TC-MD 100161B.In the Oregon Tax Court. Magistrate Division, Property Tax.
November 30, 2011.
DECISION
ALLISON R. BOOMER, Magistrate Pro Tempore.
Plaintiff appeals the real market value of commercial property identified as Account R26481 (subject property) for the 2009-10 tax year. A trial was held in the Tax Courtroom, Salem, Oregon on July 20, 2011. William L. Ghiorso, Attorney at Law, appeared on behalf of Plaintiff. Alex Rhoten (Rhoten), a commercial real estate broker in Salem, Oregon, and Charles Sides (Sides), managing member of Plaintiff, testified on behalf of Plaintiff. Scott A. Norris, Assistant County Counsel, appeared on behalf of Defendant. Thomas D. Rohlfing (Rohlfing), Senior Commercial Property Appraiser, testified on behalf of Defendant. Plaintiff did not provide any exhibits. Defendant’s Exhibit A was received without objection.
I. STATEMENT OF FACTS
The subject property improvement is a two-story warehouse converted into office space (building) that is 103,888 square feet in size. (See Def’s Ex A at 1.) Sides testified that the building was constructed in 1993 or 1994. Plaintiff bought it for about $4 million in 1994 or 1995; it was previously a hardware store. Sides testified that Plaintiff spent about $2 million on a remodel, including running a concrete floor through the middle of the building. Sides testified that he had the State of Oregon (State) in mind as a tenant when Plaintiff remodeled the building. The building is entirely open space with a few bathrooms and conference rooms. Sides testified
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that Plaintiff’s tenant, the State, provided cubicles to create office space. All cubicles and furniture in the building belong to the State and will be removed if the State leaves.
Sides testified that he is the managing member of Plaintiff and that there is one other member. He testified that Plaintiff is a “single asset” LLC that manages only the subject property. Sides testified that Plaintiff’s past projects include the Robertson building (which is state-occupied), Keizer Station, and the Willamette Valley Bank. He testified that he is familiar with real estate in Salem, Oregon.
A. Subject property lease
Sides testified that Plaintiff began leasing the subject property to the State in 1995; the primary tenant has always been the State, but there have been two different State agencies. As of January 1, 2009, 101,768 square feet were leased by the State and approximately 2,000 square feet were leased by the Broadway Café. (Def’s Ex A at 1, 2.) Sides testified that the building is only suitable for a single large tenant. He testified that, currently, there are only about two years left on the State’s lease; that creates uncertainty about the future because no one knows what the State will do in terms of downsizing.
Sides testified that properties such as the subject property cannot be sold without an existing lease; prospective buyers need to know that there is a tenant in the building because that increases security. Sides testified that there are no tenants in the Salem area other than the State that would occupy the building; he would have to sell it as a large warehouse if it were unoccupied. Sides testified that Plaintiff’s lease with the State includes a “non-appropriations clause” stating, essentially, that the State cannot be sued if it breaks its lease. That clause makes potential buyers nervous even though the State, at least in the past, has been a reliable tenant.
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Sides testified that Plaintiff’s lease with the State is a modified gross lease; the State pays about $.30 per square foot of “operational costs” and Plaintiff pays the remainder. He testified that the actual expenses for the subject property are about $20,000 per month or $240,000 per year. Sides testified that it is very typical to have a modified gross lease with the State; the only triple net lease that Plaintiff has had with the State was with the Oregon State Police, but that is now over. Sides testified that State tenants want fixed costs due to the current budget situation.
Sides testified that Plaintiff’s lease with the State was extended once and that extension is currently in effect. He testified that he does not believe that there is another option for extension; the State is required, after a certain period of time or number of extensions, to renegotiate its lease and accept additional offers. Rohlfing testified that, based on his review of Plaintiff’s lease with the State, there is another option to extend the lease through 2018 with annual increases in rent. Sides testified on rebuttal that the option for a 5 year lease extension through 2018 is only in the lease because Plaintiff “begged” the State to include it; the option helped Plaintiff obtain financing. He testified that, “politically,” the State will not exercise options beyond 20 years because it has to renegotiate leases after 20 years.
B. Plaintiff’s offer and comparable sale
Sides characterized the building as a “large box” and testified that there are not many comparable sales. He testified that the sale of the “State Farm” building was the most recent comparable sale of which he is aware. Sides testified that the State Farm building is a large brick building that abuts Interstate 5; it is approximately 278,000 square feet, more than twice as large as the subject property. He testified that the State Farm building was sold in 2007 for approximately $13 million. Sides testified that the company that purchased the State Farm building initially made an offer of $11 million on the subject property, in late 2007. He testified
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that that offer fell through when the company failed to put up money at closing and ultimately, purchased the State Farm building instead. Sides testified that, as of January 1, 2009, there was no standing offer to purchase the subject property, as stated in the Totten appraisal.
Rohlfing testified that he believes Sides’s testimony regarding the $11 million offer on the subject property. He testified that an offer is not a sale; he would have analyzed the sale of the subject property for $11 million if it had occurred, but it did not. Rohlfing noted that the statement in the Totten appraisal concerning the $18 million offer for the subject property was important, but not decisive to his analysis of the subject property value.
C. Plaintiff’s market trend evidence
Rhoten testified that he is a commercial real estate broker and owner of the Salem Coldwell Banker Commercial. He testified that, for the past 25 years, he has completed a market survey of commercial real estate in the Salem area. Rhoten testified that he considers many factors to determine market values. He testified that he has observed a downward trend in the market for the past three years. Rhoten testified that, in late 2008, there was widespread uncertainty about the economy and financial institutions shut down. He testified that 2009 and 2010 were characterized by a lack of market activity. Rhoten testified that the only upward trends observed in that period were associated with certain “premium, gold-standard” properties, none of which exist in Salem.
Rhoten testified that the overall vacancy rate in the Salam office market is six percent. He testified that vacancy rates are higher for larger office properties, up to 18 percent. He testified that triple net leases are typical in the office market. Rhoten testified that, “not knowing the building, not understanding the current lease,” he would estimate a rental range of $.75 to $1.00 or $1.05 per square foot based on typical market rents. He testified that typical operating
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expenses are $.45 to $.60 per square foot. Rhoten testified that potential buyers in the market for single-tenant properties such as the subject property typically want an existing lease of at least 60 months because that reduces the risk of attrition; single-tenant properties as “all or nothing.”
D. Defendant’s value evidence
Rohlfing testified that, for taxation purposes, the value to be determined is the value of the “fee simple interest” in the subject property. He testified that, when valuing a fee simple interest, one must consider market rents, expenses, vacancy rates, and capitalization rates.
Rohlfing testified that he has physically inspected the subject property and also, that he has driven past the subject property. He testified that his appraisal of the subject property is largely “a review” and analysis of the “Totten appraisal” from 2008, contained in the Addenda to his appraisal. (See generally Def’s Ex A.) Sides testified that, in early 2008, Plaintiff engaged John Totten (Totten) to appraise the subject property for refinancing purposes. The Totten appraisal is as of February 27, 2008, and it concluded a value of $18,960,000. (Def’s Ex A Addenda at 1.) Rohlfing testified that he substantially agrees with the Totten appraisal, noting that the Totten appraisal included parcels not at issue in this appeal; a few “neighboring tax lots,” specifically. Rohlfing testified that he estimated the value of the tax lots not at issue in this appeal and “backed that out” of his income approach. He testified that he also “backed out” the value of an additional property substantially used as parking that is not at issue in this appeal.
Rohlfing testified that he estimated the land value of the subject property based on five land sales in Salem for prices ranging from $8.41 to $12.99 per square foot. (Def’s Ex A at 6.) The subject property is zoned Commercial Retail, as were two of the land sales identified by Rohlfing. (Id.) Rohlfing testified that only two of his five land sales are within the second half of 2008: land sale 1 occurred in September 2008, and land sale 5 occurred in October 2008. (Id.)
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Rohlfing testified that land sale 1 is on Madrona Street near the Salem Airport and the Fairview industrial park. He testified that land sale 1 is a good comparable for the subject property because, like the subject property, it is on the “fringe” of downtown Salem. Rohlfing testified that land sale 5 involved vacant land near the state fairgrounds. He selected a price of $9.40 per square foot for the subject property, for a land value of $1,760,700. (Id.)
Rohlfing testified that he agreed with the Totten appraisal income approach. He testified that Plaintiff signed a five-year lease extension with the State in October 2008, ending in September 30, 2013. Rohlfing testified that his income approach is based on the figures used in the Totten appraisal, including a five percent vacancy rate, a six percent expense rate, and a capitalization rate of 7.25 percent. (Def’s Ex A at 7.) He testified that, as Rhoten stated, there were very few sales around January 1, 2009, due to uncertainty in the market. Rohlfing testified that the 7.25 percent capitalization rate is in line with Defendant’s mass appraisals. He testified that he concluded a value of $18,139,100 and subtracted the value of the property not at issue for a value of $16,916,520 under the income approach as of January 1, 2009. (Id.)
Rohlfing testified that Totten completed an extensive sales comparison approach and concluded a value of $180 per square foot for the subject property. Rohlfing testified that he visited the comparable sales indentified by the Totten appraisal. He testified that all of the comparable sales in the Totten appraisal occurred in 2007, but that they are valid and still the best comparable sales. Rohlfing testified that he concluded a value of $18,699,840 under the sales comparison approach. (Def’s Ex A at 8.) Rohlfing testified that he agreed with Totten’s determination of the “reduced relevance of the cost approach.” (Id.) He testified that he concluded a value of $14,144,040 “based on a Marshall Swift depreciated cost value.” (Id.)
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Rohlfing testified that he gave the most weight to the income approach and determined a real market value of $16,950,000 for the subject property for the 2009-10 tax year.
Plaintiff requests a 2009-10 real market value of $11,000,000. Rohlfing concluded a 2009-10 real market value of $16,950,000 for the subject property. However, Defendant requests that the court sustain the 2009-10 real market value on the roll, $15,283,570. The subject property’s 2009-10 maximum assessed value and assessed value are both $10,978,380.
II. ANALYSIS
The issue before the court is the real market value of the subject property for the 2009-10 tax year. “Real market value is the standard used throughout the ad valorem statutes except for special assessments.”Richardson v. Clackamas County Assessor, TC-MD No 020869D, WL 21263620 at *2 (Mar 26, 2003) (citing Gangle v. Dept. of Rev., 13 OTR 343, 345 (1995)). Real market value is defined in ORS 308.205(1), which states:
“Real market value of all property, real and personal, means the amount in cash that could reasonably be expected to be paid by an informed buyer to an informed seller, each acting without compulsion in an arm’s-length transaction occurring as of the assessment date for the tax year.”[1]
The assessment date for the 2009-10 tax year was January 1, 2009 See ORS 308.007; ORS 308.210.
Plaintiff has the burden of proof and must establish its case by a preponderance of the evidence. ORS 305.427. A “[p]reponderance of the evidence means the greater weight of evidence, the more convincing evidence.” Feves v. Dept. of Revenue, 4 OTR 302, 312 (1971). “[I]t is not enough for a taxpayer to criticize a county’s position. Taxpayers must provide competent evidence of the [real market value] of their property.” Poddar v. Dept. of Rev.,
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18 OTR 324, 332 (2005) (citing Woods v. Dept. of Rev., 16 OTR 56, 59 (2002)). “[I]f the evidence is inconclusive or unpersuasive, the taxpayer will have failed to meet his burden of proof.” Reed v. Dept. of Rev., 310 Or 260, 265, 798 P2d 235 (1990). The Court has jurisdiction to determine the real market value of the subject property “based on the evidence before the court, without regard to the values pleaded by the parties.” ORS 305.412.
There are three approaches of valuation that must be considered in determining the real market value of a property even if one of the approaches is found to be inapplicable: the cost, income, and sales comparison approaches. See ORS 308.205(2); OAR 150-308.205-(A)(2). “[W]hether in any given assessment one approach should be used exclusive of the others or is preferable to another or to a combination of the approaches is a question of fact to be determined by the court upon the record.” Pacific Power Light Co. v. Dept. of Rev. (Pacific Power), 286 Or 529, 533, 596 P2d 912 (1979). Plaintiff’s evidence pertained to the income approach and, to some extent, the sales comparison approach. Rohlfing testified that he placed the most weight on the income approach, with secondary weight given to the sales comparison approach.
“The income method of valuation relies on the assumption that a willing investor will purchase a property for an amount that reflects the future income stream it produces.” Allen v. Dept. of Rev.
(Allen), 17 OTR 248, 253 (2003) (citation omitted). “The direct capitalization method * * * focuses on two key components: (1) the capitalization rate * * * and (2) net operating income[.]”Allen, 17 OTR at 253. Plaintiff did not provide a complete analysis of the value of the subject property using the income approach; rather, Rhoten and Sides testified to various components of the direct capitalization method, including actual expenses under Plaintiff’s lease with the State, vacancy rates in the Salem market, and typical rental rates for
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office properties. Plaintiff’s income approach evidence is incomplete and the court cannot determine value under the income approach based on the testimony of Rhoten and Sides.
As additional evidence of value, Sides testified concerning an offer to purchase the subject property for $11 million in late 2007. He testified that the offeror ultimately purchased a larger property, the State Farm building, for $13 million. “A recent sale of the property in question is important in determining its market value.”Kem v. Dept. of Rev., 267 Or 111, 114, 514 P2d 1335 (1973). “If the sale is a recent, voluntary, arm’s length transaction between a buyer and seller, both of whom are knowledgeable and willing, then the sale price, while certainly not conclusive, is very persuasive of the market value.” Id. OAR 150-308.205-(A)(2)(c) states requirements for the use of the sales comparison approach:
“In utilizing the sales comparison approach only actual market transactions of property comparable to the subject, or adjusted to be comparable, will be used. All transactions utilized in the sales comparison approach must be verified to ensure they reflect arm’s-length market transactions.”
In support of Plaintiff’s requested 2009-10 real market value of $11 million, Sides testified concerning a 2007 offer to purchase the subject property for $11 million and the subsequent purchase of the State Farm building for $13 million by the offeror. The 2007 offer to purchase the subject property is not an actual sale of the subject property. An offer to purchase the subject property is not irrelevant; however, the offer was made in 2007 and is not “recent” as of the January 1, 2009, assessment date. Furthermore, there is no evidence as to whether the 2007 offer to purchase the subject property represented the market value of the subject property. Sides testified that the offeror ultimately purchased the larger, “State Farm” building for $13 million. As with the 2007 offer to purchase the subject property, there is no evidence as to whether the State Farm sale was “arm’s-length.” Additionally, is not clear if the State Farm sale is “comparable to the subject, or adjusted to be comparable.” OAR 150-308.205-(A)(2)(c).
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The subject property’s 2009-10 real market value on the roll is $15,283,570 and the 2009-10 maximum assessed value is $10,978,380. Defendant concluded a 2009-10 value for the subject property that is greater than the 2009-10 roll real market value, but requests that the 2009-10 real market value be sustained. Plaintiff has not established by a preponderance of the evidence that the 2009-10 real market value of the subject property was $11 million. The evidence before the court supports the 2009-10 roll real market value of $15,283,570.
III. CONCLUSION
After carefully considering the evidence and testimony, the court finds that Plaintiff has failed to meet its burden of proof. The court further finds that the subject property’s 2009-10 roll real market value is supported. Plaintiff’s appeal must be denied. Now, therefore,
IT IS THE DECISION OF THIS COURT that Plaintiff’s appeal is denied.
Dated this ___ day of November 2011.
If you want to appeal this Decision, file a Complaint in theRegular Division of the Oregon Tax Court, by mailing to:1163 State Street, Salem, OR 97301-2563; or by hand delivery to: Fourth Floor,1241 State Street, Salem, OR.
Your Complaint must be submitted within 60 days after the date ofthe Decision or this Decision becomes final and cannot be changed.
This document was signed by Magistrate Pro Tempore Allison R.Boomer on November 30, 2011. The Court filed and entered this documenton November 30, 2011.
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