Washington Beef, Inc. v. County of Yakima

• Decision Date: 14 February 2008
• Docket Number: No. 25966-8-III.,25966-8-III.
• Citation: 177 P.3d 162,143 Wn. App. 165
• Court: Washington Court of Appeals
• Parties: WASHINGTON BEEF, INC., and Washington Beef, LLC, Appellants, v. COUNTY OF YAKIMA, Respondent.

177 P.3d 162

143 Wn. App. 165

WASHINGTON BEEF, INC., and Washington Beef, LLC, Appellants, v. COUNTY OF YAKIMA, Respondent.

No. 25966-8-III.

Court of Appeals of Washington, Division 3.

February 14, 2008.

Jacquelyn A. Beatty, Attorney at Law, Charles Allen Robinson, Karr Tuttle Campbell, Walter Eugene Barton, Attorney at Law, Seattle, WA, for Appellants.

John Vernon Staffan, Attorney at Law, Yakima, WA, for Respondent.

SWEENEY, C.J.

¶ 1 Setting the value of assets for the purpose of assessing property taxes is more of an art than a science. And we review a trial judge's findings following a trial for substantial evidence. The evidence here included testimony on the proper approach to valuation. The trial judge heard conflicting expert testimony from the county and the taxpayer on the appropriate method of valuing property. All experts here purported to provide the appropriate analytical tools to calculate the value of a beef processing plant for the purpose of assessing county ad valorem taxes. The trial judge rejected approaches suggested by both sides and in a reasoned, calculated set of findings of fact and conclusions of law set the value of the plant and facilities. We conclude that the court's findings are supported by this record and that they support the court's conclusions of law, including the court's conclusion of the value of the plant. We therefore affirm the judgment.

FACTS

WASHINGTON BEEF

¶ 2 Washington Beef Inc. is a beef slaughter, fabrication, and storage plant located in Toppenish, Yakima County, Washington. It is a Washington corporation formed in 1980. The plant was originally three separate facilities used to process beef for wholesale and retail sales in foreign and domestic markets. Central Foods Ltd. is a Japanese corporation. [t bought Washington Beef Inc. in 1988. Over the next 14 years, it added $40 million in capital improvements. Central eventually consolidated the operations in one modern 205,000 square foot plant on 132 acres.

¶ 3 The Japanese economy slowed in the late 1990s. And Central was then less willing to provide necessary capital for Washington Beef Inc. The corporation's property was valued at $25 million in May 1998 by a private appraisal firm. Washington Beef Inc. faced increased competition from Canadian beef processing plants at that time. Earnings declined. Washington Beef Inc. management asked the owners for permission to seek new capital. The owners gave permission in 2002. And Washington Beef Inc. began to look for potential purchasers or investors.

¶ 4 AgriBeef Inc. is a beef processing firm incorporated in Idaho. It bought most of Washington Beef Inc.'s assets in April 2003. AgriBeef paid $10,250,000 in cash and assumed $22,000,000 in liabilities for a total purchase price of around $32,250,000. Washington Beef Inc. and AgriBeef allocated $4,749,000 of the total purchase price to the plant and land as part of their deal. AgriBeef formed Washington Beef LLC to operate the plant. We will refer to Washington Beef Inc. and Washington Beef LLC as Washington Beef unless reference to the original entity is appropriate.

YAKIMA COUNTY AND ASSESSED VALUES

¶ 5 Yakima County (County) is a municipal corporation in south central Washington. The County is on a two-year tax cycle. So property taxes for a particular year are based on the value assessed on January 1 of the previous year. Yakima County's assessor is Dave Cook. He valued Washington Beefs land in 2001, 2002, and 2003 at $1,098,250. Washington Beef agrees with the assessed value of the land. Mr. Cook valued the buildings and equipment as of January 2001 at $34,717,200. Washington Beef disagrees. It values that property at $6,901,750. Mr. Cook valued buildings and equipment as of January 2002 at $31,350,400. Washington Beef disagrees and valued that property at $5,801,750. Finally, Mr. Cook valued that property as of January 2003 at $30,718,453. And Washington Beef valued the property at $3,650,750.

PAYMENT OF TAX

¶ 6 Washington Beef paid the 2002, 2003, and 2004 ad valorem taxes, based on the disputed values. It paid under written protest. Washington Beef then sued Yakima County for a refund. Actually, between the two companies (Washington Beef Inc. and Washington Beef LLC) there were three separate suits for refund filed; all were consolidated for trial.

THE TRIAL

¶ 7 The case was tried to the court over the course of nine days. Both Washington Beef and the County offered expert testimony on proper methods of valuing Washington Beefs plant and facilities and the resultant value. Washington Beef's experts focused on the historical income generated by the facility and the values attributed to various assets when AgriBeef bought Washington Beef Inc. The County's experts emphasized the plant's potential, "normalized cash flows," and downplayed the values ascribed to various assets of the plant when it was sold to AgriBeef. Clerk's Papers (CP) at 39. Each disagreed on the basic assumptions needed to value the plant based on income such as cash flows, capitalization rates, discounts rates, and the like.

¶ 8 The trial judge concluded that the County had failed to factor in "economic obsolescence" that resulted from increased competition and other business pressures external to the plant. CP at 33. But the judge also concluded that Washington Beef had overstated the effect of these external factors on the value of the plant and thereby understated the value of the facilities. The judge also found that the historical cash flows used to calculate the value of the facility understated its value. He then set the County's overvaluations at $5,717,200 in 2001, $4,750,400 in 2002, and $6,718,453 in 2003. The court entered appropriate findings of fact and conclusions of law and a judgment that required the County to refund a portion of the taxes along with interest. The court denied Washington Beefs motions to reconsider. Washington Beef petitioned the Washington Supreme. Court for discretionary review. The. Supreme Court transferred the matter to us.

DISCUSSION

All property shall be valued at one hundred percent of its true and fair value in money and assessed on the same basis unless specifically provided otherwise by law.

....

The true and fair value of real property for taxation purposes . . . shall be based upon the following criteria:

(1) Any sales of the property being appraised or similar properties with respect to sales made within the past five years....

(2) In addition to sales as defined in subsection (1) of this section, consideration may be given to cost, cost less depreciation, reconstruction cost less depreciation, or capitalization of income that would be derived from prudent use of the property. In the case of property of a complex nature, . . . or property not having a record of sale within five years and not having a significant number of sales of similar property in the general area, the provisions of this subsection shall be the dominant factors in valuation. When provisions of this subsection are relied upon for establishing values the property owner shall be advised upon request of the factors used in arriving at such value.

Former RCW 84.40.030 (2001) (emphasis added). The property must be valued based on its highest and best use. WAC 458-07-030(3). Highest and best use is "the most profitable, likely use to which a property can be put. It is the use which will yield the highest return on the owner's investment." WAC 458-07-030(3).

METHODS OF DETERMINING FAIR MARKET VALUE

¶ 9 The phrase "true and fair value in money" means "fair market value." Cascade Court Ltd. P'ship v. Noble, 105 Wash.App. 563, 567, 20 P.3d 997 (2001). And market value is what a willing buyer under no obligation to buy would pay a willing seller under no obligation to sell. Crystal Chalets Ass'n v. Pierce County, 93 Wash.App. 70, 77, 966 P.2d 424 (1998).

¶ 10 But arriving at a market value is difficult particularly when the property is "of a complex nature" as it is here. There are three general approaches to arrive at market value: capitalization of income, cost, and market. Id. Appraisers generally use one or a combination of these three general approaches to arrive at fair market value. Id. The appraiser must then reconcile the values arrived at through these three methods and emphasize the "value generated by the method deemed to be the most reliable." Id. at 77-78, 966 P.2d 424.

Capitalization of Income

¶ 11 Washington Beef based its valuations on the income approach. This method assumes value is approximately equal to the present value of the future benefits of property ownership. Sahalee Country Club, Inc. v. Bd. of Tax Appeals, 108 Wash.2d 26, 33, 735 P.2d 1320 (1987). An appropriate annual rate of capitalization is applied to a forecast of annual net income. Id. Unlike the cost approach, the income approach "explicitly considers the impact of economic obsolescence by relying on the cash flow generated by the assets as of the valuation date, given the known economic and financial factors facing the Company." CP at 34 (Finding of Fact 35).

¶ 12 Income capitalization converts anticipated cash flows into present value by capitalizing (converting to an asset) net operating income or cash flow by a capitalization rate. Sahalee, 108 Wash.2d at 33, 735 P.2d 1320. The idea is to place a present value on a future stream of income, Crystal Chalets,¹ because how much the plant is expected to generate in the future is an indicator of what it is worth now.

¶ 13 There are two essential variables to this approach. The first is the anticipated income stream or cash flow. The experts did not agree on the appropriate value of the cash flow here. The second factor is the capitalization rate: the rate to be divided into the income or cash flow to arrive at a present value of the facility (capitalized value). Here, the parties disputed the appropriate rate to be applied. The rate makes a big difference in the...