In a previous post, we talked about the general rule that the cost approach is generally the least reliable approach to determine the fair market value of industrial and commercial properties. The reason is that you are more likely to find functional obsolescence and economic obsolescence in these kinds of properties, and it is extraordinarily difficult to estimate value loss due to multiple items of obsolescence.
However, that reason does not apply when dealing with a new industrial or commercial property, because there probably exists no obsolescence. When it criticized the cost approach in Greens of Pine Glen (.pdf), the Supreme Court was careful to say that the cost approach is well suited for valuing newly developed properties and specialty properties for which the other approaches are impractical. The Property Tax Commission found occasion to apply this logic in the recently-decided Appeal of Target Corporation from the decision of the Cabarrus County Board of Equalization and Review.
In 2005, Target spent $1,500,000 to buy a 12.3 acre tract of land in Kannapolis, North Carolina. By the end of 2006, it had constructed a Target Superstore thereon at a cost of $9,467,390, for a total investment of $10,967,390. Effective January 1, 2008, Cabarrus County assessed the land underlying the Superstore at $2,250,250 and the store and other improvements at $16,694,300 for a total assessed value of $18,954,550. In short, Cabarrus County believed that the value of Target's property was 76% higher on January 1, 2008, than Target had actually invested to buy and build the property in 2005 and 2006.
For its appeal, Target hired an appraiser who testified that the value of the property was somewhere in between. More specifically, the appraiser determined the land to be worth $3,082,100 (over 100% more than its actual cost) and the improvements to be worth $11,396,840 (20% more than their actual cost). He got there by utilizing the sales comparison approach to value the land, and relying primarily on the cost approach to value the improvements - both because they were new and because the property was designed and built as a specialty property.
Rarely do the taxpayer and the taxing jurisdiction agree on the most reliable approach to be applied, and even more rarely is the agreed upon approach the cost approach. But, that is exactly what happened in Target Corporation.
Like Target's expert, Cabarrus County relied on the cost approach to assess the improvements. The difference in opinion, however, resulted from Cabarrus County's reliance on its Schedule of Values land value tables to value the land and upon its cost tables for department stores to value the improvements. Interestingly, the Property Tax Commission decided that the fair market value of the property as of January 1, 2008 was even lower than the opinion of Target's appraiser. The Commission held that the property was worth $14,000,000. Why the Commission chose that value is not entirely clear.
Our reading of the Commission's decision is that the Commission found Cabarrus County's land value tables to be more trustworthly than both the appraiser's opinion of the land value and the actual 2005 selling price of the land. Thus, it accepted Cabarrus County's valuation of the land at $2,520,250. Simultaneously, though, it held that the appraiser's opinion of the improvement value (roughly) was more trustworthy than both Cabarrus County's department store cost tables and the actual 2005-2006 construction cost of the improvements. Thus it held that the improvement value was $11,479,750.
So what is the takeaway? Certainly, nothing here disturbs the general rule that the cost approach is not the best valuation method to determine the value of industrial or commercial property, unless said property is special or new. But does Target Corporation tell us anything about how the Commission weighs cost approach evidence when the cost approach is the most relevant approach? Not really. It cannot be said that this decision holds a taxing jurisdiction's Schedule of Values to be the most trustworthy data, because the Commission rejected that data in determining the value of improvements. It also can't be said that expert opinionshould trump, because the Commission rejected that data in determining the value of the land. Finally, it obviously can't be said that actual cost is the key, because the Commission rejected that data both in determinng the value of the land and the value of the improvements - although that rejection may have been due to the passage of time.
For now, taxing jurisdictions and appealing taxpayers will have to continue to guess about what the Commission will and will not find pursuasive when the cost approach is the best valuation method.
Niether John Cocklereece, Justin Hardy, nor Bell, Davis & Pitt, P.A. were involved with any phase of the Target Corporation appeal.
Image Copyright Larry Pieniazek. This work is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported Generic License.