Board of Assessment Appeals of State of Colo. v. City and County of Denver

• Decision Date: 10 October 1991
• Docket Number: No. 90CA0814,90CA0814
• Citation: 829 P.2d 1319
• Parties: BOARD OF ASSESSMENT APPEALS OF the STATE OF COLORADO, and Regis Jesuit Holding, Inc., Petitioners-Appellees, v. CITY AND COUNTY OF DENVER, State of Colorado, Board of Equalization of the City and County of Denver, and Alan N. Charnes, Manager of Revenue, in his official capacity as ex officio Assessor of the City and County of Denver, Respondents-Appellants. . IV
• Court: Colorado Court of Appeals

Page 1319

829 P.2d 1319

BOARD OF ASSESSMENT APPEALS OF the STATE OF COLORADO, and Regis Jesuit Holding, Inc., Petitioners-Appellees, v. CITY AND COUNTY OF DENVER, State of Colorado, Board of Equalization of the City and County of Denver, and Alan N Charnes, Manager of Revenue, in his official capacity as ex officio Assessor of the City and County of Denver Respondents-Appellants.

No. 90CA0814.

Colorado Court of Appeals Div. IV.

Oct. 10, 1991.

Rehearing Denied Nov. 21, 1991.

Certiorari Granted May 11, 1992.

Gale A. Norton, Atty. Gen., Raymond T. Slaughter, Chief Deputy Atty. Gen., Timothy M. Tymkovich, Sol. Gen., Larry A. Williams, Asst. Atty. Gen., Denver, for petitioner-appellee Bd. of Assessment Appeals of State of Colo.

Jon Slaughter Pelegrin, Lakewood, for petitioner-appellee Regis Jesuit Holding, Inc.

Patricia L. Wells, City Atty., Donald E. Wilson, Karen A. Aviles, Asst. City Atty., Denver, for respondents-appellants.

Opinion by Judge REED.

Respondents, City and County of Denver, its Board of Equalization, and Alan M. Charnes, ex officio assessor, appeal the order of the petitioner Board of Assessment Appeals (BOAA) which reduced for ad valorem tax purposes the value of the subject real property owned by the petitioner Regis Jesuit Holding, Inc. (Regis) for tax year 1989. We affirm.

This action involves the valuation, as of January 1, 1989, of property located at 5001 Federal Boulevard, Denver, Colorado, owned by Regis. The property is occupied by a K-Mart store pursuant to a lease executed by Regis in 1965. Although the base term of the lease was for 20 years, the lease is subject to a series of options to renew by the lessee, which extends the term through the year 2000.

By the terms of the lease, the lease payments are based upon a rate of $1.50 a square foot plus an override. As a result, the lease payments during the years 1987-1988 were approximately $2.00 a square foot. It is undisputed that this lease rental rate is considerably below the market for leases of comparable properties that were entered into in 1987 and 1988.

The assessor for the City and County of Denver valued the property, as of January 1, 1989, at $3,731,000. This value was affirmed by the Denver Board of Equalization (DBOE) upon challenge by Regis.

Thereafter, Regis appealed and a de novo hearing was held before the BOAA. It determined that the value of the property was $2,500,000--a value considerably below that urged by the assessor and affirmed by the DBOE ($3,731,000) and considerably more than that urged by Regis ($1,066,470).

The fundamental dispute between the parties is the effect of the existing lease with its terms unfavorable to Regis, in valuing the property. The assessor's premise is that the property shall be valued as if the encumbrance of the lease does not exist, or at least, that the lease is to be discredited. Regis, on the other hand, contends that the terms of the long-term lease play a vital role on the issue of value.

The assessor's evidence was that he examined the available data for the statutory base years, January 1, 1987, through June 30, 1988 (and the five-year extension period preceding June 30, 1988), and found no comparable properties which were sold free from a long-term lease. Thus, he considered, and then rejected, the market approach. Also, he considered the cost approach. However, it resulted in a value of $3,997,400, which, in his opinion, exceeded the true value of the property. Therefore, this approach was rejected by him.

However, in considering the income approach, the assessor testified that, for comparable properties, he had compared and examined leases that had been entered into during the 18-month base period and that this comparison established a fair market rental rate of $4.00 a square foot (and $7.25 a square foot for K-Mart's service garage). Thus, utilizing these rental rates rather than the actual lease payments, he assessed a value of $3,731,000 which was subsequently adopted by the DBOE.

Regis' expert agreed with the assessor that a value under the cost approach was excessive and should be disregarded. As to the market approach, however, Regis' witness relied upon sales of comparable properties which were encumbered at the time of sale with long-term leases similar to that upon Regis' property. Because there were no sales during the regular 18-month base period, the comparables chosen by this expert were sales occurring within the extension of the base period permitted by statute, i.e., within five years prior to June 30, 1988. After adjusting these sales and bringing them current to January 1, 1989, Regis' expert found the market value of the subject property to be $1,316,138.

This witness also determined value based upon the income approach. To do so, he factored in the lease payments of the subject property, as an indicator, along with lease payments made upon comparable properties during the 18-month base period. In each instance, all of the lease rates were determined by long-term leases entered into in 1965, 1967, and 1975, respectively. Using the income approach, the expert determined a value of $1,066,460.

After hearing, the BOAA determined the value of the property to be $2,500,000 which it allocated between the land and the improvements. The assessor and DBOE appeal from this determination.

I.

Respondents contend that the BOAA erred in considering the market approach to determine the property's value because the only evidence thereof represented a sale of but a partial interest in the property. We disagree.

Colo. Const. art. X, § 3(1)(a), provides in pertinent part:

"Each property tax levy shall be uniform upon all real and personal property.... The actual value of all real and personal property ... shall be determined under general laws, which shall prescribe such methods and regulations as shall secure just and equalized valuations for assessments of all real and personal property.... Valuations for assessment shall be based on appraisals by assessing officers to determine the actual value of property in accordance with provisions of law, which laws shall provide that actual value be determined by appropriate consideration of cost approach, market approach, and income approach to appraisal."

Pursuant to this constitutional mandate, the General Assembly has enacted a statutory scheme for the appraisal of property. This includes § 39-1-103(5)(a), C.R.S. (1990 Cum.Supp.), which provides, in pertinent part:

"All real and personal property shall be appraised and the actual value thereof for property tax purposes determined by the assessor.... 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." (emphasis added)

To facilitate this procedure, § 39-1-104, C.R.S. (1990 Cum.Supp.) requires that a base year system be established to assign values to property. Under that method, the value of property is based upon a specified base period which value is then used in calculating the property's assessed value each year until a new base period is established. Carrara Place, Ltd. v. Arapahoe County Board of Equalization, 761 P.2d 197 (Colo.1988).

The base period for the 1989 assessment is the 18-month period from January 1, 1987, through June 30, 1988, "except that, if comparable valuation data is not available from such one-and-one-half year period to adequately determine the value of a class of property, the period of five years immediately prior to July 1, 1988, shall be utilized to determine the level of value" for assessments for 1989. See § 39-1-104(10.1)(b), C.R.S. (1990 Cum.Supp.).

Additionally, § 39-1-106, C.R.S. (1982 Repl.Vol. 16B), provides:

"For purposes of property taxation, it shall make no difference that the use, possession, or ownership of any taxable property is qualified, limited, not the subject of alienation, or the subject of levy or distraint separately from the particular tax derivable therefrom...." (emphasis added)

While conceding that the market approach is a mandated valuation method, respondents argue that it should have been rejected here. They argue that there was no evidence of a sale of all the interests in the property because the subject property, as well as the comparable properties, were all subject to leases and that, therefore, the sales only reflected a sale of the lessor's interest to receive rent and the right of...