APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, SECOND DIVISION
Collector of Cook County, Applicant-Appellant, v.
Illinois Bell Telephone Company, Objector-Appellee)
515 N.E.2d 731, 161 Ill. App. 3d 860, 113 Ill. Dec. 746
Appeal from the Circuit Court of Cook County; the Hon. Robert J. Dempsey, Judge, presiding.
Rehearing denied October 27, 1987 1987.IL.1452
PRESIDING JUSTICE SCARIANO delivered the opinion of the court. HARTMAN and BILANDIC, JJ., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE SCARIANO
The collector of Cook County (collector) appeals from a decision of the circuit court reducing the Cook County assessor's valuation of certain property owned by appellee, Illinois Bell Telephone Company (Bell), located at 10 South Canal Street in the city of Chicago. When the assessor made his 1974 quadrennial assessment, the total fair market value of Bell's land and building was fixed at $20,786,433; however, when the property was reassessed one year later, the assessor increased the value of the building to $47,864,312, although the land value remained the same at $2,205,495. Bell paid the 1975, 1976 and 1977 real estate taxes on the property under protest, and filed timely valuation complaints with the Board of Appeals, which sustained the assessment.
After the collector initiated this application, Bell filed timely objections to the assessment in the circuit court. The trial Judge found that by the end of 1974, Bell "had over $49 million invested in the building," and he commented that the assessor's estimated market value for the year 1975 was "reasonably close to the actual investment made in the improvement by Illinois Bell." Nevertheless, he reduced the valuation on the entire property to $23,600,000 for 1975, and applying Bell's expert appraiser's estimated increment value of 5% per year, the Judge further determined the fair market value of the property to be $24,832,500 for 1976 and $26,015,000 for 1977. The only issue we need to address on appeal is whether, under the circumstances of this case, the trial court erred in holding that the approach to valuation of the 10 South Canal Street building for ad valorem tax purposes was "purely a question of law" to be determined by the Judge. We reverse.
Thomas Leonard, a clerk in the Cook County assessor's audit department, whose function was to correct the assessor's "Form 4905" to reflect the appropriate value for realty, prepared such a form for the Bell property. A "Form 4905" is a worksheet upon which the specific characteristics of a building are matched to specific costs in order to calculate a total cost for the building. Leonard, who was called as a witness by both parties, testified before the trial court that he did not inspect the building or see any of the plans and specifications pertaining to it prior to filling out the form 4905, but simply copied information from a previous form. Leonard admitted that he had no opinion of the value of 10 South Canal Street either before or after he completed the form, and that one of his superiors gave him a figure to arrive at in determining the value because the previous form 4905 for that building was voided.
His supervisor also told him to use whatever factors and adjustments were necessary to attain the requested figure. In so calculating, Leonard multiplied the costs given for framing, excavating, basement floor, and roof cover by 2.5 as a "construction adjustment factor." He conceded that the highest construction adjustment factor allowed in the Cook County assessor's manual was 1.3, and that the manual did not permit any construction adjustment for multistory buildings such as the one that forms the subject matter of this case. He could not explain why the use of a construction adjustment was warranted. Leonard also applied a 1.5 grade adjustment to all components of the building, including those that had been subject to the construction adjustment.
Bell called two real estate appraisers, John Shanahan and Jared Shlaes, as expert witnesses. Shanahan testified that the "highest and best use" of the structure at issue herein was as an "office and computer building," which he equated with its present use. He estimated that the replacement cost of the building would be $35 million, but that its fair market value was between $20 million and $21 million. Shanahan did not know how much it had actually cost to erect the building, nor did he inquire of anyone at Bell as to what the construction costs were, although he thought it important enough to obtain such cost data from the owners of other buildings. Shanahan also did not believe that the structure could be classified as "special purpose" property, which he defined as property that had to be designed for a specific use, had no discernible alternative market and for which the cost of conversion to an alternative use was prohibitive.
Shlaes testified that the highest and best use of the property was as an "office and computer building," and he noted in a written report that its best use was its present use. He was aware that the "hard cost" of building the edifice was approximately $42 million and that the cost would have been greater in 1975-77 than in 1971. He also indicated that it would cost about $10,500,000 to install windows in floors 3 through 20, which had been constructed without glazing, thereby making the building more suitable for general office space. Despite its initial cost and the conversion expense, Shlaes concluded that the 10 South Canal Street property had a market value of between $20 million and $22 million, based on its highest and best use. Shlaes agreed with Shanahan that the building could not be categorized as special purpose, and defined that term as a structure with a purpose so limited that the property has no market or that there would be excessive cost in converting it to another use.
Robert Kelly, assistant supervisor of the industrial-commercial department of the assessor's office, testified as an expert appraiser on behalf of the collector and was accepted as such by the trial Judge. Kelly inspected and appraised 10 South Canal Street in December 1981, and prepared a form 4905 for use in the instant litigation. He was aware that the structure cost approximately $50 million to build in 1970-71. Using the reproduction cost approach, Kelly opined that the market value of 10 South Canal Street was approximately $47 million as of 1977. In arriving at this figure, he utilized the State of Illinois Assessor's Appraisal Manual issued in August 1976, and adopted by the Cook County assessor's office on January 1, 1977. The State manual was more current than the Cook County assessor's manual, which had not been updated since 1974. Kelly testified that assessing officials were not bound by any particular manual, and that he therefore used several sources to verify his cost estimate.
In preparing the form 4905, Kelly used different classifications for pricing different components. For example, he classified the building as "commercial" when he priced the heating, ventilating, plumbing, sprinkler and air-conditioning systems; "office" when pricing the electrical system; and "institutional/utility" when pricing the framing. He acknowledged that the 16-foot 6-inch ceiling heights of the Bell property were functionally obsolete. Kelly testified further that he used the reproduction cost method of valuation because he believed the 10 South Canal Street building to be "special purpose" property, which he defined as property which has no independent marketability, and which cannot be converted to other uses without a large capital investment. He estimated that it would cost $11 million to convert the property to an office building, and he opined that such a large capital outlay was indicative of special purpose. However, Kelly agreed with Shanahan and Shlaes that 10 South Canal Street had other possible uses, including those of office, computer, storage or exhibition space, and that there was a market for these uses in the greater Loop area between 1975 and 1977.
Kelly's belief that the building was a special purpose property was predicated upon what he characterized as the exceedingly unique nature of the structure. The building was designed as a toll, or long-distance, switching center at a time when tall, mechanical "cross-bar" computers did the switching. Floors 3 through 20 were built with 16-foot 6-inch high ceilings and no windows to accommodate the cross-bar switching equipment. The 21st through the 27th floors, which included windows, were intended to be used originally as office space, but were designed and built with floor loads and ceiling heights capable of handling more switching equipment. The 28th floor was designed to house power equipment, and the 29th floor was built for the radio equipment associated with the microwave disc on the roof, which was used to transmit telephone signals. The building contained 832,186 feet of gross building area built on a site of 49,687 square feet. The trial court found that construction on what it described as the "29 story and basement steel and concrete structure" at 10 South Canal Street began in 1966, was substantially completed in 1971, and that by the end of 1974, Bell had over $49 million invested in the building.
The invention of integrated circuits gave rise to Electronic Switching Systems , a technological breakthrough which had five times the capacity of cross-bar switches and occupied half the space. This new technology could be installed in buildings with the standard 12- to 13-foot ceiling heights. The ESS equipment was first used for long-distance service at 10 South Canal Street in January 1976. Had the ESS technology been available at the time of construction, the building conceivably could have been 20% shorter.
Frank Henderson, a retired Bell employee who had been in charge of planning the building, testified that AT&T, Bell, and the military provided the construction criteria in order that the building could withstand extreme stress. Consequently, the building has numerous unique characteristics to assure continuance of communications in the case of natural catastrophe, sabotage, or enemy action: a well as a backup to the city water supply, standby power generating equipment and food and fuel storage capacity, a heating system driven by recycling the heat released by the telephone switching equipment, and others. The foundation of the structure was drilled to bedrock, and, at an additional cost of $5 million to $7 million, the caissons in some instances were drilled 40 feet into bedrock, whereas the typical 29-story building is based on hardpan. The building also has 45-pounds-per-square-foot resistance to lateral loads, while the Chicago Building Code requires only 20 pounds per square foot. One of Bell's witnesses described it as "a building that would survive where others would not."
In addition, the walls of the building are extraordinarily thick, consisting of 5-inch precast concrete panels in lieu of windows on floors 3 through 20, backed up with 9 inches of poured concrete weighing approximately 125 pounds per square foot. In contrast, the walls of a typical office building weigh approximately 60 pounds per square foot. This construction is actually similar to radiation containment within a nuclear reactor, and indeed, the radiation level inside the building in the event of a nuclear attack or accident would be only 1% of that outside.
The 10 South Canal Street building also has distinct features necessary to house Illinois Bell technology. In order to support the weight of the telephone equipment, the columns in the building are spaced closer together than in a typical office building, and the floor loads run from 150 to 200 pounds per square foot, although a portion of three floors has a 300 pounds per-square-foot capacity. A typical office building has a 100-pounds-per-square foot load capacity, while 150- to 175-pounds-per-square foot capacity is not unusual for a mixed office and computer structure. Moreover, unlike the 16-foot 6-inch ceilings, the new ESS equipment has not rendered these characteristics of the building functionally obsolete, since it has the same load requirements as the cross-bar system.
Four witnesses called by the collector, two of whom were currently employed by Bell, one of whom was a former employee, and the fourth an employee of the Illinois Commerce Commission, testified that, for the purpose of fixing the amount Bell would be permitted to charge its customers, the $49 million cost of the structure was included in the value of the building's "rate base" as established by the Illinois Commerce Commission. Their testimony, in sum, indicates that Bell had sought in proceedings before the Commission a "rate base" derived from the "fair market value" of its invested property, which Bell estimated by factoring its original costs upward using its own "telephone plant indexes." Accordingly, Bell estimated the value of the subject building for "rate base" purposes before the State Commerce Commission to be more than $70 million.
After hearing all of the evidence, the trial Judge initially, and correctly, stated that it was the objector's burden "in these matters" to establish fraud or constructive fraud on the assessor's part "by clear and convincing evidence" and "that assessments that are based on the Assessor's private opinion showing a lack of honest judgment are indicative of constructive fraud." The Judge went on to reason that "[the] evidence of the actions taken by Leonard standing by themselves could be indicative of a constructive fraud"; but he continued in his opinion read from the bench and later transcribed:
"On the other hand, the evidence that the value arrived at by the Assessor was reasonably close to Illinois Bell's investment and the cryptic comment in Illinois Bell Telephone Company v. Rosewell (1980), 82 Ill. App. 3d 975 at page 977, about a prior incident where plaintiff had undervalued certain real estate located in the City could be indicative of an opinion based upon knowledge on the part of Leonard's unnamed superior of Illinois Bell's ...