THIS DECISION WAS SIGNED BY JUDGE CARL N. BYERS ON APRIL 11,
2001, AND FILE STAMPED ON APRIL 11, 2001
IN THE OREGON TAX COURT
REGULAR DIVISION
Property Tax
RONALD P. HOXIE,
)
)
Plaintiff,
)
)
v.
)
)
DEPARTMENT OF REVENUE,
)
State of Oregon,
)
)
Defendant,
)
)
and
)
)
CLATSOP COUNTY ASSESSOR,
)
)
Intervenor-Defendant.)
Case No. 4494
OPINION
Plaintiff (taxpayer) appeals a magistrate determination
of the exception value used to increase the maximum assessed
value (MAV) of his property for the 1997-98 tax year.
Taxpayer claims the improvements made were not the source of
the great increase in value between 1995 and 1997.
Clatsop
County (the county) intervened and defended the assessment.
Trial was held
January 30, 2001, in Astoria, Oregon.
FACTS
The parties agree on many of the facts.
OPINION
The subject
Page 1.
property consists of an entire city block in downtown Astoria
near the county courthouse, improved with two large buildings
and a parking lot.
The office building located at 800
Exchange Street (800 building) was constructed in 1923.
It
has four stories of 4,198 square feet per floor plus 2,500
square feet in the basement.
The medical clinic building
located at
820 Exchange Street (820 building) was constructed in 1978-79
and has two stories with 7,600 square feet per floor.
The property’s history is interesting and relevant.
In
1954, a group of medical doctors purchased the 800 building
plus a parking area.
In 1978-79, the doctors acquired the
rest of the land in the block and constructed the 820 building
at a cost of approximately 1.2 million dollars.
In 1989, U.S.
Bancorp foreclosed its mortgage for $1,465,000, and the
subject property was conveyed to the bank by a deed in lieu of
foreclosure.
When the bank took over the property, all of the
buildings were vacant.
In 1989, the bank leased the second
floor of the 800 building to a state agency.
In 1993, the
bank leased the second floor of the 820 building to a group of
doctors.
Sometime around 1993, the bank listed the property
for sale at $675,000.
OPINION
The county considered buying the
Page 2.
property and negotiated a price of $500,000.
Taxpayer learned
of the availability of the property by a newspaper article
indicating that the county had declined to purchase it.
Taxpayer purchased the property in
June 1994 for $500,000.
At that time, the property had an
assessed value of $691,360.
Based on the purchase price,
taxpayer appealed to the board of equalization, which reduced
the assessed value of the property to $500,000 for the 1994-95
tax year.
The assessed value was increased for the 1995-96
tax year to $580,000 based on a trending factor of 16 percent.
Taxpayer took possession in September 1994 and
immediately began cleaning the property and started a
maintenance program.
Apparently, there was a significant amount of trash and debris
to be removed, and the 800 building was in need of painting
and many repairs.
In addition, taxpayer engaged an architect
that resulted in what taxpayer describes as three creative
changes.
The changes were: (1) realignment of the lobby area
of the first floor in the 820 building, (2) creation of a new
entrance in the 800 building to open up the first floor and
basement, and
(3) installation of a new staircase in the 800 building from
OPINION
Page 3.
the third floor to the fourth floor.
Taxpayer made a number
of other improvements such as replacing some windows, rewiring
the
800 building, leveling the first floor in the 800 building,
and installing a new fire-alarm system in the 800 building.
Many improvements were effected to make spaces suitable for
tenants such as moving walls, changing plumbing and floor
covering.
Taxpayer testified that he spent $58,664 in
improvements from the time of purchase up to July 1, 1995.
He
stated that he spent $225,265 on improvements between July 1,
1995, and July 1, 1997.
///
///
ISSUE
For purposes of determining the property’s MAV for 199798, how much value did the post-1995 improvements add?
ANALYSIS
Article XI, section 11, of the Oregon Constitution,
adopted in the 1996 general election, establishes a MAV for
property taxation.
Section 11 specifies that the MAV shall be
the 1995 real market value (RMV) reduced by 10 percent.
Thereafter, the MAV may increase 3 percent per year.
OPINION
However,
Page 4.
the constitution and implementing statutes recognize that
there are exceptions to the rule.
One specific exception is
for new construction or new improvements to existing property.
Article XI, section 11 has been implemented by statutes.
See Oregon Laws 1977, chapter 541.
ORS 308.1531 provides the
method for computing a new MAV where there are new
improvements to property.
That statute provides, in relevant
part, as follows:
“(1) If new property is added to the assessment
roll or improvements are made to property as of
January 1 of
the assessment year, the maximum
assessed value of the property shall be the sum of:
“(a) The maximum assessed value determined under
ORS 308.146; and
“(b) The product of the value of the new property
or new improvements determined under subsection (2) of
this section multiplied by the ratio of the average
maximum assessed value over the average real market
value for the assessment year.
“(2) The value of new property or new improvements
shall equal the real market value of the new property
or new improvements reduced (but not below zero) by
the real market value of retirements from the property
tax account.
“(3) The property’s assessed value for the year
shall equal the lesser of:
“(a) The property’s maximum assessed value; or
1
All references to the Oregon Revised Statutes are to
1997.
OPINION
Page 5.
“(b)
The
property’s
real
market
value.” 2
ORS
308.153.
In construing and applying ORS 308.153, it is necessary
to consider the definitions contained in ORS 308.149.
Specifically, ORS 308.149(5)(a) states, in part:
“‘New property or new improvements’ means changes
in the value of property as the result of:
“(A) New construction, reconstruction, major
additions, remodeling, renovation or rehabilitation of
property[.]”
Because new improvements are defined as “changes in
value” rather than the improvements themselves, it appears
that the legislature intended to measure the increase in RMV
of the remodeled property as opposed to the value of the
improvements themselves.
Consequently, remodeling that cost
$15,000 might increase the RMV of the property only $9,000, or
it could increase the value $50,000.
The statutory test
measures the net increase in value as a result of the
improvements.
The parties agree that the critical task for the court is
to determine how much the RMV increased as a result of the
2
Because the constitutional amendment required a change
of the assessment date from July 1 to January 1, it was
necessary to provide an adjustment for the first year to which
the provision applied. Consequently, Oregon Laws 1997,
chapter 541, section 12 provides that for the tax year
beginning July 1, 1997, the value determined under section
11(2) of the act (ORS 308.153(2)) shall be the real market
value as of July 1, 1997, reduced by retirements.
OPINION
Page 6.
improvements.3
It is a daunting task.
In making the
determination, the court must exclude increases in RMV due to
cleaning, maintenance and repairs, or minor construction.4
Likewise, the court cannot consider increases in RMV due to
inflation, changes in market demand, or changes in management
or use of the property.
Obviously, a myriad of factors can affect the RMV of
property.
Changes in interest rates, traffic patterns, laws
such as the Americans with Disabilities Act, fire and safety
codes, technology, costs, asbestos, and many other things can
all affect RMV.
However, none of those factors constitutes an
exception to the MAV.
The exception value is limited to the
RMV attributable to the new improvements.
In this case, those
new improvements are the new entrance to the 800 building, the
new staircase to the fourth floor of the 800 building, the
realigned lobby
in the 820 building, and other changes in walls, bathrooms,
3
There is no real dispute about the changed property
ratio and there is no dispute with regard to the MAV of the
property prior to the improvements.
4
“‘Minor construction’ means additions of real
property improvements, the real market value of which
does not exceed $10,000 in any assessment year or
$25,000 for cumulative additions made over five
assessment years.” ORS 308.149(6). See also OAR 150308.149-(A).
OPINION
Page 7.
floors, wiring, alarms, windows, and lights.
The new
improvements do not include cleaning and painting of the
exterior walls and windows.
It also does not include work on
the building where there is no significant change in “design
or materials.”
OAR 150-308.149-(A)(2)(b).
The determination of value is made even more difficult by
the fact that there was work in progress as of July 1, 1995.
Improvements made prior to July 1, 1995, would not be
considered “new improvements” under ORS 308.153.
Only those
improvements made from July 1, 1995, to July 1, 1997,
constitute new improvements for purposes of calculating an
exception value.
In his testimony, taxpayer acknowledged his good fortune.
He spent less than $4,000 realigning the lobby in the
820 building.
Nevertheless, by July 1, 1995, he had leased
the entire 820 building for a total monthly rent of $14,200.
He had also leased part of the first floor and all of the
second floor of the 800 building for a total monthly rent of
$5,188.
Thus, as of July 1, 1995, taxpayer was receiving
$232,656 in annual gross rent, with portions of the 800
building yet to be rented.
Taxpayer testified that his
management policy was not to build
out or finish space until after a tenant had signed the lease
OPINION
Page 8.
and that most of the improvements were done to suit the
tenants.
By July 1, 1997, taxpayer was receiving a total of
$314,234 in annual rent.
(Ptf’s Ex 43.)
Taxpayer argues that
because he was receiving 74 percent of the relevant rent by
July 1, 1995, it is unlikely that an additional 26 percent
increase in rent created a million dollar increase in value
due to the improvements.
The parties submitted appraisal evidence.
When taxpayer
sought financing to purchase the property in 1994, the Bank of
Astoria had the property appraised.
The appraiser was aware
of the property’s history and offering/listing price of
$675,000.
That appraiser saw the market as stagnant with no
real growth anticipated.
He also did not anticipate changes
in the property, viewing the “current configuration” of the
800 building as representing the “most economically optimum
use of the property at this time.”
(Ptf’s Ex 41 at 8.)
Consequently, that appraiser found an as-is value of $572,500
but a value with stabilized occupancy of $625,000.
He viewed
the property as a turn-around project with higher-than-market
risk.
In 1998, taxpayer applied to the Bank of Astoria for
refinancing.
OPINION
The bank again had the property appraised, this
Page 9.
time by Jackson Roholt.
Roholt opined that the RMV of the
property as of March 1998 was $2,050,000.
At that point, the
property had a potential gross-rental income of $347,244 per
year.
Roholt saw the property in a more positive light.
He
indicated that it is located in “the heart of downtown”
Astoria and is in a good neighborhood.
He estimated that
renovations had reduced the effective age of the 800 building
to 20 years.
Taxpayer was aware of Roholt’s appraisal and asked him to
calculate an exception value for purposes of the property tax
appeal.
Based on reconstructed income, Roholt calculated the
RMV of the property as of July 1, 1997, at $1,857,000.
Ex 1.)
(Ptf’s
He also calculated the RMV of the subject property as
of July 1, 1995, at $1,524,000.
(Ptf’s Ex 44.)
That resulted
in an increase of $333,000 in value attributable to: (1)
$225,6565 in improvements, (2) increased land values, and (3)
increased rental values due to inflation.
Roholt calculated
the increase in rent due to inflation as having a market value
of $68,960, leaving $264,040 for the increase in value due to
the improvements and increases in land value.
The county also had the property appraised for the
purpose of calculating an exception value to the MAV.
The
5
Roholt rounded the cost of the improvements to $225,000.
(Ptf’s Ex 44.)
OPINION
Page 10.
county appraiser found a RMV as of July 1, 1997, of
$1,904,000, of which she attributed $370,500 to land and
$1,533,500 to improvements.
She calculated an exception value
by first determining the RMV of the improvements for 1995 and
trending them forward to July 1, 1997.
That is, of the total
$580,000 RMV as of July 1, 1995, the appraiser found that the
RMV of the improvements was $365,640.
She trended that amount
forward to July 1, 1997, to arrive at a RMV for the
improvements of $449,737.
She then deducted that amount from
the July 1, 1997, RMV of the improvements to arrive at an
exception value of $1,083,763.
The county recognizes that the exception value may not
include increases due to market trends.
(Inv’s Ex A at 32.)
The appraiser attempted to account for market trends by
applying a trending factor to the original RMV of the
improvements.
However, that approach assumes that all of the
remaining increase in value is due to new improvements.
The
evidence indicates that such is not the case with this
property.
It is apparent that taxpayer’s leasing of the 820
building and the second floor of the 800 building were not due
to new improvements but probably a combination of cleaning and
good luck.
OPINION
Those two leases alone significantly increased the
Page 11.
income and therefore the value of the property.
Moreover,
some of the improvements were made prior to July 1, 1995, and
would therefore be excluded from consideration.
The assessment history of the subject property is
revealing.
Year
The total assessed values by year are as follows:
Assessed Value
Year
Asse
ssed
Valu
e
1988-89
1989-90
$1,340,280
$1,165,570
1993-94
1994-95
$
$
691,360
500,000
1990-91
$1,015,800
1995-96
$ 580,000
1991-92
$1,015,800
1996-97
$ 713,400
1992-93
$ 750,000
1997-98
$1,590,426
Based on all the evidence, the court is persuaded that
the decline in market value from $1,340,280 in 1988 to $500,00
in 1994-95 was primarily a result of market demand, rather
than deterioration in the property.
Likewise, the rapid
increase in value from 1995 to 1997 was due in large part to
changes in market demand.
Although the county appraiser
applied a trending factor, it must be remembered that such
factors are generalized from sales data.
A specific property
may increase in value either at a greater or lesser rate due
to its unique characteristics and circumstances.
Roholt calculated an increase in RMV between July 1,
OPINION
Page 12.
1995, and July 1, 1997, of $333,000.
Because some of the
rents in 1995 were higher that those in 1997, Roholt probably
overestimated the 1995 RMV.
However, it does not appear that
it would have been excessive by more than $50,000-$60,000.
Roholt also calculated a capitalized value of the increase in
rents after July 1, 1997, at $68,960.
(Ptf’s Ex 44.)
Concluding that the increase in rents largely offsets the
excessive rents estimated for the 1995 value, Roholt’s income
approach indicates an increase in RMV of approximately
$330,000.
The cost approach would indicate something more
than the $225,656 invested because the value of taxpayer’s
labor is not included in those out-of-pocket costs.
Because
taxpayer’s labor included management, supervision of cleaning,
and other items not includible in new improvements, it is
impossible to estimate the value of that factor.
Based on the above analysis, the court finds that the
increase in RMV was $330,000.
That increase in RMV must be
multiplied by the changed property ratio of .73, resulting in
an exception value of $240,900.
The court finds that $240,900
should be added to the original MAV of the improvements of
$329,076 for a total improvement MAV of $569,976.
When added
to the MAV of the land of $192,924, the court arrives at a
July 1, 1997, MAV for the subject property of $762,900.
OPINION
Page 13.
Judgment will be entered consistent with this Opinion.
Plaintiff to recover his costs and disbursements.
Dated this ____ day of April 2001.
______________________________
Carl N. Byers
Judge
OPINION
Page 14.
