Supervisor of Assessments v. Berman

CATHELL, Judge. This case comes to us as a result of a tax assessor’s refusal to utilize the correct approach to the assessment of a major mall department store. The Court of Appeals, in ⁶⁷⁶ Supervisor v. Ort Children Tr., 294 Md. 195 , 448 A.2d 947 (1982), stated the correct approach: This Court has held that earning capacity is properly recognized in assessing property____ In the instant matter, the property is utilized for producing income____ The property’s capacity to produce more income than that currently realized is impeded by the existing lease for years to come. The Maryland Tax Court recognized that this factor has some adverse effect on the market value of the property and took that factor into consideration in revising the assessment.

The action of the Maryland Tax Court is entirely consistent with our decisions that permit the determination of full cash value to be made by reference to the willing purchaser-willing seller test. Id. at 204-05 , 448 A.2d 947 . Even where a leasehold advantage is admitted, the analysis which prohibits any consideration of contract rent is at odds with the willing seller-willing purchaser approach to market value for property tax purposes. Id. at 208 , 448 A.2d 947 .

Mr. Berman, the appellee, appealed an assessment of the Supervisor of Assessments of Prince George’s County to the Property Tax Assessment Appeal Board, and ultimately appealed to the Tax Court. Berman prevailed at the Tax Court, which reduced the Supervisor’s assessment from $7,139,820 to $2,860,000. The Supervisor then appealed that decision to the circuit court, where Judge Salmon, in a well-reasoned and complete analysis both of the facts and of the law, affirmed the Tax Court. This appeal resulted.

The Simplified Facts 1 Montgomery Ward (Wards) and appellee Berman entered into a long term lease arrangement in approximately 1968, whereby Wards would operate a mall anchor store on land owned by Berman. Wards was, it asserts, in an arms ⁶⁷⁷ length transaction, given very favorable treatment in recognition that it would anchor a mall and thus attract customers and satellite tenants. It was understood at the time of the lease that in such arrangements the anchor tenant’s rental is disproportionately low in recognition of its ability to attract satellite tenants. The anchor tenant’s low rent is compensated for by the imposition of substantially higher rents upon the satellite tenants, to the end that the landlord would achieve the desired rental level for the entire mall through a disproportionate rental levy—low for the anchor, high for the satellites.

The trial court found the litigants to have stipulated before the Tax Court, that at the time the lease was entered into it was an arms length, good faith lease entered into by experienced parties; that Berman at that time considered the anchor store an important step in achieving his ultimate goal of developing the adjacent site into a shopping mall; and that it was important to Wards that such an adjacent mall be constructed. 2 The ultimate result was that the Wards lease, standing alone, provided for contract rent that did not, in the particular assessment year, approach the market rent of such premises if the Wards property was newly constructed and/or unencumbered by contract rent. The Supervisor of Assessments, presents three questions. They are: 1. Did the Maryland Tax Court make an error of law in its interpretation of the legal precepts set forth in Supervisor of Assessments of Allegany County v. Ort Children Trust Four, 294 Md. 195 , 448 A.2d 947 (1982)? ⁶⁷⁸ 2.

Did the Maryland Tax Court commit an error of law when it applied the legal precepts embodied in Ort to the facts in this case? 3. Did the Maryland Tax Court give consideration to all relevant facts which impact the value of the subject property? We respond by answering no to questions one and two, and yes to question three, thereby affirming the decision of the circuit court. We explain.

The Tax Court found, in part: The Court finds that the financing and the lease arrangement were both arms length and made in good faith ... entered into in approximately 1968. We believe that the lease, at the time it was entered, was based on the market rents. And there is unrefuted testimony from Mr. Lipman as to this fact. % Hi * 4s * The central issue in this appeal, we feel, is the extent to which the long-term lease to Montgomery Ward should be considered in determining the market value. jjs sjs s}e sf: The Court concluded in that case [Ort ] that the analysis [sic] which prohibits any consideration of contract rent is at odds with the willing seller/willing purchaser approach to market value for property tax purposes. In this particular case the Petitioner has presented an analysis which considered the contact rent paid by the long-term tenant.

We agree with the Petitioner’s approach in this case. On the other hand, the appraisal report of the assessor gives no consideration, in its economic approach, to the actual contract long-term lease rent which is significantly less than the market rent at the present time; or on the appropriate date of finality. * * * * * ⁶⁷⁹ Although Ort does not mandate that contract rent must be used to value income producing property when a long-term lease is involved, it does require that the affect of the lease be considered in any value. The Respondent [appellant] has failed to consider the lease to which the property is subject. Petitioner’s income approach truly reflects, we believe, what the willing buyer would look for in a determination of value.

Appellant informs us that the Court of Appeals in Ort grounded its opinion on two specific factors, i.e., “(1) that the lease was a bona fide, arms length transaction, and (2) that the rental amount represented economic rent at the time it was entered into____” Thus the Supervisor asserts that the Court of Appeals categorically limited its decision in Ort to situations where the lease represented market conditions at the time of its commencement. Portions of the testimony before the Tax Court are illustrative of the substantiality of the evidence before it which supports its decision on this issue in light of the Ort decision. Ronald Lipman, a qualified expert appraiser who testified for Berman, clearly explained the nature and purpose of the leasing arrangement at issue here, and clearly indicated that this type of arrangement reflects the industry norm, which is achieved as the result of good faith, arms length bargaining. THE WITNESS [Lipman]: The satellite stores which were built in the mall adjacent [to] Montgomery Ward benefit from Montgomery Ward’s existence.

They benefit to the extent that the tenants in them are willing to pay rents that will reflect Montgomery Ward’s existence adjacent and connected to the mall. When they pay rents to Mr. Berman, or the owner of that shopping center, that Mr. Berman built adjacent to the store, those rents are high—are higher than the rents that are being paid on department stores, and they are reflected in any income approach that any sophisticated ⁶⁸⁰ assessor or appraiser is using to value the property. I assume ... * * * * * * [I]f you take the macroview and look at the entire shopping center, the value that is assessed against the entire shopping center, if you used my Three Million on the Montgomery Ward store, and appropriate income value on the satellite stores, you would get an overall value which would be fair and balanced for the whole property. [3] [Y]ou have to recognize the fact that in order to get Montgomery Ward or any anchor to anchor a regional mall, you have to make a deal. You have to attract them.

They know they can make the deal. That’s the market place____ When that deal is made, it’s made at the level which reflects that the presence of the anchor allows the developer of the adjacent mall to charge the Sixteen, Eighteen, Twenty, Twenty-five Dollar a square foot rents for the satellites. [Wjhen an assessor appraises that component, the satellite component of the mall, he is picking up some of the value that you feel you are being denied in this appraisal. He is picking up all of the value that you are being denied in this appraisal. Q. ... [S]o according to you then, the value of this property should be lowered for assessment purposes because it acts as an attraction for the satellite stores?

A. It’s the catalyst. It’s the driving force which allows the owner of the adjacent stores to exact from those tenants rents in the teens and low twenties per square foot, triple net. On the issue of market value when the lease was negotiated, Mr. Lipman was asked: ⁶⁸¹ Q. Mr. Lipman, did you consider whether the lease payments ... the question of whether the lease payments set forth in the lease represented a market rate for the 1968-1970 period when the lease was entered into? s¡í :{■ !}: * :]< * A. Yes. A. ...

And the rate in the Dollar Sixty a square foot range is very consistent with the rate that I have found in other leases for buildings similar to this, where the negotiations took place in that time frame. Q. ... [A]round the same time frame, have you found that the lease structure, not just the rental structure, the overall lease structure for this lease, this Montgomery Ward lease, is similar or dissimilar to anchor leases that you have examined elsewhere? A. This is very similar. Q. Did you reach a conclusion as to whether the rental structure set forth in this lease represented what was market rate in the 1968-1970 period?

A. I did. A. I do believe that this rental agreement represents fair economic rent for the subject property as of the 1970, 1969, 1971 time frame. There was no testimony presented that conflicted with Mr. Lipman’s testimony as to the market rent in the 1968-71 time frame. Thus, it is clear that the situation faced by the Tax Court in this case concerned a lease and leasing arrangement that represented market conditions at the time of its commencement.

The appropriateness of including a contract rent income approach in determining market value under a willing purchaser/willing seller analysis was also indicated by the assessor when he testified. ⁶⁸² Q. Now I take it you would also agree that any investor coming in to look at the Montgomery Ward property would have to take into account the existence of the lease and the income stream that one could derive from that lease? A. [From Mr. McGucken] From an investor point of view, yes. Yes. Q. Well from any purchaser’s point of view?

A. From a purchaser’s point of view as well, yes. At another point the assessor was asked: Q. Mr. McGucken, do you agree that the rental roll at the mall should be a basis for a determination of market value