Amended May 6, 2016 Wellmark, Inc. v. Polk County Board of Review

IN THE SUPREME COURT OF IOWA
No. 14–0093
Filed February 12, 2016
Amended May 6, 2016
WELLMARK, INC.,
Appellee,
vs.
POLK COUNTY BOARD OF REVIEW,
Appellant.
On review from the Iowa Court of Appeals.
Appeal from the Iowa District Court for Polk County, Lawrence P.
McLellan, Judge.
County board of review seeks further review of a court of appeals
decision affirming the district court’s ruling on an appeal from a property
tax assessment. REVERSED.
John P. Sarcone, County Attorney, and David W. Hibbard and
Ralph E. Marasco Jr., Assistant County Attorneys, Des Moines, for
appellant.
Deborah M. Tharnish and Christopher E. James of Davis, Brown,
Koehn, Shors & Roberts, P.C., Des Moines, for appellee.
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APPEL, Justice.
In this case, we confront difficult issues related to the proper
valuation of a large, well-built, and highly attractive corporate
headquarters located in a relatively small metropolitan area for property
tax purposes.
This case involves the 2011 assessed valuation of Wellmark, Inc.’s
corporate headquarters located in Des Moines (the property). The Polk
County Assessor set the valuation at $99 million. Wellmark protested to
the Polk County Board of Review (the Board). After a hearing, the Board
denied the protest, and Wellmark appealed to the district court. On
appeal, the district court entered its findings of fact, conclusions of law,
and judgment, finding the valuation of the property for property tax
purposes on January 1, 2011, was $78 million.
The Board appealed. Among other things, the Board asserted that
the district court improperly relied upon expert testimony based not
upon the current use of the building, namely as a headquarters for a
single owner-occupant, but as a multitenant office building. We
transferred the case to the court of appeals. The court of appeals
affirmed the judgment of the district court. We granted the Board’s
application for further review.
The fundamental issue coursing through this case is whether the
Wellmark property should have been valued as if it were a multitenant
office building—the most likely use that would result if the property were
sold in the limited Des Moines market—or whether the Wellmark
property should have been valued according to its current use—a single-
tenant headquarters building—even though there was some question
whether a buyer for that use could be found in response to a
hypothetical “For Sale” sign.
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I. Background Facts and Proceedings.
A. The Property. In March 2010, Wellmark completed
construction of its corporate headquarters in downtown Des Moines. The
building is comprised of five 599,880-square-foot stories of above-ground
office space, and two levels of below-ground parking. An adjoining
parking garage and exercise facility are not included in the present
appeal.
The record demonstrates that the building is striking and highly
attractive. The outside of the building is finished with limestone,
sandblasted precast concrete, and glass, with a large U-shaped,
recessed, curved glass wall on the southern exposure. The building
design allows daylight into all the office workstations.
The first floor contains a lobby, several entrances, a convenience
store, an art gallery, a full-service restaurant, and a conference center.
The second floor contains an auditorium and facilities to support that
room, with approximately 90,000 square feet unfinished and
unoccupied. The third and fourth floors contain open office space. The
third- and fourth-floor space is filled primarily with cubicles with some
private offices. The fifth floor is designed the same as the third and
fourth floors with an executive office area at the southwest corner.
Additionally, the property was designed to be energy efficient and
environmentally friendly. The property has achieved LEED (Leadership
in Energy and Environmental Design) platinum certification. 1 LEED is a
green building certification program devised by the United States Green
Building Council. There is no dispute that the structure provides class-A
1See U.S. Green Bldg. Council, LEED Overview (2016),
http://www.usgbc.org/leed. Platinum certification is the highest level of LEED
certification. See id.
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office space with first-class amenities. It was also undisputed that the
cost to construct the building exceeded $150,000,000.
The property could fit comfortably into the surroundings of the
suburbs of Chicago, an expanding Sunbelt city, or an East Coast office
park. It is located, however, in the commercial real estate district known
as the central business district (CBD) in downtown Des Moines. The
Des Moines metropolitan statistical area (MSA) is characterized as a
“third-tier” MSA with an area population of approximately 490,000.
B. Assessment/Protest. Although staff at the Polk County
Assessor’s office originally believed the property should be valued in
excess of $100,000,000 for property tax purposes as of January 1, 2011,
the assessment eventually embraced by Polk County after a series of
meetings and consultations with senior local tax officials was
$99 million. In May 2011, Wellmark timely filed a protest of the
valuation with the Board, asserting the taxing authorities assessed the
property for more than the value authorized by law. See Iowa Code
§ 441.37(1)(b) (2011). In contrast to the assessor’s value of $99 million,
Wellmark asserted that the actual value of the property was $72 million.
In June, the Board denied the protest, noting “[t]he assessed value of
[the] property was not changed because market data indicate[d] that the
property is assessed at its fair market value.” Wellmark appealed to the
district court.
A bench trial commenced in July 2013. At the beginning of trial,
Wellmark stated without objection that the parties had agreed to a
stipulation, noting among other things that “the only grounds that [the
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parties were] proceeding on today [would be] that the property [was]
assessed for more than the value authorized by law.” 2
Four well-qualified appraisers testified regarding the value of the
property: Chris Jenkins and Ted Frandson for Wellmark, and Peter
Korpacz and Bernie Shaner for the Board. The appraisers looked to
three traditional approaches to find the property’s value: cost,
comparable sales, and income. After arriving at a value based on each of
these three traditional approaches, the appraisers reconciled the three
approaches to reach their final conclusion regarding value. The table
below sets forth the valuations of each appraiser under each method of
valuation and their reconciliations of the different approaches:
Jenkins Frandson Korpacz Shaner
Comparable-
$65,100,000 $65,987,000 $143,800,017 $83,980,000
Sales Approach
Income
$68,480,581 $75,209,978 $149,798,817 $87,450,000
Approach
Cost Approach $71,100,000 $73,123,000 $149,798,812 $122,970,000
Reconciliation $68,000,000 $70,000,000 $145,000,000 $120,000,000
The Polk County Assessor valued the property at $99 million using
the cost approach. The record does not contain calculations supporting
this figure, but it appears to have been a result of a series of internal
meetings in the assessor’s office.
The parties’ experts differed on many points and adjustments in
their analyses. A key issue was one of methodology. The Board’s
experts, Korpacz and Shaner, emphasized the current use of the
Wellmark building as a single-occupant corporate headquarters. This
2Wellmark filed a motion to strike contending that the Board, in its reply brief,
argued that the district court impermissibly relied on a statutory ground not relied
upon by Wellmark—namely, that the assessment was not equitable. The court of
appeals denied the motion. We agree with the court of appeals and do not give this
issue any further consideration.
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use was the linchpin of their evaluation. They asserted that the proper
way to value the business was in a hypothetical transaction in which the
buyer would continue the current use. Recognizing there were no
Des Moines area transactions in which a large office building was
purchased by an owner-occupant for sole use as a corporate
headquarters, Korpacz considered corporate headquarters transactions
identified from a national database in a wide variety of national locations.
While Shaner relied on local multitenant office structures in his
comparable-sales and income analyses as the best available comparisons
in the local area, he ultimately emphasized his relatively high-cost
valuation as the most accurate reflection of the value of the property
when used as a corporate headquarters by a single occupant. By
emphasizing national sales and by valuating the building at relatively
close to actual cost, the Board’s experts asserted they had provided the
best way to value the building according to its current use, justifying a
valuation well in excess of the $99 million assessment imposed by the
Board.
The experts for Wellmark disagreed. They believed it very unlikely
that the Wellmark building could be sold on the open market to a single
corporate entity for use as a corporate headquarters. Their position was
based primarily on the realities in the local Des Moines market.
Wellmark’s experts pointed out they were unaware of any occasion in the
Des Moines market when an existing building was purchased by a third-
party corporation for use as a single-tenant headquarters. Instead,
Wellmark’s experts noted that corporations seeking new locations for
corporate headquarters have generally chosen to construct new built-to-
suit signature structures in the Des Moines area. To the extent
corporations have acquired local buildings for headquarters use, they
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have only partially occupied the premises and rented out the balance to
other tenants. Additionally, Wellmark’s experts noted the very large size
of the Wellmark structure further supported the view that even in the
event a corporation was interested in purchasing the building for
headquarters use, it is very likely that a substantial balance of the
property would be rented out to third-party tenants.
Thus, the Wellmark experts viewed the possibility of a corporation
buying the building for use as a single-occupancy corporate
headquarters very unlikely. Given the realities of the local marketplace,
the experts for Wellmark determined the value of the building by using
analysis of multitenant office buildings in the Des Moines market or
similar geographic areas.
C. District Court Order. For the most part, the district court
agreed with Wellmark. The district court found that Wellmark had
produced two disinterested witnesses that indicated the market value of
the property was less than the market value determined by the assessor
and therefore the burden shifted to the Board to uphold the assessment
value. See id. § 441.21(3).
The district court considered the valuations arrived at by the
experts using the comparable-sales approach. The district court noted it
gave more weight to Wellmark’s experts because they each examined
properties located in Polk County and other municipalities, which was
“essential here in light of each appraiser’s comment that there were
relatively few sales of buildings as corporate headquarters which is the
present use of the Property.” Yet, the district court further noted that
the evaluations of Wellmark’s experts did not involve sales of corporate
headquarters to single occupants, which also represented the present
use of the building.
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Korpacz did identify sales of corporate headquarters buildings by
single occupants, but none were local. The district court noted Korpacz’s
conclusions were diminished by the facts that he did not examine any
transaction in Iowa or Polk County and that he used properties from
larger metropolitan markets where there would be more potential buyers.
These sales, the district court found, did not constitute comparable sales
because they did not take into account the availability or unavailability of
a willing buyer in the local marketplace.
The district court did not feel comfortable relying solely on the
comparable-sales approach. It concluded that the market value of the
property was not “readily established” by the comparable-sales approach
and therefore considered evidence presented involving “other factors.”
See id. § 441.21(2).
Before making its conclusion as to value, the district court noted it
found it “very difficult to reconcile any of the approaches utilized by the
appraisers in this case” because “each one utilized different properties”
and “made different assumptions with those assumptions being made in
favor of the party that retained them.” Additionally, the district court
noted, “In some instances there appeared to be different mathematical
methods used to reach [the appraisers’] conclusions . . . .”
In the end, upon de novo review, the district court found the value
of the property on January 1, 2011, was $78 million. This valuation was
consistent with an approximate cost of $136 per square foot under the
comparable-sales approach, a nine percent capitalization rate under the
income approach assuming the multitenant use of the property, and a
fifty-two percent total obsolescence and depreciation rate under the cost
approach. Additionally, the district court found the valuation resulted in
a tax of $130 per square foot, which appeared to be fair and equitable
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when compared to other similar corporate headquarters in downtown
Des Moines that were built in the past decade.
The Board appealed, contending Wellmark’s appraisers failed to
consider the current use of the subject property—a single-tenant, owner-
occupied building—when setting the assessed value. On the other hand,
the Board’s experts, and specifically Korpacz, looked to owner-occupied
properties using each appraisal approach. Therefore, the Board argued,
the district court erred in not relying on the Korpacz valuation.
Additionally, the Board argued that reliance on the income approaches of
Jenkins, Frandson, or Shaner improperly exempted from assessment
and taxation a substantial amount of market value. We transferred the
case to the court of appeals, which affirmed the district court’s judgment.
The Board filed an application for further review, making two
contentions. First, that the court of appeals erred in determining that
the market value of the property could not be readily established using
the comparable-sales approach. Additionally, the Board reprised its first
argument on appeal, contending the court of appeals and the district
court erred by allowing the property to be valued as though it were
hypothetically used as a multitenant, investor-owned building rather
than valuing it based upon its present use as a single-owner-occupied
home office. We granted further review. For the reasons expressed
below, we reverse the decision of the district court.
II. Standard of Review.
Our review of a tax protest is de novo. Boekeloo v. Bd. of Review,
529 N.W.2d 275, 276 (Iowa 1995); see also Dolphin Residential Coop., Inc.
v. Iowa City Bd. of Review, 863 N.W.2d 644, 647 (Iowa 2015) (“[A]ppeals
from decisions of the local board of review are triable in equity . . . , and
our review is de novo . . . .”). “[W]e give weight to the [district] court’s
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findings of fact, [but] we are not bound by them.” Iowa R. App. P.
6.904(3)(g); Boekeloo, 529 N.W.2d at 276. We are especially deferential
to the court’s assessment of the credibility of witnesses. Boekeloo, 529
N.W.2d at 276.
III. Introduction to Valuation Issues Related to Distinctive
Properties.
A. Overview. The valuation of property has never been an exact
science. In colonial times valuing property was known as the “rule of
common estimation.” See Joint Highway Dist. No. 9 v. Ocean Shore R.R.,
18 P.2d 413, 417 (Cal. Ct. App. 1933). Although valuation for tax
purposes is necessarily expressed in quantitative terms, the appraisal
process has never been and is not now a mathematical exercise.
Aside from the difficulty of quantitative line-drawing, there are
important conceptual problems that complicate our consideration of this
appeal. A threshold conceptual issue lurking in this case relates to the
proper methodology to be employed for tax purposes when a building has
substantial, even dramatic, features and improvements that the owner
beneficially uses but the value of which might not be objectively
demonstrable through past marketplace transactions. The classic
example is the New York Stock Exchange building, which was very costly
to build but which the owners claimed could not be sold on the open
market because its unique features were of no value to anyone else.
Does such an expensive property, for property tax purposes, have zero
value because there are no willing buyers? See People ex rel. N.Y. Stock
Exch. Bldg. Co. v. Cantor, 223 N.Y.S. 64, 68–69 (App. Div. 1927) (rejecting
zero value claim), aff’d mem., 162 N.E. 514 (N.Y. 1928). In this case, the
question is whether, for property tax purposes, the value of a building
with all its fine amenities should be based upon the taxpayer’s current
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use as an owner-occupied headquarters building, even though there may
not be a local market for such a property. The issue is sometimes
framed as whether the proper approach to valuation is one based on
“value in use” versus a market-based “value in exchange.” See Daly City
v. Smith, 243 P.2d 46, 51 (Cal. Dist. Ct. App. 1952) (“[I]t is not value in
use, either actual or prospective, to the owner that is involved, but value
in exchange . . . that is the test.”).
But the question is not entirely binary. If a property exhibits
features that provide unique value to the owner but literally to no one
else, that is one thing. But what if the current use of the property is not
only of benefit to the current owner but also has at least some impact on
the market value of the property? A property currently hosting a very
successful business might draw more in the marketplace than an
identical property with a struggling business. Is there a distinction
between value-in-use to the owner, fulfilling solely the whim and fancy of
the owner, and value-in-use that impacts what a willing buyer would pay
for the property in the open market? Further, what if the property has
features that are not truly unique but are nonetheless sufficiently
specialized to give rise to only a limited market of purchasers?
And there is more. What happens when we try to value a
distinctive but not unique property that has a limited market but there
are no reliable comparable sales upon which to base a market value? If,
for example, a corporate headquarters building with a single occupant
cannot be sold in the local market to another single-occupant
corporation, do we move down market and determine what the property
would fetch if converted into a general office building, for which the local
market is fairly robust? Or do we use appraisal techniques other than
comparable sales—such as income capitalization or reproduction costs—
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to arrive at the value that would be obtained in a hypothetical sale to a
party that would benefit from current use?
We next explore these issues as they are discussed in the caselaw.
Because any tax question must be evaluated in the context of the specific
statutory framework in each jurisdiction, the cases cited below are not
intended to present binding authority or even persuasive authority. They
are instead designed to illustrate some of the principles and challenges
facing the court in this Iowa case and to contextualize the implications of
our resolution of the issues presented.
B. Value in Use Versus Value in Exchange.
1. General principle. The Board asserts that Wellmark’s experts
erroneously relied upon calculations of value for the property that
assumed that the space would not be utilized as a single-occupant
corporate headquarters but as a multitenant office building if the
property were for sale. The legal question underlying this issue is the
proper methodology that an assessor should apply in determining the
actual value for purposes of taxation of a large, high-quality, state-of-the-
art, LEED-certified, and even beautiful office building constructed and
occupied by a single tenant as a headquarters in a tertiary market where
there are no comparable sales to support valuation of the property.
The question at least implicates the difference between what is
referred to in the cases and tax literature as “value in use” and “value in
exchange.” See Jerrold F. Janata, Courts Weigh In on “Highest and Best
Use” and Other Valuation Issues, J. Multistate Tax’n & Incentives,
January 2001, at *1, 2001 WL 43749 [hereinafter Janata]; Nancy S.
Rendleman, Charles B. Neely, Jr., & W. Christopher Matton, Toward a
Better Understanding of Value-In-Use in Property Tax Appraisals, J. Prop.
Tax Mgmt., Winter 1997, at 1, 5–10. “Value in exchange” refers to the
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value to persons generally and focuses on market value based upon a
willing buyer and willing seller. Janata, 2001 WL 43749, at *2. “Value
in use” refers to the value a specific property has for a specific use. Id.
Value in use is based upon the value of the property as it is currently
used, not on its market value considering alternative uses. Id. If a
value-in-use approach is applied, the fact that an overbuilt property has
substantial value to the current user impacts valuation for purposes of
taxation.
One of the frequently cited cases seemingly applying a value-in-use
approach is Joseph E. Seagram & Sons, Inc. v. Tax Commission, 200
N.E.2d 447 (N.Y. 1964). Seagram constructed a “monumental and
magnificent” structure for $36,000,000 but urged that under an income
approach to value, the building was worth only $17,000,000. Id. at 448.
Although the opinion is cryptic, the majority noted that Seagram did not
build the structure for commercial rental income and that the income
capitalization approach produced a “false result.” Id. Therefore, the cost
to construct the building was a factor to consider in valuation, at least in
the years soon after construction. Id. Further, “the hypothetical rental
for owner-occupied space need not be fixed at the same rate as paid by
tenants.” Id. The dissent, in contrast, indicated that if the tenants of the
building were willing to pay more for space in the Seagram Building than
for similar space elsewhere, that would be fully reflected in the
capitalization of earnings. Id. at 450 (Burke, J., dissenting).
2. Strict value in exchange requiring actual comparable sales. In
contrast to Seagram, other courts have hewed more closely to the value
in exchange or market approaches to value for purposes of taxation.
Some have strongly emphasized the role of actual comparable market
transactions in arriving at valuation for tax purposes.
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A leading case is Wisconsin ex rel. Northwestern Mutual Life
Insurance Co. v. Weiher, 188 N.W. 598 (Wis. 1922). In Weiher, the court
was confronted with determining the proper valuation for property tax
purposes of “a fine substantial, artistic building gracing half a block in
the city of Milwaukee built to meet the peculiar needs of its owner, and
not well adapted for other uses.” Id. at 599. The Weiher court held that
Wisconsin law “requires that property shall be assessed with reference to
purposes for which it may be sold rather than the purposes to which it
presently may be devoted.” Id. (quoting Wis. ex rel. Oshkosh Country Club
v. Petrick, 178 N.W. 251, 252 (Wis. 1920)).
A similar approach was taken in F & M Schaeffer Brewing Co. v.
Lehigh County Board of Appeals, 610 A.2d 1 (Pa. 1992). In F & M
Schaeffer, the court considered the value of a 791,000-square-foot
brewery. Id. at 2. The taxpayer valued the property using the
comparable-sales approach at $9.5 million. Id. at 3. The assessor,
however, determined value by analyzing the annual brewing capacity of
the plant and achieved a value of $34 million. Id.
The Pennsylvania Supreme Court rejected the assessor’s approach.
Id. at 7. The Pennsylvania court emphasized that the statute required
the court to determine “actual value” of property; that the legislature
mandated the use of comparable sales, income, and cost approaches to
making that determination; and that “a property’s use and its resulting
value-in-use cannot be considered in assessing fair market value” of the
property. Id. at 4.
A more recent illustration of relatively strict insistence on value in
exchange as reflected in actual market transactions is Pacific Mutual Life
Insurance Co. v. County of Orange, 232 Cal. Rptr. 233 (Ct. App. 1985).
As in this case, the property being appraised was a five-story building
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used as a corporate headquarters by an insurance company. Id. at 234.
The property had distinctive qualities, including an architectural style of
an inverted pyramid and a large central atrium. Id. The taxpayer argued
that the property, if sold in the local market, would likely be utilized as a
general office building. Id. at 237. The court in Pacific Mutual agreed
with the taxpayer, indicating that the use of the property as an office
building was the most likely market result. Id. The implication of Pacific
Mutual is that the highest and best use of property for purpose of
valuation ordinarily can be no higher than that for which there are
comparable sales in the marketplace.
Even in a jurisdiction that embraces a strict value-in-exchange
theory, the use of a property still may be germane to value under the
theory that the current use of the property would impact what a willing
buyer would pay for the property in the marketplace. For example,
property may have more market value when used for a reservoir than
when it is open grassland. Joint Highway, 18 P.2d at 417. The potential
use, however, may influence how the market values the property. See
City of Stockton v. Ellingwood, 275 P. 228, 231 (Cal. Dist. Ct. App. 1929)
(a use of property may make it more valuable to purchasers generally).
The strength of the actual value-in-exchange approach is its
emphasis on objective marketplace transactions that tend to cabin the
subjectivity in the valuation process. The obvious problem, however, is
that extremely valuable and costly properties for which there are no
current buyers or sellers may largely escape taxation.
3. Use of hypothetical transaction to value property where current
use has limited or no relevant comparable sales. There is another
approach in the caselaw, however, to the problem of limited or no
comparable sales for property with specialized uses. A court could
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decide not to look for comparable sales of a different or broader use in
evaluating the property but instead simply assume for valuation
purposes that there is a hypothetical buyer who would purchase the
property and continue the current use. See James C. Bonbright, 1 The
Valuation of Property 59 (1937).
The concept of a hypothetical buyer can be particularly important
in cases involving large but specialized industrial properties that are not
generally bought and sold in the marketplace but also have been
employed in the context of a sale of corporate headquarters. The obvious
impact of utilizing a hypothetical buyer theory is to shift the focus away
from comparable sales and focus on other theories of valuation, usually
replacement cost.
The notion of a hypothetical buyer even when there was no active
market for property at its present use was applied in CPC International
Inc. v. Borough of Englewood Cliffs, 473 A.2d 548 (N.J. Super. Ct. App.
Div. 1984). The court considered the value of a complex of buildings
comprising the international headquarters of CPC International. Id. at
550. The court described the buildings as “an artful blend of function
and aesthetics.” Id. at 551. Although the gross area within the buildings
was 251,000 square feet, only 160,500 were available for use as office
space. Id. at 550. The structure had 34,000 square feet of terraces,
interconnecting bridges, escalators that occupied five or six times the
space of elevators, and a “Cadillac” climate control system. Id. at 551.
The taxpayer in CPC asserted that the likelihood of finding a buyer with
comparable requirements was so remote that the downward adjustment
in valuation was required. Id. at 552. The tax court agreed, reducing the
assessment of the building for functional obsolescence because “[t]he
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building layout and expensive heating system all represent excessive
costs which are not fully returnable in the market.” Id. at 551.
The court in CPC disagreed. Id. at 551–52. Citing New Jersey
caselaw, the court held that no reduction from taxable value would be
allowed for special-purpose characteristics because those characteristics
were built into the structure by the taxpayer without regard to the
recoverability of their costs and there was no realistic suggestion that the
property was for sale. Id. at 552. While recognizing that the overbuilt
characteristics might not be recognized in the income or selling price of
the building, the CPC court noted that the improvements were installed
not to produce income or increase selling price but for the owner’s own
use. Id. at 553. As a result, the court held that there should be no
reduction in valuation for the overbuilt character of the property. Id. As
noted by a later Connecticut court, under CPC, there is no requirement
of “an actual likely purchaser in the marketplace.” Gen. Motors Corp. v.
Linden City, 22 N.J. Tax 95, 124 (2005). Instead, a court will “presume
that a hypothetical buyer exists ‘whose requirements are reasonably
accommodated by the property in question.’ ” Id. (quoting CPC Int’l, 473
A.2d at 552).
A similar approach was taken by a court in Connecticut. In Aetna
Life Insurance Co. v. City of Middletown, the court considered the value of
the corporate headquarters of a large insurance company. No.
CV960078839S, 2002 WL 377147, at *1 (Conn. Super. Ct. Feb. 14,
2002). Like here, the property was distinctive. It had many amenities, a
fitness center, lecture hall, conference rooms, convenience store, hair
salon, cafeteria, and a well-lit central court with a large granite water
fountain. Id. at *2. Because the headquarters was an extremely large
building (nearly 1.5 million square feet), which was not common in the
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real estate market, the court found no comparable sales. Id. at *7.
Rather than value the building based on other usages that would have
been reflected in comparable local sales, the court engaged in a
reproduction-cost analysis. Id. at *9; see also Gen. Elec. Co. v. Fairfield,
No. CV020392891S, 2005 WL 2081269, at *5 (Conn. Super. Ct. July 22,
2005) (declining to value national headquarters of General Electric based
on multitenant market value, but instead concluding that the cost
approach was the most reliable method of determining market value);
Beneficial Facilities Corp. v. Peapack & Gladstone Borough, 11 N.J. Tax
359, 363, 376 (1990) (evaluating a corporate headquarters with Italian
Palladian style architecture, extensive use of bricks, arched windows,
false chimneys, light wells for underground corridors, archways, patios,
fountains, and copper roofs under cost approach), aff’d per curiam, 13
N.J. Tax 112 (N.J. Super. Ct. App. Div. 1992).
An Oregon court took a similar approach in Freedom Federal
Savings & Loan Association v. Department of Revenue, 801 P.2d 809 (Or.
1990) (en banc). In that case, the Oregon court considered the value of
the headquarters building of a savings and loan association. Id. at 811.
The taxpayer argued that there was no immediate market for the
building as a corporate headquarters and that it should be valued as a
multitenant office building. Id. at 812. The court rejected the theory
although there were no comparable sales available to assist in the
valuation of the structure and financial institutions do not usually buy
their headquarters buildings but instead build them to their own
specifications. Id. at 813. Nonetheless, the Oregon court determined
that the cost approach was the best method to evaluate the structure.
Id. In applying the cost approach, the court also declined to reduce the
value for “inutility” because the property was overbuilt for a multitenant
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office building, noting that there was no overbuilding while the property
was used as a corporate headquarters. Id.
The notion of hypothetical market transactions where there are no
comparable sales of specialized property is particularly important in the
context of large industrial properties. A leading case is Ford Motor Co. v.
Edison Township, 10 N.J. Tax 153 (1988), aff’d, 604 A.2d 580 (N.J.
1992). In that case, the court considered the value of an automobile
assembly, manufacturing, warehouse, and office complex. Id. at 158.
The taxpayer asserted that there was no demand for an automobile plant
and that the property should not be evaluated based on current use but
instead as a general manufacturing facility. Id. at 161. The court
emphasized that property should generally be evaluated by “the actual
condition in which the owner holds it.” Id. at 165. The Ford Motor court
made an analogy to the law of eminent domain, noting that in this field,
it has long been accepted . . . that if the property were being
employed, at the time of the taking, in the use which is
asserted to be the highest and best, that proof of actual use
satisfies the requirement of showing the existence of a
demand for that use.
Id.
The court emphasized that there was nothing in the record to
suggest that the facility was unmarketable for its current use. Id. at 166.
It further noted that the taxpayer’s approach “would permit valuable
features presently being used to entirely escape their just share of the
burden of taxation.” Id.
A similar case is Nestle USA, Inc. v. Wisconsin Department of
Revenue, 795 N.W.2d 46 (Wis. 2011). In that case, the Wisconsin
Supreme Court considered the value of a plant used to manufacture
infant formula. Id. at 48. Nestle argued that there were no sales of
20
comparable manufacturing facilities and that as a result, the property
should be valued as a general food processing plant. Id. at 51. The
Wisconsin court rejected the taxpayer’s suggestion, noting that the fact
that there were no comparable sales did not demonstrate that there was
no market for the plant as an infant formula manufacturer. Id. at 57.
The court emphasized that the taxpayer failed to offer evidence that no
market existed for an infant formula manufacturing plant. Id. The
evidence did not establish that there was no market for an infant formula
manufacturing plant, only that there were no comparable sales to assist
in the evaluation of the property. Id.
Another case involving these principles is STC Submarine, Inc. v.
Department of Revenue, 890 P.2d 1370 (Or. 1995) (en banc). In that
case, the property was used for a manufacturing facility for marine fiber
optic cable. Id. at 1370. STC’s three existing competitors already owned
their own plants. Id. at 1371. As a result, STC argued that the property
should be valued as general-purpose industrial property and not as a
manufacturing facility for marine fiber optic cable. Id.
The Oregon court rejected the taxpayer’s argument. Id. at 1372–
73. The court reasoned that there was a possibility that existing
competitors or new entrants to the market would purchase the property.
Id. at 1372. According to the court, “[t]he building’s special features,
designed to accommodate [its current] use, are part of the property’s
value-in-exchange, because they increase the amount at which the
property would change hands in the marketplace.” Id. at 1374.
A third possible approach is to consider all proffered theories of
valuation in arriving at a proper assessment and simply to make a
judgment call of market value. A representative case is Supervisor of
Assessments v. U.S. Fidelity & Guaranty Co., No. 1263, 1978 WL 1493
 21
(Md. Tax Feb. 1, 1978). In that case, the trial court was to determine the
value of the headquarters of United States Fidelity and Growth Company,
a large insurance company. Id. at *1. The building itself was unusual,
attractive, and of superior quality. Id. The taxpayer recognized that the
property cost $56,000,000 to build but asserted that its market value
was $26,000,000. Id. at *3. The Maryland trial court raised the question
of whether the building should be valued as a prestigious home office
building of a major insurance company or as a commercial office building
available for rental with an anticipated profitable net income. Id. at *4–5.
In that case, the court seems to have given some credence to the
testimony of all experts in arriving at a middling value of $36,000,000.
Id. at *5. The approach of the Maryland trial court seems somewhat
undisciplined, but perhaps its candor should be applauded for avoiding
exaggerated claims of certainty and recognizing that valuation is, at best,
an educated guess. Cf. Joint Highway, 18 P.2d at 419 (noting that an
expert opinion that failed to recognize potential but not active demand for
property should be “weighed accordingly”).
IV. Relevant Iowa Statutes and Caselaw.
A. Iowa Statutes Related to Valuation. With the above
discussion providing context, we now turn our focus specifically to Iowa
tax statutes. Traditionally, Iowa statutory law provided that property be
taxed at “actual value.” “Actual value” was defined statutorily to mean
“value in the market in the ordinary course of trade.” Iowa Code § 1305
(1897). “Value in the market,” however, was not further defined in the
statute.
In 1959, the legislature replaced the “value-in-the-market”
approach for a broader “actual-value” framework for property tax
purposes. The 1959 legislation provided,
22
In arriving at said actual value the assessor shall take into
consideration its productive and earning capacity, if any,
past, present, and prospective, its market value, if any, and
all other matters that affect the actual value of the property
....
1959 Iowa Acts ch. 291, § 21 (codified at Iowa Code § 441.21 (1962)).
The 1959 statutory provision embraced an open-ended, totality-of-
circumstances approach to valuation. In considering “actual value,” the
assessor was required to take into account productive and earning
capacity, market value, and “all other matters” that affected “actual
value.” The meaning of “actual value” was not further defined. The lack
of legislative direction in the new statute gave assessors broad discretion
in determining the methodology to use in determining actual value.
The legislature again revised the provisions related to the meaning
of actual value in 1967 which remains part of our present Code today.
See Iowa Code § 441.21(1) (2015). This time, the legislature provided a
comparatively detailed framework for assessors in determining the actual
value of property. The 1967 legislation provided,
The actual value of all property subject to assessment and
taxation shall be the fair and reasonable market value of
such property. “Market value” is defined as the fair and
reasonable exchange in the year in which the property is
listed and valued between a willing buyer and a willing
seller, neither being under any compulsion to buy or sell and
each being familiar with all the facts relating to the
particular property. Sale prices of the property or
comparable property in normal transactions reflecting
market value, and the probable availability or unavailability
of persons interested in purchasing the property, shall be
taken into consideration in arriving at its market value.
1967 Iowa Acts ch. 354, § 1 (emphasis added) (codified at Iowa Code
§ 441.21(1) (1971)).
As is apparent, the 1967 legislation restored the emphasis of prior
law on “market value.” The legislature recognized, however, that there
23
could be some circumstances where the market value of taxable property
could not be readily established. Thus, the legislature enacted an
alternate approach to establishing actual value. Specifically, the
legislature provided,
In the event market value of the property being assessed
cannot be readily established in the foregoing manner, then
the assessor may consider its productive and earning
capacity if any, industrial conditions, its cost, physical and
functional depreciation and obsolescence and replacement
cost, and all other factors which would assist in determining
the fair and reasonable market value of the property but the
actual value shall not be determined by use of only one such
factor.
Id.
Under the 1967 legislation, then, market analysis is the preferred
method of determining actual value. If market analysis can provide a
reliable estimation of value, the process is at an end. “Other factors”
may be considered if, and only if, market value cannot be readily
established through the preferred market analysis. Once that threshold
has been crossed, the assessor may consider a broad range of factors,
but cannot rely solely on one such factor in determining “the fair and
reasonable market value” of the property, or “actual value.”
Although the 1967 legislature in its alternative approach to actual
value incorporated the other-factors approach generally embraced in the
prior statute, the legislature imposed limits on it. Specifically, the
legislature declared that the following shall not be taken into
consideration: “special value . . . of the property to its present owner, and
the good will or value of a business which uses the property as
distinguished from the value of the property as property.” Id.
As with all tax statutes, this provision must be read carefully. The
legislature did not prohibit consideration of all special value or all good
24
will or value of the business in valuing property. Instead, the legislature
prohibited only use of special value “to its present owner” and good will
or value of a business “distinguished from the value of the property as
property.” Id. Thus, where the special value is not limited “to its present
owner,” or where good will or the value of a business which uses the
property impacted the value of the “property as property,” the
prohibitions do not apply.
B. Iowa Caselaw Addressing Valuation Issues.
1. Caselaw prior to 1967. An illustrative case involving the law
prior to 1967 is Bankers Life Co. v. Zirbel, 239 Iowa 275, 31 N.W.2d 368
(1948). In Bankers Life, we considered the valuation for property tax
purposes of the Bankers Life Building in Des Moines. Id. at 276, 31
N.W.2d at 369. The Bankers Life property was considered the ultimate
in beauty and utility of design, featuring a gymnasium, an auditorium,
extra elevators, a pneumatic tube system, panel heating, auxiliary
lighting, and an unusual-capacity air conditioning system. Id. at 277–
78, 285, 31 N.W.2d at 369–70, 374.
The taxpayer claimed that valuation should be based on market
value. Id. at 280, 31 N.W.2d at 371. However, we noted that the statute
(at the time) was a multifactored statute in which actual value was not
necessarily the same as market value. Id. We noted that our state was
different from that in the Wisconsin case of Weiher, where the statute
simply declared that property should be valued at “full value which could
ordinarily be obtained therefor at private sale.” Bankers Life, 239 Iowa at
283, 31 N.W.2d at 372 (quoting Weiher, 188 N.W. at 598). Based on a
totality-of-factors approach, we concluded that we were not prepared to
say that the valuation of the building with a twenty-four percent discount
from actual cost was insufficient. Id. at 286, 31 N.W.2d at 374.
25
2. Cases interpreting special value or use under the current statute.
After the 1967 legislation, of course, the framework for considering
valuation for property tax purposes was altered. An important case
under the new statute was Maytag Co. v. Partridge, 210 N.W.2d 584
(Iowa 1973). There, we were called upon to consider the proper valuation
of the Maytag manufacturing facility in Newton. Id. at 586. With respect
to Plant No. 2, the parties did not discover any comparable sales. Id.
Therefore, valuation was based necessarily not on comparable sales but
on the other-factors statutory test. Id. at 596.
One of the important questions in Maytag was how the equipment
on the premises, which was considered part of the real estate for tax
purposes, should be valued. Id. at 586. One possibility was the value of
the equipment if sold on the used equipment market. Id. at 588. On the
other hand, the equipment arguably had more value than the sum of its
parts. Id. at 589. Maytag had a complete line of machinery in place and
functioning as an integral part of a profitable manufacturing
establishment. Id. We concluded that when an assessor considers the
use being made of property with a complete line of equipment as part of a
profitable enterprise, the assessor is merely following the rule that he
must consider conditions as they are in the valuation process. Id. at
590. By so valuing the property, the assessor was not violating the
statutory provision prohibiting considering special value or use because
the equipment was not “of peculiar value to the owner.” Id. at 591. The
equipment in place would have value to other competent home appliance
manufacturers that might acquire the property and operate the plant.
Id. We contrasted the use of Maytag equipment, which gave value to the
property, with “features and fancies” of personal delight to the owner that
added no value to the property for others. Id.
26
After Maytag, we again turned to the question of valuation of a
prestigious office building in Equitable Life Insurance Co. v. Board of
Review, 281 N.W.2d 821 (Iowa 1979). In that case, we considered the
value of the Equitable Life Insurance headquarters in downtown
Des Moines. Id. at 823. The taxpayer suggested that “no other
insurance company would want to occupy a building so closely identified
with Equitable” and therefore the Board improperly considered the
building’s current use in its evaluation. Id. at 824–25. While we noted
that the argument was contrary to Equitable’s experts, who valued the
premises based on similar use, we held that whether the prior use of the
building by Equitable as a signature corporate headquarters would scare
off potential buyers was a question of fact to be determined by the fact
finder. Id. at 825.
We considered other issues surrounding an office building in Ruan
Center Corp. v. Board of Review, 297 N.W.2d 538 (Iowa 1980). One of the
issues in that case was whether improvements made by tenants should
be considered in determining the value of the building. Id. at 541. The
improvements included such common things as new carpet and paneling
but also included more unusual improvements such as a bank vault and
an area for computers installed by Wellmark’s predecessor, Blue Cross.
Id. at 541–42. While we recognized that the tenant improvements might
not have value to every possible tenant, they were nonetheless not
unique to a specific property owner and thus were not within the scope
of the statutory prohibition of consideration of special value or use. Id.
at 542.
We contemplated whether it was improper to consider intangibles
in valuing property in Merle Hay Mall v. City of Des Moines, 564 N.W.2d
419 (Iowa 1997). In that case, the taxpayer challenged sales prices
27
considered in the valuation process for including intangibles such as
name recognition, the assembled work force, and the ability to attract
anchor stores. Id. at 423–24. We held that unless prohibited under Iowa
Code section 441.21(1) (1993), intangibles may be considered in valuing
the real estate with which they are associated. Id. at 424.
Finally, we revisited the question of whether valuation of property
at its current use improperly included intangibles in Soifer v. Floyd
County Board of Review, 759 N.W.2d 775 (Iowa 2009). In Soifer, we
emphasized that we had adopted “a narrow interpretation” of special use
or value that cannot be considered in valuating real property for tax
purposes. Id. at 786 n.6. We emphasized that in order for intangibles to
be excluded, they must have value to the owner that simply would not be
enjoyed by another party. Id. at 787. The fact that a valuable going
concern is located on the property and tends to increase the value of the
property does not mean that intangibles have been impermissibly
considered in the valuation process. Id. at 788.
3. Caselaw involving comparable property. We have had a number
of cases dealing with what might be considered comparable sales under
the preferred-market test in the Iowa statutory regime. We have
generally held that comparable sales are not strictly limited to a specific
geographic area. For instance, in Bartlett & Co. Grain v. Board of Review,
we held that in a highly competitive industry, sales of terminal elevator
properties in the geographic area that includes the Midwest were
sufficiently similar to amount to comparable sales. 253 N.W.2d 86, 90
(Iowa 1977). We have similarly held that assessors cannot artificially
limit searches for comparable sales to the city in which the property is
located, declare there are no comparable sales, and then seek to employ
an other-factors analysis in determining value. Compiano v. Bd. of
28
Review, 771 N.W.2d 392, 396 (Iowa 2009); Carlon Co. v. Bd. of Review,
572 N.W.2d 146, 149–50 (Iowa 1997).
We have also held that comparable sales do not need to be
identical, but only similar to the subject property. The key case on this
issue is Soifer, 759 N.W.2d at 775. In Soifer, we considered the value of
property in Charles City where a McDonald’s franchise was located. Id.
at 778. We noted that comparable properties did not need to be
identical, but only similar. Id. at 783. Factors to be considered include
size, use, location, and character. Id. We declared that whether
properties were sufficiently similar to be comparable was generally left to
the sound discretion of the district court. Id. Specifically, we found that
although sales of franchise properties might be the most similar based
upon current use of the property, that did not mean that sales involving
non-franchise restaurants were not similar. Id. at 783–84. We
concluded that when the properties are reasonably similar and an expert
says they are sufficiently comparable for appraisal purposes, the sounder
course was to leave dissimilarities to examination and cross-examination
rather than exclude the testimony altogether. Id. at 784. The mere fact
that sales might be considered comparable, however, did not necessarily
mean that valuation based on them was credible. Id.
4. Iowa cases where value cannot be readily established by market
data. In several cases, we have noted that a party cannot move to other-
factors valuation unless a showing is made that the market value of the
property cannot be readily established through market transactions. In
Compiano, expert witnesses relied on income capitalization to establish
value but did not show that there were no comparable market
transactions to establish market value. 771 N.W.2d at 398–99. We
concluded that this technique amounted to a substitution of a new
29
approach for that adopted by the legislature. Id. at 398. Similarly, in
Carlon, we held that the burden of persuasion rests on the party seeking
to show that market data cannot readily establish market value before
proceeding to the other-factors approach to valuation. 572 N.W.2d at
150.
V. Application of Principles to Wellmark Property.
A. Whether Market Value Was Not Readily Established. We
begin our discussion with the question of whether the market value of
the Wellmark property could not be “readily established” through market
analysis. See Iowa Code § 441.21(2) (2011). We conclude that in this
case, the value of the building simply could not be readily established by
a comparable-sales analysis. On the one hand, Wellmark’s experts
utilized transactions from similar geographic markets, but the
transactions involved office buildings dedicated to multitenant use.
Further, Wellmark’s experts were required to make substantial
adjustments with respect to comparable sales in order to support their
analysis.
On the other hand, the Board’s expert, Korpacz, presented single-
occupant sales of large office buildings in large metropolitan areas that
are simply not very indicative of the value of property in the much
smaller Des Moines market. Further, some of his comparable sales
involved property subject to a long-term lease, thus clouding
comparability and raising the question of whether the buyer was
interested in the property or the income stream generated by an
advantageous lease. We therefore conclude that the district court
correctly considered other factors in its effort to establish the value of the
properties.
30
B. Application of Other-Factors Approach. We now turn our
attention to application of the other-factors approach in this case.
On balance, based on our de novo review of the entire record, we
conclude that the $99-million valuation of the building is supported by
the record. We embrace the view that the property should be valued
based on its current use. That is the principle articulated in Maytag and
Soifer, where we valued a large manufacturing concern and a franchised
restaurant. In those cases, we resisted efforts by the taxpayers to depart
from their current use in the valuation of their property. We decline to
employ a use other than current use here as well.
Our approach does not incorporate the value of prohibited
intangibles into the appraisal. Although the legislature has prohibited
consideration of special value and good will, we have narrowly construed
these exceptions. Soifer, 759 N.W.2d at 786 n.6. If improvements to a
property are not merely valuable to the specific owner but would be of
value to others, such improvements should be recognized in the
valuation process. As in Equitable Life, the office space and
improvements on the Wellmark property “could readily be used by any
large enterprise desiring to house its home office under one roof.”
Equitable Life, 281 N.W.2d at 825.
It is true, of course, that the market for the Wellmark property for
use as a single-tenant office building may be limited. But we think the
fact that the property is currently being successfully used as a single-
tenant corporate headquarters cannot go unnoticed. Current use is an
indicator that there is demand for such a structure. See Ford Motor, 10
N.J. Tax at 166–67. While no specific potential buyer has been
identified, we do not think there has been a showing of no market, but
only of no active market. We adopt the view of other jurisdictions that
31
under the circumstances, value should be based on the presumed
existence of a hypothetical buyer at its current use. CPC Int’l, 473 A.2d
at 552.
Further, we find it ironic that the taxpayer, having expended more
than $150 million on its new corporate headquarters, now urges that the
property is worth less than half of that amount for tax purposes. As
noted by one court, “[g]iven a profit-minded owner with available
experience and resources, and a competent builder, the cost of
construction is likely to represent the value of the newly-finished
product.” Blakely v. Bd. of Assessors, 462 N.E.2d 278, 283 (Mass. 1984)
(quoting Joseph E. Seagram & Sons, Inc. v. Tax Comm’n, 238 N.Y.S.2d
228, 234 (App. Div. 1963) (Breitel, J., concurring)). We further note that
under the approach advocated by Wellmark, very expensive and costly
properties such as large manufacturing concerns could escape fair
taxation on the ground of lack of a local market for a specific use.
Based on our de novo review of the record, we conclude that the
cost approach provides the best mechanism for determining market
value. There is no dispute that the building is appropriate as a corporate
headquarters for an insurance company. There is also no dispute that
the actual cost of the building was in the neighborhood of $150 million
and that there had been very little physical deterioration of the structure
as of the date of the assessment. Courts have often applied the cost
approach in determining the value of a single-tenant corporate
headquarters property when comparable sales were not available. See
Gen. Elec., 2005 WL 2081269 at *5; Aetna Life Ins., 2002 WL 377147 at
*8; CPC Int’l, 473 A.2d at 552; Beneficial Facilities Corp., 11 N.J. Tax at
378; Freedom Fed. Sav. & Loan, 801 P.2d at 812–13.
32
In order to overcome the Board’s assessment, we must be
convinced that substantial functional obsolescence occurred on the day
that the doors of the building opened. As in Bankers Life, where the
Board valued the property with a twenty-four percent obsolesce factor,
we do not think any reasonable depreciation of this new building can
bring the value below the $99 million established by the Board. Bankers
Life, 239 Iowa at 286, 31 N.W.2d at 374.
We recognize, of course, that there is no science in this
determination, only judgment based on the record before us. No doubt
the potential market participants for a 600,000-square-foot building are
limited. Nonetheless, we cannot say that there is no market for
corporate-headquarters-type buildings of this size, even if located in
Des Moines. A substantial discount in market value because of the lack
of an active market strikes us as unjustified by the current record. We
therefore agree, based upon our de novo review of the record, with the
Board’s assessment of $99 million. 3
VI. Conclusion.
For the above reasons, the decision of the district court is reversed.
REVERSED.
3Because of our conclusion that the Board met its burden on the valuation
question, we need not address whether the testimony of Wellmark’s experts shifted the
burden of proof to the Board under Iowa Code section 441.21(3)(b). For the purposes of
this appeal, we assume without deciding that the burden did shift but was satisfied by
the Board.