Opinion ID: 1782662
Heading Depth: 1
Heading Rank: 5

Heading: Did the Board Sustain Its Burden of Proof?

Text: Four witnesses gave opinions of the market value of the Soifers' property. The Board called one expert, appraiser Ehler, and introduced the testimony of the Floyd County assessor, Bruce Hovden. The taxpayers presented two expert witnesses, appraiser Blanchfield and realtor Parsons. For the reasons we now discuss, we find the Board's evidence more persuasive than that of the taxpayers. We will address the testimony of each witness separately. A. Appraiser Ehler. The Board presented testimony from appraiser Robert Ehler that the assessed property had a market value of $381,000. Although Ehler made value calculations using the comparable-sales, income and cost methods, he based his opinion on the comparable-sales approach. His relied on the sale of eight properties used for fast-food, franchise restaurants sold to buyers who continued to use the property for the same or another fast-food, franchise restaurant. 1. Franchise-to-franchise sales. The Soifers' expert criticized Ehler's reliance on only franchise-to-franchise sales, asserting such sales inappropriately included some kind of intangible business value. An assessor can consider intangibles in arriving at the actual value of the taxable property provided the intangibles specified in section 441.21(2) are not considered. Merle Hay Mall, 564 N.W.2d at 423. As we noted above, section 441.21(2) specifically prohibits the assessor from considering [s]pecial value or use value of the property to its owner, and the good will or value of a business which uses the property as distinguished from the value of the property as property. [6] Iowa Code § 441.21(2). There is certainly a tension between valuing property based on its present use and yet avoiding the inclusion of prohibited intangibles. A review of some of our prior cases addressing this issue illuminates where the fine line between these two concepts lies. In Heritage Cablevision v. Board of Review, 457 N.W.2d 594 (Iowa 1990), the taxpayer challenged an assessment of real property used for the operation of a cable television system. The board's expert had used sales of cable television systems as the basis for his comparable-sales valuation. Heritage Cablevision, 457 N.W.2d at 598. This court agreed with the trial court's observation that the value of the entire system necessarily included nontaxable assets such as a franchise to operate, the value of the business, and goodwill. Id. Although the expert had attempted to make adjustments for the inclusion of prohibited intangibles in the sales prices of the comparable properties, we concluded his calculation of market value under the income and cost approaches revealed that a much larger adjustment would have been appropriate. Id. at 599. Therefore, we rejected the comparable-sales component of the witness's testimony. Id. In our subsequent Merle Hay Mall case, the taxpayer claimed the assessor had inappropriately included intangible business value in his assessment, such as the worth of the business organization, management, the assembled work force, working capital, and legal rights such as trade names, franchises, and agreements, that have been assembled to make a business a viable entity. 564 N.W.2d at 423. We disagreed with the taxpayer that a reduction in the valuation was necessary to account for such intangibles and distinguished our Heritage Cablevision case. Id. at 424. We noted that, with the exception of the intangibles removed from valuation by statute, intangibles may be considered in valuing the real estate with which they are associated. Id. at 424. This court addressed a similar issue in Maytag Co. v. Partridge, 210 N.W.2d 584 (Iowa 1973). Although the Maytag case concerned a tax valuation of the Maytag plant under the other-factors approach, our holding in that case is consistent with our resolution of the taxpayer challenge in Merle Hay Mall. 210 N.W.2d at 590. In Maytag, the taxpayer argued that, in considering the use to which the subject property was put, the assessor improperly included good will or value of the business. Id. We rejected this argument stating, When an assessor considers the use being made of property, ... [h]e is recognizing the effect of the use upon the value of the property itself. He is not adding on separate items for good will, patents, or personnel. Id. Our holding in these cases is consistent with an early case in which the taxpayer challenged the assessor's valuation of an electric light plant on the basis it included the value of the taxpayer's franchise. Lake City Elec. Light Co. v. McCrary, 132 Iowa 624, 625, 110 N.W. 19, 19 (1906). Although we held this argument was essentially a claim of excessive valuation that should have been made in an appeal to the board of review, we offered the following observation: Indeed, we think that the existence of the franchise and the fact that the light plant was a going concern instead of a mere aggregation of dead material were matters which the assessor was entitled to consider in appraising the property, and that such valuation is in no manner inconsistent with the general proposition that the franchise as such is not a taxable item of property. Lake City Elec. Light Co., 132 Iowa at 626-27, 110 N.W. at 20; accord City Council v. Cedar Rapids & M.C. Ry., 120 Iowa 259, 266, 94 N.W. 501, 503 (1903) (stating we think that the value of the franchise held by the corporation ... is not the subject of assessment under the statute as it exists; but we see no reason why the fact that the railway is in successful operation, earning money for its owners, may not properly be considered by the assessor in estimating its value). We think the fast-food restaurant property at issue here is similar to the properties housing viable commercial enterprises assessed in our Merle Hay Mall, Maytag, and Lake City Electric cases. Ehler testified the business itselfincluding the prohibited intangibles of good will and the value of the business using the property is usually sold separately from the real estate. Cf. Riso, 362 N.W.2d at 516-17 (holding percentage rent used in income-approach valuation was not shown to be based on good will because McDonald's and Burger King are separately compensated for the use of their name and other factors in franchise agreements). Moreover, according to Ehler, even when both the real property and the business are sold in one transaction, a portion of the purchase price is allocated to the nonreal estate assets. He said the sales he used were of real estate only. He also pointed out that his calculations of value under the income and cost methods supported his comparable-sales figure. Ehler's actual value under an income approach was $850,000, and he testified the difference between this figure and the $381,000 market value under the sales approach represented the business value of the McDonald's restaurant. See Post-Newsweek Cable, Inc., 497 N.W.2d at 817 (stating difference between value determined under income approach and much lower value determined under cost approach suggested nontaxable assets were included in income-method valuation). Ehler's actual value using the cost approach was only $500 less than the value he calculated under the sales method, which, he testified, demonstrated the accuracy of the adjustments and assumptions underlying his comparable-sales valuation. We conclude based on the record in this case that Ehler's use of franchise-to-franchise sales did not include prohibited intangibles. The taxpayers challenge Ehler's use of franchise-to-franchise sales for the additional reason that McDonald's requires buyers of McDonald's properties to agree to a noncompete clause that prevents use of the property for a fast-food franchise restaurant for twenty years. Therefore, the taxpayers claim, the actual market value of this property is more accurately reflected by sales of franchise properties to buyers who will use the property for general restaurant purposes. Such sales would reflect a lower market value, argue the Soifers, because the McDonald's architecture and the fast-food set-up would have no value to such a buyer. While there is superficial appeal to this argument, valuing the Soifers' property as if it were not a viable McDonald's would be contrary to the principle that assessed property is valued based on its present use, including any functioning commercial enterprise on the property. In Riso, this court held that an assessor is entitled to consider the use of the [assessed] property as a going concern. 362 N.W.2d at 517; accord Maytag Co., 210 N.W.2d at 590; Lake City Elec. Light Co., 132 Iowa at 626-27, 110 N.W. at 20. As we stated in Maytag, [w]hen an assessor considers the use being made of property, he is merely following the rule that he must consider conditions as they are. 210 N.W.2d at 590 (rejecting an expert's analysis that valued machinery in use in the Maytag factory based on the used machinery market price). Our discussion in Riso is particularly enlightening because Riso addressed the valuation of a McDonald's property and a Burger King property. 362 N.W.2d at 515. In Riso, the experts used cost and income methods for valuation. Id. at 516. Under the income approach, the assessor considered both the base rent paid by the McDonald's and Burger King lessees, as well as additional rent payments measured by a percentage of gross sales over a certain figure. Id. at 515-16. The district court had concluded the assessor could not rely on the percentage rent because it constituted special use or good will value of the property that was precluded from consideration by section 441.21(2). Id. at 516. This court disagreed and observed, That substantial revenues will be generated by any of the leading fast-food restaurants of the kind involved here is no surprise. Those revenues are largely a product of the use of the property in the contemplated manner. Id. at 517. We concluded the assessor's use of percentage rent in determining value under the income method was appropriate because the percentage rent reflected the value of the property as a going concern. Id. Similarly, here, franchise-to-franchise sales of similar properties reflect the value of the property in its present use as a franchise restaurant. To eliminate such sales because McDonald's insists on noncompete clauses when selling its properties would ignore the requirement that real estate be valued based on its present use. In addition, our cases do not support a reduction in market value based on a property owner's self-imposed restrictions. In Merle Hay Mall, the taxpayer argued the assessor failed to consider the fact that no willing buyer would offer full price for the mall property because it was subject to a very unfavorable lease to Younkers, one of the anchor tenants. 564 N.W.2d at 422. We pointed out that both the lessee's and lessor's interests are included in the valuation and, while the lease was unfavorable to the mall owner, it was very favorable to Younkers. Id. Therefore, we concluded, the combined value of the parties' interests... remains the same. Id. We held the assessor, who valued the property under an income capitalization approach, properly used the objective rental income value of the Younkers store, rather than the actual lease amount, to establish a valuation. Id. at 423. We think a similar rationale applies even more forcefully here where the restriction that potentially negatively impacts a sales price is self-imposed. The property at issue in this case is a functional fast-food restaurant. Objectively, in the absence of McDonald's desire not to sell to a competing business, the building would have value to a potential buyer who desires to continue this use of the property. As already noted, it is this going-concern value that our statute seeks to capture in a comparable-sales analysis. It would be contrary to legislative intent to allow a taxpayer to circumvent the statutory scheme by voluntarily eliminating buyers who would use the property in the same manner, thereby artificially reducing the potential sales price of the property. For this reason, we think Ehler's use of franchise-to-franchise sales was entirely proper notwithstanding limitations McDonald's may choose to impose when it sells the property. 2. Adjustments for points of difference. A second criticism of Ehler's testimony has more merit. Ehler made adjustments to the sales prices of his comparable properties to account for differences between them and the appraised property, but could not describe the precise adjustments he made. His report, which was admitted into evidence, also failed to quantify his adjustments, and he did not bring his working papers with him when he testified. The absence of evidence of the specific adjustments made by Ehler makes an informed evaluation of the credibility of Ehler's comparable-sales valuation difficult. If Ehler's opinion had been offered to support an actual value equal to his valuation of $381,000, we would be more concerned about the precision of his adjustments. But because the Board adopted the assessor's valuation of $352,990, almost $30,000 less than Ehler's valuation, there is some margin for error in Ehler's calculations. The witnesses appear to have agreed that one of the most prominent factors that affected the value of the subject property was its location some distance from the new bypass. The availability of buyers who would be interested in purchasing a fast-food restaurant in this location is an important factor in establishing market value. See Iowa Code § 441.21(1)( b ). Even if we assume, however, that Ehler made no adjustment for this factor or an inadequate adjustment, his opinion still substantiates the Board's valuation. Blanchfield, the Soifers' expert, made a five-dollar per square foot adjustment in the sales price of one of the comparable properties he used to account for the poor location of the subject property on Old Highway 218. If we reduce Ehler's per-squarefoot value for the subject property by the same five-dollar adjustment, Ehler's comparable-sales valuation is approximately $361,000, still well above the assessed value of $352,990. In addition, we find merit in Ehler's testimony that the similar value he calculated under the cost approach validated the unspecified adjustments he made in arriving at a value based on comparable sales. See Heritage Cablevision, 457 N.W.2d at 598 (The advantage of using multiple appraisal techniques lies primarily in those instances where the differing techniques lead to similar conclusions concerning market value and therefore tend to support each other.) In summary, we think Ehler's testimony corroborates the Board's valuation, notwithstanding his failure to specify the adjustments he made to the sales prices of comparable properties. 3. Timing of sales. Finally, Ehler's opinion is also challenged on the basis that the sales upon which he relied occurred between 1997 and 1999, prior to the assessment years at issue in this case. Notably, the statute does not require that comparable sales occur within a certain time period of the assessment year. Moreover, adjustments can be made for changes in the market over time. See Equitable Life Ins. Co., 281 N.W.2d at 826 (considering comparable sale that occurred six years prior to year of assessment, noting adjustments in the sale price were made for time). In the present case, Ehler testified he made no adjustment for the timing of the comparable sales because he believed the market had been relatively stable from the late 1990s through the appraisal date. The taxpayers introduced no evidence that the market was not relatively stable during this period. On balance, we do not find the timing of Ehler's comparable sales to substantially detract from the credibility of his valuation. B. County Assessor Hovden. The county assessor testified generally to his valuation of the property at $352,990. He also explained that the Department of Revenue and Finance conducts random appraisals to spot-check whether the valuations made by county assessors reflect market value. Coincidentally, the Soifers' property was the subject of such a random appraisal by the department in the general time frame at issue here. The department's appraisal produced a market value of $353,390, $400 higher than the county assessor's valuation. We think the department's nearly identical valuation is persuasive corroboration of the market value determined by the assessor. C. Appraiser Blanchfield. There are several reasons we find Blanchfield undervalued the Soifers' property. Blanchfield used the sales of four comparable properties as the basis for his $230,000 valuation. He determined the price per square foot at which the properties sold and then made adjustments to this square-foot value based on differences between the comparable properties and the subject property. This process resulted in a per-square-foot value from a low of $49.05 based on comparable one to highs of $59.50 based on comparable four and $60.50 based on comparable three. Extrapolating from these square-foot values, Blanchfield computed a market value of the subject property within a range of $197,966 to $244,178. Applying his professional judgment and placing greatest weight on sales one and four, Blanchfield formed the opinion that the value per square foot for the Soifers' property was $57, producing a market value of $230,000. These calculations resulted in an undervaluation of the Soifers' property, however, due to an error in the square footage attributed to the building sold in sale four. The size of this building was overstated, which caused Blanchfield to calculate a lower square-foot value and a correspondingly lower market value for the subject property. Ehler testified that, had the correct square footage been used by Blanchfield, the square-foot value of sale four would have been $84.01 rather than $59.50, and the adjusted market value for the Soifers' property based on sale four would have been $340,000 rather than $240,000. Clearly, given the fact Blanchfield placed greatest reliance on sales one and four in valuing the subject property, it is reasonable to conclude that, had he used the correct square footage for comparable four, he would have placed a much higher market value on the Soifers' property. In addition, even using the corrected figures for sale four arguably results in an undervaluation of the subject property because comparable property four was not sold as a restaurant. Rather, the buyer tore down the franchise-restaurant building that had operated as a McDonald's and replaced it with a bank. Thus, sale four did not reflect a present-use value for the property because the buyer did not intend to use the building on the property as a fast-food restaurant. Common sense tells us the building on the property was, therefore, a liability that depressed the sales price, not an asset as it would be if the property were purchased with the intent of continuing the operation of a fast-food restaurant. Similar factors cause us to discount the value of the other three sales upon which Blanchfield relied. Sales one, two, and three were at one time operated as a Hardee's, a Kentucky Fried Chicken, and a McDonald's. None of these properties continued to be used as a fast-food restaurant after their sale. Therefore, the sales prices did not completely capture the value of the properties in their present use. Accordingly, we conclude Blanchfield's opinion based on comparable sales understated the value of the Soifers' property. Blanchfield's cost approach valuation was also flawed. The cost approach is based on the principle that a purchaser would pay no more for developed property than the cost of developing a new property. Under this approach, an appraiser determines the cost of developing a new property like the subject property and then applies a depreciation factor. The factor of depreciation is the difference in value between a new building and an old structure. Blanchfield used the Marshall and Swift Valuation Services Guide to determine replacement cost. Using this guide, he arrived at a forty-three percent depreciation factor and an ultimate determination of fair market value under the cost approach of $232,000. The Board correctly points out that the county assessor is required by law to use a state appraisal manual prepared by the director of the department of revenue. See Iowa Code § 421.17(17) (placing duty on director [t]o prepare and issue a state appraisal manual which each county and city assessor shall use in assessing and valuing all classes of property in the state). This manual, known as the Iowa Real Property Appraisal Manual, includes depreciation tables, which under the circumstances of this case would call for a depreciation factor of only twenty-nine percent. Consequently, Blanchfield's cost-approach value of $232,000 was also an understatement of the value of the Soifers' property. D. Realtor Parsons. Parsons used property sales in Charles City for her comparable-sales valuation because she believed these properties were sufficiently comparable and the market for commercial property in Charles City was uniquely local and not part of a region-wide market. Although we have determined the properties used by Parsons satisfied the threshold requirement of similarity, we are not persuaded the market for a McDonald's restaurant is uniquely local. When from the nature of the property the market for the purchase and sale encompasses a wider area, the wider area becomes the field for investigation. Bartlett & Co. Grain, 253 N.W.2d at 94 (allowing evidence of sales of other terminal elevators that were at some distance from property being assessed); accord Farmers Grain Dealers Ass'n v. Sather, 267 N.W.2d 58, 62 (Iowa 1978) (rejecting argument that witness's testimony was incompetent because most of comparable grain elevators were located out of state). In determining the appropriate geographic area that may provide a source for comparable properties, we focus on the present use of the assessed property. See Maytag Co., 210 N.W.2d at 591 (holding property must be valued as it is presently being used). In the present case, that use is as a McDonald's restaurant or, more generally, as a fast-food franchise restaurant. Therefore, the focus is on a buyer interested in purchasing a McDonald's or similar fast-food restaurant. Parsons suggested no reason that a buyer interested in operating a fast-food restaurant would restrict his or her search to Charles City, Iowa. Indeed, the Soifers own McDonald's restaurants in Oelwein, Independence, and Waverly in addition to the Charles City location. Because we are not convinced the market for the subject property was uniquely local as asserted by this witness, we do not consider the comparable properties she used to reach an opinion on value particularly persuasive. Moreover, because Parsons limited her other sales to those occurring in Charles City, she considered no franchise-to-franchise sales in determining market value. For these reasons, we think her valuation is not entitled to as much weight as that of Ehler. In summary, we find the valuation of the Board's witness, Ehler, to be most convincing. Because that valuation exceeded the value placed on the property by the Board, we conclude the Board has carried its burden to prove that its valuation was not excessive.