Winco Foods, LLC v. Dept. of Rev. , 21 Or. Tax 223 ( 2013 )

No. 30 August 30, 2013 223
IN THE OREGON TAX COURT
REGULAR DIVISION
WINCO FOODS, LLC,
Plaintiff,
v.
DEPARTMENT OF REVENUE,
and Marion County Assessor,
Defendants.
(TC 5013)
Plaintiff (taxpayer) appealed to the Magistrate Division from a decision
of the Marion County Board of Property Tax Appeals (BOPTA). The appeal
was later specially designated to the Regular Division. Taxpayer argued that
Defendant Department of Revenue (the department) and Marion County Assessor
(the county) had improperly valued its warehouse facility, requesting an adjust-
ment of the property’s real market value. Following trial and post-trial briefing,
the court found that the parties’ significant differences in different valuation
approaches led the court to reach conclusions as to calculational principles and
to direct the parties to apply the conclusions in reaching a value upon which they
either could agree upon or the differences as to which would be presented to the
court for final decision.
Trial was held in the courtroom of the Oregon Tax Court,
Salem, from June 27 through 29, 2012.
John F. Neupert, Miller Nash LLP, Portland, argued the
cause for Plaintiff (taxpayer).
Joseph A. Laronge, Senior Assistant Attorney General,
Department of Justice, Salem, argued the cause for Defen-
dant Department of Revenue (the department).
Decision rendered August 30, 2013.
HENRY C. BREITHAUPT, Judge.
I. INTRODUCTION
This property tax valuation case is before the court
after a trial and post-trial briefing by the parties. The year
at issue is the tax year 2009-10.
II. FACTS
The subject property is an approximately 1 million
square foot grocery distribution warehouse and related
224 Winco Foods, LLC v. Dept. of Rev.
facilities and land located in Woodburn, Oregon, just west
of the Interstate 5 freeway on an irregularly shaped land
area of approximately 80 acres. The property improvements
are one large steel construction building with extensive cold
storage and frozen storage capacity, an office facility and
a large dry storage area. This building has 40-foot ceiling
heights. In addition, there are buildings for produce return,
truck washing, vehicle repair and fueling. The improve-
ments were originally constructed in 1997. Remodeling and
expansion occurred in 1999, 2002, and 2008.
III. ISSUE
The issue in this case is the real market value of the
subject property as of the assessment date of January 1, 2009.
IV. ANALYSIS
Plaintiff (taxpayer) and Defendant Department of
Revenue (department) appear to have many things in com-
mon in their approaches to valuation and several signifi-
cant differences. Neither property uses an indicator of value
based on capitalized income from the property. The calcula-
tional approaches of the parties on other indicators differ in
important respects. Therefore, the court will reach conclu-
sions as to calculational principles and direct the parties to
apply the conclusions in reaching a calculation of value upon
which they either can agree or the differences as to which
will be presented to the court for final decision.
A. Use of Sales Indicator
Taxpayer’s valuation expert, Robert Greene, devel-
oped a comparable sales indicator of value for the subject.
Admitting that there were not comparable sales of large
refrigerated distribution warehouses, Greene reached a
conclusion as to the sales prices of arguably comparable
dry storage facilities. The expert then added to that value
an amount equal to the depreciated cost of machinery and
equipment found at the subject property, as determined by
the second expert, Richard Kaufman, who testified for tax-
payer. The expert for the department, Bronson Rueda, con-
cluded that there were no sales sufficiently comparable in
time and character to permit development of a sales indica-
tor of value.
Cite as 21 OTR 223 (2013) 225
The court is of the view that the development of the
sales indicator by Greene has problems associated with it
that make his conclusions not persuasive. The first of the
deficiencies is in the size of facility that was involved in
Greene’s sample of sales. They were all significantly smaller
than the square footage of the very large-sized subject
facility. Of equal importance is that the properties Greene
viewed as comparable had 32-foot ceilings whereas the sub-
ject property has 40-foot ceilings.
Secondly, Greene took the sales data and adjusted
it for market changes. However, in doing so, Greene relied
on information and data about the general industrial mar-
ket, even though he concluded that the highest and best use
of the subject was as a mega-distribution facility with cold
storage and refrigeration. The court is not willing to accept
that the market for the specialized type of property that the
subject property represents is the same as the market for
properties, even industrial properties, generally.
To the indicated value for dry storage space, Greene
added the depreciated cost indication developed by Kaufman
for the machinery and equipment found at the subject
property. This approach assumes that one can simply add
machinery and equipment to a general storage space. The
record has little if any evidence that this can be done with-
out significant cost. Greene admitted that his calculations
did not have any adjustment for the extra capital cost that
would be needed to add machinery and equipment to prop-
erties he thought were comparable as to dry storage space.
The court concludes that the sales indicator devel-
oped by Greene is not reliable.
B. Cost Indicator
Both parties developed cost indications of value. The
major differences in approach as to this indicator were with
respect to calculation of physical depreciation and whether
an allowance should or should not be made for external
obsolescence.1
1
The parties do not appear to be significantly separated as to the calculation
of replacement cost new or cost of land. The court directs the parties to confer
regarding any differences they believe they have on these items in light of the
matters decided in this opinion.
226 Winco Foods, LLC v. Dept. of Rev.
C. Physical Depreciation
Rueda, the expert for the department, relied
exclusively on an external information service, Marshall
Valuation Services, for a determination of the economic life
of the structures at issue. Greene testified that unquestion-
ing reliance on that service is not adequate, a fact recog-
nized by the publishers of the service itself. Greene’s dis-
cussion of the adjustments needed included those needed to
take into account the actual facts for the buildings at issue,
its construction materials and other factors.
Greene also was more careful not to include in the
cost of the structure the costs of machinery and equipment
attached to the structure. This avoided an error contained in
the conclusions of Rueda, who did include some machinery
in the figures to which the longer lives for the structures, as
compared with machinery and equipment, were applied.
The court concludes that the physical deprecia-
tion methodology used by Greene is the correct one and the
adjustment for physical depreciation should be calculated
using that methodology.
D. External Obsolescence
Taxpayer asserts that there is substantial external,
or economic, obsolescence associated with the subject property.
Taxpayer argues that decline in general economic conditions
that had occurred prior to the assessment date justify a reduc-
tion in the cost indicator for economic obsolescence. On this
question, as with all questions in this appeal, taxpayer has
the burden of proof. ORS 305.427. The court concludes that
taxpayer has failed to carry that burden as to this question.
As has already been mentioned, the subject prop-
erty is a property with a particular highest and best use,
that of a large-scale grocery distribution with cold storage
and refrigerated storage capacity. Notwithstanding that
highest and best use, Greene relied on information and dis-
cussions with persons regarding the economy and industrial
properties generally. Economic obsolescence may occur as to
a specific property type, but the court does not accept that it
can be established by reference to general information about
much broader classes of property. Taxpayer has not supplied
Cite as 21 OTR 223 (2013) 227
the court with any authoritative source that supports the
approach taken by Greene. Further, a text that all parties
accept as authoritative, The Appraisal of Real Estate, indi-
cates that consideration of facts applicable, or not, to par-
ticular property types is necessary to determine whether
economic obsolescence has occurred in the particular seg-
ment of the overall market or segment of the economy in
which the subject property is found. Appraisal Institute, The
Appraisal of Real Estate 442-43 (13th ed 2008).2
Greene did not look at the economic facts in the
general market for food products, groceries or facilities that
serve those areas of the market. Therefore, Greene’s sup-
porting material simply does not satisfy the burden of show-
ing that, more probably than not, the subject property would
suffer from external or economic obsolescence. Although
many segments of the economy, and the properties found in
or serving those segments, experienced significant adverse
effects at or about the time of the assessment date for this
case, the court cannot conclude that this, or any other par-
ticular property, was subject to economic obsolescence with-
out a much more focused study.
In both pre-trial proceedings and at trial the qual-
ity of the material relied upon by Rueda was a subject of
dispute between the parties. Even if Rueda’s study of the
relevant markets and economic conditions in them were
to be totally ignored, taxpayer has not borne its burden of
proof. However, the evidence which Rueda did develop does
not, in fact, deserve to be ignored. Even taking into account
that some of the evidence relied upon was severely weak-
ened by the need to redact confidential information, Rueda
presented relevant and unrebutted information about the
grocery and food products segments of the economy that
support a conclusion that the subject property did not suf-
fer from economic obsolescence to the extent asserted by
Greene, or even at all.
2
An article from The Appraisal Journal offered as an exhibit by the depart-
ment also makes clear that economic obsolescence, if it exists, can only be
determined by a much more detailed analysis of the property in question and
the particular segment of the economy that the property serves or occupies. See
Donald J. Harman and Michael B. Shapiro, Depreciation: Incurable Functional
Obsolescence and Sequence of Deductions, The Appraisal Journal 408 (Jul 1983).
228 Winco Foods, LLC v. Dept. of Rev.
E. Final Determination of Value
The court cannot determine if there are signifi-
cant differences between the parties as to replacement cost
new, primarily because of the different property included in
the structure by Rueda, but also because of what may or
may not be any substantial difference as to the cost of con-
struction new. However, the department accepts Kaufman’s
determination of value for machinery and equipment. That
being the case, the parties are directed to confer regard-
ing the necessary adjustment to replacement cost new and
land value, if any. Physical depreciation to be deducted is to
be determined as computed by Greene. The parties agree
to a deduction for functional obsolescence. No deduction for
external obsolescence is to be taken. If the parties can agree
on a final value, the court will enter a judgment in accor-
dance with the agreement. If one or more elements remain
at issue, the court will hold a brief hearing to resolve those.
V. CONCLUSION
Now, therefore,
IT IS THE DECISION OF THIS COURT that the
parties are directed to confer as to the determination of a
final value using the calculational principles as described
above to apply the conclusions in reaching a calculation of
value upon which they either can agree or the differences as
to which will be presented to the court for final decision.