Powell Street I LLC v. Dept. of Rev.

No. 41 	August 2, 2017 	423
IN THE OREGON TAX COURT
REGULAR DIVISION
POWELL STREET I LLC,
Plaintiff,
v.
DEPARTMENT OF REVENUE,
Defendant,
and
MULTNOMAH COUNTY ASSESSOR,
Defendant-Intervenor.
(TC 5263)
Plaintiff (taxpayer) appealed as to real market value (RMV) of its real prop-
erty in Multnomah County. The subject property (a shopping center) lacked an
anchor tenant and was 51 percent vacant on the assessment date. Using the sales
comparison approach, the appraisers significantly diverged on whether a com-
parable property should have a vacant anchor tenant. Taxpayer argued that no
market participant would pay the “stabilized” value determined by the income
approach for a shopping center that was more than 50 percent vacant. Therefore,
according to taxpayer, the subject property’s value for tax purposes could not
be the stabilized value of the property. The department argued that, notwith-
standing the substantial vacancy caused by the vacant anchor space, the sub-
ject property was behaving in a stabilized fashion because the anchor space had
only recently become vacant after an extended period of occupancy. Given the
significant vacancy of the property, the lack of an anchor tenant, the costs and
processes associated with attracting and retaining a new anchor tenant, and the
lack of a signed lease signifying the retention of a new anchor tenant, the court
found that the RMV of the subject property was significantly impaired and that
taxpayer’s appraiser had appropriately considered comparable sales with signif-
icant vacancy issues for the sales comparison approach and adjusted the stabi-
lized RMV determined by the income approach to determine the actual RMV of
the subject property. Accordingly, the department’s sales comparison analysis
was rejected and, to the extent that it did not make a deduction for the substan-
tial vacancy of the subject property, the department’s income approach analysis
was also rejected.
Trial was held April 18 and 19, 2016, in the courtroom of
the Oregon Tax Court, Salem.
Sam Zeigler, Christopher K. Robinson PC, Lake Oswego,
argued the cause for Plaintiff (taxpayer).
Joseph A. Laronge and Daniel Paul, Assistant Attorneys
General, Department of Justice, Salem, argued the cause for
Defendant Department of Revenue (the department).

424 	Powell Street I LLC v. Dept. of Rev.
Carlos A. Rasch, Assistant Multnomah County Counsel,
Portland, appeared for Defendant-Intervenor Multnomah
County Assessor (the county).
Decision rendered August 2, 2017.
HENRY C. BREITHAUPT, Judge.
I. 	INTRODUCTION
This case is before the court after trial to determine
the real market value (RMV) of property owned by Plaintiff
(taxpayer). The tax year at issue is 2014-15, with a corre-
sponding assessment date of January 1, 2014.
II. 	FACTS
The facts in this case are drawn from the appraisal
reports, trial testimony, and exhibits introduced by the
parties.
A. 	The Property
The property at issue is Powell Street Station (the
subject property), an L-shaped shopping center located
at the intersection of SE Powell Boulevard and SE 82nd
Avenue in Portland, Oregon.1
Taxpayer’s appraiser considered the quality of the
property to be above average, and its condition to be average.
The department’s appraiser agreed. Taxpayer’s appraiser
considered the location of the property to be average. The
department’s appraiser considered the location of the shop-
ping center to be favorable. Both appraisers considered the
highest and best use of the property to be continued use as
a neighborhood shopping center.
The total area of the shopping center is 393,890
square feet, and includes a building, a supporting park-
ing area, and a small drive-up ATM kiosk. The area of the
building is 117,766 square feet, all of which is considered
rentable space. That space is broken out into various sizes.
1 Although the shopping center is located at the intersection of SE Powell
and SE 82nd, and the shopping center fronts both streets, it does not occupy the
actual signalized corner of the intersection.

Cite as 22 OTR 423 (2017) 	425
B. 	The Tenant Spaces
The largest space, referred to as the anchor space,
is 53,720 square feet and was vacant as of the assessment
date. Until January 2013, a discount grocer had occupied
the anchor space for 25 years. The grocer vacated the anchor
space in January 2013, but it continued to pay rent until
May 2013. The anchor space represents 45.6 percent of the
property’s rentable space.
As of the assessment date, taxpayer was in posses-
sion of a signed letter of intent with a replacement grocer
to operate in the anchor space. The court received testi-
mony on the effect of a letter of intent for tenants of anchor
spaces, referred to as anchor tenants. A letter of intent is not
contractually binding on either the property owner or the
anchor tenant. It was merely evidence of a potential contrac-
tual relationship between the two.
The remainder of the rentable space is divided into
rentable units of various sizes. Ranging from largest to
smallest, the shopping center has one junior anchor space
(measuring 21,136 square feet), three large inline spaces
(measuring 3,450 to 5,500 square feet), one corner inline
space (measuring 4,320 square feet), and sixteen smaller
inline spaces (measuring 840 to 2,215 square feet). There
was testimony that tenants of these spaces had contractual
provisions, typical of the marketplace, which allowed for
modifications to the lease in the event the anchor space was
vacant. Those modifications include lower rent payments, a
hold on rent increases, and cancellation of the lease.
C. 	Tenant Space Vacancy
In addition to the vacancy of the anchor space, as
of the assessment date, taxpayer’s appraisal report lists
one large inline space (5,400 square feet), the corner inline
space (4,320 square feet), and one smaller inline space
(1,500 square feet) as vacant, for a combined total of 11,220
square feet or 9.5 percent of the subject property’s rentable
space. Accordingly, with the addition of the vacant anchor
space, 69,940 square feet or 55.1 percent of the property’s
rentable space was listed as vacant as of the assessment
date.

426 	Powell Street I LLC v. Dept. of Rev.
The department’s appraiser noted a 49 percent
occupancy rate (translating to a 51 percent vacancy rate),
but the department does not appear to seize on the differ-
ence in vacancy estimates. It appears to the court that the
slight difference in the appraiser’s actual vacancy rates
results from the fact that, contrary to an earlier portion of
taxpayer’s appraisal report, the vacancy listing on page 54
of the report lists the large inline space as occupied by a
tenant. The court determines that the subject property was
51 percent vacant as of the assessment date.2
D. 	The Appraisals
Both parties introduced appraisal reports prepared
by their respective appraisers. Although the appraisers came
to different value conclusions, much of their analyses are
similar. The court will compare and contrast the appraiser’s
analyses under each appraisal method.
E. 	The Income Approach—Taxpayer
With respect to the income approach, both parties
used the direct capitalization method. Taxpayer’s appraiser
determined the following market rents: $9.00 per-square-
foot for the anchor space; $12.00 per-square-foot for the
junior anchor space; $13.00 per-square-foot for the large
inline spaces; $10.00 per-square-foot for the corner inline
space; and $18.00 per-square-foot for the smaller line
spaces. 3 However, because the largest of the large inline
spaces, measuring 5,500 square feet, “has a high exposure
end cap location at the northeast corner of the property,”
taxpayer’s appraiser determined that a higher market rent,
at $18.00 per-square-foot was supported.
Based on these market rents, and an additional
$14,400 per year in income from the ATM kiosk, tax-
payer’s appraiser determined a Potential Gross Income (PGI)
of $1,445,082 for the subject property. Taxpayer’s appraiser
then deducted a ten percent vacancy and credit loss from
2 The effect of this difference on taxpayer’s appraisal appears to be negligible.
3 In determining the market rent for the corner inline space, taxpayer’s
appraiser treated it as a large inline space for purpose of the rent comparable
analysis, but then made a “downward adjustment in excess of 20% for its inferior
exposure, access, and overall utility.”

Cite as 22 OTR 423 (2017) 	427
the PGI, which gives the subject property an Effective
Gross Income (EGI) of $1,300,574. From the EGI, tax-
payer’s appraiser deducted an estimated eight percent of
nonreimbursable expenses to reach a Net Operating Income
(NOI) of $1,196,528. Taxpayer’s appraiser determined a
capitalization rate of eight percent, and, based on the NOI,
determined a value of $14,960,000.
Up until this point, although they determined dif-
fering market input amounts, both appraisers followed the
same appraisal theory. However, taxpayer’s appraiser con-
tends that the $14,960,000 value determined under the
income approach is the “stabilized value” of the property. As
previously discussed, the subject property lacked an anchor
tenant and was 51 percent vacant on the assessment date.
On this basis, taxpayer made a deduction of $4,710,000 in
“lease-up costs” to reflect the loss in rent and costs necessary
to attract and retain tenants (particularly an anchor tenant)
to reach stabilization. This results in an income approach
value determined by taxpayer’s appraiser of $10,250,000.
F. 	The Income Approach—The Department
The department’s appraiser also utilized the income
approach. The department’s appraiser determined the fol-
lowing market rents: $9.00 per-square-foot for the anchor
space; $12.00 per-square-foot for the junior anchor space;
and $19.00 per-square-foot for the inline spaces. The depart-
ment’s appraiser came to the same market rent conclusion
as taxpayer’s appraiser as to the anchor and junior anchor
spaces. However, the department’s appraiser determined
a higher overall market rent for the inline spaces and did
not differentiate between the sizes of inline spaces or their
visibility.
Based on these market rents, and an additional
$14,400 per year in income from the ATM kiosk, the
department’s appraiser determined a PGI of $1,566,802
for the subject property. The department’s appraiser then
deducted an eight percent vacancy and credit loss from the
PGI, which gives the subject property an EGI of $1,441,458.
From the EGI, the department’s appraiser deducted an esti-
mated ten percent of nonreimbursable expenses to reach a
NOI of $1,297,312. The department’s appraiser determined

428 	Powell Street I LLC v. Dept. of Rev.
a capitalization rate of 7.50 percent, and, based on the
NOI, determined a value of $17,300,000 under the income
approach.
G. 	The Sales Comparison Approach
With respect to the sales comparison approach, the
appraisers significantly diverge on whether a comparable
property should have a vacant anchor tenant. Taxpayer’s
appraiser looked for shopping centers around Oregon, includ-
ing Bend and Klamath Falls, with vacant anchor spaces to
determine the impact on value from the substantial vacancy
and came to a value conclusion of $10,010,000. Taxpayer’s
appraiser subsequently adjusted these sales for several fac-
tors, including location. The department’s appraiser looked
for shopping centers in the greater Portland area with
occupied anchor spaces and came to a value conclusion of
$18,800,000, making no adjustment for the subject proper-
ty’s substantial vacancy.
H. 	The Cost Approach
With 	respect 	to 	the 	cost 	approach, 	taxpayer’s
appraiser determined there was a lack of market evidence
to establish the depreciation values necessary to determine
the replacement cost, and that market participants place
little emphasis on the replacement cost of such proper-
ties in their value determinations. Accordingly, taxpayer’s
appraiser did not conduct a cost approach analysis. The
department’s appraiser did conduct a cost approach analy-
sis, which yielded a value of $19,800,000.
I. 	Reconciliation of Values
In summary, taxpayer’s appraiser determined value
indications for the subject property of $10,250,000 under
the income approach, and $10,010,000 under the sales com-
parison approach. Taxpayer’s appraiser did not conduct a
cost approach analysis. Taxpayer’s appraiser gave the sales
comparison approach “significant weight,” and the income
approach “substantial emphasis.” Accordingly, taxpayer’s
appraiser placed equal emphasis on each approach and
determined an ultimate value conclusion of $10,130,000 for
the subject property.

Cite as 22 OTR 423 (2017) 	429
The department’s appraiser determined value indi-
cations for the subject property of $17,300,000 under the
income approach, $18,800,000 under the sales comparison
approach, and $19,800,000 under the cost approach. The
department’s appraiser placed primary emphasis on the
income approach in part because it “is generally considered
to be the best and most accurate means of determining the
value of income-producing properties.” The department’s
appraiser placed secondary emphasis on the sales com-
parison and cost approaches. Ultimately, the department’s
appraiser determined a final value conclusion of $17,500,000
for the subject property.
Additional facts will be introduced as necessary in
the analysis section of this Opinion.
III. 	ISSUE
The issue in this case is the RMV of the shopping
center as of the assessment date.
IV. 	ANALYSIS
This case concerns the valuation of real property.
For purposes of property assessment and taxation, real and
personal property is valued at 100 percent of its RMV. ORS
308.232. 4 RMV is defined in Oregon as:
“the amount in cash that could reasonably be expected to
be paid by an informed buyer to an informed seller each
acting without compulsion in an arm’s-length transaction
occurring as of the assessment date for the tax year.”
ORS 308.205(1).
Subject to some limitation, the legislature has
determined that RMV “shall be determined by methods
and procedures in accordance with rules adopted by the
Department of Revenue.” ORS 308.205(2). Neither party
relies on the application or interpretation of any rules of the
department in this case.
The RMV of property is ultimately a question of
fact. Chart Development Corp. v. Dept. of Rev., 16 OTR 9,
4 Unless otherwise indicated, all references to the Oregon Revised Statutes
(ORS) are to the 2013 edition.

430 	Powell Street I LLC v. Dept. of Rev.
11 (2001). In addition, methods of accounting or valuation,
unless otherwise prescribed by law or regulation, are to
be analyzed in light of the evidence introduced by the par-
ties. Bylund v. Dept. of Rev., 292 Or 582, 585, 641 P2d 577
(1982).
Accordingly, subject to the definition of RMV found
in ORS 308.205, and any controlling case law or other rel-
evant statutes, the valuation question in this case is one of
fact, to be determined in light of the evidence introduced by
the parties. In this case, taxpayer has admitted that it has
the burden to prove, by a preponderance of the evidence, the
RMV of the subject property. ORS 305.427. However, this
court also has the authority to determine the RMV of prop-
erty “without regard to the values pleaded by the parties.”
ORS 305.412.
There are two main appraisal issues before the
court. The first issue is how, if at all, to take into account the
substantial vacancy of the subject property. The resolution
of this issue will, to a great extent, determine the persua-
siveness of each party’s appraisal.
As to the comparable sales analysis, taxpayer’s
appraiser 	selected 	properties 	with 	substantial 	vacancy
issues to determine the value of the substantially vacant
subject property. The department’s appraiser did not, effec-
tively concluding that substantial vacancy on a given prop-
erty would not affect the amount paid for that property.
As to the income approach analysis, taxpayer’s
appraiser made a deduction of approximately $4.7 million
in lease-up costs to reflect the substantial vacancy of the
subject property. The department’s appraiser did not, again
effectively concluding that substantial vacancy would not
affect the value of the subject property as of the assessment
date.
The 	second 	issue 	is 	that, 	notwithstanding 	the
vacancy issue, the parties are still separated by roughly
$2.3 million in RMV as determined by the income approach,
on which both appraisers placed substantial or primary
emphasis in their appraisals. This separation is the result

Cite as 22 OTR 423 (2017) 	431
of competing determinations of market rent and income cap-
italization rates. 5
This court will address both issues, beginning first
with the effect, if any, that the substantial vacancy of the
subject property has on its RMV as of the assessment date.
A. 	Substantial Vacancy
Before addressing the substantial vacancy of the
subject property, it is worth repeating that the depart-
ment does not dispute the fact of the substantial vacancy.
In addition, the department’s appraiser did not dispute the
type of adjustments made by taxpayer. 6 Accordingly, the
5 The parties also differ as to vacancy and credit loss and nonreimbursable
expense rates. However, on closer inspection, these differences cancel each other
out. Taxpayer claims an eight percent vacancy loss and a ten percent expense
rate; the department claims a ten percent vacancy loss and an eight percent
expense rate. In either calculation, the total deduction from the PGI is 17.2 per-
cent, leaving an NOI that is 82.8 percent of the PGI.
6 The department originally argued that such adjustments are not supported
by the appraisal literature, and that for purposes of the income approach all rent-
able space on a property, including vacant space, must be considered as rented
out at a market rate of rent, subject only to a deduction for a market standard
vacancy and collection loss. (See generally Def’s Trial Memo.) However, in light of
the trial testimony of the department’s appraiser (the witness) quoted below, such
an argument is not supported by the evidence placed into the record.
“Mr. Laronge[, counsel for the department]: * * * Is there a point—if you
would look at this property and start saying, you know, this vacancy is not
following market norms, like it’s—it’s been vacant for five years * * * what
happens then in terms of how you think about stabilization factors once it’s
outside market norm?
“* * * * *
“The Witness: Well, rather than stabilization, I might consider a number
of things. I look for comparables that were behaving that way, and if there
were any—if there weren’t any, then it might become a question of highest
and best use * * *. Then there is a decision as to how to go from there. So it
really depends.
“The Court: Well, let’s assume that you found some other properties that
were behaving that way * * *. That is, it was below what the Fred Meyer—you
know, the big shops wanted, and it was above, at that point, the New Seasons
and Whole Foods * * *—what if the, sort of, ‘This is irrelevant. It’s a little bit
irrelevant.’ It was the size and outline of the past, but it’s not the size and
outline of today.
“Witness: You’re describing functional obsolescence * * *.
“The Court: So now we have—so here’s a possible functional obsolescence
adjustment in the cost side of it. What would you do on the income side?
“The Witness: * * * [O]n the income side, I would look at, basically, that there
would be probably something where I’d have—I’d have to determine whether
stabilization is even possible going forward or whether it has to be changed. * * *

432 	Powell Street I LLC v. Dept. of Rev.
department’s only dispute on the basis of this evidence is
whether that vacancy has an effect on the RMV of this prop-
erty. In other words, the issue is whether taxpayer’s stabili-
zation adjustments are appropriate as applied to the subject
property as of the assessment date.
1. 	Arguments of the parties
Taxpayer argues, and has presented supporting
evidence, that no market participant would pay the “stabi-
lized” value determined by the income approach for a shop-
ping center that is more than 50 percent vacant. Therefore,
according to taxpayer, the subject property’s value for tax
purposes cannot be the stabilized value of the property. An
adjustment must be made for the substantial vacancy.
The department argues that, notwithstanding the
substantial vacancy caused by the vacant anchor space,
“The Court: Let’s assume you did think it was possible.
“The Witness: Uh-huh.
“The Court: But it was going to take time, and money, and lost rent, maybe
some extra concessions to get there. Would you make any adjustment on the
income?
“The Witness: I think those—yes, I think those would be appropriate.
“The Court: And then you would start making the adjustments?
“The Witness: Yes.
“The Court: And aren’t those essentially adjustments—I’m not talking about
quantitative. Aren’t they qualitative adjustments that the plaintiff has made
in this case on the income end of it?
“The Witness: Yeah. I don’t think this property falls into that—
“* * * * *
“The Court: Well, I think what you just told me is that if I—I might well
use the techniques they use if I looked at the property and classified it as
a value-added property as opposed to not. And then you would say, ‘That’s
right, Your Honor, but you forgot you have to listen to my testimony a little
bit. You’ve got to remember I’m here to tell you it isn’t a value-add property.
It’s operating in the ordinary course or operating within the middle of [the]
bell curve.’ And then I would say, ‘But Mr. Norling is telling me that it’s a
value-add.’
“The Witness: So and that’s our difference.
“The Court: So this classification has nothing to do with leases or leased
fee. It has to do with the market’s perception of is this a wounded elephant
[property] who’s going to get well or is this an elephant who * * * may never
get well.
“The Witness: That’s right, Your Honor.”
(Transcript at 598-604, Apr 19, 2016.)

Cite as 22 OTR 423 (2017) 	433
the subject property was behaving in a stabilized fashion
because the anchor space had only recently become vacant
after an extended period of occupancy.7 In the department’s
view:
“[The anchor space] was only vacant for 12 months as of the
valuation date. Thus, as of the valuation date, the anchor
space had spent 24 out of 25 years as occupied. In testi-
mony, [the department’s appraiser] assumed for the sake of
argument that property would be vacant for another year.
This corresponded to the 8 percent vacancy rate (2 vacant
years out of 26 years is roughly 8 percent) used by [the
department’s appraiser] in his income approach.”
The implication then, according to the department,
is that the anchor space was not actually vacant for an exces-
sive amount of time as of the assessment date.
The department further argues that the anchor
space was not vacant for an excessive amount of time by rely-
ing on the fact that the anchor space was either occupied or
leased until May 31, 2013, which is only seven months prior
to the assessment date, and that a potential anchor tenant
had already signed, on May 28, 2013, a letter of intent to
lease the anchor space. The department’s view is that, not-
withstanding the vacant anchor space and the absence of
any signed lease, the subject property was within market
norms for filling the space within a reasonable time and was
therefore behaving in a stabilized fashion. The department’s
appraiser notes, “[L]ocal commercial brokers familiar with
shopping centers say that the typical time-frame to replace
an anchor tenant similar to the subject is 6 to 18 months.”
The question comes down to one of timing. Under
taxpayer’s theory, the RMV of a property decreases once an
anchor tenant vacates the anchor space. Under the depart-
ment’s theory, the RMV of a property remains stable for a
brief period after the vacancy of the anchor tenant—it is not
until the anchor space exceeds a market expected vacancy
period that an adjustment for the vacant anchor space may
be made.
7 Recall that, while the total vacancy of the property was 51 percent vacant
as of the assessment date, 45.6 percent of that vacant space is attributed to the
vacant anchor space. If the anchor space was filled, the subject property would be
operating at a market standard occupancy rate.

434 	Powell Street I LLC v. Dept. of Rev.
2. 	Analysis
Recall that, unless otherwise prescribed by law or
regulation, methods of valuation are analyzed in light of the
evidence introduced by the parties. Bylund, 292 Or at 585.
Real and personal property is valued at 100 percent of its
RMV, which is defined as “the amount in cash that could
reasonably be expected to be paid by an informed buyer to
an informed seller each acting without compulsion in an
arm’s-length transaction.” ORS 308.232; ORS 308.205(1).
The court first considers the department’s theory
that the anchor space vacancy was within market norms
because it was only vacant, or expected to be vacant, for two
out of 26 years, or eight percent of the time since the last
occupancy started. Under the department’s theory, such
a property, even if it is currently over 50 percent vacant,
should be valued exactly the same as a property that is occu-
pied subject only to market expected vacancy.
The error of the department’s theory, if not appar-
ent on its face, becomes clear if one considers a hypothetical
anchor space that was leased and occupied continuously for
a 50-year period. If that anchor space was vacated at the
end of the lease term, then, under the department’s theory,
appraisers would not be able to take the substantial vacancy
into account for assessment purposes until the eight percent
vacancy rate threshold was reached. 8 That would not occur
until approximately 4.5 years later. 9 The department offers
no legal or factual support for such an analysis, and tax-
payer has indicated that market participants do not share
the department’s strained statistical approach.
Of course, perhaps the department’s theory was
merely a check on the appraiser’s assumption that the
anchor space might take up to two years (total) to become
occupied, and whether such a period of vacancy was outside
the expectations of a buyer of a stabilized property. However,
such a check is irrelevant to the determination of value as of
the assessment date in the face of the testimony introduced
by taxpayer.
8 And other spaces are experiencing no vacancy.
9 4.5 years vacancy ÷ 54.5 years total = 8.26 percent vacancy rate.

Cite as 22 OTR 423 (2017) 	435
The testimony introduced by taxpayer persuasively
demonstrates that buyers of shopping centers lacking an
anchor tenant would “absolutely” take such vacancy into
account when determining what price to pay for the shop-
ping centers. The department introduced no testimony to
refute the reaction of market participants to a substantial
vacancy in a shopping center.
Failing to introduce market evidence of its own, the
department instead relied on briefing upon case law and
appraisal theory that addressed two fundamental appraisal
concepts: that (1) Oregon law requires appraisals to value all
of the interests in the property, otherwise known as the fee
simple estate and (2) to value the fee simple estate, apprais-
ers must utilize market rents instead of contract rents in
the income approach. See Tetherow Golf Course v. Deschutes
County Assessor, 20 OTR 554 (2012); Deschutes County
Assessor v. Broken Top Club, LLC, 15 OTR 231 (2000); First
Interstate Bank v. Dept. of Rev., 10 OTR 452 (1987), aff’d,
306 Or 450, 760 P2d 880 (1988); Swan Lake Mldg. Co. v.
Dept. of Rev., 257 Or 622, 625, 478 P2d 393 (1970); see also
Appraisal Institute, The Appraisal of Real Estate 441, 447
(14th ed 2013).
These authorities do not assist the department.
Taxpayer 	disputes 	neither 	concept. 	In 	fact, 	taxpayer’s
appraiser sought to value the fee simple estate. In doing so,
taxpayer’s appraiser used market rents to determine the
PGI of the subject property in its income approach. However,
taxpayer’s appraiser made a sizeable—but substantiated—
deduction for the lease-up costs that would be incurred by
a hypothetical purchaser to fully lease or stabilize the prop-
erty. This approach is entirely consistent with the market
testimony of taxpayer’s witnesses and unrefuted by the
department, as is the consideration of substantial vacancy
in taxpayer’s sales comparable analysis.
Viewing this issue in another light, the parties in
this case both agree on the highest and best use of the sub-
ject property. The highest and best use is continued use as a
shopping center, which is expected to earn income. And the
evidence in this case shows that the department’s appraiser
agrees that the type of income approach adjustment made by

436 	Powell Street I LLC v. Dept. of Rev.
taxpayer’s appraiser is theoretically appropriate as applied
to shopping centers, just not as applied to the subject prop-
erty on the assessment date. See 22 OTR at 431 n 6. That
is an issue quite distinct from whether taxpayer’s appraiser
is valuing the fee simple estate or using market rents in his
analysis. The department’s arguments are not persuasive,
and this court finds the approach of taxpayer persuasive.
In adopting taxpayer’s approach, the court com-
ments upon the testimony of taxpayer’s appraiser, in which
he says of the $4.7 million deduction for lease-up costs,
“there is no source that I can state where it says that it’s
appropriate valuation methodology to account for stabiliza-
tion costs within the context of a fee simple analysis.” In
another case, such an admission might well be fatal to that
party’s appraisal. See Dept. of Rev. v. River’s Edge Investments
LLC, 21 OTR 469, 475 (2014) (“If not adequately justified, [a
serious departure from appraisal practice] would lead the
court to place no reliance on the appraisal of the expert who
took the departure.”).
However, this case is a good example of why methods
of valuation are analyzed in light of the evidence introduced
by the parties. Bylund, 292 Or at 585. Under the depart-
ment’s theory, the unstated presumption must be that the
owner of an income producing property has the ability to—
with minimal time and cost—fill any vacancies on the sub-
ject property. With respect to the appraisal literature, upon
which the department relies, the presumption is explicit:
“When the fee simple interest is valued, the presumption is
that the property is available to be leased at market rates.”
The Appraisal of Real Estate 441 (“Interests To Be Valued”
text box) (emphasis added).
Here, taxpayer has introduced sufficient evidence
to test and, in this court’s opinion, rebut that presumption.
Taxpayer showed that there were significant hurdles to be
jumped and funds to be expended to seek out and secure an
anchor tenant.10
10 In this case, the substantial vacancy is caused primarily by the absence
of an anchor tenant. The court makes no determination on whether the analy-
sis would change if the substantial vacancy was caused by a number of inline
or junior anchor tenant vacancies. In addition, in this case, there was no lease

Cite as 22 OTR 423 (2017) 	437
Those hurdles and costs are the result, in part, of
approvals required of the city for any buildout of the anchor
space. Id. According to a preliminary letter from the City of
Portland, any building permit valued at $145,200 or more
may require that up to ten percent of the total permit value
must be spent on nonconforming use and other property
upgrades, such as “parking lot landscaping, bicycle parking,
pedestrian connections and screening * * * ADA upgrades,
seismic upgrades and storm water improvements.” The
estimated costs necessary to secure the interested anchor
tenant in this case total approximately $2.6 million, which
include a tenant allowance of $1 million. During the time
necessary to plan and seek approval for the buildouts, the
available anchor space is not income producing.
These factors alone support an adjustment for the
substantial vacancy of the subject property. Yet, taxpayer
also showed that the anchor tenant vacancy specifically
affects the market value of a shopping center in a way man-
ifestly different than that of vacancy of smaller inline shops.
The vacancy of the anchor space causes a ripple effect to
other rentable spaces on the property. It is a practice in the
marketplace for smaller shops to condition the amount of
their rent payments or length of their lease on the presence
of an anchor tenant. Taxpayer has justified the $4.7 million
deduction in lease-up costs from the income approach, and
the consideration of substantial vacancy in the sales compa-
rable approach.
Finally, nothing in the record suggests that the
approvals needed, the nonconforming upgrades required, or
estimated funds and time necessary to place an interested
anchor tenant into the subject property are unusual or out-
side market norms. They cannot accordingly be deemed to
be attributable to poor property management, which would
go to actions or skills of the particular owner and would
accordingly not be relevant for purposes of property assess-
ment and taxation. See Seneca Sustainable Energy, LLC II
v. Dept. of Rev., 22 OTR 263, 272 (2016) (“Appraisal theory
requires that an appraiser ignore the skill of any particular
obligating a new anchor tenant to occupy the anchor space after the vacancy of
the prior anchor tenant. Such a fact might also change the analysis.

438 	Powell Street I LLC v. Dept. of Rev.
potential owner or purchaser and focus instead on typical
management skill.”).
Given the significant vacancy of the property, the
lack of an anchor tenant, the costs and processes associated
with attracting and retaining a new anchor tenant, and
the lack of a signed lease signifying the retention of a new
anchor tenant, this court finds that the RMV of the subject
property was significantly impaired. Taxpayer’s appraiser
appropriately considered comparable sales with signifi-
cant vacancy issues for the sales comparison approach and
adjusted the stabilized RMV determined by the income
approach to determine the actual RMV of the subject prop-
erty. Accordingly, the department’s sales comparison anal-
ysis is rejected and, to the extent that it does not make a
deduction for the substantial vacancy of the subject prop-
erty, the department’s income approach analysis is rejected.
B. 	Market Rent and Income Capitalization Rates
Having concluded that taxpayer’s appraisal is more
persuasive on how to take into account the substantial
vacancy of the subject property, the court now focuses on
the remaining $2.3 million difference between the parties
in their income approach analyses. The court first begins
with the market rent rates.
1. 	Market rent rates
As 	previously 	explained, 	the 	appraisers 	deter-
mined identical market rents for the anchor and junior
anchor spaces. The only disagreement is the market rent
attributable to the inline spaces on the subject property.
Nevertheless, that disagreement results in a $121,720 dif-
ference in the PGI of the subject property, or approximately
$1.3 million in value.11 The court discusses each appraiser’s
analysis in more detail before explaining why the approach
of taxpayer’s analysis is more persuasive.
With respect to the inline spaces on the subject
property, 	taxpayer’s 	appraiser 	initially 	determined 	two
11 Depending on the capitalization rate used, the $121,720 difference in PGI
results in a valuation difference of either $1,343,787 (using the department’s 7.5
percent capitalization rate) or $1,259,800 (using taxpayer’s eight percent capital-
ization rate).

Cite as 22 OTR 423 (2017) 	439
separate market rents, one for larger inline spaces (which
included the corner inline space), and one for smaller inline
spaces. For the smaller inline spaces, taxpayer’s appraiser
determined a market rent of $18.00 per-square-foot. For
the larger inline spaces, taxpayer’s appraiser determined
a market rent of $13.00 per-square-foot. However, tax-
payer’s appraiser made adjustments to the large inline space
market rent rate for two of the larger inline spaces. First,
taxpayer’s appraiser adjusted the market rent rate down to
$10.00 per-square-foot for the corner inline space because
of “its inferior exposure, access, and overall utility.” Second,
taxpayer’s appraiser adjusted the market rent rate up to
$18.00 per-square-foot for the largest of the large inline
spaces and determined separate market rents for the large
inline space because of its “high exposure end cap location
at the northeast corner of the property.”
The department’s appraiser determined one mar-
ket rent for the various inline spaces. That market rent was
$19.00 per-square-foot.
Both appraisers conducted competent comparable
rent analyses under their respective approaches. As far as
volume of support, both appraisers included the same num-
ber of rent comparables. That said, the court notes that,
by not distinguishing between types of inline spaces, the
department’s appraiser had more support for its conclusion
of the market rent for the inline spaces. However, in com-
paring taxpayer’s smaller inline market rent rate and the
department’s general inline market rent rate, the difference
of $1.00 per-square-foot is not significant.
The difference becomes significant when consider-
ing the disparity between taxpayer’s determination of the
large inline and corner inline market rents, and the depart-
ment’s determination of the general inline market rent.12
The court finds taxpayer’s sensitivity to the positioning, vis-
ibility, utility, and relative size of the various inline spaces to
be more persuasive when determining what rent rate would
be used in a market transaction for such inline spaces. The
12 But note that the largest of the large inline spaces was determined by
taxpayer’s appraiser to share the $18.00 per-square-foot market rent rate as the
smaller inline spaces.

440 	Powell Street I LLC v. Dept. of Rev.
court agrees with the determination of taxpayer’s appraiser
of the market rent rates.
2. 	Income capitalization rate
At this point, the only significant appraisal differ-
ence remaining is the income capitalization rate. Taxpayer’s
appraiser determined a capitalization rate of eight percent,
whereas the department’s appraiser determined a capital-
ization rate of 7.5 percent. Given taxpayer’s determination
of an NOI of $1,196,528, the competing capitalization rates
result in approximately $1 million of difference in value.
Both appraisers conducted a market extraction
analysis to determine the market capitalization rate by look-
ing at sales of other properties, and comparing those rates
to local or national trend data. Both appraisers also com-
pared the individual characteristics of the sales reviewed
to the characteristics of the subject property. Taxpayer’s
appraiser opted to quantify the effect of such characteristics
on the capitalization rate. The department’s appraiser opted
to qualitatively reflect how good of an indicator of the capi-
talization rate each property was.
Neither party expended much briefing on the deter-
mination 	of 	the 	capitalization 	rate. 	However, 	taxpayer
points out one significant flaw with the capitalization rate
determined by the department’s appraiser: the appraiser
“did not adjust his capitalization rate—which was based
on the six sales [of fully stabilized properties] in his sales-
comparison approach—to account for the Shopping Center’s
anchor vacancy.”
The court agrees with taxpayer. At first blush,
determining a capitalization rate based upon the substan-
tial vacancy of the subject property might appear to be a
form of double deduction, given the $4.7 million deduction
of lease-up costs attributable to stabilizing the substantial
vacancy of the subject property.
However, the $4.7 million deduction reflects the
reduction of income and the amount of funds and time
necessary to achieve stabilization. The deduction does not
account for the increased risk of the property associated
with achieving stabilization, which taxpayer’s capitalization

Cite as 22 OTR 423 (2017) 	441
rate does. The approach of taxpayer’s appraiser appropri-
ately calculates the PGI and NOI of the property as if it
was stabilized; it infers a value of the property based on the
increased risk associated with the property not being stabi-
lized; and then it deducts the loss of rent and lease-up costs
necessary to get the property to income stabilization.
V. 	CONCLUSION
The court concludes that the appraisal of taxpayer
more likely than not determines the correct valuation of
the subject property. The department’s failure to account
for the substantial vacancy of the subject property renders
its sales comparison analysis unpersuasive. That same fail-
ure greatly impairs the persuasiveness of the department’s
income approach analysis. Taxpayer’s determination of mar-
ket rents and the capitalization rate in the income approach
are more persuasive. Finally, although not previously dis-
cussed, taxpayer’s failure to conduct a cost approach analy-
sis does not undermine the persuasiveness of its appraisal.
Both appraisers agreed that the income approach to value
is a much better indicator for the subject property, and the
department’s appraiser gave little weight to the value deter-
mined by its cost approach. Now, therefore,
IT IS THE OPINION OF THE COURT that the
value of the subject property is $10,130,000.