Adams Outdoor Advertising, Ltd. v. City of Madison, 2006 WI 104 (Wis. 7/13/2006)

• Decision Date: 13 July 2006
• Docket Number: No. 2005AP508.,2005AP508.
• Citation: 2006 WI 104
• Parties: Adams Outdoor Advertising, Ltd. d/b/a Adams Outdoor Advertising of Madison, Plaintiff-Appellant, v. City of Madison, Defendant-Respondent.
• Court: Wisconsin Supreme Court

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2006 WI 104

Adams Outdoor Advertising, Ltd. d/b/a Adams Outdoor Advertising of Madison, Plaintiff-Appellant, v. City of Madison, Defendant-Respondent.

No. 2005AP508.

Supreme Court of Wisconsin.

Opinion Filed: July 13, 2006.

APPEAL from a judgment of the Circuit Court for Dane County, Maryann Sumi, Judge. Reversed and cause remanded.

For the plaintiff-appellant there were briefs by Thomas S. Hornig, Margery Mebane Tibbetts, and Brennan, Steil & Basting, S.C., Janesville, and oral argument by Thomas S. Hornig.

For the defendant-respondent, there was a brief and oral argument by Larry W. O'Brien, assistant city attorney, with whom on the brief was Michael P. May, city attorney.

DAVID T. PROSSER, J.

¶ 1 This case is before the court on certification by the court of appeals, pursuant to Wis. Stat. (Rule) § 809.61 (2003-04).¹ The circuit court upheld the City of Madison's (the City) personal property tax assessment of Adams Outdoor Advertising, Ltd. (Adams) billboards for 2002 and 2003, and Adams appealed.²

¶ 2 Adams presents essentially four challenges to the assessments:

A. The City erroneously used the third tier income approach to assess Adams' billboards even though evidence of comparable sales was available.

B. Assuming the City could use third tier methods to assess Adams' billboards, the City improperly relied upon only the income approach to assess Adams' billboards, in violation of Bischoff v. City of Appleton, 81 Wis. 2d 612, 260 N.W.2d 773 (1978).

C. Assuming the City could use the third tier income approach to assess Adams' billboards, the City erroneously applied the income approach by including the value of the billboard permits in the assessments even though the permits are either intangible personal property or an interest in real property.

D. Use of the third tier income approach to assess Adams' billboards when almost all other personal property in the City is assessed using the cost-less-depreciation approach (the cost approach) contravenes the Uniformity Clause of the Wisconsin Constitution, article VIII, section 1.

¶ 3 We answer Adams' challenges as follows:

A. The City was entitled to use third tier methods of assessment to assess Adams' billboards because there was not a recent arms-length sale of the property and Adams did not produce evidence of reasonably comparable sales.

B. Although net income from billboard rentals may be a factor to consider in a third tier analysis, it cannot be the sole controlling factor in determining value. When the Madison City Assessor acknowledged that he considered but rejected all other approaches and factors, his assessment contravened long-standing assessment principles articulated in Waste Management of Wisconsin, Inc. v. Kenosha County Board of Review, 184 Wis. 2d 541, 558, 516 N.W.2d 695 (1994); Bischoff, 81 Wis. 2d at 619; and State ex rel. I.B.M. Corp. v. Board of Review, 231 Wis. 303, 311-12, 285 N.W. 784 (1939), as well as the prevailing practice for assessing billboards throughout Wisconsin and the United States.

C. The City erred by including the value of billboard permits in the assessment of Adams' billboards. Billboard permits are not tangible personal property. For property tax purposes, billboard permits constitute an interest in real property, as defined by Wis. Stat. § 70.03.

D. Having concluded that the City's assessment is improper because it relied on only an income approach and because it improperly included the value of billboard permits, we do not reach the question of whether the City's use of the income approach violates the Uniformity Clause.

¶ 4 Accordingly, we reverse the circuit court and remand the cause to the circuit court, which is directed to stay further proceedings pending reassessment of Adams' billboards by the City in a manner consistent with this opinion, or until the parties reach a settlement.

I. BACKGROUND

¶ 5 Adams challenges as excessive the City's personal property tax assessments of its billboards for the years 2002 and 2003. The City assessed Adams' billboards at $ 6,022,400 in 2002 and $5,858,000 in 2003.³ In 2002 and 2003 Adams owned 109 billboard structures in the City, according to an appraisal prepared for Adams. These structures presented "206 billboard faces," according to the Madison assessor. All billboard structures were on leased land.

¶ 6 Adams timely challenged the 2002 and 2003 assessments before the City Board of Assessors and then the City Board of Review.⁴ For both years, Adams claimed the fair market value of its billboards was $401,984. Adams' fundamental objection to the City's assessments was that they included value attributable to elements other than tangible personal property, including the location of the billboards and the billboard permits.⁵

¶ 7 After Adams failed to obtain meaningful relief from the Board of Review, Adams timely commenced actions against the City in Dane County Circuit Court pursuant to Wis. Stat. § 74.37(3)(d). The circuit court consolidated the 2002 and 2003 actions and held a three-day trial July 27-29, 2004, from which this appeal ensued.

¶ 8 Since 1994 the City has used the income approach to value billboards. Under the income approach, an assessor seeks to convert future benefits likely to be derived from property into an estimate of present market value. See Waste Mgmt., 184 Wis. 2d at 541. Using the income approach, the assessor first determines the net annual income from personal property, such as billboards. This figure is reached by deducting from gross income "the leasehold interest in the land," all typical operating expenses, and income attributed to something other than the personal property. Then the assessor sets a capitalization rate and applies this rate to the net annual income to determine the expected income stream over the economic life of the billboards. Id.; see also 1 Property Assessment Manual for Wisconsin Assessors, ch. 7 at 7-27 to 7-28 and ch.9 at 9-11 to 9-25 (hereinafter, Property Assessment Manual).

¶ 9 Prior to 1994, the City appraised billboards using the cost approach. Under the cost approach the total cost required to reproduce a billboard is determined and from this amount depreciation is subtracted. Vivid, Inc. v. Fiedler, 219 Wis. 2d 764, 783, 580 N.W.2d 644 (1998); see also 1 Property Assessment Manual, ch. 7 at 7-22 to 7-25 and 9-11.

¶ 10 The City switched from the cost approach to the income approach in 1994 after receiving an appraisal supplied by Adams as part of Adams' inverse condemnation lawsuit against the City. In the early 1990s, the City began actively restricting the number of billboards within the City pursuant to Wis. Stat. § 84.30. To establish its damages, Adams commissioned an appraisal from Ruppert and Ruppert, Inc. (the Condemnation Appraisal). The Condemnation Appraisal used the income approach and valued Adams' billboards within the City at approximately $5,000,000.

¶ 11 The Condemnation Appraisal prompted the City to re-think how it assessed billboards. In 1994, using the income approach, the City initially assessed Adams' billboards at $5,000,000, up from assessments of no more than $ 2,000,000 in the previous three years.⁶ Since 1994, the City's assessments of Adams' billboards have steadily increased using the income approach.

¶ 12 At trial, Adams emphasized how unusual it is to use the income approach to value billboards. Testimony revealed that other than Madison, the only jurisdictions in the nation that use the income approach are Sun Prairie and La Crosse. Additionally, testimony revealed that within the City, billboards are the only personal property assessed using the income approach, except certain buildings on leased property.

¶ 13 Although the above facts are undisputed, the parties, through their expert witnesses, fiercely contest the proper assessment methodology. Consequently, it is necessary to briefly summarize the testimony of the parties' experts.

¶ 14 The City's Chief Assessor, Michael Kurth (Kurth), testified that he appraised Adams' billboards using the income approach because there were no recent arms-length sales of the billboards and no reasonably comparable sales information. Kurth explained that in deriving the amount of income attributable to the billboard structures he determined Adams' total income and then subtracted the value of the leasehold interest, the income attributable to Adams' art and advertising-development department, and Adams' operating expenses. According to Kurth, the result of these calculations equaled the net income attributable to the billboard structures and the billboard permits. To this figure, Kurth then applied a capitalization rate of 14% to calculate the true cash value of the billboards.

¶ 15 Additionally, Kurth's testimony addressed the cost approach. First, he explained that he rejected the cost approach because he believed the true cash value of Adams' billboards was greater than the cost of its components. According to Kurth, the cost to construct a billboard does not reflect how the industry calculates the fair market value of billboards. Second, he criticized the calculations of Adams' expert (Rodolfo Aguilar) under the cost approach as omitting several significant costs, including site procurement costs, design costs, and permit costs, thereby significantly undervaluing Adams' billboards.

¶ 16 Adams presented three expert witnesses: Rodolfo Aguilar (Aguilar), Mark Ulmer (Ulmer), and Donald Sutte (Sutte). Adams' experts testified that either the market approach (comparable sales) or the cost approach should be used to appraise billboards for personal property tax assessments. None of these experts, however, presented evidence of comparable sales. Only Aguilar provided affirmative testimony as to the value of Adams' billboards. Using the cost approach, Aguilar valued Adams' 109 billboard structures in the City at $1,565,100.

¶ 17 Aguilar, Ulmer, and Sutte were all critical of the City's use of the...