Opinion ID: 1147197
Heading Depth: 2
Heading Rank: 3

Heading: The Deed Restrictions

Text: Although the court of appeals based its decision on the deed restriction imposed, we believe two deed restrictions exist: one that requires the owner to operate the facility on a nonprofit basis for the benefit of Sun City homeowners, and one that limits the use of the property to recreational purposes.
The nonprofit restriction for the benefit of Sun City homeowners affects the financial operation of the owner's business, but does not impact the type of use to which the property may be put. The essence of Rec Centers' argument is that the value of the recreational property has been transferred to those who have the right to use it while denying the owner a profit. The property tax, however, is levied upon the land itself and not the interests in the land or its profitability. See Carlson v. Assessment Appeal Bd. I, 167 Cal. App.3d 1004, 213 Cal. Rptr. 555, 559 (1985) (deed restriction ignored; separate legal interests in property do not affect manner of assessment, therefore it is not the profitableness of the property to the present owner that is relevant so long as property itself has value); Lake County (where the owner is not exempt, tax is on value of property, not the value of the owner's interest); In re Neptune Township (where witnesses testified that property could not be sold and thus had zero value, deed restriction  including provision prohibiting profit  should be ignored because [t]he law requires an assessment of the value, not of the owners' title, but of the land; the assessed value represents the value of all interests in the land); Swan Lake Moulding (long term leases); Hoover v. State Bd. of Equalization, 579 S.W.2d 192 (Tenn. App. 1978) (for property tax purposes, value attaches to the property itself, not to the interest of the party in possession, thus alienation restrictions preventing sale were not to be considered in assessing value). This court, too, has recognized the general principle that the tax is levied against the property and not the owner when deciding a case involving the interest of an adverse possessor. We stated: The owner does not owe the tax levied against his property. The whole proceeding to collect taxes is in rem. Under our system, it is the property that owes the tax, and not the owner. Santos v. Simon, 60 Ariz. 426, 429, 138 P.2d 896, 897 (1943). As a pragmatic matter, property that may be used only for nonprofit purposes does, in the real world, have value. Standard real estate practice permits the appraiser to value the property of nonprofit organizations to determine appropriate mortgage loans. See Encyclopedia of Real Estate Appraising 614 (1959). The appraiser deems property similar to the one at issue (country clubs) as a special purpose property. Id. Generally, such properties operate on a nonprofit basis. Id. The appraiser ignores the nonprofit status in making his evaluation. The fact that the property has enough value to satisfy a lender, despite its owner's nonprofit status, is probative of its value for tax purposes. The nonprofit limitation for the benefit of Sun City residents does not destroy the value of the property. The holder of title, Rec Centers, may share the value of the land's use with those having the right to enforce its use on a nonprofit basis. This does not make the land valueless; it merely divides its value between the operator/owner and those having the right to use it. The tax, however, is on the total value of the land, not on the fractional personal interests that share its value. See Santos, Lake County, In re Neptune Township, Hoover. Arizona courts have specifically addressed challenges to tax valuation by nonprofit enterprises. See Graham County v. Graham County Elec. Coop., Inc., 109 Ariz 468, 512 P.2d 11 (1973). In Graham County, as in the present case, the trial court accepted the taxpayer's low valuation of the property. This court held that the appraiser's use of the income approach was improper because the taxpayer was a nonprofit corporation that set its rate with the deliberate intention of not making a profit. We noted that the task of establishing value for some property is difficult but declined to hold that simply because property was not saleable, it had no cash value. Id. [8] This brings us, finally, to the question of marketability. Rec Centers insists that the assessor must consider the realities of the market place and may not create a mythical sale in accordance with the definition of market value. Appellee's Answering Brief at 10 (citing Department of Revenue v. Transamerica Title Ins. Co., 117 Ariz. 26, 29, 570 P.2d 797, 800 (1977)). We believe this argument confuses the concept of marketability with that of value. The statutes do not impose a tax on market value but on full cash value. They equate full cash value with market value ( see A.R.S. § 42-227(A)), but provide that any of the standard appraisal methods may be used in the determination, thus contemplating that where market value is not the best indicator of value, other approaches, such as a cost or income approach, may be used to fix value. See A.R.S. § 42-201(4). Thus, although a particular restriction may destroy marketability, the property may have value in use to the owner and should therefore be assessed and taxed. Arizona has recognized this principle. See Sperry Rand, 112 Ariz. at 581, 544 P.2d at 1096 (special purpose building with little or no value on the market but having great value in use to the owner should not be assessed by use of the market technique but, instead, by a cost less depreciation method); Graham County (use of income approach improper, because taxpayer was nonprofit electric cooperative). These principles have been long recognized in states other than Arizona. See New York Stock Exch. Bldg. Co. v. Cantor, 221 A.D. 193, 223 N.Y.S. 64 (1927), aff'd mem., 248 N.Y. 533, 162 N.E. 514 (1928) (stock exchange building, which could be used only by stock exchange, had no value on the market and was to be assessed at reproduction cost less depreciation; owner's argument for zero valuation rejected); see also Equitable Life Ins. Co. v. Board of Review, 281 N.W.2d 821 (Iowa 1979) (when market value cannot be determined by sales price, other factors approach is to be used); Joseph F. Seagram & Sons, Inc. v. Tax Comm'n, 18 A.D.2d 109, 238 N.Y.S.2d 228 (1963), aff'd, 14 N.Y.2d 314, 251 N.Y.S.2d 460, 200 N.E.2d 447 (1964) (Seagram's building, designed and built as an architectural landmark, on completion was worth on the market only one-half its construction cost; nevertheless, it should be valued at cost of construction and not market value). These cases all stand for the proposition that property that has little or no marketability may still be of great value in use to the owner and must bear its just burden of taxes. Brophy, 58 Ariz. at 554, 121 P.2d at 652. The restriction to use by Sun City homeowners presents a similar issue. A restriction to beneficial use by a limited number of people does not affect the manner in which the land may be used; rather, it limits the class of individuals entitled to use the land. It does not limit the value of the land as land but only divides or assigns the value as between a specified class of owners. We do not believe either the framers of our constitution, or the legislature that implemented its provisions in mandating that all property be taxed, contemplated that such a limitation would provide an exemption or reduction of taxes. If Webb wished to create a private park for the benefit of homeowners in its development, that private park must nonetheless bear its burden of taxation. Thus, we conclude that from the standpoint of valuation for tax purposes, the nonprofit restriction for the benefit of Sun City homeowners does not affect the value of the property. It may divide its value in use between the owner and those having the right to use it, but the tax is on the property as a whole and not on any fractionalization of the owner's interest or profits. The restriction may indeed turn the property into a special purpose property, of limited marketability, but one nevertheless valuable and subject to tax despite the owner's inability to sell it. The restriction to nonprofit status is a personal interest that actively affects the value of the owner's title; therefore, it cannot provide an exemption neither sanctioned by the legislature nor permitted by our constitution. The voluntarily imposed restriction, actually made for the overall benefit of the commercial enterprise, cannot be permitted to remove valuable property from the tax rolls. We hold that the assessor may not consider the restrictions limiting profitability or the class of users to be benefited in determining the assessed value of the property.
Our conclusion regarding the nonprofit restriction does not preclude the assessor from considering the effect of the portion of the restriction that limits the use of the land to recreational activity. The restriction to recreational use does not divide value between different users but affects the value of the whole property. Just as with zoning and subdivision restrictions that limit the use of land, the recreational use restriction has an undoubted effect on value, whether the value be measured by any appraisal method. See A.R.S. § 42-141(A)(5). The property cannot be valued as if it were property to be used for residences, apartments, retail stores, or industry; the land is not and cannot be so used even though it may be now properly located and zoned. The limitation on use does not divide value between those who have the right to use; it limits the value in use of all users. We deal with golf courses and bowling alleys, not industrial parks. The department must consider current usage when valuing property. A.R.S. § 42-141(A)(5); Golder v. Dept. of Revenue, 123 Ariz. 260, 599 P.2d 216 (1979); [9] see also Lochmoor Club v. City of Grosse Pointe Woods, 3 Mich. App. 524, 143 N.W.2d 177 (1966) (assessor erred in valuing property for residential use when he ignored restriction to country club and park purposes). Whatever the approach to valuation, the department must therefore consider the recreational use. [10]