APPELLATE COURT OF ILLINOIS, THIRD DISTRICT
516 N.E.2d 1006, 163 Ill. App. 3d 811, 114 Ill. Dec. 851 1987.IL.1793
Appeal from the Circuit Court of Kankakee County; the Hon. Wayne P. Dyer, Judge, presiding.
PRESIDING JUSTICE BARRY delivered the opinion of the court. STOUDER and SCOTT, JJ., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE BARRY
The Kankakee County board of review appeals from judgment of the circuit court of Kankakee County affirming a decision of the State Property Tax Appeal Board which found that the fair market value of the subject property, known as the Riverwoods Apartments, was $2,325,000 as of January 1, 1984. The only issue presented for our consideration is whether a government rent subsidy should have been considered in determining the property's fair market value.
Riverwoods Apartments is a nine-story, 125-unit building located at 300 River Street in Kankakee, Illinois. The building is owned by Riverwoods Associates, a limited partnership. Occupancy is limited to elderly residents. Their rent, it appears, is subsidized pursuant to an agreement with the Illinois Housing Development Authority; however, the subsidy agreement does not appear in the record before us. Construction was completed on the building on September 28, 1983.
At a hearing before the PTAB, both Riverwoods Associates, as appellant, and the county board of review, as appellee, presented appraisal reports in support of their respective positions. In addition, Riverwoods Associates presented testimony of its appraiser, Mr. Nicholas Muros, a certified assessment evaluator.
Muros applied three accepted methods of valuation in arriving at his determination of the property's fair market value -- the cost approach (land value plus depreciated reproduction cost of improvements); the income approach (capitalization of net operating income); and the market data approach (comparison of prices actually paid, asked or offered for similar properties). Muros concluded that the income approach yielded the most pertinent data, and his Conclusion of the fair market value -- $2,325,000 -- coincides with his determination of value using the income approach. In this regard, Muros observed that in 1984 Riverwoods Associates received approximately $736 per month per apartment pursuant to the Federal government subsidy agreement, of which an average of only $123 per month was paid by the tenants. Because of the broad range between these two figures, Muros explained, he did not consider the government subsidy agreement(s) and its (their) effect on income, interest or rent restrictions when he applied the income approach. Instead, Muros surveyed apartment rents of nonsubsidized units in the Kankakee area, and arrived at a "gross potential rent" figure of $457,800. Muros adjusted his "gross potential rent" for vacancy and collection losses and for other income to $447,100, which figure Muros labeled "effective gross income." Similarly, Muros "stabilized" the property's expenses by applying expense to income ratios developed by the Institute of Real Estate Management Apartment Survey. By this method, he arrived at a "total expense" figure of $172,600. Then, Muros capitalized the "net operating income" of $274,500 at the rate of 11.8%, thereby arriving at a value of $2,326,271, which he rounded down to $2,325,000. Muros' reproduction cost and market data approaches yielded values of $2,308,000 and $2,300,000, respectively.
Mr. W. B. Stoutamoyer, member of the Appraisal Institute, prepared the appraisal submitted by the county board of review. He used the same three approaches employed by Muros. However, it appears that in applying the income approach, Stoutamoyer considered comparable subsidized properties in the areas of Kankakee and central Illinois, and arrived at "economic" rents of $520 per month for the subject property's 124 one-bedroom units and $670 per month for the single two-bedroom unit. In this manner, Stoutamoyer determined that the "total potential annual gross income" was $781,800, from which he deducted for vacancy and credit loss and added "other income" and arrived at an "effective gross income" of $776,482. Stoutamoyer derived expenses of $156,263, and then capitalized the "net income before recapture" of $620,219 at the rate of 10.5%, and arrived at a value of $5,906,848, which he rounded down to $5,900,000.
The market data approach, which Stoutamoyer considered to be the most "dangerous" under the circumstances, yielded a value of $5,504,000. It should be noted that none of the comparable properties considered by Stoutamoyer in the market data approach were subsidized housing.
In computing the property's value under the cost approach, Stoutamoyer used the Marshall Valuation Service to arrive at a base cost of $53.81 per square foot, to which he applied a local multiplier of 1.09 and then added $2.49 per square foot for extra improvements to the property. The building's square footage of 103,824 was then multiplied by $61.14 for a "total cost new" of $6,347,799. From this, Stoutamoyer deducted depreciation and added the land value and arrived at an indicated value of $6,665,875. Stoutamoyer considered that the cost method should be accorded greatest credence, primarily because of the newness of the building and the lack of significant depreciation. He concluded, accordingly, that the fair market value of the subject property as of February 21, 1985, was $6,665,875.
The trial court's approval of the PTAB's adoption of Muros' assessment, it appears, was based primarily upon its analysis of our supreme court's opinion in Springfield Marine Bank v. Property Tax Appeal Board (1970), 44 Ill. 2d 428, 431, 256 N.E.2d 334, 336. In Springfield Marine, the court declared that for tax assessment purposes a property's actual, or contractual, rental income should be disregarded where the property is encumbered by a long-term lease which does not reflect the property's "capacity for earning income." In this case, the trial court acknowledged the distinction between the "encumbrance" in Springfield Marine and the "favorable" lease in this case, but concluded that the doctrine of Springfield Marine should apply here so as not to treat the taxpayer "on different terms from the taxing body.
In this appeal, the owners direct our attention to two decisions from foreign jurisdictions in support of their contention that the value of a government subsidy is irrelevant for purposes of real property assessment. (Canton Towers, Ltd. v. Board of Revision (1983), 3 Ohio St. 3d 4, 444 N.E.2d 1027; Congresshills Apartments v. Township of Ypsilanti (1983), 128 Mich. App. 279, 341 N.W.2d 121.) We have reviewed these decisions, as well as Springfield Marine and several other cases from foreign ...