The opinion of the court was delivered by: Mary Hannah Leavitt, Judge
BEFORE: HONORABLE MARY HANNAH LEAVITT, Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE PATRICIA A. McCULLOUGH, Judge
Grand Prix Harrisburg, LLC (Taxpayer) appeals an order of the Court of Common Pleas of Dauphin County (trial court) denying its challenge to its 2009 real estate assessment of $7,958,700 as excessive. Instead, the trial court established a higher assessment for Taxpayer in the amount of $9,270,750. In reaching this conclusion, the trial court relied on the expert testimony of the taxing authorities and rejected the expert testimony of Taxpayer. However, the trial court's stated reasons for making this choice do not explain its credibility determination. Accordingly, we vacate and remand for further findings.
Taxpayer owns a four-acre parcel of land located in an industrial park in Swatara Township, Dauphin County. The parcel contains a "Residence Inn by Marriott" hotel, which was built in 1989 to offer extended-stay lodging to business travelers. The hotel has 12 separate buildings and a total of 122 guest rooms.
In tax year 2009, Dauphin County assessed Taxpayer's property at $7,958,700, which was calculated on the basis of a fair market value of $11,288,900. Reproduced Record at 375a (R.R. ___). Taxpayer challenged the assessment as excessive, but the Dauphin County Board of Assessment Appeals (Board) denied its appeal. Taxpayer then appealed to the trial court arguing, inter alia, that the Board's valuation of the property's fair market value was too high. The fair market value is "the price which a purchaser, willing but not obliged to buy, would pay an owner, willing but not obliged to sell, taking into consideration all uses to which the property is adapted and might in reason be applied." Buhl Foundation v. Board of Property Assessment, Appeals and Review of Allegheny County, 407 Pa. 567, 570, 180 A.2d 900, 902 (1962).
The trial court conducted a de novo hearing, at which Taxpayer, the Board, Dauphin County, Central Dauphin School District, and Swatara Township (collectively, the Taxing Authorities) participated. The parties stipulated that the Taxing Authorities made out a prima facie case for the validity of the assessment by submission of the tax card.*fn1 Taxpayer then submitted evidence, consisting principally of expert testimony, and the Taxing Authorities responded with the rebuttal evidence of their own expert.
Taxpayer's expert, Frederick Lesavoy, MAI, SRA, prepared an appraisal report of the property's fair market value as of September 1, 2009, which was submitted into evidence. He also testified. Lasavoy explained that a hotel is "a very unique type of real estate" because its market value is based both on the real estate and on the value of the ongoing business operating on the real estate. R.R. 42a; Notes of Testimony, July 8, 2011, at 13-14 (N.T. ___). The non-real estate elements must be separately valued because they are not subject to real estate taxes. The two non-real estate elements are: (1) the hotel's furniture, fixtures and equipment (Furniture) and (2) the intangible business enterprise value (Business Value) of the activity conducted on the real property. Lesavoy described the Business Value as "the benefit that the buyers of a hotel get by purchasing a piece of real estate that has an ongoing business, an operation that's going on inside of it." R.R. 42a; N.T. 15.
Fair market value, "while not easily ascertained, is fixed by the opinions of competent witnesses as to what the property is worth on the market at a fair sale." Buhl Foundation, 407 Pa. at 570, 180 A.2d at 902. A fair market sale of a hotel would include both Furniture and Business Value. However, because these items are not subject to real property taxes, they must be separately valued and backed out of the fair sale price to establish the fair market value for real estate tax purposes. The experts agreed on these essential principles.
To establish fair market value, Lesavoy used both the sales comparison approach and the income approach. For the sales comparison approach, Lesavoy selected three recent sales of hotels that were comparable to Taxpayer's hotel. Based on those sales, Lesavoy testified that Taxpayer's hotel would sell for a total price of $11,165,000. Lesavoy valued the Furniture at $700,000. In his experience dealing with hotel buyers, the Business Value usually accounts for 10 to 20 percent of the purchase price; accordingly, Lesavoy selected an average Business Value of 15 percent. By deducting the Furniture and Business Value, Lesavoy gave a fair market value to Taxpayer's hotel real estate of $8,790,000, under the sales comparison approach.
In the income approach, the appraiser establishes an annual net operating income and then applies a selected capitalization rate to arrive at a fair market value for the real estate. Because the purpose of the real estate appraisal is to tax the property, not the business conducted thereon, Lesavoy testified that the actual reported income and expenses of a particular hotel is irrelevant. Lesavoy explained that real estate values are not a function of a particular proprietor's business acumen. Accordingly, the goal must be to appraise a typical hotel operation. To do that, Lesavoy averaged the performance of all similar types of hotels competing with each other, i.e., market performance rather than individual performance. His sources of income of Taxpayer's competitors were a PKF Consulting Report and Smith Travel Research's STAR Report. The reports list the gross revenue and expense estimates for hotels in Taxpayer's market. From this average income, Lesavoy deducted franchising and management fees as expenses. By this methodology, Lesavoy arrived at a net operating income of $1,536,051 for Taxpayer's hotel.
Lesavoy then selected a capitalization rate to apply to the annual net income of $1,536,051, to arrive at the amount a reasonable investor would pay for Taxpayer's hotel, i.e., the "fair market value." Lesavoy conferred with investors, examined actual sales data and used investor surveys that established industry standard capitalization rates. Lesavoy selected a capitalization rate of 12 percent. Lesavoy then multiplied his 15 percent Business Value by the 12 percent capitalization rate, which yielded 1.8 percent. Lesavoy added 1.8 percent to 12 percent to arrive at a capitalization rate of 13.8 percent. Lesavoy then removed real estate taxes by multiplying the common level ratio by the millage rate. This produced a total capitalization rate of 15.4 percent. Notably, the higher the capitalization rate, the lower the fair market value. Application of the capitalization rate produced a figure, rounded, of $9,975,000. By deducting $700,000 for Furniture, Lesavoy established a total real estate value of $9,275,000 under the income approach.
Lesavoy then compared his $8,790,000 fair market value using the sales comparison approach with the $9,275,000 fair market value using the income approach. By combining the two approaches, he settled on a fair market value of $9,000,000 for Taxpayer's hotel. The assessment was then ...