Present: All the Justices
SHOOSMITH BROS., INC.
v. Record No. 032572 OPINION BY JUSTICE ELIZABETH B. LACY
September 17, 2004
COUNTY OF CHESTERFIELD
FROM THE CIRCUIT COURT OF CHESTERFIELD COUNTY
Michael C. Allen, Judge
In this appeal, we consider whether the trial court erred
in sustaining the County's assessment of real property
operated as a landfill.
I.
Shoosmith Brothers, Inc. (Shoosmith) owns a 1,163 acre
parcel of land in Chesterfield County. Although the parcel is
designated as a single tax parcel for real estate taxation
purposes, the parcel is divided into separate tracts based on
the use of those tracts to determine its fair market value.
For the past 27 years Shoosmith has used 200 acres of the
parcel as a sanitary landfill under a conditional use permit
Shoosmith obtained from the County and a Solid Waste Facility
Permit it obtained from the Virginia Department of
Environmental Quality. In 1993, the County applied the income
capitalization method (income method) of assessment to the
landfill property and assessed the 200 acres at a fair market
value of $12,987,600. The 1993 valuation has remained
constant and was the assessed value of the landfill for the
2001 tax year.
In March 2001, Shoosmith filed an Application for Review
of the Assessment of the landfill property asserting that the
property was not assessed at its fair market value because
"business income [was] used rather than the real estate's
rental income to estimate real estate value." Following a
hearing, the Board of Equalization upheld the County's use of
the income method and the 2001 assessment of $19,859,935 for
the entire 1,163-acre parcel. Shoosmith appealed that
decision to the circuit court, claiming the County improperly
assessed the 200-acre landfill property.
At trial, Shoosmith's expert witness, Ivo H. Romenesko,
testified that, in his opinion, the County's assessment
included the value of the property and of Shoosmith's ongoing
landfill business, which meant the County was assessing the
value of the permits. According to Romenesko, the fair market
value of the landfill property should be based on the value of
the land without the permits. To determine the proper value
of the 200 acres, Romenesko examined the sale of four
properties zoned agricultural or residential which Romenesko
considered comparable and concluded that the value of the
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landfill property was approximately $5,000 per acre or
$1,000,000.1
The County's Commercial and Industrial Appraisal
Supervisor, Jeffrey Overbey, testified that he applied the
income method of assessment, although it was "not the only
approach," because it was "the preferred approach and the most
accurate approach." He testified that he did not consider the
income method as an appraisal of a "going concern," and that,
while the state and county permits affected the value of the
property, the permits were not separately valued for real
estate purposes. Overbey testified that income-producing
property such as a landfill is "bought and sold based on the
income stream that it generates" and that the income method of
assessment rather than the cost method is preferable. He also
stated that the sales of undeveloped agricultural or
residential land that Shoosmith's expert advanced were not
comparable sales because their values were not indicative of
the market value of income-producing property.
Overbey explained that, after determining that the
highest and best use of the property was that of a landfill,
he conducted the assessment following the methodology
1
The properties were (1) 256.82 acres at $3,349 per acre
zoned residential (formerly agricultural) but not yet serviced
by sewer and water; (2) 96.68 acres at $4,655 per acre zoned
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prescribed in an article styled "Appraisal of Sanitary
Landfills," by Robert L. Foreman, MAI, SRPA, a professional
real estate appraiser, which appears as Chapter 50 of the
third edition of the Encyclopedia of Real Estate Appraising at
pages 1077-1092 (Edith J. Friedman, ed., 1978) (Foreman
article). The Foreman article stated that "[t]he only
appropriate method of appraising a sanitary landfill is to
arrive at the present worth of the income stream . . . [plus]
the present worth of the reversion after the site has been
filled" and that "[s]ophisticated assessing agencies" appraise
a landfill on this basis. Id. at 1083, 1085.
The methodology set out in the Foreman article requires
determining the annual gross income of the landfill property,
deducting the costs expended to produce the income to
determine the "net income" generated by the real estate,
projecting the net income for the useful life of the landfill
property, and discounting the projected income stream to the
present value of the real estate by using a discount rate.
Id. at 1083. Applying this formula, Overbey estimated the
annual gross income of the landfill property at $13,125,000
and applied an estimated costs expended factor of 75.2%, which
agricultural; (3) 27.60 acres at $5,616 zoned agricultural;
and (4) 42.90 acres at $5,828 per acre zoned agricultural.
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resulted in an estimated net income of $3,250,000.2 Overbey
then projected the net income over the remaining life of the
landfill, approximately 25 years, and applied a 25% discount
rate. Overbey assessed the value of the 200 acres at
$12,987,600.
J. Brian Bergan, a property tax consultant for the
Commonwealth who consulted with Chesterfield County on the
Shoosmith landfill assessment, testified that the cost and
comparable sales methods of assessment were not appropriate
for assessing Shoosmith's landfill because there was "no
substantiation" for the cost methodology and a lack of
comparable sales that could be considered.
Following the hearing, the circuit court concluded that
the County had used an appropriate assessment methodology and
that the assessment was a "reasonable assessment of the fair
market value" of the landfill property. Shoosmith filed an
appeal raising a number of assignments of error. We granted
the appeal, limited to whether the trial court erred in (1)
holding that the County's method of assessment was appropriate
and that the County Assessor's assessment of the property was
proper; (2) upholding the County's 2001 assessment of the 200-
acre landfill property; or (3) refusing to accept Shoosmith's
2
Overbey used estimates of the revenue and expenses
because Shoosmith declined to provide actual figures in
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expert testimony of the fair market value of the landfill
property.
II.
The parties do not dispute the principles which we apply
when reviewing a challenge to a tax assessment. We presume
that a county's tax assessment is correct, and the burden is
on the taxpayer to rebut the presumption by showing by a clear
preponderance of the evidence that its property is assessed at
more than fair market value. Shoosmith agrees that it must
show that the County committed manifest error or totally
disregarded controlling evidence in its determination of fair
market value. Tidewater Psychiatric Institute, Inc. v. City
of Virginia Beach, 256 Va. 136, 140-41, 501 S.E.2d 761, 763-64
(1998).
Shoosmith asserts that the County committed manifest
error by using the income method of assessment in assessing
the landfill property. Shoosmith's rationale for its position
can be summarized as follows. Under Article X, § 2 of the
Constitution of Virginia, real estate and tangible personal
property shall be assessed and taxed at their fair market
value. Intangible assets such as non-transferable use permits
are not subject to assessment and taxation under this
provision. Shoosmith maintains that if the use of real
response to the County's request.
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property requires a permit which does not run with the land,
any assessment of that property that is based on the permitted
use is manifestly erroneous because such an assessment
includes an assessment of an intangible asset the permit
represents. In this case, state and local law required
Shoosmith to secure permits to conduct a landfill operation on
its land. Those permits did not run with the land and were
not transferable. Because the method of assessment the County
used factored in the income generated by a use of the land
that Shoosmith enjoyed only by virtue of the non-transferable
permit, the County's assessment, according to Shoosmith,
included an assessment of an intangible asset and, therefore,
was manifestly erroneous.
We reject Shoosmith's premise that consideration of the
use of property when permits are required for that use is
improper because it constitutes assessment of the permits
themselves. We begin with the basic principle that real
property is to be assessed at its fair market value and with
the "fundamental rule that in assessing all tangible
properties for tax purposes such properties should be assessed
at their highest and best use." Norfolk & Western Railway Co.
v. Commonwealth, 211 Va. 692, 699, 179 S.E.2d 623, 628 (1971).
These rules require consideration of a property's use when
assessing the property. They make no exception for uses that
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depend on securing a permit from a governmental agency, and
they do not differentiate between a use conducted pursuant to
a transferable or non-transferable permit. Our previous cases
are consistent with this principle.
In Board of Supervisors of Fairfax County v. HCA Health
Services of Virginia, Inc., 260 Va. 317, 535 S.E.2d 163
(2000), we considered the proper tax assessment of a hospital.
The trial court first concluded that the county's assessment
using the depreciated cost method was not entitled to a
presumption of correctness because the county did not consider
other methods of assessment. 260 Va. at 328, 535 S.E.2d at
168. The other available assessment methods the hospital
presented to the trial court included an income analysis and a
comparable sales analysis. The former was based on net
revenues from the hospital's real property, consisting of
revenue from inpatient services and imputed rental income to
the hospital from its outpatient service area. The latter
included a number of "arms-length" sales of hospitals. Id. at
327, 535 S.E.2d at 168. We approved the trial court's holding
that the county's assessment based on the depreciated cost
method was erroneous because the county did not consider,
among other things, market forces in the health care industry
affecting obsolescence and depreciation, and we approved the
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assessment made by the trial court based on health care
industry market forces. Id. at 331, 535 S.E.2d at 170.
Under Shoosmith's theory, consideration of comparable
sales of other hospitals, revenue streams from the operation
of the hospital, and issues related to the use of the property
as a hospital such as market forces in the health care
industry relating to obsolescence would have been improper
because the operation of a hospital requires a non-
transferable certificate of public necessity issued by the
state. Code §§ 32.1-102.3, -102.5. In affirming the judgment
of the trial court in Health Services, we implicitly rejected
such a theory.
Accordingly, we hold that consideration of the use of the
land in assessing fair market value, even if such use requires
non-transferable government permits, is not the assessment of
an intangible asset. Therefore, the County did not commit
manifest error in assessing Shoosmith's 200-acre landfill as a
landfill using the income method of assessment.
Shoosmith also asserts that the County's application of
the income method was flawed because proper use of that method
requires determining the rental value of the land and "[o]nly
the income attributable to the land – rent – should be
included." Shoosmith bases this argument on our statements in
prior cases that economic rent was the measure to be used in
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capitalizing income for fair market value determinations. See
e.g. Tysons International LP v. Board of Supervisors, 241 Va.
5, 11, 400 S.E.2d 151, 154 (1991), Board of Supervisors v.
Nassif, 223 Va. 400, 404-05, 290 S.E.2d 822, 825 (1982).
Again, we disagree with Shoosmith.
The cases Shoosmith cites involved properties that were
subject to lease and the issue in each case was whether the
economic or contract rent should be used when applying the
income capitalization assessment method. The use of economic
rent is appropriate when land is under lease, but in this
case, the landfill property is owner-operated and is not under
lease, and there are no comparable leases of such land in
evidence.
The methodology the County used in applying the income
assessment was consistent with the formula the Foreman article
prescribed for assessing landfills. As that article
recognizes, if the landfill is leased and the lease data is
available, the assessment would include that income in the net
income attributable to the real estate. "However, such leases
are almost unheard of . . . , and the only way the appraiser
can estimate a net income stream attributable to the real
estate is to make a careful analysis of the expenses." This
is precisely the situation here. The property is not under
lease and the County applied a 75% expense factor to account
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for the expenses and an "unusually high" 25% discount factor.
See also Waste Management of Wisconsin v. Kenosha County Board
of Review, 516 N.W.2d 695, 704-05 (Wis. 1994).
Based on this record, we hold that the trial court did
not err in concluding that Shoosmith failed to show either
that the County committed manifest error in assessing the
landfill property based on the income method or that the
County ignored controlling evidence in determining the fair
market value of the property at issue. Accordingly, we will
affirm the judgment of the trial court.
Affirmed.
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