The Appraisal Journal SPRING 2021
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The
Appraisal
Journal
SPRING 2021
Volume LXXXIX, Number 2
F Valuationof Private
Golf and Country Clubs
for Ad Valorem Taxation
by Laurence A. Hirsh, MAI
PAGE 85
Land Values and
External Obsolescence
by Stanley D. Longhofer, PhD
PAGE 95
Environmental Dead Zones:
The Evaluation of
Contaminated Properties
by Michael Tachovsky
PAGE 104Contents
The Appraisal Journal | Spring 2021 | Volume LXXXIX, Number 2
ii Mission Statement
iv A Message from the Editor-in-Chief
v Appraisal Journal Awards
xii Annual Conference Announcement
COLUMNS & DEPARTMENTS
71 Cases in Brief
Recent Court Decisions on Real Estate and Valuation
by Benjamin A. Blair, JD
118 Resource Center
Inflation Outlook and Statistical Analysis Software Resources
by Dan L. Swango, PhD, MAI, SRA
129 Letters to the Editor
PEER-REVIEWED ARTICLES
Valuation of Private Golf and Country Clubs for Ad Valorem Taxation
85
by Laurence A. Hirsh, MAI
Land Values and External Obsolescence
95
by Stanley D. Longhofer, PhD
Environmental Dead Zones: The Evaluation of Contaminated Properties
104
by Michael Tachovsky
ANNOUNCEMENTS
131 New Appraisal Institute Publications
132 Article Topics in Need of Authors
133 Manuscript Guide
134 Appraisal Journal Order Form
COVER PHOTO: Congressional Country Club in Bethesda, Maryland,
by Stan Badz/PGA Tour via Getty Images
www.appraisalinstitute.org Spring 2021 • The Appraisal Journal iThe Appraisal Journal
Published by the Appraisal Institute
Rodman Schley, MAI, SRA, President
Pledger M. “Jody” Bishop III, MAI, SRA, AI-GRS, President-Elect
Craig Steinley, MAI, SRA, AI-GRS, AI-RRS, Vice President
Jefferson L. Sherman, MAI, AI-GRS, Immediate Past President
Jim Amorin, CAE, MAI, SRA, AI-GRS, Chief Executive Officer
Stephen T. Crosson, MAI, SRA, Editor-in-Chief
Nancy K. Bannon, Managing Editor
Justin Richards, Senior Communications Coordinator
The Appraisal Journal (ISSN 0003-7087) is published quarterly (Winter, Spring, Summer, and Fall). © 2021 by the Appraisal Institute, an Illinois Not-for-Profit Corporation
at 200 W. Madison, Suite 1500, Chicago, Illinois 60606. www.appraisalinstitute.org. All rights reserved. No part of this publication may be reproduced, modified, rewritten,
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Mission Statement: The Appraisal Journal is published to provide a peer-reviewed forum for information and ideas on the practice and theory of valuation and analyses
of real estate and related interests. The Appraisal Journal presents ideas, concepts, and possible appraisal and analytical techniques to be considered; some articles are
for the development and expansion of appraisal theory while others are useful in the evolution of practice.
Disclaimer: The materials presented in this publication represent the opinions and views of the authors. Although these materials may have been reviewed by members
of the Appraisal Institute, the views and opinions expressed herein are not endorsed or approved by the Appraisal Institute as policy unless adopted by the Board of
Directors pursuant to the Bylaws of the Appraisal Institute. While substantial care has been taken to provide accurate and current data and information, the Appraisal
Institute does not warrant the accuracy or timeliness of the data and information contained herein. Further, any principles and conclusions presented in this publication
are subject to court decisions and to local, state, and federal laws and regulations and any revisions of such laws and regulations.
This publication is for educational and informational purposes only with the understanding that the Appraisal Institute is not engaged in rendering legal, accounting,
or other professional advice or services. Nothing in these materials is to be construed as the offering of such advice or services. If expert advice or services are required,
readers are responsible for obtaining such advice or services from appropriate professionals.
Nondiscrimination Policy: Organized in 1932, the Appraisal Institute advocates equal opportunity and nondiscrimination in the appraisal profession and conducts
its activities in accordance with applicable federal, state, and local laws.
The Appraisal Institute advances professionalism and ethics, global standards, methodologies, and practices through the professional development of property
economics worldwide.
ii The Appraisal Journal • Spring 2021 www.appraisalinstitute.orgThe Appraisal Journal Editorial Board Stephen T. Crosson, MAI, SRA,* Chair, Dallas, Texas Larry T. Wright, MAI, SRA, AI-GRS, Vice Chair, Houston, Texas Julie Friess, SRA, AI-RRS, Sedona, Arizona Walter E. Gardiner, SRA, AI-RRS, Hammond, Louisiana Kerry M. Jorgensen, MAI, Sandy, Utah David C. Lennhoff, MAI, SRA, AI-GRS, Gaithersburg, Maryland Mark R. Linné, MAI, SRA, AI-GRS, Lakewood, Colorado James H. Martin, MAI, Mt. Pleasant, South Carolina Stephen D. Roach, MAI, SRA, AI-GRS, San Diego, California The Appraisal Journal Review Panel The Appraisal Journal Academic Review Panel Gregory J. Accetta, MAI, AI-GRS, Providence, Rhode Island Tim Allen, PhD, Florida Gulf Coast University Anthony C. Barna, MAI, SRA, Pittsburgh, Pennsylvania Anjelita Cadena, PhD, University of North Texas C. Kevin Bokoske, MAI, AI-GRS, AI-RRS, Ft. Lauderdale, Florida Peter F. Colwell, PhD, University of Illinois Norman Chung, MAI, AI-GRS, Los Angeles, California François Des Rosiers, PhD, Laval University George Dell, MAI, SRA,* San Diego, California Barry A. Diskin, PhD, MAI, AI-GRS, Florida State University John G. Ellis, MAI, Encino, California Donald R. Epley, PhD, MAI, SRA, University of South Alabama Stephen F. Fanning, MAI, AI-GRS,* Denton, Texas Jeffrey D. Fisher, PhD, Indiana University Kenneth G. Foltz, MAI, SRA, Wesley Chapel, Florida Terry V. Grissom, PhD,* University of Missouri–Kansas City Jack P. Friedman, PhD, MAI, SRA, Chicago, Illinois Thomas W. Hamilton, PhD, MAI,* Roosevelt University Brian L. Goodheim, MAI, SRA, Boulder, Colorado William G. Hardin III, PhD, Florida International University Robert M. Greene, PhD, MAI, SRA, AI-GRS, Olympia, Washington Lonnie W. Hendry Jr., Texas Tech University John A. Kilpatrick, PhD, MAI, Seattle, Washington Mark Lee Levine, PhD, JD, MAI, University of Denver S. Warren Klutz III, MAI, SRA, AI-GRS, Bristol, Tennessee Kenneth M. Lusht, PhD, MAI, SRA,* Florida Gulf Coast University, Douglas M. Laney, MAI, Tucson, Arizona Penn State University Michael A. McElveen, MAI, Tampa, Florida Mark E. Moore, PhD, Texas Tech University Mark E. Mitchell, MAI, AI-GRS, Louisville, Kentucky Barrett A. Slade, PhD, MAI, Brigham Young University Dan P. Mueller, MAI, St. Paul, Minnesota Brent C Smith, PhD, Virginia Commonwealth University Nathan Pomerantz, MAI, Rehovot, Israel Mark A. Sunderman, PhD, University of Memphis Rudy R. Robinson III, MAI, Austin, Texas Grant I. Thrall, PhD, University of Florida David J. Sangree, MAI, Cleveland, Ohio Alan Tidwell, PhD, University of Alabama Eric C. Schneider, MAI, SRA, AI-GRS, San Diego, California H. Shelton Weeks, PhD, Florida Gulf Coast University John A. Schwartz, MAI, Denver, Colorado John E. Williams, PhD, Morehouse College Melanie Sieger, MAI, AI-GRS, Chevy Chase, Maryland Elaine M. Worzala, PhD, George Washington University Dan L. Swango, PhD, MAI, SRA, Tucson, Arizona James D. Vernor, PhD, MAI, Atlanta, Georgia *Statistics Work Group member www.appraisalinstitute.org Spring 2021 • The Appraisal Journal iii
From the Editor-in-Chief
Stephen T. Crosson, MAI, SRA
Thought Leadership
Dear Readers:
Each year, the Spring issue of The Appraisal Jour- as to when such value loss is attributable to the
nal recognizes exceptional work within this forum land and when it is attributable to the structure.
for ideas on real estate valuation, and on the fol- The discussion demonstrates that external factors
lowing pages you will see the announcement of that affect the property’s value are attributable to
our 2020 article awards. It is important that we the land if the current use is the property’s highest
pause and acknowledge these excellent articles and best use and are attributable to external obso-
and their authors. In addition, we recognize the lescence of the building otherwise.
outstanding service of Larry T. Wright, MAI,
SRA, AI-GRS, who during the past year has con- The third feature, “Environmental Dead Zones:
tributed valuable volunteer hours to the Journal. The Evaluation of Contaminated Properties,”
proposes categories and classifications of contam-
We also have three peer-reviewed feature articles inated properties based on the environmental
aimed at helping professional appraisers with land use restrictions. The article suggests that by
their value analyses of certain properties with categorizing environmental land use restrictions,
special circumstances. comparisons of market data can be made and the
condition of a subject property can be described,
The cover article, “Valuation of Private Golf and assisting in assignments involving environmen-
Country Clubs for Ad Valorem Taxation,” exam- tally contaminated properties.
ines relevant issues in the valuation of private golf
and country clubs, including business intangible Also, in this issue you will find the latest edition
property, golf club intangible personal property, of Resource Center, with helpful links to materials
and the issue of isolating real property value from and analyses on the inflation outlook. Here, read-
the going concern. This article summarizes the ers will find a plethora of relevant government,
widely known methods of estimating the value academic, and private-sector data on this topic.
of intangible personal property. The discussion In addition, the column presents descriptions of
highlights the differences between the facilities’ useful, popular statistical software to enhance val-
real property components and business operations uation analyses—especially free online tools.
models of daily-fee, semi-private, private, and
resort golf facilities. We appreciate the dedication of all who have
contributed to The Appraisal Journal’s peer review
The second feature, “Land Values and External process as well as the authors who have shared
Obsolescence,” looks at the challenge of address- their knowledge with our readers. As always, we
ing external obsolescence in a cost approach welcome your comments regarding any aspect of
analysis. Loss due to external obsolescence is The Appraisal Journal.
driven by factors outside the property, and it can
be difficult to distinguish between external obso- Stephen T. Crosson, MAI, SRA
lescence of the improvements and a reduction in Editorial Board Chair and Editor-in-Chief
value of the land. This article provides guidance The Appraisal Journal
iv The Appraisal Journal • Spring 2021 www.appraisalinstitute.orgAppraisal Journal Outstanding Service Award
For Exceptional Commitment in 2020
Larry T. Wright, MAI, SRA, AI-GRS
Larry T. Wright, MAI, SRA, AI-GRS, is the winner of The Appraisal
Journal’s 2020 Outstanding Service Award. This award recognizes
the member of the Journal’s Editorial Board, Review Panel, or
Academic Review Panel who during the previous year showed
exceptional commitment to The Appraisal Journal through out-
standing service.
Wright has been a real estate appraiser since 1973. He gradu-
ated from the University of Oklahoma with a bachelor of science
degree in mathematics. During his career as an appraiser, he has
been involved in appraising for various individuals, corporations,
and government entities such as the federal government, the State
of Texas, Harris County, and the City of Houston. The primary
focus of his practice has been litigation related to eminent domain,
title insurance, estate tax, property tax, divorce, and bankruptcy;
errors and omissions cases involving appraisers, real estate agents,
and brokers; mortgage fraud; and cases involving builder and
developer defects. Since 1997, he has been an approved instructor
for the Appraisal Institute. He currently serves as vice chair of The
Appraisal Journal Editorial Board and serves on the Appraisal Insti-
tute Education Committee. He previously served as chair of the
Education Committee of the Houston Chapter of the Appraisal
Institute. While still consulting, his current endeavors have con-
centrated on teaching, writing seminars, and aiding in the writing
or reviewing of Appraisal Institute courses and seminars. He also
holds a teaching position with the C. T. Bauer College of Business
Real Estate Program at the University of Houston, lecturing about
market analysis and valuation.
www.appraisalinstitute.org Spring 2021 • The Appraisal Journal vArmstrong/Kahn Award
Most Outstanding Article of 2020 • Sponsored by the Appraisal Institute Education and Relief Foundation
Winning Article: “Golf Course
Communities as Multisided Markets:
Ownership Implications”
Bruce K. Cole, PhD, and David B. Hueber, PhD, are the winners of
the 2020 Armstrong/Kahn Award for their article, “Golf Course
Communities as Multisided Markets: Ownership Implications,”
published in the Spring 2020 issue of The Appraisal Journal.
The Armstrong/Kahn Award is presented by The Appraisal Jour-
nal’s Editorial Board for the most outstanding original article
published in The Appraisal Journal during the previous year. Arti-
cles are judged on the basis of pertinence to appraisal practice;
contribution to the valuation literature; provocative thought;
thought-provoking presentation of concepts and practical prob-
lems; and logical analysis, perceptive reasoning, and clarity of
presentation.
In “Golf Course Communities as Multisided Markets: Owner-
ship Implications,” Cole and Hueber explain the connection of
golf courses to land value in golf course communities, and the
Bruce K. Cole, PhD unique challenges that homeowners associations (HOAs) face as
they try to reconfigure golf course operations and preserve property
values within their communities. The authors’ study suggests that
HOA ownership of a course may have a negative impact on sale
prices in a golf community; therefore, HOAs should consider alter-
natives to course ownership for ensuring the financial security of
golf course communities.
Bruce K. Cole, PhD, is president of the Richard T. Greener
Institute for Social Policy Research, and he currently serves as
chair of the State Executive Committee of the Sierra Club of
South Carolina. Through his real estate advisory firm, Palmetto
Realty Advisors, Cole provides guidance to business leaders in
the areas of commercial and residential real estate investment
management and development. Cole previously served as an assis-
tant professor of finance at the University of South Carolina
and as the chief financial officer of the Boston Public Library.
He holds a doctorate in planning, design, and the built environ-
David B. Hueber, PhD ment from Clemson University; a master’s degree in business
administration from the Stanford Graduate School of Business; a
master’s degree in accounting from Northeastern University; and
vi The Appraisal Journal • Spring 2021 www.appraisalinstitute.orgArmstrong/Kahn Award a bachelor’s degree in economics from Harvard University. He is a certified public accountant and a licensed real estate broker. Cole has published numerous case studies, newspaper articles, and trade journal analyses. David B. Hueber, PhD, is a former senior executive at the PGA Tour and past president and chief executive officer of the National Golf Foundation, the Ben Hogan Company, and Cosmo World Group—a privately held Japanese conglomerate of golf companies and facilities including Angeles National in Los Angeles, Pebble Beach in California, the Four Seasons Hualalai in Hawaii, and golf course properties in Western Europe and Australia. He holds a doctorate in design and the built environment from Clemson University, a master’s degree in business administration from the University of Memphis, and a bachelor’s degree in business administration from Florida State University. His published works include the text In the Rough: The Business Game of Golf. To read the award-winning article, go to http://bit.ly/Appraisal_Journal. www.appraisalinstitute.org Spring 2021 • The Appraisal Journal vii
Swango Award
Best Article by a Practicing Appraiser in 2020 • Sponsored by the Appraisal Institute Education and Relief Foundation
Winning Article: “Timing Is Everything:
The Role of Interim Use in the
Highest and Best Use Conclusion”
David C. Lennhoff, MAI, SRA, AI-GRS, and Richard L. Parli, MAI, are
the winners of the 2020 Swango Award for their article, “Timing
Is Everything: The Role of Interim Use in the Highest and Best
Use Conclusion,” published in the Summer 2020 issue of The
Appraisal Journal.
The Appraisal Journal’s Editorial Board presents the Swango
Award to the best article published during the previous year on
residential, general, or technology-related topics, or for original
research of benefit to real estate analysts and valuers. The article
must be written by an appraisal practitioner. Articles are judged
based on practicality and usefulness in addressing issues faced by
appraisers in their day-to-day practice; logical analysis, perceptive
reasoning, and clarity of presentation; and soundness of methodol-
ogy used, especially in an area of original research.
“Timing Is Everything: The Role of Interim Use in the Highest
David C. Lennhoff, MAI, and Best Use Conclusion” proposes the formal incorporation of
SRA, AI-GRS the concept of interim use into the definition of highest and best use
to help improve understanding of the relationship of the two con-
cepts. The article suggests new definitions of interim use and mixed-
use development to improve clarity.
David C. Lennhoff, MAI, SRA, AI-GRS, is a principal with
Lennhoff Real Estate Consulting LLC, which is officed in
Gaithersburg, Maryland. His practice centers on litigation valua-
tion and expert testimony relating to appraisal methodology,
the Uniform Standards of Professional Appraisal Practice, and
allocating assets of a going concern. He has taught nationally
and internationally for the Appraisal Institute. International
presentations have been in Tokyo, Japan; Beijing and Shanghai,
China; Berlin, Germany; Seoul, South Korea; and Mexico City,
Mexico. He has been a development team member for numerous
Appraisal Institute courses and seminars and was editor of its
Capitalization Theory and Techniques Study Guide, third edition.
He was the lead developer for the Institute’s asset allocation
Richard L. Parli, MAI course, Fundamentals of Separating Real Property, Personal Property,
and Intangible Business Assets, and edited the two accompanying
business enterprise value anthologies. He also authored the
viii The Appraisal Journal • Spring 2021 www.appraisalinstitute.orgSwango Award Small Hotel/Motel Valuation seminar. Lennhoff also is a principal member of the Real Estate Counseling Group of America, a national organization of analysts and academicians founded by the late William N. Kinnard Jr., PhD. He is a past editor-in- chief of and frequent contributor to The Appraisal Journal, and a previous recipient of the Journal’s Armstrong/Kahn Award and Swango Award. Richard L. Parli, MAI, is president of Parli Appraisal Inc., a full-service appraisal firm located in Fairfax, Virginia. He has been involved in the development of numerous Appraisal Institute courses and seminars, is a coauthor of the Appraisal Institute text The Valuation of Apartment Properties, and is a professional faculty member of the Johns Hopkins Carey Graduate School of Business. He has an MBA in finance from the Pennsylvania State Univer- sity and is a principal member of the Real Estate Counseling Group of America. He is a three-time recipient of The Appraisal Journal’s Armstrong/Kahn Award. To read the award-winning article, go to http://bit.ly/Appraisal_Journal. www.appraisalinstitute.org Spring 2021 • The Appraisal Journal ix
Richard U. Ratcliff Award
Best Article by an Academic in 2020 • Sponsored by the Appraisal Institute Education and Relief Foundation
Winning Article: “Perspectives
on the Assembled Workforce
in Real Property Valuation”
Kimberly K. Merriman, PhD, and Leonard J. Patcella, MAI, are the
winners of the 2020 Richard U. Ratcliff Award for their article,
“Perspectives on the Assembled Workforce in Real Property Valua
tion,” published in the Summer 2020 issue of The Appraisal Journal.
The Richard U. Ratcliff Award is presented annually for the best
original article published in The Appraisal Journal written by an
academic author. Articles are judged on the basis of pertinent
appraisal interest, provocative thought, logical analysis, perceptive
reasoning, clarity of presentation, and overall contribution to the
literature of valuation. To be eligible for this award, an article must
have been peer reviewed by members of The Appraisal Journal’s
Academic Review Panel and an author must be primarily engaged
in teaching at a college or university.
In “Perspectives on the Assembled Workforce in Real Property
Valuation,” Merriman and Patcella discuss appraisals for ad valorem
Kimberly K. Merriman, PhD tax purposes, which may require appraisers to remove the value of
non–real property elements from the real property value. The article
examines theory and practice surrounding a recognized yet debated
non–real property element: the trained and assembled workforce.
It describes the theoretical footings of this intangible asset and
presents a step-by-step conceptual treatment of the assembled work-
force in real property valuation with a case study demonstration.
Kimberly K. Merriman, PhD, is an independent Pennsylvania
general certified appraiser and Candidate for Designation of
the Appraisal Institute, specializing in the valuation of real prop-
erty going concerns. She is owner of the realty firm FineHill
LLC and a professor with the Manning School of Business at the
University of Massachusetts Lowell. Her research related to the
assembled workforce is widely cited and has received national
attention. She is the author of Valuation of Human Capital: Quanti-
fying the Importance of an Assembled Workforce, which is used exten-
sively in university classrooms. Merriman holds a PhD in business
Leonard J. Patcella, MAI administration and a BBA in accounting from Temple University.
Leonard J. Patcella, MAI, is a principal in the firm Equity
Appraisal Co. Inc., which he founded in 1987. He has performed
x The Appraisal Journal • Spring 2021 www.appraisalinstitute.orgRichard U. Ratcliff Award valuation studies involving a wide range of property types and appraisal problems. He served as the Appraisal Institute Philadel- phia Chapter president in 1997 and serves as a member of its national faculty. Patcella is a CMI-designated member of the Institute for Professionals in Taxation and also serves as a member of its national faculty. Patcella has been qualified as a real estate valuation expert in numerous state tax courts, courts of common pleas, and federal bankruptcy courts, and he has presented testi- mony before more than seventy city and county boards of assess- ment. He holds a bachelor of science degree in real estate from Pennsylvania State University. To read the award-winning article, go to http://bit.ly/Appraisal_Journal. www.appraisalinstitute.org Spring 2021 • The Appraisal Journal xi
Cases in Brief
by Benjamin A. Blair, JD
Recent Court Decisions on Real Estate
and Valuation
Market rent paid to shareholders expenses it pays in carrying on business, includ-
in a rural town not excessive ing the rent paid by the business. But for an
expense to be ordinary and necessary, it must also
Plentywood is a town of about 1,700 people in be reasonable in amount. The Commissioner
northeast Montana. Plentywood Drug, Inc. (PDI) does not often question the reasonableness of
is a Montana corporation that operates the only rent agreed to by parties at arm’s length, but
pharmacy in Plentywood. Founded in 1910, PDI when there is a close relationship between the
is now owned by Robert and Marilyn Mann and lessor and lessee, an inquiry into what constitutes
Kathryn and Marvin Eberling. The pharmacy reasonable rent is necessary to determine whether
rents space in a building on Plentywood’s Main the sum paid is in excess of what would have
Street, owned in equal shares by the Manns and been required in a lease with a stranger.
Eberlings. The building contains 8,125 square The parties “quickly realized that finding com-
feet of retail space and 5,250 square feet of base- parable properties in a town of 1,700 people in
ment support area. frontier Montana” would be difficult. Montana is
PDI pays rent to the four owners of the build- a nondisclosure state, so real estate data such as
ing. The rent is set by oral agreement at the sale price is legally confidential and unavailable.
beginning of each year and is not reduced to a And the issue is magnified in a town the size of
formal written lease. PDI paid rent of $83,584 in Plentywood, which has a limited number of
2011 and $192,000 in 2012 and 2013. Because potentially comparable buildings.
the couples each owned half the building, they The Taxpayers produced a rent-survey report
each reported half the rent on their income tax from an appraiser based in Williston, North
returns; PDI deducted the rent from its corporate Dakota, a larger town an hour away from Plenty-
income each year. wood. He surveyed rent comparables in Plenty-
The Commissioner of the Internal Revenue wood and in Williston. He first considered a lease
Service (Commissioner) audited PDI for tax for the US Post Office in Plentywood, which
years 2011–2013, then expanded the audit to the signed a ten-year lease for $18 per square foot
Manns and Eberlings, issuing notices of defi- that was renewed in 2008 for $15.90. He also
ciency to them and to PDI. All proposed adjust- found leases in Williston for office buildings and
ments were resolved except those related to the a pharmacy, but he noted that rents were increas-
rent paid to the couples as lessors and deduced by ing in Williston during the years at issue because
PDI as lessee. On that issue, the Commissioner of its location in the middle of the North Dakota
contended that PDI had paid its shareholders too oil boom. He concluded to rent for PDI of $25
high a rent, which would in effect make some of per square foot of the main floor, plus $8 per
that rent a nondeductible dividend. PDI and the square foot for the basement, based on finished
couples (collectively, Taxpayers) timely appealed basement rents in Williston. He described this
to the US Tax Court to decide what fair market conclusion as a rent survey, not an appraisal.
rent for the building would be. The Commissioner offered the testimony of an
The Internal Revenue Code (Code) allows IRS staff appraiser. He used data from only prop-
a taxpayer to deduct ordinary and necessary erties located in Plentywood but found only four
www.appraisalinstitute.org Spring 2021 • The Appraisal Journal 71Cases in Brief
comparables: two government-subsidized apart- post office rent could be applied. The tax court
ment buildings, the post office, and a 625-square- also rejected the Commissioner’s appraiser’s con-
foot donut shop. He adjusted the rents for clusion that the basement had no value; it
various factors, including for the different types adopted the Taxpayers’ appraiser’s conclusion for
of construction; he observed that retail proper- the basement space, even though it was based on
ties generally have lower construction costs than rents in Williston.
apartments. He developed rent only for PDI’s Accordingly, the tax court concluded to fair
main level; he concluded that the basement market rent for PDI of $171,187.50 per year.
space had no value in itself, but rather contrib- Although PDI paid slightly higher rent in 2012
uted to the value of the main floor space. His and 2013, the court noted “just how difficult it
market rent conclusions were below $60,000 was for the parties’ professional appraisers to cal-
each year. culate a fair rent themselves.” Accordingly, the
The tax court began by addressing the Com- tax court concluded that there was no underpay-
missioner’s argument that the Taxpayers’ ment of tax, and thus no penalties were applied.
appraiser should have, but failed to, comply with
USPAP because his assignment was an appraisal. Plentywood Drug, Inc. v. Commissioner
The tax court agreed that under Uniform Stan- US Tax Court
dards of Professional Appraisal Practice (USPAP) April 26, 2021
a market rent opinion is an appraisal assignment, T.C. Memo. 2021-045
but the tax court’s rules allow it to consider
expert valuation opinions that do not comport
with USPAP, though the weight assigned to that Build-to-suit leases do not reflect
evidence may be diminished. market rent and are not definitionally
The tax court then considered each party’s part of real property
comparables. The court found that the differ-
ences between Plentywood and Williston were In 2005, Bass Pro Shops (Bass Pro) negotiated a
too substantial to rely on Williston leases. Willis- twenty-year, build-to-suit lease agreement with
ton’s population was eight times that of Plenty- the owners of a property in Johnson County,
wood, and it had a much stronger economy, Kansas (County). Under the lease, the landlord
generating higher rents. But the Commissioner’s was responsible for various expenses, including
comparables were just as problematic: “when a property taxes. The lease required Bass Pro to pay
town is so small that an appraiser looking for annual rent of $600,000, but it gave Bass Pro the
comparables for retail space ends up looking at option of buying the property for $10 at the end
apartment buildings, perhaps it might be wiser to of the lease term. Bass Pro ultimately built a
go to the next town over.” 130,998-square-foot building on the property
The parties’ appraisers did share one compara- and has occupied it since construction.
ble, the post office building. The tax court found In 2008, Arciterra BP Olathe KS LLC (Arci
many of the Commissioner’s adjustments to that terra) purchased the property for $1.9 million,
lease to be excessive, but the court observed one subject to the 2005 lease. The lease produced a
factor he did not consider: the creditworthiness positive cash flow until 2016, when the County
of the government and the long-term nature of doubled the property’s tax assessment. Arciterra
the lease. That factor offset the downward adjust- appealed to the Board of Tax Appeals (Board),
ments, so the court concluded that the $15.90 which conducted an evidentiary hearing.
72 The Appraisal Journal • Spring 2021 www.appraisalinstitute.orgCases in Brief Both parties’ appraisers agreed that the income arguments on appeal is its unwillingness to follow approach was the most relevant indicator of the Prieb.” First, the County argued that Prieb’s defi- property’s value. The County’s appraiser consid- nition of fee simple interest should be rejected in ered a mix of lease types, including build-to-suit favor of the definition from Black’s Law Dictio- leases. He explained that it was acceptable to nary. But the court of appeals found it “unneces- consider build-to-suit leases to determine market sary to parse any linguistic differences between rent if the necessary adjustments were made, the two” because the County never explained though he did not say what adjustments he made why the original definition was wrong or how use to account for that factor. He ultimately con- of Black’s definition would make a difference. cluded to rent of $10 per square foot and arrived The court also reiterated that, while Kansas tax at a value of $14.4 million, which he said was for statutes do not use the term “fee simple,” it is the fee simple estate as required by Kansas law, clear that the legislative intent underlying the though he denied that such a standard required statutory scheme of property taxation has always the property to be valued as though it was vacant been to appraise the property as if in fee simple. on the date of value. The County also disagreed with Prieb’s finding Arciterra’s appraiser prepared two valuations: that build-to-suit leases are essentially financing one of the fee simple interest and one of the agreements, instead asserting that such leases are “hypothetical leased fee” estate, in which he nothing more than operating leases to occupy assumed that the property would be encumbered real property. The court likewise rejected this by a short-term lease to a moderate-credit tenant. argument, finding that second-generation as-is He explained that he performed this second leases are most indicative of market rent, as the analysis because he was unsure what Kansas law cost of owner-occupied renovations are amor- required in valuing a fee simple interest when a tized over the term of the lease. Market rent is property is occupied. He excluded first-genera- not necessarily accurately reflected in a particu- tion build-to-suit leases, observing that such lar lease that encumbered a property, particularly rents were not representative of market because when the lease is a build-to-suit lease or is other- they were typically negotiated before improve- wise unique. Here, not only was the lease build- ments were made to the property. He concluded to-suit, but it also included the unusual provision to rent of $7 per square foot, arriving at a fee sim- giving the tenant the option of buying the prop- ple value of $7.5 million and a “hypothetical erty for $10 at the end of the 20-year lease term. leased fee” value of $9 million. Finally, the County argued that the statutory The Board concluded that build-to-suit leases definition of real property for tax purposes sup- do not reflect market rent and should not be used ported the conclusion that the value of the lease- to determine market rent unless an appraiser hold must be included in the valuation. That makes the necessary adjustments. Accordingly, definition states that real property includes “not the Board rejected the County’s appraisal. only the land itself, but all buildings, fixtures, Instead, the Board adopted Arciterra’s hypothet- improvements, [and] rights and privileges apper- ical leased fee valuation. The County appealed. taining thereto.” The court found no authority, In an earlier Kansas case, In re Prieb, the court though, that a lease is a “right relating to real concluded that Kansas law required that property property” such that the lease is definitionally part tax valuations be based on the fee simple inter- of the real property. “This argument is merely est, not the leased fee estate. The court here another way of asserting that fee simple is not observed that “underlying most of the County’s required,” and the court rejected it. www.appraisalinstitute.org Spring 2021 • The Appraisal Journal 73
Cases in Brief
Ultimately, the Board heard two days of testi- Mohit continued to pursue his legal claims,
mony, and while “there may be legitimate ques- however. He amended his complaint to allege
tions about some of the assumptions that that the regulation and the permit requirement
underlie” the hypothetical leased fee value pre- were contrary to state law, violated the Due Pro-
pared by Arciterra’s expert and concluded to by cess Clause of the US Constitution, and effected
the Board, those questions were not appealed. a regulatory taking without just compensation.
The County failed to show that the Board erred Haines City was granted summary judgment on
in rejecting its appraisal, and the court affirmed most issues, but the federal claims were dismissed
the Board’s determination. without prejudice, so Mohit filed in federal court,
alleging violations of the Takings Clause, among
In re Arciterra BP Olathe KS, LLC others. The federal district court denied all of
Kansas Court of Appeals Mohit’s claims, and he appealed.
April 2, 2021 The Fifth Amendment to the US Constitu-
484 P.3d 261 tion provides that private property shall not be
taken for public use without just compensation.
The US Supreme Court has noted two scenarios
Inconvenience from city’s development where a government regulation is so onerous
regulation does not constitute a taking that it constitutes a taking. The first is when,
with certain qualifications, a regulation denies
In May 2012, Benedict Mohit purchased a all economically beneficial or productive use of
twenty-acre property located in Haines City, land. The second is when the regulation is found
Florida, and “immediately began growing a com- to be a taking based on a complex of factors
mercial hay crop.” His intent was to farm and including the economic impact of the regulation
use the profits to build and maintain a family on the claimant and the extent to which the reg-
home on the property. Two months after he ulation has interfered with distinct investment-
bought the property, Haines City adopted a land backed expectations.
development regulation that prohibited using On the first scenario—the only avenue
his land for keeping farm animals or for other expressly mentioned by Mohit in his claims—
agricultural purposes absent a permit. After the court of appeals observed that Mohit cannot
being told by city officials that he needed a per- plausibly argue that he was deprived of all eco-
mit to carry out his farming plans, Mohit filed nomically beneficial or productive use of the
suit in state court, alleging that Haines City was property. After all, he was permitted to engage
unlawfully prohibiting his proposed livestock in some agricultural activities, even if those
grazing on his farm. activities were less extensive than he would
The state trial court concluded that Mohit have liked. That is not a denial of “all” produc-
should submit a new application for a conditional tive uses of the property.
use permit to pursue livestock farming. Mohit did On the second scenario, involving the com-
so, though he wrote on the top of his application plex of factors, Mohit limited his briefing to argu-
that he viewed the permit requirement as unlaw- ments about state law instead of engaging in the
ful. Three months later, Haines City granted him analysis of the various factors. The court con-
the permit, allowing him to have up to twenty cluded that Mohit did not adequately connect
goats, twenty cattle, and five horses—exactly his argument to the only inquiry that matters:
what Mohit asked for in his application. whether the regulation constituted a taking. The
74 The Appraisal Journal • Spring 2021 www.appraisalinstitute.orgCases in Brief
court concluded that “it may well be that the transaction, with Randall and Kathleen Erick-
land development regulation and the permit son as the current heirs.
caused deep inconvenience and frustration for Between 1926 and 2017, the surface rights to
Mohit.” But because inconvenience is not suffi- the land transferred several times through
cient to show a compensable taking, and because recorded instruments, with each instrument
Mohit failed to substantiate his arguments, the reciting the same “excepting and reserving” lan-
court affirmed the decision of the district court. guage from the 1926 deed. By 2017, the owner-
ship of the land had transferred to the trusts of
Mohit v. City of Haines City Paul and Vesta Morrison.
US Court of Appeals, Eleventh Circuit In August 2017, the Ericksons filed an action
January 26, 2021 to quiet title and for declaratory judgment that
2021 WL 244583 they own the mineral rights to the land by virtue
of the reservation. The Morrisons counter-
claimed for a declaration that the reservation of
Recitation of a preexisting interest the mineral rights had been extinguished under
in a recorded title transaction preserves the Act. The trial court ruled in favor of the
the interest Ericksons, and the Morrisons appealed. They
argued that the trial court erred by holding that
Ohio’s Marketable Title Act (Act) provides that the severed mineral interest at issue was pre-
an unbroken chain of title to land for a period of served from extinguishment. The court of
forty years establishes a marketable record title to appeals agreed, explaining that the reservation
the land, which generally extinguishes property does not state by whom the interest was origi-
interests that predate the landowner’s root of nally reserved, nor to whom the interest was
title. However, the Act provides that marketable granted. Thus, the reservation was general, not
record title is subject to “all interests and defects” specific. The Ericksons appealed to the state
inherent in the chain of title with a key excep- supreme court.
tion: a “general reference” to easements, restric- On appeal, the Ericksons maintained that the
tions, or other interests created prior to the root Act does not require a reservation to include the
of title is not sufficient to preserve that interest name of the owner of a mineral interest in order
unless the general reference also includes “spe- for it to be preserved, and that even in the
cific identification” of the recorded title transac- absence of a specific name in the reservation, a
tion that created the interest. title search would reveal the owner of the reser-
In February 1926, James and Rose Logan con- vation by a review of the chain of title, reading
veyed the surface rights to 139 acres of land in the 1926 deed and searching forward in time.
Guernsey County, Ohio, to Edward Riggs, but Because the owner of the reservation can be
the Logans retained the mineral rights by adding determined through the chain of title, the Erick-
the following language to the deed: “excepting sons contended that it is a specific reference, not
and reserving therefrom all coal, gas, and oil a general reference. The Morrisons argued that
with the right of said first parties, their heirs and under the Act, a title examiner should need to
assigns, at any time to drill and operate for oil review only the language in the root of title and
and gas and to mine all coal.” The Logans ulti- the instruments recorded during the 40 years
mately sold their mineral rights through execu- prior in order to locate any specific references to
tion of a deed specifically referring to the 1926 an interest predating the root of title. Here,
www.appraisalinstitute.org Spring 2021 • The Appraisal Journal 75Cases in Brief
because the prior interest cannot be located sets forth no such rule. Likewise, there is no rule
without a more extensive search and none of the that requires the reference to identify the type of
recorded title transactions within the prior forty interest or its owner. A recitation of a preexisting
years mentioned the Ericksons, they contended interest is not a general reference simply because
the reservation is not a specific reference. it does not name the owner.
The state supreme court reframed the question Here, the transfer of the surface rights does
as whether a reference to a reservation of mineral not contain vague, boilerplate language except-
rights in a surface landowner’s root of title is a ing any reservations that may or may not exist.
general reference that is insufficient to preserve Rather, the root of title was made subject to a
the reservation if it does not name the owner of specific, identifiable reservation of mineral
the reserved rights. rights recited though the chain of title using
The Act was created in 1961 to extinguish the same language as the recorded title trans
stale interests and claims in land that existed action that recorded it. Accordingly, that
prior to the root of title, with the goal of sim reference is sufficient to preserve the reserved
plifying and facilitating land title transactions rights from being extinguished under the Act.
by allowing persons to rely on a record chain The trial court’s judgment for the Ericksons
of title. The court quoted a commentator was reinstated.
who observed that the specific identification
provision in the Act was directed at the com- Erickson v. Morrison
mon conveyancing practice of including in the Supreme Court of Ohio
deed description language like “subject to ease- March 16, 2021
ments and use restrictions of record.” This type 2021 WL 966949
of general provision is probably adequate to
protect the grantor from liability on covenants
for title in a warranty deed, but such a general Adjusting sale for conversion costs makes
reference leaves it unclear whether a prior inter- sale less comparable to subject facility
est in fact exists.
The Act creates a three-step inquiry: (1) Is Detroit Diesel Corporation (Diesel) owns a
there an interest described within the chain of single-user manufacturing facility located pri-
title? (2) If so, is the reference to that interest a marily in Redford Township, Michigan (the
general reference? (3) If so, does the general ref- Township). As of December 31, 2016, Diesel
erence contain a specific identification of a used the property to manufacture powertrains,
recorded title transaction? Here, the answer to diesel engines, and axles for heavy and medium
the first question is yes, because the documents trucks. The facility spanned three million square
in the chain of title state that surface rights in feet; the first million was constructed before
the land are subject to a reservation of mineral World War II, with the remainder expanded
rights. At issue is whether that reference to the piecemeal over time. Despite the facility’s age,
reservation was a general reference. Diesel was using it to conduct modern manufac-
In an earlier case, the Ohio court declined to turing activities, having made improvements to
establish a bright-line rule that an interest is pre- the real estate. Nevertheless, large portions of
served only if the reference to it includes either the facility were not up to modern standards.
the volume and page where the interest was cre- For the 2017 tax year, the Township deter-
ated or the date it was recorded, because the Act mined the true cash value of the property to be
76 The Appraisal Journal • Spring 2021 www.appraisalinstitute.orgCases in Brief $41 million. Diesel challenged that value as sales for single-user manufacturing. The Town- excessive, filing an appeal with the Michigan ship argued that Diesel’s appraiser’s conclusion Tax Tribunal. was generic industrial use, rather than specific. At trial, Diesel offered the testimony of an The Tribunal noted that it was generally unsat- appraiser who explained that very few users were isfied and unpersuaded by the appraisers’ sale in the market for a three-million-square-foot comparables. But taking a global view of the complex. Many automakers had shut down their testimony, the Tribunal found that multitenant plants in Michigan, and while there was demand use is the most frequent use for large manufactur- for this type of building from warehouse and ing facilities, given that nine of eleven of Diesel’s distribution companies, a plant like the subject comparable sales were converted to multitenant property would most likely be purchased for use after sale and that five of eight of the Town- industrial redevelopment or conversion to a ship’s sales were already multitenant at the time multitenant space. Accordingly, Diesel’s appraiser of sale. But because the cost of converting a concluded that the highest and best use of the three-million-square-foot, single-user building property was for “industrial development.” would be substantial, the Tribunal found that Based on that determination, the appraiser the highest and best use of the property was identified and adjusted four sales of manufactur- “industrial use,” not solely single-use manufac- ing plants with over one million square feet and turing as the Township had advocated. located in the Midwest. All four sales were of for- For various reasons, the Tribunal rejected most mer automotive plants, and the appraiser adjusted of the parties’ comparable sales, but concluded for differences in market conditions, size, loca- that Diesel’s first sale comparable was a good tion, ceiling height, and age, among other fac- indicator of the subject’s value. After adjusting tors. He also considered seven supplemental that sale, the Tribunal concluded that Diesel’s sales. He concluded to a value of $9.41 million property had a total value of $18 million. The for the subject property. Township appealed. The Township’s appraiser argued that high On appeal, the Township argued that the Tri- demand existed for industrial space, driven by bunal erred in finding that industrial use— the auto industry as well as ecommerce and tech encompassing both single-use and multi-use—was companies. He concluded that the property’s the highest and best use of the property. Accord- highest and best use was a continuation of single- ing to the Township, that conclusion was legally user manufacturing, opining that conversion of erroneous and not supported by substantial evi- the property was not feasible. He identified four dence. The court of appeals was not persuaded. sales, only one of which was over one million The Township first argued that it was inconsis- square feet. Further, three of the properties were tent for the Tribunal to adopt industrial use as multitenant properties, two of the sales were the highest and best use because the Tribunal leased fee transfers, and another was purchased rejected single-user manufacturing—a subcate- by a long-term tenant. He also considered four gory of industrial use—as the highest and best supplemental sales, but he arrived at an opinion use. The court found this argument misplaced, as of value of $50 million. it was clear the Tribunal was rejecting single-user At the close of evidence, Diesel argued that manufacturing as the one and only highest and the Township’s highest and best use conclusion best use, but not rejecting a highest and best use was not supported by its own appraiser’s compa- conclusion that encompassed single-user manu- rables, because the majority of them were not facturing. Moreover, the focus of the highest and www.appraisalinstitute.org Spring 2021 • The Appraisal Journal 77
Cases in Brief
best use analysis is the identification of the most Equitable partition of co-owned land
profitable use of the property going forward so can be divided collectively among groups
long as there is market demand for that use. This of owners
does not necessarily mean, however, that the
identified use will always produce the same sale Leonard and Linda Smith (the Smiths) and their
price in every circumstance. four children—Lynden, Jaclyn, Sarah, and
The Township also argued that no evidence Lucas—are co-owners of 4,972 acres of land in
supported the conclusion that multitenant use Sheridan County, Nebraska, which they inher-
was financially feasible. Diesel’s appraiser did not ited from Linda’s parents. The shared land is
account for those costs in his appraisal, and, made up of three noncontiguous parcels. Two
according to the Township, without discussion parcels are 46% owned by Linda, with each child
of specific conversion costs for the infinite com- owning 13.5%. The third parcel, consisting
binations of potential conversions, there is no largely of pastureland, is 32.5% owned by the
substantial evidence to support a conclusion that Smiths in common, with the remainder divided
conversion is financially feasible. equally among Linda and the four children.
The court rejected this argument, noting that In 2017, three of the Smiths’ children, Appel-
the Township “wrongly assumes” that a robust lants Lynden, Jaclyn, and Sarah, filed a shared
discussion of conversion costs was necessary. complaint for partition of the co-owned land,
Diesel showed that conversion was financially seeking that the property be partitioned and
feasible through its comparable sales analysis, divided among its owners in kind and if it
which specifically identified multiple older, large cannot be partitioned in kind, then that it be
single-user manufacturing facilities sold for con- sold, with the net proceeds divided accordingly.
version to multitenant industrial use. Further- The Smiths and son Lucas (Appellees) filed a
more, conversion costs would not be a relevant shared answer, conceding that partition of the
adjustment to calculating the property’s value, co-owned land was necessary and appropriate
since the comparable relied on by the Tribunal and requesting that a referee be appointed. The
was a price before conversion to multitenant use. trial court appointed a referee to recommend
The subject has not been converted to multi whether the property could be partitioned in
tenant use. Adjusting that sale for conversion kind without great prejudice to the owners or
costs would make it less comparable, not more whether the property should be sold and the pro-
comparable, to the subject. ceeds divided.
In sum, the court found that material and The referee inspected the property and opined
substantial evidence supported the Tribunal’s that partition in kind could not be made without
findings and conclusions. Therefore, its decision great prejudice to the owners. Appellees filed an
was affirmed. objection to the referee’s report, alleging that the
sale of the property would work a serious and
Detroit Diesel Corp. v. Redford Township unique hardship on the Appellees given their
Michigan Court of Appeals investment in the property and its location adja-
January 21, 2021 cent to other property owned by the Smiths.
2021 WL 218311 The purpose of partition is to provide owners
with separate and exclusive possession of their
portion of co-owned land. Partition in kind phys-
ically divides the property, whereas partition by
78 The Appraisal Journal • Spring 2021 www.appraisalinstitute.orgCases in Brief sale involves the division of sale proceeds. There The court of appeals agreed that such a remedy is a strong presumption in favor of partition in should be rarely used and only when it is equita- kind if feasible and equitable. bly necessary, but that under a court’s equitable During trial, most of the family testified. powers, a court can divide property between two Appellants and Appellees both called an expert groups of owners. It said that this case was “one witness to testify regarding the feasibility of par- of the rare situations which warrants a partition titioning the co-owned land in kind. Leonard in kind” collectively between the Appellants proposed a division that would give Appellants and Appellees. 1,880 acres of the total acreage; while that was First, the Appellants clearly aligned their not equal to the Appellants’ collective 40.5% interests, acting as a unit through the proceed- interest by acreage, it would provide them with ings and, at least implicitly, indicating a collec- their collective share of the value of the co-owned tive desire to partition by sale. Additionally, land. The Appellees also called an appraiser who partition by sale would create a significant hard- calculated the value of each of the three parcels ship for Appellees, especially because Leonard and opined that the land could be fairly parti- and Linda own land which borders the co-owned tioned between Appellees collectively and property and because their ranching and farming Appellants collectively. operations have been in place on the property for For the Appellants, Jaclyn testified that she did decades. By dividing the land in kind collectively not want a collective share of the land, because between the two groups, the trial court awarded then another partition action would have to be Appellees sufficient land to keep their operation initiated, and she did not want to be legally running, while giving Appellants more than bound to the other family members. The Appel- their fair share of the value of the land to sell. lants also called their own appraiser who valued The appraisers concluded the land was very mar- each parcel, but applying the Appellees’ division ketable, and the Appellants could sell the land using his values would yield only 35.75% of the awarded them and obtain more than their 13.5% total value, versus their 40.5% interest in the individual share of the total value of the land. land. That would be an inequitable result. This was precisely what they sought in their par- The court entered an order sustaining the tition action and at trial. Appellees’ objection to the referee’s report and Because collective division between groups of ordering an in-kind division of the property such co-owners is within the powers of the trial court, that Appellants collectively received 41.17% of and here such an approach resulted in an equita- the total value of the property. While partition ble outcome, the court of appeals affirmed the in kind may be difficult in this case, the court trial court’s decision to partition the land in kind concluded that an equitable division was not rather than to order the sale of all of the land. impossible, and a forced sale would not advance the interests of most of the family. The Appel- Smith v. Smith lants appealed. Nebraska Court of Appeals The Appellants challenged the trial court’s March 16, 2021 authority to order partition in kind such that 957 N.W.2d 511 co-owned land is divided collectively between two groups of owners. They argued that partition in kind can only be achieved by awarding each owner his or her individual share of the land. www.appraisalinstitute.org Spring 2021 • The Appraisal Journal 79
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