Nationwide Mutual Insurance Co. v. Polk County Board of Review

                   IN THE SUPREME COURT OF IOWA

                                     No. 20–1290

           Submitted September 15, 2022—Filed December 16, 2022


NATIONWIDE MUTUAL INSURANCE CO.,

      Appellant,

vs.

POLK COUNTY BOARD OF REVIEW,

      Appellee.


      On review from the Iowa Court of Appeals.

      Appeal from the Iowa District Court for Polk County, Paul D. Scott, Judge.

      Property owner Nationwide Mutual Insurance Co. appeals its property tax

assessment by the Polk County Board of Review. DECISION OF THE COURT

OF APPEALS VACATED; DISTRICT COURT JUDGMENT AFFIRMED.

      McDermott, J., delivered the opinion of the court, in which all participating

justices joined. May, J., took no part in the consideration or decision of the case.

      Sean P. Moore (argued) of Brown, Winick, Graves, Gross and Baskerville,

P.L.C., Des Moines, for appellant.

      John P. Sarcone, Polk County Attorney, and Mark Taylor (argued) and

Jason Wittgraf, Assistant Polk County Attorneys, for appellee.
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McDERMOTT, Justice.

      This case presents a challenge to a county assessor’s valuation for tax

purposes of two large corporate office buildings in downtown Des Moines. The

assessor set the value of the two buildings at $87,050,000 and $44,910,000,

which the properties’ owner, Nationwide Mutual Insurance Co. (Nationwide),

protested to the Polk County Board of Review (Board). The Board upheld the

county assessor’s valuation, and Nationwide appealed to the district court.

Nationwide and the Board each called two appraisers as expert witnesses. The

district court found the Board’s experts more reliable than Nationwide’s and

affirmed the assessment. Nationwide then appealed to this court, and we

transferred the case to the court of appeals. The court of appeals reversed the

district court’s determination about the relative reliability of the expert testimony

and reduced the assessments. We granted the Board’s application seeking

further review.

      When valuing real property for tax assessments, the law strives for fairness

and uniformity, operating on the notion that similar properties within a given

tax classification should be taxed similarly. Because courts reviewing challenges

to valuations usually lack technical expertise in appraising commercial real

estate, these types of cases often hinge on a factfinder’s judgment about

conflicting expert witness testimony. And so it goes in this case.

      The question before us centers on whether the Board’s expert appraisers

grounded their opinions in a flawed appraisal method that didn’t rely enough on
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sales of similar properties and, thus, whether the district court erred by relying

on these experts when it affirmed the assessor’s valuation.

                                            I.

      The two office buildings at issue—neighboring each other at 1100 Locust

Street and 1200 Locust Street—have slightly different histories. The building at

1100 Locust was, in 2002, among the first constructed in what’s known as

downtown Des Moines’s Western Gateway area. In 2006, Nationwide and the

City of Des Moines (City) agreed to an expansion project as part of an “urban

renewal” development agreement. Under this agreement, Nationwide would

expand its building at 1100 Locust and construct another smaller office building

at 1200 Locust. In exchange, the City would provide Nationwide about $28

million in economic incentives to help finance the project. Nationwide further

agreed that the minimum property values for tax assessment purposes over the

next ten years—starting from when the construction projects concluded in

2008—would not fall below $78.5 million for 1100 Locust and $36 million for

1200 Locust. The protested assessments at issue are for tax years 2017 and

2018, and thus within the agreement’s ten-year period.

      The properties are described with a series of compound adjectives: single-

tenant, built-to-suit, owner-occupied, corporate headquarters. The building at

1100 Locust rises seven stories with a gross building area of almost 800,000

square feet, while 1200 Locust stands five stories with a gross building area of

almost 372,000 square feet. Nationwide has continued to invest in these

properties, partially remodeling both buildings between 2011 and 2016.
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      The county assessor is generally tasked with valuing the real property in

a county for tax assessment purposes. For tax years 2017 and 2018, the Polk

County Assessor increased the valuations of both properties, from $80.23 million

to $87.05 million for 1100 Locust, and from $41.39 million to $44.91 million for

1200 Locust. An employee from the Polk County Assessor’s Office testified that

an initial assessment is typically determined using a mass appraisal technique,

such as a large study of the sales of commercial-class properties, and then

applying a uniform percentage change for properties within that class. An

individualized property valuation is prepared only if a property owner files a

protest.

      And that’s what happened here. To arrive at the 2017 valuation, the Polk

County Assessor took the 2015 property tax valuations for all commercial-class

properties in Des Moines’s central business district (such as 1100 Locust and

1200 Locust) and added 8.5%. When Nationwide filed its protest, the assessor

performed an individualized “cost” analysis on both properties using a state

manual that estimates construction costs if the building were to be constructed

anew. After deducting estimated physical depreciation based on the buildings’

ages, the assessor arrived at a depreciated value. Because the depreciated value

exceeded the assessor’s earlier valuation, the Board—the body that adjudicates

property owner protests (and now the defendant in this case)—determined that

no adjustment to the original tax assessment was warranted and thus denied

Nationwide’s protest.
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      Nationwide filed a petition for judicial review with the district court. In the

district court, Nationwide and the Board each presented testimony from two

expert witnesses who had conducted valuations of the properties: for the Board,

appraisers Mark Kenney and Russ Manternach; for Nationwide, appraisers Don

Vaske and Tom Scaletty. Each expert analyzed the properties using the three

valuation methods commonly used to value real property: the “cost” approach,

which considers the cost of reproducing the property anew minus depreciation;

the “income” approach, which considers the income-producing capacity of the

property; and the “comparable-sales” (or simply “sales”) approach, which

compares the property to other properties with similar characteristics that have

recently sold.

      But each expert emphasized different approaches—and as to the sales

approach in particular, different properties for comparison—in arriving at a

“reconciled” value for each property. To give a flavor of the different points of

emphasis, Kenney (retained by the Board) provided a single combined appraisal

that Nationwide’s lawyer worked to unpack into its component parts on cross-

examination. Kenney gave less weight to the comparable-sales approach because

he found suitable comparison properties lacking in Des Moines or sufficiently

similar markets. Kenney also found the income approach ill-fitting.

      Manternach (the Board’s other expert) gave the least weight to the cost

approach because, in his view, the amount of accrued depreciation skewed the

valuation too much. In his comparable-sales analysis, Manternach used local

properties, but couldn’t find suitable single-tenant properties. Manternach
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testified that adjusting a sale of an owner-occupied single-tenant building in a

larger metropolitan area wouldn’t provide a sufficiently objective comparison.

      Vaske (retained by Nationwide) testified that in his view the comparable-

sales approach offered the most reliable method. He analyzed two properties in

Des Moines, one in suburban Kansas City, and one in St. Paul. But Vaske had

to make considerable adjustments in analyzing his proposed comparable

properties for building age (they weren’t as new as Nationwide’s) and—most

particularly—size, since two of his comparable properties had square footages of

only 225,654 and 102,242, while the Nationwide properties are 798,696 and

371,920.

      Scaletty (Nationwide’s other expert) analyzed but assigned no weight to the

cost approach, instead assigning a 60/40 split to the sales and income

approaches in his analysis. The local properties that he viewed as comparable

sales were not owner-occupied, single-tenant buildings. Scaletty’s calculations

also made the largest adjustment to the gross square footage available for actual

business use, reducing 1100 Locust’s 798,696 gross square footage by 15%,

down to 669,565 square feet.

      As the table below shows, the experts’ valuations, including their

reconciled final valuations, varied widely:
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                        1100 Locust (assessed at $87,050,000)
                                Board of Review                 Nationwide
                          Manternach       Kenney          Vaske        Scaletty
Cost approach             $86,100,000 $99,000,000 $54,385,000 $39,470,000
Sales approach            $81,300,000 $107,000,000 $48,237,000 $39,390,000
Income approach           $82,100,000 $80,000,000 $48,117,000 $39,550,000
Reconciled valuation      $82,100,000 $94,000,000 $49,000,000 $39,450,000


                        1200 Locust (assessed at $44,910,000)
                                Board of Review                Nationwide
                           Manternach       Kenney        Vaske        Scaletty
Cost approach              $44,000,000 $41,000,000 $26,650,000 $23,440,000
Sales approach             $42,800,000 $63,000,000 $26,034,000 $22,640,000
Income approach            $42,900,000 $55,000,000 $25,134,000 $24,240,000
Reconciled valuation       $43,000,000 $47,000,000 $26,000,000 $23,280,000

        The district court acknowledged that Iowa law requires that county

assessors first seek to use a comparable-sales approach in setting a valuation,

and that other approaches should be used only when market value cannot be

readily   determined    using     the   comparable-sales      approach.   

(1)(b)(1) (2018). The district court noted that all four expert appraisers

incorporated the three traditional approaches in arriving at their reconciled

valuation numbers.

        Although the district court found Nationwide’s experts credible, it found

the Board’s experts more reliable. The district court thus gave greater weight to

the Board’s expert valuations, which more closely tracked the county assessor’s

valuation. In its analysis, the district court discounted the testimony of

Nationwide’s associate vice president of corporate real estate, who contended

that 1100 Locust should not be considered a “corporate headquarters” building.

While     perhaps   technically    accurate    given   that   Nationwide’s   national
                                        8


headquarters are in Columbus, Ohio, the district court found the testimony

unconvincing considering that all four expert witnesses—even Nationwide’s—

described the properties as single-tenant corporate headquarters,             and

Nationwide’s own agreement with the City called for an “expansion of the regional

headquarters for Nationwide.”

      The district court also noted that, despite’s Nationwide’s push to set the

valuation at the minimum assessment from the parties’ agreement, Nationwide

never appealed the property tax assessments for 2015, which also landed above

the minimum. The district court further found persuasive Nationwide’s own

property insurance coverage that set the replacement cost for 1100 Locust at

$148,061,365 and 1200 Locust at $67,804,793—both well above the county

assessor’s valuations for each property. The district court thus affirmed the Polk

County Assessor’s original tax valuation of 1100 Locust at $87,050,000 and

1200 Locust at $44,910,000.

      Nationwide appealed, arguing that the Board’s evidence failed to meet the

requirements set out in Wellmark, Inc. v. Polk County Board of Review, 

 (Iowa 2016), and, relatedly, that the district court erred in finding

the Board’s experts more reliable than Nationwide’s experts. After we transferred

the case, the court of appeals determined that the Board’s experts failed to rely

on the comparable-sales approach to value the properties as required by statute.

The Board thus failed, in the court’s view, to support the county assessor’s

valuation with “competent evidence.” Because the court of appeals found that

Nationwide’s experts, conversely, had properly arrived at their valuations using
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the comparable-sales approach, the court reversed the decision of the district

court. Rather than remand, the court set the valuations at the agreed minimums

(from the 2008 agreement) of $78.5 million for 1100 Locust and $36 million for

1200 Locust.

                                             II.

      Iowa law requires that assessors tax property at its “actual value,” which

refers to its “fair and reasonable market value.” 

(1)(a)–(b)(1).

Market value, in turn, refers to “the fair and reasonable exchange . . . 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.”

 at § 441.21(1)(b)(1).

      The Code establishes the sales approach as the preferred method of

determining valuation, requiring that “[s]ale prices of the property or comparable

property in normal transactions reflecting market value, and the probable

availability or unavailability of persons interested in purchasing the property,

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

interpreted this to mean “a party cannot move to other-factors valuation unless

a showing is made that the market value of the property cannot be readily

established through market transactions.” Wellmark, 

. Our

cases have repeatedly recited the sales approach’s favored status. See, e.g.,

Heritage Cablevision v. Bd. of Rev., 

 (Iowa 1990); Bartlett &

Co. Grain v. Bd. of Rev., 

, 87–88 (Iowa 1977) (en banc).
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      Despite the Code’s preference for the sales approach, valuations using

comparable sales alone are not always appropriate. When market value can’t be

“readily established” using a sales approach, “the assessor may determine the

value of the property using the other uniform and recognized appraisal methods.”

(2). These “other” methods include “its productive and

earning capacity, if any” (in other words, the income approach) and “its cost,

physical and functional depreciation and obsolescence and replacement cost” (in

other words, the cost approach), along with “all other factors which would assist

in determining the fair and reasonable market value of the property.” 

      The taxpayer bears the initial burden of proving that an assessment is

incorrect. 

 § 441.21(3)(b)(1). But if the taxpayer presents “competent evidence”

from two or more disinterested witnesses that the property’s market value is less

than the assessed value, then the burden of proof swings to the assessor. Id. In

this case, it’s undisputed that Nationwide presented competent evidence through

its experts to rebut the presumption of validity, thus shifting the burden to the

Board to uphold the assessment. See id.; Equitable Life Ins. v. Bd. of Rev., 

 (Iowa 1979).

      Although acknowledging the burden had shifted to the Board, the court of

appeals found that the district court failed in the initial step of the analysis when

it determined that the properties’ values could not be readily established using

the sales approach. The assumption that the Board’s experts did not present

competent evidence because neither relied on the sales approach misconstrues
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the question of competent evidence. The real question involves a judgment about

the persuasive force of the properties tendered by an expert as “comparable.”

      In some cases, the lines of force between the assessed and comparable

properties will be too remote to exert any real pull. When that happens—as the

statute contemplates, and as we held in Wellmark—using other valuation

methods in the analysis is appropriate. “The statutory preference for evaluations

based on comparable sales,” after all, “applies only to those situations where the

value may be readily established by that method alone.” Heritage Cablevision,

.

      We review tax protest cases de novo. Soifer v. Floyd Cnty. Bd. of Rev., 

 (Iowa 2009). Although we give weight to the district court’s

factual findings, we’re not bound by them. Boekeloo v. Bd. of Rev., 

 (Iowa 1995). But we are “especially deferential to the court’s assessment

of the credibility of witnesses.” Wellmark, 

.

      The district court found that the comparable-sales approach could not

readily establish the properties’ values, and it thus looked to the other

approaches that the experts presented. In finding the Board’s experts’ opinions

more reliable, the district court necessarily adopted the Board’s experts’ views

that the sales approach alone was inadequate to readily establish the market

value of the two properties. The district court did so with the benefit of having

heard directly the experts’ testimony to assess the persuasive force of their

valuation opinions. That all the experts used all three approaches in arriving at

a valuation could reasonably imply that a property’s market value “could not
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readily be established through the ‘sales prices’ approach alone but had to be

determined by use of the ‘other factors’ approach.” Equitable Life Ins., 

 (emphasis added). Yet the court of appeals determined that the

Board’s experts “did not present competent evidence of the value of [the

properties]” because they relied too heavily on factors other than comparable

sales in their analysis.

      The court of appeals, in our view, grafted too rigid a standard onto section

441.21. The determination that the Board’s experts failed to present competent

evidence (because neither relied on the sales approach) misconstrues what the

statute refers to as “competent evidence.” See 

(3)(b)(1). In

Compiano v. Board of Review, we stated that “the production of competent

evidence by two disinterested witnesses in tax assessment cases only pertains to

shifting the burden of proof.” 

 (Iowa 2009). There’s no

dispute that Nationwide’s two expert witnesses fit the bill and that the burden

shifted to the Board to uphold the assessments. But the quantum of an expert’s

reliance on the sales approach as opposed to other factors does not, on its own,

determine whether a party has produced competent evidence in a case. See

Wellmark, 

.

      What’s more, simply because an appraiser calculates a valuation using a

comparable-sales approach does not mean that this approach in fact readily

establishes a property’s value. We need look no further than our most recent

appraisal case for proof. In Wellmark, experts for both sides offered valuations

using a comparable-sales approach to assess Wellmark’s headquarters. 

 at
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681–82. The experts disagreed, of course, about what properties were truly

comparable—the taxpayer’s experts used sales from geographic markets similar

to Des Moines, but multi-tenant office buildings; the board’s experts used sales

of single-occupant office buildings, but in large metropolitan areas. 

 Yet we

found both side’s comparable-sales-based valuations unconvincing. 

 We

reiterated that comparable sales are not strictly limited by geographic area, nor

do they need to be identical to the subject property (only similar). 

 (“[W]hether

properties were sufficiently similar to be comparable was generally left to the

sound discretion of the district court.”). Because “[t]he value of the building

simply could not be readily established by a comparable-sales analysis,” we

considered other factors to establish the property’s value. 

      In our view, the same consideration of “other factors” is necessary in this

case. The expert witnesses presented a number of recently sold properties as

“comparable sales.” But the properties cited in Des Moines, for instance, were

multi-tenant office buildings with (as one might expect) varying uses by those

multiple tenants, or were not build-to-suit corporate headquarters. The proposed

properties that didn’t suffer these incongruent characteristics were in

substantially dissimilar markets than Des Moines (for instance, suburban

Chicago, Kansas City, or St. Paul), thus leaving plenty of doubt about how much

weight to afford the other-market sales prices. Ideally, appraisers would find a

recent sale in the same geographic region as their subject property of similar

size, age, condition, and current use. But this is simply not always possible,

particularly with a built-to-suit corporate headquarters. No expert provided
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evidence of any sales in the Des Moines area of a large office building to an

owner-occupant for that occupant’s sole use as a corporate headquarters.

      It bears repeating that each expert used all three approaches—income,

cost, and comparable-sales—in forming a proposed reconciled valuation.

“Implicit in this evidence”—referring to expert opinions using all three methods

of valuation—“is an assumption by the parties that market value for the property

could not readily be established through the ‘sales prices’ approach alone but

had to be determined by use of the ‘other factors’ approach.” Equitable Life Ins.,

; see also Wellmark, 

 (reciting, with

approval, cases using the cost approach to value a single-tenant corporate

headquarters when comparable sales were inadequate). None of the experts in

this case proposed that the court use only a comparable-sales approach to

valuing Nationwide’s properties. And because comparable sales alone were

inadequate, the district court correctly considered “other factors.” 

(2) (requiring that “the actual value shall not be determined by use of

only one such factor”).

      We find no basis to reject the district court’s determination about the

relative reliability of the expert witness testimony or the court’s reliance on the

reconciled values incorporating other factors in the analysis, and thus hold that

the Board met its burden to prove the valuation was not excessive. We affirm the

assessments of 1100 Locust at $87,050,000 and 1200 Locust at $44,910,000.

      DECISION OF THE COURT OF APPEALS VACATED; DISTRICT COURT

JUDGMENT AFFIRMED.
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All justices concur except May, J., who takes no part.