Opinion ID: 1147197
Heading Depth: 2
Heading Rank: 2

Heading: The Arguments Under Arizona Case Law

Text: 1. The Department's Argument: The Effect of Leases and Mortgages The department contends that deed restrictions should be treated like leases and mortgages and ignored for valuation purposes. Under established Arizona law, property burdened by long term leases or mortgages is not appraised at its potentially restricted selling price, but is compared to similar property without such burdens. See Steinfeld v. State, 37 Ariz. 389, 294 P. 834 (1930); Magma Inv. & Dev. Corp. v. Pima County, 128 Ariz. 291, 625 P.2d 354 (Ct.App. 1981); Caldwell v. Dept. of Revenue, 122 Ariz. 519, 596 P.2d 45 (Ct.App. 1979). Even if such encumbrances make a particular property more or less desirable to a prospective buyer, the assessed value for tax purposes is not affected. Caldwell, 122 Ariz. at 521, 596 P.2d at 47. This rule obtains despite the obvious fact that such encumbrances affect the price the owner could obtain in the market. Id. [3] The court of appeals declined to apply the rule for leases and mortgages, believing it premised on mere pragmatic considerations: If the assessor were required to consider leases and mortgages in his calculations, the difficult business of fixing value would be rendered even more complex. 162 Ariz. at 280, 782 P.2d at 1173. The majority of courts, however, has chosen to disregard the effect of leases and mortgages for more important reasons than the fear that the calculation would be too complex for the assessor. J. Youngman, Defining and Valuing the Base of the Property Tax, 58 Wash.L.Rev. 713, 718-19 (1983). Such encumbrances are ignored because taxes are assessed only against the property; [t]he basis for [disregarding the effect of leases] is that the tax is levied upon the land and is a tax upon all the interests into which the land might be divided.... Swan Lake Moulding Co. v. Department of Revenue, 257 Or. 622, 478 P.2d 393, 395 (1970) (cited in Caldwell, 122 Ariz. at 521, 596 P.2d at 47, to support holding that leases do not affect full cash value for tax valuation). Thus, because the tax is against the property itself, the fee owner's personal financial status is irrelevant. Youngman, supra, 58 Wash.L.Rev. at 719. The assessor is not concerned with whether the owner has borrowed funds to purchase the property, whether the owner has permitted a good or bad tenant to occupy it, or whether the owner's business operation is profitable or unprofitable. See generally id. and cases cited therein. 2. Rec Centers' Argument: The Effect of Easements on Valuation Rec Centers argues that the deed restrictions should be treated like easements and thus be considered in the assessed value of all Sun City property. See Arizona R.C.I.A. Lands, Inc. v. Ainsworth, 21 Ariz. App. 38, 41, 515 P.2d 335, 338 (1973); 1 J. Bonbright, Valuation of Property 496-97 (1937); Restatement of Property § 509 (1944). This argument is based on the testimony of one of Rec Centers' witnesses that the right to use the recreational property had enhanced the value of the Sun City homeowners' properties and had induced potential buyers to purchase homes in what had been an otherwise unattractive area at some distance from Phoenix. Thus, Rec Centers argues, the value of the recreational property has flowed through and is reflected in the value of the Sun City properties. The court of appeals was persuaded by this theory and held that the deed restriction was similar to a recorded easement that burdens one property and benefits another. 162 Ariz. at 281, 782 P.2d at 1174; see also Ainsworth, 21 Ariz. App. at 41, 515 P.2d at 338. Thus, the court concluded the value of Sun City property was enhanced by the right to use Rec Centers' property. But Rec Centers introduced no specific evidence or market data concerning the amounts by which residential property within Sun City was increased in value because of a right to use Rec Centers' property. The testimony of the witness was nothing more than his conclusion that the value of residential property in Sun City had been benefited to an unspecified degree by the proximity to and availability of the recreation property owned by Rec Centers. We note that to prove an increase in value of the homeowners' properties, Rec Centers would have to overcome a number of obstacles. First, each member of Rec Centers is burdened with the obligation of contributing to Rec Centers' maintenance. The effect of that burden as weighed against the benefit of membership is speculative; the record is silent respecting the value of the use of Rec Centers' facilities as offset by the homeowners' payment of monthly dues. Second, if Rec Centers wished to rely on its claim that Webb increased the price of Sun City homes to offset its improvement cost, it should have demonstrated that the increase made the homes more valuable than any other home in an equally desirable location in the vicinity. Purchasers of Sun City properties may have had other reasons for locating in the area, such as the atmosphere of a retirement community or the proximity of medical care or convalescent homes. Third, Rec Centers had to show how each of the homes benefited from the exclusive useavailability of the facilities. [4] This case differs from others cited by Rec Centers in which the property at issue was surrounded by a discrete number of homes that had the exclusive privilege of use of the recreational area. We are here confronted with an entire community. Moreover, even granting that the conclusion is correct, and property located near a golf course, with the right to use the course for a fee, may be worth more than similar property that has no such right, [5] we fail to see the relevance of this point. The question is not the assessed value of all Sun City residential property but rather the value of the recreational properties. Nor does case law support Rec Centers' flow through theory. The property burdened with an easement must be valued for tax purposes as its use is affected by the easement, just as the property benefited by the easement must be valued as its use is enhanced by the easement. See Alvin v. Johnson, 241 Minn. 257, 63 N.W.2d 22, 26 (1954). A similar arrangement existed in Locke Lake Colony v. Town of Barnstead, 126 N.H. 136, 489 A.2d 120 (1985) (restrictions on the use of a property, incorporated in the deeds and by-laws of a homeowners' association, created a right akin to an easement; held that the assessor had properly added the value of the servient estates to the value of the dominant estates). [6] Rec Centers has not offered evidence that the restriction created a quantifiable increase in value in any specific Sun City property. The taxable value of the servient property cannot merely evaporate, and the likelihood of even an actual easement rendering a servient property valueless is remote. See Lake County Bd. of Review v. Property Tax Appeal Bd., 91 Ill. App.3d 117, 46 Ill.Dec. 451, 414 N.E.2d 173 (1980) (simply because property benefits others does not mean the property has no value); In re Appeal of Neptune Township, 86 N.J. Super. 492, 207 A.2d 330 (1965) (even land subject to severely limited uses has some value  but that valuation should be determined on the basis of the restricted use). [7] Undoubtedly the restrictions in question affect value even if an easement has not been created. Thus, the question is whether the specific effect of the restrictions must be recognized by the assessor, and, if so, in what manner.