Before we consider the merits of the parties' arguments, we must determine the appropriate standard of review. The PTAB is required by statute to conduct hearings and decide each case before it based upon equity and the weight of the evidence presented. (Ill. Rev. Stat. 1987, ch. 120, par. 592.4.) Its decisions are then subject to review under the provisions of the Administrative Review Law (Ill. Rev. Stat. 1987, ch. 110, par. 3-101 et seq.). The Act limits the scope of judicial review by providing that "[t]he findings and Conclusions of the administrative agency on questions of fact shall be held to be prima facie true and correct." (Ill. Rev. Stat. 1987, ch. 110, par. 3-110.) Thus, the usual standard for judicial review of an administrative decision is whether it is contrary to the manifest weight of the evidence (Commonwealth Edison Co. v. Property Tax Appeal Board (1984), 102 Ill. 2d 443), and a court will not intervene in a case where there is simply a difference of opinion as to the actual value of property (Board of Review v. Property Tax Appeal Board (1982), 104 Ill. App. 3d 859; In re Application of Aurand (1980), 90 Ill. App. 3d 560). The Review Board contends, and the appellate court held, however, that this case involves an improper method of valuation rather than simply a difference of opinion as to the market value of Riverwoods' property. (See Chrysler Corp. v. Property Tax Appeal Board (1979), 69 Ill. App. 3d 207.) The Review Board argues that the PTAB erred in concluding that, under Springfield Marine Bank v. Property Tax Appeal Board (1970), 44 Ill. 2d 428, the value of Riverwoods' property had to be determined without considering the subsidy income Riverwoods receives pursuant to its contract with the government. Accordingly, we must determine whether the PTAB erred as a matter of law when it determined that the subsidy income Riverwoods receives pursuant to its contract with the government may not be considered when determining the fair market value of Riverwoods' property for taxation purposes.
SUPREME COURT OF ILLINOIS
544 N.E.2d 762, 131 Ill. 2d 1, 136 Ill. Dec. 76 1989.IL.1454
Appeal from the Appellate Court for the Third District; heard in that court on appeal from the Circuit Court of Kankakee County, the Hon. Wayne P. Dyer, Judge, presiding.
JUSTICE WARD delivered the opinion of the court. JUSTICE CALVO took no part in the consideration or decision of this case.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE WARD
This appeal arises from an administrative review proceeding. Riverwoods Associates (Riverwoods) filed a complaint with the Kankakee County board of review (Review Board) alleging that the assessor of Kankakee County had overassessed its property in 1984. The Review Board determined that the property had a fair market value of $7,904,735 and under section 20 of the Revenue Act of 1939 (Ill. Rev. Stat. 1983, ch. 120, par. 501) should be assessed at one-third of that value, or $2,632,722. The Review Board refused to reduce the assessment, and Riverwoods appealed to the Illinois Property Tax Appeal Board . The PTAB conducted a hearing pursuant to its statutory authority (Ill. Rev. Stat. 1987, ch. 120, par. 592.3) and reduced the valuation of the property from $7,904,735 to $2,325,000, finding that the rent subsidy Riverwoods received pursuant to a contract with the Illinois Housing Development Authority should not be considered in determining the value of the property for tax purposes. The PTAB accordingly reduced the tax assessment on the property from $2,632,722 to $775,388. The Review Board filed a petition in the circuit court of Kankakee County for administrative review of the PTAB's decision (Ill. Rev. Stat. 1987, ch. 110, par. 3- 104) and the circuit court affirmed the PTAB's decision. The Review Board appealed and the appellate court reversed, holding that the PTAB erred as a matter of law in adopting a valuation approach which ignored the subsidy Riverwoods received from the Illinois Housing Development Authority. (163 Ill. App. 3d 811.) We granted the PTAB's petition for leave to appeal in No. 66396 and Riverwoods' petition for leave to appeal in No. 66397. 107 Ill. 2d R. 315(a).
Riverwoods Apartments is a 125-unit building located in the city of Kankakee. The building is rented exclusively to elderly residents, whose rent is subsidized under an agreement with the Illinois Housing Development Authority. The terms of the subsidy agreement are not part of the record. The property owner, Riverwoods Associates, appeared before the Kankakee County board of review (the Review Board) complaining that the assessor had improperly assessed the value of the property and requesting a tax reduction. The Review Board denied its complaint and Riverwoods appealed to the PTAB.
At an administrative hearing held before the PTAB, both Riverwoods and the Review Board introduced written appraisals of the fair market value of Riverwoods' property. Riverwoods also presented the testimony of its appraiser. Both appraisals applied the three methods of valuation in calculating the fair market value of the property: the market data approach, the reproduction cost approach and the capitalization of net income approach.
At issue here is the proper method for calculating the fair market value of property under the capitalization of net income method of valuation. Under this approach, the fair cash value of property is determined by applying a capitalization rate to the property's estimated net annual income. There is no dispute concerning the proper capitalization rate. Rather, we are asked to determine whether the rent subsidy which Riverwoods receives under its contract with the government should be considered in estimating the net annual income of the apartment building.
Nicholas Muros, who prepared the appraisal submitted by Riverwoods at the hearing before the PTAB, testified that he did not take the government subsidy into account in estimating the net annual income of the apartment building for purposes of the income approach. He explained that, in 1984, Riverwoods received an average monthly rent of $123 per apartment directly from tenants. In addition, Riverwoods received a substantial rental subsidy pursuant to a Federal subsidy agreement. Although the subsidy agreement is not part of the record, the trial court's memorandum states that the subsidy provides approximately 80% of Riverwoods' income. Muros stated that he did not consider the rent subsidy as part of the rental income on the property, because he viewed the subsidy as income earned from the government contract, rather than income earned by the property itself. Instead, he surveyed the average rent paid for comparable non-subsidized apartment units in the Kankakee area, and arrived at a gross potential rent figure of $300 to $350 per apartment, or a gross income of $457,800. He then adjusted this figure for vacancy losses and expenses, and arrived at a "net income" of $274,500. He then capitalized this figure at a rate of 11.8%, and arrived at a value of $2,326,271, which he rounded down to $2,325,000. As stated, Muros' report also developed estimates of value under the market data approach ($2,300,000) and under the reproduction cost approach ($2,325,000). He concluded, however, that the income approach produced the most accurate method of valuation. His final opinion that Riverwoods' property had a fair market value of $2,325,000 coincides with his estimate of value under the income approach.
Walter Stoutamoyer prepared the appraisal which the Review Board submitted to the PTAB. Although Stoutamoyer did not appear before the PTAB to explain his data or methodology, his appraisal indicates that he did consider the subsidy in estimating the net annual income of Riverwoods' property for purposes of the income approach. Accordingly, he determined that the property had a much higher fair market value of $5,900,000 under the net income approach. In applying the income approach, however, Stoutamoyer did not use the rent Riverwoods received from tenants plus the government subsidy as the gross income figure. Instead, he considered the rents paid at comparable properties in the Kankakee and Central Illinois areas. Although his appraisal does not state whether or not these comparable properties were subsidized, Riverwoods' attorney conceded that the properties Stoutamoyer considered were subsidized housing projects. Stoutamoyer estimated that Riverwoods received an average potential rent of $520 per month per apartment, and a potential gross annual income of $781,800. He then adjusted this figure for vacancy losses and expenses and arrived at a net income figure of $620,219. He then capitalized this figure at a rate of 10.5% and arrived at a value of $5,906,848, which he rounded down to $5,900,000. Although Stoutamoyer's appraisal considered the income approach, his value estimate was based almost exclusively upon the reproduction cost approach, under which the depreciated cost of the improvements to the land is added to the value of the land itself. His Conclusion that Riverwoods' property had a fair market value of $6,665,875 coincided with his estimate of value under the reproduction cost approach. Stoutamoyer's appraisal also determined that Riverwoods' property had a value of $5,504,000 under the market data approach, although he disregarded this estimate of value as unreliable under the circumstances.
The PTAB adopted the appraisal that Muros prepared for Riverwoods and found the fair market value of the subject property was $2,325,000. The PTAB rejected Stoutamoyer's appraisal, stating that it relied too heavily upon the reproduction cost approach, which is not favored under decisions in our State in situations where the income and market approaches to determining value may be applied. The PTAB then concluded that Muros' use of market rent, rather than actual or contract rent, in calculating the fair market value of Riverwoods' property was consistent with the principles set forth in Springfield Marine Bank v. Property Tax Appeal Board (1970), 44 Ill. 2d 428. The PTAB interpreted Springfield Marine as holding that property subject to an encumbrance which distorts the property's rental income above or below market value must be valuated as unencumbered. The PTAB therefore relied upon the appraisal introduced by Riverwoods as the best estimate of value and determined that the property had a fair market value of $2,325,000.
The trial court upheld the PTAB's decision. The Review Board argued that the PTAB erred when it relied upon an appraisal which did not consider the rent subsidy Riverwoods received from the government. The court stated, however, that the Review Board had failed to subpoena the subsidy contract or present any evidence before the PTAB regarding the terms of the agreement. The court found that it was virtually impossible for the PTAB to appraise the effect of the subsidy contract in the absence of any evidence as to its terms. The court also stated that the principles set out in Springfield Marine should be applied in cases such as this, where the encumbrance at issue increased, rather than decreased, the value of the property. The court thus concluded that Riverwoods' property should be valued apart from the subsidy agreement. The court finally concluded ...