The opinion
IN THE OREGON TAX COURT
MAGISTRATE DIVISION
Property Tax
DEPOT INVESTORS, LTD., )
)
Plaintiff, ) TC-MD 150308D
)
v. )
)
BENTON COUNTY ASSESSOR, )
)
Defendant. ) FINAL DECISION
This Final Decision incorporates without change the court’s Decision, entered
February 18, 2016. The court did not receive a statement of costs and disbursements
within 14 days after its Decision was entered. See TCR-MD 16 C(1).
Plaintiff appeals the real market value of property identified as Accounts 122105,
116768, and 122113 (subject property) for the 2014–15 tax year. A trial was held in the
Oregon Tax Courtroom on November 23, 2015, in Salem, Oregon. Hollis McMilan
appeared on behalf of Plaintiff. Dean Rothenfluch (Rothenfluch) and Arthur Garnet
“Gary” Pond (Pond) testified on behalf of Plaintiff. Richard Newkirk (Newkirk)
appeared and testified on behalf of Defendant. Taryn Selvey (Selvey) testified on behalf
of Defendant. Plaintiff’s Exhibits 1 through 7 were received without objection.
Defendant’s Exhibits A, D, E, F, and H were received without objection. Defendant’s
Exhibits C and G were received over Plaintiff’s objection. Defendant’s Exhibit B was
not received. This matter was tried concurrently with case TC-MD 150309D.
On November 19, 2015, Plaintiff filed an “unopposed emergency motion” to
allow Terry Emmert (Emmert) to testify by telephone because he had injured himself in
Mexico and was unable to attend trial. On November 20, 2015, Plaintiff filed its
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Emergency Motion to Reschedule Trial, based on Emmert’s unavailability. The court
allowed Emmert to testify by phone; however, counsel for Plaintiff was unable to contact
him. Under Tax Court Rule–Magistrate Division (TCR-MD) 8 B(3), the court denied
Plaintiff’s request to reschedule the trial because Emmert’s testimony was not necessary
to the presentation of Plaintiff’s case, and because it was unknown how long Emmert
would be unavailable.
I. STATEMENT OF FACTS
The subject property was a one-story restaurant building with 6,016 square feet of
gross building area on 0.9571 acre of land. (Def’s Ex A at 7.) It had an approximately
330-square-foot outdoor dining area with a view of the Willamette River, and 54 asphalt
parking spaces. (Id.) Plaintiff appealed from an Order of the Board of Property Tax
Appeals (BOPTA) finding a total Real Market Value (RMV) of $1,331,591 for the
subject property. Plaintiff alleged an RMV of $875,000. Defendant requests a total
RMV of $1,430,000.
A. Plaintiff’s Evidence
Pond testified that he is a self-employed commercial real estate broker and a
partner with Commercial Associates in Corvallis, Oregon. Pond testified that a previous
lessee had informed him the subject property had been operating as a restaurant for many
years and was vacant from mid-2012 through January 1, 2014. Pond testified that in
March 2015, while representing the Old Spaghetti Factory (OSF), he viewed the subject
property and observed that the restaurant equipment was outdated, a skylight had been
leaking, the kitchen was filthy, and the premises lacked general maintenance. Pond
submitted an offer on behalf of OSF to Plaintiff, which was accepted. (Test. of Pond.)
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The ten year triple-net lease, renewable for four, five year terms, provided for rent
payments of $5,000 per month plus six percent of all gross receipts which exceeded the
basic rent. (Def Ex H.) The lease also provided for a 10 percent increase of the base rent
every five years. (Id.) The lease terms obliged OSF to begin paying rent on the earlier
occurring of the date the restaurant opened or 180 days after receiving all permits
necessary to construct or operate a restaurant. (Def’s Ex H at 3.) Pond testified that the
rent abatement was in consideration of OSF removing outdated equipment from the
subject property and making improvements costing almost $750,000. The lease was
dated July of 2014; the day was left blank, and neither of Plaintiff’s witnesses was able to
recall the exact date of the lease or the date when OSF had obtained all necessary
permits. (Id. at 14.) Pond testified that OSF opened for business at the end of
November 2014.
On or about December 28, 2014, Pond prepared a letter documenting his
valuation of the subject property. (Ptf’s Ex 1.) Pond used an income capitalization
approach to determine the value of the subject property. (Id. at 1.) Pond used the initial
$5,000 basic monthly rent under the OSF lease to determine a gross rental income of
$60,000 per year for the subject property. (Id. at 2.) Pond added the property tax
reimbursement of $25,408 and then deducted five percent for vacancy and credit loss,
which his letter asserted was an industry standard. (Id.) That figure resulted in a gross
operating income of $81,138, from which Pond deducted $25,408 in real property taxes
and $3,245 (four percent of gross operating income) for reserves and miscellaneous
expenses, arriving at a net operating income of $52,485. (Id.) Pond applied
capitalization rates of 6.00 and 6.25 percent because the high quality of the OSF tenant
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made the risk of a default low. Using those capitalization rates, Pond determined the
value of the subject property was between $840,000 and $875,000 respectively. Pond
testified that if he had not known about the OSF lease, he probably would have used a
higher capitalization rate, which would have resulted in a lower value. Pond testified that
he had two reasons for not adding value for the additional percentage rent based on gross
sales: first, he was not given any information about what OSF’s actual sales were after it
opened, and second, his analysis was prepared with insufficient time for stabilization.
Pond testified that even if he had information about the additional percentage rent, he
would not have added it to his analysis because the figures would be speculative.
Rothenfluch testified that he is a CPA for Plaintiff and that he prepared the K-1
statements for Plaintiff that were received into evidence as Exhibits 2 through 7.
Rothenfluch testified that for several years after 2009—when Michael’s Landing, a long-
term renter, went out of business—the subject property generated sporadic rental income
from a number of short-term tenants. A summary of the rents received for the subject
property from 2009 through 2014 follows:1
Total Rent
Year Received
2009 None stated
2010 $ 20,200
2011 $ 73,602
2012 $ 12,585
2013 $ -0-
2014 $ 7,000
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1
The information in this table is drawn from Plaintiff’s exhibits 2 through 6.
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B. Defendant’s Evidence
Newkirk testified that he is a commercial appraiser who has been employed by
Defendant for approximately 13 years. Newkirk prepared a written appraisal of the
subject property using the comparable sales and income approaches. (Def’s Ex A.)
Newkirk determined that the value of the subject property as of January 1, 2014, was
$1,430,000. (Id. at 3.) Newkirk testified that the subject property consisted of three
parcels of real property: one that includes the restaurant structure and two that are parking
areas. The building was originally the Corvallis Train Depot, and it was moved to its
current location in 1982. (Def’s Ex G at 1.) In that same year, an additional 2,730 square
feet were added and the entire property was leased as a restaurant named Michael’s
Landing for almost 20 years. (Def’s Ex A at 9.) Newkirk testified the subject property is
zoned Central Business District, although it is situated on the waterfront. He testified that
the highest and best use for the subject property is as a restaurant.
Newkirk testified that he selected six properties for the comparable sales approach
to value. The first two comparable properties were restaurants in the Corvallis area.
(Def’s Ex A at 29–30.) Comparable 1 was the sale of a property nine months after the
appraisal date that had Sharis restaurant as a long-term tenant. (Id. at 29.) The property
sold at $453.86 per square foot, and Newkirk testified that this sale represented the higher
end of the comparable properties. (Id.) Comparable 2 was a 2010 sale of a restaurant,
known as the Tokyo Steakhouse, for $175.10 per square foot. (Id. at 20.) Newkirk
testified that the property had originally been a clothing store and had been converted to a
“stylish restaurant.” (Id.) That sale represented the lower end of comparable properties
in Corvallis. Comparable sales 3, 4, and 6 were located in the Salem area, and
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comparable sale 5 was located in Eugene. (See id. at 31–34.) The unadjusted sales of the
comparable properties ranged from $162.65 to $527.74 per square foot. (Id.) In addition
to analyzing the sales on an overall price-per-square-foot basis, Newkirk performed a
qualitative analysis in which he evaluated the comparable properties as inferior, superior,
or similar to the subject property. (Id. at 36–39.) Newkirk valued the condition of sale of
the subject property as “similar” to comparable 1 and 2. (Id. at 36.) Newkirk estimated
that “the subject property valuation is likely to occur between $271 and $454 per square
foot” and ultimately concluded that $300 per square foot was an appropriate value. (Id.
at 39.) Using that figure, Newkirk came up with a gross value before adjustments of
$1,800,000 (6,016 sq. ft. x $300, “rounded”). (Id. at 39.) Newkirk then adjusted that
figure based on a vacancy of the property from January 1, 2014, through the end of June
2014, using the OSF rent figure of $5,000 per month. (Id.) Using a lost rent of $30,000
for the period, Newkirk applied a five percent vacancy factor, six percent expense ratio
and 7.25 percent capitalization factor to arrive at a total negative adjustment of $370,000.
Subtracting the adjustments from the initial indicated value of $1,800,000, Newkirk
found a value of $1,430,000 using the sales comparison approach. (Id.)
For Defendant’s income capitalization approach, Newkirk selected three
properties, with comparables 1 and 2 being the same properties selected in the
comparable sales analysis. (Id. at 44.) Comparable 1 had an annual rental rate of $32.10
per square foot on a triple net basis which represented the higher end of the properties.
(Id.) Comparable 2 had an annual rental rate of $20.65 per square foot, on a triple net
basis, which represented the lower end of the properties reviewed. (Id.) Comparable 3
was a fast food restaurant in the Corvallis area with a lease at $30 per square foot. (Id. at
FINAL DECISION TC-MD 150308D 6
43.) Newkirk testified that fast food restaurants tend to have a higher rent per square
foot.
Using the three comparables, Newkirk determined that the average comparable
rent was $27.58 per square foot, but for purposes of the analysis selected $24.00 per
square foot. (Id. at 45.) With that estimate, Newkirk found an annual gross rent of
$144,384, deducted five percent for vacancy, three percent for management, and two
point five percent for reserves, leaving a Net Operating Income (NOI) of $129,621. (Id.
at 45.) Next, Newkirk applied a 7.25 capitalization factor and obtained an indicated
value of $1,787,872. (Id. at 45.) Just as he did for the sale comparison approach,
Newkirk adjusted the value by $370,000 as a capitalized value of the lost rent and arrived
at a real market value of $1,420,000. (Id.) Newkirk testified on cross-examination that
his methodology for adjusting the value of the subject property using a lost rent figure of
$5,000 per month was not methodologically supported.
II. ANALYSIS
The issue before the court is the real market value of Plaintiff’s property as of
January 1, 2014. “Real market value is the standard used throughout the ad valorem
statutes except for special assessments.” Richardson v. Clackamas County Assessor, TC-
MD 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.”
2
References to the Oregon Revised Statutes (ORS) are to the 2013 edition.
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The burden of proof is on the plaintiff to establish its claim by a preponderance of
the evidence. ORS 305.427. “A preponderance of the evidence means the greater weight
of evidence, the more convincing evidence.” Feves v. Dept. of Rev, 4 OTR 302, 312
(1971)). To sustain the burden of proof in a property valuation case a party “must
provide competent evidence of the RMV.” Poddar v. Dept. of Rev., 18 OTR 324, 332
(2005) (citations omitted) (emphasis added). Such evidence includes “appraisal reports
and sales adjusted for time, location, size, quality, and other distinguishing differences,
and testimony from licensed professionals such as appraisers, real estate agents and
licensed brokers.” Metzger v. Clatsop County Assessor, TC-MD 120534D at 5 (Oct 30,
2012).
RMV is to be determined “in all cases” by “methods and procedures in
accordance with rules adopted by the Department of Revenue.” ORS 308.205(2). The
Department of Revenue has mandated the consideration of three approaches to real
property valuation: the “sales comparison approach, cost approach, and income
approach.” OAR 150-308.205-(A)(2)(a). Not every approach will be applicable to every
property. Id.; see e.g. Allen v. Dept. of Rev., 17 OTR 248, 252 (2003). The valuation
approach or approaches to be used is “a question of fact to be determined by the court
upon the record.” Pacific Power & Light Co. v. Dept. of Rev., 286 Or 529, 533, 596 P2d
912 (1979). Ultimately, the real market value of a property is a question of fact and the
court is responsible for determining value. Chart Development Corp. v. Dept. of Rev., 16
OTR 9, 11 (2001) (citation omitted).
The first step in the valuation process is to determine the highest and best use of
the subject property. OAR 150-308.205-(A)(2)(i). The parties agreed that the highest
FINAL DECISION TC-MD 150308D 8
and best use of the subject property, as improved, is the existing restaurant use. The
court accepts their assessment on the highest and best use question.
The second step is to determine and apply the approach or approaches to value.
Plaintiff utilized an income capitalization approach using only the existing OSF lease on
the subject property. Plaintiff argued that the lease entered between two sophisticated
parties, Plaintiff and OSF, just a few months after the valuation date, represented the best
indication of value for the subject property. Plaintiff’s approach does have some merit, in
that the lease is fairly contemporaneous with the assessment date and did represent an
arms-length transaction between two sophisticated market participants.
OAR 150-308.205-(A)(2)(g) provides that “[t]he income used in the income
approach must be the economic rent that the property would most probably command in
the open market as indicated by current rents being paid, and asked, for comparable
space.”
Plaintiff’s income approach is based only on the existing lease, rather than on
market leases. However, more troubling to the court is the fact that Plaintiff’s appraisal
method did not account for several factors that would be significant to a hypothetical
buyer of the subject property. Those factors are the rental increases of ten percent every
five years, the six percent overage based on gross sales, the significant investment by
OSF in the building, and the rent abatement. To state the concern another way
“practitioners who use direct capitalization must recognize that while an overall
capitalization rate is only applied to one characteristic of the property, (i.e., to a single
year’s net operating income), the overall capitalization rate is valid only if it accounts for
all other characteristics of the property.” Appraisal Institute, The Appraisal of Real
FINAL DECISION TC-MD 150308D 9
Estate, at 461 (14th ed 2013). Plaintiff’s appraisal did not account for all of the factors
which are part of the OSF lease. Plaintiff’s argument that those figures are speculative
does not mean they should be ignored. To do so renders the appraisal artificially low. It
is impossible from the evidence presented to determine an appropriate adjustment to the
figures, and thus the court is unable to determine a value of the subject property as of the
assessment date using Plaintiff’s evidence. The court finds that Plaintiff has failed to
meet its burden of proof.
Even though the burden has not shifted under ORS 305.427, “the court has
jurisdiction to determine the real market value or correct valuation on the basis of the
evidence before the court, without regard to the values pleaded by the parties.” ORS
305.412. Defendant asserts a total real market value of the subject property that is higher
than that found by BOPTA. Defendant used two methodologies to determine value of the
property; the sales comparison and income capitalization approach.
With regard to Defendant’s sales comparison approach, Defendant failed to make
appropriate adjustments for the condition of the subject property for which the tenant
expended $750,000 in improvements and for which the Plaintiff gave rental concessions
of up to $30,000. Defendant’s comparable properties 1 and 2 were in pristine condition
with long term tenants whereas the subject property was in need of significant updating,
repairs, had a long period of sporadic rental income, and was vacant as of the assessment
date. Defendant’s evidence provides no guidance on the effect of the properties’
condition and rental history on its real market value. As a result, the court concludes that
Defendant overestimated the value of the property.
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With regard to Defendant’s income approach, Defendant conceded on cross-
examination that the discounts applied to reduce the value for “lost rent” were
methodologically unsupported. The court is unable to rely on Defendant’s evidence in
determining value of the subject property.
III. CONCLUSION
The court has carefully evaluated the evidence and testimony in light of
applicable law (including appraisal methodology therein) and concludes that Plaintiff
failed to meet its burden of proof. The evidence presented is inconclusive and the court
is unable to determine the 2014-15 real property value of the subject property. Now,
therefore,
IT IS THE DECISION OF THIS COURT that Plaintiff’s appeal is denied.
Dated this day of March 2016.
RICHARD DAVIS
MAGISTRATE
If you want to appeal this Final 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
Final Decision or this Final Decision cannot be changed. TCR-MD 19 B.
This document was filed and entered on March 14, 2016.
FINAL DECISION TC-MD 150308D 11