CLP Elements v. Benton County Assessor ( 2012 )

IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Property Tax
CLP ELEMENTS LLC, )
)
Plaintiff, ) TC-MD 110559N
)
v. )
)
BENTON COUNTY ASSESSOR, )
)
Defendant. ) DECISION
Plaintiff appeals the real market value of property identified as Account 417374 (subject
property) for the 2010-11 tax year. A trial was held in the Oregon Tax Court Mediation Center
on November 14, 2011. Richard Carone (Carone), general partner of Plaintiff, appeared and
testified on behalf of Plaintiff. Steven Zenker (Zenker), Certified General Appraiser, MAI,
Cushman & Wakefield of Oregon, Inc.; Kinn Edwards (Edwards), proprietor and co-owner of
del Alma restaurant and bar; and Darren Dickerhoof (Dickerhoof), owner of several retail and
office properties in Corvallis, also testified on behalf of Plaintiff. Richard D. Newkirk, Jr.,
(Newkirk), commercial and industrial appraiser, appeared and testified on behalf of Defendant.
Plaintiff‟s Exhibits 1 through 9, 16, 17, 18, 19, 21, 22, 24, and 25 and Defendant‟s Exhibits A, B,
and C were offered and received without objection.
I. STATEMENT OF FACTS
The subject property‟s 2010-11 roll real market value was $8,395,950 and its 2010-11
maximum assessed value was $5,365,491. (Ptf‟s Compl at 2.) “The subject property is a six-
story mixed-use building that includes three floors of „spa‟ space, one floor is designated for
office use and the top two floors are improved for restaurant/bar use.” (Ptf‟s Ex 1 at v.) The
subject property land is 4,792 square feet and the subject property improvement is 27,534 square
DECISION TC-MD 110559N 1
feet, gross1; the net rentable area of the subject property is 21,441 square feet. (Id.; Def‟s Ex A
at 7.) Construction of the subject property improvement was completed in 2008. (Ptf‟s Ex 1 at
v.) Zenker determined it to be of good quality and good condition. (Id.) The subject property
does not include any parking. (Def‟s Ex A at 12.) Plaintiff has “a lease for parking on a paved
parking area about ½ block south * * * of the subject property. The lease provides for 27
parking spaces at $50 each/month * * *. The parking rate is typical for the City of Corvallis
downtown area.” (Id.)
Zenker testified that the subject property is located on SW 2nd Street in downtown
Corvallis. (see Ptf‟s Ex 1 at vii-ix.) He testified that corner lots are typically more valuable than
center lots, like the subject property, because corner lots receive more exposure. Zenker
determined that the subject property is zoned central business. (Ptf‟s Ex 1 at v; see also Ptf‟s Ex
17 (Corvallis zoning map showing that the entirety of 1st Street is in the Riverfront zone whereas
the majority of 2nd Street is in the Central Business zone).) He testified that he confirmed the
subject property zoning with the City of Corvallis. Zenker noted that Newkirk identified the
subject property zoning as “River Front,” which allows some residential uses. (See Def‟s Ex A
at 14.) Newkirk testified that the he talked with someone at the Corvallis city planning
department and was told that one of the goals of the Riverfront zone is to increase population
density in downtown Corvallis. Dickerhoof testified that he views the Riverfront zone as a
drawback because it is not clear what is allowed; a lot of discretion is left to the City of Corvallis
and it is burdensome to determine allowable uses.
Both parties provided appraisal reports. Carone testified that he retained Zenker on the
recommendation of Citizens Bank; he had no prior relationship with Zenker, which Zenker
1
Defendant lists the subject property as 27,147 square feet, gross. (Def‟s Ex A at 7.)
DECISION TC-MD 110559N 2
confirmed in his testimony. Zenker testified that he had previously appraised the subject
property for Citizens Bank for lending purposes. He testified that he has been in the appraisal
business since 1986 and appraised over 100 buildings in the last five years. Zenker testified that
his appraisal of the subject property complies with the Uniform Standards of Professional
Appraisal Practices (USPAP). He testified that he determined the value of the subject property
as though stabilized and then subtracted lease-up costs. Zenker determined the value of the
subject property as of both January 1, 2009, and January 1, 2010. (Ptf‟s Ex 1 at vi.) Newkirk
testified that his appraisal report is an updated version of the report that he prepared for the
previous tax year appeal involving the subject property.
A. Highest and best use
Zenker determined the subject property‟s highest and best use as improved to be “[l]eave
the first floors in their current configuration but convert the upper floors (fifth and sixth floors) to
office use[.]” (Ptf‟s Ex 1 at v.) Newkirk determined the highest and best use of the subject
property as improved to be the “current use - mixed use office/retail building,” with an
alternative highest and best use of “office use, or mixed use - office/retail.” (Def‟s Ex A at 14.)
B. Plaintiff’s income approach
As of January 1, 2010, the fifth and sixth floors of the subject property were completely
vacant and the fourth floor had only six percent occupancy; the subject property occupancy was
54.2 percent.2 (Ptf‟s Ex 1 at 71, 84.) A tenant rented 240 square feet on the fourth floor at $1.25
per square foot on a modified gross month-to-month lease; Plaintiff “anticipates that [the] tenant
will move as more space is leased in the building.” (Id. at 72-73.) As of January 1, 2010, Epic
Spa rented the first three floors at $2.30 per square foot, triple net. (Id.) Carone testified that he
2
As of January 1, 2009, the subject property occupancy was 81.2 percent (17,413 square feet). (Ptf‟s Ex 1
at 70, 83.)
DECISION TC-MD 110559N 3
is a part-owner and the landlord of Epic Spa. He testified that, in 2011, the spa will likely
“break even” at just under $1 million in revenue, which is up 20 percent from the 2010 spa
revenue of about $800,000. Carone testified that the spa lease is $13.64 per square foot,
annually.
Zenker determined that, in the subject property‟s market, “office leases for this property
type are typically written on a modified (full service gross) basis whereby the tenant is required
to pay for any increases (pro rata share) in base-year expenses. Retail spaces in the market are
typically structured on a net (triple net) basis in which the tenant pays their pro rata share of
expenses.” (Ptf‟s Ex 1 at 71.) Zenker‟s rent conclusions for all floors of the subject property are
all based on modified gross leases. (Id. at 76.)
Zenker determined market rent for the fourth, fifth, and sixth floors of the subject
property based on office rent comparables. (Ptf‟s Ex 1 at 74-77.) Although the subject property
fifth and sixth floors were, in fact, operated as a restaurant, Zenker “estimate[d] rent for the
upper floors assuming office use” as of January 1, 2010. (Id. at 77.) He identified six office rent
comparables with per month rents ranging from $1.60 to $2.25 per square foot and an average of
$1.98 per square foot. (Ptf‟s Ex 1 at 74, 76.) Zenker‟s office rent comparables are all older than
the subject property and all are “Class B” whereas the subject property is “Class A.” (Id.) He
reported that Gary Pond of Commercial Associates “noted that the subject [property] is probably
one of the few if only „Class A‟ office propert[ies] in Corvallis.” (Id. at 76.) Zenker stated that
Pond believed the subject property “should be able to command rents in the $2.25 to $2.50 per
square foot per month range.” (Id.) Zenker concluded rent of $2.25 per square foot for the
subject property fourth floor and $2.30 per square foot for the subject property fifth and sixth
floors. (Id.)
DECISION TC-MD 110559N 4
Zenker determined market rent for the first, second, and third floors of the subject
property based on spa and retail rent comparables. (Ptf‟s Ex 1 at 78-80.) He identified six “retail
rent comparables” for the subject property with rents ranging from $1.20 to $2.10 per square foot
and an average of $1.67 per square foot. (Id. at 78, 80.) The subject property “is considered to
be superior to all of the comparables in terms of quality.” (Id. at 80.) Zenker testified that
comparable 7, Retreat Day Spa, is the best comparable for subject property spa space; 2010 rent
was $2.10 per square foot. (See id. at 78, 80.) He reported that there are ten spas located in the
Corvallis area, the largest of which is the Retreat Day Spa. (Id.) “[T]he brokers who sold the
subject [property] indicated that there were three operators in the Portland area that were willing
to lease the subject [property]‟s spa if it were available. No lease information was provided for
these potential tenants.” (Id.) Zenker noted that a spa “located in the Pearl District of downtown
Portland,” the “Salt Grotto,” leases space at “$2.00 per square foot on a net basis [and t]he lease
began in August of 2009.” (Id.) That spa “reportedly completed [its] own interior improvements
at a cost in excess of $50.00 per square foot.” (Id.) Zenker determined “that an appropriate rent
for the subject [property spa space] should be from $2.00 to $2.50 per square foot per month”
and determined rent as of January 1, 2010, to be $2.30 for the first floor and $2.05 for the second
and third floors. (Id. at 80-81.) Zenker explained that the first floor has better exposure and
access than the second and third floors. (Id. at 80.)
Dickerhoof testified that he owns and manages numerous retail and office properties in
Corvallis, including two shopping centers. He testified that he leases office space at about $1.50
to $1.60 per square foot on a full service lease. Dickerhoof testified that his retail properties
lease at rates ranging from $1.00 per square foot to $2.15 per square foot, triple net. Newkirk
///
DECISION TC-MD 110559N 5
asked Dickerhoof if one could get $2.00 per square foot for the subject property. Dickerhoof
testified that he approached “image conscious” tenants and could not get any “bites.”
Using the net rentable area, Zenker determined total gross income of $566,660 for the
subject property. (Ptf‟s Ex 1 at 82.) He determined a five percent vacancy and collection loss to
be the “stabilized” rate as of January 1, 2010, and subtracted $28,333 for effective gross income
of $538,327. (Id. at 83, 91.) Zenker considered the subject property actual expenses and
operating expenses of other, similar properties. He calculated expenses for subject property
including property insurance, management fees, total utilities, repairs and maintenance, cleaning
and janitorial, parking lot payments, and other taxes, fees, and permits (not including property
taxes). (Ptf‟s Ex 1 at 87.) Zenker determined the total operating expenses for the subject
property to be $173,850, which is $8.11 per square foot or 32.29 percent, as of January 1, 2010.3
(Id.) He also identified three expense comparables in Corvallis, each of which is listed as
“confidential” and not named; total expenses for net rentable area ranged from $7.20 to $7.82 per
square foot for those properties. (Id. at 89.) Zenker testified that he used the subject property
actual expenses and concluded total expenses of 36.88 percent including property taxes.4 (Id. at
91.) Zenker determined net operating income (NOI) of $339,8175 as of January 1, 2010. (Id.)
To determine an appropriate capitalization rate for the subject property, Zenker
considered market conditions, office market investor surveys, and comparable sales of office
3
Those figures appear to be typographical errors. The expenses listed by Zenker add up to $130,970 and
$6.11 per square foot, or 24.33 percent of effective gross income, which is Zenker‟s conclusion for January 1, 2009.
(Ptf‟s Ex 1 at 90.) Zenker‟s January 1, 2010, net operating income (NOI) of $339,817, including property taxes,
appears to be calculated based on operating expenses of $130,970; if operating expenses of $173,850 were used, the
January 1, 2010, NOI would be $296,937, not $339,817, as he concluded. (See id. at 91.)
4
If the typographical error in Zenker‟s calculation of operating expenses as of January 1, 2010, were
corrected, total operating expenses would be $6.11 per square foot, or 24.33 percent, as concluded in 2009; total
expenses would remain 36.88 percent as stated in Zenker‟s report. (See Ptf‟s Ex 1 at 90-91.)
5
Not including property taxes, Zenker‟s NOI as of January 1, 2010, is $407,357. (See Ptf‟s Ex 1 at 91.)
DECISION TC-MD 110559N 6
properties. (Ptf‟s Ex 1 at 91-95, 98-103.) Zenker identified three comparable sales in 2009 with
capitalization rates ranging from 8.14 percent to 8.40 percent. (Id. at 100.) The Korpacz fourth
quarter 2009 investor surveys reported an average capitalization rate of 8.75 percent for the
national office market and 9.30 percent for the Pacific Northwest market. (Id. at 101.) Zenker
concluded a capitalization rate of 9.25 percent as of January 1, 2010. (Id. at 103.) Newkirk
questioned Zenker‟s use of a 9.25 percent capitalization rate when the highest rate indicated by
Zenker‟s actual sales was 8.40 percent. Zenker testified that the subject property presents more
risk to a potential investor because it is a mixed use property. Dickerhoof testified that
capitalization rates range from 6.5 percent for long-term leases with national tenants such as
Auto Zone, to 8.5 or 9 percent for multi-tenant properties. He testified that those rates reflect
risk, and long-term leases with large, national companies are less risky. Zenker determined a
“Hypothetical Stabilized Value” of $3,673,697 as of January 1, 2010. (Id.)
Zenker determined that lease up costs should be subtracted from value conclusions under
the cost, sales comparison, and income capitalization approaches. He stated that “leasing activity
in the market appears to be stagnant for the moment.” (Id. at 84.) Zenker determined an 18-
month lease up period to be reasonable as of January 1, 2010.6 (Ptf‟s Ex 1 at 84.) Using
“stabilized” vacancy of five percent, he concluded that 89.1 percent of the 9,824 square feet of
vacant space as of January 1, 2010, must be occupied before the subject property reaches
stabilized occupancy. (Id. at 85.) Using a blended rental rate of $2.28 per square foot, tenant
improvements of $25 per square foot, and 10 percent entrepreneurial profit, Zenker calculated
lease up costs of $701,772. (Id. at 86.) He subtracted lease up costs for an “Indicated „As Is‟
Value” of $2,970,000 (rounded) for the subject property as of January 1, 2010. (Id. at 103.)
6
Zenker determined a 12-month lease up period to be reasonable as of January 1, 2009. (Ptf‟s Ex 1 at 83.)
DECISION TC-MD 110559N 7
C. Defendant’s income approach
Newkirk testified that the subject property was not stabilized as of January 1, 2010. He
stated that the “net rentable area” of the subject property averaged $36.32 per square foot. (Def‟s
Ex A at 64.) Newkirk stated that “the Epic Spa lease [of the first three floors] contains
provisions for the lesser of 15% of revenues, or $3.03 per square foot (monthly).” (Id.) He
stated that Plaintiff‟s “rent receipts for 2010 were $111,019, representing receipts for Epic Spa
based on 15% revenues, and partial year rental receipts from the Watershed, a new office tenant
occupying the 4th floor.” (Id.) The fifth and sixth floors of the subject property were vacant in
2010, but “2011 income also includes an interim tenant (The Vue), located on the 5th and 6th
floors * * * [that] provides weddings and other events to the general public.” (Id.) “[T]otal
project income [is] estimated between $274,010 and $449,000 for 2011.” (Id.)
Newkirk identified seven rent comparables (five leases and two listings) for the subject
property office and spa spaces and three rent comparables for the subject property restaurant
space. (See Def‟s Ex A at 63.) Newkirk testified that he considered medical offices as
comparable to the subject property spa space because it was hard to find spa rent comparables.
His office lease comparables are all properties built between 1999 and 2009 located in Corvallis
and Salem. (Id. at 72.) The three properties in Salem are Class A and the four in Corvallis are
Class B. (Id.) The five existing leases are dated in 2008, 2009, and 2010 and are all modified
gross. (Id.) The unadjusted lease rates range from $1.74 to $2.36 per square foot per month;
Newkirk‟s adjusted lease rates range from $2.31 to $2.92 per square foot per month. (Id.) The
two lease listings are $1.90 and $2.45 per square foot per month, unadjusted; Newkirk adjusted
those listings to $2.30 and $2.43 per square foot per month. (Id.) Based on those comparables,
Newkirk selected a lease rate of $2.83 per square foot per month for the first three floors of the
DECISION TC-MD 110559N 8
subject property and $2.50 per square foot per month for the fourth floor of the subject property.
(Id. at 64.)
Newkirk‟s three restaurant rent comparables are Tokyo Steakhouse, Baja Fresh, and Del
Alma, which is managed by Edwards, all located in Corvallis.7 (Def‟s Ex A at 74-77.)
Respectively, the lease rates were $1.58, $2.50, and $1.58 per square foot per month, unadjusted,
and $2.67, $3.58, and $1.58 per square foot per month, adjusted. (Id.) Newkirk determined
reasonable restaurant rent to be $3.13 per square foot per month. (Id. at 82-83.)
Edwards testified that he is a proprietor and co-owner of Del Alma, Newkirk‟s restaurant
comparable 3, and that he has been in the restaurant business since 1986. He testified that
several Corvallis restaurants closed in the past few years. Edwards testified that a restaurant‟s
rent should not constitute more than 10 percent of its revenue. He testified that, in 2011, Del
Alma‟s rent was $8,000 per month based on a full service lease at $1.60 per square foot per
month. Edwards testified that Del Alma‟s 2011 revenue as of the date of trial was $65,000 to
$70,000 per month, but his goal is $80,000 per month revenue. He testified that typical monthly
revenues for downtown Corvallis restaurants range from about $60,000 to a high of $100,000.
Dickerhoof testified that Newkirk‟s comparable 2, Baja Fresh, is located on 9th street, which is a
better location than the subject property because of increased traffic and exposure; it also has
parking.
Newkirk also concluded vacancy and collection loss of five percent for the subject
property. (Def‟s Ex A at 81-83.) To determine market expenses, Newkirk obtained “[f]ive (5)
leases * * * from the Corvallis market * * *.” (Id. at 80.) The “office” properties range in size
from 2,910 square feet to 264,000 square feet. (Id.) Lease rates ranged from $1.38 to $1.88 per
7
The Tokyo Steakhouse and Baja Fresh leases are both triple net; Del Alma lease is full service. (Def‟s Ex
A at 77.)
DECISION TC-MD 110559N 9
square foot per month. (Id.) Newkirk calculated expense ratios for each of the five properties by
dividing the “lease expenses” by the “annual lease” for rates ranging “from 25.12% to 35.27% of
the gross lease rate, or about an average of 30.20%.” (Id.) He concluded “an expense rate of
about 25%” for the subject property office space. (Id.) For the subject property restaurant space,
Newkirk stated that comparable leases are typically triple net and “[m]anagement fees typically
range between 2 and 6 percent[,]” so he selected expenses of four percent. (Id. at 82.) Newkirk
also included “structural reserves” at 2.5 percent in his calculation of NOI.8 (Id. at 81-83.)
Newkirk testified that his expenses included property taxes.
Newkirk analyzed market sales of “generally comparable property sold in Oregon within
the past 48 months” to determine an appropriate capitalization rate for the subject property.
(Def‟s Ex A at 79.) He selected six sales and two listings of “office [and] medical office
propert[ies]” and five sales of “restaurant” properties. (Id.) Newkirk‟s six office and medical
office sales occurred between November 2007 and August 2009; he found that “typical
capitalization rates for medical/office properties range from 6.5% to 8.85%, with an average of
7.00% for listings, and 7.47% for improved sales.” (Id.) He concluded a capitalization rate of
7.5 percent for “medical/office space in the subject property.” (Id. at 80.) Newkirk‟s restaurant
sales occurred between December 2005 and February 2010; he found that, “[f]or restaurant
properties, capitalization rates range from 5.56% to 13.48% with an average of 7.76%.”9 (Id. 79-
80.) Newkirk selected a rate of 6.75 percent for the “restaurant” space. (Id. at 80.)
Newkirk calculated NOI and an indicated value for each of the three types of spaces in
the subject property. (Def‟s Ex A at 81-83.) In his report, he used gross square feet rather than
8
Newkirk testified on cross examination that the “25%” expense ratio stated for the subject property
restaurant space was a typographical error; the correct figure is four percent. (See Def‟s Ex A at 83.)
9
13.48 percent capitalization rate for the Junction City sale. (Def‟s Ex A at 79.)
DECISION TC-MD 110559N 10
net rentable square feet to calculate NOI and concluded a value of $8,660,000, then subtracted
the value of parking, $400,000, for an indicated value of $8,260,000 under the income approach.
(Id. at 83-84.) Newkirk testified on cross examination that he erroneously used gross square feet
rather than net rentable square feet and revised his calculation to reflect net rentable square feet;
he concluded a value of $6,450,000, after subtracting $400,000 for parking.
D. Sales comparison approach; subject property sale
Zenker analyzed market sales based on “sales price per square foot of net rentable area.”
(Ptf‟s Ex 1 at 57.) He identified five sales of comparable properties in Eugene in 2008 and 2009
and one listing in Corvallis. (Id. at 60.) The unadjusted prices per square foot for those six
properties ranged from $121.38 to $237.56, with an average of $156.44 per square foot. (Id.)
Zenker made qualitative, percentage adjustments and determined adjusted prices per square foot
ranging from $129.19 to $196.75, with an average of $154.82 per square foot. (Id. at 62.) He
testified that the subject property does not have its own parking spots whereas all of the
comparable sales and listing have parking, so he made a downward adjustment of five percent to
each sale and listing price. (See id.) Zenker also made a downward location adjustment of five
percent to each of the sales of Eugene properties. (Id.) He made upwards adjustments for “age,
quality, & condition.” (Id.) Zenker made downward adjustments to the five Eugene sales for
market conditions. (Id.) He made a downward adjustment to the listing because it is a listing.
(Id. at 62, 64.) Zenker made a downward adjustment to each sale and listing because “the
subject [property‟s] mixed-use configuration would limit its marketability[.]” (Id. at 62, 65.)
Zenker determined that his comparable sales 2, 3, and 6 were the most similar to the
subject property based on the net adjustments; the adjusted prices per square foot of those sales
were $129.19, $168.16, and $136.12, respectively. (Ptf‟s Ex 1 at 68.) Zenker described his sales
DECISION TC-MD 110559N 11
2, 3, and 6 as “overall inferior” to the subject property. (Id. at 62.) His comparable sale 5, with
an unadjusted sale price of $237.56 per square foot and an adjusted price per square foot of
$196.75 was the only comparable sale that he considered “overall superior” to the subject
property. (Id.) Zenker selected a price of $160 per square foot and determined an “Indicated
Hypothetical Stabilized Value” of $3,430,560. (Id. at 68.) Subtracting lease up costs of
$701,772, he determined a value of $2,730,000 under the sales comparison approach. (Id.)
Zenker considered that value reasonable as compared with the subject property purchase price of
$3,259,000 in June 2009, and “in light of changes in the economy * * *.” (Id. at 69.)
Newkirk testified that his sales comparison approach was the same as that which he
utilized for the 2009-10 appeal, with the exception of a new medical office sale 5. (See also
Def‟s Ex A at 34.) Like Zenker, Newkirk‟s unit of comparison was price per square foot; it is
not clear whether he used net rentable square feet or gross square feet. (Id. at 33.) Newkirk
analyzed three sales and two listings of medical office properties, four sales of office properties
(including one medical office), and four sales of restaurant properties. (Id. at 36-61 46.) He
made quantitative adjustments for differences including construction class, age, size, zoning,
location/access, and conditions of sale, as well as qualitative determinations. (Id. at 35-36.)
Newkirk‟s adjustments included “[t]ime adjustments * * * based on an indicated appreciation
rate of 4.5%, up to the January 1, 2009[,] (no adjustment for 2009).” (Id. at 45, 53, 61.)
Newkirk‟s medical office sales and listings range in size from 2,715 to 104,856 square
feet. (Def‟s Ex A at 42.) The properties are located in Corvallis, Hillsboro, and Cedar Mill, and
all are single use medical office properties with the exception of listing 4, which includes 4,779
square feet of retail space. (Id. at 40, 42.) The three sales occurred in April 2008, June 2008,
and September 2009. (Id. at 42.) Unadjusted prices per square foot range from $249 for listing 4
DECISION TC-MD 110559N 12
to $315 per square foot for sale 2, a 104,856 square foot medical office in Hillsboro. (Id.)
Newkirk‟s adjusted prices per square foot range from $244 to $414. (Id. at 45.) He concluded
$360 per square foot for the first three floors of the subject property for a value of $4,950,000.10
(Id.)
Newkirk‟s office sales range in size from 3,918 to 51,110 square feet and are located in
Corvallis, Salem, Tigard, and Eugene. (Def‟s Ex A at 50.) The properties are all are single use
office properties; sale 1 is a single use medical office located in Corvallis. (Id. at 46, 50.) The
sales occurred in November 2007, April 2008, May 2008, and November 2009. (Id. at 50.) The
unadjusted prices per square foot range from $207 to $259; the adjusted prices per square foot
range from $218 to $266. (Id. at 53.) Newkirk concluded a value of $310 per square foot and
determined a value of $1,430,000 for the subject property fourth floor.11 (Id.)
Newkirk‟s restaurant sales range in size from 3,093 to 11,472 square feet and are located
in Corvallis, Woodburn, and Eugene. (Def‟s Ex A at 58.) The sales occurred in December 2005,
September 2008, January 2009, and February 2010. (Id.) The unadjusted prices per square foot
range from $174 to $404; the adjusted prices per square foot range from $177 to $459, with an
average of $241 per square foot. (Id. at 61.) Newkirk determined a value of $300 per square
foot or a value of $2,140,000 for the subject property fifth and sixth floors.12 (Id.) Newkirk
///
///
10
Newkirk‟s value conclusion is based on the 13,755 gross square feet. (Def‟s Ex A at 45.)
11
Newkirk‟s value conclusion is based on 4,617 gross square feet. (Def‟s Ex A at 53.)
12
Newkirk‟s report states that the value of $300 per square foot was applied to “the Fourth floor of regular
office space.” (Def‟s Ex A at 61.) However, the fourth floor of the subject property is office and Newkirk
determined its value under his sales comparison approach on page 53 of his report. (Def‟s Ex A at 53.) Newkirk‟s
value conclusion is based on 7,143 gross square feet. (Id. at 61.)
DECISION TC-MD 110559N 13
added the values for each type of space for a total value of $8,520,000. (Id. at 62.) He
subtracted the value of parking, $400,000,13 for a total value of $8,100,000. (Id. at 62-63.)
Carone testified that Plaintiff purchased the subject property on June 3, 2009, for
$3,259,000, of which about $600,000 was for personal property. (See Ptf‟s Ex 1 at 2.) He
testified that the previous owner of the subject property had opened a spa and restaurant in the
subject property in April 2008 and both closed in December 2008 or January 2009. Dickerhoof
testified that he considered purchasing the subject property in 2008 for $3.5 million. He testified
that investors considering whether to purchase a property such as the subject property focus on
what rents can be achieved. Dickerhoof testified that the first three floors of the subject property
are very nice, but not very usable; they would probably have to be converted to medical offices.
He testified that the typical cost to “reposition” a property is about $30 per square foot.
Dickerhoof testified that he considered the “effective cost” to purchase the subject property to be
$4.2 million, which was not a worthwhile purchase.
Newkirk testified that there is some evidence that the 2009 sale of the subject property
was a distress sale, including a March 8, 2009, newspaper article in the Corvallis Gazette Times
describing the foreclosure of the subject property in 2009 as a result of the previous owner‟s
financial troubles. (See Def‟s Ex A at 88-92.) Newkirk noted that:
“local commercial broker Gary Pond calculate[d] a buyer would need to charge
monthly rents of $3.85 per square foot to net a modest 6 percent return on
investment. * * *. „There is nothing renting near that rate in the downtown, and
even the new projects on Ninth Street haven‟t broken $3,‟ Pond said in an email.
Assuming the building was fully leased at an average monthly rate of $2 per
square foot, Pond said, a buyer could make the deal pencil out at a sale price of
around $8.5 million.”
13
Newkirk noted that the comparable sales all included “ample parking,” so he subtracted the value of
parking, which he calculated by multiplying the space required for the subject property parking, 9,088 square feet,
by $44 per square foot for parking, determined based on his land value. (Def‟s Ex A at 62.)
DECISION TC-MD 110559N 14
(Id. at 92.) Dickerhoof testified that he did not think the subject property was a distressed sale; it
was listed by a well-known Portland company and several groups were looking at it.
E. Cost approach; reconciliation
Zenker testified that he did not place much weight on the cost approach because the
subject property is very unique and suffers from external obsolescence in the range of 56 to 58
percent.14 (See Ptf‟s Ex 1 at 47-48.) He testified that the subject property “also has
superadequacy issues as it relates to the amount of interior improvements present in the
property.” (See Id. at 48.) To determine the value of the subject property land, Zenker identified
four comparable land sales in 2006 and 2007 and two land listings in Corvallis. (Ptf‟s Ex 1 at
36.) He made qualitative adjustments and determined prices per square foot ranging from $18.50
to $54.15, with an average of $33.70. (Id. at 38.) Zenker concluded a price per square foot of
$33 for the subject property land as of January 1, 2010, and concluded a land value of $160,000.
(Id. at 43-44.) Using Marshall Valuation Service, Zenker determined a replacement cost new of
$7,999,517 for the subject property structures as of January 1, 2010. (Id. at 49.) Including
“age/life” and economic (external) obsolescence, he concluded the depreciated improvements
value to be $3,437,548. (Id. at 51.) Zenker separately analyzed the value of the site
improvements under the cost approach and concluded a value of $11,906. (Id. at 51-53.) He
subtracted lease-up costs of $701,772 for a total indicated value of $2,907,682 under the cost
approach. (Id. at 56.) Zenker determined a reconciled “as is value” of $2,900,000 as of January
1, 2010.15 (Id. at 104.)
///
14
Zenker calculated external obsolescence based on the disparity between the replacement cost new of the
subject property improvements and the value conclusion under the other approaches of value. (Ptf‟s Ex 1 at 47-48.)
15
As of January 1, 2009, Zenker determined a reconciled “as is value” of $3,510,000 for the subject
property. (Ptf‟s Ex 1 at 104.)
DECISION TC-MD 110559N 15
Newkirk searched for land sales in the Central Business and Riverfront zones and
identified five “potentially” comparable sales, including the sale of the subject property land on
November 14, 2003,16 and two listings. (Def‟s Ex A at 23, 24.) Not including the sale of the
subject property land in 2003, Newkirk‟s land sales occurred in 2005, 2006, and 2007. (Id. at
24.) Newkirk‟s unadjusted prices per square foot ranged from $23.91 to $70.94; the adjusted
prices per square foot ranged “from $32.01 to $83.71, with an average of $74.37 per square
foot.” (Id. at 27) Newkirk concluded a value of $60.0017 per square foot, or $290,000, for the
subject property land. (Id.) He valued the subject property improvements using Marshall &
Swift Cost Valuation Service and calculated a replacement cost new of $8,691,061, including a
cost of $141,075, or 1.65 percent, for LEED‟s materials and certification.18 (Id. at 29-31.)
Newkirk determined a depreciated replacement cost of $8,473,785 for the subject property
improvements and a total value of $8,760,000 under the cost approach. (Id. at 31, 32.) Newkirk
testified that he gave the most weight to the income and sales comparison approaches and
determined a reconciled value of $8,210,000. (See id. at 84-85.) At trial, Defendant‟s appraiser
revised his 2010-11 real market value to, approximately, $6,450,000.
II. ANALYSIS
The issue before the court is the real market value of the subject property for the 2010-11
16
Plaintiff offered evidence on rebuttal that the subject property was not bare land at the time of the 2003
sale; it included a building. (Ptf‟s Ex 18, 19.) Newkirk testified that, even if the subject property included a
building at the time of the 2003 sale, the purchase was effectively for land only because the buyer intended to
demolish the existing building.
17
The figure appears to be a typographical error. In the exhibit Newkirk concludes a value of $64.00 per
square foot, but uses the value of $60.00 per square foot in his calculations
18
Newkirk determined that the subject property improvements are “substantially complete in designation
requirements, materials, and workmanship in obtaining LEED‟s Certified Silver status. According to „Building
Operating Management‟, the November 2008 issue, the LEED premium addition to project costs will range from 1
to 3.3%.” (Def‟s Ex A at 30.) Newkirk testified, however, that it is his understanding that the subject property‟s
LEED certification is not yet complete. (See id. at 7.)
DECISION TC-MD 110559N 16
tax year. “Real market value is the standard used throughout the ad valorem statutes except for
special assessments.” Richardson v. Clackamas County Assessor (Richardson), TC-MD No
020869D, WL 21263620 at *2 (Mar 26, 2003) (citing Gangle v. Dept. of Rev., 13 OTR 343, 345
(1995)). Real market value is defined in ORS 308.205(1), which states:
“Real market value of all property, real and personal, means 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.”19
The assessment date for the 2010-11 tax year was January 1, 2010. ORS 308.007; ORS 308.210.
Plaintiff has the burden of proof and must establish its case by a preponderance of the evidence.
ORS 305.427. “[T]he court has jurisdiction to determine the real market value or correct
valuation on the basis of the evidence before the court, without regard to the values pleaded by
the parties.” ORS 305.412.
“Real market value in all cases shall be determined by methods and procedures in
accordance with rules adopted by the Department of Revenue * * *.” ORS 308.205(2);
See OAR 150-308.205-(A)(2)(a). There are three methods of valuation that are used to
determine real market value: (1) the cost approach, (2) the sales comparison approach, and (3)
the income approach. Allen v. Dept of Rev. (Allen), 17 OTR 248, 252 (2003); see also OAR 150-
308.205-(A)(2)(a). The approach of valuation to be used is a question of fact to be determined
on the record. Pacific Power & Light Co. v. Dept. of Revenue., 286 Or 529, 533 (1979). Both
parties placed most weight on the income approach and the sales comparison approach.
Although both parties determined a value under the cost approach, neither party gave that
///
19
All references to the Oregon Revised Statutes (ORS) and to the Oregon Administrative Rules (OAR) are
to 2009.
DECISION TC-MD 110559N 17
approach much weight. The court agrees that the income and sales comparison approaches
should be given the most weight.
A. Income approach
“The income method of valuation relies on the assumption that a willing investor will
purchase a property for an amount that reflects the future income stream it produces.”
Allen, 17 OTR at 253 (citation omitted). “The direct capitalization method * * * focuses on two
key components: (1) the capitalization rate * * * and (2) [NOI.]” Id. at 253. “NOI is the
currently expected net income of a property after all operating expenses are deducted from gross
income. To calculate the NOI, appraisers look at historical gross income and expenses for the
subject, adjusted by reference to market data.” Id. at 254, citing Appraisal Institute, The
Appraisal of Real Estate 484 (12th ed 2001). “A cap[italization] rate is generally calculated
using market sales. Slight deviations in cap[italization] rates profoundly change the estimated
value of a property, making the proper calculation of the rate of paramount importance.” Id. at
260.
Determining market rent for the subject property as of January 1, 2010, is particularly
challenging in this case given that the subject property was not stabilized as of January 1, 2010;
there are few good rent comparables for the subject property spa; and it is not clear that the
highest and best use of the fifth and sixth floors are as a restaurant. Zenker identified retail rent
comparables, including one spa, and concluded market rent to be $2.30 for the first floor and
$2.05 for the second and third floors of the subject property. Using office rent comparables,
Zenker concluded rent of $2.25 per square foot per month for the fourth floor and $2.30 per
square foot per month for the fifth and sixth floors. Those conclusions are supported by the
///
DECISION TC-MD 110559N 18
testimony of Dickerhoof that office space leases at $1.50 to $1.60 per square foot and retail
properties lease at $1.00 per square foot to $2.15 per square foot.
Newkirk determined rent of $2.83 per square foot per month for first three floors of the
subject property based on medical office leases and $2.50 per square foot per month for the
fourth floor of the subject property based on office lease comparables.20 The highest unadjusted
lease rate for either medical office or office rent comparables identified by Newkirk was $2.36
per month, with the exception of a lease listing at $2.45 per month. Newkirk determined rent of
$3.13 per square foot per month for the fifth and sixth floors of the subject property based on
three restaurant leases. The highest unadjusted lease rate for the restaurants identified by
Newkirk was $2.50 per square foot per month for a Baja Fresh in Corvallis. It is difficult to
understand how the subject property could command rents higher than any of the properties
identified as comparables. The court finds that Zenker‟s conclusion that the highest and best use
of the fifth and sixth floors of the subject property is as office space is supported. The court
further finds that the evidence presented supports the market rents concluded by Zenker and
accepts his calculation of gross income of $566,660 as of January 1, 2010.
Both Zenker and Newkirk agreed that stabilized vacancy and credit loss was five percent
as of January 1, 2010. The court accepts their determinations as reasonable in this case. Zenker
relied on the subject property‟s actual expenses and concluded total expenses, including property
taxes, of 36.88 percent. He reported “total operating expenses” not including property taxes of
32.29 percent, but that figure appears to be a typographical error; the correct figure for operating
expenses, not including property taxes, is 24.33 percent, as Zenker concluded for the 2009-10 tax
20
Newkirk testified that he relied on medical office comparables for the subject property spa space because
it was difficult to find spa comparables, not because he considered use as a medical office to be the highest and best
use. Dickerhoof testified that, had he purchased the subject property in 2009, he would have repositioned the first
three floors of the subject property to medical offices, but the cost would likely be $30 per square foot.
DECISION TC-MD 110559N 19
year. Newkirk concluded expenses of 25 percent for the first through fourth floors of subject
property and concluded four percent expenses for the fifth and sixth floors. “This court has
indicated a preference for an income approach that removes property taxes from expenses * * *.”
Morse Hays LLC v. Benton County Assessor, TC-MD No 100697C at 9 (July 5, 2011). The
court finds that reasonable expenses for the subject property, not including property taxes, were
25 percent as of January 1, 2010, for NOI of $403,745.
“A cap[italization] rate is generally calculated using market sales.” Allen, 17 OTR at
260. The capitalization rates of Zenker‟s comparable sales in 2009 ranged from 8.14 to 8.40
percent. He also reported that the Korpacz fourth quarter 2009 investor survey stated average
capitalization rates of 8.75 percent for the national office market and 9.30 percent for the Pacific
Northwest market. The capitalization rates of Newkirk‟s office and medical office comparable
sales, which occurred between November 2007 and August 2009, ranged from 6.5 to 8.85
percent. Both Zenker and Dickerhoof testified that a capitalization rate at the higher end of the
range is appropriate for the subject property because it is a mixed use property and, therefore,
presents more risk. The court accepts that testimony and finds that a capitalization rate of 8.50
percent21 is appropriate for the subject property as of January 1, 2010, for a value of $4,750,000.
The court accepts Newkirk‟s calculation of $400,000 for parking costs, and concludes a value of
$4,350,000 for the subject property under the income approach as of January 1, 2010.
B. Sales comparison approach
“In utilizing the sales comparison approach only actual market transactions of
property comparable to the subject, or adjusted to be comparable, will be used.
All transactions utilized in the sales comparison approach must be verified to
ensure they reflect arms-length market transactions.”
OAR 150-308.205-(A)(2)(c). “The court looks for arm‟s length sale transactions of property
21
The court did not receive any evidence of the tax rate.
DECISION TC-MD 110559N 20
similar in size, quality, age and location * * * in order to determine the real market value” of the
subject property. Richardson, WL 21263620 at *3.
Zenker identified sales 2, 3, and 6 as his best comparable sales for the subject property,
each of which he identified as “overall inferior” to the subject property. His comparable sale 5,
with an unadjusted sale price of $237.56 per square foot and an adjusted price per square foot of
$196.75 was the only comparable sale that he considered “overall superior” to the subject
property. Newkirk identified medical office, office, and restaurant sales as comparable sales for
the various floors of the subject property. The court finds that Newkirk‟s restaurant sales are not
good comparables for the subject property. Newkirk‟s sales from 2007 and the first half of 2008
are less helpful in determining the real market value of the subject property as of January 1,
2010, and it is not clear why those sales were adjusted upward at 4.5 percent per year for
time/market conditions. Of the medical office and office sales identified by Newkirk, the court
finds that the unadjusted listing price of a medical office in Corvallis (listing 3) at $276.17 per
square foot likely sets the upper end of the range of values for the subject property. The
unadjusted prices per square foot of Newkirk‟s office sales range from $207 to $259; all of those
sales occurred before the January 1, 2010, assessment date. Based on the market evidence
presented, the court finds that the value indicated for the subject property is $195 per square foot,
for a value of $4,181,000 based on the net rentable area of the subject property.22
C. Lease up costs
Zenker determined that $701,771 in lease up costs, including tenant improvements
($25/SF) and entrepreneurial profit (10%), should be subtracted from the value conclusion under
the income approach because the subject property was not stabilized as of January 1, 2010. In
22
Zenker adjusted his comparable sales for the lack of parking at the subject property, so no additional
subtraction of parking costs is required.
DECISION TC-MD 110559N 21
Kailes v. Josephine County Assessor (Kailes), 16 OTR-MD 348 (2001), this court addressed the
appropriateness of “an adjustment for so-called „stabilization costs,‟ ” including lost rent, leasing
commissions, and tenant improvements. Id. at 353. The court ultimately allowed an adjustment
for rent loss, calculated based on the approach recommended by The Appraisal of Real Estate.23
Id. at 356-57. However, the court in Kailes found that the property at issue was a “problem
property” based on the unusual length of time that the property at issue had “remained vacant
and for sale” without any offers and the associated market stigma. Id. at 355. There is no
evidence before the court suggesting that the subject property is a “problem property” which
cannot be leased or sold. Based on the testimony of Carone and Dickerhoof, there were several
investors interested in purchasing the subject property in 2009. Furthermore, 81.2 percent of the
subject property was occupied as of January 1, 2009; the higher vacancy as of January 1, 2010,
was due to the closure of the restaurant located on the fifth and sixth floors. Accordingly, the
court finds that an adjustment for lease up costs is not appropriate in this case.
III. CONCLUSION
After carefully considering the testimony and evidence presented, the court finds that the
real market value of the subject property as of January 1, 2010, was $4,250,000. Now, therefore,
///
///
///
///
23
“The Appraisal of Real Estate discusses rent loss in the context of a proposed multi-tenant project that is
not fully leased. In that situation, the authors note that „[t]he appraiser should account for the impact of the rent lost
while the building is moving toward stabilized occupancy.‟ Several approaches are set forth regarding how the
appraiser can account for the loss of rent. One recommended technique is to „discount[ ] the net income loss during
lease-up, which is then deducted from the value of the property at stabilized occupancy.‟ ” Kailes, 16 OTR-MD at
356 (internal citations omitted).
DECISION TC-MD 110559N 22
IT IS THE DECISION OF THIS COURT that the real market value of property
identified as Account 417374 was $4,250,000 for the 2010-11 tax year.
Dated this day of March 2012.
ALLISON R. BOOMER
MAGISTRATE PRO TEMPORE
If you want to appeal this Decision, file a Complaint in the Regular Division of
the Oregon Tax Court, by mailing to: 1163 State Street, Salem, OR 97301-2563;
or by hand delivery to: Fourth Floor, 1241 State Street, Salem, OR.
Your Complaint must be submitted within 60 days after the date of the Decision
or this Decision becomes final and cannot be changed.
This document was signed by Magistrate Pro Tempore Allison R. Boomer on
March 22, 2012. The Court filed and entered this document on March 22, 2012.
DECISION TC-MD 110559N 23