Betz Evans Associates v. Dept. of Rev. , 21 Or. Tax 461 ( 2014 )

No. 58 August 14, 2014 461
IN THE OREGON TAX COURT
REGULAR DIVISION
BETZ EVANS ASSOCIATES,
Plaintiff,
v.
DEPARTMENT OF REVENUE,
Defendant,
and
LANE COUNTY ASSESSOR,
Defendant-Intervenor.
(TC 5138)
Plaintiff (taxpayer) appealed from a decision of the Magistrate Division as to
the real market value (RMV) of real property in Lane County. Taxpayer sought a
reduction in the RMV that the Board of Property Tax Assessment (BOPTA) found
for a house. Defendant-Intervenor Lane County Assessor (the county) argued
that taxpayer did not satisfy the burden of proving a RMV for the subject house
lower than that determined by BOPTA. At trial, the appraisers for both parties
presented the court with conclusions as to the value of the house derived from
the cost approach and comparable sales approach to valuation. Following trial,
the court found that neither party had presented the court with a complete cost
approach analysis. Taxpayer’s analysis omitted significant costs of construction
for the subject property. The county included those costs, but did not make any
accounting for depreciation. The court therefore concluded a value figure given
by the county for cost of construction minus an amount of 16 percent subtracted
to account for depreciation.
Trial was held July 24, 2013, in the courtroom of the
Oregon Tax Court, Salem.
Lawrence O. Gildea, Attorney at Law, Eugene, argued
the cause for Plaintiff (taxpayer).
James C. Wallace, Senior Assistant Attorney General,
Department of Justice, Salem, argued the cause for Defen-
dant Department of Revenue (the department).
Sebastian Tapia, Assistant Lane County Counsel,
Eugene, argued the cause for Defendant-Intervenor Lane
County Assessor (the county).
Decision rendered August 14, 2014.
HENRY C. BREITHAUPT, Judge.
462 Betz Evans Associates v. Dept. of Rev.
I. INTRODUCTION
Plaintiff Betz Evans Associates (taxpayer) appeals
the real market value (RMV) for the 2010-11 tax year of
a house owned by taxpayer, identified by the assessor as
Account 1768504 (the subject house). The only question
before the court is the RMV of the house itself; the value of
the land the house is situated on is not at issue.
II. FACTS
The subject house is located on a 9.5 acre lot in a
gated neighborhood outside the city of Springfield, Oregon.
The subject house has 4,233 square feet of living area and
makes use of high-end finishes throughout. Taxpayer con-
tracted to have the subject house built on land that taxpayer
already owned with the intention of featuring the subject
house on the 2009 Home Builders Association of Lane County
Tour of Homes. Taxpayer and the builder planned to share
the proceeds of any eventual sale, but the contract between
taxpayer and the builder provided that if a purchaser could
not be found, taxpayer would purchase the subject house for
the builder’s cost of construction.
The builder completed construction of the subject
house in July of 2009. Taxpayer and the builder placed the
subject house and the underlying parcel on the market for
$1,600,000 but received no offers. After unsuccessfully seek-
ing to sell the subject house for roughly one year, taxpayer
purchased the subject house from the builder for $714,000—
an amount meant to compensate the builder for the cost of
building the subject house, but not including any amount
for the builder’s overhead or profits. Taxpayer made no fur-
ther effort to market the subject house and Michael Evans,
a principal of taxpayer, now uses the subject house as his
personal residence.
Defendant-Intervenor Lane County Assessor (the
county) added the subject house to the tax rolls as new prop-
erty effective January 1, 2010—the assessment date for the
2010-11 tax year. Taxpayer appealed the combined value
of the subject house and land to the Lane County Board of
Property Tax Appeals (BOPTA). BOPTA found a combined
RMV of the subject house and land of $1,203,197—with
Cite as 21 OTR 461 (2014) 463
$132,297 attributable to the land and $1,070,900 attribut-
able to the subject house. Taxpayer appealed the BOPTA
decision to the Magistrate Division of the Oregon Tax Court.
The magistrate found for the county, leading taxpayer to
appeal to the Regular Division. Betz Evans Associates v.
Lane County Assessor, TC-MD No 110329C (Oct 4, 2012). In
proceedings before this division, taxpayer seeks a reduction
in the RMV that BOPTA found for the house. The county
argues that taxpayer has not satisfied the burden of proving
a RMV for the subject house lower than that determined by
BOPTA.
III. ISSUE
The sole issue in this case is the RMV of the subject
house.
IV. ANALYSIS
RMV is defined as
“[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.”
ORS 308.205(1).1 The house was added as new property to
the assessment roll for the 2010-11 tax year, the tax year at
issue in this case. Determining the RMV of new property is
necessary to calculate both the assessed value and the max-
imum assessed value (MAV) of new property for the tax year
that it is added to the roll. ORS 308.153.
The RMV of property in a given tax year is a ques-
tion of fact. As in all proceedings before the tax court, the
party seeking affirmative relief has the burden of proving
questions of fact by a preponderance of the evidence. ORS
305.427. Taxpayer is the party seeking affirmative relief in
this case and so has the burden of proof.
Both parties rely in large part on appraisal reports
prepared by witnesses qualified as experts in real prop-
erty appraisal. Each appraisal witness further provided
testimony at trial in support of his own appraisal report.
1
The court’s references to the Oregon Revised Statutes (ORS) are to 2011.
464 Betz Evans Associates v. Dept. of Rev.
Both appraisers presented conclusions as to the value of the
house based on the comparable sales approach and the cost
approach.
A. The Cost Approach
As was stated above, the appraisers for both par-
ties presented the court with conclusions as to the value of
the house derived from the cost approach to valuation. The
cost approach assumes that the cost of construction—and
thus the cost of building a substitute property with similar
features—influences the value of real property. Appraisal
Institute, The Appraisal of Real Estate 561 (14th ed 2013).
The cost of construction includes both the direct and the
indirect costs and is assumed to represent a “ceiling” on
value, as a purchaser of real property is unlikely to pay more
for an existing property than it would cost to build substan-
tially similar property. Id. In a typical cost approach, the
market value of real property at a given moment in time
is found by depreciating the initial cost of construction to
reflect age, wear, obsolescence, or other market conditions.
Id. at 568-69.
Taxpayer’s appraiser concluded that the $714,000
that taxpayer paid the builder for the house does in fact
represent the actual cost of construction. In reaching this
conclusion, however, taxpayer’s appraiser excluded any costs
attributable to the builder’s overhead and profits. Taxpayer’s
appraiser seeks to justify this approach on the grounds that,
under the depressed conditions of the real estate market in
early 2010, few builders would have been able to recover
their overhead costs or make a profit off of the sale of a house
like the subject house.
This omission was improper. Considerations of the
sort mentioned by taxpayer are more appropriately included
in the adjustments for wear, tear, and market conditions
that typically follow determination of the cost of construc-
tion. The builder’s overhead and profit expectations are
properly included in the costs of construction regardless of
whether those costs can be recouped or those profits realized
from the eventual sale of the property. The Appraisal of Real
Estate at 571.
Cite as 21 OTR 461 (2014) 465
The result is, in essence, that taxpayer’s cost approach
double-counted the depressed state of the real estate mar-
ket in early 2010. Taxpayer’s appraiser provided substantial
evidence supporting 8 to 16 percent depreciation for the sub-
ject house between the date of completion and January 1,
2010. The problem is that taxpayer’s appraiser applied that
well-supported depreciation figure to a figure for cost of con-
struction that already includes a loss for the builder to the
extent of overhead costs and foregone profits. As such, little
weight can be given to the conclusion of value from the cost
approach of taxpayer’s appraiser.
The county’s appraiser, on the other hand, based his
cost approach on cost data procured from Marshall & Swift,
a commercially available source for estimated building costs
of a sort commonly used by experts in this field. Using this
resource, the county’s appraiser constructed two alternative
scenarios for cost of construction—one for each of the two
quality classes found in Marshall & Swift that the house
arguably falls within. These two alternative scenarios place
a value on the house of $880,089 (if the house is considered
“Single Family Residence Class D / Excellent”) or $1,349,066
(if the house is considered “High Value Residence Class 3”).
Inasmuch as the “High Value Residence Class 3” scenario
substantially exceeds the value that the county seeks to
uphold, the court will focus on the county’s “Single Family
Residence Class D / Excellent” scenario.
Taxpayer objects to the county’s reliance on Marshall
& Swift on the ground that where, as here, the costs of con-
struction are known, they should prevail over estimates like
those contained in Marshall & Swift. This argument fails
because, as stated above, the $714,000 figure relied upon by
taxpayer does not represent the actual cost of building the
subject house. That actual cost includes an amount for the
builder’s overhead and profit that taxpayer did not include in
its $714,000 figure. That deficiency eliminates any ground
for privileging the figure given by taxpayer over the esti-
mated cost of construction provided by the county.
However, the county’s cost approach is flawed in
its own way. The county’s appraiser did not undertake any
depreciation of the cost of construction estimate derived
466 Betz Evans Associates v. Dept. of Rev.
from Marshall & Swift. “Depreciation” in this context takes
in both physical wear and tear and changes in market condi-
tions that impair the salability of real property or improve-
ments. The Appraisal of Real Estate at 576-77. This is note-
worthy because the testimony of the county’s appraiser
generally supports the conclusion that the real estate mar-
ket in Lane County featured significant depreciation as of
January 1, 2010.
In short, neither party presented the court with a
complete cost approach analysis. Taxpayer’s analysis omit-
ted significant costs of construction for the subject prop-
erty. The county included those costs, but did not make any
accounting for depreciation. The court will revisit this issue
below.
B. The Comparable Sales Approach
Both taxpayer’s appraiser and the appraiser for the
county also presented conclusions as to the value of the sub-
ject house using the comparable sales approach. The RMV
of property at a given point in time can be determined by
analysis of sales of other similar properties at about the
same time.
Both taxpayer and the county rely upon sub-
stantially the same comparable sales in reaching their
respective conclusions as to the value of the subject house.
However, the comparable sales approach of the county’s
appraiser suffers from a serious flaw. The county’s
appraiser did not, in his comparable sales approach, par-
tition land value from improvements value on any of the
properties that the county’s appraiser used for compara-
ble sales. (Trans at 86-87.) At trial the county’s appraiser
admitted that this was a mistake on his part and that
properly accounting for land value would produce a signif-
icant change in RMV. This failure to look at the value of
the house as a discrete item, and to compare it to the value
of other comparable houses as discrete items, severely
reduces the usefulness of the comparable sales approach
of the county’s appraiser.
The county argues that if the land component of
each comparable sale can be shown to be comparable, that
Cite as 21 OTR 461 (2014) 467
land value can be extracted from the overall value of each
supposedly comparable sale, leaving only the improvement
value for comparison to the house at issue in this case.
However, this argument fails because the county’s appraiser
did not analyze the land values of these supposedly com-
parable properties so that they could be extracted from
the overall values of the comparables. Under these circum-
stances, the court cannot give any weight to the comparable
sales approach of the county.
Taxpayer’s comparable sales approach, on the other
hand, does at least attempt to value the house through ref-
erence to sales of comparable houses. The county takes issue
with the adjustments that taxpayer’s appraiser made to the
values of the comparable properties. However, even if, for
the sake of argument, these objections of the county are
granted, the court is left with a partially deficient compara-
ble sales approach by taxpayer’s appraiser opposing a com-
pletely deficient comparable sales approach by the appraiser
for the county.
However, the sales comparison approach on
the whole is of limited use in this case. As the apprais-
ers for both parties acknowledge, the sales comparison
approach is not ideal for valuing property in an inactive
market. Both parties presented evidence tending to show
that the real estate market in Lane County on and about
January 1, 2010, suffered from just this sort of inactivity.
Both of these considerations point to the cost approach as
the preferred method of finding the value of the subject
property.
C. The Cost Approaches of the Parties Revisited
The court found above that the cost approaches pro-
vided by the appraisers for both parties each have their own
failings. In the case of the cost approach of taxpayer, that
failing is the omission of any amount in the cost calcula-
tion for the builder’s overhead and profits. In the case of the
cost approach of the county, the failing is the omission of
any amount of depreciation. Interestingly, each party’s cost
approach supplies a credible figure where the cost approach
of its opponent is lacking.
468 Betz Evans Associates v. Dept. of Rev.
“When the determination of [RMV] * * * is an issue
before the tax court,” the court may determine RMV “without
regard to the values pleaded by the parties.” ORS 305.412.
With that in mind, the court concludes that the $880,089
figure given by the county for cost of construction is correct.
From that figure, however, an amount must be subtracted
to account for depreciation. Taxpayer argues that the appro-
priate amount ranges from 8 to 16 percent, with most of the
evidence leaning toward the 16 percent depreciation figure.
The county’s appraiser did not deduct any depreciation in
his appraisal report, but did provide time-trend analysis and
testimony that generally supports taxpayer on this point.
Applying the 16 percent depreciation figure provided by tax-
payer to the county’s $880,089 figure for cost of construction
produces an RMV for the subject house on January 1, 2010,
of $739,275.
V. CONCLUSION
Based on the presentations of the parties, the court
concludes that the RMV of the subject house was $739,000
(rounded) on January 1, 2010. Now, therefore,
IT IS THE DECISION OF THIS COURT that the
RMV of the subject house was $739,000 on January 1, 2010.