Truitt Brothers, Inc. v. Dept. of Rev. , 10 Or. Tax 111 ( 1985 )

ON PETITION FOR REHEARING Upon rehearing the court concluded that its adoption of defendant's estimated depreciated reproduction cost (DRC) included a deduction for economic obsolescence; therefore, the court's deduction from defendant's DRC of plaintiff's estimate of economic obsolescence was in error.

Defendant also contended that the court's definition of fair market value concerning "terms equivalent to cash" was inconsistent with the department's administrative rule. Court declined to amend the definition, finding that "terms equivalent to cash" and "in terms of money" convey the same meaning. Decision amended October 24, 1985. Defendant filed a petition for rehearing seeking correction of the court's opinion which was entered in this case on August 7, 1985. The court agreed to hear arguments on two points raised in defendant's petition. Arguments of counsel were heard on October 18, 1985.

The first argument made by defendant concerned economic obsolescence attributable to the land by virtue of a different higher and best use. In its opinion, the court adopted defendant's estimate of depreciated reproduction cost (DRC) from which was deducted plaintiff's estimate of economic obsolescence. The court expressly indicated that this estimate of economic obsolescence included obsolescence arising from use of the land. In its petition for rehearing, defendant points out that the economic obsolescence attributable to land use had already been deducted from defendant's estimate of DRC and therefore the court's decision essentially doubles up on that aspect of economic obsolescence. In opposition, plaintiff argues that the economic obsolescence adopted by the court was determined by deducting plaintiff's whole plant value from plaintiff's DRC which took into account economic obsolescence due to land use. Plaintiff argues that if you change the amount of DRC, then the amount of economic obsolescence due to other than land use must change in the same amount.

8. It may be that in applying the cost approach, economic obsolescence due to land use should be considered in addition to economic obsolescence from other sources. Here, however, the economic obsolescence from other sources is measured by essentially accepting an indication of value from the market approach. Such a measure reflects economic obsolescence from all sources. To add economic obsolescence from all sources, as measured by the market approach, to economic obsolescence due to land use would appear to be a doubling up.

9. Acknowledging that the procedure is unusual, it is an attempt to accomplish a reconciliation or correlation of the indications of value. In this case the court has accepted defendant's DRC as the most reliable indication of the upper limit of value. At the same time, the court was persuaded that economic obsolescence is present in the industry and accepted plaintiff's estimate of economic obsolescence. Plaintiff's estimate of economic obsolescence was based on the appraiser's judgment and analysis of all the data pertaining to that aspect of value. Although the court adopted the appraiser's estimate of economic obsolescence, it did not necessarily adopt all other conclusions and adjustments made by the appraiser. If the court were to make its own estimate of economic obsolescence, it would not give the same weight or make the same adjustments to the comparable sale and other indications of value.¹ While more precise determinations might be made, the correlation process is not one of just "crunching the numbers." Appraising is an art because judgment must be exercised in all stages of the valuation process and because in reality property has a range of value.

After reviewing the specific evidence of economic obsolescence, the court has concluded that defendant is correct and that the DRC, from which the economic obsolescence is deducted, should be increased to $7,506,460. This will result in the following adjustments to the values of the properties:

Depreciated Reproduction Economic True Cash Cost (DRC) Obsolescence Value ____________ ____________ _________

Buildings $ 739,630 $ 222,384 $ 517,246 Yard Improve. 126,630 38,072 88,558 Machinery Equipment 6,640,200 2,196,851 4,443,349 __________ _________ _________

Totals 7,506,460 2,457,307 5,049,153 Plus Land 553,240 _________ Total $5,602,393

Defendant's second point concerns the definition of fair market value used by the court in its opinion. That definition, quoted on pages three and four of the opinion, was taken from the 8th Edition of The Appraisal of Real Estate published by the American Institute of Real Estate Appraisers, a widely accepted and cited appraisal text. Defendant contends that the element of the definition which concerns "terms equivalent to cash" is inconsistent with the definition of market value as established in the department's administrative rule, OAR 150-308.205-A(1)(a). The relevant portion of that administrative rule states:

"Market Value as a basis for true cash value shall be taken to mean the highest price in terms of money which a property will bring if exposed for sale in the open market, * * *." (Emphasis added.)

10, 11. The court does not view the definitions as being inconsistent with each other. The phrases "terms equivalent to cash" and "in terms of money" appear to convey the same meaning. A word of caution, however, is appropriate. In order to prove "cash equivalency," substantial data is required to demonstrate the effects of terms on the market overall.² It is not sufficient to simply demonstrate that terms have made a difference in the price as to a single property. Assumptions about the effect of contracts or terms likewise are not proof.U.S. Nat'l Bank of Oregon v. Dept. of Rev., 8 OTR 256 (1980). It is worth noting that to date no party before this court has been able to establish the data necessary to apply the concept.

Plaintiff shall prepare a form of judgment consistent with the opinion and as modified herein.

¹ One indication of economic obsolescence would be to deduct the Castle and Cooke sale (indication of value) which the court views as being $5,000,000, from defendant's DRC of $7,506,460, which gives an indicated amount of economic obsolescence of $2,506,460.

² The concept has been applied in a variety of contexts. It appears, however, that in some contexts there are still many questions that must be answered before it can be accepted. See,for example, Sirmans, et al., Cash Equivalency Valuation forCreative Financing Methods, The Appraisal Journal, July 1984, at 420.