THE SENATOR, INC., Appellant-Appellant on Appeal, v. ADA COUNTY, BOARD OF EQUALIZATION, Respondent-Respondent on Appeal.
No. 27402.
Supreme Court of Idaho, Boise, December 2002 Term.
April 2, 2003.
67 P.3d 45
CONCLUSION
This Court affirms the district court‘s grant of partial summary judgment to Rycair. The district court‘s award of attorney fees to Rycair is set aside and remanded to the district court for further action consistent with this opinion. On the issue of costs, this Court holds that the district court properly exercised its discretion in not awarding all of Rycair‘s costs.
No attorney fees or costs are awarded on appeal.
Chief Justice TROUT and Justices SCHROEDER, KIDWELL and EISMANN, CONCUR.
Hon. Greg H. Bower, Ada County Prosecuting Attorney; Teresa A. Baker, Deputy Prosecuting Attorney, Boise, for respondent. Teresa A. Baker argued.
EISMANN, Justice.
This is an appeal from a judgment of the district court affirming the tax assessment of a mobile home/manufactured home park. The taxpayer contends that to give major consideration to the actual and functional use of the park, the assessment must, as a matter of law, take into account the actual vacancy rate of the space rentals. We disagree and affirm the judgment of the district court.
I. FACTS AND PROCEDURAL HISTORY
The Senator, Inc., owns a mobile home/manufactured home park named “The Senator Retirement Community” (herein “Park“) located in Boise, Ada County, Idaho. The 18.99-acre Park was built in 1968 as a mobile home park. In 1976 Congress enacted statutes regulating the mobile housing industry. As a result, mobile housing built prior to 1976 is called a mobile home, and mobile housing built from 1976 to the present is called a manufactured home. In the early 1990‘s, the Park adopted a policy of phasing out the mobile homes in the Park and only renting spaces for manufactured homes. In 1993 it also decided to restrict its renters to persons aged 55 years or older.
In 1999, the Ada County Assessor assessed the value of the Park at $2,241,883. The Park appealed to the Ada County Board of Equalization, which affirmed the 1999 assessment. The Park then appealed to the Idaho State Board of Tax Appeals, which is permitted to receive further evidence on appeal.
In 2000, the Ada County Assessor assessed the value of the Park at $1,938,500. The Park appealed to the Ada County Board of Equalization, which affirmed the assessment. The Park then appealed to the district court pursuant to
Both cases were consolidated in the district court. It heard the matter as a trial de novo and issued its memorandum decision on January 23, 2001. The Park contended that the assessed value was erroneous for two reasons. First, it failed to take into consideration the actual and functional use of the property, which the Park contends should take into consideration its space rental vacancy rate. Second, the Park contended that the assessment included an amount for business goodwill. The district court rejected these arguments. It found that the Park had failed to show by clear and convincing evidence that the assessed value of its property failed to take into consideration “the actual and functional use” as required by
II. ISSUES ON APPEAL
A. Must the actual vacancy rate of the manufactured home rental lots in the Park be considered when determining the actual and functional use of the Park‘s real property?
B. Was the district court‘s decision supported by substantial and competent evidence?
C. Did the county assessor improperly include business goodwill in valuing the Park‘s real property?
III. ANALYSIS
The district court determines the appeal of the county assessor‘s valuation in a trial de novo without a jury as though it were an original proceeding in that court. Riverside Dev. Co. v. Vandenberg, 137 Idaho 382, 48 P.3d 1271 (2002);
A. Must the Actual Vacancy Rate of the Manufactured Home Rental Lots in the Park Be Considered When Determining the Actual and Functional Use of the Park‘s Real Property?
Generally, all real property subject to property taxation must be assessed annually at market value as of 12:01 a.m. on the first day of January in the year in which such property taxes are levied.
“Market value” means the amount of United States dollars or equivalent for which, in all probability, a property would exchange hands between a willing seller, under no compulsion to sell, and an informed, capable buyer, with a reasonable time allowed to consummate the sale, substantiated by a reasonable down or full cash payment.
Rule 217 of the Property Tax Administrative Rules adopted by the Tax Commission provides that when assessing real property, the assessor shall consider the sales comparison approach, the cost approach, and the income approach.
When determining the market value of the Park, the deputy assessor used all three methods, but she gave the most weight to the income approach. In her calculations, she used a three percent vacancy rate, which she testified was the typical vacancy rate in the market. The Park‘s actual vacancy rate was 26% in 1999 and 32% in 2000. The Park contends that the income approach must be based upon the Park‘s actual vacancy rate in order to take into account the actual and functional use of the property. It argues, “Here 88 spaces of Appellant‘s manufactured
The legislature has not defined the phrase “actual and functional use.” When interpreting a statute, we must begin with the literal words of the statute, giving the language its plain, obvious and rational meaning. Thomson v. City of Lewiston, 137 Idaho 473, 50 P.3d 488 (2002). Our goal is to give effect to the purpose of the statute and the legislative intent in enacting it, which may be implied from the language used or inferred on grounds of policy or reasonableness. Id. The interpretation of a statute is an issue of law over which we exercise free review. State v. Maidwell, 137 Idaho 424, 50 P.3d 439 (2002).
Real property is typically valued at its highest and best use. That determination takes into consideration the uses that are legally permissible, physically possible, financially feasible, maximally profitable, and reasonably probable in order to arrive at the highest value for the property. The highest and best use of real property may not be its present use, or the use for which any of its improvements were designed.
In 1971 the legislature added to what was then
The word “actual” means: “1. existing in act or fact; real: an actual case of treason; actual expenses; an actual hardship. 2. existing now; present; current: the actual position of the moon.” WEBSTER‘S NEW UNIVERSAL UNABRIDGED DICTIONARY 15 (1989 Barnes & Noble, N.Y.) (italics in original). The word “functional” means: “1. of or pertaining to a function or functions: functional difficulties in the administration. 2. having or serving a utilitarian purpose; capable of serving the purpose for which it was designed: functional architecture; a chair that is functional as well as decorative.” Id. at 574 (italics in original). Considering the definitions of “actual” and “functional” and the legislature‘s apparent purpose in adding that requirement, the actual and functional use of real property is its existing use and the use for which it was designed or intended.
The Park argues that as a matter of law the actual and functional use of rented spaces differs from the actual and functional use of unrented spaces. We disagree. What is being valued for assessment purposes is the real property, not the business being operated on the real property. The actual and functional use of the real property is as a mobile home/manufactured home park. The assessed value of the Park‘s real property is simply an opinion regarding the probable sale price of the real property if it were sold for use as a mobile home/manufactured home park, assuming there was a willing seller, under no compulsion to sell, and an informed, capable buyer, with a reasonable time allowed to consummate the sale and a reasonable down or full cash payment. The Park‘s actual vacancy rate may or may not affect that probable sale price, depending upon the cause of the vacancy rate. Both the rented
We addressed a similar issue in Riverside Development Company v. Vandenberg, 137 Idaho 382, 48 P.3d 1271 (2002). The issue in Riverside Development was the value of unsold subdivision lots. The assessor determined that the actual and functional use of the unsold lots was as single-family residence lots, and the assessor valued them at their retail value, based upon the sales price of lots that had sold. The taxpayer contended that the actual and functional use of the unsold lots was as inventory and that as inventory they had a lower value. We upheld the district court‘s finding that the actual and functional use of the unsold lots was as single-family residential lots. Similarly, in this case the actual and functional use of the Park‘s unrented spaces is as mobile home/manufactured home rental spaces, not as an inventory of lower-valued unrented spaces.
The Park argues that Greenfield Village Apartments, L.P. v. Ada County, 130 Idaho 207, 938 P.2d 1245 (1997), and Fairway Development Co. v. Bannock County, 113 Idaho 933, 750 P.2d 954 (1988), support its position. In the Greenfield Village case, the taxpayer owned a low-income rental housing project that was subject to a restrictive covenant that bound the owner and all subsequent owners to restricted rent charges for twenty years. After considering all three appraisal methods, the assessor valued the apartment complex based upon the sales comparison approach. When doing so, he did not take into account the restrictive covenant, but used as comparable sales apartment complexes that did not have a similar restriction on rental income. This Court held that by failing to take the restrictive covenant into consideration, the assessor had ignored the property‘s actual and functional use. As we stated, “The ‘actual and functional use’ of this property is as a rent-restricted, low-income housing. It cannot be used otherwise.” 130 Idaho at 210, 938 P.2d at 1248. In Greenfield Village, the restrictive covenant had to be taken into consideration when estimating the probable sale price (market value) of the real property because any purchaser would be bound by the rent restrictions in the covenant. Here, there is nothing similar that would limit the rent that could be charged by any future purchaser of the Park.
In the Fairway Development case, the issue was the valuation of a fifty-six-unit apartment complex that had been converted into condominiums. Upon the filing of the document to convert the apartments into condominiums, the assessor began assessing the units as condominiums rather than apartments, which increased their assessed value by 337%. The assessor used the sales comparison approach to value the unsold units, based upon the sales of other condominium units in the county. The taxpayer sold nine condominium units, but during the ensuing ten years did not sell any more units and continued renting the unsold units as apartments. We held that by focusing entirely upon the classification of the unsold units as condominiums rather than upon their actual use as apartments, the assessor had failed to give major consideration to the actual and functional use of the units.
Certainly it cannot be said on this record that exclusive use of the market data approach based on sales of condominiums (when none have been sold for ten years) gives major consideration to the “actual and functional” use. It may not result in accurate or fair appraisals to define all other Bannock County condominiums as “similar properties” to Fairway Estates and so use the values of those properties as the basis for assessing Fairway.... Here, we hold that Fairway cannot be assessed with attention given only to its property‘s classification as “condominium.”
113 Idaho at 937-38, 750 P.2d at 958-59 (italics in original). In the Fairway Development case, we did not hold that unrented apartments should be valued differently than rented apartments.
In this case, the district court did not err in finding that the actual and functional use of the vacant and the occupied rental spaces was the same. Their actual and functional
B. Was the District Court‘s Decision Supported by Substantial and Competent Evidence?
The Park argues that the district court‘s decision violates Sections 2 and 5 of Article VII of the Idaho Constitution2 because it failed to take into account the Park‘s actual vacancy rate. As the Park argues, these provisions require that taxation must be proportional and uniform as among the “same class” of those to be taxed. Fairway Development Co. v. Bannock County, 113 Idaho 933, 750 P.2d 954 (1988). Uniformity in taxing implies equality in the burden of taxation, which cannot exist without uniformity in the mode of assessment as well as in the rate of tax. Chastain‘s, Inc. v. State Tax Commission, 72 Idaho 344, 241 P.2d 167 (1952). The Park argues that the valuation of its property was inflated because the deputy assessor used a market vacancy rate of 3% rather than the actual vacancy rates of 26% in 1999 and 32% in 2000. If that valuation is permitted to stand, the Park contends it will be required to pay more than its proportional share of taxes.
While the courts will not attempt to correct mere mistakes or errors of judgment on the part of the assessor, where intentional, systematic discrimination occurs, either through undervaluation or through overvaluation of one property or class of property as compared to other property in the county, the courts will grant relief. Anderson‘s Red & White Store v. Kootenai County, 70 Idaho 260, 215 P.2d 815 (1950). “Individual irregularities and inequality in taxation will always exist. It is a process which cannot be reduced to an exact science. The law does not require exactitude, but it does require uniformity.” Id. at 265, 215 P.2d at 818.
The Park‘s argument regarding Sections 2 and 5 of Article VII of the Idaho Constitution is based upon its contention that its real property was overvalued. If it was not overvalued, then there was no constitutional violation. The Park does not contend that it was taxed at a higher rate than other real property in Ada County. Whether or not the Park‘s property was overvalued depends upon whether or not the district court‘s findings of fact are supported by substantial and competent evidence. Thus, the Park‘s argument regarding Sections 2 and 5 of Article VII of the Idaho Constitution is, in reality, simply an argument that the district court‘s findings were not based upon substantial and competent evidence.
Both parties presented two experts who testified regarding the market value of the Park‘s real property. The district court found that the two witnesses called by Ada County were very credible and that the two witnesses called by the Park were not persuasive. As a result, the district court found that the Park failed to meet its burden of proving by clear and convincing evidence that the assessment of its real property was arbitrary, capricious and erroneous.
The first appraisal witness called by the Park was Mark Richey, a real estate appraiser. Mr. Richey used two methods in valuing the Park‘s real property. He first testified
Mr. Richey testified that the other valuation method he used was based upon the actual and functional use of the Park‘s real property. In this approach, he multiplied the gross annual rent for the rented spaces by a multiplier of 5.5 to arrive at a value for the rented spaces. He then calculated a value for the unrented spaces, which he classified as surplus land. Based upon land sales, he testified that the surplus land would be valued at $50,000 per acre, but because the unrented spaces were interspersed throughout the Park and would be difficult to sell, he discounted their value to $25,000 per acre. By adding these two figures together, he valued the Senator‘s real property at $1,810,000 on January 1, 1999, and $1,800,000 on January 1, 2000.
On cross-examination, Mr. Richey admitted that the cost approach is not the most reliable method for valuing older properties. He also testified that the gross rent multiplier of 5.5 that he used in his calculations was the lowest within the range of gross rent multipliers derived from actual sales of mobile home parks.3 He did not state why he chose to use the lowest gross rent multiplier from comparable sales. The use of a higher gross rent multiplier would have resulted in a higher value. He also admitted that a buyer purchasing a mobile home park does not pay a certain amount for the rented spaces and then a lower amount for the unrented spaces.
The other appraisal witness called by the Park was Paul Hyde who is a business appraiser, not a real property appraiser. He stated that this was his first formal appraisal of a mobile home facility. He testified that the income approach is the most reliable method of valuing the Park‘s business because that type of property is sold and purchased based upon actual income. In his opinion, the market value of the Park‘s business was $1,450,000 on January 1, 1999, and $1,841,000 on January 1, 2000. When valuing the Park‘s business, Mr. Hyde used its actual income and expenses. Mr. Richey testified, however, that when using the classic income approach to value real property, the appraiser uses market rents, market occupancy levels, and market expenses.4 Mr. Hyde did not use either the sales comparison approach or the cost approach in arriving at his opinion.
Ada County called as an appraisal witness Jan Kochan, a commercial appraiser from the Ada County Assessor‘s Office, and Brad Janish, a commercial real estate appraiser. Ms. Kochan testified that she used three approaches when valuing the Park‘s real property. She arrived at a value of $2,049,443 using the cost approach, a value of $2,261,000, using the sales comparison approach, and a value of $2,241,883 using the income approach. After considering those approaches, she arrived at a final value of $2,241,883, giving the greatest weight to the income approach because it is income-producing property.
Mr. Janish testified that he has valued thirty to forty mobile home or manufactured home parks during his career. Although he valued the Park‘s real property using the
The Park had the burden of proving by clear and convincing evidence that it is entitled to the relief claimed. Roeder Holdings, L.L.C. v. Board of Equalization of Ada County, 136 Idaho 809, 41 P.3d 237 (2001). The assessed value of $1,938,500 for the Park‘s real property is presumed correct. The district court did not find the testimony of either Mr. Richey or Mr. Hyde to be persuasive, and it found credible the testimony of Ms. Kochan and Mr. Janish. It is the province of the trial court to weigh conflict-
ing evidence and to judge the credibility of witnesses. King v. King, 137 Idaho 438, 50 P.3d 453 (2002). Evidence is regarded as substantial if a reasonable trier of fact would accept it and rely upon it in determining whether a disputed point of fact has been proven. Id. The district court concluded that the Park had failed to sustain its burden of proof. The district court‘s finding in this regard is supported by substantial and competent evidence.
The dissent raises as an issue on appeal that the Park should have been assessed as an over-age-fifty-five mobile home park. The dissent argues, “The Senator‘s over fifty-five age restriction ... has significant impact on the market value of its real property. By ignoring The Senator‘s age restriction, the assessor failed to give major consideration to actual and functional use.” The age restriction would be material if it impacted the fair market value of the Park‘s real property. Neither party contended that it did, however. Although we can speculate as to the age restriction‘s impact upon the fair market value of the real property, neither party‘s experts opined that the value was increased or decreased by that age restriction,6 nor did either party contend that the age restriction should have been considered when valuing the real property. Because neither party raised that issue, we did not address it on appeal.
C. Did the County Assessor Improperly Include Business Goodwill in Valuing the Park‘s Real Property?
IV. CONCLUSION
The judgment of the district court is affirmed. Costs on appeal are awarded to Ada County.
Justices SCHROEDER, WALTERS, and Justice Pro Tem. HOHNHORST, concur.
Justice KIDWELL, dissenting as to the analysis of part III A.
The Ada County assessor failed to give major consideration to the actual and functional use of The Senator‘s real property when assigning a market value for tax assessment purposes. Therefore, I respectfully dissent.
ANALYSIS
Real property in Idaho is subject to a tax based on its market value.
There seems to be confusion over the meaning of the phrase “actual and functional use” as used in
The Senator is a manufactured home park that rents spaces to tenants fifty-five (55) years of age or older. The Senator is a “limited use” mobile home park. The Senator is not a general use mobile home park, as the assessor determined. The majority correctly states, “what is being valued for assessment purposes is real property, not the business being operated on the real property.” However, when giving major consideration to the actual and functional use of real property in order to determine its market value, the assessor cannot ignore the realities of a business operating on the property. A willing buyer and seller would undoubtedly take into consideration the limited use of The Senator in identifying the real property‘s market value. Broadly categorizing any mobile/manufactured home park as a general mobile home park is akin to broadly categorizing both a full service Albertson‘s and a small corner grocer as “grocery stores” for purposes of assessing the market value of the real property on which they operate. In order to give major consideration to the actual and functional use of real property, an assessor must consider the nature of the business operating on the real property.
Three cases cited by the majority support this position. In Riverside Dev. Co. v. Vandenberg, this Court upheld the assessor‘s determination that the actual and functional use of unsold lots in a subdivision were as single-family residence lots, not inventory, as the taxpayer had argued. 137 Idaho 382, 384, 48 P.3d 1271, 1274 (2002). This determination
In these three cases, the nature of the business operating on the real property was a major consideration in determining the actual and functional use of the property, and consequently, the correct market value for assessment purposes. The Senator‘s over fifty-five age restriction, a socially acceptable and beneficial classification, has significant impact on the market value of its real property. By ignoring The Senator‘s age restriction, the assessor failed to give major consideration to actual and functional use.
In addition to the requirements of Title 63, as discussed above, in determining a real property‘s market value, an assessor must also take into account the rules promulgated by the Commission. However, a search of the Commission‘s rules reveals no guidance on how an assessor should give major consideration to the actual and functional use of real property when assigning a market value. The Commission improperly leaves such determinations to the unfettered discretion of the assessor. It is necessary for the Commission to promulgate rules that provide guidance to assessors on how to give major consideration to the actual and functional use of real property when assigning a market value.
The majority finds there is substantial, competent evidence supporting The Senator‘s assessed value. The majority dismisses the dissent by stating the issue of the age restriction was not raised by either party and that the impact of the age restriction on the fair market value would be speculative. In doing so, the majority misses the point of the dissent. There is no question that fair market value of The Senator, as assessed by the county, is supported by substantial, competent evidence. However, this does not change the fact that assessors act without the benefit of guidance from the Commission in making their decisions. There is absolutely no doubt that a willing buyer and seller, in a voluntary transaction, would seriously consider The Senator‘s occupancy rate in determining its fair market value. The standard occupancy rate for general use manufactured home park, or even an age-restricted park, should not control the assessor‘s decision. The Commission should promulgate regulations instructing assessors on how to give major consideration to the actual and functional use of the property they are assessing rather than allowing assessors to use their unfettered discretion in determining the value of real property, such as The Senator‘s, based on inapplicable occupancy rates.
For these reasons, I would remand this case to reconsider The Senator‘s assessed tax based on its actual and functional use.
Notes
§ 2. Revenue to be provided by taxation.—The legislature shall provide such revenue as may be needful, by levying a tax by valuation, so that every person or corporation shall pay a tax in proportion to the value of his, her, or its property, except as in this article hereinafter otherwise provided. The legislature may also impose a license tax, both upon natural persons and upon corporations, other than municipal, doing business in this state; also a per capita tax: provided, the legislature may exempt a limited amount of improvements upon land from taxation.
§ 5. Taxes to be uniform—Exemptions.—All taxes shall be uniform upon the same class of subjects within the territorial limits, of the authority levying the tax, and shall be levied and collected under general laws, which shall prescribe such regulations as shall secure a just valuation for taxation of all property, real and personal: provided, that the legislature may allow such exemptions from taxation from time to time as shall seem necessary and just, and all existing exemptions provided by the laws of the territory, shall continue until changed by the legislature of the state: provided further, that duplicate taxation of property for the same purpose during the same year, is hereby prohibited.