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Fairbanks North Star Borough Assessor's Office v. Golden Heart Utilities, Inc. (11/17/00) sp-5334
Fairbanks North Star Borough Assessor's Office v. Golden Heart Utilities, Inc. (11/17/00) sp-5334
Notice: This opinion is subject to correction before publication in
the Pacific Reporter. Readers are requested to bring errors to the attention of
the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone
(907) 264-0608, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
FAIRBANKS NORTH STAR BOROUGH )
ASSESSOR'S OFFICE, ) Supreme Court Nos. S-9120/9179
)
Appellant/ ) Superior Court No.
Cross-Appellee, ) 4FA-98-1848 CI
)
v. ) O P I N I O N
)
GOLDEN HEART UTILITIES, INC., ) [No. 5334 - November 17, 2000]
an Alaskan Corporation, )
)
Appellee/ )
Cross-Appellant. )
______________________________)
Appeal from the Superior Court of the State of
Alaska, Fourth Judicial District, Fairbanks,
Charles R. Pengilly, Judge.
Appearances: John R. Messenger, Preston Gates
& Ellis, LLP, Anchorage, for Appellant and Cross-Appellee. Lance
C. Parrish, Parrish Law Office, APC, Fairbanks, for Appellee and
Cross-Appellant.
Before: Matthews, Chief Justice, Eastaugh,
Fabe, Bryner, and Carpeneti, Justices.
FABE, Justice.
I. INTRODUCTION
When the City of Fairbanks sold its sewer and water
utility assets to Golden Heart Utilities, Golden Heart entered into
a non-exclusive lease of the Fairbanks downtown utilidor system.
The Fairbanks North Star Borough Assessor's Office (the assessor)
placed the lease on its assessment rolls and assessed the value of
Golden Heart's possessory interest at $223,083. Golden Heart
objected, complaining that the assessor used an improper method of
valuing its lease. The Board of Equalization disagreed, concluding
that the value of Golden Heart's possessory interest in exempt
property had been established by a valid method. Golden Heart
appealed the board's decision to the superior court, and the court
invalidated the assessment. The assessor appeals. Because the
assessor used a recognized and appropriate method of valuation to
assess Golden Heart's possessory interest in tax-exempt property,
we reverse.
II. FACTS AND PROCEEDINGS
In 1997 the City of Fairbanks transferred its sewer and
water utilities to a private corporation, Golden Heart Utilities,
Inc. In a separate agreement related to the sale, the City granted
Golden Heart a non-exclusive lease of the City's downtown utilidor
[Fn. 1] system. The utilidor lease was not exclusive and required
Golden Heart to pay up to $20,000 annually for fifty years. The
assessor has conceded that this rent was the market rate. The
lease, however, does not address the issue of property taxes.
The Fairbanks North Star Borough Assessor added Golden
Heart's leasehold interest to the tax rolls as a private possessory
interest in publicly owned, non-taxable property and assessed the
value of that interest at $223,083. To arrive at that assessment,
the assessor's office employed the "reversionary method." The
"reversionary method" estimates the value of a leasehold interest
by taking the value of the fee interest of the property and
deducting both the value of the burden of use restrictions imposed
by the City and the value of the City's reversionary interest in
the property. In this case, the assessor estimated the fee simple
value to be $250,000. [Fn. 2] It then deducted ten percent of the
fee value, or $25,000, to account for the decrease in value
resulting from the use restrictions placed on the lease. The
assessor then estimated the value of the City's reversionary
interest at the expiration of the fifty-year lease term at $1,917
[Fn. 3] and deducted that amount from the fee simple value.
Fee Simple Value: $250,000
- 10% Use Restriction Deduction: $ 25,000
- Reversionary Interest: $ 1,917
Assessed Value: $223,083
Golden Heart appealed the assessment to the Borough's
Board of Equalization on the grounds that the assessment was
improper, unequal, and excessive. The board held a public hearing
on Golden Heart's appeal in June 1998. At the hearing Golden Heart
presented testimony that the assessor's valuation method was not
recognized by the appraisal profession and was fundamentally wrong.
An expert for Golden Heart also testified that the only value
attributable to a leasehold interest is the value created when the
contract rent is lower than the fair market value rent.
The assessor representative admitted that the
"reversionary method" was not an appraisal method recognized by the
appraisal profession. But the assessor explained that it used that
methodology because it had received materials prepared by the
Alaska Department of Community and Regional Affairs, Local
Government Assistance Division that described the method.
Moreover, experts from both sides acknowledged that we have
recognized this methodology in our decision in North Star Alaska
Housing Corp. v. Fairbanks North Star Borough Board of Equalization
[Fn. 4] for determining the value of a possessory interest in tax-
exempt property. The board found that "[t]he Assessor's possessory
interest valuation methodology is valid for determining the taxable
value of a private leasehold interest in public, non-taxable
property" and upheld the assessment.
Golden Heart appealed the board's decision to the
superior court, arguing that the board erred in upholding the
assessor's use of the reversionary method. Golden Heart asserted
that the reversionary method was fundamentally wrong, and that the
assessor had inappropriately shifted "value attributable to the
City's tax exempt ownership interest to [Golden Heart's] taxable
leasehold interest in an attempt to gain tax revenue" in violation
of the law. Instead Golden Heart contends that it should be taxed
according to the value it would obtain from selling the lease
agreement on the open market, called the "rent-savings method."
[Fn. 5] The assessor argued in response that the Alaska
Constitution authorizes local governments to tax leaseholds on
government property and grants the discretion to choose any
recognized method of valuation. The superior court ruled in favor
of Golden Heart, concluding that the assessor's valuation method
was fundamentally wrong. The assessor appeals.
III. STANDARD OF REVIEW
This case involves a challenge to the merits of an
administrative decision. We independently review the merits of
such a decision, giving no deference to the superior court's
decision. [Fn. 6] In reviewing the same issue presented in this
case, whether the "reversionary method" was an appropriate
valuation technique, we applied the reasonable basis standard of
review. [Fn. 7] This standard is appropriate "[w]here an agency
decision as to questions of fact and law involves agency
expertise." [Fn. 8] Provided that the assessor has a reasonable
basis for a valuation method, that method will be allowed "so long
as there was no fraud or clear adoption of a fundamentally wrong
principle of valuation." [Fn. 9]
IV. DISCUSSION
The Alaska Constitution allows private interests in land
owned by the government to be taxed. [Fn. 10] Accordingly, "a
private leasehold, contract, or other interest in the [tax exempt
municipal] property is taxable to the extent of the interest." [Fn.
11] The parties in this case dispute how to value private
interests in tax exempt property.
A. The Alaska Constitution Does Not Mandate the Use of Any
Specific Valuation Method.
Golden Heart asserts that Alaska's constitution and
statutes compel local governments to employ appraisal methods that
are "recognized by the appraisal community" and that ascertain the
property's "full and true value." To support this contention,
Golden Heart argues that the authority cited in the case approving
the assessor's valuation method, North Star Alaska Housing, [Fn.
12] is based on Alaska's pre-statehood taxing scheme. The pre-
statehood scheme allowed local taxing authorities to set "the mode
and manner of assessment." [Fn. 13] Golden Heart contends that
Alaska's constitution and statutes altered that scheme. Article
IX, section 3 of the Alaska Constitution states: "Standards for
appraisal of all property assessed by the State or its political
subdivisions shall be prescribed by law." And the legislature
subsequently mandated the following standards for appraisal:
The assessor shall assess property at its full
and true value . . . . The full and true value is the estimated
price that the property would bring in an open market and under the
then prevailing market conditions in a sale between a willing
seller and a willing buyer both conversant with the property . . .
.[ [Fn. 14]]
According to Golden Heart, the word "assessment" was
struck from a prior draft of article 9, section 3 of the Alaska
Constitution and replaced with "appraisal." Golden Heart argues
that local assessors therefore do not have authority to adopt
"separate unpublished 'assessment' standards." Golden Heart
asserts that this argument has two implications. First, it
maintains that because the constitution mandates that the
legislature prescribe valuation standards, a deferential standard
of review is unwarranted. Second, it contends that when the
legislature adopted the "full and true value" standard in AS
29.45.110, it prescribed that assessors use a valuation method
recognized by the appraisal profession.
1. A deferential standard of review is appropriate.
Golden Heart argues that because the legislature
prescribes the method of valuation, applying a deferential standard
of review to the valuation method chosen by the Board of
Equalization is inappropriate. We disagree. The Alaska
Constitution empowered the legislature to prescribe valuation
standards. [Fn. 15] The legislature chose to define those
standards broadly, requiring that property be assessed "at its full
and true value." [Fn. 16] Accordingly, the precise method for
determining the "full and true value" of property is within the
assessor's discretion. We recognized that discretion when we
applied the reasonable basis standard of review in North Star
Alaska Housing [Fn. 17] and again in Cool Homes, Inc. v. Fairbanks
North Star Borough. [Fn. 18]
Although Golden Heart correctly points out that some of
the authority cited in North Star Alaska Housing is based on the
pre-statehood tax scheme, that fact does not diminish the
precedential value of our prior application of the deferential
standard in light of the legislature's broad direction that
property be assessed "at its full and true value." [Fn. 19]
2. Recognized appraisal standards are not mandated by
law.
Throughout its brief, Golden Heart contends that the
reversionary method is not a recognized appraisal method. Even
accepting this argument as true, we conclude that it lacks legal
significance. The Alaska Constitution requires that the law
prescribe appraisal standards, [Fn. 20] and the implementing law
mandates that property be assessed "at its full and true value," in
other words, "the estimated price that the property would bring in
an open market." [Fn. 21] The relevant inquiry is whether or not
a valuation method selected by the assessor provides some
reasonable estimate of the market value of the interest to be
taxed, [Fn. 22] not whether the appraisal method has received the
imprimatur of acceptance from the appraisal community. If the
assessor has a reasonable basis for the valuation method, we will
approve that method "so long as there was no fraud or clear
adoption of a fundamentally wrong principle of valuation." [Fn. 23]
The central question in this case is whether the appraisal method
employed by the assessor resulted in an unreasonable valuation.
B. Governments May Tax the Value of the Possessory Interest
in the Leased Property.
Golden Heart argues that because it pays market rent on
the utilidor property, if it were to assign its interest to an
informed buyer the assignee would not be willing to pay anything
for the interest because the lease terms reflect the market price.
Accordingly, Golden Heart believes that the assessed value should
be zero.
The assessor, however, does not argue that the
reversionary method accurately values the utilidor lease contract.
Instead, the assessor argues that the assessment reflects the value
that Golden Heart derives from its ability to use the utilidor
property in its operations -- its possessory interest. Even if
Golden Heart cannot sell its lease contract for any significant
sum, the assessor seeks to tax the benefit Golden Heart derives
from its right to use the utilidor. [Fn. 24] This use of the
property must have some value, or Golden Heart would not agree that
$20,000 in annual rent is fair market value.
It was appropriate for the assessor to assess Golden
Heart's possessory interest. Although our approval of the taxing
of a possessory interest in tax-exempt property is not explicit in
our decisions in North Star Alaska Housing [Fn. 25] and Cool Homes,
[Fn. 26] we implicitly approved of the practice. First, we
approved the use of the reversionary method, which begins with the
fee value of a property in an attempt to discern the market value
of a lease. [Fn. 27] Second, we concluded that the assessments in
those cases were valid because the interests to be taxed shared
"attributes of a fee interest" in that the leases were long term.
[Fn. 28] Even though Golden Heart pays rent, the longevity of the
agreement makes Golden Heart's interest analogous to a fee
interest. Moreover, the reversionary method accounts for the
differences between a leasehold interest and a fee interest in the
utilidor by deducting value to reflect the restrictions on the
lease and the fact that the property will eventually revert back to
the City.
In several other states, local governments are permitted
to tax a private party's possessory interest in tax-exempt
property. [Fn. 29] We agree with the assessor and conclude that
"[t]he value to be taxed is the value of the right to use the
property over the period of the lease." [Fn. 30] We join these
other states in allowing municipal governments to assess the
possessory interest in tax-exempt property. "[W]hat is being taxed
is the value of the leasehold, in the sense of the price for which
it can be sold, not the value of the leasehold to the tenant, in
the sense of the profit that the tenant can make upon a sale of the
lease." [Fn. 31]
Golden Heart argues that the Alaska Constitution
specifically requires the assessor to assess the market value of
its lease contract rather than the value of its possessory
interest. Article IX, section 5 of the Alaska Constitution states
that "[p]rivate leaseholds, contracts, or interests in [tax-exempt]
land or property . . . shall be taxable to the extent of the
interests." (Emphasis added.) Golden Heart argues that because
the constitution specifically refers to a "leasehold," the assessor
cannot tax its "possessory interest." But the term "leasehold" is
not exclusive of the term "possessory interest." A "leasehold" is
a "tenant's possessory estate in land or premises." [Fn. 32]
Golden Heart provides no additional legal authority for its
proposed distinction.
Moreover, the constitution appears to contemplate the
taxation of more than leaseholds in tax-exempt property. The
constitutional provision includes the more inclusive term
"interests" in enumerating what a municipality may assess. [Fn. 33]
We therefore reject Golden Heart's argument that by allowing a
"leasehold" to be taxed, the Alaska Constitution excluded the
possibility that a municipality could tax a "possessory interest"
in a lease.
C. The Reversionary Method Is an Appropriate Valuation
Method.
We have twice upheld the application of the reversionary
method of valuation used in this case. [Fn. 34] In North Star
Alaska Housing, we reviewed an assessment of property in which the
federal government leased land at no cost to a housing developer.
[Fn. 35] The developer then built houses on the land and leased
them back to the federal government. [Fn. 36] When Fairbanks
assessed the property, the developer challenged the assessment.
[Fn. 37] We affirmed the assessment and the valuation method. [Fn.
38]
The valuation method approved in North Star Alaska
Housing was the same one employed in the instant case. [Fn. 39] As
in this case, the developer argued that the leasehold should be
assessed according to the value the leaseholder would receive if it
sold its interest on the open market, and the value of the interest
would be zero. [Fn. 40] But we rejected that argument and
concluded that it was appropriate to value the leasehold "based on
the land's market value, as if it were owned by [the leaseholder],
minus an adjustment based on the fact that [the leaseholder's]
interest in land is only for a [fixed] term . . . ." [Fn. 41] We
again approved of this valuation method in our decision in Cool
Homes, Inc. v. Fairbanks North Star Borough. [Fn. 42]
Golden Heart, however, believes that the decisions in
North Star Alaska Housing and Cool Homes are distinguishable from
the instant case. In those cases, the lessees either paid no rent
or nominal rent for their leases. [Fn. 43] Under those
circumstances both the reversionary method and the rent savings
method would yield approximately equal valuations. According to
the rent savings method, one would assess the lease at the market
value of the lease, which is the market value of the possessory
interest, less the rent actually paid. [Fn. 44] If the lessee pays
no rent, the market value of the lease contract is the same as the
assessed value of the possessory interest. The reversionary method
starts with "the fee simple value, discounted by a factor
representing the fact that the property will revert to the owner in
the future," [Fn. 45] a figure approximately equal to the market
value of the possessory interest in the property.
But when the lessee pays rent, the value assessed by the
"rent savings method" goes down, and the value assessed by the
"reversionary method" stays the same. [Fn. 46] Golden Heart argues
that this result is untenable because there can only be one measure
of market value. But this argument begs the question. The issue
is which interest the assessor is valuing. We have already
concluded that Fairbanks may assess the possessory interest.
Therefore, it is not anomalous that the market value of the lease
is different from the market value of the possessory interest; the
valuations are measures of two completely different interests. [Fn.
47]
Moreover, many states have adopted the rule that when
governments tax a lessee's possessory interest in otherwise exempt
property, they should value the interest without regard for the
amount of contract rent. [Fn. 48] Many of these courts distinguish
between the lessee's equity in the lease and the value of the
lessee's right to use the property. [Fn. 49] Although the
valuation methods vary, [Fn. 50] these states seek to ascertain the
value of the right to possess the property for the contract term,
without regard for the contract price, [Fn. 51] just as the
assessor has done here.
The California Supreme Court has explained why the
assessment of leases of tax-exempt property requires valuation
methods different from the assessment of private property that is
subject to a lease. In De Luz Homes v. County of San Diego,
Justice Traynor explained that in a normal lease, no distinction is
made between the possessor and the individual holding the
reversionary interest when values are assessed. [Fn. 52] Instead,
the reversioner and possessor sort out the tax liability in a
private arrangement. [Fn. 53] Inquiring into the value of the
possessory and reversionary interest is important, however, when
the reversionary interest is tax exempt. [Fn. 54] Because the
reversion is not taxed, some method of valuing the tenant's
possessory interest must be employed to account for the value of
the reversion. [Fn. 55]
Golden Heart argues that the extra-jurisdictional
authority is not persuasive. Instead, Golden Heart directs us to
Great Northern Railway Co. v. Weeks. [Fn. 56] Golden Heart asserts
that Weeks stands for the proposition that the assessor must use
"the same valuation standard for tax and condemnation cases,"
quoting the following language:
The principles governing the ascertainment of
value for the purposes of taxation are the same as those that
control in condemnation cases, confiscation cases, and generally in
controversies involving the ascertainment of just compensation.[[Fn. 57]]
But other courts have distinguished Weeks and held that different
valuation methods for condemnation and taxation purposes may be
employed. [Fn. 58] And the Supreme Court has expressly limited the
precedential value of Weeks, confining its holding to the specific
facts. [Fn. 59]
Contrary to Golden Heart's contention, there are good
reasons for employing different methods of valuation for
condemnation and taxation purposes. In a condemnation, the
interest holder loses its possessory interest. As Justice Traynor
explained:
In eminent domain the full value of the
interest must be paid for, but since the taking discharges the
obligation to pay future rent, the value of that obligation to the
lessor must be awarded to him. Although the lessee is awarded
damages equal only to the value of his equity, he receives the full
value of his possessory interest, for his obligation to pay rent is
discharged.[ [Fn. 60]]
In a taxation case, the assessor is attempting to ascertain the
value of the possessory interest without regard for the obligation
to pay rent because the assessment does not extinguish the lessee's
obligation to pay that rent. Accordingly, the value of the
reversionary interest is deducted from the fee simple value of the
property less the decrease in value caused by the lease
restrictions.
We conclude that the reversionary method is a valid
method for valuation of a possessory interest in tax-exempt
property. Both the assessor and Golden Heart agree that the rate
of $20,000 per year is fair market rent. And neither the
assessor's use of the eight percent capitalization rate to value
the fee interest at $250,000 [Fn. 61] nor the assessor's estimate
that the use restrictions deplete the market value of the lease by
ten percent has been challenged.
Golden Heart does, however, point to an error in the
assessor's valuation. Golden Heart argues that when calculating
the reversionary interest, the assessor improperly calculated the
value of the reversion using the $225,000 value, reached by
deducting ten percent of the fee simple value of $250,000 from the
fee value to account for the use restrictions. Golden Heart
contends that this deduction is inappropriate because when the
property reverts to Fairbanks it will not contain the lease's
restrictions. We agree. Once the lease term expires, the utilidor
will revert back to Fairbanks, but because Fairbanks is the fee
owner, it will not be subject to use restrictions. Factoring the
use restrictions into the valuation of Fairbanks's reversion is
therefore inappropriate.
Assessor's Reversion Estimate = (fee value -
(.1) fee value) x (present value factor)
The present value factor for a lease expiring
in fifty years, assuming 10% annual compound interest, is .008519.
Assessor's Reversion Estimate = (250,000 -
25,000) x (.008519) = $1,917
Recalculated Reversion Estimate = (250,000 -
0) (.008519) = $2,130
Accordingly, the new assessed value should be the fee value
($250,000) less the amount accounting for the use restrictions
($25,000) less the recalculated value of the reversionary interest
($2,130), [Fn. 62] equalling $222,870.
D. The Assessor's Valuation Did Not Violate Equal
Protection.
Golden Heart argues that the assessor's valuation of its
possessory interest denied it equal protection. Golden Heart
asserts that "[t]he Assessor chooses between two valuation
standards based solely on the exemption status of the holders of
the interest. . . . It is impermissible to change valuation
standards based on the tax status of the holders of an interest."
It is perfectly acceptable, however, to use different valuation
standards for exempt and non-exempt property. The Alaska
Constitution expressly calls for property owned by the state or its
political subdivisions to be tax exempt, [Fn. 63] and expressly
allows privately held interests in exempt lands to be taxed. [Fn.
64] Golden Heart argues that the assessor has denied it equal
protection because it does not tax all leases. But this argument
mischaracterizes Fairbanks's assessing procedures.
The Board of Equalization found that "private property is
taxable to the fee owner based on the full fee value of the
property." The tax obligation of a lessee of private property
manifests itself in the form of rent paid to the fee holder -- the
lessor -- who is responsible for the property tax. In cases such
as these where a private party leases property from the government,
the fee holder is tax exempt. Because the assessor cannot assess
the tax-exempt fee holder, it assesses the interest held by the
private lessee "to the extent of the interest" [Fn. 65] and
calculates the value of that possessory interest. [Fn. 66] As the
California Supreme Court explained:
In practice, assessors usually enter the
entire value of land and improvements on the tax roll without
distinction between possessory and reversionary interests . . . .
As between reversioners and possessors payment of the tax is a
private arrangement. When, however, the possessory interest is
taxable and the reversion is exempt, only the possessory interest
is subject to assessment and taxation.[ [Fn. 67]]
Far from being an equal protection violation, this practice
actually levels the field between lessees of private property and
those with leases from a tax-exempt entity. [Fn. 68]
Golden Heart makes a second argument that it has been
treated differently than other holders of tax-exempt property.
Golden Heart points out that leasehold interests for floatplane
slips at the airport are not taxed. At the hearing the assessor
explained that it did not tax these leases because the value was so
low that the cost of doing so would exceed the tax revenue
generated. Golden Heart argues that this practice either violates
equal protection or is arbitrary and capricious because the
assessor lacks standards for determining when the value of the
interest was too low to tax.
Both the United States and Alaska Constitution guarantee
people equal protection under the law. [Fn. 69] "These clauses,
however, require 'equal treatment only for those who are similarly
situated.'" [Fn. 70] And Golden Heart has not demonstrated that it
has been treated differently from similarly situated parties. Our
cases point out that the City of Fairbanks has a decades-old policy
of taxing possessory interests in tax-exempt property. [Fn. 71]
There are several leases of tax-exempt land in the Fairbanks area
which the City has assessed, including the airport and the
properties in North Star Alaska Housing and Cool Homes.
Golden Heart claims, however, that the assessor has
violated its equal protection rights by failing to tax leases of
floatplane slips at the airport. But these interests are not
similarly situated to the Golden Heart's utilidor lease. The
assessor stated that its reason for not assessing the floatplane
leases was their low value in relation to the cost of collection of
the tax. And Golden Heart has failed to demonstrate why this was
an unjustifiable or arbitrary classification.
To demonstrate that the board acted arbitrarily or
capriciously, Golden Heart would have to show that the City of
Fairbanks had "no principled basis for distinguishing between" [Fn.
72] the floatplane slip leases and the utilidor lease. The
testimony at the hearing noted that the valuation of the floatplane
leases was well below that of the utilidor lease. [Fn. 73] The
record contains no more information about the values of the
floatplane slip leases, but it does demonstrate that valuable
leases at the airport are taxed. Given the record, we see no basis
to overturn the board's finding that Golden Heart has not been
singled out for unequal treatment.
E. Golden Heart Was Not Denied Due Process.
Golden Heart complains of alleged improprieties during
the hearing process, which it argues amount to a violation of due
process. The claims of error [Fn. 74] include the assessor's
alleged failure to give reasonable notice of its position and the
board's refusal to allow Golden Heart to call adverse witnesses
during the presentation of its case.
Golden Heart argues that it did not have adequate notice
of the assessor's position. The assessor provided its position
memorandum to Golden Heart on the Friday before the Monday hearing.
Although this notice complied with Fairbanks North Star Borough
Ordinance 3.24.001(D), [Fn. 75] Golden Heart argues that this
notice was insufficient. Golden Heart claims it was prejudiced
because it could not prepare extensively to respond to the
assessor's case. But the transcript indicates that Golden Heart
adequately understood the assessor's position at the hearing.
Because "[t]he crux of due process is opportunity to be heard and
the right to adequately represent one's interests," [Fn. 76] the
board did not deny Golden Heart due process.
Golden Heart also wanted to call the assessor as part of
its case in chief. Golden Heart argued that because it did not
have an adequate opportunity to learn the position of the assessor
prior to the hearing, the assessor should have been required to
testify first so that Golden Heart's expert could respond. The
board denied this request. Instead it granted Golden Heart "wide
latitude" in presenting rebuttal evidence.
[Golden Heart] will be allowed wide latitude
in [its] rebuttal case to present [its] expert testimony that would
rely on any of the evidence that is brought forth during either the
direct or cross examination of the assessors, which will enable
[Golden Heart] to have all of the evidence in the record that [it
wishes] to put in. At the same time, we'll retain the order that
the Board is used to and feels comfortable with, but [Golden Heart]
will not be precluded from the presentation of any of [its]
evidence.
By allowing Golden Heart the option of delaying its
expert testimony until after the assessor had presented its case,
the board afforded Golden Heart the opportunity to cure the problem
about which it now complains. Generally, administrative bodies
have discretion with regard to the order of proof and the
presentation of evidence. [Fn. 77] Moreover, the Wisconsin Supreme
Court has confronted an identical argument and concluded that there
was no due process violation. [Fn. 78] In State ex rel. Gregersen
v. Board of Review, the Board of Review did not allow the taxpayer
to call the assessor in his case in chief. [Fn. 79] The Wisconsin
Supreme Court affirmed the assessment, concluding that there was no
denial of the taxpayer's right to cross-examine, just a
postponement. [Fn. 80] Because Golden Heart was permitted to rebut
the assessor's testimony, the board's decision did not constitute
a due process violation.
V. CONCLUSION
Because Alaska's constitution, statutes, and case law
authorize local governments to tax a possessory interest in tax-
exempt public property, the assessor's valuation was not
fundamentally wrong. But because the assessor inappropriately
considered the impact of the use restrictions when it valued the
City's reversionary interest, the 1998 assessment should be
modified from $223,087 to $222,870.
FOOTNOTES
Footnote 1:
The "utilidor" contains the pipes and wiring comprising
important portions of Fairbanks's public works.
Footnote 2:
The assessor arrived at this figure by capitalizing the annual
rent of $20,000 per year at a rate of eight percent.
Footnote 3:
The assessor arrived at the value of the reversionary interest
by starting with the fair market value and deducting the value of
the use restrictions, a figure called the "value less
restrictions." The assessor determined the value of the reversion
by figuring out the present value of the "value less restrictions"
at the end of the 50-year term. The assessor estimated the present
value by taking the product of the "value less restrictions" and
the present value factor found on a compound interest table that
assumed an interest rate of 10%. ($250,000 - $25,000) x (.008519)
= $1,917
Footnote 4:
778 P.2d 1140, 1143-45 (Alaska 1989).
Footnote 5:
The assessor refers to this method as the "rent-savings
method," but Golden Heart has avoided using that term because this
court has explicitly upheld a municipality's decision to value a
lease of tax-exempt property by the "reversionary method" instead
of the "rent-savings method." See North Star Alaska Hous., 778
P.2d at 1143-45. Because Golden Heart's advocated method so
closely resembles the "rent-savings method" we refer to it as such.
"The rent savings method arrives at a value based upon the market
rental value of the leasehold minus the amount of rent actually
paid by the lessee." Id. at 1143.
Footnote 6:
See Robles v. Providence Hosp., 988 P.2d 592, 596 (Alaska
1999).
Footnote 7:
See North Star Alaska Hous., 778 P.2d at 1144 n.7.
Footnote 8:
Id. (internal punctuation and citation omitted).
Footnote 9:
Hoblit v. Greater Anchorage Area Borough, 473 P.2d 630, 632
(Alaska 1970) (quoting Twentieth Century Inv. Co. v. City of
Juneau, 359 P.2d 783, 788 (Alaska 1961)) (internal punctuation
omitted).
Footnote 10:
Alaska Const. art. IX, sec. 5 ("Private leaseholds, contracts,
or
interests in land or property owned or held by the United States,
the State, or its political subdivisions, shall be taxable to the
extent of the interests.").
Footnote 11:
AS 29.45.030(a)(1)(A).
Footnote 12:
778 P.2d at 1143-45.
Footnote 13:
Twentieth Century Inv. Co., 359 P.2d at 788 n.13 (internal
quotation omitted).
Footnote 14:
AS 29.45.110(a).
Footnote 15:
See Alaska Const. art. IX, sec. 3.
Footnote 16:
AS 29.45.110(a).
Footnote 17:
778 P.2d at 1144 n.7.
Footnote 18:
860 P.2d 1248, 1262-66 (Alaska 1993).
Footnote 19:
AS 29.45.110(a).
Footnote 20:
See Alaska Const. art. IX, sec. 3.
Footnote 21:
AS 29.45.110(a).
Footnote 22:
See North Star Alaska Hous., 778 P.2d at 1144 n.7.
Footnote 23:
Hoblit v. Greater Anchorage Area Borough, 473 P.2d 630, 632
(Alaska 1970) (quoting Twentieth Century Inv. Co. v. City of
Juneau, 359 P.2d 783, 788 (Alaska 1961)) (internal punctuation
omitted).
Footnote 24:
See Pier 67, Inc. v. King County, 469 P.2d 902, 907 (Wash.
1970).
Footnote 25:
778 P.2d at 1143-45.
Footnote 26:
860 P.2d at 1263-64.
Footnote 27:
See North Star Alaska Hous., 778 P.2d at 1143-45; Cool Homes,
860 P.2d at 1263-64.
Footnote 28:
North Star Alaska Hous., 778 P.2d at 1145; see Cool Homes, 860
P.2d at 1263-64.
Footnote 29:
See De Luz Homes v. County of San Diego, 290 P.2d 544, 554-58
(Cal. 1955); Texas Co. v. County of Los Angeles, 338 P.2d 440, 444
(Cal. 1959); People ex rel. Korzen v. American Airlines, Inc., 233
N.E.2d 568, 572 (Ill. 1968); People ex rel. Kucharski v. Trans
World Airlines, Inc., 251 N.E.2d 225, 226-27 (Ill. 1969); Portland
Gen. Elec. Co. v. State Tax Comm'n, 437 P.2d 827, 833 (Or. 1968);
Shaia v. City of Richmond, 153 S.E.2d 257, 261 (Va. 1967); Pier 67,
469 P.2d at 907.
Footnote 30:
Pier 67, 469 P.2d at 907.
Footnote 31:
Trans World Airlines, Inc., 251 N.E.2d at 226.
Footnote 32:
Black's Law Dictionary 900 (7th ed. 1999); but see Black's Law
Dictionary 900 (defining a "leasehold interest," for the purposes
of eminent domain, as "the lessee's interest in the lease itself,
measured by the difference between the total remaining rent and the
rent the lessee would pay for similar space for the same period");
see also Totemoff v. State, 905 P.2d 954, 966 (Alaska 1995);
Dannemiller v. AMFAC Distrib. Corp., 566 P.2d 645, 653 n.10
(Alaska 1977).
Footnote 33:
Alaska Const. art IX, sec. 5.
Footnote 34:
See Cool Homes, Inc. v. Fairbanks N. Star Borough, 860 P.2d
1248, 1262-66 (Alaska 1993); North Star Alaska Hous. Corp. v.
Fairbanks N. Star Borough Bd. of Equalization, 778 P.2d 1140, 1143-
45 (Alaska 1989).
Footnote 35:
778 P.2d at 1141.
Footnote 36:
See id. at 1141-42.
Footnote 37:
See id. at 1142.
Footnote 38:
See id. at 1145.
Footnote 39:
See id. at 1143-45.
Footnote 40:
See id. at 1143, 1144.
Footnote 41:
Id. at 1144.
Footnote 42:
860 P.2d at 1262-66.
Footnote 43:
See North Star Alaska Hous., 778 P.2d at 1145; Cool Homes, 860
P.2d at 1252.
Footnote 44:
See id.; see also People ex rel. Kucharski v. Trans World
Airlines, Inc., 251 N.E.2d 225, 226 (Ill. 1969).
Footnote 45:
North Star Alaska Hous., 778 P.2d at 1143.
Footnote 46:
Rent Savings Method
Possessory Int. Value - Rent Paid = Lease Market Value
Reversionary Method
Fee Simple Value - Reversionary Int. Value = Possessory Int. Value
Therefore, when "Rent Paid" is equal to zero, the market value of
the lease would equal the value of the possessory interest.
Footnote 47:
The superior court believed that Golden Heart's payment of
rent distinguished this case from our decision in North Star Alaska
Housing and Cool Homes. But the payment of rent does not affect
the value of Golden Heart's possessory interest.
Footnote 48:
See Texas Co. v. County of Los Angeles, 338 P.2d 440, 444
(Cal. 1959); De Luz Homes v. County of San Diego, 290 P.2d 544,
554-58 (Cal. 1955); People ex rel. Kucharski v. Trans World
Airlines, Inc., 251 N.E.2d 225, 226-27 (Ill. 1969); People ex rel.
Korzen v. American Airlines, Inc., 233 N.E.2d 568, 572 (Ill. 1968);
Portland Gen. Elec. Co. v. State Tax Comm'n, 437 P.2d 827, 833 (Or.
1968); Shaia v. City of Richmond, 153 S.E.2d 257, 261 (Va. 1967);
Pier 67, Inc. v. King County, 469 P.2d 902, 907 (Wash. 1970).
Footnote 49:
See Trans World Airlines, 251 N.E. 2d at 226; Portland Gen.
Elec., 437 P.2d at 833; Shaia, 153 S.E.2d at 264; Pier 67, 469 P.2d
at 907.
Footnote 50:
Compare De Luz Homes, 290 P.2d at 557-58, with Shaia, 153
S.E.2d at 262.
Footnote 51:
See De Luz Homes, 290 P.2d at 557-58; Texas Co., 338 P.2d at
444; American Airlines, 233 N.E.2d at 572; Trans World Airlines,
251 N.E. 2d at 226; Portland Gen. Elec., 437 P.2d at 833; Shaia,
153 S.E.2d at 264; Pier 67, 469 P.2d at 907.
Footnote 52:
290 P.2d at 554-55.
Footnote 53:
See id. at 555.
Footnote 54:
See id.
Footnote 55:
See id.
Footnote 56:
297 U.S. 135 (1936). In Weeks, the Supreme Court overturned
a state's valuation of a railway system because the valuation
method factored in value attributable to the entire rail system,
even portions of the system located outside the state. See id. at
142-44.
Footnote 57:
297 U.S. at 139.
Footnote 58:
See, e.g., Great N. Nekoosa Corp. v. United States, 544 F.
Supp. 511, 514-15 (D. Me. 1982).
Footnote 59:
See Nashville, C. & St. L. Ry. v. Browning, 310 U.S. 362, 371
(1940) ("Plainly, therefore, [Weeks] must have rested upon
considerations peculiar to its own facts.").
Footnote 60:
Texas Co., 338 P.2d at 444.
Footnote 61:
The assessor arrived at the $250,000 valuation of the fee
interest by dividing the annual rent of $20,000 by a capitalization
rate of eight percent. 20,000 ö .08 = $250,000
Footnote 62:
Although the disparity between the two valuations may seem de
minimis, that disparity will widen as the expiration of the lease
term draws closer. The present value factor that Fairbanks uses to
calculate the present value of the reversion will increase every
year. For example, when the lease term was to expire in 50 years,
the factor was .008519. According to the same table that factor
should be .022095 when the expiration is 40 years away, .148644
when it is 20 years away, .385543 when it is 10 years away, .620921
when it is 5 years away, and .909091 when it is 1 year away. The
reversion gets more valuable as eventual transfer back to Fairbanks
becomes imminent. The valuation of Golden Heart's possessory
interest in future years should reflect this phenomenon.
Footnote 63:
Alaska Const. art. IX, sec. 4.
Footnote 64:
Alaska Const. art. IX, sec. 5.
Footnote 65:
AS 29.45.030(a)(1)(A).
Footnote 66:
See North Star Alaska Hous., 778 P.2d at 1145.
Footnote 67:
De Luz Homes v. County of San Diego, 290 P.2d 544, 555 (Cal.
1955) (citations omitted).
Footnote 68:
See Trimble v. City of Seattle, 231 U.S. 683, 689-90 (1914)
("If these leaseholds are not taxable, they are a favored class of
property; for ordinarily leaseholds are taxed even if they are
lumped and included in the value of the fee.").
Footnote 69:
See U.S. Const. amend. XIV, sec. 2; Alaska Const. art. I, sec.
2.
Footnote 70:
Rutter v. State, 963 P.2d 1007, 1013 (Alaska 1998) (quoting
Shepherd v. State, Dep't of Fish & Game, 897 P.2d 33, 44 (Alaska
1995)).
Footnote 71:
See North Star Alaska Hous., 778 P.2d at 1145; Cool Homes,
Inc. v. Fairbanks N. Star Borough, 860 P.2d 1248, 1262-66 (Alaska
1993).
Footnote 72:
Noey v. Dep't of Envtl. Conservation, 737 P.2d 796, 806
(Alaska 1987).
Footnote 73:
No valuations were provided at the hearing, but Golden Heart's
counsel did mention that the rent on a floatplane slip was $360 per
year, well below the $20,000 annual rental rate of the utilidor.
If the $360 figure was close to the market rent, the assessed value
of the floatplane slips would be orders of magnitude lower than the
valuation of the utilidor, assuming the same eight percent
capitalization rate used to value the utilidor.
Footnote 74:
Golden Heart makes eight claims of error in all, but we do not
consider all of them because they were not briefed sufficiently for
us to consider them on appeal. See Adamson v. University of
Alaska, 819 P.2d 886, 889 n.3 (Alaska 1991) ("where a point is
given only a cursory statement in the argument portion of a brief,
the point will not be considered on appeal").
Footnote 75:
FNSBCO 3.24.001(D) requires that information regarding the
assessor's position be made available one working day before the
hearing.
Footnote 76:
Matanuska Maid, Inc. v. State, 620 P.2d 182, 192 (Alaska
1980).
Footnote 77:
Cf. Stein v. Kelso, 846 P.2d 123, 126 (Alaska 1993)
(Department of Environmental Conservation hearing officer's
evidentiary ruling reviewed for an abuse of discretion).
Footnote 78:
See State ex rel. Gregersen v. Board of Review of Town of
Lincoln, 92 N.W.2d 236 (Wis. 1958).
Footnote 79:
Id. at 237-38.
Footnote 80:
See id. at 239, 241.
