United States: Assessment Appeals Board Finds Cost Does Not Equal Value for the San Francisco Giants´ Possessory Interest in SBC Park

The San Francisco Assessment Appeals Board ("Board") issued its findings of fact for assessment appeals brought by the San Francisco Giants challenging the 2001, 2002, and 2003 assessments of the team’s possessory interest in SBC Park. While the case involved many issues that are unique to the assessment of major league ballparks, the Board ultimately resolved the difficulties by relying on the fundamental appraisal principle that cost does not necessarily equal value. The Board’s decision, as described in this article, recognized that when there is substantial evidence that the market in general will not pay what a particular taxpayer has paid to develop a property, the cost approach is not a reliable indicator of value because it ignores the discrepancy between the historical cost and what typical investors in the marketplace would be willing to pay. In addition, the Board’s decision recognized that for properties that are usually developed through a partnership of public and private financing, the total costs of the project do not reflect the assessable value of the private possessory interest in that property.

Without question, major league ballparks are unique special purpose properties. Only 30 such properties are currently in use by major league baseball teams, and since the cost to develop such properties can be prohibitive, these projects are usually undertaken as joint endeavors between the team and the local governmental entities. Indeed, during the hearing on the assessment of SBC Park, the parties presented evidence showing that the costs of constructing major league ballparks on average are split 70/30, with local governments paying roughly 70 percent of the development costs and the teams picking up the balance. As noted by the Board, based on the evidence presented at the hearing, the reason communities pay such a significant portion of the costs is because "most communities believe there are substantial positive economic and fiscal benefits generated by retaining or acquiring a major league ball club, and by the development of a new ballpark. In addition … the community receives non-economic benefits from having a major league team, such as community cohesion, pride and public entertainment." Board Findings, p. 26:1-5.

Thus, a fundamental question presented in this case was whether the owner of a possessory interest in a major league ballpark should be assessed on the total cost of development, when only a portion of those costs is justified by the benefits that flow to the team. In the case of SBC Park, the issue of allocating value was particularly important, because, unlike every other ballpark constructed since 1962, SBC Park was funded almost exclusively by the team. Therefore, if an appraiser were to base his or her assessment of SBC Park exclusively on the development costs incurred by the Giants, then the appraiser would have to account somehow for the value of that project that inured to the benefit of the community — value that typically has been paid for by local governments in the development of other ballparks, but which was paid for by the Giants in the case of SBC Park.

Nevertheless, at the hearing, the Assessor presented a valuation based solely on the costs incurred by the Giants to build the ballpark, making no adjustment for economic obsolescence and no allocation for the value of the project that would inure to public’s benefit (e.g., the development, economic stimulation, and resurgence of the surrounding area). In essence, the Assessor’s cost approach simply took the total cost to develop the project and depreciated that cost over a projected economic life for the ballpark, yielding assessed values of $322,733,000 for 2001, $326,587,000 for 2002, and $323,083,000 for 2003.

The taxpayer disputed the Assessor’s exclusive reliance on the cost approach, and also argued that the Assessor’s cost approach was flawed because it failed to account for substantial economic obsolescence and the fact that the costs incurred by the Giants to build SBC Park were not typical of the market, and therefore, reflected the team’s unique "investment value" rather than fair market value. Thus, the taxpayer presented an appraisal based on all three approaches to value — i.e., the comparative sales approach, the income approach, and the cost approach.

Under its comparative sales approach, the taxpayer demonstrated that the market does not consider development costs when valuing major league ballparks. The taxpayer presented evidence showing that the Toronto SkyDome, which was constructed in 1989 at a cost of roughly $476 million US, sold for a small fraction of its construction costs in subsequent years. Thus, just four years after construction, the SkyDome sold for $109 million US (less than a quarter of its original cost), and in 1999, the property sold again for just $54.4 million US (less than an eighth of its original cost). Then, in 2004 the SkyDome sold a third time for roughly $28 million US (a sale occurring after the lien date, but nevertheless illustrative of the dramatic distinction between cost and market value).

The taxpayer argued that the market data evidenced by the sales of the SkyDome, as well as sales of baseball franchises with their ballpark possessory interests, demonstrated that the market does not value a team’s possessory interest in its major league ballpark based on the costs of construction. The taxpayer explained that this was market evidence of "economic obsolescence," which is reflected by the difference between what the market will pay for a property and its replacement cost new less the other forms of depreciation.

Under its income approach to value, the taxpayer presented an analysis based on the typical occupancy costs incurred by major league teams at 15 similarly situated ballparks. As noted above, major league ballparks are usually built as joint ventures between the public and private sectors — therefore, the lease terms for these properties often allocate operating costs and revenues between the two interests. However, the specific terms of each lease vary from ballpark to ballpark (e.g., one team may pay more in base rent or shared revenues — i.e., percentage rent — and less in upfront development costs, while another team will pay more in upfront development costs but less in base rent and percentage rent). Therefore, in order to equalize the lease terms of the comparable ballparks, the taxpayer argued that an appraiser must first equalize the leases by converting them all to a "full service gross lease" basis, similar to the full service gross lease adjustments that appraisers make to compare various office leases when the degree of expense sharing fluctuates between leases. The taxpayer’s experts did such a full service gross rent conversion to arrive at the "total occupancy costs" incurred by the other major league teams, and relied on those occupancy costs as the true economic rents for comparable properties in their income approach.

Finally, the taxpayer’s cost approach to value was determined in much the same fashion as the Assessor’s cost approach, with one major exception — the taxpayer included an adjustment for economic obsolescence. As indicated above, the Giants funded development of SBC Park almost exclusively on their own. Since the vast majority of other ballparks (and all that have been built since 1962) have been constructed with both public and private funds, the Giants’ costs for SBC Park exceeded those of the market in general for similar properties, and as such, the cost approach needed to reflect the aberrational costs incurred by the taxpayer for the property. This difference between what a single investor has paid for a property in excess of what the market in general pays for similar properties can be described by various appraisal concepts, including the concept of investment value versus market value. The Giants’ experts explained that it can also be described as economic obsolescence — i.e., the difference between replacement cost new less other forms of depreciation, and what the market is willing to pay for a property. Thus, the Giants’ appraisers adjusted the Giants’ construction costs by the average amount of local government contribution to the construction of the other recently built ballparks. Reconciling the three approaches, the taxpayer’s experts concluded that the value of the ballpark should be $162.5 million for 2001, $167 million for 2002, and $170 million for 2003.

In its decision, the Board held that the Assessor’s cost approach was unreliable, because it failed to reflect the reality that the marketplace values possessory interests in major league ballparks at a value far less than the total costs of construction. The Board stressed that it is a fundamental principle in the appraisal field that cost does not necessarily equal value, and, in this case, that maxim applied because the developer chose to pay a much higher construction cost than what the market in general would pay. As the Board explained, "[i]n such cases, the property may have a value to its particular developer that is not shared by the market in general, i.e., ‘investment value.’ Yet, the market value of such property (i.e., the value not to that particular developer, but to the market in general) would still be below the construction costs, and the assessment should be based on that market value, not the costs paid by that particular taxpayer.’" Board Findings, p. 24:6-11 (citing DeLuz Homes, Inc. v. County of San Diego, 45 Cal. 2d 546 (1955); Pacific Mutual v. County of Orange, 187 Cal. App. 3d 1141 (1985)).

To illustrate this concept, the Board cited an example given by one of the taxpayer’s witnesses wherein a 15-theater multiplex would cost $15 million to construct. If, based on the income projections, the private market in general would only spend $10 million to develop the project, then the assessable value would only be $10 million — even if the local municipality paid for the additional $5 million development costs to help revitalize the area. "[T]he fact that it may actually cost $15 million to construct the multiplex was irrelevant for purposes of assessment, because the private market would ignore the municipal subsidy in placing a value on the property." Board Findings,
pp. 24:27-25:1.

Thus, it follows that since all other major league ballparks built over the past 40 years were constructed using joint financing from both the public and private sectors, an assessment of such a ballpark based solely on the total cost of construction would be erroneous, because the approach would ignore the public subsidy typically contributed in these types of projects. As such, the Board found that exclusive use of the cost approach is not reliable to determine the fair market value of SBC Park.

The Board also rejected the use of the comparative sales approach. Although the Board found the sales of the Toronto SkyDome¹ illustrative of the dramatic disparity between cost and value for major league ballparks, since the number of comparative sales was limited, the Board held that the data was insufficient to form a reliable comparative sales indicator.

Consequently, the Board ultimately relied on an income approach to value. Based on the evidence presented at the hearing, the Board used an income approach first to determine the total value of all of the Giants’ tangible and intangible assets (i.e., the Giant’s major league baseball team and their possessory interest in SBC Park combined), and then subtracted from that value an amount allocated to the team based on an inflation of the team’s prior acquisition cost. By subtracting the intangible value attributed to the team from the total asset value based on an income approach, the Board determined the fair market value of the possessory interest in SBC Park. In the end, the Board determined that the value of SBC Park was $230 million for the 2001 lien date, $240 million for 2002, and $236 million for 2003.²

Although this case may be viewed by some as a narrow decision given the unique nature of major league ballparks, as indicated above, the Board reconciled a number of the complexities by acknowledging the simple appraisal principle that cost does not always equal value. This case is instructive for appraisers and boards of equalization examining other properties in order to recognize that when reliable evidence shows that the market value of a type of property is less than its replacement cost new less physical and functional obsolescence, then the cost approach should not be used unless an adjustment is made to reflect the discrepancy between how the market values that property and its cost of development.

Footnotes:

Peter Kanter and Troy Van Dongen represented the San Francisco Giants in this case.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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