The opinion
IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Property Tax
CLACKAMAS COUNTY ASSESSOR, )
)
Plaintiff, ) TC-MD 100701D
)
v. )
)
WILSONVILLE 2006 SE LLC, )
)
Defendant. ) DECISION
Plaintiff appeals the Clackamas County Board of Property Tax Appeals’ Order, dated
April 5, 2010, stating that the real market value of property identified as Account 05005691
(subject property) was $16,363,230 for tax year 2009-10. A trial was held in the Oregon Tax
Courtroom, Salem, Oregon on October 6, 2011, and October 11, 2011. Kathleen Rastetter,
Assistant County Counsel, Clackamas County, appeared on behalf of Plaintiff. Ronald R.
Saunders (Saunders), Registered Appraiser, Clackamas County, testified on behalf of Plaintiff.
Christopher Robinson, Attorney at Law, appeared on behalf of Defendant. Steward Cliffton
Peterson (Peterson), commercial broker and partner, Macadam Forbes, and Richard P. Herman
(Herman), MAI, FRICS, member, R. P. Herman & Associates LLC, testified on behalf of
Defendant.
Plaintiff’s Exhibit 1, pages ii-vi and 1-166, 201-230, 418, 446-466, 568-575, 582-586,
Exhibits 2, 6, 8, 9, and Declaration of Debra Cobun and Defendant’s Exhibits A, B, C, G, H, and
I were offered and admitted.
I. STATEMENT OF FACTS
The subject property was described by Herman as:
“a one and two story, single tenant, flexible occupancy/research and development
DECISION TC-MD 100701D 1
industrial building which was completed in late 2008. It is entirely occupied by
Rockwell Collins Aerospace & Electronics, Inc. The building structure consists
of tilt-up stained concrete walls which have been thickened in order to
accommodate abundant fenestration. The building walls are typically 24 – 28 feet
in height. The main floor level and footprint is approximately 101,056 square feet
in size and has been built-out to tenant specifications with executive and platform
office space, a research and development laboratory, assembly and testing rooms,
meeting/conference rooms, equipment repair facility, executive offices, employee
cafeteria, restrooms and equipment alcoves. The upper floor level has
approximately 23,394 square feet of floor area which primarily supports executive
office suites and platform office cubicles. * * * [T]he site is professionally
landscaped and supports a 465 space asphalt surfaced parking lot.
“The subject site has an area of approximately 8.76 acres, * * *. The easternmost
100 feet of the parcel is an undevelopable buffer zone/conservation easement.
The developable area of the site approximates 7.0 acres. * * *. It is zoned
Planned Development – Industrial.”
(Def’s Ex A at 5, 6.)1 Saunders concluded that “[t]here are no comparable properties in the
Portland PMSA.” (Ptf’s Ex 1at iii.). Peterson testified that the subject property is a “crossover
building with offices and labs.” Peterson testified that the first floor of the subject property is a
“catacomb” of offices and cubicles whereas the second floor is “much nicer” because it is
“open.”
A. Highest and Best Use
Both appraisers, Herman and Saunders, agree that the highest and best use of the subject
property as improved is, as described by Saunders, a “light industrial/flex type R & D property
for Rockwell Collins.” (See Ptf’s Ex 1 at 41.) Herman testified that the subject property’s
“interior build-out * * * is unique to the tenant,” noting that “it is a first generation build-out.”
(See Def’s Ex A at 28.) He concluded that “there are no physical or functional features of the
building shell that adversely influence the market position of the building.” (Id.)
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1
Saunder’s Summary Appraisal Report provides similar information in Exhibit 1 at pages iii, iv, 7.
DECISION TC-MD 100701D 2
Saunders testified that the subject property’s tenant “spent $3,045,992 in additional
specialized tenant improvements to finish the building for their specific aerospace and
electronics division needs. “If Rockwell Collins were to vacate the building, the specialized
tenant improvements would have limited value to an alternative user.” (Ptf’s Ex 1 at 41.) The
parties agree that the property owner “has no right to make the tenant remove” the tenant
improvements during the lease or when the lease terminates.
After extensive testimony, the parties conceded that as of the assessment date,
January 1, 2009, the structure was 100 percent complete and approximately 70 percent of the
building is used as “office.”
B. Valuation Approaches
Both Saunders and Herman testified that in determining the subject property’s 2009-10
real market value, “All three approaches to value were considered,” the cost, sales comparison or
and income approaches to value.” (Ptf’s Ex 1 at iv; Def’s Ex A at 5.)
1. Cost Approach
Saunders testified that he selected four land sales as comparable to the subject property’s
“327,136 SF net useable portion of the subject site.” (Ptf’s Ex 1 at 44.) The four land sales
ranged in size from 246,550 square feet to 483,080 square feet and the “Transaction
(Status/Date)” occurred from December 2007 to September 2008. (Id.) Saunders concluded that
the “sales range from $6.00 to $8.77/SF” and those sales are “[g]ood support * * * for a unit
value of $8.50/SF in comparison.” (Id. at 45.) He stated that, “When the subject’s 327,136 SF
i[s] multiplied by $8.50/SF the indicated market value of the land as of January 1, 2009 was
$2,780,656.” (Id.) Saunders noted that, “The developer’s purchase of the subject property for
$7.64/SF [“on June 5, 2006 for $2,500,000 cash”] supports the reasonableness of the appraiser’s
DECISION TC-MD 100701D 3
value estimate of $8.50/SF for the subject site in comparison.” (Id.) In response to questions,
Saunders testified that none of the sale prices were adjusted “for trend” even though he agreed
that land sale prices were declining after 2007. He testified that his adjustments were
“qualitative,” not “quantitative,” and there were no “match sales.”
Herman concluded a land real market value of $2,500,000 that he stated was “the actual
allocation made to the subject site relative to the purchase of a larger parcel that was
subsequently partitioned.” (Def’s Ex A at 59.) He further stated that “[t]he unit value equivalent
of $8.20/developable square foot is corroborated by other industrial land sales that have
transacted in the general market area, examples of which have been included in the Addenda.”
(Id.) Herman offered no testimony about the “other industrial land sales” transactions referenced
in his appraisal report, labeled Defendant’s Exhibit A. In response to questions directing him to
his Exhibit A-193 showing a 5 acre parcel listed for $16.78 per square foot, Herman testified that
the “$2,500,000 is reasonable and supportable by sales” and listings are not sales.
Saunders testified that he relied on “the State Farm Insurance Company appraisal” for
“Direct Costs,” “Indirect Costs,” and “Other Costs excluding entrepreneurial profit.” (See Ptf’s
Ex 1 at 46.) Defendant objected to Saunders reliance on an appraisal report prepared by
someone who was not present to testify and there was no written authorization given to Saunders
to use that appraisal. The court agreed with Defendant, stating that without testimony from the
person who prepared the appraisal report, the reliability of the information is unknown and the
document has not been authenticated.
Herman testified that the subject property’s “Total Structure Cost/Profit” including a
“Developers Profit (8%)” was $13,687,002. (See Def’s Ex A at 59.) When questioned, Herman
testified that he relied on Perlo Construction reported construction cost of $6,130,520 for the
DECISION TC-MD 100701D 4
“direct shell.” (See id. at 147.) He testified that to that amount he added the lease agreement
tenant improvement allowance of $4,393,085 and “soft costs” of $2,150,065. (See id. at 59,
147.) He concluded a rounded “Total Project Cost” (land and building) of $16,187,000. (See id.
at 59.) Herman testified that the cost approach results in an “upper threshold of value.”
The parties agree that a “developers’ profit” or “entrepreneurial profit” is hard to
estimate. Herman testified that the developer told him that he would have estimated a “much
lower” profit. Herman testified that he did not add “the excess” payment by the tenant for
improvements in excess of the amount reimbursed by the property owner to the tenant for such
improvements to the total building cost. Saunders testified that he does not agree that those costs
should be excluded because the owner “couldn’t finish the building without spending more than
the tenant improvement allowance.” He concluded that the property owner could not “purchase
a property” at January 1, 2009, that was “equal to or similar to subject property for less than the
replacement cost of $22 Million to $23 Million.” Herman testified that he does not “agree” that
the cost approach is most applicable even, though the property was completed close to the
assessment date, because the “market expectations” shifted as of the assessment date.
2. Sales Comparison Approach
Saunders testified that after conducting research “in the Portland metropolitan area to
locate sales of similar industrial property[,]” he included “five sales and one listing that occurred
during 2006, 2007 and 2008 which have varying degrees of comparability to the subject
property.” (Ptf’s Ex 1 at 49.) In his appraisal report, Saunders stated:
“The subject property will be compared to the other comparable sales based on
124,450 SF GLA with 40.1% office build-out with the balance of the subject’s
manufacturing, testing and production areas also being 100% build out, but at a
lower quality than typical office space. * * *.
“* * * * *
DECISION TC-MD 100701D 5
“The fee simple interest in the subject property will be valued with no
consideration given to the long term lease agreement. * * *. All sales were
verified with either the buyer, seller, or brokers involved in the transactions. * *
*.
“Consideration has been given to each sale for differences between the sale and
the subject property for ownership interest, date of sale, location, design, quality,
age, condition, etc. Since it was not possible to isolate specific dollar adjustments
from the market for these differences, a bracketing technique was used to value
the subject property.”
(Id. at 57.)
Saunders testified that the “office/flex buildings * * * range in building size from 51,110
SF to 126,180 SF GLA” and the “co-star comp sheets are in the county’s database.” (See id. at
50.) The price per square foot for the five sales ranged from $159.49 to $236.74. (Id.)
Saunders testified that he included one property listed for sale because it “became vacant on
December 1, 2008, one month before the date of valuation.” (See id. at 49.) He testified that the
property was “listed above market” at $175 per square foot based on its “age, quality and
condition.” (Id. at 58.)
Saunders testified that he “concluded a unit value of $170.00/SF for the subject property
(with no consideration given to the subject’s specialized interior improvements constructed by
Rockwell Collins) which when multiplied by the subject’s 124,450 SF GLA is an indicated
market value of $21,156,500. (Id. t 59.)
Herman testified that his “diligent search of the marketplace revealed several meaningful
flexible occupancy industrial building market comparisons * * *.” (Def’s Ex A at 45.) He
selected six sales that closed from August 2008 to December 2009. (Id. at 46.) When asked
why he selected sale dates after the assessment date, Herman responded that there was “no data
to measure as of January 1, 2009,” and using data after that date means that “we no longer have
to guess” and the “market trends are confirmed.” Herman asked about the “comparability” of his
DECISION TC-MD 100701D 6
selected six sales to the subject property given that the subject property was built in 2008 and all
of the selected sales were built in 1980s and 1990s, and four of the six were “multi-tenant flex”
whereas the subject property is “single tenant flex.” Herman responded that adjustments for age
and other differences or factors were all “qualitative.” The “floor area” of the six properties
ranged from 42,440 square feet to 169,998 square feet. (Id.) The unadjusted sale price per
square foot ranged from $91.32 to $150.80. (Id.) Plaintiff pointed out, and Herman agreed, that
if the sales after 2009 are “taken out” the range of price per square foot is $114.62 to $150.80
and the capitalization rates are 7.2 percent, 8.0 percent and 8.25 percent. (See id.)
After giving a brief overview of each of the selected properties, Herman testified that the
most comparable property to the subject property was a “single tenant” occupied building at the
“time of the purchase” that was “constructed in 1984 and substantially renovated in 2003.” (See
id. at 49.) In his appraisal report, Herman wrote that this property “was not actively exposed to
the marketplace and was negotiated as a sale and leaseback agreement through broker
solicitation.” (Id. at 49.) Herman provided the following additional information:
“The nominal sale price was $5,750,000 with the purchaser paying an additional
$150,000 in brokerage commission. The lessee subsequently failed with the
property being placed back on the market at an asking price of $150/SF in late
March, 2009. It is also being offered as a lease opportunity at $12/SF (absolute
net).”
(Id. at 50.) Herman concluded that after giving “all considerations, with particular emphasis
upon market conditions, it is the appraiser’s opinion and conclusion that the market value of the
subject property fee simple title as of January 1, 2009 would be competitive as $130/SF or
$16,178,500 based upon a gross floor area of 124,450 square feet.” (Id. at 51.)
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DECISION TC-MD 100701D 7
3. Income Approach
Saunders testified that the subject property is an income producing property that was
leased to one tenant at the time of assessment. Saunders recapped the subject property’s existing
lease agreement:
“The subject is fully occupied by Rockwell Collins Aerospace and Electronics,
Inc. beginning September 1, 2008 for a period of ten years and eight months.
There are two five year options to renew. The tenant received eight months free
rent. The effective rent for the subject property is $12.89/SF ($133,687.96/mo.)
on a triple net expense basis, if the eight months free rent is adjusted equally over
the term of the lease. * * *. The average effective rent over the lease term is
$14.52/SF.”
(Ptf’s Ex 1 at 60-61.) Herman concluded that the “net effective rent including the build-out
concession [for the subject property] was $11.20/SF per year.” (Def’s Ex A at 52.)
a. Potential Gross Income
In his appraisal report, Saunders wrote:
“For lease comparison purposes the subject property is compared to other lease
comparables based on a gross leasable area of 124,450 SF with 40% office and
60% manufacturing, testing, distribution and production areas which are finished.
In this approach to value no additional value is considered for the specialized
improvements completed by Rockwell Collins for their specific use, ie produce
development, testing and manufacturing of aerospace and electronic circuitry for
military and commercial uses.
“* * * * *
“A search was conducted to locate leases which were similar in location, date the
lease was signed, and being similar in physical features to the subject property. *
* *. There are a limited number of single tenant flex type R & D properties which
are leased in the state of Oregon. Therefore, the appraiser utilized additional lease
information on flex type R&D properties in California and Nevada to compare to
the subject property. The leases were reviewed and verified and the four most
comparable leases and one listing were included for further analysis and are set
forth on the second following page.”
(Ptf’s Ex 1 at 60.) The four comparable leases selected were two properties located in
Wilsonville, Oregon, (including the subject property), one property located in Las Vegas,
DECISION TC-MD 100701D 8
Nevada, and one property located in San Jose, California. (Id. at 62.) According to Saunders,
the available lease area ranged from 25,875 square feet to 141,620 square feet with effective rent
per square foot ranging from $12.72 to $18.00. (Id.) The “Start Date” for the four leases
ranged from June 2007 to September 2008, the latest being the subject property, and the lease
term was ten years for each of the selected properties. (Id.) Saunders concluded that even
though the “best indicator of market rent for the subject property” is the subject property’s
existing lease, “which indicates a rental rate of $12.89/SF[,]” * * * “[g]ood support is provided
for a market rent for the subject property of $13.00/SF in comparison, which when multiplied by
the subject’s gross leasable area of 124,450 GLA is a potential gross income estimate of
$1,617,850.” (Id. at 67.)
In response to questions, Saunders testified that the parties “executed their lease
agreement in November 2007.” Peterson testified that November 2007 was the “zenith of the
market.” Herman described the market conditions at January 1, 2009, as “apocalyptic.” The
parties dispute whether financing was available for new construction. (Ptf’s Ex 8.)
Saunders testified that the lease rent rate would have been “higher” if the property
owner paid for the total tenant improvement build-out costs, totaling “over $7 Million.” In
response to how Saunders could determine a lease rent rate in excess of the average rent ($12.35)
of the comparable properties, Saunders testified that because of the “build out costs,” he
concluded that the “$12.89 effective rent” is a “low indication of rent.” Defendant presented
Saunders with a “flyer” for a “flex office” building “under construction” that is located adjacent
to the subject property. (Def’s Ex C.) According to the flyer and Peterson’s testimony, the lease
rate offered was $9.90 per square foot for a triple net lease and $20 per square foot for tenant
improvement. (Id.) Saunders testified that the “flyer is undated” and that he knows that
DECISION TC-MD 100701D 9
currently that building is being marketed for a “lease rent rate of $17.90 per square foot and $45
per square foot for tenant improvements.” He also testified that a “listing is not a good
indication” and he places more reliance on “consummated leases.” Saunders testified that he
“looked at a lot of data” and did not “see that leases were showing a significant reduction
between July 1, 2008, and January 1, 2009,” but rather that “rents were flat.”
Peterson testified that after August 2008, “three transactions failed,” “20 to 30 percent
less transactions were being negotiated,” and “no leases [were] done” in early 2009. In response,
Plaintiff offered its Exhibit 9, Portland Industrial Market, Inventory & Development, Select Top
Under Construction Properties, Year-End 2008 – Portland, listing 15 construction projects of
varying sizes that were under construction with “delivery dates” in the first quarter 2009.
Herman was questioned about various market reports. (See Def’s Ex A at 163-169.)
Peterson testified that in his opinion, as of January 1, 2009, the market was not at “$13
per square foot triple net.” Peterson testified that the “Wilsonville market had higher vacancy
rates than Portland” because that area was the “laggard in the I-5” corridor. Peterson was asked
about the “Hollywood Video” building located across Interstate 5 from the subject property and
that was described as a “rival building” to the subject property. Peterson testified that as of
December 2008, the “asking rent” was $12.00 per square foot and subsequently the building
went “back to the lender” who is now “asking $9.50 per square foot” with a “$30 per square foot
tenant improvement allowance.”
Herman selected four leased properties, all located in Hillsboro, Oregon. (Def’s Ex A at
54.) In his appraisal report, he wrote:
“The defining elements of comparability were space similarity to the subject as to
functionality, quality, size of space leased and expense structure. * * *. Leases
for similar flexible occupancy industrial space are universally negotiated on an
absolute net basis wherein the tenant is responsible for all costs of occupancy less
DECISION TC-MD 100701D 10
management and structural reserves. Additionally, this type of space is typically
negotiated on a blended rate basis as opposed to aggregating shell and office
components.”
(Id. at 52.) For the four properties selected by Herman, the “Area Leased” ranged from 28,482
square feet to 75,010 square feet, and “Effective Rate” ranged from $10.20 per square foot to
$11.04 per square foot, with two of the properties not having a “Build-Out Allowance” because
the tenants were renewing existing leases. (Id. at 54.) The “Start Date” for the four leases
ranged from January 2008 to January 2009, with the lease term ranging from one year to six
years. (Id.) Herman concluded a “Total Base Rent” of $1,368,950 at $11.00 per square foot.
(Id. at 58.)
b. Vacancy and Collection Loss
The parties disagreed as to the appropriate vacancy and collection loss. Saunders wrote
in his appraisal report:
“In the Wilsonville sub-market the vacancy rate for industrial property was 8.7%
at the end of 2008. Flex/R&D space had a 7.1 vacancy rate at the end of 2008 in
the sub-market in which the subject property is located. * * *. Historical vacancy
rates have ranged between 5% and 12% over the previous three years.
Considering that the subject property is well located, new, good quality, with no
functional inadequacies, a stabilized 5% vacancy and collection loss factor will be
applied to the subject property.
“When 5% is multiplied by $1,617,850 potential gross annual income, the
indicated vacancy and collection loss reserve for the subject property is $80,893
per year. The effective gross annual income is estimated to be $1,536,957.”
(Ptf’s Ex 1 at 67.)
Herman testified that he relied on “surveys” from three difference sources reporting space
available to lease in comparison to total lease space for the “Southwest I-5 Flex/Industrial
Market.” (See Def’s Ex A at 57.) He concluded that:
“[b]ased upon this statistical data, it would appear that there is a general
consensus as to a 9 percent to 12 percent ambient vacancy rate as of the valuation
date. * * *. [I]t is the appraiser’s opinion and conclusion that a prudent investor
DECISION TC-MD 100701D 11
would factor a minimum vacancy and turnover allowance of 10 percent. * * *.
[T]he budgeted revenue loss interval would be equivalent to approximately one
year per ten year period (10%).”
(Id. at 57.) Plaintiff questioned Herman about his vacancy and collection loss percentage,
directing his attention to a report by Colliers International, The Market Report, for the fourth
quarter 2008, stating that “Flex Market, I-5 South” vacancy rate was 5.2 percent. (Ptf’s Ex 6 at
4.)
c. Annual Operating Expenses
The parties agree that the subject property “is a single tenant triple net leased type
property where most expenses are paid for by the tenant.” (Ptf’s Ex 1 at 68.) In his appraisal
report, Saunders wrote that “[t]wo exceptions are Professional Management which typically runs
1% and reserves for replacement which can range from 1-2% of effective gross income, a 3%
estimated annual operating expense will be utilized in this analysis.” (Id.) In his appraisal
report, Herman wrote, “Therefore, the only non-recoverable expenses are executive
management, structural reserve [“2% EGI”] and turnover reserve [“2% EGI”].”
(Def’s Ex A at 57, 58.) Herman computed a “Turnover Budget” of $1,016,679, including a
“Build-Out Allowance ($5/SF 2nd Generation),” “One Month Free Rent Move-in,” “Preservation
Utilities During Lease-up (1 year),” “Leasing Commission (5%/3 year cap),” and “Insurance,
Taxes During Lease-up.” (See id. at 57.) In his appraisal report, Herman stated that the
computed turnover budget was discounted “at a 3 percent safe rate for the 10 year initial turnover
period,” resulting “in a line item expense of $88,685.” (Id.) “Executive management has been
estimated at 2 percent of collected revenue, as has structural reserves based upon survey results
published in the first quarter 2009 Korpacz Real Estate Market Survey.” (Id.)
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DECISION TC-MD 100701D 12
Herman was questioned about his computed “Turnover Budget.” Quoting from
Appraising Industrial Property (2005), Plaintiff asked Herman about “above the line” and “below
the line” expenses, questioning, whether it is acceptable to “use tenant expenses that appear
below the line when computing net operating income.” Herman testified that given the terms of
the subject property’s lease, specifically that the tenant has no obligation “to tear out its
improvements” and the “ten year term,” it becomes a “critical responsibility” for the property
owner, and should be considered a cost of operation. Peterson testified that “re-tenanting is a
huge cost,” and estimating that cost is an “art, there is no formula.” Plaintiff pointed out that in
the Appraisal Institute, The Appraisal of Real Estate at 480 (13th edition 2008), states that “re-
tenanting” and lease commissions should not be “considered” part of operating expenses.
Herman testified that if the “lease-up expenses” are excluded then the “cap rate would be
higher.”
d. Net Operating Income
After determining potential gross income, vacancy and collection loss, and annual
operating expenses, the parties determined net operating income. Saunders determined a “Net
Annual Operating Income” of $1,490,848. (Ptf’s Ex 1 at 68.) Herman determined an “Estimated
Net Operating Income at Stabilization” of $1,094,088. (Def’s Ex A at 58.)
e. Capitalization Rate
In determining an “overall capitalization rate,” Saunders testified that he “abstracted
overall rates from three comparable sales in the prior sales comparison approach, which were
leased at the time of sale.” (See Ptf’s Ex 1 at 68.) He testified that the “overall rates range[d]
from 7.38 to 7.75%.” (Id.) Saunders concluded that the applicable capitalization rate was 7.25
percent, stating that the subject property is a “larger better quality light industrial R&D property
which is new and well located” and “is superior to all the comparable sales cited above.” (Id.)
DECISION TC-MD 100701D 13
Herman testified that the “market capitalization rate range reflected by the comparables
cited in the Sales Comparison Approach was 7.2 percent to 9.46 percent.” (Def’s Ex A at 58.)
In his appraisal report, Herman wrote:
“The Korpacz Real Estate Market Survey of flex/R&D rate of return expectations
relative to the first quarter of 2009 was a range of 7.0 percent to 10.0 percent.
Due to the age, quality and location of the subject, it is the appraiser’s opinion and
conclusion that the subject property would be competitive in the marketplace at a
7.75 percent capitalization rate.”
(Def’s Ex A at 58.) Herman was questioned about using data from the “first quarter of 2009”
rather than the “fourth quarter 2008” and responded that “risk was rising in the first quarter of
2009.”
f. Income Approach Value Estimate
Saunders testified that, “When the estimated net annual operating income of $1,490,848
is divided by an overall capitalization rate of 7.25%, the indicated market value of the fee simple
interest in the subject property as of January 1, 2009 is $20,563,421.” (See Ptf’s Ex 1 at 68.)
Herman testified that based on his estimate of the subject property's net operating
income, $1,094,088, and capitalizing that net operating income at seven and three quarters
percent, “The resulting value estimate based upon the Income Approach has therefore been
calculated at $14,117,250 * * *.” (See Def’s Ex A at 58.)
C. Reconciliation of Approaches and Determination of Real Market Value
Saunders testified that he placed “primary weight” on the income approach, “which
indicated a market value estimate of the fee simple interest in the real property as of January 1,
2009 of $20,563,421.” (See Ptf’s Ex 1 at 70.)
Like Saunders, Herman testified that he placed “Primary emphasis * * * upon the Income
Approach value indication.” (See Def’s Ex A at 60.) He explained that the sales comparison
approach was “utilized to test the reasonableness of the Income Approach value estimate based
DECISION TC-MD 100701D 14
upon price per square foot[,]” and the “Cost Approach serves to credibly establish an upper value
threshold due to market conditions which have severely impacted the financial feasibility of
development and financing availability.” (Id.) Herman concluded “a value estimate of
$15,000,000 as of January 1, 2009.” (Id.)
D. Use Value: Tenant Leasehold Improvements
The parties disagree as to whether the “tenant leasehold improvements have * * *
measurable contributory value to the fee ownership.” (Def’s Ex A at 59.) Herman testified that
“inasmuch as all [tenant leasehold improvements] are unique to the tenant and will likely not be
of functional benefit to any other tenant” and “the tenant may remove or leave any or all of the
leasehold improvements” or “ownership may have to assume the cost burden of removal at lease
termination which could well exceed any salvage value associated with the leasehold
improvements” there is “no value” to subject property. (Id.)
Plaintiff offered the Declaration of Debra Cobun, controller for Perlo McCormack Pacific
Company, stating that the subject property’s tenant, Rockwell Collins, was invoiced and paid
$7,401,742.42 for tenant improvements completed as of December 30, 2008. (Ptf’s Dec of
Debra Cobun, Oct 10, 2011.) The declaration stated that, “This amount, $7,401,742.42, does not
include any cost of the building shell, which was paid for under a separate contract by Jack
Martin, of Wilsonville 2006 NW LLC.” (Id.)
Saunders testified that in addition to the tenant improvement allowance of $35.30 per
square foot stated in the Lease Agreement (Ptf’s Ex 1, specifically at 124) the tenant [Rockwell
Collins] spent an additional $3,045,992 and those costs were part of the amount stated on the
December 30, 2008, invoice. Saunders testified that because the tenant “spent an additional
$3,045,992 on specialized tenant improvements to develop the interior of the building for a
DECISION TC-MD 100701D 15
specific use[,] * * * the use value of the real property to Rockwell Collins is much higher than
the market value to an alternate user.” (See id. at 10.) Saunders was questioned at length as to
“how the use value” determines “real market value” for the subject property where the owner is
not the user. He testified that the “special improvements add value to the enterprise,” Rockwell
Collins, even though the “improvements belong to the owner.” Saunders testified that the
“typical investor would not place any value on these specialized improvements and would
anticipate remodeling the building interior for an alternate user.” (Id.) To the real market value
he determined, Saunders added the cost ($3,045,992) he computed was paid by the tenant in
excess of the tenant improvement allowance stated in the lease agreement to conclude a “use
value estimate.” (Id. at iv, 69, 70.) Saunders testified that the “Appraisal Institute” recognizes
the use value approach when there is a “specific use or specialized use.”
II. ANALYSIS
The issue before the court is the 2009-10 real market value of Plaintiff’s property. “Real
market value is the standard used throughout the ad valorem statutes except for special
assessments.” Richardson v. Clackamas County Assessor, TC-MD No 020869D, WL 21263620,
at *2 (Mar 26, 2003) (citing Gangle v. Dept. of Rev., 13 OTR 343, 345 (1995)). Real market
value is defined in ORS 308.205(1),2 which reads:
“Real market value of all property, real and personal, means the amount in cash
that could reasonably be expected to be paid by an informed buyer to an informed
seller, each acting without compulsion in an arm's length transaction occurring as
of the assessment date for the tax year.”
There are three approaches of valuation (cost, income, and comparable sales) that must
be considered in determining the real market value of a property even if one of the approaches is
2
All references to the Oregon Revised Statutes (ORS) and Oregon Administrative Rules (OAR) are to year
2009.
DECISION TC-MD 100701D 16
found to not be applicable. See ORS 308.205(2) and OAR 150-308.205-(A)(2)(a). Each party
determined the subject property’s real market value using the three valuation approaches.
A. Cost Approach
Using the cost approach, Herman determined that the subject property’s real market value
as of the assessment date was $16,189,000 (rounded). (Def’s Ex A at 59, 147.) Herman testified
that he did not include the cost of tenant improvements paid by the tenant that were in excess of
the amount to be paid in accordance with the lease agreement by the property owner for tenant
improvements. That is contrary to accepted appraisal standards: “Tenant finish costs may also
be necessary to achieve stabilized occupancy and, if so, they must be added as a direct cost.”
Appraisal Institute, Appraisal of Real Estate at 382 (13th Ed 2008). Saunders submitted
evidence stating that the additional costs in the amount of $3,045,992 were paid for tenant
improvements by the tenant. (Ptf’s Ex 1 at 10.) Those costs should have been included in
Herman’s determination of real market value, resulting in a total (land and improvement) real
market value of approximately $19,235,000. Herman testified that he placed no reliance on the
cost approach.
Saunders testified that based on appraisal reports prepared by fee appraisers who were
not Plaintiff’s employees, he concluded the subject property’s total real market value was
$23,000,000. Unfortunately, those fee appraisers did not testify. Defendant and the court were
not given the opportunity to question those individuals. The court will not rely on Saunders’s
estimate of real market value, which is based primarily on work done by others who did not
testify.
Given the testimony and evidence, the court will give no consideration to the parties’
determination of the subject property’s real market value using the cost approach.
DECISION TC-MD 100701D 17
B. Comparable Sales Approach
Both appraisers relied on the comparable sales approach to check the “reasonableness” of
the income approach value. (Ptf’s Ex 1 at 70; Def’s Ex A at 60.) The comparable properties
selected by the appraisers were described as primarily “multi-tenant flex,” although two of
Herman’s six comparable properties were “single tenant flex” and two of Saunders five
comparable properties were “office buildings.” (Ptf’s Ex 1 at 50; Def’s Ex A at 46.) Saunders
included a property listed for sale, noting an asking price per square foot of $175. (Ptf’s Ex 1 at
51.) Even though that property is similar in size to the subject property, it was built in 1980 and
remodeled in 1998, and most important, that property was still listed for sale as of the trial date,
providing little evidence of value for the subject property. (Id.) The sale dates of Saunders’s
comparable properties were January 2006, March 2006, November 2007, May 2008, and June
2008 with three of the five sales clustered around $160 per square foot with the two “office
buildings” having a price per square foot in excess of $200. (Id. at 50.) Saunders “concluded a
unit value of $170.00/SF for the subject property (with no consideration given to the subject’s
specialized interior improvements constructed by Rockwell Collins) which * * * is an indicated
market value of $21,156,500.” (Id. at 59.)
In contrast, the sale dates of Herman’s comparable properties were August 2008,
December 2008, February 2009, October 2009, and December 2009. (Def’s Ex A at 46.) Giving
little significance to the sales completed after the assessment date, the price per square foot for
three comparable properties ranged from $115 (rounded) to $151 (rounded) per square foot. (Id.)
Herman concluded “that the market value of the subject property fee simple title as of
January 1, 2009 would be competitive at $130/SF or $16,178,500 * * *.” (Id. at 51.)
///
DECISION TC-MD 100701D 18
Saunders’s comparable sales clustered around $160 per square foot. (Ptf’s Ex 1 at 50.)
Herman’s computed price per square foot ($130) is within the range of comparable sales. (Def’s
Ex A at 51.) Sales after the assessment date ($91 to 112 (rounded)) support a price per square
foot less than the high end of the range. (Id. at 46.) Saunders did not include comparable sales
after June 2008, a full six months prior to the assessment date, even though there are sales after
that date and before the assessment date. (Ptf’s Ex 1 at 50.) Sales after June, 2008, reflect the
market conditions as of the assessment date and should have been considered by Saunders.
Given the subject property’s location and age and the evidence, the court concludes that $140 per
square foot is reasonable, resulting in a real market value of $17,423,000.
C. Income Approach
The income approach is defined by Herman as “an appraisal process that converts
anticipated benefits derived from the ownership of income producing property into a value
estimate.” (Def’s Ex 1 at 52.) Saunders offered a similar definition: “The income approach
measures the value of an income producing property based on the property’s income producing
ability.” (Ptf’s Ex 1 at 60.) The income approach was given “primary emphasis” by Plaintiff
and Defendant in determining the subject property’s real market value. (Ptf’s Ex 1 at 70; Def’s
Ex A at 60.) The appraisers did not agree on any of the income approach components: gross
revenue, vacancy rate, expenses, or capitalization rate. (Ptf’s Ex 1 at 68; Def’s Ex A at 58.)
1. Potential Gross Income
Beginning with gross income, both appraisers undertook a search to locate leases that
“were similar in location, date the lease was signed, and being similar in physical features to the
subject property.” (See Ptf’s Ex 1 at 60.) Saunders extended his search to Nevada and
California. (Id.) He determined that the two leases outside Oregon had an effective rent, per
DECISION TC-MD 100701D 19
square foot per month, of approximately $18. (Id. at 62.) In contrast, the other three lease
comparables, the subject property, a one-story office/warehouse in Wilsonville and a listing in
Wilsonville, all had effective rents of $12 to $13. (Id.) Ultimately, Saunders concluded that the
“best indicator of market rent for the subject property is lease #1 [the subject property], which
indicates a rental rate of $12.89/SF.” (Id. at 67.) Herman selected lease comparables from four
properties located in Hillsboro, Oregon. (Def’s Ex A at 54.) The effective rent per square foot
ranged from $10.20 to $11.04. (Id.) Herman concluded a “base rent” of “$11.00/SF,” testifying
that a lower rate than the subject property’s lease agreement rate was appropriate because the
subject property’s lease was negotiated months prior to the assessment date. (See id. at 58.)
Given the evidence and testimony, the court concludes that the effective rent, per square foot per
month, is $12. The total potential gross annual income is $1,493,400.
2. Vacancy Rate .
Looking next to “vacancy and collection loss” that is described as the “vacancy period
between tenants,” Saunders’s report stated that Historical vacancy rates have ranged between 5%
and 12% over the previous three years.” (Ptf’s Ex 1 at 67.) Without stating the source of his
historical data or identifying the vacancy rate by year, Saunders concluded that because “the
subject property is well located, new, good quality, with no functional inadequacies, a stabilized
5% vacancy and collection loss factor will be applied to the subject property.” (Id.) Herman’s
report stated that according to three sources (Norris, Beggs & Simpson; Grubb & Ellis; and
CBRE) the vacancy rate for “Southwest I-5 Flex/Industrial Market Vacancy Survey (January 1,
2009)” ranged from 9.5 percent to 12.95 percent. (Def’s Ex A at 57.) He concluded “that a
prudent investor would factor a minimum vacancy and turnover allowance of 10 percent.” (Id.)
Saunders’s report stated that “[f]lex/R&D space had a 7.1% vacancy rate at the end of 2008 in
DECISION TC-MD 100701D 20
the sub-market in which the subject property is located.” (Ptf’s Ex 1 at 67.) He did not cite the
source. Given Saunders’s failure to provide the source of his data or to substantiate his
conclusion that a vacancy rate at the low end of a three year period for an unidentified location is
reasonable, the court accepts Herman’s vacancy rate of 10 percent.
3. Operating Expenses
Saunders and Herman agree that because the subject property “is a single tenant triple net
leased type property where most expenses are paid for by the tenant,” operating expenses are
limited to professional or executive management and reserves for replacement or structural
reserves. (See Ptf’s Ex 1 at 68; Def’s Ex A at 58.) Saunders concluded “a 3% estimated annual
operating expense,” and Herman concluded a four percent estimated annual operating expense.
(Id.) Neither party provided source detail for his conclusion. The court accepts Saunders’s
determination that operating expenses should be computed as three percent of effective gross
income.
In addition to the operating expenses discussed above, Herman concluded that an
additional operating expense identified as a turnover reserve was appropriate “assuming a ten-
year turnover interval * * *.” (Def’s Ex A at 57.) For the turnover reserve, Herman identified
the following costs: “Build-Out Allowance,” “One Month Free Rent Move-in,” “Preservation
Utilities During Lease-up (1 year),” “Leasing Commission,” “Insurance, Taxes During Lease-
up.” (Id.) In addition to assuming a ten year turnover interval, Herman discounted the computed
turnover budget “at a 3 percent safe rate for the 10 year initial turnover period” to compute “a
line time expense of $88,685.” (Id.) The court acknowledges that the subject property’s tenant
signed an initial ten year lease with two five year renewal options. (Ptf’s Ex 1 at 60.) Herman
concludes that if the subject property’s current tenant fails to exercise its options or vacates the
DECISION TC-MD 100701D 21
premises the next tenant will also be a 10 year tenant. The court finds no factual basis for that
assumption. In addition, the court finds the costs detailed in the turnover reserve to be
speculative. The court does not consider the turnover reserve to be a quantifiable operating cost.
4. Capitalization Rate
The final component in determining real market value using the income approach is the
capitalization rate. Saunders’s “abstracted overall rates from three comparable sales in the prior
sales comparison approach, which were leased at the time of sale.” (Ptf’s Ex 1 at 68.) He stated
that the “overall rates range from 7.38 to 7.75%.” (Id.) Saunders concluded that because the
property was “a larger better quality light industrial R&D property which is new and well located
[it] would likely sell at a capitalization rate of 7.25% in comparison as it is superior to all the
comparable sales cited above.” (Id.)
In addition to the capitalization rates, ranging from 7.2 percent to 9.46 percent and were
extracted from the sales used in his sales comparison approach, Herman considered the “Korpacz
Real Estate Market Survey of flex/R&D rate of return expectations relative to the first quarter of
2009,” showing “a range of 7.0 percent to 10.0 percent.” (Def’s Ex A at 58.) Herman ultimately
concluded a capitalization rate of 7.75 percent. (Id.)
In selecting a capitalization rate outside the range of capitalization rates computed for his
comparable properties, Saunders discounts the comparability of the properties he selected,
leaving the capitalization rate unsupported by the evidence. Herman selected a capitalization
rate at the low end of the overall rates computed for his comparable properties. The court
concludes that Herman’s capitalization rate is adequately supported by the evidence and accepts
a capitalization rate of 7.75 percent.
///
DECISION TC-MD 100701D 22
Using a gross annual income of $1,493,400 reduced by a 10 percent vacancy factor and
operating expenses of three percent, the net operating income of $1,299,258 is capitalized by
seven and three quarters percent to determine a real market value of $16,764,619.
III. CONCLUSION
Based on careful review of the evidence and testimony, the court concludes that primary
emphasis is given to the income approach supported by the sales comparison approach. The
court determines a real market value for the subject property as of the assessment date,
January 1, 2009, of $17,000,000. Now, therefore,
IT IS THE DECISION OF THIS COURT that the 2009-10 real market value of property
identified as Account 05005691 is $17,000,000.
Dated this day of December 2011.
JILL A. TANNER
PRESIDING MAGISTRATE
If you want to appeal this Decision, file a Complaint in the Regular Division of
the Oregon Tax Court, by mailing to: 1163 State Street, Salem, OR 97301-2563;
or by hand delivery to: Fourth Floor, 1241 State Street, Salem, OR.
Your Complaint must be submitted within 60 days after the date of the Decision
or this Decision becomes final and cannot be changed.
This document was signed by Presiding Magistrate Jill A. Tanner on
January 11, 2012. The Court filed and entered this document on January 11,
2012.
DECISION TC-MD 100701D 23