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IN THE OREGON TAX COURT MAGISTRATE DIVISION Property Tax WILSONVILLE JUST STORE IT L.L.C., Plaintiff, v. CLACKAMAS COUNTY ASSESSOR, Defendant. ) ) ) ) ) ) ) ) )

TC-MD 120417D

DECISION

Plaintiff appeals the 2011-12 real market value and exception real market value determined by the Clackamas County Board of Property Tax Appeals (BOPTA) in its Order dated April 11, 2012, for property identified as Account 00812099 (subject property). Kevin Howard (Howard), owner and broker of Kevin Howard Real Estate, Inc., and owner and manager of 73 storage facilities, including the subject property, appeared and testified on behalf of Plaintiff. Ronald Saunders (Saunders), Oregon registered appraiser, appeared and testified on behalf of Defendant. Plaintiffs Exhibits 1 through 14, Conclusion (Tab 10), Addendum (Tab 11), Plaintiffs Rebuttal Exhibit 15 and Defendants Exhibit A were received without objection. Both parties agree that the subject propertys highest and best use as vacant is commercial and as improved is the subject propertys continued use as a self-storage facility. The parties disagree that the facility will be expanded as requested in the original development plan submitted to the City of Wilsonville. I. STATEMENT OF FACTS The subject property is a "[t]hree story, heated self-storage facility (Phase 1) containing 404 self-storage units. There [are] 55,900 [square feet] of gross building area, including the

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leasing office, hallways, apartment and common areas. There [are] 39,655 [square feet] of net rentable area." (Defs Ex A at 42.) Saunders testified that the subject property is the newest of "the four self-storage facilities" in the city of Wilsonville and is "of superior design." The subject property is located on 1.28 acres and was completed in May 2010. (Id. at 16.) Howard testified that Saunders incorrectly stated that there are"0.65 acres (28,507 [square feet]) of excess land planned for 404 self-storage units in a future second phase." (Id.) Howard testified that 6,000 square feet of the 28,507 square feet was required by the City of Wilsonville to be paved for 10 parking spots. He offered a letter from Stu Peterson, SIOR, of Macadam Forbes, recommending that Plaintiff list the remaining vacant land (22,507 square feet)1 for $4.50 per square foot "and expect to see offers starting in the low 3s per [square foot] for this land. It has no frontage, bottleneck access and is of an irregular shape." (Ptfs Ex 14.) Howard testified that the land parcel would require "an access easement, it is not on the main street" and "is blocked by the parking." He testified that there are no comparable sales for this type of parcel. Howard determined a real market value of $157,549 for the 22,507 square foot land parcel. Saunders determined an "estimated value of the 28,507 SF of surplus land is $12.30 SF or $350,636. To this amount is added an additional $50,000 for the entitlements and infrastructure which is in place, for a total estimated value of the surplus land of $400,636." (Defs Ex A at 70.) Howard questioned Saunders, asking how he concluded the value was $400,636 when he previously concluded the value was $250,000 at the time he submitted his report to BOPTA. (cf. Ptfs Rebuttal Ex 15 at 5.) Saunders testified that for his current appraisal report he concluded that the land was "surplus, not excess, land" and Plaintiff originally "paid $15 per square foot" for land that Plaintiff is now "holding for future development, Phase II." In

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Peterson lists the area of the vacant land as 22,800 square feet.

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response to Howards questions, Saunders wavered, stating that it may not have been appropriate to include an "additional $50,000 for the entitlements and infrastructure." (Defs Ex A at 70.) Howard testified that the original plan was to attach an expansion, i.e., Phase II, to Phase I, but that now with the 10 parking spaces, "Phase II could not be attached." Saunders stated that "there is no evidence" that the "surplus land is 20 percent or 30 percent of what Plaintiff originally paid for it." Howard testified that he concluded the income approach was the only applicable method to determine the subject propertys real market value because the subject property "is an incomeproducing property." Howard reviewed each of the components of the income approach, beginning with rental rates. He testified that there are "three properties within one-half mile of the subject" that support his rent comparables. Howard testified that at the time the subject property opened in May 2010, there was "pent up demand" and approximately 30 percent of the facility "quickly filled," but to compete with three other storage facilities in Wilsonville the subject property offers discounts, including "30% off for 1 year" or "50% off first 3 months." (Ptfs Ex 1.) Howard reviewed a "Comparison Chart" for square feet occupied and units occupied, testifying that the "business is seasonal with occupancy the greatest in July, August, and September." (See Ptfs Ex 2.) Howard testified that it "takes five years to fill up" a storage facility, supporting his testimony with comparison charts for Tualatin Storage (built 2006) for January 2008 through June 2012, 88th Street Storage (built 2006) for February 2008 through December 2011, and Gresham Storage (built 2009) for June 2009 through June 2012. (Ptfs Exs 3-5.) Howard testified that "after five years the occupancy averages 79 percent, based on square footage." (Cf. Ptfs Ex 6.)

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Howard testified that "operating expense percent as of June 2011" averaged 40.5 percent based on 64 storage facilities. (Ptfs Ex 8.) Howard testified that a nine percent capitalization rate was appropriate for the subject property. He stated that there are few sales of storage facilities, making it "hard to determine a capitalization rate." He testified that in July 2011, he "purchased a storage facility located in Roseburg," paying $1,000,000 and resulting in an 8.5 percent capitalization rate. (Ptfs Ex 9.) He provided a brokers listing for Beaverton Safeguard Storage, showing a listing price of $1,850,000, and a "current cap rate" of 9.10 percent. (Ptfs Ex 10.) Howard testified that the "actual sale" occurred on April 5, 2011, and the buyer paid $1,825,000 for a "9.2 cap rate." (Id.) Howard testified that he determined the subject propertys real market value to be $1,685,520 as of January 1, 2011. (Ptfs Ex 7.) Howard explained that he determined an annual potential gross rental income of $404,594 based on the current mix of unit size and rental rates. (Id.) He testified that he concluded a "realistic" maximum occupancy of 79 percent of available square footage, resulting in rental income of $319,630 per year. (Id.) In response to Saunders question, Howard disputed the statement made by one of his equity partners to the City of Wilsonville Development Commission that "two percent" is a "correct" vacancy rate." He testified that as of January 1, 2011, the subject property was "30 percent occupied" based on the number of units rented. Howard testified that he reduced the rental income by actual or estimated "rent up" cost and two percent "credit loss." (Id.) He testified that he determined "annual operating cost" to be 40.5 percent of "total sales." (Id.) In response to Saunders question, Howard testified that "property taxes are 12 percent of the total operating costs." Howard stated that even though he did not increase the annual income he did increase the "operating expenses each year, approximately $5,000 per year."

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Howard testified that he capitalized the resulting annual net operating income for calendar years 2010 through 2016, concluding a real market "stabilized" value of $2,088,189 in 2016. (Id.) He testified that he subtracted the "present value of absorption" from the "fully leased up value" to arrive at a "net value" as of the assessment date of $1,685,520. (Id.) Saunders questioned Howard about his choice of a reversionary capitalization rate and how he computed the present value of the subject property as of the assessment date. Howard strongly advocated that an investor would not pay a "stabilized value sales price" for a "partially occupied building" and there would "likely be some deduction for absorption lease-up." Saunders stated that Howards "DCF [discounted cash flow] is too speculative." Saunders testified that his appraisal report considers the three approaches to valuation, cost, income and comparable sales. (Defs Ex A at 4.) Looking first at the cost approach, Saunders determined a land cost based on "the prior sale of the subject property," which "required a downward adjustment of 18% for time indicating a unit price of" $12.30 per square foot for an "indicated site value" of $685,811. (Id. at 66, 70.) Even though Saunders determined the "value of surplus land" to be $350,636, he did not include that value in the "Value Indicated by the Cost Approach." (Id. at 74.) Saunders stated in his appraisal report that he "utilized Marshall Valuation Service" in determining the "replacement cost includ[ing] estimates of direct costs, indirect costs and developers profit." (Id. at 71.) Howard challenged Saunderss inclusion of "Absorption/Lease-up Cost" in the amount of $500,000, which Saunders stated was "[b]ased on county appraisers estimate." (Id. at 73.) Saunders determined a depreciated replacement cost including the site value without the surplus land of $4,174,657. (Id. at 74.) Howard testified that in September 2010, the subject property was subject to a loan ///

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in the amount of $3,100,000. He testified that "there was no indication at the time [the subject propertys improvements were] being built that the economy would be in this state." Saunderss appraisal report described the sales comparison approach: "The comparables in this section represent the best comparable data [in the Portland-Vancouver Metropolitan Statistical Area] the appraiser could verify as of the effective date of the appraisal. The appraiser reviewed ten comparable sales of which the six most comparable sales were selected. * * *. "* * * * * "The appraiser made qualitative adjustments which are shown in the sales adjustment grid later in this section. The adjustments are based upon conversations with market participants tempered with the appraisers experience. "* * * The appraiser will utilize a negative 6% annual time adjustment (after January 1, 2009) to adjust the sale prices to the January 1, 2011 date of value and a positive 6% annual time adjustment for sales which occurred after January 1, 2011 date of value. * * *. "* * * * * "* * * Overall, no one sale had predominant comparability. * * * Considering the subjects potential stabilized [net operating income] per [square foot], location, new condition and occupancy stabilization costs, it is the appraisers opinion that the subject property would sell for approximately $85.00 [per square foot] in comparison. When the subjects 39,665 [square foot net rentable area] is multiplied by $85.00 the indicated value is $3,370, 675. To this amount is added the value of the subjects phase 2 surplus land which was previously estimated to be $400,636 for a total value of $3,771,311." (Defs Ex A at 86, 92.) Saunders also discussed the "Income Multiplier Analysis." (Id. at 93.) Saunders concluded: "The range [7.22 to 8.66] of EGIM [effective gross income multiplier] is a much more narrow[] range[,] reflecting the actual occupancy level of each comparable sale. It will be used to estimate the value of the subject property. The subject being new in a developing area with upside potential should have a multiplier in the upper end of the range. * * * Considering the subjects location, condition, age, quality and design, it is my opinion that the subject property would sell for an EGIM of 8.25 in comparison. /// /// DECISION TC-MD 120417D 6

"* * * [T]he indicated market value is $3,210,273. To this amount is added the value of the excess land of $400,636 for a market value estimate of $3,610,909. "* * * * * "The price per SF indicated a value estimate of $3,771,311. The effective gross income multiplier indicated a value conclusion of $3,610,909. Equal weight was placed on both indications of value. The sales data provide reasonable support for a market value estimate as of January 1, 2011 of $3,700,000." (Id. at 93.) Howard questioned Saunders about the three comparable sales occurring in January 2008, April 2008 and May 2008. Saunderss appraisal report discussed the income approach, stating that "[t]he rent comparables selected are located within a four mile radius of the subject property." (Id. at 75.) Howard testified that two of Saunderss rent comparables are more than "12 miles" from the city of Wilsonville. He asked how those can be comparable to the subject property, specifically when those two facilities are "highly occupied" and "rents are higher" than at the subject property. After reviewing the comparable rent data, Saunders found that the "subjects actual rental rates are below the rental range indicated by the rent comparables. The subject consists of several unit sizes * * * that are not ,,typical market unit sizes; however, a majority of the subject units are close to these typical sizes * * *." Saunders stated that "[c]onsidering the current recession, a typical purchaser would place most weight on the subjects actual achieved rents" and found that total annual rental income was equal to actual rents, or $426,630. (Id. at 82.) Saunders determined that the subject property "receives other income from late fees and merchandise sales such as boxes, locks, labels, etc. A[n] estimate of $500 per month or $6,000 per year is projected for this category. * * * The potential gross income is the sum of the gross annual rental income of $426,360 and the additional annual income of $6,000 for a total estimated amount of $432,360 per year." (Id. at 83.)

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Relying on the "subject developer" who "reported that there was a 2.2% vacancy rate over the last ten years in his land use application to the city of Wilsonville in 2009," Saunders concluded that "the average total vacancy and credit loss estimate for investment property is * * * 10% of potential gross annual income on a long term basis." (Id.) Howard challenged Saunderss conclusion, stating that Saunderss data supported a vacancy percentage of 9.53 percent and that Saunders did not include anything for credit loss. (Id. at 60.) Howard testified that the actual amount for vacancy should be 14 percent, discount two percent and credit loss five percent for total of 21 percent. Saunderss appraisal report stated that the "comparable sales * * * indicated expense percentages of 34

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