Opinion ID: 1892821
Heading Depth: 1
Heading Rank: 2

Heading: appraisals and assessment

Text: In 1985, Otoe County hired John Charles Fritz, a licensed Nebraska real estate appraiser, to reappraise all real property in the county as of January 1, 1986. Fritz appraised the bank property at $839,790. The assessor and the equalization board reviewed Fritz' appraisal, compared Fritz' appraisal of the bank property with appraisals of similar properties, and adopted the appraisal as the county's assessment of actual value for the Bank's property. Robert M. Ogden, a licensed Nebraska real estate appraiser hired by the Bank to determine the value of the Bank's property as of January 1, 1986, noted three accepted methods of determining the actual value of real property: the cost approach, the market approach, and the income approach. Under the cost approach, Ogden determined the replacement cost of improvements, subtracted depreciation of the improvements, and added the value of the land. Ogden identified three types of depreciation: physical, functional, and economic depreciation. Physical depreciation results from deterioration of the improvements over time. Functional depreciation or obsolescence results from lack of market acceptance due to the obsolete nature of improvements, inability to recover the cost of unique features of a building suited to one business but unusable if the building is sold to another type of business, and decreased value caused by an improvement that is overbuilt in relation to the locale or community where the structure is situated. Economic depreciation results from external economic forces which depress the value of the property. Using the Marshall Valuation Service and Residential Cost Handbook (Marshall-Swift manual) published by Marshall and Swift Publication Company, Ogden estimated the replacement cost of structures on the bank property at $1,200,000. Ogden found no physical depreciation had occurred during the 16 months between completion of the structures in September 1984 and the valuation date, January 1, 1986. However, Ogden estimated functional obsolescence to be 40 percent and stated: The layout of the subject property is functionally below typical due to the specialized nature of the building as a main bank facility. The construction of the subject property exceeds the typical steel building used for a small-town office building and is overadequate due to the bank utilizing the facility as a monument-type structure. Ogden also relied on market research in arriving at 40 percent as the functional depreciation for the bank property: That figure was based on research of the market of financial institutions that was [sic] sold, and I found one particular property that I abstracted out a functional depreciation from that sale that showed a 52 percent functional depreciation. And I estimated the subject was a similar financial institution and estimated it to be 40 percent. Ogden estimated economic depreciation at 30 percent. Economic data provided by Ogden showed retail sales in Syracuse had declined by 19 percent over the 6-year period from 1980 through 1985, and unemployment in Otoe County had increased from 5.5 percent in December 1984 to 6.7 percent in December 1985. No evidence in the record showed a relationship between retail sales or unemployment and prices in real estate sales or the decline of real estate prices in Syracuse. Using sales of unimproved property, Ogden estimated the value of the bank site at $47,000 and, using the Marshall-Swift manual, found the value of the Bank's parking lot was $14,500. Ogden determined the value of the bank property under the cost approach was $422,000. Under the market approach, Ogden examined 12 sales of commercial property in Nebraska and attempted to extrapolate a sale price for the bank property. Ogden's comparable sales ranged from the sale of an old grocery store in Syracuse, an 8,096-square-foot building which sold for $6.64 per square foot, to the sale of a bank in Lincoln, a 4,830-square-foot building which sold for $89.03 per square foot. Although several of the sales involved structures designed to house financial institutions, only 1 of the 12 properties Ogden studied was larger than the Syracuse bank facilities. In his market analysis, Ogden relied heavily on the sale of a 29,288-square-foot bank in Grand Island which sold for $28.57 per square foot, and admitted that the other properties used for comparison would need substantial upward or downward adjustments in the sales price to compare with a hypothetical sale price for the Bank in Syracuse. Ogden believed that the sale price of the Bank's main building would be $29 per square foot, which was multiplied by the amount of the Bank's office space above ground in the main building and produced a value of $390,000 for the Bank's property. Ogden did not consider the basement or separate structures in determining the value of the bank property under the market approach. Ogden rejected the income approach as an accurate indicator of the bank property's value because financial institutions usually own their own building, resulting in few if any comparable rentals from which to extrapolate an income figure for capitalization. Considering all three methods of valuation, Ogden gave most weight to the market approach for his opinion that the actual value of the Bank's property was $390,000 as of January 1, 1986. Glen Davidson, a licensed Nebraska real estate appraiser and witness for the Bank, testified that based on his knowledge of sales in and around Syracuse over a 25-year period, the market value of the Bank's property was between $200,000 and $250,000. Fritz testified for the county. In valuing the Bank's property, Fritz rejected the market and income approaches, since there was insufficient data from which to extrapolate a sale price or rent for the property. Thus, Fritz relied on the cost approach and determined the reproduction cost of the Bank's improvements by using a 1981 Marshall-Swift manual formerly prescribed by the Nebraska Department of Revenue. From the reproduction cost, Fritz subtracted depreciation and then added the value of the Bank's land. The Marshall-Swift manual provides different square foot costs for reproduction, which are based on the quality of construction: excellent, good, average, and low cost. In the manual, the terms average and good refer to the quality of construction. The cost of reproduction for average construction is 24 percent less than the cost for good construction. Although the Bank's improvements were classified as good rather than average according to the 1981 manual, Fritz used average construction cost for the Bank's improvements, since the Bank was located in a small town and had overbuilt its facilities. Regarding his use of average reproductive construction costs in arriving at a value for the Bank's property, Fritz stated: [I]t's the judgment of the appraiser which direction he cares to go when it's a fine line. And in this case, and the reason we went to the lower value is because of the opinion of Number 2, relative location and 3 desirability of functional use and the market value. However, Fritz used prices for good construction in determining the value of similarly constructed financial institutions in Nebraska City, a larger community in Otoe County. To determine depreciation, including physical, functional, and economic depreciation, Fritz studied sales prices of 45 to 50 commercial properties in Otoe County from 1981 to 1984, compared reconstruction costs for improvements on those properties, and, using this data, determined the depreciation rate applicable to commercial property of various ages throughout the county. Fritz applied a 5-percent depreciation rate to improvements on the Bank's property and concluded that the Bank's property had an actual value of $917,560 as of January 1, 1986. The county granted a 10-percent roll back to all improvements in the county, resulting in an assessed value of $825,805 for the Bank's improvements. According to Fritz, the Bank's land had a value of $13,985. Therefore, the total assessed actual value for the Bank's property was $839,790 as of January 1, 1986. Fritz testified that he valued all properties in the county through a uniform process and that the value of the bank property in Syracuse was equalized with the value of other property in Otoe County. During cross-examination of Fritz, the Bank offered a copy of the 1984 Marshall-Swift manual to show that Fritz misused the manual's classifications of good and average construction as factors affecting the value of the Bank's property. Nothing shows that the 1981 manual, used by Fritz, and the 1984 manual are substantially similar. Pursuant to the county's objection, the court excluded the 1984 manual because the document was not the manual in force at the time Fritz conducted his appraisal. However, on cross-examination Fritz acknowledged that his use of good and average construction for reproduction costs was based on location of the improvements, while the 1984 Marshall-Swift manual used a classification based on the quality of construction, not the site of the structure.