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

Heading: Tax Court’s Ruling on the Merits

Text: 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