Jones v. Jefferson County Assessor ( 2011 )

IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Property Tax
GORDON C. JONES; KELLY W. & DENA )
R. CASSIDY; SCRUB JAY LLC; MARK A. )
& CANDICE W. STAYER; DHR, LLC; )
CENTRAL CASCADE VENTURES LLC; )
and CHERRYANDGRAY 1, LLC, )
)
Plaintiffs, ) TC-MD 110492C
)
v. )
)
JEFFERSON COUNTY ASSESSOR, )
)
Defendant. ) DECISION
Plaintiffs have appealed to this court seeking a reduction in the value of certain real
property identified in the assessor‟s records as Account 1313 for the 2010-11 tax year. Trial in
the matter was held by telephone November 10, 2011. Plaintiffs were represented by
Christopher K. Robinson, attorney at law, and Sharon B. Tuppan, attorney at law. Defendant
was represented by Alexa N. Gassner, County Counsel. Testifying for Plaintiffs were Kirk Ward
(Ward), Norris & Stevens, Investment Real Estate Services, and William E. Leavens (Leavens),
Certified General Appraiser in the states of Oregon and Washington.
I. STATEMENT OF FACTS
The subject property is a 64 unit apartment complex on an approximately five acre parcel
in Madras, Oregon, that was built in 1996. (Ptfs‟ Ex 1 at 2, 16.) There are 36 two-bedroom,
one-bath units that are 724 square feet in size, and 28 three-bedroom, two-bath units that are 924
square feet in size. (Id. at 16.) The larger three-bedroom units have washer/dryer hookups. (Id.
at 17.) The units are housed in seven two-story buildings made of wood frame construction with
hardi type lap exterior siding and average quality vinyl windows. (Id.) Access to the second
story units is by covered exterior stairwells. (Id.) There is also an office building and a small
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DECISION TC-MD 110492C 1
single-story laundry building. (Id.) The on-site laundry machines are operated by a third party
vendor.
By their Complaint, Plaintiffs requested a reduction in the real market value (RMV) to
$920,000. (Ptfs‟ Compl at 1.) Defendant filed an Answer asking the court to “[s]ustain [the]
county‟s real market and assessed value of $2,150,796.” (Def‟s Ans at 1.) Plaintiffs amended
their request at trial to conform to the evidence, requesting an RMV of $935,000.
The property was originally on the assessment and tax rolls with an RMV of $2,150,796,
a maximum assessed value (MAV) of $2,281,090, and an assessed value (AV) of $2,150,796.
(Ptfs‟ Ltr at 2, May 12, 2011.) Plaintiffs appealed to the County Board of Property Tax Appeals
(Board) and the Board reduced the RMV and AV to $1,700,000. (Id.) As indicated above,
Plaintiffs are seeking a reduction in the RMV to $935,000 and Defendant is requesting an
increase in the RMV to $2,150,796.
In support of their value reduction request, Plaintiffs submitted a 100 page appraisal
report prepared by Leavens, which values the property at $935,000 under the income
capitalization approach and $895,000 under the sales comparison approach. (Ptfs‟ Ex 1 at 47,
56.) Leavens testified that he gave primary reliance on the income capitalization approach and
concluded with a value reconciliation of $935,000. (Id. at 47.) That report was admitted into
evidence. The court also admitted Plaintiffs‟ Exhibits 3 and 4, which are operating statements
and rent rolls for the subject property for the years 2007 through 2009. Plaintiffs did not offer
their Exhibit 2, a five page document described in the cover letter to Plaintiffs‟ attorney Mr.
Robinson as the county‟s appraisal.
Defendant‟s appraisal was excluded from evidence because it was not timely exchanged.
That report, intended as Defendant‟s Exhibit A, was postmarked October 31, 2011, and received
and filed by the court on November 3, 2011. The court‟s exhibit exchange rule, TCR-MD 10
C(1), provides in relevant part:
DECISION TC-MD 110492C 2
“Unless otherwise set by the court, all exhibits must be either postmarked at least
14 days before the trial date or physically received at least 10 days before the trial
date.”
TCR-MD 10 D sets forth the sanctions a magistrate may impose when evidence is
received after the exchange deadlines, and provides that “[a] magistrate may exclude any
evidence received after the time of exchange.”
II. ANALYSIS
The issue in this case is the RMV of Plaintiffs‟ property as of January 1, 2010. Oregon
law defines RMV for property assessment and taxation purposes 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).1
While there are three recognized methods for valuing property, the sales comparison
approach is most appropriate for valuing residential property, particularly in cases where only the
value of the land is at issue.2 The court looks at arm‟s-length sales transactions of similar
property to determine a correct RMV. Richardson v. Clackamas County Assessor, TC-MD No
020869D, WL 21263620 at *3 (Mar 26, 2003).
Plaintiffs‟ case was presented through the testimony of two highly qualified real estate
professionals: Kirk Ward (Ward), with Norris & Stevens, who specializes in apartment
brokerage and has 35 years of experience, and William Leavens (Leavens), an appraiser certified
in the states of Oregon and Washington who has 10 years of appraisal experience.
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1
All references to the Oregon Revised Statutes (ORS) are to the 2009 edition.
2
An administrative rule promulgated by the Oregon Department of Revenue instructs that the three
approaches to value--sales comparison, cost, and income--be considered in determining a property‟s value, but
recognizes that all three approaches may not be applicable in a given case. OAR 150-308.205-(A)(2) (2009).
Because the subject property is owner occupied and does not generate any income, neither party used the income
approach in valuing Plaintiff‟s property. Because land value is at issue, the typical methodology prescribed by the
cost approach is not relevant.
DECISION TC-MD 110492C 3
Ward testified at length about principles of market areas in terms of property valuation
and stated that of the 37 cities in Oregon in which the management company for which he works
(Norris & Stevens) operates, Madras was, in his professional opinion, the weakest market area.
Ward testified about vacancy rates, explaining that there is both a “physical vacancy,” which is
the actual absence of a tenant, and “economic vacancy,” which is comprised of landlord
concessions such as one month of free rent upon signing a 12 month lease and the nonpayment
of rent, which often leads to eviction after one or more months of no rent payments. As a result,
economic vacancy is often, as in this case, higher than physical vacancy. However, Ward
testified that the subject property had 100 percent turnover in 2009, explaining that all 64 units
were at one time vacant that year. According to Ward‟s testimony, the subject property had an
average physical vacancy rate of fourteen percent per month and an additional economic vacancy
rate of 10 percent for a combined total of approximately 25 percent.
Ward testified that the owners of the subject property have a “sister property,” which is
essentially identical to the subject property but is located in Hermiston, Oregon. That property,
however, greatly outperformed the subject property. In 2009, the Hermiston property generated
$100,000 more revenue than the subject and had $62,700 less in operating costs (as a percentage
of effective gross income and cost per unit). According to Ward, the biggest reasons for the
difference in expenses between the two properties are the much higher utility costs in Madras
and greater advertising costs. Additionally, the Madras property experienced significantly more
tenant turnover (100 percent for the subject versus 50 percent for the Hermiston property).
Ward also testified about the focus of prospective investors and lenders, the two key
players in buying and selling multi tenant real estate. According to Ward, both look almost
exclusively at actual net operating income (NOI) rather than prospective (pro forma) revenues.
Ward testified that lenders are also interested in current operating expenses.
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DECISION TC-MD 110492C 4
Ward was directed to Leavens‟s appraisal and pointed out that the subject‟s NOI declined
sharply from calendar year 2008 to 2009, from approximately $106,000 in 2008 to $43,000 in
2009. (Ptfs‟ Ex 1 at 91, 87.) Defendant‟s representative, Gassner, attempted to discredit Ward
on cross-examination by pointing out that the property‟s current vacancy rate was only
approximately four percent. Ward responded that that rate was for a single month and
represented physical vacancy only. The court is not persuaded by Gassner‟s revelations both for
the reasons stated by Ward and because the assessment date is January 1, 2010, and the trial was
held in November 2011, nearly two years after the applicable value date. There were additional
questions about the $20,000 in advertising expenses for the subject in 2009 and the number of
tenants evicted that year, questions aimed at revealing that 2009 was an atypical year. While
there certainly is some truth to that, Defendant has no appraisal evidence and Plaintiffs‟ two
experts concluded that the value of the subject was under $1 million, well below the $1.7 million
RMV set by the Board.
Leavens testified briefly as to the key aspects of his appraisal report, explaining that he
considered but rejected the cost approach to value because of the age of the subject (more than
10 years old) and the fact that there were an insufficient number of vacant land sales. Leavens
utilized both the income capitalization approach and the sales comparison approach, and he
concluded that the former (income capitalization) was the more appropriate and most reliable
indicator of value because the subject is an income-producing property.
Looking at the income capitalization approach, Leavens analyzed actual rents for the
subject and rents (unadjusted and adjusted) for five comparable properties in Madras to establish
an average adjusted gross rent for the subject. Based on his analysis and appraisal experience,
Leavens concluded that the two-bedroom units had an average adjusted rent of $407 per month
and that the three-bedroom units had an average adjusted rent of $490 per month for a total
annual potential gross income (PGI) of $341,760. (Ptfs' Ex 1 at 36, 43.) Leavens added $8,500
DECISION TC-MD 110492C 5
of additional supplemental income for a combined total PGI of $350,260. (Id. at 44.) Applying
a 15 percent vacancy and credit loss, as explained on page 44 of his appraisal and elaborated on
at trial, Leavens arrived at an effective gross income (EGI) of $297,721. (Id.)
Leavens next looked at actual operating expenses for the subject property for 2007, 2008,
and 2009, which were $166,894, $165,013, and $213,329, and forecasted an appropriate
stabilized operating expense figure of $191,858 (annual). (Id. at 45.) Subtracting the $191,858
of operating expenses from the PGI of $297,721 resulted in an NOI of $105,863. (Id.)
In arriving at an appropriate capitalization rate, Leavens considered five comparable
properties, two in Albany, one in Medford, one in Jacksonville, and one in Springfield. Leavens
found comparables #2 and #3 to be the most appropriate indicators of a rate for the subject and
concluded that the base capitalization rate was 9.35 percent. (Id. at 46, 47.) Leavens testified
that the tax rate had to be added to the base rate to arrive at an appropriate loaded capitalization
rate and that he had made an error in his calculations, which is reflected in his appraisal report at
page 47. Whereas he reported the levy rate of 2.12 percent, Leavens testified at trial that the rate
should be 1.98 percent for a loaded capitalization rate of 11.33 percent. Applying that rate to the
$105,863 NOI results in an indicated value of $935,000.3
Leavens analyzed five comparable sales and concluded with an indicated value of
$895,000. (Id. at 56.) As explained earlier, Leavens placed primary reliance on his income
capitalization approach and concluded that an indicated value for the subject property as of
January 1, 2010, was $935,000.
Defendant‟s appraisal was not timely submitted and was therefore excluded by the court.
Defendant did not put on a case in chief and the court‟s determination of value comes down to an
evaluation of Plaintiffs‟ evidence.
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3
$105,863 ÷ 0.1133 = $934,360, or $935,000 (rounded).
DECISION TC-MD 110492C 6
In the final analysis, the value of property is ultimately a question of fact. Chart
Development Corp. v. Dept. of Rev., 16 OTR 9, 11 (2001) (citation omitted). By statute, Plaintiff
has the burden of proof and must establish an error in the record assessment by a
“preponderance” of the evidence. ORS 305.427. This court has previously ruled that a
“[p]reponderance of the evidence means the greater weight of evidence, the more convincing
evidence.” Feves v. Dept. of Revenue, 4 OTR 302, 312 (1971); see also Riley Hill General
Contractor v. Tandy Corp., 303 Or 390, 394, 737 P.2d 595 (1987) (where the Oregon Supreme
Court explained that the derivation of the word “preponderance” is Latin in origin and “translates
to „outweigh, be of greater weight.‟ ”). Evidence that is inconclusive or unpersuasive is
insufficient to sustain the burden of proof. Reed v. Dept. of Rev., 310 Or 260, 265, 798 P2d 235(1990).
III. CONCLUSION
The only evidence before the court is Plaintiffs‟ appraisal. Plaintiff presented the
testimony of two competent experts in the field of property valuation, witnesses whose testimony
buttressed the appraisal report Plaintiffs submitted. Based on that report, the court concludes that
the real market value of the subject property on January 1, 2010, (2010-11 tax year) was
$935,000. Because that number is lower than the current maximum assessed value of
$2,281,090, the court concludes that the assessed value of the subject property is, by virtue of
law, $935,000. See generally ORS 308.146(2). Now, therefore,
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DECISION TC-MD 110492C 7
IT IS THE DECISION OF THIS COURT that the real market value and assessed value
of the subject property, assessor‟s Account 1313, was $935,000 as of January 1, 2010.
Dated this day of December 2011.
DAN ROBINSON
MAGISTRATE
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 Dan Robinson on December 16, 2011.
The Court filed and entered this document on December 16, 2011.
DECISION TC-MD 110492C 8