Board") which denied a property assessment reduction requested by appellant, Seaford Associates, L.P. and David Cordish Associates (collectively "Seaford Associates"). Seaford Associates contends that the Superior Court erred in sustaining the Board's refusal to consider appraisal evidence based on the income capitalization method. We hold that the Board's refusal to consider such evidence based on the need for uniformity was arbitrary and erroneous as a matter of law. Accordingly, we reverse the decision of the Superior Court.

I

The pertinent facts underlying this appeal are not in dispute and the issue posed in the Superior Court, and in this Court, is essentially a legal one.

Seaford Associates is the owner of the Nylon Capital Shopping Center located on Stein Highway in Seaford, Delaware. The Nylon Center consists of three separate buildings housing various commercial establishments including a department store, a drug store, a grocery store, a bowling alley and other smaller retail shops. The center was constructed approximately twenty years ago. Most of its leases are "percentage-of-the-gross" type and are subject to periodic renewal. At the time Seaford Associates petitioned for an assessment reduction in early 1986, the Nylon Center was beginning to experience the effects of competition from a new regional shopping center, The Village Center, located on Route 13 in Seaford. Based on what it viewed as materially adverse effects on the expected income streams of its tenants, Seaford Associates sought a reduction of between 48 percent to 57 percent in the Center's 1985 assessment of $2,269,791.00.

In a hearing before the Board, Seaford Associates presented the testimony of the Nylon Center manager who described the impact of The Village Center and the population of its retail trade zone. He claimed that the Seaford area had a stable economy, and its population has grown at a steady but slow pace. The principal evidence of valuation in support of the assessment reduction was offered by Thomas C. Reynolds, an expert real estate appraiser whose written appraisal report had been supplied to the Board in advance of the hearing. It is this evidence, ultimately rejected by the Board, which is the focus of this appeal.

Sussex County real estate assessments are based on a 1974 base tax year. Thus the appraiser's task is to first determine a present (1986) valuation and then "factor back" that valuation to the base year since all Sussex County real estate is assessed at 50 percent of its 1974 value. In his search for present value Reynolds considered three separate valuation techniques: the market approach, the capitalization of income approach and the cost approach. ¹ He rejected the market approach because of the lack of comparables, i.e., there had been no recent sales of similar shopping centers from which projections could be made. Reynolds similarly rejected the reproduction cost new technique, although he used this method as a check against the valuation achieved through the capitalized income approach. His use of the cost technique yielded a present value of $3,344,000.00. He did not believe the cost approach had independent significance because one of the cost components, improvements on the "replica structure," was subject to functional obsolescence "due to the layout of the three buildings and their proximity to each other."

Reynolds' selection of the capitalization of income method proceeded on the assumption that the presence of the competing shopping center would be reflected in decreasing rental income (estimated at seven percent), higher vacancy rates and an increase in advertising to meet new competition. By applying the discount factors to a capitalized value with a competing center, as opposed to valuation without a competing center, Reynolds projected a discount to present value of 48 to 57.5 percent depending on whether a reduced tax rate resulting from the petition for reassessment was factored into expenses. The resulting valuation of $2,371,420 (rounded off to $2,400,000.00) without tax reduction represented the present value of the center as compared to its value of $5,555,965 without a competing center. Reynolds then applied a 50 percent reduction arrived at a 1974 base year figure of $1,118,570. Approximately the same result could be achieved by applying the 48 to 57.5 percent discount factor to the County's $2,269,791 base year assessment figure. In sum, Reynolds relied upon the income approach as the basis for a valuation which would reduce the present assessment between 48 percent to 57.5 percent.

In support of the existing assessment, the County offered the statements of Harold Carmean, Sussex County Director of Assessments, who opposed any reduction. While conceding that "the income approach is preferable from the investor's standpoint" he questioned the accuracy of certain data used by Reynolds. He urged the Board to reject the income method in favor of the cost approach, "the way it is currently done in Sussex County." Carmean advised the Board that "... if you decide to go with the income approach, then you are changing a system that is currently not [sic] in place and ramification that could cost."

In a written decision, the Board gave the following reason for denying an assessment reduction:

Sussex County has consistently used the "Cost Approach" for its valuation of property for assessment purposes and the "Income Approach" must be rejected for the sake of uniformity.

On appeal, the Superior Court upheld the Board's rejection of the income method. After noting the constitutional requirement of uniformity in taxes, the Superior Court ruled:

Thus, it is the duty of the individual taxing units to select an accepted method for the evaluation of the true value of real estate to be taxed. The county has done this by adopting one of the three accepted methods; that is, the cost less depreciation approach.

While acknowledging that a "different method would more accurately measure the market value of its property," the Court noted that the income approach would require a review of tax rate with fluctuation of income and the Board "must accord precedence to uniformity."

II

A property owner seeking a reduction in assessment is faced with a substantial evidential burden at both the administrative and appellate levels. Before the Board of Assessment it confronts the presumption of accuracy in favor of the existing assessment, a presumption which is rebutted only through evidence of substantial overvaluation. Fitzsimmons v. McCorkle, Del.Supr., 214 A.2d 334, 337 (1965); see also Delaware Racing Ass'n v. McMahon, Del.Supr., 340 A.2d 837, 840 (1975). On appeal to the Superior Court, and on further appeal to this Court, the Board of Assessment decision is deemed "prima facie correct" and will be disturbed only if the appellant can show that the Board acted "contrary to law, fraudulently, arbitrarily or capriciously." 9 Del.C. § 8312(c).

Seaford Associates contends that it sustained its evidential burden of showing substantial overassessment through the appraisal expert who concluded that the shopping center was overassessed by double its fair market value. The Board counters that the burden of demonstrating overassessment in this case was not met because the valuation method relied upon by the property owner, the capitalization of income approach, was speculative and fraught with unsupported projections of both income and expenses. ² The Board's contentions on appeal, however, do not square with its decision that it rejected the income approach "for the sake of uniformity" and in preference for its consistent use of the cost approach. While the Board may have had unarticulated reservations concerning the use of the data contained in Reynolds' income formulation, it posited its decision on a blanket rejection of the income method. The issue posed on appeal therefore does not call for a weighing of evidence to determine if the record supports a claim of overassessment. Rather, we address the narrow legal question of whether an administrative body charged with the duty of determining claims of overassessment may preclude application of one of the three accepted standards for real property valuation.

It is now well established in Delaware, as in most jurisdictions, that real estate tax...