Hewlett-Packard Co. v. Benton County Assessor , 21 Or. Tax 186 ( 2013 )

186 May 15, 2013 No. 26
26
21 OTR
Hewlett-Packard
2013 Co. v. Benton County Assessor May 15, 2013
IN THE OREGON TAX COURT
REGULAR DIVISION
HEWLETT-PACKARD COMPANY,
Plaintiff,
v.
BENTON COUNTY ASSESSOR
and Department of Revenue,
Defendants.
(TC 4979)
Plaintiff (taxpayer) appealed to the Magistrate Division of the Tax Court
as to the real market value of its facility in Benton County. The appeal was sub-
sequently specially designated to the Regular Division. Taxpayer argued that
Defendant (the department) had improperly assessed its property by failing to
consider functional and external obsolescence factors and nonvalue added costs.
Following trial, the court found that the department’s appraisal methodology was
fundamentally flawed primarily because it did not include a highest and best use
analysis. The court found taxpayer’s expert experienced, understandable, careful
and credible, and that taxpayer’s argued values were supported by the evidence
in the record.
Trial was held November 14 to 18, 21 to 23, and 28 to 30,
2011, in the courtroom of the Oregon Tax Court, Salem.
David L. Canary and Cynthia M. Fraser, Garvey Schubert
Barer, Portland, argued the cause for Plaintiff (taxpayer).
James C. Wallace and Joseph A. Laronge, Senior
Assistant Attorneys General, Department of Justice, Salem,
argued the cause for Defendant Department of Revenue (the
department). Defendant Benton County Assessor did not
appear.
Decision for Plaintiff rendered May 15, 2013.
HENRY C. BREITHAUPT, Judge.
I. INTRODUCTION
This matter is before the court after trial and post-
trial briefing. The tax years at issue are 2008-09, 2009-10,
and 2010-11. The parties have no disagreement as to land
value or machinery and equipment (M&E), but are signifi-
cantly separated on their views of the real market value
Cite as 21 OTR 186 (2013) 187
(RMV) of the buildings and structures located at a site in
Corvallis, Oregon. With regard to that issue the court has
reviewed the record and transcript of this lengthy trial,
especially the testimony of the appraisal witnesses.
II. FACTS
Of the great many facts established and discussed
during the course of the trial on this matter, a summary
of some are helpful to the court’s analysis. Other facts are
mentioned in the portions of this Opinion where they have
relevance.
The buildings in question were constructed on
a large campus of approximately 180 acres in Corvallis,
Oregon. The buildings were constructed over the period
from 1970s to the late 1990s. The buildings together con-
tain an area of approximately 2 million gross square feet
and were specifically constructed for the owner-occupant.
The buildings were initially used in the manufacturing of
Plaintiff’s (taxpayer’s) well known hand held calculators.
With the development of taxpayer’s proprietary ink-jet
printer technology in the 1980s, the use of the buildings for
manufacturing of calculators ceased and the focus of use of
the then existing buildings shifted to the ink-jet business.
The growth of that business was explosive and eight build-
ings were constructed in the 1990s.
The original use of some of the early buildings
included manufacturing of silicon wafers and integrated cir-
cuits. That use became relatively quickly outdated as evolv-
ing technology outstripped the physical limitations of the
buildings. By 2007 only two of an original four “fab” areas
remained at all operative. However, the rapid growth of the
ink-jet business brought the employee population in the
buildings to a high of approximately 8,000. As of the assess-
ment dates at issue in this case the employee population had
been reduced to between 2,000 and 2,500. The reduction
in work force reflected a decision by taxpayer to outsource
many of the functions previously performed in Corvallis.
The land use approvals applicable to the cam-
pus contemplate manufacturing uses and related support
functions with the related functions to be secondary in
188 Hewlett-Packard Co. v. Benton County Assessor
character. The buildings are constructed along a long cor-
ridor that links most of the buildings together. Utilities and
other services to the buildings, such as air conditioning, are
centrally supplied and not separately metered to the build-
ings, another reflection of the construction of the buildings
by an owner-occupant.
The roll values for the buildings and structures
for the 2008-09 and 2009-10 years were initially substan-
tially below the levels for which Defendant Department of
Revenue (the department) now contends. When taxpayer
appealed other components of value, the department coun-
terclaimed as to the value of buildings and structures, sig-
nificantly increasing the asserted value for that component
of the property.
III. ISSUES
The issues in this case are the proper RMV for the
buildings and structures at taxpayer’s Corvallis campus for
the years 2008-09, 2009-10, and 2010-11.
IV. ANALYSIS
A. Highest and Best Use
In discussing highest and best use (HBU), it is
important to identify the property that is the subject of the
analysis. In this case the property is comprised of all the
buildings on taxpayer’s campus in Corvallis, Oregon. This is
not a case involving one or another or some of the buildings.
This case considers all of the buildings.
The first question that must be addressed in a cred-
ible appraisal is the question of highest and best use (HBU)
of the property subject to valuation. Freedom Fed. Savings
and Loan v. Dept. of Rev., 310 Or 723, 801 P2d 809 (1990).
This first step sets a critical framework within which the
valuation process occurs. Most importantly, the HBU affects
what other properties may be considered comparable, a fun-
damentally important question when selecting so called
“comparable” sales and determining, where appropriate,
which properties are selected for use in determination of
elements of the income indicator analysis.
Cite as 21 OTR 186 (2013) 189
Often there is little or no question that the cur-
rent use of a property is the HBU. However, especially in
times of general economic transition or transition in partic-
ular industries, an analysis of HBU is absolutely necessary.
In this case the record demonstrates that both in general
terms and in terms of the industry in which this property
has been employed, significant changes were underway that
could well cause the property to have a different HBU. That
fact notwithstanding, the appraiser for the department did
no HBU analysis. That raises a very serious problem as the
leading authority on appraisal, recognized as such by both
parties, requires an income analysis for financial feasibility.
Appraisal Institute, The Appraisal of Real Estate 186 (13th
ed 2008).
On the question of HBU analysis and any reflec-
tion of that in her report, the testimony of the department’s
appraiser was that no evaluation was contained in her
report. On this subject particularly, and in other areas of
the testimony generally, the appraiser was so evasive and
confusing that the court cannot place much, if any, weight
on her testimony or work. The department’s positions on
brief fare no better. The department continually confuses
analysis of HBU with development of an income indicator of
value.
The appraiser for taxpayer did perform an HBU
analysis. That analysis looked at the costs, over time, of
converting the existing space into space suitable for leas-
ing to others and then weighed that cost against reasonably
expected returns over time. Taxpayer’s appraiser concluded
that the HBU of a significant portion of the property—the
so-called “non-core property”—did not contribute any value
to the improvements as a whole as the cost of conversion to
marketable space exceeded the benefits of such conversion.
In arriving at that conclusion, taxpayer’s expert
evaluated the market and concluded that a potential buyer
of the property at issue would buy it to use approximately
1.2 million square feet (the “core property”) for a variety of
uses typical of a manufacturing and research and devel-
opment operation but would pay nothing for the remain-
ing building space. The square footage numbers relate to
190 Hewlett-Packard Co. v. Benton County Assessor
rentable square feet rather than gross square feet. The “core
property,” as determined by taxpayer’s appraiser, is approxi-
mately the same square footage as was occupied by taxpayer
on the assessment dates. The testimony of that appraiser
indicates that he looked at market usage of such spaces and
not just the actual usage by taxpayer. On these points the
conclusions of taxpayer’s appraiser are highly persuasive.
Further it does not, as suggested by the department, confuse
market evidence with the actual use by the existing owner.
The analysis done by taxpayer’s expert assumed that the
owner of the core space would, in effect, pay market rates
for the space it used.
The department’s appraiser placed substantial reli-
ance on what property was actually occupied by taxpayer
on the various assessment dates. This was a fundamental
error as the actual use of the property by the current owner
cannot govern the analysis. The analysis must be governed
by what use a hypothetical purchaser would make of the
property.
The department’s appraiser appears to have con-
cluded that all of the space at the campus, with the excep-
tion of Building 2, the so-called “fab,” would be purchased
for the purpose of leasing the space to a variety of users.
However, the department’s appraiser did no objective
analysis to support this conclusion. The department seeks
to avoid the consequences of the failure of its appraiser to
engage in an analysis of HBU by simply stating that its con-
clusions are “axiomatic.” The primary appraisal witness for
the department, asked if a hypothetical purchaser would use
all of the buildings comprising the subject property, testified
that she “assumed” that would be the case and accordingly
did no economic feasibility study. The court rejects such an
approach, both in general or as to any particular element
or step in the valuation process. Value is a question of fact,
not the application of axioms—elements of logical analysis
employed without regard to actual facts. Without analysis,
and based only on her assumptions, the appraiser for the
department concluded that the space not used by a hypo-
thetical purchaser of the property—the so called “non-core”
space—would be absorbed by other users in the market, at
Cite as 21 OTR 186 (2013) 191
very healthy lease rates and with few, if any, conversion costs
to make the existing space attractive at such lease rates. All
of the evidence regarding the actual demands of the market
in Corvallis, the location of the property relative to major
transportation facilities, the actual condition of the property
and other factors indicates that the department’s witness is
simply wrong and unrealistic.
The failure of the department to undertake an
analysis of HBU places its appraisal in a severely handi-
capped, if not fatally flawed, position. The court also notes
that the department appraiser made significant contradic-
tory statements about HBU—at one point considering the
whole campus as prime investment grade property and at
another time agreeing with taxpayer’s expert that the con-
version of the property to an office park was not feasible.
The court simply cannot rely on much, if not all, of the work
or testimony of this witness for the department. Suggestions
in the department brief that the witness was not allowed to
explain contradictions are not supported by anything in the
record on redirect examination explaining contradictions.
The analysis of HBU performed by the appraiser
for taxpayer, while perhaps not free from criticism, is, in
the opinion of the court, properly supported. The expert
for taxpayer actually tackled the problem rather than rely-
ing on axioms. The disjointed and at times confused cross-
examination of taxpayer’s appraiser did little if anything to
weaken the credibility of that witness. More importantly,
the most important conclusion in the analysis—that there is
a significant amount of space in the improvements that does
not contribute value to the property—is consistent with the
unrebutted testimony of witnesses for taxpayer with knowl-
edge of these improvements in particular and the market
for space in Corvallis in general. The court accepts the con-
clusion that the costs of maintaining the excess space and
converting it to space that would be attractive to the mar-
ket would exceed the value to be produced by the potential
rental of that space. In addition, the record shows that there
are not insignificant questions about the legal obstacles that
would be presented by trying to lease out the excess space.
192 Hewlett-Packard Co. v. Benton County Assessor
The court finds that the HBU as found by the
appraiser for taxpayer is the HBU of the property.
Accordingly, the valuation exercise is of the core area as
determined by that appraiser, with no value assigned to the
non-core space.1
B. The Indicators of Value; Choice of Indicators
There is no dispute between the parties that there
are three indicators of value: the income indicator, the cost
indicator, and the comparable sales indicator. In his valua-
tion of the property, the appraiser for taxpayer did not per-
form an analysis of the income indicator. This was based
on his conclusion that the HBU of the property was use by
a single manufacturer using the core space and leaving the
excess space empty. As to the core space, the appraiser for
taxpayer used the cost approach and an indicator based on
what the market rent would be for the owner occupant. The
court agrees with that approach to valuation for owner occu-
pied property.
The department suggests that the failure by taxpayer’s
appraiser to develop an income indicator of value is fatal to
his appraisal. That is not so. In cases where the HBU is occu-
pation and use of a special purpose facility by the owner, it is
an accepted view that the income indicator is not practically
available or useful. That judgment of the appraiser for tax-
payer is supported in this record and accepted by the court.2
The appraiser for the department purported to employ all
three indicators of value. Those were applied to all space
except Building 2 (the major “fab” building). To any such con-
clusion the appraiser for the department then added a value
amount, determined under the cost indicator, for the “fab”
Building 2. The witness was unable to provide any authority
for using this method of mixing indicators of value.
1
The parties are in disagreement as to how much space is properly consid-
ered as in the core area as opposed to the excess space area. The court finds that
the conclusions of the appraiser for taxpayer are, more probably than not, correct.
Most importantly, they are fully supported by the onsite manager most familiar
with the property whose testimony was not rebutted by the department.
2
The department objects that the approach of the appraiser for taxpayer
reflects somehow value in use as opposed to market value. The court does not
agree. Rather, the appraiser for taxpayer properly concluded that a purchaser of
the property would purchase it for use and not as an investment, the return on
which would come from rental of the buildings to others.
Cite as 21 OTR 186 (2013) 193
C. The Comparable Sales Indicator
In their approaches to this indicator of value, the
appraisers for the parties took materially different
approaches. The appraiser for taxpayer, following his deter-
mination of HBU, looked at sales of manufacturing cam-
pus clusters for indications of value for the core space. The
appraiser for the department did not rely on sales of larger
manufacturing campuses. Rather, she gathered smaller
properties located at some distance from the subject. In
addition, the comparables chosen by the appraiser for the
department were for the most part located in areas such as
Hillsboro, Oregon, where, unlike Corvallis, there is a “crit-
ical mass” of properties of the types found at the subject
property.
The major weakness of the approach followed by
the appraiser for the department was that she concluded
that sales data for relatively smaller buildings with multi-
tenant features could be used in valuing a collection of
buildings with overall rentable area in excess of one million
square feet to be leased to one tenant, the one tenant fea-
ture being a result of the conclusion of the court as to HBU.
The appraiser concluded that such size and use differences
were not shown in the market as making a difference in sale
price. The data relied on by the appraiser did not however
contain comparisons of actual sales with such wide varia-
tions in size. Further, on cross-examination this witness
admitted that the sales she relied upon did not necessarily
reflect the actions of buyers that would purchase the sub-
ject property. Throughout the examination on this subject
the department’s witness was evasive, inconclusive and, at
times actually or seemingly contradictory. The court places
little or no weight on the comparable sales analysis done by
this witness.
The appraiser for taxpayer examined several sales
of properties of size comparable to the core area of the sub-
ject. The evidence developed by the witness indicated that
there was a size adjustment necessary in comparing prop-
erties of significantly different sizes, a conclusion consistent
with The Appraisal of Real Estate. Although the conclusions
194 Hewlett-Packard Co. v. Benton County Assessor
of taxpayer’s witness as to comparability and appropriate
adjustments are not free from any criticism, the evidence he
adduced and his approach to adjustments is by far superior
to the work of the department’s witness in those areas.
D. The Cost Factor
Both appraisal witnesses agreed on the basic
approach in developing a cost indicator of value: determina-
tion of replacement cost and subtraction from that figure of
physical depreciation, functional obsolescence, and economic
obsolescence.
The appraiser for the department began her
analysis with a significant factual error. The evidence estab-
lishes, far more probably than not, that the buildings have
not been renovated regularly, even though she concluded
they had been. The conclusion of the department witness
as to the comparison of actual age and effective age of the
buildings on the campus was wrong. Accordingly her calcu-
lation of physical depreciation, even if otherwise performed
correctly, was erroneous. Taxpayer’s witness Chris Hanson
was knowledgeable and his testimony contradicted the con-
clusions of the department’s appraiser. The witness for tax-
payer did not make the same error.
The appraiser for the department also concluded
that the campus buildings suffered from no functional obso-
lescence. Given the testimony as to the original construc-
tion of the buildings and a comparison of their historic use
with the use this appraiser concluded would be highest and
best, the conclusion of the witness on this point is simply
not credible. Many of the buildings were quickly and inex-
pensively constructed in order to meet immediate needs of
taxpayer, with no concern for alternative uses or ultimate
disposition. Large floor plates and interior improvements
of, in most cases, limited quality result in buildings that
would need significant investment in order to be used for
the purposes that the department’s witness concluded would
be their highest and best use. With the possible exception
of Building 10, this is especially true of the space which the
department’s witness concluded would be capable of being
leased at class A rates.
Cite as 21 OTR 186 (2013) 195
As to Building 2, the evidence was unrebutted that
its characteristics were completely out of date as to use in
semiconductor fabrication. Yet the department witness made
no adjustment for functional obsolescence for this building.
That makes the conclusions of the department witness in
this regard unreliable.
As stated above, the court accepts the HBU conclu-
sion of taxpayer and rejects that of the department. From
that point it follows that taxpayer’s conclusion as to func-
tional obsolescence due to superadequacy is accepted. It also
follows that the department’s conclusion that there is no
functional obsolescence must be rejected.
The acceptance of taxpayer’s conclusion also fits
the evidence. This campus is the product of an explosion of
growth related to a technology—printer heads—in a loca-
tion removed from technology or manufacturing centers and
poorly located in terms of transportation and labor force.
When the printer head technology was developed to the point
that manufacturing was most economically outsourced, the
workforce at the campus was radically reduced and many
of the activities that had occurred there were curtailed.
The change in technology production realities made signif-
icant portions of the campus superadequate to taxpayer’s
needs. However, in terms of market value analysis, the
record developed by taxpayer also shows that the campus
became superadequate for typical market needs for cam-
puses of buildings of this type.
The conclusions as to the cost indicator reached by
the appraiser for taxpayer are accepted and those of the
appraiser for the department are rejected.
E. Income Indicator
The accepted conclusion as to HBU also drives the
conclusion that an income factor analysis is not appropriate
in this case. The HBU accepted by the court is that of an
owner occupying and using the core space at the campus
and paying market rents to do so. The income approach to
value would be appropriate if the property could be sold to
an investor who would undertake necessary conversion and
lease the property out to multiple users. That is neither the
HBU found by the court nor one justified by the record.
196 Hewlett-Packard Co. v. Benton County Assessor
Again, the factual record prevents the conclusions
reached by the department. That record shows that the
market for rental space in the Corvallis area simply would
not support a decision by an investor to buy the collection
of buildings that are the subject of this case with the goal
to convert them into space to be leased to multiple users at
rents anywhere approaching the rents that the department
appraiser believes would be paid by ultimate users of the
space. The record and the site visit conducted by the court
support a conclusion that the conversion costs to make much
of the space into the type accepted by the market would, to
be economically feasible and sensible, lead to rents that the
physical realities and location of this space simply would not
support. Far from transportation infrastructure and major
populations, this campus was constructed as a unified oper-
ation of a user interested in utility rather than, for the most
part, quality. The facts regarding Building 7 are particu-
larly representative of this.3 The factual bases as to conver-
sion costs and rents used by the department appraiser, while
they may support the conclusion reached by that witness,
are simply not credible. The court rejects those conclusions.
V. CONCLUSION
The appraiser for taxpayer had significantly more
experience in the valuation of properties of the type present
here. Notwithstanding the attempts by the department to
suggest that he was not credible, the court found him expe-
rienced, understandable, careful, and credible. The same
cannot be said for the appraiser for the department.
For the foregoing reasons, the real market values
for the subject property as found by the appraiser for tax-
payer are accepted by the court as the real market values for
the subject properties as of the respective assessment dates.
Now, therefore,
3
It is also disturbing to the court that the department repeatedly suggests
that use by taxpayer of space to house very functional cubicles means that the
space is office space of the type than can command the highest rents in the mar-
ket without significant tenant improvements. The cubicle approach is another
prime example of the utilitarian approach of taxpayer and not the market expec-
tation of someone paying rent at the highest levels.
Cite as 21 OTR 186 (2013) 197
IT IS THE DECISION OF THIS COURT that the
real market values for the subject property as found by the
appraiser for Plaintiff are accepted by the court as the real
market values for the subject properties as of the respective
assessment dates.