Dept. of Rev. v. River's Edge Investments LLC , 21 Or. Tax 469 ( 2014 )

No. 59 August 19, 2014 469
IN THE OREGON TAX COURT
REGULAR DIVISION
DEPARTMENT OF REVENUE
and Deschutes County Assessor,
Plaintiffs,
v.
RIVER’S EDGE INVESTMENTS LLC,
Defendant.
(TC 4962)
Plaintiffs Department of Revenue (the department) and Deschutes County
Assessor appealed from a Magistrate Division decision as to the real market
value of a convention center and land in Deschutes County. At trial, the depart-
ment argued that while the subject property was in a tax account that did not
include a neighboring hotel property, the relationship of the subject property to
the nearby hotel and the common ownership of the two properties was of decisive
importance in the valuation of the subject property. The court found that nothing
in the language of the Oregon Constitution, the statutes or case law provided
any support for determining the RMV of property in one tax account by reference
to the RMV or any other characteristic of property in a different tax account.
The court further found that the failure of the department to bear its burden
would not result in a determination of a value by default in the way that occurs
when a taxpayer is unsuccessful in challenging an existing roll value. The court
determined that it would consider whether the RMV of the property asserted by
taxpayer was reasonable. The court considered the income indicator to be the
most reliable indicator of value in this situation and found that the department
had not established that the elements employed by the witness for taxpayer were
unreasonable. Accordingly, the court accepted as reasonable the value conclusion
of taxpayer.
Trial was held March 11 through 14, 2013, in the court-
room of the Oregon Tax Court, Salem.
Douglas M. Adair, Senior Assistant Attorney General,
Department of Justice, Salem, argued the cause for Plaintiff
(the department).
Laurie E. Craghead, Deschutes County Counsel, Bend,
argued the cause for Plaintiff Deschutes County Assessor
(the county).
Mark G. Reinecke, Bryant Lovlien & Jarvis PC, Bend,
argued the cause for Defendant (taxpayer).
Decision rendered August 19, 2014.
470 Dept. of Rev. v. River’s Edge Investments LLC
HENRY C. BREITHAUPT, Judge.
I. INTRODUCTION
This case is before the court for decision after trial.
The tax year is 2008-09. Plaintiffs Department of Revenue
and Deschutes County Assessor (collectively referred to
as the department) appealed a decision in the Magistrate
Division in favor of Defendant (taxpayer).
II. FACTS
The property in question is a convention center and
related land (the subject property) located on the west side of
the Deschutes River in Bend, Oregon. The subject property
was constructed by taxpayer and completed in 2006.
The convention center on the subject property is a
modern and fully functioning convention center with large
kitchen facilities, meeting rooms, audio-visual equipment
and all of the facilities needed for operation of a convention
center. Personal property associated with the convention
center is not at issue in this case.
Prior to construction of the subject property, tax-
payer owned and operated, and still owns and operates, a
large full-service hotel just north of the subject property.
That facility is in a tax account separate from the tax account
for the subject property. Taxpayer owns other property in
the general neighborhood of the subject property, including
a golf course.
The development and construction of the subject
property occurred after significant dispute and litigation
with governmental and private parties regarding land use
restrictions and allowances related to the subject property
and surrounding property owned by taxpayer. The litigation
was settled pursuant to an agreement (the Development
Agreement) that addressed the construction of the subject
property and other issues related to surrounding property
owned by taxpayer.
Pursuant to the Development Agreement, tax-
payer could not proceed with other development near the
subject property until a convention center was constructed.
Construction of the convention center was a condition to the
Cite as 21 OTR 469 (2014) 471
receipt by taxpayer of certain other land use benefits related
to other property in the neighborhood.
In their briefs, the parties have discussed in
detail the question of whether the Development Agreement
required continued maintenance and operation of the con-
vention center. Unfortunately, the parties both approached
this primarily by way of testimony of appraisers or others
who clearly did not have expertise in analyzing legal agree-
ments. Even when a witness was an attorney, the actual con-
tractual provisions that could lead to an answer to the ques-
tion of proper interpretation of the Development Agreement
were not addressed. Neither party directly addressed the
proper interpretation of the Development Agreement in
briefs, even though the interpretation of such agreements is
almost always a matter of law. This approach to the question
falls short of being helpful to the court.
The valuation expert for the department considered
only the cost indicator of value for the convention center. He
did not consider the market indicator as he could identify no
comparable sales to use to develop that indicator.
The valuation witness for the department consid-
ered the subject property to be “especial property” subject to
valuation under OAR 150-308.205-(A)(3). That regulation
provides that in the case of especial property, consideration
is to be given only to the cost and income indicators of value.
Notwithstanding the provisions of OAR 150-
308.205-(A)(3), the witness for the department did not
consider the income indicator to the subject property, even
though it is an income producing property. The witness
reasoned that the subject property had to be valued with
consideration to the economic benefits to the hotel located
across the street from the center. He stated he did not have
good data on the economic benefits enjoyed by the hotel and
therefore could not develop an appropriate income indicator
of value for the subject property.
Relying solely on the cost indicator of value, making
a deduction for physical depreciation and making no deduc-
tion for functional or economic obsolescence, the valuation
witness for the department concluded a value for the subject
property of $16,700,000.
472 Dept. of Rev. v. River’s Edge Investments LLC
The valuation expert offered by taxpayer developed
both an income indicator and a cost indicator of value for
the subject property. The cost indicator produced a value
that was far in excess of that indicated by the income indi-
cator. This witness considered the difference in indicators to
be attributable to functional or economic obsolescence that
should be deducted from the value indicated by the cost indi-
cator. Making that deduction, the witness reached a value
conclusion of $2,668,000 for the subject property.
III. ISSUE
The issue is the real market value (RMV) of the
subject property as of January 1, 2008.
IV. ANALYSIS
This case presents some issues that are apparently
of first impression and some that are not. The department
bears the burden of proof in this matter and the court will
first discuss several issues connected with the approach
taken by the department in the valuation of the subject
property.
As noted in the summary of the facts, the subject
property is in a tax account that does not include the neigh-
boring hotel property. The department argues that the rela-
tionship of the subject property to the hotel and the common
ownership of the two properties is of decisive importance in
the valuation of the subject property.
The position of the department in this regard is,
however, not supported by the statutes implementing the
provisions of Article XI, sections 11(b) (Measure 5) or 11
(Measure 50), of the Oregon Constitution or the decisions
of the Oregon Supreme Court. An understanding of this is
aided by a brief summary of the operation of Measure 50.
Measure 50 and the legislation implementing it
define the “maximum assessed value” (MAV) and the RMV
of “property.” RMV is defined in the constitution as being
“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, as
Cite as 21 OTR 469 (2014) 473
established by law.” Or Const, Art XI, § 11(1)(a)(A); see ORS
308.205(1) - (2).1
MAV is defined, for the tax year beginning July 1,
1997, as the “value for ad valorem property tax purposes
that does not exceed the property’s real market value for
the tax year beginning July 1, 1995, reduced by 10 percent.”
Or Const, Art XI, § 11(1)(a). For subsequent years, the MAV
“shall not increase by more than three percent from the pre-
vious tax year.” Id. § 11(1)(b).
Consistently with the constitution, the assessed
value (AV) is the lesser of the RMV or the MAV for “prop-
erty.” ORS 308.146(2). For purposes of determining whether
the AV of property exceeds the property’s MAV, “property”
means, except for centrally assessed property not relevant
here, “[a]ll property included within a single property tax
account.” ORS 308.142(1)(a).
The AV of any property can be determined only after
comparing the RMV of the property and the MAV determined
for the property. It therefore logically follows that the RMV
of any property must be determined by reference to what the
RMV of all property in a tax account is. Consideration of the
RMV or MAV of property found in another tax account is, as
a necessary conclusion, not permitted.
The foregoing discussion is fully consistent with the
decision of the Oregon Supreme Court in Flavorland Foods
v. Washington County Assessor, 334 Or 562, 54 P3d 582
(2002). In Flavorland the court concluded that the Measure
50 constitutional reference to “each unit of property” meant
all property in a property tax account. Id. at 578.
Nothing in the language of the constitution, the
statutes or the Flavorland decision provides any support
for determining the RMV of property in one property tax
account by reference to the RMV or any other characteris-
tic of property in a different property tax account. Such a
cross-account approach does not even appear to be neces-
sary. Property tax accounts can be merged. ORS 308.162(1).
If, as the department has suggested throughout this case,
1
The court’s references to the Oregon Revised Statutes (ORS) are to 2007.
474 Dept. of Rev. v. River’s Edge Investments LLC
it is important to consider the value of the convention cen-
ter only in connection with the value of the hotel property,
a merger of tax accounts might well be a preferred way of
proceeding.
The department’s expert therefore had no legal
basis for taking into account, in the valuation of the conven-
tion center, what he considered to be augmented income at
the hotel, produced by the presence of the convention cen-
ter. That income could only be relevant to the value of the
property in the tax account in which the hotel property was
found. Further, his conclusion that the highest and best use
of the convention center was operation in conjunction with
the hotel is simply inconsistent with the account focus of
Measure 50.
The department argues, however, that the relation-
ship between the convention center and the hotel, together
with the common ownership of both, makes the convention
center “especial property.” Even if that argument, based on
the department’s rule OAR 150-308.205-(A)(3), was correct,
it could not produce a result inconsistent with the constitu-
tion, statutes and the decision in Flavorland.
Even within those limits, it is not clear what char-
acterization of the convention center as “especial property”
accomplishes. The rule itself simply states that where such
property is involved, there will, by definition, be no market
indicator of value. Rather, reliance will have to be placed on
the income or cost indicators of value.
In this case, neither appraiser, in fact, developed a
market indicator of value. The appraisers diverged in their
approaches not because of differences in development of a
market indicator, but rather in their consideration of an
income indicator and their approaches to necessary depreci-
ation to be taken into account in the development of the cost
indicator.
The department’s own rule directs consideration of
both the income and cost indicators of value, even if a prop-
erty is “especial” or to be valued in order to arrive at just
compensation. And yet, the department’s expert witness did
not develop an income indicator. That is a serious departure
Cite as 21 OTR 469 (2014) 475
from appraisal practice. Appraisal Institute, The Appraisal
of Real Estate 130 (13th ed 2008). If not adequately justified,
it would lead the court to place no reliance on the appraisal
of the expert who took the departure.
The justification given by the appraiser for the
department for this departure from standard practice was
that the income information he had for the convention cen-
ter did not include income augmentation experienced by the
hotel by reason of the existence and operation of the conven-
tion center. That explanation is deficient for two reasons.
As already discussed, the RMV of the convention
center, and any other property in the same property tax
account, must be determined independently of consideration
of property (here the hotel) contained in another property
tax account. That is a consequence of the application of the
paramount provisions of Measure 50.
Further, even if Measure 50 did not compel separate
consideration of the convention center and the hotel, basic
valuation principles would. The department has concluded
that one of the reasons that the convention center was con-
structed was that it would draw more business for the hotel.
That conclusion is supported by the feasibility studies in the
record done by the hotel owner in considering whether to
build the conference center. It is, of course, also supported
by common sense.
However, the fact that the convention center was
expected to produce more business for the hotel does not
mean that the marginal increase in business for the hotel,
assuming it could be quantified, should be considered in
the valuation of the convention center. Rather, if and to the
extent that such expectations were fulfilled, the net operat-
ing income of the hotel property would be increased and con-
sideration of that increase would be reflected in an increase
in the income indicator of value for the hotel.
Indeed, consideration of increased revenue at the
hotel would produce a significant risk of double-counting if
that revenue were also used to value the convention center.
The appraiser for the department recognized this. It is also
the case that the statutes and rules of the department do not
476 Dept. of Rev. v. River’s Edge Investments LLC
contain a method for identifying the amount, if any, of hotel
income attributable to the presence of the convention cen-
ter. Nor do they contain a mechanism for considering such
revenue only in the valuation of the convention center or the
hotel, but not both.
The property tax statutes in Oregon contain a meth-
odology for valuation of units of property that are interre-
lated and operated by one owner. See ORS 308.550 (relating
to the assessment of so-called centrally assessed properties).
Those provisions do not apply to property of the type pre-
sented in this case.
Another problem with the approach of the depart-
ment is that it places great emphasis on who happens to
be the owner of the property being valued. The premise of
the department’s argument is that the convention center
and the hotel were, and will continue to be, owned by the
same owner. However, the identity of an owner is not a factor
that is taken into account in valuation of property. That is
especially so where, as here, the record indicates that noth-
ing requires the convention center and the hotel to remain
under common ownership.
The court would also observe that the department’s
theory of valuation does not really depend on common own-
ership, notwithstanding the stress the department placed
on that fact in this case. If the convention center were sold
to a third party, the sale would very likely be at a price much
below the cost of construction of the center. That is the con-
clusion of taxpayer. However, even under the department’s
view of matters, continued operation of the convention cen-
ter would produce additional business for the hotel. That
increase in business for the hotel would yield some return on
or of the investment of the current owner in the convention
center. In addition, whatever sales price that owner would
realize on the sale of the convention center would yield a
return on or of such investment.
Why, then, does the department insist on its
approach to valuation, an approach that seeks to combine
the hotel and the convention center? Once again, Measure
50 supplies an important piece of the answer to the question.
Although the court did not ask counsel for the department
Cite as 21 OTR 469 (2014) 477
for the answer to this question, such counsel indicated what
the answer would have been. In an opening exchange during
the trial, counsel for the department conceded that the case
would not be in court if the hotel and the convention center
were in the same tax account.
The greatest problem for the department, and the
revenue of Deschutes County, is almost surely produced by
the fact that the MAV for property in the account in which
the hotel is located is at a level such that increases in RMV
of the hotel produced by the increased revenue attributable
to the presence of the convention center will not produce
additional property tax revenue. This would occur if the
RMV of the property in the hotel tax account is already in
excess of the MAV of such property. Additions to the RMV of
the hotel would, in such a case, simply increase the amount
by which the RMV exceeds the MAV. It would not, however,
produce any additional AV.
This result, obviously unpleasant for the county, if
it exists, appears to be a product of the fact that Measure
50 in most cases limits increases in the MAV of the prop-
erty in the hotel account to three percent per year. That
limit might not have applied, or may only partially have
applied, if the convention center had been added into the
property tax account in which the hotel is found. In such a
case, under Flavorland, the RMV and MAV of all property
in the account may be considered for purposes of applying
Measure 50. However, that did not occur.
The problems created by Measure 50 for the
county are, however, no reason to depart from fundamen-
tal appraisal principles or the consideration of the income
method required by OAR 150-308.205-(A)(3). Because
the expert witness for the department made such depar-
tures, the court places no reliance on his conclusion of
value.
An appeal to this division results in a trial de novo.
ORS 305.425(1). Further, the failure of the department
to bear its burden does not result in a determination of a
value by default in the way that occurs when a taxpayer is
unsuccessful in challenging an existing roll value. The court
478 Dept. of Rev. v. River’s Edge Investments LLC
must, therefore, consider whether the RMV of the property
asserted by taxpayer is reasonable.
The appraisal witness for taxpayer did consider
both an income indicator and a cost indicator of value for
the property. The value conclusion of that witness was
$2,668,000, which number did not include personal prop-
erty. Primary reliance was placed on the income indicator
and the cost indicator was adjusted for obsolescence features
so as to approximate the income indicator.
The property is an income producing property. It is
in its early stages of operation and came onto the scene at
one of the worst times in American economic history. The
court considers the income indicator to be the most reliable
indicator of value in this situation. The department has not
established that the elements employed by the witness for
taxpayer were unreasonable. Accordingly, the court accepts
as reasonable the value conclusion of taxpayer’s expert
witness.
V. CONCLUSION
Now, therefore,
IT IS THE FINDING OF THIS COURT that the
real market value of the subject property for the 2008-09
tax year was $2,668,000.