Estate has 'limited market appeal,' says panel


When it came down to it, the excesses and "limited market appeal" of billionaire Larry Ellison's 23-acre Woodside estate are what compelled a property assessment appeals board to issue a ruling that led to a $1.1 million drop in Mr. Ellison's property taxes for the estate this year.

The San Mateo County Assessment Appeals Board last December agreed with Mr. Ellison's claim that the county's assessment of his Mountain Home Road property was $100 million-plus more than its real value, and that, consequently, his annual tax bill was far too high.

It's a decision that maintains that the value of the lavish estate, which cost more than $200 million to develop over a nine-year period, is greatly depreciated because it "suffers from significant functional obsolescence" -- the result, in part, of the limited market appeal of its 16th century-style Japanese architecture, and its "structural 'overimprovements' and excessive landscaping/site improvements."

The ruling means that Mr. Ellison -- named by earlier this month as the 14th wealthiest person in the world, with assets of $25 billion -- will not only pay about 60 percent less in taxes on the property from now on, but will also be refunded about $3.06 million for taxes paid since 2004.

Although the refund will come from the county-wide property tax revenue coffers, the Portola Valley elementary and Sequoia high school districts, along with the town of Woodside, will be impacted annually by the loss of tax revenue beginning this year.

What's it worth?

The ruling centered on the question of whether the value of the buildings and other developed elements on the property should be determined by their reproduction cost or on their replacement cost.

In general, the former refers to the cost of replicating the buildings and other features of the land's improvements in the same style and through the same processes. The latter refers to what it would cost to replace buildings and other features using an "equivalent utility" standard.

The appeal, filed by Mr. Ellison's Octopus Holdings LP, asserted that the replacement cost approach should have been used instead of the reproduction cost approach favored by the county.

The county had assessed the property by determining the cost of reproducing its buildings and other significant developments -- amenities that required extraordinary levels of craftsmanship and cash to develop.

Based on a Japanese emperor's 16th century country estate, the development includes "a five-acre man-made lake, two waterfalls, two bridges, extensive irrigation and electrical systems and substantial plantings and numerous trees, many quite mature," according to the appeals board's ruling. It also describes a main house with two wings connected by a breezeway, and a lower-level garage, game room, media room, sauna and bathrooms.

There are also three cottages, a two-bedroom guest house, and a former barn that now houses a gymnasium and exercise area, the appeals board noted.

The original cost estimate of the project was set at $40 million in the mid-1990s, but by 1999, the estimate had risen to $60 million.

That figure proved to be hugely optimistic, however. Deputy county assessor Terrence Flinn said the final cost of the project exceeded $200 million.

In 2004, the county assessed the value of improvements to the property at $149.8 million; that's the assessed value excluding the value of the land, which was not in dispute.

Mr. Flinn said the $149.8 million figure represented a concession to the property owner, who argued that the actual final cost of the project was excessively high due to mistakes made during the nine-year building process -- a process that called for rare skills and innovative techniques that were sometimes unsuccessful.

The attorney for Octopus Holdings, William R. Bennett of Bennett & Yee in San Francisco, didn't return the Almanac's phone calls before press time.

The ruling

In ruling that the county should have considered replacement costs rather than reproduction costs to determine the property's value, the appeals board cited the Assessor's Handbook rule stating that "when property suffers from functional obsolescence or other depreciation, the reproduction cost approach is less reliable than the replacement cost approach, unless the depreciation can be accurately measured."

The replacement cost, it noted, "is the cost to replace an existing property with a property of equivalent utility as of a particular date. Such an approach, therefore accounts for functional obsolescence."

In supporting its opinion that the estate is functionally obsolete, the appeals panel cited: "the limited market for high-end luxury homes; the limited market appeal of 16th century Japanese architecture and grounds; the limited amenities of the main residential structure due to its design and layout; and structural 'overimprovements' and excessive landscaping/site improvements, both of which are costly to maintain."

The board noted that "structures were 'overimproved' insofar as they contain costly amenities and their construction involves especially costly processes, neither of which would be valued in the markteplace." These include handcrafted, untreated wooden shingles, thatched roofs that were "specially and laboriously created and treated," and the "ground-up" construction, which required that structures be tented "to prevent water damage during the extended building process."

The panel also cited the maintenance costs for the property's "excessive landscaping" -- estimated at about $4.2 million a year.

Ruling's impact?

Mr. Flinn, the deputy county assessor, said that his office disagreed that the Woodside estate suffered from depreciation. "We thought that what was built was valuable," he said.

Challenges to the county's assessment of property value happen from time to time, he noted, and he doesn't view the Ellison ruling as a precedent to be concerned about.

"Each (case) has its own argument," he said, adding that this one was argued primarily on the style of the development and its consequent decline in "full value."


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