Lowe's Home Centers, LLC v. Iowa Property Assessment Appeal Board ( 2021 )

IN THE COURT OF APPEALS OF IOWA
No. 20-0764
Filed February 17, 2021
LOWE'S HOME CENTERS, LLC,
Plaintiff-Appellant,
vs.
IOWA PROPERTY ASSESSMENT APPEAL BOARD,
Defendant-Appellee,
and
JOHNSON COUNTY BOARD OF REVIEW,
Intervenor.
________________________________________________________________
Appeal from the Iowa District Court for Johnson County, Kevin McKeever,
Judge.
A large home improvement retailer appeals a district court order affirming
the Property Assessment Appeal Board’s valuation of one of its commercial
properties. AFFIRMED.
Matthew M. Craft and Erich D. Priebe of Dutton, Daniels, Hines, Kalkhoff,
Cook & Swanson, P.L.C., Waterloo, for appellant.
Jessica Braunschweig-Norris and Bradley O. Hopkins, Des Moines, for
appellee.
Considered by Doyle, P.J., and Tabor and Ahlers, JJ.
2
TABOR, Judge.
The taxpayer, Lowe’s Home Centers, LLC, appeals a judicial-review order
affirming the Property Assessment Appeal Board’s (PAAB) valuation of its
Coralville property at $10,940,000. Lowe’s argues the PAAB violated Iowa law by
adopting an appraisal that valued the property according to its “current use,” rather
than its fair market value. Because the PAAB’s determination of value adhered to
the governing rule that tax assessors should value property based on its “present
use,” we affirm the district court’s order.
I. Facts and Prior Proceedings
Lowe’s owns and operates a 131,569-square-foot big-box home
improvement store in Coralville. The store occupies 21.78 acres of commercial
land in a developing area. Other improvements include a large outdoor sales and
garden area and concrete pavement. The Johnson County Assessor’s 2017 tax
assessment valued Lowe’s improved property at $11,865,600. Lowe’s challenged
that assessment before the Johnson County Board of Review, claiming the
valuation was excessive. See Iowa Code § 441.37(1)(a)(1)(b) (2017).
Unsuccessful before the county, Lowe’s appealed to the PAAB.
At the July 2018 contested hearing, the PAAB heard evidence from two
expert appraisers: Laurence Allen for Lowe’s and Russ Manternach for the board.
Each asserted his appraisal reflected “the fee simple market value of the subject
property.” In Allen’s view, the proper method for determining the fee simple value
was to assess the property as if it was vacant.1 To estimate the fee simple value,
1 Before the district court, Lowe’s argued the property needed to be valued as
vacant because the property would transfer in fee simple, free and clear of
3
Allen used a sales-comparison approach and an income approach. Under the first
approach, he compared sale prices of seven large home improvement stores
around the Midwest that were similar in size, design, and use to the Lowe’s
property.2 Each store was vacant for some time before it sold. Likewise, Allen
considered several big-box rent comparables under his income approach.
Because his comparables had tenants in place, he inflated the capitalization rate
to “reflect the anticipated loss of income from the tenant in place . . . and the cost
of finding a new tenant.” Relying more on his comparable-sales analysis, Allen
valued the Lowe’s property at $5,200,000.
By contrast, Manternach used three valuation methods: the
sales-comparison, income, and cost approaches. Assuming the Lowe’s property
had “stable occupancy” and “stabilized market rent,” rather than being vacant,
Manternach valued the property at $10,940,000. Unlike Allen’s sales
comparisons, Manternach compared several smaller properties in Iowa, including
four former grocery stores. He also differed from Allen in finding “that the larger
metropolitan areas in Iowa have seen ‘very low’ capitalization rates.” Opting for
the lower rate, Manternach testified “he was not assuming the subject property
was dark or vacant, but rather that it [was] occupied” in his valuation.
Weighing the experts’ opinions, the PAAB found “issues with the quality and
reliability of sales each appraiser used in his analysis.” Yet the agency determined
encumbrances. For determining the fee simple market value, we held in I.C.M.
Realty v. Woodward, 433 N.W.2d 760, 762 (Iowa Ct. App. 1988), that “the proper
measure of value is what the property would bring if sold in fee simple free and
clear of any leases.” The district court rejected Lowe’s vacancy claim, citing the
principle that “fee simple market valuation must reflect current conditions.”
2 Allen even compared some former Lowe’s and Home Depot stores.
4
that “the problems with Manternach’s sales and his adjustments [were] less severe
than the problems with Allen’s sales.” Finding Manternach’s appraisal more
persuasive, the PAAB adopted his $10,940,000 valuation. The PAAB reasoned:
“We can question the support for and degree of some of Manternach’s
adjustments, but we must also recognize that Allen failed entirely to make
adjustments that were necessary to valuing the fee simple interest of the subject
property in its current use.”
Lowe’s then sought judicial review in the district court, claiming the PAAB
erred in adopting an appraisal that did not value the property at its fee simple
market value.3 The court affirmed the PAAB’s decision, concluding (1) fee simple
did not mean vacant; (2) “market value” and “current use” were not mutually
exclusive; and (3) consideration of “current use” did not violate Iowa law.
Lowe’s now appeals.
II. Scope and Standards of Review
We review the PAAB’s decision for correction of errors at law. Iowa Code
§ 441.39 (2019). Because the district court affirmed the agency on judicial review,
“we apply the standards of chapter 17A to determine if we reach the same
conclusion as the district court.” Wendling Quarries, Inc. v. Prop. Assessment
Appeal Bd., 865 N.W.2d 635, 638 (Iowa Ct. App. 2015); Winnebago Indus., Inc. v.
Haverly, 727 N.W.2d 567, 571 (Iowa 2006) (“When a district court exercises its
authority on judicial review, it acts in an appellate capacity to correct any errors of
3 After Lowe’s petitioned for judicial review, the Johnson County Board of Review
intervened as a party under Iowa Rule of Civil Procedure 1.407(1)(a). The board
filed a waiver of brief on appeal, joining the PAAB’s arguments.
5
law by the agency.”). If our conclusions are the same, we affirm. Winnebago, 727
N.W.2d at 571. “If the agency’s action was based on an erroneous interpretation
of a provision of law whose interpretation has not been clearly vested in the
agency, we shall reverse, modify or grant other appropriate relief from the agency
action.” Naumann v. Iowa Prop. Assessment Appeal Bd., 791 N.W.2d 258, 260
(Iowa 2010) (citing Iowa Code § 17A.19(10)(c)).
III. “Current Use” Analysis
Lowe’s claims the PAAB’s ruling adopting Manternach’s appraisal that
reflected the property’s “current use” violated “the standards set by Iowa law.” To
assess Lowe’s argument, we start with an overview of the legal principles
governing property tax valuations. Iowa Code section 441.21(1) requires all
taxable property to be assessed “at its actual value,” meaning its “fair and
reasonable market value.” A property’s market value is “the fair and reasonable
exchange in the year in which the property is listed and valued between a willing
buyer and a willing seller, neither being under any compulsion to buy or sell and
each being familiar with all the facts relating to the particular property.” Iowa Code
§ 441.21(1)(b)(1).
To challenge an assessment, a taxpayer may file a protest, alleging “the
property [was] assessed for more than the value authorized by law.” Id.§ 441.37(1)(a)(1)(b). In this context, the taxpayer bears the burden of proving by
a preponderance of the evidence that the assessed amount exceeded the
property’s market value. Id. § 441.21(3)(b)(1); Compiano v. Bd. of Rev., 771
6
N.W.2d 392, 396 (Iowa 2009).4 In offering proof before the PAAB or district court,
the taxpayer “must use the assessment methods as prescribed by the law.” Ross
v. Bd. of Rev., 417 N.W.2d 462, 465 (Iowa 1988).
Section 441.21 provides two approaches for assessing a property’s market
value—the comparable-sales approach and the other-factors approach. Equitable
Life Ins. Co. v. Bd. of Rev., 281 N.W.2d 821, 823 (Iowa 1979). The
comparable-sales approach is the “preferred method” of valuation. Wellmark, Inc.
v. Cnty. Bd. of Rev., 875 N.W.2d 667, 679 (Iowa 2015); see Boekeloo v. Bd. of
Rev., 529 N.W.2d 275, 277 (Iowa 1995). This means “when adequate evidence
of comparable sales is available,” the assessor must consider that evidence.
Compiano, 771 N.W.2d at 398; Iowa Code § 441.21(1)(b)(1) (“Sale prices of the
property or comparable property in normal transactions reflecting market
value . . . shall be taken into consideration in arriving at its market value.”
(emphasis added)).
But what if sale prices of the property or comparable properties are
unavailable? Section 441.21(2) provides the alternative approach:
In the event market value of the property being assessed cannot be
readily established in the foregoing manner, then the assessor may
determine the value of the property using . . . all other factors which
would assist in determining the fair and reasonable market value of
the property but the actual value shall not be determined by use of
only one such factor.
4 Under Iowa Code section 441.21(3), the taxpayer can shift the burden to the
board of review to uphold the assessed value, if “the [taxpayer] offers competent
evidence by at least two disinterested witnesses that the market value of the
property is less than the market value determined by the assessor.” Lowe’s offered
evidence from only one witness, so it failed to shift the burden. Because Lowe’s
retained the burden of proof, it had to establish (1) the valuation was excessive
and (2) the correct valuation. Soifer v. Floyd Cnty. Bd. of Rev., 759 N.W.2d 775,
780 (Iowa 2009).
7
Based on this later provision, our supreme court established a general rule,
stating the other-factors approach can be used “if and only if” the comparable-sales
approach is inadequate. Bartlett & Co. Grain v. Bd. of Rev., 253 N.W.2d 86, 88
(Iowa 1977); Wellmark, 875 N.W.2d at 679; Ross, 417 N.W.2d at 465. The rule
requires a fact-finder to first determine that the comparable-sales approach is
unworkable before considering other factors. Bartlett, 253 N.W.2d at 88. Once in
the other-factors category, an assessor may not consider the “[s]pecial value or
use value of the property to its present owner” or “the goodwill or value of a
business” using the property. Iowa Code § 441.21(2). But the supreme court
limited the scope of that prohibition. See Wellmark, 875 N.W.2d at 679 (“Although
the legislature has prohibited consideration of special value and good will, we have
narrowly construed these exceptions.”). So long as “improvements to a property
are not merely valuable to the specific owner but would be of value to others, such
improvements should be recognized in the valuation process.” Id. at 683.
With these principles in mind, we turn to the parties’ contentions. Lowe’s
argues the PAAB improperly valued the property according to its “current use,”
rather than the fair market value as required by Iowa Code section 441.21(1)(b).
Lowe’s relies on Wellmark, 875 N.W.2d at 679, to bolster its contention that “‘other
factors’ related to use value can be considered ‘if and only if’ the record does not
show a market for the sale of similar properties.” Maintaining that “current use”
cannot be considered in determining market value under the preferred approach,
Lowe’s contends the PAAB’s consideration of “current use,” despite evidence of “a
robust market for sale and lease of big box retail properties,” violated the directives
of Wellmark and Iowa Code section 441.21(1)(b).
8
In resistance, the PAAB argues Lowe’s misconstrues the meaning of
“current use,” as discussed in Wellmark. The PAAB asserts “Wellmark is the latest
in a long line of court rulings” that has considered the property’s current use when
assessing market value under section 441.21. According to the PAAB, Wellmark
“articulated a general proposition that property should be valued in its current use,
regardless of the valuation approach used.” The PAAB also challenges Lowe’s
reading of the statute, claiming “nothing in the text of section 441.21 can
reasonably be interpreted as a directive that a property’s current use can only be
considered when valuing a property using other factors.”
The PAAB is correct. Lowe’s conflates the idea of “current use” with “use
value of the property to its present owner” under Iowa Code section 441.21(2). In
doing so, Lowe’s insists “current use” and “value in use” share one meaning in the
Wellmark decision.5 Based on that faulty underlying assumption, Lowe’s
concludes that the statute prohibits an assessor from considering the property’s
current use when determining its market value through a sales analysis. Put
differently, Lowe’s reads Wellmark as relegating the relevance of “current use” to
the other-factors approach in section 441.21(2).
5 In Wellmark, the court explored the differences between the phrases “value in
use” and “value in exchange.” 875 N.W.2d at 673 (noting exploration was
“designed to illustrate some of the principles and challenges facing the court” and
not intended as binding or even persuasive authority). The court defined “value in
use” as “the value a specific property has for a specific use.” Id. On the other
hand, “value in exchange” means “the value to persons generally and focuses on
market value based upon a willing buyer and willing seller.” Id. But the court did
not draw an indelible line separating the two concepts. Instead, the court
recognized, “Even in a jurisdiction that embraces a strict value-in-exchange theory,
the use of a property still may be germane to value under the theory that the current
use of the property would impact what a willing buyer would pay for the property in
the marketplace.” Id. at 675.
9
By contrast, PAAB employs the phrase in a broader context. In its ruling,
the agency referred to “current use” when discussing the requirement that
“property is to be valued based on its ‘present use.’”6 See Soifer, 759 N.W.2d at
784 (quoting Iowa Admin. Code r. 701-71.1(1)). Because the PAAB associates
the phrase “current use” with this more general principle, it argues that Wellmark
did not reinterpret section 441.21 to excise “current use” from the determination of
fair market value.
In sorting the parties’ divergent definitions of “current use,” we must focus
on what our supreme court said and didn’t say in Wellmark. Lowe’s argues the
Wellmark decision established “that current use valuation is an exception to the
market value rule, and can only [be] considered when there is no active market for
the property at issue.” We disagree. A closer reading of Wellmark shows the
supreme court discussed “current use” in a general sense and not within the strict
confines of section 441.21(2). The issue was “whether the Wellmark property
should have been valued as if it were a multitenant office building . . . or whether
the Wellmark property should have been valued according to its current use [as] a
single-tenant headquarters building.” Wellmark, 875 N.W.2d at 668. In going with
the latter, the court reasoned “the fact that the property is currently being
successfully used as a single-tenant corporate headquarters cannot go unnoticed.”
Id. at 683. The court added, “Current use is an indicator that there is demand for
6The words “current” and “present” are synonyms. See In re S.R.N., 481 N.W.2d
672, 682 (Wis. Ct. App. 1992).
10
such a structure.” Id. Taken as a whole, Wellmark remained faithful to the
governing rule that a property’s value depends on its current use.
We acknowledge the possible confusion from Wellmark’s discussion of
“current use” in the other-factors section. But the context is crucial. In concluding
“that the property should be valued based on its current use,” the court pointed to
“the principle articulated in Maytag and Soifer.” Wellmark, 875 N.W.2d at 682
(citing Maytag Co. v. Partridge, 210 N.W.2d 584 (Iowa 1973), and Soifer, 759
N.W.2d at 784). While touting Wellmark’s dicta, Lowe’s fails to address those two
cases. As a result, Lowe’s takes the court’s language out of context. Indeed,
Wellmark’s embrace of Maytag and Soifer clarifies the current use issue.
In both cases, the supreme court rejected the taxpayers’ contentions that
commercial property valuations could not be based on the current use of the
property. In doing so, Maytag distinguished current use of a property from the
other factors in section 441.21(2). Maytag, 210 N.W.2d at 590–91. Maytag
provided that “special value or use of property to its present owner comes into play
when sentiment, taste, or other factors, frequently subjective, give property
peculiar value or use to its owner that it does not have to others.” Id. at 591. In
distinguishing “special value” from “current use,” Maytag explained:
When an assessor considers the use being made of property, he is
merely following the rule that he must consider conditions as they
are. He is recognizing the effect of the use upon the value of the
property itself. He is not adding on separate items for good will,
patents, or personnel.
Id. at 590. Thus, Maytag recognized that a property’s current use was relevant
under the general rule covering valuation.
11
Likewise, in Soifer, the court discussed “current use” in the context of the
administrative rule—that property must be valued according to its “present use.”
See Soifer, 759 N.W.2d at 784 (rejecting taxpayers’ claim that property should be
valued for general restaurant purposes because “valuing the Soifers’ property as
if it were not a viable McDonald’s would be contrary to the principle that assessed
property is valued based on its present use, including any functioning commercial
enterprise on the property”). Most important here, Soifer applied that general
principle even though an active market of comparable sales was available. See
id. at 785 (concluding taxpayers offered evidence of “sufficiently similar”
comparable properties).
In its ruling, the PAAB relied on the basic principles in Maytag and Soifer
that (1) properties should be valued based on their present use, and (2) assessors
should consider conditions as they are. Consistent with the case law, the PAAB
found Allen’s appraisal less persuasive because he did not adequately adjust the
property’s valuation based on its present use or current conditions. Some
deficiencies included “Allen’s failure to acknowledge any contributory value of the
garden center and other outdoor sales area”; Allen’s use of multi-tenant or
deed-restricted comparables that differed from Lowe’s current single-occupant
retail use; and “Allen’s decision not to, at minimum, estimate the subject’s land
value.” The PAAB also criticized Allen for failing to make adjustments for post-sale
expenditures in his comparable-sales approach. The PAAB noted: “Without
adjustments, these comparable sales prices essentially reflect the value of vacant
buildings potentially in need of remodeling for retail use. As such, we do not
believe they reflect the current use of the subject property.”
12
Based on these shortcomings, we agree with the district court’s conclusion
that the PAAB’s rejection of Allen’s appraisal was appropriate. The agency’s
action was not based on an erroneous interpretation of law. All of PAAB’s
criticisms were consistent with the rule that “an assessor must . . . consider
conditions existing at the time and the condition of the property in which the owner
holds it.” Maytag, 210 N.W.2d at 589. Applying that rule, we reject Lowe’s
contention that a fee simple interest must be valued as vacant. Neither
section 441.21 nor case law imposes a vacancy requirement in the fee simple
valuation context. Finally, the PAAB’s consideration of the property’s current use
did not violate Iowa law. Because Wellmark did not depart from the principle in
Maytag and Soifer that a property should be valued at its current use, we affirm
the district court’s judicial review.
AFFIRMED.