Thames Point Assoc. v. Supervisor of Assessments of Baltimore City

ROBERT M. BELL, Judge. Thames Point Associates, appellant, pursuant to a condominium regime dated June 30, 1981, rebuilt the old National Can Company warehouse and factory into a 33 unit building. Thirty-two of the units were residential and the last, located on the first floor, was commercial. The residential units were intended to be, and, therefore, were marketed as, condominiums for sale.

Such was the intention and marketing strategy pursued by appellant on January 1, 1982, the date of finality, 1 when the improvements were assessed for tax purposes. As of January 1, 1982, all of the old pipes had been removed from the building, the exterior walls had been sandblasted, the old flooring replaced and new flooring added, partition walls had been erected between the units, the electrical and plumbing lines had been run into each unit, the drywall had been erected, the doors had been hung, and the wood trim was “for the most part” in place. Remaining to be done as of that date were: connection of the plumbing fixtures in the individual units; painting of the drywalls; tiling and carpeting of the flooring in each unit; connection of the individual air conditioning and heat ⁵ ing units; installation in each unit of electrical meters, light fixtures, appliances, hot water heaters, and hardware. Furthermore, at that time, appellant was engaged in an advertising campaign to sell the individual condominium units.

In fact, beginning in 1981, and continuing through the first part of 1982, appellant expended some $100,000 for that purpose. The Supervisor of Assessments of Baltimore City, appellee, determined that as of January 1, 1982, the Thames Point condominiums were substantially complete and assessed the property for taxation purposes for an initial one-half year, January 1, 1982 through June 30, 1982, and for a complete year, July 1, 1982 through June 30, 1983. To reach its determination, appellee relied upon the following factors: (1) the roof was completed; (2) the drywall was installed; (3) the woodwork was substantially completed; and (4) much of the remaining work to be done consisted of customized items to be completed at the option of the purchaser. Appellee also relied upon information received that the developer’s intention was to bring the units to 90% completion by January 1, 1982, leaving unfinished such custom features as would be desirable to be done at the option of the purchaser.

As of the date of finality, despite appellant’s advertising campaign, no unit had been sold as a condominium. Nevertheless, appellee, relying upon the facts that the property was already subject to a condominium regime, the individual units were constructed so as to provide separate systems for each unit, any buyer of the entire development would view it as a condominium, and the experience of the assessor indicating that there was a market for condominiums in the area, found that the highest and best use of such property was as a condominium. The property was, therefore, assessed as a condominium, and a value assigned for each individual unit for both the half year and the full year. This contrasted with appellant’s conclusion that the highest and best use was as rental property and its valuation of the property using the income approach. ⁶ The assessments were appealed to the Maryland Tax Court.

The evidence presented before the court revealed that there, was no dispute between the parties as to the amount of work that had been completed up to the date of finality or the amount of work which remained to be done after that date in order that each unit be totally complete. The evidence revealed, however, that the parties sharply diverged as to the meaning or effect of that level of completion on the date the assessments were made. They also sharply disagreed as to the highest and best use of the subject premises and, consequently, as to the appropriate method of assessment of the property. Appellant conceded that three of the residential units were completed as of January 1, 1982.

It contended, however, defining “substantially complete” as when the units are habitable, i.e. when a use and occupancy permit would be obtainable, that the remaining residential units were not substantially completed by that date. According to appellant’s evidence, those 29 units would not be substantially complete until the carpet was laid and that, as to each, it would take a crew of two or three persons between a week to ten days, depending upon the trade, to complete the work. Appellant conceded that it delayed the installation of carpet and appliances to permit purchaser selection and that some other items were not completed because of the risk of theft. According to appellant, of the 29 units not substantially complete on the date of finality, seven were completed between January 1 and July 1, 1982, ten between August and December 1982, and the remaining units were completed between January 1 and July 1, 1983.

Appellant also maintained that, since the project had not been successfully promoted as a condominium, the highest and best use of the subject property was as a rental project. Despite an expensive advertising campaign, no units were sold prior to January 1, 1982, and although additional funds were thereafter expended, no units were ever sold. Appellant concluded that the only feasible method for valuing the property was the income approach under which the income ⁷ from the project as an apartment complex would be capitalized. Appellee’s assessor testified as to the reasons she felt the building was substantially completed and that its highest and best use was as a condominium property.

The assessor explained her valuation of the property as a condominium and her method of assessment. Her testimony was, with respect to the valuation, that she took the square foot selling price for each unit, the overall price, and reduced it by five percent. Because she felt that the asking price was too high, she further reduced the resulting figure by 20% for the 1982-83 year and by 30% for the preceding one-half year. The tax court upheld the assessment.

Relying on Radin v. Supervisor of Assess., 254 Md. 294 , 255 A.2d 413 (1969), the tax court found that all units were “substantially completed” on the finality date; the “building” was “under roof and its exterior plastering and woodwork are substantially complete, although not entirely”. It further found that the highest and best use of the subject property, as of the finality date, was as a condominium. Although it acknowledged that no sales had been made during the eight months prior to January 1, 1982 and that a longer period of time would have been desirable, the court refused to consider rentals after that date. Finally, the court found that the only evidence as to the value of the property was that of the assessor and that that evidence, presumptively correct, had not been refuted.

The Circuit Court for Baltimore City affirmed. It too relied on Radin on the issue of substantial completion. Regarding the valuation issue, the court said: ... It’s an unfortunate case where the builder or the owner, taxpayer made a mistake and made a poor investment.

That condominiums were not the highest and best use for the property. That rentals were. The properties might indeed have been worth less than that. But there was a reasonable basis for that evaluation of $1,588,- ⁸ 000. 00.as of January 1, 1982.

The court would no more disturb that because it later turned out that it was too high. I would increase it if it later turned out to be too low. It’s a very unfortunate situation. I must say I do sympathize with the taxpayer here.

But he made a bad investment. It turned out that the properties were not worth what he thought they were. But there was a reasonable basis to infer that they were worth that much. He, himself, thought so and since I find that the tax court proceeded under the correct law, I am also finding that there was credible evidence within the record from which the tax court could have reasonably inferred the assessments which they determined.

Appellant’s appeal of the judgment of the circuit court presents two issues: 1. Did the lower court err as a matter of law in determining that a condominium unit with no plumbing fixtures in the bathroom or kitchen, no toilet, sink, bathtub or shower in the bathroom, no sink, dishwasher, stove or other amenities in the kitchen, no electrical fixtures, no heat or air conditioning units installed, no water, electricity or heat available, and no flooring completed, was substantially completed for real estate tax assessment purposes? 2. Was the Tax Court’s finding on the valuation of each condominium unit supported by any substantial evidence in the record? We too will affirm.

The standard of review applicable to decisions of the Tax Court is set out in Maryland Code Ann., art. 81, § 229(o): In any case, the circuit court ... shall determine the matter upon the record made in Maryland Tax Court. The circuit court ... shall affirm the Tax Court order if it is not erroneous as a matter of law and if it is supported by substantial evidence appearing in the record. In other cases, the circuit court . 1. may affirm, reverse, remand, or modify the order appealed from. ⁹ Under this section, the standard of review depends upon the nature of the Tax Court finding being reviewed. Interpreting Ramsay, Scarlett & Co. v. Comptroller, 302 Md. 825 , 490 A.2d 1296 (1985), we recently made the point, in Comptroller of the Treasury v. World Book Childcraft International, Inc., 67 Md.App. 424 , 508 A.2d 148 (1986), that a three step analysis must be employed to the review of an agency decision: 1.

First, the reviewing court must determine whether the agency recognized and applied the correct principles of law governing the case. The reviewing court is not constrained to affirm the agency where its order “is premised solely upon an erroneous conclusion of law.” 302 Md. at 834 , 490 A.2d 1296 . 2. Once it is determined that the agency did not err in its determination or interpretation of the applicable law, the reviewing court next examines the agency’s factual findings to determine if they are supported by substantial evidence, i.e., by such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. Id.

At this juncture, the Ramsay, Scarlett court reminds us that “it is the agency’s province to resolve conflicting evidence, and, where inconsistent inferences can be drawn from the same evidence, it is for the agency to draw the inferences. Id. at 835 , 490 A.2d 1296 . 3. Finally, the reviewing court must examine how the agency applied the law to the facts. This, of course, is a judgmental process involving a mixed question of law and fact, and great deference must be accorded to the agency.

The test of appellate review of this function is “whether, ... a reasoning mind could reasonably have reached the conclusion reached by the [agency], consistent with a proper application of the [controlling legal principles].” Id. at 838 , 490 A.2d 1296 . ¹⁰ Thus, appellate review of Tax Court orders based upon an erroneous conclusion of law is expansive, that is, the appellate court may substitute its judgment for that of the Tax Court. Ramsay, Scarlett & Co. v. Comptroller, 302 Md. at 834 , 490 A.2d 1296 ; Comptroller of the Treasury v. World Book Childcraft International, Inc., supra, 67 Md. at p. 438, 508 A.2d 148 . Review is limited, however, where there is no error of law and the Tax Court’s factual determinations are at issue. Ramsay, Scarlett, supra; World Book, supra.

Under this scenario, the Tax Court’s factual determinations must be upheld if there is substantial evidence in the record to support them. Board of Educ., Mont. Co. v. Paynter, 303 Md. 22, 34 , 491 A.2d 1186 (1985); Ramsay, Scarlett, supra; Balto. Lutheran High Sch. v. Emp.

Sec. Adm., 302 Md. 649, 662 , 490 A.2d 701 (1985); Supervisor of Assess. v. Carroll, 298 Md. 311, 318 , 469 A.2d 858 (1984); Supervisor v. St. Leonard Shores Joint Ven., 61 Md.App. 204, 212 , 486 A.2d 206 , cert. granted 303 Md. 115 , 492 A.2d 616 (1985). Yet a different test applies, whether applying the appropriate legal principle, a reasoning mind could have reached the conclusion reached by the agency, Ramsay, Scarlett, 302 Md. at 838, 490 A.2d 1296 , when the issue involves a mixed question of law and fact. Id.; Comptroller v. Diebold, Inc., 279 Md. 401, 407 , 369 A.2d 77 (1977); World Book, supra, 67 Md. App. p. 439, 508 A.2d 148 . In order that we may apply the proper standard, we must first determine the nature of the Tax Court finding at issue sub judice. “Substantially Completed"—Law, Fact, or Mixed The question whether and when new construction is to be assessed for tax purposes is governed by Md.Code Ann., art. 81, § 19(a)(1) (presently Md. Tax Property Code Ann. §§ 8-104 and 8-205), which provided: (a) In general.—(1) In valuing and assessing real estate, the land itself and the building or other improvements thereon shall be valued and assessed separately; and ¹¹ buildings or improvements not substantially completed on the date of finality, semiannual date of finality or quarterly date of finality should not be assessed at all.

For the purposes of this appeal, the critical language is the undefined phrase, “substantially completed”. The critical issue is not so much the meaning of the phrase as it is the essential nature of a finding by the Tax Court that new construction is or is not “substantially completed”. In Radin v. Supervisor of Assess., supra, the Court of Appeals was presented with the issue whether the trial judge was correct in his finding that “review of the testimony convinces this Court that 'such finding [by the Tax Court, of substantial completion] is supported by the evidence’ ”. Id., 254 Md. at 299 , 255 A.2d 413 .

At issue was whether a highrise apartment house in Montgomery County was substantially complete on the date of finality, an issue which required that § 19(a) be interpreted. Also involved was the interpretation of a Montgomery County Code provision which defined the term “substantially completed” as “when the building is under roof, plastered (or ceiled) and trimmed”. Id., 254 Md. at 296 , 255 A.2d 413 . The Maryland Tax Court, finding the building to have been substantially completed, affirmed assessments made by the supervisor of assessments, reasoning: [Something other than a final completion of the building was intended, otherwise the assessable date could have easily been equated with the time the certificate of final inspection and occupancy ... was issued.

The words “substantially completed”, even when considered from the standpoint of the acceptance of a building imply “that there remained uncompleted work that would require use of labor and materials;” Baltimore County Department v. Henry A. Knott, 234 Md. 417, 425 [ 199 A.2d 369 ] (1964). The case of Shaughnessy v. Linguistic Society, 198 Md. 446, 451 [ 84 A.2d 68 ] (1951) points out that the expression “substantial part” is not a term of “mathematical precision”. ¹² Id., 254 Md. at 297-98 , 255 A.2d 413 . The circuit court affirmed the judgment of the Tax Court, and the Court of Appeals, in turn, affirmed the judgment of the circuit court. In doing so, the Court referred to Skinner Drydock Co. v. Balto.

City, 96 Md. 32, 41-42 , 53 A. 416 (1902) and Hamburger v. Baltimore City, 106 Md. 479 , 68 A. 23 (1907) and pointed out that [t]he statutes (§ 19(a) of Art. 81 of the Code and § 84-7(f) of the Montgomery County Code) seem to have adopted the language in the Court’s opinions and holdings in those 'two cases which determined the proposition that a building under construction is substantially completed for purposes of assessment for taxes when it is under roof and its interior plastering and woodwork are substantially, although not entirely, completed. Id., 254 Md. at 298 , 255 A.2d 413 . Moreover, the Court found that the Tax Court’s judgment was not erroneous as a matter of law and that it was supported by substantial evidence in the record. Id., 254 Md. at 299 , 255 A.2d 413 .

At issue in Skinner was whether a dock “was ... substantially completed or so nearly so as it can fairly be said that it was on October 1st a subject for taxation”. Id., 96 Md. at 42 , 53 A. 416 .