Board of Assessment Appeals of State of Colo. v. E.E. Sonnenberg & Sons, Inc.

• Decision Date: 10 September 1990
• Docket Number: No. 88SC558,88SC558
• Citation: 797 P.2d 27
• Parties: BOARD OF ASSESSMENT APPEALS OF the STATE OF COLORADO and Logan County Board of Equalization, Petitioners, v. E.E. SONNENBERG & SONS, INC., Respondent.
• Court: Colorado Supreme Court

Page 27

797 P.2d 27

BOARD OF ASSESSMENT APPEALS OF the STATE OF COLORADO and Logan County Board of Equalization, Petitioners, v. E.E. SONNENBERG & SONS, INC., Respondent.

No. 88SC558.

Supreme Court of Colorado En Banc.

Sept. 10, 1990.

Duane Woodard, Atty. Gen., Charles B. Howe, Chief Deputy Atty. Gen., Richard H. Forman, Sol. Gen., Larry A. Williams, Asst. Atty. Gen., Denver, for Petitioner Bd. of Assessment Appeals.

Roger L. Nixt, Logan County Atty., Sterling, for petitioner Logan County Bd. of Equalization.

Davis, Graham & Stubbs, Andrew M. Low, Denver, for respondent.

Justice LOHR delivered the Opinion of the Court.

This case concerns the valuation of the E.E. Sonnenberg & Sons, Inc. commercial cattle feedlot ("feedlot") for assessment of property taxes. The central question is whether in conducting a de novo review of the value placed on the feedlot for assessment purposes by the Logan County Board of Equalization for the 1985 tax year, the Board of Assessment Appeals ("Board") abused its discretion by relying solely on the cost approach to valuation rather than also giving consideration to the feedlot's value under the market approach. The Logan County District Court affirmed the Board's decision. The Colorado Court of Appeals reversed, based on the Board's failure to consider the market approach in valuing the feedlot, and remanded to the Board for rehearing. E.E. Sonnenberg & Sons, Inc. v. Board of Assessment Appeals, 768 P.2d 748 (Colo.App.1988). We granted certiorari to review the court of appeals' judgment. We agree with the court of appeals that the Board abused its discretion by failing to consider evidence of the feedlot's value under the market approach. We disagree, however, with the additional holding of the court of appeals that the Board erred in excluding evidence of the valuation placed on feedlots in other counties by assessors in those counties for the 1985 tax year. Accordingly, we affirm the judgment of the court of appeals in part and reverse it in part.

I.

E.E. Sonnenberg & Sons, Inc. ("taxpayer") constructed a commercial cattle feedlot in Logan County, Colorado, between 1974 and 1977. The facility occupies approximately 254 acres and has a maximum capacity of 28,000 head of cattle. ¹

For the tax year 1985, the Logan County Assessor determined that the feedlot had an actual value of $3,576,070 for tax assessment purposes. ² Dissatisfied, the taxpayer petitioned the Logan County Board of Equalization ³ pursuant to section 39-8- 106, 16B C.R.S. (1982 & 1989 Supp.), ⁴ and as a result obtained a 5% reduction in the valuation, to $3,397,280.

Still dissatisfied with the value assigned to the feedlot, ⁵ the taxpayer appealed to the Board pursuant to section 39-8-108(1), 16B C.R.S. (1989 Supp.). ⁶ The Board conducted a trial de novo, ⁷ at which the taxpayer's expert estimated the actual value of the feedlot using all three methods of valuation designated by section 39-1-103(5)(a), 16B C.R.S. (1989 Supp.), for property of the type at issue here. The statute provides in relevant part that

[a]ll real and personal property shall be appraised and the actual value thereof for property tax purposes determined by the assessor of the county wherein such property is located. The actual value of such property ... shall be that value determined by appropriate consideration of the cost approach, the market approach, and the income approach to appraisal. The assessor shall consider and document all elements of such approaches that are applicable prior to a determination of actual value.

The requirement that the cost, market and income approaches be used for valuing property such as feedlots for purposes of property taxation is also found in Article X, section 3(1)(a), of the Colorado Constitution.

Using the income approach, ⁸ the taxpayer's expert estimated the value of the feedlot at $1,344,000. He then valued the feedlot at $1,505,000 using the cost approach, ⁹ based on an estimated replacement cost of $4,300,000, less 65% physical, economic and functional depreciation as of 1977, the statutorily-determined base year for tax assessment purposes. ¹⁰ The taxpayer's expert stated that in selecting the depreciation factor, he did not rely to any significant extent on the physical deterioration of the feedlot because in the 1977 base year the complex was relatively new. Instead, he based the 65% depreciation principally on the high economic obsolescence to which cattle feedlots were subject at the relevant time. ¹¹

The taxpayer's expert next estimated the value of the feedlot under the market approach ¹² at $1,344,000. He based this estimate principally on sales of two comparable feedlots located outside Logan County, near Lamar, Colorado, and Scottsbluff, Nebraska, but within 200 miles of the feedlot and within the "High Plains feeding area," ¹³ of which Logan County is a part. Additionally, he considered sales of ten other feedlots located in Colorado, Kansas, Oklahoma and Texas. The taxpayer's expert thought it appropriate to use comparable sales outside the county and state, and explained that "the industry, itself, makes no distinction between state lines or county lines." He added that although no feedlots were sold in Logan County during the relevant period, and the market for feedlots throughout the High Plains feeding area was relatively inactive during that time, the market approach nonetheless provided the best means of determining the value of the property. Using the figures derived from the three approaches, the taxpayer's expert arrived at $1,350,000 as the actual value of the feedlot.

The Logan County Assessor then testified that she arrived at a valuation of the feedlot for tax assessment purposes ¹⁴ using only the cost approach, based on the estimated replacement cost of the feedlot, and where necessary, Sonnenberg's record of the original construction cost, less physical depreciation to the 1977 base year, computed by taking into account the construction date and estimated economic life of each of the various improvements constituting the feedlot. ¹⁵ This resulted in a composite depreciation of approximately 14 1/2% from replacement cost to the 1977 base year. The assessor explained that her office did not use the income approach or the market approach in assessing the value of the property because "[w]e had no sales to compare, and we had insufficient data to do an income approach," ¹⁶ leaving the cost approach as the best means of valuing the property. The assessor testified that she was unable to find comparable sales within Logan County and, finding none, did not look outside the county or make any further effort to obtain the data necessary to apply the market approach. She agreed, however, that where a market may be discerned, the market approach is the best indicator of a property's actual value.

In calculating the value of the feedlot under the cost approach, the assessor used approximately the same replacement cost figures as the taxpayer's expert, but arrived at a final figure almost three times higher by limiting depreciation to physical depreciation based on the expected economic life of the improvements rather than taking into account economic obsolescence, which was the primary basis for the 65% depreciation considered appropriate by the taxpayer's expert. The latter defended the 65% depreciation rate as justified by the depressed economic conditions of the market at the relevant time. The assessor acknowledged that economic depreciation is a valid factor to consider in arriving at a property's value. She did not consider economic depreciation in this case, however, because she found no comparable sales within the county and lacked other data on market value. ¹⁷

The taxpayer attempted twice during the hearing to introduce evidence of the actual value assigned to feedlots in other counties for assessment of property taxes. On each occasion, the Board sustained the county's general objection to the effect that the proffered evidence was irrelevant. The taxpayer then made an offer of proof out of the presence of the Board that two witnesses would have testified as to their examination of the tax assessment records for the 1985 tax year in Weld, Otero and Morgan counties, where they found four feedlots that had been determined to have far lower valuations for assessment purposes on a per-head capacity basis than the Logan County Assessor had assigned to the taxpayer's feedlot. ¹⁸

In closing arguments to the Board, Logan County represented that the Board was precluded by the sales ratio statute, § 39-1-103(8)(d), 16B C.R.S. (1982), from considering the market approach to valuation because there were fewer than 30 comparable sales within the county during the relevant two-year period. The taxpayer then asserted in rebuttal that the feedlot was a special use property to which the sales ratio statute did not apply.

The Board unanimously denied the relief sought. Explaining that it found the 65% depreciation factor used by the taxpayer's expert to value the property under the cost approach "unacceptable," the Board determined that the assessor had properly valued the feedlot.

The taxpayer appealed to the Logan County District Court, which affirmed the Board's decision. The district court based its decision in part on Logan County's argument that the sales ratio statute, § 39-1-103(8)(d), barred use of the market approach in this case because there were fewer than 30 comparable sales within the county during the relevant time period, calling the statute a "formidable obstacle."

The taxpayer sought further appellate review in the Colorado Court of Appeals, which reversed the judgment of the district court and remanded the case with directions that it be further remanded to the Board for rehearing. The court of appeals held that the district court's reliance on the sales ratio statute was misplaced, and consequently that the Board was required to give...