Supervisor of Assessments of Allegany County v. Ort Children Trust Four

• Decision Date: 11 August 1982
• Docket Number: No. 150,150
• Citation: 294 Md. 195,448 A.2d 947
• Parties: SUPERVISOR OF ASSESSMENTS OF ALLEGANY COUNTY v. The ORT CHILDREN TRUST FOUR.
• Court: Maryland Court of Appeals

Page 195

294 Md. 195

448 A.2d 947

SUPERVISOR OF ASSESSMENTS OF ALLEGANY COUNTY v. The ORT CHILDREN TRUST FOUR.

No. 150.

Court of Appeals of Maryland.

Aug. 11, 1982.

Peter W. Taliaferro, Asst. Atty. Gen., Baltimore (Stephen H. Sachs, Atty. Gen., Baltimore, on brief), for appellant.

James L. Thompson and Joseph V. Truhe, Jr., Rockville, and William Walsh, Cumberland, for appellee.

Argued before MURPHY, C. J., and SMITH, ELDRIDGE, COLE, DAVIDSON, RODOWSKY and COUCH, JJ.

RODOWSKY, Judge.

This appeal involves the 1979-80 assessment for real estate taxes of an income producing property. The property is saddled with a long term lease at a flat rent which was reflective of the market when the contract was made in 1962. Unique to this case is mutual agreement that in January 1979, the property could have commanded a rent more than twice that actually reserved under the lease, if the property had been available to be let at that time. The Maryland Tax Court acknowledged in its written opinion that it gave consideration to the actual rent in reducing the assessment as established by the supervisor of assessments for the county. In so doing, the assessor says the Tax Court erred as a matter of law. For reasons herein set forth, we shall conclude that there was no error.

The property involved is 4.373 acres of land, improved by a warehouse building, in LaVale, Allegany County. It is owned by The Ort Children Trust Four (the Trust). Predecessors in title to the Trust constructed the warehouse under a build and lease agreement of August 29, 1962 with Sears, Roebuck & Co. (Sears). The lease commenced in 1963 for an initial term of 20 years. Sears holds, at its option, the right to extend the lease for four additional terms, each of five years, under the same lease provisions applicable to the initial 20 year term. If all options are exercised, the right of Sears to occupy the property will extend to the year 2003. The rent is a fixed amount, payable monthly, and totals $22,444.56 per year. Real estate taxes, public liability insurance, fire and extended coverage insurance and structural maintenance, including the roof, are the landlord's obligation at its expense. The rent established in 1962 converts to approximately $.55/s.f. (the contract rent). ¹ It is conceded that as of January 1, 1979 comparable property rented for $1.25 to $1.75/s.f. (the economic rent). ²

The Supervisor of Assessments for Allegany County (Supervisor) valued the land at $46,850 and the improvements at $292,000 as of the applicable date of finality, January 1, 1979. The improvements were valued by the cost of reproduction method, with a 41% depreciation allowance. This total valuation of $338,850 resulted in an assessment of $169,425 under the assessment to value ratio of 50%.

The Trust pursued its challenge of the assessment to the level of the Maryland Tax Court, where a real estate expert for the taxpayer testified that the value of the property was $80,000. His opinion utilized the contract rent and also reflected the cost to the owner of a new roof which the building required, for which an estimate of $68,500 had been received. This expert presented four variations of an income approach, all of which started with net rental income of approximately $18,000 per year, arrived at by deducting expenses representing insurance, maintenance, reserve for replacement, management, legal and accounting. All of his methods used a capitalization rate of 13.25%. In a direct capitalization approach the indicated value would be $69,600 if the cost of the roof were deducted from the product of capitalizing the net rent. If an amount required to amortize the cost of a new roof over a 20 year period at 10.5% were deducted from the net rent before capitalization, the indicated value would be $76,100. Taxpayer's expert then utilized the "Inwood" annuity approach and undertook to express the present worth of the right to receive the net contract rent for 24.5 years plus the value of the property at the end of the lease term, all discounted at 13.25%. A figure of $418,000 was used in this computation as the value of the property at the end of the lease term, based upon 1979 economic rent. If the cost of the roof were deducted from the product of discounting, the indicated value of the property would be $80,700. If amortized roof repair cost were deducted from the annual, net, contract rent before discounting to present worth, the "Inwood" approach would indicate a value of $90,200.

The assessor in the Tax Court presented, as a check on his cost of reproduction appraisal, an income approach to value. It utilized $1.25/s.f. as the gross rent. This was the lower end of the economic rent range. The lower end of that range was used because the assessor gave consideration to contract rent "to a certain extent." Net income was determined after deducting only for insurance. A return at 9.395% attributable to the land, at the assessor's land valuation, was computed and deducted from the net economic rent to determine that portion of the net economic rent attributable to the improvements. This in turn was capitalized at 11.395%. By this approach a total valuation of land and improvements of $401,220 was indicated to the assessor. This confirmed, in his opinion, the total assessment developed by the reproduction cost method.

The Tax Court reduced the assessor's valuation to $246,850 or, in dollars of assessment, to $123,425, effected by a $46,000 reduction in the assessment on the improvements.

In its written opinion the Tax Court does not specifically set forth how its valuation was determined. It found, however, "that the present lease terms which specify the rent to be paid and other conditions should have been accorded more weight by the Supervisor and that this assessment appealed from should be reduced." The Tax Court also made the following findings:

In the instant case, if any increment in value has occurred since the lease began in 1963, such increment has inured to the benefit of the [lessee], Sears, and the leasehold interest of the tenant is not subject to taxation in Maryland and what is taxed to the owner is the fair market value of his property.

No testimony has been introduced by the Supervisor to indicate that the rental entered into at the time of the lease's beginning in 1963 was not the proper rental as of that time.

The value arrived at by the Supervisor is based upon a rent which does not exist and this valuation also fails to recognize the cost of replacing the roof which is the responsibility of the owner.

The Petitioner's presentation is based upon facts, most importantly the lease rental and terms which would primarily control the purchase price this property could expect to produce if placed on the open market for sale.

The Supervisor appealed to the Circuit Court for Allegany County which affirmed the Tax Court. Appeal was taken by the Supervisor to the Court of Special Appeals. We granted the Supervisor's petition for a writ of certiorari prior to consideration of the case by the intermediate appellate court. As refined by oral argument in this Court, the position of the Supervisor is that the Maryland Tax Court could not, as a matter of law, give any consideration to the contract rent received by the Trust, because there was no dispute that the contract rent was less than the economic rent on the date of finality.

Our task on this appeal is to determine whether the Circuit Court for Allegany County erred in affirming the Maryland Tax Court. The standard of review of Tax Court orders by a circuit court is set forth in Md.Code (1957, 1980 Repl.Vol.), Art. 81, § 229(o):

[T]he circuit court ... shall determine the matter upon the record made in the Maryland Tax Court. The circuit court ... shall affirm the Tax Court order if it is not erroneous as a matter of law and if it is supported by substantial evidence appearing in the record. In other cases, the circuit court ... may affirm, reverse, remand, or modify the order appealed from.

By subsection (h) of § 229, the Maryland Tax Court

is empowered to assess anew, classify anew, abate, modify, change or alter any valuation [or] assessment ... appealed from, provided that in the absence of any affirmative evidence to the contrary or of any error apparent on the face of the proceedings, the assessment ... appealed from shall be affirmed.

There is no contention in this case that the assessment made by the Maryland Tax Court is unsupported by the record, if the Tax Court could legally take the effect of the contract rent into consideration in arriving at its valuation. But for the legal point advanced by the Supervisor, this case would simply be the Tax Court resolution of a dispute over valuation.

Article 81, § 14(b)(1)(i) provides that "[a]ll real property required by this article to be assessed shall be valued at its full cash value on the date of finality." Section 14(b)(1)(ii)1 states that "[f]ull cash value means current value."

In Schley v. Montgomery County, 106 Md. 407, 410, 67 A. 250, 251-52 (1907), a case involving the valuation of shares of stock, we said that "[t]he value of an article is ordinarily what it will bring at a fair sale in the market, unless it be of so special a nature that no market for it exists and then its intrinsic value must be ascertained by a consideration of its cost, nature, utility and other characteristics." Thereafter, when interpreting "full cash value" as applied to the assessment of real property for ordinary taxes, this Court said in Rogan v. Commissioners of Calvert County, 194 Md. 299, 311, 71 A.2d 47, 52 (1950):

Ordinarily the cash value of property is the market value. Schley v. Montgomery County Com'rs., 106 Md. 407, 410, 67 A. 250. But, as Justice White said in San Francisco National Bank v. Dodge, 197 U.S. 70, 25 S.Ct. 384, 386, 49 L.Ed. 669, the market value of property is the value a willing purchaser will pay for it to a...