Portsmouth 2175 Elmhurst, LLC v. City of Portsmouth

837 S.E.2d 504

PORTSMOUTH 2175 ELMHURST, LLC,

v.CITY OF PORTSMOUTH, et al.

Record No. 181439

Supreme Court of Virginia.

January 23, 2020

Barry Randolph Koch, Virginia Beach (Thomas E. Snyder ; Inman & Strickler, on briefs), for appellant.

James A. Cales, III, Norfolk (Furniss, Davis, Rashkind and Saunders, on brief), for appellees.

PRESENT: All the Justices

OPINION BY JUSTICE STEPHEN R. McCULLOUGH

Portsmouth 2175 Elmhurst, LLC ("the Taxpayer") challenges its real estate tax assessments for the years 2013, 2014, and 2015, for a property located in the City of Portsmouth. It also contends that the attorney’s fees charged to the Taxpayer to collect the assessments were not reasonable. For the reasons noted below, we will affirm the judgment of the trial court.

BACKGROUND

I. THE PROPERTY .

2175 Elmhurst Lane consists of 12.544 acres and, at the time, a 141,229 square foot former meatpacking plant. The building was constructed in 1971. It originally served as a retail store; Smithfield Foods later repurposed the building to manufacture hot dogs. Smithfield Foods ceased operations at the plant in 2012. After determining that "the plant cannot support the changes in manufacturing technology and product development necessary to meet our needs," Smithfield Foods decided to sell it. The property was marketed for $1,900,000. The Taxpayer purchased it for $875,000 in 2013. The plant was vacant for the tax years at issue.

The City of Portsmouth assessed the property as follows:

2013, Land: $1,026,120, Building: $5,106,400, Total: $6,132,520.

2014, Land: $1,026,120, Building: $5,106,400, Total: $6,132,520.

In 2015, the City lowered the 2015 assessment as follows:

2015, Land: $1,026,120, Building: $2,742,040, Total: $3,768,160.

For these three years, the Taxpayer paid under protest a total of $233,540.31 in taxes, storm water fees and penalties, interest, and attorney’s fees of $36,477.34.

After buying the property, the Taxpayer stripped and sold certain equipment and fixtures from the building: the heating, air conditioning, sprinkler, canopies, bathroom facilities and cold storage. The Taxpayer then set about selling the property. It was marketed for $1,100,000 but sold for $575,000 in September of 2015. The purchaser tore down the building on the property and built a distribution center.

The Taxpayer filed an amended complaint challenging the assessments for 2013, 2014, and 2015 as well as the imposition of attorney’s fees.

II. THE EXPERTS .

At the trial, the Taxpayer presented expert testimony from Lawrence J. Colorito, Jr., an experienced commercial real estate appraiser, who opined that, in light of the poor condition of the building and its unsuitability for alternative uses, the highest and best use for the property was to demolish the existing building and build a new building for industrial use. Colorito considered all three approaches to valuation, the cost approach, the income approach, and the sales comparison method. He testified that the cost approach was not feasible because the building had reached the end of its useful life. Therefore, he relied on the sales comparison approach. He examined a number of sales of properties he deemed comparable. He concluded that the fair market value for the land was $1,442,580. From this figure, Colorito deducted the cost of demolishing the building, which he estimated at $500,000. In his opinion, the fair market value of the property minus the cost of demolition yielded a fair market value of $950,000. Colorito’s detailed appraisal was admitted into evidence.

The City offered the testimony of Holt William Butt, III, the assessor for the City of Portsmouth. Before working for the City, Butt spent several decades as a private real estate appraiser. Butt explained that the property was assessed under a mass appraisal system, which values a large group of properties as of a specific date.¹ Butt testified that the City appraises 3,000 commercial properties each year, and that in doing so, it uses a computer-assisted mass appraisal system, which relies on a cost model. This cost model incorporates information from a commercial service, Marshall & Swift, and cost information from local builders. The cost model is adjusted using market information and income information if it is available. In this instance, Butt testified that the City has never had income information about this property because the owners were also the operators and they did not pay themselves rent. The City reevaluates properties every year, and in so doing it employs statistical analysis to verify its assessments.

Butt testified that the City uses all three approaches, the cost, income, and sales comparison methods. He testified that he looked at the sale of the property but deemed the sale "non-qualified" because it was not "at market." Therefore, he did not consider the sale in assessing the property. Id. Counsel for the Taxpayer did not explore this point on cross-examination. Butt noted that during his time at the City Assessor’s office, Smithfield Foods had never challenged the City’s assessments.

For the year 2015, after the Taxpayer appealed the tax assessments to the Board of Equalization, Butt "drilled down" to take a "closer look" and determined that the assessment overvalued the property. He determined that the deteriorating condition of the property justified additional functional depreciation and so he proposed a lower assessment in the amount of $3,811,480.

The trial court admitted a two-page document written by Butt in which he provided a description of the property and the building on it, and in which he explained the methodology used in the mass appraisal.

The City also offered the testimony from Evan Pierce, a real estate appraiser with over 40 years of experience. Pierce challenged on a number of grounds Colorito’s conclusion that an industrial use constituted the highest and best use of the property. In his view, a commercial use would be better suited to the property. Pierce also took issue with the comparable sales of property the Taxpayers’ experts relied on in their valuation. He did not offer a valuation of the property. He agreed that a commercial use would require the former meat packing plant to be torn down.

The Taxpayer also offered testimony from Nancy Gossett Dove, another experienced commercial real estate appraiser. She offered testimony supporting Colorito’s conclusion that the property was best suited for an industrial use. She disputed Pierce’s view that a commercial use was best, and defended the comparable sales Colorito employed in reaching his conclusions. With respect to Butt’s assessment, Dove testified that "it does appear" that Butt employed only the cost approach. She explained that using the cost approach for older buildings makes little sense because it is so difficult to determine the amount of depreciation that applies. Id . Instead, she opined, the income and sales comparison methods are better for this type of property. She also explained that she would have expected Butt to offer some comments on the highest and best use of the property. She further noted that although Butt acknowledged the fact that the property had been sold, it "appears that" he "ignored" those sales.

Dove authored a written review report critiquing the City’s appraisal and citing a number of violations of the Uniform Standards of Professional Appraisal Practice ("USPAP")² as well as additional criticisms. The circuit court admitted this report into evidence.

III. THE ATTORNEY’S FEES .

The City of Portsmouth contracted with an attorney, Robert C. Barclay, IV, for representation in collecting delinquent taxes. His contract provided for a contingency fee of 20 percent of the taxes collected, including penalties and interest. He explained the process he employs in recovering delinquent taxes. First, the City will contact him about a property. At that point, his firm makes a copy of the City’s file. He reviews the materials in the file and establishes an internal file. He identifies the owner of the property, which can sometimes be difficult. He then issues a demand letter. Id . In this instance, he discussed the case with counsel for the Taxpayer and with a potential buyer, who wanted a payoff letter. The Taxpayer suggested a payment plan, and counsel relayed that information to the City Treasurer. Id . Counsel also researched a number of issues to provide feedback to the City Treasurer about the likelihood of payment. He met with the City’s Assessor and had several meetings with the Treasurer. He eventually drafted a promissory agreement between the Treasurer and the Taxpayer. Counsel drafted several additional payoff letters. Counsel acknowledged that he did not have to file suit. He explained that he did not keep hourly records for his work on the case. Barclay testified that the 20 percent contingency fee is standard for this type of work. The City sought to recover $36,477.34 in attorney’s fees, or 20 percent of the tax recovery.

IV. THE TRIAL COURT’S JUDGMENT .

In a detailed memorandum opinion, the trial court upheld the assessments. The court noted that when the Taxpayer purchased the property in 2013, it was a functional meatpacking facility. Although Smithfield Foods found the plant unsuitable for its needs, the court concluded, no evidence established that it was unsuitable for use by any other manufacturer. Id . The court rejected the plaintiff’s contention that the building had no value in 2013 and likely 2014. Id . For the tax year 2015, however, the court concluded that the property had fallen into disrepair. The court credited Butt’s testimony that the property was assessed using proper techniques of mass appraisal based on the cost approach. Id. The court wrote that the Taxpayer offered testimony from experts whose opinions were in conflict with those of the City, but that the Taxpayer’s experts did not "at any point state that the City had violated any generally accepted practices, standards, rules,...