Magna Inv. & Development Corp. v. Pima County, 2

• Court: Arizona Court of Appeals
• Writing for the Court: HATHAWAY
• Citation: Magna Inv. & Development Corp. v. Pima County, 625 P.2d 354, 128 Ariz. 291 (Ariz. App. 1981)
• Decision Date: 23 January 1981
• Docket Number: No. 2,CA-CIV,2
• Parties: MAGNA INVESTMENT & DEVELOPMENT CORPORATION, a Utah corporation; Sierra Investment Company, an Arizona corporation; Joseph K. Kivel and Esther Kivel, his wife; A. Victor Kivel and Betty Jean Kivel, his wife; Daniel Kivel and Beverly Kivel, his wife; Alvin Kivel and Janice Kivel, his wife; and Federated Department Stores, Inc., on behalf of its Levy's Division, Plaintiffs/Appellees, v. PIMA COUNTY, a body politic; Arizona Department of Revenue and the State of Arizona, Defendants/Appellants. 3717.

Page 354

625 P.2d 354

128 Ariz. 291

MAGNA INVESTMENT & DEVELOPMENT CORPORATION, a Utah corporation; Sierra Investment Company, an Arizona corporation; Joseph K. Kivel and Esther Kivel, his wife; A. Victor Kivel and Betty Jean Kivel, his wife; Daniel Kivel and Beverly Kivel, his wife; Alvin Kivel and Janice Kivel, his wife; and Federated Department Stores, Inc., on behalf of its Levy's Division, Plaintiffs/Appellees, v. PIMA COUNTY, a body politic; Arizona Department of Revenue and the State of Arizona, Defendants/Appellants.

No. 2 CA-CIV 3717.

Court of Appeals of Arizona, Division 2.

Jan. 23, 1981.

Rehearing Denied March 4, 1981.

Miller, Pitt & Feldman, P. C. by Gerald Maltz, Tucson, for plaintiffs/appellees.

Stephen D. Neely, Pima County Atty., by Peter E. Pearman, Deputy County Atty., Tucson, for defendant/appellant Pima County.

Robert K. Corbin, Atty. Gen., by Barbara E. Fisher, Asst. Atty. Gen., Tucson, for defendants/appellants Department of Revenue and State of Arizona.

OPINION

HATHAWAY, Chief Judge.

In this appeal we are asked to determine whether the superior court erred in its finding that the full cash value placed upon the subject property by the county assessor for purposes of 1979 real property taxation was excessive, and in ruling on two pretrial discovery motions.

This case involves an appeal from the county assessor's determination of the full cash value of Levy's Department Store, including approximately 17.7 acres of land, located in El Con shopping center for the tax year 1979. Levy's is a three-story department store consisting of 298,483 square feet. The remaining portion of the subject property is used for parking. The property is owned by appellees Magna Investment and Development Corporation, Sierra Investment Company and the Kivels and the building is leased to appellee Federated Department Stores, Inc., Levy's parent corporation. The original term of the lease is for 30 years from December 3, 1969, to December 3, 1999, with five separate renewal options of ten years each. The lease provides that real estate taxes are to be paid by the tenant. Even though Levy's is a part of El Con shopping center, the subject property is assessed separately and independently from any other portion of the shopping center.

The county assessor placed a full cash value on the property as of January 1, 1979, of $7,240,228 ($1,235,724 for real estate plus $6,004,504 for improvements). After appellees' petitions for review were denied by the appropriate administrative agencies, they appealed to superior court pursuant to A.R.S. Sec. 42-152. In anticipation of trial, the opposing parties each hired expert appraisers to prepare appraisal reports on the subject property. Appellees' witness, Mark H. Klafter, testified that in his opinion the full cash value of the property as of January 1, 1979, was $6,000,000. Klafter's 99-page appraisal report was admitted into evidence and he remained on the witness stand for approximately one day at trial. Appellants, including Pima County, the state Department of Revenue and the State of Arizona, hired Lawrence E. Brown as their expert. Brown, who prepared a 60-page report and also testified for one day, valued the property at $10,400,000. Aside from two other minor witnesses, the entire trial centered on the opinions of these two expert appraisers.

The trial court made specific findings of fact and conclusions of law. It found that Klafter's appraisal was the more objective and the better of the two appraisals, that Klafter was better qualified than Brown to make the appraisal, and that the assessment of $7,240,228 made by the county assessor was excessive. Finding of fact No. 11 stated:

"11. The appraisal report of Mr. Klafter, plaintiffs' Exhibit 1, correctly reflects the full cash value of the subject property and the Court adopts said appraisal as the Findings of the Court."

Appellants contend that the decision of the trial court should be reversed and the assessor's valuation of the subject property should be upheld. The issues raised by the parties can be set forth as follows 1. Was there sufficient evidence to strike down the full cash value placed on the subject property by the county assessor?

2. Did the trial court err in refusing to compel the production of the leases and rents of all El Con stores and in requiring the assessor to disclose Brown's appraisal report prior to trial?

SUFFICIENCY OF THE EVIDENCE

Appellants argue that the evidence fails to support the trial court's conclusion that the assessor's valuation is excessive and that the full cash value of the property is $6,000,000, and that appellees have failed to show by competent evidence that the assessor's valuation was excessive. In reviewing the evidence, we note that the law regarding our standard of review in tax appeals is clear. The trial court may not make an independent valuation of the full cash value (market value) of the subject property until two conditions have been met. First, evidence must be presented to rebut the statutory presumption under A.R.S. Sec. 42-152(B) that the valuation "as approved by the appropriate state or county authority (is) correct and lawful." Second, the court must determine whether the valuation is excessive or insufficient. Such a preliminary finding is a condition precedent to the court's making its own evaluation of the facts. The evidence of excessiveness or insufficiency may also be a part or all of the evidence in determining full cash value. Department of Property Valuation v. Trico Electric Cooperative, Inc., 113 Ariz. 68, 546 P.2d 804 (1976); Graham County v. Graham County Electric Cooperative, Inc., 109 Ariz. 468, 512 P.2d 11 (1973); Navajo County v. Four Corners Pipe Line Co., 106 Ariz. 511, 479 P.2d 174 (1970), reh. den. 107 Ariz. 296, 486 P.2d 778 (1971).

Our review of the evidence shows that the trial court's decision was based on competent evidence sufficient to substantiate the finding of excessiveness, and that it acted properly in adopting Klafter's appraisal report as indicating the correct full cash value of the subject property.

Both experts used the three accepted approaches to estimating value: (1) reproduction cost of the property, (2) income projected into the future (capitalization of income), and (3) market data appraisal, which is the comparison of sales of similar property. See Mohave County v. Duval Corp., 119 Ariz. 105, 579 P.2d 1075 (1978). Neither expert accorded great weight to the market data appraisal. Klafter gave no estimate of value under this method due to the lack of comparable sales. Brown estimated the market value of the land only under this method to be $1,545,000.

The experts differed greatly in their appraisals under the other two methods. Under the reproduction cost approach, Klafter appraised the property at $4,500,000. Brown valued the property at $9,800,000 under this method. The principal difference was that Klafter deducted over $6,800,000 from his reproduction costs for "economic obsolescence." Economic obsolescence was defined by both experts as a loss in value caused by forces external to the property and outside the control of the property owner. Klafter's basic thesis was that the size of Levy's made it economically obsolete as a realty sales item, and his lower appraisals under both the reproduction cost and capitalization of income methods reflect this opinion. On direct examination, he testified:

"Q. Mr. Klafter, in the course of your investigation, study and analysis and your drawing upon your 40 years' experience, did you determine that there were any substantial uneconomic characteristics from the owners' point of view of this particular property?

A. Yes, I did.

Q. What in particular, sir?

A. I think that the size of the property is an uneconomic characteristic. I think it is I guess you might use the term it is a white elephant because it is so large that if it was vacant, the other potential lessees are extremely limited.

The store is almost 300,000 square feet and today's department stores are built in major department stores such as Levy's are today sized at about 150,000 square feet, and if it were vacant today, for some unknown reason Federated and the owners terminated the lease, it probably would be leased so that a part of it was leased to an anchor tenant and the balance of it would have to be leased to other tenants. This would result in a less attractive anchor business as measured by shoppers and especially as measured by the mall tenants, the other tenants and the smaller tenants in the mall."

The record contains competent evident supporting Klafter's lower appraisals under the reproduction cost method.

Both experts agreed that the income capitalization method provided the preferred method of valuating the subject property. Moreover, both experts agreed on the capitalization rate of approximately 9.5%. Under the income method, using four different approaches, Klafter reached figures ranging from $5,600,000 to $6,100,000 as the full cash value of the property. Weighing the strengths and weaknesses of each approach, he estimated the value under this method at $6,000,000. Brown, on the other hand, estimated full cash value at $10,400,000 under the same method. These income capitalization estimates were equal to the final appraisal of the property in both the Klafter and Brown reports. The fundamental difference between the experts was that Klafter estimated a fair market rental value of $2.00 per square foot per year for the subject property, while Brown, using two different approaches, adopted $3.30 per square foot per year as fair market rental value.

Again, competent evidence supports the trial court's conclusion that Klafter's valuation under this method was correct and that Brown's was incorrect. Both experts reviewed comparable leases from around the country to arrive at their fair market rental figures. In reaching his fair market rental estimate of...