Present: All the Justices
TIDEWATER PSYCHIATRIC INSTITUTE, INC.
OPINION BY
v. Record No. 971635 JUSTICE LAWRENCE L. KOONTZ, JR.
June 5, 1998
CITY OF VIRGINIA BEACH
FROM THE CIRCUIT COURT OF THE CITY OF VIRGINIA BEACH
Morris B. Gutterman, Judge Designate
This is a taxpayer’s appeal from a judgment upholding
assessments of a private psychiatric hospital facility for the
tax years 1990 through 1995. 1
BACKGROUND
Tidewater Psychiatric Institute, Inc. (Tidewater) filed an
application and subsequent amended application for relief to
correct alleged erroneous assessments for the tax years 1990
through 1995 of two parcels in the City of Virginia Beach (the
City) that Tidewater owned or leased, 2 asserting that these
assessments “were arbitrary, inequitable and excessive.”
1
The tax year for real property in the City of Virginia
Beach is based upon assessments made during the first six months
of one year with taxes levied on those assessments for the
period of July 1 of that year to June 30 of the following year.
For purposes of clarity, we will refer to tax years within this
opinion by their “year-ending” date. Thus, an assessment made
in 1989 for taxes levied between July 1, 1989 and June 30, 1990
would be the assessment for the 1990 tax year.
2
The evidence was at times in conflict with the allegation
in Tidewater’s pleadings that Tidewater owned one parcel and
leased the other at all times relevant to the assessments being
challenged. It appears that the confusion over the ownership of
the property stems in part from the fact that Tidewater
continued to operate the hospital located on the property, while
In the course of pretrial discovery, Tidewater filed
supplemental interrogatories requesting that the City identify
its expert witnesses. The City identified Bradley R. Sanford, a
commercial real estate appraiser, as its only expert witness.
During the pretrial conference, the City indicated that it also
intended to call Jerald D. Banagan, the City Assessor, as an
expert witness. Tidewater subsequently filed a motion in limine
to prohibit Banagan from offering expert testimony, asserting
that the City had failed to name him as an expert in its
response to interrogatories. The trial court overruled the
motion, but offered Tidewater a continuance so that it might
redepose Banagan. Tidewater declined the offer of a continuance
and later conceded that it “claim[ed] no surprise” as a result
of Banagan’s testimony.
At trial, the evidence showed that the disputed assessments
related to two contiguous parcels comprising a hospital facility
and gymnasium (the property). The hospital facility is located
on a parcel of approximately four acres and consists of a two-
story, wood and steel frame, aluminum-sided main building and an
attached two-story, steel frame, masonry and concrete addition.
Together, the main building and addition have 61 patient beds as
the property changed hands among various corporate entities.
However, the parties do not dispute that Tidewater was
responsible for and actually paid the taxes levied on the
assessments it challenges in this case.
2
well as support facilities. The gymnasium, which is also a two-
story, steel frame, masonry and concrete structure, is situated
to the rear of the main building on a three-acre parcel.
For the 1990 tax year, the combined assessment of the two
parcels by the City valued the property at $3,960,424. For the
1991 tax year the combined assessment was $4,171,907; for 1992,
$4,324,367; for 1993 and 1994, $4,804,034; and for 1995,
$4,789,876.
Tidewater presented evidence from Tappe Squires, a vice-
president of Tidewater’s parent company. Squires testified that
the property had originally been acquired in 1982 as part of a
corporate takeover of a network of thirty similar facilities at
an aggregate price of $102,000,000. Tidewater’s parent company
subsequently sold the property in 1994 to another hospital
network for a total sales price of $872,000. The gymnasium was
subsequently sold the following year for $68,000.
Tidewater also presented evidence from Carol Reynolds, a
commercial real estate appraiser. Reynolds presented the
evaluation of the property she prepared for Tidewater. In that
evaluation, Reynolds appraised the property’s fair market value
at $2,800,000 on January 1 for the years from 1991 to 1994.
Comparing Reynolds’ appraisal to the City’s assessment in tax
years 1991 to 1995, Tidewater alleged over-assessments of
3
between approximately $1,300,000 and $2,000,000 for those years.
Based upon these calculations, Tidewater asserted that it had
overpaid $98,148.21 in real estate taxes over that period.
Reynolds testified that she used three approaches in
determining the fair market value of the property: a cost
method, an income method, and a comparable sales method. She
further testified that of these three methods, the cost method,
which establishes the value of a building based upon its
reproduction cost less its depreciation, was the least reliable
due to the subjective nature of depreciation, especially for
older facilities such as Tidewater’s property.
Tidewater then called Banagan, the City Assessor, as an
adverse witness. Banagan testified that in assessing the
property, the City used only the depreciated reproduction cost
method to evaluate the property because it had determined that
no reliable comparable sales or income data were available upon
which to base the assessments. Banagan further testified that
his office used a set of standard published indices and the
“calculator method” described in the guidelines to the indices
to obtain the depreciated reproduction cost of the property, and
that this was “the method we used on all our properties that we
do a cost approach on.”
Banagan further testified that during the period in
question the City had utilized two different building class
4
schedules from the indices to determine the depreciated value of
the buildings on the property. Banagan explained that the
buildings were of “Class A” construction quality because they
were primarily steel frame, masonry and concrete structures, but
that guidelines to the indices directed that low-rise “Class A”
structures, such as Tidewater’s property, be treated as “Class
C” structures.
Initially, the City interpreted the guidelines as requiring
the use “Class C” cost, but still permitting “Class A”
depreciation because the property “is a steel frame building.
. . . It will stand longer.” In 1994, the City altered its
policy and began using both “Class C” cost and depreciation
schedules for such properties. Banagan described the change in
policy as “a philosophical change. That doesn’t mean one way is
more correct than the other. . . . It is a rather insignificant,
minor, technical, change.”
The City called Sanford as an expert witness. Sanford
testified that he had been retained by the City to perform a
“desk top” or technical review of Reynolds’ evaluation of the
property. Sanford “found that the appraisal report lacked depth
of data . . . and that resulted in a lack of in-depth analysis
such that [Sanford] could [not] agree with [Reynolds’] value
conclusion.”
5
The City then recalled Banagan as its own witness and
sought to have him qualified as an expert appraiser. Tidewater
challenged his qualifications as an appraiser of psychiatric
hospitals. The trial court qualified Banagan as an expert
appraiser, responding to Tidewater’s objection by stating that
Banagan’s level of familiarity with the specific type of
property was a matter of the weight to be given his testimony.
Banagan reiterated his prior testimony that the City used
the depreciated reproduction cost method of valuing the property
because no reliable data for the income or comparable sales
methods were available to evaluate the property. Banagan
further testified that the City did not believe that the 1994
and 1995 sales were arm’s-length transactions, since the value
assigned to the property in these transactions was well below
the value of other commercially zoned property in the City as
established by comparable sales.
After receiving trial memoranda from the parties and
reviewing the record and evidence, the trial court entered an
order dated May 5, 1997, denying the amended application on the
ground that Tidewater had “failed to establish either manifest
error or total disregard of controlling evidence by the City’s
Real Estate Assessor.” We awarded Tidewater this appeal.
6
DISCUSSION
Real estate is to be assessed at its fair market value.
Va. Const. art. X, § 2. However, assessments by taxing
authorities are afforded a presumption of correctness, and the
burden is on the taxpayer to rebut that presumption. Board of
Supervisors of Fairfax County v. Telecommunications Industries,
246 Va. 472, 475, 436 S.E.2d 442, 444 (1993). To do so, the
taxpayer must show by a clear preponderance of the evidence that
his property is assessed at more than fair market value. Code
§ 58.1-3984; see also City of Richmond v. Gordon, 224 Va. 103,
110, 294 S.E.2d 846, 850 (1982); Skyline Swannanoa, Inc. v.
Nelson County, 186 Va. 878, 886, 44 S.E.2d 437, 441 (1947).
Thus, the dispositive issue of this appeal is whether the trial
court correctly determined that Tidewater failed to rebut that
presumption by “a showing of manifest error or total disregard
of controlling evidence” in the City’s method of determining the
fair market value of the property. 3 Telecommunications
Industries, 246 Va. at 475, 436 S.E.2d at 444.
3
Tidewater also assigns error to the trial court’s
permitting Banagan to testify as an expert witness on the ground
that he had not been properly identified as such during
discovery. By declining the trial court’s offer of a
continuance and conceding that it suffered no prejudice because
of surprise, Tidewater waived this objection, and we will not
consider this issue on appeal.
7
Tidewater’s evidence of the fair market value of the
property was limited to an expert’s appraisal for four of the
six tax years in question. Tidewater devoted much of its case
to presenting its theory that the City erred in using
depreciated reproduction cost, rather than sales or income
methods, to determine fair market value in its assessment of the
property. The City presented evidence that challenged the
validity of the data used in Tidewater’s appraisal and provided
justification for its having rejected the alternative methods of
assessing the property relied on by Tidewater’s expert. The
City further presented evidence that it used a recognized method
of determining fair market value through standard indices for
determining reproduction cost and depreciation. In these
respects, the issue was presented to the trial court as a
“battle of experts,” and we will defer to the judgment of weight
and credibility given to the testimony of the experts by the
trial court. Norfolk and Western Railway Company v.
Commonwealth, 211 Va. 692, 700, 179 S.E.2d 623, 629 (1971).
Tidewater contends, however, that its evidence nonetheless
established that the City’s method of assessing the property was
improper in that the City relied solely on the depreciated
reproduction cost method in determining the value of Tidewater’s
property. In support of this contention, Tidewater cites
Tuckahoe Woman’s Club v. City of Richmond for the proposition
8
that “[d]epreciated reproduction cost may be an element for
consideration in ascertaining fair market value, but it cannot
of itself be the standard for assessment.” 199 Va. 734, 740,
101 S.E.2d 571, 575 (1958). This language is being taken out of
context, and, thus, Tidewater’s reliance on it is misplaced.
In Tuckahoe, the evidence showed that the depreciated
reproduction cost of the land and improvements was $105,000.
Id. at 737, 101 S.E.2d at 573. However, the evidence further
showed that market conditions were such that the property “would
not bring more than $75,000 to $85,000” if offered for sale on
the open market. Id. at 739, 101 S.E.2d at 575. The City
conceded that the sales method produced an accurate assessment
and that the depreciated reproduction cost “produced an amount
in excess of what the property could be sold for.” Id. at 740,
101 S.E.2d at 575. Therefore, we held that the City’s resort to
this method of determining fair market value in disregard of the
undisputed evidence of the actual sales value of the property
constituted manifest error. However, our decision in Tuckahoe
is not applicable on the facts here.
We have subsequently applied the holding in Tuckahoe in
other cases and have explained that the use of depreciated
reproduction cost as the sole basis for determining fair market
value is erroneous only where the taxing authority fails to
consider other factors that plainly show such a method “would
9
patently lead to unfair and improper results.” First and
Merchants National Bank of Richmond v. County of Amherst, 204
Va. 584, 588, 132 S.E.2d 721, 724 (1963). Thus, where a taxing
authority considers and properly rejects other methods of
calculating the value of property, an assessment based on
depreciated reproduction cost is entitled to a presumption of
validity where that method is the only one remaining. Norfolk
and Western, 211 Va. at 700-01, 179 S.E.2d at 629.
The record establishes that the City considered other
methods for determining fair market value, but that it lacked
reliable data to arrive at an accurate value for the property
under an income method. The record further shows that the City
considered using a comparable sales method of assessment, but
determined that the 1994 and 1995 sales were clearly not fair
market prices in light of the prevailing market. Thus, as in
Norfolk and Western, depreciated reproduction cost was the only
reliable method available to the taxing authority, and the value
arrived at under that method is entitled to a presumption of
correctness. Id. Accordingly, we hold that Tidewater failed to
meet its burden of showing that the City’s choice of depreciated
reproduction cost as the method for valuing this particular
property was manifest error or in disregard of controlling
evidence.
10
Tidewater nonetheless contends that even if the City’s use
of the depreciated reproduction cost method was appropriate, it
improperly applied that method in those years in which it based
the property’s reproduction cost on the “Class C” schedule, but
used the “Class A” schedule to calculate the percentage of
depreciation. We disagree.
Tidewater failed to present any evidence rebutting
Banagan’s testimony that neither interpretation of the
guidelines was “more correct than the other.” The evidence at
best established that the City simply altered its interpretation
of the guidelines accompanying the indices it used to determine
the value of properties under the depreciated reproduction cost
method, and not that its prior method was manifestly erroneous
or that it applied that method arbitrarily to Tidewater’s
property while treating similar properties differently.
For these reasons, we will affirm the judgment of the trial
court. 4
Affirmed.
4
We also accepted an assignment of cross-error raised by the
City. Our resolution of the principal issue of the appeal in
the City’s favor renders that cross-error moot.
11