Lowe's Home Centers, LLC v. Iowa Property Assessment Appeal Board

IN THE COURT OF APPEALS OF IOWA

No. 20-0764
Filed February 17, 2021

LOWE'S HOME CENTERS, LLC,
Plaintiff-Appellant,

vs.

IOWA PROPERTY ASSESSMENT APPEAL BOARD,
Defendant-Appellee,

and

JOHNSON COUNTY BOARD OF REVIEW,
Intervenor.
________________________________________________________________

Appeal from the Iowa District Court for Johnson County, Kevin McKeever,

Judge.

A large home improvement retailer appeals a district court order affirming

the Property Assessment Appeal Board’s valuation of one of its commercial

properties. AFFIRMED.

Matthew M. Craft and Erich D. Priebe of Dutton, Daniels, Hines, Kalkhoff,

Cook & Swanson, P.L.C., Waterloo, for appellant.

Jessica Braunschweig-Norris and Bradley O. Hopkins, Des Moines, for

appellee.

Considered by Doyle, P.J., and Tabor and Ahlers, JJ.
2

TABOR, Judge.

The taxpayer, Lowe’s Home Centers, LLC, appeals a judicial-review order

affirming the Property Assessment Appeal Board’s (PAAB) valuation of its

Coralville property at $10,940,000. Lowe’s argues the PAAB violated Iowa law by

adopting an appraisal that valued the property according to its “current use,” rather

than its fair market value. Because the PAAB’s determination of value adhered to

the governing rule that tax assessors should value property based on its “present

use,” we affirm the district court’s order.

I. Facts and Prior Proceedings

Lowe’s owns and operates a 131,569-square-foot big-box home

improvement store in Coralville. The store occupies 21.78 acres of commercial

land in a developing area. Other improvements include a large outdoor sales and

garden area and concrete pavement. The Johnson County Assessor’s 2017 tax

assessment valued Lowe’s improved property at $11,865,600. Lowe’s challenged

that assessment before the Johnson County Board of Review, claiming the

valuation was excessive. See Iowa Code § 441.37(1)(a)(1)(b) (2017).

Unsuccessful before the county, Lowe’s appealed to the PAAB.

At the July 2018 contested hearing, the PAAB heard evidence from two

expert appraisers: Laurence Allen for Lowe’s and Russ Manternach for the board.

Each asserted his appraisal reflected “the fee simple market value of the subject

property.” In Allen’s view, the proper method for determining the fee simple value

was to assess the property as if it was vacant.1 To estimate the fee simple value,

1 Before the district court, Lowe’s argued the property needed to be valued as
vacant because the property would transfer in fee simple, free and clear of
3

Allen used a sales-comparison approach and an income approach. Under the first

approach, he compared sale prices of seven large home improvement stores

around the Midwest that were similar in size, design, and use to the Lowe’s

property.2 Each store was vacant for some time before it sold. Likewise, Allen

considered several big-box rent comparables under his income approach.

Because his comparables had tenants in place, he inflated the capitalization rate

to “reflect the anticipated loss of income from the tenant in place . . . and the cost

of finding a new tenant.” Relying more on his comparable-sales analysis, Allen

valued the Lowe’s property at $5,200,000.

By contrast, Manternach used three valuation methods: the

sales-comparison, income, and cost approaches. Assuming the Lowe’s property

had “stable occupancy” and “stabilized market rent,” rather than being vacant,

Manternach valued the property at $10,940,000. Unlike Allen’s sales

comparisons, Manternach compared several smaller properties in Iowa, including

four former grocery stores. He also differed from Allen in finding “that the larger

metropolitan areas in Iowa have seen ‘very low’ capitalization rates.” Opting for

the lower rate, Manternach testified “he was not assuming the subject property

was dark or vacant, but rather that it [was] occupied” in his valuation.

Weighing the experts’ opinions, the PAAB found “issues with the quality and

reliability of sales each appraiser used in his analysis.” Yet the agency determined

encumbrances. For determining the fee simple market value, we held in I.C.M.
Realty v. Woodward, 433 N.W.2d 760, 762 (Iowa Ct. App. 1988), that “the proper
measure of value is what the property would bring if sold in fee simple free and
clear of any leases.” The district court rejected Lowe’s vacancy claim, citing the
principle that “fee simple market valuation must reflect current conditions.”
2 Allen even compared some former Lowe’s and Home Depot stores.
4

that “the problems with Manternach’s sales and his adjustments [were] less severe

than the problems with Allen’s sales.” Finding Manternach’s appraisal more

persuasive, the PAAB adopted his $10,940,000 valuation. The PAAB reasoned:

“We can question the support for and degree of some of Manternach’s

adjustments, but we must also recognize that Allen failed entirely to make

adjustments that were necessary to valuing the fee simple interest of the subject

property in its current use.”

Lowe’s then sought judicial review in the district court, claiming the PAAB

erred in adopting an appraisal that did not value the property at its fee simple

market value.3 The court affirmed the PAAB’s decision, concluding (1) fee simple

did not mean vacant; (2) “market value” and “current use” were not mutually

exclusive; and (3) consideration of “current use” did not violate Iowa law.

Lowe’s now appeals.

II. Scope and Standards of Review

We review the PAAB’s decision for correction of errors at law. Iowa Code

§ 441.39 (2019). Because the district court affirmed the agency on judicial review,

“we apply the standards of chapter 17A to determine if we reach the same

conclusion as the district court.” Wendling Quarries, Inc. v. Prop. Assessment

Appeal Bd., 865 N.W.2d 635, 638 (Iowa Ct. App. 2015); Winnebago Indus., Inc. v.

Haverly, 727 N.W.2d 567, 571 (Iowa 2006) (“When a district court exercises its

authority on judicial review, it acts in an appellate capacity to correct any errors of

3 After Lowe’s petitioned for judicial review, the Johnson County Board of Review
intervened as a party under Iowa Rule of Civil Procedure 1.407(1)(a). The board
filed a waiver of brief on appeal, joining the PAAB’s arguments.
5

law by the agency.”). If our conclusions are the same, we affirm. Winnebago, 727

N.W.2d at 571. “If the agency’s action was based on an erroneous interpretation

of a provision of law whose interpretation has not been clearly vested in the

agency, we shall reverse, modify or grant other appropriate relief from the agency

action.” Naumann v. Iowa Prop. Assessment Appeal Bd., 791 N.W.2d 258, 260

(Iowa 2010) (citing Iowa Code § 17A.19(10)(c)).

III. “Current Use” Analysis

Lowe’s claims the PAAB’s ruling adopting Manternach’s appraisal that

reflected the property’s “current use” violated “the standards set by Iowa law.” To

assess Lowe’s argument, we start with an overview of the legal principles

governing property tax valuations. Iowa Code section 441.21(1) requires all

taxable property to be assessed “at its actual value,” meaning its “fair and

reasonable market value.” A property’s market value is “the fair and reasonable

exchange in the year in which the property is listed and valued between a willing

buyer and a willing seller, neither being under any compulsion to buy or sell and

each being familiar with all the facts relating to the particular property.” Iowa Code

§ 441.21(1)(b)(1).

To challenge an assessment, a taxpayer may file a protest, alleging “the

property [was] assessed for more than the value authorized by law.” Id.

§ 441.37(1)(a)(1)(b). In this context, the taxpayer bears the burden of proving by

a preponderance of the evidence that the assessed amount exceeded the

property’s market value. Id. § 441.21(3)(b)(1); Compiano v. Bd. of Rev., 771
6

N.W.2d 392, 396 (Iowa 2009).4 In offering proof before the PAAB or district court,

the taxpayer “must use the assessment methods as prescribed by the law.” Ross

v. Bd. of Rev., 417 N.W.2d 462, 465 (Iowa 1988).

Section 441.21 provides two approaches for assessing a property’s market

value—the comparable-sales approach and the other-factors approach. Equitable

Life Ins. Co. v. Bd. of Rev., 281 N.W.2d 821, 823 (Iowa 1979). The

comparable-sales approach is the “preferred method” of valuation. Wellmark, Inc.

v. Cnty. Bd. of Rev., 875 N.W.2d 667, 679 (Iowa 2015); see Boekeloo v. Bd. of

Rev., 529 N.W.2d 275, 277 (Iowa 1995). This means “when adequate evidence

of comparable sales is available,” the assessor must consider that evidence.

Compiano, 771 N.W.2d at 398; Iowa Code § 441.21(1)(b)(1) (“Sale prices of the

property or comparable property in normal transactions reflecting market

value . . . shall be taken into consideration in arriving at its market value.”

(emphasis added)).

But what if sale prices of the property or comparable properties are

unavailable? Section 441.21(2) provides the alternative approach:

In the event market value of the property being assessed cannot be
readily established in the foregoing manner, then the assessor may
determine the value of the property using . . . all other factors which
would assist in determining the fair and reasonable market value of
the property but the actual value shall not be determined by use of
only one such factor.

4 Under Iowa Code section 441.21(3), the taxpayer can shift the burden to the
board of review to uphold the assessed value, if “the [taxpayer] offers competent
evidence by at least two disinterested witnesses that the market value of the
property is less than the market value determined by the assessor.” Lowe’s offered
evidence from only one witness, so it failed to shift the burden. Because Lowe’s
retained the burden of proof, it had to establish (1) the valuation was excessive
and (2) the correct valuation. Soifer v. Floyd Cnty. Bd. of Rev., 759 N.W.2d 775,
780 (Iowa 2009).
7

Based on this later provision, our supreme court established a general rule,

stating the other-factors approach can be used “if and only if” the comparable-sales

approach is inadequate. Bartlett & Co. Grain v. Bd. of Rev., 253 N.W.2d 86, 88

(Iowa 1977); Wellmark, 875 N.W.2d at 679; Ross, 417 N.W.2d at 465. The rule

requires a fact-finder to first determine that the comparable-sales approach is

unworkable before considering other factors. Bartlett, 253 N.W.2d at 88. Once in

the other-factors category, an assessor may not consider the “[s]pecial value or

use value of the property to its present owner” or “the goodwill or value of a

business” using the property. Iowa Code § 441.21(2). But the supreme court

limited the scope of that prohibition. See Wellmark, 875 N.W.2d at 679 (“Although

the legislature has prohibited consideration of special value and good will, we have

narrowly construed these exceptions.”). So long as “improvements to a property

are not merely valuable to the specific owner but would be of value to others, such

improvements should be recognized in the valuation process.” Id. at 683.

With these principles in mind, we turn to the parties’ contentions. Lowe’s

argues the PAAB improperly valued the property according to its “current use,”

rather than the fair market value as required by Iowa Code section 441.21(1)(b).

Lowe’s relies on Wellmark, 875 N.W.2d at 679, to bolster its contention that “‘other

factors’ related to use value can be considered ‘if and only if’ the record does not

show a market for the sale of similar properties.” Maintaining that “current use”

cannot be considered in determining market value under the preferred approach,

Lowe’s contends the PAAB’s consideration of “current use,” despite evidence of “a

robust market for sale and lease of big box retail properties,” violated the directives

of Wellmark and Iowa Code section 441.21(1)(b).
8

In resistance, the PAAB argues Lowe’s misconstrues the meaning of

“current use,” as discussed in Wellmark. The PAAB asserts “Wellmark is the latest

in a long line of court rulings” that has considered the property’s current use when

assessing market value under section 441.21. According to the PAAB, Wellmark

“articulated a general proposition that property should be valued in its current use,

regardless of the valuation approach used.” The PAAB also challenges Lowe’s

reading of the statute, claiming “nothing in the text of section 441.21 can

reasonably be interpreted as a directive that a property’s current use can only be

considered when valuing a property using other factors.”

The PAAB is correct. Lowe’s conflates the idea of “current use” with “use

value of the property to its present owner” under Iowa Code section 441.21(2). In

doing so, Lowe’s insists “current use” and “value in use” share one meaning in the

Wellmark decision.5 Based on that faulty underlying assumption, Lowe’s

concludes that the statute prohibits an assessor from considering the property’s

current use when determining its market value through a sales analysis. Put

differently, Lowe’s reads Wellmark as relegating the relevance of “current use” to

the other-factors approach in section 441.21(2).

5 In Wellmark, the court explored the differences between the phrases “value in
use” and “value in exchange.” 875 N.W.2d at 673 (noting exploration was
“designed to illustrate some of the principles and challenges facing the court” and
not intended as binding or even persuasive authority). The court defined “value in
use” as “the value a specific property has for a specific use.” Id. On the other
hand, “value in exchange” means “the value to persons generally and focuses on
market value based upon a willing buyer and willing seller.” Id. But the court did
not draw an indelible line separating the two concepts. Instead, the court
recognized, “Even in a jurisdiction that embraces a strict value-in-exchange theory,
the use of a property still may be germane to value under the theory that the current
use of the property would impact what a willing buyer would pay for the property in
the marketplace.” Id. at 675.
9

By contrast, PAAB employs the phrase in a broader context. In its ruling,

the agency referred to “current use” when discussing the requirement that

“property is to be valued based on its ‘present use.’”6 See Soifer, 759 N.W.2d at

784 (quoting Iowa Admin. Code r. 701-71.1(1)). Because the PAAB associates

the phrase “current use” with this more general principle, it argues that Wellmark

did not reinterpret section 441.21 to excise “current use” from the determination of

fair market value.

In sorting the parties’ divergent definitions of “current use,” we must focus

on what our supreme court said and didn’t say in Wellmark. Lowe’s argues the

Wellmark decision established “that current use valuation is an exception to the

market value rule, and can only [be] considered when there is no active market for

the property at issue.” We disagree. A closer reading of Wellmark shows the

supreme court discussed “current use” in a general sense and not within the strict

confines of section 441.21(2). The issue was “whether the Wellmark property

should have been valued as if it were a multitenant office building . . . or whether

the Wellmark property should have been valued according to its current use [as] a

single-tenant headquarters building.” Wellmark, 875 N.W.2d at 668. In going with

the latter, the court reasoned “the fact that the property is currently being

successfully used as a single-tenant corporate headquarters cannot go unnoticed.”

Id. at 683. The court added, “Current use is an indicator that there is demand for

6The words “current” and “present” are synonyms. See In re S.R.N., 481 N.W.2d
672, 682 (Wis. Ct. App. 1992).
10

such a structure.” Id. Taken as a whole, Wellmark remained faithful to the

governing rule that a property’s value depends on its current use.

We acknowledge the possible confusion from Wellmark’s discussion of

“current use” in the other-factors section. But the context is crucial. In concluding

“that the property should be valued based on its current use,” the court pointed to

“the principle articulated in Maytag and Soifer.” Wellmark, 875 N.W.2d at 682

(citing Maytag Co. v. Partridge, 210 N.W.2d 584 (Iowa 1973), and Soifer, 759

N.W.2d at 784). While touting Wellmark’s dicta, Lowe’s fails to address those two

cases. As a result, Lowe’s takes the court’s language out of context. Indeed,

Wellmark’s embrace of Maytag and Soifer clarifies the current use issue.

In both cases, the supreme court rejected the taxpayers’ contentions that

commercial property valuations could not be based on the current use of the

property. In doing so, Maytag distinguished current use of a property from the

other factors in section 441.21(2). Maytag, 210 N.W.2d at 590–91. Maytag

provided that “special value or use of property to its present owner comes into play

when sentiment, taste, or other factors, frequently subjective, give property

peculiar value or use to its owner that it does not have to others.” Id. at 591. In

distinguishing “special value” from “current use,” Maytag explained:

When an assessor considers the use being made of property, he is
merely following the rule that he must consider conditions as they
are. He is recognizing the effect of the use upon the value of the
property itself. He is not adding on separate items for good will,
patents, or personnel.

Id. at 590. Thus, Maytag recognized that a property’s current use was relevant

under the general rule covering valuation.
11

Likewise, in Soifer, the court discussed “current use” in the context of the

administrative rule—that property must be valued according to its “present use.”

See Soifer, 759 N.W.2d at 784 (rejecting taxpayers’ claim that property should be

valued for general restaurant purposes because “valuing the Soifers’ property as

if it were not a viable McDonald’s would be contrary to the principle that assessed

property is valued based on its present use, including any functioning commercial

enterprise on the property”). Most important here, Soifer applied that general

principle even though an active market of comparable sales was available. See

id. at 785 (concluding taxpayers offered evidence of “sufficiently similar”

comparable properties).

In its ruling, the PAAB relied on the basic principles in Maytag and Soifer

that (1) properties should be valued based on their present use, and (2) assessors

should consider conditions as they are. Consistent with the case law, the PAAB

found Allen’s appraisal less persuasive because he did not adequately adjust the

property’s valuation based on its present use or current conditions. Some

deficiencies included “Allen’s failure to acknowledge any contributory value of the

garden center and other outdoor sales area”; Allen’s use of multi-tenant or

deed-restricted comparables that differed from Lowe’s current single-occupant

retail use; and “Allen’s decision not to, at minimum, estimate the subject’s land

value.” The PAAB also criticized Allen for failing to make adjustments for post-sale

expenditures in his comparable-sales approach. The PAAB noted: “Without

adjustments, these comparable sales prices essentially reflect the value of vacant

buildings potentially in need of remodeling for retail use. As such, we do not

believe they reflect the current use of the subject property.”
12

Based on these shortcomings, we agree with the district court’s conclusion

that the PAAB’s rejection of Allen’s appraisal was appropriate. The agency’s

action was not based on an erroneous interpretation of law. All of PAAB’s

criticisms were consistent with the rule that “an assessor must . . . consider

conditions existing at the time and the condition of the property in which the owner

holds it.” Maytag, 210 N.W.2d at 589. Applying that rule, we reject Lowe’s

contention that a fee simple interest must be valued as vacant. Neither

section 441.21 nor case law imposes a vacancy requirement in the fee simple

valuation context. Finally, the PAAB’s consideration of the property’s current use

did not violate Iowa law. Because Wellmark did not depart from the principle in

Maytag and Soifer that a property should be valued at its current use, we affirm

the district court’s judicial review.

AFFIRMED.