1. Taxation--bankruptcy--stigma not on property
The Tax Commission did not err in its 1993 valuation of the taxpayer's property at
$28,150,000 even though the taxpayer bought the property for $18,520,000 after the previous
owner filed for Chapter 11 bankruptcy. The mismanagement of property by a business owner is
not a proper reason to lower the property's value and any stigma resulting from the previous
property owner's business failure and subsequent bankruptcy taints the prior owner, not the
property.
2. Taxation--bankruptcy--actual sale price not true value
The Tax Commission did not err in failing to adopt the actual sale price of the property
as its true value in money because the circumstances of this transaction, a bankruptcy sale, reveal
the sale was not an arm's length transaction between a willing buyer and a willing seller.
Appeal by taxpayer from final decision entered 24 November
1997 by the North Carolina Property Tax Commission. Heard in the
Court of Appeals 23 February 1999.
C.B. McLean, Jr., for taxpayer-appellant.
Wake County Attorney's Office, by Assistant Wake County
Attorney Shelley T. Eason, for appellee.
LEWIS, Judge.
Appellant Phoenix Limited Partnership ("taxpayer") disputes
the 1993 tax valuation of its property, a 29-story office tower
known as Two Hannover Square and an adjacent three-storygalleria, situated on 0.6221 acres of land in downtown Raleigh
(collectively, "the property"). The property's initial 1993
valuation was $40,755,536, but this figure was reduced to
$31,768,902 upon taxpayer's appeal to the Wake County Board of
Equalization and Review ("the Board"). Taxpayer appealed this
decision to the North Carolina Property Tax Commission ("the
Commission"), which lowered the figure further to $28,150,000.
Seeking an even lower valuation, taxpayer now appeals to this
Court.
There is no dispute that 1 January 1993 is the critical date
for valuation purposes in this case. See N.C. Gen. Stat. § 105-
285(d) (1997). In September of 1992, the owner of the property
had filed for bankruptcy protection under Chapter 11. By the
beginning of 1993, the property was no more than two years old
and had but nineteen percent (19%) occupancy. The U.S.
Bankruptcy Court approved the sale of the property to taxpayer in
February of 1993 for $18,520,000. Taxpayer's central argument is
that this figure more accurately reflects the value of the
property than the $28,150,000 figure adopted by the Commission.
The Commission heard testimony from a number of witnesses
using different valuation methods to arrive at possible values of
the property. Ultimately, the Commission adopted the $28,150,000value computed under a direct capitalization approach by J.
Thomas Hester ("Hester"), an expert witness for Wake County.
Taxpayer's first argument on appeal is a three-part contention
that the Commission erred in adopting this value without
correcting alleged factual and legal errors affecting Hester's
computation.
We must first address this Court's standard of review for
decisions of the Commission. Our statutes make the following
provisions:
(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's findings, inferences,
conclusions or decisions are:
(1) In violation of constitutional
provisions; or
(2) In excess of statutory authority or
jurisdiction of the Commission; or
(3) Made upon unlawful proceedings; or
(4) Affected by other errors of law; or
(5) Unsupported by competent, material
and substantial evidence in view of theentire record as submitted; or
(6) Arbitrary or capricious.
N.C. Gen. Stat. § 105-345.2(b) (1997). We make these
determinations in light of the whole record, with due account
taken of the rule of prejudicial error. N.C. Gen. Stat. § 105-
345.2(c) (1997).
Taxpayer first notes that Hester presented two variations of
the income approach in his appraisal: the direct capitalization
approach, yielding a value of $28,150,000, and the discounted
cash flow method, yielding a value of $29,790,000. The
Commission adopted the former approach, despite Hester's
testimony that it was less preferable than the latter. There is
evidence to support each of these figures, and taxpayer's bare
assertion that adopting the appraiser's disfavored method
constitutes error is without merit. In light of our standard of
review, we do not find this to be reversible error.
In the second part of its first argument, taxpayer claims
the Commission failed to correct errors in Hester's testimony
identified in a report by Martin & Associates, experts hired by
taxpayer. Taxpayer cites no case law, statutes, or appraisal
guidelines in support of its argument; instead, we are asked to
reverse the Commission to resolve a disagreement between
appraisers hired by adversarial parties. This we decline to do. The Commission was in a far better position to weigh the
credibility of the witnesses and their methods, and we defer to
its judgment. The testimony of both Hester and members of Martin
& Associates had support in the record, and "[i]n the absence of
case law to the contrary, we cannot say that the Commission erred
in adopting the position of certain experts over that of others."
In re Appeal of Westinghouse Electric Corp., 93 N.C. App. 710,
716, 379 S.E.2d 37, 40 (1989).
The third part of taxpayer's first argument is that Hester
ignored the "stigma" of bad business decisions and bankruptcy on
the property in determining its appraisal value. The issue of
this purported stigma is raised again in taxpayer's third main
argument on appeal, that "the Commission erred by failing to
consider the stigma affecting the property as required by N.C.
Gen. Stat. § 105-317." Addressing these arguments together, we
find them without merit.
Persons appraising a building have a statutorily imposed
duty "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."
N.C. Gen. Stat. § 105-317(a)(2) (1997). Taxpayer claims the
stigma of bankruptcy haunts this property and is a factor thataffects its value, thus falling under the purview of G.S. § 105-
317(a)(2). Taxpayer contends in its brief that Hester "offer[ed]
his opinion that the stigma should not be considered in
appraising the fee simple value of the property," citing the
following exchange in the transcript:
Q. Okay. But is it your opinion that
this stigma is not a factor that should be
considered in arriving at your estimate of
value as of 1/1 of '93?
A. Well, I think technically speaking,
if we're going to look at fee simple we would
look at this building without the stigma,
outside the stigma. I can't say that that's
what I've done. I think it's in there.
(emphasis added). It appears to us from this testimony, then,
that although Hester may have preferred to avoid considering the
stigma of bankruptcy, he nevertheless considered it in his
analysis. Hester cannot be faulted for failing to express in his
testimony exactly how such a stigma can be quantified in light of
the highly speculative nature of such an ethereal concept.
Taxpayer's contention that Hester ignored the impact of any
stigma on the property is without merit.
[1]Taxpayer directs us to no case in this state, and we
have found none, which indicates that mismanagement of property
by a business owner is a proper reason to lower the property's
tax value. We agree with Wake County that "any stigma resultingfrom the property owner's business failure and subsequent
bankruptcy taints the owner, not the property." The focus of
G.S. § 105-317(a)(2) is on the property itself and not the
business acumen of the parties involved in the development of the
property. Taxpayer's attempts to analogize this situation to the
stigma of environmental contamination in In re Appeal of Camel
City Laundry Co., 115 N.C. App. 469, 444 S.E.2d 689 (1994) and In
re Appeal of Camel City Laundry Co., 123 N.C. App. 210, 472
S.E.2d 402 (1996), disc. review denied, 345 N.C. 342, 483 S.E.2d
162 (1997), fail. Those cases involved real property affected by
subsurface soil and groundwater contamination, rendering the
property difficult to sell. Here, the issue of bankruptcy is
clearly distinguishable, as it reflects mismanagement and has no
bearing on the safety of or the cost to clean up the premises.
By declining to further reduce the tax value of this property
even lower than it did to reflect the stigma of bankruptcy, the
Commission wisely refused to set a standard of "penaliz[ing] the
competent and diligent" by "reward[ing] the incompetent or
indolent." See In re Appeal of Greensboro Office Partnership, 72
N.C. App. 635, 640, 325 S.E.2d 24, 26 (quoting In re Pine Raleigh
Corp., 258 N.C. 398, 403, 128 S.E.2d 855, 859 (1963)), disc.
review denied, 313 N.C. 601, 330 S.E.2d 610 (1985). Furthermore,
taxpayer's testimony at oral argument that the property iscurrently better occupied than it was before it became the
subject of bankruptcy proceedings, when there could have been no
stigma of bankruptcy, indicates to us that any stigma attached to
the property is fading with time and good management.
[2]Taxpayer's second main argument on appeal is that the
Commission erred by failing to adopt the actual sale price of the
property as its true value in money on 1 January 1993. Taxpayer
contends the sale of this property met the statutory requirements
set out below:
All property, real and personal, shall as far
as practicable be appraised or valued at its
true value in money. When used in this
Subchapter, the words "true value" 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.
N.C. Gen. Stat. § 105-283 (1997) (emphasis added). The
Commission indicated in its findings of fact that the
circumstances of this case precluded the sale of the property to
taxpayer from establishing the fair market value of the property.
Based on our review of the whole record, we agree with the
Commission.
Taxpayer contends in its brief that this was "an arm'slength sale between a willing and financially able buyer and a
willing seller, neither under any compulsion to buy or to sell,"
just two pages after arguing that there was a stigma on the
property because it "ha[d] been so poorly received by the
marketplace that the owner [was] forced into bankruptcy filing
. . . ." These assertions are inherently contradictory.
Furthermore, evidence before the Commission supported Hester's
testimony that this bankruptcy sale was not an arm's length
transaction. Interest on fully secured claims was accruing at a
rate of $1,000 a day and the Carolina Power and Light Company was
threatening to disconnect power on the property. Time was of the
essence in the sale, and the buyer was required to provide full
consideration entirely in cash. A bid higher than taxpayer's was
made but rejected because the debtor would have had to seek
additional financing if the process was delayed even two weeks
while the new bid was confirmed. While we need not reach the
question of whether a sale in a Chapter 11 bankruptcy proceeding
is ever an arm's length transaction, it seems clear to us under
the facts and circumstances of this transaction that this sale
was not between a willing buyer and a willing seller as
contemplated by the statute and therefore was not indicative of
the property's true value in money under G.S. § 105-283. As
such, the Commission did not err by reviewing the opinions ofappraisers when determining the value of the property.
Taxpayer's final argument is a general contention that the
Commission's decision to value the property at $28,150,000 "is in
violation of constitutional provisions or affected by errors of
law or unsupported by competent, material, and substantial
evidence in view of the entire record as submitted or arbitrary
or capricious." In light of our review of the whole record under
the provisions of our statutes and the analysis set out above, we
find this argument without merit.
Affirmed.
Judges GREENE and HORTON concur.
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