Canyon Villas v. State, Tax Comm'n

• Decision Date: 25 September 2008
• Docket Number: No. 47994.,47994.
• Citation: 192 P.3d 746
• Parties: CANYON VILLAS APARTMENTS CORPORATION, A Nevada Corporation d/b/a Canyon Villas Apartments; Desert Club Corporation d/b/a Desert Club Apartments; D.I.P. Investment Corporation d/b/a Player's Club Apartments; D.I.P. Investment Corporation d/b/a Invitational Apartments; Indian Hills, LLC, A Nevada Limited Liability Company d/b/a Indian Hills Apartments; Hidden Cove Corporation, A Nevada Corporation d/b/a Hidden Cove Apartments; Breakers, LLC, A Nevada Limited Liability Company d/b/a Breakers Apartments; Eagle Trace, LLC, A Nevada Limited Liability Company d/b/a Eagle Trace Apartments; D.I.P. Investment Corporation, A Nevada Corporation d/b/a Diamondhead Apartments; Spanish Ridge Corporation, A Nevada Corporation d/b/a Spanish Ridge Apartments; ORRC Holding II Corporation, A Nevada Corporation d/b/a Red Rock Apartments; Falling Water Corporation, A Nevada Corporation d/b/a Falling Water Apartments; Arroyo Grande Apartment Corporation, A Nevada Corporation d/b/a Arroyo Grande Apartments; Horizon Ridge Apartment Corporation, A Nevada Corporation d/b/a Horizon Ridge Apartments; Durango North and Durango South Corporations, Nevada Corporations d/b/a Durango Canyon Apartments; and Olen Residential Realty Corporation, A Nevada Corporation d/b/a Spanish Wells Apartments, Appellants v. STATE of Nevada; Nevada Tax Commission; State Board of Equalization; County of Clark; Clark County Board of Equalization; and Clark County Assessor Mark W. Schofield, Respondents.
• Court: Nevada Supreme Court

192 P.3d 746

CANYON VILLAS APARTMENTS CORPORATION, A Nevada Corporation d/b/a Canyon Villas Apartments; Desert Club Corporation d/b/a Desert Club Apartments; D.I.P. Investment Corporation d/b/a Player's Club Apartments; D.I.P. Investment Corporation d/b/a Invitational Apartments; Indian Hills, LLC, A Nevada Limited Liability Company d/b/a Indian Hills Apartments; Hidden Cove Corporation, A Nevada Corporation d/b/a Hidden Cove Apartments; Breakers, LLC, A Nevada Limited Liability Company d/b/a Breakers Apartments; Eagle Trace, LLC, A Nevada Limited Liability Company d/b/a Eagle Trace Apartments; D.I.P. Investment Corporation, A Nevada Corporation d/b/a Diamondhead Apartments; Spanish Ridge Corporation, A Nevada Corporation d/b/a Spanish Ridge Apartments; ORRC Holding II Corporation, A Nevada Corporation d/b/a Red Rock Apartments; Falling Water Corporation, A Nevada Corporation d/b/a Falling Water Apartments; Arroyo Grande Apartment Corporation, A Nevada Corporation d/b/a Arroyo Grande Apartments; Horizon Ridge Apartment Corporation, A Nevada Corporation d/b/a Horizon Ridge Apartments; Durango North and Durango South Corporations, Nevada Corporations d/b/a Durango Canyon Apartments; and Olen Residential Realty Corporation, A Nevada Corporation d/b/a Spanish Wells Apartments, Appellants v. STATE of Nevada; Nevada Tax Commission; State Board of Equalization; County of Clark; Clark County Board of Equalization; and Clark County Assessor Mark W. Schofield, Respondents.

No. 47994.

Supreme Court of Nevada.

September 25, 2008.

R. Clay Hendrix, P.C., and R. Clay Hendrix and Aaron D. Christensen, Las Vegas, for Appellants.

Catherine Cortez Masto, Attorney General, and Dawn Nala Kemp, Deputy Attorney General, Carson City, for Respondents State of Nevada, Nevada Tax Commission, and State Board of Equalization.

David J. Roger, District Attorney, and Paul D. Johnson, Deputy District Attorney, Clark County, for Respondents Clark County, Clark County Board of Equalization, and Clark County Assessor.

BEFORE THE COURT EN BANC.

OPINION

PER CURIAM:

In this appeal, we consider the appropriate method for assessing the taxable value of income-producing real property when the property's improvements contain constructional defects. This case arises from respondent the State Board of Equalization's determination with respect to the 2004-2005 tax assessment of appellants' properties. Each appellant owns a property containing an apartment complex. According to appellants, the 2004-2005 tax assessment of their properties did not properly account for constructional defects present in their apartment complexes. The State Board of Equalization asserts that the constructional defects were properly accounted for in determining the full cash value of appellants' properties by adjusting the capitalization rates in the income capitalization method used under NRS 361.227(5)(c) to determine the properties' full cash value.

In general, the income capitalization method for valuing property evaluates the following two factors to determine a property's full cash value: (1) the annual income that a hypothetical buyer expects to receive from the property, and (2) the rate at which the buyer expects a return on his investment in the property or the capitalization rate. Because those two factors account for the income a property is expected to generate and the condition of improvements on the property, including any constructional defects, the income capitalization method is an appropriate method for assessing the full cash value of income-generating property that contains constructional defects in its improvements. The record in this case demonstrates that the State Board of Equalization exercised its best judgment in raising the capitalization rate to assess appellants' property values in light of the complexes' constructional defects. We thus affirm the district court's order denying judicial review of the State Board of Equalization's decision.

FACTUAL BACKGROUND

Appellants are 16 subsidiaries of Olen Residential Realty Corporation (collectively Olen Residential). Olen Residential's 16 apartment complexes are located in various locations in and around Las Vegas, Nevada.

Before respondent, the Clark County Assessor, performed Olen Residential's tax assessments, Olen Residential informed the Assessor that it had discovered significant constructional defects at some of its apartment complex properties. Olen Residential requested that the Assessor reduce the taxable value of its properties based on the constructional defects. The Assessor refused and instead assessed Olen Residential's properties as prescribed under NRS 361.227, without accounting for the constructional defects. First, the Assessor determined the properties' taxable values, under subsection 1 of that statute. Then, to ensure that the properties' taxable values did not exceed their full cash values,¹ the Assessor determined the properties full cash values using one of three alternative valuation methods provided by subsection 5 of that statute—the income capitalization method.

Believing that its tax assessments should have been reduced by the value of its constructional defects, Olen Residential appealed its assessment to respondent the Clark County Board of Equalization. At the County Board hearing, the County Board raised the capitalization rate on 7 of the 16 apartments. The County Board's decision was based upon the capitalization rate of similar properties and was unrelated to the alleged constructional defects in the apartment complexes. Still dissatisfied with its 2004-2005 tax assessment, Olen Residential appealed the County Board's decision to the State Board of Equalization. Meanwhile, Olen Residential received a $112 million judgment in a constructional defect action that it had instituted with respect to some of its apartments. Olen Residential introduced that judgment in its appeal to the State Board. Based upon the judgment and other testimony, the State Board raised the capitalization rate by 2.25 percent on all 16 apartments to account for their constructional defects. In so doing, the State Board refused to adopt Olen Residential's suggested approach for accounting for its properties' constructional defects—simply deducting the amount of its constructional defects from the value of its apartment complexes.

Unsatisfied with the State Board's decision, Olen Residential petitioned the district court for judicial review. The district court denied Olen Residential's petition, concluding that Olen Residential's suggested approach was not a proper method for accounting for constructional defects and, thus, affirmed the State Board's decision. This appeal followed.

DISCUSSION

In an appeal from a district court order denying a petition for judicial review of a State Board decision, this court presumes that the State Board's decision is valid.² To overcome that presumption of validity, the taxpayer must demonstrate by clear and satisfactory evidence that the State Board's valuation is unjust and inequitable.³ To satisfy this requirement, a taxpayer must demonstrate "`that the [S]tate [B]oard applied a fundamentally wrong principle, . . . refused to exercise its best judgment,'" or levied an excessively high assessment that necessarily implicated fraud and bad faith.⁴ As regards the State Board's determinations that are based on statutory construction, this court reviews those conclusions de novo.⁵

On appeal, Olen Residential contends that the constructional defects in its apartment complexes were not properly accounted for in assessing its properties' taxable values. That contention is principally a question of whether the income capitalization method for valuing property is an appropriate method for assessing the taxable value of income-generating property with constructional defects in its improvements. To address that question, we first consider Nevada's property tax assessment scheme. Following that discussion, we will address whether Nevada's tax assessment scheme provides a valuation method sufficient to assess Olen Residential's properties. Because we conclude that it does, we will consider whether the appropriate valuation method was properly applied in this case.

Nevada's property tax assessment scheme

In arguing that its properties' constructional defects were not properly accounted for when the taxable values were assessed, Olen Residential argues that neither the enumerated valuation methods within Nevada's statutory tax assessment scheme, nor the regulations promulgated thereto, provide a method sufficient to assess their properties' values. To determine whether Nevada law currently provides an appropriate method for valuing properties affected by constructional defects, we consider Nevada's current tax assessment scheme.

Article 10, Section 1 of the Nevada Constitution generally directs the Legislature to provide laws for the assessment and taxation of real property. The Legislature accordingly enacted NRS 361.227 for assessing real property's taxable value and assigned county assessors the task of determining the taxable value for property located within their designated counties.⁶ NRS 361.227(1)(a) essentially directs the county assessor to appraise two components of property in determining its taxable value: the land and any improvements on the land. The land is assessed in light of its uses, given any improvements on it.⁷ With respect to appraising improvements on the land, NRS 361.227(1)(b) directs the assessor to use the cost approach, providing that the value of any improvements must be appraised by subtracting any applicable obsolescence, or "impairment to property,"⁸ and other depreciation from the cost of replacing the improvements.

After the assessor determines the taxable value of the real property as set forth in NRS 361.227(1)—by appraising the land and any improvements on it—the assessor must ensure that the property's taxable...