Winco Foods, LLC v. Dept. of Rev.

No. 30 August 30, 2013 223

IN THE OREGON TAX COURT

REGULAR DIVISION

WINCO FOODS, LLC,

Plaintiff,

v.

DEPARTMENT OF REVENUE,

and Marion County Assessor,

Defendants.

(TC 5013)

Plaintiff (taxpayer) appealed to the Magistrate Division from a decision

of the Marion County Board of Property Tax Appeals (BOPTA). The appeal

was later specially designated to the Regular Division. Taxpayer argued that

Defendant Department of Revenue (the department) and Marion County Assessor

(the county) had improperly valued its warehouse facility, requesting an adjust-

ment of the property’s real market value. Following trial and post-trial briefing,

the court found that the parties’ significant differences in different valuation

approaches led the court to reach conclusions as to calculational principles and

to direct the parties to apply the conclusions in reaching a value upon which they

either could agree upon or the differences as to which would be presented to the

court for final decision.

Trial was held in the courtroom of the Oregon Tax Court,

Salem, from June 27 through 29, 2012.

John F. Neupert, Miller Nash LLP, Portland, argued the

cause for Plaintiff (taxpayer).

Joseph A. Laronge, Senior Assistant Attorney General,

Department of Justice, Salem, argued the cause for Defen-

dant Department of Revenue (the department).

Decision rendered August 30, 2013.

HENRY C. BREITHAUPT, Judge.

I. INTRODUCTION

This property tax valuation case is before the court

after a trial and post-trial briefing by the parties. The year

at issue is the tax year 2009-10.

II. FACTS

The subject property is an approximately 1 million

square foot grocery distribution warehouse and related

224 Winco Foods, LLC v. Dept. of Rev.

facilities and land located in Woodburn, Oregon, just west

of the Interstate 5 freeway on an irregularly shaped land

area of approximately 80 acres. The property improvements

are one large steel construction building with extensive cold

storage and frozen storage capacity, an office facility and

a large dry storage area. This building has 40-foot ceiling

heights. In addition, there are buildings for produce return,

truck washing, vehicle repair and fueling. The improve-

ments were originally constructed in 1997. Remodeling and

expansion occurred in 1999, 2002, and 2008.

III. ISSUE

The issue in this case is the real market value of the

subject property as of the assessment date of January 1, 2009.

IV. ANALYSIS

Plaintiff (taxpayer) and Defendant Department of

Revenue (department) appear to have many things in com-

mon in their approaches to valuation and several signifi-

cant differences. Neither property uses an indicator of value

based on capitalized income from the property. The calcula-

tional approaches of the parties on other indicators differ in

important respects. Therefore, the court will reach conclu-

sions as to calculational principles and direct the parties to

apply the conclusions in reaching a calculation of value upon

which they either can agree or the differences as to which

will be presented to the court for final decision.

A. Use of Sales Indicator

Taxpayer’s valuation expert, Robert Greene, devel-

oped a comparable sales indicator of value for the subject.

Admitting that there were not comparable sales of large

refrigerated distribution warehouses, Greene reached a

conclusion as to the sales prices of arguably comparable

dry storage facilities. The expert then added to that value

an amount equal to the depreciated cost of machinery and

equipment found at the subject property, as determined by

the second expert, Richard Kaufman, who testified for tax-

payer. The expert for the department, Bronson Rueda, con-

cluded that there were no sales sufficiently comparable in

time and character to permit development of a sales indica-

tor of value.

Cite as 21 OTR 223 (2013) 225

The court is of the view that the development of the

sales indicator by Greene has problems associated with it

that make his conclusions not persuasive. The first of the

deficiencies is in the size of facility that was involved in

Greene’s sample of sales. They were all significantly smaller

than the square footage of the very large-sized subject

facility. Of equal importance is that the properties Greene

viewed as comparable had 32-foot ceilings whereas the sub-

ject property has 40-foot ceilings.

Secondly, Greene took the sales data and adjusted

it for market changes. However, in doing so, Greene relied

on information and data about the general industrial mar-

ket, even though he concluded that the highest and best use

of the subject was as a mega-distribution facility with cold

storage and refrigeration. The court is not willing to accept

that the market for the specialized type of property that the

subject property represents is the same as the market for

properties, even industrial properties, generally.

To the indicated value for dry storage space, Greene

added the depreciated cost indication developed by Kaufman

for the machinery and equipment found at the subject

property. This approach assumes that one can simply add

machinery and equipment to a general storage space. The

record has little if any evidence that this can be done with-

out significant cost. Greene admitted that his calculations

did not have any adjustment for the extra capital cost that

would be needed to add machinery and equipment to prop-

erties he thought were comparable as to dry storage space.

The court concludes that the sales indicator devel-

oped by Greene is not reliable.

B. Cost Indicator

Both parties developed cost indications of value. The

major differences in approach as to this indicator were with

respect to calculation of physical depreciation and whether

an allowance should or should not be made for external

obsolescence.1

1

The parties do not appear to be significantly separated as to the calculation

of replacement cost new or cost of land. The court directs the parties to confer

regarding any differences they believe they have on these items in light of the

matters decided in this opinion.

226 Winco Foods, LLC v. Dept. of Rev.

C. Physical Depreciation

Rueda, the expert for the department, relied

exclusively on an external information service, Marshall

Valuation Services, for a determination of the economic life

of the structures at issue. Greene testified that unquestion-

ing reliance on that service is not adequate, a fact recog-

nized by the publishers of the service itself. Greene’s dis-

cussion of the adjustments needed included those needed to

take into account the actual facts for the buildings at issue,

its construction materials and other factors.

Greene also was more careful not to include in the

cost of the structure the costs of machinery and equipment

attached to the structure. This avoided an error contained in

the conclusions of Rueda, who did include some machinery

in the figures to which the longer lives for the structures, as

compared with machinery and equipment, were applied.

The court concludes that the physical deprecia-

tion methodology used by Greene is the correct one and the

adjustment for physical depreciation should be calculated

using that methodology.

D. External Obsolescence

Taxpayer asserts that there is substantial external,

or economic, obsolescence associated with the subject property.

Taxpayer argues that decline in general economic conditions

that had occurred prior to the assessment date justify a reduc-

tion in the cost indicator for economic obsolescence. On this

question, as with all questions in this appeal, taxpayer has

the burden of proof. ORS 305.427. The court concludes that

taxpayer has failed to carry that burden as to this question.

As has already been mentioned, the subject prop-

erty is a property with a particular highest and best use,

that of a large-scale grocery distribution with cold storage

and refrigerated storage capacity. Notwithstanding that

highest and best use, Greene relied on information and dis-

cussions with persons regarding the economy and industrial

properties generally. Economic obsolescence may occur as to

a specific property type, but the court does not accept that it

can be established by reference to general information about

much broader classes of property. Taxpayer has not supplied

Cite as 21 OTR 223 (2013) 227

the court with any authoritative source that supports the

approach taken by Greene. Further, a text that all parties

accept as authoritative, The Appraisal of Real Estate, indi-

cates that consideration of facts applicable, or not, to par-

ticular property types is necessary to determine whether

economic obsolescence has occurred in the particular seg-

ment of the overall market or segment of the economy in

which the subject property is found. Appraisal Institute, The

Appraisal of Real Estate 442-43 (13th ed 2008).2

Greene did not look at the economic facts in the

general market for food products, groceries or facilities that

serve those areas of the market. Therefore, Greene’s sup-

porting material simply does not satisfy the burden of show-

ing that, more probably than not, the subject property would

suffer from external or economic obsolescence. Although

many segments of the economy, and the properties found in

or serving those segments, experienced significant adverse

effects at or about the time of the assessment date for this

case, the court cannot conclude that this, or any other par-

ticular property, was subject to economic obsolescence with-

out a much more focused study.

In both pre-trial proceedings and at trial the qual-

ity of the material relied upon by Rueda was a subject of

dispute between the parties. Even if Rueda’s study of the

relevant markets and economic conditions in them were

to be totally ignored, taxpayer has not borne its burden of

proof. However, the evidence which Rueda did develop does

not, in fact, deserve to be ignored. Even taking into account

that some of the evidence relied upon was severely weak-

ened by the need to redact confidential information, Rueda

presented relevant and unrebutted information about the

grocery and food products segments of the economy that

support a conclusion that the subject property did not suf-

fer from economic obsolescence to the extent asserted by

Greene, or even at all.

2

An article from The Appraisal Journal offered as an exhibit by the depart-

ment also makes clear that economic obsolescence, if it exists, can only be

determined by a much more detailed analysis of the property in question and

the particular segment of the economy that the property serves or occupies. See

Donald J. Harman and Michael B. Shapiro, Depreciation: Incurable Functional

Obsolescence and Sequence of Deductions, The Appraisal Journal 408 (Jul 1983).

228 Winco Foods, LLC v. Dept. of Rev.

E. Final Determination of Value

The court cannot determine if there are signifi-

cant differences between the parties as to replacement cost

new, primarily because of the different property included in

the structure by Rueda, but also because of what may or

may not be any substantial difference as to the cost of con-

struction new. However, the department accepts Kaufman’s

determination of value for machinery and equipment. That

being the case, the parties are directed to confer regard-

ing the necessary adjustment to replacement cost new and

land value, if any. Physical depreciation to be deducted is to

be determined as computed by Greene. The parties agree

to a deduction for functional obsolescence. No deduction for

external obsolescence is to be taken. If the parties can agree

on a final value, the court will enter a judgment in accor-

dance with the agreement. If one or more elements remain

at issue, the court will hold a brief hearing to resolve those.

V. CONCLUSION

Now, therefore,

IT IS THE DECISION OF THIS COURT that the

parties are directed to confer as to the determination of a

final value using the calculational principles as described

above to apply the conclusions in reaching a calculation of

value upon which they either can agree or the differences as

to which will be presented to the court for final decision.