Dept. of Rev. v. Sahhali South, LLC , 21 Or. Tax 148 ( 2013 )

148 March 4, 2013 No. 21
IN THE OREGON TAX COURT
REGULAR DIVISION
DEPARTMENT OF REVENUE
and Tillamook County Assessor,
Plaintiffs,
v.
SAHHALI SOUTH, LLC,
Defendant.
(TC 4994)
Plaintiffs (the department) appealed from a Magistrate Division decision
as to the real market value (RMV) of lots in Tillamook County. Following trial,
the court found that the valuation approach of the department’s appraiser, albeit
with minor flaws, was far superior to the analysis of the appraiser for taxpayer
who did not undertake a full highest and best use analysis, and that the RMV
of the property at issue should be as determined by the department, less certain
subdivision costs accounted for by a risk discount of 25 percent.
Trial was held December 15 and 16, 2011, in the court-
room of the Oregon Tax Court, Salem.
Douglas M. Adair, Senior Assistant Attorney General,
Department of Justice, Salem, argued the cause for Plaintiffs
(the department).
Rohn M. Roberts, Arnold Gallagher, et al., Eugene,
argued the cause for Defendant (taxpayer).
Decision rendered March 4, 2013.
HENRY C. BREITHAUPT, Judge.
I. INTRODUCTION
This property tax case is before the court after trial.
The tax year is 2008-09. The property involved in the case
comprises 36 townhome lots, and two larger undivided lots,
all on the Oregon coast just north of the town of Neskowin.
In the Magistrate Division a decision was entered in favor of
Defendant (taxpayer). Plaintiffs (collectively referred to as
the department) have appealed from the decision of the mag-
istrate. The parties have stipulated as to the value of eight
detached home lots that had been at issue in the Magistrate
Division.
Cite as 21 OTR 148 (2013) 149
II. FACTS
Reference is made to the decision of the magistrate
for background facts about which there is no disagreement.
The subject properties are all part of a development of single
family house—or detached—lots and townhome lots. The
properties, by all accounts, generally have view and location
features of very high to superior quality.
The townhome lots are smaller than the detached
home lots in the development. Lot size could be smaller
given a common and completed septic system that did not
require additional lot area for individual septic systems. The
lots are located on a sloping bluff generally within 1000 feet
of the ocean. Between the development and the ocean is a
federally protected wetland through which one can walk to
the ocean. Protections of the wetland insure that there will
not be development of the land between the development and
the ocean.
The project lots have high quality streets, curbs and
storm drains and have all underground utilities. The town-
home lots, while separate, are part of a development plan
that calls for construction of one townhome immediately
adjacent to its neighbor. This feature means that the lots
will be developed only when the “sister” lot is also developed
with a completed townhome structure. These townhome fea-
tures result in townhome lots often, but not always, being
sold to developers or builders who market lots with com-
pleted structures when they have purchasers for both parts
of a pair of lots.
Taxpayer developed the lots in the context of an
agreement with Butterfield Homes, Inc. (Butterfield), an
unrelated company in the business of building and mar-
keting completed townhome packages consisting of land
and the townhome improvement. The parties, or affiliates,
had also cooperated in the development, construction and
sale of completed townhomes in a project, Sahhali Shores,
located adjacent, but across Highway 101, from the subject
properties.
As the Sahhali Shores project was coming to com-
pletion in 2005, taxpayer negotiated with Butterfield an
150 Dept. of Rev. v. Sahhali South, LLC
exclusive Option Agreement (the Option), pursuant to
which—subject to certain conditions and over a 43-month
period of time—Butterfield could purchase lots, improve
those lots with townhomes and sell the resulting package of
land and improvement. Taxpayer did not invite bids from or
negotiate with other builders with respect to the purchase
of lots, completion of townhomes and marketing of the land
and completed townhomes. The prices under the Option var-
ied according to the location of lots, and were composed of a
base price and an amount equal to 2 percent of the sale price
of the completed package of lot and townhome.
In May of 2006 the parties negotiated increases in
base price for purchases by Butterfield under the Option.
This occurred in connection with additional development
costs incurred by taxpayer in connection with construction
of highway turn lanes required by government authorities.
The additional highway construction requirements also
resulted in a delay in the ability of Butterfield to complete
sales. This delay caused a loss of sales as potential purchasers
went to other projects or, as the overall market began to
change, decided not to complete a purchase. The loss of sales
also resulted in Butterfield falling behind on minimum
sales or “takedown” obligations under the Option. Taxpayer
did not, however, seek to cancel or renegotiate the terms of
the Option.
In addition to the townhome lots, two other lots are
at issue in this case. They are lots 13 and 48. Those lots
were initially platted and approved as single family resi-
dence lots. Subdivision of those lots was legally possible as
of January 1, 2008. Indeed, one of the lots was subdivided in
2009.
III. ISSUE
The issue in this case is the real market value
(RMV), as of January 1, 2008, of the lots at issue in this
case.
IV. ANALYSIS
There are three main points of disagreement
between the parties in this case. The first is the signifi-
cance, if any, of the Option, and the prices thereunder, in
Cite as 21 OTR 148 (2013) 151
application of the comparable sales indicator of value.1 The
second disagreement is as to the comparable sales chosen by
the respective appraisers for the parties. Finally, the parties
disagree as to the highest and best use of lots 13 and 48.
Taxpayer’s appraiser took the position that the highest and
best use of the lots was for sale without subdivision of the
lots. The department’s appraiser took the position that the
highest and best use of the lots was subdivision and sale.
A. The Option
Taxpayer maintains that the prices Butterfield was
required to pay for townhome lots upon exercise of the Option
are a very good indicator of the value of a lot on January 1,
2008—an indicator so good that the concluded value as of the
assessment date is very close to the Option price, taking into
account some element for the additional price attributable
to taxpayer’s share of ultimate sales price. The department,
for various reasons, objects to consideration of the prices set
under the Option as evidence of RMV as of the assessment
date.
Taxpayer stresses that the Option was negotiated
between two unrelated parties, each of whom had every
incentive to maximize its economic return flowing from the
Option. That appears to be true. However, those features of
a comparable sale—that is, unrelated parties acting without
compulsion—are not enough to satisfy the criteria of a com-
parable sale for use in the proof of RMV. They do not over-
come the fact that what the parties negotiated was not a sale
at all, but rather the grant to Butterfield of rights to buy
which, if exercised, would create an obligation of taxpayer to
sell.
The rights of Butterfield extended over a signifi-
cant time—43 months. That fact together with the exclusive
rights of Butterfield and the pricing arrangement under the
Option show that the Option cannot be relied upon to provide
a valid sale for appraisal at any given point in time. Whatever
market forces and realities led to the establishment of the
1
Both parties agree that the comparable sales indicator of value is the proper
indicator on which to rely in determining RMV for the property at issue in this
case.
152 Dept. of Rev. v. Sahhali South, LLC
pricing provisions of the Option, they could not prevent mar-
ket realities from changing such that sales completed under
the Option in no way necessarily reflected market realities
at the time of exercise of the Option. If prices for individual
lots escalated after the Option was signed, the price paid by
Butterfield would not be RMV as defined in ORS 308.205.2
Rather the RMV would be a combination of the Option
price and the economic value of the Option to Butterfield.3
Indeed, if the market for townhome lots declined, it would
also be true that the Option price would not indicate the
RMV either. Of course the option holder would most likely
not exercise the Option in such a case. But that economically
rational act does not supply a price in a transaction in the
market. It only indicates that the Option price is, in fact, not
the RMV of the property.
The usefulness of the comparable sales indicator of
RMV is that where a comparable property is involved, the
binding decisions of a buyer and a seller provide evidence of
value far superior to the other indicators of value and, as in
this case, the only real evidence of value. Buyers and sellers
are not committed to a possibility; they are committed to an
actual transaction.
The department argues that the Option also had
features of a bulk sale. To the extent that is the case, Oregon
law is clear that the prices agreed upon by taxpayer and
Butterfield would not be good evidence of RMV. See, e.g.,
Mathias v. Dept. of Rev., 312 Or 50, 817 P2d 272 (1991).
Taxpayer correctly argues that the transaction under the
Option was not in fact a bulk sale. However, it was a bulk
option to purchase and, as such, has some of the troublesome
elements of a bulk sale. Most notably, the Option applied to
2
There is evidence from both parties that the market was rising between the
time the Option was entered into and the assessment date, although the increase
in prices and values had leveled off as of the assessment date. All references to
the Oregon Revised Statutes (ORS) are to the 2007 edition.
3
There is a provision in the Option for an additional increment of price to be
paid by Butterfield. This is two percent of final sales price of the lot and town-
home to the ultimate purchaser. There was no showing at trial as to whether, or
to what extent, such a price increment caused sale prices to be below, at or even
above general market values. In this regard, as in so many regards in taxpayer’s
proof, what the option prices showed was what the option prices were. That is
simply not enough.
Cite as 21 OTR 148 (2013) 153
all the townhome lots and had a term that contemplated
the complete build out of the townhome project. There
was also only one possible purchaser under this exclusive
arrangement—an arrangement entered into without any
effort by taxpayer to entertain proposals from other builders
or developers. Although it is not clear what all the consid-
erations of the parties were in negotiating the Option, the
record demonstrates that both sides of the agreement were
interested in having a rapid build out and sale of the town-
homes. Indeed, that goal appears to have also influenced
taxpayer in choosing one option party for all the lots and to
have that option party be a builder who would also under-
take marketing and sales efforts.
The court does not question the good faith of the
witnesses who explained these considerations that moti-
vated the option parties. However, as with a bulk sale of lots,
this bulk option of lots accommodates the business goals of
only these particular parties. The transaction does not sup-
ply good evidence of whether or at what price others, or even
these parties, would have sold and bought lots individually
on or about January 1, 2008. And third party offers or inter-
est in buying lots from taxpayer was effectively barred by
the existence of the Option.
For these reasons, the court gives little to no weight
to the prices of sales of lots under the Option.
B. Comparable Sales
The views of the parties about the extent to which the
Option provides market evidence also affects the approach
the appraisers for each party took to finding and analyzing
an overall group of comparable sales. Taxpayer’s appraiser
relied on a number of sales that had occurred under the
Option and took the sales prices paid by Butterfield as evi-
dence of the market value of lots as of January 1, 2008. For
the reasons stated above, the court cannot agree with this
analytical step of taxpayer’s appraiser.
The appraiser for taxpayer also identified several
lot sales at other locations and used the results of those sales
to support his conclusion of value. However, in this step of
his analysis, the testimony of the appraiser for taxpayer
154 Dept. of Rev. v. Sahhali South, LLC
indicates that he committed one of the most fundamental
errors in reasoning—he assumed as his major premise his
own conclusion as to value. His testimony indicates that
he first took the Option sales as evidence of value. He then
located lot sales, in fact far distant from the subject prop-
erty and in no way comparable to the subject property, as
to location and view amenities. He testified, however, that
they were comparable to the subject because they were in
the same price range as he had concluded applied to the sub-
ject lots—based on his reliance on the Option sales.
The non-subject sales upon which the appraiser for
taxpayer relied were, in fact, not comparable to the subject.
First, they were located at some distance from the subject.
Second, many, if not most of them had decidedly inferior
view characteristics. Indeed, many had no ocean view what-
soever whereas the main attraction of the subject lots is the
good to extremely good ocean views available. Similarly, the
purported comparables were at significant distances from
the ocean. The evidence indicates that distance from the
ocean is the other feature that makes the subject lots very
attractive.
Based both on the logical error of the appraiser for
taxpayer and the court’s own evaluation of the supposedly
comparable non-subject sales, the court places no weight on
the opinion of the appraiser for taxpayer as to the compara-
bles he employed in the comparable sales indicator of RMV.
The appraiser for the department also used only
the comparable sales indicator in determining RMV. Many
of the comparables used by this expert were sales that had
been analyzed by the appraiser for taxpayer. However, those
sales were apparently used by the appraiser for the depart-
ment but discounted or not relied upon by the appraiser for
taxpayer. In this category one sale stands out. It was a sale
of a townhome lot located near the subject property. The sale
was of the lot alone and apparently made to the end user. The
date of the sale, June 26, 2008, was reasonably close to the
assessment date. The property sold had very good view and
location amenities. The sale price was $375,000, consistent
with the conclusion of the appraiser for the department as
to the subject property. However, the appraiser for taxpayer
Cite as 21 OTR 148 (2013) 155
did not rely on this sale and did not have a good reason for
not doing so, other than, apparently, that the value was out
of line with the Option prices.
Some of the sales relied upon by the appraiser
for the department are after the assessment date and, in
some cases, significantly so. However, the appraiser for the
department analyzed the trending of sales prices during the
post-assessment date period and concluded that the mar-
ket for lots on the coast was relatively stable during this
period. Post-assessment date sales may be used when it is
shown that markets have not moved significantly during
the post-assessment period. Ernst Brothers Corp. v. Dept. of
Rev., 320 Or 294, 305, 882 P2d 591 (1994). The appraiser
for taxpayer questioned the reliance by the department on
these sales, arguing that the market was declining during
the relevant period and not stable. To support this point,
the appraiser for taxpayer used sales trends for all types
of property in all areas of three counties. That data source
significantly weakens the criticism leveled by appraiser
for taxpayer. This is so because the property in question
here is prime ocean front property, not the general census
of residential lots or improved properties in a county. The
court concludes that the sales data used by the appraiser for
the department from periods after the assessment date is
reliable.4
In testing the reasonableness of their conclusions
as to lot value, each appraiser undertook some form of “lot
residual” analysis. This involved taking the ultimate sale of
a lot and townhome “package” and then multiplying that by
a developed lot to total ratio in order to extract the contribu-
tion to ultimate value of the lot. The department’s appraiser
located developments, other than the subject development,
where lots sales occurred and later, sales of land and
improvement occurred. The appraiser compared the lot sale
price to the finished “package” price and developed a lot to
“package” ratio of approximately 40 percent. Using approx-
imately that figure and the asking prices for the lots that
4
In any case, even if the criticism of the appraiser for taxpayer were well
taken, the downward trend of the market after the assessment date would not
support a conclusion that the sales could not be used. They would, at most, pro-
vide evidence of an RMV below that for which the department contends.
156 Dept. of Rev. v. Sahhali South, LLC
remained unsold, the appraiser for the department showed
that the residual method supported his values determined
under the comparable sales approach.
The appraiser for taxpayer once again allowed the
Option to dominate his analysis. In developing a residual
approach value, he looked only at sales that occurred at the
subject development. He then compared the Option price to
the final sales price of the “package” and calculated that
the lot to “package” ratio was approximately 25 percent.
Multiplying that percentage by the actual sales of the com-
pleted “packages” that had occurred, the appraiser, not sur-
prisingly, showed that the ratio of lot to “package” values
was 25 percent. Of course, all this analysis proved was that
the ratio for this set of sales was the ratio for this set of
sales. The appraiser for taxpayer did not seek out external
sales or determine if his ratio was supported by market evi-
dence from other comparable developments.
The test of reasonableness used by the appraiser
for the department is not totally free of criticism, mainly
because the lot sales were on lots different from those under-
lying the “package” sales used in the analysis. However,
the department’s appraiser did review the comparability of
lots involved in the analysis and concluded that they were
similar.
The approach of the department’s appraiser, what-
ever its minor flaw, is far superior to the analysis of the
appraiser for taxpayer. That appraiser again started from
the proposition that the prices under the Option were RMV
and having assumed the correctness of that point proceeded
to “prove” that it was true. The failure of that appraiser to
develop any market evidence from other sales or develop-
ments renders his approach unreliable.
The court concludes that the department has borne
its burden of proof that the lot values for the townhome lots,
other than lots 13 and 48, are as it maintains.
C. Highest and Best Use and Valuation of Lots 13 and 48
These two lots were not subject to the Option and,
as originally platted, were significantly larger than the
townhome lots. There was testimony from the developer
Cite as 21 OTR 148 (2013) 157
that concern for initial plat approval motivated the devel-
oper not to include these lots sites for location of two townho-
mes. However, in 2009, these lots were, in fact, subdivided.
The parties differ as to the initial appraisal ques-
tion of the highest and best use of these lots. The depart-
ment takes the position that subdivision of the lots produced
the highest value, and was legally possible. Taxpayer takes
the position that approval of any subdivision application was
subject to the risk of no approval being granted. The depart-
ment values these lots at the rate applicable for the view and
location characteristics they have, minus an allowance for
the costs of subdivision. Taxpayer does not take into account
any subdivision but adjusted the value of the lots upward
from others in order to take into account the greater size of
the lots. The testimony of the appraiser for taxpayer indi-
cates he apparently did not undertake a full highest and
best use analysis.
The court is of the opinion that the highest and best
use of these lots was subdivision, as in fact occurred shortly
after the assessment date. However, the court also views
the department’s valuation methodology as incorrect inso-
far as it does not provide a discount for the risk of land use
approvals. While the subdivision of the lots was legally pos-
sible, approval was not a certainty. The difficulties that this
development had with government approvals, especially in
connection with highway access, demonstrate the risks that
approvals present.
V. CONCLUSION
Now, therefore,
IT IS THE DECISION OF THIS COURT that
Plaintiffs’ value for each lot, less the subdivision costs with
which the department agrees, is an appropriate base. The
value of the lots should then be further reduced by a risk
discount of 25 percent.