East Haven Associates v. Town of East Haven et al. (2011)

MEMORANDUM OF DECISION

By way of an application dated April 2, 2009, filed on April 20, 2009 and amended on December 28, 2010 and March 10, 2011, East Haven Associates appealed, pursuant to General Statutes § 12–117a, from the valuation placed on its property located at 75 Frontage Road, East Haven, Connecticut by the town of East Haven (town) for the tax years 2008, 2009 and 2010.   The court heard evidence on March 9, 2011 and post-trial briefs were filed on April 1, 2011 by the applicant and April 6, 2011 by the town.

General Statutes § 12–117a “provides a method by which an owner of property may directly call in question the valuation placed by assessors upon his property ․ In a § 12–117a appeal, the trial court performs a two-step function.   The burden, in the first instance, is upon the plaintiff to show that ․ [the] property has been overassessed.   In this regard mere overvaluation is sufficient to justify redress ․ Whether a property has been overvalued for tax assessment purposes is a question of fact for the trier.”   (Internal quotation marks omitted;  citations omitted.)  Konover v. West Hanford, 242 Conn. 727, 734–35, 699 A.2d 158 (1997).   The court must, de novo, ascertain the “true and actual value of the applicant's property.”  Id., 735.   The court must undertake a further inquiry to determine the amount of the reassessment that would be just” if it is persuaded that the taxpayer has met its burden of proving that the assessment was excessive.  Ireland v. Wethersfield, 242 Conn. 550, 557, 698 A.2d 688 (1997).

In making its determination as to whether there was an overassessment in the first instance, the court has wide discretion to determine value and “may accept or reject evidence regarding valuation as it deems appropriate.”   Metropolitan District v. Burlington, 241 Conn. 382, 396, 696 A.2d 969 (1997).  “[I]n de novo tax appeals under § 12–117a ․ the court's subject matter jurisdiction includes the power to consider all factors relevant to the determination of the tax liability in question.”  FDIC v. Crystal, 251 Conn. 748, 763, 741 A.2d 956 (1999).

“A property's highest and best use is commonly accepted by real estate appraisers as the starting point for an analysis of its true and actual value.   The highest and best use conclusion ․ dictates which methods of valuation are applicable.”  United Technology Corp. v. East Windsor, 262 Conn. 11, 25–26, 807 A.2d 955 (2002).  “[T]he process of estimating the value of property for taxation is, at best, one of approximation and judgment, and ․ there is a margin for a difference of opinion.”  Burritt Mutual Savings Bank v. New Britain, 146 Conn. 669, 675, 154 A.2d 608 (1959).

The court finds the following facts based on the pleadings, the credible testimony and the exhibits offered into evidence.   As of October 1, 2008, East Haven Associates owned the subject property which is a parcel of land with improvements in the nature of a commercial retail shopping center consisting of a number of buildings located at 75 Frontage Road in East Haven.  (Second Amended Complaint, all counts, ¶ 1.)   On October 1, 2006, the town assessed the subject property in connection with a revaluation process at a fair market value of $5,180,00.00.  (Second Amended Complaint, all counts, ¶ 2.)   For the assessment years 2008 and 2009, the property was valued at approximately $5,200,000.00 according to the assessor's unchallenged testimony.   On February 1, 2011, the town issued a change of assessment notice following its recalculation of the total square footage of the subject property which increased the fair market value of the property to $5,738,860.00 for the assessment year 2010.  (Ex.2).

The subject property is located adjacent to the southbound (westbound) lanes of Interstate 95 (I–95) with approximately 1,000 feet of non-contiguous frontage on North Frontage Road. It consists of approximately 5.8 acres of land, one freestanding single-story “Wendy's” fast food restaurant of approximately 3,115 gross and net square feet, one freestanding single-story restaurant facility occupied as “King Buffet” of approximately 6,920 gross square square feet, one freestanding single-story retail facility building occupied by “Off Track Betting” of approximately 5,000 gross and net square feet and one single-story multi-tenant strip retail building of approximately 39,538 gross square feet, for a total gross square footage of 54,573.   The subject property is accessible both from Frontage Road (Route 1) and from exits 51 and 52 off of I–95. A variety of retail and commercial businesses are located adjacent to it on Frontage Road including a Home Depot store and a “CarMax” used car facility to the west and new and used car sales and service properties as well as other retail establishments to the south.   The area is heavily traveled.

The highest and best use of the subject property is as a commercial retail shopping center.   As of the revaluation date of October 1, 2006, the commercial retail center marketplace in Connecticut was stable.   The subject property had an actual vacancy rate of 19% as of October 1, 2006.   There were a mix of lease terms.   Wendy's, King Buffet, Autozone and Autotote (OTB), had long-term leases and several other tenants had shorter terms.   The leases were triple net.

According to the town's assessor, Michael Milici, the property was not physically inspected in connection with the 2006 revaluation process.   The assessor's card described the property as having 50,683 square feet based on information gathered in 2000 by a revaluation firm hired by the town.   In connection with this case, however, the assessor physically measured the property and concluded that it actually was 54,573 square feet.   Consequently, the assessment was changed for the year 2010 to reflect the assessor's recalculation of the property's square footage based on his measurements.

In estimating the subject property's fair market value as of October 1, 2006, the applicant's appraiser, Thomas Merola (Merola), and the town's appraiser, Joseph Perrelli (Perrelli), used the income approach to value premised on the direct capitalization technique and the direct sales comparison approach.   Merola, however, premised his estimate on 50,683 square feet as recorded on the assessor's card while Perrelli premised his estimate on the corrected measurement of 54,573 square feet.

The “actual size of a taxpayer's property” is a factor that the court must consider in estimating a property's value in a tax appeal.  Konover v. West Hartford, supra, 242 Conn. 744.   The court concludes that the credible evidence in this case establishes that the actual size of the subject property for the purposes of the October 1, 2006 revaluation is 54,573 square feet.   This conclusion seriously undermines the court's ability to rely on Merola's estimate of the property's fair market value.

Other facts further undermine Merola's opinion.   The applicant urges the court to adopt Merola's comparable sales approach valuation as “a reliable method for establishing the fair market value of the Property [sic] as of October 1, 2006.”  (Post–Trial Brief, p. 7.) With respect to the sales comparison approach, the court, based on its own knowledge of the area in which the subject property is located, see O'Brien v. Board of Tax Review, 169 Conn. 129, 136, 362 A.2d 914 (1975), rejects Merola's conclusion, upon which he premised some adjustments, that the property has only “average” highway access.   The property is located on U.S. Route 1, a major east-west Connecticut state highway that provides an alternate route to New Haven, and the property abuts I–95 with easy access to and from its southbound (westbound) lanes and with access as well to its northbound (eastbound) lanes.   The free-standing building housing the Wendy's restaurant is visible from the highway.   See Ex. A. The court also rejects Merola's use of a 50% vacancy rate as an adjustment factor for the subject property for the sale comparison approach because the evidence establishes the actual vacancy rate as of October 1, 2006 to have been 19%.   Accordingly, the court does not credit Merola's estimated value of $3,800,000 derived from the sales comparison approach.

In reaching his conclusion regarding the subject property's fair market value, Merola gave equal weight to the estimated market value he derived from the sales comparison methodology and the estimated market value he derived from the income capitalization approach.   Perrelli relied primarily on the income capitalization approach, opining that the sales comparison approach was useful to support the income approach and as a “secondary indicator of market value.”  (Ex. B, p. 35.)   The court agrees and will determine the value of the subject property using the income capitalization approach.   See General Statutes § 12–63b(a).

“The income capitalization approach consists of the following seven steps:  (1) estimate gross income;  (2) estimate vacancy and collection loss;  (3) calculate effective gross income (i.e., deduct vacancy and collection loss from estimated gross income);  (4) estimate fixed and operating expenses and reserves for replacement of short-lived items;  (5) estimate net income (i.e., deduct expenses from effective gross income);  (6) select an applicable capitalization rate;  and (7) apply the capitalization rate to net income to arrive at an indication of the market value of the property being appraised ․ The process is based on the principle that the amount of net income a property can produce is related to its market value.”  (Citation omitted;  internal quotation marks omitted.)  Abington, LLC v. Avon, 101 Conn.App. 709, 712, n.4, 922 A.2d 1148 (2007).  “Net operating income is not only a critical variable, it is also a prerequisite to the income capitalization approach.”   Housing Authority v. CB Alexander Real Estate, LLC, 107 Conn.App. 167, 175, 944 A.2d 1010 (2008).

In order to estimate gross income for the subject property, each appraiser needed to calculate the actual rental income as of October 1, 2006 and to derive an estimated fair market rent value as of that date.   See First Bethel Associates v. Bethel, 231 Conn. 731, 739–42, 651 A.2d 1279 (1995) (Appropriate to consider both contract rent and market rent in valuing property using the income capitalization method).   With respect to actual rental income, Merola's report indicates that units 1, 2, 4, 3a and 6–9 were vacant for a total of 22,900 square feet of vacant space.  (Ex. 1, p. 30.)   However, the evidence establishes that the actual vacancy rate as of October 1, 2006 was 19% or approximately 10,000 square feet, which is the figure stated in Perrelli's report.  (Ex. B, p. 40.)   The court credits Perrelli's conclusion that the actual rental income as of October 1, 2006 was $400,688.00.   The court further adopts Perrelli's estimated market rent of $12.00 per square foot triple net and his conclusion that a number of the leases at the subject property were below market rates.   Perrelli conducted a far more comprehensive and detailed market rent analysis than Merola, looking at fifteen properties, including five in East Haven, compared to the two properties in East Haven upon which Merola relied for his estimate of market lease rates.   Accordingly, the court adopts Perrelli's conclusion that the property had a gross potential income of $583,038.00.

The next step is to estimate the vacancy and collection loss rate.   In this regard, the court concludes that a rate of 15% accurately reflected the market conditions as of the revaluation date.   Consequently, the court concludes that the effective gross income rate for the subject property was $495,582.00.   The court rejects Merola's use of the subject property's expenses for both 2006 and 2007 as an improper basis for calculating the property's operating expenses as of October 1, 2006 and adopts Perrelli's stabilized operating expense estimate of $65,189.00.   Consequently, the court concludes that the estimated net income for the subject property as of October 1, 2006 was $430,390.00.

In reaching a capitalization rate, Merola looked at investment yield rates and mortgage derived rates, including national data,¹ but ultimately rejected that data and instead relied on a band of investment analysis which he adjusted for a tax factor ² to conclude that the appropriate capitalization rate was 10.25%. Perrelli, on the other hand, relied on investment yield rates and mortgage rates, including national data,³ and capitalization rates derived from actual market transactions in 2006 before October 1st to conclude that the appropriate rate was 7.75%. Perrelli's rate is consistent with the national average, see notes 1 and 3 supra, and the court adopts his rate as relevant and appropriate.   Applying the capitalization rate of 7.75% to the net income of $430,393.00 yields a fair market value of $5,553,458.00 as of October 1, 2006.

Having rejected Merola's sales comparison analysis and concluded that the relevant income capitalization approach yields a fair market value in excess of the town's assessed value for the tax years 2008 and 2009, the court must find that the applicant has failed to meet its burden of establishing an overassessment for those years.   The court denies the appeal for those tax years as set forth in the first and second counts of the second amended complaint.

The next question is whether the applicant has met its burden with respect to the 2010 tax year.   In the third count of the second amended complaint, the applicant has alleged that the town's increase in the assessment constituted “an impermissible interim revaluation of the property.” (¶ 4.)

In its brief, the applicant relies on Albemarle Weston Street, LLC v. Hartford, 104 Conn.App. 701, 936 A.2d 656 (2007), for the proposition that an assessor's “discovery of previously unknown square footage information concerning a property during the course of a tax appeal case did not justify the issuance of a notice of increase in assessment.”  (Post–Trial Brief, p. 15.)   The Albermarle case must be confined to its facts.   There, the subject property had been assessed in 1999 based on an inspection that found 14,400 square feet were allocated for use as office space.   In 2003, in connection with the next general revaluation, the property was reinspected and the assessor concluded that 19,900 square feet were allocated for use as office space as of 2003.  Id., 703.   Thereafter, the Hartford city council passed a resolution freezing the grand list at the 1999 assessment but the assessor sent out a revised notice of assessment based on the new measurements.   The issue before the trial court was whether “a mistake occurred in the process of the 1999 revaluation that would provide a basis for the assessor to make an interim revaluation of the subject property.”  Id., 705.   The trial court made a specific factual finding “that no mistake had been made in determining the amount of square feet used for office space in 1999,” id. 705, and the Appellate Court determined that finding was not clearly erroneous.  Id., 706–07.

In this case, the court has made a specific factual finding that the assessor made a mistake in determining the square footage of the subject property in connection with October 1, 2006 revaluation and that the property should have been assessed based on the accurate measurement of 54,573 square feet.   Accordingly, the assessor had the authority under General Statutes § 12–55(b) to make an interim change in the 2006 valuation based on its discovery of the accurate size of the property.   See Matzul v. Montville, 70 Conn.App. 442, 446–49, 798 A.2d 1002, cert. denied, 261 Conn. 923, 806 A.2d 1060 (2002).

Nonetheless, the assessed value of $5,738,860.00 exceeds the fair market value of $5,553,458.00 that this court has concluded represents the property's value as of October 1, 2006 based on the accurate measurement 54,573 square feet and for all of the other reasons set forth above.⁴  Accordingly, based on all the credible evidence, Aetna Life Insurance Co. v. Middletown, 77 Con.App. 21, 28–30, 822 A.2d 330, cert. denied, 265 Conn. 901, 829 A.2d 419 (2003), the court concludes that the applicant has met its burden with respect to the third count and sustains the appeal as to that count only.

In sum, judgment shall enter in favor of the defendant town on the first and second counts and in favor of the plaintiff applicant on the third count of the second amended complaint.   No costs are awarded to either party.

Linda K. Lager, Judge

FOOTNOTES

FN1. The Korpacz Real Estate Inventor Survey, Third Quarter 2006 showing an average capitalization rate in the national strip shopping center market of 7.97%..  FN1. The Korpacz Real Estate Inventor Survey, Third Quarter 2006 showing an average capitalization rate in the national strip shopping center market of 7.97%.

FN2. Since the leases at the subject property were triple net, this adjustment was not proper.   See Stop & Shop Supermarket v. Danbury, Superior Court, Judicial District of New Britain, Docket No. CV 08 4021509S (Aronson, J.T.R., Aug. 17, 2010)..  FN2. Since the leases at the subject property were triple net, this adjustment was not proper.   See Stop & Shop Supermarket v. Danbury, Superior Court, Judicial District of New Britain, Docket No. CV 08 4021509S (Aronson, J.T.R., Aug. 17, 2010).

FN3. The Korpacz Real Estate Inventor Survey, Second Quarter 2006 showing an average capitalization rate in the national strip shopping center market of 7.36%..  FN3. The Korpacz Real Estate Inventor Survey, Second Quarter 2006 showing an average capitalization rate in the national strip shopping center market of 7.36%.

FN4. The court recognizes that Perrelli's direct sales comparison analysis yielded an estimated fair market value for the subject property of approximately $6,000,000.00, but Perrelli relied on that estimate to support the fair market value that he derived from the income capitalization approach.   As stated in the body of this opinion, the court has determined that the income capitalization approach is the most relevant methodology to apply in this case..  FN4. The court recognizes that Perrelli's direct sales comparison analysis yielded an estimated fair market value for the subject property of approximately $6,000,000.00, but Perrelli relied on that estimate to support the fair market value that he derived from the income capitalization approach.   As stated in the body of this opinion, the court has determined that the income capitalization approach is the most relevant methodology to apply in this case.

Lager, Linda K., J.