Kathleen J. Compiano, Moss Properties, Llc, Mariah Howard, And Evan Howard Vs. Board Of Review Of Polk County ( 2009 )

IN THE SUPREME COURT OF IOWA
No. 07–0363
Filed August 7, 2009
KATHLEEN J. COMPIANO, MOSS PROPERTIES, LLC, MARIAH HOWARD,
and EVAN HOWARD,
Appellants,
vs.
BOARD OF REVIEW OF POLK COUNTY,
Appellee.
Appeal from the Iowa District Court for Polk County, Carla T.
Schemmel, Judge.
Appeal by taxpayers from decision by district court in a proceeding to
protest an assessment of real estate for tax purposes. AFFIRMED.
Dennis P. Ogden of Belin Lamson McCormick Zumbach Flynn, PC,
Des Moines, for appellants.
John P. Sarcone, County Attorney, and Ralph E. Marasco, Jr.,
Assistant County Attorney, for appellee.
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CADY, Justice.
In this appeal by the owners of real estate from a decision by the
district court denying a protest of the assessment of the real estate, we
affirm the decision of the district court.
I. Background Facts and Proceedings.
Kathleen Compiano owns a one-half interest in a parcel of real estate
located at 7900 Hickman Road in Windsor Heights. The other owners are
Mariah Howard, Evan Howard, and Moss Properties, LLC. The parcel covers
approximately eight acres. An 84,000 square foot building is located on the
property. Kathleen and the other owners purchased the property in 1985.
For many years, the building was occupied by a Richman Gordman retail
store under a lease, which continued after Kathleen and the other owners
purchased the property. A distributing company took over occupancy of the
building under a fifteen-year lease in 1990 after Richman Gordman filed for
bankruptcy protection. The lease arrangements have provided a profitable
return for the owners.
The property has been managed by Thomas Compiano since it was
purchased by the owners. Thomas Compiano is the son of Kathleen. At the
time of trial, Kathleen was eighty-six years old.
In early 2005, the distributing company notified Thomas Compiano it
would not renew the lease and planned to move its operation from the
building on August 31, 2005. Since that time, Compiano has had only
modest success in finding new tenants to occupy the entire space of the
building. He has also attempted, without success, to sell the property with
the help of David Little, a vice-president of Terrus Real Estate Group. Little
became the listing agent for the property in July 2006.
The Polk County Assessor valued the property for tax purposes on
January 1, 2005, at $4,179,000. The owners timely protested the
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assessment in May 2005 by filing a petition with the Polk County Board of
Review. They claimed the property was assessed for more than the value
authorized by law and ultimately asserted the assessed value should be $3.5
million. Following a hearing, the board of review determined the market
data showed the property was not overassessed. It denied the protest.
The owners filed an appeal from the decision by the board of review
with the district court. The district court heard the appeal in October 2006.
Little and Compiano both testified at the hearing the real estate had a
market value of $3.5 million.
Little testified he sought to determine the market value of the property
after he became the listing agent. He was unable to find any sales of
comparable property in Windsor Heights within the preceding six-month
period that would allow him to value the property under the comparable-
sales method of valuation. Instead, he valued the property under the income
method of valuation. Under this method, he considered the amount of
income produced by the property and applied a capitalization rate to reach a
market value of $3.5 million. He believed the comparable-sales approach to
valuation can be misleading in the commercial real estate market and has
found from his experience that investors in commercial real estate reach a
sales price based on the income potential of the property.
Compiano testified he has been unable to lease all of the available
space in the building after the distributing company left in August 2005. He
also testified one of the tenants in the building would be leaving in 2008,
and the building was in need of maintenance and updating. Compiano is a
CPA and has been involved in the commercial real estate business in the
Des Moines area for over twenty-five years. He testified the value of
commercial real estate is driven by the cash flow of the property, and this
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concept was largely responsible for his opinion that the property had a value
of $3.5 million.
The board presented evidence from a commercial appraiser with the
Polk County Assessor’s Office in support of the appraisal. It also introduced
a two-page summary of an appraisal analysis of the property prepared by a
former commercial appraiser of the assessor’s office. This report was
prepared by the assessor’s office for the board of review. The owners
objected to the report as hearsay.
The district court denied the protest appeal. It found the owners “did
not meet their burden to have two ‘disinterested’ witnesses testify.” It also
found comparable sales in the Des Moines area could have been utilized to
value the property under the comparable-sales approach, and the owners
improperly limited their search for comparable sales. Finally, the district
court determined the assessment analysis performed by the county assessor
was sound.
The owners filed an appeal from the decision of the district court that
presents four claims of error. First, they claim the district court misapplied
the burden of proof in tax-assessment cases by requiring the owners to
produce two disinterested witnesses to testify to the value of the property as
a prerequisite to establishing their claim that the property was overassessed.
Second, they claim the district court erred in finding Little and Compiano
were not disinterested witnesses. Third, they claim the appraisal analysis
introduced by the board was hearsay, and the district court erred in
admitting it into evidence. Finally, they claim the evidence produced at the
hearing before the district court supported a finding that the assessment
should be reduced to $3.5 million.
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II. Standard of Review.
We review tax protests de novo. Boekeloo v. Bd. of Review, 529 N.W.2d
275, 276 (Iowa 1995).
III. Overview of Applicable Law.
Real estate in Iowa is assessed for the purpose of annual taxation.
Iowa Code § 428.4 (2003). The assessment determines the value of the real
estate as of January 1 of the year of the assessment, and the amount of the
assessment is used to determine the amount of taxation. See id.The county assessor values and assesses the real estate and reports
the results to the director of revenue. Id. See generally id. § 441.17
(discussing duties of assessor). Property is assessed at its actual value, id.
§ 441.21(1)(a), which is determined by the market value of the property in
the year the property is valued, id. § 441.21(1)(b). The assessor is guided by
certain statutory requirements in determining the market value of real
estate, as well as written rules adopted by the department of revenue. Id.
§ 441.21(1); Soifer v. Floyd County Bd. of Review, 759 N.W.2d 775, 778–79
(Iowa 2009). One of the statutory requirements is the assessor must use the
comparable-sales approach to the valuation of real estate when comparable
sales are available. Iowa Code § 441.21(1); Soifer, 759 N.W.2d at 779 n.2.
An assessor can resort to the other methods of valuation only when
comparable sales cannot readily be established. Iowa Code § 441.21(2);
Soifer, 759 N.W.2d at 782 (noting statute requires comparable-sales
approach be used unless market value cannot be determined under this
method); see also Ross v. Bd. of Review, 417 N.W.2d 462, 464–65 (Iowa
1988) (discussing Iowa Code § 441.21).
A taxpayer is permitted to protest an assessment made by the county
assessor. Iowa Code § 441.37. A local body known as the board of review
hears the protest and is authorized to change the assessment. Id. The
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grounds for a protest are limited by statute. Id. § 441.37(1). They include
an inequitable assessment compared with other like property,
overassessment of the property, and any error in the assessment of the
property. 1 Id.
An appeal may be taken from the decision of the board of review to the
district court. 2 Id. § 441.38. In an appeal from a decision by the board of
review, the district court hears the case in equity and determines anew those
assessment issues previously presented to the board. Id. § 441.39. No new
grounds may be raised in district court, but additional evidence may be
presented. Id. § 441.38. There is no presumption the assessment or
valuation at issue was correct. Id. § 441.39.
In an appeal by a taxpayer challenging an assessment, the burden at
the district court hearing, as before the board of review, is on the taxpayer to
prove one of the statutory grounds for protest. Eagle Foods Ctrs., Inc. v. City
of Davenport Bd. of Review, 497 N.W.2d 860, 862–63 (Iowa 1993); Equitable
Life Ins. Co. v. Bd. of Review, 281 N.W.2d 821, 824 (Iowa 1979). The
taxpayer must establish a ground for protest by a preponderance of the
evidence. Richards v. Hardin County Bd. of Review, 393 N.W.2d 148, 151
(Iowa 1986). Yet, if the taxpayer
“offers competent evidence by two or more disinterested
witnesses that the market value of the property is less than the
market value determined by the assessor, the burden of proof
[shifts to] the officials or persons seeking to uphold such
valuation [to establish no grounds for protest exist].”
1The other grounds to protest are the property is not assessable, the property is
exempt from taxes or misclassified, and there is fraud in the assessment. Iowa Code
§ 441.37(1).
2Beginning in the assessment year January 1, 2007, appeals from the board of
review regarding assessments, valuations, or equalization may be taken to a statewide
property assessment appeal board in lieu of a direct appeal to the district court. Iowa Code
§ 441.37A(1) (2009). An appeal to the board is a contested case under chapter 17A. Id. A
party who is adversely affected by the decision of the board may subsequently seek judicial
review under chapter 17A. Id. § 441.38B.
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Equitable Life Ins. Co., 281 N.W.2d at 823 (quoting Iowa Code § 441.21(1973)). Ultimately, the burden of proof is one of persuasion. 3
The procedure in district court actually creates a two-step process.
Carlon Co. v. Bd. of Review, 572 N.W.2d 146, 150 (Iowa 1997). The district
court first makes an independent determination on the grounds of protest
based on all the evidence. Id.; see also Richards, 393 N.W.2d at 150(recognizing district court determines valuation issues based on totality of
evidence); Equitable Life Ins. Co., 281 N.W.2d at 827 (stating courts do not fix
assessment as an original matter, but only consider grounds for protest
urged before the board of review). If the taxpayer fails to shift the burden of
proof to the board, the grounds for protest must be established by the
taxpayer. Richards, 393 N.W.2d at 151; see Ross, 417 N.W.2d at 465(“[F]ailing to shift burden of proof is not equivalent to failing to satisfy the
burden of proof.”). If the proof offered by the taxpayer fails to establish the
grounds for protest, the assessment is affirmed. See Equitable Life Ins. Co.,
281 N.W.2d at 827 (stating a court is not an independent assessing
tribunal). Conversely, if the court determines the grounds of protest have
been established, it must then determine the value or correct assessment of
the property. Carlon Co., 572 N.W.2d at 150; Equitable Life Ins. Co., 281
N.W.2d at 827. This process is the second step. Here, the court makes its
independent determination of the value based on all the evidence.
Cablevision Assocs. VI v. Fort Dodge Bd. of Review, 424 N.W.2d 212, 214–15
(Iowa 1988); Richards, 393 N.W.2d at 150. If the record is inadequate to
determine the value of the property, the court may remand the case for
3The burden of persuasion actually comes into play after all of the evidence is
introduced at the hearing. 2 John W. Strong, McCormick on Evidence § 336, at 409 (5th ed.
1999).
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additional evidence to make the determination. Cablevision Assocs. VI, 424
N.W.2d at 215.
IV. Issues Presented for Appeal.
Our review of the tax assessment procedure in Iowa helps frame and
dispose of the issues presented on appeal. The owners assert the evidence
before the district court established the property was assessed for more than
the value authorized by law, and the district court should have set the
assessed value at $3.5 million. The owners claim the district court failed to
reach this conclusion because it misapplied the burden of proof, erred in
finding Compiano and Little were not disinterested witnesses, and admitted
an appraisal report into evidence at the district court hearing in violation of
the rule against hearsay.
A. Burden of Proof. It is a basic tenet that the failure to shift the
burden of proof in a tax assessment case is not equivalent to the failure to
satisfy the burden of proof. Ross, 417 N.W.2d at 465. Clearly, the
production of competent evidence by two disinterested witnesses in tax
assessment cases only pertains to shifting the burden of proof.
Nevertheless, appeals from a district court are de novo. We make our own
review of the evidence and determine if the burden of proof shifts based on
an evaluation of the evidence found in the record.
B. Competent Evidence of Two Disinterested Witnesses. We have
defined a “disinterested witness” in tax assessment cases as a person “who
has no right, claim, title, or legal share in the cause or matter in issue, and
who is lawfully competent to testify.” Post-Newsweek Cable, Inc. v. Bd. of
Review, 497 N.W.2d 810, 813 (Iowa 1993). The district court found Thomas
Compiano was not disinterested because his mother was an owner of the
property, and he managed the property. It found Little was not disinterested
because he was the real estate agent for the property.
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The statute not only requires two disinterested witnesses, it also
specifically requires the evidence offered by a disinterested witness to be
competent before the burden of proof shifts to the board. Boekeloo, 529
N.W.2d at 279. Thus, if the evidence offered by the witnesses is not
competent, the status of the witness as interested or disinterested is
irrelevant to the issue of shifting the burden of proof. Evidence is competent
under the statute when it complies “with the statutory scheme for property
valuation for tax assessment purposes.” Id.; accord Soifer, 759 N.W.2d at
782 (quoting Boekeloo, 529 N.W.2d at 279).
The legislative scheme for the valuation of real estate for purposes of
assessing taxes begins with the market-value approach, based on
“comparable sales of other properties.” Ross, 417 N.W.2d at 464; see also
Iowa Code § 441.21(1)(b); Soifer, 759 N.W.2d at 782. Under our statutory
scheme, the alternative methods to the comparable-sales approach to
valuation of property cannot be used when adequate evidence of comparable
sales is available to readily establish the market value by that method. Ross,
417 N.W.2d at 465. Thus, a witness must first establish that evidence of
comparable sales was not available to establish market value under the
comparable-sales approach before the other approaches to valuation become
competent evidence in a tax assessment proceeding. See Soifer, 759 N.W.2d
at 782 (noting if evidence “does not comport with the statute, the evidence is
not relevant and is, therefore, inadmissible”).
In this case, Little and Compiano both failed to show comparable sales
were not available to establish market value. Little essentially took the
position that the use of the comparable-sales approach as the sole method to
value commercial property of the type in this case would be misleading, and
he opined that potential buyers of such property prefer to determine the
sales price based on the income potential of the property. Consequently, he
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basically substituted his approach to the valuation of commercial property
for the approach adopted by the legislature. Even though Little also testified
he could find no comparable sales, he limited his search of comparable sales
to the first six months of 2006 and further limited his search to the suburb
of Des Moines where the property was located. Again, our legislature has
provided for a different scheme. Real estate is valued as of January 1 of the
assessment year, which in this case was 2005. Additionally, we have
previously said that comparable sales do not need to be “within the
assessor’s geographical area.” Carlon Co., 572 N.W.2d at 150. Little
acknowledged there were many sales of similar property in the Des Moines
area, particularly in West Des Moines and Clive. See Soifer, 759 N.W.2d at
792 (holding witness inappropriately limited search for comparable sales to
town where property was located rather than canvassing a broader
geographic area).
Compiano also ignored the comparable-sales approach to valuing real
estate. Like Little, he essentially testified the market price of commercial
real estate is driven by the potential cash flow of the property. He failed to
consider other sales of like property.
We conclude the opinions on market value expressed by Little and
Compiano did not comply with the statutory scheme for valuing property for
the purposes of tax assessment. Both witnesses failed to use the sales-price
approach to valuing property, and both witnesses failed to show that
comparable sales were not readily available in the relevant assessment.
Accordingly, the burden of proof did not shift to the board of review.
C. Proof of Overassessment. The protest by the owners in this case
was that the property was “assessed for more than the value authorized by
law.” Iowa Code § 441.37(1)(b). To prove “an assessment is excessive under
the law, [the taxpayer] must use the assessment methods as prescribed by
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the law.” Ross, 417 N.W.2d at 465. In this case, the evidence offered by the
owners did not follow the law and was “not relevant under this record to the
correct legal assessment” of the property. Id. Accordingly, the owners failed
to establish the property was overassessed, and we need not consider if the
appraisal report offered by the board was improperly admitted into evidence
at the district court hearing.
V. Conclusion.
On our de novo review, we conclude the owners failed to meet their
burden of proof. We affirm the decision of the district court.
AFFIRMED.
All justices concur except Wiggins, J., who takes no part.