Stafford Hills Properties, LLC and Zupancic Rathbone Law Group PC v. Clackamas County Assessor ( 2015 )

IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Property Tax
STAFFORD HILLS PROPERTIES LLC and )
ZUPANCIC RATHBONE LAW GROUP PC, )
)
Plaintiffs, ) TC-MD 140184N
)
v. )
)
CLACKAMAS COUNTY ASSESSOR, )
)
Defendant. ) FINAL DECISION
This Final Decision incorporates without change the court’s Decision, entered
May 1, 2015. The court did not receive a statement of costs and disbursements within 14 days
after its Decision was entered. See TCR-MD 16 C(1).
Plaintiffs appeal the real market value and exception value of property identified as
Account 00345380 (subject property) for the 2013-14 tax year. A two-day trial was held in the
Oregon Tax Courtroom beginning on October 29, 2014, in Salem, Oregon. Christopher K.
Robinson, Attorney, appeared on behalf of Plaintiffs. C. Spencer Powell (Powell), MAI, and
James Zupancic (Zupancic), subject property developer, testified for Plaintiffs. Kathleen J.
Rastetter, Clackamas County Counsel, appeared on behalf of Defendant. David W. Sohm
(Sohm), Registered Appraiser 3, testified for Defendant. Plaintiffs’ Exhibits 1-2, 5-8, and 10-17
and Defendant’s Exhibits A through E and G were received without objection.1 The parties
submitted written closing arguments.
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1
The following Exhibits are subject to the protective order: Plaintiffs’ Exhibit 1 at 75, 76, 78, 81, 82, 105,
172 through 201, 203 through 263, 265 through 285; Plaintiffs’ Exhibits 2, 6, 7, and 17; and Defendant’s Exhibit B.
FINAL DECISION TC-MD 140184N 1
I. STATEMENT OF FACTS
Plaintiffs own and operate the subject property, a 90,708-square foot (gross) multi-
purpose facility devoted to tennis and fitness activities.2 (Ptfs’ Ex 1 at 35.) Powell testified that
the subject property was primarily constructed in 2012 and was 97.6 percent completed as of the
January 1, 2013, valuation date. (See id. at 53.) Sohm wrote that parts of the subject property
were incomplete as of the date of site inspection, December 26, 2012. (Def’s Ex A at 29.) But
he concluded that “the entire facility was complete” on January 1, 2013, based on an aerial
photograph from Google Earth. Id.
A. Subject Property Site
The subject property is located on 15.5 acres in the Stafford Hills neighborhood of
Tualatin, 12 miles south of Portland.3 (Ptfs’ Ex 1 at 35, 44.) Sohm wrote that that area contains
“predominantly upscale homes” on well-maintained hillside lots. (Def’s Ex A at 9.) The subject
property is located close to I-5 and I-205. (Id. at 18, 22.) SW Nyberg Lane on the west side of
the subject property connects to I-5. (Def’s Ex A at 22.) Powell wrote that Nyberg Lane
provides average exposure. (Ptfs’ Ex 1 at 45.)
The subject property land was purchased on May 4, 2009, by James D. and Maria C.
Zupancic for $895,000, or $57,742 per gross acre or $182,653 per developable area. (Ptfs’ Ex 1
at 36.) That “sale occurred prior to any wetland mitigation or the issuance of the conditional use
permit * * *.” (Id.)
The subject property site is zoned Low Density Residential (RL), the purpose of which is
“to provide low density residential areas in the city * * *.” (Ptfs’ Ex 1 at 46.) The City of
2
Powell wrote the subject property’s net rentable area is 89,532 square feet. (Ptfs’ Ex 1 at 35.)
3
Sohm wrote that the subject property is 15.23 acres. (Def’s Ex A at 2, 21.)
FINAL DECISION TC-MD 140184N 2
Tualatin issued a conditional use permit for construction of the subject property facility; the
permit will expire if the subject property facility ceases to operate for two years. (Ptfs’ Ex 1 at
47; Ex 10 at 3-4.) To obtain the permit, Plaintiffs were required to satisfy several conditions,
including the development of an Architectural Review plan to establish landscaping buffers
between the facility and existing neighbors and a Parking Management Plan to ensure sufficient
on-site parking and to restrict off-site parking in city-regulated space. (Ptfs’ Ex 5 at 1-2.) The
conditional use permit also requires Plaintiffs to close the facility by 10:00 p.m. nightly. (Id.)
Powell testified that a portion of the subject property site containing the tennis facility is
located in the Flood Plain District and requires additional flood insurance, the cost of which is
about $12,000 annually. (See Ptfs’ Ex 1 at 47-49; Ptfs’ Ex 6 at 1.) “A utility easement runs
diagonally through the site * * *.” (Def’s Ex A at 22.) Sohm wrote that the “unsightly overhead
power lines which cross the subject property” are a negative factor for the property. (Id. at 24.)
Powell wrote that 4.9 acres of the subject property site is developable land. (Ptfs’ Ex 1 at
44.) Powell and Zupancic each testified that the remaining 10.6 acres falls within wetlands and
other protected areas under the Natural Resource Protection Overlay District, which required
significant support to preserve the natural habitat to comply with restrictions set by the Oregon
Department of State Lands.4 (See id. at 47, 49; see also Def’s Exhibit A at 22.) They each
testified that the initial wetlands mitigation natural resource enhancement work cost about $1.4
million and the restrictions render 10.6 acres of the subject property undevelopable. (See Ptfs’
Exhibit 1 at 50.) The subject property wetland fill permit requires long-term maintenance and
monitoring. (Def’s Ex A at 22-23.)
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4
Sohm wrote that the undevelopable wetlands measures 10.31 acres. (Def’s Ex A at 21.)
FINAL DECISION TC-MD 140184N 3
B. Subject Property Improvements
Powell described the subject property as “a full service health club * * *.” (Ptfs’ Ex 1 at
35.) Sohm described the subject property as “a good quality tennis center * * *.” (Def’s Ex A at
29.) Powell testified that the subject property facility includes Building A, a 72,188-square-foot
building with health club and tennis space; Building B, a 17,344-square-foot building with
office, activity, wellness space; Building C, a 176-square-foot building with fountain equipment;
and Building D, a 1,000-square-foot building with pool equipment.5 (See Ptfs’ Ex 1 at 5, 53.)
He testified that Plaintiffs designed the subject facility as two separate buildings (A and B) due
to the utility easement. Powell determined that the facility’s effective age was zero with a
remaining economic life of 45 years. (Id. at 53.) The facility was in very good condition
according to Powell and in “good to excellent condition” according to Sohm. (Id.; Def’s Ex A at
6.)
Powell wrote that Building A is LEED certified and includes 51,966 square feet devoted
to the indoor tennis facility and 20,222 square feet used as the health club. (Ptfs’ Ex 1 at 52-53.)
Building A includes “a two-story clubhouse with foyer, reception, lounge with gas fireplace,
café, men and women’s locker rooms (each equipped with a sauna), and several
fitness/cardio/weight related rooms and open space.” (Id. at 52.) Sohm wrote that it also
includes a Pro Shop, a covered deck overlooking the pool, and a viewing platform in the tennis
area. (Def’s Ex A at 7, 27.) The indoor tennis courts are built four feet below the 100-year flood
plain elevation. (Id. at 27.) To address flood potential, the walls have overhead doors to allow
air flow, and, if necessary, flood water passage. (Id.)
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5
Sohm provided the following measurements for Buildings A and B: Building A is 69,535 square feet and
Building B is 16,788 square feet. (Def’s Ex A at 2, 7, 27.)
FINAL DECISION TC-MD 140184N 4
Building B is a two-story LEED certified building dedicated to wellness activities and it
includes locker rooms, a day spa, a day care center, physical therapy space leased to Therapeutic
Associates, group exercise rooms, and several conference and meeting spaces, one of which
contains a commercial kitchen. (See Ptfs’ Ex 1 at 52; Def’s Ex A at 7, 27.) The west side of
Building B has a covered balcony and a fenced play area for the day care center. (Ptfs’ Ex 1 at
52; Def’s Ex A at 27-28.)
Powell wrote that the subject property includes “an outdoor 25-yard heated swimming
pool, spa, children’s fountain, and three fenced outdoor tennis courts.” (Ptfs’ Ex 1 at 54.) The
facility is bordered by “concrete walkways, yard and lot lighting, a monument sign, perimeter
fencing around the east, south[,] and west elevations, and concrete retaining walls.” (Id.)
Powell testified that the subject property includes a parking lot with 138 spaces for a
parking ratio of 1.54 spaces per 1,000 rentable square-feet, which Powell characterized as “low;
albeit, within the range of other clubs as presented in the Sales Comparison Approach.” (Ptfs’
Ex 1 at 54.) He testified that 75 of the spaces cannot be used before 8:00 a.m. Zupancic testified
that members have complained about parking.
C. Subject Property Operations and Market
Sohm wrote that Plaintiffs offer fitness memberships and tennis memberships; the tennis
memberships cost more. (Def’s Ex A at 50-51.) Zupancic testified that tennis members are
typically willing to drive a further distance to the club and are more stable, whereas fitness
members turn over more frequently. He testified that tennis members have higher expectations.
Zupancic testified that the fitness market is highly competitive and he tries to distinguish the
subject property from the low-cost/high-volume clubs. He testified that the subject property
facility has a greater capacity for fitness memberships than tennis memberships.
FINAL DECISION TC-MD 140184N 5
Sohm testified that, based on his review of tennis industry association information and his
conversations with club managers, interest in tennis was growing in 2011 and 2012. He
provided a February 8, 2012, newspaper article, quoting Zupancic that “[t]here hasn’t been a new
tennis facility built in the Portland area in the last 35 years, and there is really nothing in the area
that will be comparable, except perhaps the Multnomah Athletic Club.” (Def’s Ex A at 92
(internal quotation marks omitted).) Sohm testified that he identified nine private tennis clubs
that compete with the subject property, and he identified two facilities that compete with the
subject property for fitness memberships: Club Sport and 24-Hour Fitness, both in Tualatin. (See
id. at 54-61.)
D. The Parties’ Appraisals
Powell and Sohm each testified that they appraised the subject property as of January 1,
2013. Both appraisers concluded that the subject property’s highest and best use as if vacant was
residential development. (See Ptfs’ Ex 1 at 62; Def’s Ex A at 64.) They also agreed that the
subject property’s highest and best use as improved was its existing use as a tennis and fitness
club. (Ptfs’ Ex 1 at 63; Def’s Ex A at 64.)
1. Cost Approach
a. Land Value
Powell and Sohm each selected land sales with “similar residential zoning” as the subject
property. (Ptfs’ Ex 1 at 69; Def’s Ex A at 66-67.) Powell identified three bare land sales that he
considered comparable to the subject property’s developable land, which ranged in size from
9.99 to 19.43 acres and sold between August 2010 and January 2014. (Ptfs’ Ex 1 at 66-69, 71.)
He wrote that he viewed the subject property as bracketed by land sales 2 and 3. (Id. at 69.)
Powell identified land sale 2, purchased for $257,334 per acre, as “the May 2011 sale of 19.43
FINAL DECISION TC-MD 140184N 6
acres of R-7 zoned land located in Tigard.” (Id. at 67.) He wrote that the land was purchased by
the City of Tigard “for future park space.” (Id.) Powell concluded land sale 2 was “a low
indicator based on the larger size, inferior zone/density, access and exposure.” (Id. at 68.)
Powell described land sale 3 as an “assemblage of three parcels purchased between May
2011 and January 2014.” (Ptfs’ Ex 1 at 68.) Land sale 3 totaled 11.99 acres and, prior to sale,
was the site of the Tualatin Elementary School. (Id. at 68, 71.) The sale price of all three parcels
totaled $402,007 per-acre. (Id. at 71.) Land sale 3 was purchased “to construct a new 100,000
SF +/- skilled nursing and assisted living facility * * *.” (Id. at 68.) Powell wrote that the buyer
incurred additional undisclosed costs to safely demolish the existing structures and to pay off the
buyer’s remaining promissory note; the demolition costs were not included in Powell’s analysis.
(Id. at 68-69.) He concluded sale 3 was a high indicator. (Id.) Powell concluded a land value of
$325,000 per acre, or $1,600,000 total, rounded, for the subject property’s developable land. (Id.
at 69-70.) Because Powell determined it would not be cost-effective to mitigate the 10.6 acres of
undevelopable land, he assigned no value to that portion of the subject property. (Id. at 69-70.)
Sohm utilized five bare land sales between 2006 and 2012 to estimate the real market
value of the subject property’s developable land. (Def’s Ex A at 66-67.) His land sales ranged
in size from 5.79 to 19.63 acres and ranged in price from $5.45 to $8.19 per square foot. (Id.)
Sohm placed most weight on land sale 5 because it was “the most recent in date of sale” and was
“comparable in size and topography to the subject” property. (Id. at 67.) Land sale 5 was a 5.79
acre parcel that sold in June 2012 for $5.45 per square foot. (Id.) It was purchased to develop 35
single family lots. (Id.) Sohm placed “secondary weight” on land sale 4, which is Powell’s land
sale 2 that sold for $5.91 per square foot. (Id.) Sohm determined a value of $5.50 per square
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FINAL DECISION TC-MD 140184N 7
foot, which he adjusted downward by 10 percent due to the subject property’s floodplain
location, and concluded a developable land real market value of $1,069,400. (Id.)
To establish the subject property’s undevelopable land real market value, Sohm reviewed
four comparable land sales between June 2009 and March 2010 that ranged in size from 16.53 to
27.47 acres and ranged in price from $5,841 to $18,202 per acre. (Def’s Ex A at 67-68.) Sohm
wrote that all four land sales were purchased for use as open space. (Id. at 68.) He determined
that land sale 2, which sold for $11,250 per acre in September 2009, was the most similar to the
subject property based on its topography. (Id. at 69.) Sohm determined a value of $11,250 per
acre, or $115,088, for the subject property’s undevelopable land and concluded a total land real
market value of $1,184,488 for the subject property. (Id. at 69.)
b. Improvements value
Powell considered both the subject property’s actual construction cost and its estimated
replacement cost using the Marshall & Swift Valuation Service (MVS). (Ptfs’ Ex 1 at 75.) He
testified that the actual total construction cost was $11,201,595, as reflected on the July 10, 2012,
change order. (Id. at 75-76.) Powell wrote that that total included “profit and overhead to the
builder and a contingency allowance.” (Id. at 75.) Powell added 10 percent for indirect costs for
a total improvements cost of $12,321,755. (Id.) Zupancic testified that the subject property’s
actual construction costs as of January 1, 2013, were less than reported because the $319,000 bid
for “Solar PV” never happened. (See Def’s Ex B at 5.) He testified that about $300,000 of work
was completed after January 1, 2013. Zupancic testified that, of the “site work,” about $1.4
million was for wetlands mitigation required by state and federal agencies to develop the subject
property site. He testified that the wetlands mitigation cost should not be included in the
subject property’s actual cost because it is an extraordinary site development cost.
FINAL DECISION TC-MD 140184N 8
Using MVS, Powell determined the subject property’s replacement cost was $12,330,184
including total direct costs of $11,209,258 and 10 percent indirect costs. (Ptfs’ Ex 1 at 77-78.)
Powell wrote that “[a]ctual construction costs are typically the most reliable source for
improvement costs.” (Ptfs’ Ex 1 at 78.) As a result, he concluded a total improvements cost of
$12,321,755 based on the subject property’s actual cost. (Id.) Powell calculated 10 percent
entrepreneurial profit of $1,392,176 based on the total improvements cost plus land value. (Id.)
He determined that “an allocation for functional obsolescence of 35.00% is indicated” based on
the difference between his conclusion under the cost approach as compared with the income and
sales comparison approaches.6 (Id. at 79.) Powell testified that the following contributed to the
subject property’s functional obsolescence: the conditional use permit restrictions, the tennis
courts located in the floodplain, the flood insurance, the wetlands mitigation, and the necessity of
constructing two buildings rather than one. As a result, Powell deducted functional obsolescence
of $4,799,876 for a total indicated value of $10,515,000, rounded, under the cost approach. (See
id. at 81.) Powell acknowledged that the total indicated value under the cost approach without a
deduction for functional obsolescence is $15,315,000, rounded. (See id. at 79.)
Sohm testified that he also considered both the subject property’s actual cost and its
replacement cost estimated using MVS. (See Def’s Ex A at 69-73.) Like Powell, Sohm used the
subject property’s actual cost of $11,201,995. (Id. at 73.) Sohm added indirect costs of 15
percent, or $1,680,239; entrepreneurial profit and overhead of 10 percent, or $1,406,632; and
land value, or $1,184,488, for a total indicated value of $15,473,000, rounded, under the cost
6
On cross examination, Powell agreed with an excerpt from The Appraisal of Real Estate stating in part
that, “in most applications of the cost approach, the need to estimate the functional obsolescence attributable to an
incurable superadequacy is eliminated by using replacement cost instead of reproduction cost[.]” (Def’s Ex G at 3.)
However, Sohm testified that both appraisers effectively used reproduction cost because they relied on actual costs.
FINAL DECISION TC-MD 140184N 9
approach. (Id. at 74-75.) He testified that he selected 15 percent indirect costs based on the
typical range for “specialized” properties. (See id. at 74.) Sohm testified that he did not find the
subject property suffered from functional obsolescence or any other form of depreciation, noting
that it was brand new as of January 1, 2013. (See id.) He testified that, if he had found any
functional obsolescence, he would have capitalized it over the life of the subject property, which
is the correct method under the 14th edition of The Appraisal of Real Estate.
2. Sales Comparison Approach
Powell utilized five sales between March 2012 and July 2014 and one pending sale to
determine the subject property’s real market value under the sales comparison approach. (Ptfs’
Ex 1 at 93.) Powell’s sales ranged from $33.41 to $206.67 per square-foot. (Id.) Powell
testified that none of his comparable sales were combination fitness and tennis facilities and the
condition of each sale was inferior to that of the subject property. Only sale 2 of Courtside
Fitness in Salem included tennis courts. (Id. at 94.)
Powell wrote that the subject property’s “health club and activity center are bracketed by
[sales] 5 and 6[.]” (Ptfs’ Ex 1 at 98.) Sale 5 is the 88,862 square-foot Riverplace Sport & Spa in
Southwest Portland that was built in 1986 and renovated in 2007. (Id. at 99.) Powell testified
that the lender repossessed the property from the prior owner and sold it to an investor in July
2014 for $10,000,000. (See id. at 96, 99.) Powell determined that sale 5’s location and zoning
were superior but “[c]ondition and quality [were] inferior.” (Id. at 96.) He adjusted sale 5
downward by $100,000 for deferred maintenance and by $250,000 for personal property
included with the sale, for an adjusted sale price of $9,650,000, or $173.99 per square foot. (Id.
at 96, 99.)
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FINAL DECISION TC-MD 140184N 10
Powell’s pending sale 6 was of the 74,488-square-foot Duniway Athletic Club in
Southwest Portland, which was built in 1977 and was subsequently renovated. (Ptfs’ Ex 1 at 97,
99.) He wrote that it “suffered from significant deferred maintenance including the roof and
HVAC system. * * * The cost to cure the deferred maintenance was quoted at ‘a couple
million.’ ” (Id. at 97.) Powell wrote that the property had been “listed for roughly three years,
with a most recent price point of $11,700,000 ($170.31/SF).” (Id.) Powell interviewed the
broker, who “indicated that he has had three offers in the last 40 to 45 days, all at $10,000,000.
The accepted offer is to an investor who plans to redevelop the building interior as creative office
space.” (Id.) Powell concluded pending sale 6 indicated a value of $145.56 per square foot. (Id.
at 99.) He concluded an indicated value of $165 per square foot for the subject property’s fitness
and activity spaces, for a total value $6,195,000, rounded, for those spaces. (Id. at 98.)
Powell determined that “[a] lower value is warranted for the area allocated to the tennis
facility due to the lower level of interior buildout, lack of air conditioning, and location within
the floodplain.” (Ptfs’ Ex 1 at 98.) He determined the subject property’s tennis space was best
bracketed by sales 1 and 2. (Id.) Sale 1 was the 70,866 square-foot Courtsports Athletic Club
facility in Eugene, which was built in 1978 and later renovated before it sold for $59.13 per
square foot in March 2012. (Id. at 99.) Powell wrote that sale 1 “was an REO transaction from
Siuslaw Valley Bank.” (Id. at 93.) He determined that sale 1’s location was superior; but it
lacked tennis facilities, and its condition and quality were inferior to the subject property. (Id. at
94.)
Powell’s sale 2 was the 41,905 square-foot Courtside Fitness facility in Salem, which was
built in 1973, remodeled once in 1987, and remodeled again before it was sold in December
2012 for $33.41 per square-foot. (Ptfs’ Ex 1 at 94, 99.) Powell wrote that sale 2 was originally a
FINAL DECISION TC-MD 140184N 11
warehouse, but is now a tennis facility with six indoor tennis courts, offices, locker rooms, and
reception area. (Id. at 94.) He concluded sale 2 was inferior in condition and quality to the
subject property and also lacked its amenities. (Id.) Powell determined an indicated value of
$75 per square foot for the subject property’s tennis space, for a total value of $3,900,000,
rounded, for that space. (Id. at 98.) He concluded the subject property’s total real market value
under the sales comparison approach was $10,095,000, or $112.75 per square-foot. (Id. at 98.)
Sohm testified that he could not find any truly comparable sales of tennis centers on or
after January 1, 2010, in Oregon, Washington, Idaho, or northern California. (See Def’s Ex A at
76.) He testified that he reviewed five sales of fitness centers to provide a check on his cost
approach value conclusion. (See id.) Of those properties, Sohm selected two sales and one
listing as most comparable to the subject property. (Id.) Sohm’s sale 1 was a 45,172 square-foot
24-Hour Fitness facility built in 2010 on 3.44 acres located in Beaverton about 14.5 miles from
the subject property. (Id. at 76-77.) It sold in July 2011 for $287.79 per square foot. (Id. at 76.)
Sohm’s sale 2 was a “two building mixed use property that includes 24-Hour Fitness as the
major tenant in a mixed retail area of southeast Portland” about 13 miles from the subject
property. (Id. at 78.) The 43,560 square-foot fitness facility was two years old at the time it sold
in December 2011 for $244.92 per square foot. (Id. at 76, 78.) Sohm testified that he made
downward adjustments to sales 1 and 2 because they have indoor lap pools, are located in
commercial zones, have lower land to building ratios. (See id. at 77-78.) He wrote that both
sales lack “the area devoted to tennis courts that is less expensive to build and maintain.” (Id.)
Sohm’s comparable listing was the Duniway Park facility, used by Powell as his pending
sale 6. (See id. at 79; Ptfs’ Ex 1 at 86.) Sohm wrote that the listing agent noted “substantial
deferred maintenance in this structure[.]” (Def’s Ex A at 79.) Sohm adjusted the listing price
FINAL DECISION TC-MD 140184N 12
downward for land value, quality, and “to reflect the impact of negotiation” due to the listing
status, and upward for age and condition. (Id.) He placed the most weight on sale 1 and
concluded a value of $185 per square foot, or $15,969,755, to which he added $115,088 for the
subject property’s undevelopable land, for a total indicated real market value of $16,084,843
under the sales comparison approach. (Id. at 80.)
3. Income Approach
Powell testified that the subject property’s actual leases were not arm’s-length, so he did
not rely upon them.7 (See Ptfs’ Ex 1 at 82.) He reviewed five arm’s-length leases and one lease
listing to determine potential gross income. (Id. 82-88.) The leases were of facilities ranging in
size from 45,000 to 68,600 square feet of rentable space with adjusted annual rent ranging from
$8.76 to $28.50 per square foot, triple net. (Id. at 83, 88.) Powell testified that none of the leases
were of combination fitness and tennis facilities. None of the leases included tennis courts. (Id.
at 83-88.) Powell concluded that leases 1 and 4 best bracketed the subject property. (Id. at 86.)
Powell’s lease 1 was a 45,000-square-foot build-to-suit 24-Hour Fitness facility in
Vancouver, Washington. (Ptfs’ Ex 1 at 83.) Lease 1 was built and leased in September 2008 for
a 15-year term with an initial annual rent of $19.00 per square foot for the first five years and
subsequent increases every five years. (Id.) As of the assessment date, lease 1 was still rented at
$19.00 per square foot annually. (Id.) Lease 4 was a 10-year lease of the Riverplace Athletic
Center in downtown Portland that began in October 2012. (Id. at 85.) The facility was built in
1987 and renovated in 2007. (Id. at 85, 88.) Lease 4 was “as-is” and included three months of
free rent. (Id. at 85.) It was leased by the bank that repossessed the property from the original
7
The subject property is leased to a related entity. (Ptfs’ Ex 1 at 82; Def’s Ex A at 12.) Powell determined
the lease to Therapeutic Associates was also not arm’s-length. (Ptfs’ Ex 1 at 82.)
FINAL DECISION TC-MD 140184N 13
owner before the bank sold the property. (Id.) Lease 4 began at $15.20 per square foot annually
with subsequent increases in years three, five, and every year thereafter. (Id.)
Powell concluded that lease 1 was superior to the subject property because it included an
indoor swimming pool, had a parking ratio of 4.51 per 1,000 square feet of the facility, and was
located in a “more commercial[ly] oriented neighborhood * * *.” (Ptfs’ Ex 1 at 83.) He
concluded lease 4’s location was superior, but its condition and quality were inferior, writing that
lease 4 “suffered from poor management and deferred maintenance[]” before renovation and
leasing by the bank. (Id. at 85.) Powell concluded an annual lease rate of $16.00 per square foot
for the subject property’s fitness and activity spaces and $10.00 per square foot for its tennis
space. (Id. at 87.) Powell wrote that a lower rent for the tennis space is due to “the lower level
of interior buildout, lack of air conditioning, and location within the floodplain.” (Id. at 87.)
Powell concluded potential gross income of $1,120,716 for the subject property from
which he subtracted 7.5 percent vacancy and credit loss for effective gross income of
$1,036,662. (Ptfs’ Ex 1 at 92.) He subtracted 3 percent for management and 4 percent for
replacement reserves for a net operating income of $964,096. (Id.) Powell testified that he
determined a capitalization rate based on his comparable sales and conversations with brokers.
(See id. at 99.) He testified that a broker told him that a typical capitalization rate for stabilized
clubs is eight to nine percent, but he selected a higher rate of 9.75 percent because the subject
property was not stabilized. Powell concluded an indicated real market value under the income
approach of $9,890,000, or $110.46 per square-foot, for the subject property. (Id. at 92.)
Sohm wrote that he did not complete an income approach for the subject property for
several reasons. (See Def’s Ex A at 81.) He determined that the subject property’s income had
not yet stabilized. (Id.) Sohm testified that he was unable to obtain income and expense data
FINAL DECISION TC-MD 140184N 14
from comparable facilities and he did not think Powell’s leases were comparable. He determined
that available national data was inapplicable to the subject property because it “is dominated by
other regions where typical operations involve court time fees in addition to membership dues.
Clubs in the northwest rely on dues and do not charge time fees.” (Id.) Finally, Sohm testified
that he found that most tennis clubs are owner occupied. (See id. at 65.)
4. Final Value Conclusion and Requested Values
Powell wrote that he relied on all three valuation approaches, placing “significant”
emphasis on the income and sales comparison approaches and “secondary emphasis” on the cost
approach. (Ptfs’ Ex 1 at 104.) He determined that the disparity between the cost approach and
the other approaches indicates the subject property “clearly includes superadequacies.” (Id.)
Powell concluded the subject property’s real market value as of January 1, 2013, would have
been $10,000,000, “assuming construction was 100% complete and [it] was operating at a
stabilized level * * *.” (Id. at 105.) Powell testified that he deducted the cost to complete the
subject property, which he calculated to be $190,000, as well as absorption costs of $2,005,000,
which included $1,890,000 “rent loss” and $115,000 “leasing commission.” (See id. at 105-06.)
He testified that he estimated a stabilization date of September 1, 2016, based on a linear trend
line of membership at the subject property. (See id. at 105.) Powell explained that his rent loss
deduction was calculated based on the percentage of memberships required to achieve stabilized
occupancy as of the assessment date. (Id. at 105.) He deducted leasing commissions because
“[t]ypically a broker would be involved in the leasing of vacant space. Therefore, leasing
commissions are included in the absorption analysis.” (Id. at 106.) Powell wrote that his final
as-is real market value conclusion for the subject property was $7,805,000, or $87.18 per square-
foot. (Id.)
FINAL DECISION TC-MD 140184N 15
Sohm relied on the cost approach and the sales comparison approaches, but gave “little
credence” to the sales comparison approach because comparable sales data was limited. (Def’s
Ex A at 82.) However, Sohm found that his cost approach conclusion was supported by the
available data under the sales comparison approach. (Id.) Sohm’s final real market value
conclusion for the subject property as of January 1, 2013, was $15,473,000. (Id.)
The subject property’s 2013-14 tax roll real market value was $12,774,442, with
$2,916,342 allocated to the land and $9,858,100 to the buildings. (Def’s Ex A at 20.) Its 2013-
14 exception real market value was $10,722,548. (Id.) Its 2013-14 maximum assessed value
and assessed value were both $10,031,592. (Id.)
II. ANALYSIS
The issue before the court is the 2013-14 real market value and exception value of the
subject property. ORS 308.205(1) defines real market value as:8
“[T]he 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.”
January 1, 2013, was the assessment date for the 2013-14 tax year. See ORS 308.007(a); ORS
308.210. To determine a property’s real market value, ORS 308.205(2) requires use of “methods
and procedures in accordance with rules adopted by the Department of Revenue.” The relevant
rule names the three valuation approaches that must be considered: the cost, sales comparison,
and income approaches. OAR 150-308.205-(A)(2)(a). Although all three approaches must be
considered, all three approaches may not be applicable in a given case. Id. Which approach is
most persuasive is a question of fact that the court will determine on the record before it. Pacific
Power & Light Co. v. Dept. of Revenue, 286 Or 529, 533, 596 P2d 912 (1979).
8
The court’s references to the Oregon Revised Statutes (ORS) are to 2011.
FINAL DECISION TC-MD 140184N 16
The exception real market value is the real market value of “new property or new
improvements” in existence as of January 1, 2013. See ORS 308.146(3)(a); 308.153(2)(a).
Plaintiffs bear the burden to prove their case by a preponderance of the evidence. See
ORS 305.427. A preponderance means “the greater weight of evidence, the more convincing
evidence.” Feves v. Dept. of Revenue, 4 OTR 302, 312 (1971). To carry their burden, Plaintiffs
must demonstrate “competent evidence of the [real market value] of their property.” Poddar v.
Dept. of Rev., 18 OTR 324, 332 (2005) (quoting Woods v. Dept. of Rev., 16 OTR 56, 59 (2002))
(internal quotation marks omitted). This court has jurisdiction to determine the real market value
“on the basis of the evidence before the court, without regard to the values pleaded by the
parties.” ORS 305.412.
A. Highest and Best Use; Characterization of the Subject Property; and Market
Highest and best use is “the reasonably probable and legal use of vacant land or an
improved property that is physically possible, appropriately supported, and financially feasible,
and that results in the highest value.” OAR 150-308.205-(A)(1)(e). Both appraisers concluded
that the subject property’s highest and best use if vacant would be a residential development and
that its highest and best use as improved is its current use.
Plaintiffs wrote that “[o]ne threshold issue that arose during trial was whether the subject
property is a tennis center or a multi-purpose fitness facility.” (Ptfs’ Post-Trial Br at 2.) In
Plaintiffs’ view, the subject property is fundamentally a multi-purpose fitness facility. (See id.)
They acknowledged that the largest part of the subject property, 58 percent, is dedicated to the
indoor tennis courts, but noted that “[m]ore revenue is generated by the fitness memberships than
by the tennis memberships because there are more fitness members than tennis members.” (Id.
FINAL DECISION TC-MD 140184N 17
at 2-3.) Defendant agreed that the subject property is a multi-purpose facility,9 but asserted that
the it is “a unique property that should be valued under the loss to owner standard” in ORS
308.205(2)(c) because it lacks an active or immediate market. (Def’s Closing Br at 5-6.)
If a property has no immediate market, then only the cost and income approaches may be
used to determine its value. OAR 150-308.205-(A)(3); see also Freedom Fed. Savings and Loan
v. Dept. of Rev., 310 Or 723, 728-29, 801 P2d 809 (1990) (concluding the cost approach was the
preferred valuation method given lack of sufficiently similar sales); Les Schwab Tire Centers v.
Crook County Assessor, 14 OTR 588, 594 (1999), (“no comparable sales or rentals within a
reasonable distance, time, and proximity” renders a property devoid of an immediate market).
A proper characterization of the subject property and its market is, therefore, necessary to
determine which approaches to value are relevant and to select comparable sales and leases, if
any. The court agrees with Plaintiffs that the subject property is a multi-purpose facility, but
does not agree that the tennis aspect may be disregarded; it is a significant part of the subject
property facility and contributes financially to its operations. The court is not persuaded that the
subject property lacks an immediate market under OAR 150-305.205-(A)(3). That rule discusses
“especial property,” which is defined as “property specially designed, equipped, and used for a
specific operation or use that is beneficial to only one particular user.” OAR 150-308.205-
(A)(3). As Plaintiffs correctly stated, the subject property is not “beneficial to only one user or
designed for only one specific use. Anyone could purchase this facility; it would have value in
the hands of a different owner.” (Ptfs’ Post-Trial Br at 4.) Indeed, Sohm identified nine tennis
centers and two fitness facilities that compete with the subject property in its market area.
///
9
In its closing brief, Defendant described the subject property as a “fitness, wellness, aquatic, and tennis
center.” (Def’s Closing Br at 1.)
FINAL DECISION TC-MD 140184N 18
Although the court is not persuaded that the subject property is an especial property that
lacks an immediate market, the court notes that it is important to ensure that sufficiently similar
sales are available for the sales comparison approach to provide a reliable value indication. See
Hewlett-Packard v Benton County Assessor, 21 OTR 186, 193 (2013) (disapproving of
appraiser’s reliance on sales with significant size and use differences that “did not necessarily
reflect the actions of buyers that would purchase the subject property”). The court reviews that
evidence below.
B. Sales Comparison Approach
Under the sales comparison approach, “only actual market transactions of property
comparable to the subject property, or adjusted to be comparable,” may be used and all sales
“must be verified to ensure they reflect arms-length market transactions.” OAR 150-308.205-
(A)(2)(c). To be comparable, properties should be “similar in size, quality, age and location” to
the subject property. Richardson v. Clackamas County Assessor, TC-MD 020869D, WL
21263620 at *3 (Mar 26, 2003.)
Powell relied on five sales and one pending sale in his sales comparison approach. None
of Powell’s sales included the same mix of uses as the subject property, so Powell separately
analyzed the value of the subject property’s fitness space and its tennis space. He placed the
most weight on sale 5 and pending sale 6 to determine the value of the subject property’s fitness
space. Powell’s sale 5 was a 28 year old property sold by the lender after repossession. It
suffered from deferred maintenance and was of inferior quality and condition to the subject
property. Nevertheless, Powell concluded a value for the subject property’s fitness space
($165.00 per square foot) that was less than that of sale 5 ($173.99 per square foot). Pending
sale 6 was a 37 year old property with “significant deferred maintenance.” The court is not
FINAL DECISION TC-MD 140184N 19
persuaded that either sale 5 or pending sale 6 is comparable to the subject property’s fitness
space based on their ages, conditions, and the fact that sale 5 was a distressed sale by the lender
following repossession.
Powell placed the most weight on sales 1 and 2 to determine the value of the subject
property’s tennis space. Sale 1 was 34 years old and sale 2 was 39 years old. Both sales were
inferior to the subject property in condition and quality. Neither sale was located near Tualatin;
sale 1 was in Eugene and sale 2 was in Salem. Sale 1 was a distressed REO sale. Powell used
sale 1 to value the subject property’s tennis space, despite the fact that it lacked tennis facilities.
The court concludes that Powell’s sales 1 and 2 are not comparable to the subject property’s
tennis space. Moreover, it is unclear how Powell selected a value of $75 per square foot, or $3.9
million, for the subject property’s tennis space. None of Powell’s sales support that value and it
is less than the cost calculated by Powell to build replacement tennis facilities.
As Defendant noted, an examination of comparable sales must ask “whether the buyer
* * * would seriously consider the subject property as an alternative to the property that he/she
chose.” (Def’s Closing Br at 9 (citing Appraisal Institute, The Appraisal of Real Estate 394
(14th Ed 2013).) The court agrees and finds that none of Powell’s sales were sufficiently similar
to the subject property to provide a reliable value indication. Although Sohm completed a sales
comparison approach, he testified that he placed little to no weight on it because he did not find
any sales sufficiently similar to the subject property. The sales comparison approach is
unpersuasive.
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 v.
FINAL DECISION TC-MD 140184N 20
Dept. of Rev., 17 OTR 248, 253 (2003). “The direct capitalization method used [here] * * *
focuses on two key components: (1) the capitalization rate * * * and (2) net operating income * *
*.” Id. To calculate net operating income, “appraisers look at historical gross income and
expenses for the subject, adjusted by reference to market data.” Id. at 254.
Both appraisers agreed that the subject property was not stabilized as of the assessment
date. In addition, they agreed that the subject property’s actual leases were not arm’s-length. As
a result, Powell relied upon leases of properties he considered comparable to determine potential
gross income for the subject property. None of Powell’s leases included the same mix of uses as
the subject property and none included tennis facilities. The court finds Powell’s comparable
leases unpersuasive for similar reasons that it found his comparable sales unpersuasive.
Powell placed the most weight on leases 1 and 4. Lease 1 was a 24-Hour Fitness facility
located in Vancouver, Washington that was built and leased in 2008. That property is more
similar to the subject property than the much older facilities built in the 1970s. However, a 2008
lease likely reflects different market conditions and is not, therefore, persuasive evidence of lease
rates as of January 1, 2013, absent appropriate adjustments. Powell’s lease 4 was an as-is lease
of a facility built in 1987 that suffered from deferred maintenance. It was leased by a bank
following repossession and prior to the bank’s sale of that property. Those properties are not
comparable to the subject property as a whole, or even to its fitness space. Powell’s lease rate
conclusion for the subject property’s tennis space is not supported by any evidence.
Sohm testified that he considered an income approach but did not complete one because
he was unable to obtain lease information from any comparable properties, he did not consider
national data to be relevant to the subject property, and he found that most tennis clubs were
owner occupied. Citing this court’s opinion in Dept. of Rev. v. River’s Edge Inv., LLC (River’s
FINAL DECISION TC-MD 140184N 21
Edge), 21 OTR 469, 474-75 (2014). Plaintiffs argued that Sohm’s failure to complete an income
approach represents “a serious departure from appraisal practice[]” and renders his appraisal
unreliable. (Ptfs’ Post-Trial Br at 5.) In River’s Edge, this court wrote that, “[i]f not adequately
justified,” an appraiser’s failure to complete an income approach “would lead the court to place
no reliance on the appraisal of the expert who took the departure.” River’s Edge, 21 OTR at 475.
Here, Sohm adequately justified his failure to complete an income approach. The court’s review
of Powell’s income approach supports Sohm’s conclusion that insufficient comparable leases
were available to provide a reliable real market value indication under the income approach as of
January 1, 2013.
D. Cost Approach
Under the cost approach, the real market value of a property is determined “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.” Magno v. Dept. of Rev., 19 OTR 51, 55 (2006) (quoting Appraisal Institute, The
Appraisal of Real Estate 63(12th ed 2001)) (alteration in original) (internal quotation marks
omitted). The cost approach is especially persuasive when, as here, the subject property
improvements are relatively new. See id.Both appraisers considered the actual cost to construct the subject property and the
replacement cost estimated using MVS. Both appraisers ultimately relied on the subject
property’s actual construction costs. Powell concluded an indicated value of $10,515,000 and
Sohm concluded an indicated value of $15,473,000. That difference is due to the appraisers’
land real market value conclusions, their indirect cost estimations, and Powell’s 35 percent
///
FINAL DECISION TC-MD 140184N 22
deduction for functional obsolescence. Powell acknowledged that his cost approach conclusion
would be $15,315,000 without the deduction for functional obsolescence.
1. Land Value
Powell and Sohm each considered several sales of residential zoned land as comparable
to the subject property’s 4.9 developable acres. One of those was the same sale: a May 2011 sale
of 19.43 acres purchased by the City of Tigard “for future park space.” Powell determined that
sale bracketed the subject property on the low end, whereas Sohm concluded a real market value
for the subject property’s 4.9 developable acres below the price of that sale. Powell concluded a
value of $325,000 per acre by bracketing the subject property’s developable land between two
land sales. Sohm concluded a value of about $5 per square foot for the subject property’s 4.9
developable acres. That value is less than the price of any of Sohm’s comparable land sales;
thus, he failed to bracket the subject property’s developable land.
Powell assigned no value to the subject property’s 10.6 undevelopable acres because it
would not be cost-effective to mitigate that land. He concluded the subject property’s total land
real market value was $1,600,000. Sohm considered several sales of open space as comparable
to the subject property’s undevelopable land and concluded a value of $11,250 per acre for that
land. He concluded a total real market value of $1,184,488 for the subject property’s bare land.
The court agrees with Sohm that the subject property’s undevelopable land may have
value as open space, but concludes that his analysis of that value was incomplete. Use of the
subject property’s undevelopable land as open space is a different highest and best use than
residential development, indicating that a different buyer would be interested in that land.10
However, Sohm did not analyze whether the subject property land could be partitioned or the
10
The buyers that Sohm “indicates would be interested in the undevelopable portion would not be the type
of buyers or investors that would be looking to acquire the entire property.” (Ptfs’ Post-Trial Br at 19.)
FINAL DECISION TC-MD 140184N 23
cost of doing so. Ultimately, the court finds Powell’s 2013-14 bare land real market value
conclusion of $1,600,000 to be more persuasive and accepts his determination.
2. Improvements Value
Powell and Sohm both relied on the subject property’s actual construction costs of
$11,201,595. Zupancic testified that, of that amount, a $319,000 bid for “Solar PV” should be
removed because the work never happened. That indicates an actual cost of $10,882,595.
Powell calculated indirect costs of 10 percent whereas Sohm used 15 percent. The court accepts
Powell’s determination of 10 percent indirect costs, or $1,088,260, rather than 15 percent
because Sohm’s determination was based on his conclusion that the subject property was a
specialized property. Adding the land value of $1,600,000 and 10 percent entrepreneurial profit
results in an indicated real market value of $14,928,000, rounded, under the cost approach.
Powell deducted 35 percent for functional obsolescence, which he measured based on the
difference between his value conclusions under the cost approach as compared with the other
approaches to value. As Defendant correctly noted, that is not one of the accepted methods of
measuring functional obsolescence.11 (Def’s Closing Br at 15 (citing Appraisal Institute, The
Appraisal of Real Estate 623-28 (14th ed 2013).) Furthermore, as Sohm testified, even if there
were functional obsolescence due to a superadequacy, its cost should be capitalized over the life
of the subject property. (See id.) Powell’s calculation of a 35 percent deduction for functional
obsolescence is not supported by appraisal methodology and is unpersuasive in this case.
Zupancic testified that that the $1.4 million cost of wetlands mitigation was extraordinary
and should be deducted from the cost approach conclusion. (See Ptfs’ Post-Trial Br at 13 n1.)
11
“The three principal methods for estimating depreciation are the market extraction method[,] the
economic age-life method[, and] the breakdown method.” Appraisal Institute, The Appraisal of Real Estate 597
(14th Ed 2013).
FINAL DECISION TC-MD 140184N 24
The court disagrees. Plaintiffs’ evidence demonstrated they were required to complete wetlands
mitigation before the City of Tualatin would grant the conditional use permit for the subject
property. Thus, those costs were necessary and any buyer would have incurred them. Plaintiffs
did not present any evidence of “ordinary” site development costs based on which the court
could conclude that the subject property’s site development costs were “extraordinary.”
Plaintiffs noted other governmental restrictions impacting the subject property, including
restrictions on parking and operating hours, mandatory wetlands maintenance, mandatory flood
insurance, and the possibility of losing their non-conforming use exemption. The court
acknowledges that each of those restrictions or requirements may negatively impact the subject
property’s real market value. Governmental restrictions must be considered when determining
real market value. See ORS 305.205(2)(d). However, Plaintiffs have failed to present evidence
of the specific effect of those restrictions on the subject property’s real market value.
E. Reconciliation
The court finds that the cost approach provides the best evidence of the subject property’s
real market value as of January 1, 2013, and indicates a real market value of $14,928,000.
Powell determined that “absorption costs” totaling $2,005,000 should be deducted from the final
value conclusion. Those costs included $1,890,000 for “rent loss” and $115,000 for “leasing
commissions.” Powell based those deductions on the percentage of memberships required to
achieve stabilized occupancy of the subject property. The court concludes that Powell’s
deductions are unsupported. The subject property is not leased to the members and no evidence
was presented that market lease rates are contingent upon specific membership levels. Similarly,
no evidence was presented that connects membership levels with leasing commissions.
///
FINAL DECISION TC-MD 140184N 25
Powell and Zupancic each testified that the subject property was 97.6 percent complete as
of January 1, 2013, and the court found their testimony persuasive. Powell calculated that a
deduction of $190,000 should be made for the cost to complete the subject property, whereas
Zupancic testified that the deduction should be $300,000. (See Ptfs’ Post-Trial Br at 13 n1.) The
court finds that a downward adjustment of 2.4 percent, or $358,300, rounded, is supported for the
cost to complete the subject property. The court finds that the subject property’s real market
value was $14,569,700 as of January 1, 2013. The court concludes that its 2013-14 exception
real market value was $12,969,700.
III. CONCLUSION
After careful consideration, the court finds that the cost approach provides the best real
market value evidence in this case. The court further finds that the subject property was 97.6
percent complete as of January 1, 2013, and its real market value on that date was $14,569,700.
The court concludes that the subject property’s 2013-14 exception real market value was
$12,969,700. Now, therefore,
IT IS THE DECISION OF THIS COURT that the 2013-14 real market value of property
identified as Account 00345380 was $14,569,700. Its 2013-14 exception real market value was
$12,969,700.
Dated this day of May 2015
ALLISON R. BOOMER
MAGISTRATE
If you want to appeal this Final 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 Final
Decision or this Final Decision cannot be changed. TCR-MD 19 B.
This document was filed and entered on May 18, 2015.
FINAL DECISION TC-MD 140184N 26
FINAL DECISION TC-MD 140184N 27