Opinion ID: 1215217
Heading Depth: 1
Heading Rank: 5

Heading: the folsom i opinion

Text: We conclude that Folsom I is not clearly erroneous. The opinion was ambiguous in one respect, however. We clarify the ambiguity, but affirm the holding of our prior opinion. Folsom I holds that both the lessor's and the lessee's interests should be valued in an assessment under RCW 84.40.030. The court determined that this should be done by calculating separate values for those two interests and then combining those values in a single assessment. The County and amici contend that this method violates the unit assessment rule. They contend that only valuation by an estimation of fair market value complies with RCW 84.40.030. The conclusion of Folsom I, that valuing both the lessee's and the lessor's interests does not in itself violate the unit assessment rule, is not clear error. The basic goal of assessment of leased property was stated by the court in Folsom I in this way: An estimation of the value of property subject to a lease focuses upon two major interests: (1) the interest of the lessor who owns the fee, and (2) the interest of the lessee occupying the leasehold. Further analyzed, the lessor's fee interest consists of (a) the right to receive contract rent, (b) the right of reversion, and (c) any right he might have to improvements at the end of the lease. The lessee's leasehold interest consists of (a) the right to occupy the leasehold, (b) the right to the difference between contract rent and higher market rent, and (c) any interest he might have in any improvements to the leasehold. Solis-Cohen, Jr., Appraisal of Leaseholds, in Encyclopedia of Real Estate Appraising 465, 473, 476-77 (1959). (Footnote omitted.) Folsom I, at 764. Both parties and amici agree that this correctly states the goal in this case. However, the County contends that this court erred in adopting a methodology which separates, values and then recombines the lessee's and lessor's interests. [1] First, the County argues that considering the interests of the lessee violates the requirements of RCW 84.40.030 and WAC 458-12-300 and -301, which prescribe assessments based on what a willing buyer would pay a willing seller, taking into account income available from prudent use of the property. The County contends that only the capitalization of fair market rent can produce the intrinsic value of the property. The fragmentation of property interests and use of formulas to separately determine those interests will have results which are unfair and contrary to statute. Fragmentation of interests does not treat property subject to a lease in the same manner as equivalent property occupied by the owner, giving undue weight to contractual relationship not affecting the intrinsic value of the property. Brief of Appellant, at 22. The County argues that: Leases are simply contracts and do not change the value of real property. The court in Folsom I rejected this argument because it ignores the realities of the market, thereby violating the willing buyer-willing seller standard. Even if a disadvantageous lease can be attributed to imprudence, the property's value must reflect what a willing buyer would pay; a willing buyer would not pay full market value for property burdened by a long-term lease at below-market rates. Folsom I, at 767. The County does not show that this conclusion is clear error. [3] The County also argues that the method of Folsom I violates the unit assessment rule. As the court recently stated: Where private land is leased, the entire estate including the fee, the leasehold and any improvements thereon, is assessed and taxed as a unit with the burden of paying the taxes being a matter of contract between the lessor and lessee. Duwamish Warehouse Co. v. Hoppe, 102 Wn.2d 249, 253, 684 P.2d 703 (1984). [2] The court heard and rejected the County's argument on this point in Folsom I. The court pointed out that the rule prohibits fragmenting taxation among several taxpayers holding various interests. It does not prohibit the separate valuation of those interests in the course of arriving at a single figure for the parcel as a whole. The unit assessment rule has been succinctly stated by the United States Supreme Court in Trimble v. Seattle, 231 U.S. 683, 689, 58 L.Ed. 435, 34 S.Ct. 218 (1913): In ordinary cases the whole property is taxed and which party shall bear the burden is not a matter of public concern. In Alaska Land Co. v. King Cy., 77 Wn.2d 247, 461 P.2d 339 (1969) we considered whether it was proper for the assessor to assess the value of the land and the improvements separately and add the two values together to arrive at an assessed valuation of the property. We held that method was proper. In reaffirming the unit assessment rule in this context, we stated: We hold, therefore, that the tax assessor is required by the statutes to assess each parcel of real property with the improvements erected thereon, on the basis of its market value, without deduction for indebtedness; and that where the land is leased, it is not his duty to apportion the taxes between the lessor and the lessee. (Italics ours.) Alaska Land, at 254. The unit assessment rule came into play in Clark-Kunzl Co. v. Williams, 78 Wn.2d 59, 469 P.2d 874 (1970). There, King County had attempted to tax certain improvements by the lessee of state-owned land as personal property. The court affirmed a permanent injunction against the County, invoking the unit assessment rule. It is clear then that as to the six restaurants located on privately owned land, the county's attempt to identify the cost of the improvements as determining the taxable value of the leaseholds and to assess this value separately from the fee interest is contrary to the general plan of our property tax statutes. The value, if any, of the improvements to the buildings should have been reflected in the assessments of the fee interests. (Footnote omitted.) Clark-Kunzl, at 63. In short, the unit assessment rule prohibits multiple assessments on multiple taxpayers holding disparate interests in a single piece of land. Who will bear the tax burden is a matter for contracting between the holders of those various interests. The unit assessment rule concerns only the final outcome of the assessor's task: he should produce one assessment for one taxpayer. The rule does not preclude the separate valuation of multiple interests in the course of producing this single assessment. This was our holding in Folsom I, and the County has not offered any argument which would persuade us that the court's conclusion was clear error. The County also argues that RCW 84.40.030 imposes three clear mandates on assessments. First, that all property should be assessed on the same basis. The County concludes that this means that all contractual relationships of the owner should be ignored and the fee valued as if the owner has not entered into any leases. However, the County offers no argument for this conclusion. In fact, the statute states that property shall be taxed at 100 percent of its true and fair value in money and assessed on the same basis. This general direction clearly does not require the court or the assessor to disregard particular uses to which specific parcels have been put. It is obvious that the so-called willing buyer component referred to in RCW 84.40.030 would take uses, burdens and benefits into consideration. Second, the County argues that RCW 84.40.030(1) requires the assessor to take into account political restrictions such as zoning as well as physical and environmental influences. Since this recitation does not specifically refer to leases, the County concludes leases should be disregarded in valuations. However, this list appears in the first subsection, which governs assessments based on comparable sales. It is therefore irrelevant to this assessment, which is based on capitalization of income, the method prescribed by subsection (2) of the statute. Third, the County argues that RCW 84.40.030(2) requires the capitalization of income derived from prudent use of the property. The County concludes that the income which would be derived from prudent use of the property can mean only one thing  market rent. There is no argument offered for this conclusion, which the court clearly rejected in Folsom I. In our opinion, the term prudent use refers to the use to which the land is put, e.g., retail space versus pasture-land, as opposed to the amount of income that can be extracted from a particular tract of land being used for the purpose for which it is best suited. See WAC 458-12-330 (and cases cited therein). Accordingly, use of land is not necessarily imprudent simply because the owner receives less than market rent from his lessee. Folsom I, at 763 n. 2. Finally, the County argues that the court erred in not according the assessor's valuation a presumption of correctness. The Folsom I court recognized that the assessor's valuation is entitled to such a presumption and that the assessor should be accorded considerable discretion in determining property value for tax purposes. RCW 84.40.030 establishes a presumption in favor of the assessor's determination which can be overcome only by clear, cogent and convincing evidence. However, the assessor's discretion is not unlimited. In this case, for example, a cost-based valuation was dictated by RCW 84.40.030(2), which provides: In the case of property of a complex nature ... or property not having a record of sale within five years and not having a significant number of sales of similar property in the general area, the provisions of this subsection (2) shall be the dominant factors in valuation. Similarly, it is within the power of this court to construe the true and fair value standard of RCW 84.40.030 and WAC 458-12-300 as requiring the assessor to take specific factors into account in the course of his assessments. Accordingly, the court held in Folsom I that while the assessor's valuation was entitled to a presumption: Nevertheless, we believe that, in valuing property subject to a long-term lease, contract rent should be presumed the proper base figure for valuation in the absence of clear, convincing evidence that market rent exceeds contract rent. If market rent exceeds contract rent, the appropriate method of valuation is to add the present value of the leasehold bonus to the capitalized value of contract rent. (Citations omitted.) Folsom I, at 769-70. What we prescribed was not a hard and fast rule, but a factual inquiry to be conducted by the assessor to ensure that the realities of the marketplace were fully recognized in the assessment. The appraisal of property is, after all, an attempt by humans to establish the true value of property pursuant to legal guidelines. The method prescribed here left ample room for the necessary exercise of discretion on the part of the assessor. Following the passage just quoted, we said: However, if the now below-market lease originally was not entered into in a good faith, arm's length transaction, the assessor may ignore contract rent and base valuation solely on market rent. Likewise, if a disadvantageous lease will expire by its terms within such a short period of time that a willing buyer reasonably can be expected to ignore the short-term burden on the property's income-producing capabilities, the assessor may rely solely on market rent. If the lease is subject to optional periodic renewals, the assessor must exercise his judgment in determining whether the lessee will exercise the option, and may ignore contract rent only if the lessee is unlikely to exercise the option. Folsom I, at 770. In short, the presumption operates only after the assessor applies the method prescribed by statute, as construed. In the case of commercial property subject to a long term lease, that means the capitalization of contract rent with the addition of the lessee's interest in the leasehold bonus. Folsom I, at 769. Since the County fails to show clear error in the court's conclusion that both the lessee's and the lessor's interests should be valued, the court will not reconsider its holding in Folsom I. The question remains whether the formula adopted by the trial court to achieve the purposes stated in Folsom I was correct. [4] The formula applied by the trial court did not carry out the intent of Folsom I. This is understandable since Folsom I could be misunderstood. The misunderstanding could have arisen from the following passages which appear to be inconsistent: If market rent exceeds contract rent, the appropriate method of valuation is to add the present value of the leasehold bonus to the capitalized value of contract rent. See Koeppel & Kramer, 2 Real Est. L.J., at 573. Folsom I, at 769-70. [3] Accordingly, we affirm the trial court's order to the extent the court directed Spokane County to capitalize contract rent for valuation purposes, but reverse and remand the case with direction to add the present worth of the difference between the capitalized value of contract rent and market rent to the value obtained by the capitalization of contract rent. Folsom I, at 769. It is undisputed that market rent exceeds contract rent in this case. Under the first, general rule, therefore, the property in question should be valued by adding the present value of the leasehold bonus to the capitalized value of the contract rent. The second quoted passage, however, is consistent with the general rule only if one assumes that the present value of the leasehold bonus is the same as the present worth of the difference between the capitalized value of contract rent and market rent. That is not the case. Ordinarily the leasehold bonus is considered to be the present value of the sum, over the life of the lease, of the annual difference between economic rent and contract rent. Youngman, Defining and Valuing the Base of the Property Tax, 58 Wash. L. Rev. 713, 726 (1983); Encyclopedia of Real Estate Appraising 475 (Friedman ed. 1959). However, our remanding instructions directed the trial court to discount the difference between the capitalized market rent and the capitalized contract rent. This was misleading because in calculating the leasehold bonus, there is no reason to double discount ( i.e., discount capitalized amounts). While the parties and the trial court followed our specific remanding language, the opinion taken as a whole was ambiguous. The law of the case doctrine does not require us to refrain from clarifying this point. The general rule stated in Folsom I should control. The property should be valued by adding the present value of the leasehold bonus, arrived at by generally accepted techniques to the capitalized value of the contract rent. [4] We remand the cause to the trial court for the calculation of the value of the property. The assessor should, in utilizing a capitalization of market rent approach for appraising the property, consider the value of the fee simple to be the sum of the lessor's and lessee's interests, though the assessor need not appraise those interests separately to arrive at a value for the unit. The lessor's interests will consist of (a) the right to receive contract rent, (b) the right of reversion, and (c) the right, if any, of improvements at the end of the lease; the lessee's interests will include (a) the right to occupy, (b) the right to the difference, if any, between contract rent and a higher (if so) market rent, and (c) any interest in improvements at the conclusion of the lease. In any event, the sum of the parts cannot exceed or be less than the value of the whole. The ultimate appraisal should endeavor to arrive at the fair market value of the property as if it were an unencumbered fee. We do not find the appeal of the County to be frivolous, but find the respondent property owners to be the prevailing party for the purposes of the assessment of costs. Each party shall bear its respective attorney's fees. Remanded. PEARSON, C.J., UTTER, BRACHTENBACH, DOLLIVER, ANDERSEN, GOODLOE, and DURHAM, JJ., and WILLIAMS, J. Pro Tem., concur. Reconsideration denied December 29, 1988.