WH Development, LLC, and Hy-Vee, Inc. v. Polk County Board of Review

IN THE COURT OF APPEALS OF IOWA
No. 22-0826
Filed March 29, 2023
WH DEVELOPMENT, LLC, and HY-VEE, INC.,
Plaintiffs-Appellants,
vs.
POLK COUNTY BOARD OF REVIEW,
Defendant-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Polk County, Michael D. Huppert,
Judge.
WH Development, LLC and Hy-Vee, Inc. appeal the assessed value of a
Polk County property. AFFIRMED.
Richard A. Davidson and Brett R. Marshall of Lane & Waterman LLP,
Davenport, for appellants.
Kimberly Graham, Polk County Attorney, and Mark Taylor, Assistant Polk
County Attorney, Des Moines, for appellee.
Considered by Bower, C.J., and Badding and Buller, JJ.
2
BOWER, Chief Judge.
WH Development, LLC and Hy-Vee, Inc. (collectively Hy-Vee) appeal the
district court’s findings upholding the Polk County Board of Review’s (Board) 2019
real estate assessment of a store and property in Windsor Heights. We affirm.
I. Background Facts & Proceedings
The property subject of this appeal is a grocery store located in Windsor
Heights. The land consists of 7.091 acres (308,883 square feet). The building is
67,492 square feet, with an additional 3672 square feet of finished office, training,
and breakroom space on a mezzanine. The building was built in 1997 and has
since been remodeled and expanded. The parking lot at the front of the store has
348 parking spaces, and a smaller parking area is located at the back of the store.
In 1999, Hy-Vee sold the property for $7,500,000 to UTF Windsor Heights,
LLC, who executed a long-term lease to Hy-Vee. In 2007, UTF Windsor Heights,
LLC, sold the property to WH Development, LLC, for $8,200,000. In 2014, the
initial lease was extended to a thirty-year term with the potential for four five-year
renewals.1
The January 1, 2019 tax assessment for the property was $6,310,000, a
$400,000 increase from the 2018 tax assessment. 2 Hy-Vee protested the
assessment to the Board, asserting the property’s actual value was $3,155,000—
half the assessed value. The Board denied the protest “because the property is
1 Although the property has a long-term lease, the appraisals are done without
consideration of the lease.
2 The increase was part of a biennial appraisal of all commercial property
assessments by the assessor’s office under a separate statutory process.
3
not assessed for more than the value authorized by law.” Hy-Vee appealed the
assessment in district court.
Four appraisers were hired to offer opinions of the property’s value. Hy-Vee
hired certified appraisers Thomas Scaletty and John Olson, and the Board hired
Dennis Cronk and Russ Manternach. No objections were raised as to the
credentials of any of the appraisers, though each side argued the other’s experts
failed to follow the statutory scheme. Each expert analyzed the property using
three commonly-used valuation methods—comparable sales, cost, and income—
and then gave a final opinion of the property’s value.
Appraiser Comparable Cost Income Final Per
Sales Approach Approach Opinion of Sq.
Approach Value Foot
Scaletty $4,050,000 $4,040,000 $4,030,000 $4,050,000 $60
Olson $4,050,000 $4,550,000 $4,135,000 $4,135,000 $60
Cronk $6,190,000 $6,310,000 $5,870,000 $6,150,000 $873
Manternach $6,410,0004 $6,720,000 $6,750,000 $6,600,000 $95
After analyzing the evidence submitted, the court affirmed the Board’s
ruling, stating, “The [Board]’s evidence through its experts . . . is sufficient to
sustain its burden to uphold that assessment by a preponderance of the evidence.”
Hy-Vee appeals, requesting a valuation between $4,660,000 and
$5,210,000.
3 Cronk included the mezzanine space in his appraisal calculations; the other three
appraisers calculated using the general square footage of 67,492.
4 Hy-Vee’s briefing inexplicably states Manternach’s appraisal values are $470,000
to $650,000 higher than those found in the record before us.
4
II. Standard of Review
“Our review of a tax protest is de novo. ‘[W]e give weight to the [district]
court’s findings of fact, [but] we are not bound by them.’ We are especially
deferential to the court’s assessment of the credibility of witnesses.” Wellmark,
Inc. v. Polk Cnty. Bd. of Rev., 875 N.W.2d 667, 672 (Iowa 2016) (alterations in
original) (internal citations omitted).
III. Legal Background
“The valuation of property has never been an exact science. . . . Although
valuation for tax purposes is necessarily expressed in quantitative terms, the
appraisal process has never been and is not now a mathematical exercise.” Id.Iowa Code section 441.21(3)(b)(2) (2019) establishes the burden of proof
in tax assessment valuation challenges:
For assessment years beginning on or after January 1, 2018,
the burden of proof shall be upon any complainant attacking such
valuation as excessive, inadequate, inequitable, or capricious.
However, in protest or appeal proceedings when the complainant
offers competent evidence that the market value of the property is
different than the market value determined by the assessor, the
burden of proof thereafter shall be upon the officials or persons
seeking to uphold such valuation to be assessed.
Under Iowa law, all taxable property is valued at its “actual value”—i.e. “the
fair and reasonable market value.” Iowa Code § 441.21(1)(a), (b)(1).
“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. In arriving at market value, sale prices of property
in abnormal transactions not reflecting market value shall not be
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taken into account, or shall be adjusted to eliminate the effect of
factors which distort market value, including but not limited to sales
to immediate family of the seller, foreclosure or other forced sales,
contract sales, discounted purchase transactions or purchase of
adjoining land or other land to be operated as a unit.
Id. § 441.21(1)(b)(1).
Iowa law requires assessors “first seek to use a comparable-sales approach
in setting a valuation, and [the] other approaches should only be used when market
value cannot be readily determined using the comparable-sales approach.”
Nationwide Mut. Ins. Co. v. Polk Cnty. Bd. of Rev., 983 N.W.2d 37, 40 (Iowa 2022).
When valuing real property for tax assessments, the law
strives for fairness and uniformity, operating on the notion that similar
properties within a given tax classification should be taxed similarly.
Because courts reviewing challenges to valuations usually lack
technical expertise in appraising commercial real estate, these types
of cases often hinge on a factfinder’s judgment about conflicting
expert witness testimony.
Id. at 38.
“Ideally, appraisers would find a recent sale in the same geographic region
as their subject property of similar size, age, condition, and current use.” Id. at
43.5 Whether properties are sufficiently similar to be considered comparable is
“generally left to the sound discretion of the district court.” Wellmark, 875 N.W.2d
at 681. “The mere fact that sales might be considered comparable, however,
d[oes] not necessarily mean that valuation based on them [is] credible.” Id. at 682.
5 Hy-Vee argues the Board’s experts conflated “highest and best use” and “present
use,” and asks that we overrule supreme court case law listing current use as a
point of comparison. “We are not at liberty to overturn Iowa Supreme Court
precedent.” State v. Hastings, 466 N.W.2d 697, 700 (Iowa Ct. App. 1990); see
State v. Miller, 841 N.W.2d 583, 584 n.1 (Iowa 2014) (“Generally, it is the role of
the supreme court to decide if case precedent should no longer be followed.”).
6
“When sales of other properties are admitted, the market value of the
assessed property must be adjusted to account for differences between the
comparable property and the assessed property to the extent any differences
would distort the market value of the assessed property in the absence of such
adjustments.” Soifer v. Floyd Cnty. Bd. of Rev., 759 N.W.2d 775, 783 (Iowa 2009).
“If distorting sale factors or the points of difference between the assessed property
and the other property are not quantifiable so as to permit the required adjustment,
the other property will not be considered comparable.” Id. While a long-term lease
may cloud comparability, “an appraiser may make an adjustment to reflect the
effect of the lease on the value of the property.” Walmart, Inc. v. City of Davenport
Iowa Bd. of Rev., No. 21-1018, 2023 WL 1808504, at *6 (Iowa Ct. App. Feb. 8,
2023) (collecting cases discussing how to address leases in valuation). Similarly,
“[v]acant properties can be used as comparable sales if suitable adjustments are
made.” Id. at *5.
IV. Analysis
Hy-Vee presented reports and testimony from experts Scaletty and Olson
to support its claim the market value of the property was different from the
assessed value. The district court found this evidence sufficient to meet Hy-Vee’s
burden under section 441.21(3)(b)(2), and we agree. The burden of proof then
shifted to the Board to uphold the valuation.
“[T]hese types of cases often hinge on a factfinder’s judgment about
conflicting expert witness testimony.” Nationwide, 983 N.W.2d at 38. None of the
experts relied solely on comparable sales when reaching their “final value” of the
property, each including the income approach to some degree in their
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reconciliation. Scaletty’s report stated he relied significantly on the income
approach with the sales approach secondary, but also the sales-comparison
approach was weighted 75% and the income approach 25% in his market value
analysis.6 Olson’s report indicated he gave the sales-comparison approach
secondary weight to the income approach in valuing the property. Cronk gave
strong emphasis to sales-comparison and moderate emphasis to the income
approach. Manternach’s report stated the sales-comparison approach was a
credible indicator of value, and the income approach was also given consideration
because similar properties “are generally purchased based on their
income[-]producing potential.”
Despite all appraisers’ consideration of multiple approaches in their final
opinions, the district court determined “both sides have presented sufficient
evidence for the court to consider on the sales approach to market value, . . . and
there is no need for the court to address each expert’s evaluation under the cost
and income approaches.” While the experts gave the sales approach varying
weights in their analyses, each was able to identify available comparable sales to
gauge their approach using this method. The court observed the experts did not
agree on what a comparable sale should be and examined the sales considered
by each expert.
Scaletty utilized eight comparable sales in his analysis. While
four of the sales involved former grocery stores, none of the
properties had the same current use as the property at issue after
they were sold. Of the eight, Scaletty only took into account post-
sale expenditures on one of the sales (all of the properties were
6 Scaletty testified the language in his report saying the sales approach was
weighted secondary to the income approach was not accurate and should not be
considered.
8
vacant at the time they were sold). Two of the properties were former
Dahl’s[7] grocery stores and both were sold as part of their former
owner’s bankruptcy; Scaletty made no adjustment in the sales price
for these properties, concluding there was no evidence that these
transactions constituted distress sales.
Olson utilized six comparable sales in his analysis. Two of
the properties involved occupied grocery stores that were purchased
for that continued use; of these two, however, one was located in a
very small metropolitan area and was considerably smaller than the
subject property. While Olson did attempt to make adjustments in
the prices for the comparable sales, these were only qualitative in
nature (plus, minus or none) and he provided no percentage amount
for any adjustments. While such adjustments are allowed as an
appropriate appraisal methodology, they have been faulted in at
least one other jurisdiction as “not assist[ing] the court in either
evaluating an expert’s value conclusions or independently finding the
Subject’s value.” He did not make any adjustments for the three
former Dahl’s stores (the two utilized by Scaletty and a third in Ames
that was “essentially a land sale”) having been sold as part of an
underlying bankruptcy. While he did make some adjustments for
post-sale expenditures, he made no adjustment for the subject
property having a finished office mezzanine.
Cronk utilized four comparable sales in his analysis. The first
two sales represent two sides of the same overall transaction; sale
#1 was of a former Nebraska Furniture Mart location and #2 was a
former Price Chopper store that became the new location for
Nebraska Furniture Mart. In analyzing the second sale, Cronk
adjusted the $4 million sale price upwards to the tune of
approximately $2.3 million to reflect both additional remodeling
expense incurred by the seller (which increased the price) and
preexisting water damage as well as the buyer’s efforts to sell off a
lot on one end (which decreased the price). The last two sales both
involved leased fee sales where the property was sold with an
outstanding lease back to the seller. Cronk took into account the
market rent rates in the affected area in gauging whether the specific
lease rates justified any further adjustment; he concluded that the
price for sale #3 should be adjusted downward, but that no
adjustment was necessary for sale #4 on the basis of the lease price.
Manternach utilized five comparable sales in his analysis.
The first sale was a leased fee sale involving a Hy-Vee store in
Ankeny; Manternach made a downward adjustment in the price to
reflect the superior terms of the lease in relation to market conditions.
He also made an upward adjustment for time and changes in the
market (the sale took place in 2015 and conditions had improved in
7In 2015, Dahl’s Foods went out of business and liquidated multiple store locations
around the Des Moines metro area.
9
the interim), but also a downward adjustment for superior land to
building ratio and the sale location having additional amenities.
Manternach’s sale #2 was the same transaction as Cronk’s sale #2
(the purchase of a former Price Chopper store for use as a Nebraska
Furniture Mart location). He made upward adjustments to the sales
price for the inferior condition of the property, post-sale expenditures
and not having a finished mezzanine. He adjusted downward for the
comparable sale having a greater land to building ratio; his overall
adjustment was upward to the tune of approximately 29% to $89.63
per square foot. Of the remaining comparables, the third and fifth
were significantly adjusted upward overall from their sale prices due
to inferior location and condition, as well as not having a finished
mezzanine. The fourth comparable sales was a former grocery store
in Omaha that was converted to a Hobby Lobby store. Manternach
adjusted for post-sale expenditures of $1.5 million to make the
conversion. He also made adjustments upward for lower land to
building ratio and not having a finished mezzanine.
(Internal citations omitted.)
The district court clearly laid out the principles used to analyze the experts’
appraisals. “First, sales comparables that account for the present use of the
subject property are preferred over those that do not.” “Second, as a corollary to
the first point, comparable sales are not necessarily excluded from consideration
simply because they involve sale-leasebacks, if appropriate adjustments are made
to reflect the value of the fee simple interest of the owner.” The court then
concluded the Board’s experts “provided the more credible and persuasive
analysis as to the subject property’s actual market value,” and “[t]he [Board]’s
evidence through its experts, both collectively in terms of properly following the
statutory scheme, and most notably through the valuations of Manternach, is
sufficient to sustain its burden to uphold th[e] assessment by a preponderance of
the evidence.”
Hy-Vee contests the district court’s evaluations of the experts and their
reports. It asserts the court should have rejected the Board’s experts’ use of
10
leased-fee sales in their comparable sales and the adjustments the experts made.
Instead, Hy-Vee argues Scaletty’s and Olson’s comparable sales are accurate
reflections of market value for the property, particularly the Dahl’s Foods location
sales discarded by the Board’s experts as too old and distressed.
Contrary to Hy-Vee’s argument only fee-simple sales should be used as
comparable sales, we accept that leased-fee property sales can be considered as
long as appropriate adjustments are made.8 See Walmart, 2023 WL 1808504,
at *6. Cronk explained his adjustments to the leased-fee comparables and the
reasoning behind them, but he also testified he gave more weight to his fee simple
comparables from the Des Moines market. Only one of Manternach’s
comparables was a leased property, and he adjusted the market value downward
as appropriate to balance the lease.
Like the district court, we question some of the adjustment decisions by Hy-
Vee’s experts. Two sales both Scaletty and Olson relied heavily upon were 2015
sales of former Dahl’s Foods grocery stores. One of the properties was purchased
by a convenience store chain to build on and not for use as big box retail, and the
other was a foreclosure sale. See Iowa Code § 441.21(1)(b) (defining market
value as a sale where neither party is under compulsion to buy or sell, and
excluding or adjusting to account for market value distortion factors including
foreclosure). Hy-Vee’s experts did not consider these to be distress sales, and
neither made adjustments to arrive at a fair market value. The Board’s experts
both excluded the sales from their comparables, explaining to the court the sales
8Ironically, the sale of the property subject of this appeal would be categorically
excluded as a comparable sale for valuation under Hy-Vee’s theory.
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were a little older than they preferred to use and both appraisers considered them
to be “distress” sales made because the owning company went bankrupt. The
circumstances of the sales were abnormal, and Hy-Vee’s experts should have
adjusted to correct the market distortion before relying on the sales as sufficiently
comparable.
Although no comparable sale was used by all the appraisers in their
analyses, one used by Scaletty, Cronk, and Manternach illustrates differing
valuation approaches. The appraisers had differing information about the
condition of the property at the time of the sale. Scaletty was told it was in good
condition with no roof problems and an operational HVAC. Cronk evaluated the
sale with an understanding it had roof damage and was in poor condition and
therefore included remodeling costs as part of his valuation. Manternach also
testified the broker told him the store had been gutted and adjusted accordingly.
Their adjusted sale prices per square foot reflected these differing reports of how
close to usable the space was: Scaletty’s adjusted sale price per square foot was
$71.37, Cronk’s was $95.25, and Manternach’s was $89.63.
On our de novo review, and after examining the appraisals and various
comparable sales choices made by the experts, we find no basis to reject the
district court’s credibility determinations of the expert witnesses. The Board’s
experts’ comparable sales were appropriate, and their adjustments follow Iowa
law. We find their appraisals to be persuasive and sufficient to sustain the Board’s
burden of proof upholding the assessor’s valuation. We affirm the decision of the
district court.
AFFIRMED.