On August 5, 2024, the Washington Court of Appeals, Division One, demonstrated the difficulty for property owners to challenge a local government’s decision to pass the cost of city improvements to them. In SHG Garage SPE et al. v. City of Seattle, the City of Seattle created a local improvement district, or “LID,” to raise funds from property owners to pay for waterfront improvements. The cost of the improvements were imposed as an assessment on owners who “specially benefitted” from the improvements.

Facts

The case arose out of the property owners’ appeal of Seattle’s LID assessments. The assessments were intended to fund Seattle’s multi-year project to rebuild and transform the central waterfront following the removal of the SR99 viaduct. In January 2019, the Seattle City Council created LID No. 6751 partially to fund six major public improvement projects, including a promenade, an elevated pedestrian bridge, Pioneer Square street improvements, a pedestrian link between the waterfront and Western Avenue, Pike and Pine Street improvements, and a reconstructed Pier 58 park—all along the central waterfront. The LID was premised on assessing 6,238 properties to pay approximately $160 million toward the cost of the improvements.

The City commissioned ABS Valuation Inc. to estimate the increased value that would accrue to each property in the LID—i.e., the “special benefit.” ABS used a series of mass appraisal techniques, market sales data, and lease data to calculate the “special benefit” for each parcel based on the property’s highest and best use and market value. ABS’s study provided a general overview of ABA’s reasoning and analysis, but it did not include the specific values and calculations used to arrive at the estimated assessments.

ABS determined the total special benefit to the affected properties was $448 million. Then it divided the City Council’s $160 million assessment cap by $448 million to reach a cost/benefit ratio of approximately 39%. ABS multiplied the special benefit assessable to each parcel by the cost/benefit ratio to determine the final assessment for each parcel.

Four hundred and thirty property owners objected to the assessment. After a public hearing, the hearing examiner recommended the remand of 17 properties to ABS for further analysis. ABS revised its analysis and reduced the assessment for 15 of the 17 properties. The City Council accepted the 15 reduced assessments and denied the remaining 415 objections.

Twenty-one property owners appealed their assessments to King County Superior Court. The court granted the appeal, and ruled that the City’s process for assessing the properties was arbitrary and capricious. The City appealed. This week the court of appeals reversed the lower court, and upheld the City’s LID process and assessments.

Court of Appeals Decision

Under Washington law, the “special benefit” to a property in an LID is the increase in fair market value attributable to the local improvement; a special assessment should not substantially exceed a property’s special benefit; and a property should not be assessed “proportionately more than its share” of the total assessment relative to other, similarly situated properties in the LID.

The court explained that Washington law delineates a deferential standard of review to local governments with regard to LID assessments, as follows:

• • A local government’s assessment is presumed proper. The court assumes: (i) the improvement grants a benefit; (ii) the assessment is no greater than the benefit conferred; (iii) the assessment is equal to, or proportionate with, the assessments on other similarly situated properties; and (iv) the assessment is fair. The challenging party bears the burden of proving otherwise.
  • A superior court must confirm a local government’s decision unless it finds that the assessment is founded upon a fundamentally wrong basis and/or the decision of the legislative body was arbitrary and capricious.
  • An assessment is founded on a fundamentally wrong basis if there is an error in the method of assessment or in the procedures used by the local government, the nature of which is so fundamental as to necessitate nullification of the entire LID, as opposed to modification of the assessment for a particular property.
  • A local government’s LID decision is arbitrary and capricious if it constitutes “willful and unreasoning action, taken without regard to or consideration of the facts and circumstances surrounding the decision.” Importantly, “[w]here there is room for two opinions, an action taken after due consideration is not arbitrary and capricious even though the reviewing court may believe it is erroneous.”
  • The court’s review is limited to the record of proceedings before the local government, and the court does not undertake an independent evaluation of the merits.
  • Claims of unfairness made before the local government, without supporting evidence of appraisal values and benefits, are inadequate to overcome the presumptions of fairness and appearance of correctness that favor local governments.

In SHG Garage, the property owners fell short of meeting their burden. First, the owners failed to present expert appraisal evidence that the properties would not benefit from the improvements. The superior court held such evidence is necessary to overcome the presumption that an LID improvement provides a benefit to the properties within the LID.

The court also found the criticism raised by the property owners’ expert was insufficient to set aside ABS’s valuation methodology. Criticism of the City’s analysis alone would not carry the burden to prove the assessments were founded on a fundamentally wrong basis. Instead, the owners would have to produce their own evidence that established the value of their properties before and after the assessment to rebut the presumption that the City’s assessment was proper.

The property owners also contended that ABS failed to comply with applicable Uniform Standards of Appraisal Practice (USPAP) in developing its valuations and assessments. The court held, however, that the City’s failure to comply with USPAP did not necessarily mean the valuations were inaccurate. Without independent proof of allegedly “proper” valuations that were different, the owners failed to overcome the presumption that the City’s analysis was correct. Thus, the superior court concluded the assessments had not been founded on a fundamentally wrong basis.

Conclusion

In short, the August 5 decision by the Washington Court of Appeals in SHG Garage indicates the courts will grant significant deference to cities and counties that establish a local improvement district. Property owners must furnish significant, independent proof that a city’s or county’s analysis was “fundamentally wrong” to overcome the strong presumption that favors local government LID decisions. It is not enough for property owners’ experts simply to critique the local government’s appraisal or valuation study, or to show that another valuation methodology might be preferable. Instead, it is incumbent on property owners to invest the resources necessary to establish specific, credible evidence that an assessment is founded on a fundamental error which renders it so flawed as to necessitate