Dep't of Revenue v. River's Edge Invs., LLC

• Decision Date: 30 June 2016
• Docket Number: SC S062829,TC 4962
• Citation: 377 P.3d 540,359 Or. 822
• Parties: Department of Revenue, State of Oregon; and Deschutes County Assessor, Appellants, v. River's Edge Investments, LLC, Respondent.
• Court: Oregon Supreme Court

359 Or. 822

377 P.3d 540

Department of Revenue, State of Oregon; and Deschutes County Assessor, Appellants

v.River's Edge Investments, LLC, Respondent.

TC 4962

SC S062829

Supreme Court of Oregon.

Argued and submitted January 14, 2016.

June 30, 2016

Marilyn J. Harbur, Assistant Attorney General, Salem, argued the cause and filed the briefs for appellant Department of Revenue. With her on the briefs were Ellen F. Rosenblum, Attorney General, and Daniel Paul, Assistant Attorney General.

Laurie E. Craghead, Deschutes County Assistant Legal Counsel, Bend, filed the brief for appellant Deschutes County Assessor.

Mark G. Reinecke, Bryant Lovlien & Jarvis PC, Bend, argued the cause and filed the brief for respondent. With him on the brief were Neil R. Bryant and Danielle Lordi.

En Banc

BREWER, J.

This is an appeal from a Tax Court decision involving the value of a convention center in Bend, Oregon, for property tax purposes for the 2008–09 tax year. The taxpayer who owns the convention center also owns a hotel across the street. The convention center and the hotel are held in different property tax accounts. Taxpayer's appraisal valued the convention center at $4,130,000, after applying two different approaches to valuation—the cost approach and the income approach (described in more detail below). The appraiser for the Deschutes County Assessor (assessor) and the Department of Revenue (department) appraised the convention center at $16,700,000, after applying only the cost approach to valuation. The Regular Division of the Tax Court rejected the department's appraisal for two independent reasons. First, the court held that Measure 50 (codified as Article XI, section 11, of the Oregon Constitution ) and its enabling statutes required the property in each tax account to be valued separately. The court also independently concluded that the department's appraisal was unpersuasive because the appraiser lacked good reason for not having used the income approach. Dept. of Rev. v. River's Edge Investments LLC , 21 OTR 469, 2014 WL 4087928 (2014). In a supplemental judgment, the Tax Court awarded taxpayer its attorney fees, concluding that the department's position was not objectively reasonable and that the department should be deterred from making similar arguments in the future. Dept. of Rev. v. River's Edge Investments, LLC II , 22 OTR 46, 48, 2015 WL 1359314 (2015).

The department and the assessor have appealed to this court, raising a narrow range of issues.¹ As we explain, we affirm the Tax Court's decision to reject the department's appraisal on the ground that it was unpersuasive. Because that independent reason supports the Tax Court's decision, we affirm its judgment, and we need not decide whether Measure 50 requires valuing the property in each property tax account separately. Because it was based in part on the Tax Court's Measure 50 analysis, we vacate the award of attorney fees and remand for further proceedings.

I. OVERVIEW OF LAW

Before turning to the facts of this case and the Tax Court's holding, it is useful to establish the legal context in which those issues arise: taxation of real property. We review the general principles and elaborate only on the details that are in play in this case.

A. Real Market Value and Appraisal

1. Real market value

The real market value of property is the starting point for determining the amount of property tax. See ORS 308.232 (unless property is exempt from ad valorem taxation, it should “be valued at 100 percent of its real market value”).² “Real market value” is defined as essentially what a hypothetical buyer would pay to a hypothetical seller in an arm's length transaction. See ORS 308.205(1) (defining real market value);³ Hewlett–Packard Co. v. Benton County Assessor , 357 Or. 598, 602, 356 P.3d 70 (2015).⁴ The real market value is derived from the “highest and best use” of the property, because the highest sale price would come from a buyer who intended to use the property in the most profitable way.⁵

2. Maximum assessed value and Measure 50

The real market value of property, however, is not necessarily the assessed value that goes on the tax roll. That qualification derives from Measure 50, a constitutional amendment enacted in 1997 (codified as Article XI, section 11, of the Oregon Constitution ), and its enabling legislation. In sum, Measure 50 caps property taxes: The assessed value of the property will be the lesser of the real market value or what is called the “maximum assessed value.” See Or. Const, Art XI, § 11 (1) (describing calculation of maximum assessed value);⁶ ORS 308.146(2).⁷ The maximum assessed value generally is designed to keep the assessed property value from increasing more than three percent per year. See Or. Const, Art XI, § 11 (1)(b); ORS 308.146(1).

For purposes of determining compliance with Measure 50, “property” means “[a]ll property included within a single property tax account [.]” ORS 308.142(1)(a). A property tax account is an administrative division of property. ORS 308.142(2) (also for purposes of complying with Measure 50, the term “property tax account” means “the administrative division of property for purposes of listing on the assessment roll”).

3. Appraisal: cost, income, and comparable sales

To determine the real market value of property, appraisers generally consider three different approaches to valuation: cost, income, and comparable sales. OAR 150–308.205–(A)(2)(a) (requiring the consideration of cost, income, or sales comparison approaches);⁸ Hewlett – Packard Co ., 357 Or. at 603, 356 P.3d 70. The cost approach estimates value from the cost that would be needed to construct a similar property; the income approach estimates value from the income that the property could be expected to generate; and the comparable sales approach estimates value from the prices paid for similar properties. See id .

An appraiser must consider all three approaches, even if the appraiser ultimately cannot use one or more of them in developing the appraisal. OAR 150–308.205–(A)(2)(a) (recognizing that some approaches cannot be applied to a particular property, but “each [approach] must be investigated for its merit”); see Hewlett–Packard Co ., 357 Or. at 603, 356 P.3d 70. When an appraiser uses more than one approach, the resulting values suggested by each approach may not be identical. The appraiser then must reconcile those value indications into a single, final value. Id. ; see also Appraisal Institute, The Appraisal of Real Estate 65 (12th ed. 2001) (“The final analytical step in the valuation process is the reconciliation of the value indications derived into a single dollar figure or a range into which the value will most likely fall. The nature of reconciliation depends on the appraisal problem, the approaches that have been used, and the reliability of the value indications derived.”).

4. Appraisal of especial property

In some cases, a property has no immediate market value. In that circumstance, the real market value is determined based on just compensation. See ORS 308.205(2)(c) (“If the property has no immediate market value, its real market value is the amount of money that would justly compensate the owner for loss of the property.”). The department has implemented that statute through its “especial property” rule, OAR 150–308.205–(A)(3). See STC Submarine, Inc. v. Dept. of Rev. , 320 Or. 589, 595, 890 P.2d 1370 (1995) (so noting). Under the especial property rule, an appraiser does not need to use the comparable sales approach, because there are no comparable sales. Instead, real market value is determined by estimating just compensation through the cost approach and/or the income approach. The rule provides:

“Valuation of Especial Property: Especial property is property specially designed, equipped, and used for a specific operation or use that is beneficial to only one particular user. This may occur because the especial property is part of a larger total operation or because of the specific nature of the operation or use. In either case, the improvement's usefulness is designed without concern for marketability. Because a general market for the property does not exist, the property has no apparent immediate market value. Real market value must be determined by estimating just compensation for loss to the owner of the unit of property through either the cost or income approaches, whichever is applicable, or a combination of both.”

OAR 150–308.205–(A)(3).

II. FACTS AND TAX COURT PROCEEDINGS

A. Facts

As noted, the property at issue here is a convention center and related land in Bend.

Taxpayer built the convention center south of its existing full-service hotel. The hotel and convention center properties are adjacent, but are in separate tax accounts. Taxpayer also owns other property in the neighborhood, including a golf course.

The department and the assessor filed a complaint in the Regular Division of the Tax Court challenging the real market value of the property as of January 1, 2008, for the 2008–09 tax year. The department and assessor asserted that the magistrate had erred in finding a real market value of $3,538,000 for the property, and asserted that the correct real market value was no less than $15,250,000.

At trial, each side presented an appraisal of the property. Neither of the appraisals used the comparable sales approach. See River's Edge Investments LLC , 21 OTR at 474 (noting that neither appraiser “developed a market indicator of value”). The department's appraiser concluded that the highest and best use of the property as improved was as a convention center “used in conjunction with” taxpayer's hotel. The department's appraiser used only the cost approach in valuing the property. He concluded that, as of January 1, 2008, the property should have been valued at $16,700,000.

The department's appraiser did not use an income approach. He concluded that the convention center property would increase hotel room rentals, and...