INSTITUTE, INC. v. CITY OF VIRGINIA BEACH
June 5, 1998
Record No. 971635
TIDEWATER PSYCHIATRIC INSTITUTE, INC.
CITY OF VIRGINIA BEACH
OPINION BY JUSTICE LAWRENCE L. KOONTZ, JR.
FROM THE CIRCUIT COURT OF THE CITY OF VIRGINIA BEACH
Morris B. Gutterman, Judge Designate
Present: All the Justices
This is a taxpayer’s appeal from a judgment upholding
assessments of a private psychiatric hospital facility for the
tax years 1990 through 1995. 
Tidewater Psychiatric Institute, Inc. (Tidewater) filed an
application and subsequent amended application for relief to
correct alleged erroneous assessments for the tax years 1990
through 1995 of two parcels in the City of Virginia Beach (the
City) that Tidewater owned or leased,  asserting that these
assessments "were arbitrary, inequitable and
In the course of pretrial discovery, Tidewater filed
supplemental interrogatories requesting that the City identify
its expert witnesses. The City identified Bradley R. Sanford, a
commercial real estate appraiser, as its only expert witness.
During the pretrial conference, the City indicated that it also
intended to call Jerald D. Banagan, the City Assessor, as an
expert witness. Tidewater subsequently filed a motion in limine
to prohibit Banagan from offering expert testimony, asserting
that the City had failed to name him as an expert in its response
to interrogatories. The trial court overruled the motion, but
offered Tidewater a continuance so that it might redepose
Banagan. Tidewater declined the offer of a continuance and later
conceded that it "claim[ed] no surprise" as a result of
At trial, the evidence showed that the disputed assessments
related to two contiguous parcels comprising a hospital facility
and gymnasium (the property). The hospital facility is located on
a parcel of approximately four acres and consists of a two-story,
wood and steel frame, aluminum-sided main building and an
attached two-story, steel frame, masonry and concrete addition.
Together, the main building and addition have 61 patient beds as
well as support facilities. The gymnasium, which is also a
two-story, steel frame, masonry and concrete structure, is
situated to the rear of the main building on a three-acre parcel.
For the 1990 tax year, the combined assessment of the two
parcels by the City valued the property at $3,960,424. For the
1991 tax year the combined assessment was $4,171,907; for 1992,
$4,324,367; for 1993 and 1994, $4,804,034; and for 1995,
Tidewater presented evidence from Tappe Squires, a
vice-president of Tidewater’s parent company. Squires
testified that the property had originally been acquired in 1982
as part of a corporate takeover of a network of thirty similar
facilities at an aggregate price of $102,000,000.
Tidewater’s parent company subsequently sold the property in
1994 to another hospital network for a total sales price of
$872,000. The gymnasium was subsequently sold the following year
Tidewater also presented evidence from Carol Reynolds, a
commercial real estate appraiser. Reynolds presented the
evaluation of the property she prepared for Tidewater. In that
evaluation, Reynolds appraised the property’s fair market
value at $2,800,000 on January 1 for the years from 1991 to 1994.
Comparing Reynolds’ appraisal to the City’s assessment
in tax years 1991 to 1995, Tidewater alleged over-assessments of
between approximately $1,300,000 and $2,000,000 for those years.
Based upon these calculations, Tidewater asserted that it had
overpaid $98,148.21 in real estate taxes over that period.
Reynolds testified that she used three approaches in
determining the fair market value of the property: a cost method,
an income method, and a comparable sales method. She further
testified that of these three methods, the cost method, which
establishes the value of a building based upon its reproduction
cost less its depreciation, was the least reliable due to the
subjective nature of depreciation, especially for older
facilities such as Tidewater’s property.
Tidewater then called Banagan, the City Assessor, as an
adverse witness. Banagan testified that in assessing the
property, the City used only the depreciated reproduction cost
method to evaluate the property because it had determined that no
reliable comparable sales or income data were available upon
which to base the assessments. Banagan further testified that his
office used a set of standard published indices and the
"calculator method" described in the guidelines to the
indices to obtain the depreciated reproduction cost of the
property, and that this was "the method we used on all our
properties that we do a cost approach on."
Banagan further testified that during the period in question
the City had utilized two different building class schedules from
the indices to determine the depreciated value of the buildings
on the property. Banagan explained that the buildings were of
"Class A" construction quality because they were
primarily steel frame, masonry and concrete structures, but that
guidelines to the indices directed that low-rise "Class
A" structures, such as Tidewater’s property, be treated
as "Class C" structures.
Initially, the City interpreted the guidelines as requiring
the use "Class C" cost, but still permitting
"Class A" depreciation because the property "is a
steel frame building. . . . It will stand longer."
In 1994, the City altered its policy and began using both
"Class C" cost and depreciation schedules for such
properties. Banagan described the change in policy as "a
philosophical change. That doesn’t mean one way is more
correct than the other. . . . It is a rather
insignificant, minor, technical, change."
The City called Sanford as an expert witness. Sanford
testified that he had been retained by the City to perform a
"desk top" or technical review of Reynolds’
evaluation of the property. Sanford "found that the
appraisal report lacked depth of data . . . and that
resulted in a lack of in-depth analysis such that [Sanford] could
[not] agree with [Reynolds’] value conclusion."
The City then recalled Banagan as its own witness and sought
to have him qualified as an expert appraiser. Tidewater
challenged his qualifications as an appraiser of psychiatric
hospitals. The trial court qualified Banagan as an expert
appraiser, responding to Tidewater’s objection by stating
that Banagan’s level of familiarity with the specific type
of property was a matter of the weight to be given his testimony.
Banagan reiterated his prior testimony that the City used the
depreciated reproduction cost method of valuing the property
because no reliable data for the income or comparable sales
methods were available to evaluate the property. Banagan further
testified that the City did not believe that the 1994 and 1995
sales were arm’s-length transactions, since the value
assigned to the property in these transactions was well below the
value of other commercially zoned property in the City as
established by comparable sales.
After receiving trial memoranda from the parties and reviewing
the record and evidence, the trial court entered an order dated
May 5, 1997, denying the amended application on the ground that
Tidewater had "failed to establish either manifest error or
total disregard of controlling evidence by the City’s Real
Estate Assessor." We awarded Tidewater this appeal.
Real estate is to be assessed at its fair market value. Va.
Const. art. X, Sec.2. However, assessments by taxing
authorities are afforded a presumption of correctness, and the
burden is on the taxpayer to rebut that presumption. Board of
Supervisors of Fairfax County v. Telecommunications Industries,
246 Va. 472, 475, 436 S.E.2d 442, 444 (1993). To do so, the
taxpayer must show by a clear preponderance of the evidence that
his property is assessed at more than fair market value. Code
Sec.58.1-3984; see also City of Richmond v.
Gordon, 224 Va. 103, 110, 294 S.E.2d 846, 850 (1982); Skyline
Swannanoa, Inc. v. Nelson County, 186 Va. 878, 886, 44 S.E.2d
437, 441 (1947). Thus, the dispositive issue of this appeal is
whether the trial court correctly determined that Tidewater
failed to rebut that presumption by "a showing of manifest
error or total disregard of controlling evidence" in the
City’s method of determining the fair market value of the
Telecommunications Industries, 246 Va. at 475, 436
S.E.2d at 444.
Tidewater’s evidence of the fair market value of the
property was limited to an expert’s appraisal for four of
the six tax years in question. Tidewater devoted much of its case
to presenting its theory that the City erred in using depreciated
reproduction cost, rather than sales or income methods, to
determine fair market value in its assessment of the property.
The City presented evidence that challenged the validity of the
data used in Tidewater’s appraisal and provided
justification for its having rejected the alternative methods of
assessing the property relied on by Tidewater’s expert. The
City further presented evidence that it used a recognized method
of determining fair market value through standard indices for
determining reproduction cost and depreciation. In these
respects, the issue was presented to the trial court as a
"battle of experts," and we will defer to the judgment
of weight and credibility given to the testimony of the experts
by the trial court. Norfolk and Western Railway Company v.
Commonwealth, 211 Va. 692, 700, 179 S.E.2d 623, 629 (1971).
Tidewater contends, however, that its evidence nonetheless
established that the City’s method of assessing the property
was improper in that the City relied solely on the depreciated
reproduction cost method in determining the value of
Tidewater’s property. In support of this contention,
Tidewater cites Tuckahoe Woman’s Club v. City of Richmond
for the proposition that "[d]epreciated reproduction cost
may be an element for consideration in ascertaining fair market
value, but it cannot of itself be the standard for
assessment." 199 Va. 734, 740, 101 S.E.2d 571, 575 (1958).
This language is being taken out of context, and, thus,
Tidewater’s reliance on it is misplaced.
In Tuckahoe, the evidence showed that the depreciated
reproduction cost of the land and improvements was $105,000. Id.
at 737, 101 S.E.2d at 573. However, the evidence further showed
that market conditions were such that the property "would
not bring more than $75,000 to $85,000" if offered for sale
on the open market. Id. at 739, 101 S.E.2d at 575. The
City conceded that the sales method produced an accurate
assessment and that the depreciated reproduction cost
"produced an amount in excess of what the property could be
sold for." Id. at 740, 101 S.E.2d at 575. Therefore,
we held that the City’s resort to this method of determining
fair market value in disregard of the undisputed evidence of the
actual sales value of the property constituted manifest error.
However, our decision in Tuckahoe is not applicable on the
We have subsequently applied the holding in Tuckahoe in
other cases and have explained that the use of depreciated
reproduction cost as the sole basis for determining fair market
value is erroneous only where the taxing authority fails to
consider other factors that plainly show such a method
"would patently lead to unfair and improper results." First
and Merchants National Bank of Richmond v. County of Amherst,
204 Va. 584, 588, 132 S.E.2d 721, 724 (1963). Thus, where a
taxing authority considers and properly rejects other methods of
calculating the value of property, an assessment based on
depreciated reproduction cost is entitled to a presumption of
validity where that method is the only one remaining. Norfolk
and Western, 211 Va. at 700-01, 179 S.E.2d at 629.
The record establishes that the City considered other methods
for determining fair market value, but that it lacked reliable
data to arrive at an accurate value for the property under an
income method. The record further shows that the City considered
using a comparable sales method of assessment, but determined
that the 1994 and 1995 sales were clearly not fair market prices
in light of the prevailing market. Thus, as in Norfolk and
Western, depreciated reproduction cost was the only reliable
method available to the taxing authority, and the value arrived
at under that method is entitled to a presumption of correctness.
Id. Accordingly, we hold that Tidewater failed to meet its
burden of showing that the City’s choice of depreciated
reproduction cost as the method for valuing this particular
property was manifest error or in disregard of controlling
Tidewater nonetheless contends that even if the City’s
use of the depreciated reproduction cost method was appropriate,
it improperly applied that method in those years in which it
based the property’s reproduction cost on the "Class
C" schedule, but used the "Class A" schedule to
calculate the percentage of depreciation. We disagree.
Tidewater failed to present any evidence rebutting
Banagan’s testimony that neither interpretation of the
guidelines was "more correct than the other." The
evidence at best established that the City simply altered its
interpretation of the guidelines accompanying the indices it used
to determine the value of properties under the depreciated
reproduction cost method, and not that its prior method was
manifestly erroneous or that it applied that method arbitrarily
to Tidewater’s property while treating similar properties
For these reasons, we will affirm the judgment of the trial
 The tax year for real property
in the City of Virginia Beach is based upon assessments made
during the first six months of one year with taxes levied on
those assessments for the period of July 1 of that year to June
30 of the following year. For purposes of clarity, we will refer
to tax years within this opinion by their "year-ending"
date. Thus, an assessment made in 1989 for taxes levied between
July 1, 1989 and June 30, 1990 would be the assessment for the
1990 tax year.
 The evidence was at times in
conflict with the allegation in Tidewater’s pleadings that
Tidewater owned one parcel and leased the other at all times
relevant to the assessments being challenged. It appears that the
confusion over the ownership of the property stems in part from
the fact that Tidewater continued to operate the hospital located
on the property, while the property changed hands among various
corporate entities. However, the parties do not dispute that
Tidewater was responsible for and actually paid the taxes levied
on the assessments it challenges in this case.
 Tidewater also assigns error to
the trial court’s permitting Banagan to testify as an expert
witness on the ground that he had not been properly identified as
such during discovery. By declining the trial court’s offer
of a continuance and conceding that it suffered no prejudice
because of surprise, Tidewater waived this objection, and we will
not consider this issue on appeal.
 We also accepted an assignment
of cross-error raised by the City. Our resolution of the
principal issue of the appeal in the City’s favor renders
that cross-error moot.