Douglas County Assessor v. Vannucci Bandon Properties LLC ( 2013 )

IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Property Tax
DOUGLAS COUNTY ASSESSOR, )
)
Plaintiff, ) TC-MD 120430N
)
v. )
)
VANNUCCI BANDON PROPERTIES LLC, )
)
Defendant. ) DECISION
Plaintiff appeals the real market value of property identified as Account R126921
(subject property) for the 2011-12 tax year. A telephone trial was held on April 9, 2013. Paul E.
Meyer, Douglas County Counsel, appeared on behalf of Plaintiff. Brian Lif (Lif), Registered
Appraiser III, testified on behalf of Plaintiff. Roger A. Hartman (Hartman), power of attorney,
appeared and testified on behalf of Defendant. Melony Hakola (Hakola), CCIM, Commercial
Broker, and Steve Gerlt (Gerlt), Oregon Registered Appraiser, testified on behalf of Defendant.
Plaintiff’s Exhibit A was received over Defendant’s objection.1 Defendant’s Exhibits A through
C were received without objection.
I. STATEMENT OF FACTS
The subject property is a 5,379-square foot commercial building situated on 0.66 acres in
Douglas County.2 (Ptf’s Ex A at 4.) It is located in the “C3 General Commercial” zone. (Id.)
1
On April 1, 2013, Defendant filed a Motion to Exclude Plaintiff’s Exhibit “A” (Motion) under Tax Court
Rule-Magistrate Division (TCR-MD) 10 B(1). TCR-MD 10 B(1) states that “Plaintiff’s exhibits shall be marked
numerically and have the case number on the label.” Defendant moved to exclude Plaintiff’s Exhibit A because it
was labeled alphabetically rather than numerically and because Lif erroneously referred to “Defendant” as
“Plaintiff” in his appraisal report. TCR-MD 10 D states that “[a] magistrate may exclude any evidence received
after the time of exchange, sanction any party who withholds information, or use any other measure the magistrate
considers appropriate.” After considering the matter, the court denied Defendant’s Motion. Although Plaintiff failed
to comply with the labeling requirement under TCR-MD 10 B(1), exclusion of Plaintiff’s Exhibit A as a result is not
an appropriate sanction under TCR-MD 10 D in this instance.
2
Lif testified that the subject property is 5,379 square feet; the figure stated on page four of his report is a
typographical error. (See Ptf’s Ex A at 4.)
DECISION TC-MD 120430N 1
The subject property land was acquired by Defendant for $200,000 in May 2005. (Id.) The
subject property improvement was constructed in 2006 at a reported cost of $950,000, or $176
per square foot. (Id.) Lif testified that the subject property is a “high end medical office.” (See
id. at 5-8 (photographs).) Gerlt testified that the subject property was designed to be half
medical office and half professional office. Lif testified that he has been inside the subject
property and observed that it was “very well built out.” He testified, however, that he could not
say whether part of the subject property was “general office” rather than “medical office” based
on his inspection. Gerlt testified that the medical office is used by the wife of the subject
property owner, Vannucci. (See Def’s Ex C at 1.) He testified that the subject property general
office space has never been leased. Gerlt testified that the subject property was intended to be
part of a subdivision of professional offices, but no others were built.
Plaintiff analyzed the 2011-12 real market value of the subject property using each of the
three approaches of value: the cost approach, the income approach, and the sales comparison
approach. (See Ptf’s Ex A at 10-15.) Defendant relied upon the sales comparison approach and
income approach, having determined that the cost approach was not relevant for an assessment
as of January 1, 2011. (See Def’s Ex A at 20.) The parties’ value evidence is discussed in detail
in the analysis section below.
The 2011-12 tax roll real market value of the subject property was $1,289,379. (Ptf’s Ex
A at 4.) The board of property tax appeals (BOPTA) reduced the 2011-12 real market value to
$792,375. (Id.) The 2011-12 maximum assessed value is $962,525. (Id.) Plaintiff requests that
the 2011-12 real market value of the subject property be increased to $1,075,500. (Id. at 15.)
Defendant requests that the 2011-12 real market value determined by BOPTA be sustained.
///
DECISION TC-MD 120430N 2
II. ANALYSIS
The issue before the court is the real market value of the subject property for the 2011-12
tax year. “Real market value is the standard used throughout the ad valorem statutes except for
special assessments.” Richardson v. Clackamas County Assessor (Richardson), TC-MD No
020869D, WL 21263620 at *2 (Mar 26, 2003) (citing Gangle v. Dept. of Rev., 13 OTR 343, 345
(1995)). Real market value is defined in ORS 308.205(1), which states:
“Real market value of all property, real and personal, means the amount in cash
that could reasonably be expected to be paid by an informed buyer to an informed
seller, each acting without compulsion in an arm’s-length transaction occurring as
of the assessment date for the tax year.”3
The assessment date for the 2011-12 tax year was January 1, 2011. ORS 308.007; ORS 308.210.
“Real market value in all cases shall be determined by methods and procedures in
accordance with rules adopted by the Department of Revenue.” ORS 308.205(2). There are
three approaches of valuation that must be considered, although all three approaches may not be
applicable: the cost approach, the sales comparison approach, and the income approach.
OAR 150-308.205-(A)(2)(a); Allen v. Dept of Rev. (Allen), 17 OTR 248, 252 (2003). The real
market value of property is ultimately a question of fact. Chart Development Corp. v. Dept. of
Rev., 16 OTR 9, 11 (2001) (citation omitted).
Plaintiff has the burden of proof and must establish its case by a preponderance of the
evidence. ORS 305.427. 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). If
the evidence is inconclusive or unpersuasive, Plaintiff will have failed to meet its burden of
proof. See Reed v. Dept. of Rev., 310 Or 260, 265, 798 P2d 235 (1990). “[T]he court has
3
All references to the Oregon Revised Statutes (ORS) and to the Oregon Administrative Rules (OAR) are
to 2009.
DECISION TC-MD 120430N 3
jurisdiction to determine the real market value or correct valuation on the basis of the evidence
before the court, without regard to the values pleaded by the parties.” ORS 305.412.
A. Cost approach
“The cost approach is ‘particularly useful in valuing new or nearly new improvements.’ ”
Magno v. Dept. of Rev., 19 OTR 51, 55 (2006) (citations omitted). “ ‘In the cost approach, the
value of a property is derived by adding the estimated value of the land to the current cost of
constructing a reproduction or replacement for the improvements and then subtracting the
amount of depreciation * * * in the structure from all causes.’ ” Id. (citations omitted).
Using “Marshall & Swift valuation,” Lif determined a real market value of $1,089,500 as
of January 1, 2011, under the cost approach. (Id. at 10.) He noted that the reported actual cost of
the subject property was $950,000 for the improvements and $200,000 to acquire the land, for a
total of $1,150,000. (Id. at 4, 10.) Defendant did not offer evidence under the cost approach
because the subject property was not “new or nearly new” as of January 1, 2011. (Def’s Ex A at
20.) No evidence was offered to rebut Lif’s conclusion under the cost approach. However, the
subject property improvements were constructed in 2006 and were not “new or nearly new” as of
January 1, 2011. For that reason, the court finds that little weight should be placed on the cost
approach in this case.
B. Sales comparison approach
The sales comparison approach “may be used to value improved properties, vacant land,
or land being considered as though vacant.” Chambers Management Corp v. Lane County
Assessor, TC-MD No 060354D, WL 1068455 at *3 (Apr 3, 2007) (citations omitted). The
“court looks for arm’s length sale transactions of property similar in size, quality, age and
location” to the subject property. Richardson v. Clackamas County Assessor, TC-MD No
DECISION TC-MD 120430N 4
020869D, WL 21263620 *3 (Mar 26, 2003). OAR 150-308.205-(A)(2)(c) states:
“In utilizing the sales comparison approach only actual market transactions of
property comparable to the subject, or adjusted to be comparable, will be used.
All transactions utilized in the sales comparison approach must be verified to
ensure they reflect arms-length market transactions. When non-typical market
conditions of sale are involved in a transaction (duress, death, foreclosures,
interrelated corporations or persons, etc.) the transaction will not be used in the
sales comparison approach unless market-based adjustments can be made for the
non typical market condition.”
1. Plaintiff’s sales comparison approach
Lif relied in part on the subject property listing price and a rejected offer to purchase the
subject property. (See Ptf’s Ex A at 11.) Lif stated in his report that the “[s]ubject property has
been listed for $1,199,000 over the last year indicating a listing price of $223 per square foot
including land. Property owner refused a $1,000,000+ offer and according to Sperry Van Ness
included no concessions.” (Id.) Gerlt testified that the subject property owner received an offer
of $1,020,000 that he rejected because he would have had to remodel the professional office at a
cost of $200,000 and lease back the subject property for a period of five years at $18 per square
foot, or $1.50 per square foot per month. (See Def’s Ex C.) Hartman testified that the net sale
price would have been about $557,000. (See id. at 2.)
Lif also relied upon three sales of medical offices between May 2009 and April 2012.
(Ptf’s Ex A at 11.) Lif described his sale 1 as a 3,448-square foot “Medical Dental Office” built
in 1980 that sold in February 2011 for $224 per square foot. (Id.) Lif’s sale 2 was a 2,104-
square foot “Medical Office” built in 1986 that sold in May 2009 for $250 per square foot. (Id.)
Lif’s sale 3 was a 3,170-square foot “Medical Office” built in 2005 that sold in April 2012 for
$181 per square foot. (Id.) Lif testified that sale 3 is most similar to the subject property and
was also used by Defendant. Lif testified that he did not make adjustments for location because
all three sales were located in close proximity to the subject property. (See id at 13 (map).) He
DECISION TC-MD 120430N 5
testified that he did not make time adjustments because he could not determine market-based
time adjustments. The parties agreed that the market was in decline in 2011 and flat in 2012. Lif
concluded $200 per square foot for the subject property, or $1,075,800. (Id. at 11.)
On cross examination, Lif testified that his sale 2 is located in a medical campus or park
and that all three of his sales are located near other medical or dental offices. He testified that
the subject property is “free standing,” although it is located near other medical offices. Lif
testified that he did not consider any adjustment necessary for the fact that his comparable sales
were located in medical parks. Hartman noted that, according to the “Sale 1 Verification”
provided by Defendant, Lif’s sale 1 was not listed with a realtor; was a sale between two
business associates; was leased at the time of sale; and required no down payment. (Ptf’s Ex A
at 24-25.) Lif testified that he did not make adjustments for any of those conditions of sale 1.
The “Sale 1 Verification” further states that the buyer did not think the price paid represented the
fair market value of the property: “I think the price is to[o] high. We paid a premium so we did
not have to move our dental business.” (Id.) The “Sale 2 Verification” states that it was a “1031
exchange.” (Id. at 26-27.)
Gerlt relied on two sales, the first of which he described as a “professional office” that
sold for $99.58 per square foot in April 2012.4 (See Def’s Exs C, A at 20.) Gerlt’s second sale is
the same sale used by Lif as his third comparable sale: a “medical office” that sold for $181.39
per square foot in June 2012. (Def’s Exs C, A at 20.) Gerlt did not make any adjustments to
those sales. (See Def’s Ex C at 1.) Plaintiff questioned whether Gerlt’s sale 1 was a “bank sale.”
///
4
Hartman testified and presented an analysis of the same sales discussed by Gerlt. (See Def’s Ex A at 20.)
Hartman made a downward time adjustments of 10 percent to each sale and made a downward location adjustment
of 15 percent to the second sale. (Id.)
DECISION TC-MD 120430N 6
Hartman testified that the property had previously been owned by a bank, but it was not
“repossessed” by the bank; rather, it was used for computer storage.
Gerlt used the first sale to determine the value of the “professional office” portion of the
subject property and used the second sale to determine the value of the “medical office” portion
of the subject property. (Def’s Ex A at 20; Ex C at 1.) Under the sales comparison approach,
Gerlt concluded a value of $755,668. (Def’s Ex C at 1.) As additional evidence, Hartman
testified that the “old cancer center,” a 8,960-square foot building that was remodeled, was on
the market listed at $925,000, or $103.24 per square foot, for 639 days from July 2009 through
April 2011 with no offers. (Def’s Ex A at 15.)
In a letter dated March 25, 2013, Hakola discussed sales in the subject property’s market:
“Within the last 24 months only two medical properties have sold in the Multiple
Listing Service. A former Chiropractic Clinic located at 2270 NW Troost Street
sold for $575,000 based on a price per S/F of $181.39. It was on the market for
273 days with an original list price of $835,000. The second medical office space
at 544 West Umpqua Street sold for $112,500 based on a price per S/F of $41.67.
It was on the market with an original list price of $199,000.”
(Def’s Ex B at 2, see also 3-7.) Hakola presented evidence of three sales of office buildings in
2010 and 2011, with prices per square foot ranging from $27.93 to $85.71. (Id. at 8-13.) She
testified that she showed the subject property in March 2013 and received an offer of $700,000,
which is low, but the highest offer received yet. (See id. at 2.)
The court finds the evidence presented under the sales comparison approach indicates
that the real market value of the subject property as of January 1, 2011, was in the range of
$700,000 to $973,600. Lif’s first sale was not an arm’s-length transaction; it was a sale between
“business associates.” Moreover, the buyers of sale 1 stated that they paid “a premium” to avoid
moving their dental business. Lif did not make any adjustments for the sale 1 conditions. Lif’s
sale 1 is, at best, a high indicator of the subject property’s real market value as of January 1,
DECISION TC-MD 120430N 7
2011. Lif’s second sale, a 1031 exchange, occurred more than one and one half years before the
assessment date, yet Lif made no adjustment for changes in market conditions during that time.
The parties both considered Lif’s sale 3 to be comparable to the subject property and the court
finds that it provides the best sale presented under the sales comparison approach. Lif’s sale 3
indicates a value of $181 per square foot, or $973,599, as of January 1, 2011. Evidence
presented of efforts to market and sell the subject property suggests that its real market value was
lower as of January 1, 2011, perhaps as low as $700,000.
The Oregon Supreme Court stated in Truitt Brothers, Inc. v. Dept. of Rev. (Truitt Bros):
“Usually, one sale does not make a market. The basic assumption of the sales
comparison approach is that there is sufficient data and information available to
provide a pattern or range of indicated value. The sales comparison approach is
intended to reflect the ‘market’ and not just one or two buyers.”
302 Or 603, 609, 732 P2d 497 (1987). “When the market contains an insufficient number of
transactions to create value patterns, the application of the [comparable sales] approach may be
limited or inappropriate.” Id. at 610 (citations omitted). Due to the very limited number of
comparable sales, the court is not persuaded that the information presented is sufficient to
provide a reliable indicated value under the sales comparison approach. As a result, the court
gives little weight to the sales comparison approach.
C. Income approach
“The income method of valuation relies on the assumption that a willing investor will
purchase a property for an amount that reflects the future income stream it produces.” Allen, 17
OTR at 253 (citations omitted). “The direct capitalization method * * * focuses on two key
components: (1) the capitalization rate * * * and (2) net operating income.” Id. at 253. “[Net
operating income] is the currently expected net income of a property after all operating expenses
are deducted from gross income.” Id. at 254 (citations omitted).
DECISION TC-MD 120430N 8
In his income approach, Lif relied in part on the subject property lease listing rate of
$1.50 per square foot per month. (Ptf’s Ex A at 14.) He stated that “[a] portion of the subject
medical office is advertised for lease at $1.50/sq ft NNN. This lease rate is typical in the area for
this caliber of medical office property.” (Id.) Lif testified that he reviewed eight comparable
leases with rates ranging from $1.31 to $2.71 per square foot and a mean of $1.57 per square
foot, although he did not provide those with his evidence. Lif used a seven percent vacancy rate
and “an expense ratio of 10% was used since this is based upon a triple net lease where the
tenant pays all the expenses.” (Id.) Lif used a capitalization rate of 7.5 percent, which he stated
“is considered typical and can be supported by Sale #1 indicating a cap rate of approximately
6%.” (Id.) Lif testified that the vacancy rate and expense ratio were both typical for the market,
although he did not provide any evidence supporting those rates. He concluded a value of
$1,080,500 under the income approach. (Id.)
Defendant questioned Lif regarding why he used seven percent vacancy given that the
subject property has been 50 percent vacant since 2006. Lif testified that he does not think 50
percent vacancy is the market rate and he thinks that the subject property owner could have
offered to lease the subject property at less than $1.50 to get a tenant. Hakola testified that she
thinks the market vacancy rate was about 30 percent based on listings.
Hartman testified that a property built in 2010 and located about one half block from the
subject property has been listed for lease at $0.75 per square foot per month with no takers. (See
also Def’s Ex A at 13-14 (photographs of the property).) He testified that another property,
described in the listing as “medical/commercial suites,” was listed in 2011 for $0.75 per square
foot and had received no offers. (Def’s Ex A at 18-19.) Hartman testified, based on his
conversations with realtors, an eight percent capitalization is supported. (Id. at 20.)
DECISION TC-MD 120430N 9
In her March 25, 2013, letter, Hakola provided her opinion that the real market value of
the subject property under the income approach is $720,000. (Def’s Ex B at 1.) Hakola stated
that she has “had the [subject property] lease listing [at $1.50 per square foot] since September
2011 with still no tenant.” (Id.) She explained her opinion of value as:
“[t]he average medical price per S/F on the Mercy Medical Campus is $1.00 per
S/F. [The subject property] is half office and half medical space. * * * [At] 60
cents per S/F for the office portion of the building, the monthly income would be
$4,800.00 and NOI (Net Operating Income) of $57,600.00. Based on an 8% cap
for our area, that brings the value by an Income Approach to $720,000.00.”
(Id.) Hakola testified that the subject property is a beautiful building, but the location is not good
because it is not on Garden Valley Boulevard and is not visible from the boulevard. (See id.)
She testified that she has marketed the subject property aggressively and offered free rent.
Hakola provided a “rent study” of office space that she prepared for another client,
describing four “recorded leases” with starting dates in 2012 and 2013. (Def’s Ex B at 14.) She
testified that typical office space lease rates were between $0.40 and $0.75 per square foot per
month. The four leases included in her rent study were: a 2945-square foot “dental office”
leased “net” for one year at $3,200 per month; a 2,700-square foot office leased “net” at $1,500
per month; a 2,000-square foot office leased “net” for one year at $1,100 per month; and a 4,400-
square foot office leased “full service” at $1.00 per square foot for five years with “$18.00 per
annual S/F allowance for T.I.” (Id.) On a per month basis, those lease rates range from $0.55 to
$1.09 per square foot. (See id.) Hakola testified that she listed another medical office located at
2550 NW Medical Drive for over two years; it was initially listed at $1.50 per square foot,
reduced to $1.25, and reduced again to $1.00 as of the date of trial. She testified that it has 26
dedicated parking spaces, which is very desirable.
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DECISION TC-MD 120430N 10
Plaintiff questioned Hakola about two leases that Lif reviewed at $1.57 per square foot
and $2.17 per square foot. She testified that the “Hollywood video building” is leased at $2.17
per square foot to the American Red Cross and Aspen Dental. She testified that it cost $410,000
to split that building into two office spaces, including splitting the “HVAC” and adding a new
roof. Hakola testified that the building has the best location at a busy intersection on Garden
Valley Boulevard. She testified that a space near the Albertson’s grocery store is leased to
Battery Plus for $1.50 per square foot, but that lease is “all-inclusive,” not triple net.
The court finds that Lif’s market rent of $1.50 per square foot is unpersuasive. Hakola
testified persuasively that the subject property office space was vacant and listed at $1.50 per
square foot since at least September 2011, and that she has marketed the subject property
aggressively. Moreover, there is no other evidence supporting market rent of $1.50 per square
foot. Lif testified that he reviewed other leases, but he did not provide any information about
those leases in his evidence. Hakola testified that she considered the market lease rate to be
$1.00 per square foot for the subject property medical office and $0.60 per square foot for the
subject property office. She presented several office leases to support her conclusion. Hakola’s
comparable leases are from leases started in 2012 and 2013, one to two years after the
assessment date of January 1, 2011. Nevertheless, Hakola’s evidence of market rents was the
most persuasive evidence presented to the court in this matter and the court agrees with Hakola’s
market rent conclusions of $1.00 per square foot for the subject property medical office and
$0.60 per square foot for the subject property office.
The court received no evidence of vacancy rates, expense rates, or capitalization rates.
Lif and Hakola each testified as to their opinions, but neither provided any supporting market
evidence. It is unclear to the court how Lif selected his vacancy rate of seven percent.
DECISION TC-MD 120430N 11
Defendant’s representatives suggested that the vacancy rate should be 50 percent based on the
subject property’s actual vacancy rate. The court is not persuaded that the market vacancy rate
was 50 percent as of January 1, 2011, particularly given Defendant’s apparent refusal to reduce
the subject property lease listing price from $1.50 per square foot. Hakola, evidently, did not
include a vacancy rate or expense rate in her income approach; she effectively used a rate of zero
for both vacancy and expenses. Lif used a capitalization rate of 7.5 percent and Hakola used 8
percent. Neither presented any evidence supporting their selected capitalization rates.5
The lack of evidence on market vacancy and expense rates renders the income approach
incomplete. To the extent that the court can determine an indicated value under the income
approach, that value is in the range of $720,000 to $768,000. Hakola concluded a value of
$720,000 under the income approach using a capitalization rate of eight percent and with no
vacancy or expense rate. Lif selected a capitalization rate of 7.5 percent, which indicates a value
of $768,000 with no vacancy or expense rate. The evidence presented, although incomplete,
suggests that the indicated value of the subject property under the income approach was no more
than $768,000 as of January 1, 2011. Because the evidence presented under the income
approach was incomplete, the court cannot place much weight on the income approach.
D. Reconciliation and burden of proof
Much of the evidence presented by the parties was inconclusive or unpersuasive. The
parties relied primarily on the sales comparison and income approaches. The evidence presented
supports a finding that very few sales of comparable properties occurred close to the January 1,
2011, assessment date. The parties both agreed that a property that sold for $181 per square foot
5
Lif stated in his report that his sale 1 indicated a capitalization rate of six percent. As discussed above, the
court found that Lif’s sale one was not an arm’s-length transaction; it was a sale between business associates and the
buyers reported that they “paid a premium” to avoid moving their dental business. Lif’s sale 1 is not persuasive.
DECISION TC-MD 120430N 12
in April 2012 was comparable to the subject property. That sale, without any adjustments,
suggests a real market value of $973,599. However, as stated in Truitt Bros, one sale does not
usually make a market. Truitt Bros, 302 Or at 609. The evidence submitted by the parties under
the income approach indicated that the real market value of the subject property as of January 1,
2011, was no more than $768,000. However, the evidence presented under the income approach
was incomplete and the court cannot place much weight on the income approach.
III. CONCLUSION
Plaintiff has the burden of proof in this matter and must establish its case by a
preponderance of the evidence. Plaintiff has failed to prove by a preponderance of the evidence
that the real market value of the subject property was $1,075,500 as of January 1, 2011. BOPTA
reduced the 2011-12 real market value of the subject property to $792,375. That value is in the
range supported by the evidence presented in this matter. The court concludes the 2011-12 real
market value determined by BOPTA is reasonable and there is insufficient evidence supporting a
change in that value. Plaintiff’s appeal must be denied. Now, therefore,
IT IS THE DECISION OF THIS COURT that Plaintiff’s appeal is denied.
Dated this day of June 2013.
ALLISON R. BOOMER
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 Allison R. Boomer on June 19, 2013.
The Court filed and entered this document on June 19, 2013.
DECISION TC-MD 120430N 13