{
  "id": 11237571,
  "name": "In The Matter of: The Appeal of CHARLES D. OWENS and JOHN F. PADGETT d/b/a FOREST CITY ASSOCIATES from the decision of the Rutherford County Board of Equalization and Review Concerning Property Taxation for 1994",
  "name_abbreviation": "In re the Appeal of Owens",
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    "judges": [
      "Judges GREENE and McGEE concur."
    ],
    "parties": [
      "In The Matter of: The Appeal of CHARLES D. OWENS and JOHN F. PADGETT d/b/a FOREST CITY ASSOCIATES from the decision of the Rutherford County Board of Equalization and Review Concerning Property Taxation for 1994"
    ],
    "opinions": [
      {
        "text": "JOHN, Judge.\nAppellant County of Rutherford (the County) appeals a final decision of the North Carolina Property Tax Commission (the Commission) appraising certain commercial warehouses owned by appellees Charles D. Owens, Jr. (Owens), and John F. Padgett (Padgett) (jointly \u201cTaxpayers\u201d). The County argues the Commission erred by: 1) rendering findings of fact, conclusions of law and an order \u201cunsupported by competent, material and substantial evidence in view of the entire record;\u201d 2) denying the County\u2019s motion for dismissal at the close of Taxpayers\u2019 evidence; and 3) \u201cdenying the County\u2019s motion for discovery sanctions and in ordering the matter to be heard on its merits.\u201d For the reasons set forth herein, we reverse the decision of the Commission.\nRelevant facts and procedural history include the following: In 1994, the County conducted a reappraisal and reassessment of Taxpayers\u2019 small industrial park in Rutherford County. Taxpayers appealed the County\u2019s assessment to the Rutherford County Board of Equalization and Review which affirmed the County\u2019s appraisal. On 20 October 1994, Taxpayers appealed to the Property Tax Commission and filed required Applications for Hearing 21 November 1994.\nAt the 26 September 1997 hearing before the Commission, the primary issue was the valuation of nine (9) parcels (the property) in Taxpayers\u2019 industrial park upon each of which had been constructed a prefabricated metal warehouse. Taxpayers leased the warehouses to commercial tenants at a rate of approximately $1.50 per square foot per month.\nTaxpayers maintained to the Commission that the County\u2019s values were too high because they were based upon \u201creplacement cost and the income approach,\u201d and that a more accurate valuation would be \u201cwhat it had cost [the Taxpayers] to build\u201d the buildings. The income approach was inappropriate, Taxpayers continued, because sales of highly comparable properties in Rutherford County were lacking, thus precluding determination of a proper capitalization rate for use of the income approach of appraisal. Finally, Taxpayers concluded, no reasonable person would purchase the property at the County\u2019s values because the maximum rent obtainable would not produce sufficient income to justify such a purchase, i.e., unimproved property could be purchased and identical new buildings placed thereon for a sum less than the County\u2019s valuation of the property.\nThe County conceded direct comparable sales evidence was lacking and that the comparable sales approach to valuation \u201cwas given the least amount of consideration.\u201d Instead, it was the County\u2019s position that the property \u201chighly lend[s itself] to a cost approach methodology but [should be] adjusted through the income approach.\u201d In its final analysis, and \u201cin reconciling [the] valuation estimate, [the County] placed most emphasis on the income approach because of the nature of the property\u201d as income producing.\nIn applying the income approach of valuation, the County\ncapitalize [d the] buildings based upon mortgage equity capitalization principles which [is a yield capitalization method and] takes into consideration typical financing of buildings.\nSpecifically, County expert witness Charles Long (Long) stated:\nWe use a 75 percent loan to value ratio with 25 percent of the balance. The equity position that the \u2014 the investor will assume will be their portion at a 12 percent equity yield rate. . . . This is also based on a typical 25-year term at eight and one-quarter percent borrowing rate. And again, one other component to consider in that rate is a 10-year holding period, which is the typical amount of time the investor would hold that building before considering a sale. When you take those elements into consideration, that gives a basis of ten and a half percent (10.5%) for a capitalization rate. Then we added, based on the age of the \u2014 of the building . . . twenty-five one-hundredths of a percent for each age that the building exists. So a brand new building will be ten and a half percent (10.5%), a two to three-year old building 10.75 percent, and then adding one-quarter of one percent for each two years of age that a building existed.\nLong further testified on cross-examination as follows:\nQ: And that equity capitalization rate requires comparable sales, doesn\u2019t it, to determine?\nA: You can \u2014 you can determine that equity capitalization rate through comparable sales and that must be highly comparable. . . . They are not required; however, they can be proven in the marketplace as to what the equity yield is. And you can get that information just from lending practices.\nQ: Well, are you familiar with what is termed the American Institute of Real Estate Appraisers [and their textbook, The Appraisal of Real Estate]?\nA: That\u2019s correct.\nQ: Doesn\u2019t it say in the volume that I have \u2014 that equity capitalization rates are derived from comparable sales by dividing the pretax \u2014 pretax cash flow of each sale by the equity invested?\nA: That is what that says in that section, that\u2019s correct.\nQ: Now, you\u2019ve already testified though that you had a lack of comparable sales in regard to this type property, isn\u2019t that correct?\nA: That\u2019s correct.\nQ: So your capital rate would be distorted in regard to whatever means that you used to get those comparable sales necessary to capitalize \u2014 to make your capitalization rate?\nA: No, the information that we used was secondary information; and those equity capitalization rates were derived using comparable sales.\nQ: . . . That means [the information] came from other areas other than Rutherford County, isn\u2019t that correct?\nA: That\u2019s correct.\nOn 14 November 1997, the Commission announced its final written decision, providing in relevant part that:\n5. The County\u2019s appraisal of [Taxpayers\u2019] properties substantially exceeded the true value in money of the properties as of January 1, 1994.\n6. Of the three appraisal methods recognized by the Commission, cost approach, comparable sales approach, and income approach, the Commission finds that no probative evidence was offered regarding the comparable sales and cost approaches. Even though the Commission considered all three of the appraisal methods, the Commission relied on the income approach to determine the values of the subject properties.\n7. Under the income approach method, the value of property is determined by dividing the net income by an appropriate capitalization rate. The Taxpayer presented evidence showing the monthly rental income regarding each of the subject properties. . . . After accepting the Taxpayer\u2019s income as market income and adjusting the annual gross income of the properties for expenses and vacancy, the resulting net income was capitalized into an indication of market value for each of the subject properties.\nThe following table reflects the Commission\u2019s final appraisal of the nine parcels, as well as the corresponding values asserted by Taxpayers and the County.\nThe County timely appealed to this Court 11 December 1997. On appeal, the County in the main asserts that its\nsubstantial rights . . . have been prejudiced because the Commission\u2019s findings, inferences, conclusions or decisions are . . . [unsupported by competent, material and substantial evidence in view of the entire record as submitted.\nWe conclude the County\u2019s argument has merit.\nOur review of a final decision of the Commission is governed by N.C.G.S. \u00a7 105-345.2(b) (1997), which states:\n(b) So far as necessary to the decision and where presented, the court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning and applicability of the terms of any Commission action. The court may affirm or reverse the decision of the Commission, declare the same null and void, or remand the case for further proceedings; or it may reverse or modify the decision if the substantial rights of the appellants have been prejudiced because the Commission\u2019s findings, inferences, conclusions or decisions are:\n(1) In violation of constitutional provisions; or\n(2) In excess of statutory authority or jurisdiction of the Commission; or\n(3) Made upon unlawful proceedings; or\n(4) Affected by other errors of law; or\n(5) Unsupported by competent, material and substantial evidence in view of the entire record as submitted; or\n(6) Arbitrary or capricious.\nUpon challenge to a decision of the Commission under subsection (5) above, we are to review the \u201cwhole record.\u201d N.C.G.S. \u00a7 105-345.2(c) (1997); see also Mao/Pines Assoc. v. New Hanover Bd. of Equalization, 116 N.C. App. 551, 556, 449 S.E.2d 196, 199 (1994). The \u201cwhole record\u201d test is not a tool of judicial intrusion; \u201cinstead, it merely gives a reviewing court the capability to determine whether an administrative decision has a rational basis in the evidence.\u201d In re Rogers, 297 N.C. 48, 65, 253 S.E.2d 912, 922 (1979).\nIn addition, certain other principles apply: (1) a reviewing court is neither free to weigh the evidence presented to the Commission nor to substitute its own evaluation of the evidence for that of the Commission; (2) ad valorem tax assessments are presumed to be correct; and (3) \u201cthe correctness of tax assessments, the good faith of tax assessors and the validity of their actions are presumed.\u201d In re McElwee, 304 N.C. 68, 75, 283 S.E.2d 115, 120 (1981).\nThe General Assembly requires all property in this State be appraised for ad valorem tax purposes in accordance with N.C.G.S. \u00a7 105-283 (1997) which provides in pertinent part:\n[a]ll property . . . shall as far as practicable be appraised or valued at its true value in money. When used in this Subchapter, the words, \u201ctrue value\u201d shall be interpreted as meaning market value, that is, the price estimated in terms of money at which the property would change hands between a willing and financially able buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of all the uses to which the property is adapted and for which it is capable of being used.\nUnder N.C.G.S. \u00a7 105-317(a) (1997), the following specific factors are to be considered in arriving at \u201ctrue value\u201d:\nWhenever any real property is appraised it shall be the duty of the persons making appraisals:\n(2) In determining the true value of a building or other improvement, to consider at least its location; type of construction; age; replacement cost; cost; adaptability for residence, commercial, industrial, or other uses; past income; probable future income; and any other factors that may affect its value.\nThe County contends it complied with the foregoing provisions in employing an income approach to the valuation of the property. We have previously commented \u201cthe income approach is the most reliable method in reaching the market value of investment property.\u201d In re Appeal of Belk-Broome Co., 119 N.C. App. 470, 474, 458 S.E.2d 921, 924, aff\u2019d, 342 N.C. 890, 467 S.E.2d 242 (1996). \u201cThe income approach to value is based on the principle that something is worth what it will earn.\u201d In re Southern Railway, 313 N.C. 177, 185, 328 S.E.2d 235, 241 (1985).\nThe capitalized value of a given income stream varies directly with the amount of income and inversely with the capitalization rate ... and [s] light variations in the capitalization rate can result in large variations in value.\nId.\nThe parties agree that there are two principal income capitalization appraisal methods \u2014 direct capitalization and yield capitalization. Indeed, both parties cite and rely upon a textbook produced by the Institute of Appraisers, The Appraisal of Real Estate. Although not binding upon this Court, this source summarizes the two methods of capitalization as follows:\nDirect capitalization is ... used to convert an estimate of a single year\u2019s income expectancy, or an annual average of several years\u2019 income expectancies, into an indication of value in one direct step \u2014 either by dividing the income estimate by an appropriate income rate or by multiplying the income estimate by an appropriate factor. . . . The rate or factor selected represents the relationship between income and value observed in the market and is derived through comparable sales analysis.\nYield capitalization is . . . used to convert future benefits to present value by discounting each future benefit at an appropriate yield rate or by developing an overall rate that explicitly reflects the investment\u2019s income pattern, value change, and yield rate.... The method is profit-or yield-oriented, simulating typical investor assumptions with formulas that calculate the present value of expected benefits assuming specified profit or yield requirements.\nDirect capitalization is simple and easily understood. The capitalization rate or factor is derived directly from the market.... Yield capitalization, on the other hand, tends to be complex, requiring the use of special tables, calculators, or computer programs [and the] formulas and factors [used] can be obtained from financial tables. . . .\nAccording to the testimony of Long, the County utilized a mortgage-equity capitalization approach, a variety of yield capitalization, to value the property. In the absence of evidence of direct comparable sales within Rutherford County, the County determined the capitalization rate by looking to \u201cthe marketplace as to what the equity yield [was]. And [the County derived] that information just from lending practices.\u201d The only comparable sales information was from areas outside Rutherford County and was \u201csecondary information,\u201d and not \u201chighly comparable.\u201d Ultimately, the County established the appropriate capitalization rate as being between ten and one-half percent (10.5%) and twelve and three-quarters percent (12.75%), depending upon the age of the warehouse.\nTaxpayers did not address an appropriate capitalization rate in their evidence in view of their contention that valuation should be based upon the cost of constructing the improvements on the property.\nIn its final decision, the Commission indicated it valued the property by \u201cdividing the net income by an appropriate capitalization rate.\u201d The Commission thus relied upon the direct capitalization method, see Appraisal of Real Estate, rather than the yield capitalization approach employed by the County or the cost approach advocated by Taxpayers. However, the Commission\u2019s final decision fails to disclose the specific capitalization rate it utilized. Moreover, review of the \u201cwhole record,\u201d see G.S. \u00a7 105-345.2(c), does not reveal any evidence supporting the ultimate capitalization rate apparently employed by the Commission.\nTaxpayers maintain the Commission\u2019s capitalization rate may be determined mathematically by dividing the annual income produced by a particular parcel into the corresponding appraisal value assigned to that parcel by the Commission. Such calculations suggest a twenty percent (20%) rate was utilized by the Commission. Notwithstanding, \u201c[i]t is difficult, if not impossible, for an appellate court to divine the decision making process of an administrative agency unless the agency clearly sets it out in its order.\u201d Southern Railway, 313 N.C. at 183, 328 S.E.2d at 240.\nTaxpayers respond by pointing to the testimony of Padgett who noted Taxpayers sought an annual gross return of twenty-one percent (21%) on their investment, and who expressed the opinion that an investor would require a similar return if purchasing the property. However, as stated in Taxpayers\u2019 brief:\n[Under the direct capitalization approach], the capitalization rate or factor is derived directly from the market and no distinction is made between return on and return of capital. Direct capitalization does not explain value in terms of specific investor assumptions.\nAppraisal of Real Estate (emphasis added).\nSignificantly, the capitalization rate under the direct capitalization approach is \u201cderived through comparable sales analysis,\u201d see id., and both the County and Taxpayers acknowledge that \u201chighly comparable\u201d sales information was lacking in the instant case. Moreover, the Commission found that \u201cno probative evidence was offered regarding the comparable sales and cost approaches.\u201d Accordingly, we cannot \u201cdivine the decision making process\u201d of the Commission, Southern Railway, 313 N.C. at 183, 328 S.E.2d at 240, in particular its choice of an \u201cappropriate\u201d capitalization rate, nor may we substitute our own \u201cevaluation of the evidence for that of the [Commission].\u201d McElwee, 304 N.C. at 75, 283 S.E.2d at 120.\nWe therefore uphold the County\u2019s argument that the Commission\u2019s findings are unsupported by \u201ccompetent, material and substantial evidence in view of the entire record,\u201d G.S. \u00a7 105-345.2(b)(5), in view of its failure to specify in its final decision the \u201cappropriate\u201d capitalization rate utilized, and in view of the absence in the record of evidence sustaining the rate apparently employed by the Commission. Accordingly, the final decision of the Commission is reversed and this matter remanded to the Commission for entry of a new final decision containing findings of fact supported by evidence in the record. On remand, the Commission shall rely upon the existing record and hear additional arguments as it deems appropriate. See G.S. \u00a7 105-345.2(b) (\u201ccourt may affirm or reverse the decision of the Commission, declare the same null and void, or remand the case for further proceedings\u201d); see also Brock v. Tax Commission, 290 N.C. 731, 737, 228 S.E.2d 254, 258 (1976) (where Commission\u2019s findings are not supported by competent, material and substantial evidence, \u201cthe case will be remanded for further proceedings\u201d).\nPrior to conclusion, we note the County also argues that the Commission erred in denying the County\u2019s motion for dismissal at the close of Taxpayers\u2019 evidence, and that the Commission abused its discretion by failing to impose sanctions and hearing Taxpayers\u2019 appeal on the merits in light of Taxpayers\u2019 willful failure to comply with a discovery order. Suffice it to state we have carefully reviewed the record and determined these contentions are unfounded.\nReversed and remanded.\nJudges GREENE and McGEE concur.",
        "type": "majority",
        "author": "JOHN, Judge."
      }
    ],
    "attorneys": [
      "County of Rutherford, by County of Rutherford Attorney Laura J. Bridges and Shelley T. Eason, for appellant.",
      "J. Thomas Davis, for appellee."
    ],
    "corrections": "",
    "head_matter": "In The Matter of: The Appeal of CHARLES D. OWENS and JOHN F. PADGETT d/b/a FOREST CITY ASSOCIATES from the decision of the Rutherford County Board of Equalization and Review Concerning Property Taxation for 1994\nNo. COA98-270\n(Filed 16 February 1999)\nTaxation\u2014 valuation \u2014 capitalization rate \u2014 findings not sufficient\nA decision of the North Carolina Property Tax Commission appraising certain commercial warehouses was reversed and remanded where the Commission used the income capitalization appraisal method but failed to specify in its final decision the capitalization rate utilized and there was an absence in the record of evidence sustaining the rate apparently employed by the Commission. On remand, the Commission was to rely on the existing record and hear additional arguments as it deemed appropriate.\nAppeal by Rutherford County from the final decision of the North Carolina Property Tax Commission entered 14 November 1997. Heard in the Court of Appeals 22 October 1998.\nCounty of Rutherford, by County of Rutherford Attorney Laura J. Bridges and Shelley T. Eason, for appellant.\nJ. Thomas Davis, for appellee."
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  "file_name": "0281-01",
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  "last_page_order": 324
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