Stafford Hills Properties, LLC v. Dept. of Rev. ( 2017 )

470 December 5, 2017 No. 43
IN THE OREGON TAX COURT
REGULAR DIVISION
STAFFORD HILLS PROPERTIES, LLC,
Plaintiff,
v.
DEPARTMENT OF REVENUE,
Defendant,
and
CLACKAMAS COUNTY ASSESSOR,
Defendant-Intervenor.
(TC 5250)
Plaintiff (taxpayer) appealed from a decision of the Magistrate Division as
to the real market value of its property, a multisport fitness club with tennis
facilities in Clackamas County, Oregon. Taxpayer argued that because market
participants seeking to purchase a multisport club would largely, if not exclu-
sively, consider the income stream of the property when valuing the property,
cost would be essentially irrelevant, and generally the income approach to value
would be favored for such properties. In addition, taxpayer argued that the
county’s appraisal, in which primary reliance was placed on the cost approach,
should be rejected because market participants generally treat the cost of a prop-
erty as irrelevant. Taxpayer also argued that, even if a cost approach were to
be considered, a 40 percent reduction in the total cost value would be appro-
priate because the subject property was built with significant superadequacy.
Defendant-Intervenor (the county) argued that because multisport clubs are dif-
ficult to compare with other properties in the area, and because the property at
issue was recently constructed, the cost approach was the best indicator of value.
Further, with respect to the income approach conducted by taxpayer’s appraiser,
the county argued that reliance upon national averages to determine a market
rent for a property in the greater Portland area was not compliant with general
appraisal theory and was contrary to OAR 150-308-0240(2)(g). The court found
that it was compelled to reject the appraisal of taxpayer for failure to rely on local
market information for the income approach and for failing to prove the adjust-
ment for superadequacy in the cost approach. The court accepted the appraisal of
the county except as with respect to the addition of developer’s profit to the raw
land value. The court made no finding on the AV or MAV of the property
Trial was held July 18 through 20, 2016, in the court-
room of the Oregon Tax Court, Salem.
Sam B. Zeigler, CKR Law Group, PC, Portland, argued
the cause for Plaintiff (taxpayer).
Daniel Paul, Assistant Attorney General, Department of
Justice, Salem, argued the cause for Defendant Department
of Revenue (the department).
Cite as 22 OTR 470 (2017) 471
Kathleen J. Rastetter, Assistant Clackamas County
Counsel, Oregon City, argued the cause for Defendant-
Intervenor Clackamas County Assessor (the county).
Decision rendered November 6, 2017. Amended decision
rendered December 5, 2017.
HENRY C. BREITHAUPT, Judge.
I. INTRODUCTION
This case is before the court after trial to determine
the real market value (RMV) of property owned by Plaintiff
(taxpayer). The tax year at issue is 2013-14, with a corre-
sponding assessment date of January 1, 2013. Because the
property was recently completed, exception value for new
property is at issue.1
II. FACTS
The facts in this case are drawn from the appraisal
reports, trial testimony, and exhibits introduced by the
parties.
A. The Property
The property at issue is the Stafford Hills Club
(the Club). The Club is owned by taxpayer Stafford Hills
Properties, LLC, and operated by taxpayer’s wholly owned
subsidiary Stafford Hills Management Club. The manage-
ment entity leases the Club from taxpayer for the operation
of the Club. Taxpayer’s chairman and CEO, James Zupancic,
testified that he structured the rent paid by the manage-
ment entity to be as close to fair market rent as possible.
The Club is treated by both parties as a multisport
club or facility, which is a fitness facility that includes a
1
Under Article XI, section 11(b), of the Oregon Constitution, commonly
referred to as Measure 50, and its enacting statutes, the assessed value of a
property is the lesser of either the property’s real market value or its maximum
assessed value. Generally, the maximum assessed value cannot increase more
than three percent in any given year. However, there are exceptions to the three
percent limit, one of which is for cases of new property or new improvements to
property. Or Const, Art XI, § 11(c)(A). Taxpayer does not dispute that there is new
property or new improvements in this case. This Amended Opinion corrects the
court’s Opinion of November 6, 2017, which listed an incorrect assessment date
and tax year at issue.
472 Stafford Hills Properties, LLC v. Dept. of Rev.
tennis component. Both parties agree that the highest and
best use of the property is a multisport club. The Club is
located on a 4.9 acre portion of a 15.23 acre parcel of land.2
The land is zoned low density residential, but the Club has
secured a Conditional Use Permit (CUP) for operation of the
Club. The Club is the only private tennis facility in the area,
and is located near expensive houses.
The Club offers a variety of services to its members.
Those services are largely separated between two buildings,
a main building and a smaller wellness center.
The main building is 72,188 square feet. Within it,
there are seven indoor tennis courts and a two-story club-
house with a foyer, reception lounge, locker rooms, viewing
mezzanine, pro shop, staff offices, and a fitness center.
The wellness center is 18,072 square feet. Within
it, there is a beauty salon, laundry, child daycare center,
demonstration kitchen, hot yoga room, and a physical ther-
apy treatment center. It also contains locker rooms, multi-
purpose rooms, and administrative offices.
Between the main building and the wellness cen-
ter, there is a solar-heated, six-lane saline swimming pool
with associated outdoor furniture, and three more tennis
courts. There are also two small buildings for maintenance
or equipment purposes.
According to Evan Zupancic, the chief operating
officer of the Club, the two-building design of the Club
was necessitated by a sewer easement than runs through
the property between the two buildings. According to one
of taxpayer’s expert witnesses, Richard Caro, Jr., this
two-building configuration negatively affects club opera-
tions and, ultimately, the marketability of the Club.3 The
two-building layout results in higher costs than if the facil-
ity was all one building. For example, certain staffing costs
(such as personnel at each entrance), cleaning costs, and
2
The remaining 10.33 acres of the land is undeveloped wetland.
3
Richard Caro’s relevant qualifications are introduced below under subsec-
tion E., “Profiles of Success.”
Cite as 22 OTR 470 (2017) 473
“heating/ventilation/air conditioning system[s]” are unable
to be shared between the buildings, and therefore must be
duplicated.
B. The Conditional Use Permit (CUP)
The Club is located on land that is zoned for low
density residential purposes. However, as stated, taxpayer
has secured a CUP that allows operation of the Club subject
to certain conditions.
As pertains to this case, the two most notable con-
ditions of the CUP are (1) that the Club must close opera-
tions by 10:00 p.m. daily and cannot resume operations until
either 5:30 a.m. on weekdays or 6:30 am on weekends, and
(2) that the Club is limited to 138 parking spaces.4
Parking is further limited by a provision in the
CUP that restricts parking on the eastern area of the park-
ing lot before 8:00 a.m. In addition to the limited number
of parking spaces, street parking is prohibited. In wit-
ness Evan Zupancic’s experience and as a graduate of the
International Health Racquet and Sports Club Association
(IHRSA) Institute, the industry standard for parking is 275
spaces—nearly double the maximum number of spaces on
the property.
These conditions limit both the hours during which
the Club may operate (it may not operate as a 24-hour facil-
ity) and the number of clients that the Club may serve during
those hours. To address the parking issue, taxpayer offers a
valet service to its clients. Evan Zupancic testified that the
valet service alleviates client frustrations associated with
the inability to find a parking spot.
Although the Club could not operate at all without
the CUP, the conditions contained in the CUP do appear
to limit the revenue that can be generated by operation of
the Club. The revenue generated by the Club is relevant to
taxpayer’s approach to estimating the fair market rent of the
4
Under the terms of the CUP, the number of parking spaces is 122. However,
a subsequent parking management plan increased the number of parking spaces
to 138.
474 Stafford Hills Properties, LLC v. Dept. of Rev.
subject property, described below.5 However, as discussed
below, the revenue impacts on the Club of the CUP are not
relevant to estimating the fair market rent of the subject
property on the evidence introduced here.6
C. Nonconforming Use
The Club, as of the assessment date, was a noncon-
forming use under the Tualatin Development Code. The
CUP was conferred in 2009. The code changed in 2010 such
that private clubs—like the Club here—are no longer per-
missible recipients of conditional use permits. However, the
Club can still continue to operate as a nonconforming use,
given the CUP.
The court received testimony from CEO James
Zupancic on the dangers of operating as a nonconforming
use. In Tualatin, if the Club ceases operations for more than
12 months, it loses its right to continue to operate under the
terms of the CUP. The Club may re-establish operations only
if it is “specifically approved by the Planning Commission.”
However, approval cannot be granted until after a public
hearing is held.
James Zupancic testified that re-approval by the
Planning Commission “is far from a slam-dunk,” as the
neighborhood’s reception to the Club is mixed. In addition,
the risk associated with re-approval extends beyond the ces-
sation of operations for purely business purposes. In cases of
property damage, the risk can be even greater, according to
James Zupancic:
“[I]f there’s damage to the non-conforming structure,
in many cases you can’t rebuild it. Under [Tualatin
Development Code Section] 35.050, ‘If a non-conforming
structure or a structure containing a non-conforming use
is destroyed or damaged by any cause’—so that could be
a flood, that could be fire, it could be an earthquake, any
5
Taxpayer’s approach requires an estimation of feasible rent as a percentage
of the revenue of the average club, which taxpayer then compared to the actual
rent of the subject property. Accordingly, the revenue of the subject property is
relevant to taxpayer’s arguments as to the value of the subject property.
6
Taxpayer has not shown that the fair market rent for a multipurpose ath-
letic club is based on a percentage of the revenue earned by the athletic club, such
as a percentage-of-revenue rent payment. Indeed, the Club itself, and the rent
comparables, appear to be subject to flat rent payments based on the number of
square footage—not the income of the club.
Cite as 22 OTR 470 (2017) 475
other act of God, man-made, it could be a terrorist attack,
who knows what—‘requiring the discontinuance of the use
for more than six months while making repairs of future
structure or use on the property, shall conform to the pro-
visions of the Tualatin Community Plan, unless reinstate-
ment of the non-conforming structure or use is approved by
the Planning Commission.”
(Emphasis added.)
These risks are, according to James Zupancic, con-
sidered by credit underwriters in “assessing risk and estab-
lishing the applicable interest rate for secured financing of
real property.” Taxpayer’s expert witness, Richard Caro,
testified that a market purchaser of this property would
consider the CUP as a negative as compared to a club oper-
ating without the need for a CUP.
D. The Market for Multisport Facilities
The parties disagree on how comparable fitness-only
facilities—that is, facilities without a tennis component—
and even other multisport facilities are to the subject prop-
erty for valuation purposes. Accordingly, an understanding
of the multisport facility market is important to the resolu-
tion of this case.
Taxpayer’s expert witness, Richard Caro, testified
that the multisport club market is a subset of the overall
athletic club market, with fitness-only clubs being a sepa-
rate subset. The defining characteristic of a multisport club
is a tennis component. Tennis courts require a significant
amount of space, and courts range in size between 6,000
and 7,000 square feet. Accordingly, multisport clubs are
usually larger facilities.
On the strength of Richard Caro’s testimony, the
evidence supports a finding that multisport clubs are diffi-
cult to compare to at least fitness-only facilities, if not also
to other multisport clubs. Regardless, even if sales of other
multisport clubs could be relevant for valuation purposes,
there are generally “very few” sales of multi-sport facilities
to use as comparable sales. This evidence is corroborated
by the lack of multisport facilities—that is, facilities with
a tennis component—used as sales or rent comparables by
either appraiser.
476 Stafford Hills Properties, LLC v. Dept. of Rev.
Generally, multisport clubs share several charac-
teristics, which indicate that multisport facilities as a cat-
egory are manifestly different from fitness-only facilities.
These characteristics also indicate that multisport facilities
are typically unique offerings and difficult to compare to
each other.
Principally, according to Richard Caro, multisport
clubs have a tennis component. As a result, they often have
a very large indoor component and a significant outdoor
component. Each club is uniquely configured. Including
construction, it takes up to two years to complete develop-
ment of a club. Multisport clubs typically own their own real
estate or pay rent rates that are “extremely low,” e.g., $2.00
to $6.00 per-square-foot.
Multisport clubs tend to attract couples and fami-
lies rather than individual members, and member retention
is usually higher as a result. Because of its relatively com-
plex and unique nature, a multisport club requires “a higher
level of staff because it has to have experts in each area” of
programing or service that it provides. Accordingly, multi-
sport clubs “charge higher fees and yield higher revenue per
member.” However, they also “take longer to market their
club’s concept to do the proper selling and get trial members,
thus they have a slower ramp-up of membership over time in
their life cycle.”
Finally, although multisport clubs do compete with
each other and fitness-only clubs (because of their fitness
component), Richard Caro testified that “a pure fitness
equipment user would not join a multi-sport club and pay
more money unless he thought he would soon, either add
family members to the membership, or engage in one or
more of the other activities and offerings in order to pay a
higher amount of money.”
Richard Caro also testified on the market and char-
acteristics of fitness-only clubs. Fitness-only clubs lease their
space, rather than own it. Fitness-only clubs are also space
efficient with respect to how many members it can attract
per square foot. Fitness-only clubs can attract approx-
imately “one member for every eight to nine square feet,”
as compared to multisport facilities that can only serve up
Cite as 22 OTR 470 (2017) 477
to four people on a 6,000 square foot tennis court. Because
fitness-only clubs do not have tennis courts, they are typi-
cally smaller.
Generally, fitness-only facilities attract individuals
on a monthly dues-based membership. Fitness-only facili-
ties are also more interchangeable, quicker to open, and
have offerings that are more readily recognizable by mem-
bers, investors, owners, and the public as opposed to multi-
sport facilities, which may be more peculiar or unique in
size, scope, and offerings.
E. “Profiles of Success”
The court also heard testimony from Richard Caro
on industry data integral to the income approach to value
of taxpayer’s appraiser. Richard Caro is the president of a
“full-service management consulting company, focusing on
the health club and fitness industry.” He is also the founder
of IHRSA.
IHRSA is a global trade association serving “over
10,000 clubs in about 80 different countries around the
world.” IHRSA conducts educational programs, research,
and lobbying efforts associated with the athletic club indus-
try. IHRSA also prepares reports for the athletic club indus-
try. One of the reports prepared by IHRSA is “Profiles of
Success.” As explained by the witness:
“[Profiles of Success] is prepared by asking individual
club owners and leaders to provide confidential financial
information, membership information, pricing information,
all kinds of confidential information, to an independent
third party, not even IHRSA, an outside research company
called Industry Insights, and they collect the information
and then tabulate it and provide the data for IHRSA, who
then writes up their conclusions in a report each year that’s
called Profiles of Success.”
Richard Caro testified that Profiles of Success
is used by various parties in the athletic club industry,
including owners, operators, investors, appraisers, asses-
sors, and lenders. According to Richard Caro, the reports
are the “authoritative” and “best” source for athletic club
industry data nationally. The reports also provide an
478 Stafford Hills Properties, LLC v. Dept. of Rev.
industry-accepted methodology for estimating the amount
of rent and real estate taxes that the operator of an athletic
club can feasibly pay.
F. Taxpayer’s Appraisal
Taxpayer’s appraiser conducted an income, sales
comparison, and cost approach to value the subject prop-
erty. Although taxpayer’s appraiser conducted all three
approaches, he concluded that the most reliable indicator of
value was the income approach.
1. Income approach
An appraiser conducting an income approach to
value using the direct capitalization method generally
(1) determines the market rent for a piece of property;
(2) multiplies it by the total rental space to determine the
potential gross income (PGI); (3) deducts a market rate of
vacancy and collection loss from the PGI to determine the
effective gross income (EGI); (4) deducts a market rate of
non-reimbursable expenses from the EGI to determine the
net operating income (NOI); and finally (5) divides the NOI
by a market capitalization rate to determine the value of the
property.7
Typically, appraisers will consider other relevant
rental rates in the market to determine the “market” rent
for a property. Here, taxpayer’s appraiser determined that
there was a “lack of relevant lease rate comparisons” for
multi-sport athletic clubs, and therefore estimated the mar-
ket rent feasible for the Club using IHRSA data.
To estimate the market rent, taxpayer’s appraiser
consulted both the 2013 IHRSA Profiles of Success report
(which contains 2012 calendar year data) and the 2014
IHRSA Profiles of Success report (which contains 2013 cal-
endar year data).
For each year, taxpayer’s appraiser first determined
the total amount of rent that would be paid by a typical ath-
letic club. He began by looking up the mean annual reve-
nue for athletic clubs. Then, he looked up the mean rent
7
See generally, Appraisal Institute, The Appraisal of Real Estate, 491 (14th
ed 2014).
Cite as 22 OTR 470 (2017) 479
allocation as a percentage of revenue. By multiplying these
two numbers, taxpayer’s appraiser calculated the mean
gross rent amount due for the typical athletic club.
Next, taxpayer’s appraiser determined the size of
a typical athletic club. He began by looking up the mean
membership count for an athletic club. Then, he looked up
the facility area per member. Using these two numbers,
taxpayer’s appraiser calculated the mean size of the typical
athletic club.
Taxpayer’s appraiser then used both of the previous
calculations to calculate the mean rent per-square-foot that
is feasible for a typical athletic club.
Taxpayer’s appraiser conducted calculations using
both the 2013 report and the 2014 report. The mean rent per-
square-foot calculated by using the 2014 report was higher
than that calculated by using the 2013 report. Taxpayer’s
appraiser concluded that, as of the assessment date, a mar-
ket purchaser would be aware of the improving market
conditions. Accordingly, taxpayer used the mean rent deter-
mined using the 2014 IHRSA report.
Taxpayer’s mean rent calculations were as follows:
• ($5,026,400 mean revenue) x (7.1% proportional
mean rent) = $356,874 mean rent
• (2,959 mean membership) x (14.1 facility area per
member) = 41,722 square-foot mean area
• ($356,874 mean rent) ÷ (41,722 square feet mean
area) = $8.55 per-square-foot mean feasible rent
The $8.55 per-square-foot mean feasible market
rent was somewhat lower than the actual rent paid to tax-
payer by its wholly owned management subsidiary. Recall
that James Zupancic testified that the actual rent was struc-
tured to be as close as possible to market rent. Taxpayer’s
appraiser compared both the feasible rent and the actual
rent and determined that the market rent for the Club was
$8.75 per-square-foot. The court’s doubt as to the persua-
siveness of this check is discussed in the analysis section of
this opinion.
480 Stafford Hills Properties, LLC v. Dept. of Rev.
Using that market rent, taxpayer’s appraiser deter-
mined a PGI of the property of $789,775.
Taxpayer’s appraiser then deducted 10 percent
from the PGI for vacancy and collection allowance because
“it can be reasonably concluded that a knowledgeable pur-
chaser would budget at least a one-year contingent vacancy
allowance at the end of an initial 10-year lease term.” This
results in an EGI of $710,797.
Taxpayer’s appraiser then deducted four percent of
the EGI for non-reimbursable expenses rate, equally attrib-
utable to structural reserves and executive management.
Accordingly, taxpayer’s appraiser determined an NOI of
$682,365.
Finally, taxpayer’s appraiser determined the mar-
ket capitalization rate. Taxpayer’s appraiser considered the
market capitalization rates based upon his comparable sales
analysis, with a range of approximately eight percent to nine
percent, and the 2012 Price Waterhouse Cooper National Net
Lease Market Survey, which reported a range of six percent
to 8.75 percent for capitalization rates. Ultimately, because
the Club was not yet stabilized, and subject to additional
risk because of the CUP, taxpayer’s appraiser determined a
market capitalization rate of nine percent for the Club.
Applying the nine percent market capitalization
rate to the NOI of $682,365, taxpayer’s appraiser calculated
a rounded value for the subject property of $7,600,000.
2. Sales comparison approach
Taxpayer’s appraiser placed secondary emphasis
on the sales comparison approach because no sufficiently
comparable sales could be located: “Interviews with numer-
ous market participants did not result in identification of
any health club purchases by local private party / non-credit
strength tenants that were even generally similar to the
subject property as to age, condition, quality and net lease
revenue potential.” The sales that taxpayer’s appraiser did
find were primarily closed businesses sold for redevelop-
ment. Nevertheless, taxpayer’s appraiser conducted a sales
comparison approach analysis and determined a value of
$9,000,000 for the Club.
Cite as 22 OTR 470 (2017) 481
3. Cost approach
With respect to the cost approach, taxpayer’s
appraiser determined that the direct costs associated with
constructing the Club were $9,908,016. The indirect costs
according to taxpayer’s appraiser were $417,449, yielding a
total of $10,325,465 for both direct and indirect costs.
Taxpayer’s appraiser then added a five percent
developer’s profit allowance in construction of the sub-
ject property. The total cost plus developer’s profit equals
$10,841,738. Taxpayer’s appraiser determined that five per-
cent was appropriate in lieu of the still-lingering effects of
the 2008 recession, when a standard developer’s profit was
as high as eight percent.
Taxpayer’s appraiser then determined a value
for the land, which was somewhat complicated by the fact
that only 4.9 acres of the 15.23 acre parcel of land were
developable—the remainder being undevelopable wetland.
Because the land is zoned low density residential, taxpayer’s
appraiser estimated how many homesites might be develop-
able on the land, and determined the market price for each
homesite.
Ultimately, taxpayer’s appraiser determined
that 35 homesites could be developed on the land at a
value of $40,000 each, resulting in a value for the land of
$1,400,000. This results in a total cost value of the property
of $12,241,738.
Because the Club was recently completed as of the
valuation date, taxpayer’s appraiser determined no depre-
ciation was appropriate. However, taxpayer’s appraiser
deducted 40 percent from the cost value of the property (not
including land) for superadequacy of the Club associated
with the limitations of the CUP, including parking. This
results in a rounded $8,000,000 in value determined by the
cost approach.
The court will introduce facts relevant to discuss the
rationale for the superadequacy deduction in the analysis
section to this opinion.
482 Stafford Hills Properties, LLC v. Dept. of Rev.
4. Reconciliation of value
In sum, taxpayer’s appraiser determined a value
for the subject property of $7,600,000 using the income
approach, $9,000,000 using the sales comparison approach,
and $8,000,000 using the cost approach. Taxpayer’s
appraiser placed primary emphasis on the income approach,
with secondary emphasis placed upon the sales comparison
and cost approaches.
Taxpayer’s appraiser determined that the income
approach indicated a valuation floor of $7,600,000 because a
market purchaser could expect that conditions were improv-
ing and that the Club was a “long-term opportunity for
membership growth.” Taxpayer’s appraiser then surmised
that the sales comparison approach value of $9,000,000 was
unobtainable because the sales comparables could be pur-
chased for repurposing or redevelopment, where the subject
property, as a non-conforming use in a low density residen-
tial area, could not be. Accordingly, taxpayer’s appraiser
determined a value for the subject property of $8,000,000.
G. The County’s Appraisal
The appraiser for Defendant-Intervenor Clackamas
County Assessor (the county) also conducted an income,
sales comparison, and cost approach to value the subject
property. Although the county’s appraiser conducted all
three approaches, he placed the most reliance on the cost
indicator of value.
1. Income approach
In conducting the income approach analysis, the
county’s appraiser considered seven rent comparables, that
indicated a market rent range from $15.58 per-square-foot
to $28.50 per-square-foot. The county’s appraiser noted,
“The subject property is a multi-purpose fitness facility with
an emphasis on tennis. No other leased facilities were iden-
tified that similarly emphasized tennis.” This was relevant
because “The square footage of the subject facility is consid-
erably larger than the identified comparable lease proper-
ties due to the tennis element.” Such differences in size and
offering would require adjustment.
Cite as 22 OTR 470 (2017) 483
The county’s appraiser rejected the higher compa-
rable rental rates and determined that the market rent for
the Club would be between the rental rate of $15.58 per-
square-foot for comparable #7 and $19.00 per-square-foot for
comparable #5. Comparable #5 is a 24 Hour Fitness fran-
chise, which, while occupying 45,000 square feet, has no
tennis courts. Comparable #7 is a former athletic facility,
which also had no tennis courts and in addition was vacant.
The county’s appraiser determined a market
rental rate of $17.00 per-square-foot, resulting in a PGI of
$1,467,491. The county’s appraiser then deducted a vacancy
and credit loss factor of five percent or $73,375. The county’s
appraiser then deducted three percent or $41,823 in non-
reimbursable operating expenses and structural reserves
of $8,362. Accordingly, the county’s appraiser determined a
NOI of $1,343,661.
The county’s appraiser considered the capitaliza-
tion rates of several comparables and determined a market
capitalization rate for the subject property of 8.75 percent.
Accordingly, capitalization of the NOI for subject prop-
erty results in a value of $15,356,126. However, the coun-
ty’s appraiser deducted $104,151 in unfinished work that
must be completed, resulting in a final rounded value of
$15,252,000.
2. Sales comparison approach
The county’s appraiser conducted a sales com-
parison approach and determined a value of $15,866,000.
However, the county’s appraiser noted that “The subject
property differs significantly from the identified comparable
sales because of the high percentage of the building area
devoted to tennis courts.” The county’s appraiser was unable
to use comparable sales to extract an appropriate adjust-
ment. Instead, the county’s appraiser utilized the Marshall
Valuation Service and his appraisal judgment to determine
a downward adjustment of 10 percent for the subject prop-
erty to account for the presence of tennis courts.
3. Cost approach
In conducting the cost approach, the county’s
appraiser noted, “No comparable building costs were
484 Stafford Hills Properties, LLC v. Dept. of Rev.
identified in the relevant market area for multi-purpose
fitness facilities with extensive tennis courts.” Accordingly,
the county’s appraiser utilized Marshall Valuation Service,
“a reliable, national cost estimating service” to estimate
the cost value of the Club. Using the service, the county’s
appraiser estimated a direct cost of the Club of $10,595,481.
The county’s appraiser requested actual cost information
from taxpayer, from which the county’s appraiser deter-
mined a total actual direct cost of $11,201,595. The county’s
appraiser used the actual direct costs of $11,201,595 in his
cost approach.
The county’s appraiser then determined the indi-
rect costs associated with the Club. The county’s appraiser
requested indirect cost information from taxpayer. The
county’s appraiser determined that certain indirect costs
were not included or understated in taxpayer’s records,
including:
• $56,178 for obtaining a LEED Certification
• $10,184 in understated system development charges
(sewer, water, transportation)
• $139,653 in understated building permit fees
Upon adding these costs, the county’s appraiser determined
a total indirect cost associated with the Club of $1,848,927.
In total, the direct and indirect costs of the sub-
ject property were determined by the county’s appraiser to
be $13,050,522. However, the county’s appraiser deducted
$104,151 in incomplete work from the total direct and indi-
rect costs, resulting in an improvement cost of $12,946,371.
With respect to the value of the land, the county’s
appraiser reviewed five land sales comparables and deter-
mined an initial value of $5.50 per-square-foot. However,
the appraiser deducted 10 percent from the value of the land
on the basis that the subject property is in a flood plain,
resulting in a value of $5.00 per-square-foot, or a rounded
$1,069,000 raw land value for the subject property.8
8
For assessment purposes, the county’s appraiser determined the total cost
of the land plus improvements tied to the land. To the $1,069,000 in land value,
the county’s appraiser added $1,400,000 for the cost of mitigating the wetlands
Cite as 22 OTR 470 (2017) 485
In total, the county’s appraiser determined a land
value plus improvement cost of $14,015,371. To that total,
the county’s appraiser added a 10 percent developer’s profit
(based on an estimated developer’s profit range of eight per-
cent to 20 percent), resulting in a rounded $15,417,000 in
cost value for the subject property. The county’s appraiser
determined that no depreciation was appropriate because
the subject property was in new condition as of the assess-
ment date. The county’s appraiser also determined that no
superadequacy adjustment was appropriate.
4. Reconciliation of value
In sum, the county’s appraiser determined a value
for the subject property of $15,252,000 using the income
approach, $15,866,000 using the sales comparison approach,
and $15,417,000 using the cost approach. The county’s
appraiser placed primary emphasis on the cost approach
because the subject property was unique in comparison to
the comparables used in the sales comparison and income
approaches. The county’s appraiser determined a final value
for the property of $15,417,000. Because some of the improve-
ments are allocated to the land value, the county’s appraiser
determined the net improvement value for assessment pur-
poses to be $11,971,000.
Additional facts will be introduced as necessary in
the analysis section of this opinion.
III. ISSUE
The issue in this case is the RMV of the subject
property as of the assessment date.
IV. ANALYSIS
This case concerns the valuation of real property.
For purposes of property assessment and taxation, real and
portion of the subject property, which mitigation allowed development of the Club.
Next, the county’s appraiser determined the on-site development costs for the sub-
ject property. The county’s appraiser utilized the county’s On-site Development
Land Cost Table. From that table, the county ascertained a cost of $4.57 per-
square-foot for a five acre site on sloping terrain, representing a gross of $977,432
in on-site development costs. In total, the county’s appraiser determined a cost
value of the land for property tax assessment purposes of $3,446,000.
486 Stafford Hills Properties, LLC v. Dept. of Rev.
personal property is valued at 100 percent of its RMV. ORS
308.232.9 RMV is defined in Oregon as
“the amount in cash that could reasonably be expected to
be paid by an informed buyer to an informed seller each
acting without compulsion in an arm’s-length transaction
occurring as of the assessment date for the tax year.”
ORS 308.205(1). The RMV of property is ultimately a ques-
tion of fact. Chart Development Corp. v. Dept. of Rev., 16 OTR
9, 11 (2001).
Subject to some limitation, the legislature has
determined that RMV “shall be determined by methods
and procedures in accordance with rules adopted by the
Department of Revenue.” ORS 308.205(2). This court’s rules
require that a party relying upon an Oregon Administrative
Rule (OAR) of the department for purposes of determining
RMV under ORS 308.205 must so indicate its reliance on
that rule. Tax Court Rule (TCR) 20 I. Methods of accounting
or valuation, unless otherwise prescribed by law or regula-
tion, are to be analyzed in light of the evidence introduced
by the parties. Bylund v. Dept. of Rev., 292 Or 582, 585, 641
P2d 577 (1982).
Taxpayer has not relied upon any rules of the
department. The county, however, has relied upon OAR 150-
308-0240(2)(g),10 which states, in relevant part, “The income
to be used in the income approach must be the economic rent
that the property would most probably command in the open
market as indicated by current rents being paid, and asked,
for comparable space.” (Emphasis added.)
In this case, taxpayer has admitted that it has the
burden to prove, by a preponderance of the evidence, the
RMV of the subject property. ORS 305.427. However, this
90
Unless otherwise indicated, the court’s references to the Oregon Revised
Statutes (ORS) are to the 2013 edition.
10
The county also cited OAR 150-308-0240(2)(a), which requires all three
approaches (cost, sales, and income) to be considered, and OAR 150-307-0010
(2)(a)(A)(ii), which requires on-site development costs to be added to the land for
purposes of property tax assessment. The former rule is not in dispute as taxpay-
er’s appraiser conducted all three approaches in his appraisal. The latter, while
relevant in a general sense, does not appear to be disputed by taxpayer and does
not appear to be relevant to this case for purposes of determining the real market
value of the subject property.
Cite as 22 OTR 470 (2017) 487
court also has the authority to determine the RMV of prop-
erty “without regard to the values pleaded by the parties.”
ORS 305.412.
Fundamentally, this case is about how an appraiser
approaches an appraisal assignment when that assignment
is complicated by the fact that there are few, if any, market
sales or rent comparables in the area similar to the subject
property. The task in this case is compounded by the fact
that there is minimal operating history of the Club because
it was recently completed. Finally, this case is further com-
plicated by the existence of at least some evidence that the
cost paid for the newly constructed facility overstates its
value because the Club was built too large and there is sig-
nificant superadequacy.
Accordingly, in this case, there are questions as to
the reliability or persuasiveness of all three approaches—
sales, income, and cost. Nevertheless, this court is tasked
with determining which appraisal, if any, is more likely
than not a correct determination of the value of the Club.
This court will first summarize the positions of the
parties before analyzing the key appraisal issues. As noted
in the introduction to this opinion, the RMV determined for
this year is of particular importance to the parties because
the Club, being recently constructed, is treated as new
property for purposes of determining an initial maximum
assessed value (MAV) and assessed value (AV).
A. Taxpayer’s Position
The essence of taxpayer’s position is simply stated.
Market participants seeking to purchase a multisport club
would largely, if not exclusively, consider the income stream
of the property when valuing the property. Cost is essen-
tially irrelevant. This position certainly has at least facile
appeal, as the Club is an income-producing property, and
generally the income approach to value is favored for such
properties.
In addition, taxpayer argues that the county’s
appraisal, in which primary reliance was placed on the cost
approach, should be rejected because market participants
generally treat the cost of a property as irrelevant. Taxpayer
488 Stafford Hills Properties, LLC v. Dept. of Rev.
also argues that, even if a cost approach is to be considered,
a 40 percent reduction in the total cost value is appropri-
ate because the subject property was built with significant
superadequacy.
B. The County’s Position
The county’s position is also simply stated. Because
multisport clubs are difficult to compare with other prop-
erties in the area, and because the Club was recently con-
structed, the cost approach is the best indicator of value.
Further, with respect to the income approach conducted by
taxpayer’s appraiser, the county argues that reliance upon
national averages to determine a market rent for a prop-
erty in the greater Portland area is not compliant with gen-
eral appraisal theory and is contrary to OAR 150-308-0240
(2)(g).
C. Income versus Cost for Newly Constructed Properties
Principally, resolution of this case depends upon
which approach to value this court finds most persuasive
on the evidence presented—the income approach or the
cost approach. Neither party’s appraiser placed significant
emphasis on the sales comparison approach due to the lack
of relevant sales comparables.
In theory, both approaches could be quite appro-
priate in this case because the subject property is both
income-producing and was recently constructed. The income
approach to value is generally useful in the valuation of
income-producing properties. The cost approach is generally
useful in the valuation of recently constructed properties.
That said, this court is not persuaded by the income
approach conducted by taxpayer’s appraiser. The income
approach to value uses market information to determine
the market value of the property. However, both apprais-
ers struggled with the fact that the market information on
rental rates for multisport facilities similar to the Club is
lacking. On that basis, taxpayer’s appraiser opted to con-
duct an alternative method of determining market rent.
Taxpayer’s appraiser made inferences on national
averages to determine the local market rent for the Club,
Cite as 22 OTR 470 (2017) 489
which is located in Oregon. That approach, while creative,
does not give the court confidence that the local market rent
for the Club has been determined. Also, it does not use local
market rental rates to determine the appropriate market
rate for the Club as required under OAR 150-308-0240
(2)(g).
Moreover, using the actual rent by the Club as cor-
roborative evidence is not persuasive. The lease between
tenant and landlord is not the result of an arms-length
transaction. But more importantly, the actual rent was cal-
culated in a similar manner to the appraiser’s estimation
of market rent and was also based on IHRSA data. That
greatly reduces the actual rent’s value as an independent
check on the market estimated value.
As stated by James Zupancic in his direct testimony:
“Witness: And I should say, Counsel, if I may, these
rent amounts were determined to be as close as we could
determine fair market rent. Because as a matter of law,
and since I have the disability of being a lawyer as well as
a businessman, I wanted to make sure that this was a rela-
tionship between these two entities that would be upheld
as being a proper relationship, since both would be dealing
with each other as if it was an arm’s length relationship,
“Counsel: And as part of that analysis, did the club
project anticipated revenues that it would have once it
actually started getting up and running?
“Witness: Yes. We had—we brought investments into
this—this particular project. And it was necessary for us to
be able to make financial projections. And we made finan-
cial projections of gross revenue going out at least several
years.
“Counsel: And is this average annual effective rent
number that I’ve just described, the $793,000 and change,
ultimately was that a number that you felt in developing
the club was a sustainable rent, given projected operations
going forward?
“Witness: I would say that it was on the high side of
sustainable, because you have to look at what the stabi-
lized revenue would be of a club like ours. And at approxi-
mately $790,000 in annual rent, we would have to generate
490 Stafford Hills Properties, LLC v. Dept. of Rev.
a tremendous amount of income off of this property, but we
felt that the potential was there, and that we could do it.
“So given our projections, we felt that this was in the
range of what the IHRSA data had provided to us with
regard to an expectation of percentage rent—or excuse
me—rent as a percentage of gross revenue.”
As explained in the ultimate paragraph of the pre-
vious testimony, James Zupancic developed the actual rent
by using “IHRSA data” to determine an “expectation of * * *
rent as a percentage of gross revenue.” That creates a sig-
nificant problem to taxpayer’s appraisal as to the persua-
siveness of using IHRSA data to determine the fair market
rent. The use of the actual rent of the Club as a check on the
estimated market rent is circular in that both the estimated
market rent and the actual rent are based on interpreta-
tions of the IHRSA data.
Taxpayer’s appraiser, by backing up his estima-
tion of market rent (determined using IHRSA data) on the
actual rent of the club (determined using IHRSA data) does
not address the primary weakness of the appraisal: the data
provides national figures, which are not persuasive for local
market determinations, and not acceptable under OAR 150-
308-0240(2)(g). For these reasons, the court rejects taxpay-
er’s income approach.
With respect to the county’s income approach, the
county’s appraiser only placed secondary emphasis on the
income approach. Taxpayer argues that the county’s income
approach should be disregarded because it relies on rents of
properties that are not similar to the subject property.
There is substantial evidence in the record that
multisport clubs are difficult to compare to other clubs,
whether fitness-only or multisport. However, this court is
wary of making a finding that any attempt to use rent or
sales comparables for a multisport club renders the related
appraisal analysis unsound.
Fortunately, in taxpayer’s view, the county’s
appraiser relied solely on the cost approach. Accordingly,
this court may avoid addressing how, if at all, to conduct an
income or sales comparable analysis when market evidence
is lacking.
Cite as 22 OTR 470 (2017) 491
For this property, given the lack of market informa-
tion available for use in the income approach to value, and
given the fact that the property was recently constructed,
the court considers the cost approach to be more persuasive.
Of course, properties can be and sometimes are built costing
more than they are worth. Indeed, taxpayer has argued that
is what has occurred here, and James Zupancic testified
that he knew that going in and hoped to make up the differ-
ence through operation of the Club. Taxpayer also argues,
and introduced supporting evidence, that market partici-
pants do not significantly rely on the cost of a property when
determining its value. However, when market comparisons
are lacking, and the property is newly constructed, the court
finds that the cost approach to value is more reliable and
persuasive than the income approach to value.
Whether the initial value determined under the
cost approach must be adjusted for superadequacy is a sepa-
rate question to which the court now turns.
D. Superadequacy
In his cost approach to value, taxpayer’s appraiser
made a deduction of 40 percent of the total cost for superad-
equacy. Just as he did in his income approach to value, tax-
payer’s appraiser turned to the national averages in the
IHRSA Profiles of Success report. As detailed by taxpayer’s
appraiser:
“As presented in the 2014 IHRSA survey data, it is evi-
dent that multi-sport facilities such as the subject are func-
tionally competitive in the marketplace with approximately
14.1 square feet per member. The mean member count was
3,581 whereas the mean facility size was 50,168 square feet.
The forecasted member count for the subject property was
1,233 at the end of 2012 and 2,874 as to 2013. At the average
of 2,053 members, the corresponding functional equivalent
size for the subject based upon IHRSA survey data would
have been a facility that was approximately 30,000 square
feet. Given the actual size of the subject property (90,260
SF), it therefore represented an over-improvement of approx-
imately 60,000 square feet which can be largely attributed
to the wellness center and the fact that the facility was con-
structed in two separate buildings which created cost ineffi-
ciencies. Other indexes are also relevant. The actual size of
492 Stafford Hills Properties, LLC v. Dept. of Rev.
the subject (90,260 SF), when compared to the mean facil-
ity size (50,168 SF), suggests a 45 percent super-adequacy.
The 2013 year end member count of 2,803, when compared
to the industry mean of 3,558, suggests in excess of 20 per-
cent capacity underutilization. Similarly, the 2013 member
count represents 32.2 square feet of indoor space per mem-
ber which is more than double the industry mean. The ability
to increase the number of members substantially beyond the
forecasted maximum threshold may not have been possible
due to on-site parking limitations which is further com-
pounded by parking restrictions associated with the condi-
tional use permit. Therefore, it can be reasonably and fac-
tually concluded that the functional super-adequacy of the
existing structures is incurable. Given these considerations,
and the corresponding depreciation range indicated by the
various indexes of roughly 20 to 50 percent, depreciation
has been estimated at 40 percent of replacement cost, all of
which has been attributed to super-adequacy. This estimate
is all-inclusive of various property characteristics that con-
tribute to inefficiency and super-adequacy.
“By far, the greatest influence is the atypically large
size of the facility relative to membership. Integration of
a ‘wellness center’ is also atypical of the multi-sport facil-
ity model and may not have contributed to membership
growth to the extent anticipated by the developer.”
(Emphases added.)
This court cannot accept taxpayer’s superadequacy
argument. Taxpayer has introduced evidence to support the
finding that multisport facilities are difficult to compare
even to other multisport facilities.11 Accordingly, reliance
upon national averages to determine what constitutes the
appropriate size for taxpayer’s unique offering to the local
marketplace is both unpersuasive and counter to taxpay-
er’s evidentiary arguments with respect to other parts of the
appraisal process.
Furthermore, the Club was recently constructed.
Relying upon membership forecasts for the first two years
of its existence to determine superadequacy does not fit
the evidence, introduced by taxpayer, that multisport clubs
11
For example, Richard Caro stated, “each [multisport] club is a unique club,
which makes it hard to generalize, hard to compare to others, and hard to predict
its outcome.”
Cite as 22 OTR 470 (2017) 493
take multiple years to achieve stabilization of membership.
Taxpayer can guess that it has constructed too large of a
facility based on the number of parking spaces that it has.
However, that estimate is insufficient to survive taxpayer’s
burden to show that the subject property is more likely than
not subject to a 40 percent superadequacy adjustment.
Finally, taxpayer’s appraiser suggests that the
existence of a wellness center and the size of the Club are
atypical of the industry. Such arguments are not persuasive.
First, the evidence suggests that most if not all multisport
clubs are unique to some extent, so it is not clear what rele-
vance to superadequacy there is in the atypical nature of a
wellness center.
Second, with respect to the size of the Club, the
evidence introduced by taxpayer indicates that multisport
facilities are typically larger offerings. Indeed, the county’s
appraiser noted four athletic clubs, two of which had a ten-
nis component, which clubs had sizes ranging from 115,470
square feet to 232,638 square feet. The court cannot con-
clude that the Club, given its unique mix of offerings, is
more likely than not too large.
On the evidence introduced in this case as to this tax
year, this court cannot conclude that a 40 percent superade-
quacy adjustment to the cost approach is appropriate.
E. Developer’s Profit
The parties’ appraisers differed in their treatment
of developer’s profit. The county’s appraiser added a devel-
oper’s profit to the total cost of the Club, including the cost
value of the raw land. Taxpayer’s appraiser, however, only
added a developer’s profit to the direct and indirect cost of
construction related to the Club. The position of taxpay-
er’s appraiser is in line with accepted appraisal methodol-
ogy in The Appraisal of Real Estate (14th ed). The county’s
appraiser gave no justification for adding a developer’s profit
to the raw land value, and the addition of such developer’s
profit to the raw land value is rejected.
The court notes that each party’s appraiser deter-
mined a substantially different developer’s profit rate. The
494 Stafford Hills Properties, LLC v. Dept. of Rev.
county’s appraiser determined a rate of 10 percent, based
upon an estimated range of eight percent to 20 percent.
Taxpayer’s appraiser determined a rate of five percent,
based upon the eight percent rate before the 2008 recession,
reduced by the effects of the 2008 recession. Neither party
expended any briefing on why their appraiser’s determina-
tion of the developer’s profit rate was correct. Because tax-
payer failed to carry its burden of proof, the court will accept
the county appraiser’s determination of the developer’s profit
rate.
F. Value of the Property
Having considered the appraisals of each party, the
court must now determine the value of the property. The
court is not persuaded by taxpayer’s appraisal. It is there-
fore rejected.
The RMV assessed and determined by the BOPTA
for the subject property was $12,774,442. After litigation
in the Magistrate Division, the magistrate issued a Final
Decision in which the RMV of the property was deter-
mined to be $14,569,700. Stafford Hills Properties, LLC v.
Clackamas County Assessor, TC-MD 140184N (May 1, 2015)
(slip op at 26).
Taxpayer, as Plaintiff, is the only party that filed
a complaint in this case. However, the county filed in its
answer in the Regular Division a “counterclaim” that the
RMV of the subject property is $15,173,000. The county’s
appraiser determined a cost value of $15,417,000. This court
has the statutory authority to determine the correct value of
the property regardless of the values pleaded by the parties.
ORS 305.412.
With the exception of the developer’s profit calcu-
lated by the county as noted above, the court accepts the
RMV determination of the county’s appraiser. The improve-
ment value determined by the county is also accepted,
except as must be modified by recalculation of the develop-
er’s profit.
Previously, by joint motion of the parties, this court
ordered that the issues of RMV and the changed property
Cite as 22 OTR 470 (2017) 495
ratio used by the county to determine the MAV and AV of
the property were to be bifurcated, with resolution of the
RMV issue to be decided first. Accordingly, this court makes
no determination on the AV or the MAV associated with the
Club resulting from this opinion.
V. CONCLUSION
The court rejects the appraisal of taxpayer for
failure to rely on local market information for the income
approach and for failing to prove the adjustment for superad-
equacy in the cost approach. The court accepts the appraisal
of the county except as noted with respect to the addition of
developer’s profit to the raw land value. The court makes no
finding on the AV or MAV of the property. Now, therefore,
IT IS THE DECISION OF THIS COURT that the
county will provide the court with an updated RMV of the
property after adjustment of the developer’s profit.
IT IS FURTHER DECIDED that the parties will
address the issue of what AV and MAV results from the
updated RMV.