Title: Wilsonville Heights Assoc., Ltd. v. Dept. of Rev.

State: oregon

Issuer: Oregon Supreme Court

Document:

FILED:  November 3, 2005
IN THE SUPREME COURT OF THE STATE OF OREGON
WILSONVILLE HEIGHTS ASSOC., LTD.,
Respondent,
v.
DEPARTMENT OF REVENUE,
State of Oregon,
Appellant.
(OTC 4262; SC S50763)
En Banc
On appeal from the Oregon Tax Court.*
Argued and submitted November 8, 2004.
Robert W. Muir, Attorney-in-Charge, Salem, argued the cause
and filed the briefs for appellant.  With him on the brief were
Hardy Myers, Attorney General, Mary H. Williams, Solicitor
General, and Rochelle Nedeau and Marilyn J. Harbur, Assistant
Attorneys General.
Christopher K. Robinson, Lake Oswego, argued the cause for
respondent.  W. Scott Phinney, Lake Oswego, filed the brief for
respondent.
RIGGS, J.
The judgment of the Tax Court is affirmed.
*17 OTR 139 (2003)
RIGGS, J.
In this tax case, we decide whether the Oregon Tax
Court erred in selecting a particular methodology for determining
the assessable value of a low-income housing property for ad
valorem tax purposes.  The Tax Court found in favor of taxpayer,
Wilsonville Heights Association, Ltd., when it deducted the value
of federal restrictions on taxpayer's low-income housing property
from the property's unrestricted value to determine the taxable
interest in the property.  Wilsonville Heights Assoc., Ltd. v.
Dept. of Rev., 17 OTR 139 (2003).  The Oregon Department of
Revenue (department) appeals to this court pursuant to ORS
305.445. (1)  For the reasons that follow, we affirm the
decision of the Tax Court.
This court reviews Tax Court decisions for errors or
questions of law or lack of substantial evidence.  ORS 305.445. 
The following facts are undisputed.  In 1985, taxpayer purchased
a parcel of land in Wilsonville, Oregon, and then built on that
land a 24-unit low-income housing project pursuant to section 515
of the Federal Housing Act of 1949 (515 Program).  42 USC § 1485
(1985).  The 515 Program enables developers to obtain financing
for such housing projects under the following terms:  (1) the
owner contributes five percent of the initial project cost; (2)
the federal government provides the remaining costs through a
guaranteed, nonrecourse loan; (3) the loan may not be prepaid for
20 years, and the owner may not refinance the project while the
government's regulatory agreement is in effect; (4) the agreement
limits the rent that owners may charge and limits the tenants to
those with incomes in a specified range; (5) all cash flow first
must be applied to loan servicing, project maintenance and
operating costs, and making required payments to a government-owned reserve account; (6) if sufficient funds remain after
making all required expenditures, the owner is entitled to an
equity dividend payment of no more than eight percent of the
owner's initial contribution; (7) the owner's annual income never
may exceed that set equity dividend amount; (8) the government
provides an interest rate subsidy so that the owner effectively
pays only one percent of the loan interest; (9) the owner may
transfer the property subject to governmental control of all
aspects of the transaction including terms, sale price, and
preapproval of the buyer; and (10) any government-approved buyer
of the property receives the same loan support and is required to
comply with the same program restrictions.  
In this case, taxpayer's five percent down payment was
$35,500; the government guaranteed a loan for the remaining
$674,500 in costs to build the project; the loan interest rate
was 10.625 percent and the government paid 9.625 percent of that
interest; and the taxpayer was entitled to an annual equity
dividend amount of $2,840.  Taxpayer received that dividend
payment in only two of the first six years of operation. 
Additionally, during the tax years at issue in this case, there
was no ascertainable market for low-income housing
properties. (2)
In the tax years 1992-93, 1993-94, and 1994-95, the tax
assessor valued taxpayer's property at $706,900, $735,170, and
$816,030, respectively.  Taxpayer sought a reduction in the real
market value assessment of the property for all three of those
tax years.  In response, the department reassessed the property
at $700,000, $728,000, and $757,120, respectively.  Taxpayer
appealed that assessment to the Tax Court, arguing that the
department failed to consider the governmental restrictions on
the property when arriving at its real market value computation. 
Taxpayer alleged that the government's restrictions reduced the
real market value of the property to $225,000 for each of the
three tax years.
The Tax Court first concluded that the proper valuation
of a federal low-income housing property for ad valorem tax
purposes must establish the value of the property without
restrictions (VPWR) and then reduce that figure by the value of
the government's restrictions or interest (VGI).  Wilsonville
Heights Assoc., 17 OTR at 148.  The resulting figure would be the
value of the taxable interest (VTI) in that property.  Id.  
The Tax Court then proceeded to apply the formula
described.  Initially, and in the absence of evidence submitted
by the department, the court adopted taxpayer's market sales
figures for comparable unrestricted rental properties to
determine VPWR during the three tax years at issue.  Id. at 149.
The Tax Court then turned to the task of determining
the value of the government's interest, or VGI, in the project. 
The court first assumed that the government's interest was 
"defined and protected by the restrictions on rent, operations,
and other matters" and that the government, in essence, "pa[id]
for" those restrictions by providing its loan support.  Id. at
146.  Therefore, the court concluded that the value of the
government's restrictions would be equal to the sum of the values 
of the government's interest subsidization plus loan guarantee. 
Id. at 150.  The court could determine with reasonable certainty
the present value of the government's interest subsidy payments,
but found that it could not quantify the market value of the loan
guarantee.  Id. at 150-51.  Thus, the court looked to the
exchange between the government and taxpayer to obtain a figure
for VGI by analogizing to the "presumed equivalency" concept from
Internal Revenue Code (IRC) §1031 exchanges. (3)  Id. at 151. 
That is, the court assumed that, in an arm's-length transaction,
taxpayer surrendered market rents to obtain the government's loan
support; the present value in lost rents may be presumed
equivalent to the value of the government's loan support.  Id. 
Because the court found taxpayer's figures for the present value
of lost rents (PVLR) to be reliable, it then substituted those
known values for VGI in each tax year.  Id. at 151, 153.  The
court thereafter concluded that the taxable interest for the
years 1992-94 were as follows:
Id. at 153.
The Tax Court confirmed that its use of the PVLR figure
to reduce unrestricted property values in each tax year
accurately depicted the market reality of the subject property
because, (1) PVLR reflects that an owner's property interest
increases as the expiration of the government restrictions draws
nearer; and (2) PVLR fluctuates with market rents.  Id. at 151-52.  
In comparing the VTI values derived from the foregoing
approach, the Tax Court next utilized the income approach to
valuation suggested by both parties and adopted the
capitalization rate developed by taxpayer's appraiser.  Id. at
154, 156, 159.  Employing both direct and yield capitalization
methods, the court found comparable values to those derived from
the "VPWR - VGI = VTI" approach.  Id. at 154-62.  The court
issued a judgment consistent with taxpayer's pleadings and set
the real market value of taxpayer's property at $225,000 for all
three tax years. (5)  Id. at 163.  The present appeal followed.
On appeal, the department argues that the Tax Court
erred by (1) determining that the federal restrictions on the
subject property "constitute property of the federal government
that is exempt from ad valorem property taxation"; and (2)
failing to include in that formulation the "benefits" of the
government's financing agreement.  The department asserts that
the Tax Court's method for determining the real market value of
the property was not authorized by statute, administrative rule,
or this court's case law, and that it was not consistent with
either of the parties' contentions.  The department's briefing
focused solely on the Tax Court’s "VPWR - VGI = VTI" method.
Taxpayer responds that (1) the Tax Court never held
that governmental restrictions constitute property interests that
are exempt from ad valorem taxation but, rather, that it made a
factual determination in accordance with applicable law that such
restrictions reduce taxpayer's assessable interest in the
property; and (2) the Tax Court correctly determined under the
applicable law that the government's financing support does not
affect the property's open market value and should not be
considered "benefits" that increase the taxable interest in the
property.  Accordingly, taxpayer argues that the Tax Court made
only factual determinations that are beyond the scope of this
court's review.  ORS 305.445.  
We first note that the Tax Court employed multiple
methods for valuing the subject property:  in addition to its
"VPWR - VGI = VTI" approach, it employed two income approaches
utilizing both direct and yield capitalization methods.  The
department assigns error to only the Tax Court’s "VPWR - VGI =
VTI" approach.  We limit our inquiry to that approach. (6)  
We agree with taxpayer that the Tax Court did not hold
that the government's restrictions constituted a property
interest; neither did it hold that the extent of the government's
interest was exempt from taxation.  The "government interest," as
we understand it, is merely a value that the Tax Court assigned
to the government's restriction on taxpayer's use of the
property.  The Tax Court, in turn, reduced the unrestricted
property value by that amount.  The term and its calculation were
simply tools in describing value. 
However, this court must decide whether the Tax Court
correctly applied the law to the facts in this case.  State v.
Barnum, 333 Or 297, 302, 959 P3d 178 (2002) (when scope of review
is for errors of law, the reviewing court decides whether trial
court applied legal principles correctly to facts).  Accordingly,
the fundamental question before this court is whether the Tax
Court made its real market value determinations for taxpayer’s
low-income housing property consistently with applicable
statutes, rules, and case law.  Within that single inquiry, we
will address the department's second assignment of error as well,
that is, whether the Tax Court erred by failing to include the
government's loan support as a taxable "benefit" to taxpayer. 
Because the Tax Court's methodology involved reducing, rather
than increasing, taxpayer's assessable interest by an amount
presumed to be equivalent to the government's loan support, our
review of the court's methodology necessarily addresses that
second assignment of error.  We turn to that inquiry.
ORS 308.205(2) (1991), amended by Or Laws 1993, ch. 19,
§6; 1997, ch. 541, §152, (7) provided:
"(1) Real market value of all property, real and
personal, as the property exists on the date of
assessment, means the minimum amount in cash which
could reasonably be expected by an informed seller
acting without compulsion from an informed buyer acting
without compulsion, in an arm’s-length transaction
during the fiscal year.
"(2) Real market value in all cases shall be
determined by methods and procedures in accordance with
rules adopted by the Department of Revenue and in
accordance with the following:
"* * * * *
"(c) If the property has no immediate market
value, its real market value is the amount of money
that would justly compensate the owner for loss of the
property.
"(d) If the property is subject to governmental
restriction as to use on the assessment date under
applicable law or regulations, real market value shall
not be based upon sales that reflect for the property a
value that the property would have if the use of the
property were not subject to the restriction unless
adjustments in value are made reflecting the effect of
the restrictions."
Oregon Administrative Rule (OAR) 150-308.205-(A)(2) (8) provides the department's methods and procedures for
determining real market value.  That rule provides, in part:
"(a) For the valuation of real property all three
approaches--sales comparison approach, cost approach,
and income approach--must be considered. For a
particular property, it may be that all three
approaches cannot be applied, however, each must be
investigated for its merit in each specific appraisal.
"* * * * * 
"(c) 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.  When
nontypical market conditions of sale are involved in a
transaction (duress, death, foreclosures, interrelated
corporations or persons, etc.) the transaction will not
be used in the sales comparison approach unless market-based adjustments can be made for the nontypical market
condition.
"(d) If there are no market transactions of
property comparable to the subject, then it is still
appropriate to use market value indications derived by
the cost, income or stock and debt approaches."
The department argues that the Tax Court erred because
it failed to determine the value of the whole property pursuant
to ORS 308.205(1).  The department asserts that, based on that
provision, "market value is the amount in cash that reasonably
could be expected to be paid by an informed buyer to an informed
seller."  However, the department's argument ignores additional
provisions set forth in ORS 308.205(2) that are relevant to a
proper determination of taxpayer's assessable property
interest. (9) Particularly, we agree with taxpayer that,
consistently with ORS 308.205(2)(d) and this court's case law
construing that provision, the Tax Court must determine real
market value by making value adjustments "reflecting the effect
of the [government's] restrictions" on the subject property.  ORS
308.205(2)(d). (10) 
In Bayridge Assoc. Ltd. Partnership v. Dept. of Rev.,
321 Or 21, 892 P2d 1002 (1995), this court held that a property
owner's voluntary participation in the government's low-income
housing program constituted a "governmental restriction as to
use" that required a reduction in the assessed value of that
property pursuant to ORS 308.205(2) (1989), amended by Or Laws
1991, ch. 459, §88; 1993, ch. 19, §6; 1997, ch. 541, §152. (11) 
In Bayridge, that taxpayer's property was subject to restrictions
similar to those present in this case: a limitation on rents that
owner could charge, a limitation on the pool of tenants to whom
owner could rent apartments, and terms that were binding on the
owner for a period of years.  321 Or at 29-30.
The department fails to distinguish, let alone
acknowledge, this court's holding in Bayridge.  Instead, the
department argues that, rather than subtract the value of the
government's restrictions from the real market value assessed
against taxpayer, the Tax Court merely should determine real
market value "in light of those restrictions."  That is a
distinction that seems to us to make no difference.  This court
already determined in Bayridge that low-income housing
restrictions constitute the type of restrictions contemplated by
ORS 308.205(2)(d).  Id. at 31.  That statutory provision also
expressly requires that  property subject to those restrictions
must be adjusted by a value "reflecting the effect of the
restrictions."  ORS 308.205(2)(d).  Therefore, the Tax Court
correctly determined that taxpayer's assessable interest in the
property must reflect the reduction in value caused by the
government's restrictions.
The department argues finally that, contrary to ORS
308.205(2), the Tax Court failed to follow the methods and
procedures set forth in OAR 150-308.205-(A)(2) for determining
real market value.  The department argues that the Tax Court's
valuation method was contrary to the mandate of paragraph (a),
which requires that in "the valuation of real property[, the]
sales comparison approach, cost approach, and income approach [] 
must be considered."  However, that provision further recognizes
that there may be instances in which "all three approaches cannot
be applied" and, consequently, the provision requires only that
an appraiser "investigate[]" those approaches in each specific
appraisal.  OAR 150-308.205-(A)(2)(a). 
Additionally, OAR 150-308.205-(A)(2)(c) provides that,
"[i]n utilizing the sales comparison approach[,] only actual
market transactions of property comparable * * * or adjusted to
be comparable, will be used."  That rule gives no specific
guidance as to how those adjustments should be made, except that
figures "must be verified to ensure they reflect arm[']s-length
market transactions."  Id.  OAR 150-308.205-(A)(2)(d) then
provides that, in the absence of comparable market transactions,
"it is still appropriate to use market value indications derived
by the cost, income or stock and debt approaches."    
In this case, the Tax Court first adopted taxpayer's
figures for market sales of unrestricted properties.  Then,
consistently with OAR 150-308.205-(A)(2)(c), the court adjusted
those figures "to be comparable" to the subject property when it
deducted the value of the governmental restrictions, or its
presumed equivalent, from those unrestricted property values. 
Although the rule requires that such an adjustment be made, the
rule does not prescribe any particular method or procedure for
developing a value for that adjustment.  Accordingly, the Tax
Court did not make its property value adjustments contrary to any
method or procedure prescribed, but in the absence of such
specification.  
Ultimately, the Tax Court's methodology became an issue
of evidence.  The court found that department's appraisers
employed methods that (1) "consistently refused to consider
conventional indicators of value"; Wilsonville Heights Assoc., 17
OTR at 149;  (2) utilized only one type of income approach that
was "wholly inadequate" (and appears to us to be contrary to the
rule); id. at 152; (3) generated results that failed to "take
into account the decreasing value of the government interest or
the impact of termination of the government interest"; id. at
153; and (4) "completely ignore[d ]whether the value of the
[taxpayer]'s interest might change depending on the level of
market rents generally or the condition of the property."  id.  
On the other hand, the Tax Court found that taxpayer's
appraiser had utilized "conventional and accepted methods" and
had developed more credible market data.  Id. at 149.  The court
further relied on taxpayer's expert witness for the present value
of lost rent figures when determining the total value that a
project owner surrenders to obtain the government's
participation.  Id. at 151 n 17.  Based on those factual
findings, the Tax Court utilized the more credible evidence
within a methodology that the court believed complied with the
relevant rules.  On the record that the parties created, the
department has not shown us how that belief was misplaced.
Finally, and most importantly, the Tax Court did not
develop its "VPWR - VGI = VTI" methodology to the exclusion of
other prescribed methods or procedures.  Instead, under the
authority of OAR 150-308.205-(A)(2)(d), the court employed
"market value indications derived by * * * the income approach" -- a valuation method suggested by both parties.  Following that
approach, the court further employed both a direct capitalization
method and a yield capitalization method in verifying that all
the figures that it had obtained were consistent.  Thus, as
required by OAR 150-308.205-(A)(2)(a), the Tax Court investigated
and considered adequately multiple valuation methods and
procedures.     
In summary, we do not find the department's challenges
to the Tax Court's analysis or conclusions in this case to be
well-taken.  We hold that the Tax Court determined taxpayer's
assessable interest in the low-income housing property at issue
in accordance with the applicable statutes, rules, and this
court's case law.  
The judgment of the Tax Court is affirmed.
1. ORS 305.445 provides, in part:
"The sole and exclusive remedy for review of any
decision or order of the judge of the Tax Court shall
be by appeal to the Supreme Court. * * * The scope of
the review of either a decision or order of the Tax
Court judge shall be limited to errors or questions of
law or lack of substantial evidence in the record to
support the Tax Court’s decision or order."
2. The Tax Court noted that changes in the 1980's to
governmental regulations affecting low-income housing properties
might have contributed to the lack of market for such properties. 
Wilsonville Heights Assoc., 17 OTR at 142.  In any event, neither
party submitted evidence of open-market sales of similarly
restricted properties, nor do they dispute the absence of an
immediate market for such properties.
3. Rather than cite the entirety of that code section, we
assert here, as did the Tax Court, the more succinct description
of the concept provided in Philadelphia Park Amusement Co. v.
U.S., 126 F Supp 184, 130 Ct Cl 166 (1954).  Put simply, "the
value of * * * two properties exchanged in an arm[']s-length
transaction are either equal in fact, or are presumed to be
equal."  Wilsonville Heights Assoc., 17 OTR at 151 (quoting
Philadelphia Park, 126 F Supp at 189). 
4. The listed figures correct the 1993-94 VGI and VTI figures
set out in the Tax Court's opinion.  That court had noted in its
opinion that taxpayer's original PVLR/VGI figures were in error
for 1993-94, and that the court would address the issue in
supplemental proceedings.  Id. at 153 n 22.  We include the
corrected figures here but note that they do not alter the Tax
Court's analysis or final determination.
5. The Tax Court's actual value determinations were lower than
those alleged by taxpayer in its pleadings; however, the court
determined that it could not issue a judgment with figures below
those alleged.  Id. at 163 (citing Chart Development Corp. v.
Dept. of Rev., 16 OTR 9, 14-15 (2001) (to avoid unfair surprise
and interference with department's ability to perform statutorily
mandated supervisory function, Tax Court limits party to relief
sought in pleadings)).  Neither party in this case questions that
determination on appeal. 
6. In oral argument before this court, the department further
contended that the Tax Court had erred by adopting the
capitalization rate developed by taxpayer's appraiser, rather
than that developed by the department's appraiser, when that
court utilized the income approach to valuation suggested by both
parties.  The department did not assign error to the Tax Court's
income approach to valuation, and its written arguments made 
exclusive reference to the "VPWR - VGI = VTI" methodology. 
Accordingly, we will not consider the department's argument
concerning the appropriate capitalization rate and income
approach here.  See ORAP 5.45 (court's review limited to matters
assigned as error).  
7. Although the pertinent provisions remain relatively
unchanged, we refer here, and throughout the remainder of this
opinion, to the 1991 version of ORS 308.205(2) that is applicable
to this case.
8. We refer to the current version of the rules because the
department has provided in OAR 150-305.100-(B) that: 
"[a]dministrative rules adopted by the department,
unless specified otherwise by statute or by rule, shall
be applicable for all periods open to examination."
See also U.S. Bancorp v. Dept. of Rev., 337 Or 625, 639, 103 P3d
85 (2004) (department's intent to have rule apply retroactively
is clear after examining text and context of rule and OAR 150-305.100-(B)). 
9. In this we agree with the Tax Court's observation that the
"department confuses the value of the property with the value of
the taxable interest."  Id. at 153 n 21. 
10. Although the Tax Court expressly stated that paragraph 
(c) applies in this case (Id. at 146), the court did not address
a pertinent inquiry of that paragraph, viz., whether the figures
at issue also would "justly compensate the owner for loss of the
property."  ORS 308.205(2)(c).  However, neither party challenges
or argues in favor of the Tax Court's analysis based on the
applicability of that provision.
11. ORS 308.205 (1989) did not differ substantively from ORS
308.205(2) (1991), the provision at issue here.