Present: All the Justices
KESWICK CLUB, L.P.
OPINION BY
v. Record No. 060672 JUSTICE LAWRENCE L. KOONTZ, JR.
January 12, 2007
COUNTY OF ALBEMARLE
FROM THE CIRCUIT COURT OF ALBEMARLE COUNTY
James A. Luke, Judge Designate
In this appeal, a taxpayer challenges a judgment upholding
a county’s assessment of the fair market value of real estate
owned by the taxpayer for the 2003 and 2004 tax years.
Specifically, we consider whether the county failed to properly
consider the income and sales approaches to valuation before
basing its assessment solely on the cost approach.
BACKGROUND
The property that is the subject of this appeal is Keswick
Club, an approximately 153-acre property in Albemarle County
(“the county”). Keswick Club is a private recreational club
with facilities that include an eighteen-hole golf course, pro
shop, clubhouse with restaurant, spa, swimming pools, tennis
courts, exercise room and other amenities. Keswick Club is
located adjacent to an upscale residential subdivision known as
Keswick Estates and a luxury hotel known as Keswick Hall.
During the relevant times, Keswick Club, L.P. (“the taxpayer”)
was the record owner of the subject property.
In 2003, the county performed its biennial reassessment of
real estate values for the 2003 and 2004 tax years.
Subsequently, the county issued to the taxpayer a notice of
reassessment stating that Keswick Club’s assessed fair market
value for 2003 was $12,771,500.1 The taxpayer disputed the
county’s assessment of Keswick Club’s fair market value and
submitted an appraisal report prepared by a private appraiser.
This appraisal report reflected Keswick Club’s fair market value
at $2.9 million utilizing the income and sales approaches to
valuation, but not the cost approach.2
In a letter to the taxpayer dated May 15, 2003, the county
disagreed with the methodology used in the private appraisal
report and explained that it had chosen to use the cost
approach, not the income approach or the sales approach, in
valuing Keswick Club. The county stated in the letter that:
1
The notice of reassessment indicated that the prior
assessed value of Keswick Club was $11,318,900.
2
The cost, income, and sales approaches are the three
valuation approaches or methods most widely used to assess the
fair market value of real estate. In simple terms, the cost
approach values property by adding the value of land to the
value of improvements, which is measured by the cost to
reproduce those improvements minus depreciation. The income
approach estimates the value of income-producing property by
measuring the income the property is expected to generate. The
sales method values property utilizing recent sale prices of
comparable properties. Each of the three approaches has several
commonly used names, but for simplicity and consistency, we will
refer to them as the cost, income, and sales approaches.
2
We have reviewed the appraisal report you
provided and as a result disagree with the final value
estimate. In our opinion, given the status of the
golf clubs located within the County, it is difficult
to arrive at a fair market valuation by employing the
income approach. The sales comparison approach was
also not used due to the lack of available sales
information within our jurisdiction. We have chosen
to value area golf clubs using the cost approach.
The county’s letter also noted that the other golf clubs in
the county were assessed at $21,585,700, $13,281,200, and
$9,159,800.3
The taxpayer sought review by the county Board of
Equalization, which reduced Keswick Club’s fair market value by
$1,345,400 to account for functional obsolescence and other
factors. The county subsequently made a further reduction to
account for a decrease in acreage such that Keswick Club’s final
assessed fair market value by the county was $11,175,700.4
The taxpayer filed an application in the Circuit Court of
Albemarle County pursuant to Code § 58.1-3984 requesting that
the circuit court correct the county’s 2003 and 2004
assessments. The taxpayer asserted that the county used only
3
In the letter, the county notified the taxpayer that
Keswick Club’s assessed fair market value had been reduced by
$227,900 to account for an additional depreciation allowance.
4
The taxpayer claims that it paid its 2003 tax based on
Keswick Club’s assessed fair market value prior to the reduction
by the Board of Equalization. The taxpayer paid its 2004 tax
based on the $11,175,700 assessed fair market value after the
3
the cost approach in making its valuation and by doing so
“failed to consider all factors required by law for a lawful and
proper valuation of the subject property.” The taxpayer
maintained that Keswick Club’s actual fair market value,
estimated using the “proper and preferred” methods of valuation,
was $2,900,000. The county filed a responsive pleading
asserting, among other things, that its valuation method was
proper and that it had used the cost approach “only after
considering but properly rejecting the use of other valuation
methods.”
At a bench trial held in the circuit court, the parties
presented evidence of Keswick Club’s financial performance on
the issue of whether the income approach could feasibly be
applied in appraising Keswick Club. The undisputed evidence
showed that Keswick Club had operated at an uninterrupted loss
for many consecutive years. Keswick Club’s general manager
testified, however, that Keswick Club was projected to become
profitable in future years as the result of aggressive efforts
initiated by Keswick Club’s new owner, Orient Express Hotels,
Inc. (“Orient Express”). Orient Express had purchased Keswick
Club in 2002 when the previous owner, Metropolaris, Inc.,
reduction by the Board of Equalization and the further reduction
made by the county.
4
exercised its option under a 1999 “put and call agreement”
between itself and Orient Express to sell all of Keswick Club
L.P.’s stock to Orient Express for $3.7 million.5 Keswick
Club’s general manager testified that, although the “loss-making
situation” had decreased since Orient Express purchased Keswick
Club, the club continued to operate at a loss.
The county assessor who had assessed Keswick Club testified
that, in making his appraisal, he “looked at all three
approaches to value” before choosing to base his assessment
solely on the cost approach. The assessor stated that he chose
to use the cost method because it rendered the “most accurate
appraisal of the property” and is “appropriate when you have a
special-use property” such as a golf course.
The county assessor testified that he rejected the income
approach because he did not receive any income statements or
other financial information pertaining to Keswick Club.
However, the assessor acknowledged that he never requested any
such information. On the issue of whether he would utilize the
5
The put and call agreement involved the transfer of shares
in a subsidiary of Metropolaris, KGC Inc. This subsidiary of
Metropolaris was the sole shareholder of Keswick Club General
Partner, Inc., the general partner of Keswick Club, L.P., and
the majority shareholder of Keswick Club, Inc., the sole limited
partner of Keswick Club, L.P. It suffices for purposes of this
appeal that the transfer of the shares in KGC, Inc. amounted to
a sale of all of the beneficial ownership in Keswick Club.
5
income approach on a for-profit business that was losing money,
the assessor stated that he would still consider such property
“income producing property.” He further stated that he would
not use the income approach because he could not “do a proper
analysis of a property with a negative income to create . . . an
accurate reflection of market value.”
The county assessor testified that he attempted to develop
an appraisal based on the sales approach but could locate only
one comparable sale inside the county. The assessor testified
that “[a]fter careful examination” of that sale he chose not to
use the sales approach in appraising Keswick Club. The assessor
testified that he did not look outside the county for comparable
sales, but gave no reason for his failure to do so. The
assessor also testified that he did not consider the 2002 sale
of the beneficial ownership of Keswick Club as a comparable sale
because there was no record of the sale in the county real
estate records and because he did not consider the sale to be an
arms-length sale on the open market. The assessor’s testimony
indicated that he had not seen any documents related to the put
and call agreement governing the sale, that he knew nothing
about the terms of that agreement, and that he did not make any
effort to become aware of the terms of the agreement.
6
Both parties presented expert testimony by private
appraisers and presented as evidence appraisal reports prepared
by those experts. The taxpayer’s expert, David Sangree,
testified that he utilized the income approach and the sales
approach, but not the cost approach, to appraise Keswick Club.
Sangree testified that he used the income approach despite the
fact that Keswick Club was losing money based on his projection
that, due to improved operating performance and capital
improvements undertaken by the new management, Keswick Club was
likely to become profitable. Sangree testified that, in
applying the sales approach, he used the 2002 sale of Keswick
Club as a comparable sale because “the subject sale is certainly
the most important sale to consider.” Sangree also used several
golf courses outside Albemarle County and two out-of-state golf
courses as comparable sales. Sangree estimated the fair market
value of Keswick Club at $2,900,000.
The county’s expert, Ivo Romanesko, testified that he did
not use the income approach to appraise Keswick Club because
projecting future profits would require a great deal of
speculation given the club’s history of losing money. Instead,
Romanesko utilized the cost and sales approaches. In using the
sales approach, Romanesko located comparable sales outside the
county but did not search for comparable sales occurring outside
7
the State. Romanesko did not consider the 2002 sale of Keswick
Club as a comparable sale because in his opinion the situation
created by the put and call agreement did not amount to an open
market sale. Romanesko’s final valuations of Keswick Club using
the cost and sales approaches were $12,950,000 and $12,000,000,
respectively.
In its closing argument and post-trial brief, the taxpayer
contended, among other things, that the county erred in basing
its assessment solely on the cost approach. The taxpayer
asserted that the cost approach is less reliable for determining
the fair market value of income producing property than the
income and sales approaches. Because the county only utilized
the cost approach in making the assessment, without a credible
basis for not considering the income or sales method, the
taxpayer contended that the assessment was not entitled to the
presumption of validity normally afforded to a taxing
authority’s assessment. In response, the county generally
contended that it considered all three valuation approaches in
making its assessment and that the assessment should be upheld
as not manifestly erroneous.
In a letter opinion, which subsequently was incorporated by
reference into a final order, the circuit court approved the
county’s $11,175,700 assessment of Keswick Club. The circuit
8
court ruled that, under Tidewater Psychiatric Institute, Inc. v.
City of Virginia Beach, 256 Va. 136, 501 S.E.2d 761 (1998), a
taxing authority may use the cost approach as its sole valuation
method if no reliable data for the income or sales methods is
available. The circuit court noted the county assessor’s
testimony that he considered all three valuation approaches
before determining that the cost approach would be “best” for
Keswick Club. The circuit court also noted that Romanesko had
appraised Keswick Club’s fair market value at $12,500,000.
Accordingly, the circuit court concluded that the taxpayer
failed to prove that the county committed manifest error in
assessing Keswick Club’s fair market value and approved the
county’s $11,175,700 assessment. This appeal followed.
DISCUSSION
The principles that guide our review of a judgment
upholding a taxing authority’s assessment of the fair market
value of real estate are well established. The Constitution of
Virginia requires that real estate be assessed at its fair
market value. Va. Const. art. X, § 2; see also Code § 58.1-3201
(requiring taxing authorities to assess real property at one-
hundred percent fair market value). We have defined the fair
market value of a property as its sale price when offered for
sale “by one who desires, but is not obliged, to sell it, and is
9
bought by one who is under no necessity of having it.” Tuckahoe
Woman’s Club v. City of Richmond, 199 Va. 734, 737, 101 S.E.2d
571, 574 (1958); see also Lake Monticello Service Co. v. Board
of Supervisors, 237 Va. 434, 438, 377 S.E.2d 446, 448 (1989).
A taxpayer seeking relief from an allegedly erroneous
assessment has the burden to show that the assessment exceeds
fair market value. Code § 58.1-3984; see Shoosmith Bros. v.
County of Chesterfield, 268 Va. 241, 245, 601 S.E.2d 641, 643
(2004); Board of Supervisors of Fairfax County v. HCA Health
Services, Inc., 260 Va. 317, 329-30, 535 S.E.2d 163, 169-70
(2000); Tidewater Psychiatric Inst., 256 Va. at 140-41, 501
S.E.2d at 763. Generally, a taxing authority’s assessment of a
property’s fair market value is presumed valid and a circuit
court will reject and correct a taxing authority’s assessment
only if the taxpayer demonstrates that the taxing authority
committed manifest error or disregarded controlling evidence in
making the assessment. See Shoosmith Bros., 268 Va. at 245, 601
S.E.2d at 643; HCA Health Servs., 260 Va. at 329-30, 535 S.E.2d
at 169-70; Tidewater Psychiatric Inst., 256 Va. at 140-41, 501
S.E.2d at 763.
In determining the fair market value of real estate, taxing
authorities commonly use one or more of three valuation
approaches: the cost approach, income approach, and sales
10
approach. Each of these approaches utilizes different
characteristics of a property to estimate fair market value, and
each analyzes different elements of the property which would
likely affect the price a potential buyer would be willing to
pay for the property on the open market. Ideally, an appraisal
should, if possible, derive its final determination of a
property’s value using all three approaches in order to maximize
the likelihood that the valuation accurately reflects the
property’s fair market value. See Arlington County Board v.
Ginsberg, 228 Va. 633, 641, 325 S.E.2d 348, 353 (1985)(stating
that “[e]verything which affects market value must be
considered”); see also Lake Monticello Serv. Co., 237 Va. at
439, 377 S.E.2d at 449 (fair market value “focuses on those
elements which influence a buyer and a seller in arriving at a
sale price”).
However, with respect to any given property, a taxing
authority may determine that the use of one or more of these
approaches is not feasible. In cases where a taxing authority
bases an assessment of fair market value solely on one approach
in determining the fair market value of property, the resulting
assessment is entitled to the presumption of validity so long as
the taxing authority “consider[s] and properly reject[s]” the
other valuation methods. HCA Health Services, 260 Va. at 330-
11
31, 535 S.E.2d at 170; Tidewater Psychiatric Inst., 256 Va. 140-
41, 501 S.E.2d at 763. In applying the “considers and properly
rejects” standard to a taxing authority’s decision to apply a
single approach, we have refused to afford a presumption of
validity to an assessment when the taxing authority failed to
make an “effort to acquire the data necessary to perform
appraisals” based on the other approaches. HCA Health Services,
260 Va. at 330, 535 S.E.2d at 170.
Since the taxpayer challenges the assessment in this case
based on the county’s choice of the cost approach as the sole
method used to make the assessment, we must determine whether
the evidence in this case reflects that the county considered
and properly rejected the income and sales approaches before
relying solely on the cost approach. In doing so, we reiterate
that “courts must be hesitant, within reasonable bounds, to set
aside the judgment of assessors; otherwise, the courts will
become boards of assessment thereby arrogating to themselves the
function of the duly constituted tax authorities.” City of
Richmond v. Gordon, 224 Va. 103, 110, 294 S.E.2d 846, 850 (1982)
(internal quotation marks omitted).
The assessment of real estate, especially with regard to
unique properties such as golf courses, is a process upon which
even experts can disagree, as reflected by the disparity between
12
the approaches used and the results reached by the county
assessor and the experts in this case. Accordingly, in
determining whether the county considered and properly rejected
the income and sales approaches in this case, we do not review
the ultimate conclusions of the professional appraisers
regarding the utility or non-utility of applying a certain
approach to valuing Keswick Club’s fair market value over an
alternate approach.
We begin our review of the evidence with the county’s May
15, 2003 letter to the taxpayer. In that letter, the county, in
explaining its method for valuing Keswick Club, stated that
“[w]e have chosen to value area golf clubs using the cost
approach.” The county further stated that due to the “status of
golf clubs in the county” it would be difficult to determine
fair market value using the income approach and that the sales
approach was not used in valuing Keswick Club due to the lack of
comparable sales in the county. The county’s statement that it
had chosen to value all area golf clubs using solely the cost
approach evidences a categorical determination by the county
that golf courses as a class of property would not be appraised
using the income and sales methods. Such a determination
disregards the fact that golf courses, like other properties,
are constantly vulnerable to changing market forces that may
13
affect fair market value and each is a unique property. For the
county to apply the cost approach in an arbitrary, categorical
fashion to all golf courses invokes a serious risk that
information relevant to the determination of fair market value
will not be considered.6
The evidence adduced at trial further suggests that the
county applied the cost approach to Keswick Club in an automatic
fashion without sufficiently attempting to gather the data
necessary to utilize the income approach or sales approach.
Regarding the income approach, the county assessor’s testimony
indicates that he rejected the income method because he was not
provided income statements or other financial information
concerning Keswick Club. However, the assessor acknowledged in
his testimony that neither he nor any other county official ever
requested Keswick Club’s income statements or financial
information, even though the county was entitled to request this
6
The county indicated at trial that its reference to the
“status of golf clubs in the county” in the May 15, 2003 letter
reflected its belief that, while golf courses in the county
operated to generate income, no club was operating to maximize
income, and that the income approach would thus not accurately
reflect fair market value. However, even if the county’s golf
courses do not operate in a fashion so as to maximize profit,
such a fact would not be a reason to reject the income approach
outright but, rather, would be a factor to consider in
determining what weight the income approach would have in the
ultimate assessment of the property’s value with respect to each
golf course.
14
information under Code § 58.1-3294.7 The fact that the county
did not attempt to obtain the financial information that would
be crucial to a determination whether the income approach would
be feasible or appropriate, despite being statutorily empowered
to do so, further indicates that the county arbitrarily
determined to use the cost method in appraising Keswick Club
without properly considering the feasibility of using the income
approach.
Regarding its consideration of the sales approach, the
county stated that it considered that approach but rejected it
due to the paucity of comparable sales within the county and its
decision not to look for comparable sales outside the
jurisdiction. The county also chose not to consider the 2002
sale of Keswick Club, which the county concluded was not an
arms-length transaction. In reviewing whether the county
considered and properly rejected the sales approach, the
evidence shows that the county considered only one sale within
the jurisdiction. The evidence in the record is insufficient
for us to decide that the county’s decision not to look for
comparable sales outside of the jurisdiction was error.
7
Code § 58.1-3294 provides, in relevant part, that “[a]ny
duly authorized real estate assessor . . . may require that the
owners of income-producing real estate . . . furnish . . .
15
However, the evidence supports the conclusion that the county’s
refusal to sufficiently investigate, or investigate at all, the
terms and circumstances of the 2002 sale of Keswick Club amounts
to a failure by the county to consider and properly reject the
sales approach.
It is well settled that a recent sale of the subject
property, while not conclusive in determining fair market value,
is entitled to “substantial weight.” Arlington County Board,
228 Va. at 640, 325 S.E.2d at 352; Board of Supervisors v.
Donatelli & Klein, Inc., 228 Va. 620, 628, 325 S.E.2d 342, 345
(1985); American Viscose Corp. v. City of Roanoke, 205 Va. 192,
196, 135 S.E.2d 795, 798 (1964). As the county correctly
contends, a taxing authority may choose not to consider a sale
of the subject property that is not an arms-length transaction
made on the open market. See Tidewater Psychiatric Inst., 256
Va. at 140-41, 501 S.E.2d at 763 (recent sale of subject
property rejected by taxing authority where sale price was well
below the recent sale price of comparable properties).
Nevertheless, given the strong evidence of fair market value
that a recent sale of the subject property can provide, a taxing
authority should carefully scrutinize the factual circumstances
statements of the income and expenses attributable over a
specified period of time to each such parcel of real estate.”
16
of such a sale before determining that it does not meet the
criteria for an arms-length transaction.
In this case, the county stated that it did not consider
the 2002 sale of Keswick Club to be a comparable sale because
the sale took place under a put and call agreement negotiated
three years prior to the sale. However, the county assessor
acknowledged at trial that he knew “nothing” about the terms of
this agreement or the circumstances pertaining to it.
Furthermore, the evidence does not reflect that the county made
any attempt to acquire information relevant to this agreement
that would have informed its conclusion that the sale was not an
arms-length transaction. The fact that the sale was of the
beneficial interest of an entity owning Keswick Club, as opposed
to the outright sale of the real estate, is not a sufficient
reason, in and of itself, to fail to investigate the terms of
that sale. In light of the principle that a recent sale of a
subject property is to be afforded substantial weight in
assessing that property’s fair market value, the county’s
failure even to attempt to familiarize itself with the terms of
the put and call agreement leads to the conclusion that the
county did not “consider and properly reject” the sales
approach.
17
For these reasons, we are of opinion that the county’s
categorical application of the cost approach to the valuation of
all golf courses resulted in a failure by the county to consider
and properly reject the income and sales approaches before
solely utilizing the cost approach in assessing the fair market
value of Keswick Club. Here, the county did not attempt to
obtain the data necessary to perform appraisals based on the
income and sales approaches. An assessment based on a single
approach to the determination of market value, where the taxing
authority failed to consider and properly reject the other
approaches, is not entitled to a presumption of validity. HCA
Health Servs., 260 Va. at 329-30, 535 S.E.2d at 169-70.
Therefore, the taxpayer was required only to show that the
county’s assessment was erroneous, not that the county committed
manifest error or disregarded controlling evidence in making its
assessment. Id. at 330, 535 S.E.2d at 170.
CONCLUSION
The circuit court’s letter opinion reflects that the court
reviewed the county’s 2003 and 2004 assessments of Keswick Club
under the standard of review applicable when the assessments are
entitled to a presumption of validity, requiring the taxpayer to
prove that the county committed manifest error or disregarded
controlling evidence. However, since the assessments were not
18
entitled to a presumption of validity, the proper standard of
review was the less stringent standard, requiring the taxpayer
only to prove that the county’s assessments were erroneous. The
circuit court erred in reviewing the taxpayer’s application to
correct the county’s assessments of Keswick Club under the wrong
standard of review. Accordingly, we will reverse the judgment
of the circuit court and remand this case so that the circuit
court can apply the proper and less stringent standard of review
applicable under the facts of this particular case.
Reversed and remanded.
19