Tetherow Golf Course v. Deschutes County Assessor , 20 Or. Tax 554 ( 2012 )

554 July 31, 2012 No. 62
IN THE OREGON TAX COURT
REGULAR DIVISION
TETHEROW GOLF COURSE LLC,
Plaintiff,
v.
DESCHUTES COUNTY ASSESSOR
and Department of Revenue,
Defendants.
(TC 4988 & 5020)
TETHEROW GLEN 58 LLC,
Plaintiff,
v.
DESCHUTES COUNTY ASSESSOR
and Department of Revenue,
Defendants.
(TC 5019)
Plaintiffs (taxpayer) appealed the real market value of a golf course and
adjacent real property in Deschutes County. The court found that taxpayer’s val-
uation evidence did not effectively consider two significant facts, namely a bank
appraisal completed approximately five months before the assessment date, and
the arm’s length purchase of the subject property within a short time after the
assessment date. As a result of the failure of taxpayer’s expert to confront and
rebut the indicator of value present in the bank appraisal and sale, the court
placed little to no weight on the opinion of the expert and therefore taxpayer did
not meet its burden of proof as to value. The court further found that that the
value of the golf course should be consistent with the range of values established
by the bank appraisal and sale of the subject property, and that Defendant (the
county)’s trending analysis suggesting a range of five percent decline in value
for golf course properties was acceptable in light of taxpayer’s failure to carry its
burden of proof.
Trial was held August 15 & 16, 2011, in the courtroom of
the Oregon Tax Court, Salem.
Neil R. Bryant, Bryant Lovlien & Jarvis PC, Bend,
argued the cause for Plaintiffs (taxpayer).
Laurie E. Craghead, Deschutes County Counsel, Bend,
argued the cause for Defendant Deschutes County Assessor
(the county).
Decision rendered July 31, 2012.
Cite as 20 OTR 554 (2012) 555
HENRY C. BREITHAUPT, Judge.
I. INTRODUCTION
This matter is before the court after a trial. At
issue is the value for property tax purposes of a golf course.
The 2009-10 and 2010-11 tax years are at issue. The rele-
vant assessment dates are therefore January 1, 2009, and
January 1, 2010. Also involved in the case are the values of
58 residential lots, adjacent to the golf course, for the 2010-11
tax year only.
II. FACT
A. Golf Course
The facts relevant to this opinion are not numer-
ous and are, for the most part, not subject to dispute. The
Tetherow golf course is a very high quality golf course
located in Bend, Oregon. The development of the course was
initially undertaken in connection with adjacent residential
lots, a clubhouse and other facilities.
The course was opened in the summer of 2008.1 The
course was purchased by the present owners in February
2009, for a price of $10,500,000. In the current ownership
group is one person who is a both a former golf professional
and has been associated with the development of the course
under prior ownership. The other person in the ownership
group is a sophisticated investor. In the summer of 2008, a
financial institution extended a mortgage loan to the prior
owners of the course. The loan was on a nonrecourse basis.
In connection with that loan an appraisal was commis-
sioned and completed that placed a value on the course of
$10,000,000, including personal property.
The economic conditions in the United States and
in the Bend, Oregon area went through significant change
during the period of 2007 to 2011, some of which may not
yet have fully played out. Bend had experienced signifi-
cant growth in terms of development of residential lots,
1
Unless otherwise noted, references to exhibits are to exhibits in case TC
5019.
556 Tetherow Golf Course v. Deschutes County Assessor
construction of homes and development of golf courses prior
to the initial valuation date of January 1, 2009. Those trends
had slowed significantly as of January 1, 2009. Testimony of
managers of other golf clubs in the Bend area establishes
that clubs have experienced loss of members and have
decreased membership fees in response to deteriorating eco-
nomic conditions.
The golf course was developed within a context
that persons who bought adjoining residential lots would be
required to become members of the golf club owning and
operating the course. The membership fee called for in the
development documents was, except for certain special mem-
berships, $30,000 for each lot. In addition to membership
fees, members are required to pay monthly dues. This mem-
bership obligation is a covenant recorded in the land records
and binding on persons who purchase residential lots. There
are memberships available to persons other than lot owners,
but the memberships are not open to the public generally.
Plaintiff (taxpayer) presented an appraisal report
at trial and a report reviewing that appraisal as to the
January 1, 2009, assessment date. Defendant Deschutes
County Assessor (the county) presented an appraisal report
for the 2009-10 tax year. For the 2010-11 tax year the county
did not present an appraisal report but based its determina-
tion of real market value on a trending analysis applied to
the value it asserted for the 2009-10 year.
B. Residential Lots
The lots located next to the golf course are divided
into two types, those with a view of the golf course and those
without such a view. All of the lots are of roughly the same
size. None of the lots are improved with dwellings but all the
lots are prepared for such dwellings to be constructed. As
mentioned above, any buyer of a lot is required to purchase
a membership in the golf club for $30,000.
III. ISSUE
The issues in this case are the real market value of
the golf course for the 2009-10 and 2010-11 years and the
real market value of the residential lots for the 2010-11 year.
Cite as 20 OTR 554 (2012) 557
IV. ANALYSIS
A. Golf Course
The real market value of property is a question of
fact as to which taxpayer bears the burden of proof. ORS
305.427 (2009). That burden is successfully borne only if the
court can conclude that the value asserted by taxpayer is,
more probably than not, the value of the property as of the
assessment date in question. In this case there are two years
and two assessment dates: January 1, 2009, and January 1,
2010. The court will begin with a determination as to the
value of the golf course as of January 1, 2009.
As to the real market value of the golf course as of
January 1, 2009, there are two very significant facts that
taxpayer does not effectively deal with in the evidence and
expert opinion it has presented to the court. The first fact,
chronologically, is the bank appraisal completed in the sum-
mer of 2008, approximately five months before the assess-
ment date. That appraisal concluded a value for the golf
course at $10,000,000, including personal property. That
appraisal was done for a bank that was in no way related
to the owners of the course. The court must conclude that it
was done by a financial institution that had no economic or
other interest in overstating the value of the course.
The second, and more important, fact is the arm’s
length purchase of the very property at issue within a
short time after the assessment date for a purchase price
of $10,500,000. Taxpayer’s primary expert placed little or
no weight on this sale of the subject property. The expert
explained this by asserting that he felt the purchase was the
product of an emotional attachment to the property on the
part of the one owner who was and had been most involved
in the day to day development of the property.
Taxpayer’s expert witness offered no objective
information to support his conclusion that the sale was the
product of emotional factors. There was no testimony by the
second owner of taxpayer, a person acknowledged to be a
sophisticated investor. Nor did the expert offer any evidence
that the sale was other than an arm’s length transaction.
558 Tetherow Golf Course v. Deschutes County Assessor
The owner most involved in the day to day develop-
ment of the property did not attribute the purchase price to
emotional considerations. Rather, that person testified that,
in his view, he and his partner paid approximately $3.5 mil-
lion for the golf course itself and $7 million for the right to
collect membership fees as sale of adjoining lots occurred.
That testimony confirms that the value of the property was
equal to the purchase price. This conclusion follows for the
simple reason that the ability to collect the membership fees
was an income potential of the property itself.2 The valua-
tion of that income potential by the parties to the sale rep-
resents a very good indicator of the value of the property.
The failure of taxpayer’s expert to adequately con-
front and rebut the strong indicator of value present in the
bank appraisal and the March 2009 sale leads the court to
place little, if any, weight on the opinion of value expressed
by taxpayer’s expert witness for the 2009-10 year.3 The
Tetherow course was designated as the best new course in
the nation by Golf Magazine. The architect who designed
Tetherow was similarly honored. There is no evidence that
the Mountainview course has ever achieved such recogni-
tion. It is also noteworthy that taxpayer’s expert did not use
the Mountainview course as a comparable for the 2010-11
tax year. The only explanation given for this difference was
that the expert had used different thinking for the later year.
That suggests that the opinion of the expert was entirely too
subjective and not grounded in objectively verifiable fact.
For the foregoing reasons, the court places no reli-
ance on the opinion expressed by the expert witness for
2
This owner of taxpayer appears to have believed that receipts used to pay
down debt on the property were somehow not relevant to a determination of the
value of the property because they went directly to the bank. This view improp-
erly confuses the value of property with the method of financing acquisition
through debt, equity or both. It also would be relevant if the owner’s interest in
the property or the lender’s interest in the property were subject to assessment.
However, it is the property, not the interests of various parties, that is subject to
assessment and taxation.
3
The opinion of the expert witness is also undermined by the choice of cer-
tain comparable properties made by the expert. For example, the expert con-
cluded that the subject property was comparable to the Mountainview course in
Boring, Oregon. The evidence leads to a conclusion that the Mountainview course
is decidedly inferior to the subject.
Cite as 20 OTR 554 (2012) 559
taxpayer. Accordingly, taxpayer has not satisfied its burden
of proof that the value of the property was, more probably
than not, the value asserted by taxpayer.
The court finds that the value of the golf course
should be consistent with the range of values established by
the bank appraisal and the March 2009 sale of the subject
property.4 The court concludes that the value of the course
as of the assessment date was equal to the purchase price
paid by taxpayer. The expert for the county adjusted that
price upward to account for a hypothetical resale of 37 mem-
berships that were in effect as of the assessment date. As
will be discussed below, this approach by the witness for the
county is not accepted by the court. Nor does the court agree
with other minor adjustments the witness for the county
made to the sale price paid by taxpayer.
The price paid for the course was $10,500,000. Of
that price the county agrees that $900,000 was attributable
to personal property otherwise to be taken into account. The
value of the real property as of January 1, 2009, was, there-
fore, $9,600,000.
As to the 2010-11 tax year, the expert opinion pre-
sented for taxpayer again does not take into account in any
way the sale of the property in March 2009. If there were
numerous sales of arguably comparable properties in the
locale of the subject and closer to the assessment date of
January 1, 2010, this might be acceptable. However those are
not the facts with which the court is faced. More importantly,
the value conclusion of the expert for taxpayer for the 2010-11
year is that the golf course was worth $2,785,000. That value
represents a decrease of approximately $7,000,000 from the
value that the court has found for the 2009-10 year.
Although the evidence supports a conclusion that
values of almost all, if not all, property in Deschutes County
declined during the 2009 calendar year, there is no support
4
The parties presented the court with arguments as to whether the expert
for taxpayer did or did not comply with the principles expressed in Deschutes
County Assessor v. Dept. of Rev., 15 OTR 231 (2000), relating to treatment or
effect of the particular membership obligations and course operation restrictions
that may have been placed on the property by the owner or a previous owner. It
appears to the court that all appraisers purported to comply with Broken Top.
560 Tetherow Golf Course v. Deschutes County Assessor
in the evidence and opinions presented by taxpayer that
would justify the level of decline implicit in the opinion of
the expert for taxpayer. The income indicator developed
by taxpayer’s appraiser involves so many assumptions and
estimates that the court does not consider it to be particu-
larly reliable. The comparable sales indicator presented by
taxpayer, while not this time relying on the Mountainview
property as a comparable, nonetheless involves properties at
such a distance from the subject as to be suspect. Taxpayer
has failed to bear its burden of proof on these critical ele-
ments in the analysis.
The county, while not presenting an appraisal of the
property as of January 1, 2010, does not bear the burden of
proof. What the county has presented is a trending analysis
suggesting that the decline in value for golf course proper-
ties was in the range of five percent. That conclusion does
not appear to be facially incorrect and it is accepted by the
court in the face of the failure of taxpayer to bear its burden
of proof that the value of the property was, more probably
than not, lower. The approach of trending from an actual
sale of the property also appears to the court to be prefer-
able to an attempt to develop an income indicator of value
for a relatively new property. Especially in difficult transi-
tion times there are simply too many assumptions that must
be made in the development of an income indicator to place
much reliance on that indicator.
The court concludes that the value of the golf course
as of January 1, 2010, was five percent less than its January 1,
2009, value of $9,600,000: that being $9,120,000.
B. Broken Top
The parties have spent significant efforts discuss-
ing the extent to which their appraisals did or did not com-
port with this court’s decision in Deschutes County Assessor
v. Dept. of Rev., 15 OTR 231 (2000) (Broken Top). The reso-
lution of this case does not depend on the outcome of these
arguments. However, the court takes this opportunity to
comment on some of the points of contention and the teach-
ing of Broken Top, primarily for the reason that numerous
cases have arisen recently in Deschutes County regarding
Cite as 20 OTR 554 (2012) 561
the proper valuation of golf courses and a number of those
have, at the request of the parties in those cases, been placed
in abeyance pending the decision in this case.
One principle of Oregon property taxation recog-
nized in Broken Top is that in the valuation of property sub-
ject to existing leases or most other encumbrances, Oregon
law dictates that the separate interests of an owner and the
interests of lessees or beneficiaries of other encumbrances
be ignored. See, Swan Lake Mldg. Co. v. Dept. of Rev., 257
Or 622, 625, 478 P2d 393 (1971). Instead, the value of prop-
erty is determined without separate valuation of the several
interests in the property. Accordingly, in the case of prop-
erty subject to existing leases, Oregon law requires consid-
eration of market rent and not actual or “contract” rent due
under actual leases of the property. Id.The parties agree, and the court accepts, that
membership agreements at golf courses may be analyzed
in a fashion similar to leases in a commercial building.
Accordingly, to the extent that the terms of the membership
arrangements are above or below those present in the rel-
evant market generally, the valuation must take that into
account and adjust any variance so that market rates and
terms are analyzed.5
A second principle recognized in Broken Top relates
to what type of property is generally subject to taxation in
Oregon. The appraisers for the taxpayer in Broken Top stated
that they had done appraisals of the course in question there
as a “going concern subject to rights of membership.” Broken
Top, 15 OTR at 235. This court pointed out that such an
approach to valuation did not comply with Oregon law. Id.
at 237. Oregon does not subject to taxation the intangible
values associated with the operation of a property as part of
a business.
A third principle central to the decision in Broken
Top is that determination of the highest and best use of any
property is a critical first step in any valuation. The court
5
The membership agreements also contain buy back provisions. However
the contingent nature of these and the length of time before they might be trig-
gered appear to have resulted in there being little value attributed to them.
562 Tetherow Golf Course v. Deschutes County Assessor
noted that all appraisers concluded that the highest and best
use of the property at issue was as a golf course with a club-
house. The court noted, however, that the appraisers took
different views as to the best method of operating the prop-
erty. The appraisers for the taxpayer concluded that contin-
ued operation of the course with membership restricted to
the owners of adjacent lots was the best use. The county’s
appraiser concluded that an open membership policy would
produce better economic returns. The court concluded that
the county’s appraiser had the better position. Id. at 241.
In this case, the county and its expert witness have
taken certain positions they believe are either justified or
required by Broken Top. The court questions the validity of
certain of those positions. First, the county appears to argue
that Broken Top requires appraisers to pretend that the
property in question here had no membership agreements
in place as of the date of valuation. This would be the equiv-
alent of arguing that in a commercial building with office
space leased out, an appraiser would be required to pretend
that no such leases existed. The court disagrees with any
such contention.
The decision in Broken Top never stated that exist-
ing membership agreements had to be considered as non-
existent as of the date of valuation. The most important
decision in Broken Top was rather whether the valuation of
the property should assume open membership or only mem-
bership from persons who owned an adjacent lot. The court
concluded that open membership was the highest and best
use as it would have the maximum economic return. Id.What the court did, in effect, say should be ignored were the
contract rights that limited membership to lot owners. Not
only does Broken Top provide no justification for pretend-
ing no memberships exist on the valuation date in the case
where the highest and best use of the property is as a mem-
bership course, any such assumption would present signifi-
cant additional problems. Would an appraiser then have to
estimate a period over which the absent memberships would
then be sold? The court does not accept the county’s reading
of Broken Top in this regard.
Cite as 20 OTR 554 (2012) 563
All appraisers in this case appear to agree, a mem-
bership course—as opposed to an open play course—is the
highest and best use.6 The question remains whether highest
and best use is membership limited to lot owners or as open
to the public. Here again, although taxpayer’s appraiser was
not completely clear on this, all appraisers appear to con-
clude that open membership would be the highest and best
use of the course.
At this point in the process of valuation, the ques-
tion would become what, if anything, to do with existing
membership agreements. They are similar to existing leases
in a commercial building. The county, as stated, argues that
the appraisal should proceed as if all the existing mem-
berships did not exist and were available for issuance as of
the valuation date. From this position the appraiser for the
county then concluded that a number of memberships equal
to the existing number (37) would be sold in the first year
following the valuation date of January 1, 2009. Concluding
that those memberships would be sold for $30,000 each, the
appraiser included in the revenue for 2009, in addition to
other revenue, the amount of $1,110,000, representing such
initial membership revenue.
As stated above, the court does not believe that
Broken Top justifies such an approach. Nothing in the deci-
sion describes such an approach. Nor do the legal bases
discussed in the opinion suggest such an approach. Rather,
Broken Top is consistent with the process by which an
appraiser, using the market rent approach to value, would
take existing membership agreements into account, if the
highest and best use of the property was that of operation
as a membership course. However, the appraiser would then
adjust the income from such leases or agreements that would
accrue after the valuation date so that the income stream
reflected market rates and terms rather than premium or
discount rates or terms “locked in” under existing agree-
ments. In the case of the subject property, that approach
would not “re-sell” the existing memberships. Rather, as to
those memberships, the only change that would be made
6
By “open play” the court means open to play by the public without the obli-
gation to become a member.
564 Tetherow Golf Course v. Deschutes County Assessor
would be to determine if monthly dues—the equivalent of
monthly rent—should be adjusted to equal market rates for
use of a comparable facility.
As to the initial membership payment, to the extent
such payments have been made, they would not be reflected
in the sales indicator as the only property at issue is real
property. Nor would they be reflected in the income indicator
for a hypothetical purchaser contemplating a current pur-
chase as they would not be income to that purchaser.7 Such
payments could be reflected in the cost indicator of value to
the extent the sums were used to improve the property.8 The
county presented no authority or market evidence for the
proposition that existing memberships should be analyzed
as available for resale.
As to unsold memberships, the valuation exercise
would have to confront what the market rate for a mem-
bership would be as of the valuation date, again assuming
that the determination was made that the highest and best
use of the property was operation as a membership course
as opposed to an open play course. In this case the apprais-
ers were in agreement that the highest and best use was
operation as a membership course. They differed in where
they thought the market rate for membership payments
would be. It was not clear to the court whether the apprais-
ers accepted the monthly dues as being at market rates, but
the conclusion of the court in this opinion does not require a
clarification of that point.
C. Residential Lots
Taxpayer’s expert witness concluded that the lots
with a golf course view were worth $205,000 and the lots
without such a view were worth $145,000 in each case as of
January 1, 2010. The county witness concluded to a value of
$260,000 for the view lots and $206,000 for the lots without
a view.
7
No account would be taken unless, perhaps, if market evidence indicated
that the prepayment feature of the membership payment affected the amount of
dues that users of the course paid.
8
The court notes that no appraiser placed any significant reliance on the cost
indicator of value in this case.
Cite as 20 OTR 554 (2012) 565
The two appraisers had differences of opinion as to
which lot sales in the Bend area should be considered as
comparable with the subject property. Taxpayer’s appraiser
included sales from developments at some distance from the
subject while the county’s appraiser used more sales from the
subject development and the neighboring Broken Top devel-
opment. These differences do not, in the opinion of the court,
support much of a basis for distinguishing between the two
appraisals, although the court believes the analysis of the
county is marginally better overall as to these matters.
However, one element that does serve to distinguish
the appraisals is the error that the appraiser for taxpayer
made in accounting for required membership fees at prop-
erties he felt were comparable. Taxpayer’s appraiser sub-
tracted the membership fee from the comparable lot sale
price to arrive at a sale price for the real estate alone. The
appraiser for the county took the same step.
The appraiser for taxpayer then used the adjusted
sales prices for what he concluded were the comparable
sales to support a conclusion for the value of the subject lots.
However, the appraiser then took an additional deduction of
$30,000, the required membership obligation of a lot pur-
chaser at Tetherow, in concluding to a lot value. This was an
inappropriate double deduction.
If an adjustment is made to the value conclusions
of taxpayer’s appraiser for the lots in order to eliminate the
double deduction, the indicated values are $175,000 for the
lots without a view and $235,000 for the lots with a view.
That value appears to the court to be the proper starting
point in valuing the lots. That conclusion is supported also by
another appraisal of the lots done by The Bratton Appraisal
Group with an effective date of May 1, 2009. Bratton con-
cluded to a value of $175,000 for the lots without a view and
a value of $235,000 for the lots with a view.
In the opinion of the court, this starting point value
for the lots should be adjusted upward by $5,000 per lot to
account for the marginally better comparables on which the
county position is based. That leads to a concluded value of
$180,000 for the lots without a view and $240,000 for the
566 Tetherow Golf Course v. Deschutes County Assessor
lots with a view. This, in the opinion of the court, is the cor-
rect value as of the assessment date of January 1, 2010.
V. CONCLUSION
Now, therefore,
IT IS THE DECISION OF THIS COURT that the
real market value of the golf course for the 2009-10 tax year
is $9,600,000; and
IT IS FURTHER DECIDED that the real market
value of the golf course for the 2010-11 year is $9,120,000;
and
IT IS FURTHER DECIDED that the real market
value of the residential lots for the 2010-11 year is $180,000
for the lots without a view and $240,000 for the lots with a
view.