Property Tax/Locally Assessed
BEFORE THE UTAH STATE TAX COMMISSION
) FINDINGS OF FACT, CONCLUSIONS
PETITIONER, ) OF LAW, AND FINAL DECISION
Petitioner, ) Appeal No. 01-0457
) Tax Type: Property Tax/Locally Assessed
BOARD OF EQUALIZATION OF ) Personal Property
COUNTY COUNTY, ) Tax Year: 2000
STATE OF UTAH, )
) Judge: Phan
R. Bruce Johnson, Commissioner
Marc. B. Johnson, Commissioner
Jane Phan, Administrative Law Judge
For Petitioner: PETITIONER REP, Esq.
For Respondent: RESPONDENT REP, Deputy COUNTY County Attorney
STATEMENT OF THE CASE
This matter came before the Utah State Tax Commission for a Formal Hearing on March 5, 2002. The parties submitted post hearing briefs in this matter on April 4 and April 5, 2002. In addition Petitioner submitted a Reply Memorandum and Motion for Leave to File with the Commission. The Motion for Leave is hereby granted and the Reply Memorandum accepted in this matter.
Based upon the evidence and testimony presented at the hearing and the arguments of the parties, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. Petitioner is appealing Respondent's valuation of the subject personal property for property tax purposes.
2. The year in question is 2000, with the lien date at issue of January 1, 2000.
3. The subject personal property is a 56' high 160" diameter, plasma-fired EQUIPMENT together with a number of support systems and subsystems including furnaces, building, cranes and conveyors, designed to melt scrap steel to produce molten "hot metal" suitable for further purification and processing into finished steel ("EQUIPMENT").
4. The Utah County Assessor initially valued the subject property at $$$$$ as of the lien date in question. This valuation was based on the Personal Property Valuation Guides adopted by the Property Tax Division of the Utah State Tax Commission in Utah Admin. Rules R884-2P-33.E. In determining the value in reliance on the rule the COUNTY County Assessor had applied the "percent good" factor specified in the rule to the acquisition cost.
5. The COUNTY County Board of Equalization reduced the value to $$$$$. This was based on an income method using a lease agreement between PETITIONER ("PETITIONER") and COMPANY A ("COMPANY A") and an 18% capitalization rate.
6. The actual steel shell of the EQUIPMENT vessel, which is in the shape of tapered hollow column, was purchased in 1996 for $$$$$. Then it was shipped to Utah and installed on the COMPANY B ("COMPANY B") plant grounds in CITY, Utah, where the support systems and subsystems were installed, for a total cost of approximately $$$$$. In a financing arrangement, COMPANY B purchased the EQUIPMENT and leased it to PETITIONER. PETITIONER in turn leased it to COMPANY B. For COMPANY B the purposes of acquiring the sub-lessee interest in the EQUIPMENT were to provide increased capacity when demands were such that the capacity from the blast furnaces were insufficient, and to provide a back up to the blast furnaces when they were down for maintenance or other reasons. Production costs were higher using the EQUIPMENT rather than the blast furnaces and the EQUIPMENT was not intended to replace the blast furnaces.
7. COMPANY B leased the EQUIPMENT from PETITIONER B from the time of its installation in December 1995 until the COMPANY A-PETITIONER lease was rejected by the bankruptcy Court in COMPANY B's Chapter 11 bankruptcy proceeding on DATE, 2000. However, COMPANY B had stopped using the subject property by DATE 1997. In addition COMPANY A has paid no lease payments to PETITIONER since DATE 1998.
8. PETITIONER is, in turn, the lessee of the EQUIPMENT under a "head lease" with COMPANY A and is currently responsible for any personal property taxes that are assessed on the EQUPMENT. This lease was entered into on DATE, 1996. COMPANY A is the owner of the EQUIPMENT. The sole purpose for COMPANY A to purchase the EQUIPMENT was to receive the income stream from PETITIONER in the form of rental payments. COMPANY A never intended to operate the EQUIPMENT. PETITIONER is required to make the lease payments to COMPANY A whether or not the EQUIPMENT is operated, whether or not the EQUIPMENT is generating a profit to the lessee, PETITIONER, and whether or not the EQUIPMENT is generating a profit to the sub-lessee, COMPANY B. The lease rate that PETITIONER pays to COMPANY A is approximately $$$$$ per year. Under the terms, PETITIONER can buy out the lease in 2005 for $$$$$. PETITIONER cannot, without reason, prohibit an assignment of the EQUIPMENT Lease by the owner, COMPANY A, to another buyer. (Exhibit R-13 page 39.)
9. The income stream from PETIONER to COMPANY A is clearly a contractual financing arrangement unrelated to the underlying value of the EQUIPMENT, and is instead related to the credit of PETITIONER. It is similar to an annuity or other financial instrument that generates a cash flow. The income stream from PETITIONER to COMPANY A is not associated with the value of the EQUIPMENT as of the lien date. (Exhibit G-1 Page 13, lines 3-6)
10. As of the date of the lease between PETITIONER and COMPANY A, DATE, 1996, PETITIONER would have had some understanding of the production capacity since the EQUIPMENT had been operated sporadically from DATE 1995.
11. The EQUIPMENT produced varying amounts of end-product during parts of several months beginning DATE 1995. Ex.G-9. It operated about 130 days out of 625 until it was finally shut down DATE, 1997. The original design criterion for the EQUIPMENT was an output of 2,600 tons per day, a level that was not reached. The maximum output of about 50% of design levels was attained for only a few of the days the EQUIPMENT was operated.
12. From the information provided by the parties, COMPANY B ceased operation of the EQUIPMENT because of the high cost of production in relation to the low price of steel and that the EQUIPMENT did not meet the design levels of production. Prior to the lien date steel prices had fallen to the point that it would cost more to produce steel in the EQUIPMENT than the market price of the steel. In addition, it was much more complicated than anticipated to start and stop EQUIPMENT production as demand dictated because the EQUIPMENT was difficult to operate.
13. On DATE, 1999, COMPANY B filed for protection under Chapter 11 of the U.S. Bankruptcy Code. As of the January 1, 2000, lien date a prospective buyer of the EQUIPMENT would be aware that there was the possibility that the COMPANY B-PETITIONER lease would be rejected by the bankruptcy court. In fact, on DATE, 2000, the lease was rejected by the Bankruptcy Court and it was clear that there was no role for the EQUIPMENT in any business plan involving COMPANY B.
14. The EQUIPMENT can not economically operate separate in distance from either a steel plant or some further processing facility. The hot liquid iron produced from the EQUIPMENT goes into a secondary steel-making machine, the "EQUIPMENT 2," to produce molten steel. This molten steel is then cast to form products like coil, plate, pipe and slab. Since the only steel plant in the immediate vicinity is COMPANY B, if the EQUIPMENT is not operated by COMPANY B, the most likely scenario for a purchaser of the separate EQUIPMENT who intended to use the EQUIPMENT as designed would be to relocate the EQUIPMENT. However, the costs to disassemble, transport and reassemble the EQUIPMENT are substantial.
15. It was Petitioner's position that the market value of the EQUIPMENT as of the lien date at issue was $$$$$. This is what value could be obtained from some portions of the subject property as salvage and some portions as scrap. In support of this value request, Petitioner submitted an appraisal prepared by NAME, a Managing Director of FIRM and a Senior Member of the ASSOCIATION. NAME has extensive experience in the valuation and analysis of steel manufacturing equipment. NAME conducted a complete analysis of the fair market value of the EQUIPMENT and concluded, "as a result of economic obsolescence, there exists (a) no identifiable, economic use for the EQUIPMENT as it currently is sited and configured, and (b) no identifiable market for purchase, disassembly, transportation, reassembly and refurbishment off-site, either domestically or internationally." (Ex.G-1, at 5.) NAME's appraisal conclusion was that there was no buyer for this property as an operating unit and the only potential buyers were for scrap and salvage. At most, there would be willing buyers to pay fair market value for some parts of the facility like the cranes and subsystems as well as some scrap materials contained in the facility. (Ex. G-3A)
16. In his appraisal NAME considered the three approaches to value: income; market; and cost. However, it was his conclusion that the market and income approaches were the only methods by which a direct value could be derived. He concluded that the value from the market approach was $$$$$ and from the income approach $$$$$. In his reconciliation he gave the market approach the most weight for an overall value of $$$$$ which was a scrap and salvage value.
a. In his income approach NAME concluded that there was a limited potential for the EQUIPMENT to generate income if it was converted to a new technology referred to as the EQUIPMENT 3 Method. If converted to this method it was possible that the EQUIPMENT could produce a product with a positive cash flow. In his approach NAME was not considering the rental income generated from the subject property, but the actual income which could be generated from the use of the subject property. However, it was his conclusion that the feasibility of the modification on-site had a very low probability of success and he gave more weight to the value for the subject property generated from the market approach.
b. In his market approach, NAME looked at the supply and demand of PRODUCT melting equipment and the market in general as well as the specific nature of the unique characteristics of the subject EQUIPMENT that might affect marketability.
i. Considering the market in general, he noted that since the early 1980's the number of foundries in operation have diminished and the number of blast furnaces in use have also declined during this same period. He did not have specific data concerning EQUIPMENT but speculated that there also had been a similar reduction in the number of operating EQUIPMENT. Based on the market research, NAME concluded that the market for large foundry equipment was very thin and that the market for EQUIPMENT was extremely thin if not altogether nonexistent. He notes that most EQUIPMENT, even smaller ones, remain their entire service life in the original setting. The only sale that any of the parties presented of a EQUIPMENT which was purchased to be moved to a different location, was PETITIONER/COMPANY B's purchase of the subject's EQUIPMENT vessel for $$$$$ from COMPANY C.
ii. There are some features unique to the subject EQUIPMENT which reduce its marketability. It is one of the largest EQUIPMENT in the world, if not the largest. The size would be detrimental to many smaller operations because of the disproportionate excess energy costs. A second factor is that when the original COMPANY C EQUIPMENT was moved to the COMPANY B factory it was modified to fit the function desired by COMPANY B. This function is more specific to COMPANY B's single purpose use and may not suit other operations. In addition, the plasma torches added by COMPANY B utilize certain proprietary technology licensed by COMPANY D which may restrict the exportation of the subject property limiting the international marketability of the subject EQUIPMENT.
***c. In the cost approach NAME estimated the cost new to replace the EQUIPMENT at $$$$$. However, he concluded that there was some $$$$$ attributable to economic, functional and physical obsolescence that should be deducted from the cost new. It was his determination that the cost approach was not appropriate for valuation of "abandoned-in-place property" such as the subject property.
17. In addition to the appraisal submitted by NAME, Petitioner submitted a Valuation of the EQUIPMENT at Geneva Steel prepared by COMPANY E ("COMPANY E") It was COMPANY E's conclusion that the EQUIPMENT could not operate efficiently or at all unless a significant capital expenditure was made and it recommended that the EQUIPMENT not be operated. They also concluded that the value of the EQUIPMENT was the value of the equipment and components that would be sold individually.
18. NAME 2 had also performed an appraisal for the COMPANY B Bankruptcy proceeding. In testimony he presented in that proceeding he presented a valuation of the EQUIPMENT if sold to an off-site buyer. It was his value conclusion that for an off-site buyer the valuation of the EQUIPMENT was $$$$$.
19. Respondent submitted an appraisal prepared by NAME 3 and NAME 4, Deputy County Assessors who are certified appraisers in the state of Utah. In the appraisal NAME 3 and NAME 4 considered a cost, market and income approach to value and made a final value determination of $$$$$, as of the lien date January 1, 2000. The value they derived from the Income Approach was $$$$$, from the Market Approach $$$$$ and from the cost approach $$$$$.
a. In the income approach, Respondent's appraisers relied on an discounted cash flow analysis based on the rental income stream received by COMPANY A from PETITIONER. Using a 12% rate and the approximately $$$$$ payment per year resulted in value of $$$$$. It was their opinion that the risk associated with the future income flow to COMPANY A from PETITIONER was minimal as PETITIONER has investment grade credit. They rely on the fact that COMPANY A is the owner of the subject EQUIPMENT and argue that the lease produces income to the owner from the subject property. Interestingly, Respondent's appraisers gave no consideration to the second lease for the subject property, the lease between COMPANY B and PETITIONER. COMPANY B had originally entered into this lease with the intent to use the subject property in its steel manufacturing, so this lease is directly related to the EQUIPMENT.
b. The value NAME 3 and NAME 4 derived from the market approach was $$$$$. They gave this approach little weight, however, because they felt that there was insufficient market data to support this approach. They indicated that this approach is reliable for property types that are bought and sold regularly in the market. Respondent's appraisers note that this is a "special-purpose" type of property. They were unable to find any comparable sales of EQUIPMENT. The $$$$$ came from PETITIONER and COMPANY B's purchase of the subject property in 1996. c. The value that NAME 3 and NAME 4 derived from the cost approach was $$$$$. It was their opinion that the cost approach was the only reasonable and reliable indicator of value for the subject property. They note that the EQUIPMENT is new or nearly new, pointing out that according to NAME 2's testimony in the bankruptcy proceeding that the EQUIPMENT was almost unused. They also note that it is a special-use property which is not frequently exchanged in the market and there is a lack of market sales. They determined that the cost new of the EQUIPMENT is $$$$$. In determining the cost new, Respondent's appraisers rely on the original cost to construct the EQUIPMENT at its present site including the purchase of the EQUIPMENT vessel for $$$$$ and costs to dismantle, ship and install it along with other items that comprise the EQUIPMENT. From this they subtracted their estimated depreciation. They allowed physical depreciation of $$$$$, noting that the EQUIPMENT was hardly used. They allowed 21% or $$$$$ for external depreciation. They based this amount on the difference between the market price of steel, $$$$$ per ton according an American Metals market report dated DATE 1998, and the actual cost to produce steel from a EQUIPMENT of $$$$$ per ton. They used the differences between the price of steel and the EQUIPMENT's cost to produce to determine the 21% obsolescence factor.
20. It is the Commission's conclusion from review of Respondent's appraisal, that it fails to consider the true obsolescence of the EQUIPMENT and overstates the value. While relying on one lease in determining the income approach value the Respondent ignores a second lease, and the default thereof, which is more relevant to the value of the EQUIPMENT. COMPANY B had entered into the lease with PETITIONER with the intent to use the EQUIPMENT in its operations. However, by DATE, 1997, COMPANY B ceased using the EQUIPMENT and COMPANY B defaulted in its lease payments to PETITIONER more than one year prior to the lien date. The evidence indicated that there was almost no possibility of PETITIONER finding a new sublessee who would rent the EQUIPMENT in place as of the lien date. In addition, as of the lien date, neither PETITIONER nor any other party would have entered into the lease obligation to pay $$$$$ per year to COMPANY A for the EQUIPMENT. The PETITIONER/COMPANY A lease is a financing arrangement that was entered prior to the EQUIPMENT becoming obsolete and is irrelevant to the value of the EQUIPMENT on the lien date. In addition, Respondent's method of determining obsolescence in the cost approach does not fairly reflect the obsolete nature of the subject property. The fact that it cost 21% more to produce the steel in the EQUIPMENT than the market price of the steel tends to support a much more significant obsolescence.
21. The EQUIPMENT was insured for $$$$$, for the period of time from DATE, 2001 through DATE, 2002. However, the amount of the insurance was specified in the lease between PETITIONER and COMPANY A.
22. From review of the evidence presented at the hearing it is the Commission's conclusion that the EQUIPMENT is economically and functionally obsolete. Further, the Commission concludes that Petitioner is correct in its position that the only market value of the EQUIPMENT is the scrap or salvage value which can be obtained from selling separately any marketable parts.
1. The Tax Commission is required to oversee the just administration of property taxes to ensure that property is valued for tax purposes according to fair market value. Utah Code Ann. '59-1-210(7).
2. All tangible taxable property shall be assessed and taxed at a uniform and equal rate on the basis of its fair market value, as valued on January 1, unless otherwise provided by law. Utah Code Ann. '59-2-103 (1).
3. "Fair market value" means the amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. For purposes of taxation, "fair market value" shall be determined using the current zoning laws applicable to the property in question, except in cases where there is a reasonable probability of a change in the zoning laws affecting that property in the tax year in question and the change would have an appreciable influence upon the value.
In requesting a value of $$$$$, Respondent's relies heavily on PETITIONER/COMPANY A lease arrangement and ignores the defaulted PETITIONER/COMPANY B lease agreement, as well as the fact that on the lien date neither the lessee PETITIONER or the sublessee COMPANY B would have entered into their respective lease arrangements. In fact, the evidence indicates that there would be no other party willing to be the lessee or sublessee of either of these agreements because the EQUIPMENT was obsolete. As noted in the findings the Commission finds that the PETITIOENR/COMPANY A lease arrangement is not relevant for determining the value of the subject property on the lien date. It is a financing arrangement not related to the value of the EQUIPMENT and that as of the lien date, PETITIONER would not have entered into the arrangement. In addition, although in their appraisal they call it a cost, market and income approach to value, Respondent's appraisers were relying on the original cost to build the EQUIPMENT at its current site and the purchase and lease financing arrangements of the same transaction for all three approaches to value.
The Commission concludes from the evidence submitted that the obsolescence is both functional and economical. The EQUIPMENT never did function as intended because it did not meet production expectations, it would take retooling to work at all at this point, and it is too large and too specialized for most other operations. In addition the EQUIPMENT can not function economically separate from a steel mill. In looking at the external obsolescence factors, the only steel mill in the nearby vicinity has no intention of operating the EQUIPMENT in the foreseeable future and the costs of moving the EQUIPMENT are prohibitive. Additionally, the price of steel is lower than the cost to produce it in the EQUIPMENT. Although the price of steel could change at some unforseen date the other obsolescence factors would still be present. As of the lien date at issue the EQUIPMENT was obsolete and the Commission agrees with NAME that the highest and best use for the EQUIPMENT was for scrap and salvage. The best evidence submitted at the hearing of the scrap and salvage value of the EQUIPMENT was $$$$$.
The statutes require that property is assessed and taxed at a uniform and equal rate on the basis of its fair market value, on the January 1, lien date. Utah Code Ann. '59-2-103 (1). "Fair market value" means the amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of he relevant facts. Utah Code Ann. '59-2-102 (12). "Fair market value" is not necessarily the value to the owner of the property from a contractual financing arrangement which may, in fact, be an intangible. "Fair market value" is the probable sales price if this property were to be sold on the lien date. The weight of the evidence presented in this hearing is that no one would purchase the EQUIPMENT independently from the associated steel plant, except for scrap and salvage. Moreover, even if some other company were to buy all of COMPANY B, there is no evidence to indicate that such a purchaser would attribute any value to the EQUIPMENT. The evidence presented indicates to the Commission that even in this scenario a new purchaser of COMPANY B would find the EQUIPMENT to have no more than a scrap and salvage value.
CONCLUSIONS OF LAW
The evidence presented at the hearing establishes a "fair market value" for the subject property of $$$$$. The property tax assessment must be based on the "fair market value."
DECISION AND ORDER
Based upon the foregoing, the Tax Commission finds that the market value of the subject property as of January 1, 2000, is $$$$$. The County Auditor is ordered to adjust the assessment records as appropriate in compliance with this order.
DATED this 28th day of June , 2002.
Administrative Law Judge
BY ORDER OF THE UTAH STATE TAX COMMISSION:
The Commission has reviewed this case and the undersigned concur in this decision.
DATED this 28th day of June , 2002.
Pam Hendrickson R. Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc B. Johnson