Williamson County, Tennessee v. Tennessee State Board of Equalization

11/28/2023

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

August 2, 2022 Session

WILLIAMSON COUNTY, TENNESSEE ET AL. v. TENNESSEE STATE

BOARD OF EQUALIZATION ET AL.

Appeal from the Chancery Court for Williamson County

No. 47743 James G. Martin, III, Judge

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No. M2021-01091-COA-R3-CV

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A taxpayer appealed a County Board of Equalization’s property valuation to the State

Board of Equalization. The State Board reduced the valuation. The County then sought

judicial review. After a new hearing in which the trial court heard testimony from

competing appraisers, it affirmed the State Board’s valuation. It also determined that the

County’s request to reclassify the property was untimely. We affirm.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed

W. NEAL MCBRAYER, J., delivered the opinion of the court, in which FRANK G. CLEMENT,

JR., P.J., M.S., and THOMAS R. FRIERSON II, J., joined.

Robert T. Lee, Mt. Juliet, Tennessee, for the appellants, Williamson County, Tennessee,

and Brad Coleman, Williamson County Assessor of Property.

Stephen J. Jasper, and Matthew J. Sinback, Nashville, Tennessee, for the appellee, AT&T

Services, Inc.

Herbert H. Slatery III, Attorney General and Reporter, Andrée Sophia Blumstein, Solicitor

General, and Mary Ellen Knack, Senior Assistant Attorney General, for the appellee,

Tennessee State Board of Equalization.

OPINION

I.

In late 2013, DC402 Franklin Road LLC purchased an office building/data center

located in Brentwood, Tennessee, from AT&T Services, Inc. as part of a sale-leaseback

transaction. DC402 Franklin Road paid $109,220,000 for the approximately 43-acre

property. It then leased the property back to AT&T for an initial term of ten years, with

three ten-year renewal options. The lease was triple net with base rent starting at

$7,645,330 per year, which increased 2 percent annually. So, over the initial term, AT&T

would pay total rent of $83,714,230.47 plus taxes, insurance, and maintenance.

After the purchase, Williamson County assumed responsibility for assessing the

property for ad valorem tax purposes.1 Its assessor of property assessed the property at

$85,850,000 as of January 1, 2015. This assessment triggered the current dispute over the

proper valuation of the property.

A.

DC402 Franklin Road appealed the assessment to the Williamson County Board of

Equalization. See Tenn. Code Ann. § 67-5-1407(a) (2018). The County Board upheld the

assessment. So DC402 Franklin Road appealed to the State Board of Equalization,

identifying AT&T as its authorized representative and the taxpayer. See id.

§ 67-5-1412(a)(1) (2018).

AT&T contended the value of the property was lower than assessed. Williamson

County countered that the value was actually higher than assessed. The administrative

judge determined that neither party carried its burden of proof to alter the assessed value.

See TENN. COMP. R. & REGS. 0600-01-.11 (2022) (placing the burden of proof on the “party

seeking to change the current classification and/or assessment”). So it affirmed the 2015

valuation.

AT&T then appealed to the State Board’s Assessment Appeals Commission. See

Tenn. Code Ann. § 67-5-1502(a) (Supp. 2017). Again, both parties objected to the 2015

valuation. The Commission conducted a new evidentiary hearing on the valuation of the

property as permitted by then-existing law.2 It heard from four witnesses.

AT&T called James “Jimmy” Brown, Ron Neyhart, and Richard Sullivan.

Mr. Brown, an AT&T employee, oversaw the data center’s operations when it was sold to

DC402 Franklin Road. He testified to the building’s outdated infrastructure and the

extensive renovations that would have been necessary for the building to meet 2015 data

1

Before the purchase, the Office of State Assessed Properties, a division of the Comptroller of the

Treasury, assessed the property as public utility property. See Tenn. Code Ann. §§ 67-5-801(a), 67-5-1301

(Supp. 2017); see also Colonial Pipeline Co. v. Morgan, 263 S.W.3d 827, 833 (Tenn. 2008).

2

For appeals filed to the Commission before July 1, 2017, as here, the parties could provide “any

additional or supplemental evidence . . . relevant to an issue raised in the appeal.” TENN. COMP. R. & REGS.

0600-01-.13 (2016).

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center standards. And Mr. Sullivan, a representative from AT&T’s property tax group,

said that AT&T did not intend to exercise the option to extend the initial lease term.

Mr. Neyhart, an appraiser with a commercial real estate services firm, opined that the

property’s highest and best use was for mixed use development. Based on this use, he

believed its fee simple value was $21,850,000.

Mr. Sullivan also explained the 2013 sale-leaseback transaction had “little or

nothing to do with market value of the applicable propert[y].” It was a financial transaction

negotiated to maximize AT&T’s cash proceeds up front. AT&T often entered into such

transactions, leasing the facilities back “at above-market rental rates to essentially pay back

the loans.” So the sales price and lease payments were linked, irrespective of the property’s

market value.

To support its valuation, Williamson County offered the testimony of David Horner,

an appraiser in its assessor’s office. He opined that the value of the property was higher

than originally assessed. His valuation was based on DC402 Franklin Road’s “leased fee”

interest in the property, specifically its interest subject to the lease with AT&T.

The Commission issued a final decision and order classifying the property as

commercial property and reducing its valuation. In reaching its decision, the Commission

agreed with AT&T that the 2013 sale-leaseback was “not representative of market value.”

Rejecting the opinions of both parties’ appraisers, the Commission arrived at its own

valuation of $45,700,000.3

Williamson County filed a petition for reconsideration, asserting that the

Commission failed to value the property in accordance with Tennessee law. Williamson

County also argued, for the first time, that the property should be classified as public utility

property for ad valorem tax purposes. The Commission denied the petition.4

B.

Williamson County and the assessor (together, “Williamson County”) petitioned for

judicial review. They asked the trial court to find that the fair market value of the property

was $103,500,000 as of January 1, 2015, and to reclassify the property as a public utility

rather than commercial property. Rather than confining themselves to the record created

before the Commission, the parties retained new valuation experts and engaged in

discovery.

3

The Commission utilized the income approach to valuation, using data from AT&T’s appraisal

report.

4

Because the State Board did not seek to review the action, the Commission’s decision became the

final decision of the State Board. See Tenn. Code Ann. § 67-5-1502(j) (Supp. 2017).

3

Williamson County’s expert, Peter F. Korpacz, determined the “leased fee” value

of the property based on an assumption that the sale-leaseback contract rent was “market

rent” that would continue in perpetuity. And the property’s highest and best use was as a

data center. But he had not spoken to anyone at AT&T regarding the functional capabilities

of the property in 2015 or whether AT&T intended to stay.

The appraisal also referenced DC402 Franklin Road’s sale of the property to a third-

party buyer in 2017.5 As Mr. Korpacz explained, the 2017 sale was not used to value the

property. Rather it showed the “demand for the property” and supported his valuation for

the property as of 2015. The 2017 sale was a “portfolio sale” in which the third-party buyer

purchased fourteen data centers, including the Franklin Road property, for a total price of

$750,000,000. The deed conveying the Franklin Road property stated the consideration

was $110,000,000. Mr. Korpacz was uncertain how the parties determined the portion of

the total portfolio price to allocate to the Franklin Road property. He had not spoken with

the parties about the price allocation.

In response, AT&T offered David C. Lennhoff as an expert on real estate appraisal

methodology. Mr. Lennhoff testified that Mr. Korpacz’s reliance on the 2013

sale-leaseback transaction was not appropriate. The transaction was a financing vehicle.

And, in appraisals, sale-leaseback transactions are “appropriate to ignore” when they are

financing vehicles. He also diminished the significance of the 2017 portfolio sale. In such

sales, the parties may “just allocate [the total portfolio sale price] as a matter of

convenience.”

Mr. Brown, the AT&T employee who oversaw the data center’s operations, and

Russ McFadden, AT&T’s vice president of portfolio management and strategy, testified

about the property’s condition and use. The property’s infrastructure, technology, and

power capabilities were all obsolete in 2015. Modernizing the property would require

tearing the building down. AT&T entered into the sale-leaseback transaction because it

needed time to remove the property’s infrastructure while maintaining connectivity to its

broader network. It never intended to renew the lease after the initial term.

Finally, AT&T offered the appraisal report and testimony of Richard Perutelli.

Mr. Perutelli consulted with AT&T employees, a broker with specialized knowledge about

data centers, and local zoning officials and developers. And he concluded that

redevelopment, which would require demolition of the building, was the highest and best

5

Although the 2017 sale occurred just a few months before the April 2018 hearing, the Commission

allowed Williamson County to offer the evidence “for the limited purpose of substantiating a reasonable

pre-assessment-date assumption” that the property continued to be marketable as a data center. The

transaction did not affect AT&T’s lease.

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use for the property. For purposes of redevelopment, Mr. Perutelli valued the property at

$45,700,000.6

Before rendering its decision, the trial court requested that the parties and the State

Board of Equalization provide post-trial arguments as to the appropriate standard of review.

The trial court ultimately applied a de novo standard of review based on Tennessee Code

Annotated § 67-5-1511(b) and case law. See Anderson Cnty. Tenn. v. Tenn. State Bd. of

Equalization, No. E2018-00142-COA-R3-CV, 2020 WL 762511, at *7 (Tenn. Ct. App.

Feb. 14, 2020) (citing Richardson v. Tenn. Assessment Appeals Comm’n, 828 S.W.2d 403,

406 (Tenn. Ct. App. 1991)).

Based on this standard of review and the evidence, the trial court found the

property’s value was $45,700,000 as of January 1, 2015. In doing so, the court credited

Mr. Perutelli’s testimony and relied on his opinion of the fair market value. It noted that

the Commission had independently arrived at the same valuation. It also found that the

property was functionally obsolete and unmarketable as a data center in 2015. It concluded

that “Tennessee law require[d] valuation of the fee simple estate available to be leased at

market rate.” Neither the 2013 sale-leaseback transaction nor the 2017 portfolio sale

reflected the market rate.

The trial court also concluded that the property was properly classified as industrial

and commercial property. Williamson County had waived the classification issue because

it failed to act to reclassify the property within the statutory time limit. And even if the

issue had not been waived, Williamson County had failed to establish the property should

be reclassified. The court “ha[d] received little evidence demonstrating the [p]roperty’s

use as a public utility in 2015.”

II.

Williamson County appeals, raising three issues. The first two issues focus on the

valuation of the property. The last focuses on the classification of the property. But before

reaching those issues, we must address the proper standard of review.

A.

Williamson County and AT&T agree on the standard of review. Because this case

originated with a decision from the State Board of Equalization, they contend the

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Mr. Perutelli arrived at his valuation by first determining the property’s value with the existing

building was $47,327,940. He then deducted $2,016,000, the projected cost of demolition based on

estimates obtained from local construction companies. And he added $393,000 for the value of some

generators that could be salvaged. This resulted in a net value of $45,704,940, which Mr. Perutelli rounded

to $45,700,000.

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deferential standard of review under the Uniform Administrative Procedures Act

(“UAPA”) should apply. See Tenn. Code Ann. § 4-5-322(h) (2021). Under the UAPA, a

court may reverse or modify an administrative decision only

if the rights of the petitioner have been prejudiced because the administrative

findings, inferences, conclusions or decisions are:

(1) In violation of constitutional or statutory provisions;

(2) In excess of the statutory authority of the agency;

(3) Made upon unlawful procedure;

(4) Arbitrary or capricious or characterized by abuse of discretion or clearly

unwarranted exercise of discretion; or

(5)(A)(i) [U]nsupported by evidence that is both substantial and material in

light of the entire record;

(ii) In determining the substantiality of evidence, the court shall take into

account whatever in the record fairly detracts from its weight, but the court

shall not substitute its judgment for that of the agency as to the weight of the

evidence on questions of fact.

Id.

The State Board contends that the standard of review should be de novo. Under

Tennessee Code Annotated § 67-5-1511(b), the statute providing for judicial review of

State Board decisions, the review must “consist of a new hearing in the chancery court

based upon the administrative record and any additional or supplemental evidence which

either party wishes to adduce relevant to any issue.” Id. § 67-5-1511(b) (2018). Here, the

trial court did conduct a new hearing and the parties submitted additional evidence. The

State Board reasons that receipt of additional evidence is incompatible with the UAPA

standard. Judicial review under the UAPA is confined to the administrative record, except

“[i]n cases of alleged irregularities in procedure before the agency, not shown by the

record.” Id. § 4-5-322(g). If the evidence on which the State Board relies must be

measured by a “substantial and material” standard as required by the UAPA, the

introduction of “additional or supplement evidence” would make no difference.

More importantly, the Tennessee Supreme Court has defined “de novo judicial

review” using the same language that appears in Tennessee Code Annotated

§ 67-5-1511(b). See Frye v. Memphis State Univ., 671 S.W.2d 467, 469 (Tenn. 1984). In

other words, “[a] statute requiring de novo judicial review means ‘a new hearing in the

chancery court based upon the administrative record and any additional or supplemental

evidence which either party wishes to adduce relevant to any issue.’” Tenn. Waste Movers,

Inc. v. Loudon Cnty., 160 S.W.3d 517, 520 (Tenn. 2005) (quoting Frye, 671 S.W.2d at

469).

6

Under the version of the statute in effect when Williamson County sought judicial

review of the decision of the State Board, this Court has held in at least one reported

decision that the standard of review is de novo.7 Maury Cnty. ex rel. Maury Reg’l Hosp.

v. Tenn. State Bd. of Equalization, 117 S.W.3d 779, 782 (Tenn. Ct. App. 2003). But, in

other reported decisions, this Court has held that judicial review falls under the deferential

standard found in the UAPA. Coal Creek Co. v. Anderson Cnty., 546 S.W.3d 87, 97 (Tenn.

Ct. App. 2017); Willamette Indus., Inc. v. Tenn. Assessment Appeals Comm’n, 11 S.W.3d

142, 147 (Tenn. Ct. App. 1999). Because later decisions did not expressly reverse earlier

decisions, it is difficult to discern which reported decision should be deemed controlling.

See TENN. SUP. CT. R. 4(G)(2) (providing that “[o]pinion[s] reported in the official reporter

. . . shall be considered controlling authority for all purposes unless and until such opinion

is reversed or modified by a court of competent jurisdiction”). Most of this Court’s

unreported decisions have held that the UAPA governs judicial review of decisions of the

State Board. See, e.g., Am. Bus. Supply, Inc. v. Tenn. State Bd. of Equalization, No. M2022-

01411-COA-R3-CV, 2023 WL 7101290, at *5 (Tenn. Ct. App. Oct. 27, 2023); In re TWT

Acquisition, LLC, No. M2020-01100-COA-R3-CV, 2022 WL 554312, at *1 (Tenn. Ct.

App. Feb. 24, 2022); Cress v. Tenn. State Bd. of Equalization, No. E2021-00093-COA-R3-

CV, 2021 WL 5148088, at *4 (Tenn. Ct. App. Nov. 5, 2021); Vanderbilt Univ. v. Tenn.

State Bd. of Equalization, No. M2014-01386-COA-R3-CV, 2015 WL 1870194, at *5

(Tenn. Ct. App. Apr. 22, 2015); Spring Hill, L.P. v. Tenn. State Bd. of Equalization, No.

M2001-02683-COA-R3-CV, 2003 WL 23099679, at *4 (Tenn. Ct. App. Dec. 31, 2003).

But the trial court relied on a recent, unreported case of this Court that described the review

of final decisions as de novo. See Anderson Cnty. Tenn., 2020 WL 762511, at *7.

Given this Court’s conflicting precedent, we rely on the Tennessee Supreme Court’s

definition of de novo judicial review. It means, as Tennessee Code Annotated

§ 67-5-1511(b) provides, “a new hearing in the chancery court based upon the

administrative record and any additional or supplemental evidence which either party

wishes to adduce relevant to any issue.” See Frye, 671 S.W.2d at 469. It does not “mean

a complete repetition of all of the evidence.” Id. at 469 n.2. But the parties may avail

themselves of the opportunity to submit additional or supplemental evidence.

We use the scope of review from Tennessee Rule of Appellate Procedure 13(d). See

Wells v. Tenn. Bd. of Regents, 9 S.W.3d 779, 783 (Tenn. 1999). The trial court’s findings

of fact derived from the additional or supplemental evidence are reviewed de novo upon

the record, accompanied by a presumption of correctness, unless the preponderance of the

7

For appeals filed on or after July 1, 2023, the Legislature has resolved the question of the proper

standard of review by amending Tennessee Code Annotated § 67-5-1511(b) to clarify that the review “is a

de novo appeal, with no presumption of correctness of the decisions of the lower tribunals of the case at

hand.” See S.B. 148, 113th Gen. Assemb., Reg. Sess. (Tenn. 2023). An earlier version of the judicial

review statute also used the words “de novo appeal.” Cress v. Tenn. State Bd. of Equalization, No. E2021-

00093-COA-R3-CV, 2021 WL 5148088, at *4 n.3 (Tenn. Ct. App. Nov. 5, 2021).

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evidence is otherwise. TENN. R. APP. P. 13(d). We review the trial court’s conclusions of

law de novo with no presumption of correctness. Colonial Pipeline Co. v. Morgan, 263

S.W.3d 827, 836 (Tenn. 2008).

B.

Turning to the issues raised on appeal, Williamson County first faults the trial court

for allegedly failing to consider the property’s intrinsic value. It argues that part of that

intrinsic value is the AT&T lease. Property value must “be ascertained from the evidence

of its sound, intrinsic and immediate value, for purposes of sale between a willing seller

and a willing buyer without consideration of speculative values.” Tenn. Code Ann.

§ 67-5-601(a) (Supp. 2017). Williamson County reasons that it would be “highly unlikely

that a ‘willing seller’ would sell the subject property on January 1, 2015, for the proposed

value of $45,700,000 . . . when the property would generate over $76,000,000 in rent over

the remaining term of the lease.”

In valuing property, assessors must “be guided by, and following the instructions

of, the appropriate assessment manuals issued by the division of property assessments and

approved by the [State Board].” Id. § 67-5-602(b) (2018). Those manuals consider several

factors, including “current use” and “whether the property is income-bearing or non-

income bearing.” Id. § 67-5-602(b). But those manuals also consider “other factors and

evidence of value generally recognized by appraisers as bearing on the sound, intrinsic and

immediate economic value at the time of assessment.” Id. Here, the court determined,

based upon the report of AT&T’s appraiser, Mr. Perutelli, that “[i]t is widely accepted and

recognized in the appraisal field that, when valuing the fee simple interest in a property, all

rentable space must be estimated at market rent levels, and any rent attributed to specific

leases must be disregarded.” And it found the 2013 sale-leaseback transaction “was a

financing transaction and not an arm’s length sale.” So the sales price and rent were not

reflective of the market. Use of the 2013 transaction would inflate the market value of the

property and not be credible.

We discern no error in the court’s acceptance of Mr. Perutelli’s opinion that the

2013 sale-leaseback transaction should not be taken into account in valuing the property.

See Brown v. Crown Equip. Corp., 181 S.W.3d 268, 275 (Tenn. 2005) (recognizing “[t]he

weight of the theories and the resolution of legitimate but competing expert opinions are

matters entrusted to the trier of fact”). Mr. Perutelli demonstrated sufficient experience

and familiarity with real estate appraisals. And professional literature supported his

opinion that the terms of a sale-transaction should not be used to value property unless

those terms can be confirmed to be at market. The evidence also supports the findings that

the sales price and rent from the 2013 sale-leaseback transaction were above market. The

proof showed that the terms of the transaction were negotiated like a loan, with the purchase

price dependent on the rent AT&T was willing to pay.

8

Williamson County next faults the trial court’s determination of the highest and best

use of the property. It claims that the court found that the highest and best use of the

property was for the improvements on the property to be demolished and the land

redeveloped. But we agree with AT&T that the court made no such determination. Rather,

the court recognized that “Mr. Perutelli ultimately concluded that the [p]roperty’s highest

and best use was ‘redevelopment,’ which requires demolition of the building.” This

conclusion informed the appraiser’s opinion of the property’s value, including which

valuation approaches were appropriate. Although it might be surmised that the court

agreed with this aspect of Mr. Perutelli’s opinion, the court made no finding concerning

the property’s highest and best use.

C.

For taxation purposes, property classified as real property is subclassified according

to its use. The use subclassification, in turn, determines the applicable assessment ratio

(and tax burden for the taxpayer):

(1) PUBLIC UTILITY PROPERTY. Public utility property shall be assessed

at fifty-five percent (55%) of its value;

(2) INDUSTRIAL AND COMMERCIAL PROPERTY. Industrial and

commercial property shall be assessed at forty percent (40%) of its value;

(3) RESIDENTIAL PROPERTY. Residential property shall be assessed at

twenty-five percent (25%) of its value; and

(4) FARM PROPERTY. Farm property shall be assessed at twenty-five

percent (25%) of its value.

Tenn. Code Ann. § 67-5-801(a) (Supp. 2017). When real property is used for more than

one purpose, the property is apportioned among the different subclasses according to State

Board guidelines. Id. § 67-5-801(b)(1). As its final issue, Williamson County contends

that the property should be subclassified as public utility property and not as industrial and

commercial property.

We conclude that the issue was waived. The trial court denied Williamson County’s

request to reclassify the property on two alternative and independent grounds. The court

concluded that Williamson County “ha[d] failed to timely preserve the issue and waived

its right to pursue classification,” and the court determined that Williamson County had

failed to prove that the property should be classified as public utility property. In its brief,

Williamson County only addressed the latter ground. It addressed the former ground in its

reply brief.

9

“Generally, where a trial court provides more than one basis for its ruling, the

appellant must appeal all the alternative grounds for the ruling.” Hatfield v. Allenbrooke

Nursing & Rehab. Ctr., LLC, No. W2017-00957-COA-R3-CV, 2018 WL 3740565, at *7

(Tenn. Ct. App. Aug. 6, 2018). When an appellant fails to do so, the lower court must be

affirmed. Id. at *8. Although the timeliness issue is addressed in the reply brief, reply

briefs are not “vehicle[s] to correct deficiencies in initial briefs.” Augustin v. Bradley Cnty.

Sheriff’s Office, 598 S.W.3d 220, 227 (Tenn. Ct. App. 2019).

III.

The evidence did not preponderate against the trial court’s valuation of the property.

And the issue of the correct subclassification of the property was waived. So we affirm.

s/ W. Neal McBrayer

W. NEAL MCBRAYER, JUDGE

10