ABKA Ltd. Partnership v. Board of Review

JON P. WILCOX, J.

¶ 49. (dissenting). Although I agree with the majority that the assessor's inverse methodology and his use of estimated figures are supported by a reasonable view of the evidence, I disagree with its conclusion that the fees received from management of off-site condominiums may be included in the assessment of the resort property.

¶ 50. Relying heavily on the concept that the management fees and the resort property are "inextricably intertwined," the majority fails to articulate clear guidelines for determining whether particular business income generated by an owner's contract with off-site property may be included in an assessment. The inclusion of such off-site income in an assessment has no precedent in Wisconsin case law and appears to have no basis in the Wisconsin Property Assessment Manual, other appraisal literature, or the case law of other jurisdictions. The resulting assessment involves the taxation of an intangible personal property interest, business income that does not "appertain to" the real property. Because I conclude that the assessment is therefore contrary to Wis. Stats. §§ 70.03, 70.112(1), and 70.32(1), results in double taxation, and undermines the Uniformity Clause of the Wisconsin Constitution, I respectfully dissent.

¶ 51. I agree with the majority that the scope of our certiorari review of the Board's action is narrowly limited. Majority opinion at 334; State ex. rel Geipel v. *351City of Milwaukee, 68 Wis. 2d 726, 731, 229 N.W.2d 585 (1975); Darcel, Inc. v. Manitowoc Bd. of Review, 137 Wis. 2d 623, 626, 405 N.W.2d 344 (1987). However, as the majority acknowledges, one of the explicit grounds of our review is "whether the Board acted according to law." Majority opinion at 335; Geipel, 68 Wis. 2d at 731; Darcel, 137 Wis. 2d at 626. Although the Board's view of the evidence is reviewed with great deference, "the court may determine whether the assessment was made on the statutory basis, for such inquiry involves a question of law." Geipel, 68 Wis. 2d at 732 (citations omitted). Indeed, both of the cases the majority cites in support of the "strictly limited" standard of review rejected Board-approved assessments after determining that they were not in accordance with the law. See id. at 733-34, 737; Darcel, 137 Wis. 2d at 624.

¶ 52. Any approach to assessment of real property for taxation purposes first must conform to the statutory framework authorizing taxation. Taxes are to be levied upon all general property that is not exempt, including non-exempt real property. Wis. Stat. §§ 70.01, 70.02. "Real property" includes the land itself, all improvements on the land, and "all fixtures and rights and privileges appertaining thereto. . . ." Wis. Stat. § 70.03. However, it cannot include intangible personal property, which is specifically exempted from taxation. Wis. Stat. § 70.112(1). Assessors are to value real property at its full fair market value, in accordance with the Wisconsin Property Assessment Manual and professionally accepted appraisal practices. Wis. Stat. §§ 70.32(1), 73.03(2a).

¶ 53. We have always recognized that under these statutes an assessor must take care to value the real estate, and not the business concern using the real estate, in an assessment. Waste Management of Wis., *352Inc. v. Kenosha County Bd. of Review, 184 Wis. 2d 541, 565, 516 N.W.2d 695 (1994). Other jurisdictions appear to be in general agreement that business value must be separated carefully from real estate value in property tax assessments.1

¶ 54. In assessing real property, assessors utilize three basic approaches: the sales comparison, cost, and income approaches. 1 Property Assessment Manual for Wisconsin Assessors, ch. 9, at 9-6. Of these, the "sales comparison approach," which looks to recent arm's-length sales of the assessed property or comparable properties, is preferred because it most accurately reflects the property's fair market value. Waste Management, 184 Wis. 2d at 556-57; Bischoff v. Appleton, 81 Wis. 2d 612, 618-19, 260 N.W.2d 773 (1978). See also Wis. Stat. § 70.32(l)(directing assessors to first consider recent sales of the property and comparable properties, and then other factors affecting the property's value) and 1 Property Assessment Manual for Wisconsin Assessors, ch. 9, at 9-6, 9-19 (recognizing that the sales comparison approach should be used if applicable, and that other approaches should be con*353sidered only in the absence of sales comparison information).

¶ 55. In sum, although the income approach is not the preferred method for valuing real estate, this court has permitted the approach to be used in the absence of comparable sales and in conformity with the Wisconsin Property Assessment Manual. See Waste Management, 184 Wis. 2d at 560.

¶ 56. However, no Wisconsin case has ever allowed a property tax assessment to capture income generated by separate, off-site property. Thus, although the majority states that "Wisconsin law does not create such an artificial distinction between on-site and off-site income," majority at 343, no previous Wisconsin case has even suggested that off-site income could properly be captured in an assessment.

¶ 57. Typically, the income approach is used to value income producing properties that generate rental income on site. The approach "can provide a somewhat comfortable fit when used to value the more common income producing properties such as industrial, office or apartment buildings, or shopping centers, uses which often involve long or medium term leases or tenancies, which generate 'rental income' for the owners." Analogic Corp. v. Bd. of Assessors, 700 N.E.2d 548, 553 (Mass. App. Ct. 1998).

¶ 58. In these more typical income approach assessments, the assessor estimates the property's income by estimating its market rent. The Wisconsin Property Assessment Manual often describes the income approach in terms of rental income. See, e.g., 1 Property Assessment Manual for Wisconsin Assessors, ch. 7, 7-20, ("[The assessor calculates] an estimate of net income by deducting the appropriate expenses from an estimate of the market rent of the property."), and *354ch. 9, 9-7 ("Potential gross income is the income that would be generated if a property was 100 percent occupied and receiving the market rent.").

¶ 59. Similarly, industry literature recognizes that "[t]he income to investment properties consists primarily of rent." The Appraisal Institute, The Appraisal of Real Estate 478 (11th ed. 1996). In the past, this court has approved the inclusion of on-site income in assessing the fair market value of rental property. See State ex. rel N / S Assocs. v. Bd. of Review, 164 Wis. 2d 31, 52, 473 N.W.2d 554 (Ct. App. 1991); Rosen v. Milwaukee, 72 Wis. 2d 653, 670—71, 242 N.W.2d 681 (1976). Indeed, in this case ABKA agrees that the income derived from rental of rooms at the resort property was properly included in its assessment.

¶ 60. On-site rental income was essentially at issue in N/S Associates, the case that first used the phrase "inextricably intertwined" on which the majority opinion so heavily relies. In that case, the owner of a shopping mall challenged the use of a recent sale as an estimate of the mail's fair market value on the grounds that the sale price included business value. N / S Assocs., 164 Wis. 2d at 52. Obviously mindful of the fact that a recent arm's-length sale is the best information for an assessment, see id. at 56-57, the court of appeals held that the assessment's reliance on the recent sale was permissible, even though it might include some business value. Id. at 55. Because "the leasing of space to tenants and related activities" was a value that would transfer with the mall at sale, it was "inextricably intertwined" with the mall. Id.

¶ 61. In contrast, the management fees at issue in this case are not generated by the rental of the assessed property and are easily separated from the *355on-site rental income. The fees are generated by the owner's contracts to manage the rental of the off-site condominiums. There appears to be no precedent for including such income in a property tax assessment, and the majority cites nothing in the Wisconsin Property Assessment Manual or other appraisal industry authorities that explicitly justifies its approval of such an assessment.

¶ 62. Moreover, the majority seems to give the phrase "inextricably intertwined" a different meaning than it had inN/S Associates, and a different meaning than it is normally understood to have. A common definition of "inextricable" is "[difficult or impossible to disentangle or untie." The American Heritage Dictionary of the English Language 924 (3d ed. 1992). "Intertwine" means "[t]o join or become joined by twining together." Id. at 944. Thus, to say that something is "inextricably intertwined" normally means that it is joined together and impossible to disentangle. The income at issue in N/S Associates actually was "inextricably intertwined" with the assessed property because, as the court noted, "there was substantial evidence before the Board of Review that it was not possible to separate Southridge mail's non-transfer-rable income-producing capacity from the elements of real estate that are set out in section 70.03. . . ." N / S Assocs., 164 Wis. 2d at 55.

¶ 63. Notwithstanding the usual meaning of the phrase "inextricably intertwined," the majority determines that "the issue of severability did not represent the dispositive factor" in N/S Associates. Majority at 342. The opinion further explains that the easy sever-ability of ABKA's management fee income from the income of the resort property itself simply "does not alter the outcome" of its analysis of whether the income *356is "inextricably intertwined" with the resort property. Majority at 342.

¶ 64. Thus,' in the majority opinion, the phrase "inextricably intertwined" does not seem to have its normal dictionary definition or the definition it had in N/S Associates itself. The precise meaning of the phrase is therefore obscure and will generate uncertainty in property tax assessments throughout the state.

¶ 65. To justify its decision that the off-site management fees are "inextricably intertwined" with the resort property, the majority relies on its conclusions that the income generated by the fees is a transferable value, majority at 338-40, and is "generated primarily on the resort property itself." Majority at 343.

¶ 66. To begin with, the idea that the income is a "transferable value that will survive a sale of the Abbey," majority at 339, appears to be unsupported by the record. ABKA, the owner of the resort, receives the income under one-year contracts with the individual condominium owners. Although the record establishes that, on average, 20 to 30 owners have contracted for ABKA's management services each year, there is no evidence that the same owners consistently renew their contracts, and the owners are under no obligation to do so. An owner's decision whether to renew a particular contract is likely to be greatly affected by his or her satisfaction with the quality of the services provided. Thus, nothing in the record suggests ABKA's management income would automatically- transfer with the assessed resort upon sale.2 This stands in contrast to *357the income generated by renting mall space in N/S Associates, which was the mall's "raison d'etre," N / S Assocs. at 55, and would obviously transfer with the mall itself.

¶ 67. Likewise, the majority's conclusion that "[t]he condominium rental fees are generated by the range of services and amenities provided on the resort grounds," majority at 343, does not appear to be supported by the record. In reaching its conclusion, the majority is persuaded by the fact that "the condominiums serve as extensions of the Abbey," and "[rjenters enjoy the same privileges and opportunities as resort guests and are not separately identified for revenue or expense purposes." Majority at 343.

¶ 68. These facts do not seem relevant to determining whether the condominium management fees appertain to the resort property. The fact that renters may not be aware that the condominiums are actually separate properties does not change the fact that they are separately owned and separately assessed. The renters may indeed be attracted by the amenities available at the resort property, just as they are attracted by the nearby lake. However, any member of the public may also make use of the resort property's amenities, on a fee-for-service basis. The condominium renters pay the same fees for the use of those facilities, and those fees have already been taken into account in the *358assessment. Thus, the additional income generated by the condominium renters' use of the amenities at the resort property are already included in the assessment, before the fees ABKA receives for managing the condominiums are added.

¶ 69. It seems clear that, rather than being generated by the resort property, the management fee income is generated by the condominium properties themselves. A person who rents a condominium pays the condominium owner primarily for the privilege of temporarily rooming at the condominium. In exchange for half of the rent paid to the condominium owner, ABKA provides services such as reservations, check-in, switchboard, and cleaning. Most of the services provided by ABKA could be managed from a building miles away from the condominiums. Thus, the management fees do not "appertain to" the resort property, but to the business that owns and operates the resort. They are not generated by the resort property, but by the rental of the separately owned, separately assessed condominium properties.

¶ 70. Waste Management also fails to support the majority's determination that the condominium management fees appertain to the resort property. That case was a great leap from our former precedents, none of which had permitted the inclusion of owner-operator income in a property tax assessment. The primary value of the landfill property at issue was its ability to receive waste. Id. at 568. We determined that a significant portion of the tipping fees generated on site was "attributable to the transferable income-producing capacity of the underlying land itself, and not to the labor and skill of the owner." Id. at 569.

¶ 71. Although the opinion concluded that there is no absolute bar to using owner-operator income to *359value real estate, in the absence of rental income, Waste Management, 184 Wis. 2d at 563, it repeatedly emphasized caution and warned that its reasoning might only apply to the unique circumstances of a landfill property. Id. at 569.

¶ 72. The majority opinion in this case is an even greater leap from precedent. The majority does not cite, and I am unable to find, any precedent in the case law of Wisconsin or other jurisdictions that supports the inclusion of income from management of off-site property in an income approach assessment. As noted above, there seems to be general agreement that even on-site business interests must be carefully separated from real property interests in property tax assessments. On the rare occasion that off-site income has been considered in a property tax assessment, the income has been generated by the activity of on-site residents. See Knollcroft Apartments, Inc. v. Borough of Fair Lawn, 3 N.J. Tax 25, 36 (N.J. Tax Ct. 1981)(allowing an apartment building's assessment to include half of the income from rental of parking spaces on an adjacent parking lot that the apartment owner used free of charge in exchange for maintaining the lot).

¶ 73. In particular, the decision to allow a property tax assessment of a hotel property to capture income generated by the owner-operator's contract to manage separate, off-site properties appears to be unprecedented. Indeed, cases reviewing income-approach assessment of hotels frequently have cautioned that the assessor must deduct non-realty value from the estimate of real property's net income. See Analogic, 700 N.E.2d at 553; Equitable Life Assurance Soc'y / Marriott Hotels, Inc. v. State Tax Comm’n, 852 *360S.W.2d 376, 380-81 (Mo. Ct. App. 1993). Analogic cautions that:

Hotels present unique problems to appraisers. They tend to be labor intensive businesses which derive only a portion of their income from daily room (space) occupancies. They derive other income from services and sales of such items as food and alcohol. . . . This "other income," if not attributable to the realty, is not "rental income" for purposes of valuation under the income capitalization method.

Analogic, 700 N.E.2d at 553 (citation omitted). Similarly, as we noted in Waste Management, the Wisconsin Property Assessment Manual warns that for hotel properties, "the amount of income is substantially affected by the quality of management," and so "[t]he assessor should be careful to make sure that only the real estate is being valued and not the quality of management or goodwill." Waste Management, 184 Wis. 2d at 565 (citing 1 Property Assessment Manual for Wisconsin Assessors, ch. 9, at 9—24).

¶ 74. Moreover, nothing in the Wisconsin Property Assessment Manual provides that income like the management income in this case should be included in an income approach assessment. The manual states that miscellaneous, non-rental income may include "parking, coin operated laundries, and rental of clubhouses or party rooms," but cautions that any assessable items of personal property must not be double assessed. 1 Property Assessment Manual for Wisconsin Assessors, ch. 9, 9-10. This passage describes only income from operations on the property itself. Similarly, The Appraisal of Real Estate provides that "other income" includes:

*361all income generated by the operation of the real property that is not derived directly from space rental. It includes income from services supplied to the tenants such as switchboard service, antenna connections, and garage space; income from coin-operated equipment and parking fees is also included. Because service-derived income may or may not be attributablé to the real property, an appraiser might find it inappropriate to include this income in the property's potential gross income. The appraiser may treat other income as business income or as real property income, depending on its source.

The Appraisal Institute, The Appraisal of Real Estate 489 (11th ed. 1996). It is true that under these principles, and as Waste Management holds, certain business income generated by the real estate may be included in an income approach assessment.

¶ 75. However, it does not follow from this that income generated by the owner-operator of a resort property under year-to-year contracts to manage the rental of adjacent condominiums should increase the resort property's tax assessment. Such income is easily distinguished from the income generated by the rental of the resort property itself. It is intangible personal property belonging to the owner of the resort and does not appertain to the resort property itself. Its inclusion in the assessment is therefore unlawful under Wis. Stats. §§ 70.03 and 70.32.

¶ 76. In addition to resulting in an inaccurate and unlawful calculation of the fair market value of real property, this assessment may violate Wisconsin's unitary taxation rule and result in double taxation. Under Wisconsin law, all real property must be assessed to its owner. Wis. Stat. § 70.17; Aberg v. Moe, 198 Wis. 349, 359, 224 N.W. 132 (1929). Each condo*362minium is assessed separately, and a fair market value assessment of each condominium would presumably include the value of the rental income. Nonetheless, the record shows that the assessor assessed part of this income to the resort property. The result may be that this portion of a condominium's value will be captured in two assessments, the assessment of the condominium and the assessment of the resort.

¶ 77. Finally, this assessment also appears to violate the Uniformity Clause of the Wisconsin Constitution. Article VIII, section 1 of the Constitution provides that "[t]he rule of taxation shall be uniform. . . The provision requires not "uniformity of methods of taxation, but uniformity in results. ..." State ex rel. La Follette v. Torphy, 85 Wis. 2d 94, 109, 270 N.W.2d 187 (1978), citing Chicago and N.W. Railway Co. v. State, 128 Wis. 553, 614, 615, 108 N.W. 557 (1906). Yet, under the majority opinion, the amount of management income to be included in an assessment "may vary depending on the ability to exploit the income-producing capacity that inherently exists with the Abbey." This suggests that the assessment of the Abbey resort will not be uniform because the value of the resort in relation to other similar resort properties may vary depending upon the quality of management and the amount of entrepreneurial activity by each resort's owner. This is a serious undermining of the rule of uniformity in taxation required by the Wisconsin Constitution.

¶ 78. The majority opinion will have serious and far-reaching repercussions for property tax assessments across Wisconsin. The record shows that the property assessor in this case did not "specifically address" the Wisconsin property assessment manual and instead relied on interpretation of language in *363N/ S Associates and Waste Management. The language of the majority opinion invites even broader interpretation. The opinion repeats the inscrutable phrase "inextricably intertwined" seventeen times, yet never precisely articulates which analysis determines whether off-site business income appertains to real property.

¶ 79. In sum, although the majority opinion cautions that it is "not to be construed as a broad license to ignore the site of income and thus assess income derived from any off-site property that may have tenuous relationship to the main property being assessed," majority at 344,1 believe that it approves just such an assessment. Because the resulting assessment is unlawful, I respectfully dissent.

¶ 80. I am authorized to state that Justice DAVID T. PROSSER joins in this dissenting opinion.

See, e.g., Service America Corporation v. County of San Diego, 19 Cal. Rptr. 2d 165, 171 (Cal. Ct. App. 1993);New Haven Water Co. v. Bd. of Tax Review, 422 A.2d 946, 951-52 (Conn. 1979); Post-Newsweek Cable, Inc. v. Bd. of Review, 497 N.W.2d 810, 816-17 (Iowa 1993); Inner Harbor Marina of Baltimore, Inc. v. Supervisor of Assessments, No. 6280, 1991 WL 322991, at 1 (Md. Tax Ct. May 13, 1991); Coastal Eagle Point Oil Co. v. Westville Borough, 13 N.J. Tax 242, 281-283 (N.J. Tax Ct. 1993); Dublin Senior Community Ltd. Partnership v. Franklin County Bd. of Revision, 687 N.E.2d 426, 430 (Ohio 1997); Boise Cascade Corp. v. Dep't of Revenue, 12 Or. Tax 263, 266-269 (Or. T.C. 1991).

The majority supports its conclusion that the management income is a transferable value that will survive the sale of the Abbey by relying on the testimony of ABKA's appraiser, Frank Karth, that future purchasers of the resort would expect *357to acquire the interest in managing the condominiums. Majority at 340. However, Karth's testimony did not suggest that the management income is "impossible to disentangle" from the resort property or would transfer automatically with it. To the contrary, Karth testified that in order to transform his valuation of the resort as a "going concern" into a valuation of the property itself for tax assessment purposes, he extracted the value of the management income.