Opinion ID: 1983906
Heading Depth: 1
Heading Rank: 2

Heading: competent evidence of fair market value

Text: It is settled law that real estate tax assessments must be based on the property's true value in money, 9 Del.C. § 8306(a), which is the same as its fair market value. Delaware Racing Ass'n. v. McMahon, Del. Supr., 340 A.2d 837, 842 (1975). The recognized definition of fair market value, in this context as in others, is the price which would be agreed upon by a willing seller and a willing buyer, under ordinary circumstances, neither party being under any compulsion to buy or sell. Seaford Assoc. v. Bd. of Assessment Rev., Del.Supr., 539 A.2d 1045, 1048 (1988). The three principal valuation approaches used in determining the fair market value of real estate are: comparable sales (or market), income capitalization, and reproduction cost. Id. at 1048-49. Each of these methods has strengths and weaknesses. For example, the Seaford Court noted that the reliability of the comparable sales approach depends upon there being an adequate number of comparable properties. The capitalization of income method is the preferred method to value income-producing properties, but it is driven by numerous variables and, therefore, should be used in conjunction with another valuation method. The Seaford Court concluded that, [m]arket value ... may be determined by using any of the three recognized methods, or any combination thereof. In this case, although the taxpayer advocated a leased fee value, the AAC appraisal included the fee simple value, as determined by all three traditional valuation approaches. AAC concluded that the leased fee value of the property was $11.3 million. The appraisal also estimated fee simple market values of $13.5-$14.6 million. The taxpayer pointed this out to the Board and argued that, even if the Board looked only at the higher, fee simple values, the $5 million difference between AAC's fee simple values and the assessed property value was sufficient to demonstrate substantial overvaluation and thereby overcome the presumption in favor of the assessment. The Board apparently ignored this evidence. The trial court carefully considered the appropriateness of using a leased fee value and concluded: [U]se of actual rent (or in this case lack of any rent), as opposed to market rent, is in line with the definition of a leased fee analysis, rather than a fee simple analysis. The Court finds that the definition of fair market value, when an assessment involves a commercial investment property is also more in line with the use of a leased fee valuation. A buyer and seller, when determining the price of an income-producing property, will be primarily interested in the income likely to be produced by the leases. In turn, the actual rents charged, as well as whether large portions of the property are unleased are certain to be taken into consideration. Therefore, the Court finds that Excelsior's use of a leased fee analysis to determine the value of the Property did not, in and of itself, cause the valuation to fail as competent evidence of substantial overvaluation of the Property. Excelsior Associates, L.P. v. New Castle County Department of Finance, et al., supra at 18-19. We agree that the taxpayer presented competent evidence of overvaluation to the Board and that it was error for the Board to dismiss the taxpayer's appeal. However, we do so without approving or disapproving the leased fee value approach used by AAC. As noted earlier, the statutory mandate is that real estate be assessed for tax purposes at its fair market value. In Seaford this Court noted the importance of accurate valuation, discussed the three principal valuation methods, and stressed the desirability of using all three valuation approaches to the extent the circumstances of a specific property will permit. Seaford, 539 A.2d at 1048. The thrust of the Seaford decision was that each property presents its own valuation problems and each valuation method has its own strengths and limitations. Since the goal is accurate valuation, the Seaford Court encouraged reliance on more than one valuation method. We reaffirm that principle and conclude that it would be helpful to articulate, in general terms, what constitutes competent evidence of valuation. In the context of corporate valuations, the so-called Delaware Block method of valuing stock, or a company, was replaced in 1983 with a more liberal approach [allowing] proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court.... Weinberger v. UOP, Inc., Del. Supr., 457 A.2d 701, 713 (1983). We hold that this same standard should apply to the determination of the fair market value of real estate. This holding may eliminate or limit, to the extent feasible, preliminary skirmishes on the issue of whether the taxpayer's evidence constitutes competent evidence of value for purposes of overcoming the presumption that the assessed value is accurate. See Fitzsimmons v. McCorkle, Del.Supr., 59 Del. 94, 214 A.2d 334 (1965). If a taxpayer presents evidence of substantial overvaluation, based upon a valuation technique generally acceptable in the financial community, the Board should hear the entire appeal. The County is free to use different valuation methodologies and to present evidence and argument in support of its position that the taxpayer's valuation is unreliable or otherwise inaccurate. The Board then will be able to use its expertise to evaluate the competing methodologies; make an informed judgment as to which is more persuasive; and state the reasons for its decision. In this case, for example, the Board should have accepted AAC's appraisal and found that the taxpayer had presented competent evidence of overvaluation. At the full hearing, if the County had presented contrary evidence, the Board could have concluded, among other things, that the County's evidence of value was more persuasive, or that AAC's analysis should be accepted without the 20 percent adjustment used to arrive at the leased premise value.