The Iowa Supreme Court held that an assessment using franchise-to-franchise comparable sales for property used for a fast food franchise was not excessive or inequitable. (Soifer v. Floyd County Board of Review, Iowa S. Ct., Dkt. No. 05–1641, 01/23/2009 .)
Background. The Court of Appeals had held that the Board of Review's assessment of the taxpayer's property, a McDonald's franchise, was excessive because the Board used franchise-to-franchise comparable sales of property which resulted in the inclusion of intangible goodwill or the value of the McDonald's business, which is a disallowed factor under Iowa Code § 441.21(2) . The Supreme Court vacated the judgment and affirmed the District Court finding of a higher actual value based on the Board of Review's determination that the assessment was not excessive or inequitable.
Present use valuation. The Supreme Court noted that under the general statutory scheme for assessment purposes, property should be classified and valued according to its present use and not according to its highest and best use. While there is a line between valuing property based on its present use and yet avoiding the inclusion of prohibited intangibles, the value of a business may be considered in valuing the real estate with which they are associated. Citing jurisprudence, the Court held that while the value of the franchise itself is not the subject of assessment there is no reason why the fact that a successful business is on the property may not be considered by the assessor in estimating the property's value. When an assessor considers the use being made of property, he is recognizing the effect of the use upon the value of the property itself and not adding on separate items for goodwill, patents, personnel, or other intangibles. Thus, to value the taxpayer's property as if it were not a viable McDonald's fast food franchise would be contrary to the principle that assessed property is valued based on its present use, including any functioning commercial enterprise on the property.
Non-compete clause. The use of franchise-to-franchise sales was also challenged because McDonald's requires buyers of McDonald's properties to agree to a 20-year non-compete clause barring the use of the property for a fast-food franchise restaurant. Because of this, the taxpayers claimed the actual market value of the property is more accurately reflected by lower sales amounts of franchise properties to buyers who will use the property for general restaurant and not fast food franchise purposes. The Court rejected the argument saying that jurisprudence does not support a reduction in market value based on a property owner's self imposed restriction. More importantly, to eliminate such sales because McDonald's insists on non-compete clauses when selling its properties would ignore the requirement that real estate be valued based on its present use.
Not excessive or inequitable. There was only a $500 difference between the cost approach and the use of franchise-to-franchise sales which confirmed that the valuation did not include prohibited intangibles. Further, while the comparables were for periods before the assessment years in issue, the applicable statute does not require that comparable sales occur within a certain time period of the assessment year. On the other hand, the taxpayers' comparable sales were not persuasive because one sale used an erroneous square footage, another was not in a uniquely local location, and yet another was for property not sold as a restaurant but for a bank, all resulting in sales prices that did not reflect the value of comparable properties in their present use. The taxpayers could not avail of Iowa Code § 441.37(1) for non-equitable assessment because they did not present testimony of two witnesses that the valuation was inequitable when compared with similar properties in the taxing district so the burden did not shift to the Board.