Hewlett-Packard Co. v. Benton Cnty. Assessor

• Decision Date: 06 August 2015
• Docket Number: No. 30,S061457,S061458,TC4979,TC4987,TC4980,S061456 (Control),30
• Citation: 357 Or 598
• Parties: HEWLETT-PACKARD COMPANY, Plaintiff-Respondent, v. BENTON COUNTY ASSESSOR, Defendant, and DEPARTMENT OF REVENUE, Defendant-Appellant.
• Court: Oregon Supreme Court

357 Or 598

HEWLETT-PACKARD COMPANY, Plaintiff-Respondent, v. BENTON COUNTY ASSESSOR, Defendant, andDEPARTMENT OF REVENUE, Defendant-Appellant.

No. 30

TC4979

TC4980

TC4987

S061456 (Control)

S061457

S061458

SUPREME COURT OF THE STATE OF OREGON

Argued and submitted on June 24, 2014

August 6, 2015

En Banc

On appeal from the Oregon Tax Court.^*

Henry C. Breithaupt, Judge.

Joseph A. Laronge, Assistant Attorney General, Salem, argued the cause and filed the briefs for appellant. With him on the brief was Ellen Rosenblum, Attorney General.

David L. Canary, Garvey Schubert Barer, Portland, argued the cause for the respondent. Cynthia M. Fraser filed the brief for the respondent. With her on the brief was David L. Canary and William K. Kabeiseman.

BALMER, C. J.

The judgment of the Oregon Tax Court is affirmed.

BALMER, C. J.

In this direct appeal from the Oregon Tax Court Regular Division (Tax Court), we must decide whether the Tax Court properly applied administrative rules governing property tax appraisals. Specifically, this case requires us to consider the relationship between two terms defined in the Department of Revenue's administrative rules: "highest and best use" and "value of the loss." See OAR 150-308.205-(D)(1)(c) (defining highest and best use); OAR 150-308.205-(F)(3)(k) (defining value of the loss). A property's highest and best use is, among other things, the most profitable use that a potential owner could make of the property. The value of the loss measures the negative value created by components of the property that prevent it from cost-effectively serving its highest and best use.

The department appeals from a decision of the Tax Court that accepted the property valuation proposed by taxpayer Hewlett-Packard (HP). In reaching that conclusion, the Tax Court held that the highest and best use of HP's property was a continuation of its current use as a single-tenant, owner-occupied research and manufacturing facility. The Tax Court also held that, of the numerous buildings on the campus, a potential owner would anticipate using only certain "core" buildings and would not anticipate using the "non-core" buildings. As a result, those non-core buildings were components of the property that prevented it from cost-effectively serving its highest and best use. The Tax Court, therefore, assessed the value of the loss caused by the presence of the non-core buildings. To do so, the Tax Court calculated the additional operating expenses that an owner would incur while operating the subject property—which has both the core and non-core space—as compared to the operating expenses that an owner would incur while operating a cost-effective version of the property consisting of only the core space.

In this appeal, the department does not challenge the Tax Court's findings that the non-core buildings were an overdevelopment or that the highest and best use of the property was as a single-tenant, owner-occupied research and manufacturing facility. Instead, the department raisesthe narrow issue of whether the Tax Court properly applied the administrative rule defining the value of the loss, OAR 150-308.205-(F)(3)(k). According to the department, the Tax Court erred by calculating the value of the loss as if a potential owner would make no alterations to the subject property. The department contends that the Tax Court should have calculated the value of the loss as if a potential owner would convert the non-core space into marketable rental space, which, according to the department, would result in more value than leaving the non-core space vacant.

We reject the department's argument because it presumes that the most valuable use of the non-core buildings is as marketable rental space. That presumption is inconsistent with the Tax Court's analysis of the highest and best use of the property. The department, however, does not challenge that analysis. That is, the department does not ask us to review the factual basis for the Tax Court's determination that the highest and best use of the property is as a single-tenant, owner-occupied research and manufacturing facility or the Tax Court's application of the department's administrative rules that govern the highest and best use determination. See ORS 305.445 (scope of review). As a result, we assume that the highest and best use of the non-core buildings is to leave them unaltered rather than to convert them to marketable space. Given that assumption, the Tax Court properly identified the value of the loss as the additional operating expenses that an owner would incur to operate the subject property compared to a more cost-effective option. We therefore affirm the decision of the Tax Court.

The department's rules defining the highest and best use and the value of the loss are part of a complex scheme of administrative rules outlining the methods and procedures that the department requires for appraising industrial plants, like HP's property. See generally OAR 150-308.205-(D) (describing the valuation process); OAR 150-308.205-(F) (describing methods for valuing property inefficiencies). To assess the department's contention that the Tax Court misapplied those rules, we must consider how the highest and best use and the value of the loss fit withinthe department's larger scheme of methods and procedures as well as the Tax Court's relevant factual findings.

The subject property is HP's 178-acre manufacturing and research campus in Corvallis, Oregon. HP pays taxes on both its real property and personal property. The real property consists of the land and its improvements. The personal property is HP's equipment located on site. In this case, the parties dispute the value of the real estate improvements for the three tax years beginning in 2008 and ending in 2011.

Those improvements include 28 buildings containing about 2 million square feet. The buildings share common utilities and are linked by a long corridor. HP constructed the buildings between the 1970s and the 1990s and has used the buildings to support as many as 8,000 employees while developing and manufacturing parts for scientific calculators and ink-jet printers. By 2007, however, HP had reduced the number of components manufactured at that property and needed only about 2,000 employees on site. At that time, HP identified the property's "core space" as 1.2 million square feet contained in 17 buildings. The remaining 800,000 square feet was identified as the "non-core" space. Over the next couple of years, HP consolidated its operations into the core space and vacated the non-core space. After the consolidation, HP began leasing out a small portion of the recently vacated non-core space to outside firms.

For the tax years of 2008-09 and 2009-10, Benton County assessed the total value of the improvements at $76 million and $79 million respectively. HP did not challenge those assessments but asked the Tax Court to review Benton County's assessment of HP's equipment on the property. Benton County counterclaimed, contending that it had undervalued the improvements in 2008-09 and 2009-10. For the next tax year, 2010-11, Benton County assessed the value of the improvements at $200 million.

After a partial settlement resolving the value of HP's equipment, the parties presented evidence to the Tax Court on the only remaining issue—the extent to which HP's improvements contributed to, or detracted from, the "real market value" of HP's property. See ORS 308.232 (requiring"ad valorem property taxation" to be based on the property's "real market value"). Generally, a property's real market value is the amount of money an informed and disinterested seller could reasonably expect an informed and disinterested buyer to pay for the property on the date of the assessment. See ORS 308.205(1) (defining real market value).

To find how much a potential buyer would pay to own the property, an appraiser must follow the appraisal methods and procedures adopted by the department. ORS 308.205(2) (requiring a property tax appraisal to be completed "in accordance with rules adopted by the Department of Revenue"). The department's rules call for an appraiser to value the property according to its "highest and best use." OAR 150-308.205-(D)(3)(i) ("Determining the highest and best use for the unit of property is necessary for establishing real market value."). The department requires valuing property according to its highest and best use because a seller "can expect to receive the highest offer from a prospective buyer who intends to put the property to its most profitable use." STC Submarine, Inc. v. Dept. of Rev., 320 Or 589, 592 n 5, 890 P2d 1370 (1995).

The department defines "highest and best use" as "the reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, and financially feasible, and that results in the highest value. See The Appraisal of Real Estate, 12th edition (2001)." OAR 150-308.205-(D)(1)(c).¹ To find a property's highest and best use, an appraiser identifies the property's potential alternative uses and tests them against the criteria set out in the department's definition of highest and best use. Those alternative uses "may include, among others, all possible uses that might result from retaining, altering or ceasing the integrated nature of the unit of property." OAR 150-308.205-(D)(3)(i). For an improved property, those alternative uses often consist of "continuation of the existinguse, renovation or rehabilitation, expansion, adaptation or conversion to another use, partial or total demolition, or some combination of these alternatives." Appraisal of Real Estate at 315.²

An appraiser uses the results from the highest and best use analysis to produce a final valuation opinion. See id. at 60 ("Through the highest and best use analysis, the appraiser * * * identifies the use or uses on which the final opinion of value is based."). As a result, "[t]he first issue is the...