In this appeal, a taxpayer challenges a judgment upholding a county's assessment of the fair market value of real estate owned by the taxpayer for the 2003 and 2004 tax years. Specifically, we consider whether the county failed to properly consider the income and sales approaches to valuation before basing its assessment solely on the cost approach.
BACKGROUND
The property that is the subject of this appeal is Keswick Club, an approximately 153-acre property in Albemarle County ("the county"). Keswick Club is a private recreational club with facilities that include an
In 2003, the county performed its biennial reassessment of real estate values for the 2003 and 2004 tax years. Subsequently, the county issued to the taxpayer a notice of reassessment stating that Keswick Club's assessed fair market value for 2003 was $12,771,500. 1 The taxpayer disputed the county's assessment of Keswick Club's fair market value and submitted an appraisal report prepared by a private appraiser. This appraisal report reflected Keswick Club's fair market value at $2.9 million utilizing the income and sales approaches to valuation, but not the cost approach. 2
In a letter to the taxpayer dated May 15, 2003, the county disagreed with the methodology used in the private appraisal report and explained that it had chosen to use the cost approach, not the income approach or the sales approach, in valuing Keswick Club. The county stated in the letter that:
We have reviewed the appraisal report you provided and as a result disagree with the final value estimate. In our opinion, given the status of the golf clubs located within the County, it is difficult to arrive at a fair market valuation by employing the income approach. The sales comparison approach was also not used due to the lack of available sales information within our jurisdiction. We have chosen to value area golf clubs using the cost approach.
The county's letter also noted that the other golf clubs in the county were assessed at $21,585,700, $13,281,200, and $9,159,800. 3
The taxpayer sought review by the county Board of Equalization, which reduced Keswick Club's fair market value by $1,345,400 to account for functional obsolescence and other factors. The county subsequently made a further reduction to account for a decrease in acreage such that Keswick Club's final assessed fair market value by the county was $11,175,700. 4
The taxpayer filed an application in the Circuit Court of Albemarle County pursuant to Code § 58.1-3984 requesting that the circuit court correct the county's 2003 and 2004 assessments. The taxpayer asserted that the county used only the cost approach in making its valuation and by doing so "failed to consider all factors required by law for a lawful and proper valuation of the subject property." The taxpayer maintained that Keswick Club's actual fair market value, estimated using the "proper and preferred" methods of valuation, was $2,900,000. The county filed a responsive pleading asserting, among other things, that its valuation method was proper and that it had used the cost approach "only after considering but properly rejecting the use of other valuation methods."
At a bench trial held in the circuit court, the parties presented evidence of Keswick
The county assessor who had assessed Keswick Club testified that, in making his appraisal, he "looked at all three approaches to value" before choosing to base his assessment solely on the cost approach. The assessor stated that he chose to use the cost method because it rendered the "most accurate appraisal of the property" and is "appropriate when you have a special-use property" such as a golf course.
The county assessor testified that he rejected the income approach because he did not receive any income statements or other financial information pertaining to Keswick Club. However, the assessor acknowledged that he never requested any such information. On the issue of whether he would utilize the income approach on a for-profit business that was losing money, the assessor stated that he would still consider such property "income producing property." He further stated that he would not use the income approach because he could not "do a proper analysis of a property with a negative income to create ... an accurate reflection of market value."
The county assessor testified that he attempted to develop an appraisal based on the sales approach but could locate only one comparable sale inside the county. The assessor testified that "[a]fter careful examination" of that sale he chose not to use the sales approach in appraising Keswick Club. The assessor testified that he did not look outside the county for comparable sales, but gave no reason for his failure to do so. The assessor also testified that he did not consider the 2002 sale of the beneficial ownership of Keswick Club as a comparable sale because there was no record of the sale in the county real estate records and because he did not consider the sale to be an arms-length sale on the open market. The assessor's testimony indicated that he had not seen any documents related to the put and call agreement governing the sale, that he knew nothing about the terms of that agreement, and that he did not make any effort to become aware of the terms of the agreement.
Both parties presented expert testimony by private appraisers and presented as evidence appraisal reports prepared by those experts. The taxpayer's expert, David Sangree, testified that he utilized the income approach and the sales approach, but not the cost approach, to appraise Keswick Club. Sangree testified that he used the income approach despite the fact that Keswick Club was losing money based on his projection that, due to improved operating performance and capital improvements undertaken by the new management, Keswick Club was likely to become profitable. Sangree testified that, in applying the sales approach, he used the 2002 sale of Keswick Club as a comparable sale because "the subject sale is certainly the most important sale to consider." Sangree also used several golf courses outside Albemarle County and two out-of-state golf courses as comparable sales. Sangree estimated
The county's expert, Ivo Romanesko, testified that he did not use the income approach to appraise Keswick Club because projecting future profits would require a great deal of speculation given the club's history of losing money. Instead, Romanesko utilized the cost and sales approaches. In using the sales approach, Romanesko located comparable sales outside the county but did not search for comparable sales occurring outside the State. Romanesko did not consider the 2002 sale of Keswick Club as a comparable sale because in his opinion the situation created by the put and call agreement did not amount to an open market sale. Romanesko's final valuations of Keswick Club using the cost and sales approaches were $12,950,000 and $12,000,000, respectively.
In its closing argument and post-trial brief, the taxpayer contended, among other things, that the county erred in basing its assessment solely on the cost approach. The taxpayer asserted that the cost approach is less reliable for determining the fair market value of income producing property than the income and sales approaches. Because the county only utilized the cost approach in making the assessment, without a credible basis for not considering the income or sales method, the taxpayer contended that the assessment was not entitled to the presumption of validity normally afforded to a taxing authority's assessment. In response, the county generally contended that it considered all three valuation approaches in making its assessment and that the assessment should be upheld as not manifestly erroneous.
In a letter opinion, which subsequently was incorporated by reference into a final order, the circuit court approved the county's $11,175,700 assessment of Keswick Club. The circuit court ruled that, under
Tidewater Psychiatric Institute, Inc. v. City of Virginia Beach,
DISCUSSION
The principles that guide our review of a judgment upholding a taxing authority's assessment of the fair market value of real estate are well established. The Constitution of Virginia requires that real estate be assessed at its fair market value. Va. Const. art. X, § 2;
see also
Code § 58.1-3201 (requiring taxing authorities to assess real property at one-hundred percent fair market value). We have defined the fair market value of a property as its sale price when offered for sale "by one who desires, but is not obliged, to sell it, and is bought by one who is under no necessity of having it."
Tuckahoe Woman's Club v. City of Richmond,
A taxpayer seeking relief from an allegedly erroneous assessment has the burden to show that the assessment exceeds fair market value. Code § 58.1-3984;
see Shoosmith Bros. v. County of Chesterfield,
In determining the fair market value of real estate, taxing authorities commonly use one or more of three valuation approaches: the cost approach, income approach, and sales approach. Each of these approaches utilizes different characteristics of a property to estimate fair market value, and each analyzes different elements of the property which would likely affect the price a potential buyer would be willing to pay for the property on the open market. Ideally, an appraisal should, if possible, derive its final determination of a property's value using all three approaches in order to maximize the likelihood that the valuation accurately reflects the property's fair market value.
See Arlington County Board v. Ginsberg,
However, with respect to any given property, a taxing authority may determine that the use of one or more of these approaches is not feasible. In cases where a taxing authority bases an assessment of fair market value solely on one approach in determining the fair market value of property, the resulting assessment is entitled to the presumption of validity so long as the taxing authority "consider[s] and properly reject[s]" the other valuation methods.
HCA Health Services,
Since the taxpayer challenges the assessment in this case based on the county's choice of the cost approach as the sole method used to make the assessment, we must determine whether the evidence in this case reflects that the county considered and properly rejected the income and sales approaches before relying solely on the cost approach. In doing so, we reiterate that "courts must be hesitant, within reasonable bounds, to set aside the judgment of assessors; otherwise, the courts will become boards of assessment thereby arrogating to themselves the function of the duly constituted tax authorities."
City of Richmond v. Gordon,
The assessment of real estate, especially with regard to unique properties such as golf courses, is a process upon which even experts can disagree, as reflected by the disparity between the approaches used and the results reached by the county assessor and the experts in this case. Accordingly, in determining whether the county considered and properly rejected the income and sales approaches in this case, we do not review the ultimate conclusions of the professional appraisers regarding the utility or non-utility of applying a certain approach to valuing Keswick Club's fair market value over an alternate approach.
We begin our review of the evidence with the county's May 15, 2003 letter to the taxpayer. In that letter, the county, in explaining its method for valuing Keswick Club, stated that "[w]e have chosen to value area golf clubs using the cost approach." The county further stated that due to the "status of golf clubs in the county" it would be difficult to determine fair market value using the income approach and that the sales approach was not used in valuing Keswick Club due to the lack of comparable sales in the county. The county's statement that it had chosen to value all area golf clubs using solely the cost approach evidences a categorical determination by the county that golf courses as a class of property would not be appraised using the income and sales methods. Such a determination disregards the fact that golf courses, like other properties, are constantly vulnerable to changing market forces that may affect fair market value and
The evidence adduced at trial further suggests that the county applied the cost approach to Keswick Club in an automatic fashion without sufficiently attempting to gather the data necessary to utilize the income approach or sales approach. Regarding the income approach, the county assessor's testimony indicates that he rejected the income method because he was not provided income statements or other financial information concerning Keswick Club. However, the assessor acknowledged in his testimony that neither he nor any other county official ever requested Keswick Club's income statements or financial information, even though the county was entitled to request this information under Code § 58.1-3294. 7 The fact that the county did not attempt to obtain the financial information that would be crucial to a determination whether the income approach would be feasible or appropriate, despite being statutorily empowered to do so, further indicates that the county arbitrarily determined to use the cost method in appraising Keswick Club without properly considering the feasibility of using the income approach.
Regarding its consideration of the sales approach, the county stated that it considered that approach but rejected it due to the paucity of comparable sales within the county and its decision not to look for comparable sales outside the jurisdiction. The county also chose not to consider the 2002 sale of Keswick Club, which the county concluded was not an arms-length transaction. In reviewing whether the county considered and properly rejected the sales approach, the evidence shows that the county considered only one sale within the jurisdiction. The evidence in the record is insufficient for us to decide that the county's decision not to look for comparable sales outside of the jurisdiction was error. However, the evidence supports the conclusion that the county's refusal to sufficiently investigate, or investigate at all, the terms and circumstances of the 2002 sale of Keswick Club amounts to a failure by the county to consider and properly reject the sales approach.
It is well settled that a recent sale of the subject property, while not conclusive in determining fair market value, is entitled to "substantial weight."
Arlington County Board,
In this case, the county stated that it did not consider the 2002 sale of Keswick Club to be a comparable sale because the sale took
For these reasons, we are of opinion that the county's categorical application of the cost approach to the valuation of all golf courses resulted in a failure by the county to consider and properly reject the income and sales approaches before solely utilizing the cost approach in assessing the fair market value of Keswick Club. Here, the county did not attempt to obtain the data necessary to perform appraisals based on the income and sales approaches. An assessment based on a single approach to the determination of market value, where the taxing authority failed to consider and properly reject the other approaches, is not entitled to a presumption of validity.
HCA Health Servs.,
CONCLUSION
The circuit court's letter opinion reflects that the court reviewed the county's 2003 and 2004 assessments of Keswick Club under the standard of review applicable when the assessments are entitled to a presumption of validity, requiring the taxpayer to prove that the county committed manifest error or disregarded controlling evidence. However, since the assessments were not entitled to a presumption of validity, the proper standard of review was the less stringent standard, requiring the taxpayer only to prove that the county's assessments were erroneous. The circuit court erred in reviewing the taxpayer's application to correct the county's assessments of Keswick Club under the wrong standard of review. Accordingly, we will reverse the judgment of the circuit court and remand this case so that the circuit court can apply the proper and less stringent standard of review applicable under the facts of this particular case.
Reversed and remanded.
The notice of reassessment indicated that the prior assessed value of Keswick Club was $11,318,900.
The cost, income, and sales approaches are the three valuation approaches or methods most widely used to assess the fair market value of real estate. In simple terms, the cost approach values property by adding the value of land to the value of improvements, which is measured by the cost to reproduce those improvements minus depreciation. The income approach estimates the value of income-producing property by measuring the income the property is expected to generate. The sales method values property utilizing recent sale prices of comparable properties. Each of the three approaches has several commonly used names, but for simplicity and consistency, we will refer to them as the cost, income, and sales approaches.
In the letter, the county notified the taxpayer that Keswick Club's assessed fair market value had been reduced by $227,900 to account for an additional depreciation allowance.
The taxpayer claims that it paid its 2003 tax based on Keswick Club's assessed fair market value prior to the reduction by the Board of Equalization. The taxpayer paid its 2004 tax based on the $11,175,700 assessed fair market value after the reduction by the Board of Equalization and the further reduction made by the county.
The put and call agreement involved the transfer of shares in a subsidiary of Metropolaris, KGC Inc. This subsidiary of Metropolaris was the sole shareholder of Keswick Club General Partner, Inc., the general partner of Keswick Club, L.P., and the majority shareholder of Keswick Club, Inc., the sole limited partner of Keswick Club, L.P. It suffices for purposes of this appeal that the transfer of the shares in KGC, Inc. amounted to a sale of all of the beneficial ownership in Keswick Club.
The county indicated at trial that its reference to the "status of golf clubs in the county" in the May 15, 2003 letter reflected its belief that, while golf courses in the county operated to generate income, no club was operating to maximize income, and that the income approach would thus not accurately reflect fair market value. However, even if the county's golf courses do not operate in a fashion so as to maximize profit, such a fact would not be a reason to reject the income approach outright but, rather, would be a factor to consider in determining what weight the income approach would have in the ultimate assessment of the property's value with respect to each golf course.
Code § 58.1-3294 provides, in relevant part, that "[a]ny duly authorized real estate assessor ... may require that the owners of income-producing real estate ... furnish ... statements of the income and expenses attributable over a specified period of time to each such parcel of real estate."