The Appraisal Journal SUMMER 2020
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The
Appraisal
Journal
SUMMER 2020
Volume LXXXVIII, Number 3
F Perspectives
on
the Assembled Workforce
in Real Property Valuation
by Kimberly K. Merriman, PhD, and
Leonard J. Patcella, MAI
PAGE 166
Is the Eiffel Tower Worth More
Than the Statue of Liberty?
Techniques for Determining
the Value of Iconic National
Landmarks, Part II
by Richard J. Roddewig, JD, MAI,
Anne S. Baxendale, and J. Andrew Stables
PAGE 179
Timing Is Everything:
The Role of Interim Use
in the Highest and Best
Use Conclusion
by David C. Lennhoff, MAI, SRA, AI-GRS,
and Richard L. Parli, MAI
PAGE 198Contents
The Appraisal Journal | Summer 2020 | Volume LXXXVIII, Number 3
ii Mission Statement
iv New Appraisal Institute Publications
COLUMNS & DEPARTMENTS
153 Cases in Brief
Recent Court Decisions on Real Estate and Valuation
by Benjamin A. Blair, JD
206 Resource Center
Exploring Residential Property Dynamics:
Commentary on Residential Property Appraisal
by Dan L. Swango, PhD, MAI, SRA
216 Letters to the Editor
PEER-REVIEWED ARTICLES
166 Perspectives on the Assembled Workforce in Real Property Valuation
by Kimberly K. Merriman, PhD, and Leonard J. Patcella, MAI
Is the Eiffel Tower Worth More Than the Statue of Liberty? Techniques
179
for Determining the Value of Iconic National Landmarks—Part II
by Richard J. Roddewig, JD, MAI, Anne S. Baxendale, and J. Andrew Stables
198 iming Is Everything: The Role of Interim Use
T
in the Highest and Best Use Conclusion
by David C. Lennhoff, MAI, SRA, AI-GRS, and Richard L. Parli, MAI
ANNOUNCEMENTS
224 Appraisal Institute Online Education
225 Article Topics in Need of Authors
226 Statement of Ownership
227 Manuscript Guide
228 Appraisal Journal Order Form
COVER PHOTO: Maskot via Getty Images
www.appraisalinstitute.org Summer 2020 • The Appraisal Journal iThe Appraisal Journal
Published by the Appraisal Institute
Jefferson L. Sherman, MAI, AI-GRS, President
Rodman Schley, MAI, SRA, President-Elect
Pledger M. “Jody” Bishop III, MAI, SRA, AI-GRS, Vice President
Stephen S. Wagner, MAI, SRA, 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). © 2020 by the Appraisal Institute, an Illinois Not-for-Profit Corporation
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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
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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.
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readers are responsible for obtaining such advice or services from appropriate professionals.
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The Appraisal Institute advances professionalism and ethics, global standards, methodologies, and practices through the professional development of property
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ii The Appraisal Journal • Summer 2020 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 Barry A. Diskin, PhD, MAI, AI-GRS, Florida State University Gregory J. Accetta, MAI, AI-GRS, Providence, Rhode Island Donald R. Epley, PhD, MAI, SRA, University of South Alabama Anthony C. Barna, MAI, SRA, Pittsburgh, Pennsylvania Jeffrey D. Fisher, PhD, Indiana University C. Kevin Bokoske, MAI, AI-GRS, AI-RRS, Ft. Lauderdale, Florida Terry V. Grissom, PhD,* University of Missouri–Kansas City George Dell, MAI, SRA,* San Diego, California Thomas W. Hamilton, PhD, MAI,* Roosevelt University Stephen F. Fanning, MAI, AI-GRS,* Denton, Texas William G. Hardin III, PhD, Florida International University Kenneth G. Foltz, MAI, SRA, Wesley Chapel, Florida Lonnie W. Hendry Jr., Texas Tech University Jack P. Friedman, PhD, MAI, SRA, Chicago, Illinois Mark Lee Levine, PhD, JD, MAI, University of Denver Brian L. Goodheim, MAI, SRA, Boulder, Colorado Kenneth M. Lusht, PhD, MAI, SRA,* Florida Gulf Coast University, Robert M. Greene, PhD, MAI, SRA, AI-GRS, Olympia, Washington Penn State University John A. Kilpatrick, PhD, MAI, Seattle, Washington Mark E. Moore, PhD, Texas Tech University S. Warren Klutz III, MAI, SRA, AI-GRS, Bristol, Tennessee Barrett A. Slade, PhD, MAI, Brigham Young University Douglas M. Laney, MAI, Tucson, Arizona Brent C Smith, PhD, Virginia Commonwealth University Mark E. Mitchell, MAI, AI-GRS, Louisville, Kentucky Mark A. Sunderman, PhD, University of Memphis Dan P. Mueller, MAI, St. Paul, Minnesota Grant I. Thrall, PhD, University of Florida Nathan Pomerantz, MAI, Rehovot, Israel Alan Tidwell, PhD, University of Alabama Rudy R. Robinson III, MAI, Austin, Texas H. Shelton Weeks, PhD, Florida Gulf Coast University David J. Sangree, MAI, Cleveland, Ohio John E. Williams, PhD, Morehouse College John A. Schwartz, MAI, Denver, Colorado Elaine M. Worzala, PhD, College of Charleston Melanie Sieger, MAI, AI-GRS, Chevy Chase, Maryland Dan L. Swango, PhD, MAI, SRA, Tucson, Arizona James D. Vernor, PhD, MAI, Atlanta, Georgia The Appraisal Journal Academic Review Panel Tim Allen, PhD, Florida Gulf Coast University Anjelita Cadena, PhD, University of North Texas Peter F. Colwell, PhD, University of Illinois François Des Rosiers, PhD, Laval University *Statistics Work Group member www.appraisalinstitute.org Summer 2020 • The Appraisal Journal iii
Cases in Brief
by Benjamin A. Blair, JD
Recent Court Decisions on Real Estate
and Valuation
Unadjusted sales of leased properties part of a portfolio and a Section 1031 exchange,
are not comparables in property tax which the appraiser explained would affect the
valuation of grocery store parties’ motivations in negotiating a sale price.
In response, the PVA’s chief deputy explained
Kroger is a grocery store chain that owns, in fee that he relied on Kroger’s actual construction
simple, a parcel of land and improvements in costs in setting the assessment, but that he also
Georgetown, Kentucky. The property consists identified sales of purportedly comparable prop-
of 12 acres of land and a 130,000-square-foot erties. He did not make adjustments to account
retail building primarily occupied by a Kroger for vacancy or occupancy at the time of the sale,
grocery store. because, in the chief deputy’s opinion, the sale
For the 2015 tax year, the Scott County Prop- price represents each property’s fair market value
erty Valuation Administrator (PVA) valued the and thus no adjustment was needed.
property at $15.2 million. Kroger disputed this The Board entered a final order upholding the
valuation, initially seeking review with the PVA’s assessment, because the PVA’s sales were
County Board of Assessment Appeals, then with transactions of occupied properties, which the
the state Board of Tax Appeals (Board). Kroger Board found to be more comparable to the sub-
asserted that the PVA’s valuation was arbitrary, ject property than Kroger’s vacant property sales
because it was not based on admissible evidence from outside Kentucky. Kroger appealed to the
of value and was improperly based on a value-in- county circuit court, which denied the appeal,
use methodology. In opposition, Kroger offered and then to the court of appeals.
an appraisal opinion of fair cash value of $6.7 On appeal, Kroger argued that there was insuf-
million—$4.1 million for the improvement and ficient evidence to support the Board’s final
$2.6 million for the land. Kroger’s appraiser used order. Kroger contended that the PVA’s use of
the sales comparison and income approaches to unadjusted sales of leased properties and original
value the property. construction costs did not constitute substantial
Before the Board, Kroger’s appraiser explained evidence, and that Kroger’s appraiser had
that he valued the property at its fair market explained why each sale was not a reliable indi-
value for the fee simple title because no lease cator of the property’s value. The court of appeals
was in place. Therefore, he searched for sales of agreed with Kroger.
properties being sold in fee simple and large The court observed that all of the PVA’s com-
enough to be comparable to the grocery store. parable sales were subject to leases. A lease has
Although those properties were primarily out- its own value. Under prior case law, the fair mar-
side the local area, they were all sales of large ket value of a leasehold could be ascertained by
single-occupant properties. subtracting the fair market value of the land if
Kroger’s appraiser also addressed the compara- sold subject to the lease from the fair market
ble properties provided by the PVA. Those prop- value of the land as if sold free and clear of the
erties, according to the appraiser, were purchased lease. Furthermore, additional information is
subject to a lease, rather than in fee simple. Also, needed to value properties with leases, including
the PVA’s comparables included properties sold as the terms of the lease, requirements for mainte-
www.appraisalinstitute.org Summer 2020 • The Appraisal Journal 153Cases in Brief
nance and improvements, fixed or percentage the tennis facilities with two eleven-story residen-
rent, length and duration of the lease, options for tial buildings. The City was dissatisfied with the
increases or decreases, and “the type of tenants proposed changes and attempted to block Ship-
and his financial stability.” yard from moving forward. Notwithstanding the
Because the PVA did not introduce any evi- City’s opposition, the state Department of Envi-
dence to apply the necessary adjustments to the ronmental Protection issued a waterfront develop-
sales of leased properties, the court agreed with ment permit to Shipyard.
Kroger that the evidence it presented to counter Following several lawsuits and administrative
the PVA’s assessment compels a finding that the proceedings, the planning board voted to deny
property was overvalued. As Kroger’s appraiser Shipyard’s new application without holding a
explained, each of the sales the PVA relied on hearing. Shipyard filed suit seeking automatic
was not truly comparable to the subject property. approval of its application under the Municipal
Therefore, those sales could not provide a basis Land Use Law (MLUL), and a trial court agreed
for the PVA’s assessment, and the circuit court with Shipyard that the failure of the board to
erred in affirming the Board’s final order. hold a hearing compelled automatic approval of
The court of appeals reversed the Board’s deci- the plans. This decision was upheld on appeal.
sion and remanded the case for reconsideration In late 2013, while these proceedings were
of the proper assessment using proper evidence. pending, the City passed two ordinances affect-
ing Shipyard’s proposed plans. The first was a
Kroger Ltd. P’ship I v. Jenkins zoning ordinance that prohibited new construc-
Kentucky Court of Appeals tion or substantial improvement of existing
July 17, 2020 structures on piers or platforms projecting into
No. 2019-CA-001133-MR the river. The second, passed under the City’s
police powers, required all construction to be
“landward of the mean high tide” except for port
Approved final development plan and shipbuilding facilities and “open space and
not subject to ordinances that have outdoor passive and active recreational uses.”
the effect of a zoning change Shipyard’s pier was seaward of the mean high
tide, and its proposal would not satisfy either of
Shipyard Associates LP (Shipyard) owns several these permitted uses.
pieces of waterfront property abutting the Hudson Shipyard filed suit challenging the City’s pro-
River in Hoboken, New Jersey (City). In 1997, posed application of the ordinances to its
the City Planning Board approved Shipyard’s pro- approved plans. Shipyard argued that the prior
posal to develop several luxury high-rise apart- appellate decision finalized its application,
ment buildings, commercial retail units, parking thereby insulating it from any zoning ordinances
garages, a park, and a waterfront promenade on passed within two years of its final approval, by
the property. The proposal also included three operation of the MLUL. The City, in response,
tennis courts and a tennis pavilion available to the argued that the second ordinance was a general
fee-paying public, which would be built on a plat- environmental regulation, not a zoning ordi-
form extending into the river. Shipyard developed nance, and therefore not subject to the two-year
most of the property in substantial accordance protection. In 2017, the trial court agreed with
with the agreement. But in August 2011, Shipyard Shipyard, finding that the ordinance was func-
filed an application with the planning board seek- tionally a zoning ordinance because it funda-
ing to amend the site plan approval and replace mentally changed the zoning of the land where
154 The Appraisal Journal • Summer 2020 www.appraisalinstitute.orgCases in Brief the project was to be built. The City appealed. for two years against even those changes in zoning On appeal, the City emphasized that it had pertaining to public health and safety, the court enacted the ordinance under its police power concluded that the two-year period of protection to amend the City’s flood-damage-prevention had been tolled while the litigation progressed. requirements, not the zoning requirements, and Therefore, the court concluded that the City that therefore the two-year protection did not could not use either of the ordinances to amend apply. In response, Shipyard emphasized that the the zoning requirements for Shipyard’s project. ordinance established a new permit requirement and contained provisions regulating construc- Shipyard Associates LP v. City of Hoboken tion, utilities, subdivisions, and new develop- New Jersey Supreme Court ment, and thus, no matter what the City called May 5, 2020 it, the ordinance operated as a zoning ordinance 230 A.3d 278 and subverted the two-year protection. The court agreed that zoning is a police power vested in the legislative branch, but that the Home renovation breach of contract MLUL assigned zoning powers to municipalities award may include both out-of-pocket so they could regulate land development in a and benefit-of-the-bargain damages manner that promotes public health, safety, and welfare. But in evaluating an ordinance, the Justin Moore could not afford a home in the San court considers not only how the city character- Francisco neighborhoods he preferred. He con- izes it, but also how the ordinance functions in tacted Richard Teed, a real estate agent who pro- practice. Here, the court agreed with Shipyard moted himself as a building contractor with an that the ordinance was a zoning ordinance. extensive background in historic renovations Before the enactment, Shipyard could build resi- and quality construction. Teed told Moore that dential high-rises on the pier, but the ordinance he could locate a lower-priced fixer-upper home eliminated any possibility of moving forward in a choice neighborhood and renovate it in a with the project. It was thus a fundamental cost-effective manner. After touring examples of change to the zoning of the land. other homes Teed had renovated, Moore retained The City also argued, in the alternative, that Teed as his real estate agent. the MLUL contains various exceptions for the In May 2011, Moore bought a large fixer-upper application of regulations pertaining to public for $4.8 million. Moore borrowed significantly health and safety. The City thus suggested that from his father and a bank to purchase the house, the court read the public health and safety excep- and Teed received a commission on the sale. tions into the two-year protection, which was in Teed proposed renovating the basement to cre- a different section of the statute. The court ate a “below-ground floor Grade A living space,” declined such a reading. Because the legislature as well as modernizing and expanding other included public health and safety exceptions rooms in the house. Teed and Moore had only in the sections applying to preliminary in-depth discussions about the costs of construc- approvals, not final approvals, the court inter- tion. Moore expected that for $900,000, Teed preted the plain language of the statute as con- would deliver the home renovated to the same templating greater protections for developers at high-end standard as the other projects they had successive stages of the approval process. toured. The parties did not sign a written con- Having determined that the MLUL provided tract, but Moore nonetheless believed the par- the holder of a final approval with vested rights ties had an oral agreement. www.appraisalinstitute.org Summer 2020 • The Appraisal Journal 155
Cases in Brief
Based on his interactions with Teed and Teed’s purchases of real estate. The court of appeal
promotional materials, Moore believed Teed was found no merit to these contentions.
a general contractor in addition to a real estate There are two measures of damages for fraud:
agent. In fact, Teed was not a licensed contractor. out-of-pocket and benefit-of-the-bargain. Out-
Teed’s team gutted large parts of the house and of-pocket damages are intended to restore the
built a defective foundation that lacked water- plaintiff to the financial position enjoyed prior
proofing despite the property’s high water table. to the fraudulent transaction, awarding the
After Moore became aware of the defects, he difference in actual value at the time of the
halted all work on the project, and his father transaction between what the plaintiff gave and
engaged consultants who concluded that the what he received. Benefit-of-the-bargain dam-
foundation had to be torn out and replaced. ages are concerned with putting the plaintiff
Moore hired a new architect and contractor who in the position he would have enjoyed if the
completed the promised work at a much higher false representation relied upon had been true.
cost than Teed had estimated. Teed contended that these two types of damages
In August 2013, Moore filed suit against Teed. cannot both be awarded on a tort claim, but
Moore alleged that he was fraudulently induced the court concluded that where the defrauding
to purchase and renovate the property based on party has a fiduciary duty to the victim of fraud,
false representations. Moore eventually expanded a broader measure of damages than just out-of-
the renovation beyond what Teed had originally pocket losses may be awarded.
proposed at a cost of $9 million, but Moore did Teed also argued that the benefit-of-the-bar-
not seek damages for those additions. gain damages award was improper because the
At trial, Moore offered the testimony of a con- scope of the promised work and the actual value
struction cost estimator who opined that Teed’s received were not definite and concrete. Accord-
estimates had been unrealistically low and that ing to Teed, Moore’s damages were too specula-
construction costs had increased in the time it tive because the project that Teed said would
took to replace the foundation. Moore sought cost $900,000 was never built due to extensive
damages in the amount of the difference between revisions Moore made to the plans over time.
Teed’s promised renovation cost of $900,000 and Teed also argued that the cost estimation expert
the estimated $4.47 million cost to do that work. could not re-create the cost of building such a
Teed argued that there was no promised remodel, project under 2011–2012 rates, and the estima-
and that Moore’s alleged damages did not repre- tor had not relied on the actual costs to com-
sent any loss that was actually sustained by plete the project. On both arguments, the court
Moore. The jury found for Moore on most of his disagreed with Teed. The court concluded that
claims, awarding “benefit-of-the-bargain” dam- the estimator’s testimony established the pro-
ages of $900,000 and out-of-pocket damages of jected costs with reasonable certainty, based on
$822,904 for the actual cost to replace the foun- floor plans and specifications directly tied to
dation, plus additional damages for delay and Teed’s original proposal. The jury’s award was
attorney fees. Teed appealed. thus not improperly speculative, and the court
Teed challenged the damages award on several affirmed the jury’s award of damages.
grounds. First, he claimed that benefit-of-the-bar-
gain damages cannot be awarded alongside out- Moore v. Teed
of-pocket damages as a matter of law and that California Court of Appeal, First District
benefit-of-the-bargain damages are not a permis- April 24, 2020
sible form of recovery for fraud actions involving 48 Cal. App. 5th 280
156 The Appraisal Journal • Summer 2020 www.appraisalinstitute.orgCases in Brief
Property appurtenant to golf course The parties agreed that the easement met the
qualifies for conservation easement requirement that the restriction be granted in
deduction perpetuity, and they agreed that the Trust was a
qualified organization. There also was no ques-
Pollard Land Company bought over 2,000 unde- tion that the protection of “a relatively natural
veloped acres along the Savannah River north habitat of fish, wildlife, or plants” and the “preser-
of Augusta, Georgia. In 2002, Pollard conveyed vation of open space… for the scenic enjoyment
463 acres of the land to Champions Retreat Golf of the general public” constitute conservation
Founders LLC (Champions). On the land, purposes. The parties disagreed, however, about
Champions built a golf course consisting of three whether the contribution was made exclusively
nine-hole courses, each designed by a celebrated for those conservation purposes.
professional golfer. The course opened in 2005 The Internal Revenue Code allows a deduction
and remains a private course open only to club for an easement contributed for the protection of
members and their guests. a habitat for rare, endangered, or threatened spe-
The golf course occupies roughly two-thirds of cies or if the easement contributes to the ecologi-
the 463 acres. Champions also sold 66 homesites cal viability of a nearby national forest. These
on 95 acres on the west side of the course, away standards apply despite the presence of a golf
from the Savannah River. Thus, roughly 57 acres, course on part of the property.
consisting of bottomland forests and wetlands, The IRS’s expert agreed that many birds use
remains undeveloped. This includes land on an the property but explained that the habitat itself
island in the river that consists of both undevel- is not “relatively natural” on account of the fair-
oped land and six holes of the golf course. ways and greens, which consist of non-native
The property is home to several species of birds, grasses. But the court observed that the birds do,
some of which are rare, and to the regionally in fact, live on the property and “apparently find
declining southern fox squirrel, and to rare plant the habitat quite suitable.” Furthermore, while
species. Although the land is not accessible to the the golf course itself is comprised of non-native
public, the property is observable to members of grasses, the remainder of the easement property is
the public who kayak or canoe on the river. natural and includes a rare species of plant. The
In 2009, the Champions golf course was strug- court held that the IRS offered no theory why
gling financially. After hearing of another case protecting that plant is not an appropriate con-
involving a deduction for conservation ease- servation purpose. In total, the court agreed with
ments over golf course property, Champions con- Champions that the easement protected “a rela-
tributed a conservation easement to the North tively natural habitat of fish, wildlife, or plants”
American Land Trust (Trust). The easement consistent with the statutory requirements.
covers 348 acres, including both the undevel- The IRS also argued that the land was not
oped land and the golf course and driving range, open to the general public, and thus could not be
but not the golf course buildings or homesites. used for the scenic enjoyment of the property.
The Champions easement runs to the bank of The relevant regulation explains that preserva-
the Savannah River; on the other side, 700 feet tion of land may be for the scenic enjoyment of
away, is a large national forest. Champions the public if development of the property would
claimed a charitable deduction for the contribu- impair the scenic character of the land or would
tion, but the Internal Revenue Service (IRS) dis- interfere with a scenic panorama that can be
allowed the deduction. The tax court upheld the enjoyed from a park, nature preserve, road, or
IRS’s decision, and Champions appealed. waterbody that is open to or used by the public.
www.appraisalinstitute.org Summer 2020 • The Appraisal Journal 157Cases in Brief
Indisputably, members of the public canoe and County actually owned the improvements. Fol-
kayak alongside and through the easement. And lowing briefing, the state tax court concluded
while the golf course itself might not provide sce- that Sky Ranch owned the improvements and
nic enjoyment, the natural areas covered by the upheld the tax. Sky Ranch appealed.
easement do, and the golf course detracts little, if In Arizona, the general rule is that a permanent
at all, from that visibility. Ultimately, therefore, structure placed upon and attached to the realty
the court concluded that the record established by a tenant is real property belonging to the les-
that Champions was entitled to a deduction in sor. Parties may alter this rule, however, by specif-
the proper amount. Because the tax court upheld ically agreeing to treat the improvements as
the IRS’s disallowance of the deduction, the tax owned by the lessee. The question was whether
court did not address the amount of the deduc- Sky Ranch’s ownership of the improvements
tion, so the court remanded the case for the tax during the term of the lease qualified as owner-
court to address that issue. ship of the improvements for assessment purposes.
Sky Ranch cited several cases which held that
Champions Retreat Golf Founders LLC v. lessors owned improvements built by the lessees,
Commissioner of IRS but the court observed that the lease agreements
Eleventh Circuit Court of Appeals in those cases did not expressly recognize that
May 13, 2020 the lessee would own the improvements for the
959 F.3d 1033 term of the lease.
Beyond that “plain term” in the lease, the lease
confirmed that Sky Ranch enjoyed the tradi-
Assessment of taxes on lessee-owned tional rights of control and disposition of
improvements is proper regardless of improvements, for example by preserving Sky
exempt lessor’s revisionary interest Ranch’s right to convey or encumber its interest
in all buildings situated on the leased premises.
Yavapai County, Arizona, (County) owns and And Sky Ranch had relied on that language to
leases land to the Sedona Oak Creek Airport offer the improvements as collateral under a loan
Authority (Airport Authority) to operate the agreement. To the court, this supported the con-
Sedona Airport. In 1982, the Airport Authority clusion that the parties intended the lease to
subleased several acres to Sky Ranch Operations abrogate the general ownership rule and provide
LLC (Sky Ranch), on which Sky Ranch would that Sky Ranch owns the improvements.
build and operate a lodge and resort. The sub- As further evidence that Sky Ranch owns the
lease has been extended through 2050. improvements, the County noted that the lease
The Sky Ranch sublease provides that all extended to the “premises,” which is described as
buildings installed by the lessee “shall be and only the raw land. Although a lease extending
remain the property of Lessee during the term of only to land is “unremarkable” when no improve-
this lease” but that upon termination of the lease, ments had been built, the present lease had been
all buildings would become the property of the amended three times since the improvements
Airport Authority and the County. were constructed, yet the lease description
For the 2016 and 2017 tax years, the County remained the same.
assessed and taxed Sky Ranch for the resort Finally, Sky Ranch argued that its interest was
buildings as improvements on possessory rights. merely a leasehold interest in the improvements
Sky Ranch sought a refund of the taxes paid, because the County owns the improvements
arguing that the taxes were illegal because the when the lease terminates. But the court con-
158 The Appraisal Journal • Summer 2020 www.appraisalinstitute.orgCases in Brief
cluded that a lessor’s reversionary interest in them. But AAHP’s failure to act within 45 days
improvements did not determine who presently of receipt of a proposed change would be deemed
owned the improvements. And since the lease an approval of the change, and Hoffman would
here expressly granted a present ownership inter- be permitted to undertake the proposed activity.
est in the improvements to Sky Ranch, the rever- Based on the language of the donation agree-
sion provision does not control. ment, the Internal Revenue Service concluded
Because the court agreed that Sky Ranch owned that Hoffman was not entitled to a deduction.
the improvements on leased ground, it affirmed The tax court agreed, holding that Hoffman’s
the tax court’s decision. Accordingly, because Sky donation did not qualify for a deduction because
Ranch owned the improvements, the assessment it was not “exclusively for conservation pur-
of taxes on those improvements was proper. poses.” Hoffman appealed.
As a general rule, the Internal Revenue Code
Sky Ranch Operations LLC v. Yavapai County does not allow taxpayers to take a charitable
Arizona Court of Appeals deduction for a donation of a partial interest in
May 12, 2020 property, like an easement. But qualified conserva-
2020 WL 2393785 tion contributions are an exception to that general
rule. To qualify, the donation must be “exclusively
for conservation purposes,” a term which includes
For qualified tax deduction, the preservation of historic buildings.
donation must be for conservation Among the requirements for a donation to be
purposes in perpetuity considered exclusively for conservation purposes
is that the donation must protect the conserva-
Hoffman Properties owns the historic Tremaine tion purposes in perpetuity. To satisfy this require-
Building in Cleveland, Ohio. In the mid-2000s, ment, the donation must be enforceable in
Hoffman donated an easement in the facade of perpetuity, meaning that it must include legally
the building, as well as certain airspace restric- enforceable restrictions that will prevent the
tions, to the American Association of Historic donor from using its retained interest in the
Preservation (AAHP). Through a written dona- property in a way that is inconsistent with the
tion agreement, Hoffman agreed not to alter the donation’s conservation purposes.
historic character of the facade or to build in the The court of appeals observed that the dona-
airspace. Hoffman treated the donation as a qual- tion agreement gives AAHP a 45-day window in
ified conservation contribution, and claimed a which to prevent certain changes to the facade
$15 million tax deduction for its donation. or airspace. If AAHP were to miss that window
The donation agreement described certain for any reason, it would lose the ability to stop
actions that Hoffman could take as long as Hoffman from making the change. The court fur-
AAHP approved, which the parties referred to as ther noted the “world of difference” between
“conditional rights.” Hoffman reserved the right restrictions that are enforceable in perpetuity
to alter, reconstruct, or change the appearance of and those that are enforceable for only 45 days.
the facade contrary to the regulations of the Sec- Hoffman offered an alternative theory of the
retary of the Interior on the rehabilitation of his- perpetuity requirement, namely that the restric-
toric buildings. Under the agreement, if Hoffman tions are perpetual because the restrictions them-
sought to act upon this right, it was required to selves will always be a part of the agreement. The
submit the proposed changes to AAHP, which court dismissed this theory because the Internal
would review them and either approve or reject Revenue Code is not concerned about the mere
www.appraisalinstitute.org Summer 2020 • The Appraisal Journal 159Cases in Brief
existence of restrictions; rather, it requires that restriction agreements (LURA) made between
the donation protect the conservation purposes Poplar Bluff and the Missouri Housing Develop-
in perpetuity. Once the 45-day provision is trig- ment Commission (MHDC). The terms of the
gered, Hoffman’s donation no longer protects the LURA state that restrictive covenants governing
historical character of the building. use and occupancy run with the land and bind
The court also distinguished Hoffman’s dona- subsequent owners of the properties for the terms
tion agreement from other cases where courts of the agreements. The mandatory compliance
have upheld tax deductions for similar dona- period for both properties was fifteen years, plus an
tions. In those cases, the parties included clauses extended low-income use period of fifteen years.
that allowed the donee to give its consent to Under the terms of the LURA, the properties
changes in the facade or to abandon some or all had to be rented to qualified low-income ten-
of its rights in the donation. Those terms are ants, and rent could not be increased without
consistent with the perpetuity requirement prior approval of MHDC and subject to limita-
because “any donee might fail to enforce a con- tions. The properties could also not be sold with-
servation easement, with or without such a out the consent of MHDC.
clause.” But the court noted that Hoffman’s The county assessor assessed the properties at
45-day clause goes much further. It does not sim- values between $2.4 million and $3.6 million for
ply allow AAHP to abandon the protections in the 2009, 2011, and 2013 tax years. Poplar Bluff
the agreement; it divests AAHP of the power to appealed and requested review by the State Tax
enforce the protections if it fails to act within a Commission. At trial, two appraisers testified on
limited window of time. Accordingly, the dona- behalf of the assessor and two appraisers testified
tion was not considered to be exclusively for on behalf of Poplar Bluff. The main distinction
conservation purposes in perpetuity, and the between the appraisers’ methodologies was
court of appeals affirmed the tax court’s denial of whether or not they considered the LURA while
the deduction. preparing their appraisals. The assessor rejected a
valuation approach that relied on actual income
Hoffman Properties II, LP v. and expenses. To the assessor, the owner’s deci-
Commissioner of Internal Revenue sion to enter into LURA was a choice made
Sixth Circuit Court of Appeals when deciding to own low-income housing, and
April 14, 2020 assessors are to value the property, not the busi-
956 F.3d 832 ness of the owner.
Both of the assessor’s appraisal witnesses testi-
fied that they looked at market income levels and
Deed restriction for below-market rent did not consider the restrictions on the property.
should be considered in market value The first appraiser evaluated Poplar Bluff’s prop-
appraisals erty rights as an owner of the fee simple title under
the hypothetical condition that no government
Poplar Bluff Associates LP (Poplar Bluff) devel- contracts were in place. The second appraiser did
oped two housing complexes funded by low- not consider the deed restrictions associated with
income tax credits in Butler County, Missouri. the properties, instead choosing to look at the
The first project, developed in 1999, included 48 rents on four comparable properties.
units, while the second project, developed in Both of Poplar Bluff’s appraisal witnesses, on
2005, included 40 units. Both developments are the other hand, testified that they valued the
subject to low-income housing tax credit land use properties with restrictions in place. The first
160 The Appraisal Journal • Summer 2020 www.appraisalinstitute.orgCases in Brief appraiser stated that he had to value the property restrictions imposed by virtue of the LURA with the deed restriction in place and using the would hypothesize an unrealistic market and current low-income housing tax credit rents assume facts that do not exist. established by MHDC. The second appraiser Therefore, the court held that unlike tax cred- compared the market rents from other rent- its, which have no direct contribution to the restricted properties, inherently valuing the market value of subsidized housing, below- property as rent-restricted. market leases have a direct effect on the income After the trial, the Commission’s hearing offi- of the property, and thus its market value. There- cer found that Poplar Bluff had presented persua- fore, the Commission’s adoption of Poplar Bluff’s sive evidence that the true market value of the appraiser’s opinions was both reasonable and properties was significantly lower than the asses- lawful, and the decision was affirmed. sor’s valuations. The hearing officer agreed that properties funded by low-income tax credits are Tibbs v. Poplar Bluff Associates I, LP unique in that their owners have willingly Missouri Court of Appeals accepted various restrictions in exchange for April 14, 2020 economically desirable benefits. The assessor 599 S.W.3d 1 appealed, eventually to the state court of appeals. On appeal, the assessor argued that the Com- mission erred by ruling that low-income housing Tax assessment valuation not valid should be valued using its actual income and where methodology did not remove expenses rather than market income and all intangible business value expenses, because this method failed to value the fee simple estate and otherwise undervalued the In 1990, Walt Disney Parks & Resorts (Disney) property. The court, however, noted that prior constructed the Disney Yacht & Beach Club case law held that the “better reasoned approach” Resort on 65 acres adjacent to Epcot near several is to consider actual as well as potential income other hotels. The resort features 1,197 guest in determining true value. It said that this rooms, a 70,000-square-foot conference center, approach was more realistic with regard to eco- dining and retail outlets, a spa, and other recre- nomic conditions that cause property to have ational amenities. lower actual rents than could be obtained if the In 2015, the County Property Appraiser property was unrestricted. (County Appraiser) assessed the value of the The court agreed that prior case law held that property at $336.9 million, an increase of 118% low-income housing tax credits themselves are over the prior year’s assessment. Disney filed a intangible property, and thus they could not be complaint against the County Appraiser, arguing considered in the valuation of a rent-restricted that the County Appraiser’s assessment failed to apartment complex. Here, however, it was not comply with Florida law and accepted appraisal the credits themselves that were at issue; rather, practices because it exceeded market value and both properties were covered by LURA that included the value of certain intangible property. restrict the amounts the owner could charge for At trial, Disney offered first the testimony of rent, and a well-informed buyer would consider a business appraiser who valued the intangible the existence of a deed restriction associated assets on the property as if a hypothetical inves- with a property when making a decision on tor was buying the property. He specifically whether to buy the property. To calculate the identified cash, favorable operating licenses, value of the properties without considering the assembled workforce, brand, and goodwill as www.appraisalinstitute.org Summer 2020 • The Appraisal Journal 161
Cases in Brief
intangible assets implicated. He determined that qualify for removal. The trial court ruled that,
the business enterprise value of the property was even if the methodology used by the County
$341.9 million. Appraiser was accepted in the appraisal pro
Disney also presented the testimony of a real fession, it could not be used in a manner that
estate appraiser. For his analysis, the Disney violated Florida law by assessing more than
appraiser used the income capitalization real property value. After adjusting Disney’s
approach. He started with the actual average appraised values, the court concluded to a value of
daily rate achieved by the resort, then made $209.2 million. The County Appraiser appealed.
adjustments to account for nontaxable items that On appeal, the County Appraiser argued that
were part of the value of the rooms. He also the trial court should not have rejected its
adopted hypothetical conditions and calculated method of removing intangible value and should
the hypothetical lease income for the property’s not have performed its own assessment rather
retail, restaurant, and spa spaces that were leased than remanding the case for reassessment.
to third parties, which he explained had the The court of appeal began by noting that the
effect of extracting business value. After capital- Florida Constitution specifically prohibits coun-
izing the net operating income, he deducted tan- ties from taxing intangible property. Real prop-
gible personal property value, ultimately arriving erty, which is subject to tax, includes only land,
at a real estate value of $180.9 million. buildings, fixtures, and improvements to land.
The County Appraiser presented a valuation The court agreed with the trial court that the
expert from the County Appraiser’s office. As method used by the County Appraiser impermis-
operating expenses, he deducted management sibly included Disney’s intangible business value
fees and franchise fees but made no other adjust- in its assessment.
ments to revenue for any amenities or for the The court concluded that, because the County
fact that the property is Disney-branded. He Appraiser’s method does not provide for adjust-
explained that the operating expense deductions ments to the gross income for intangible business
removed all business-related income from the value prior to making management and franchise
gross figure. The result was the final assessed fee expense deductions, the method “does not
value of $336.9 million. remove all business value from an assessment.” To
In rebuttal, Disney presented the testimony of the contrary, the court concluded that the method
an economist who opined that the County “ignores the fact that an intangible business value
Appraiser’s methodology was inconsistent with may be directly benefiting a business’s income
economic theory and market behavior, under stream.” Therefore, the court held that the
estimated business value, and failed to account method itself “violates Florida law because it does
for a return on the investment in furniture, fix- not remove the non-taxable, intangible business
tures, and equipment. Overall, he opined that value from an assessment.” The court did, how-
there was “no scenario” in which simply deduct- ever, order the trial court to remand the dispute to
ing franchise and management fees would remove the County Appraiser for a reassessment.
all intangible value. Following the first court of appeal decision in
The trial court found that the County Appraiser this case, the County Appraiser moved for a
improperly considered income from the business rehearing by the court of appeal, arguing that the
activities conducted on the property in establish- court’s first decision was overextended by reject-
ing the just value of the property, and rejected ing the method used by the County Appraiser
the County Appraiser’s contention that the in itself, rather than as applied by the County
intangibles identified by Disney’s experts did not Appraiser in this case. The court granted the
162 The Appraisal Journal • Summer 2020 www.appraisalinstitute.orgCases in Brief
motion for rehearing, withdrew its first decision, Proceeding to trial, both parties offered expert
and issued a substitute opinion. In the substitute opinions of value. Kearny’s appraiser estimated
opinion, instead of using sweeping language the value of the entire landfill, not just the sub-
rejecting the method used by the County ject property, at $23.4 million. He assumed
Appraiser, the court concluded that the manner assemblage, i.e., that a new buyer would also buy
in which the County Appraiser applied the the portion of the property already owned by
method impermissibly included intangible busi- NJSEA. Because zone landfills are legally permis-
ness value. The outcome of the decision was the sible and because the property is an operating
same, but the substitute opinion gave counties landfill, the appraiser opined that its current use
leeway to properly apply the method used by the was its highest and best use. Further, based on his
County Appraiser here. review, the appraiser testified that the property
will generate $14 million to $16 million per year
Singh v. Walt Disney Parks & Resorts US, Inc. for the next seven years, so the landfill was the
Florida Court of Appeal, Fifth District maximally productive use.
June 19, 2020, and August 7, 2020 NJSEA’s appraiser, in contrast, based his
2020 WL 3394725 and 2020 Fla. App. appraised values on the property’s highest and
LEXIS 11180* best use at the termination of the lease between
NJSEA and Kearny, at which time the landfill
operations would cease. Thus, he calculated the
Highest and best use analysis supports property’s value under the assumption that the
valuation in taking of landfill landfill operations would cease. Further, in his
highest and best use analysis, he emphasized that
The New Jersey Sports and Exposition Authority due to the large mound of garbage sitting in the
(NJSEA) is the zoning and planning agency for middle of the landfill, in a tidal marsh, with
the Hackensack region. NJSEA is authorized to steeply sloped sides, the landfill had virtually no
acquire any real property in its jurisdiction if it is practical utility. Thus, given the limited poten-
necessary or convenient to do so for any autho- tial uses, he concluded recreational use was the
rized purposes, including the provision of solid property’s highest and best use.
waste disposal and recycling facilities. In October 2018, the trial court held a bench
The Keegan Landfill consists of approximately trial, hearing from eight witnesses, including
110 acres located in Kearny, New Jersey (Kearny). appraisers and other experts. The court found that
The majority of the disposal activity occurred at NJSEA’s expert’s valuation of the property was
the site in the 1960s and 1970s, and the landfill correct and held that the fair market value at the
was not properly remediated. NJSEA or its affili- time of the taking was $1.818 million. The pre-
ates leased the landfill from Kearny. According ponderance of the evidence supported NJSEA’s
to a 2016 appraisal report, the estimated market appraiser’s assumption, while Kearny provided no
value of the fee simple interest in the landfill was reason to assume cooperation between NJSEA
$1.88 million. By letter NJSEA offered to pur- and a new purchaser. Because a landfill could not
chase the landfill from Kearny precondemnation be operated solely on the Kearny portion without
at market value, which Kearny declined. NJSEA significant alterations, the court agreed that the
therefore filed a condemnation complaint in the property was best suited for passive recreation.
trial court. Following a challenge and appeals, Kearny appealed, arguing that the trial court
the courts authorized NJSEA to exercise its emi- erred in finding its appraiser’s use of assemblage
nent domain powers. was speculative. Considering the history of coop-
www.appraisalinstitute.org Summer 2020 • The Appraisal Journal 163Cases in Brief
eration and the lease agreement between the par- dential encroachment on existing manufactur-
ties, Kearny argued it reasonably incorporated the ing facilities. Residential uses were thus not
value of the property already owned by NJSEA permitted within PMDs.
into its just compensation calculation. The appel- A large chocolate factory was located two
late division rejected this argument summarily. blocks south of Eychaner’s property. The factory’s
Kearny also argued that two of NJSEA’s non- owner initially opposed its factory’s inclusion in
appraisal expert reports set forth inadmissible the PMD, but eventually the owner dropped its
“net opinions” that failed to explain the reasons opposition in exchange for the City’s willingness
or calculations that led to their conclusions. The to help it expand its industrial campus by acquir-
net opinion rule forbids the admission of an ing nearby property to create a buffer between its
expert’s conclusions that are not supported by operations and proposed residential develop-
factual evidence or other data. Thus, the expert ment. The City intended to fund the project
must “give the why and wherefore” that supports through a tax increment financing (TIF) plan.
the opinion, rather than a mere conclusion. Although Eychaner’s property was not deemed
Contrary to Kearny’s assertions, though, the blighted, a study commissioned by the City stated
appellate division noted that the expert reports in that it met the requirements of a conservation
question were not appraisals or opinions of value. area, which may become a blighted area. The fac-
Rather, one expert simply discussed New Jersey’s tory’s owner submitted a redevelopment proposal
regulations and the permitting process for solid seeking to acquire 4.2 acres surrounding its fac-
waste landfills. Any reference to the sale of the tory, including Eychaner’s land. Initially the fac-
property was within the context of describing the tory offered to buy Eychaner’s land, but he refused
process of transferring the permit. In addition, to sell, so the City notified Eychaner of its possi-
the second expert discussed the factors a buyer ble taking of his property with the intent of con-
would consider in purchasing the property and veying it to the chocolate factory. The city
why a hypothetical buyer would not be interested council passed an ordinance authorizing the tak-
in doing so. Both experts sufficiently supported ing to achieve the objectives of the TIF.
their conclusions. Accordingly, the appellate In 2005, the City filed a complaint to condemn
division affirmed the trial court’s judgment. Eychaner’s property. The case eventually pro-
ceeded to a jury trial on just compensation,
New Jersey Sports and Exposition Authority v. which resulted in an award of $2.5 million.
Town of Kearny Eychaner appealed, and the courts ultimately
Superior Ct. of New Jersey, Appellate Division concluded that the use of eminent domain to
April 9, 2020 expand the chocolate factory’s campus passed
Docket No. A-2487-18T2 constitutional muster, but the case was remanded
for a new trial on just compensation.
Meanwhile, the City was undertaking a com-
Change in specifics of city redevelopment prehensive review of the industrial corridors in
plan did not negate public taking the City, to address the modern realities of the
industrial marketplace and its evolving role in
Fred Eychaner owned vacant land in the River the economy. The first corridor to be reviewed
West area of Chicago. In 1999, the City of included Eychaner’s property and the chocolate
Chicago (City) proposed creating a planned factory. A mix of uses, including high-density,
manufacturing district (PMD) there, aimed at mixed-use development, was proposed as the best
protecting industrial jobs and preventing resi- use of the area.
164 The Appraisal Journal • Summer 2020 www.appraisalinstitute.orgCases in Brief At the second just compensation trial, the City that the earlier decisions relied on the City’s and Eychaner presented experts who agreed that TIF, the court disagreed that the City’s review the highest and best use of the property would be proposal was the “sole expression” of the City’s high-rise residential development with ancillary plans for the area, and that it did not supersede commercial use. Although the property would the TIF, which continued to remain in effect. have to be rezoned, the experts agreed that Further, the City’s current plan to redevelop the approval of the zoning change was reasonably area around Eychaner’s property seeks to preserve probable. The jury returned an award of $7.1 mil- the industrial character of the corridor while also lion to Eychaner. Eychaner filed a post-trial attracting innovation and technology-oriented motion not challenging the compensation award, businesses, a valid public use. but renewing his argument that the City’s exer- Finally, the court held that Eychaner presented cise of eminent domain was unconstitutional. He no evidence of changes to the plan for the area, also asserted that the taking no longer served a and that his assertion that the current plan no permissible public use since the City had changed longer supports the taking was false. Residential its plans for the area surrounding Eychaner’s uses remain prohibited under the current zoning, property. The trial court denied the motion, and and Eychaner cited no evidence that the facto- Eychaner appealed. ry’s owners intend to use the property for a resi- On appeal, Eychaner argued that the TIF and dential purpose or a use otherwise inconsistent the City’s plans for the area were inconsistent. with the TIF’s goals. Rather, the acquisition of He asserted that the City no longer intended to Eychaner’s property would allow the factory to preserve industrial uses in the area; Eychaner expand into a self-contained campus, thereby argued that the City would relocate the choco- maintaining its workforce in the City while late factory rather than expand its campus, and reducing conflicts with neighboring uses. Because therefore the taking was for private, not public, these are all legitimate goals and part of the City’s use and “nothing more than a naked transfer larger plans for the area, the court held that the from Eychaner to the factory owner in the name trial court did not err in denying Eychaner’s post- of economic development.” Because the trial trial motion to reconsider. court did not reconsider the judgment, Eychaner argued that the judgment should be reversed. City of Chicago v. Eychaner The court found that Eychaner failed to Illinois Appellate Court, First District demonstrate that the purported new evidence May 11, 2020 would change the outcome. While it was true 2020 IL App (1st) 191053 About the Author Benjamin A. Blair, JD, is a partner in the Indianapolis office of the international law firm of Faegre Drinker Biddle & Reath LLP, where his practice focuses on state and local tax litigation for clients across the United States. A frequent speaker and author on taxation and valuation issues, Blair holds a juris doctor from the Indiana University Maurer School of Law, where he also serves as an adjunct professor. Contact: Benjamin.Blair@FaegreDrinker.com www.appraisalinstitute.org Summer 2020 • The Appraisal Journal 165
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