Noteworthy 2018 Property Tax Cases

Property tax cases decided last year include Land Partners, LLC v. County of Orange (2018) 19 Cal.App. 5th 741, which provides insight for taxpayers seeking to obtain an award of attorney fees against the County Assessor in a refund action;  Durante v. County of Santa Clara (2018) 29 Cal.App.5th 839, which reaffirmed that the transfer of a life estate is a reassessable change in ownership, and serves as a reminder to raise all issues at the assessment appeal hearing so they will not be barred on appeal; Glovis America, Inc. v. County of Ventura (2018) 28 Cal.App. 5th 62, a possessory interest case, where the Court allowed the assessor to use lease options as part of the anticipated term of possession; and Next Century Associates, LLC v. County of Los Angeles (2018) 29 Cal.App.5th 713, which was a case in which the Court of Appeal disapproved of cryptic Assessment Appeals Board findings of fact which valued the property at the roll value although the assessor had abandoned that value in favor of a value at least $18 million lower.

The cases are described below:

1. Land Partners, LLC v. County of Orange (2018) 19 Cal.App. 5th 741.  Land Partners, LLC and Los Alisos Ranch Company (collectively Land Partners) owned a 68 acre parcel of land improved with a mobilehome park in the City of Westminster.  Following a change in ownership, the assessor reassessed the value of the property at a new value of $60,010,000.  The assessor’s valuation was sustained on appeal.  Land Partner’s claim for refund alleged that the assessor overvalued the property by at least $22 million; the erroneous valuation was caused by the incorrect application of the income approach, which was an appropriate valuation method.  In addition to the refund, the complaint also sought attorney fees based on the erroneous assessment.

Following expert testimony from both parties, the trial court concluded that “in material respects” the assessor’s valuation was “arbitrary, in excess of discretion, and/or in violation of the standards prescribed by law. Specifically, it found the assessor failed to recognize and apply directions from Rule 8 and section 502 of the Board of Equalization’s assessors’ handbook, meaning the ‘assessment was not in fact based on the economic reality of how the subject property would be bought and sold.’  The court explained this did not meet the constitutional mandate of ‘achiev[ing] a reasonable estimate of the true value’ of the property.”  (Id. at p. 744.)  The assessor’s errors included:

  • Failure to consider any market data in calculating market rent for the mobilehome spaces;
  • Failure to determine operating expenses based on market data;
  • No evidence to support the conclusion that a 95% occupancy rate could be achieved within two years;
  • Failure to factor all known and reported damage in his calculation of repair costs;
  • Lack of evidentiary support for repair costs.

Following the trial Land Partners sought to recover attorney fees pursuant to §5152. The court, which interpreted the statute as requiring a showing that the Assessor failed to apply a law, rule or regulation because the Assessor subjectively believed it to be unconstitutional or invalid, denied the motion.  The court found that the Assessor just applied the law incorrectly, which was not enough to trigger §5152.  (Id. at p. 447.)

The Court of Appeal stated the rule justifying attorney fees pursuant to §5152 as follows:  “Based on the clear language of these statutes (i.e. §5152 and §538) there are three prerequisites to obtaining attorney fees under section 5152 in a taxpayer refund action.  First, the court must have allowed recovery of taxes.  (§5152.)  Second, the court must have found the void assessment, or portion thereof, was made in violation of a specific provision of the state constitution, the property tax statutes, or a Board of Equalization rule or regulation.  (Ibid.)  Third, the court must find the assessor subjectively believed a specific provision of the state constitution, the property tax statutes, or a Board of Equalization rule or regulation was unconstitutional or invalid, and assessed property contrary thereto, but the assessor failed to bring the requisite declaratory relief action.”  (Id. at p. 746.)

 Signaling its holding, the Court warned that “[c]are must be taken to distinguish between a situation in which an assessor believes a provision to be unconstitutional or invalid, and a situation in which an assessor misinterprets a provision.  The former would implicate section 5152, whereas the latter would not.”  (Id. at p. 746.)

The Court noted that Land Partners advocated the adoption of a rule that would allow recovery of fees any time the assessor violates a “‘well-settled and unambiguous’ appraisal rule,” or a rebuttable presumption that the assessor’s violation of a law or rule was due to its belief in its invalidity unless otherwise rebutted.  The Court refused to rewrite the law in this fashion.  (Id. at p. 748-49.)

The Court concluded that §5152 does not apply merely because an assessor fails to follow a statute or rule.  “Sections 5152 and 538 require a cognitive decision on the part of the assessor that a particular provision, rule or regulation is unconstitutional or invalid either on its face or as applied to the circumstances in the case.”  [Citation omitted.]  Accordingly, a factual finding by the court “‘that the reason the assessor did not apply a particular provision was that he or she believe it to be unconstitutional or invalid’ is a prerequisite to an attorney fee award under this section.”  [Citations omitted.]  Since the trial court failed to make such a finding, the denial of Land Partner’s motion for fees was proper.  (Id. at p. 749.)

The case makes it clear that assessor must act in the belief that a particular provision is unconstitutional; not simply make a mistake in applying the law.

2. Durante v. County of Santa Clara (2018) 29 Cal.App.5th 839.  Plaintiff and her sister inherited a home in San Jose when their mother died in 2003, taking title as tenants in common, each with a 50% interest in the property.  Only plaintiff lived in the home.  In 2009, plaintiff’s sister granted her a life estate in her 50% interest.  As a result, plaintiff had sole ownership rights in the property for the rest of her life, with her sister regaining a 50% interest on plaintiff’s death.

Based on the 2009 deed, the County reassessed the property because of the life estate which had been conveyed to plaintiff, resulting in a significantly higher property tax bill.  Plaintiff appealed the reassessment on the ground that the creation of a life estate did not effect a change in ownership; however, following a hearing, the reassessment was upheld.  Plaintiff filed suit for refund.  The trial court found that the 2009 deed granting plaintiff a life estate constituted a reassessable change in ownership.

The Court of Appeal found no error.  The evidence was that a life estate, which is an interest substantially equivalent to the fee interest, changed hands when it was transferred to plaintiff from her sister.  The interest was subject to reassessment.

Plaintiff also argued that the property was improperly valued.  The Court found this issue to be outside of the scope of the case, presumably because the issue had not been raised in the assessment appeal hearing.  The Court concluded it could only determine whether the trial court correctly decided whether reassessment was allowed by law; no opinion was expressed on valuation.

The outcome of the case was certain.  Perhaps the lesson of the case is to make sure to raise all grounds for appeal, i.e. reassessment and valuation, at the assessment appeal hearing; otherwise reviewing courts have no basis to consider those arguments.

3. Glovis America, Inc. v. County of Ventura (2018) 28 Cal.App. 5th 62. This is a possessory interest case.  In 2007 Glovis leased land from the Navy to provide vehicle inspection and processing services at Port Hueneme.  In 2013 Glovis and the Navy signed a five-year lease, exempt from federal contract terms, which provided for a term beginning September 16, 2013 and ending September 15, 2018, with two five-year options at the request of the Lessee and approval of the Government.  The lease contained a “release rate” provision such that 180 days prior to the end of a term an appraisal can be prepared to determine market value; as well as a provision permitting Glovis to perform long-term maintenance in lieu of paying rent. Ventura County issued a tax bill for 2014-15 and a supplemental tax bill for 2013-14, using 15 years (not 5 years) as the reasonably anticipated term of possession.

Glovis appealed arguing it did not have an extension option because (1) it lacked a unilateral right to extend the lease term; (2) the contract was subject to competitive bidding every five years; and (3) previous leases did not include options.  It also argued that it could not be determined whether the lease options would even be exercised.  The evidence showed this was Glovis’ fifth lease with the Navy and all prior leases were renewed; prior leases were subject to competitive bidding, though this one was not; and this was the first lease to include an option to extend the lease term.  The Assessment Appeals Board sustained the assessment and Glovis challenged the Board’s determinations in the trial court.  The court granted County’s motion for judgment on the pleadings with leave to amend.  Days later Glovis amended its complaint, and included an amended agreement with the Navy which revised the term of possession to exclude the two five-year options.  The trial court refused to consider the amended lease with the Navy and sustained the County’s demurrer to the amended complaint without leave to amend.

The Court of Appeal found that the lease gave Glovis an option to extend its possession past the initial five year term, and did not contain any language permitting the Navy to withdraw or revoke its offer, which was the very definition of an option.  (Id. at p. 69.)  It concluded that assessments must be made based upon facts known to the assessor at the time of valuation.  “Evidence that only later comes into existence does not render the assessment invalid.”  The assessor was allowed to rely on the lease as originally written and “was not required to ‘ferret[] out the . . . undisclosed and secret intentions of [the Navy] and [Glovis] relative to the terms of [the] lease.’”  The Court found it would be “improper” for it to consider the “amended” lease to undermine the assessor’s valuation.  (Id. at p. 70.)  However, even if it did so, it would still conclude that Glovis had an option, and the parties’ substantive rights remained the same; because the nature of the original lease was such that the Navy could not revoke the option.  (Id. at p. 71.)

The Court also concluded that it was not unreasonable to assume that the option would be exercised.  The long history of possession supported the assessor’s years long valuation.  The fact that the Navy could terminate at any time, only affects value; not taxability.

4. Next Century Associates, LLC v. County of Los Angeles (2018) 29 Cal.App.5th 713.  Next Century Associates, LLC purchased the Century Plaza Hotel and the real property on which it is located, in mid-2008, for $366.5 million.  On January 1, 2009, the assessor enrolled $367,612,305 as the value of the property.  Next Century asserted that the “global economic meltdown” of late 2008 caused the property’s market value to drop significantly between the date of purchase and January 1, 2009, and applied for a reduction in the property’s assessed value.

The assessor did not try to support the enrolled value at the hearing.  Its DCF analysis produced a valuation of $349,800,000, about 17.8 million below the enrolled value.  The Board rejected the assessor’s DCF analysis because it contained an error; it overstated the hotel’s 2006 NOI.

Next Century’s DCF analysis produced a valuation of $277,800,000, almost $90 million below the enrolled value.  Next Century alleged that if the assessor’s NOI error was corrected, it would generally support Next Century’s DCF analysis.  The Board rejected Next Century’s proposed valuation, stating that the company’s “income growth rates do not justify a 22% decline in value from the 2d quarter of year 2008 to the lien date of January 1, 2009, and do not justify a 29% decline in the subject property’s NOI from year 2008 to 2013.”  (Id. at p. 716.)

The Board concluded Next Century had not met its burden of proof, denied its application, and left in place the enrolled value, “even though no party thought it correctly reflected the property’s value as of the lien date.”  (Id.)

Next Century filed a suit for refund.  After a review of the administrative record and remanding for clarification, the superior court entered judgment in favor of the County.

On appeal, Next Century alleges that the Board was required to either accept Next Century’s proposed assessed value, calculate its own assessed value, or direct the Assessor to recalculate the assessed value.

The Court of Appeal concluded that “the Board’s rejection of Next Century’s valuation, without sufficient explanation, and with knowledge that the Assessor’s valuation analysis – if corrected – would result in a valuation significantly lower than the enrolled value, was arbitrary, as was its decision to leave in place an enrolled value that had been repudiated by the Assessor and was unsupported by any evidence.  We also conclude that the Board’s cryptic findings are insufficient to bridge the analytic gap between the evidence and the Board’s conclusions.  [Citation omitted.]  And we conclude the record as a whole does not include substantial evidence in support of the Board’s order leaving the enrolled value in place.”  (Id. at p. 717.)

What is particularly interesting is the court’s statements regarding the Board’s responsibilities relative to producing detailed findings of fact that fully explain the basis of its decision.  The Court noted (and I quote broadly from the opinion because this language is potentially helpful in many cases):

“Although the Assessor’s analysis contained an error, if the error were corrected, it would not increase the Assessor’s valuation conclusion (per the Assessor) and might (per Next Century) result in a value consistent with that advocated by Next Century.  In other words, if anything, the error made the Assessor’s proposed valuation too high.

Under these circumstances it was incumbent on the Board to explain in far more detail the deficiencies it perceived in Next Century’s analysis so that the parties and the court could understand why the Board rejected Next Century’s analysis, and its rationale for affirming the discredited enrolled value.  Clearly, the Board has the power to disregard a valuation analysis it determines for good reason is unpersuasive, and to reject expert testimony that is speculative, unsupported, or otherwise unpersuasive.  But it must tell the parties, and reviewing courts, why it rejects the evidence in other than conclusory terms.  The orderly process of judicial review requires that administrative agencies must ‘set forth findings to bridge the analytic gap between the raw evidence and ultimate decision or order.’  [Citations omitted.]  This requirement applies with equal force to local assessment appeals boards.  [Citation omitted.]

Among other functions, [the] findings requirement serves to conduce the administrative body to draw legally relevant sub-conclusions of its ultimate decision; the intended effect is to facilitate orderly analysis and minimize the likelihood that the agency will randomly leap from evidence to conclusions [Citations.]  In addition, findings enable the reviewing court to trace and examine the agency’s mode of analysis.  [Citations.]  [¶]  Absent such roadsigns, a reviewing court would be forced into unguided and resource-consuming explorations; it would have to grope through the record to determine whether some combination of credible evidentiary items which supported some line of factual and legal conclusions supported the ultimate order or decision of the agency.  [Citation omitted.]

Here, the Board stated that Next Century’s “income growth rates” do not justify the decline in value it sought, nor do they “justify a 29% decline in the subject property’s NOI from year 2008 to year 2013.” But the Board did not indicate (1) how it reached these conclusions or (2) what value it believes the income growth rates do support and why.

In any event, no party put forth evidence that the existing roll value remained valid. On the contrary, the parties agreed it was too high. Thus, there was no substantial evidence supporting the continued validity of that valuation and any presumption in favor of the existing roll value was rebutted.

The Board was not limited to choosing between the valuation advocated by Next Century, the Assessor, and the existing roll value.  Instead, the Board ‘shall make its own determination of value based upon the evidence properly admitted at the hearing.’  [Property Tax Rule 324 (b).]  If desired, the Board could have continued the hearing to allow the Assessor to correct the defect in his valuation analysis, so the Board would have the benefit of the Assessor’s opinion.  [Property Tax Rule 323 (c).]  But it was not entitled to uphold an enrolled value that the Assessor agreed was too high, and was unsupported by any evidence.”  (Id. at p. 723-24.)

This is powerful language to remind Assessment Appeals Board’s of the importance of their responsibility in finding value and thoroughly explaining their analysis and rationale behind the decisions they make in their findings of fact.

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