Petrogas Pac. LLC v. Xczar

520 P.3d 1077

PETROGAS PACIFIC LLC and Petrogas West LLC, Appellants,

v.Rebecca XCZAR, Whatcom County Assessor, Respondent.

No. 83065-1-I

Court of Appeals of Washington, Division 1.

Filed November 28, 2022

Norman J. Bruns, Michelle Delappe, Fox Rothschild LLP, 1001 4th Ave. Ste. 4400, Seattle, WA, 98154-1065, David Peter Papiez, Attorney at Law, 1001 4th Ave. Ste. 4400, Seattle, WA, 98154-1192, for Appellants.

George Roche, Attorney at Law, Brandon Michael Waldron, Whatcom County Prosecuting Attorney, 311 Grand Ave. Ste. 201, Bellingham, WA, 98225-4038, for Respondent.

PUBLISHED OPINION

Mann, J. ¶ 1 This appeal arises from the property tax valuation of a terminal and wharf owned by Petrogas Pacific LLC and Petrogas West LLC (Petrogas). Petrogas appeals the final decision of the Board of Tax Appeals (Board). Petrogas argues that the Board erred (1) by considering intangible characteristics of the subject properties, (2) by considering an aquatic lands lease in the property tax value, and (3) by rejecting Petrogas's appraisal. We affirm.

FACTS

A. Purchase and Valuation

¶ 2 Petrogas owns and operates a liquified petroleum gas (LPG) terminal and wharf near Ferndale, Washington. In May 2014, Petrogas acquired the terminal from Chevron for $242,000,000. In September 2016, Petrogas acquired the wharf from Intalco Aluminum for $122,000,000.

¶ 3 The terminal provides storage and distribution of liquefied propane and butane to domestic and international markets. The terminal can export and import up to 30,000 barrels a day, has rail, truck, and pipeline capacity, and is connected to two local refineries. The wharf serves the LPG operation of the terminal and the aluminum smelting operation of Intalco. The wharf is built on aquatic lands within the Strait of Georgia and subject to an aquatic lands lease with the State of Washington. The aquatic lands lease allows 48 ships to dock at the pier per year, regardless of product. Ships unload alumina ore to supply the Intalco aluminum smelting plant and load LPG product from the terminal to ship overseas.

¶ 4 The purchases of the terminal and wharf were somewhat complicated by the arrangements currently in place and a third party right of first refusal. Because purchase of the terminal connected significantly with Petrogas's other assets and connections, Petrogas was motivated to bid very aggressively on the property. Yet Petrogas's counsel testified that the transaction was "typical of such a sale." In addition, during the 2016 purchase of the wharf, Petrogas agreed to an overpayment because the wharf was critical to the integrity of the terminal and Petrogas's export program as a whole.

¶ 5 After purchasing the terminal, Petrogas's independent auditors, Pricewaterhouse Coopers (PwC) conducted an appraisal and allocation. PwC's appraisal was conducted under U.S. general approved accounting practices (U.S. GAAP). Based on appraisals, PwC allocated $11,895,000 to land, $157,752,327 to the real property improvements (Terminals/Tanks), and $2,772,500 to tangible personal property. PwC allocated the remaining amount of the price to intangible value.

¶ 6 After purchasing the wharf, Petrogas engaged an appraisal firm to assess the wharf's condition, which estimated repair costs of around $11 million, and obtained an appraisal concluding the fair market value of the wharf in its condition at the time of sale was $10,205,058. Petrogas allocated $10,205,058 to the wharf improvements, other smaller amounts to tangible personal property at the wharf, $100,000,000 to intangible goodwill, and $11,699,896 to the aquatic lands lease. Petrogas reported this allocation on the real estate excise tax affidavit. PwC reviewed and agreed to the allocation for the purposes of financial accounting under U.S. GAAP.

¶ 7 Once the Whatcom County Assessor¹ (Assessor) received notice of the terminal sale, it believed the property had been undervalued and began a review. During this review, the Assessor reviewed publicly available information on the industry to understand the "fundamentally dynamic changes that had been occurring" in the business. The Assessor found that demand from the Asian market had been increasing, while on the supply side, new reserves were being discovered. It also found that the highest and best use of the wharf was changing from its initial purpose to support Intalco's aluminum smelter to increasingly larger shipments of LPG.

¶ 8 For its 2016 valuation of the wharf, the Assessor relied on the sales information for the combined terminal and wharf for $364,000,000. After deductions for inventory, intangible value, and others values, the Assessor valued the wharf at $182,725,099, and the terminal at $90,108,394.

¶ 9 In 2017, the Assessor requested an Advisory Appraisal from the Department of Revenue (DOR). DOR used all three valuation approaches—cost, income, and sales—to form a final opinion of market value. While the Assessor criticized aspects of the DOR appraisal, it used some of their documentation and methodology to conduct both a cost approach and an income approach to value Petrogas's property for 2017 and 2018. As a result, the Assessor valued the terminal at $190,710,788 for 2017 and $194,606,203 for 2018. The Assessor valued the wharf at $182,725,099 for 2016, $98,244,952 for 2017, and $100,251,680 for 2018.

¶ 10 Petrogas sought review of all five valuations before the Board.

B. Proceedings before the Board

¶ 11 The Board conducted a formal hearing over six days, hearing from seven witnesses. The Board admitted multiple exhibits from each party, including an appraisal report commissioned by Petrogas, a review of the appraisal submitted by the Assessor, and rebuttal reports.

¶ 12 Petrogas's appraisal report was conducted by Kevin Reilly, ASA, of evcValuation LLC. At the time of the report, there were only 10 LPG export facilities in North America, with several more planned or under construction. Petrogas's LPG terminal and wharf were the only operating LPG storage and export facility on the West Coast.

¶ 13 When Reilly considered all three of the traditional approaches to valuation, Reilly found the sales comparison approach and income approach not applicable to the valuation of the terminal and wharf. Reilly did not develop the sales comparison approach because Petrogas's purchase was the only known sale of an operating LPG terminal on the West Coast and "there are typically many details of [these] transactions that are not able to be discerned." In deciding not to develop an income approach to value, Reilly cited several challenges such as: limited historical financials, a limited number of comparable terminals to establish a regional market, related parties leading to unrecognized revenues and operating expenses, limited information to develop market-based throughput rates for the West Coast, and the overall highly proprietary nature of LPG terminal history.

¶ 14 Thus, Reilly only developed and applied the cost approach. Under the cost approach, Reilly concluded that both the 2018 and 2017 market values for the terminal were $157,000,000. Reilly also concluded the market values for the wharf were $17,000,000 for 2018, $16,000,000 for 2017, and $15,000,000 for 2016. The appraisal also concluded that "the highest and best use of the LPG Terminal and Wharf are their current uses as LPG export facilities."

¶ 15 The Assessor's review appraisal was conducted by Brent Eyre, ASA. Eyre's report criticized the Reilly appraisal in three main areas. First, Eyre argued that in analyzing the highest and best use for the properties, Reilly's cost approach, a summation of the value of the tangible real property as individual and independent assets, would not achieve the highest and best use as an integrated assets function. In contrast, under a unit appraisal, an integrated group of operating assets is valued as "one thing without reference to the independent value of the component parts."

¶ 16 Second, Eyre argued that Reilly should have included the value of the aquatic lands lease in assessing the overall value of the terminal and wharf. Third, Eyre criticized Reilly's failure to consider and analyze the sale of the subject properties. This would have shown that considerable taxable value was missing from the cost approach and led Reilly to use a unitary valuation method. Eyre concluded, "these errors have led to an improper valuation of the subject property." The Board found Eyre credible.

¶ 17 The Board issued its final decision on June 29, 2021. While the Board found Reilly credible, it also found that Reilly "did not consider intangible characteristics including proximity to Asian markets, scarcity of LPG facilities on the West Coast, the aquatic lands lease, and the number of ships that can land at the wharf annually." The Board concluded that the Reilly appraisal erred by considering only the cost approach and not appropriately considering the subject sales nor any income approach valuation. And the Board concluded that Petrogas's contended values excluded attributes of the properties that were properly taxable. The Board concluded that the DOR and Assessor properly used unitary valuation methods and the Assessor's valuations were properly performed.

¶ 18 As a result, the Board upheld the Assessor's valuation of the terminal for 2017 and 2018. The Board also upheld the Assessor's valuation of the wharf for 2017 and 2018. The Board, however, adjusted the 2016 valuation of the wharf from $182,725,099 to $98,000,000. The assessed values, Petrogas's response, and the Board's decision are as follows:

Assessment Year	Assessed Value	Petrogas's Appraisal	Board's Decision
Wharf
2016	$182,725,099	$15,000,000	$98,000,000
2017	$98,244,952	$16,000,000	$98,244,952
2018	$100,251,680	$17,000,000	$100,251,680
Terminal
2017	$190,710,788	$157,000,000	$190,710,788
2018	$194,606,203	$157,000,000	$194,606,203

¶ 19 Petrogas petitioned for review of the agency decision. Whatcom County Superior Court certified the case for direct review under RCW...