A California court of appeal recently rejected a landowner’s claim that newly purchased replacement property should be exempt from reassessment and the establishment of a new base year value because the landowner sold his original property under threat of condemnation to a private party involved in a redevelopment project. The court of appeal held the landowner failed to exhaust its administrative remedies before the Assessment Appeals Board on the issue of whether the private party was acting as an agent for one or more public entities when it acquired the property from the landowner as he did not raise this issue until the appeal. (Duea v. County of San Diego (--- Cal.Rptr.3d ----, Cal.App. 4 Dist., February 29, 2012).
David Duea (“Duea”) operated a business on property he purchased in San Diego in 1988. San Diego voters approved a memorandum of understanding (“MOU”) in November 1998 between the City of San Diego (“City”), San Diego Redevelopment Agency (“Agency”), Centre City Development Corporation (“CCDC”), and Padres, L.P., for a redevelopment project, a ballpark district, and construction of a ballpark. Duea’s property was designated for acquisition and redevelopment as a boutique hotel. Although condemnation actions were initiated by public entities for parcels of property adjacent to Duea’s property, formal condemnation proceedings for Duea’s property were either stopped or delayed because third parties filed lawsuits against the ballpark project.
In August 2000, JMI Realty, Inc. (“JMI”) approached Duea about selling his property in order to carry out the MOU. Duea sold the property to JMI in September 2000 for $1,100,000. Duea then purchased a replacement property in San Diego for $535,000.
California voters adopted Proposition 13 in 1978 to limit ad valorem tax on real property to one percent of a property’s “full cash value,” which is “the county assessor’s valuation of real property as shown on the 1975−76 tax bill,’ or, as relevant here, ‘thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment.’” When there is a change of ownership, a “property is reassessed at a new base year value (e.g., revalued at current fair market value) as of the date of the transfer.” Certain transfers are exempt from the change of ownership rule. One such exemption applies where “real property [is] acquired as a replacement for comparable property following the exercise of ‘eminent domain proceedings’ and the real property [is] acquired by a ‘public entity.’”
Duea filed a “Claim for Base Year Transfer—Acquisition by Public Entity” with the San Diego County Assessor so that the tax base of the original property could be transferred to the replacement property. The Assessor denied Duea’s application on the ground that the original property was not acquired by a public entity.
Duea filed an application of equalization with the San Diego County Assessment Appeals Board (“Board”). The CCDC confirmed that the transfer of ownership of the original property to JMI was for use in connection with the ballpark and that CCDC would have condemned the property under its eminent domain power if Duea had not sold the property to JMI. Duea testified in a hearing before the Board that he had been displaced from his original property “by the functional equivalent of eminent domain.” The Board rejected Duea’s claim on the ground that Duea transferred the property to a private party, not a public entity, and even if Duea made the sale under the threat of eminent domain, the sale was not one recognized by California law as allowing a transfer of the base year value of the property to a replacement property, as the property was not sold to a public entity.
Duea filed an action in superior court to challenge the Board’s ruling and obtain a property tax refund. For the first time, Duea claimed that when JMI acquired the original property, it was acting as an agent for City, CCDC, and/or the Agency, and therefore, the sale of the property was in fact a sale to a public entity. The trial court held that Duea failed to show he had exhausted his administrative remedies because he never presented his legal theory in the administrative proceedings that the sale of his property to JMI is exempt under the Revenue and Taxation Code because JMI acted as an agent for a public entity. The superior court further found that even if it ignored the fact that Duea had not exhausted his administrative remedies, there is still substantial evidence to support the Board’s determination that Duea sold his property to a private party and not a public entity.
Duea asserted the trial court should have conducted a trial de novo on the facts and found that JMI was an agent of one of the public entities when it acquired the property. The appellate court rejected Duea’s claim that the trial court was required by Revenue and Taxation Code section 1605.5 to conduct a trial de novo. Section 1605.5 provides in part that a county board must hear applications for a reduction in assessment where there is an issue regarding whether a property has been subject to a change in ownership. Section 1605.5 allows for a trial de novo with regard to legal issues, but does not entitle a party to obtain a trial de novo on factual issues. The appellate court found that the trial court properly applied the substantial evidence rule to the Board’s findings of fact and properly refused to conduct a trial de novo on the facts.
Duea also asserted that the trial court erred when it granted his request to supplement the record with the MOU and the administrative record but denied his request as to all other documents he sought to introduce. However, Duea failed to include his request to supplement in the appellate record. The court concluded that even if it were to independently consider the documents not considered by the Board or the trial court, the court would still conclude that the Board properly denied his claim.
Duea did not raise before the Board the issue of agency or argue that JMI was an agent for a public entity when JMI bought the original property. The court noted that the Board was in a far superior position “to apply the then-applicable law on this issue and make all necessary factual determinations from the evidence in the administrative record.” The court found that given the uncertainty in the law at the time the transactions took place and the evidence in the record, there are conflicting inferences on the issue of whether JMI was acting as an agent for a public entity when it bought the property from Duea in 2000. Accordingly, the court of appeal affirmed the decision of the trial court.
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