Wilsonville Just Store It LLC v. Clackamas County Assessor ( 2012 )

IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Property Tax
WILSONVILLE JUST STORE IT L.L.C., )
)
Plaintiff, ) TC-MD 120417D
)
v. )
)
CLACKAMAS COUNTY ASSESSOR, )
)
Defendant. ) DECISION
Plaintiff appeals the 2011-12 real market value and exception real market value
determined by the Clackamas County Board of Property Tax Appeals (BOPTA) in its Order
dated April 11, 2012, for property identified as Account 00812099 (subject property). Kevin
Howard (Howard), owner and broker of Kevin Howard Real Estate, Inc., and owner and
manager of 73 storage facilities, including the subject property, appeared and testified on behalf
of Plaintiff. Ronald Saunders (Saunders), Oregon registered appraiser, appeared and testified on
behalf of Defendant.
Plaintiff‟s Exhibits 1 through 14, Conclusion (Tab 10), Addendum (Tab 11), Plaintiff‟s
Rebuttal Exhibit 15 and Defendant‟s Exhibit A were received without objection.
Both parties agree that the subject property‟s highest and best use as vacant is
commercial and as improved is the subject property‟s continued use as a self-storage facility.
The parties disagree that the facility will be expanded as requested in the original development
plan submitted to the City of Wilsonville.
I. STATEMENT OF FACTS
The subject property is a “[t]hree story, heated self-storage facility (Phase 1) containing
404 self-storage units. There [are] 55,900 [square feet] of gross building area, including the
DECISION TC-MD 120417D 1
leasing office, hallways, apartment and common areas. There [are] 39,655 [square feet] of net
rentable area.” (Def‟s Ex A at 42.) Saunders testified that the subject property is the newest of
“the four self-storage facilities” in the city of Wilsonville and is “of superior design.” The
subject property is located on 1.28 acres and was completed in May 2010. (Id. at 16.)
Howard testified that Saunders incorrectly stated that there are“0.65 acres (28,507
[square feet]) of excess land planned for 404 self-storage units in a future second phase.” (Id.)
Howard testified that 6,000 square feet of the 28,507 square feet was required by the City of
Wilsonville to be paved for 10 parking spots. He offered a letter from Stu Peterson, SIOR, of
Macadam Forbes, recommending that Plaintiff list the remaining vacant land (22,507 square
feet)1 for $4.50 per square foot “and expect to see offers starting in the low 3‟s per [square foot]
for this land. It has no frontage, bottleneck access and is of an irregular shape.” (Ptf‟s Ex 14.)
Howard testified that the land parcel would require “an access easement, it is not on the main
street” and “is blocked by the parking.” He testified that there are no comparable sales for this
type of parcel. Howard determined a real market value of $157,549 for the 22,507 square foot
land parcel. Saunders determined an “estimated value of the 28,507 SF of surplus land is $12.30
SF or $350,636. To this amount is added an additional $50,000 for the entitlements and
infrastructure which is in place, for a total estimated value of the surplus land of $400,636.”
(Def‟s Ex A at 70.) Howard questioned Saunders, asking how he concluded the value was
$400,636 when he previously concluded the value was $250,000 at the time he submitted his
report to BOPTA. (cf. Ptf‟s Rebuttal Ex 15 at 5.) Saunders testified that for his current appraisal
report he concluded that the land was “surplus, not excess, land” and Plaintiff originally “paid
$15 per square foot” for land that Plaintiff is now “holding for future development, Phase II.” In
1
Peterson lists the area of the vacant land as 22,800 square feet.
DECISION TC-MD 120417D 2
response to Howard‟s questions, Saunders wavered, stating that it may not have been appropriate
to include an “additional $50,000 for the entitlements and infrastructure.” (Def‟s Ex A at 70.)
Howard testified that the original plan was to attach an expansion, i.e., Phase II, to Phase I, but
that now with the 10 parking spaces, “Phase II could not be attached.” Saunders stated that
“there is no evidence” that the “surplus land is 20 percent or 30 percent of what Plaintiff
originally paid for it.”
Howard testified that he concluded the income approach was the only applicable method
to determine the subject property‟s real market value because the subject property “is an income-
producing property.” Howard reviewed each of the components of the income approach,
beginning with rental rates. He testified that there are “three properties within one-half mile of
the subject” that support his rent comparables. Howard testified that at the time the subject
property opened in May 2010, there was “pent up demand” and approximately 30 percent of the
facility “quickly filled,” but to compete with three other storage facilities in Wilsonville the
subject property offers discounts, including “30% off for 1 year” or “50% off first 3 months.”
(Ptf‟s Ex 1.) Howard reviewed a “Comparison Chart” for square feet occupied and units
occupied, testifying that the “business is seasonal with occupancy the greatest in July, August,
and September.” (See Ptf‟s Ex 2.)
Howard testified that it “takes five years to fill up” a storage facility, supporting his
testimony with comparison charts for Tualatin Storage (built 2006) for January 2008 through
June 2012, 88th Street Storage (built 2006) for February 2008 through December 2011, and
Gresham Storage (built 2009) for June 2009 through June 2012. (Ptf‟s Exs 3-5.) Howard
testified that “after five years the occupancy averages 79 percent, based on square footage.” (Cf.
Ptf‟s Ex 6.)
DECISION TC-MD 120417D 3
Howard testified that “operating expense percent as of June 2011” averaged 40.5 percent
based on 64 storage facilities. (Ptf‟s Ex 8.)
Howard testified that a nine percent capitalization rate was appropriate for the subject
property. He stated that there are few sales of storage facilities, making it “hard to determine a
capitalization rate.” He testified that in July 2011, he “purchased a storage facility located in
Roseburg,” paying $1,000,000 and resulting in an 8.5 percent capitalization rate. (Ptf‟s Ex 9.)
He provided a broker‟s listing for Beaverton Safeguard Storage, showing a listing price of
$1,850,000, and a “current cap rate” of 9.10 percent. (Ptf‟s Ex 10.) Howard testified that the
“actual sale” occurred on April 5, 2011, and the buyer paid $1,825,000 for a “9.2 cap rate.” (Id.)
Howard testified that he determined the subject property‟s real market value to be
$1,685,520 as of January 1, 2011. (Ptf‟s Ex 7.) Howard explained that he determined an annual
potential gross rental income of $404,594 based on the current mix of unit size and rental rates.
(Id.) He testified that he concluded a “realistic” maximum occupancy of 79 percent of available
square footage, resulting in rental income of $319,630 per year. (Id.) In response to Saunders‟
question, Howard disputed the statement made by one of his equity partners to the City of
Wilsonville Development Commission that “two percent” is a “correct” vacancy rate.” He
testified that as of January 1, 2011, the subject property was “30 percent occupied” based on the
number of units rented. Howard testified that he reduced the rental income by actual or
estimated “rent up” cost and two percent “credit loss.” (Id.) He testified that he determined
“annual operating cost” to be 40.5 percent of “total sales.” (Id.) In response to Saunders
question, Howard testified that “property taxes are 12 percent of the total operating costs.”
Howard stated that even though he did not increase the annual income he did increase the
“operating expenses each year, approximately $5,000 per year.”
DECISION TC-MD 120417D 4
Howard testified that he capitalized the resulting annual net operating income for
calendar years 2010 through 2016, concluding a real market “stabilized” value of $2,088,189 in
2016. (Id.) He testified that he subtracted the “present value of absorption” from the “fully
leased up value” to arrive at a “net value” as of the assessment date of $1,685,520. (Id.)
Saunders questioned Howard about his choice of a reversionary capitalization rate and how he
computed the present value of the subject property as of the assessment date. Howard strongly
advocated that an investor would not pay a “stabilized value sales price” for a “partially occupied
building” and there would “likely be some deduction for absorption lease-up.” Saunders stated
that Howard‟s “DCF [discounted cash flow] is too speculative.”
Saunders testified that his appraisal report considers the three approaches to valuation,
cost, income and comparable sales. (Def‟s Ex A at 4.) Looking first at the cost approach,
Saunders determined a land cost based on “the prior sale of the subject property,” which
“required a downward adjustment of 18% for time indicating a unit price of” $12.30 per square
foot for an “indicated site value” of $685,811. (Id. at 66, 70.) Even though Saunders
determined the “value of surplus land” to be $350,636, he did not include that value in the
“Value Indicated by the Cost Approach.” (Id. at 74.) Saunders stated in his appraisal report that
he “utilized Marshall Valuation Service” in determining the “replacement cost includ[ing]
estimates of direct costs, indirect costs and developer‟s profit.” (Id. at 71.) Howard challenged
Saunders‟s inclusion of “Absorption/Lease-up Cost” in the amount of $500,000, which Saunders
stated was “[b]ased on county appraiser‟s estimate.” (Id. at 73.) Saunders determined a
depreciated replacement cost including the site value without the surplus land of $4,174,657.
(Id. at 74.) Howard testified that in September 2010, the subject property was subject to a loan
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DECISION TC-MD 120417D 5
in the amount of $3,100,000. He testified that “there was no indication at the time [the subject
property‟s improvements were] being built that the economy would be in this state.”
Saunders‟s appraisal report described the sales comparison approach:
“The comparables in this section represent the best comparable data [in the
Portland-Vancouver Metropolitan Statistical Area] the appraiser could verify as of
the effective date of the appraisal. The appraiser reviewed ten comparable sales
of which the six most comparable sales were selected. * * *.
“* * * * *
“The appraiser made qualitative adjustments which are shown in the sales
adjustment grid later in this section. The adjustments are based upon
conversations with market participants tempered with the appraiser‟s experience.
“* * * The appraiser will utilize a negative 6% annual time adjustment
(after January 1, 2009) to adjust the sale prices to the January 1, 2011 date of
value and a positive 6% annual time adjustment for sales which occurred after
January 1, 2011 date of value. * * *.
“* * * * *
“* * * Overall, no one sale had predominant comparability. * * *
Considering the subject‟s potential stabilized [net operating income] per [square
foot], location, new condition and occupancy stabilization costs, it is the
appraiser‟s opinion that the subject property would sell for approximately $85.00
[per square foot] in comparison. When the subject‟s 39,665 [square foot net
rentable area] is multiplied by $85.00 the indicated value is $3,370, 675. To this
amount is added the value of the subject‟s phase 2 surplus land which was
previously estimated to be $400,636 for a total value of $3,771,311.”
(Def‟s Ex A at 86, 92.) Saunders also discussed the “Income Multiplier Analysis.” (Id. at 93.)
Saunders concluded:
“The range [7.22 to 8.66] of EGIM [effective gross income multiplier] is a
much more narrow[] range[,] reflecting the actual occupancy level of each
comparable sale. It will be used to estimate the value of the subject property. The
subject being new in a developing area with upside potential should have a
multiplier in the upper end of the range. * * * Considering the subject‟s location,
condition, age, quality and design, it is my opinion that the subject property would
sell for an EGIM of 8.25 in comparison.
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DECISION TC-MD 120417D 6
“* * * [T]he indicated market value is $3,210,273. To this amount is
added the value of the excess land of $400,636 for a market value estimate of
$3,610,909.
“* * * * *
“The price per SF indicated a value estimate of $3,771,311. The effective
gross income multiplier indicated a value conclusion of $3,610,909. Equal weight
was placed on both indications of value. The sales data provide reasonable
support for a market value estimate as of January 1, 2011 of $3,700,000.”
(Id. at 93.) Howard questioned Saunders about the three comparable sales occurring in January
2008, April 2008 and May 2008.
Saunders‟s appraisal report discussed the income approach, stating that “[t]he rent
comparables selected are located within a four mile radius of the subject property.” (Id. at 75.)
Howard testified that two of Saunders‟s rent comparables are more than “12 miles” from the city
of Wilsonville. He asked how those can be comparable to the subject property, specifically
when those two facilities are “highly occupied” and “rents are higher” than at the subject
property. After reviewing the comparable rent data, Saunders found that the “subject‟s actual
rental rates are below the rental range indicated by the rent comparables. The subject consists of
several unit sizes * * * that are not „typical‟ market unit sizes; however, a majority of the subject
units are close to these typical sizes * * *.” Saunders stated that “[c]onsidering the current
recession, a typical purchaser would place most weight on the subject‟s actual achieved rents”
and found that total annual rental income was equal to actual rents, or $426,630. (Id. at 82.)
Saunders determined that the subject property
“receives other income from late fees and merchandise sales such as boxes, locks,
labels, etc. A[n] estimate of $500 per month or $6,000 per year is projected for
this category. * * * The potential gross income is the sum of the gross annual
rental income of $426,360 and the additional annual income of $6,000 for a total
estimated amount of $432,360 per year.”
(Id. at 83.)
DECISION TC-MD 120417D 7
Relying on the “subject developer” who “reported that there was a 2.2% vacancy rate
over the last ten years in his land use application to the city of Wilsonville in 2009,” Saunders
concluded that “the average total vacancy and credit loss estimate for investment property is
* * * 10% of potential gross annual income on a long term basis.” (Id.) Howard challenged
Saunders‟s conclusion, stating that Saunders‟s data supported a vacancy percentage of 9.53
percent and that Saunders did not include anything for credit loss. (Id. at 60.) Howard testified
that the actual amount for vacancy should be 14 percent, discount two percent and credit loss
five percent for total of 21 percent.
Saunders‟s appraisal report stated that the “comparable sales * * * indicated expense
percentages of 34 – 37% of effective gross income. Considering the fact that the subject
property is a new functional, average quality facility in good condition, stabilized operating
expenses of 35% have been estimated.” (Id. at 83.) Howard questioned Saunders as to why he
included property taxes in the operating expenses even though those expenses should have been
removed and a property tax rate added to the capitalization rate. Howard admitted that he too
included property taxes in his determined operating expense rate.
Saunders concluded that the
“comparable sales indicated a range of overall [capitalization] rates from 7.5% to
9%. * * * Considering the subject [is] newer, well located, surrounded by
developing residential, commercial and industrial areas, in an area with a
historically low vacancy rate, an appropriate overall rate for the subject property
is judged to be 8% in comparison. When the estimated annual [net operating
income] of $252,931 is divided by an overall rate of 8%, the indicated value is
$3,161,638.”
(Id. at 84.) To that indicated value, Saunders added the “market value of the surplus land
[$400,636]” to determine an “estimated market value of the subject property as of January 1,
2011” to be $3,562,274. (Id.) Howard challenged Saunders‟s capitalization rate, stating that he
failed to “adjust for the crash in the market.”
DECISION TC-MD 120417D 8
In reconciling the three approaches to valuation, Saunders‟s appraisal report stated:
“After considering factors relevant to the valuation of the subject property
and the quality of available data for analysis, most weight was placed on the value
indication from the income approach, which indicated a market value of the fee
simple interest in the real property as of January 1, 2011 of $3,562,274.
Additional support was provided by the value indicated by the sales comparison
approach. This approach supports the reasonableness of the value indication
provided by the income approach. Limited weight was placed on the cost
approach which is believed to set the upper limit of value * * *.”
(Id. at 95.) Howard stated that even though Saunders considered all three approaches Saunders
concluded that “the income approach was the strongest indicator of value.”
II. ANALYSIS
The issue before the court is the subject property‟s real market value as of January 1,
2011. In Oregon, all real property “not exempt from ad valorem property taxation or subject to
special assessment shall be valued at 100 percent of its real market value.” ORS 308.232.2 ORS
308.205(1) defines real market value as follows:
“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.”
Real market value is determined by the particular methods and procedures adopted by the
Department of Revenue. ORS 308.205(2). There are three approaches to valuation (income,
cost, and sales comparison) that must be considered when determining the real market value of a
property. OAR 150-308.205-(A)(2)(a); see also Allen v. Dept. of Rev. (Allen), 17 OTR 248, 252
(2003); Gangle v. Dept. of Rev., 13 OTR 343, 345 (1995). The valuation approach to be used is a
question of fact to be determined on the record. Pacific Power & Light Co. v. Dept. of Rev., 286
Or 529, 533, 596 P2d 912 (1979). Saunders considered all three approaches to valuation,
2
All references to the Oregon Revised Statutes (ORS) and Oregon Administrative Rules (OAR) are to
2009.
DECISION TC-MD 120417D 9
concluding that the subject property‟s real market value is best determined by the income
approach. Plaintiff relied on a modified income approach. The court agrees that because the
subject property is an income producing property, the income approach is the most reliable.
“Any property that generates income can be valued using the income capitalization
approach.” Appraisal Institute, The Appraisal of Real Estate 447 (13th ed 2008). “In the income
capitalization approach, an appraiser analyzes a property‟s capacity to generate future benefits
and capitalizes the income into an indication of present value. The principle of anticipation is
fundamental to the approach.” Id. at 445. Anticipation is defined as “[t]he perception that value
is created by the expectation of benefits to be derived in the future.” Id. at 35.
“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) net operating income * * *.” Id. at 253.
Looking first at the capitalization rate, Plaintiff concludes that the appropriate rate is nine percent
after considering sales occurring after the assessment date and the financial market conditions as
of the assessment date. Defendant concludes that the appropriate rate is eight percent, giving
most weight to the subject property‟s age and location. Defendant‟s comparable sales support
Plaintiff‟s conclusion that the capitalization rate should reflect the change in the market resulting
from the lack of liquidity after the financial crisis of late 2008. (See Def‟s Ex A at 87 (showing
nine percent capitalization rate in all three post-2008 sales).) Based on the evidence, the court
agrees with Plaintiff that the capitalization rate should be 9 percent. Even though the subject
property is new, it faces competition from three competitors, all within a few miles and offering
the same service: storage.
DECISION TC-MD 120417D 10
This court has stated that a property tax rate should be added to the capitalization rate.
Neither party included a property tax rate in their capitalization rate. Saunders provided
information that the property tax rate as of the assessment date was $18.7129 per thousand.
(Def‟s Ex A at 33.) Plaintiff submitted the Clackamas County Board of Property Tax Appeals
2011-2012 Value Recalculation stating that the changed property ratio is 0.886. (Ptf‟s Rebuttal
Ex 15 at 46.) After applying the “changed property ratio” to the property tax rate the adjusted
property tax rate is 1.66 percent. The overall capitalization rate is therefore 10.66 percent.
The next key component is net operating income. The starting point in determining net
operating income is potential gross revenue. In determining potential gross revenue, Saunders
completed a rent comparable study. (Def‟s Ex A at 75-82.) Howard concluded that for the next
five years the subject property would not increase the 2010 rental rates. The court agrees with
Saunders that to compute the subject property‟s real market value at the point it reaches
stabilization market rents are appropriate. The court accepts Defendant‟s potential gross income
of $432,000 (rounded) per year. (Id. at 83.)
The parties differ significantly as to the appropriate vacancy and collection loss.
Saunders placed significance on the “subject developer” who “reported that there was a 2.2%
vacancy rate over the last ten years” in the “city of Wilsonville for the three [prior] existing self-
storage properties.” (Id.). He acknowledged that as of the assessment date the “subject was
approximately 30% occupied,” but did not consider how the introduction of 404 storage units in
a relatively small market would impact vacancy rates for a new property. (Id.) Howard testified
that to attract renters the subject property extended discounts in addition to vacancy and credit
losses. Based on the evidence, the court concludes that the total vacancy, credit loss, and
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DECISION TC-MD 120417D 11
discount rate is 17 percent. As a result, the subject property‟s effective gross income is
$359,000 (rounded).
To compute net operating income, effective gross income is reduced by annual operating
expenses. The parties‟ estimates of operating expenses ranged from 35 percent to 86.4 percent.
(Def‟s Ex A at 83; see Ptf‟s Exs 7-8.) Both parties included property tax expense in total
estimated annual operating expenses. This court has previously concluded that the property tax
expense should not be included in the operating expenses and that a property tax rate should be
added to the capitalization rate. Based on the evidence, the court concludes that the operating
expense percentage excluding the property tax expense is 30 percent.
After adjusting the effective gross income for operating expenses, the net operating
income is $251,300. Using the overall capitalization rate of 10.66 percent, the subject property‟s
real market value as of the assessment date is $2,360,000 (rounded.)
Plaintiff requests that the subject property‟s real market value be reduced by the “present
value of absorption calculation” in the amount of $402,669. (Ptf‟s Ex 7.) In its discussion of
absorption, this court looked to examples reported in the eleventh edition of The Appraisal of
Real Estate:
“One type of problem property is a property that has not achieved the level of
utility for which it was designed and consequently is a financial failure, e.g., a
strip shopping center that did not meet a breakeven occupancy level and thus has
not generated the necessary cash flow to pay debt service or provide a return on
the investment * * *.”
Kailes v. Josephine County Assessor, 16 OTR-MD 348, 354-55 (2001) (quoting Appraisal
Institute, The Appraisal of Real Estate 580 (11th ed 1996)). The court does not agree that the
subject property is like the problem property example. As of the date of assessment, the subject
property had been operating for approximately six months. Six months is insufficient time to
conclude that the subject property is a “financial failure.” (Id.) Howard testified that “[n]ew
DECISION TC-MD 120417D 12
complexes are taking 5 years to fruition. Initially they see a quick increase from 0 to 30%, then
they plateau.” (Ptf‟s Let dated Sept 6, 2012.) Howard testified that after 24 months the subject
property is 67 percent occupied. (Ptf‟s Addendum, “Assessor‟s Survey – July 2012”.) Based on
that evidence and Howard‟s testimony, the subject property appears to be ahead of Howard‟s “5
years to fruition.” The court concludes that for the tax year under appeal there is insufficient
evidence that an absorption adjustment is necessary to determine the subject property‟s real
market value as of the assessment date.
The parties agree that the real market value of a land parcel identified as surplus land
must be added to the real market value determined by the income approach. The parties disagree
as to the size of the surplus land. The court accepts Howard‟s testimony that the surplus land
measures 22,507 square foot after a reduction for the 10 parking spaces overlooked by
Defendant. Howard determined a real market value of $157,549, or $7.00 per square foot, even
though he offered a letter from a real estate broker concluding that the parcel should not be listed
for more than $4.50 per square foot. (Ptf‟s Ex 14.) Saunders determined a real market value of
$350,636, based on 28,507 square feet valued at $12.30 per square foot. (Def‟s Ex A at 70.)
Saunders placed the most weight on Plaintiff‟s purchase price of the entire parcel in July 2009,
adjusted “downward” 18 percent “for time” for an indicated price per square foot of $12.30
(rounded.) (Id. at 66, 70.) Saunders‟s comparable land sales were for parcels substantially larger
than the surplus land. (Id. at 60.)
After reviewing the testimony and evidence, the court concludes that there is insufficient
evidence for the court to make a determination of the real market value of the surplus land. For
the board of property tax appeals hearing, Saunders concluded a real market value of “$250,000
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DECISION TC-MD 120417D 13
for excess land (35% of the site value).” (Ptf‟s Rebuttal Ex 15 at 5.) Lacking sufficient evidence
to the contrary, the court accepts that determination.
The subject property was placed on the tax rolls for the first time in the 2011-12 tax year.
Neither party submitted evidence of real market exception value. Given the court‟s
determination that the subject property‟s real market value is substantially the same as the real
market value determined by the Clackamas County Board of Property Tax Appeals, the court
accepts the “Real Market Value of Exception Found by Board” in the amount of $1,861,683.
(Ptf‟s Compl at 4.)
III. CONCLUSION
After careful review of the testimony and evidence, the court concludes that the income
approach is the best method to determine the subject property‟s real market value. Now,
therefore,
IT IS THE DECISION OF THIS COURT that the 2011-12 real market value of property
identified as Account 00812099 is $2,610,000.
IT IS FURTHER DECIDED that the 2011-12 real market exception value of property
identified as Account 00812099 is $1,861,683.
Dated this day of December 2012.
JILL A. TANNER
PRESIDING 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 Presiding Magistrate Jill A. Tanner on December 12, 2012. The
Court filed and entered this document on December 12, 2012.
DECISION TC-MD 120417D 14