Opinion
No. 3-732 / 02-1884
Filed February 27, 2004
Appeal from the Iowa District Court for Dubuque County, Joseph C. Keefe (summary judgment) and R.J. Curnan (trial), Judges.
The plaintiffs, owners of bed and breakfast properties, appeal the district court's affirmance of the board of review's classification of their properties. Plaintiff Stuart also challenges the valuation of his property. AFFIRMED IN PART; REVERSED IN PART.
Francis J. Lange of Lange Neuwoehner, Dubuque, for appellants.
Barry A. Lindahl, Dubuque, for appellee.
Heard by Huitink, P.J., and Zimmer and Miller, JJ.
David Stuart, Amy Boynton, and Charles and Susan Huntley, owners of bed and breakfast properties, appeal from the district court ruling that affirmed the classification of their properties as commercial real estate. Stuart also appeals from the district court's valuation of his bed and breakfast inn for property tax purposes. Upon review we reverse the classification of the properties, but affirm the valuation of Stuart's property.
Background Facts and Proceedings.
David Stuart owns property located at 1492 Locust Street, Amy Boynton owns property located at 199 Loras Boulevard, and Charles and Susan Huntley own property located at 1105 Grove Terrace, all in Dubuque, Iowa. Each parcel of real estate contains a single-family dwelling that is operated as a bed and breakfast. Each house was purchased as either an on-going bed and breakfast concern, or with the intent that it would be converted to a bed and breakfast inn. All three houses offer between seven and nine rooms to the public for overnight accommodations. Amy Boynton and the Huntleys live in their respective inns. An innkeeper currently lives in the Stuart property.
Since the Stuart property was purchased several different people, including Stuart's wife, have resided in the property. In the proceedings before the district court, the City stipulated that all three properties are used as dwellings.
The Board of Review of the City of Dubuque (the Board) classified all three properties as commercial rather than residential real estate. The Board approved the city assessor's $88,090 appraisal of Stuart's property, despite Stuart's claim that the property was worth less than half that amount. Stuart, Boynton and the Huntleys (the plaintiffs), appealed the Board's decision to the district court. All the plaintiffs contested the classification of their property as commercial real estate, arguing the single-family nature of all the dwellings required that they be classified as residential real estate. In addition, Stuart challenged the assessed value of his property.
Following a bench trial, the district court concluded all three properties had been properly classified as commercial real estate. The court also affirmed the assessed value of Stuart's property. The plaintiffs appeal from the classifications of their respective properties. Stuart also appeals from the valuation of his property, arguing he established that the actual value of his property was $49,000 or less.
Prior to trial the plaintiffs sought partial summary judgment on the classification issue. Although the court's denial of their motion was briefed and argued on appeal, we find it unnecessary to address the claim in our ruling.
Scope of Review.
In this equity matter, our review is de novo. See Iowa Code § 441.39 (2001); Iowa R. App. P. 6.4. We give weight to the fact findings of the district court, especially when considering the credibility of witnesses, but are not bound by those findings. Iowa R. App. P. 6.14(6)( g). In addressing valuation issues "[w]e decide the ultimate issues involved . . . [and] `there shall be no presumption as to the correctness of the valuation of assessment appealed from.'" Carlon Co. v. Board of Review, 572 N.W.2d 146, 148 (Iowa 1997) (citations omitted).
Classification.
The Iowa Department of Revenue and Finance (the Department) has promulgated rules for the classification and valuation of real estate. See Iowa Admin. Code ch. 701-71. Classifications are to be based on "the best judgment of the assessor following the guidelines" in the Iowa Administrative Code. Iowa Admin. Code r. 701-71.1(1). As a general matter, property is to be classified according to its use. Id. Consequently, residential real estate includes land and buildings primarily used or intended to be used for human habitation. Id. at r. 71.1(4). An exception to this rule is made for buildings for human habitation that are used as commercial ventures, including but not limitedto hotels, motels, rest homes, and structures containing three or more separate living quarters. Id. Such property is to be classified as commercial real estate, as is any property which is "primarily used or intended as a place of business where . . . services [are] . . . offered for sale." Id. at r. 71.1(5).
However, the administrative rules create a specific exception to commercial classification for single- and two-family dwellings. Pursuant to Iowa Administrative Code rule 701-71.1(5), "regardless of the number of separate living quarters or any commercial use of the property, single- and two-family dwellings . . . shall be classified as residential real estate." Id. Each of the buildings involved in this appeal is used as a dwelling and as a bed and breakfast. All three buildings were originally constructed as single-family dwellings. Thus, they would seem to fall within the exception created by rule 701-71.1(5).
Our supreme court has upheld the constitutionality of this exception for single- and two-family dwellings. See Sperfslage v. Ames City Bd. of Review, 480 N.W.2d 47, 49 (Iowa 1992) (discussing classification scheme in context of equal protection challenge). In Sperfslage, the court concluded the Department had a rational basis for its property classification scheme. Id. That basis depended, not on the commercial or residential use of the property, but on market classifications. Id. Stated simply, the Department made an exception for single- and two-family dwellings because they, unlike motels or commercially-constructed apartment complexes, fall into the same market as owner-occupied dwellings, and are much more likely to be purchased as a residence. See id. Although the houses at issue in this matter are large, and testimony was introduced that their size would make them difficult to sell as single-family residences, they nevertheless are single-family dwellings, and possess the potential to be sold as such.
Based on the language of the Iowa Administrative Code, and guided by our supreme court's pronouncements in Sperfslage, we conclude the correct classification of each of the properties involved in this appeal is residential. Accordingly, the district court's conclusion that the properties were properly classified as commercial is reversed.
Valuation of Stuart's Property.
The Iowa Code requires that property subject to taxation be valued at its "actual value." Iowa Code § 441.21(1)(a). Actual value is the "fair and reasonable market value" of the property, as measured by the sales price of the property, during the year the property is listed, in a transaction between a willing buyer and willing seller. Id. § 441.21(1)(b). This necessarily includes a consideration of any factor that may affect market value, including the availability of a willing buyer. Id.; Boekeloo v. Board of Review, 529 N.W.2d 275, 278 (Iowa 1995). In setting actual value there is a preference for the comparable sales approach, or using evidence of the sale price of the property, as well as that of any comparable properties. Boekeloo, 529 N.W.2d at 277. Only when the actual value cannot be "readily established" by a comparable sales approach may the assessor use an alternate valuation method. Iowa Code § 441.21(2); Boekeloo, 529 N.W.2d at 277.
As an initial matter Stuart argues the comparable sales method was not available in this case. Stuart bears the burden on this issue. Carlon Co. v. Board of Review, 572 N.W.2d 146, 150 (Iowa 1997). Although Stuart did present evidence that there were no comparable properties to the Stuart real estate, in reviewing his claims we note Stuart's complaints focus primarily on the application of the method by various expert witnesses, rather than on the availability of the method itself. In addition, Stuart's primary independent witness, Robert Felderman, employed the comparable value method or "sales comparison approach" in arriving at an assessed value for the Stuart property of $49,000. Although Felderman arrived at a $92,500 value by using the cost approach, his report stated the sales comparison approach "is typically more reflective of the current market for historical property and is given the greatest weight." We conclude the comparable sales method was available in this case.
We therefore turn to the question of whether the assessor's valuation should be upheld. As a general matter, Stuart bears the burden to establish, by a preponderance of the evidence, that the $88,090 value set by the assessor was excessive, inequitable or capricious. See Carlon Co., 572 N.W.2d at 150. However, if Stuart presents competent evidence from at least two disinterested witnesses that the market value of his property is less than that determined by the city assessor, the burden of persuasion shifts to the Board to uphold its valuation. See Iowa Code § 441.21(3); Carlon Co., 572 N.W.2d at 150. The district court found and Stuart presumes that he presented evidence sufficient to shift the burden. We cannot agree.
To be considered "competent," the testimony of the two disinterested witnesses must be in line with the statutory scheme. Boekeloo, 529 N.W.2d at 279. In other words, their testimony as to value must be based on the comparable sales approach or, in the event the comparable sales approach is not available, upon an alternative method as contemplated by statute. Id. See also Iowa Code § 441.21(2) (defining alternate approaches). We have already determined the comparable sales approach was available to assess the value of Stuart's property. However, of Stuart's disinterested witnesses, only Felderman employed the comparable sales approach. Stuart's other real estate expert, Jim Jacobsen, never provided an independent value for the Stuart property, and admitted he did not do an appraisal or market analysis. Because only one disinterested witness offered competent evidence, the burden of proof remained with Stuart. Boekeloo, 529 N.W.2d at 279.
Jacobsen stated he was familiar with the property values in the area of the Stuart property. Although he "couldn't really say" what a fair sales price would be for "an older home" in the area of the Stuart property, he did testify to an overall difficulty in reselling larger, older homes in the area, and to the fact market prices in the area were in decline. He also opined there were no comparable properties upon which to assess the market value of the Stuart property, because all the older, larger homes in the area were fairly unique. He also testified to the poor condition of Stuart's property. Although Stuart presented other witnesses, none provided an assessed value consistent with the comparable sales approach.
The record reveals Stuart's property was assessed at $133,530 as of January 1, 2000. The assessor went to the property at Stuart's request and discussed Stuart's concerns about its assessed value. Later, he determined the value of the property to be $88,090. The assessments conducted by the city assessor and the City's two other witnesses all employed the comparable sales method. Of the three assessments, the one conducted by the city assessor arrived at the lowest value.
Stuart attacks all three assessments. Among other things, he argues that the properties used by the City's witnesses were not in fact comparable. However, a property can have characteristics different from the assessed real estate and still be considered a "comparable" property. See, e.g., Sears, Roebuck Co. v. Sieren, 460 N.W.2d 887, 890 (Iowa Ct.App. 1990) (finding large anchor store space and small retail shop spaces to be comparable properties). Even properties in a different geographical location can be considered comparable. See Carlon Co., 572 N.W.2d at 150. Practical considerations must be made. Sears, Roebuck Co., 460 N.W.2d at 890.
The evidence before the district court included five estimates of value which ranged from $49,000 to approximately $160,000. All of the witnesses who offered estimates of value were persons with education and experience in the area of property valuations. Upon our de novo review of the record, we agree with the district court's conclusion that the evidence preponderates in favor, rather than against, the Board's approved assessment. Because we conclude Stuart failed to establish the assessor's valuation of his property was excessive, we affirm the district court on this issue.
This range of values does not include Plaintiff Stuart's own estimate that the value of his real estate was no more than $42,010.
Conclusion.
All three properties at issue in this matter should have been classified as residential real estate. We therefore reverse the classification made by the Board, and direct that all three properties be re-classified as residential real estate. We affirm, however, the assessment of Stuart's property.