Dennis v. County of Santa Clara

• Decision Date: 16 November 1989
• Docket Number: No. H003791,H003791
• Citation: 215 Cal.App.3d 1019,263 Cal.Rptr. 887
• Court: California Court of Appeals Court of Appeals
• Parties: Nelson R. DENNIS, et al., Plaintiffs and Appellants, v. COUNTY OF SANTA CLARA, et al., Defendants and Appellants.

Page 887

263 Cal.Rptr. 887

215 Cal.App.3d 1019

Nelson R. DENNIS, et al., Plaintiffs and Appellants, v. COUNTY OF SANTA CLARA, et al., Defendants and Appellants.

No. H003791.

Court of Appeal, Sixth District, California.

Nov. 16, 1989.

As Modified on Denial of Rehearing Dec. 15, 1989.

Review Denied March 15, 1990.

Stephen A. Dennis, Thoits, Love, Hershberger & McLean, Palo Alto, for plaintiffs, respondents and appellants.

Donald L. Clark, County Counsel, Thomas Wm. Cain, San Jose, and Vanessa Ann Zecher, Deputy County Counsel, for defendants, appellants and respondents.

AGLIANO, Presiding Justice.

Following plaintiffs' purchase of real property in San Jose, the Assessor of Santa Clara County revalued the property for tax purposes in an amount substantially higher than the purchase price. After the Assessment Appeals Board denied plaintiffs' application for changed assessment, plaintiffs filed this action to nullify the Board's decision. The superior court set aside the Board's decision, finding that the full value of the property was the amount of plaintiffs' purchase price, and entered judgment accordingly. The County of Santa Clara and City of San Jose appeal. Plaintiffs cross-appeal with respect to attorney fees. We conclude for the reasons stated below that the judgment must be reversed.

Factual and Procedural Background

In May 1982, plaintiffs purchased commercial real property at 3100 Alum Rock Avenue, San Jose, for $215,418 in cash. At the time, plaintiffs had an ownership interest in the corporation that was the major tenant on the property.

In June 1983, using the market data and income methods of appraisal, the assessor revalued the property for tax purposes at $334,600. (Rev. & Tax.Code, § 50.) Plaintiffs paid the tax on the newly assessed value, but applied to the Board for changed assessment, claiming the assessor considered improper factors in his determination of value. (Rev. & Tax.Code, § 1603.) On the evidence presented, the Board found the value of the property to be $334,600, as determined by the assessor under both the market data and income methods. The Board noted: "The property was purchased directly from the owners, who were real estate brokers, and it was not listed on a multiple listing service at the time of sale."

Plaintiffs then filed a complaint in superior court for refund. The matter was submitted to the trial court on the administrative record and the parties' briefs.

In July 1985, the trial court remanded the matter to the Board for further findings on the following questions: "1. The extent, if any, that the Board considered the acquisition cost of the subject property, together with the reasons for rejecting same; [p] 2. The comparable sales specifically relied upon, together with the nature and extent of all economic adjustments made to such comparable properties to account for difference between same and subject property; [p] 3. The capitalization rate relied upon, together with the basis for the utilization of same; and [p] 4. The sources utilized in determining the appropriate amount of economic rental income attributable to the subject property."

The Board issued supplementary findings and conclusions in April 1986. Explaining its treatment of the purchase price, the Board stated: "Subject property was purchased by the applicants in May, 1982 for $215,000. The applicant's primary contention in this appeal was that the sale of subject property to applicants was the only valid measure of the property's fair market value. [p] At the time of the sale of subject property to applicants in May, 1982, the primary tenant was a corporation in which the applicants and their son were the shareholders. The corporation had a four year lease on the property renewable on or before December 31, 1984 for an additional term. [p] At the time the applicants purchased subject property it was not listed on a multiple listing service, and there was no evidence that it was offered for sale to any person other than applicants. The property was purchased directly from the former owners, and the applicants testified that the negotiated sales price was based in part on leases in existence at the time of purchase, which reflected rental rates which were below the market rates for the property.... [p] The Board finds that the purchase of subject property by the applicants in May, 1982 was an arms length transaction; however, the Board further finds that when it is viewed in light of the comparable sales introduced by the Assessor and further viewed in light of the fact that it was purchased by an existing tenant without having been exposed for sale on the open market, it is not a sufficiently reliable indicator of the market value of subject property to form a basis for determining the full cash value of such property."

As to the market data relied upon, the Board stated: "To support his conclusion of value derived from the use of the comparable sales approach, the Assessor introduced evidence of seven sales of properties located in the same or similar older retail and commercial areas. Comparables No. 1-3 were located in the immediate neighborhood of the subject property, and the remaining properties were located in areas with similar uses. Each of the comparables had retail uses, and Comparables No. 1, 4, and 5 had uses in addition to retail uses. The indicated values per square foot for Comparables No. 1, 2, 3, 5, and 6 were adjusted for the passage of time from the date of sale pursuant to a regressive analysis of sales prepared by the Standards Division of the Assessor's office.... Each of the seven sales introduced into evidence by the Assessor is sufficiently alike subject property as to shed light on the value of such property. The Board finds that the adjustments for time made by the Assessor to Comparables No. 1, 2, 3, 5, and 6 were reasonable...."

Referring to the capitalization of income approach, the Board found the following: "The Assessor also introduced evidence of value based upon an income approach.... [p] In arriving at value using the income approach, the Assessor used a capitalization rate of 11% based upon the property being an older property. This was higher than the rate used by the applicants (10%) in their income analysis.... [p] Based on the Assessor's testimony as to the appropriate capitalization rate and as to the market rent for subject property, the Board finds that the market value of subject property using an income approach to value is in excess of $334,600."

In determining what rental income would have represented reasonable economic yield for the property, "[t]he [Assessor's] appraiser testified that the market for retail properties at the time of sale was 75cents per square foot and that the market for shop/warehouse space was 30cents per square foot. In determining the rental value of the office area, the appraiser used the asking price per square foot of subject property. No other evidence of comparable rentals was presented.... [p] ... The Board further finds that the contract rents on subject property were below market rental rates and could not be used in an income approach to value."

The matter was again reviewed by the trial court, based on the record of the first trial, the Board's supplemental findings, and additional briefs. On August 31, 1987, the court determined that the supplemental findings did not cure the defects in the original findings, "particularly with respect to the rejection of the purchase price, or acquisition cost, as an indicator of fair market value." The court admonished that "the substitution of the fact that the property was purchased by a tenant, in lieu of the lack of multiple listing, as a basis for rejecting the purchase price compounds the problem. This sale and purchase was an 'open market transaction' as a matter of law and the Board is in error in rejecting it, or minimizing it, as a basis for determining full value. [p] Moreover, the evidence presented at the hearing does not provide any substantial basis for the finding as to comparable sales or appropriate rent for the subject property. The properties compared are indeed significantly dissimilar ... as evident from review of the transcript." The court concluded that "[u]nder all the circumstances, it is clear that the defects cannot be cured based upon the evidence presented at the hearing and that the only competent and substantial evidence is that the full cash value is $215,000."

The trial court awarded plaintiffs $1,500 in attorney fees.

Additional facts will be recited as they relate to the issues discussed below.

Discussion

We confront two issues on appeal. First, we must determine whether the assessor was bound to adopt plaintiffs' purchase price as the fair market value of the property or whether he properly relied upon the market data and income methods of appraisal. Second, assuming that the assessor properly relied upon those methods, we must determine whether he properly applied the methods to this case.

Standard of Review

Whether the valuation method used by an assessor is valid constitutes a question of law. The court must determine "whether the challenged method of valuation is arbitrary, in excess of discretion, or in violation of the standards prescribed by law." (Bret Harte Inn, Inc. v. City and County of San Francisco (1976) 16 Cal.3d 14, 23, 127 Cal.Rptr. 154, 544 P.2d 1354.) Our review is de novo.

In reviewing the application of a valid valuation method, the trial court reviews the entire record to determine if the findings are supported by substantial evidence. (Norby Lumber Co. v. County of Madera (1988) 202 Cal.App.3d 1352, 1362, 249 Cal.Rptr. 646; Hunt-Wesson Foods, Inc. v. County of Alameda (1974) 41 Cal.App.3d 163, 176, 116 Cal.Rptr. 160.) A board of assessment appeals is " 'the sole judge of questions of fact and of the values of property.' " (Id. at p. 177, 116 Cal.Rptr. 160.) As the court stated in Bank of...