ALIOTO FISH COMPANY LTD v. CITY AND COUNTY OF SAN FRANCISCO (1984)

This is an action for a refund of taxes paid under written protest.   Plaintiffs are individuals and/or corporations who have possessory interests in property owned by defendant, City and County of San Francisco (City).   Plaintiffs include:  (1) Alioto's Fish Company, Ltd., dba Alioto's Restaurant;  (2) Cresci Bros., Inc.;  (3) Alioto's Fish Company, Ltd., dba Exposition Fish Grotto;  (4) Fisherman's Grotto No. 9;  (5) Franciscan Restaurant and Parking Lot;  (6) Guardino's, Inc.;  (7) Sabella and La Torre (Frank Sabella and Louis La Torre);  (8) Scoma's Restaurant;  and (9) Tarantino's Restaurant.   All of the plaintiffs' businesses are restaurants located at Fisherman's Wharf in San Francisco.

In 1975, an appraiser in the city assessor's office appraised plaintiffs' possessory interests to determine the property taxes that were due for the fiscal year 1975.   Plaintiffs objected to the valuation method that he used and filed a petition with the San Francisco Tax Assessment Appeals Board (Board) for a reduction in the assessments.   On May 13, 1976, the Board heard the petition and on June 7, 1976, it was denied.   Plaintiffs paid the assessed tax under a written protest, and filed a complaint in San Francisco Superior Court seeking a refund.   Again they challenged the valuation method.   The matter was submitted to the trial court on the basis of the transcript of the hearing before the Board and the parties' briefs.   The trial court found for plaintiffs and, on November 3, 1981, entered judgment in their favor.   The matter was remanded to the Board for reevaluation and equalization of the tax.

The City appeals from the trial court's judgment.

The City's appraiser valued plaintiffs' possessory interests as follows: ¹

At the hearing before the Board, plaintiffs presented appraisals of similarly situated fee simple properties in order to show that there was an unreasonable and unfair disparity among comparable restaurants and that this disparity was the result of an improper and invalid method of valuation.   The fee simple restaurants were appraised as follows:

At the hearing before the Board, Byron H. Cunningham testified for plaintiffs.   He had been a real estate appraiser since 1953 and had appraised property and qualified as an expert witness in the superior court in the counties of Santa Clara, Santa Cruz, and Lake.   He admitted that he had never appraised the properties in question, nor any possessory interests.

At the hearing before the Board, Cunningham testified that the City appraiser used plaintiffs' gross income in valuing their possessory interests.   He indicated that doing so penalized those who were good entrepreneurs in that the value of their possessory interests was based in part on their ability to obtain a good chef, use better food, stay open for extended hours, etc.   He also testified that, in his opinion, the appraisals of plaintiffs' possessory interests were not uniform.   He noted that since the owner of a possessory interest has fewer rights than the owner of a fee simple, the value of a fee simple should serve as the upper limit on the value of a possessory interest.²  Thus, plaintiffs' possessory interests should not have been valued higher than similarly situated fee simple interests nearby.   However, he pointed out that plaintiffs' possessory interests were valued noticeably higher than Sabella's or DiMaggio's, which are fee simple interests in the same area.

 Mr. Engdahl testified for the City.³  He had been an appraiser since 1959 and had appraised the possessory interests on Fisherman's Wharf for nine years.

He testified about the method that he used to value plaintiffs' possessory interests.   He stated that he tried to eliminate entrepreneurship from his valuations because it was not a proper factor to use in an appraisal.   However, he admitted that he had placed a heavy emphasis on gross income when assessing Scoma's.   Moreover, he stated that how the owner used the property was an important factor in appraising its value.

Both Engdahl and Cunningham testified concerning the ages and conditions of the restaurants located on the possessory and fee simple interests in the Fisherman's Wharf area, their respective views, and the foot traffic available to each.

Engdahl testified that Cresci's, Guardino's, and Sabella and La Torre's, had been built around 1914 and had not been remodeled much since then.   Guardino's had a view, but Cresci's and Sabella and La Torre's did not.   Guardino's had good foot traffic.   Tarantino's was built right after World War I.   Alioto's was built in the 1920's, had been restored sometime later, and had a view of the water.   The Franciscan was built in 1925.   Fisherman's Grotto was built around 1929 and had a view.   DiMaggio's was built in 1942 and had a good view.   Scoma's was built in 1942, had been altered in the last 10 years, but had a rather poor view.   Sabella's was built in 1964 and had a good view.

Cunningham testified that DiMaggio's had been remodeled and was in better physical condition than Scoma's.   He said that DiMaggio's had a better view of the bay than Scoma's, Tokyo Sukiyaki, or Sabella's.   He also noted that there was considerable foot traffic available to DiMaggio's, while Scoma's was relatively isolated.

After reviewing the record before the Board, the trial court made detailed findings of fact and conclusions of law, and determined that plaintiffs had not received fair consideration from defendant in assessing their property interests.⁴

I.

The City contends that when the trial court reviewed the Board's findings, it was governed by the substantial evidence test, and therefore, the court erred in that it independently weighed the evidence that was presented to the Board.

Plaintiffs claim that the City misunderstands the nature of their attack on the appraisals.   They note that at the hearing before the Board, in their complaint in superior court, and in their trial briefs, they clearly indicated that they were challenging the validity of the appraisal method itself, and not the particular results of the application of a valid method.

 When a taxpayer contends that there has been an improper application of a valid method of valuation, the trial court may overturn the Board's decision only when there is no substantial evidence to support it.  (Georgia-Pacific Corp. v. County of Butte (1974) 37 Cal.App.3d 461, 473, 112 Cal.Rptr. 327;  Hunt-Wesson Foods, Inc. v. County of Alameda (1974) 41 Cal.App.3d 163, 178, 116 Cal.Rptr. 160.)

 However, when the taxpayer challenges the method of valuation itself, the trial court is presented with a question of law and is not bound by the substantial evidence test.   Rather, a judicial inquiry is made “independent of and apart from the decision of the Board and unrestricted by any consideration of the scope of review.”  (Georgia-Pacific Corp. v. County of Butte, supra, 37 Cal.App.3d 461, 474, 112 Cal.Rptr. 327;  Bret Harte Inn, Inc. v. City and County of San Francisco (1976) 16 Cal.3d 14, 23, 127 Cal.Rptr. 154, 544 P.2d 1354;  Mahoney v. City of San Diego (1926) 198 Cal. 388, 403–404, 245 P. 189;  Meyers v. County of Alameda (1977) 70 Cal.App.3d 799, 804, 139 Cal.Rptr. 165;  Hunt-Wesson Foods, Inc. v. County of Alameda, supra, 41 Cal.App.3d 163, 178, 116 Cal.Rptr. 160;  County of Amador v. State Board of Equalization (1966) 240 Cal.App.2d 205, 216, 49 Cal.Rptr. 448.)

 In this case, plaintiffs challenged the method that the City appraiser used to establish the full cash value of their possessory interests.   Therefore, the trial judge did not err in independently weighing the evidence that was presented to the Board.

II.

The City contends that plaintiffs failed to present substantial evidence that their particular assessments were improper, therefore, the trial court's findings to that effect were not supported by substantial evidence.   As discussed above, however, the issue before the trial court was the validity of the appraiser's method of valuation.   Thus, the issue before us is whether the trial court erred in finding that the valuation method was improper.⁵

Pertinent to our review is Birch v. County of Orange (1921) 186 Cal. 736, 200 P. 647.   In Birch, plaintiff challenged the valuation of his land.   He owned 20.16 acres of oil producing land in Orange County.   He contended that the County Board of Equalization had acted arbitrarily and fraudulently because his land was given excessively higher valuations than the other oil producing land that surrounded his.   At trial plaintiff offered the following evidence, 186 Cal. at pages 738–740, 200 P. 647:

The plaintiff argued that the disparity between the appraised values of his property and that of all of the adjacent property of similar quality and use combined showed that the appraisal of his land was unfair and excessive.   The county offered no explanation for this disparity.   The court found that the disparity was “so obvious and inconsistent with any theory of fair dealing that it could not be reconciled on the mere presumption that the appraiser and board of equalization did their duty as they saw it.   In the absence of any explanation or justification for this inequality ․ it stands out so glaringly and out of all reason that of itself it raises an inference of bad faith.”   (Id., 186 Cal. at p. 741, 200 P. 647;  see Best v. County of Los Angeles (1964) 228 Cal.App.2d 655, 659–660, 39 Cal.Rptr. 665.)   As a result, the court reversed the judgment of nonsuit against the plaintiff.  (Birch v. County of Orange, supra, 186 Cal. 736, 745, 200 P. 647.)

Thereafter, the case was tried, judgment was entered for defendant, and plaintiff again appealed.  (Birch v. County of Orange (1927) 88 Cal.App. 82, 262 P. 788.)   The appellate court reviewed the evidence presented at trial, held that the disparity in appraisals was so great that the assessment of plaintiff's property could not be upheld and reversed the judgment.  (Id., 88 Cal.App. at p. 87, 262 P. 788.)

 In this case, plaintiffs presented evidence of a disparity in the appraisals of similarly situated restaurants.   The court found that there was a disparity and from this fact inferred that the method of valuation reflected bad faith in the City's appraisals.   The evidence before the Board and the court supports this finding of disparity.   For example, Alioto's was valued at $67.70 per square foot, while Scoma's, which is smaller and has a poorer view of the Bay, was valued at $207.79 per square foot.   Moreover, as previously noted, Cunningham testified that a possessory interest in property is normally of less value than a fee simple, suggesting that, in general, a possessory interest should not be given a greater value than a similarly situated fee simple.   However, DiMaggio's, a fee simple property, was valued at $27.10 per square foot, while Scoma's, a possessory interest with less foot traffic, a poorer view, and an older building than DiMaggio's, was valued at $207.79 per square foot.

Given this disparity among possessory interests and between the possessory interests and fee simples, the burden was on the City to explain the disparity and justify its method of valuation.  (Birch v. County of Orange, supra, 186 Cal. 736, 741, 200 P. 647;  see Best v. County of Los Angeles, supra, 228 Cal.App.2d 655, 659–660, 39 Cal.Rptr. 665.)   The trial court concluded that the City appraiser, Mr. Engdahl, failed to adequately explain his appraisal method.   We agree.   Mr. Engdahl's testimony was contradictory and contained no comprehensible explanation of, or justification for, the great disparity in his appraisals of the restaurants on Fisherman's Wharf.

Section 401 of the Revenue and Taxation Code states that “Every assessor shall assess all property subject to general property taxation at its full value.”   In determining full value, gross income should not be used where it is attributable to something other than the property itself, such as entrepreneurship.  (De Luz Homes, Inc. v. County of San Diego (1955) 45 Cal.2d 546, 564–565, 290 P.2d 544.)

Engdahl testified in accord with this view.   He stated that entrepreneurship should not be used to add to the value of property, “[o]therwise we are assessing the individual businessman and his ability to do business rather than the real property.   And our charge is to assess for tax purposes the value of the real property.”

However, Engdahl stated that how the possessor of property used it was one of the most important considerations in appraising its value.   Given the fact that all of the properties being scrutinized by the Board and the court were restaurants on Fisherman's Wharf, Engdahl's statement strongly suggests that he did consider the entrepreneurial ability of the restaurants' owners.   In fact, he admitted using entrepreneurship as a factor in his valuation when he stated, “I will not deny that Scoma's does have an entrepreneur factor which I have taken into consideration in my appraisal.”

He also testified that the value of a possessory interest would be less than that of a fee property.   Yet he gave no explanation for why there was so much disparity between plaintiffs' possessory interests and the fee properties.⁶

Finally, we note that Mr. Engdahl agreed that if certain buildings were all residential properties on the same block, there should probably be a final equal tax for all of them.   Then he said that in this case the restaurants were of different types.   However, the only difference he noted was that some were directly on the waterfront, while others merely had a view of it.   Yet Scoma's, which had a poorer view than Alioto's or DiMaggio's, was valued higher than either of them.   Although the view from each restaurant may have been a legitimate differentiating factor that could lead to a disparity in the appraised values of the restaurants on Fisherman's Wharf, the actual disparity in the appraisals appears unreasonable in that a restaurant with a poor view was assigned the greatest value.

In light of our analysis and discussion of the facts, we concur with the trial court's finding that the disparity in the assessments is inconsistent with any theory of fair dealing and raises an inference of bad faith.   Moreover, since we further agree that the City failed to explain or justify this disparity, we conclude that plaintiffs did not receive fair consideration from the City in the appraisal of their possessory interests and the tax assessments based on those appraisals.

The judgment is affirmed.

APPENDIX I

“V

“The Assessor of defendant CITY AND COUNTY OF SAN FRANCISCO assessed to Plaintiffs for the tax fiscal year 1975 the aforesaid possessory interests located in defendant CITY AND COUNTY OF SAN FRANCISCO and erroneously determined that the full cash value and assessed value for the determination of taxes on said property as of the lien date for said tax fiscal year as was follows:

APPENDIX II

Findings of Fact

“10. The figures listed ․ [see ante, p. 51] evidence not only a great disparity between fee simple valuations, as compared to plaintiffs' possessory interest valuations, but also unexplained discrepancies between the various possessory interest valuations themselves.

“12. All of the properties (fee simple and possessory interest) are similar in character, nature, and location.

“13. Although the three (3) fee simple properties are located across the street from the water and wharf, while the possessory interest properties are actually on the water, this distinction alone is not enough to justify the vast disparities involved in this case.   This is true in view of the fact that the water, the wharf, the party-fishing boats, and the fishing boats are important for viewing purposes mainly, and the fee simple properties in some instances have almost identical views of the water, wharf, and boats.

“14. The various restaurants differ in the amount of profits they earn.

“15. The difference in the amount of profits earned by the various restaurants is attributable to the entrepreneurship of the different restaurants.

“16. Defendant has failed to adequately explain the actual method or formulas used in reaching the valuation and assessment of the properties in question, resulting in the aforesaid disparity of valuations and assessments.

“17. A correct application of the income valuation method, taking into account the fact that the future income of the subject restaurants cannot be ascribed entirely to the property itself, would not result in the vast disparity in assessments as the defendant has created between the similar properties in this action.”

Conclusions of Law

“1. The restaurants Sabella's, Tokyo Sukiyaki, and DiMaggio's are of like character, kind and location as the plaintiffs' restaurants, the only difference being that they are held by their owners in fee simple, whereas the plaintiffs have only a possessory interest in their buildings.

“2. The plaintiffs' possessory interests should not be valued higher than the said fee simple properties by law, because the possessory interests contain less property rights than the fee simple properties, being of like nature and situation.

“5. In valuing property, the assessor must adhere to the statutory standard of ‘full cash value,’ and must therefore estimate the price the property would bring on an open market.

“6. The net earnings to be capitalized, therefore, are not those of the present owner of the property but those that would be anticipated by a prospective purchaser.

“7. Since the difference in the profits earned by the various restaurants is accountable to the entrepreneurship of the different restaurants, the income from the property cannot be attributed entirely to the property itself.

“10. The disparity of assessments between the plaintiffs' possessory interests and those of the fee simple interests of others, of like value and similarly situated, is so inconsistent with any theory of fair dealing that of itself it raises an inference of bad faith.

“11. The plaintiff taxpayers have not received fair consideration from the defendant in assessing their property interests at the same rate and on the same basis of valuation as that applied to other property of like character and similarly situated.”

FOOTNOTES

1.   For assessed value of possessory interests, see Appendix I.

2.   Cunningham quoted from the Assessor's Handbook as follows:  “[A] possessory interest constitutes a private right to the possession and use of publicly owned property for a period of time less than perpetuity.   It is a portion of the bundle of rights that would normally be included in fee ownership, and its value, therefore, is normally something less than the value in perpetuity of the whole bundle.”

3.   Plaintiffs contend that because Engdahl did not testify under oath, his testimony was not competent evidence.   However, an objection that evidence is incompetent because a witness has not been sworn is waived if not made when the evidence is offered, or at least while the defect can be remedied.  (Estate of Da Roza (1947) 82 Cal.App.2d 550, 555–556, 186 P.2d 725;  Todd v. City of Visalia (1967) 254 Cal.App.2d 679, 690–691, 62 Cal.Rptr. 485.)   Since no objection was made at the hearing, plaintiffs waived this objection.

4.   For pertinent findings of fact and conclusions of law, see Appendix II.

5.   The City also contends that plaintiffs claimed that the fee simple properties were assessed at too low a value.   Again, the record indicates that plaintiffs challenged the method used to value their properties, claiming that it was improper and caused inequitable results.

6.   Defendant claims that Cunningham testified that he found Engdahl's appraisal of plaintiffs' possessory interests to be standard.   However, Cunningham qualified his statement:  “[T]here are certain rights that do not pass with possessory interest ․ [a]nd for those, certain deductions would have to be made from the fee value of properties in order to come up with a possessory interest value.”   Earlier, Cunningham testified that the appraiser had included gross income in his valuations, which was improper, and that the value of plaintiffs' properties should not be more than DiMaggio's, nor more than fee properties in general.

ROUSE, Associate Justice.

KLINE, P.J., and SMITH, J., concur.