2727 SAN PEDRO LLC V. BERNALILLO COUNTY ASSESSOR
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2727 SAN PEDRO LLC,
Petitioner-Appellant,
v.
BERNALILLO COUNTY ASSESSOR,
Respondent-Appellee.
COURT OF APPEALS OF NEW MEXICO
APPEAL FROM THE DISTRICT COURT OF BERNALILLO COUNTY, Clay
Campbell, District Judge
John R. Polk, Albuquerque, NM, Vance,
Chavez & Associates, LLC, Claud Eugene Vance, Albuquerque, NM, for
Appellant
Robles, Rael & Anaya, P.C., Charles
Rennick, Marcus J. Rael, Jr., Albuquerque, NM, for Appellee
JULIE J. VARGAS, Judge. WE CONCUR: J.
MILES HANISEE, Judge, KRISTINA BOGARDUS, Judge
{1} 2727 San Pedro LLC
(Taxpayer) appeals the district court’s affirmation of the Bernalillo County
Valuation Protests Board’s (the Board) decision to uphold the Bernalillo County
Assessor’s (the Assessor) valuation of Taxpayer’s property for tax year 2015.
Taxpayer claims that the district court erroneously concluded that it had not
overcome the presumption that the Assessor’s valuation was correct. As a result
of this error, Taxpayer argues that the district court failed to properly shift
the burden to the Assessor to prove that her method of valuation utilized a
generally accepted appraisal technique. Finally, Taxpayer contends that the
Assessor failed to use a generally accepted appraisal technique in valuing its
property, and, as such, the Assessor’s valuation was not supported by
substantial evidence. We agree with Taxpayer that it overcame the presumption
of correctness and that the burden shifted to the Assessor. We also agree with
Taxpayer that the Assessor’s valuation was not supported by substantial
evidence because the Assessor failed to put on evidence that the expense rate
it utilized was appropriate for Taxpayer’s property type. We reverse the
district court with instructions to remand the matter back to the Board for
further proceedings.
{2} This is the second
of two appeals Taxpayer filed objecting to the Assessor’s valuation of
Taxpayer’s commercial building at 2727 San Pedro NE in Albuquerque, New Mexico
(Property). In its initial appeal, Taxpayer filed a petition protesting the
Assessor’s 2014 valuation of the Property.
2727 San Pedro LLC v. Bernalillo
Cty. Assessor (
San Pedro I),
2017-NMCA-008, ¶ 1,
389 P.3d 287. The
Board and the district court affirmed the Assessor’s valuation.
Id. We
granted Taxpayer’s petition for a writ of certiorari and, following briefing
and oral argument, issued an opinion on September 13, 2016, vacating the
district court’s decision and remanding the matter to the Board for additional
proceedings because the Assessor failed to satisfy her burden “to prove that
[her] method of valuation utilized a generally accepted appraisal technique.”
Id.
¶¶ 2, 25, 29 (internal quotation marks and citation omitted). Specifically,
we concluded that the Assessor failed to show that the market data on which she
relied to calculate Taxpayer’s value was applicable “in this market, for this
property type, and during this time period,” preventing a reasonable person
from concluding that the methodology used was based on a generally accepted
appraisal technique.
Id. ¶ 25 (emphasis omitted).
{3} While its 2014
protest was pending in the district court, Taxpayer received its 2015 notice of
value from the Assessor for the Property, valuing the Property at the same
amount of the 2014 valuation. Taxpayer protested this valuation, again
repeating its argument that the income method of appraisal was most appropriate
and the actual income produced from the Property was insufficient to justify
the Assessor’s valuation. A hearing before the Board on Taxpayer’s 2015 protest
took place in December 2015.
{4} Upon conclusion of
the hearing, the Board determined the Assessor’s valuation was the most
reliable, and Taxpayer did not overcome the presumption of correctness in favor
of that valuation. Taxpayer appealed the Board’s decision to the district court
pursuant to Rule
1-074 NMRA. The district court agreed with the Board and
concluded Taxpayer did not present evidence tending to disprove the factual correctness
of the Assessor’s valuation. Taxpayer appealed the district court’s decision by
filing a petition for a writ of certiorari in this Court pursuant to Rule
12-505 NMRA, which we granted.
{5} Taxpayer raises
five issues on appeal that we group into two general categories. First,
Taxpayer claims that the district court erroneously concluded that it had not
overcome the presumption that the Assessor’s valuation was correct and
therefore failed to shift the burden to the Assessor to prove that her method
of valuation utilized a generally accepted appraisal technique. Second,
Taxpayer contends that the Assessor failed to use a generally accepted
appraisal technique in valuing the Property when it used unreliable hearsay to
support its valuation. The Assessor’s valuation, Taxpayer claims, was therefore
not supported by substantial evidence.
{6} District courts sit
in an appellate capacity when reviewing an administrative decision.
See
Rule 1-074(T). “Upon a grant of a petition for writ of certiorari under Rule
12-505, this Court conducts the same review of an administrative order as the
district court sitting in its appellate capacity, while at the same time
determining whether the district court erred in the first appeal.”
Town
& Country Food Stores, Inc. v. N.M. Reg. & Licensing Dep’t,
2012-NMCA-046, ¶ 8,
277 P.3d 490 (alteration, internal quotation marks, and
citation omitted). We employ a whole record review when reviewing
administrative decisions.
See In re Otero Cty. Elec. Coop., Inc.,
1989-NMSC-033, ¶ 6,
108 N.M. 462,
774 P.2d 1050. “This standard requires that
we independently review the entire record of the administrative hearing to
determine whether the decision was arbitrary and capricious, not supported by
substantial evidence, or otherwise not in accordance with law.”
San Pedro I,
2017-NMCA-008, ¶ 15 (omission, alteration, internal quotation marks, and
citation omitted). “To the extent [Taxpayer] contends that there are errors of
law in the [district] court’s conclusions or in those findings that function as
conclusions, we apply a de novo standard of review.”
Jones v. Schoellkopf,
2005-NMCA-124, ¶ 8,
138 N.M. 477,
122 P.3d 844. “When the facts are not in
dispute, but the parties disagree on the legal conclusion to be drawn from
those facts, we review the issues de novo.”
Id. However, “we give a
heightened degree of deference to legal questions that implicate special agency
expertise or the determination of fundamental policies within the scope of the
agency’s statutory function.”
Jicarilla Apache Nation v. Rodarte,
2004-NMSC-035, ¶ 25,
136 N.M. 630,
103 P.3d 554 (internal quotation marks and
citation omitted).
Statutory Scheme for Valuation of Property for Taxation
{7} Our Property Tax
Code (the Code), NMSA 1978 §§
7-35-1 to -38-93(1973, as amended through 2018),
sets out the method for valuation of real property in New Mexico and authorizes
the Taxation and Revenue Department (Department) or the county assessor to
determine those values. Section 7-36-15(A). Unless otherwise authorized by the
Code, “the value of property for property taxation purposes shall be its market
value as determined by the application of the sales of comparable property,
income or cost methods of valuation or any combination of these methods.”
Section 7-36-15(B). The Department or the county assessor “shall apply
generally accepted appraisal techniques” in determining property values.
Section 7-36-15(B)(1).
{8} As she had done in
2014, the Assessor used the income method of valuation to determine the value
of Taxpayer’s Property. “The income method of valuation is a method used to
value property by capitalizing its income when the market value method cannot
be used due to lack of data on sales of comparable properties . . . [and] is
determined by dividing the annual income by the applicable capitalization
rate.”
3.6.5.22(A)(1) NMAC (2001) “ ‘[I]ncome’ . . . is net income or the
difference between annual revenue or receipts, actual or imputed, from rental
of the property and the annual expenses relating to the property[,]”
3.6.5.22(A)(5) NMAC, and “is based upon the fair rent which can be imputed to
the property . . .based upon rent actually received . . . by the owner and upon
typical rentals received in the area for similar property in similar use[.]”
3.6.5.22(A)(3) NMAC. Expenses relating to the property that are deducted to
arrive at a property’s income are defined as “the outlay or average annual
allocation of money or money’s worth that can fairly be charged against the
revenue or receipts from the property. . . . [and] are limited to those which
are ordinary and necessary in the production of the revenue and receipts from
the property and do not include debt retirement, interest on funds invested in
the property or income taxes.”
3.6.5.22(A)(6) NMAC.
{9} “The value of
property determined by the county assessor is presumed to be correct.”
First
Nat’l Bank v. Bernalillo Cty. Valuation Protest Bd.,
1977-NMCA-005, ¶ 24,
90 N.M. 110,
560 P.2d 174. A taxpayer, however, can overcome the presumption of
correctness by “showing that the assessor did not follow the statutory
provisions of the [Code] or by presenting evidence tending to dispute the
factual correctness of the valuation” based on generally accepted appraisal
techniques.
Id. “When a taxpayer overcomes the presumption of
correctness of the assessor’s method of valuation, the burden shifts to the
assessor to prove that his or [her] method of valuation utilized a ‘generally
accepted appraisal technique.’ ”
Id. ¶ 25. Both the Board and the district
court concluded that Taxpayer did not overcome the presumption of correctness
of the Assessor’s valuation.
Taxpayer Overcame The Assessor’s Presumption of
Correctness
{10} At the hearing
before the Board, the Assessor advised that she valued the Property by using
the actual average rent collected from the Property and market-based values
derived from other similar properties for the vacancy and expense rates. Using
those numbers, she arrived at a value of $923,800. Taxpayer, by contrast,
presented evidence of its actual 2014 expenses through an Annual Property
Operating Data (APOD) report, from which he derived a Property value of
$721,200.
{11} Weighing all the
evidence presented at the hearing, the Board concluded the “Assessor’s
valuation is the most reliable and . . . [Taxpayer] has not overcome the
presumption of correctness in favor of that valuation.” Similarly, the district
court held Taxpayer failed to overcome the presumption of correctness because
Taxpayer “failed to show the Assessor did not use a generally accepted
appraisal technique.” In arriving at its conclusion, the district court stated,
“To the extent [Taxpayer] claims the valuation is incorrect merely because it
uses market rates rather than the [P]roperty’s actual vacancy and expense
rates, the [district c]ourt rejects the argument.”
{12} Taxpayer contends it
overcame the presumption of correctness when it applied the income method of
appraisal to the Property, utilizing the actual income and expenses from the
Property to derive a value different from the Assessor’s and the Assessor
failed to introduce evidence showing Taxpayer did not use a generally accepted
appraisal technique in arriving at that different value. The Assessor responds
that because the record contains evidence supporting its valuation of the
property, the Board’s finding below should remain undisturbed.
{13} The standard to
overcome the presumption of correctness, however, does not require a taxpayer
to prove that the Assessor’s valuation is not supported by the evidence, as the
Assessor contends. Nor is it to present evidence which is more reliable than
the Assessor’s, as the Board intimated. Instead, to overcome the presumption of
correctness, a taxpayer need only present evidence tending to dispute the
valuation of the Assessor.
See San Pedro I, 2017-NMCA-008, ¶ 22.
{14} In
San Pedro I,
we considered whether Taxpayer presented sufficient evidence to overcome the
statutory presumption of correctness when it “proposed a market value based
upon its own application of the income method of valuation.”
Id. ¶ 22.
Noting that “[Taxpayer’s] application of the income method of valuation [using
actual expenses] differs from that advocated by the Assessor,” and that the
Assessor did not claim that Taxpayer’s methodology was not a generally accepted
appraisal technique, we concluded that Taxpayer’s evidence of value disputed
the factual correctness of the Assessor’s method of valuation.
Id. Thus,
Taxpayer overcame the statutory presumption of correctness and “shifted the
burden of proof to the Assessor to prove that his or her method of valuation
utilized a generally accepted appraisal technique.”
Id. (alteration,
internal quotation marks, and citation omitted).
{15} At the hearing
before the Board that gave rise to this appeal, Taxpayer again presented
evidence using actual expenses to calculate the value of the Property applying
the income method of valuation, with the result differing from that advocated
by the Assessor, just as it had in
San Pedro I. Once again, the Assessor
did not claim Taxpayer’s approach was not a generally accepted appraisal
technique. As was the case in
San Pedro I, Taxpayer’s evidence of
differing value “tends to dispute the factual correctness of the method of
valuation.”
Id. ( alterations, internal quotation marks, and citation
omitted.) “[T]he burden of proof [therefore] shifted to the Assessor to prove
that her method of valuation utilized a generally accepted appraisal
technique.”
Id. (alteration, internal quotation marks, and citation
omitted).
The Assessor Failed to Provide Substantial Evidence That
She Used a Generally Accepted Appraisal Technique.
{16} We next turn to the
issue of whether substantial evidence exists to support the Board’s conclusion
that the Assessor used a generally accepted appraisal technique in her
application of the income method to value the Property.
See id. ¶¶ 23,
25. Initially, we note that the Board found that Taxpayer did not show that the
Assessor failed to use generally accepted appraisal techniques, implicitly
concluding that the Assessor’s appraisal techniques were, in fact, generally
accepted.
{17} Taxpayer raises
three specific objections to challenge the Board’s implicit finding. First,
Taxpayer argues that the Assessor improperly imposed a flat percentage expense
limit in calculating the value of the Property. Second, Taxpayer contends that
the Assessor’s use of market data for five unidentified properties to calculate
the applicable expense rate violated his right to a fair hearing and therefore,
due process rights. Third, Taxpayer claims that the Board’s findings that the
Assessor used a generally accepted appraisal technique was not supported by
substantial evidence because it was based exclusively on hearsay and did not
include evidence that the income and expense information relied upon by the
Assessor were for properties that were comparable to Taxpayer’s Property. At
the root of all three of Taxpayer’s arguments is his objection to the
Assessor’s use of five unidentified properties to calculate the expense rate to
be used in the valuation of the Property. “Whether an appraisal technique is
‘generally accepted’ is a question of fact.”
Id. ¶ 20. We defer to the
Board’s factual determinations where they are supported by substantial
evidence.
See El Castillo Ret. Residences v. Martinez,
2017-NMSC-026, ¶
21,
401 P.3d 751.
{18} In applying the
income method of valuation to value Taxpayer’s Property, the Assessor used a
combination of market and actual data. Because Taxpayer’s argument on appeal
focuses on the information relied upon by the Assessor to calculate the expense
rate component of the Assessor’s income method valuation, we begin our analysis
there.
{19} At the hearing
before the Board, the Assessor presented a pro forma explaining her calculation
of the value of the Property using the income approach. The pro forma notes
that the Assessor applied a forty-five percent expense rate
1 in arriving at a valuation of
$923,800. Juanita Chavez, an employee of the Assessor, testified that to
determine the appropriate expense rate to calculate the Property’s value, the
Assessor compiled information related to expense rates for other office buildings
in the area and arrived at a forty-one percent expense rate, which she
increased to forty-five percent for purposes of calculating the Property’s
value. The expense information contains five entries listing two properties on
San Pedro Drive, two properties on Uptown Boulevard, and one property on
Prospect. The Assessor testified that the expense rate information she used was
provided to the Assessor’s office by other taxpayers
and was for
properties located in the same neighborhood designation as Taxpayer’s Property.
Ms. Chavez explained that the five properties she used to calculate the expense
rate were all office buildings, were all properties offering full-service
leases, and were all of the office buildings in the same neighborhood whose
information was available to her. The expense rates shown are for the years
2011, 2012, and 2013 and range from twenty-five percent of effective gross
income to fifty-nine percent of effective gross income. It is unclear whether
the entries are for five different properties or just three, as the two Uptown
Boulevard properties and two San Pedro Drive properties show expense rates for
different years, allowing for the possibility that the Assessor’s information
shows the expense rate for the same properties over different time periods.
{20} To rebut the
information provided by the Assessor, Taxpayer provided testimony from realtor,
Ken Shaffer, and from appraiser, Ron Alfred. When asked for his expert opinion
on the market expense rate for office space similar in age to the Property,
Alfred presented two data sheets for properties he contended were similar. The
first property, located on Louisiana Boulevard, was quickly discounted because
it was subject to triple-net leases, requiring tenants to pay the cost of most
property expenses. Alfred, however, also pointed to a building located in
downtown Albuquerque, which he conceded was not located in the same area as the
Property, but was newer in effective age and similar in construction type and
type of lease. The downtown property, Alfred testified, had an expense rate of
fifty-nine percent of effective gross income.
{21} Taxpayer also called
Ken Shaffer, a commercial realtor, to testify on his behalf. Shaffer testified
that commercial realtors generally develop an APOD for a property in order to
bring it to market to sell.
Generally, his APOD contains all expenses
usually connected with an office building. Use of an APOD, he testified, is a
generally accepted appraisal technique to develop the net operating income of a
property relative to the income approach.
{22} Addressing the
Assessor’s information, Shaffer testified that expense rate information
averaged from five properties is not statistically reliable, and the Assessor
should have used at least thirty properties.
Explaining the
considerations at play in evaluating property values and expense rates, Shaffer
testified that Class C office properties, such as Taxpayer’s Property, face the
biggest challenge in the existing market, with owners frequently having to
offer a period of free rent, significant tenant improvements, and a short lease
term. Further, Shaffer noted that to determine whether expenses are “ordinary
and necessary,” as required by the regulation, they must be set out by
line-item in order to be properly reviewed. Finally, Shaffer explained that
expense rates will differ between commercial properties and it was necessary to
consider the property itself, stating as one such example, “You have a lot of
common area and trees to take care of, that’s going to give you higher expenses
because you have a lot more land to take care of.”
{23} Considering the
evidence that was presented, we cannot say that, under the circumstances of
this case, the Board’s factual determinations are supported by substantial
evidence.
See id. Just as we found that the Assessor failed to provide
sufficient evidence that the expense rates on which she relied applied to
Taxpayer’s office building in
San Pedro I, we find similar shortfalls
here.
See 2017-NMCA-008, ¶ 25. We are unable to determine from the
evidence presented by the Assessor whether the properties upon which she relied
to arrive at her expense rate were of the property type of Taxpayer’s Property.
See id. (noting that without data showing that forty-five percent is
appropriate for the property type at issue, we cannot conclude the assessor
used generally accepted appraisal techniques);
see also Edith J.
Friedman,
Encyclopedia of Real Estate Appraising, at 381 (3d ed. 1978)
(stating that “[t]he cost of operating an office building varies with its age,
condition in which it has been maintained, size, shape, height, mechanical and
other equipment, and the services provided by the landlord”). Shaffer testified
that Class C properties such as Taxpayer’s face unique challenges, requiring
the owners of those properties to incur expenses that are not applicable to
owners of other office buildings. Absent data showing that the five properties
on which the Assessor relied to arrive at her forty-five percent expense rate
are either similar to Taxpayer’s Property in those qualities that affect the
operating expenses of an office building or that the Assessor adjusted the
expense rate to account for the lack of similarity, we cannot conclude that the
Assessor’s valuation was conducted using generally accepted appraisal
techniques.
{24} We understand that
the Assessor is subject to certain statutory constraints that limit her ability
to disclose information related to the Property.
See § 7-38-19(E)
(requiring information regarding income and expenses of specific property may
only be released as authorized by Section 7-38-4). Nonetheless, the Assessor is
permitted to release information if it is to be used in a way that does not
identify the property owner. Section 7-38-4(A)(5). Nothing in the statute
prohibits the assessor from testifying about the itemized expenses, age, size,
and condition of comparable properties on which the Assessor relies, as well as
the services provided by the landlords for those properties.
See
Encyclopedia of Real Estate Appraising,
supra, at 381. Nonetheless,
the Assessor did not provide the Board with that information. We find that, on
whole record review, substantial evidence does not exist to support the
conclusion that the Assessor used generally accepted accounting principles when
she valued Taxpayer’s Property.
{25} We therefore reverse
the district court’s order and remand the matter to the district court with
instructions to vacate the Board’s decision and remand the matter to the Board
for further proceedings in accordance with this decision.