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February 12, 1998



Before Steadman, King, and Reid, Associate Judges.

The opinion of the court was delivered by: Per Curiam:

The District of Columbia appeals the trial court's findings rejecting assessments for tax years 1990, 1991 and 1992 of real property owned by Square 345 Associates Limited Partnership ("the taxpayer"). The court accepted the valuation placed on the property by the taxpayer's expert who relied, in significant part, upon a process which utilized a "capitalization rate" as characterized by this court in Rock Creek Plaza-Woodner Ltd. Partnership v. District of Columbia, 466 A.2d 857 (D.C. 1983). For the reasons stated below, we reverse and remand the case to the trial court with instructions to reconsider its valuations in light of our recent decision in District of Columbia v. Rose Assocs., 697 A.2d 1236 (D.C. 1997), where we held that the Rock Creek Plaza "capitalization rate" characterization was not definitive.

The taxpayer's property is a twelve-story office building located at 1001 G Street, N.W., constructed during the calendar years 1987 to 1989. Assessments of the property were made by the Department of Finance and Revenue ("DFR") for the tax years 1990 (second half only), 1991 and 1992. *fn1 In each of these years, the building was complete for tax purposes but essentially untenanted. The assessor for the 1990 (second half) and 1991 assessments calculated a property value of $81,759,980 for each of these years, using the "replacement cost" methodology. *fn1 The assessor for the 1992 assessment calculated a property value of $99,632,000 for that year using the "income capitalization" approach. *fn1 The taxpayer appealed each of these assessments to the Board of Equalization and Review ("BER"), which affirmed the assessments of the DFR.

The Superior Court, Tax Division, in a consolidated review found for the taxpayer and reduced all three assessments to the significantly lower valuations determined by [345 ASSOC, 706 A2d Page 576]

the taxpayer's expert witness. *fn2 This expert used the income capitalization approach for the assessments for all three tax years, relying in large part on language in Rock Creek Plaza. The court in that case stated that an assessment using the income capitalization approach

entails deriving a "stabilized annual net income" by reference to the income and expenses of the property over a period of several years. That annual net income is then divided by a capitalization rate — a number representing the percentage rate that taxpayers must recover annually to pay the mortgage, to obtain a fair return on taxpayers' equity in the property, and to pay real estate taxes.

Rock Creek Plaza, supra, 466 A.2d at 858 (emphasis added). The taxpayer's expert used this characterization as the basis for his calculation of the capitalization rate, which in turn determined the Square 345 property value. That expert selected a capitalization rate that insured payment of the mortgage and real estate taxes and a fair return on the developers's equity in the property, as provided in the italicized material quoted above from Rock Creek Plaza.

The trial judge ruled that the general approach and specific calculations of the taxpayer's expert were convincing and concluded that, although the DFR had used the income capitalization approach for the 1992 assessment, it had applied the approach incorrectly. In particular, the court found that the capitalization rate selected by the DFR took into account only "limited" investment adjustments that were "too simplistic to illustrate the expectable income stream" of the building. The judge observed that "[i]f the capitalization rate is insufficient to meet the investment requirements set forth in [Rock Creek Plaza], then the assessment or appraisal must [be] rejected by the Court even if it is not otherwise defective."

We recently decided in Rose Assocs., however, that the Rock Creek Plaza characterization of capitalization rate was not definitive, concluding that the trial court had "misread the Rock Creek Plaza language as establishing a binding and all-encompassing definition of `capitalization rate.'" Rose Assocs., supra, 697 A.2d at 1237. The Rose Assocs. court observed that the Rock Creek Plaza language was "nothing more than oft-repeated dictum, not a binding precedent." Id. Because the experts the trial court relied upon in Rose Assocs. applied the Rock Creek Plaza characterization of the capitalization rate in determining valuation, we reversed and remanded to the trial court for reconsideration in light of what we had held regarding the Rock Creek Plaza language. In this case, in rejecting the opinion of the District's expert for the 1992 valuation and in accepting the valuation of the taxpayer's expert for all three years, the trial court also relied upon the Rock Creek Plaza characterization. *fn3 Accordingly, we remand this case with instructions to the trial court to reconsider its [345 ASSOC, 706 A2d Page 577]

valuation for each tax year in light of our decision in Rose Assocs.

Reversed and ...

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