Board of Equalization Meeting   7/16/2020

All right, so from a bookkeeping point of view, being the new secretary, I have the outline that you gave me.

I'm just gonna cross things out and fill in as we go along, is that correct?

Yes.

Yeah, just cross off the room and we'll get there.

Okay, just, okay.

Number, okay, so via, okay.

I do.

Hi, it's Daniel Grubb, attorney for Walmart, Target, and the Hyatt.

Can anybody hear me?

Oh, okay.

All right.

Should we call the meeting to order?

It's at one o'clock on the 16th.

This is a meeting of the Board of Equalization.

There are five members here.

David Van Roijen, Anthony Arsali, David Ferrall, Karen Pape, and Bill Cromwell.

The public has the opportunity to access and participate in the electronic meeting through phone, computer, or tablet.

Directions on how to connect are located on the Albemarle County website.

This meeting is being held pursuant to and in compliance with ordinance number 20-A, parentheses 6.

Mr. Grubb, the members of the committee here are members of the different districts in Albemarle County and we are here to listen to what you have to say and then

David, before you get too much further, you need to call the meeting to order.

All right.

In retrospect, we called the meeting to order at one o'clock and all members are present.

We have a quorum.

May we have a motion that the minutes, has everybody read the minutes from the previous meeting, except for Mr. Cromwell?

Now, there are two different sets of minutes.

One was from the last meeting from last year and one from the organizational meeting.

Correct.

The first one was, what was the date on the first one?

6-19-19.

It sounds right.

This is the organization.

I second it.

All in favor?

Aye.

And the second meeting, the organizational meeting, was from 6-20-20.

What date was that?

Did someone have that?

I don't have it in front of me.

Bear with me.

It should have been July the 1st.

OK.

So that's from 7-1-2020.

Second.

Sorry, who seconded?

That was Mr. Cromwell.

All in favor?

Aye.

Thank you.

We are.

Very good.

Mr. Grubb, are you still there?

I still am.

Very good.

I'm sorry we had all that organizational meeting in front of you, but you're free to go ahead and let us know what you'd like to discuss.

Thanks very much.

I would like to start with the Walmart on 975 Hilton Heights Road.

Very good.

Give us one second.

I'm sorry.

We're all new to this, but wasn't there a statement that was read at the beginning of each student meeting?

Didn't we discuss that with the county attorney?

I think David is not one of the beginning.

Yes.

OK, great.

All right, thank you.

So let me know when you have that packet.

All right, I'm ready.

Anybody else around in their packets?

OK, and on page two, and now you see that this is an owner-occupied Class C discount store built in 1992.

And we're claiming that the fair market value is approximately $10.7 million and was assessed at $12.8 million.

And I want to say off the top that our complaint with the assessment is not the way that the assessors assess

big box retail stores.

It's a complaint with the way they assess owner occupied stores.

It wouldn't matter whether this was a hospital or a big box retail store.

The complaint would be the same.

And it goes to sort of the very fundamentals of real estate assessment.

So I wanna step back for just a second and go over this to make sure we're all on the same page here.

What is the fair market value of this property?

If you look at all the definitions that are out there about fair market value,

fair market value, including Virginia's, they all pretty much say the same thing.

What would this property sell for?

Now, if you've got a recent sale of the property, that's easy.

You pretty much have an answer to the test, but that rarely happens.

So what the assessors have to do is they have to recreate a hypothetical sale of the property on the date of value, in this case, January 1st, 2020.

And because they don't have

a recent sale.

What they have to do is pick one of three approaches to value what they think a willing buyer and willing seller would enter into for an agreement to buy the property.

First, there's the income approach, which is generally considered the best method of valuing commercial real estate.

But there's a problem with using the income approach in owner-occupied properties.

So I completely understand why the assessors didn't use the income approach.

and that's because the owner-occupier doesn't charge himself rent and so there's no way of knowing what this property would actually rent for because there's no evidence from the property itself.

So in order to recreate this sale price in this hypothetical sale, you would have to use hypothetical rent, hypothetical expenses, hypothetical vacancy because owner-occupied properties aren't vacant

and a hypothetical cap rate because there hasn't been a recent sale of the property and there's just too many hypotheticals you pile on that and you won't get a very accurate value.

The approach the assessor decided to use was the cost approach to value.

And unfortunately, that is the worst method to use to value owner-occupied properties like this one.

And the reason that is is because

The investors don't care what Walmart spent to build the store and the International Association of Assessing Officers has called this using the cost approach

to value any sort of commercial real estate is the least useful approach.

And that's not coming from me.

If you want to check that, that's on page 33 of the packet.

It has the standards of the IAAO on valuing property, and you'll see it's ranked third on the list of usefulness behind the income and the sales comparison approach.

And part of the reason is the theory behind the cost approach.

The theory behind the cost approach goes something like this.

An investor will pay no more for a building than it would cost for him to build a replica of the building.

Well, if you operate on that theory, you're always going to get the high end of the value range.

An investor will pay no more for this.

In all likelihood, they're probably going to pay somewhat less than that, but they definitely aren't going to pay any more than this.

But you're always going to get the high end of the value if you use that.

Additionally, Marshall and Swift, where most of this cost approach stuff comes from, and I believe the assessors use that.

They'll correct me if I'm wrong.

Marshall and Swift doesn't claim its numbers are correct or sufficient, that they're only guides.

Well, this gives you a rough idea.

And again, you don't have to take my word for this.

The Marshall and Swift disclaimers are in our appeal packet on page 26 that they don't guarantee any of these numbers.

They say, you know, this is kind of a starting point for you to use your assessment at.

The other reason not to use the cost approach on this particular building is because it's so old.

And if you look like they're on page two, I just take the quote from the International Association of Assessing Officers.

The cost approach usually works best for newer improvements because construction costs are easier to estimate and there is less depreciation.

Again, these improvements are 28 years old.

Even Marshall and Swift would say, you know, our approach doesn't work so well

when a building is this old.

If you turn to page three of the packet, I wanna show you something about that.

Yep.

So let me explain to you something about Marshall and Swift depreciation tables.

They're national numbers.

Not only are they not local to Virginia or Albemarle County, they're not even local to the East Coast or the Mid-Atlantic.

They're not even local to property east of the Mississippi.

These are national numbers that they use.

And that's why I say, look, this is a guideline.

You can't just use these numbers and expect an accurate valuation.

So what we've done is we've tried to figure out how far off are these numbers for Virginia.

So in May of 2019, we had an interesting occurrence.

In May of 2019, Walmart built a new store in Loudoun County.

They also entered into a contract

to sell a store in Loudoun County.

Because those two happened almost at exactly the same time, May 2019, we were able to isolate out what is the Marshall and Swift error, at least in Virginia.

And you'll see the math how that works.

And so what we did there was we know what the cost to build was.

So we don't have to use Marshall and Swift's numbers because we already know what the cost to build a store in Loudoun County, Virginia is.

and then what we did was we took the sale of the property and used that as the number that it actually sold for under contract price in 2019 and what we were able to do is isolate out the physical depreciation that should have occurred under Marshall and Swift using their national numbers and what actually did occur and

Based on the sale of this property, we were noticing that that difference is almost 15%, a difference of 15% in that sale, and we broke that down in error per year.

Now the reason we're calling that external obsolescence per year is Marshall and Swift, in their depreciation tables, they call everything depreciation, physical depreciation, functional obsolescence, and external obsolescence.

Well, we're just assuming that that number is going to at least cover the physical depreciation.

Then you get to the question of functional obsolescence and functional obsolescence is obsolescence that occurs at the property that is curable at the property.

We're operating under the assumption that Walmart does a good job of avoiding functional obsolescence.

They are frequently

making renovations and improvements to that property to cure functional obsolescence.

So we're gonna, for the sake of argument, we're gonna say that Walmart doesn't have any functional obsolescence because as a corporation, they always work to make their properties the most current that they can.

So whatever is left in the difference is going to be external obsolescence.

And external obsolescence is obsolescence that occurs in a property that is external to it, and there is nothing the owner of the property can do to cure the obsolescence at that property.

So again, when you look at that, that external obsolescence per year, the error rate is about a half percent a year, which is really not too bad.

And if you're talking about a five year property,

I mean, that's not too bad.

But when you're talking about a 28 year old property, that difference starts to add up.

Now, another reason that you wouldn't want to use the cost approach to this property is because it's owner occupied.

And we have a quote there on page two, if you look back on page two, and this is from the comptroller of the currency.

And the comptroller of the currency has said, highly specialized improvements required to meet the needs of an owner-occupant can result in a cost greater than the value that can be supported by income generated by leasing to another user.

Now, why would the comptroller of the currency care how a bank values owner-occupied property?

Because the comptroller wants to make sure that collateral is valued correctly.

So their values aren't overstated, which would

threaten the stability of the banking industry.

So there's the control of the currency weighing in.

And all of these things that I'm saying are not coming from me.

They're coming from the IAAO or the comptroller of the currency.

I mean, it's generally accepted appraisal practices that you wouldn't use the cost approach on this type of building.

But let's say that you wanted to.

And let's say that if you

corrected this external obsolescence.

And I know you can make the argument, well, that's external obsolescence in Loudoun County, not in Albemarle County.

True.

But it's a lot better than Marshall and Swift, which is national in nature.

If you just corrected for this external obsolescence, you would get a fair market value of the property of $10.7 million

which is very close to what we're asking for in the appeal anyway.

So even if you could use the cost approach, if you just made this correction to external obsolescence, you would get very close to our appeal value of $10.7 million.

What we used is we used to come up with our fair market value of the property is we use the sales comparison approach.

The sales comparison approach

is the best way to do this.

And the number one reason is sales aren't hypotheticals, sales are facts.

So as long as you have truly comparable properties, then you are going to get a good value, an accurate value.

Our sales grid is on page four.

Page five?

Correct.

In Virginia, over 80,000 square foot.

We also put some ones at the region there from North Carolina and Maryland, just because some of our clients, some boards on the borders, they want to see North Carolina and Maryland.

And you'll see that the assessor used some as well.

Now, here's the issue.

You've got to make sure that you're comparing apples to apples when you use a sales comparable.

Owner-occupied stores, as I've already said, are not leased.

They are not leased stores.

And so you have to compare other stores that aren't leased because it's easy to confuse the difference between what's vacant and what's leased.

You can have a property that's vacant that's still leased, and we're gonna show you a few examples of that.

And you can have a property that's completely occupied

but is not leased.

And every owner-occupied store doesn't charge itself rent.

And so it is occupied, but it's not leased.

So the issue is whether it's leased or not.

And when you take the average of all these stores, and these are all the sales since 2016, you come up with an average of 36 to $37 a square foot.

Now we're not asking for that.

We're asking for $70 a square foot.

and but I want to give an example.

Look at the top store, the sale, the Sam's Club in Richmond for $51 a square foot.

I just want to tell you a little story about that.

This is a Sam's Club in Henrico County that we've been appealing for years.

And each year the board has been reducing it a little each year to sort of make it closer to its value.

And this past year, the assessors in Herrico County, for their January 1, 2020, assessed this property and they used the cost approach.

And they came with the number that was like, and I've seen the worksheets on this because this is one of the stories that we analyzed.

They came in using the cost approach at, I think it was $12.7 million.

And the assessors looked at it and said, wow, this is just too far off.

There's no way this is right.

and so they brought that price down for their assessment for 2020 at $11.5 million and it sold two months later for only $7 million.

So even after they adjusted their own price and sort of disregarded their own cost approach, they still didn't come anywhere close to the real value of the property and it's not because they're stupid, it's because the cost approach just doesn't work that well for these properties.

Now I wanna show you this Leesburg property we talked about earlier.

If you could go to page five.

This was the 2018 marketing brochure for the sale of the property in Leesburg.

And if you look at that on that first page, is everybody there?

I can't really tell.

If you look at what I underlined on that page, available in the spring of 2019.

I wanted to put that in to show you this wasn't some property that had been sitting vacant for years.

It wasn't vacant at all.

It was a fully operational store that was currently being operated as a store.

So we don't have any of this dark store theory debate stuff.

This was a fully functional store.

I lived in Leesburg for more than 10 years.

When I went to Walmart, this is a Walmart I went to every single time.

and there was nothing wrong with this property.

Again, it was a fully operational store.

So that's why they said it would be available in the spring because as I mentioned, their new store wasn't even gonna be open.

So they were gonna continue to operate this store.

And the only reason they went to the new store is because they wanted a larger store in that part of Loudoun County.

And if you go there to the next page on page six, you'll look at what they did to market the store.

And this is what as real estate investors, Walmart said, they wanted to show a potential investor what they found important when they placed a value on a store.

And you can see they value population within a five mile radius of the store and average household income within a five mile radius of the store.

They also value traffic count.

I think when I looked at I remember when I looked at that, the two properties were roughly the same.

But if you go to the next page, on page seven, you'll see the demographics for the 975 Hilton Heights Road, Walmart.

And you'll see that the population is slightly less than that Leesburg Walmart.

But the difference in income is staggering.

Within a five mile radius, the average household income of the store on Hilton Heights Road is $88,000

a household.

In Leesburg, it's 156,000.

And everybody knows that Loudoun County is one of the richest counties in the country.

So that's why in addition, the Hilton Heights Road store is actually a year older than the store in Leesburg.

So there's a little bit of difference.

But 1992, 1993, I mean, that's roughly the same.

So what you really have in the difference is

The number of people, but more importantly, the average household income is only twice, it's almost twice what it is in Loudoun County as it is in that part of Albemarle County.

And so that's why we pegged our value at $70 per square foot, because if the Walmart on Edwards Ferry Road sold at 75, and again, that went under contract in May 2019 for $75 a square foot, then

We're pegging our appeal value at 70, which we think is high, but that's what we're doing sort of as a compromise value.

We're valuing our property at $70 a square foot, and that's how we come up with our number.

Now, if you look at the assessor's packet, if you turn to the assessor's packet, I'm gonna make a, just mention a couple things about the assessor's packet.

What they say under this, under the first page, they say that the tax rep is basing its appeal on the sale of closed stores.

No, we're not.

That Walmart store in Leesburg was not a closed store.

If we based our appeal on the sale of closed stores, which some of the other comparables are, we would be appealing at $37 a square foot.

So that simply isn't true.

The other thing I would like you to look at is

The store in Leesburg didn't close at all.

It was a seamless handover between when the new store was built and they moved their operation from one to the other.

And I want you to look at their big box sales on page five.

and I spent the day looking all these up on CoStar and I can tell you all of these are leased sales and I wanna go over a couple of them.

Oh, wait a minute, all of them but two are leased sales.

So if you look at the Richmond sale at 6807 Midlothian Turnpike, that was a non-leased property.

and it sold for $64 a square foot and the only reason it got that high of a value is because it was approved for off-track betting before the sale so that's why it even sold that high.

The other one was the sale in Virginia Beach, the former Kmart, you'll see it on the bottom for $63 a square foot and so that was owner occupied as well, it was non-leased.

Everything else

I'm sorry, everything else on this list is a leased property.

Now you may remember the argument we had last year about the Albemarle County sale of the former Gander Mountain.

And we were going back and forth and I said, well, you know, the owner said they were still making their lease payments.

So what I did was I did some research on that and found out exactly what happened at that property on the former Gander Mountain.

Now let me just say off the top,

The square footage size on that is only 46,000 square feet.

So it's not really a comparable based on its size.

I mean, the subject property here is 153,000 square feet, and this is a 46,000 square foot property.

So it's not really comparable because of its size.

But even if you know economy of scale, the smaller something gets, the amount of its price per square foot goes up.

But even this is

They say it's vacant at the time of the sale, but there is a difference between what is vacant and what is leased.

So here's what happened at this Gander Mountain.

And I went back through and I looked at the bankruptcy court records of Gander Mountain to find out this information.

It used to be there was a corporation called United Land Corp that developed and owned the property for Gander Mountain and United Land Corp held the lease.

Gander Mountain filed for bankruptcy in 2017.

As part of the bankruptcy, it assigned its lease to all of its stores to CWI Inc. CWI Inc. is just the legal name for Camping World.

So Camping World assumed the lease at this property.

Now just because it assumed the lease, it didn't assume any obligation to operate the store.

So again, this is another example of how

You can have a vacant store that's still generating real estate in because there's a lease.

CWI was obligated on this lease at least up until the time of its sale.

Now, I believe it was Goodwill that took over after that, and they could be that Goodwill assumed the lease, Camper World's lease, or it could be they got renegotiated to a new lease.

Whatever it was, this was a leased property at the time of the sale.

If you want to see what a Gander Mountain sells for when it's not leased, there was a 2019 sale of a Gander Mountain in Winchester built actually in 2006, and it sold for $63 a square foot.

Now we don't think it's a comparable because the store is so small, but if you want to look at that sale, that other Gander Mountain that was not leased, that's on page 22 of our appeal packet.

So that's just to recap the whole discussion we had last year about the Gander Mountain sale.

Now, if you look down, this sale in Norfolk that they have, that 641 East Little Creek Road, the Sam's Club, that is also leased by Walmart.

Walmart does not own that store, it leases that store.

It's like five years into a 20-year lease on this store, and it is vacant.

It is dark as night because

They just can't make a go of it at this location.

But it doesn't matter.

They're still on the hook for the lease.

And the owner doesn't care whether it's occupied and all the lights are on or whether it's not.

It only cares whether it's making money.

And it's still making money.

And that's the difference between something that's just occupied and something that is actually leased.

So if you turn to page five of their sales,

They show all these Southwestern US Walmart sales and they've got this fully occupied, fully occupied, fully occupied.

Occupied doesn't mean anything is how much is whether it's leased or it's not leased.

Now I looked up the ones on this list that were either North Carolina or Maryland and

I found out that all of these are leased.

They're not owner occupied stores, they're lease stores.

And if you have Walmart as a tenant, that's probably one of the most credit worthy tenants in the country.

And of course, the sales price is going to be much higher if Walmart is your tenant.

But again, and I keep saying this over and over to make the point, owner occupants leave when they sell the store

and the owner is taking over essentially what an empty building is.

And I know that the assessors are gonna claim dark store theory.

We don't do dark store theory.

We don't believe in dark store theory.

And I also wanna point out the assessors are doing the same thing that we are, but they're using the cost approach.

What the assessors are doing is they're replicating the cost of an empty store.

So it's the same thing.

We're both using empty stores

We're using the sale of an empty store and they're using the cost to build of an empty store.

So this has nothing to do with dark store theory.

This has to do with the comparable sales of other leased big box retail stores.

The last note that I want to make on this is that you will hear in all of their packets, and I'm not, you know, criticizing the assessors for doing this.

I'm just explaining it.

This concept of equalization that

Well, our sales, our assessments of all stores and all these big bucks stores in the jurisdiction are uniform and equalized.

And they have to do that.

So again, they're not doing something wrong, they're doing something they have to do.

But the concept of uniformity does not come into play until after you've solved the question of fair market value.

And that's straight from the Constitution of Virginia.

Everything has to be valued at its fair market value.

Uniformity comes in when something is valued under its fair market value.

So I'll give you an example.

Let's say that all the big box retail stores in Albemarle County were valued at 10% under their fair market value, except for this Walmart.

Then this Walmart would have the right to appeal and say, we're entitled to the same tax break that all the other big box retailers got.

So that's when uniformity comes in.

Uniformity only becomes a factor when you've already determined fair market value, where it's at in fair market value.

We're not making a uniformity claim here.

We're simply claiming that it's valued at a value greater than its fair market value.

And we're valuing that at $10.7 million.

Thank you.

And the essence of your appeal is that it should be depreciated by the 14% roughly.

Well, the concept is we use the sales comparison approach.

It's just a coincidence that if you correct their cost approach, giving the natural bias that Marshall and Swift has in Virginia, you almost get to the same number.

In other words, one is a correction of their cost approach.

and the other is a sales comparison approach.

And it was just a coincidence.

In fact, I didn't even really notice this until I was looking at today.

All right.

Mr. Lynch, would you like to, or anybody else have a question at this point?

If I might.

You have based your sales comparison approach primarily on that Leesburg sale, is that correct?

Correct.

Okay, great.

Okay, so I'm just gonna say a few things and I'm gonna let Stuart take over.

I just wanted to point a few things out.

Notes that I made from Mr.

Gross' presentation.

The information about the 14% or 15% economic derived from that one situation that he talked about with the new Walmart and the older Walmart that sold, that's only one piece of data.

So I wanted to point that out.

It's not a study with multiple data points.

He also said that, you know, when describing these sales that we're using, that they are still making money, I think that is a good point.

The Walmart here is doing great.

I mean, whether it's leased or not, it's still a great store, great location, and Walmart's not leaving it anytime soon.

I don't know because these last, the two sales that were at the top, the Leesburg sale and the, let me get back to that page, and the other sale were from 2020.

So we didn't necessarily analyze those because this date of sale is after the appraisal date.

I'm wondering is that Leesburg, even though it wasn't closed at the time they put it up for sale, did it close afterwards once they moved to the new Walmart that was built?

Yes, you want me to address that?

Sure, sure.

Okay, so what happened was they always knew that they were going to have the new store available in the spring of 2019 and roughly in May of 2019.

So they started marketing the other property before then.

So they knew they were moving to the new store, and so they were going to be selling this store.

So that was the market knowledge in 2018 and 2019, when they came to the meeting of minds and the sale price.

Yes, they did.

Yeah, that property's been sold, and now there's a different owner.

But again, that happens in all owner-occupied.

Yes.

That was the point that I was making.

When you're looking at the sales comparison approach, which is a great approach,

the comps are everything and making sure that you're picking those sales from locations and not necessarily cities when I say location I don't necessarily mean a city could be a location within a city that's not as good as another location but if you're picking those sales from the worst locations that they're not as good locations I'll put it that way then their sale prices are going to be lower and then

Better locations that would be more comparable to the Walmart in Albemarle County because it is doing very well.

For the most part, they happen to be lease-back sales or sales that continue to be operated by whoever was in them in the first place.

And it's because they're not leaving.

They're good locations.

I'm glad you pointed that out.

Under the guidelines of the International Association of Assessing Officers, you cannot use a sale leaseback as evidence of fair market value.

It's just not considered a reliable determination on what fair market value is.

And the reason why is because a sale leaseback in commercial real estate is sort of like the residential version of a home equity loan.

You're essentially trading your ownership interest for cash in exchange for a monthly payment.

So it's a financing mechanism in commercial real estate.

So that's why the IAAO does not look with favor on sale leasebacks to determine the value of the property.

Under Virginia law, it's a little stronger.

It says you cannot value a property based on its value to the owner.

So in this hypothetical sale of the willing buyer and the willing seller, the buyer has to be someone who is not the seller.

And so there can be no relationship between those two.

So that's another reason you cannot value this as a Walmart.

Exactly.

OK. And if we were valuing it based on any sales lease backs, we'd be at $150, $200 a square foot.

So I just want to point out there's a difference between the very high end sales and the very low end sales.

And we are in between.

And it appears to me, before Stuart takes over, that we're pretty close at $82 a square foot.

Is that where we are?

Let me look it up so I get it right.

$83.78 and you're at $75.

We're at 70 and they're at 84.

We're at 70, they're at 84.

But again, let me reiterate.

When the property is leased, you can double or triple the value of the property.

That's what the comparables look like.

I can look at a big box retail store in Virginia.

I've been doing so many of these.

But I can tell you whether it's leased or owner occupied just by the price they sold for.

I mean, I always check to make sure that's the case.

But whenever I see anything

north of like $70 a square foot.

I go, oh, that's probably a leased property.

I mean, we threw the ones in North Carolina in there, you know, the ones in North Carolina, my God, they're like in the 20s.

So, you know, the magnitude of difference is you can't divide it in half.

It is on a much more valuable property this lease.

Just think about it.

If you're the owner buying a non-leased store,

You've got several things at play now.

You've got to go into the cost it's going to take to get that building that you're buying ready for tenants.

You've got to go into the lost rent that you're going to incur in the time it takes to get that ready.

The broker's commission that you're going to pay for those leases that you finally do get on the property.

And the cost of the tenant improvements.

it's a big chunk of money that gets deducted from the value of a piece of property so it's a lot of money at stake and then there's the risk that you don't do it at all what if someone take for example the people who bought this property in Leesburg in 2019 they had no idea the coronavirus was coming so that might probably look like a good investment it turns out it's probably not going to be

and that's risk.

There's always risk.

So if you don't have somebody in place, there's always a risk that you're not going to find someone.

And that's what makes that delta so wide.

That's why we say you can't put a least comparable in with an unleased comparable.

The two are apples and oranges.

You have to use unleased properties to come up with your value.

And as I said, if we use the average on that, it would be $37, but we're using the high end of that.

and that's what we think.

Okay.

Mr. Grubb, so I'm gonna let Seward go through our side now, but I don't think we have time for you to respond to every item as he presents it.

I'll be very brief.

The Charlottesville market is certainly not the Loudoun County market.

First of all, you have to ask yourself about the Loudoun market sale.

Why did that occur?

That store was built back in 1994.

The suburbs were maybe barely there at that point.

And I believe I'm right.

and then they moved on about what, 40, 50 miles since then and so there was a need for another Walmart store.

The Charlottesville store is not in any jeopardy of closing whatsoever.

The numbers there have been very good for some time.

It's a whole different situation than what was going on in Loudoun County.

There's no need, as of January 1st of this year,

There was no need for any external obsolescence that I could find whatsoever in any of the transactions that have happened, either here or even locally, even in the local Richmond market that he was discussing.

Three of the sales that he did talk about were closed at the time.

The one that was sold for the Rosies and Molothian Turnpike in Richmond, I'm very familiar with it, sold for as an

off-track betting site.

The city of Richmond and the state offered them very big incentives for taxes to go ahead and go through with that deal.

The Virginia Beach King Mart was also closed for three or four years, I forget.

Okay, it's three years here on the sales on page four.

had been closed for some time and they completely, Pete's very familiar with that situation too because he worked at Virginia Beach and I spent a lot of time there with my family because my family is from there.

But anyway, the Kmart was completely gutted and renovated into a Walmart.

It was a viable situation.

Kmart just simply couldn't make a deal with it.

We were coming in at $83.78

cents per store of flood.

And the sales on here, the median is coming in at 130.42.

I mean, even if you look at the very bottom sales, we're not that far away from the very bottom of the sales for stores that have been closed.

We have addressed the effective age by using 28 years on that building.

It was built back in 1992, so we're using effective equals actual on that store.

and we're using a two and a half rank which is fine in my opinion.

I believe it's a little better than let's say an Ollie's or some other discount store that would typically be ranked at a 2.0 which is the average.

I just don't see that there's a need for external office lessons given the sales of Gander Mountain and we have had a few other retail sales since then but of course they happen

Early 2020, and we cannot talk about those.

But we are very well equalized with this store, with all the other discount stores in the county as well.

I know that Daniel doesn't want to hear about that, but that's something, as you're correct, we do have to do.

We have to equalize.

When you look at the Kohl's, which is a little,

A little better, as it should be.

It's more of a department store than really a discount store, but we still have to call it a discount store.

Given the description with Marsha valuation, coming in at $142 a square foot.

It's much newer.

And looking at Target, we're coming in at 112.

And Gander Mountain is very new, 190 per square foot, which was a sale.

And the Toys R Us, over on Branchlands, which is now a big watch,

We're coming in at $121 per square foot.

We feel that the property is equalized and not in excess of value based on the sales and equalizations.

They also had building permits through the years to update the building.

They keep making it better.

I really feel like if they were gonna move or close out,

for throwing money into it, but that's part of the retail business.

I have something to add first.

I did want to also say in relation to Mr. Grubb's page two about the cost approach and highly specialized improvements

Big Box store is not a highly specialized improvement.

A oil refinery is a highly specialized improvement that this statement would be applying to.

Something really specialized that couldn't be adapted to something else very easily.

But these types of properties are very easily adapted.

And so that doesn't really apply.

Plus this Walmart, it services over 100,000 people in our metro area.

It's the only one

until you get up into Greene County, in Rutgersville, I believe, and the next Walmart would be over in Waynesboro.

Mr. Lynch, Mr.

Staples, I realize that this is an owner or

owned a store and not a leased store.

And that if it were a leased store, you could do a valuation based on sales and so forth.

Is there any way or have you done any sort of projection based on that and an assumed lease just to see what kind of numbers you would come up with?

It makes sense.

Doing it doesn't necessarily, though.

So and actually this kind of brings us back to why can you not use the sale of the lease store, but you can determine the value of a store based on a hypothetical lease.

So if we were to say, okay, that Walmart would rent for $10 a square foot, and we were to do an income approach on it.

to determine what that final value would be.

That would be exactly the same thing as using a sale at $200 a square foot of a store that was leased.

So no, we do not go through that.

You know, my other comment was from Mr. Grubb and that was that I appreciate the Leesburg situation, but I somehow feel like if Walmart is moving out of one building into a newer, bigger, better building,

Well, sir, if you're using that standard, then you can say that for any commercial sale.

There's always a reason that somebody wants to sale.

In this case, this is the most benign of reasons because they want a bigger store.

But there's always a reason that somebody wants to sell.

And you could say that virtually about anything.

It's frustrating when I hear the assessor say things like that this store has no plans to close anytime soon.

Of course it doesn't.

I mean, we're not saying that the store is failing.

Whether the store fails or not, and the amount of income that it makes in its sales has nothing to do with its real estate value, because when an owner-occupant sells, it leaves.

It's something else.

I can give you some statistics on this.

When a Walmart sells, 40% of the time,

In second generation use, it's as a warehouse.

25% of the time, it's in general retail.

10% of the time, it's a church.

So again, Walmart makes money at that location because people shop at Walmart.

I do too.

I say, well, I know Walmart has really cheap prices.

I'm gonna buy something.

There's a Walmart.

Let me go shop there.

That's goodwill, but it's not real estate value.

Another way to look at it is like this.

Let's say that you have the finest location in Albemarle County.

Let's say this is the finest location in Albemarle County for retail sales and that property was selling buckets of horse manure, their sales would be lousy.

Now let's take the worst location for retail sales in Albemarle County and assessors can pick the point on the map where that would be the absolute worst place to have a retail store.

If it were selling a low-cost cure to the aging process, its sales would be astronomical.

So the reason sales are driven by somebody who wants to buy your product, not by the value of the real estate, except there's a certain amount of location that would go to its land value, but not to its improvement value.

Walmart is selling something that people want to buy.

In this case, Walmart is selling low prices.

That has nothing to do with the real estate value.

and the fact of the matter is you have to treat the store as if it is closing because the owner occupant is leaving and I know these guys are smart and I just think they're pretending not to understand this concept that you're going to have an empty store that you're taking over, the new owner is buying an empty store and when they talk about the income approach, they're right, I agree with them on that, it'd be too speculative but you could do it but what you would have to do is you would have to account for the cost to find a new tenant

and you'd have to jack up the cap rate for the risk associated with that.

Mr. Grubb, this is Anthony Arsali, one of the board members.

Okay, so let's, here's the question I have for you and just trying to figure out

My bigger concern or what my main thing is the Albemarle County sales.

I don't know the other sales as well.

I understand what's on board, but most of us here on the board are familiar with Albemarle County and that stretch along 29.

So we do have two sales.

One was a Gander Mountain sale.

And I'm going to have a follow up question on that with respect to the lease payments that you're arguing.

The other is going to be in 2020, in January 2020, which is the

Toys R Us that went bankrupt was a closed property.

But it's a similar situation as your Leesburg.

Leesburg sold in 2020.

It's a closed building.

But that's on there, page seven, the last item.

They valued $121 a square foot, but I don't think that's

Square footage price that it sold.

It sold quite a bit higher than the assessment.

And the building was built in 1991.

And that building was in pretty bad shape, especially relative to the Walmart.

So two questions.

One is, how can you explain that sale in terms of can you give us anything in terms of Albemarle County to help us out to that extent?

And then second is to the Gander Mountain with respect to the evidence of lease payments.

Do you have any evidence of lease payments?

because my understanding is when CWI took over that and because of the bankruptcy those lease they were not responsible for taking over those leases and as we were talking I just looked it up and not 100% sure if this is correct but looked like they only took over 19 all around the country so where they became subject to those lease payments so

If you have any evidence that there were lease payments made there, I think that would help us discount that $8.7 million figure.

And then with respect to the sale, I understand it's in 2020, but again, that was a bankruptcy sale, so all the discussions, everything else must have happened much earlier.

How can you discount that comp?

So those are the two points that

Okay, so let me take one of these, because I'm a little confused.

Okay.

They're not all the way to the column on the right.

Oh, I see.

I see.

Okay, second for 8.17.

And I think, at least I was familiar with that sale prior to this happening.

Well, here's what I can tell you about the Toys R Us sale, just in general that yes, well, I don't know if there, I mean, Toys R Us filed for bankruptcy, so I'm assuming, I'm going to have to go through the bankruptcy records on this, but I'm assuming that Toys R Us

I mean, they could have sold it subject to the lease.

I don't know if they were a tenant or if they were the owner at the time of the sale.

I just don't know the sale, but I can tell you this.

Okay, so they were the owner-occupier.

Been closed for about two years.

Okay.

First let me just point out that the square footage on that is only 45,000, 46,000 square feet.

which is, the subject property here is more than 150,000 square feet.

So you know as you go down the scale, as you get smaller, that the price per square foot increases.

But it also is over $180 a square foot, so.

This is the same corridor.

The thing is, obviously, we don't have a lot of comps, but this is that corridor.

This is the 29th corridor.

Albemarle County has very limited spaces where you can build these big box stores.

And so this is the two sales we've recently had, or two companies that went bankrupt, Gander Mountain and Toys R Us.

Those are the only sales we have.

OK, so let me just go to your question on the Gander Mountain one.

So what I have is the bankruptcy court's order approving the transfer of both the assets and the leases to Camperworld.

When you take over a lease, you assume all the obligations of the lease.

That's just as a matter of law.

So if you are assigned their leases, you must

pay, make the lease payments.

The agreement that Camperwell got into is whether they had to operate those stores.

And that's where you got, I think it was 17 stores that ended the agreement.

They were supposed to keep an operation.

Again, that's the difference between being vacant and being under lease.

You don't have to have an operating store to be under lease and still be making lease payments.

And that's what still makes it so valuable.

So that answers the question about the Gander Mountain.

As far as the Toys R Us store, you know,

The only thing that I can tell you about that store is that it's so much smaller.

It's not just economy of scale.

Finding a tenant in the market that was in place on the date of value, again, not assuming coronavirus or anything else, just what was in place on the date of value, is that they're easier to lease than these huge spaces for a single tenant.

and they're just, that's easier to lease.

They command more in the market than a smaller property.

Let's go back to, Mr. Garbo, let's go back to Gander Mountain.

I just, so do you have any evidence specifically to that one because I'm an attorney as well.

I understand the ramifications of the lease versus staying open.

My understanding is they only took over, assumed certain leases, not every lease, but I may be wrong.

Do you have any evidence that with this specific store, and it really would help us out, if with this specific store, do you have any evidence to provide to us that in this specific case, they assumed the lease, there was some kind of payment made, there's something in relation to that sale?

Because otherwise, that sale falls right with the Toys R Us sale, they're around the same amount, and about the similar square footage, and the Toys R Us one didn't have that lease situation.

That's the issue.

Well, okay.

I know what I have on my screen right now is the order approving the transfer to CWI.

Now, it

It mentions all of the leases.

It doesn't, I mean, I could go through, I'd have to go through those documents in the court to see if there's somewhere where it delineated out that store.

I don't think that it did.

I mean, I can send you newspaper articles that accompanied the sale that shows that it was part of that transfer to CWI.

But again, and I can send that to you if you'd like me to.

And I can show you the order from the bankruptcy court saying, now,

these leases have been assigned to you.

And I can show you the accompanying newspaper article that says this is part of that deal.

But I mean, that's all I have for that.

But the other thing I would say is I think if I go back to what they're claiming on this, is this sole, this was a, no.

No, man, I just don't know other than that.

I can send you the documents that I do have from the bankruptcy court and from the newspaper coverage at the time where that was part of the lease.

And then you had the follow on article where the owner was bragging that they were still making their lease payments after this was done.

So, you know, that's taken all together.

I mean, I think it's a pretty safe bet that CWI was honoring the lease as it had to under the court's order.

I mean, why would Gander Mountain do it?

They've declared bankruptcy.

Hang in there, let me finish.

I did speak with the new owner who lives over in Stanton when he purchased the property and he said that there, it was a vacant property,

including the leases.

It was a phone conversation.

If you wanna contact a new owner, it's pretty easy to find.

Well, no, he has to talk to you guys.

He doesn't have to talk to some attorney for a competitor.

But look, give me the information.

Well, they're even less likely to talk to an attorney for a retail competitor.

I mean, they have zero incentive to do that.

All right.

Are there any other questions from the committee members?

And just a comment, I would hope that, I mean, I think I'm part of why I was raising these questions.

So we're going to have a similar argument, I assume, with the other box store.

So I just wanted to, I don't think we need to necessarily hear, and I obviously understand that both sides probably understand that.

Sounds good.

OK, does anyone need to take a quick break?

All right, well, let's move on.

We're moving to Target.

Is Target next?

Yes, it is next.

So if you turn to page two, you'll see our pro forma.

Most of the arguments are the same.

So is everyone there?

Yep.

Okay, so this is the Target store.

It's located at 312 Connor Drive.

It's another classy discount store.

It's built in 2005.

And it's the improvement values there, of course, were 15 years old.

Again, what I would like to direct your attention to is if you go through and you turn to just, again, a comparison of the demographics,

of the Leesburg store which is on page four.

Sorry, page five on the population within a five mile radius of almost 92,000 and the average household income of 156,000 a year and you go to the store in Target and you've got a population of in five mile radius

less than half of that and an average household income of almost half of what it is at the Leesburg store.

And one of the reasons that we use these demographics is because that's what investors use.

That's why we put the Walmart

marketing folder in there because they know how to appeal to investors.

These are the numbers that the investors want to know, particularly in owner occupied properties, because there's no income numbers to show them.

The sales don't mean anything because that was sales of Wal-Mart products.

In this case, it's the sales of Target products.

You know, that's different from what that land would generate in rental income.

And that's just it is just a much it's a greatly inferior market to the Leesburg market.

I mean, I don't see how you can sort of put the two up.

And this one is assessed at much higher value than the Walmart store that they assessed at.

I mean, they assessed this store at $112 per retail square foot in a clearly inferior market.

And the reason why they're coming up with that value

is because they're using the cost approach.

So that makes a big deal if you've got an age of the property of 2005 than 1993.

But when you're talking about what these sell for on the market, what the demographics they look at are who's in the neighborhood.

And this is just extremely overvalued.

I admit the Walmart is a little close at least it's within you know two million dollars but this is way off look at the difference in the market here and it's just it's overpriced and you know and incorporating all the other arguments I made in the other case and and again and this sort of gets us around the argument of well I know that I see lots of cars in that location and you know because I always get the anecdotal evidence

either from assessors or investors.

Well, yeah, they're doing really well, these general statements about that.

This is what investors look at, demographics at the location.

And the demographics, they're not comparable.

And we're still giving $70 a square foot, even for these clearly inferior demographics.

I don't think we have a whole lot to add.

Stuart, you can run through if you have anything that's special to this property.

I just want to say first that I know Mr. Grubb is a smart guy, but he's maybe

purposely ignoring the fact that there's another part of that equation of population and income in its competitors.

And we don't really know what the competitors are in Leesburg and all the other properties around there.

And of course, there was the new Walmart that was built.

So that is a really complicated

And I would say, go ahead.

No, I'm sorry.

Go ahead.

There is always, there's an old saying that the only true comparable is the one that you buy.

There is always something that's not going to make two things comparable.

You know, you can look at anything, any fact or anything else.

There's always going to be something that doesn't make them comparable.

So what is the best data to avoid just subjective conclusions about these things, you know, what is the empirical objective data and

The argument the assessors are making would be a much stronger argument if I was going for the average.

But what I'm going for is the highest sale on the list.

They were saying, look, it's gotta be, it can't be worth more than this.

Probably if I pinpoint it down, I know that we recently hired a master appraiser in litigation to value the Walmart in Warrenton.

And he was coming in at,

It's $68 a square foot.

We know because we do these things that no two are exactly the same, but we know that if you go in Culpeper, Orange, Madison, and those areas, they're valuing their Walmarts at $60 a square foot.

I mean, we know, I understand all those things and I understand it's a complicated thing, but to avoid subjective things, I try to stick with the facts because I've got to persuade the board based on the facts, not some objective analysis of what I think something, well, the target's right next to it in this.

I've got to give the board facts.

Right, I was just pointing out that they're not all the facts.

That's all.

I can make this within about three sentences.

Okay, the property last sold back in 2004 on December 28th and it was a land sale.

It was for $9,105,700.

All right, Mr. Grubb is asking for a value of 10,528,275.

I'm not sure exactly what's going on with the 275.

Anyway, it's about $1.4 million more than that land sale from 2004.

Or he thinks that the buildings are worth about $10 a square foot.

I don't know how you can get to that logic.

That's fine.

That's a 2004 sale.

But I will tell you this that, I mean, I will concede this, the real reduction, there's more of a reduction in the improvement value.

I mean, some of these things, like you mentioned the Virginia Beach sale and how Walmart bought a Kmart that was, and their sales grid is wrong.

It wasn't built in 1980s.

That was built in 1990.

I've got, if you want to look in my packet, I've got that, the CoStar report on that sale.

I don't know, then co-stars wrong.

I don't know.

But I mean, I personally wasn't shopping there.

But let me tell you this about the Kmart store on that sale.

Walmart sunk millions of dollars into turning that into a Walmart.

Millions of dollars.

Whenever you do that, that's again the owner occupied discount that you've got to give it.

Walmart's got to turn that into a Walmart.

It's a Kmart now.

And so there are costs associated with turning that into a Walmart.

And that Walmart is doing just fine in that location.

But they had to sink a lot of money in to change it into a Walmart.

It gets discounted from the price.

It just does.

There's a difference.

Look, I'm not saying that you're right or you're wrong.

I'm just saying it's one of those subjective arguments that I hear from every assessor all over the Commonwealth.

But the fact of the matter is that's just a statement.

I'm showing data, and it's the data that investors use to make this decision, which is in line with how you value fair market value.

Well, I really strongly believe that it would be more than $10,528,000 for a 9.84-acre piece of property located in Town Center.

It's so different.

Before we start going back and forth on this, can we just stay to the facts?

Yes.

I'm using the exact same sales that we used for the Walmart as well.

We're coming in at $112.43 per square foot.

That's all the same information.

One more thing.

On page 9 of my packet, you'll notice a detail for they're doing a current renovation to the building, $1.1 million.

They're putting money back into it.

They realize the viability of the store.

We're not suggesting it's in any jeopardy of closing.

What we're saying is what would an outside investor pay for that if it's sold on the date of value?

And the fact that there are alterations in progress of $1.1 million

that means that they thought it needed $1.1 million of improvements to reach its highest and best use.

So that should actually be subtracted from its cost, not added to its cost until after all those are completed.

And you're saying in your thing that they're underway.

No, sir, it's a discount store.

It's a little better than, in my opinion, than the Walmart.

We have it ranked at about the same.

It is a two and a half and the same as just like the Walmart.

As a local real estate broker, my struggle here, as with the first case, really is the land value.

I'm hoping maybe, Daniel, you could explain how 2004 wasn't the high.

We certainly eclipsed the high here in Albemarle County from late five or six, in my opinion.

Because external obsolescence affects the land and the real estate.

So let's say that you have, you can't judge the land that this target sits on based on if it was raw land.

There's been a target on that thing since 2005.

And once a piece of property gets committed to a certain use,

It affects the value of the land itself.

So this has been paved over 15 year old target has been put on top of it.

And again, I get back to the to the sale in Virginia Beach.

Walmart had to gut the thing.

to just the bare bones and then turn into one.

There was almost nothing left of that Kmart in Virginia Beach.

There was the slab that was there.

There was some foundation and they turned it into something else.

So the improvements, they dropped very low, but the land drops too, because if you're going to value that as a piece of vacant land, even with a pad on it, then you've got to get rid of all that other stuff.

and that affects its price because it's now been committed to a purpose versus a piece of vacant land that has not.

There we go.

A couple of comments.

I think that, you know, getting into this discussion about the land value on the property, you know, if you have a retail building like this and it is not successful, then it definitely would negate the value of the land.

but you know land is only a component in the production of its ultimate purpose and the idea that you have a successful store is not irrelevant because that means that a certain amount of income and operation of the store is supporting that land value and I presume it'd be supporting the land value that they paid for so on that score I just kind of disagree with that

The other point I wanted to make is I don't think using the Loudoun County demographics showing that their average household income is 150 or whatever, thousand is relevant either.

I think you look at the optimal, I would use the word optimal demographic for what your purpose is.

I think if I was opening a store that sold mink stoles and diamonds and yachts and mercedes-benz that would make a big difference to me.

I think there's a threshold about, you know, so we're here at our average demographics, pardon me, from five miles is $99,000

I don't think anybody above the average like the 150 meters or half of our higher right so how many people go how much can you buy at a Target store it costs that much money

Well, I just think you have a sweet spot.

If you're the retailer, you look for traffic count, you look at area income capacity, but you gotta realize, I just think that's not a valid statement to say Loudoun County, because it's got a higher average income, it's gonna be a better location than Charlottesville, which has a significant average income.

So, and look, one thing you made that I want to emphasize that I think is a very good point.

You are absolutely right that the operation of the business has nothing to do with the value of the real estate.

So I want to applaud and draw, I thought that's what you said.

A successful operation of the building, okay, it has many components, land, labor, capital, and management.

All right, if it is a successful building, that means all of those components are being served in whatever kind of return they need.

and if it were not successful then they would go out of business and indeed they would have some sort of reflection on a land value.

Well, I would just say that's just an old sale that you, I mean, no one would use a 16 year old sale as a comparable for current land values.

I mean, no one, no appraiser or assessor would, well, I wouldn't say no assessor, I guess these guys are doing it, but I wouldn't see how anyone would think a 2004 sale is indicative of the world on January 1st, 2020.

That aside, let me just address the other points that you made.

The demographic question,

The reason that we set up the packet the way they do is because Walmart knows who the potential buyers are.

This is their real estate division does nothing but this every day, five days a week.

Okay.

They know what the outside investor thinks is appealing in a property.

and the higher the income, the more people, the higher the traffic count, they know investors will pay more for that if they have those numbers.

That's why it's in their marketing brochure.

If it didn't make any difference, Walmart wouldn't market it that way.

But they know the investment world out there, they value those numbers.

And here's an example of how that works.

Let me say how that may work.

Let me give you some demographics because I lived in Loudoun County for years, I live in Culpeper County now.

The poverty level for a family of four in Loudoun County, Virginia is $100,000 a year.

That's an astonishing number, but that's how rich Loudoun County is.

But it just goes to show you that people will shop at Walmart in that income range because making that much money doesn't necessarily make you rich.

When I lived in Loudoun County, I made

close to what that average household income was, myself, just as an individual.

And I shopped at the Walmart all the time.

I still shop at the local Walmarts and the local Targets all the time because I don't want to pay more for things than I have to, even if I have the money to pay more.

But that's just an anecdote.

It means nothing.

What I'm saying is that

Well, I just don't follow the logic in a sense that these investors are looking for a regular return on their money and a credit rating and yeah, they wanted a good location.

But they get their money back over the terminal lease.

And at some point, at $150,000 a year or $500,000 a year, you're only going to buy so many potato chips and tart.

You know, if I could add to that, if the improvements are operating, if the property is operating at its highest and best use, then there is no reason that any external obsolescence would be applied to the land.

Further, the most recent large land sale, Costco sale, occurred in 2014 and it was $30 a square foot for nine acres.

Well, look, the reason why is because we use the sales comparison approach and the sales comparison approach doesn't require you to identify a land value.

Your forms do in Albemarle County, but when the land is what contributes value to the improvements which generates the sale itself.

So in the sales comparison approach, you don't subtract those numbers out.

We do, admittedly, rather arbitrarily, because the form requires that.

In the sales comparison approach, there's no requirement to determine what of that is land and what of that is improvement.

It's all built into one.

The only approach that requires the segregation of the land value is the cost approach, which we don't do because we don't think it's an accurate representation of the overall value, which is what we're appealing at.

Now, as far as external obsolescence, I would just encourage you to read just the definition of external obsolescence.

External obsolescence is land, and I think I've got that quote from the IAAO.

Okay, I understand the concept of external obsolescence.

Well, what I'm trying to say is that, and I'm not trying to insult your intelligence or anything, I just want you to know that

That's what external obsolescence is.

I mean, it is a decline in land and improvement value.

And if you want to read it, it's on page 40 of our packet, the definition of an external obsolescence.

and it's by its nature things that are happening external to property.

In this case, now next year we'll be talking about the coronavirus, but this year we're talking about e-commerce.

You know, there's no location of land that's more convenient than the distance between me and my iPhone.

And I could sit there right where you are right now in Albemarle County and spend a month's worth of wages in 15 minutes on Amazon.com.

And I'll get exactly the thing I want delivered right to my door and that's what these guys are competing with.

So they're all suffering external obsolescence and that affects both the land and the improvement value.

One quick question.

Could I ask the improvements that are being made on this property for roughly $1.1 million?

I can tell you what it looks like to me.

Again, I didn't talk to Target about this, but what it looks like to me is Target does what they call a refresh, and it costs approximately $1 million.

And what they do is, based on the sales numbers that are coming into their store, like what's selling and what's not selling, they move the footprint of the store around.

Again, I'm not trying to ask you to put the coronavirus into this value, but when they find out that their grocery sales increase greatly because of the coronavirus, what they'll do is in a refresh, they will reformat some of the store to provide more space for what's hot.

And they do that refresh roughly every 10 years, and it costs roughly a million dollars to

To eliminate what I would call functional obsolescence, you know, to make that store current, like Walmart does, it'll refresh the stores.

It's mostly cosmetic and it's mostly just the moving around of things inside the store.

There is some structural changes that are made to the store, but it's what they essentially do to cure functional obsolescence.

Changes in the marketplace that can be addressed at the property level.

Sometimes it's an addition to the building, sometimes it's what he described.

Like the Walmart had a $6 million addition back in 09.

So that was adding square footage, I believe.

Yes, my computer is locking up here.

But this won't take as long as the other ones, I promise.

I know I made that promise last time, but I really promise this time.

I'm just having a problem with my computer.

Here we go.

OK, so if you look on page two of our packet, you'll see our analysis here.

And this is the income approach.

And there's essentially just one argument.

That's why this is not going to take that long.

And it really, it comes down to one of these things of what does the board think is fair?

So this is the, it's a three star hotel built in 2013 on 2100 Bond Street, the Hyatt Place.

And you can see what their actual numbers, their actual income was.

Their net operating income in 2018 was $1.5 million.

It dropped to $979,000 in 2019.

The reason it did that was because when the Charlottesville riots occurred in 2017, people canceled their long-term plans for special events such as weddings.

That showed up in the 2018, that showed up in the 2019 financials, not necessarily the 2018 financials.

So what the assessors are saying, I'm sure they'll correct me if I'm wrong to, okay, we're going to use 2018 and they agreed to reduce the assessment, but not, and they said, well, we'll look at 2019 when 20 next year.

The assessors can choose to do that if they want to, to stay a year behind, but the board is not required to do that.

The board can use the 2019 financials to show the value, because I'll tell you what, this is not a one-off event.

If we were sitting in any other circumstance right now, you could say, well, yeah, the Charlottesville riot had a one-time impact, and it's gonna go back to what it was.

Now it's not, because the 2020 financials are gonna be a bloodbath.

So this property is not going back to anywhere

close to a capitalized value of $18 million for a long time.

So what I'm asking the board to do is use the 2019 financials and we used their cap rate on that to determine a value.

And we used the value of the property that was in place at the time.

And we came up with our number using 2019 financials, knowing that 2020 is going to be far worse than 2019 has been.

And we're asking the board to use the 2019 financials, that the assessors use the 2018.

I do have a question about that if I could.

If you could help me with, so I'm looking at your 2018 on page two, and then I go over to page 55 and I see that your income before fixed charges, $1,728,252, which, you know, is in sync with what you have on page two.

But then when I look at your 2019 actuals, and I see you have that income from operations at $1,179,335.

If I look at page 50, I see that your income before fixed charges are $1,337,385.

No.

Look at page 50 and you'll see like the fifth line down, income before fixed charges.

You've got $1,337,385.

Okay.

For the 12 months ending December 31, 2019, the income before fixed charges is $1.3 million.

Well, on page two, you have your net income to be about $200,000 less.

Okay, so let me go to page two.

It's the same methodology in 2018 and 2019.

You should be using that number, 1337.385.

Bear with me.

That's okay.

Karen, can you repeat that?

I'm with you on income before fixed charges on page 50.

On page two,

Well, look at his 2018.

You know what I'm saying?

Yeah, it should be $1,353,000.

Is that right?

No, I meant for 2018.

We're good.

I'm going back to my source document, too.

So what I did was I daisy chained one, two, three, four, five, six, one, two, three, four, five, six, seven, eight numbers.

And now let me pull up the financials.

Okay.

Bear with me.

Well, they're just out of order.

48 should go after page 49.

OK, thank you.

OK, so to reduce your income before charges.

Karen, one thing can I say on page 50?

We do not load our cap rate.

Well, I think he did that.

Okay.

Oh, he made another, yeah.

Well, it, hold on a sec.

Well, both columns say income before fixed charges.

I think the problem is that the expenses, the total expenses do not add up to $3,407,220.

It doesn't actually show up on the statement as a total.

You have to add all the items up separately, and it actually adds up to $3,249,170.

OK. No way.

Yeah.

I would just have to go through, because what I did was I

I mean, I made that calculation based on subtracting things as well.

So if the total expenses, what I'm giving you is that net operations from income, okay?

So I'm subtracting the total revenue from the total expenses.

And so the total revenue, let me unveil these numbers, is based on income and certain expenses that are subtracted from them because they're hotels.

Let me reveal all these numbers.

And so they used for the actual number, they've got for their room revenue for 2019 was roughly $4.5 million.

Okay, now their expenses, they have they have itemized in their financials

Expenses that get subtracted from the amount to get that final number.

So what makes it difficult is when you're doing the expenses is adding up all the different expenses across the financials.

Again, I'd have to go back and recheck all seven entries to do that.

I will.

And if there's a mistake, I'll tell you, I made a mistake.

I shouldn't have counted this or I should have counted that.

but there's just right now doing all seven, finding all seven of those figures in this format.

Does anyone have any further questions?

Peter?

Sure.

The owners had not sent in the income and expense information since they built the property back in 2013.

So what I've been using was just estimates based on market data.

When they sent in the 2018 and the 2019 and the 2017 income expenses, we then used the actuals because that's what we used for all of the hotel properties in the county.

The assessment was reduced to $16,119,100 based on an 8% cap rate that we used and the 2018 income and expenses.

We did allow for the real estate taxes, personal property, the actual personal property value, which was reported to a revenue division.

We backed that out after the income approach to arrive at the $16,119,000 figure.

We believe that recent sales really do support our argument.

All right, I like to also look, we have to look at, as assessors, we have to look at all three approaches to value, no matter what the property is, when it's a commercial property.

And so we do, and I like to look at recent sales.

I'd like to turn your attention to page four over a printout, the comfort in and over a Monticello,

off of Route 250 just south of the exit there, the 250 exit off of 64.

It sold for $86,500 per room back in 2017, and we have the assessment at $117,654, a newer Hyatt product, which is, we believe,

Little more representative of the true value for that property as of 1-1, given the 2018 income and expenses.

We also had a sale for an older Hampton Inn.

It was in the city, just in the city over there in Albemarle Square on Route 29.

And it sold for $80,451 per room.

It's a 122 room Hampton Inn.

And it was built way back in 1986.

This is a

In my opinion, a far superior product.

It would be classified as an upscale property if you were looking at the Smith Travel Research.

Stuart, were the Fairfield Inn Marriott's, were those arm's length transactions, why are there two there?

I really don't know.

Okay.

Yeah, okay.

Yes sir, as far as I know, I did,

Did check with the city assessor.

Jeff Davis.

And also look those sales up in Co-Stars too.

That's pretty much all I have.

Just the sales support this.

The 2018 income and expenses support this value.

It's a newer property.

In fact, there were plans at least to build a Hyatt house over on one of the outpasses for Stonefield.

I guess that's where they had the farmer's market on the weekends.

They were gonna build a Hyatt house over there.

So to say that, and one thing that did stick out to me, I have to say that between the 2019 and 2018 expenses is that there was a, I believe it was a 9%

Overall increase in the expenses.

For any hotel property, that's a tremendous amount of increase in expenses, especially for a newer property like that.

I think at some point the owners have to look at management.

One question for the assessors.

With all these hotel ones you're using the income approach,

Do you always have you for the 2020 assessment?

Absolutely.

And it was the only thing available to us.

The whole year 2018 was the only thing available when we did the assessment prior to January 1, 2020.

You can come up with, after the fact, a 2019 full year statement, but it doesn't fit in basically the schedule of doing an assessment.

And I like to make a comment about that.

We have not analyzed any 2019 statements on any other properties, because now I think this is probably the only one we've actually seen.

because it was provided for this appeal.

It would be inappropriate, especially if the argument is not that this single property is having a problem, but that the region is having a problem because of those riots.

Really, you would think would affect all the hotels similarly.

We will.

We will.

But honestly, Mr. Poni has something very important.

The coronavirus especially is hitting hotels hard on more than probably any other property type.

And we are actually getting ready to send out our income letters where we're asking for the 2019 income as a baseline, but we're also asking for the 2020 first half of the year so that we can get an idea of the effect.

We can use 19 as a baseline

and then use 2020 to kind of figure out what was the effect of this.

And in a normal market, as you move forward, using that second year back, 2018 for the 2020 assessment is pretty standard and it's pretty steady.

and it provides pretty good results.

When something really dramatic like this coronavirus that's affecting, obviously it's not affecting Walmarts the same as it's affecting hotels, but it is affecting hotels, we're not denying that and we have to figure out a way to look at that.

Yeah, I would say that the shopping centers are affected just as much as the hotel.

Yes, we're done.

Yes, the figures that we're looking at, Mr. Grubb commented that, you know, we're, you know,

We're not bound to not look at the 2019 figures.

No.

I don't and yes you're not allowed to look at 2020 information because it's after the date of appraisal but you are allowed to look at 2019 so that's why I said it's I'd find it inappropriate not you can't do it but I don't think it's appropriate because looking at this one part run property

in comparison to the others, it would be totally off.

Can I make one point?

Yes.

He also sent in the 2017 income and expenses, and we fell very short on that.

So if we were to do that as well, we could go back and say, OK, let's rehash the 2018 value.

It should be closer towards $20 million if you were to use that figure.

So I'm trying to remember all this stuff, but let me write down.

So let's go back to the most recent comment, the 2017 value.

That's what we do.

I mean, we look at the most recent financials and I don't believe we appealed this property in 2017 because we thought, you know, based on the assessment of the financials, we don't have an appeal here.

We always use the most recent financials to determine whether or not we have an appeal.

So we're very consistent on what we do.

And I applaud the assessors for taking notice of the coronavirus for what they're going to do next year.

And what we're saying here is that under normal conditions, there's not this kind of fluctuation year to year where

It's such a problem for the assessors to use the 2018 financials.

But something happened in this market that affected the hotels.

Two things happened simultaneously at the same time.

One was the Charlottesville riots.

The other one was just the number of hotels that came online during that interim that is sharply reducing values.

And we're asking the board to say, we understand.

Why they use 2018?

Because they've got a calendar and they've got to get certain things done.

So we understand that.

But this is a special occasion because something happened here.

And also, we can't help thinking about the future.

This is not something this is not going to be a one off.

This thing is sliding.

and that's why we're asking the board to exercise its authority to look at the 2019 financials and we're requesting a further reduction than the reduction that the assessors are making.

Now to this comment that they use all three approaches to value, I hear this all over the commonwealth.

They don't really use all three approaches to value this property.

What they do is they use the income approach which is very appropriate.

You should use the income approach for income producing commercial real estate.

and then they sort of sanity check what they've done by looking at some sales and say yeah I think that's about right but and they didn't use the cost approach to value at all we don't pick on that at the at this level of appeal we will if we ever appeal this stuff to the circuit court but you know we sort of okay you know we sort of give them a pass on all that but they don't really do the sales comparison approach if they did that they'd have a grid and

and they'd have the adjustments they made to the grid to come up with that.

So they use the income approach, that's fine.

This is the, I just wanted to add one.

All right, so.

One quick comment about the income expenses.

This is the first year that they have sent in the income and expenses because this is the first time they have gone to a formal appeal.

Are you saying that we commonly- It's how it's been here.

Wilk Certis has appealed this property in the informal process.

All right, well we have to keep focus on what we're after.

I'm sorry, I see people were talking at once.

I was just kidding.

This is Bill Cromwell.

I told him I never sent in my numbers if I didn't have them in the field.

I was happy with the assessment.

So I'm not sure what that really discussion is.

I'd just like to move on with Peter on this idea about as we face this issue next year with the virus, I would ask for their financial statements early as you can.

And also it'd be helpful to have each give a star report and name their competitive set.

because I think that's going to be really, really important.

I've got some other ideas about that we need to discuss, but on page three of the appeal package, we've got a star report that's only through half a year.

So I see that the mark is down a little bit.

I just thought the report should not have been dated as of July.

It should have been the year end.

It would have been very helpful had you done that if you had identified your competitive set, because everybody can choose their competitive set.

Okay, I'll keep that in mind in the future.

I can't think of any reason offhand that I didn't use the year-end.

I think I just used what I had.

I don't know.

Mr. Van Roijen.

Yeah, what I'm going to do is I'm just going to have to physically go in and check the seven entries that I made against the seven entries from the financial.

It's kind of hard for me to do that when I'm arguing an appeal, but I will do that.

And I'll check to make sure that that math is correct.

Okay, and Mr. Van Roijen.

Very good.

Very good.

Okay, well, thank you very much for taking your time.

I know this actually went on longer than I thought it would, but I certainly appreciate it and so do my clients.

Thank you, Mr. Brody.

Thank you.

Yes.

That would be great.

So we're going to take a couple minutes.

him or her though?

They're having a break.

I turned chat off for the attendees.

That's right.

They can hear you.

Oh, they can hear?

OK. Well, then they should know that we're taking a couple of minutes.

OK.

So you've been Mr. Van Roijen.

I'm out here on the farm.

Yeah, down my way, it's been really bad.

I've got many nursing homes nearby where I live and the hundreds and hundreds of bodies have left.

So it's not been good.

You all have been very blessed in this area.

I mean, nursing homes here have not

I think to some extent, a lot of the outbreaks are due to

The appreciation that people have of what they read in the paper or the news that they get about how serious things are.

And I think some people don't read the paper.

Some people don't listen to the news.

Billy, are you there?

I'm sorry, did I miss it?

Did Peter say there was a reason that we had three appeals in a two-hour period instead of a three-hour period?

You know that, Stuart?

Well, that's five in four hours.

So it was... Yeah, that's rushing for you.

No, I'm just wondering, I mean, typically that would have been three hours, those three...

Because of the two that were identical, and we expected those to be half an hour for the first one and five minutes for the second.

The second one has been very quick, just like it today.

It's basically the same argument.

I have this one thing to add.

OK. Do we think?

All right.

I'm just thinking.

I mean, I'm on a time limit.

This is supposed to end at 5.

So I don't know if we're going to.

Possibly on Tuesday.

So Tuesday's schedule has changed.

I'm not sure exactly what it is.

I know one of the, the gentleman with two properties, Mr. Hedges, I think he was maybe during the second hour, 10 o'clock.

He's 10 o'clock.

He's pulled out.

He has pulled out.

We resolved his assessment.

An inspection and we changed his value based on what we found.

So, but Billy,

I'm sorry actually we have a tentative time set for that time and I'm waiting for the homeowner to respond back about the 10 o'clock vacancy on Tuesday.

I think in general, personally, even if we think these things might go quickly, it makes sense to do one per hour, and that gives us time to discuss them and not feel rushed.

But that would just be my suggestion.

Sounds good to me.

I was just going to make the likelihood of me attending Tuesday or Thursday is a lot less since I was able to attend today, given

Bring her in.

Hi, how are you?

This is Jay Adams with Marvin F4.

Jay Adams?

Mr. Adams, thank you for coming.

Thank you for having me.

This is your friendly Board of Equalization.

We represent various districts in the county and we're here to hear your appeal.

We will hear you first.

Then Mr. Lynch, staff will comment and thereafter we will discuss and give you a written

Determination within two weeks, I believe.

Thank you.

Yes, I am, David.

Thank you.

So the property I'm here to discuss today is the DoubleTree Hotel at 990 Hilton Heights in Charlottesville.

It's a 235 key property built in 1984.

As you see, the current assessment is 13,381,600.

We're asking for a value of 11,274,660.

And so the,

To kind of summarize our main issue here is that the property's performance has been steadily decreasing.

And we just kind of, in our appeal packet here, we want to highlight some of the reasons that supported that decline in performance.

And as you know,

The upscale market in Charlottesville has been struggling in part due to negative media attention due to different rallies as of recent and things like that.

And of course, with today's pandemic,

For what we see now, the performance is indicative of how we foresee it performing going forward, at least in the immediate future.

So just looking at the model on page four here, you'll see the ADR, the studded property, dropped for the past three years from 119 to 113 in 2019.

Now for our model, we use the stabilized ADR 118, which is supported by the star report.

So we did use that conservative figure relative to the actual performance of the property.

Also the subjects down 3.6% to the competitive set at 9.9% year over year.

Let's see here.

The occupancy dropped the past three years from 70% to 65% in 2019, and is in line with the competitive set of 63.5%.

And you'll be able to see in a packet later on that while the occupancy is down, the ADR is also

slightly lower than average.

So the owner's trying to get that occupancy up with the lower ADR there.

And as you see here, the effective gross income in the model is 311, 442.

which is higher than the actual income generated in 2019 but it's similar to what the assessor is using for their stabilized income and the difference in the valuation is essentially the expenses and we use the actual expenses but if you look at the expense ratio while the expense ratio

climbed up to 91%.

You'll see also, conversely, the effective gross income came down.

So the expenses pretty much stayed consistent the past three years, despite the expense ratio rising with the effective gross income coming down.

And with that said, that brings us to our value of 11 million to 74.

It seems to me we've examined the double tree in the past.

And they've made a lot of capital improvements or upgrades over the last several years.

Yes, we have.

And we have included that in the packet as well.

One paid the CapEx on

page 11 of the packet.

And while there was a reduction last year, unfortunately, the income just supports still a lower valuation.

And again, with the

In the foreseeable future, we expect the performance that's currently taking place to, if not be consistent, if not decreased to be consistent.

Forgive me, the CapEx says January 2021 through December 2021, is that correct?

I think the question was, there had been a lot of improvements over the past years, wasn't that right, David?

Yeah, and there have been improvements there.

Jay, let me ask you this.

I do, unfortunately, I do not have that information at hand, but I can see.

Have you been to the hotel?

Somewhere from my office has been to the hotel.

In terms of improvements, I do not have that.

Let me see it.

Here's one thing.

I went onto the website yesterday and I ran across quite a bit.

The hotel, I don't know if you all can see that, now has 239 rooms.

That's per the website.

We were assessing it at 235 and so was Jay.

So I need to confirm that a little better with management and hopefully that'll show up in the future in the income and expenses.

Here's something else.

This came from the website as well.

I know this is black and white, but

Still this, they did a complete remodel inside.

They spent one, they had a building permit for $1.1 million, I believe it was $1.1 million or something.

They spent quite a bit of money, yes, it was one point, I'm sorry, one point, almost $1.6 million.

They replaced the elevators and they also did a tenant outfit, a gut of the, all the common areas.

Jay, they also did interior wise, they did a complete outfit for all the rooms.

They replaced the carpets, they replaced the soft goods, the bedding, and some of the furniture.

And they did that floor by floor.

And so that had some type of effect on the 2019 income as well.

One thing that I find very,

I guess, troubling about the Doubletree is that the expenses keep going up and up and up and up.

Since when I started here back in 2016, they appealed the 2017 assessment and it was back then it was right at 80% and I believe that was high for a typical hotel expense for this.

This age should be about maybe 75%, right in there 75, 76%.

when you look at Smith Travel.

However, this is now up to 91%.

They may need to take a look at their inside financials here just to see what's going wrong.

Stuart, do you want to go through our analysis?

In a way, that was a good start.

Here's another thing that I did pick up on, Jay, on your page four, just looking at your numbers yesterday.

If you go down on the 2018 income and expenses, you show that the taxes were 181,326.

When I looked at the 2018 assessment, it was $15,941,100.

and the tax rate back then in 2018 was .00839 for 100 and you multiply that out, I know this is terrible again but this is COVID, it comes out to $133,742.

I believe that's right, it's backwards, 745, 745.

So if you then add in the personal property,

He doubled, what I'm saying is he double counted some taxes here.

When you look at the personal property, he's adding in 181,326, which is the correct number if you include the personal property and the real estate taxes.

And then up top, you're counting 24,139, but that's only for one half of the year.