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Powell Street I, LLC v. Multnomah County Assessor

Supreme Court of Oregon, En Banc

July 25, 2019

POWELL STREET I, LLC, Plaintiff-Respondent,
MULTNOMAH COUNTY ASSESSOR, Defendant-Appellant, and DEPARTMENT OF REVENUE, Defendant-Intervenor-Appellant.

          Argued and submitted May 6, 2019

          On appeal from the Oregon Tax Court. [*] (TC 5263) Henry C. Breithaupt, Judge.

          Daniel Paul, Assistant Attorney General, Salem, argued the cause and fled the briefs for appellant Department of Revenue. Also on the briefs were Ellen F. Rosenblum, Attorney General, and Benjamin Gutman, Solicitor General.

          Carlos A. Rasch, Multnomah County Attorney's Offce, Portland, fled the briefs for appellant Multnomah County Assessor. Also on the briefs was Jenny M. Madkour, County Attorney, Portland.

          Alex C. Robinson, CKR Law Group, P.C., Lake Oswego, argued the cause and fled the brief for respondent.

          Peter R. Jarvis, Holland & Knight LLP, Portland, fled the brief on behalf of amici curiae Building Owners and Managers Association of Oregon, Commercial Association of Brokers Oregon/Southwest Washington, Institute of Real Estate Management, Oregon-Columbia River Chapter #29, and NAIOP Commercial Real Estate Development [365 Or. 246] Association-Oregon. Also on the brief was Nellie Q. Barnard.

         [365 Or. 247] BALMER, J.

         The issue before us in this direct appeal from the Oregon Tax Court involves the proper valuation, for property tax purposes, of a shopping center that did not have an anchor tenant on the assessment date. The Tax Court accepted taxpayer's valuation that significantly decreased the value of the shopping center because it was missing an anchor tenant and was more than 50 percent vacant on the relevant date. Powell Street I LLC v Dept. of Rev., 22 OTR 423 (2017). On appeal, the Department of Revenue contends that the Tax Court erred; according to the department, the shopping center was required to be valued the same as a shopping center that did have an anchor tenant and was only 8-10 percent vacant. For the reasons that follow, we reject the department's argument and affirm the Tax Court's judgment.


         We begin with an overview of several familiar property tax concepts: the definition of real market value, the requirement that the tax be assessed on the "fee simple interest" in the property, and the valuation methods used by appraisers to determine real market value.

         In general, the calculation of the property tax levied on a particular property begins with the property's real market value (RMV). See ORS 308.232; Dept. of Rev. v. River's Edge Investments, LLC, 359 Or. 822, 825, 377 P.3d 540 (2016) (both so providing). The real market value is the amount that a hypothetical buyer would pay to a hypothetical seller on the assessment date. See Or Const, Art XI, § 11 (11)(a)(A) (defining real market value as "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"); see also ORS 308.205(1) (using terms "informed buyer" and "informed seller"); ORS 308.205(2)(a) (referring to "amount a typical seller would accept or the amount a typical buyer would offer that could reasonably be expected by a seller of property"). The real market value is derived from the "highest and best use" of the property-the most profitable use, for which a buyer [365 Or. 248] would be expected to pay the highest price. See Hewlett-Packard Co. v. Benton County Assessor, 357 Or. 598, 602, 356 P.3d 70 (2015)(so explaining).

         When the property is subject to leases (as is the case for the shopping center here), the value for property tax purposes may differ from the price that the owner actually might receive for the property. That is because the property tax is assessed on the fee simple interest in the property, which is the value of all interests in the property, including those of the owner (ordinarily the lessor) and any lessees.[1]That rule was relied upon and explained in Swan Lake Mldg. Co. v. Dept. of Rev., 257 Or. 622, 478 P.2d 393 (1970), reh'g den, 257 Or. 628, 480 P.2d 713 (1971). In that case, substantial portions of the property being valued were subject to leases with remaining terms as long as 30 years. The question was whether the leases should affect the valuation. The taxpayer argued that they should because any buyer of the property would take the property subject to those leases.

         This court disagreed. It held that the actual terms of those leases should not be used in calculating the value because the value of all of the interests in the property- including the lessee's interest-is to be taxed against the owner:

"In fixing the true cash value of land for property tax purposes [, ] the effect of existing leases on the value to the owner is disregarded. The basis for such a principle is that the tax is levied upon the land and is a tax upon all the interests [365 Or. 249] into which the land might be divided. Admittedly, a lease might decrease the price which the owner might receive; however, the tax is not merely upon the owner's interest; the tax is upon all the interests in the land, including the leasehold interest. This is so because of the corollary principle that taxes are assessed only against the one having title[.]"

257 Or at 625. If a property owner leased a property at below-market rates, for example, then the value of the owner's interest in the property is lower, but at the same time the lessee's leasehold interest is that much more valuable and offsets the decrease:

"If the rent reserved in the lease is less than the property is capable of producing, the lessee's interest is more valuable and it is the entire group of interests in the property, lessor's and lessee's, that is valued."

257 Or at 629 (denying rehearing).

         A "fee simple valuation" thus may deviate from the ordinary concept of real market value. If the property is leased at nonmarket rates, and if the lease will not terminate on sale of the property, then the price that the owner could obtain in the market could differ from the value used for property tax purposes. See Joan M. Youngman, Defining and Valuing the Base of the Property Tax, 58 Wash L Rev 713, 716 (1983) (fee simple valuation allows "'value' to exceed the amount which the holder of a restricted interest could command in an actual sale").

         Turning to valuation under Oregon law more generally, and broadly speaking, an appraiser determines the real market value of a property by considering three different approaches to valuation: the cost approach, the comparable sales approach, and the income approach. OAR 150-308-0240(2)(a); see River's Edge, 359 Or at 827; Hewlett-Packard, 357 Or at 603 (explaining approaches). The appraiser is not required to use all three approaches, but the appraiser must consider them. OAR 150-308-0240(2)(a); see River's Edge, 359 Or at 827; Hewlett-Packard, 357 Or at 603 (so stating).

         We have outlined the three approaches in River's Edge and other cases. The comparable sales approach estimates the value of the property by extrapolating from the [365 Or. 250] prices paid for similar properties in the area. The cost approach estimates the cost to recreate an equivalent property. If valuing a factory, for example, the appraiser would estimate the cost to build a similar factory. The income approach assumes that the hypothetical buyer would pay the present value of the stream of income that the property will generate. Accordingly, the income approach calculates that stream of future income, then discounts it by an appropriate capitalization rate. Seneca Sustainable Energy, LLC v. Dept. of Rev., 363 Or. 782, 799-800, 429 P.3d 360 (2018).

         If more than one approach is used, the appraiser will then reconcile the values obtained from the various approaches to obtain a final valuation. River's Edge, 359 Or at 827; Hewlett-Packard, 357 Or at 603. The weight to be given the different approaches is a question of fact that depends on the record developed in the case. Pacific Power & Light Co. v. Dept. of Rev.,286 Or. 529, ...

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