- Posts by Cynthia FraserPrincipal
Cynthia’s tax practice focuses on property tax appeal litigation, specializing in industrial property valuation disputes and centrally-assessed properties before the Oregon Tax Court. She has also litigated property tax ...
Does a Property's Sale Price Really Equal the Taxable Market Value?
By Cynthia M. Fraser, Esq., as published by National Real Estate Investor - nreionline.com/viewpoints, September 2014
Typically, the basic principles of a real estate appraisal for commercial and industrial properties are based on market value—the price the buyer and seller agreed upon at the point of sale. In the current economy, as we emerge from the recent recession, many real estate assessors are questioning whether the purchase prices for commercial and industrial properties reflect their true market value. In today’s competitive real estate market, many real estate investors are faced with the following question: Is the recent sale price of a property the best evidence of the property's taxable value?
Please see the complete article published in National Real Estate Investor September 9, 2014.
Cynthia M. Fraser is a partner at the law firm Garvey Schubert Barer where she specializes in property tax and condemnation litigation. Ms. Fraser is the Oregon representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Ms. Fraser can be reached at email@example.com.
Innocent Property Owners may no longer be protected by federal legislation meant to toll the statute of limitations on an action against a late discovery of contaminated property.
In CTS Corporation v Peter Waldburger et al., 573 U.S. ____ (2014), the United States Supreme Court ruled that state law may override federal legislation meant to protect a property owner when the discovery of environmental contamination is years after the release.
Congress enacted the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), including a provision that, by its terms, pre-empts statues of limitations applicable to state-law tort actions in certain circumstances with respect to an injury from a release of hazardous substances. Under these provisions, the statute of limitations begins to run on an action after the property owner or person discovers that the harm to their property or person was caused by contamination of a previous property owner or another person.
However, several states, including Oregon, Connecticut, Kansas, North Carolina, and Alabama, have statutes of repose that limit the time frame a property owner may bring a cause of action regardless of the date of discovery of the contamination or its source.
In North Carolina, homeowners challenged their state’s statute of repose that limited its ability to seek compensation for the release of hazardous substances 24 years before by an electronic manufacture that contaminated their property. The state’s statute of repose limited any cause of action to 10 years after the last culpable act, regardless of discovery of the contamination or its source. The question presented to the United States Supreme Court was whether a federal statute on the timeliness of suits for harm caused by environmental contamination, 42 U. S.C. §9658, preempts North Carolina’s 10 year statute of repose provision.
In the ordinary course, a statute of limitations creates a time limit for suing in a civil case, based on the date when the claim accrued, and is often based on the date of discovery of the harm. A statute of repose puts an outer limit on the right to bring a civil action, not from the date of discovery, but from the date of the last culpable act or omission of the defendant. In a 7 to 2 decision, the Supreme Court held that a statute of repose is not within the pre-emption mandate of the act, and that §9658 addressed statute of limitations by its express terms but that language did not include pre-emption of a state’s statute of repose. Thus, because the states are independent sovereigns, the police powers of the state are not superseded by the Federal Act, unless there is a clear manifest from Congress.
The Court reversed the Court of Appeals for the Fourth Circuit dismissing the homeowners’ state law claim for water contamination against the electronic manufacturer; 42 U.S.C. §9658 pre-empts only statutes of limitations and not statutes of repose. The question now remains, will additional state legislatures adopt statutes of repose in light of this decision.
Cynthia M. Fraser is an owner at Garvey Schubert Barer in the firm’s Portland Oregon office.
Western Real Estate Business, January 2014.
Any investor wants to maximize his property’s value and income-producing potential, but many fail to take this concept seriously – until they realize what they could be missing out on.
Who cares about the highest and best use of a property? Well, appraisers certainly care, and when a property ends up in litigation, the judge cares. Understanding how these authorities determine value will make it clear that commercial property owners should care about highest and best use, too.
I learned the importance of highest and best use during my first year at the Department of Justice, in a small condemnation or government taking case. The property owner had a single-family home on a prime piece of commercial real estate, and a highway expansion was bringing traffic lanes to within 12 feet of the house. The property had been rezoned commercial and was surrounded by other commercial uses.
As a residential asset, the entire property before partial condemnation had appraised at $140,000, whereas the land as a commercial site was worth double that amount. Because the highest and best use of the property was redevelopment as a commercial site, the value for the land taken as right of way was worth more than the residential value of the entire, previously undivided property.
Not all analyses of highest and best use are so simple and obvious. This is particularly true in the context of appraising an industrial property for a property tax appeal. The standard test for determining highest and best use has four prongs, and each can be critical to the valuation of the property. That question is: What use is legally permissible, physically possible, financially feasible and maximally profitable?
The first prong, what is legally permissible, refers to zoning or other governmental restrictions, as well as the deed restrictions, and the uses that those parameters allow for the property. In a recent case, a 57-acre property was zoned industrial, which allowed for offices as an accessory use to the industrial use. Improvements included several older flex manufacturing buildings totaling close to 600,000 square feet. The condition and use of the flex buildings varied but the need to use the structures primarily for manufacturing no longer existed.
The Oregon Department of Revenue’s appraisal valued the majority of the 600,000 square feet as office use. This did not meet the test for what is legally permissible, because the zoning only allowed office as an accessory to an industrial use.
What is financially feasible? In this same case, the appraiser for the Department of Revenue also failed to address if it was cost effective to reconfigure several 80,000-squarefoot two-story flex manufacturing facilities for multitenant use. The government’s appraisal lacked any discussion of the basic demising costs to create smaller rentable spaces, including common areas for
hallways, lobbies, and relocation of elevators and restrooms.
What is physically possible? Many of the industrial buildings in this example were interconnected. They had shared utilities, were situated on a single tax lot and offered only limited access without dedicated parking for a given building. Separation of the buildings into viable stand-alone parcels may have been prohibited by the physical location of the utilities, the placement of the buildings on the lot, or by parking, ingress and egress to the site.
The fourth prong is often the simplest to address. Of the possible uses meeting the first three facets of the highest-and-best-use test, which offers the maximum profit for the owner?
An appraiser’s failure to do a highest- and-best-use analysis and appropriately support its conclusions can be fatal in a trial setting. In a 1990 decision, Freedom Federal Savings & Loan vs. Department of Revenue, the Oregon Supreme Court held that highest and best use of the property subject to evaluation is the first question that must be addressed in a credible appraisal. This set the critical framework for valuation, and determines what other comparable properties can be used to value the subject property.
These highest-and-best-use tests must be appropriately supported. In the context of an investment property, for example, would an investor deem the current use to be most productive from a financial or physical basis for the property, or would an alternative use be preferable?
If a careful highest-and-best-use analysis is done at the beginning, the appraiser can select credible comparable sales or leases for use in valuation. The property owner, in turn, will be treated fairly, whether in a tax assessment appeal or an eminent domain acquisition.
Western Real Estate’s Business, November 2013.
The real estate headlines in Oregon newspapers this month kindled cautious optimism that the economy is in full recovery. One article touted a boom in the residential and commercial markets of Canby, a Portland suburb, while another trumpeted a bash to kick off a $25 million, mixed-use development in downtown Portland.
These positive headlines added to the stimulating effects of last year’s expansion announcements by Nike and Intel. News of those companies’ plans for growth in Hillsboro bolstered the industrial, office, and residential markets in the Sunset Corridor.
Industrial property owners, be vigilant. This uptick in the economic outlook does not mean there should be a corresponding increase in a property’s real market value and a corresponding over-assessment of the property.
It should be simple to spot an inflated assessment. By statute, a property is assessed at its real market value, defined as what a willing buyer and willing seller would agree upon in an open market transaction. Assessments are also subject to Measure 50’s maximum assessed value limitations. The assessed value is the lower of the maximum assessed value or the real market value.
Yet over-assessments are common, and the reasons numerous. Despite the economic uptick, there are still significant economic impacts to industry in Oregon resulting in over-valuation of property by the Counties and the Department of Revenue.
The madness is in the method of assessment, because it is impossible for the assessor to physically inspect and appraise each property on its rolls. Instead, the assessor will typically add up a taxpayer’s historical investments in a property as reported each year, and equate the cumulative sum of those investments to the real market value of the property – without any regard to market conditions.
Market conditions that impact a company and the real market value of the property can be significant, particularly for an industrial property. Take a high tech campus that was built in the 1970’s and designed for a single user. Back then, tech firms favored flex buildings designed for manufacturing, research and development, assembly, and distribution with a typical floor plate of 40,000 square feet. No thought went into an exit strategy when planning the design or layout of the access, parking, integrated utility systems, and location of the buildings on the property.
Fast forward to 2013, when globalization generally calls for overseas assembly plants and distribution centers located strategically to the company’s global market. The need for a single-user campus with six or more dated, 100,000-square-foot flex buildings that share interconnected utilities on a single tax lot is gone. Globalization is an economic force that is external to a company and one that drives down the market price of these facilities. It is a form of obsolescence that is rarely accounted for in a property valuation.
Another factor that assessors typically overlook at industrial sites is functional obsolescence. Consider a facility built 30 or 40 years ago. Technology for the manufacturing processes may have advanced over the years, but the building design, including the ceiling height or floor load, may limit the use of the new technology. The overall utility of the property suffers from functional obsolescence that impairs the market value.
The assessor often lacks the people power to drill down into the details of every property. Because property value reflects not only local market conditions, but also the inherent functional and economic obsolescence unique to the property, a property being taxed solely on a trending basis may be over-assessed.
As appeared in Western Real Estate’s Business November issue.
In State ex rel Dept. of Transp. v. Singh, No. 110469, A1495660, 2013 WL 3215699 (Or. Ct.. App. June 26, 2013) , the State sought to close two reservations of access by eminent domain on Highway 34 to a property that was improved with a convenience market and also to close access to the County Road using its police powers. The property owner, Mr. Singh, moved to dismiss the condemnation case for the State’s failure to comply with the Condemnation Procedures Act because its statutory offer of just compensation (1) did not include a specific description of the location and extent of the rights of post-taking access to Mr. Singh’s property, and (2) did not address all compensable damages to the property as a result of the elimination of access to the property. The trial court granted Mr. Singh’s motion for summary judgment and dismissed the State’s complaint. The State appealed.
There was no dispute that the taking eliminated all rights of access to Mr. Singh’s property, and that absent reasonable alternative post-taking access, Mr. Singh’s remaining property would be land locked. In order to mitigate the damage to the remaining property, the State attempted to grant Mr. Singh rights to access and use a new road to be constructed across the neighbors’ private properties for access to his remaining property. As the trial court correctly ruled, however, there was nothing in the State’s offer (or the Complaint) describing with any definiteness or certainty the location or right to use a proposed new access road to Mr. Singh’s property. The State merely “offered” to build a road, at some generally-described location, and at some undefined point in time, all to be determined at the State’s sole discretion. The Court of Appeals agreed with the trial court’s dismissal of the condemnation action for failure to comply with the Condemnation Procedures Act. ORS 35.346(1) required the State to “make a written offer” to the property owner (a) “to purchase the property or interest,” (b) “to pay just compensation therefore,” and (c) to “pay just compensation for any compensable damages to the remaining property.” Implicit in the concept of an offer under the statute is that the amount offered is specifically tied to the terms of the offer. Thus, the amount of damages that a condemner offers must be based on an evaluation of the compensable damages that the remaining property will suffer if the property owner accepts the terms of the proffered agreement.
Because the appraiser for the State made the assumption in its appraisal that there would be access different than what was “offered,” the dismissal was appropriate. The Court of Appeals held there is no requirement that the complaint include a metes and bounds description of the future access that the condemnor will provide. However, when the State chooses to make an offer of compensation before the specifics of a future access are certain, the statute requires that the compensation offer include compensation for that uncertainty. The trial court correctly dismissed the condemnation complaint.
Miller v. Jones, 256 Or App 392 (2013), Sercombe, J. Plaintiffs brought a declaratory judgment action to determine the validity of an agreement they claimed created an easement for an irrigation pipeline through Defendants’ property. Defendants attempted to defeat that claim by asserting that the agreement between the previous property owners was not an easement but a “license” between the two previous property owners. Alternatively, the defendants argued that if the agreement were an easement, it was not appurtenant (i.e. the easement was not attached with ownership of the land), but rather personal; thus the right to use the easement did not transfer when the property was conveyed to plaintiffs. The court considered the plain language of the document and found that the agreement was indeed an easement because it “granted a right of one person to do certain acts on land of another” as it provided the defendants the right “to service and maintain” an existing underground irrigation pipeline on the property and “access [of the pipeline] through” the subject property. These provisions plainly created an easement granting rights on property of another. The court construed the plain language of the agreement, the use of the words consistent with easement language, and the purpose of the agreement and concluded that the agreement was an easement that attached to the land granting plaintiff the right to use, service and maintain its pipeline over defendants property.
The City of Harrisburg placed a municipal water well on undeveloped property owned by the Defendant property owner, Ms. Leigh. Shortly thereafter, the City discovered that they placed the well on her property but they did nothing. Several years later Ms. Leigh decided to sell the property and her broker discovered the well and approached the City with the situation. The City responded to her discovery of the well by suing her for adverse possession of her property, instead of offering to pay her fair market value of her property. The City lost and she won an ejectment action – which resulted in the trial Court opinion that the City was not entitled to legal possession or any interest in the property and ordering the City to vacate the property and decommission the well by September 1.
Months later, on a Friday, August 28, the City offered to purchase her property for $7,425. When she rejected their offer, they filed an emergency condemnation proceeding the following Tuesday, September 2. The dates here are important.
Ms. Leigh’s position at trial was that, as a matter of law, as of September 2, (one day after the well was to have been decommissioned) Ms. Leigh owned the well because the trial court’s judgment specifically held that the City had no legal right to Ms. Leigh’s property and were required to decommission the well by September 1st , which had not occurred. The trial court rejected Ms. Leigh’s legal argument and Ms. Leigh received only compensation for the land and not for the well.
Ms. Leigh appealed to the Oregon Court of Appeals, which agreed that the ejectment judgment conclusively established that Ms. Leigh was the owner of the property, including its improvements. Accordingly, she was entitled to compensation for the value of the property, as improved. A public body that takes private property for public use must pay the property owner “just compensation”. OR Const, Art I § 18. The Court of Appeals held that the prior judgment conclusively held that the City was “wrongfully withholding possession of the Property”, and therefore, the value of the property was measured as of September 2, 2008 – the date the condemnation action was commenced and the property included compensation for the well because the well had not been decommissioned by September 1. The case was remanded back to the trial court for entry of judgment for Ms. Leigh.
(Property owner was represented by Garvey Schubert Barer.)
TransCanada, a Canadian energy company has been granted eminent domain rights to take a 50 foot easement through a property owners farm in Texas. The issue before the local court was whether TransCanada had “common carrier” status for the Keystone XL project, which would allow it to use eminent domain to acquire property for the project when the property owner would not agree to grant an easement. The case highlights an unusual loop hole in the Texas law which simply allows a company to claim its status as a common carrier on a simple one page form to avail itself of condemnation authority.
The common carrier process has recently been challenged successfully in the State Supreme Court where the court refused the pipeline company’s condemnation claim. Texas Rice Land Partners v. Denbury Green.
"Private property is constitutionally protected," Justice Willett wrote, "and a private enterprise cannot acquire condemnation power merely by checking boxes on a one-page form."
Most states, including Oregon and Washington, have strict statutory provisions granting condemnation authority and procedures to establish just compensation for property acquired for a public use.
This has been a controversial project due to its scope and the type of product being disturbed through the pipeline. The pipeline project history can be viewed at here.
In an interesting case in South Dakota the owners of a truck stop were entitled to compensation for closure of a highway exit ramp when the State closed by condemnation the exit ramp to the property during a project. It is fundamental condemnation law that a government may regulate its streets for public safety and that a property owner is not entitled to compensation for closure of public street. This is referred to as the government’s police power.
A jury awarded the Modera Hotel $756,000 for diminution in value to the hotel property for TriMet’s action in closing an access onto the city street for expansion of its light rail through downtown Portland. The case is unusual because closure of an access by a condemning authority is usually considered to fall under the condemning authority’s “police power,” that is to promote public safety, and is not generally a constitutional taking that results in compensation to the property owner. However, the Hotel was able to rely on a city ordinance that provides that when a City or Mass Transit restricts the use of a street traffic lane adjacent to a commercial property the City or Mass Transit shall be liable for and pay the difference between the fair market value of the property prior to the restriction and after the restriction. The Court of Appeals affirmed the jury award.
We regularly update clients about changes in real estate law and on industry trends. This includes briefing clients on legislative proposals in the federal tax, housing and other legal areas affecting their businesses. Staying current enables you to anticipate and prevent legal problems as well as capitalize on new developments.