Eurofresh, Inc. v. Graham County

• Decision Date: 25 October 2007
• Docket Number: No. 1 CA-TX 06-0002.,1 CA-TX 06-0002.
• Citation: 187 P.3d 530,218 Ariz. 382
• Parties: EUROFRESH, INC., a Delaware corporation, fka Bonita Nurseries, Inc., a corporation, Plaintiff/Appellee, v. GRAHAM COUNTY, Defendant/Appellant.
• Court: Arizona Court of Appeals

187 P.3d 530

218 Ariz. 382

EUROFRESH, INC., a Delaware corporation, fka Bonita Nurseries, Inc., a corporation, Plaintiff/Appellee, v. GRAHAM COUNTY, Defendant/Appellant.

No. 1 CA-TX 06-0002.

Court of Appeals of Arizona, Division 1, Department T.

October 25, 2007.

Reconsideration Denied January 11, 2008.

Review Denied June 3, 2008.

Fennemore Craig, P.C. By Paul J. Mooney, Jim L. Wright, Paul Moore, Phoenix, Attorneys for Appellee.

Helm & Kyle, Ltd. By Roberta S. Livesay, Lisa J. Bowey, Tempe, Attorneys for Appellant.

OPINION

JOHNSEN, Judge.

¶ 1 This is an appeal from a Tax Court decision granting a challenge to Graham County's assessments of the full cash value of a large hydroponic greenhouse in Willcox. The owner of the property, Eurofresh, Inc., challenged the County's assessments for tax years 2004 and 2005. During trial in the Tax Court, the parties generally agreed on the replacement cost of the greenhouse, but Eurofresh argued that the replacement cost should be reduced by 40 percent for ad valorem tax purposes because of external obsolescence. We hold that as a matter of law, proof of external obsolescence requires a showing of the cause of the asserted obsolescence and proof that it affects the value of the subject property. Because Eurofresh offered no such proof, we reverse the judgment of the Tax Court and remand for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

¶ 2 Eurofresh is the leading year-round producer and seller of greenhouse tomatoes in the United States. Although it has distribution centers at several locations throughout the country, Eurofresh operates greenhouses in only two locations, both in Arizona: the Willcox facility and another greenhouse in Snowflake that the company purchased in 2002. The greenhouses are hydroponic, meaning that the tomato plants are grown without soil.

¶ 3 The full cash value of real property is assessed as of January 1 of the preceding year. Ariz.Rev.Stat. ("A.R.S.") § 42-11001(15) (2003).¹ As of the January 1, 2003 valuation date for tax year 2004, Eurofresh owned 120 acres "under glass" in Willcox, and the County assessed the greenhouse at $36,229,693. Eurofresh added 48 acres of greenhouse in time for the January 1, 2004 valuation; for tax year 2005, the County valued Eurofresh's 168 acres of greenhouse at $51,884,078.

¶ 4 Eurofresh timely appealed the County's full cash value assessments for both tax years by filing complaints in the Tax Court.² After consolidating the appeals for the two tax years, the Tax Court held a nine-day bench trial.

¶ 5 Among the evidence at trial was a confidential offering memorandum issued by Banc of America Securities in April 2004 in connection with a $100 million loan to Eurofresh. According to the offering memorandum, in 2003 Eurofresh sold 80 million pounds of tomatoes grown in Arizona. The company's chief financial officer, Frank Van Straalen, testified that Eurofresh has a 20 percent share of the U.S. grocery-store greenhouse-tomato market. It is the largest U.S. supplier of greenhouse tomatoes; its Arizona operations give it 77 percent more productive acreage than its next largest competitor in this country. According to the offering memorandum, the fact that Eurofresh is able to produce its greenhouse tomatoes year-round affords it "a unique competitive advantage." "As a result of year-round production, technologically advanced operations and premium positioning, Eurofresh believes it is the most consistently profitable hydroponic greenhouse tomato producer in North America."

¶ 6 Eurofresh's Willcox greenhouse is the largest of its kind in the world. Evidence at trial established that Willcox provides what Eurofresh calls an "ideal location" for its greenhouse. There it enjoys a "vast" supply of groundwater and abundant sunlight, "including the highest amount of winter sunlight in North America (average of 330 days of sunlight per year)." In addition, Willcox "provides cooler temperatures in the summer and frost in the winter, which helps the biological pest control program." According to the offering memorandum, "No other greenhouse competitor is able to generate a consistent, high volume supply of premium quality tomatoes throughout each month of the calendar year." This is a particularly valuable competitive advantage in the winter, when some competitors shut down and tomato prices rise. More than half of Eurofresh's projected revenues come from fixed-price purchase agreements with major U.S. grocers and "big-box" stores.

¶ 7 As Eurofresh described in its offering memorandum, the fresh produce market in the U.S. "is characterized by consistent underlying demand and favorable growth dynamics." Since 2000, the fresh tomato segment of that market experienced a 12 percent compounded annual growth rate. Greenhouse tomatoes represented 29 percent of the $2.5 billion average weekly grocery-store tomato sales. To take advantage of market growth, in 2004 Eurofresh was mapping a long-term plan to add up to 200 more acres of production capacity in Arizona.

¶ 8 At trial the County and Eurofresh agreed the most appropriate appraisal technique to apply to the Willcox greenhouse was the "replacement cost" method. As the Tax Court noted, both sides presented roughly equivalent estimates of the greenhouse's replacement cost. Both sides also agreed that when valuing real property using the cost method, one must take depreciation into account. According to Appraisal Institute, The Appraisal of Real Estate (12th ed.) (2001), which both sides agreed was authoritative, three categories of depreciation must be considered: physical depreciation, functional obsolescence and external (or "economic") obsolescence. See id. at 363-65.³ The County and Eurofresh's expert appraiser witness, Paul Bierschwale, agreed that physical depreciation was minimal at the subject greenhouse and functional obsolescence was non-existent. The parties vigorously disagreed, however, about whether the replacement cost of the greenhouse should be reduced on account of external obsolescence.

¶ 9 Eurofresh characterized its expert witness, Bierschwale, as a national expert in the appraisal of large (20+ acres) greenhouses, and the County did not seriously dispute Bierschwale's qualifications. Bierschwale testified that the replacement cost of the Willcox greenhouse should be reduced by 40 percent for property tax purposes because of external obsolescence. He arrived at that conclusion based on his study of three recent sales of smaller greenhouses, a 20-acre greenhouse in Snowflake,⁴ a 20-acre greenhouse in Fort Lupton, Colorado, and a pair of 20-acre greenhouses (sold together) in Grant and Estancia, New Mexico.⁵ Bierschwale calculated the replacement costs of each of the three greenhouses and compared those values with the prices for which they recently had sold. After adjusting for physical depreciation and other factors, Bierschwale concluded that the three greenhouses had sold for between 40 and 58 percent less than their adjusted replacement cost. He attributed the differential to market-wide external obsolescence, and, on that basis, conservatively estimated that the replacement cost of the Willcox greenhouse should be reduced by 40 percent to arrive at its full cash value.

¶ 10 The County vigorously disputed Bierschwale's analysis. The County contended it was inappropriate to use the other greenhouse sales to calculate external obsolescence because each of the three greenhouses was in some way "distressed," each had been sold by a lender out of foreclosure or bankruptcy, and in fact, only one of the greenhouses was in operation at time of sale. More broadly, while not disputing that external obsolescence can be appropriately applied to a replacement cost analysis, the County argued that as a matter of law, Eurofresh failed to show that whatever external obsolescence that impaired the value of the other three greenhouses actually affected the value of the Willcox greenhouse.

¶ 11 The Tax Court found that Eurofresh had presented substantial competent evidence to overcome the presumption of correctness that attached to the County's valuations of the greenhouse for the tax years in question. It found that by failing to deduct from replacement cost for external obsolescence, the County had failed to correctly apply standard appraisal methods. The court noted Bierschwale's qualifications and adopted his conclusions, valuing the greenhouse at $22,291,500 for 2004 and $33,000,000 for 2005. Finally, the court awarded Eurofresh its reasonable attorney's fees, costs and expenses pursuant to A.R.S. §§ 12-348(B) and 12-332 (2003).

¶ 12 The County timely appealed the trial court's final judgment. We have jurisdiction pursuant to A.R.S. §§ 12-170(C) and 12-2101(B) (2003).

DISCUSSION

¶ 13 The County argues that reducing replacement cost for external obsolescence without proof of the specific cause of the obsolescence and proof that it affects the subject property contravenes standard appraisal methods. Eurofresh counters that under standard appraisal methods, it is not necessary to identify a cause of external obsolescence when such obsolescence is market-wide. Thus, we are asked to decide whether a party seeking an adjustment in property value for ad valorem tax purposes based on external obsolescence must prove the cause, effect and quantity of such obsolescence. We hold that it must. Therefore, we reverse the Tax Court's conclusion as to full cash value and direct that court to reinstate the full cash value assessed by the County for the years 2004 and 2005, respectively, as $36,229,693 and $51,884,078.

A. Standard of Review.

¶ 14 "We view the facts in the light most favorable to sustaining the trial court's judgment," Cimarron Foothills Cmty. Ass'n v. Kippen, 206 Ariz. 455, 457, ¶ 2, 79 P.3d 1214, 1216 (App.2003) (quoting Sw. Soil Remediation, Inc. v. City of Tucson, 201 Ariz. 438, ¶ 2, 36 P.3d 1208 (App.2001)), and will "defer to the...