
Filed:  February 8, 2001
IN THE SUPREME COURT OF THE STATE OF OREGON
PIEDMONT PLAZA INVESTORS,
		Appellant,
	v.
DEPARTMENT OF REVENUE,State of Oregon,
	Respondent.
_________________________________________________________________
SPENCER HOUSE ASSOCIATES,
Appellant,
      v.
DEPARTMENT OF REVENUE,State of Oregon,
Respondent,
      and
WASHINGTON COUNTY,
Intervenor below.
(TC 4123, 4124; SC S46526, S46527)
(Consolidated for Review and Decision)
	On appeal from the Oregon Tax Court.*
	Carl N. Byers, Judge.
	Argued and submitted September 12, 2000.
	Christopher K. Robinson, Lake Oswego, argued the cause for
appellants.  With him on the briefs was W. Scott Phinney.
	Marilyn J. Harbur, Assistant Attorney General, Salem, argued
the cause for respondent.  With her on the brief was Hardy Myers,
Attorney General.
	Before Carson, Chief Justice, and Gillette, Van Hoomissen,
Durham, Leeson, and Riggs Justices.**  
	LEESON, J.
	The decision of the Tax Court is reversed.
 *14 OTR 440 (1998)
 
	**Van Hoomissen, J., retired on December 31, 2000, and did
not participate in the decision of this case.  Kulongoski and 
DeMuniz, JJ., did not participate in the consideration or
decision of this case. 
		LEESON, J.
		In these consolidated tax cases, taxpayers challenge
tax assessments of two low-income apartment complexes, Piedmont
Plaza and Spencer House, for the tax years 1994-95 and 1995-96. 
The Tax Court determined that the real market value of the two
properties for those tax years is the amount of money that
taxpayers received through federally controlled sales of the
properties, commonly known as preservation transfer sales. 
Piedmont Plaza Investors v. Dept. of Rev., 14 OTR 440 (1998).  On
de novo review, ORS 305.445 (1995), (1) we reverse the decision of
the Tax Court.
		A brief discussion of section 236 of the National
Housing Act (section 236 program), 12 USC § 1715z-1 (1994), and 
the Low-Income Housing Preservation and Resident Homeownership
Act (Preservation Act), 12 USC § 4101 et seq. (1994), is
necessary to understand the issues in this case.  Congress
enacted the section 236 program to increase the availability of
residential housing for low-income families.  The Department of
Housing and Urban Development (HUD) administers the section 236
program.  As part of that program, which was "active" between
1968 and 1973, HUD guaranteed 40-year mortgages by conventional
lenders for properties accepted into the program.  However, HUD
required the mortgages to contain a restriction preventing the
owners from prepaying their loans for 20 years, thereby ensuring
that section 236 properties would remain available as low-income
housing for at least 20 years.  Through regulatory agreements,
HUD also exercised extensive control over the management of
section 236 properties, including setting limits on the rent that
owners could charge, restricting the amount of dividends that
owners could receive, and requiring owners to maintain capital
reserves for maintenance and repair.  In exchange, HUD paid
directly to the lenders all but one percent of the interest
payments on the loans (the interest subsidy).  Owners of section
236 properties also received management fees and favorable tax
treatment.
		In 1990, Congress enacted the Preservation Act in
response to concerns that, as the mortgages on many section 236
properties neared the 20-year mark, the owners of those
properties would exercise their right to prepay their loans and
remove their properties from the section 236 program.  The goal
of the Preservation Act was to ensure that most of the existing
section 236 housing inventory would remain available for low-income families, while fairly compensating owners for the value
of their properties.  See 24 CFR § 248.1 (2000) (describing
purposes of Preservation Act).  The Preservation Act allows
owners of section 236 properties to prepay their 40-year
mortgages if HUD makes certain written findings that conversion
of the properties to conventional housing will not have a
detrimental effect on low-income families and the availability of
low-income housing.  See 24 CFR § 248.141 (2000) (setting out
criteria for HUD approval of prepayment).
		The Preservation Act also provides owners of section
236 properties two alternatives to prepayment.  One is to extend
the section 236 restrictions for the useful life of the property
in exchange for receiving a guaranteed eight percent annual
return on equity.  The other is to sell the property to HUD-qualified buyers, who must agree to continue operating the
properties subject to the section 236 restrictions, through the
"preservation transfer" process.  Preservation transfer sales
allow owners of section 236 properties to sell their properties
at prices that are adjusted to reflect the value of the
properties as if they were not subject to the section 236
restrictions.  With that background, we turn to this case.
		Piedmont Plaza, located in Multnomah County, and
Spencer House, located in Washington County, were built as
section 236 housing in the 1970s.  Taxpayers purchased the
properties in the 1980s.  In 1997, taxpayers sold the properties
through the preservation transfer process.  Piedmont Plaza sold
for $1,371,439, and Spencer House sold for $1,296,342.
		Multnomah County assessed Piedmont Plaza at $1,301,400
for tax year 1994-95 and $1,431,500 for tax year 1995-96. 
Washington County assessed Spencer House at $1,240,140 for tax
year 1994-95 and $1,420,720 for tax year 1995-96.
		Taxpayers appealed the counties' tax assessments to the
Department of Revenue (department), which concluded that the
assessed value accurately reflected the real market value of
Spencer House. (2)  With respect to Piedmont Plaza, the department
concluded that the assessment was accurate for the 1994-95 tax
year, but that there was no evidence to justify an increase in
value for the 1995-96 tax year.  Therefore, it held that the
assessed value for Piedmont Plaza should be the same for both tax
years, namely, $1,301,400.
		Taxpayers filed complaints in the Tax Court, and the
cases were consolidated for trial.  Taxpayers and the department
submitted appraisals.  The Tax Court rejected all the proffered
appraisals and found that there was no immediate market value for
the properties.  Piedmont Plaza, 14 OTR at 454-56.  ORS
308.205(2)(c) provides that, if there is no immediate market
value for a property, then "its real market value is the amount
of money that would justly compensate the owner for loss of the
property."  The Tax Court concluded that the preservation
transfer price of each property was the best evidence in the
record of the amount that would be just compensation.  See id. at
457 (so stating).  Therefore, it held that those amounts -- 
$1,371,439 for Piedmont Plaza and $1,296,342 for Spencer House -- 
represented the real market value of the properties for the tax
years 1994-95 and 1995-96.  Id. at 459.  Taxpayers have appealed
that decision.
		ORS 308.232 requires that all property be assessed at
100 percent of its real market value.  ORS 308.205(1) defines
"real market value" as follows:
 	"Real market value of all property, real and
personal, means 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."

Real market value is to be determined according to the statutory
guidelines in ORS 308.205(2) and the "methods and procedures"
adopted by the department.  See Ernst Brothers Corp. v. Dept. of
Rev., 320 Or 294, 297-98, 882 P2d 591 (1994) (so stating).  OAR
150-308.205-(A)(2)(a), which implements ORS 308.205, requires
consideration of the cost approach, the sales comparison
approach, and the income approach to valuation in each
assessment. (3)  Taxpayers must prove by a preponderance of the
evidence that their approach to valuation best reflects the
properties' real market value.  ORS 305.427; see STC Submarine,
Inc. v. Dept. of Rev., 320 Or 589, 597, 890 P2d 1370 (1995) (so
stating).   
		Of the three approaches to assessing real market value
mentioned above, only the income approach is at issue here. (4)  The
income approach to valuation "measures the present value of the
anticipated future stream of income attributable to [an]
operating property, by discounting the [property's] anticipated
cash flows to present value using a capitalization rate that
reflects [an owner's] costs of investment."  Delta Air Lines,
Inc. v. Dept. of Rev., 328 Or 596, 603, 984 P2d 836 (1999). 
Although the Tax Court rejected both the department's and
taxpayers' income approaches to valuation, only taxpayers have
challenged the holding that their appraiser's income approach to
valuation did not pass muster. 
		Skelte, a private appraiser, prepared taxpayers'
appraisals.  Using the income approach to valuation, he
determined that the real market value for Piedmont Plaza was
$735,000 for tax year 1994-95 and $685,000 for tax year 1995-96. 
For Spencer House, he determined the values to be $705,000 for
tax year 1994-95 and $670,000 for tax year 1995-96.  The Tax
Court found Skelte's appraisals unacceptable for two reasons,
which we address in turn.  First was Skelte's treatment of the
interest subsidy.  As explained above, one feature of the section
236 program was that HUD paid directly to the lender all but one
percent of an owner's interest payments.  Accordingly, taxpayers'
loan payments consisted of principle and one-percent interest.  
The Tax Court found that, although Skelte had recognized the
interest subsidy in his income approach as a significant benefit,
		"* * * he considered this benefit offset by the
limited dividend and limited rent.  Accordingly, he
made no adjustment for the subsidy.


		"* * * * *
		"Simply assuming away the benefits and detriments
of the government restrictions is not satisfactory."

Piedmont Plaza, 14 OTR at 451, 454.
		Taxpayers argue that the Tax Court "erroneously
concluded that [Skelte] assumed that the interest subsidy and the
limited dividend canceled each other out."  (Emphasis in
original.)  According to taxpayers, Skelte did consider the
effect of the interest subsidy on the properties' income stream,
and he explained at trial why he concluded that the interest
subsidy should not be included as income in this instance.
		At trial, Skelte explained that a buyer would not
consider the interest subsidy in valuing section 236 property,
because that subsidy has no effect on "positive cash flow."  The
amount of income that an owner might derive from a property that
is subject to section 236 restrictions is determined by the
amount of rent that HUD allows an owner to charge and the
limitation on dividends that an owner may receive from the
property.  Those restrictions set the upper limit on the amount
of income that a section 236 property can generate, regardless of
the amount of interest that HUD subsidizes.  In other words,
Skelte reasoned that the interest subsidy benefits the owner by
decreasing operating expenses, but the subsidy does not have a
positive effect on the amount of income that a section 236
property can generate.  Accordingly, Skelte did not consider the
amount of the interest subsidy as income in his income approach. 
The record supports taxpayers' contention that, contrary to the
Tax Court's finding, Skelte considered the effect of the section
236 restrictions in his income approach, and he concluded
reasonably that the amount of the interest subsidy should not be
included as income.
		The Tax Court's second criticism of Skelte's income
approach was that he had "wrongly assume[d] the property will be
subject to HUD regulation indefinitely."  Piedmont Plaza, 14 OTR
at 455 (emphasis in original).  We disagree that Skelte erred in
making that assumption.  It is undisputed that, in the tax years
1994-95 and 1995-96, the properties were subject to the section
236 restrictions for the life of their mortgages.  It also is
undisputed that, in those tax years, the Preservation Act placed
additional restrictions on taxpayers' right to prepay their loans
and convert the properties to conventional housing units. 
Angelo, an owner of and expert on section 236 properties,
testified for taxpayers that owners of section 236 properties
rarely can meet all the Preservation Act's additional
requirements necessary to prepay their loans.  Absent the ability
to prepay their loans, owners of section 236 properties can elect
either to extend the section 236 restrictions for the life of the
properties and receive a guaranteed eight percent return on their
equity, or to sell the properties through the preservation
transfer process.  Under either alternative to prepayment, the
properties remain subject to the section 236 restrictions.  On
this record, we conclude that it was reasonable for Skelte to
assume that Piedmont Plaza and Spencer House would remain subject
to the section 236 restrictions indefinitely.
		For the foregoing reasons, we conclude that Skelte did
consider factors in his appraisal that the Tax Court found that
he had not considered.  We hold that taxpayers have established
by a preponderance of the evidence that their income approach to
valuation best reflects the properties' real market value for the
tax years 1994-95 and 1995-96. (5)  ORS 305.427.  Accordingly, we
find the following real market values for Piedmont Plaza and
Spencer House:
