Court: Court of Appeals of Arizona; July 12, 2001; Arizona; State Appellate Court
F. Ron Krausz and Elana Krausz Pyle, the Taxpayers, appealed a summary judgment affirming the commercial classification of their office building by Maricopa County, which has been leased to the Arizona Department of Environmental Quality (ADEQ) since 1991. The core issue was whether the property, not explicitly classified outside of commercial (class one) by Arizona law, qualifies as "devoted to any other commercial or industrial use" when leased for profit to a government entity. The court concluded that it does qualify, thereby upholding the County's classification.
The Taxpayers contested the classification based on Arizona Revised Statutes (A.R.S.) section 42-12001, which categorizes various forms of commercial property for tax purposes. They argued that the governmental use by ADEQ should negate the commercial classification. They cited A.R.S. section 42-11054(B), asserting that current usage must guide property valuation; however, the court clarified that this statute does not mandate using the tenant's use for property classification. Additionally, the Taxpayers argued that separate classification for leased residential property indicated a legislative intent to prioritize tenant use in classification determinations, which the court rejected. The court conducted a de novo review of the statutory interpretation and found the Taxpayers' arguments unpersuasive, affirming the County's classification of the property as commercial.
The legislature established a distinct classification for leased residential property, known as class four, encompassing both real and personal property used exclusively for residential leasing. This classification, articulated in A.R.S. 42-12004(A)(1), serves to differentiate such properties from class one, which includes commercial properties defined broadly as those devoted to any commercial or industrial use (A.R.S. 42-12001(12)). The creation of class four emphasizes the necessity of maintaining a separate categorization to prevent leased residential properties from being misclassified as commercial.
The legislative intent, as expressed through A.R.S. section 42-12004(A)(1), clarifies that without this statute, leased residential properties might fall under the commercial category due to their potential interpretation as commercial use by the owner. However, the adoption of this statute ensures that these properties are classified more narrowly, thus excluding them from the broader commercial classification.
In response to inquiries from Taxpayers, Ron Loder from the Maricopa County Assessor’s Office indicated that the tenant's use determines property classification in several hypothetical scenarios. However, Taxpayers overlook that in their instance, the classification hinges on the landlord's commercial use, as they lease the property for profit. The only governmental use pertains to the tenant, ADEQ, which does not align with a specific property tax classification that would take precedence over the commercial designation. Consequently, Taxpayers' property is classified as class one (commercial) property under A.R.S. 42-12001(12).
Taxpayers' arguments lack support from the principal cases they cite. In *Stewart Title Trust v. Pima County*, the court addressed the classification of property as agricultural despite the owner's intent to hold it for investment. The court emphasized that the classification should be based on current usage rather than the owner's intentions, allowing for valuation strictly by the income approach outlined in A.R.S. section 42-13101(A). However, this case does not imply that a tenant's use of leased property overrides the owner's use in determining classification.
Similarly, *Hibbs v. Calcot, Ltd.* is not applicable as it focused on a nonprofit's commercial use of property, which required a commercial classification, without addressing the significance of the lessor's use. Lastly, in *ACF Indus. Inc. v. State of Arizona*, the Ninth Circuit rejected the argument that leased residential property should be included in the average assessment ratio for commercial property. The court ruled that Arizona could treat residential and commercial properties differently, but did not support the argument that leased property could not be classified based on the owner's use. Overall, these cases do not substantiate Taxpayers' claims regarding property classification and valuation in relation to leased property.
The Iowa Supreme Court case Warden Plaza v. Bd. of Review established that a property owner's leasing of real property for profit constitutes a "use" of the property, thereby disqualifying it from property tax exemptions reserved for charitable organizations. The court determined that both the lessor and lessee are using the property simultaneously; the owner seeks profit through leasing, which is akin to physical use for personal objectives. This principle was supported by the Kansas Supreme Court's reasoning in Appeal of Wirt, emphasizing that an investor’s leasing activities reflect their utilization of the property. Consequently, the property classification must be determined by the owner's use rather than solely the tenant's use.
In the current situation, the Taxpayers' use of the property aligns with A.R.S. section 42-12001(12), while the tenant's use does not fit within any specific classification. Therefore, the Taxpayers' use dictates the property tax classification. The Taxpayers' request for attorney’s fees on appeal was denied because they were not the successful party. The court affirmed the tax court’s judgment, and the discussion referenced relevant statutes, clarifying that property classification is not limited to the tenant's use as alleged by the Taxpayers.
