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McKee Foods Corp. v. County of Augusta

Supreme Court of Virginia

July 18, 2019





         In this appeal, we consider whether the Circuit Court of August County ("circuit court") erred when it upheld the County's tax assessments against McKee Foods Corporation ("McKee") for the years 2011 through 2014.

         I. Facts and Proceedings

         McKee owns real property located at 272 Patton Farm Road, in Augusta County (the "Property"). The Property consists of an 828, 619 square foot industrial building on 171.54 acres and is where McKee manufactures, among other things, "Little Debbie" snacks. The County assessed McKee's property at $28, 525, 300 for the 2011, 2012, and 2013 tax years, and at $31, 745, 800 for the 2104 tax year. McKee filed an Application for Relief from Erroneous Assessments for Real Property Taxes in the circuit court, alleging that these assessments were above the Property's fair market value, were not uniform in application, and were otherwise invalid or illegal. McKee asserted that it was entitled to a refund of excess taxes paid on the assessments, as well as interest on the excess amounts paid to the County.

         The County filed an answer and denied that the assessments were above fair market value, manifestly erroneous, not uniform in application, or otherwise invalid or illegal. A four-day bench trial was held in December 2017.

          The evidence presented at trial demonstrated that the County hired Blue Ridge Mass. Appraisal Company, LLC ("Blue Ridge") to appraise real property for the County for its five-year reassessment cycle of 2009-2013. David Hickey ("Hickey") was the Blue Ridge employee who conducted the assessment of McKee's property for that time frame. Hickey classified the Property as industrial use property with an appraised value of $31, 741, 200. McKee appealed that assessment to the County's Board of Assessors, which reduced the assessment to $28, 525, 300. McKee then appealed to the County's Board of Equalization, which affirmed the reduced assessment. The County assessed taxes for 2011-2013 based upon that reduced figure.

         The County hired a different company, Wingate Appraisal Service ("Wingate"), to appraise real property for the five-year reassessment cycle beginning in 2014. Donald Thomas ("Thomas") was the Wingate employee who conducted the assessment of the Property. Thomas classified the Property as a special use property, with an assessed value of $31, 745, 800. The County did not use a Board of Assessors for the 2014 general reassessment, so McKee appealed that assessment directly to the County's Board of Equalization. The Board of Equalization affirmed the assessment without modification. The County then assessed taxes for 2014 based upon the assessed value of $31, 745, 800.

         McKee's Evidence

         Micheline Parkey, the corporate risk manager for McKee, testified that the company carried insurance on the property for the years in question. The insurance covered the real property and personal property, and was a policy for replacement cost, not the amount that McKee thought it could sell the property. The amount of coverage ranged from $136, 944, 380 to $139, 944, 380, depending upon the year.

          At trial, McKee introduced David Hickey's deposition transcript, because Hickey was ill and unable to testify in person. In describing how he determined the assessment amount for the Property, Hickey testified that he used a cost method[1] to appraise the property, and then he referred to a list of 52 industrial sales he had previously accumulated to see if he was in the correct range of price per square foot. The properties on this list ranged in size from 28, 360 square feet to 714, 278 square feet, and all but two of the buildings were less than half the square footage of the Property. Hickey explained that he would calculate a certain price per square foot, and then compare it to the list of industrial properties to see if it was in the range of sales on the list. He would then make adjustments so that "the bottom line conforms with what those market sales indicated."

         Hickey testified that his approach to valuation established "the range of the unit price per square foot [he] should be working towards." Hickey then used that average when he entered information about the Property into the Computer Assisted Mass. Reappraisal system ("CAMRA"), a database management system utilized by Blue Ridge to process the valuation data for real estate. When asked "[w]hat appraisal methodologies does the CAMRA system include," Hickey responded that the CAMRA valuation model is very similar to a model that goes "back in the '70s." Although he had initially described his appraisal method as a cost approach, he later testified that the CAMRA is:

not really a cost approach. We come up with -- how do I want to say it? We analyze the sales to come up with rates - unit rates that are applicable to the different types of properties because what we're -- what we're trying to do is come up with a set of rates so that, when we apply those rates against the information related to the known sales, that the value that comes out related to that --those - that inventory of -- pieces of those particular properties, that the value comes out close to what a property actually sold for.

According to Hickey, the CAMRA system's analysis needed to be "massaged" to reduce the valuation of the Property to "roughly" the raw average he derived from his list of sales. Hickey then admitted that the default physical depreciation for the Property, based on its age and condition, would have been only 9%. However, in order to achieve the result he thought was reasonable, Hickey adjusted the physical depreciation value to 45%.

         Hickey testified that he made no adjustments to the sale prices of the properties on the list to account for the size of the properties, the location of the properties, or when in the ten-year period the sales occurred. Hickey further stated that he made no attempt to ascertain the nature of the sales (i.e., whether they were arm's length transactions) when he compiled his list. Hickey admitted that he assessed the Property using an average of the sale price divided by the square footage for each of the 52 properties on the list.

         McKee then presented testimony from Thomas, who performed the 2014 assessment for the County while he was employed by Wingate. Through Thomas, McKee introduced Wingate's proposal to the County for the 2014 reassessment cycle. The proposal indicated that Miles Willett, a certified general real estate appraiser, would be conducting the appraisals. Instead of Willett, however, Thomas was the Wingate employee who assessed the Property. When Thomas assessed the Property, he was only a licensed residential real estate appraiser. Thomas did not obtain his certified general real estate appraiser license until 2015. Willett did not provide Thomas with any supervision or guidance for the McKee appraisal.

         Thomas testified that he classified the Property as a special use property solely because it was originally designed and constructed to be used for food processing. He admitted, however, that the main building on the property was a rectangular-shaped industrial building and that it could have been converted to a different use. Thomas testified that his appraisal of the Property was the price he thought it could sell for if McKee sold the Property to a buyer who also intended to use the Property as a food processing plant. Thomas used the cost approach to determine the value of the property. He testified that he was unable to use the comparable sales approach due to the lack of comparable sales for special purpose food processing plants, and he rejected the income approach due to a lack of rental market data because the Property was owner-occupied. Although Thomas testified that the market for the McKee Property was national in scope, he admitted that he did not search for rental data outside of Augusta County, and he did not search for comparable sales outside of the eastern region of the United States.

         In his assessment report to the County, Thomas stated that "the assessment is compliant with USPAP Standard 6 (Mass Appraisal, Development and Reporting), including development of scope of work and highest and best use analysis." However, at trial Thomas admitted that he did not comply with Standard 6-8. Thomas claimed he was exempt from Standard 6-8 because he performed his appraisal for the County, and there is an exemption from certain USPAP standards for federal, state or local employees performing their official capacity. However, he admitted that he was not an employee of the County when he performed the assessment, so that exemption would not apply to his assessment.

         McKee then called John Lifflander, an industrial and commercial appraiser, to testify as an expert witness regarding complex industrial appraisals. Among other qualifications, Lifflander authored the text book, "Fundamentals of Industrial Valuation," which was published by the International Association of Assessing Officers and serves as the authoritative text for that organization. Lifflander testified that he agreed to take on this case because, when he reviewed the numbers, he immediately knew the Property had been "overassessed." He explained that it was a "jumbo building," and because it was over 800, 000 square feet, it would be difficult to sell or lease. Also, he was already familiar with the price per square foot nationally for these types of properties and knew that the average price per square foot was half of the amount for which the Property had been assessed.

         Lifflander described numerous problems with Thomas' assessment. First, Lifflander testified that the McKee property was a rectangular building, "and a rectangular building can be used for a lot of different manufacturing uses." Therefore, according to Lifflander, "if somebody says the highest and best use is food manufacturing, that shows they do not understand industrial buildings." Lifflander testified that another problem with Thomas' assessment was that he used the cost approach instead of the sales approach, and when he determined the depreciation he did not have any local market research to support that amount. Lifflander explained, "[t]here's no way they could know the value from the cost approach. There's no way you can depend on that value because it has to be corroborated with market evidence because depreciation is market driven." Lifflander also testified that Thomas' assessment did not comply with USPAP Standard 6 and pointed out several ways in which the assessment failed to comply with this Standard, including "the failure to apply an estimate of functional and/or economic obsolescence," the fact that "the sales comparison approach was also left out," and that "much of the information required by USPAP Standard 6 was missing from the information that Wingate provided from its work file."

         Lifflander further testified that USPAP Standard 6 was not just generally accepted practice, "[i]t's required. It's the law for appraisers. It's not something - you can lose your license if you don't follow it. You can be banned from appraising if you don't follow it." Lifflander described the errors as "egregious, and actually, a bit perplexing." Lifflander stated the likely reason for these errors was because Thomas was only certified as a residential appraiser at the time he conducted the McKee appraisal.

         With respect to the appraisal conducted by Harvey for the 2009 reassessment cycle, Lifflander testified that it "was probably the worst work I've seen in my life." He explained that Hickey took all sales, ranging from $5 a foot to $170 a foot, averaged them out, and came out with a value for the subject, without making any adjustments. Lifflander stated:

That would be very much like me going and valuing your house in this city, for instance, and taking every house in the city, mansions, fixers, everything, and getting an average, and once I got that average I'd say, 'That's your ...

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