June 13, 2019

Board of Directors IAAO
IAAO Headquarters 314 West 10th Street
Kansas City, Missouri 64105

Re: IAAO May 2019 Exposure Draft: Setting the Record Straight on Fee Simple

Dear Board Members:

American Property Tax Counsel is the preeminent organization of real estate tax attorneys in North America.Please accept this letter as our official comments in response to the May 2019 Exposure Draft entitled Setting the Record Straight on Fee Simple promulgated by the IAAO Fee Simple Task Force.Consistent with our professional focus, these comments will address property tax policy and the legal implications of the Exposure Draft. As attorneys, our concern is the accuracy of the legal arguments advanced in the paper. The starting point is to ask the question, "why would the assessor's organization attempt to write a paper addressing legal theory and not one on appraisal methodology?"The paper appears to be nothing more than an attempt to support new legal/appraisal theories to gain an advantage in pending litigation and to shape public opinion to support a new way of valuing and taxing commercial properties.

This Exposure Draft reads like a solution in search of a problem.The Fee Simple Task Force has done little to disguise the Exposure Draft as anything but an attempt to tax certain commercial taxpayers differently than all other taxpayers.While perhaps intended as primarily a public relations vehicle, the Exposure Draft undermines the credibility of the IAAO as an organization purportedly dedicated to education and research, and its official adoption would do a disservice to the IAAO's respected assessors.[1]

Sound tax policy requires common ground and uniformity.As recognized in the Exposure Draft, fee simple estate is the foundation of what assessors are often asked to measure.However, while the Draft's authors posit a false premise that "it is essential to clarify fee simple in order to maintain accuracy, consistency, and uniformity in assessment practices," the truth is fee simple requires no further clarification.The most glaring flaw in the Exposure Draft is the unchecked presumption there is some conflict or digression between how the legal and appraisal professions define fee simple.There isn't.[2]

Context matters, and many terms can differ from the legal to the technical or industrial uses.Liabilities in accounting, for instance, can mean short-term or long-term payables.Within the law, a liability in an income tax dispute is understood to mean something different than a liability in a tort case.Similarly, title companies will speak of a fee simple estate or fee simple title and understand that it describes how title will pass to heirs.Appraisers, being in the profession of valuation, must define and communicate how fee simple impacts an asset's value.[3] Even within the legal environment, fee simple can mean that property passes as an inheritable estate in the context of a will, or that a fee simple interest in property is to be valued in the context of assessment or eminent domain.While the phrase "fee simple" can have different implications depending upon the setting in which it is invoked, there is no conflict between the legal and appraisal definitions—in any setting, it is understood to describe the "largest possible estate," "absolute ownership," "broadest interest," and so on.No experienced lawyer or judge is confused by whether "fee simple" in the assessment context invokes questions of inheritability.

States vary somewhat in the terminology used to describe the measure of assessed property, using phrases like "true value," "fair cash value," "actual value," etc., but such phrases are generally understood to mean fair market value.As to what must be assessed, states overwhelmingly agree that the taxable estate should be fee simple.Fee simple is important as a base because the fundamental aspect of assessment in most states is uniform treatment of taxpayers within a class.Some states treat residential, agricultural, and commercial/industrial property as different classes.In other states, all real estate is considered one class.Regardless, the measure of the tax must be the same across the class, and the object being measured must also be the same across the class.Where uniformity is required, one taxpayer cannot be assessed on a fee simple with no lease while a neighbor pays taxes on the fee simple subject to a lease.[4]And in law, the unencumbered fee simple is the only standard that returns uniform assessments.

2.The Definition of Fee Simple Is Already Clear

The Exposure Draft's authors make much ado about the historical evolution of the definition of fee simple but fail to consider the modern evolution of real estate as a tradeable asset.Again, it is worth noting why context is important.Real estate was not a particularly sophisticated investment until the advent of modern financing arrangements, sale-leaseback transactions, and the trading of leases as investment vehicles.As the real estate industry grew increasingly complex, it became necessary for its definitions to get specific.Similarly, the accountants among APTC's membership have observed that the accounting profession and the federal courts interpreting the Internal Revenue Code were also compelled in the early-1980s to address the growing prevalence of sale-leaseback transactions.

The Task Force argues that practitioners are confused by the word "unencumbered," yet the only cases it cites are not even on point.As a matter of law, the Ohio cases in the Exposure Draft have been superseded by the enactment of that state's amended assessment code.Contrary to the Task Force's interpretation, those cases stood for the fact that the prior statute required valuation based on a property's recent sale price even when the sale price reflected atypical circumstances or included the value of non-realty assets.The change in the statute eliminated that issue, as Ohio now mandates that assessors value the fair market value of "the fee simple estate as if unencumbered." R.C. 5713.03, as amended by 2012 Am. Sub. H.B. No. 487 (emphasis supplied to indicate new words added).[5] As for the 9^th Circuit case cited in the Exposure Draft, it is unclear what the Task Force means to suggest by its partial quotations.[6] The rest of the cited paragraph actually recognizes that a freehold estate can be "encumbered or unencumbered," and nothing in the full text of that case indicates the court is confused by that premise or by the definitions it discusses.City of Los Angeles v. San Pedro Boat Works, 635 F.3d 440, 450 (9th Cir. 2011).

As a practical matter, several states have approvingly cited (and sometimes even adopted [7]) the Appraisal Institute's definitions of fee simple and leased fee.In those jurisdictions which have explicitly relied on the recent editions of The Appraisal of Real Estate and/or The Dictionary of Real Estate Appraisal to explain these concepts, this Exposure Draft would directly conflict with applicable law.And even in states which have not adopted those definitions, most appraisers have been using the Appraisal Institute's definition of fee simple for over 35 years at minimum.No industry or professional association can force upon a state a definition which conflicts with existing laws, and the IAAO should take care not to encourage its members to violate the rules of their jurisdictions.

3.The Bundle of Sticks Endures Because It Is a Useful Metaphor

The example of the bundle of sticks is almost sacrosanct.As a technical matter, the statement, "The bundle of rights or bundle of sticks metaphor originated as a description of real estate, not a fee simple absolute estate" is incorrect.While legal historians debate the origin and evolution of the bundle metaphor there is consensus it came into common usage around the turn of the 19th century to describe ideas of ownership and rights in property, both real and personal.The fact that the bundle metaphor may be misused or misunderstood by some does not necessitate its abandonment or overhaul.As a descriptive tool, it helps most students and practitioners to visualize the interplay between the interests and the encumbrances that impact property rights and affect value.

4. Fee Simple Unencumbered Is the Basis for All Property Tax Liens

It should go without saying, but the value on which the property tax is determined should match the basis for the property tax lien to which it is attached.In every jurisdiction, property tax is a liability of the property, not the owner.When any property is valued for tax purposes, the resulting assessment gives rise to a tax lien that attaches to that property.This in rem obligation means that if the tax is not paid, the lien can be sold for the unpaid taxes.If the owner fails to take steps to satisfy the lien, the purchaser of the tax lien can become the owner of the property.These basic principles underlie every assessment of property tax.

However, the position in the Exposure Draft would cause a valuation of assets that the tax lien does not attach to.When a tax lien is sold, it is sold free and clear of all other liens and encumbrances.The buyer receives title known as "fee simple absolute."That title does not include any liability on a mortgage or any liability (or benefit) arising from a lease. None of those private, contractual rights are part of the lien.Leases and encumbrances are expressly made subordinate to the tax lien. This is because the entire premise of the property tax is that the government can seize and sell "the property" to satisfy the tax lien.

How then, can the value on which the property tax is computed include assets that the tax lien does not attach to?The answer is obvious – it cannot.Respectfully, the position in the Exposure Draft contravenes this basic principle of ad valorem taxation, further demonstrating why that position is incorrect as a matter of property tax law.

5.The paper raises ethical issues that need to be properly addressed.

The IAAO Code of Ethics raises many concerns relative to the paper.For instance, the Code provides:

"It is unethical for members to conduct their professional duties in a manner that could reasonably be expected to create the appearance of impropriety …

It is unethical to perform any appraisal, assessment, or consulting service that is not in compliance with the IAAO governing documents or the Uniform Standards of Professional Appraisal Practice …

It is unethical for members to accept an appraisal or assessment-related assignment that can reasonably be construed as being in conflict with their responsibility to their jurisdiction, employer, or client, or in which they have an unrevealed personal interest or bias …

It is unethical to accept an assignment or responsibility in which there is a personal interest without full disclosure of that interest …

It is unethical to accept an assignment or participate in an activity where a conflict of interest exists and could be perceived as a bias, or impair objectivity …

It is unethical to knowingly fail to observe the requirements of the Uniform Standards of Professional Appraisal Practice …"

There are pending cases across the country on this very issue, including many in the home states of the authors of this report and members of the Board of Directors.This paper imbeds the IAAO into pending litigation with no acknowledgment of that in the report.The report is silent on the pending matters where one or more authors are a party or are expert witnesses.The paper should not be silent on the conflicts of interest of the authors, the Board of Directors and the organization.

Given its significant authoritative status in the appraisal industry, all appraisers are encouraged to follow the standards in the Appraisal Institute's treatise, The Appraisal of Real Estate. Advocating to specifically reject the definitions in the Appraisal of Real Estate, 14^th edition, the Dictionary of Real Estate Appraisal, 6^th ed., and local law is antithetical to the IAAO's mission and responsibilities to their membership.

6. Conclusion

As with the IAAO's 2017 white paper on Commercial Big Box Retail, the Fee Simple Task Force is attempting to legislate through its latest paper, without regard to the nuances in each jurisdiction. Fortunately, under the constitutions of nearly all states, the fundamental aspect of assessment is uniformity and the ideas expressed in the Exposure Draft are legally untenable.

The constitutional mandate of uniformity requires that real estate be assessed upon the fee simple, unencumbered, because that is the only definition applicable to all real estate.Office buildings that are leased can be assessed based on fee simple, unencumbered.Single-family homes that are owned can be assessed upon that same standard.Properties held as tenants-in-common can be assessed upon that same standard.Without this "white canvas" standard, assessors would be left with no basis on which to comply with uniformity requirements.

The paper raises issues of ethics, USPAP compliance and creates confusion even within the publications of the IAAO[8].

We urge the IAAO reject the adoption of the May 2019 Exposure Draft Setting the Record Straight on Fee Simple.

Respectfully submitted,

American Property Tax Counsel
BY: Linda Terrill, President

[1] The Exposure Draft's authors are all involved in litigation concerning this issue. Indeed, several are serving as expert witnesses for taxing authorities advocating for the position set forth in the Exposure Draft. Given USPAP's clear prohibition against "Advocacy" by appraisers, the IAAO should not be taking sides in this manner.The paper gives the appearance of "creating" supporting authority because none exists.

[2] Unfortunately, the Exposure Draft's authors fail to cite any authoritative legal definitions of fee simple, relying instead on references to secondary sources.While seemingly obvious, we feel it is necessary to point out that Black's Law Dictionary is binding nowhere.Similarly, although the Restatements are generally more respected, they are likewise nonbinding except in the limited jurisdictions where limited sections have been adopted.Moreover, it is unclear why the Task Force cites to an outdated Restatement.

[3] Brokers and agents may use the term loosely or even incorrectly, but that is not a reason for the appraisal or assessment professions to change a long-accepted definition.

[4] Beyond the problem of non-uniformity, because most states recognize contracts as personal property, such a framework seems doubly unworkable in states where personal property is not taxable.

[5] Importantly, the Ohio cases cited were in large part the basis for the legislative clarification.

[6] The Task Force fails to discuss California's property tax regulations pertaining to fee simple, such as the inclusion of "unencumbered or unrestricted fee simple interest" in the definition of fair market value, the adjustment of the sale price for a property encumbered with a lease to its unencumbered-fee price, and the capitalization of unencumbered net income in the application of the income approach.(18 Calif. Code of Regs., §§ 2(a), 4(b)(2) and 8(d).)The City of San Pedro case does not discuss any of these property tax regulations.

[7] See, for example, In re Equalization Appeal of Prieb Properties, 47 Kan. App. 122, 275 P. 3d 56 (2012).The IAAO cannot advocate for its members to adopt a definition and value real property in violation of their law.

[8] The positions set forth by the taskforce are inconsistent with other IAAO publications below:

Page 12, Property Assessment Valuation 3 ed., starts with a paragraph titled Fee Simple Interest. "The owner of a fee simple absolute interest holds the title to the property free and clear of all encumbrances. The assessor typically values property as an estate in fee simple, unless statutes or administrative rules dictate otherwise. The bundle of sticks example, as well as the acronym SLUGGER stating how the rights in the bundle can be bargained away, is located at page 10, Property Assessment Valuation 3 ed.

At page 11 leases are described as being private encumbrances able to affect fee simple ownership of property. Property Assessment Valuation, 3 ed.

Again, at page 11 both Leased Fee and Fee Simple interests are discussed and the caution that "before a property is valued, the appraiser must know which interests are to be valued." Absolute Ownership—Ownership of all real property rights and interests in a real estate parcel. See fee simple. P. 1, IAAO Glossary for Appraisal and Assessment, 2d ed. Fee Simple—In land ownership, complete interest in a property, subject only to governmental powers such as eminent domain. Also fee simple absolute. See estate in fee simple; fee; and absolute ownership. Page 67, IAAO Glossary for Appraisal and Assessment, 2d ed.

In The Court Of Appeals Of The State Of Kansas In The Matter Of The Equalization Appeal Of Target Corporation, For The Year 2015 In Sedgwick County, Kansas.

Syllabus By The Court

Siegel Jennings is pleased to announce that Cecilia J. Hyun has been promoted to Partner. Ms. Hyun has been an associate at the firm for the past ten years and represents taxpayers in all aspects of the property tax challenge process from local review boards through the Ohio Supreme Court, reviews and monitors property tax assessments, and counsels investors on tax implications of acquisition and disposition.

Ms. Hyun is the 2017 President of CREW Cleveland, a chapter of CREW Network, an organization of approximately 10,000 commercial real estate professionals of all disciplines located in 70+ major markets in the United States, Canada, and the United Kingdom. She previously served as CREW Cleveland's Director of Communications and as the chapter's CREW Network Liaison. In the last 5 years, she has been recognized as CREW Cleveland's Member of the Year, received the chapter's Leadership Award, named after founding member Deborah Rocker Klausner, as well as the Member to Member Business Award.

Her articles on property tax issues have been published in the Heartland Real Estate Business, Properties Magazine, Cleveland Metropolitan Bar Association Bar Journal, and the IPT Insider. Her article, "Big-box retail offers property tax lessons for industrial owners" published in the National Real Estate Investor is referenced in the IAAO Library Big-Box Retail Store Valuation Subject Guide.

Ms. Hyun, based in the firm's Cleveland office, received her B.A. from McGill University in Montreal, Canada, and her J.D., magna cum laude, from the Cleveland Marshall College of Law. 

July 10, 2017

Board of Directors IAAO
IAAO Headquarters 314 West 10th Street
Kansas City, Missouri 64105

Re: Big Box Valuation Paper

Dear Board Members:

I am the President of American Property Tax Counsel ("APTC"), the preeminent organization of real estate tax attorneys in North America. On behalf of the APTC, we offer these comments regarding your Special Committee on valuing Big Box properties.

Our primary concern is that the report is misleading. The purpose of the report does not appear to teach generally accepted appraisal methods but, instead, to advocate for changes to longaccepted definitions of property rights while professing it is a defense of the status quo.

The paper is essentially written as an activist piece designed to give assessors questionable legal arguments to be used in pending litigation to the end of influencing the decisions in those appeals. Whether that scheme is ethical will be addressed later in these comments.

As attorneys, our concern is the accuracy of the legal arguments advanced in the paper. The starting point is to ask the question, "why would the assessor's organization attempt to write a paper addressing legal theory and not one on appraisal methodology?" Again, it appears to be nothing more than an attempt to support new legal/appraisal theories to gain an advantage in pending litigation and to shape public opinion to support a new way of valuing and taxing retail properties instead of valuing the properties in fee simple.

Some decisions cited in the paper are misleading. Often, numerous cases from one state or another were ignored. Decisions that did not support the new narrative from states such as Michigan, Kansas, California, Massachusetts, Ohio, Indiana, Pennsylvania & Oregon were never even mentioned. But, the paper included cases from Ohio that were all overturned by a statutory change. ln as much as the changes were 3 to 4 years ago, it seems the inclusion of these irrelevant cases was careless or intentional, at worst. The Supreme Court of Ohio recently issued the first decision of a case reflective of the new law. Terraza 8, LLC v. Franklin County Board of Revision, 2017-0hio-4415 (June 22, 2017). The paper, at a minimum, should be corrected and updated on the Ohio cases and include a robust and accurate discussion of the relevant cases ignored by the authors.

A Kentucky case was cited with a notation it was appealed. In fact, discretionary review of that case was denied but the court ordered that case's decision be de-published. lt is inappropriate for the report to cite or rely on a de-published decision.

Another case citation was to a lower level Idaho administrative body but the report reads as if it was a case decided by an appellate court. The Idaho Board of Tax Appeals is not a court. Its decisions are not precedent and are appealed de novo to the District Court. If Idaho does not consider the case to have any precedent, why is it included in the IAAO paper? A similar concern was raised about the citations to non-precedential cases in Florida.

ATPC members also expressed concerns over how the decisions in North Carolina and other states were misconstrued in the report.

Any rational reading of this report would lead to a conclusion that it is not credible because the paper steers one to accept as true that it is a discussion of the current law on the valuation of big boxes. It is not. It advocates for a very significant change in appraisal methodologies and property rights. The IAAO is attempting to legislate through Standards. Any change to the law as to what property rights are to be valued and taxed should be left to each state and respectful of the obligation to value all property in a uniform and equal manner and without regard to the owner or tenant.

Another important concern relates to the ethical issue of whether it is appropriate for the IAAO to interject the organization into pending matters to influence the end results.

The IAAO Code of Ethics suggests that it is not appropriate for the IAAO to do so for many reasons. For instance, the Code provides:

• "It is unethical for members to conduct their professional duties in a manner that could reasonably be expected to create the appearance of impropriety ...
• It is unethical to perform any appraisal, assessment, or consulting service that is not in compliance with the IAAO governing documents or the Uniform Standards of Professional Appraisal Practice ...
• It is unethical for members to accept an appraisal or assessment-related assignment that can reasonably be construed as being in conflict with their responsibility to their jurisdiction, employer, or client, or in which they have an unrevealed personal interest or bias ...
• It is unethical to accept an assignment or responsibility in which there is a personal interest without full disclosure of that interest ...
• It is unethical to accept an assignment or participate in an activity where a conflict of interest exists and could be perceived as a bias, or impair objectivity ...
• It is unethical to knowingly fail to observe the requirements of the Uniform Standards of Professional Appraisal Practice ... "

There are pending cases across the country on this very issue, including many in the home states of the authors of this report. This paper imbeds the IAAO into pending litigation with no acknowledgment of that in the report. The report is silent on the pending matters where one or more authors are a party. The paper is silent on the conflicts of interest of the authors, the Board of Directors and the organization.

The IAAO, in its amicus brief in the Menard v. City of Escanaba case before the Michigan Supreme Court, said, "Given its significant authoritative status in the appraisal industry, all appraisers are encouraged to follow the standards in the Appraisal Institute's treatise, The Appraisal of Real Estate." This report advocates for methods specifically repudiated in the Appraisal of Real Estate, 14 th edition. To adopt the report would be contrary to the pronouncements made by the IAAO to the Michigan Supreme Court and violate of the IAAO Code of Ethics' requirement to observe the requirements of USPAP.

While the APTC strongly disagrees with the paper's definitions and misrepresentations of appraisal methodology, fee simple, property rights vs. contract rights, the applicability of build-to-suit and/or sale leaseback rental and sales information, and many other issues in the paper, the APTC will leave that critique to appraisal organizations such as the Appraisal Institute and those members of the Appraisal Institute with expertise in the fields of appraisal methodology and USP AP compliance.

In summary, the concerns of the APTC relate to (1) the misrepresentation of the law; (2) the appropriateness of the IAAO advocating to change the law of ad valorem taxation and the long accepted definitions; and (3) the ethical issues relating to conflicts of interest and the misrepresentations.

For these reasons APTC formally submits its objections to the IAAO Paper and requests it be withdrawn. The APTC stands ready and willing to participate in any meaningful discussions with the IAAO relative to this issue.

Respectfully yours,
Stephen Paul, Esq.
President, American Property Tax Counsel
Partner, Faegre Baker Daniels
300 North Meridian Street, Suite 2700
Indianapolis, Indiana 46204

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