concluding that an option to purchase is “a sale for purposes of valuation,” should not “be treated differently from other sales merely because it is an option to purchase,” and the agreed upon price in the option is an indicator of market valueSummary of this case from Aetna Life Ins. Co. v. Montgomery Cnty. Bd. of Assessment Appeals
Submitted under sec. (Rule) 251.54 May 8, 1975 —
Decided June 3, 1975.
APPEAL from a judgment of the circuit court for Milwaukee county: HARVEY L. NEELEN, Circuit Judge. Reversed and remanded.
For the appellants the cause was submitted on the brief of John H. Niebler and Niebler Niebler, all of Menomonee Falls.
For the respondents the cause was submitted on the brief of James B. Brennan, city attorney, and William J. Lukacevich, assistant city attorney.
The judgment appealed from quashed a writ of certiorari to review the proceedings and decision of the Milwaukee board of review in refusing to set aside 1970 tax assessments on two parcels of real property owned by appellants Harvey and Caroline Geipel.
The parcels of land involved in this case are located in the city and county of Milwaukee, and are adjacent to one another. One is located at 9701 West Fairy Chasm Road, Tax Key No. 034-9994, described as the NW 1/4 of the SE 1/4 of Section 5, T8N, R 21 E, and is composed of about 40 acres. The other tract is located at 9700R West Brown Deer Road, Tax Key No. 034-9999-100, described as the N 1/2 of the SW 1/4 of the SE 1/4 of Section 5, T8N, R 21 E, composed of about 20 acres.
As of May 1, 1970, the date of the disputed assessment, the land was unimproved, with the exception of the appellants' home which was located on the 20-acre tract. Neither tract was within 600 feet of a public road, sewer or water supply. The only access to the land was over a private gravel road.
In 1969, the assessment for the 20-acre tract was $25,410 on the land and $17,860 for the improvements. In 1970, the assessment was $80,850 for the land and $17,860 for the improvements. The assessments for the 40-acre tract were $48,400 in 1969, and $132,000 in 1970.
The significant increase in assessment, which was arrived at by computing 55 percent of fair market value, resulted from the district assessor's determination that as of May 1, 1970, the fair market value of the property was $6,000 per acre for the 40-acre lot and $7,000 per acre for the 20-acre lot. That determination, which was contested by the appellants, was upheld by both the Milwaukee board of assessors and the board of review.
Three witnesses testified at the hearing before the board of review on November 9, 1971. Alan Retzlaff, a Milwaukee real estate developer, testified that on December 1, 1967, Skyline Realty, Inc., a corporation of which he was president and sole stockholder, entered into an exclusive option agreement with the appellants to purchase 304 acres of their land, including the 60 acres involved here, over a ten and one-half year period. The agreement provided that at the end of each year at least 10 percent of the total acreage had to have been purchased for each year that had elapsed or the option would be extinguished. The land was to be used for a planned development, including residential, recreational and industrial uses.
Under the terms of the agreement, the purchase price the land was to be $3,305 per acre plus or minus adjustments based on fluctuations in the Consumer Price Index. As of May 1, 1970, the contract purchase price per acre was $3,837.
Retzlaff further testified that several sales had been consummated under the terms of the agreement. On October 1, 1968, 94.5 acres were purchased for $3,335 per acre. On March 4, 1969, 89.3 acres adjacent to the objected-to 60 acres were purchased for $3,335 per acre. On August 27, 1970, 1.1 acres of the objected-to 60 acres were purchased for $3,851 per acre. On September 29, 1971, 4.5 acres of the objected-to 60 acres were purchased for $4,022 per acre.
Retzlaff also testified that development costs for the objected-to 60 acres ( i.e., for sewers, pavements and utilities) would be approximately $500,000.
Appellant Harvey Geipel testified that before entering into the agreement with Skyline Realty, Inc., he had had the subject property for sale "for a good many years" and had "several realtors work on it," but had never received an offer higher than that from Skyline Realty, Inc. There had been an offer of $2,000 per acre from another party the year before.
Lawrence Ternes, the district assessor who appraised the appellants' property, testified that although he was aware of the option agreement and the sales made thereunder, he based his valuation of the property solely on sales of what he considered to be comparable properties, all about five miles from the disputed property. The first of these "comparables" was a sale on September 8, 1966, of 16.13 acres at 7023 West Brown Deer Road for $6,000 per acre. Ternes conceded that unlike the disputed property, which was 600 feet from the nearest public street, sewer or water supply and was about three miles from the nearest expressway interchange, the property at 7023 West Brown Deer Road had about 600 feet of road frontage, a sewer available, was three blocks from a major expressway interchange, and three blocks from a major shopping center.
The second "comparable" involved a sale in January, 1970, of 26.7 acres at 1200 West Mill Road for $8,266 per acre. Ternes admitted that such property had road frontage and was within a mile and a half of an expressway interchange.
The third "comparable" involved the sale of 7.69 acres at 7276 and 7530 North Lovers Lane Road for $28,479 per acre. Such property had road frontage, sewer and water available, and was within one-half mile of four major highways. The sale price included all development costs and the property had a higher permissible density than any of the others.
Ternes testified that the comparable sales method of valuation was the only one used and that these were the only comparable sales he considered. He testified that he did not rely on the price in the option agreement because such agreement did not contemplate a "sale" of property, but rather a "development agreement" between the parties and hence was not representative of fair market value. Ternes' testimony reveals two reasons for this conclusion: (1) The option agreement provided that the appellants could repurchase their house, valued at about $32,500, and two acres of land, all for $6,670; (2) the contract grants the appellants a right of first refusal with respect to the purchase of industrial buildings constructed on the 304 acres.
Finally, Ternes testified that he did not consider the $500,000 development costs in arriving at his valuation because in his opinion such figure also included development costs for other parcels of land.
The appellants petitioned the circuit court for Milwaukee county for a writ of certiorari to review the proceedings of the board of review. Such writ was issued but was quashed upon the respondents' motion, the circuit court being of the opinion that the option agreement was not a "sale" in that it "lacks the arm's-length characteristics necessary to constitute a true sale."
The basic issue is whether the assessor's method of valuation was proper under the facts of this case.
". . . (1) Whether the board kept within its jurisdiction; (2) whether it acted according to law; (3) whether its action was arbitrary, oppressive or unreasonable and represented its will and not its judgment; and (4) whether the evidence was such that it might reasonably make the order or determination in question. State ex rel. Ball v. McPhee (1959), 6 Wis.2d 190, 94 N.W.2d 711; State ex rel. Wasilewski v. Board of School Directors (1961), 14 Wis.2d 243, 111 N.W.2d 198; State ex rel. Kaczkowski v. Fire Police Comm. (1967), 33 Wis.2d 488, 148 N.W.2d 44, 149 N.W.2d 547; State ex rel. Hippler v. Baraboo (1970), 47 Wis.2d 603, 178 N.W.2d 1. . . ."
In the context of property assessment for purposes of taxation the court may determine whether the assessment was made on the statutory basis, for such inquiry involves a question of law. State ex rel. Garton Toy Co. v. Mosel (1966), 32 Wis.2d 253, 257, 145 N.W.2d 129; State ex rel. Boostrom v. Board of Review (1969), 42 Wis.2d 149, 156, 166 N.W.2d 184; State ex rel. Markarian v. Cudahy (1970), 45 Wis.2d 683, 686, 173 N.W.2d 627. If the proper basis was used, however, and the valuation was not made arbitrarily or in bad faith, the reviewing court must sustain the valuation if there is any evidence to support it. State ex rel. Pierce v. Jodon (1924), 182 Wis. 645, 648, 197 N.W. 189; State ex rel. Dane County Title Co. v. Board (1957), 2 Wis.2d 51, 63, 85 N.W.2d 864; State ex rel. Garton Toy Co., supra.
The pertinent statute, sec. 70.32 (1), Stats., provides in part:
" Real estate, how valued. (1) Real property shall be valued by the assessor in the manner' specified in the Wisconsin property assessment manual provided under s. 73.03 (2a) from actual view or from the best information that the assessor can practicably obtain, at the full value which could ordinarily be obtained therefor at private sale. In determining the value the assessor shall consider, as to each piece, its advantage or disadvantage of location, quality of soil, quantity of standing timber, water privileges, mines, minerals, quarries, or other valuable deposits known to be available therein, and their value; but the fact that the extent and value of minerals or other valuable deposits in any parcel of land are unascertained shall not preclude the assessor from affixing to such parcel the value which could ordinarily be obtained therefor at private sale. . . ."
The proper statutory basis for assessment has been set forth repeatedly by this court:
"The valuation of real estate for tax purposes is governed by sec. 70.32 (1), Stats., which requires it to be valued from the best information at 'the full value which could ordinarily be obtained therefor at a private sale.' Commonly stated, sec. 70.32 (1) requires real estate to be assessed at its fair market value which has often been defined as the amount the property could be sold for in the open market by an owner willing and able but not compelled to sell to a purchaser willing and able but not obliged to buy. [Cases omitted.]
"The `best information' of such value is a sale of the property or if there has been no such sale then sales of reasonably comparable property. In the absence of such sales, the assessor may consider all the factors collectively which have a bearing on value of the property in order to determine its fair market value. However, it is error to use this method `when the market value is established by a fair sale of the property in question or like property.' State ex rel. Enterprise Realty Co. v. Swiderski (1955), 269 Wis. 642, 645, 70 N.W.2d 34. The statutory rule of assessment of real estate is restricted to its sale value in the open market and is not concerned with its intrinsic value if the intrinsic value differs either more or less from the sale value. State ex rel. Northwestern Mut. Life Ins. Co. v. Weiher (1922), 177 Wis. 445, 448, 188 N.W. 598." State ex rel. Markarian, supra, pp. 685, 686.
". . . sec. 70.32 (1), Stats., requires tax assessments of property utilizing the `best information' of the fair market value. Where a `fair sale' of the property has occurred, it is error to utilize other evidence of intrinsic value in the assessment. " State ex rel. Lincoln Fireproof Warehouse v. Board of Review (1973), 60 Wis.2d 84, 98, 208 N.W.2d 380.
"Where the clear market value is not established by a sale or sales the assessor or the board of review should consider all the facts collectively which have a bearing upon such market value, in order to determine it. But such facts only indicate what the fair market value is and there is no occasion to resort to them, and it is wrong to do so, when the market value is established by a fair sale of the property in question or like property. . . ." State ex rel. Enterprise Realty Co. v. Swiderski (1955) 269 Wis. 642, 645, 70 N.W.2d 34.
These excerpts clearly demonstrate that when an actual sale of the property under consideration has occurred, resort should not be made to extrinsic factors in determining the fair market value of the property. There may, of course, be situations in which actual sale price is not a valid indicator of fair market value. State ex rel. Flambeau Paper Co. v. Windus (1932), 208 Wis. 583, 587, 243 N.W. 216. The sale must be a fair, arm's-length transaction without compulsion or pressure on either party, and the taxpayer has the burden of showing that the sale was made under normal conditions. State ex rel. Evansville Mercantile Asso. v. Evansville (1957), 1 Wis.2d 40, 43, 44, 82 N.W.2d 899; State ex rel. Lincoln Fireproof Warehouse, supra, page 90.
A threshold question in the instant case is whether the contract between the appellants and Skyline Realty, Inc., should be treated differently from other sales merely because it is an option to purchase rather than an outright sale. We hold that such fact alone should not be determinative. If the agreement was the result of arm's-length negotiations and is reasonably contemporaneous with the assessment, the agreed price, like a sale price, is the best indicator of market value. That is especially true in the instant case, where sales of land under the terms of the agreement were consummated both before and after the assessment date, and where the agreed price is designed to vary to reflect economic fluctuations. Therefore, we consider the agreement to be in the nature of a sale for purposes of valuation.
In regard to whether the transaction was a fair, arm's-length agreement, appellant Harvey Geipel testified that he had tried to sell the property for several years through several realtors but had never received an offer higher than that embodied in the agreement. That testimony, in conjunction with the fact that sales were consummated under the agreement, and in the absence of any evidence to the contrary, is sufficient to establish the bona fide nature of the transaction.
State ex rel. Lincoln Fireproof Warehouse, supra, pages 97-99, offers guidance on this point:
"Respondents further contend the evidence establishes, as a matter of law, that circumstances surrounding the sale establish the sale was not at arm's length and, therefore, could not be utilized as an indicator of fair market value. These circumstances include the railroad's interest in selling the building to a customer who would be interested in continuing the rail shipping business and the fact that no six percent real estate commission had to be paid if the property were sold to Lincoln. It must be observed, however, that these factors go only to the `willingness' of the parties to deal and not to their `compulsion' to do so. The definition of clear market value consistently adhered to by the court is `the amount the property could be sold for in the open market by an owner willing and able but not compelled to sell to a purchaser willing and able but not obliged to buy.'
"It cannot be denied that the parties to the 1969 real estate transaction were desirous of doing business with each other for all of the reasons outlined by respondents. Yet nothing in the undisputed evidence before the board indicates any compulsion to buy or sell the property. Neither of the two corporate entities was in `necessitous circumstances' which would cause the sale to be at a depressed price and, while it might be argued that the railroad company made less than vigorous attempts to find other buyers, it is also true such was the railroad's corporate policy. That word of the railroad's desire to sell the property was received in the real estate community is evidenced by the number of low offers received by the railroad company.
". . . Since it is clear from the undisputed evidence in the instant case that the parties were willing but not compelled to transact, it follows that the sale was fair and the sale price did adequately reflect the fair market value. The assessor, the board of review, and the circuit court on certiorari erred in rejecting the sale price of the subject property as evidence of its fair market value. There is nothing in the record to support the conclusion that the sale was not an arm's-length transaction conducted by parties willing but not compelled to transact." See also: State ex rel. Evansville Mercantile Asso., supra, pages 44, 45.
Both the assessor and the circuit court espoused two primary reasons for their conclusion that the agreement was not an arm's-length transaction: (1) The appellants' right to repurchase their homestead, and (2) their right of first refusal for the purchase of industrial buildings. However, as stated in State ex rel. Lincoln Fireproof Warehouse, supra, page 98, "these factors go only to the `willingness' of the parties to deal and not to their `compulsion' to do so."
As we view it, the option to repurchase and the right of first refusal are merely elements of consideration which, together with the monetary amount per acre, comprise the total sale price of the land.
At the hearing, Ternes alleged that the amount agreed upon per acre was unrealistic because, while the agreement provided the same price per acre for all the land, some of it was flood plain and hence worth less than the contested 60 acres which were on higher ground. This theory is refuted by the record, however, which reveals that the bulk of the flood plain land was sold by Skyline Construction, Inc., another corporation of which Retzlaff was president and sole stockholder, to the Milwaukee County Park Commission on June 20, 1969, for $3,800 per acre.
We hold that because a "sale" of the property had occurred, the assessor erred in relying on "comparable sales" to establish the market price of the property in question and the assessment must be set aside. The evidence clearly reveals that the agreement price was the highest the appellants could get for the property from a willing buyer. With regard to the right of repurchase and the right of first refusal, the proper method of valuing the property is to determine the value as of May 1, 1970, and prorate it over the entire 304 acres, ascribing to each acre its proportionate share of the extra consideration. The resulting amount, when added to $3,837 (the monetary contract price as of May 1, 1970), will yield the total consideration and hence the market price per acre as of May 1, 1970.
We add, however, that our holding here should not be construed to mean that in every case where an option price is established by the parties such price will ipso facto be deemed fair market value. There may well be situations where such price, especially if agreed upon well in advance of the assessment date, may not adequately reflect changing conditions such as development of adjacent land, which increase the market value of the property to an extent not contemplated when the option price was agreed upon. The record fails to reveal any such situation in the instant case.
Furthermore, we recognize that our holding has a potential for abuse by unscrupulous individuals seeking to establish a low basis for taxation. However, the burden is always on the taxpayer to demonstrate the bona fide nature of the transaction.
By the Court. — Judgment reversed and remanded for further proceedings.