McGrath's Pub. Fish House v. Marion Cnty. Assessor
| Decision Date | 20 April 2022 |
| Docket Number | TC-MD 200092R |
| Parties | McGRATH'S PUBLIC FISH HOUSE, Plaintiff, v. MARION COUNTY ASSESSOR, Defendant. |
| Court | Oregon Tax Court |
UNPUBLISHED OPINION
DECISION
RICHARD DAVIS, MAGISTRATE
Plaintiff appealed a Real Property Order from the Marion County Board of Property Tax Appeals, dated February 28 2020, that sustained Defendant's tax roll value of $2 809, 560 for the 2019-20 tax year. A trial was held remotely by Webex. Alex C. Robinson, CKR Law Group, appeared on behalf of Plaintiff. Katherine Powell Banz (Banz) testified on behalf of Plaintiff. Scott A. Norris, Assistant County Counsel, appeared on behalf of Defendant. Craig Farnstrom (Farnstrom) testified on behalf of Defendant. Plaintiff's Exhibits 1 and 2 and Defendant's Exhibit A were received into evidence without objection.
The subject property is a 0.56-acre site with an 8, 205-square-foot improvement, constructed in 2001, and operating as a full-service restaurant with a sit-down bar area known as McGrath's Fish House, in Salem, Oregon. The restaurant was custom built in 2001 for Plaintiff and has operated continuously. The subject property is located in the Willamette Town Center, a multi-tenant mall on Center Street between Interstate 5 and Lancaster Blvd., a major regional corridor. The mall was purchased in 2017 and has undergone a re-branding with the current owners changing it from an interior mall to an exterior one.
Banz testified that she is a MAI certified general real estate appraiser with 18 years' experience and an owner of Powell Banz Valuation. Banz prepared a retroactive appraisal of the subject property as of January 1, 2019. Banz testified that commercial activity around the subject property has been stagnant with both decreased rents and decreased vacancy. Banz reviewed statistics from Co-Star and found 239 restaurant properties in the Salem-Kaiser area with an average restaurant size just over 4, 000 square feet. She spoke with local brokers who indicated that it would be difficult to find a buyer for the property given its size, physical obsolescence, and a trend of consumer preferences away from formal sit-down dining. Based on the Co-Star data and information from brokers, Banz determined that the large size of the subject property would be a detriment to its sale or lease.
Banz began by considering the subject property's site value; after reviewing comparable land sales, she concluded the subject property's site value was $440, 000. Banz then analyzed the "highest and best use" of the property, before considering three approaches to value-the sales comparison, income, and cost approaches. She rejected the cost approach due to the age of the property and put most weight on the income approach with secondary weight on the sales comparison approach.
Banz focused on Co-Star's data showing the subject property was more than twice the average restaurant size in the area. She interviewed local market participants who noted a lack of new construction or restaurant leasing in the area. Brokers observed a skittishness towards leasing to local and less credit-worthy tenants and a trend toward smaller buildings. Banz found that, nationally, the restaurant industry was seeing changes in consumer preferences towards fast food and away from sit-down restaurants. Banz described Plaintiff's history of expansion from a single restaurant to a regional restaurant with 21 locations, to its bankruptcy, and eventual downsizing to three remaining locations, as matching the trends noted above. She stated that "the large size of the building would either necessitate demising if vacated, and/or a low lease rate in order to entice potential tenant(s)." Banz said that high maintenance costs and wages decreased profitability of full-service restaurants, which led her to consider whether the highest and best use might be to demise the space into two restaurants. However, Banz determined the cost to demise the building would be $950, 000, which was excessive in relation to her estimated value of the building, and thus Banz concluded the existing restaurant represented the highest and best use of the subject property.
Banz considered the improvement value, using rental properties with qualities similar to the subject property's to estimate potential gross income. Banz selected seven comparable properties with leases ranging from a high of $24.96 per square foot to a low of $7.09 per square foot. Comparable 1 is a "confidential" lease of a "free-standing restaurant/bar" within a few blocks of the subject property. Banz testified that the landlord's $100, 000 tenant improvements made its $24.96 per square foot per year lease a high indicator of value. Comparable 2 is a 2018 triple net lease of an 8, 356-square-foot Red Lobster restaurant and bar located near the subject property. Banz testified that she did not place much weight on the lease at $23.17 per square foot because the lessee is a "national credit tenant." She found this comparable was a "high indicator" because "[t]he national tenancy [ ] places upward pressure on the lease rate." Comparable 3 is a 2019 lease of Masonry Bar & Grill, consisting of 4, 241 square feet in downtown Salem. Banz testified that the large landlord contribution of $100, 000 made the lease rate of $23.84 per square foot a high indicator of the subject property's value. Comparable 4 is a "confidential" July 2017 lease of a 7, 044 square foot restaurant in Salem. Banz testified that the location and exposure were inferior and the lease rate of $10.76 per square foot was a low indicator of value. Comparable 5 is the 2018 lease of Shotski's Pizza, a 5, 880-square-foot restaurant/bar along State Street near Willamette University. Banz found the comparable was a low indicator of value because of the location, parking access, and condition. Comparable 6 consists of two restaurants on a single pad in a small shopping center in South Salem. Banz chose these leases because although they are small, they represented what the rental value of the subject property would be if the property were divided into two restaurants. Banz found the 2018 rental rates of $15 and $17.59 per square foot respectively represented a reasonable to high indicator of value. Comparable 7 is a 2018 lease of a 7, 030-square-foot restaurant/lounge along Hawthorne Avenue in NE Salem. The restaurant was built in 1961 and despite its ample parking, the location, access, exposure, and condition are inferior, making the $7.09 per square foot lease a low indicator of value.
Banz determined the lease value of the subject property by bracketing Comparable 2 (Red Lobster) and 4 (a confidential property) to narrow the range of lease value to between $10.76 and $23.17 per square foot. Falling within that same bracket was Comparable 6 with two smaller restaurants. Using a value on the lower end of Comparable 6's lease rates, Banz found the probable rent to be $15 per square foot. Banz multiplied that figure by the subject property's size and found potential gross income of $123, 075 per year. She deducted 5 percent for vacancy and credit loss, operating expenses, estimated to be 4 percent for management, and 5 percent for reserves and replacement. After deductions, Banz determined the net operating income to be $106, 398, or $12.97 per square foot. Finally, Banz divided the net operating income by a capitalization rate of 6.85 percent to conclude to a value of $1, 555, 000 under the income approach.
For the sales comparison approach, Banz selected five recent commercial property sales. Comparable 1 is the June 2018 sale of a 4, 612-square-foot former grill in Keizer purchased by a church at $260.19 per square foot and converted to administrative purposes. Banz considered the parking, condition, and smaller size all superior to the subject property making this comparable a high indicator of value. Comparable 2 is the July 2018 sale of the former Don Miguel Mexican restaurant located in NE Salem for $153.90 per square foot. The 2, 924-square-foot restaurant was constructed in 1920, and Banz found the location, condition, and quality were inferior to the subject property making it a low indicator of value. Comparable 3 is the February 2019 sale of a former Murphy's Grill, a 5, 595-square-foot restaurant in Dallas, Oregon for $250.22 per square foot. The purchaser converted the building to office use. Banz found the small size made it a high indicator of value. Comparable 4 is the September 2019 sale of a 5, 928-square-foot restaurant originally constructed as a Marie Calendar's that was converted to a market and restaurant. Banz considered the $202.43 per square foot sales price a low indicator of value because of its inferior condition and quality. Comparable 5 is the December 2019 sale of a 10, 023-square-foot restaurant operated as a Black Angus Steakhouse, located just off Interstate 5 in Vancouver, Washington. Banz selected the property because of its Portland MSA[1] location and found its $279.36 per square foot price a high indicator of value. Banz bracketed comparables 3 and 4 and found a rounded value of $205 per square foot, computing to a value of $1, 680, 000 under the sales comparison approach.
Banz combined the two approaches to value, gave primary emphasis on the income capitalization approach because the subject property is an income producing property, and found the ultimate value as of the assessment date to be $1, 575, 000.
On cross-examination, Banz testified that the appraisal mentioned but did not use as comparables two restaurants located across the street from the...
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