Sheridan v. Town of Killingly

• Decision Date: 23 May 2006
• Docket Number: No. 17366.,17366.
• Citation: 897 A.2d 90,278 Conn. 252
• Court: Connecticut Supreme Court
• Parties: John R. SHERIDAN v. TOWN OF KILLINGLY.

Page 90

897 A.2d 90

278 Conn. 252

John R. SHERIDAN v. TOWN OF KILLINGLY.

No. 17366.

Supreme Court of Connecticut.

Argued February 14, 2006.

Decided May 23, 2006.

Linda L. Morkan, with whom were Gregory W. McCracken, Hartford and, on the brief, Timothy D. Bates, New London, for the appellant (defendant).

Michael A. Zizka, with whom was Kari L. Olson, Hartford, for the appellee (substitute plaintiff).

SULLIVAN, C.J., and NORCOTT, KATZ, PALMER and VERTEFEUILLE, Js.^*

SULLIVAN, C.J.

This appeal arises from an action brought by the plaintiff, John R. Sheridan,¹ against the defendant, the town of Killingly (town), challenging the town's tax assessment of real property owned by the plaintiff in the town for the years 2002 and 2003. The trial court concluded that the town's assessment was excessive and rendered judgment for the plaintiff. The town appeals from that judgment, claiming that the trial court improperly concluded that the property should have been valued by capitalizing the actual rental income of the property and that the town should not have considered the value of the leasehold interest. The town further claims that, if the court had applied the proper valuation approach, the plaintiff could not have met his burden of proving that the valuation was excessive. We conclude that the trial court improperly determined that, as a matter of law, the town could not consider the value of the leasehold interest in determining the value of the property for tax assessment purposes. We further conclude that the case should be remanded so that the court may make findings of fact under the proper legal standard.

The record reveals the following relevant facts and procedural history. The plaintiff owns property at 1699 Upper Maple Street in Killingly (property). The 202 acre property partially surrounds Alexander Lake and consists of eighty-three acres of land officially designated as open space; thirty-one acres divided into 274 leasehold tracts, each approximately one-tenth of an acre in size; undeveloped woodlands; a leased restaurant; the plaintiff's family residence; and a number of buildings that are no longer in use. The tenants on the leasehold tracts lease the land from the plaintiff and own all the buildings and improvements located thereon. Each lease has an initial term of ten years with an option to extend the term subject to further negotiation. The leases are due to expire in 2007.

The property is located in a special overlay zone known as the Alexander Lake zoning overlay district. The district was created because the leasehold tracts do not meet the minimum lot size requirements of the underlying low density zone. The special zone allows tenants to modify preexisting structures without obtaining a variance. Because the tracts do not meet the minimum lot size for the underlying zone, they cannot be subdivided and sold as separate lots.

The property had a total assessed value of $1,150,600 on the town's October 1, 2001 grand list. On January 14, 2003, the town notified the plaintiff that it had completed a revaluation of all of the town's real property for the October 1, 2002 grand list and the assessed valued of the plaintiff's property was now $9,844,210.² The plaintiff appealed from the assessment to the town's board of assessment appeals (board), and the board thereafter notified the plaintiff that it had elected not to conduct an appeal hearing, as authorized by General Statutes § 12-111. The plaintiff then appealed from the board's decision to the trial court pursuant to General Statutes § 12-117a.

At trial, the plaintiff's expert appraiser, Robert R. Morra, testified that, because the property could be sold only as a single parcel and had unique characteristics that made a comparable sales approach infeasible, he believed that an income capitalization approach to valuing the portion of the property subject to the residential leases was appropriate.³ In 2002, the property generated $12,000 in rental income from the restaurant and $499,118 in rental income from the leasehold tracts, for a gross income of $511,118. Morra subtracted a 3 percent rent loss deduction from this amount for an effective gross income of $495,784. He then deducted expenses in the amount of $272,608, for a net income of $223,176. Using a capitalization rate of 9.82 percent, Morra testified that the value of the portion of the property subject to the residential leases was $2,273,000. He added to this the value of the plaintiff's family residence, $82,000, for a total property value of $2,355,000.

The town's expert appraiser, Stephen R. Flanagan, used a hybrid approach in valuing the portion of the property subject to the leases. He calculated the value of the lessor's interest by using the income capitalization approach and he calculated the value of the tenants' leasehold interest by using a comparable sales approach. Flanagan concluded that using this hybrid approach was necessary because the town's property tax assessor had provided him with information that a number of residential tenants had sold their leasehold interest in the tracts, which consisted of any improvements on the tracts plus an assignment of the lease, for amounts greater than would have been expected if the actual rents had reflected fair market value. The assessor reasoned that, if the rents had reflected fair market value, then an arm's-length purchaser of an assignment of the lease would not have paid a premium for the leasehold interest above the value of the improvements. Because the value of the improvements was minimal in several instances, and because several purchasers had removed the existing improvements immediately after taking possession of the land, the assessor concluded that the amount paid by the purchasers indicated that the value of the leaseholds exceeded the value of the improvements and the yearly rent combined. Flanagan concluded that using an income capitalization approach based on the actual rental income would not capture the full fair market value of the property as reflected in these sales.

To calculate the income capitalization portion of the value of the property, Flanagan used an average rent of $1800 per leasehold tract, multiplied by 274 tracts, for a total of $493,200 in gross rental income.⁴ He then subtracted $153,000 in expenses and a 2 percent reserve for repairs, leaving approximately $330,000 in net income. Using a capitalization rate of 8 percent, Flanagan calculated that the "landlord's" interest in the property subject to the residential leases was worth $4,125,000, or approximately $15,000 per tract.

To calculate the value of the leasehold interest, Flanagan reviewed five sales of leasehold tracts in which the buyer had removed the existing improvements. He determined that the average sale price was $35,000 per tract. He concluded, therefore, that the value of the leasehold interest of each of the 274 leasehold tracts, not including the value of any improvements, was $35,000. Adding this value to the income capitalization value of $15,000 he concluded that each tract had a fair market value of $50,000, which, multiplied by 274, gave a total value for the leasehold tracts of $13,700,000. Flanagan valued 85.5 acres of land located elsewhere on the property at $218,000,⁵ another 26 acres of undeveloped land at $130,000, and the remaining buildings, including the family residence, at $287,000, for a total value of $14,335,000.

The trial court accepted Morra's valuation of the property, determined that the true and actual value of the property on October 1, 2002, October 1, 2003, and October 1, 2004, was $2,355,000,⁶ and rendered judgment in favor of the plaintiff. The court rejected Flanagan's valuation because it concluded that: (1) he improperly had attributed the value of the tenants' leasehold interest, which belonged to the tenants, to the value of the plaintiff's property and; (2) the valuation was predicated on the assumption that the land on which the restaurant and the family residence were located could be sold as individual parcels when, in fact, the land could not be subdivided. The town appealed from the judgment to the Appellate Court and we transferred the appeal to this court pursuant to General Statutes § 51-199(c) and Practice Book § 65-1.

The town claims on appeal that the trial court improperly concluded that, as a matter of law, it could not consider the value of the leasehold interest in determining the fair market value of the property for purposes of assessing a property tax against the plaintiff. The town further claims that, if the trial court had applied the proper standard, it reasonably could not have concluded that the plaintiff had met its burden of proving that the assessment was excessive. At oral argument before this court, the town argued that, if this court were to conclude that the trial court applied the wrong legal standard and that the record is inadequate for this court to ascertain whether the town should prevail under the correct legal standard, then the matter should be remanded to the trial court for further proceedings. The plaintiff counters that the trial court did not adopt any broad rule of law, but found only that, as a factual matter, Flanagan's approach was inappropriate for this particular property. The plaintiff further contends that this finding was reasonable and supported by the record. We agree with the town that the trial court applied an improper legal standard and conclude that the case should be remanded for further proceedings.

"In actions requiring ... a valuation of property, the trial court is charged with the duty of making an independent valuation of the property involved.... [N]o one method of valuation is controlling and ... the [court] may select the one most appropriate in the case before [it].... Moreover, a variety of factors may be considered by the trial court in assessing the value of such property.... [T]he trier...