T.C. Memo. 2006-232



                      UNITED STATES TAX COURT



ESTATE OF F. WALLACE LANGER, DECEASED, CLARENCE D. LANGER, JR.,
                     EXECUTOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11116-04.               Filed October 30, 2006.



     John H. Draneas, for petitioner.

     Wesley F. McNamara, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined a Federal estate tax

deficiency of $949,686 against the Estate of F. Wallace Langer
                               - 2 -

(the estate).1   After concessions,2 the issue for decision is the

fair market value on February 29, 2000, of Phases 2 and 5 of the

Langer MarketPlace Planned Unit Development.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.

     F. Wallace Langer (decedent), a lifelong resident of

Sherwood, Oregon, died on February 29, 2000 (the date of death).

Decedent’s nephew, Clarence D. Langer, Jr. (Clarence Langer), was

appointed executor of the estate.   At the time the petition was

filed, he resided in Sherwood, Oregon.

     1
         Amounts are rounded to the nearest dollar.
     2
        The parties have stipulated: (1) The taxable estate will
be increased by $127,802, representing the value of the residence
included in the Langer Residence Revocable Trust; (2) decedent’s
29.19-percent interest in the Langer Family LLC (LFLLC) is
included in the estate; (3) the fair market value of the real
property owned by the LFLLC, excluding Phases 2 and 5 of the PUD
and prior to reduction for deferred property taxes, was
$5,885,000 on February 29, 2000; (4) the net value of the real
property owned by LFLLC will be calculated by adding the fair
market value of Phases 2 and 5 to $5,885,000, then subtracting
$430,310 to account for property tax liabilities that would
attach the property on the date of death; and (5) the value of
decedent’s 29.19-percent interest in LFLLC will be computed by
multiplying the net value of the real estate owned by LFLLC by
15.32475 percent. This computation reflects a 47.5-percent
discount to account for all applicable discounts. The figure
thus computed will be substituted for the value of decedent’s
interest in LFLLC reported on Schedule G, Transfers During
Decedent’s Life, of the estate’s Form 706, United States Estate
(and Generation-Skipping Transfer) Tax Return.
                                 - 3 -

A.   The City of Sherwood

     Sherwood, Oregon, is located approximately 15 miles

southwest of Portland, Oregon.    During the 1990s and through at

least 2000, Sherwood experienced rapid population growth,

increasing from 5,320 in 1995 to 12,230 by 2000.

     The population growth led to increased commercial

development in the Town Center area, which was centered around

the intersection of T-S Road and Pacific Highway.3    To facilitate

commercial development, the City of Sherwood created a “master

plan” for development, which included a comprehensive development

plan, zoning districts, and a zoning map.    Individual land owners

could apply for planned unit developments, or PUDs, which

overlaid the master plan.    The PUDs included “categories of use”,

or phases, that fit within the general goals and requirements of

the comprehensive plan.     The PUDs were intended to be flexible,

offering relief from strict adherence to the zoning map.    The

phases within each PUD could be altered without going through a

comprehensive plan amendment or zoning change.    The PUD phases

were not separate legal parcels, and any development,

reconfiguration, or partitioning of the phases required the

city’s approval.

     3
        In 2000, Pacific Highway had two to three lanes of
traffic running in each direction, additional turn lanes, and an
average daily traffic count of 37,800. In 2000, T-S Road had
only one lane in each direction, a center turn lane, and an
average daily traffic count of 22,946.
                               - 4 -

     Prior to December 5, 2000, developers in Sherwood were

subject to the traffic mitigation requirements of Metro, an

elected regional government engaged in regional and local

planning in the Greater Portland area.    Traffic mitigation

requirements could include constructing new roads, widening

existing roads, or installing traffic signals.    On December 5,

2000, Sherwood passed its own traffic mitigation ordinance, the

Capacity Allocation Program (CAP).     CAP’s goal was to provide a

better mechanism for transportation planning and more accurate

calculations of infrastructure improvement costs.

     Sherwood’s continued growth and development were not without

controversy.   Around the date of decedent’s death, many Sherwood

citizens, including the mayor, showed some resistance to

continued development.   However, the resistence was insufficient

to prohibit further development.   By the date of death, new

businesses in the Town Center area included a Home Depot, grocery

stores, banks, restaurants, a movie theater, and an ice-skating

arena.

B.   The Langer MarketPlace Planned Unit Development and the
     Langer Family Limited Liability Company

     Since 1879, the Langer family owned and farmed land in

Sherwood.   Their land was located in the Town Center area,

approximately a quarter mile east of Pacific Highway and bisected

by T-S Road.   As population and commercial development increased,
                                - 5 -

farming became less practicable, and the Langers turned their

attention to commercial development.

       In 1995, the Langers created the Langer MarketPlace Planned

Unit Development (the Langer PUD), which defined the development

permitted on a 55.59-acre tract owned by a trust for decedent and

a contiguous 29.88-acre tract owned by a trust for Clarence

Langer.    While it did not create separate legal parcels, the

Langer PUD divided the land into eight phases of development.      On

April 25, 1995, the Sherwood City Council approved the Langers’

application for the PUD.    However, the approval was conditioned

upon their agreement to, among other things, develop parks,

pedestrian walkways, and:

       At each phase of development, and with each site plan
       submitted to the City, the applicant shall provide a
       traffic impact analysis for City, County and ODOT
       [Oregon Department of Transportation] review and
       approval. Recommended traffic safety and road
       improvements shall be considered by the City and may be
       required with each phase.

       By agreement dated May 9, 1998, decedent, Clarence Langer,

and other members of the Langer family formed the Langer Family

Limited Liability Company (LFLLC).      The trusts for decedent and

Clarence Langer contributed to LFLLC the land subject to the

Langer PUD.    At his death, decedent held a 29.19-percent interest

in LFLLC.

       Prior to decedent’s death, LFLLC sold Phase 1 of the Langer

PUD.    On the date of death, LFLLC still owned Phases 2 through 8.
                                 - 6 -

Because the parties stipulated their value, Phases 3, 4, 6, 7,

and 8 are not at issue.   See supra note 2.   At decedent’s death,

Phase 2 was zoned retail commercial, was 2.48 acres, and had a

rectangular configuration.   Phase 5 was zoned retail commercial,

was 11.7 acres, and had an awkward configuration.   On the date of

death, there were no deals pending regarding the development or

sale of Phases 2 and 5.

     In August 2000, LFLLC entered into negotiations with Target

Corporation (Target) for the purchase of Phase 5.   On December 5,

2000, LFLLC filed an application for development of Phase 5 with

the City of Sherwood, which was approved in October 2001.

Because the application was submitted before the CAP ordinance

was enacted, the development of Phase 5 was subject to the

traffic mitigation requirements of Metro.

     After approval of the development application, Sherwood’s

mayor encouraged LFLLC to redesign the development of Phase 5.

In 2002, LFLLC proposed an amendment to the Langer PUD and

requested the approval of a new development plan for Phases 2, 3,

and 5, which proposed changing the sizes and configurations of

those phases.   The amended PUD and new development plan were

approved on November 12, 2002.

     On September 12, 2003, LFLLC and Target signed a Sale and

Purchase Agreement for the purchase by Target of approximately

10.97 acres of Phase 5.   On July 8, 2004, LFLLC sold
                                - 7 -

approximately 3.01 acres of Phase 5 to Gramor Langer Farms LLC

(Gramor).

C.   The Estate Tax Return

     The estate timely filed a Form 706, United States Estate

(and Generation-Skipping Transfer) Tax Return (the estate tax

return).    As reflected on the estate tax return, the estate

valued LFLLC’s real property at $8,180,000 as of the date of

death and determined that the value of decedent’s 29.19-percent

interest in LFLLC, after all applicable discounts, was $837,000.

     On April 2, 2004, respondent issued the estate a notice of

deficiency.    Respondent determined that decedent’s 29.19-percent

interest in LFLLC was $2,606,700 rather than $837,000.     In

response to the notice of deficiency, the estate filed a petition

with this Court on June 28, 2004.

                               OPINION

     For Federal estate tax purposes, property includable in the

gross estate is generally included at its fair market value on

the date of the decedent’s death.    See secs. 2031(a) and 2032(a);

sec. 20.2031-1(b), Estate Tax Regs.4     Fair market value is “the

price at which the property would change hands between a willing

buyer and a willing seller, neither being under any compulsion to

buy or to sell and both having reasonable knowledge of relevant


     4
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
                                 - 8 -

facts.”   United States v. Cartwright, 

, 551 (1973);

sec. 20.2031-1(b), Estate Tax Regs.      The willing buyer and the

willing seller are hypothetical persons, instead of specific

individuals and entities, and the characteristics of these

imaginary persons are not necessarily the same as the personal

characteristics of the actual seller or a particular buyer.      See

Estate of Bright v. United States, 

, 1005-1006 (5th

Cir. 1981).

     Real estate valuation is a question of fact to be resolved

on the basis of the entire record.       See Ahmanson Found. v. United

States, 

, 769 (9th Cir. 1981); Estate of Fawcett v.

Commissioner, 

, 898 (1975).      The valuation must

reflect the highest and best use to which the property could be

put on the relevant valuation date.       Symington v. Commissioner,

, 896 (1986).

     Valuation is an inexact process.      See Buffalo Tool & Die

Manufacturing Co. v. Commissioner, 

, 452 (1980).      As

the trier of fact, we may use experts to assist us in deciding

upon value, but we are not bound by those experts’ views or

opinions.   See Silverman v. Commissioner, 

, 933 (2d

Cir. 1976), affg. T.C. Memo. 1974-285; Chiu v. Commissioner, 

, 734 (1985).   One expert may be persuasive on a

particular element of valuation, and another expert may be

persuasive on another element.    See Parker v. Commissioner, 86
                                - 9 -

T.C. 547, 562 (1986).   Consequently, we may adopt some and reject

other portions of expert reports or views.   See Helvering v.

Natl. Grocery Co., 

 (1938).

     In attempting to establish the fair market value of Phases 2

and 5, the estate and respondent rely on valuation experts.     The

estate’s valuation expert, Brian L. Kelley (Mr. Kelley), also

valued the subject land for purposes of preparing decedent’s

estate tax return.   Respondent’s valuation expert was Stephen J.

Pio (Mr. Pio).5    The experts agree that the highest and best use

of Phases 2 and 5 on the date of death was their intended use,

commercial development.   The experts also agree that the

comparable sales method is the most appropriate valuation

method.6   However, the experts disagree over the fair market

values of Phases 2 and 5 on the date of death.   Mr. Kelley

determined that Phases 2 and 5 had fair market values of $525,000

and $2,075,000, respectively.   Mr. Pio determined that Phases 2



     5
        Because we find both experts to be qualified and because
their relative experience does not impact our evaluation of their
opinions, we do not discuss their qualifications or experience.
     6
        The comparable sales approach is “‘generally the most
reliable method of valuation, the rationale being that the market
place is the best indicator of value, based on the conflicting
interests of many buyers and sellers.’” Estate of Spruill v.
Commissioner, 

, 1229 n.24 (1987) (quoting Estate of
Rabe v. Commissioner, T.C. Memo. 1975-26, affd. without published
opinion 

 (9th Cir. 1977)). This method requires
gathering information on sales of property similar to the subject
property, then comparing and weighing the information to reach a
likely value for the land being appraised.
                                  - 10 -

and 5 had fair market values of $620,000 and $3,420,000,

respectively.

     Both parties encourage us to reject the other party’s expert

report in its entirety.     However, we find each expert to be

persuasive on some points, but not on others, and give each

report its due weight.

A.   Valuation of Phase 5

     1.     Mr. Kelley’s Report

     Mr. Kelley purported to value Phase 5 by using the

comparable sales method.     However, after arriving at a value per

square foot, he then applied a “discounted cashflow analysis” to

arrive at Phase 5’s “net present ‘as-is’ land value” on the date

of death.

            a.   Comparable Sales

     To determine the value per square foot of Phase 5, Mr.

Kelley used four comparables:
                                     - 11 -

  Compar-                             Sale      Sales                  Adj. price
 able No.          Location           date      price      Acres      per sq. ft.1
    1           Intersection of      12/99    $2,918,158    9.3             $7.20
             Scholls-Sherwood Rd.
             and Pacific Highway,
               Sherwood, Oregon
    2       20260 Pacific Highway,    8/00     4,473,194   24.35/           4.22/
               Sherwood, Oregon               (3,723,194   (12.18           (7.02
                                               adjusted)   usable)        adjusted)2
    

 Ave. and       9/96    1,097,705     7.3             3.81
               Pacific Highway,
               Sherwood, Oregon
    4            T-S Road and         6/96    3,353,310    15.46            5.54
                SW 90th Ave.,
               Tualatin, Oregon

        1
        Because comparables 3 and 4 were sold 40 months and 43 months before
the valuation date, respectively, Mr. Kelley adjusted the sales prices upward
by 10.5 percent and 11.25 percent to account for inflation. No such
adjustments were made to comparables 1 and 2.
      2
        Only a portion of comparable 2 was suitable for commercial
development. Mr. Kelley determined that “approximately 50 percent” of the
site was zoned for exclusive farm use, which prohibited commercial
development. The seller of the property retained an option to repurchase that
portion of the land for $400,000, though the option was never exercised. The
seller also retained and exercised an option to repurchase a pad site on the
property for $350,000. In order to get an “apples-to-apples” comparison, Mr.
Kelley deducted $750,000, the total of the option prices, from the original
sales price to get an adjusted sales price for the portion of usable land that
was sold to and retained by the buyer.


        Mr. Kelley determined that comparables 1 and 2 were high

indicators of value because they were located on Pacific Highway,

had superior exposure to traffic (exposure) than Phase 5, and

were better configured for commercial development.7                  He

determined that comparable 3 was a low indicator due to the older

sales date and inferior configuration.            Finally, he determined

        7
        Both experts used the phrase “high indicator of value” to
describe a comparable with a value greater than the property
being valued and the phrase “low indicator of value” to describe
a comparable with a value lower than the property being valued.
                                - 12 -

that comparable 4 was most similar to Phase 5 in exposure and

location, but it was inferior in configuration and was thus a

reasonable to slightly low indicator.     Mr. Kelley concluded that

Phase 5 had a value of $6 per square foot.

     Comparables 3 and 4 were sold in 1996.      In the period

between those sales and the date of death, Sherwood experienced

rapid population growth and increased demand for commercial

property.     Given the lapse in time and the change in demand for

commercial property, we find that comparables 3 and 4 are not

reliable indicators of value.     Therefore, we take into

consideration comparables 1 and 2 only.

             b.   Discounted Cashflow Analysis

         Mr. Kelley determined that Phase 5 was not readily

marketable on the date of death and that it would take 3 years to

sell the property.     To account for “an extended marketing and due

diligence period” and for “the risk associated with the subject

property”, Mr. Kelley applied a discounted cashflow analysis to

Phase 5’s value per square foot to arrive at its “net present

‘as-is’ land value” of $2,075,000.8



     8
        Mr. Kelley’s discounted cashflow analysis was essentially
a three-step analysis: (1) He adjusted the value per square foot
upwards by 3 percent annually for 3 years to account for
inflation; (2) he then subtracted sales and marketing costs; and
(3) he then discounted that amount by 12 percent annually for 3
years to account for the time-value of money and the risks
associated with the property to arrive at a “net present ‘as-is’
land value”.
                              - 13 -

     We disagree with Mr. Kelley’s use of a discounted cashflow

analysis for two reasons.   First, Mr. Kelley did not determine

Phase 5’s fair market value on the appropriate date--the date of

death.   Because we are determining fair market value on the date

of death, it necessarily follows that the hypothetical sale

between a willing buyer and a willing seller consummates on the

date of death.   See United States v. Cartwright, 411 U.S. at 551;

sec. 20.2031-1(b), Estate Tax Regs.    Mr. Kelley did not determine

the price at which Phase 5 would change hands between a willing

buyer and a willing seller on the date of death.   Instead, he

determined the price at which Phase 5 would change hands 3 years

after the date of death and then discounted this amount by 12

percent annually for 3 years, as demonstrated by his testimony:

“In my valuation analysis, I’m appraising it for a buyer that

would most probably buy it three years from the date of

valuation, because I didn’t feel that it was really marketable at

that point in time and therefore, I needed to discount that value

over a 3-year period.”

     Second, we do not agree with Mr. Kelley’s conclusions on

which he based his use of a discounted cashflow analysis.   By

using a discounted cashflow analysis, Mr. Kelley attempted to

reduce Phase 5’s value to account for:   (1) The uncertainty of

offsite costs; (2) the City of Sherwood’s stance on further
                               - 14 -

development; and (3) the purported oversupply of commercial

property in Sherwood.

     The uncertain offsite costs to which Mr. Kelley refers are

the costs of traffic mitigation requirements imposed on

commercial developers by Metro.    However, these requirements were

not peculiar to Phase 5--all commercial developers in Sherwood

(or at least those developing larger tracts of land) were subject

to the requirements of Metro, including the developers of

comparables 1 and 2.    Any impact the uncertain traffic mitigation

costs had on the market should be reflected in the sales prices

of comparables 1 and 2, and are thus taken into account by using

those comparables in the comparable sale method.    A further

discount is not necessary.

     The estate also argues that Phase 5 was subject to other

extraordinary offsite costs.    In valuing Phase 5, we generally

take into consideration only those costs that are reasonably

foreseeable by a hypothetical buyer and a hypothetical seller on

the valuation date.    See Estate of Spruill v. Commissioner, 

, 1228 (1987).    The estate has not established that

extraordinary offsite costs were reasonably foreseeable on the

date of death.   Instead, it appears that the estate is focusing

on the costs associated with the reconfiguration of Phase 5 in

2002.   However, the reconfiguration was not contemplated by LFLLC

on or before the date of death, nor was it reasonably foreseeable
                               - 15 -

that such reconfiguration would be necessary.   Therefore, we do

not take into account any purported extraordinary offsite costs.

     Mr. Kelley and the estate assert that the City of Sherwood’s

hostility to further development made approval for additional

development difficult and expensive.    Like the uncertain offsite

costs, any impact the City’s attitude toward development had on

the market should be reflected in the sales prices of comparables

1 and 2 and is thus taken into account by using those comparables

in the comparable sale method.   A further discount is not

necessary.9

     Finally, we do not agree with Mr. Kelley’s determination

that there was an oversupply of commercial space in Sherwood on

the date of death.   In analyzing the supply and demand for

commercial property, Mr. Kelley conducted a “retail expenditure

analysis”.    To summarize, Mr. Kelley determined that there were

9,218 people residing in 3,404 households within a 1.5-mile

radius of the intersection of Pacific Highway and T-S Road.

Using average retail expenditure data, he then determined that



     9
        There is some indication that LFLLC had particular
difficulty in getting city approval because of strained personal
relationships between Clarence Langer and members of Sherwood’s
government. Because we are determining the fair market value
based on a hypothetical sale by a hypothetical seller, we do not
necessarily take into consideration the personal characteristics
of the actual seller. See Estate of Bright v. United States, 

, 1005-1006 (5th Cir. 1981). Therefore, we do not factor
in any difficulty arising from Clarence Langer’s relationship
with members of the city government.
                               - 16 -

3,404 households could support only 208,325 square feet of retail

space.    Because more than 300,000 square feet of commercial space

was available on the date of death, Mr. Kelley concluded that

there was an oversupply of commercial property.

     By limiting his analysis to a 1.5-mile radius, Mr. Kelley

made an implicit assumption that people living outside the radius

will not shop within the radius.    His approach takes into account

only 9,218 people, which does not even include the entire

population of Sherwood in 2000 (12,230).   Mr. Kelley did not

offer a reasonable explanation for why he so limited his

analysis.   The businesses within the area included a Home Depot,

grocery stores, banks, restaurants, a movie theater, and an ice-

skating arena.   We find that it is unreasonable to assume that

only those people living within 1.5 miles will frequent such

businesses.

     For the above-stated reasons, we reject Mr. Kelley’s use of

a discounted cashflow analysis.10


     10
        We recognize that discounted cashflow analysis can be an
appropriate valuation method. For example, discounted cashflow
analysis has been accepted as a method of valuing a company’s
stock by determining the present value of its future stream of
income. See, e.g., N. Trust Co. v. Commissioner, 

,
378-380 (1986). Also, in Estate of Rodgers v. Commissioner, T.C.
Memo. 1999-129, discounted cashflow analysis was accepted to
determine the fair market value of multiple pieces of real
property. The properties were so numerous that they could not be
liquidated within a reasonable time without depressing the sales
prices, and thus a discounted cashflow analysis was appropriate
to take into account a market absorption rate. Id. This case is
                                                   (continued...)
                              - 17 -

     2.   Mr. Pio’s Report

     In valuing the subject property, Mr. Pio made a

“hypothetical assumption” that Phases 2 and 5 were legally

partitioned on the date of death.11    He then determined the fair

market value of Phase 5 using seven comparables:




     10
      (...continued)
distinguishable from Estate of Rodgers because there has been no
showing that, due to their numerosity, the Phases could not be
sold within a reasonable time without depressing their sales
prices. In fact, Mr. Kelley did not purport to use his
discounted cashflow analysis to take into account a market
absorption rate, nor does the estate argue that Mr. Kelley’s
discounted cashflow analysis was used to take into account a
market absorption rate.
     11
        The estate argues that Mr. Pio’s “hypothetical
assumption” was inappropriate because Mr. Pio does not take into
account costs associated with the subdivision of the phases for
individual sale. However, both parties valued Phases 2 and 5 as
if they were separate properties on the date of death. It does
not appear that Mr. Kelley took into account the costs associated
with the subdivision of the phases, nor does the estate offer an
estimate of such costs. Because the estate has failed to provide
any basis upon which we could make an estimate, we cannot take
such costs into consideration.
                                      - 18 -

  Compar-                               Sale      Sales                Price per
 able No.          Location             date      price      Acres      sq. ft.
    7           NW Imbrie Rd. at        7/00    $7,500,000   13.01      $13.23
             NW Cornelius Pass Rd.,
                Hillsboro, Oregon
    

 Ave at TV Hwy,     2/01    7,000,000    13.22       12.16
                Hillsboro, Oregon
    9          NW Stucki Rd. at         2/00    8,276,240    17.67       10.75
                 Cornell Rd.,
               Hillsboro, Oregon
    10      Intersection of Scholls-    12/99   2,918,158     9.3        7.20
                Sherwood Rd. and
                Pacific Highway,
                Sherwood, Oregon
    11       20260 Pacific Highway,     7/00    4,473,194/   24.39/      4.22/
                Sherwood, Oregon                (4,373,194   (12.97      (7.74
                                                 adjusted)   usable)   adjusted)1
    12       T-S Rd., between Adams     9/03    2,702,160    10.93       5.68
              Ave. and Langer Dr.,
                Sherwood, Oregon
    13       T-S Rd. at Langer Dr.,     7/04    1,500,000     3.01       11.44
                Sherwood, Oregon

      1
         Mr. Pio adjusted the sales price of comparable 11 downward by
$100,000 to account for the land zoned for exclusive farm use.


        Mr. Pio determined that comparables 7, 8, and 9 were very

high or high indicators of value due to their location and

development costs, that comparable 10 was a reasonable indicator

due to its modestly superior exposure but less desirable access,

and that comparable 11 was a reasonable indicator due to its

superior exposure but inferior zoning and less desirable access.

Comparables 12 and 13 represented the sales portions of Phase 5,

as reconfigured in 2002, to Target in 2003 and Gramor in 2004.

Mr. Pio did not accord either comparable great weight.                 Mr. Pio
                                - 19 -

concluded that Phase 5 had a fair market value on the valuation

date of $7.50 per square foot, or $3,420,000.

     Mr. Pio acknowledged that Hillsboro was a completely

different market with characteristics distinct from Sherwood.      As

such, we find that comparables 7, 8, and 9 are not reliable

indicators of value.    Likewise, comparables 12 or 13 are not

reliable indicators of value.     The sales occurred more than 3

years after the valuation date, and because of the

reconfiguration, the character of the property was significantly

different than it was on the date of death.     Therefore, we take

into consideration comparables 10 and 11 only.

     3.    Fair Market Value of Phase 5

     Mr. Kelley’s comparable 1 was the same property as Mr. Pio’s

comparable 10 (comparable 1-10).     Likewise, Mr. Kelley’s

comparable 2 was the same property as Mr. Pio’s comparable 11

(comparable 2-11).     Both comparables were located in the Town

Center area of Sherwood, and the sales dates were within 6 months

of the date of death.     Thus, we find that comparables 1-10 and 2-

11 are the most helpful in determining the fair market value of

Phase 5.   Based on the expert reports, we find that there are

five major factors that must be weighed in comparing comparables

1-10 and 2-11 to Phase 5:     Location, exposure, configuration,

accessibility, and zoning.
                                   - 20 -

            a.   Comparable 1-10

     Comparable 1-10 was located on Pacific Highway, while Phase

5 was located on T-S Road.    Because Pacific Highway had a

significantly higher traffic count than T-S Road, comparable 1-10

had superior location and exposure to Phase 5.       While Mr. Pio did

not address comparable 1-10’s configuration, we agree with Mr.

Kelley that comparable 1-10 had superior configuration for

commercial development due to Phase 5’s awkward configuration.

These three factors indicate that comparable 1-10 is a high

indicator of value.

     The impact of accessibility is less clear.       However, even

assuming arguendo that Phase 5 had superior accessibility, this

factor would not outweigh the three factors above.       In addition,

both Phase 5 and comparable 1-10 were zoned retail-commercial,

making zoning a neutral factor.       Thus, comparable 1-10, at $7.20

per square foot, is a high indicator of value.

            b.   Comparable 2-11

     Only a portion of comparable 2-11 was suitable for

commercial development, the remainder being zoned for exclusive

farm use.    Both experts agree that the sale price of comparable

2-11 must be adjusted to determine the value of the area suitable

for commercial development only.       However, they do not agree to

the extent of the adjustment.       Additionally, their reports

conflict regarding the acreage of the land usable for commercial
                              - 21 -

development.   These issues must be resolved before a reliable

comparison can be made.

     Mr. Kelley valued the land zoned for exclusive farm use at

$400,000, based on an option retained by the seller to repurchase

that portion of the land.   Mr. Pio testified that,

hypothetically, if a buyer and seller believed that the land was

worth $400,000, then $400,000 would be an appropriate value.

However, Mr. Pio did not believe the land was actually worth

$400,000.   He concluded that it was worth $100,000, but did not

offer any support for his conclusion other than that he “happened

to be familiar with that property”.    Because the parties to the

sale agreed to an option price of $400,000, we find that it is an

appropriate measure of value for the exclusive farm use portion

of comparable 2-11.

     Mr. Kelley also reduced the sale price of comparable 2-11 by

$350,000 to account for an option exercised by the seller to

repurchase a 1.59-acre pad site on the property.12    Mr. Pio did

not make the adjustment because he was not aware that the seller

retained and exercised the option.     However, he testified that it

would be appropriate to reduce the sale price by $350,000, so

long as the acreage was also reduced by 1.59 acres.




     12
        A pad site is a building site within a shopping area
that is ready for construction of a retail establishment and is
usually surrounded by customer parking areas.
                               - 22 -

       We conclude that the sale price of comparable 2-11 should be

reduced by $750,000, to reflect the exclusive farm use portion

and additional pad site.    Thus, we use an adjusted sale price for

comparable 2-11 of $3,723,194.

       Mr. Kelley determined that comparable 2-11 was 24.35 acres,

and “approximately 50% of the site” was zoned for exclusive farm

use.    He used 12.18 acres (approximately 50 percent of 24.35) to

calculate the adjusted sales price per square foot.       Even though

he deducted the option price of the pad site, he did not deduct

the pad site’s 1.59 acres from the usable acres.

       Mr. Pio determined that comparable 2-11 was 24.39 acres, and

12.97 acres was usable.    Mr. Pio’s determination was based on a

plot map and is thus more reliable than Mr. Kelley’s

approximation.    From the 12.97 acres, we must also subtract the

1.59-acre pad site because we reduced the adjusted sale price by

the pad site’s option price.    Thus, we find that 11.38 acres of

comparable 2-11 was suitable for commercial development by the

buyer, resulting in an adjusted sale price of $7.51 per square

foot.

       Because of its location on Pacific Highway, comparable 2-11

had superior location and exposure to Phase 5.      It also had

superior configuration due to its relatively square shape.        Mr.

Pio argues that these factors are offset by comparable 2-11’s

inferior accessibility and zoning.      We disagree.   As discussed
                               - 23 -

above, Phase 5’s accessibility is unclear.    Even assuming

arguendo that Phase 5 had superior accessibility, this would not

offset the other three factors.   Additionally, comparable 2-11

was zoned light industrial instead of retail-commercial.

However, given the fact that comparable 2-11 was sold to Home

Depot for the construction of a Home Depot store, we find that

its zoning did not have a significant impact on the ability to

develop the property.    Thus, comparable 2-11, at $7.51 per square

foot, is a high indicator of value.

          c.   Fair Market Value of Phase 5

     Due to the importance of the traffic count, we find that

location and exposure are the most significant factors in

determining Phase 5’s fair market value.   In 2000, Pacific

Highway had an average daily traffic count of 37,800, while T-S

Road had an average daily traffic count of only 22,946.    Because

of their location on Pacific Highway, comparables 1-10 and 2-11

had superior location and exposure to Phase 5.    Additionally,

Phase 5 was less suitable for commercial development due to its

awkward configuration.    To take these factors into consideration,

we find that a 25-percent discount from the average sales price

per square foot of the comparables is appropriate.    We conclude

that Phase 5 had a value of $5.52 per square foot on the date of
                                 - 24 -

death.13   Therefore, we find that the fair market value of Phase

5 on the date of death was $2,813,279.14

C.   Valuation of Phase 2

     1.    Mr. Kelley’s Report

     Similar to his valuation of Phase 5, Mr. Kelley used the

comparable sales method to determine Phase 2’s value per square

foot ($6) and then applied a discounted cashflow analysis to

arrive at Phase 2’s “net present ‘as-is’ land value” on the date

of death ($525,000).   For the same reasons described above, we

reject the discounted cashflow analysis portion of Mr. Kelley’s

valuation.

     To determine the value per square foot of Phase 2, Mr.

Kelley used five comparables:




     13
        Phase 5’s value per square foot on date of death =
($7.51 + $7.20)/2 = $7.36 [average sales price per square foot of
comparables 1-10 and 2-11] x 0.75 [to reflect a 25-percent
discount] = $5.52.

     The estate argues that Phase 5’s value should be reduced due
to: (1) The uncertainty of traffic mitigation costs imposed by
Metro; (2) the city’s hostility towards further development; and
(3) the extraordinary offsite costs associated with making Phase
5 suitable for commercial development. These arguments are
discussed supra in our analysis of Mr. Kelley’s discounted
cashflow analysis.
     14
        $5.52 per square foot x 43,560 square feet per acre =
$240,451 per acre x 11.7 acres = $2,813,279.
                                      - 25 -

  Compar-                                Sale     Sales              Adj. price
 able No.           Location             date     price     Acres   per sq. ft.1
    1         Edy Rd., Just West of      6/99    $775,404   3.03       $5.87
                 Pacific Highway,
                 Sherwood, Oregon
    2          

 St.,        3/00    320,352    0.92       7.99
                Tualatin, Oregon
    3            Smith Blvd. at          2/99    210,000    1.06       4.55
                Pacific Highway,
                Sherwood, Oregon
    4        Intersection of Sherwood    11/97   349,919    0.95       9.05
                 Blvd. and Pacific
                     Highway,
                 Sherwood, Oregon
    5        Intersection of T-S Rd.     3/97    660,000    2.46       6.71
              and Pacific Highway,
                Sherwood, Oregon

      1
         Because comparables 4 and 5 were sold 28 months and 36 months before
the valuation date, respectively, Mr. Kelley adjusted the sales prices upward
by 7 percent and 9 percent to account for appreciation and inflation. No such
adjustments were made to comparables 1-3.


        Mr. Kelley’s expert report provided only a summary analysis

of the comparables:

        The high end of the value range is indicated by
        Comparable 4 ($9.05/SF), a pad site with superior
        exposure. In concluding a value for the subject,
        primary emphasis is placed on Comparables 1 and 5
        ($5.87/SF to $6.76/SF) both located in the immediate
        area. Considering the subject’s secondary locational
        characteristics, a value of $6.00 per square foot is
        concluded for this phase of the subject property.

        2.   Mr. Pio’s Report

        Mr. Pio used six comparables to determine Phase 2’s fair

market value on the date of death:
                                      - 26 -

  Compar-                                 Sale     Sales             Price per
 able No.1           Location             date     price     Acres    sq. ft.
     1         Intersection of SW         3/01    $249,000   0.74     $7.72
             Handley St. and Pacific
                    Highway,
                Sherwood, Oregon
     2         7300 SW Childs Rd.,        6/02    $500,000   1.74     $6.60
                Tualatin, Oregon
     3         

 Ave.,        8/99    $485,000   2.83     $3.93
                Hillsboro, Oregon
     4         SW Borchers Dr., Just      2/00    $900,000   3.39     $6.09
             West of Pacific Highway,       &
                 Sherwood, Oregon         11/00
     5            Smith Blvd. at          3/99    $210,000   1.03     $4.68
                 Pacific Highway,
                 Sherwood, Oregon
     6        Edy Rd., Just West of       6/99    $775,404   3.03     $5.87
                 Pacific Highway,
                 Sherwood, Oregon

      1
         Mr. Pio’s comparables 5 and 6 are the same properties as Mr. Kelley’s
comparables 3 and 1, respectively. We note that Mr. Pio reported the sale
date of his comparable 5 as March 1999, while Mr. Kelley reported the sale
date of that property (his comparable 3) as February 1999.


      In comparing the properties to Phase 2, Mr. Pio determined:

(1) Comparable 1 was a high indicator of value because it had

superior exposure than Phase 2 and was smaller in size, which

indicated a relatively high value per square foot; (2) comparable

2 was a good to slightly high indicator of value due to its

location in Tualatin; (3) comparable 3 was a low indicator of

value because of inferior zoning and exposure; (4) comparable 4

was a good indicator of value because of similar location and

exposure; (5) comparable 5 was a low indicator of value because,

though it was located on Pacific Highway, it was away from most

of the commercial development; and (6) comparable 6 was a good to
                              - 27 -

modestly high indicator of value; it had superior location and

exposure, but inferior configuration and access.   Mr. Pio

concluded:

     The preceding sales show a range in prices from $3.93
     to $7.72. Sale Nos. 1 and 2 ($7.72 and $6.60) are high
     indicators. Sale Nos. 3 and 5 ($3.93 and $4.58) are
     low indicators. Therefore, the subject value should be
     between these two price ranges, the mid-range of which
     is $5.64 per square foot. The remaining sales are
     $5.87 and 6.09 per square foot, suggesting a value
     conclusion closer to the upper end of the range. Based
     on the preceding, the value opinion is modestly above
     the mid-range, at $5.75 per square foot. After applied
     to the total land area, the final value opinion for
     Subject Parcel Phase 2 is:

     108,029 square feet x $5.75 = $621,167, Rounded
     $620,000.

     3.   Fair Market Value of Phase 2

     We accept Mr. Pio’s valuation of Phase 2.   Mr. Kelley did

not offer a detailed analysis of his comparables and did not

further elaborate at trial.   On the other hand, Mr. Pio offered a

detailed and reasonable comparison of each comparable to Phase 2.

We do not find that all of Mr. Pio’s comparables are reliable

indicators of value, particularly those not located in Sherwood.

However, the elimination of those comparables would not have a

significant impact on the final value determination because $5.75

per square foot was in the range of the sales prices for the

comparables located in Sherwood.   Therefore, we find that the

fair market value of Phase 2 on the date of death was $620,000.
                             - 28 -

     In reaching our holdings herein, we have considered all

arguments made, and, to the extent not mentioned above, we find

them to be moot, irrelevant, or without merit.

     To reflect the foregoing and the concessions of the parties,


                                        Decision will be entered

                                   under Rule 155.