SMP II Ltd. Partnership v. Arizona Dept. of Revenue

• Decision Date: 05 November 1996
• Docket Number: CA-TX,No. 1,1
• Citation: 188 Ariz. 320,935 P.2d 898
• Parties: , 229 Ariz. Adv. Rep. 6 SMP II LIMITED PARTNERSHIP, a partnership, Plaintiff-Appellee, Cross Appellant, v. ARIZONA DEPARTMENT OF REVENUE, an agency of the State of Arizona; Maricopa County, a political subdivision of the State of Arizona, Defendants-Appellants, Cross Appellees. 95-0005.
• Court: Arizona Court of Appeals

Page 898

935 P.2d 898

188 Ariz. 320, 229 Ariz. Adv. Rep. 6

SMP II LIMITED PARTNERSHIP, a partnership, Plaintiff-Appellee, Cross Appellant, v. ARIZONA DEPARTMENT OF REVENUE, an agency of the State of Arizona; Maricopa County, a political subdivision of the State of Arizona, Defendants-Appellants, Cross Appellees.

No. 1 CA-TX 95-0005.

Court of Appeals of Arizona,

Division 1,

Department T.

Nov. 5, 1996.

Review Denied April 29, 1997.

[188 Ariz. 322] Donald P. Roelke and Fennemore Craig, P.C. by Paul J. Mooney, Phoenix, for Plaintiff-Appellee, Cross Appellant.

Helm & Kyle, Ltd. by John D. Helm, Roberta S. Livesay, Tempe, for Defendants-Appellants, Cross Appellees.

OPINION

SULT, Judge.

Maricopa County and the Arizona Department of Revenue ("appellants") appeal from a tax court judgment reducing the 1992 full cash value of the Sheraton San Marcos Resort to $6,780,000. Appellants also appeal from the tax court's order denying their motion for new trial. SMP II Limited Partnership ("taxpayer") cross-appeals from the tax court's ruling that its expert witness costs were part of the total sum subject to the $20,000 cap imposed by Arizona Revised Statutes Annotated ("A.R.S.") section 12-348(E)(5) (1992).

FACTUAL AND PROCEDURAL HISTORY

Taxpayer owns the San Marcos Resort ("the resort") which is situated on approximately 12 acres of land in downtown Chandler, Arizona. The resort consists of the primary hotel building, which was built in 1912 and thereafter remodeled, and other amenities constructed in 1987. These include guest rooms, a pool, and tennis courts. Associated with the resort is a 113-acre golf course, which had been valued separately from the resort and was not a part of this valuation proceeding.

For 1992, the Maricopa County Assessor assigned an aggregate full cash value of $15,649,535 to the 32 tax parcels which taxpayer identified as the resort portion of the San Marcos. Through appeals to the Maricopa County Board of Equalization and the State Board of Tax Appeals, taxpayer obtained a reduction of the full cash value to $11,110,417.

In August 1992, taxpayer brought this action seeking a further reduction from the State Board's valuation. At trial, taxpayer offered the testimony of its expert appraiser, Tom Turner. Turner testified to a valuation of $6,730,000 for the resort, later revised post-trial to $6,780,000 due to correction of a subtraction error. Appellants moved to strike Turner's appraisal and testimony on the ground that it was based, in part, on income and expense data which related to a period later than the assessment date of January 1, 1992. Since the valuation is required to be made as of the assessment date, appellants argued that the use of this data resulted in an inadmissible valuation. Appellants renewed this objection when they moved for a directed verdict at the close of the evidence. The tax court denied both motions.

Appellants offered the testimony of their expert appraiser, Lawrence Bloom. Bloom testified to a valuation for the property of $8,400,000. His valuation included parcel 107A which had originally been included by taxpayer as one of the 32 parcels comprising the resort. At the time of Bloom's testimony, this parcel had not been excluded by the tax court as part of the property to be valued. However, as described below, the tax court later excluded this parcel from the resort's valuation base.

In the parties' joint pretrial statement, taxpayer advanced for the first time the position that parcel 107A should be excluded from the action because it represented the golf course restaurant and pro shop building and thus constituted a part of the golf course. On the first day of trial, taxpayer moved to dismiss parcel 107A from the action. Appellants opposed the motion, noting that parcel 107A had been included in the appeal from the start. Appellants asserted that the first notice they had that taxpayer intended to characterize parcel 107A as part of the golf course was in the joint pretrial statement circulated after appellants' expert had already produced a written appraisal that factored in the income and expenses of the golf course restaurant. Appellants argued that taxpayer's attempted dismissal at trial of parcel 107A was a violation of the notice requirement of Rule 26.1, Arizona Rules of Civil Procedure ("Ariz.R.Civ.P."), and severely prejudiced them since their expert had included the parcel in his valuation.

The tax court initially denied taxpayer's motion, but thereafter granted it when taxpayer renewed the motion at the close of the trial. The tax court then adopted as its valuation the figure provided by taxpayer's expert, namely, $6,780,000. Appellants moved for a new trial, renewing their objection to Turner's appraisal and requesting a recalculation of the valuation figure due to other asserted errors. The motion was denied and the tax court entered judgment on its verdict and also awarded taxpayer $20,000 in attorney's fees, expenses and costs. In so doing, the tax court determined that section 12-348(E)(5) required that expert witness fees be included with attorney's fees in the $20,000 cap placed on awards to prevailing taxpayers under section 12-348(B).

ISSUES

Appellants present the following issues:

1. Whether the tax court erred in declining to strike the testimony and appraisal report of taxpayer's expert;

2. Whether the tax court erred in granting taxpayer's motion to exclude parcel 107A from taxpayer's appeal;

3. Whether the tax court abused its discretion in denying appellants' motion for new trial; and

4. Whether the record lacks substantial competent evidence supporting the tax court's valuation ruling.

Taxpayer's cross-appeal raises two additional issues:

1. Whether the $20,000 cap imposed by section 12-348(E)(5) encompasses all "fees or other expenses" as defined by section 12-348(I)(1); and

2. Whether the $20,000 cap applies in full to awards against each governmental defendant.

DISCUSSION

1. The Appraisal and Testimony of Taxpayer's Expert

Turner explained that his appraisal relied on the discounted cash flow method under the income approach. He testified:

The discounted cash flow analysis is the discounting of the income stream for the property over a projected period. Resort hotels, lodging and most commercial industrial investment properties are bought for a holding period of somewheres generally from seven to ten years. We elected to do a ten-year discounted cash flow analysis. In the discounted cash flow analysis, you begin with today what's happening and today is in this instance what is today's average daily rate? What is today's occupancy? What is this hotel doing today? And then you try to project your nine additional years into the future. How is this hotel going to perform in each of these income and expense categories. We did that.

When we did that, we determined that this particular property, the San Marcos hotel, has been since renovation back in '87 on a constant increase, improvement in average daily rate and occupancy. We continued to trend that improvement.

According to Turner's approach, the historical trend since 1987 had shown steady annual increases in the average daily room rate ("ADR"). Therefore, the projection of ADR beginning "today," namely the assessment date of January 1, 1992, should have been upward. However, instead of projecting such continuous increases, Turner held the ADR constant at $70 for both 1992 and 1993, and only thereafter allowed it to rise steadily. On direct examination, Turner testified:

Q. And you have assumed that the average daily rate in 1992 would be $70?

A. Yes.

Q. What was that based on?

A. That's what it was presently operating at the end of 1991, was something near or less than $70.

Q. Why did you hold that constant for two years?

A. That was a question I couldn't remember in my deposition. I went back and I talked with a couple of guys that worked with me on this. The reason that we did--and I don't know that it's a valid reason for this particular tax purpose, but when we picked up the operating statements the last visit to the hotel, they gave us year-to-date 1992 and I believe it was either through July or August of '92 and we kind of fudged. We looked to see how they were operating for the first seven or eight months and it didn't appear that they were going to hit the $70 figure in '92, so we elected--in our best judgment, we held it at $70 in '93.

Q. And then started increasing it progressively each year?

A. Yes.

(Emphasis added.)

On cross examination, Turner testified that he had stated in deposition that by keeping the ADR at $70 for both 1992 and 1993, he was not following what he believed to be historical trends. He admitted that his use of actual 1992 operating figures had a downward effect on the total projected revenues generated in his discounted cash flow model. Turner explained that this was because the effect of holding the ADR constant for the two years of 1992 and 1993 compounded itself every year for the following eight years.

On appeal, appellants argue that because Turner had relied on evidence that had not come into existence until after the assessment date of January 1, 1992, his testimony and appraisal report were inadmissible. ¹ Appellants cite State Tax Commission v. United Verde Extension Mining Company, 39 Ariz. 136, 4 P.2d 395, aff'd on reh'g., 39 Ariz. 331, 6 P.2d 889 (1931), where our supreme court held that "the trial court is limited in determining the true value to evidence which was in existence at the time the assessment is made." Id. at 141, 4 P.2d at 400.

Taxpayer responds by acknowledging the rule that a valuation decision must be based solely on evidence in existence as of the assessment date. Moreover, taxpayer does not deny that its expert did, to some extent, base his valuation on post-January 1, 1992 information. However, taxpayer argues that appellants waived this objection by failing to properly object in...