In re: Ashley Furniture Indus.

IN THE COURT OF APPEALS OF NORTH CAROLINA

No. COA23-969

Filed 16 July 2024

Property Tax Commission, No. 19 PTC 0358

IN THE MATTER OF THE APPEAL OF:

ASHLEY FURNITURE INDUSTRIES, INC, Appellant,

From the decision of the Davie County Board of Equalization and Review concerning

the valuation of certain property for tax years 2018 and 2019.

Appeal by Ashley Furniture Industries, Inc., from final decision entered 24

March 2023 by the North Carolina Property Tax Commission sitting as the State

Board of Equalization and Review. Heard in the Court of Appeals 30 April 2024.

Maynard Nexsen PC, by David P. Ferrell, Janet L. Shires, and George T. Smith,

for Appellant Ashley Furniture Industries, Inc.

Parker Poe Adams & Bernstein LLP, by Collier R. Marsh and Charles C.

Meeker, for Appellee Davie County.

COLLINS, Judge.

Ashley Furniture Industries, Inc., (“Ashley”) appeals from a final decision of

the North Carolina Property Tax Commission (“Commission”) valuing certain

property for tax years 2018 and 2019. Ashley argues that the Commission erred by

using the income approach to value the property or, in the alternative, erroneously

applied the income approach. Ashley also argues that the Commission erroneously

applied the cost approach. We affirm the Commission’s final decision.

IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

I. Background

Ashley purchased an approximately 310-acre parcel of land in Davie County

(“Subject Property”) in 2012. At the time of the purchase, the Subject Property

contained: (1) an approximately 435,000 square-foot primary building; (2) an

approximately 81,000 square-foot bedding facility; (3) an approximately 17,000

square-foot truck facility; (4) 32 detached sheds, each approximately 37,000 square

feet; (5) an approximately 1,180 square-foot welcome center; and (6) two pump

houses, totaling approximately 2,800 square feet. Ashley expanded the primary

building by approximately 1,120,000 square feet and renovated two sheds between

2012 and 2017. In 2018, Ashley expanded the truck facility by approximately 5,100

square feet.

In 2017, Davie County reassessed the Subject Property as part of its general

reassessment. At that time, the assessment increased from $70,851,550 to

$87,836,890. Ashley did not appeal the 2017 assessment. The Subject Property was

again assessed at $87,836,890 in 2018. By letter dated 21 May 2018, Ashley appealed

the 2018 assessment to the Davie County Board of Equalization and Review (“Board”)

and requested that the County reduce the Subject Property’s value to $59,981,700.

In support of its request, Ashley stated, among other things, that “[a]s of January

2017, the proeprty (sic) only underwent new construction and renovations at a total

cost of $51,328,890 post a $10M acquisition.” The Subject Property was again

assessed at $87,836,890 in 2019, and Ashley appealed. The matter was heard by the

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

Board on 30 July 2019, at which point the assessments for both 2018 and 2019 were

considered.

The Board issued a decision valuing the Subject Property at $69,454,448 for

2018 and a separate decision valuing the Subject Property at $69,550,441 for 2019 to

account for the truck facility expansion. Ashley appealed those decisions to the North

Carolina Property Tax Commission (“Commission”). In its notices of appeal, Ashley

valued the Subject Property at $29,500,000 for 2018 and $30,000,000 for 2019 and

alleged that the Board “employed an arbitrary and/or illegal method of appraisal in

reaching the assessed value that the [Board] assigned to the subject property for the

year[s] at issue” and “assigned a value to the subject property that substantially

exceeded its true value in money as of January 1 for the year[s] at issue[.]”

The matter came on for hearing before the Commission on 13 December 2022.

Ashley submitted an appraisal report prepared by Richard Marchitelli, a certified

general real estate appraiser for Cushman & Wakefield and a Member of the

Appraisal Institute, Counselor of Real Estate, and Fellow of the Royal Institution of

Chartered Surveyors. For his appraisal, Marchitelli divided the property into two

sub-elements: Unit B comprised the 30 unrenovated sheds, and Unit A comprised the

remainder of the Subject Property. Marchitelli concluded that “the sales comparison

approach is the only applicable approach in developing a credible value opinion for

Economic Unit A” and, using this approach, appraised Unit A at $30,530,000 in 2018

and $30,620,000 in 2019. Marchitelli appraised Unit B at $3,760,000 in 2018 and

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

2019 using the cost approach. Accordingly, Marchitelli opined that the true value of

the Subject Property was $34,290,000 for 2018 and $34,380,000 for 2019.

The County submitted an appraisal report prepared by Richard Brant, a

certified general real estate appraiser for the Loftis Appraisal Company and a

Member of the Appraisal Institute. Brant divided the Subject Property into the

following sub-elements: (1) primary building; (2) bedding facility; (3) truck facility;

(4) sheds; (5) welcome center; and (6) pump houses. Brant appraised each

sub-element using all three methods of valuation: the income approach, the cost

approach, and the sales comparison approach. He then combined the appraised value

of the sub-elements to derive an appraisal for the Subject Property for each method

of valuation. Brant opined that the true value of the Subject Property for 2018 was:

(1) $69,449,949 using the income approach; (2) $69,476,426 using the cost approach;

and (3) $74,237,952 using the sales comparison approach. Placing “only limited

weight” on the income approach, “very little weight” on the cost approach, and

“[c]onsiderable weight” on the sales comparison approach, Brant reconciled the three

values for a final opinion of value of $72,000,000 for 2018. Brant opined that the true

value of the Subject Property for 2019 was: (1) $70,907,906 using the income

approach; (2) $70,848,069 using the cost approach; and (3) $75,313,272 using the

sales comparison approach. Placing the “greatest weight” on the sales comparison

approach, Brant reconciled the three values for a final opinion of value of $73,200,000

for 2019.

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

The Commission entered a final decision on 24 March 2023 valuing the Subject

Property at $60,000,000 for 2018 and $60,100,000 for 2019. Ashley appealed.

II. Discussion

Ashley argues that the Commission erred by using the income approach to

value the Subject Property (excluding the sheds) or, in the alternative, erroneously

applied the income approach. Ashley also argues that the Commission erroneously

applied the cost approach to value the Subject Property, excluding the sheds. Ashley

does not argue that the Commission erred by using the cost approach to value the

sheds, nor does it argue that the Commission erred in its application of the cost

approach to the sheds.

When reviewing decisions of the Commission, this Court

may affirm or reverse the decision of the Commission,

declare the decision null and void, or remand the case for

further proceedings; or it may reverse or modify the

decision if the substantial rights of the appellants have

been prejudiced because the Commission’s findings,

inferences, conclusions, or decisions are any of the

following:

(1) In violation of constitutional provisions.

(2) In excess of statutory authority or jurisdiction of

the Commission.

(3) Made upon unlawful proceedings.

(4) Affected by other errors of law.

(5) Unsupported by competent, material, and

substantial evidence in view of the entire record as

submitted.

(6) Arbitrary or capricious.

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

N.C. Gen. Stat. § 105-345.2(b) (2023).

Our Supreme Court has noted that “[a]n act is arbitrary when it is done

without adequate determining principle[.]” In re Hous. Auth. of Salisbury, 235 N.C.

463, 468, 70 S.E.2d 500, 503 (1952). Moreover, “[a]n act is capricious when it is done

without reason, in a whimsical manner, implying either a lack of understanding of or

a disregard for the surrounding facts and settled controlling principles.” Id. (citations

omitted). “In short, when these terms are applied to discretionary acts, such as the

determinations of the Commission, they ordinarily denote abuse of discretion, though

they do not signify nor necessarily imply bad faith.” In re Parkdale Mills, 225 N.C.

App. 713, 715, 741 S.E.2d 416, 419 (2013) (quotation marks and citations omitted).

“Determination of whether conduct is arbitrary and capricious or an abuse of

discretion is a conclusion of law.” Id. (quotation marks and citations omitted).

We review a decision of the Commission under the whole record test to

determine whether the decision has a rational basis in the evidence. In re Parkdale

Am., 212 N.C. App. 192, 194, 710 S.E.2d 449, 450 (2011). The whole record test “does

not allow the reviewing court to replace the Commission’s judgment as between two

reasonably conflicting views, even though the court could justifiably have reached a

different result had the matter been before it de novo.” In re Parkdale Mills, 225 N.C.

App. at 716, 741 S.E.2d at 419 (brackets omitted). Rather, the whole record test

“requires the court, in determining the substantiality of evidence supporting the

Commission’s decision, to take into account whatever in the record fairly detracts

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

from the weight of the Commission’s evidence.” Id. (brackets omitted). “If the

Commission’s decision, considered in the light of the foregoing rules, is supported by

substantial evidence, it cannot be overturned.” In re Philip Morris U.S.A., 130 N.C.

App. 529, 533, 503 S.E.2d 679, 682 (1998) (citations omitted).

“It is presumed that ad valorem tax assessments are correct and that the tax

assessors acted in good faith in reaching a valid decision.” In re Owens, 144 N.C. App.

349, 352, 547 S.E.2d 827, 829 (2001) (citation omitted). “This presumption may be

rebutted by material, substantial, and competent evidence that an arbitrary or illegal

method of valuation was used and the assessment substantially exceeded the true

value in money of the property.” In re Philip Morris U.S.A., 130 N.C. App. at 533,

503 S.E.2d at 682 (citations omitted). “Once a taxpayer produces sufficient

competent, material and substantial evidence to rebut the presumption of

correctness, the burden of proof then shifts to the taxing authority and the taxing

authority must demonstrate its methods produce true value.” In re Blue Ridge Mall

LLC, 214 N.C. App. 263, 267, 713 S.E.2d 779, 782 (2011) (citation omitted). “To

determine the appropriate appraisal methodology under the given circumstances, the

Commission must hear the evidence of both sides, to determine its weight and

sufficiency and the credibility of witnesses, to draw inferences, and to appraise

conflicting and circumstantial evidence, all in order to determine whether the

Department met its burden.” In re Parkdale Mills, 225 N.C. App. at 717, 741 S.E.2d

at 420 (quotation marks and citations omitted).

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

“All property, real and personal, shall as far as practicable be appraised or

valued at its true value in money.” N.C. Gen. Stat. § 105-283 (2023). When used in

this context, true value

shall be interpreted as meaning market value, that is, the

price estimated in terms of money at which the property

would change hands between a willing and financially able

buyer and a willing seller, neither being under any

compulsion to buy or to sell and both having reasonable

knowledge of all the uses to which the property is adapted

and for which it is capable of being used.

Id.

N.C. Gen. Stat. § 105-317 governs appraisals of real property and provides that

persons making appraisals have the following duties:

(1) In determining the true value of land, to consider as to

each tract, parcel, or lot separately listed at least its

advantages and disadvantages as to location; zoning;

quality of soil; waterpower; water privileges; dedication as

a nature preserve; conservation or preservation

agreements; mineral, quarry, or other valuable deposits;

fertility; adaptability for agricultural, timber-producing,

commercial, industrial, or other uses; past income;

probable future income; and any other factors that may

affect its value . . . .

(2) In determining the true value of a building or other

improvement, to consider at least its location; type of

construction; age; replacement cost; cost; adaptability for

residence, commercial, industrial, or other uses; past

income; probable future income; and any other factors that

may affect its value.

Id. § 105-317(a)(1), (2) (2023). “An important factor in determining the property’s

market value is its highest and best use.” In re Belk-Broome Co., 119 N.C. App. 470,

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

473, 458 S.E.2d 921, 923 (1995) (citations omitted), aff’d per curiam, 342 N.C. 890,

467 S.E.2d 242 (1996).

N.C. Gen. Stat. § 105-317 has been interpreted as authorizing three property

valuation methods: (1) the income approach, (2) the cost approach, and (3) the sales

comparison approach. In re Owens, 144 N.C. App. at 353, 547 S.E.2d at 829.

“However, the general statutes nowhere mandate that any particular method of

valuation be used at all times and in all places.” In re Greens of Pine Glen Ltd., 356

N.C. 642, 648, 576 S.E.2d 316, 320 (2003). “In light of the innumerable possible

situations that may arise, authorities that have the obligation of assigning a value to

land sensibly are given discretion to apply the method that most accurately captures

the ‘true value’ of the property in question.” Id.

“It is generally accepted that the income approach is the most reliable method

in reaching the market value of investment property.” In re Belk-Broome Co., 119

N.C. App. at 474, 458 S.E.2d at 924 (citations omitted). “Under the income approach,

an appraiser calculates the economic rent the property earns and deducts normal

operating expenses to arrive at net operating income.” Dep’t of Transp. v. Fleming,

112 N.C. App. 580, 583, 436 S.E.2d 407, 409 (1993). The net operating income is then

divided by a capitalization rate to determine the fair market value of the property.

Id. The capitalization rate is the “interest rate used in calculating the present value

of future periodic payments.” Capitalization Rate, Black’s Law Dictionary (11th ed.

2019).

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

Generally, “[t]he cost approach is better suited for valuing specialty property

or newly developed property” and is “used most often when no other method will yield

a realistic value.” In re Belk-Broome Co., 119 N.C. App. at 474, 458 S.E.2d at 924.

“Part of the cost approach is deducting for depreciation, which is a loss of utility and,

hence, value from any cause . . . [representing] the difference between cost new on

the date of appraisal and present market value.” In re Stroh Brewery Co., 116 N.C.

App. 178, 186, 447 S.E.2d 803, 807 (1994) (quotation marks and citation omitted).

“Depreciation may be caused by deterioration, which is a physical impairment such

as structural defects, or by obsolescence, which is an impairment of desirability or

usefulness brought about by changes in design standards (functional obsolescence) or

factors external to the property (economic obsolescence).” Id. (quotation marks and

citations omitted).

“The sales comparison approach compares the subject property with market

data based upon an appropriate unit of comparison.” See In re Lane Co.-Hickory

Chair Div., 153 N.C. App. 119, 122, 571 S.E.2d 224, 226 (2002). Under the sales

comparison approach, “[t]he prices achieved from the recent sales of comparable

properties are analyzed and adjusted for differences in location, size, age, condition,

date of sale, special suitability or any other appropriate factor, and then the adjusted

price is applied to arrive at a value for the property under consideration.” Damien

Abbott, Encyclopedia of Real Est. Terms 1036 (Delta Alpha Publishing, 2d ed. 2000)

(quotation marks omitted). “This method is limited by the availability of data on

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

recent and directly comparable property, but it is the most reliable and accepted

method of appraising real estate.” Id.

A. Income Approach

Ashley argues that the Commission’s decision to use the income approach

rather than the sales comparison approach was arbitrary because it was “not only

contrary to both appraisers’ methodologies, but also contrary to how willing buyers

would determine a value for the Subject Property.” In the alternative, Ashley argues

that the Commission erred by “failing to properly conduct its income approach

valuation for the Subject Property.” (capitalization altered).

Here, the Commission made the following findings of fact relevant to its

decision to use the income approach and its valuation using this approach:

5. The opinion expressed by the Appellant’s expert

appraisal witness, Mr. Richard Marchitelli, is that “the

highest and best use of the subject property is as a

manufacturing, warehousing, and distribution facility as it

is currently improved.” The opinion expressed by the

County’s expert appraisal witness, Mr. Richard Brant, is

notably less succinct, but nonetheless indicates a

substantially similar highest and best use: as to the

original building, the addition, and the truck facility, the

highest and best use is continued use as improved; as to

the bedding facility, originally used by the Appellant in the

manufacture of bedding materials but recently used

primarily for storage, the highest and best use is as

manufacturing space; and as to the unrenovated sheds,

used in part by the Appellant for storage, the highest and

best use is continued use as storage. While we note that

the original bedding facility was perhaps built for a

purpose other than manufacturing, and we note that the

original purpose of the unrenovated sheds may have been

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

for something other than storage, we find it reasonable

that the highest and best use of these facilities is

manufacturing and storage, respectively. Accordingly, we

find that the highest and best use of the subject property

as a whole is for manufacturing, warehousing, and

distribution, as currently improved.

....

7. Mr. Marchitelli, the appellant’s expert appraisal

witness, explained that he had approached the appraisal of

the subject property as a whole by appraising two

subelements, one of which consisted of the 31 unrenovated

sheds (adjusting this figure to 30 to reflect the 2017

renovation of Shed #11 for his opinion of value as of 2018).

Mr. Marchitelli designated the unrenovated sheds as “Unit

B,” and designated the remainder of the property,

including all land and all remaining improvements, as

“Unit A.” Furthermore, Mr. Marchitelli’s appraisal began

with an opinion of value as of January 1, 2017 (which year

is not a part of this appeal), with adjustments made to the

2018 and 2019 values to reflect changes made to the

property during 2017 and 2018, respectively.

....

11. Mr. Marchitelli appraised Unit A by relying on the sales

comparison approach. We recall that his designation of

Unit A included the land and all improvements on the

subject property other than the unrenovated sheds . . . . At

the hearing, Mr. Marchitelli testified as to his opinion that

there was no sale of a property that is perfectly comparable

to Unit A of the subject property, and that he had therefore

considered the sale of five properties that he determined to

be most comparable to Unit A . . . .

12. Whereas Mr. Marchitelli determined Unit A to have

approximately 1,700,000 square feet of building area, only

Comparable 3 has a similar amount (approximately

1,900,000 square feet) of building area. Comparable 2, at

750,000 square feet, is nearly 1 million square feet smaller

than Unit A, and the remaining properties offered as

comparable are less than 529,000 square feet in size.

Similarly, the land area of Unit A is approximately 310

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

acres, but the land area of the properties offered as

comparable ranges from approximately 183 acres for the

largest, down to approximately 42 acres for the smallest.

Mr. Marchitelli further lists comparisons between Unit A

and the comparable sales for the number of truck doors

(219 for Unit A and 27 to 114 for the comparables); for the

ceiling height (the ceiling height in the 1,120,000 square

foot addition portion of Unit A is 46 feet, with the

remainder of Unit A ranging down to 21.3 feet, as

compared to a range of 16 to 32 feet of ceiling height for

four of the comparable properties—only Comparable 5 has

a ceiling height of up to 48 feet); for the percentage of total

building area dedicated to office space (5.2% for Unit A and

1.31% to 7.57% for the comparables); and for the number of

parking spaces (2,729 for Unit A and 116 to 1,600 for the

comparables).

13. Mr. Marchitelli testified that he applied time

adjustments to the sale prices of the comparable properties

in order to account for differences in market conditions

between the time of the sales and the appraisal date of

January 1, 2017, and relied on published regional rental

data for industrial buildings in order to estimate the

changes in market conditions . . . . For the differences in

the physical characteristics of building size; ratio of land

size to building size; ratio of building size to number of

truck doors; ratio of building size to parking spaces;

percentage of building size dedicated to office space; and

ceiling height, Mr. Marchitelli made positive or negative

adjustments to account for difference between the

comparable properties and Unit A, where warranted

according to his judgment . . . . Mr. Marchitelli determined

that no adjustments were warranted for the differences in

the age and condition of the sale properties, as compared to

Unit A, but applied positive and negative adjustments of

either 5% or 10% to all other differences that he deemed

appropriate . . . .

....

18. With the exception of the time adjustments for market

conditions, we find these adjustments somewhat puzzling

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

overall. As described above, there are significant

quantitative differences in several of the physical

characteristics that have been identified in the appraisal

report as relevant to the value of Unit A, but every

adjustment made to the comparable property sale prices is

simply a 5% or 10% change, in a positive or negative

direction. There is little discussion in the appraisal report

of the rationale behind the choice to limit these

adjustments to 5% or 10% and, unlike with the time

adjustments for market conditions, there is little

discussion of actual market evidence in support of the

adjustments for differences in physical characteristics.

....

20. . . . . Mr. Marchitelli explained that, as to Unit A, he

had considered both the income approach and the cost

approach, but had not developed either approach for his

appraisal, opting instead to rely solely on the sales

comparison approach. . . .

....

27. The County’s appraisal witness, Mr. Rick Brant, also

approached the appraisal of the subject property by

considering its subelements separately, and did so in a

more granular way, developing individual values for the

land, site improvements, the primary building (for which

he considered separately the original building and the

addition), the bedding facility, the truck facility, the 32

sheds (Mr. Brant considered Shed #43 to be partially

finished, and did not distinguish it from the other sheds),

the welcome center, and two separate pump houses. Mr.

Brant explained his approach as one that relied on readily

available market information for the subelements as an

alternative to extracting less reliable information from

sales of dissimilar properties that required substantial

adjustments due to the divergent uses found on the subject

property. Although he testified that he placed the greatest

emphasis on the sales comparison approach, Mr. Brant

testified that he had developed all three approaches to

value for the subject as a test of the reasonableness of his

conclusions.

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

....

34. Mr. Brant explained that, in reviewing the sales of

properties that he considered comparable to the various

subelements of the subject property, he allocated a portion

of the sale price to the land conveyed in the sale, and

allocated the remainder of the sale price to the

improvements conveyed in the sale, in order to isolate the

improvement value from the underlying land value, and

thereby eliminate the effects of land-related factors, such

as location and land size, from the sale prices. Mr. Brant

testified that this approach also enabled him to select

properties of similar utility that were as close in proximity

as possible to the subject property.

35. Mr. Brant’s appraisal report proceeds as generally

expected. Four sales are offered as comparable for each of

the subject property’s subelements, and there are four such

subelements (the primary building, the bedding facility,

the truck facility, and the sheds) remaining for

consideration, for a total of sixteen sales. Mr. Brant

allocates a portion of the sale prices to land value, and

makes various adjustments to account for differences

between the sale properties and the respective

subelements being considered . . . . We do not address these

sales in detail here, in part because we see some of the

same issues raised by the earlier report—for example, the

lack of explanation for the positive and negative

adjustments made to the sale prices, in addition to the

broader range (negative 15% to positive 15%) of

adjustments that are applied. Most puzzling, however, is

the lack of explanation for the amount of the sale price

allocated to land value. For example, the land value

allocations listed on page 59 of the report indicate that

values ranging from $26,000 per acre to $46,000 per acre

have been attributed to the land for the respective sales,

but without any explanation of the basis for those

allocations. Without evidence enabling us to understand

and appreciate the validity of the land allocation, we have

no context for evaluating the reliability of the remaining

value allocated to the improvements. Accordingly, we have

ultimately placed little emphasis on the sales comparison

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

approach offered by the County. . . .

36. Mr. Brant next developed an income approach to

appraising the subject property by estimating the net

operating income (“NOI”) for each of the four subelements

(the primary building, the bedding facility, the truck

facility, and the sheds), and then directly capitalizing each

NOI at a rate he believed appropriate to each subelement.

For the primary building, Mr. Brant considered triple net

leases in place for four other properties that he described

as large warehouse/manufacturing facilities, and that he

considered comparable to the primary building. These

properties reported lease rates ranging from $2.13 to $5.50

per square foot, which Mr. Brant modified to a range of

$2.56 to $4.13 per square foot, after applying various

adjustments without further explanation. From these

figures, Mr. Brant determined that an appropriate rental

rate for the primary building was $3.00 per square foot,

resulting in an estimated potential gross income of

$4,659,409 for the subject property. Although no market

data is shown in in (sic) the appraisal report to support the

reductions, Mr. Brant estimated a 5% vacancy rate for the

primary building, and further reduced the estimated

effective gross income for the primary building with

estimates of management (3%) and replacement reserves

(2%), ultimately arriving at an NOI of $4,171,731 for the

primary building . . . . We note here that, although the

leased properties are offered as comparable to the primary

building, the largest of the properties (at 526,320 square

feet) is only about one-third the size of the primary building

(1,553,103 square foot). Furthermore, gross adjustments

to the leased properties range from 30% to 60%, which we

find to be significant adjustments for properties that are

offered as comparable.

....

50. Overall, we find that the income approach developed

here for the subject property contains both too much and

too little information. . . . [A]lthough the subelements are

all considered by Mr. Brant to be part of an industrial

warehouse and distribution facility, differences are

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

assumed for rental, vacancy and capitalization rates,

without further explanation for the recharacterization of

the subelements or for the choice of these rates, all of which

have significant impact on the value of each subelement

and, therefore, the subject property as a whole. While we

understand that an appraisal report represents the

writer’s professional opinion, there is insufficient evidence

before us to enable us, as the report’s readers, to evaluate

the reasonableness of the opinion. Accordingly, we place

little weight on the income approach conclusions.

....

52. We find that neither of the appraisal reports discussed

provides a compelling conclusion of value. We do note,

however, that the appraisal prepared for the County

provides a greater number of options in support of its

opinion, since all three approaches to value have been

developed for each subelement of the subject property,

whereas the appraisal prepared for the Appellant relies on

a single approach to value for the subelements it considers.

Our determination of value is therefore based upon all

information received from the parties, rather than from a

single party’s opinion.

53. We find that the primary building, and especially the

newly-constructed addition, represents the greatest single

element of value for the subject property, and therefore the

greatest influence on the overall value of the subject

property. We have previously found that the highest and

best use of the subject property is for manufacturing,

warehousing, and distribution, as currently improved. Our

preference would therefore be to consider the sales of

properties comparable to the subject property, but the sale

properties offered by the parties as comparable to the

subject are not truly comparable, and cannot be made so

without such adjustments and assumptions as to render

them unreliable.

....

55. We approach the determination of value for the

remainder of the property by initially considering the

income approach. By applying a rate of $3.00 per square

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

foot to the approximately 1,700,000 square feet of the

facility (excluding the sheds), we derive a potential gross

income of $5,100,000 for the subject property. Reducing

this figure by a 10% net adjustment for vacancy,

management, and replacement reserves yields a NOI of

$4,590,000. Capitalizing the NOI by 8% (a figure near the

average of the reported 4.49% to 12.09% range for the

subject property type, and excluding the local property tax

burden that would be carried by the tenant) yields an

estimated value of $57,000,000 (rounded) for the

remainder of the subject property. Under this approach,

the combined value of the subject property would be

$60,000,000 ($3,000,000 for the sheds and $57,000,000 for

the remainder).

....

57. We find, therefore, that the true value of the subject

property was $60,000,000 as of January 1, 2018. The

parties have separately determined that the value added

to the subject property for 2019 was either $90,000

(according to the County) or $100,000 (according to the

Appellant). From these estimates, we find that the true

value of the subject property as of January 1, 2019 was

$60,100,000.

(footnotes omitted).

Ashley submitted an appraisal report prepared by Richard Marchitelli.

Marchitelli divided the Subject Property into two sub-elements: Unit B comprised the

30 unrenovated sheds, and Unit A comprised the remainder of the Subject Property.

Marchitelli concluded that “the sales comparison approach is the only applicable

approach in developing a credible value opinion for Economic Unit A.” Marchitelli

did not consider the income approach because “properties like Unit A are most often

purchased by owner-users” and “hypothetical investors of Unit A would be deterred

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

from purchasing it as an investment rental property because of the diversity of its

physical features and functionality and depreciation issues and resulting lack of

appeal to tenants.” Marchitelli did not consider the cost approach because Unit A “is

an older, non-specialized facility with significant depreciation[,]” and the cost

approach is “particularly applicable when the property being appraised involves

relatively new improvements which represent the highest and best use of the land or

suffer only minor depreciation; or when relatively unique or specialized

improvements are located on the site for which there are few improved sales of

comparable properties.”

The Commission extensively analyzed the five properties offered by Marchitelli

as comparable properties to Unit A. The Commission found that only one of the

properties–which had 200,000 more square feet of building area than Unit A’s

1,700,000 square feet of building area–had a “similar amount” of square footage of

building area to that of Unit A. Another property was “nearly 1 million square feet

smaller than Unit A,” and the remaining properties were “less than 529,000 square

feet in size.” The Commission also found that while the land area of Unit A was

approximately 310 acres, the land area of the offered properties ranged from

“approximately 183 acres for the largest, down to approximately 42 acres for the

smallest.” The Commission found further physical differences in the number of truck

doors, ceiling heights, percentage of total building area dedicated to office space, and

parking spaces between Unit A and the properties offered as comparable properties.

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

Despite the “significant quantitative differences in several of the physical

characteristics that have been identified in the appraisal report as relevant to the

value of Unit A, . . . every adjustment [Marchitelli] made to the comparable property

sale prices is simply a 5% or 10% change, in a positive or negative direction.”

Furthermore, the Commission found that there was “little discussion of actual market

evidence in support of the adjustments for differences in physical characteristics.”

The County submitted an appraisal report prepared by Richard Brant. Brant

divided the Subject Property into the following sub-elements: (1) primary building;

(2) bedding facility; (3) truck facility; (4) sheds; (5) welcome center; and (6) pump

houses. Brant appraised each sub-element using all three methods of valuation and

reconciled the three values to state his final opinion of value, placing “only limited

weight” on the income approach, “very little weight” on the cost approach, and

“[c]onsiderable weight” on the sales comparison approach. The Commission found

that “the appraisal report prepared for the County provides a greater number of

options in support of its opinion, since all three approaches to value have been

developed for each subelement of the subject property, whereas the appraisal

prepared for the Appellant relies on a single approach to value for the subelements it

considers.”

The Commission found that Brant “relied on readily available market

information for the subelements as an alternative to extracting less reliable

information from sales of dissimilar properties that required substantial

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

adjustments[,]” and that although Brant “placed the greatest emphasis on the sales

comparison approach,” he “developed all three approaches to value for the subject as

a test of the reasonableness of his conclusions.” Brant offered four comparable

properties for each of the Subject Property’s subelements: the primary building, the

bedding facility, the truck facility, and the sheds. The Commission did not address

in detail the properties offered as comparable properties “because [it saw] some of the

same issues raised by [Marchitelli’s] report—for example, the lack of explanation for

the positive and negative adjustments made to the sale prices, in addition to the

broader range (negative 15% to positive 15%) of adjustments that are applied.” What

the Commission found “[m]ost puzzling, however, [was] the lack of explanation for

the amount of the sale price allocated to land value.” Due to the lack of evidence, the

Commission “ultimately placed little emphasis on the sales comparison approach

offered by the County.”

The Commission next analyzed in depth Brant’s appraisal developed using the

income approach. The Commission ultimately concluded, “[T]here is insufficient

evidence before us to enable us, as the report’s readers, to evaluate the

reasonableness of the opinion.” Accordingly, the Commission “place[d] little weight

on the income approach conclusions.”

As a result of its in-depth analysis of both parties’ experts’ reports, the

Commission found that “neither of the appraisal reports discussed provides a

compelling conclusion of value.” The Commission, therefore, based its determination

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

of value “upon all information received from the parties, rather than from a single

party’s opinion.” Noting that its preference would be “to consider the sales of

properties comparable to the subject property,” the Commission specifically found

that “the sale properties offered by the parties as comparable to the subject are not

truly comparable, and cannot be made so without such adjustments and assumptions

as to render them unreliable.” The Commission thus “approach[ed] the

determination of value for the remainder of the property by initially considering the

income approach.”

Brant testified before the Commission that the income approach was an

appropriate method to value the Subject Property, “especially when you look at who

the buyers and sellers are of these large modern distribution facilities[,]” and that

there was adequate data to support his income approach valuation. Ronald Loftis,

principal owner and appraiser of the Loftis Appraisal Company, also testified during

the hearing. Loftis is a Member of the Appraisal Institute, Counselor of Real Estate,

and licensed real estate broker. Loftis testified that appraisers are “given the

opportunity to develop opinions of value based upon three approaches, and those

approaches tend to triangulate. So if we look at those approaches, somewhere that

value is going to fall within that triangle, you know, where cost, sales, and income

are all going to bracket that triangle.” He further testified that he would consider

the income approach “even if it’s an owner-occupied property,” and that there was

sufficient data to support a reliable valuation using the income approach.

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

There is no requirement that “any particular method of valuation be used at

all times and in all places[,]” In re Greens of Pine Glen Ltd., 356 N.C. at 648, 576

S.E.2d at 320, and the Commission was therefore not required as a matter of law to

use any particular approach. The Commission thoroughly analyzed the evidence

before it, clearly articulated its reasoning for not using the sales comparison approach

and for using the income approach, and made its “determination of value . . . based

upon all information received from the parties.” The Commission’s decision to use

the income approach rather than the sales comparison approach to value the Subject

Property was not arbitrary and is supported by competent, material, and substantial

evidence in view of the whole record. Ashley’s argument is overruled.

1. Expenses and Obsolescence

Ashley argues that the Commission erred by failing “to account for any

expenses, functional or external obsolescence for the Subject Property.”

(capitalization altered).

The income approach does not require the appraiser to account for functional

or economic obsolescence. Under the income approach, the appraiser “calculates the

economic rent the property earns and deducts normal operating expenses” to derive

the net operating income, which is then divided by a capitalization rate to “determine

the fair market value of the property.” Fleming, 112 N.C. App. at 583, 436 S.E.2d at

409 (citation omitted). It is the cost approach that requires the appraiser to deduct

for depreciation, which may be caused “by obsolescence, which is an impairment of

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

desirability or usefulness brought about by changes in design standards (functional

obsolescence) or factors external to the property (economic obsolescence).” In re Stroh

Brewery Co., 116 N.C. App. at 186, 447 S.E.2d at 807 (quotation marks and citations

omitted). Because the Commission used the income approach, rather than the cost

approach, to value the Subject Property, it was not required to account for functional

or economic obsolescence.

2. Capitalization Rate

Ashley argues that “the Commission’s utilization of an 8% capitalization rate

is not supported by competent, material or substantial evidence.” (capitalization

altered).

In his appraisal report, Brant calculated a 6.5389% capitalization rate for the

primary building and an 8.5584% capitalization rate for the bedding facility and truck

facility. To calculate the capitalization rate for the primary building, Brant extracted

implied capitalization rates from the sales of four similar properties, ranging from

6% to 7.1%. Brant relied on a Realty Rates Investor Survey to calculate the

capitalization rate for the bedding facility and truck facility, which indicated that the

capitalization rates for industrial warehouses and distribution centers ranged from

4.39% to 12.09%, with an average capitalization rate of 8.69%.

Given the Commission’s duty to exercise judgment and discretion, the

Commission was free to use a single capitalization rate for the entire Subject Property

and make adjustments based on its finding that Brant did not adequately explain the

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

discrepancies between the capitalization rates for the primary building and the

bedding and truck facilities. See In re Blue Ridge Mall LLC, 214 N.C. App. at 276,

713 S.E.2d at 787-88 (holding that the Commission did not err by adjusting the

capitalization rate offered by the taxpayer’s appraiser); see also Albemarle Elec.

Membership Corp. v. Alexander, 282 N.C. 402, 408, 192 S.E.2d 811, 815 (1972) (“We

find nothing in the record which indicates that the Board departed from the ‘zone of

reason’ or acted arbitrarily in adopting the 6% capitalization rate.”).

Accordingly, there is competent, material, and substantial evidence in view of

the whole record to support the Commission’s decision to use an 8% capitalization

rate.

B. Cost Approach

Ashley argues that the Commission erred by “failing to make required

reductions under its cost approach for the Subject Property.” (capitalization altered).

Here, the Commission made the following finding of fact:

56. Alternatively, the evidence indicates that the property

was purchased by the Appellant for approximately

$10,500,000 and then underwent renovations and new

construction that were completed just prior to the

appraisal date and cost at least $45,000,000 according to

the Appellant’s witness (a figure that may not include all

costs), but $50,000,000 or more, according to the County’s

cost estimates. Accordingly, we find a value of $60,000,000

for 2018 to be supported by the cost approach, as well.

The Commission did not deduct for depreciation, as required by the cost approach.

However, because the Commission’s decision to use the income approach was not

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IN RE: ASHLEY FURNITURE INDUS., INC.

Opinion of the Court

arbitrary and is supported by competent, material, and substantial evidence in view

of the whole record, and the Commission correctly applied the income approach, the

substantial rights of Ashley have not been prejudiced by the Commission’s finding.

See N.C. Gen. Stat. § 105-345.2(b). Accordingly, any error in this finding does not

require remand.

III. Conclusion

For the foregoing reasons, we affirm the Commission’s final decision.

AFFIRMED.

Judges STROUD and WOOD concur.

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