Docket No. 05-00359.001-C-3
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rental unit from the 2002 and 2003 premiums of $41,791 and
$44,594 or $435 and $450 per rental unit, respectively. He
testified the stabilized insurance premium used of $43,200 or
$450 per rental unit is between the 2002 and 2003 amounts and is
consistent with the Section 42 expense comparables. He
acknowledged page 60 of the report indicates the management
company was able to negotiate lower insurance premiums for the
two properties they own in Rock Island County together with over
20 other properties McCormick Baron owns or manages. He further
explained an appraiser is anticipating the expenses to the next
owner, which may not be someone with the leverage of owning
multiple properties.
With respect to advertising fees, the appraiser stabilized the
advertising expense at $9,600 or $100 per rental unit, although
the advertising expenses fees from 2002 to 2004 ranged from
$3,826 to $6,141. Richter again tied this increased expense to
the mandatory 5% vacancy rate. He explained the owner is
attempting to achieve 95% occupancy, but the subject's actual
occupancy rate for the Section 42 units was 79%. Thus, Richter
thought doubling the advertising expense was appropriate.
The appraiser was next questioned about the expense comparable
properties, all three which are managed by McCormick Baron.
Richter acknowledged the income and expenses are estimated based
on the percentage of their effective gross incomes. The expense
ratios of the effective gross income for the two expense
comparables located in Rock Island County were 44.7% for one
property in 1999 and 46.2% for the other property in 2004. The
subject's actual expense to effective gross income ratio was 58%
in 2004 in which Richter stabilized to 60% for valuation
purposes. Richter did not consider the East St. Louis expense
property to be comparable in location. However, Richter opined
expenses are not an attribute of location, but are a function of
the building operations. In contrast, he next testified East St.
Louis is a lower-tiered economic community, noting insurance
costs would be higher, but labor costs lower in comparison to
Rock Island County.
Richter testified of the two primary methods of developing a
capitalization rate, a market derived capitalization rate is
preferred. He explained an appraiser analyzes sales of similar
comparable properties and their verifiable net incomes to
calculate a market derived capitalization rate. Richter
testified that under the market extraction method, he primarily
relied on the sales that occurred in Moline or Rock Island. In
further support of the market capitalization rate, Richter
analyzed suggested comparable sales in the Iowa section of the
Quad Cities, which he considered much less pertinent because they
are located in a different state. He did not give these sales
