Opinion ID: 3218859
Heading Depth: 1
Heading Rank: 2

Heading: facts and tax court proceedings

Text: As noted, the property at issue here is a convention center and related land in Bend. Taxpayer built the convention center south of its existing full-service hotel. The hotel and convention center properties are adjacent, but are in separate tax accounts. Taxpayer also owns other property in the neighborhood, including a golf course. Cite as 359 Or 822 (2016) 829 The department and the assessor filed a complaint in the Regular Division of the Tax Court challenging the real market value of the property as of January 1, 2008, for the 2008-09 tax year. The department and assessor asserted that the magistrate had erred in finding a real market value of $3,538,000 for the property, and asserted that the correct real market value was no less than $15,250,000. At trial, each side presented an appraisal of the property. Neither of the appraisals used the comparable sales approach. See River’s Edge Investments LLC, 21 OTR at 474 (noting that neither appraiser “developed a market indicator of value”). The department’s appraiser concluded that the highest and best use of the property as improved was as a convention center “used in conjunction with” taxpayer’s hotel. The department’s appraiser used only the cost approach in valuing the property. He concluded that, as of January 1, 2008, the property should have been valued at $16,700,000. The department’s appraiser did not use an income approach. He concluded that the convention center property would increase hotel room rentals, and so the income from those extra hotel rentals should be counted in the income approach toward the real market value of the convention center. However, because taxpayer did not have information regarding the extra room rentals that derived from the convention center, the department’s appraiser concluded that he could not use an income approach.9 The Tax Court later questioned the department’s appraiser about his decision not to perform an income approach analysis. The appraiser explained that it would have been possible to value the hotel and convention center as a package and then apportion those values between the two properties. The court then asked why the appraiser had not employed that apportionment methodology in using an income approach analysis: 9 The taxpayer provided its financial statements to the department’s appraiser at the appraiser’s request. There is no indication in the record that the department’s appraiser asked the taxpayer to provide any further information that might have facilitated the use of an income approach or that the appraiser made any effort to estimate the extra room rentals derived from the convention center based on any other data. 830 Dept. of Rev. v. River’s Edge Investments, LLC “[THE COURT]: We’ve got a problem with valuing just one parcel. We’re all scratching our heads. We’re worried that using just a focus on the convention center is lead— could be leading us astray. So maybe as a check, maybe as a valuation technique, and because you’ve done it elsewhere, you could value a package of two properties and then do an allocation. You said you could and you would have done it on the cost. Then you said, but I wouldn’t have done it on the income. Why not? “THE WITNESS: I— “[THE COURT]: You had the information. You testi- fied to that. Why didn’t you do the exercise? “THE WITNESS: Why didn’t I—okay. I didn’t do the entire hotel and convention center. I didn’t— “[THE COURT]: I know you didn’t. My question is why didn’t you? “THE WITNESS: Because I was—my understanding of the 308.205, especial use property, I didn’t feel like the income approach was a proper approach. “[THE COURT]: Why? Other than a bald conclusion with no support, why? Just because you didn’t feel that way, it won’t do it for me. “THE WITNESS: Well, I—that’s my thinking at the time. I can tell you now I wish I had. But that was my thinking at the time that this is especial use property and in order to— “[THE COURT]: But especial use property contem- plates property that’s part of a larger total operation; right? “THE WITNESS: That’s correct. “[THE COURT]: More than one property perhaps. “THE WITNESS: Correct. “[THE COURT]: That’s what we have here. And you’ve testified that in other circumstances, you started down that road and I told you to stop. But in other circumstances you’ve actually done that package and allocation process, haven’t you? “THE WITNESS: Yes. Cite as 359 Or 822 (2016) 831 “[THE COURT]: So the only reason you didn’t do it here is because you didn’t do it here? “THE WITNESS: That and just compensation, the portion that requires just compensation.” Taxpayer presented evidence of a substantially lower value. Taxpayer’s appraiser began with a somewhat different highest and best use for the property: As a standalone convention center. Taxpayer’s appraiser then used both cost and income approach analyses. His cost approach analysis was substantially similar to the one performed by the department’s appraiser, suggesting a value of $15,460,000. The income approach analysis, however, suggested a much lower value: $4,130,000. Taxpayer presented expert testimony that the income approach represented the more accurate value.
On the valuation issue, the Tax Court ultimately agreed with taxpayer. The Tax Court’s opinion may be broadly broken down into two separate parts. In the first part, the Tax Court evaluated the department’s appraisal and rejected it. River’s Edge Investments LLC, 21 OTR at 472-77. In the second part, the Tax Court independently evaluated taxpayer’s appraisal and concluded that it was reasonable. Id. at 477-78. In short, the Tax Court did not merely accept the taxpayer’s appraisal by default. Substantively, the Tax Court rejected the department’s appraisal because it contained only a cost approach; it did not contain an income approach. Id. at 474-75. It was not merely the absence of an income approach that the court found critical, however. It was the appraiser’s inability to offer a good explanation for failing to perform the income approach. Id. at 475. As noted, the department’s appraiser had explained his decision not to use the income approach on the ground that he did not have information on hotel income that identified the extra income received by the hotel as a result of the convention center. Id. The Tax Court found that explanation problematic for several reasons. Id. at 475-76. First, the Tax Court noted that Measure 50 caps maximum assessed value increases at three percent per 832 Dept. of Rev. v. River’s Edge Investments, LLC year, see ORS 308.146, and for purposes of complying with Measure 50, “property” means “ ‘[a]ll property included within a single property tax account.’ ORS 308.142(1)(a).” River’s Edge Investments LLC, 21 OTR at 473. The Tax Court opined that those and other provisions of Measure 50 indicate that the value of property in a single property tax account must be determined without “reference to the [real market value] or any other characteristic of property in a different property tax account.” Id. In so concluding, the court also relied in part on this court’s decision in Flavorland Foods v. Washington County Assessor, 334 Or 562, 54 P3d 582 (2002), which discussed Measure 50, and which we briefly address below. River’s Edge Investments LLC, 21 OTR at 473. Because Measure 50 would have precluded the department’s appraiser from giving any consideration to the hotel’s income (which involved property in a different tax account from the convention center), the court opined, the department’s appraisal suffered from two problems: The appraiser’s “conclusion that the highest and best use of the convention center was operation in conjunction with the hotel is simply inconsistent with the account focus of Measure 50,” id. at 474, and the appraiser had no basis to insist that the income of the convention center should include any of the extra income received by the hotel. Id.;10 see also id. at 475 (concluding that Measure 50 required that “the [real market value] of the convention center, and any other property in the same property tax account, must be determined independently of consideration of property (here the hotel) contained in another property tax account.”). Second, the court concluded that the department’s appraisal was unpersuasive, even aside from any Measure 50 10 The Tax Court explained: “The department’s expert therefore had no legal basis for taking into account, in the valuation of the convention center, what he considered to be augmented income at the hotel, produced by the presence of the convention center. That income could only be relevant to the value of the property in the tax account in which the hotel property was found. Further, his conclusion that the highest and best use of the convention center was operation in conjunction with the hotel is simply inconsistent with the account focus of Measure 50.” Id. Cite as 359 Or 822 (2016) 833 issue. According to the court, the decision of the department’s appraiser not to perform an income approach analysis was “a serious departure from appraisal practice”—one that, “[i]f not adequately justified,    would lead the court to place no reliance on the appraisal.” River’s Edge Investments LLC, 21 OTR at 474-75. The court then explained why it rejected the appraiser’s reason for concluding that the income approach required considering hotel income attributable to the convention center.11 First, adding hotel income to convention center income would create a risk of double-counting that income toward the value of both properties. Id. at 475. While the convention center was expected to produce more revenue for the hotel, according to the court, the extra hotel income should be counted as hotel income, not convention center income. Id. Second, the appraiser’s reasoning depended on it being legally significant that the taxpayer owned both the hotel and the convention center, when “the identity of an owner is not a factor that is taken into account in valuation of property.” Id. at 476 (adding that nothing in the record showed that the convention center and hotel had to remain owned by the same party). The Tax Court noted the emphasis that the depart- ment had placed on the especial property rule. The court questioned the relevance of the rule to the issues presented by this case: The rule provides only that the comparable sales approach is not used to value especial property, and neither party relied on the comparable sales approach in their appraisals. Id. at 474.12 The Tax Court concluded that the department’s appraiser had not offered a good reason for failing to use an income approach analysis, and his failure to do so was a departure from fundamental appraisal principles. Id. at 477. Accordingly, “the court place[d] no reliance on his conclusion of value.” Id. 11 Initially, the Tax Court reiterated its conclusion that counting hotel income toward the value of the convention center would violate Measure 50, see id. at 475, but that was not a separate and independent reason why the appraisal should be rejected. 12 The Tax Court did not decide whether the subject property was especial property under the rule, nor does our analysis require us to make that determination. 834 Dept. of Rev. v. River’s Edge Investments, LLC To sum up the court’s reasoning: the department had argued that it was entitled to assign income from some of the hotel rooms to the convention center to determine the value of the convention center using the income approach. The department was unable to do that, however, because the hotel’s records did not show how much additional rental income for the hotel the convention center generated. The Tax Court’s concern was twofold. First, the department’s argument, if accepted, would lead to counting income from the same hotel rooms twice if it used the income approach to value both the hotel and the convention center. Second, if the department wanted to treat the two properties as a single unit, it would need to combine all the income from the two, determine the combined value, and then allocate the value between the two properties. The department could not do the former, and it had not done the latter. The Tax Court explained, however, that its rejection of the department’s appraisal did not necessarily mean that it should accept the taxpayer’s appraisal by default. Id. at 477. The court therefore independently examined whether the taxpayer’s proposed real market value was reasonable. Id. at 477-78. In doing so, the court agreed with taxpayer’s appraiser that the income indicator was the better basis from which to determine value: “The property is an income producing property. It is in its early stages of operation and came onto the scene at one of the worst times in American economic history. The court considers the income indicator to be the most reliable indicator of value in this situation. The department has not established that the elements employed by the witness for taxpayer were unreasonable. Accordingly, the court accepts as reasonable the value conclusion of taxpayer’s expert witness.” Id. Accordingly, the court found that the 2008-09 real market value for the subject property was $2,668,000.13 Id. 13 Taxpayer had included personal property in both its income approach analysis and the reconciled final value in its appraisal; the Tax Court deducted that amount in reaching its final valuation. See id. at 478 (noting that taxpayer’s appraiser’s value conclusion was “$2,668,000, which number did not include personal property”). Cite as 359 Or 822 (2016) 835
Under ORS 305.490(4)(a)(A), the Tax Court may award attorney fees when it rules in favor of the taxpayer in an ad valorem property tax matter. (We discuss that statute in more detail later in this opinion.) Here, the Tax Court recognized that its exercise of discretion to award attorney fees was subject to the criteria of ORS 20.075. See River’s Edge Investments, LLC II, 22 OTR at 47 (citing that statute) and, as explained below, the court addressed four of the statutory factors. The court ultimately entered a supplemental judgment that awarded the taxpayer attorney fees and costs against the department of $243,040.40.14