Title: Tidewater Psychiatric Inst. v. City of Virginia Be

State: virginia

Issuer: Virginia Supreme Court

Document:

Present: All the Justices 
 
TIDEWATER PSYCHIATRIC INSTITUTE, INC. 
 
 
 
OPINION BY 
v.  Record No. 971635 
JUSTICE LAWRENCE L. KOONTZ, JR. 
 
 
 
June 5, 1998 
CITY OF VIRGINIA BEACH 
 
FROM THE CIRCUIT COURT OF THE CITY OF VIRGINIA BEACH 
Morris B. Gutterman, Judge Designate 
 
 
This is a taxpayer’s appeal from a judgment upholding 
assessments of a private psychiatric hospital facility for the 
tax years 1990 through 1995.1
BACKGROUND 
 
Tidewater Psychiatric Institute, Inc. (Tidewater) filed an 
application and subsequent amended application for relief to 
correct alleged erroneous assessments for the tax years 1990 
through 1995 of two parcels in the City of Virginia Beach (the 
City) that Tidewater owned or leased,2 asserting that these 
assessments “were arbitrary, inequitable and excessive.” 
                     
 
1The tax year for real property in the City of Virginia 
Beach is based upon assessments made during the first six months 
of one year with taxes levied on those assessments for the 
period of July 1 of that year to June 30 of the following year.  
For purposes of clarity, we will refer to tax years within this 
opinion by their “year-ending” date.  Thus, an assessment made 
in 1989 for taxes levied between July 1, 1989 and June 30, 1990 
would be the assessment for the 1990 tax year. 
 
 
2The evidence was at times in conflict with the allegation 
in Tidewater’s pleadings that Tidewater owned one parcel and 
leased the other at all times relevant to the assessments being 
challenged.  It appears that the confusion over the ownership of 
the property stems in part from the fact that Tidewater 
continued to operate the hospital located on the property, while 
 
In the course of pretrial discovery, Tidewater filed 
supplemental interrogatories requesting that the City identify 
its expert witnesses.  The City identified Bradley R. Sanford, a 
commercial real estate appraiser, as its only expert witness.  
During the pretrial conference, the City indicated that it also 
intended to call Jerald D. Banagan, the City Assessor, as an 
expert witness.  Tidewater subsequently filed a motion in limine 
to prohibit Banagan from offering expert testimony, asserting 
that the City had failed to name him as an expert in its 
response to interrogatories.  The trial court overruled the 
motion, but offered Tidewater a continuance so that it might 
redepose Banagan.  Tidewater declined the offer of a continuance 
and later conceded that it “claim[ed] no surprise” as a result 
of Banagan’s testimony. 
 
At trial, the evidence showed that the disputed assessments 
related to two contiguous parcels comprising a hospital facility 
and gymnasium (the property).  The hospital facility is located 
on a parcel of approximately four acres and consists of a two-
story, wood and steel frame, aluminum-sided main building and an 
attached two-story, steel frame, masonry and concrete addition.  
Together, the main building and addition have 61 patient beds as 
                                                                  
the property changed hands among various corporate entities.  
However, the parties do not dispute that Tidewater was 
responsible for and actually paid the taxes levied on the 
assessments it challenges in this case. 
 
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well as support facilities.  The gymnasium, which is also a two-
story, steel frame, masonry and concrete structure, is situated 
to the rear of the main building on a three-acre parcel. 
 
For the 1990 tax year, the combined assessment of the two 
parcels by the City valued the property at $3,960,424.  For the 
1991 tax year the combined assessment was $4,171,907; for 1992, 
$4,324,367; for 1993 and 1994, $4,804,034; and for 1995, 
$4,789,876. 
 
Tidewater presented evidence from Tappe Squires, a vice-
president of Tidewater’s parent company.  Squires testified that 
the property had originally been acquired in 1982 as part of a 
corporate takeover of a network of thirty similar facilities at 
an aggregate price of $102,000,000.  Tidewater’s parent company 
subsequently sold the property in 1994 to another hospital 
network for a total sales price of $872,000.  The gymnasium was 
subsequently sold the following year for $68,000. 
 
Tidewater also presented evidence from Carol Reynolds, a 
commercial real estate appraiser.  Reynolds presented the 
evaluation of the property she prepared for Tidewater.  In that 
evaluation, Reynolds appraised the property’s fair market value 
at $2,800,000 on January 1 for the years from 1991 to 1994.  
Comparing Reynolds’ appraisal to the City’s assessment in tax 
years 1991 to 1995, Tidewater alleged over-assessments of 
                                                                  
 
 
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between approximately $1,300,000 and $2,000,000 for those years.  
Based upon these calculations, Tidewater asserted that it had 
overpaid $98,148.21 in real estate taxes over that period. 
 
Reynolds testified that she used three approaches in 
determining the fair market value of the property: a cost 
method, an income method, and a comparable sales method.  She 
further testified that of these three methods, the cost method, 
which establishes the value of a building based upon its 
reproduction cost less its depreciation, was the least reliable 
due to the subjective nature of depreciation, especially for 
older facilities such as Tidewater’s property. 
 
Tidewater then called Banagan, the City Assessor, as an 
adverse witness.  Banagan testified that in assessing the 
property, the City used only the depreciated reproduction cost 
method to evaluate the property because it had determined that 
no reliable comparable sales or income data were available upon 
which to base the assessments.  Banagan further testified that 
his office used a set of standard published indices and the 
“calculator method” described in the guidelines to the indices 
to obtain the depreciated reproduction cost of the property, and 
that this was “the method we used on all our properties that we 
do a cost approach on.” 
 
Banagan further testified that during the period in 
question the City had utilized two different building class 
 
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schedules from the indices to determine the depreciated value of 
the buildings on the property.  Banagan explained that the 
buildings were of “Class A” construction quality because they 
were primarily steel frame, masonry and concrete structures, but 
that guidelines to the indices directed that low-rise “Class A” 
structures, such as Tidewater’s property, be treated as “Class 
C” structures. 
 
Initially, the City interpreted the guidelines as requiring 
the use “Class C” cost, but still permitting “Class A” 
depreciation because the property “is a steel frame building.  
. . . It will stand longer.”  In 1994, the City altered its 
policy and began using both “Class C” cost and depreciation 
schedules for such properties.  Banagan described the change in 
policy as “a philosophical change.  That doesn’t mean one way is 
more correct than the other. . . . It is a rather insignificant, 
minor, technical, change.” 
 
The City called Sanford as an expert witness.  Sanford 
testified that he had been retained by the City to perform a 
“desk top” or technical review of Reynolds’ evaluation of the 
property.  Sanford “found that the appraisal report lacked depth 
of data . . . and that resulted in a lack of in-depth analysis 
such that [Sanford] could [not] agree with [Reynolds’] value 
conclusion.” 
 
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The City then recalled Banagan as its own witness and 
sought to have him qualified as an expert appraiser.  Tidewater 
challenged his qualifications as an appraiser of psychiatric 
hospitals.  The trial court qualified Banagan as an expert 
appraiser, responding to Tidewater’s objection by stating that 
Banagan’s level of familiarity with the specific type of 
property was a matter of the weight to be given his testimony. 
 
Banagan reiterated his prior testimony that the City used 
the depreciated reproduction cost method of valuing the property 
because no reliable data for the income or comparable sales 
methods were available to evaluate the property.  Banagan 
further testified that the City did not believe that the 1994 
and 1995 sales were arm’s-length transactions, since the value 
assigned to the property in these transactions was well below 
the value of other commercially zoned property in the City as 
established by comparable sales. 
 
After receiving trial memoranda from the parties and 
reviewing the record and evidence, the trial court entered an 
order dated May 5, 1997, denying the amended application on the 
ground that Tidewater had “failed to establish either manifest 
error or total disregard of controlling evidence by the City’s 
Real Estate Assessor.”  We awarded Tidewater this appeal. 
 
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DISCUSSION 
 
Real estate is to be assessed at its fair market value.  
Va. Const. art. X, § 2.  However, assessments by taxing 
authorities are afforded a presumption of correctness, and the 
burden is on the taxpayer to rebut that presumption.  Board of 
Supervisors of Fairfax County v. Telecommunications Industries, 
246 Va. 472, 475, 436 S.E.2d 442, 444 (1993).  To do so, the 
taxpayer must show by a clear preponderance of the evidence that 
his property is assessed at more than fair market value.  Code 
§ 58.1-3984; see also City of Richmond v. Gordon, 224 Va. 103, 
110, 294 S.E.2d 846, 850 (1982); Skyline Swannanoa, Inc. v. 
Nelson County, 186 Va. 878, 886, 44 S.E.2d 437, 441 (1947).  
Thus, the dispositive issue of this appeal is whether the trial 
court correctly determined that Tidewater failed to rebut that 
presumption by “a showing of manifest error or total disregard 
of controlling evidence” in the City’s method of determining the 
fair market value of the property.3  Telecommunications 
Industries, 246 Va. at 475, 436 S.E.2d at 444. 
                     
 
3Tidewater also assigns error to the trial court’s 
permitting Banagan to testify as an expert witness on the ground 
that he had not been properly identified as such during 
discovery.  By declining the trial court’s offer of a 
continuance and conceding that it suffered no prejudice because 
of surprise, Tidewater waived this objection, and we will not 
consider this issue on appeal. 
 
 
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Tidewater’s evidence of the fair market value of the 
property was limited to an expert’s appraisal for four of the 
six tax years in question.  Tidewater devoted much of its case 
to presenting its theory that the City erred in using 
depreciated reproduction cost, rather than sales or income 
methods, to determine fair market value in its assessment of the 
property.  The City presented evidence that challenged the 
validity of the data used in Tidewater’s appraisal and provided 
justification for its having rejected the alternative methods of 
assessing the property relied on by Tidewater’s expert.  The 
City further presented evidence that it used a recognized method 
of determining fair market value through standard indices for 
determining reproduction cost and depreciation.  In these 
respects, the issue was presented to the trial court as a 
“battle of experts,” and we will defer to the judgment of weight 
and credibility given to the testimony of the experts by the 
trial court.  Norfolk and Western Railway Company v. 
Commonwealth, 211 Va. 692, 700, 179 S.E.2d 623, 629 (1971). 
 
Tidewater contends, however, that its evidence nonetheless 
established that the City’s method of assessing the property was 
improper in that the City relied solely on the depreciated 
reproduction cost method in determining the value of Tidewater’s 
property.  In support of this contention, Tidewater cites 
Tuckahoe Woman’s Club v. City of Richmond for the proposition 
 
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that “[d]epreciated reproduction cost may be an element for 
consideration in ascertaining fair market value, but it cannot 
of itself be the standard for assessment.”  199 Va. 734, 740, 
101 S.E.2d 571, 575 (1958).  This language is being taken out of 
context, and, thus, Tidewater’s reliance on it is misplaced. 
 
In Tuckahoe, the evidence showed that the depreciated 
reproduction cost of the land and improvements was $105,000.  
Id. at 737, 101 S.E.2d at 573.  However, the evidence further 
showed that market conditions were such that the property “would 
not bring more than $75,000 to $85,000” if offered for sale on 
the open market.  Id. at 739, 101 S.E.2d at 575.  The City 
conceded that the sales method produced an accurate assessment 
and that the depreciated reproduction cost “produced an amount 
in excess of what the property could be sold for.”  Id. at 740, 
101 S.E.2d at 575.  Therefore, we held that the City’s resort to 
this method of determining fair market value in disregard of the 
undisputed evidence of the actual sales value of the property 
constituted manifest error.  However, our decision in Tuckahoe 
is not applicable on the facts here. 
 
We have subsequently applied the holding in Tuckahoe in 
other cases and have explained that the use of depreciated 
reproduction cost as the sole basis for determining fair market 
value is erroneous only where the taxing authority fails to 
consider other factors that plainly show such a method “would 
 
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patently lead to unfair and improper results.”  First and 
Merchants National Bank of Richmond v. County of Amherst, 204 
Va. 584, 588, 132 S.E.2d 721, 724 (1963).  Thus, where a taxing 
authority considers and properly rejects other methods of 
calculating the value of property, an assessment based on 
depreciated reproduction cost is entitled to a presumption of 
validity where that method is the only one remaining.  Norfolk 
and Western, 211 Va. at 700-01, 179 S.E.2d at 629. 
 
The record establishes that the City considered other 
methods for determining fair market value, but that it lacked 
reliable data to arrive at an accurate value for the property 
under an income method.  The record further shows that the City 
considered using a comparable sales method of assessment, but 
determined that the 1994 and 1995 sales were clearly not fair 
market prices in light of the prevailing market.  Thus, as in 
Norfolk and Western, depreciated reproduction cost was the only 
reliable method available to the taxing authority, and the value 
arrived at under that method is entitled to a presumption of 
correctness.  Id.  Accordingly, we hold that Tidewater failed to 
meet its burden of showing that the City’s choice of depreciated 
reproduction cost as the method for valuing this particular 
property was manifest error or in disregard of controlling 
evidence. 
 
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Tidewater nonetheless contends that even if the City’s use 
of the depreciated reproduction cost method was appropriate, it 
improperly applied that method in those years in which it based 
the property’s reproduction cost on the “Class C” schedule, but 
used the “Class A” schedule to calculate the percentage of 
depreciation.  We disagree. 
 
Tidewater failed to present any evidence rebutting 
Banagan’s testimony that neither interpretation of the 
guidelines was “more correct than the other.”  The evidence at 
best established that the City simply altered its interpretation 
of the guidelines accompanying the indices it used to determine 
the value of properties under the depreciated reproduction cost 
method, and not that its prior method was manifestly erroneous 
or that it applied that method arbitrarily to Tidewater’s 
property while treating similar properties differently. 
 
For these reasons, we will affirm the judgment of the trial 
court.4
Affirmed. 
                     
 
4We also accepted an assignment of cross-error raised by the 
City.  Our resolution of the principal issue of the appeal in 
the City’s favor renders that cross-error moot. 
 
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