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SIXTH DIVISION
April 16, 2004

This is a consolidated appeal relating to taxpayer United Airlines, Inc.'s, objection to thereal estate tax assessment (assessment) pertaining to its leasehold interest in terminal space(leasehold interest) at O'Hare Airport, Chicago, Illinois, for the tax years 1994, 1995 and 1996.⁽¹⁾ The trial court granted taxpayer relief for the 1994 tax year and ordered a reduction in the 1994assessment. The trial court denied relief for the 1995 and 1996 tax years.

Defendant Cook County treasurer and ex officio county collector (collector) appeals thetrial court's judgment granting taxpayer relief from the real estate taxes levied against taxpayer'sleasehold interest for the 1994 tax year. Collector first argues on appeal that the method used bytaxpayer's appraiser failed to consider actual market rental transactions. Collector next argues onappeal that the appraiser's conclusion regarding market rent was impeached by objective marketvalue evidence. Collector also argues that the appraiser's methodology used to calculate adepreciated value of the leasehold interest's exclusive-use space was legally incorrect. Collector's last argument is that the cost approach used by the appraiser failed to include thevalue of the land underlying the leasehold. For the reasons stated below, we reverse the trialcourt's judgment.

Plaintiff-taxpayer United Airlines, Inc., appeals the trial court's judgment denying relieffrom the real estate taxes levied against taxpayer's leasehold interest at O'Hare Airport for the taxyears 1995 and 1996. In this appeal, taxpayer contends that the evidence presented at trial waslegally sufficient to support its contention that the 1995 and 1996 assessments, not just the 1994assessment, were incorrect or illegal. Taxpayer also contends that the limit on the assessingofficial's powers and the custom and practice of assessing officials further support the conclusionthat the entire triennial assessment was incorrect. For the reasons stated below, we affirm thetrial court's judgment.

I. BACKGROUND

The following facts are pertinent to this appeal. Taxpayer has a leasehold interest interminal space located at O'Hare Airport. The leasehold interest relates to property consisting ofapproximately 891,666 square feet of exclusive-use space occupied by taxpayer in Terminal 1,Concourses B and C; Terminal 2, Concourses E and F; and the underground baggage facility. The City of Chicago owns the property, which is tax exempt. Taxpayer is responsible for payingthe real estate taxes pursuant to section 9-195 of the Property Tax Code, which provides that alessee of tax exempt property for purposes which are not tax exempt subjects the lessee to paytaxes on the property in the same manner as on property that is not tax exempt. 35 ILCS 200/9-195 (West 1996).

The property was subject to a general assessment by the Cook County assessor in 1994and was scheduled for reassessment in three years. 35 ILCS 200/9-220 (West 1996). Theproperty's assessed value was $29,965,249 in 1994 with an imputed fair market value of$78,855,918. The assessed value in 1995 rose slightly to $29,969,818 with an imputed fairmarket value of $78,867,942. In 1996, the assessed value rose by $1 to $29,969,819 with a $3increase in the imputed fair market value to $78,867,945.

Taxpayer filed a request for a reduction of real estate taxes for each year of the 1994triennial assessment with the Cook County Board of Review, which was denied. Afterexhausting available administrative remedies and paying the outstanding real estate taxes,taxpayer filed valuation objection complaints in the circuit court of Cook County, countydivision. 35 ILCS 200/23-15 (West 1996). On December 8, 1999, each valuation objectioncomplaint for the 1994 triennial assessment was merged and proceeded as one case. Thismerged case was tried in a bench trial on October 15, 2001.

The parties stipulated to all matters relating to the statutory requirement of full paymentof real estate taxes and exhaustion of administrative remedies. Robert Herman was the onlywitness to testify at trial.

Taxpayer called Robert Herman to testify at trial as an expert witness. Herman isemployed as a tax consultant at Deloitte & Touche in Chicago, Illinois, and has over 16 yearsexperience in the real estate appraisal profession. Herman was previously employed as a realestate appraiser for Real Estate Analysis Corporation. Herman obtained the designation of MAI,Member of the Appraisal Institute, in 1990, which is the highest designation in the appraisalprofession and requires approximately five years of work and study. Herman is certified inIllinois and various other states as a real estate appraiser. Apart from his work on behalf oftaxpayer, Herman has appraised approximately 12 airport properties. The trial court foundHerman qualified as an expert in the field of real estate valuation.

At trial, Herman described the methodology he used to appraise the property. Hermanindicated that he relies on the methodology set forth in People ex rel. Korzen v. AmericanAirlines, Inc., 39 Ill. 2d 11, 233 N.E.2d 568 (1967), in appraising properties. According toAmerican Airlines, an appraiser is to estimate the property's market rent and then apply a presentvalue factor to calculate the current value of the future rents to be received by the lessor. Inassessing the property, Herman examined appraisals previously prepared by Real Estate AnalysisCorporation, the amended and restated airport use agreement and terminal facilities leasebetween the City of Chicago and United Airlines, and the assessor's record cards. Hermantestified that taxpayer did not rent the entire terminal space. Based on the agreement with theCity of Chicago, taxpayer only was responsible for the square footage that taxpayer used toconduct business. According to the agreement, taxpayer's space was exclusive-use premises andthe remaining terminal space was public use premises.

Herman also stated that there are three established approaches to value property withinthe appraisal profession, which are the sales comparison approach, the income capitalization approach and the cost approach. The sales comparison or market approach focuses on sales ofcomparable property. Willow Hill Grain, Inc. v. Property Tax Appeal Board, 187 Ill. App. 3d 9,14, 549 N.E.2d 591, 596 (1989). The income capitalization approach is used when the propertyis most valuable as rental property. Willow Hill Grain, Inc., 187 Ill. App. 3d at 14, 549 N.E.2dat 596. The cost or replacement cost method focuses on what it would cost to recreate theproperty with the same value. Willow Hill Grain, Inc., 187 Ill. App. 3d at 14, 549 N.E.2d at596.

Herman indicated that he used the income capitalization approach to determine theleasehold's value. An element of the cost approach was used to estimate market rent. Hermanstated that using the cost approach to value the leasehold was consistent with the principles setforth in American Airlines.

Herman concluded that the terminal space is special purpose property. Herman definedspecial purpose property as property that due to its design and use is so limited that the propertycould not be converted to an alternate use.

Herman indicated that an appraiser usually is able to locate substitute real estate propertyfor purposes of the sales comparison approach. However, the property here is an airportterminal facility that economically cannot be converted to an alternate use. Herman furtherstated that based on an analysis he performed, other terminal space at O'Hare Airport and otherairports across the country could not be used as comparable property sufficient to develop a salesand income approach. Herman explained that comparable property could not be located becausethe actual rent paid to the City of Chicago included business arrangements that did not contributeto the property's value. Herman further explained that since he considers the property to beclassified as special purpose property, the best way to determine market rent was through a costapproach.

Herman proceeded to described the approach used to appraise property. The costapproach is premised on the theory that cost is a function of rent. Herman explained that if thecost per square foot to reproduce the property is determined, a market rental rate could becalculated. In using the cost approach, Herman used the Means Cost Manual, a nationallyrecognized construction cost manual, to determine the various costs to reproduce the terminal. The Means Cost Manual is a historical database that compares actual construction costs ofdifferent projects across the country.

To appraise the property, Herman took the respective cost figures from the Means CostManual and then made adjustments based upon age, time and gross overruns that did notcontribute to value. The cost of the entire square footage for Terminal 1 and Terminal 2 wasdetermined and was then divided by the total building area to compute a reproduction cost persquare foot. Herman next determined the property's depreciation and its effect on the property'soverall reproduction cost. The resulting figure represented the property's total reproductioncost. Using the property's reproduction cost figure, Herman calculated a market rent figure. After an appropriate market rent was calculated, the next step was to calculate the property'svalue using the methodology set forth in American Airlines. Using the American Airlinesmethodology, Herman determined a discount rate and multiplied the discount rate by the presentworth factor over the remaining lease term. Herman's opinion, within a reasonable degree ofcertainty, was that the property's value was approximately $59,760,000 as of January 1, 1994. Herman testified that his opinion regarding the property's value would not be materially differentin 1995 and 1996. Herman explained that the American Airlines formula had three variables,consisting of market rent, the discount factor and the lease term. In each subsequent year, thelease term is shortened. The market rent in 1995 and 1996 would be slightly higher, but theincrease would be offset by the lower present value factor. Therefore, Herman concluded thatthe value for 1994 would not be materially different in 1995 and 1996.

Collector did not present witnesses to testify at trial. Collector admitted two exhibits,consisting of an invoice from the City of Chicago and a copy of the lease agreement between taxpayer and the City of Chicago.

The trial court held that American Airlines provided the relevant law to calculate theproperty's market value. The trial court ruled in the taxpayer's favor for 1994. Accordingly, anorder was entered correcting the assessed value for 1994 from $29,965,249 to $22,708,800. TheCook County treasurer was ordered to refund $1,420,773.82 with 5% per annum statutoryinterest to taxpayer. The trial court also ruled that the expert witness's testimony that theproperty's value would not be materially different in 1995 and 1996 was "not enough" to changethe property's assessed value for those years. Therefore, an order was entered denying thevaluation objections for 1995 and 1996. Taxpayer filed a timely notice of appeal after thedisposition of a posttrial motion.

II. STANDARD OF REVIEW

As a preliminary matter, we must determine the appropriate standard of review. Theparties each contend that a different standard of review is applicable to this appeal. Collectorcontends that because the appraiser used improper valuation methods in computing the leaseholdinterest's value, a question of law is presented in this appeal which requires a de novo standard ofreview. See Kankakee County Board of Review v. Property Tax Appeal Board, 131 Ill. 2d 1, 14,17, 544 N.E.2d 762, 768, 769 (1989).

Taxpayer contends that this appeal presents a mixed question of law and fact, whichrequires application of the "clearly erroneous" standard of review. A mixed question of fact andlaw is defined as "one 'in which the historical facts are admitted or established, the rule of law isundisputed, and the issue is whether the facts satisfy the statutory standard.' " AFM MessengerService, Inc. v. Department of Employment Security, 198 Ill. 2d 380, 391, 763 N.E.2d 272, 279(2001) quoting Pullman-Standard v. Swint, 456 U.S. 273, 289 n.19, 72 L. Ed. 2d 66, 80 n.19,102 S. Ct. 1781, 1790 n.19 (1982). Taxpayer argues that determination of the proper valuationmethod is a question of law, but any question regarding how market rent was obtained is aquestion of fact. Therefore, taxpayer contends, the appropriate standard of review is "clearlyerroneous."

Findings of administrative agencies, such as the Property Tax Appeal Board, are primafacie correct. See Chrysler Corp. v. Illinois Property Tax Appeal Board, 69 Ill. App. 3d 207,210, 387 N.E.2d 695, 698 (1979). However, courts have intervened in real estate objectionvaluation cases when the issue relates to the use of an improper valuation method. ChryslerCorp., 69 Ill. App. 3d at 210-11, 387 N.E.2d at 698. This appeal requires us to examine theappropriateness of the valuation methodology used by taxpayer's expert in valuing the leaseholdinterest to support its objection to the leasehold's assessed value. We are not charged with theresponsibility of determining the leasehold interest's correct value or market rent in this appeal. Therefore, our standard of review relating to the question of law at issue in this appeal is denovo. Town of Cunningham v. Property Tax Appeal Board, 225 Ill. App. 3d 760, 763, 587N.E.2d 573, 575 (1992); Chrysler Corp., 69 Ill. App. 3d at 210-11, 387 N.E.2d at 698. We alsonote that the assessor's property assessment is presumed correct. People ex rel. Devine v.Murphy, 181 Ill. 2d 522, 524, 693 N.E.2d 349, 352 (1998). A taxpayer contesting an assessmentbears the "burden of proving any contested matter of fact by clear and convincing evidence" andshowing an assessment to be incorrect or illegal. See 35 ILCS 200/23-15 (West 1996);American Airlines, 39 Ill. 2d at 20, 233 N.E.2d at 573.

III. ANALYSIS

A. 1994 Assessment Objection Analysis

Collector raises four issues for review in this appeal relating to the 1994 assessment. First, collector argues that the appraisal method used by Herman is fatally flawed because it failsto refer to actual market rental transactions. Second, Herman's conclusion regarding the marketrental was impeached by objective market value evidence. Third, the methodology used byHerman to determine a depreciated value for the exclusive-use space is legally incorrect. Finally, Herman's use of the cost approach was flawed because it failed to consider the rentalvalue of the land.

Collector first argues that Herman used an unauthorized appraisal method that failed tosupport an assessment reduction. Collector contends that a leasehold interest is valued by thepresent value of all the future payments the lessee is to pay the lessor, or the present value of anannual payment of one dollar for the unexpired term of the lease. The monthly present worthfactor of 98.59 is uncontested in this case. The parties agree that 98.59 represents the presentvalue of an annual payment of one dollar for the unexpired term of the lease. The parties,however, disagree on the current market rental figure to be multiplied by 98.59. Collector pointsto Herman's testimony in which he indicated that based on his analysis, the monthly marketrental should be approximately $606,000. Collector, however, presented an invoice datedJanuary 1994, which indicated that taxpayer paid the City of Chicago $4,300,000 as rent for themonth.

Collector claims that Herman attempted to calculate a current monthly rental figurewithout reference to the market, which is contrary to the requirements set forth in AmericanAirlines. Collector refers to Herman's testimony in which he stated that he could not findcomparable market data and that there was a lack of comparable arm's length lease transactions.Collector also refers to Herman's testimony in which he indicated that he had knowledge of thefollowing: existence of numerous leases at O'Hare Airport; existence of leases at other majorairports; the rent taxpayer paid at O'Hare Airport and at other airports could be determined; andthe rent paid by other airlines at other airports also could be determined. Collector contends thatsince Herman's approach to determine the "market value" failed to consider available marketdata, the appraisal should be insufficient to overcome the presumption that the assessment iscorrect as a matter of law. Collector argues that Herman erroneously and inexplicably chose notto find the market rent.

Taxpayer responds that Herman examined numerous airport leases with airlines acrossthe country, which included Northwest Airlines, Delta and Air Wisconsin, in preparing theappraisal report. Herman explained that in analyzing the other leases he did not find comparableleases containing an arm's length transaction from which a net rental rate could be extracted. Herman reasoned that the leases were not arm's length because it is difficult to ascertain theamount of net income derived from rentals of comparable terminal facilities in other cities. Herman explained that the rental rates varied depending on the method the airlines used toabsorb the operating expenses incurred for operating the terminals. Concluding that comparableleases sufficient to derive a market rent figure did not exist, Herman used the cost approach toestimate market rent.

Herman turned to the cost approach to estimate market value because establishedappraisal theory provides that cost is a function of rent. Herman used replacement cost tocalculate market rent, which considers the cost to rebuild or reproduce the structure, lessdepreciation costs like normal wear and tear of the structure over time. Herman then took thecalculated replacement cost and prorated or applied it to a periodic monthly cost. Herman thenadded the amount of return that an investor would likely expect to receive per month. Taxpayerargues that the methodology used by Herman to calculate an estimated market rent has beenaccepted by Illinois courts, which have acknowledged that a valuation method based onreproduction costs is helpful where no market value can be determined.

Taxpayer relies on Kendall County Board of Review v. Property Tax Appeal Board, 337Ill. App. 3d 735, 787 N.E.2d 363 (2003), to support its position that the cost approach tovaluation is an accepted method to value property. In Kendall County Board of Review, thiscourt held that use of the cost approach was valid because no evidence existed in the recordindicating a reasonable actual or potential market for the property. Kendall County Board ofReview, 337 Ill. App. 3d at 741-42, 787 N.E.2d at 369. This court reached its holding that a lackof an actual or potential market exists because the subject property was zoned for agriculturaluse but a special use for telecommunications was allowed. Kendall County Board of Review,337 Ill. App. 3d at 741, 787 N.E.2d at 369. Evidence was presented in Kendall County Board ofReview that the property could not be marketed as a communications center and the structurescurrently on the land would need to be demolished in order for the land to be used foragricultural purposes. Kendall County Board of Review, 337 Ill. App. 3d at 741, 787 N.E.2d at369. Taxpayer contends that Kendall County Board of Review supports its position because inthe instant case, the trial court accepted Herman's conclusion that the leasehold interest was aspecial purpose property which lacked market transactions. Taxpayer, therefore, argues that dueto the lack of a market, using the cost approach was proper.

Taxpayer also contends that De Luz Homes, Inc. v. County of San Diego, 45 Cal. 2d 546,290 P.2d 544 (1955), supports use of the cost approach. The issue in De Luz Homes, Inc.involved the proper valuation of a leasehold interest of a military 562-unit housing project on taxexempt land owned by the United States government. De Luz Homes, Inc., 45 Cal. 2d at 553,290 P.2d at 549. The California Supreme Court in De Luz Homes recognized the existence ofdifferent valuation methodologies and held that factors including replacement costs and incomeanalysis may be used to determine value when there is an absence of an actual market for aproperty. De Luz Homes, 45 Cal. 2d at 563, 290 P.2d at 555, citing Kaiser Co. v. Reid, 30 Cal.2d 610, 623, 184 P.2d 879, 887 (1947). Taxpayer argues that similar to the property in De LuzHomes, Herman was required to use replacement cost and income analysis to value the leaseholdsince an actual market for the property did not exist because the property was special purposeproperty. Taxpayer also argues that the lease at issue in the instant case involved numerous costsand agreements making it difficult to determine a net rent figure and the property underlying theleasehold interest could not be economically converted into an alternative use.

We agree with Collector that Herman erred in failing to consider market data incalculating the appraised value of the leasehold interest. We are unpersuaded by taxpayer'scontention that the leasehold interest related to special purpose property for which no marketexists. Special purpose property is property " 'of such nature and applied to such special use thatit cannot have a market value.' " Chrysler Corp., 69 Ill. App. 3d at 212, 387 N.E.2d at 355,quoting City of Chicago v. Farwell, 286 Ill. 415, 420, 121 N.E.2d 795, 797 (1918). The keycriterion in determining whether property is special purpose property is "whether the property isin fact so unique as to not be salable, not what factors might or might not make it so unique." Chrysler Corp., 69 Ill. App. 3d at 213, 387 N.E.2d at 356.

While we acknowledge that the rental of an airport terminal may be considered propertyof special use, we are not persuaded that the lease of such property is "so unique as to not besalable." We are mindful that the practical use for such a leasehold interest would be use as aterminal and baggage check-in; we, however, do not consider the nature of the leasehold interestin this appeal to be "one of a kind." The airline industry consists of a multitude of airlines, manyof which would likely eagerly pursue available terminal space at what has been known as theworld's busiest airport. We are cognizant of Herman's testimony in which he acknowledged thatleases with other airlines existed at O'Hare Airport. Therefore, we disagree with taxpayer'scontention that the leasehold interest is so unique as to not be salable and for which no marketexists.

Concluding that the leasehold interest is not so unique that a market for it does not exist,we now address the appropriateness of the valuation method adopted by Herman in appraisingthe property. Herman adopted the income capitalization method to appraise the leaseholdinterest and used the replacement cost method to determine market rate. We, like the courts inKendall County Board of Review and De Luz Homes, acknowledge that the income capitalizationand replacement cost methodologies are acceptable appraisal methodologies to value property. The sales comparison approach, however, is the preferred method and should be used whenmarket data is available. See Willow Hill Grain, Inc., 187 Ill. App. 3d at 14, 549 N.E.2d at 596.

The relevant market data for purposes of this appeal is the fair cash value of the leaseholdinterest. The fair cash value of a leasehold means the "rental value in the market - the amount awilling lessee will pay a willing lessor, in a voluntary transaction, for the right to use and occupythe premises." American Airlines, 39 Ill. 2d at 18, 233 N.E.2d at 572. In reviewing Herman'strial testimony, we note that Herman was aware that Northwest Airlines and possibly DeltaAirlines paid $5 per square foot on a net basis for exclusive-use space at O'Hare Airport. Wealso note that Herman stated that he could have determined the gross rent for taxpayer at O'HareAirport, the gross rent for any other of the major airlines and would have been able to determinethe gross rent for taxpayer at other airports around the country. We are mindful that no twopieces of real estate are identical and that the leases at O'Hare Airport for terminal space maynot be boilerplate. However, we are not persuaded that the variance of lease terms supports theconclusion that there are a lack of arm's length lease transactions, which prohibits compilationof market rental data for valuation purposes. Rather, we conclude that the existence of otherleases at O'Hare Airport for the lease of terminal space demonstrates the existence of a marketfor such property. The record in this case amply supports the conclusion that a potential marketfor the property exists. Therefore, we believe that the appraisal of the leasehold interest shouldhave been based in whole or in part on the sales comparison approach, especially in light of thedisparity between the monthly rental of $606,000 computed by Herman and the actual monthlyrent paid by taxpayer of $4,300,000. By failing to consider the sales comparison approach indetermining market value of the leasehold interest, we conclude that taxpayer has not met itsburden of demonstrating that the assessment was incorrect by clear and convincing evidence.

We note that both parties have thoroughly argued and responded to each other's claimsregarding the remaining contentions with respect to the 1994 valuation objection. We also notethat this court in American Airlines rejected the taxpayer's argument that the tax on a leasehold isassessed on "the potential profit available upon assignment of that interest, rather than the faircash value of the interest." American Airlines, 39 Ill. 2d at 17-18, 233 N.E.2d at 572. Since weconclude that the appraised value of the leasehold interest should have included an analysis ofexisting market data, we need not separately address: Collector's contentions that the appraisedvalue was impeached by objective market value evidence, that the appraiser's methodology tocompute depreciation on the leasehold's exclusive-use area was legally incorrect, and that thevalue of the land should have been included in the cost approach used by the appraiser.

B. 1995 and 1996 Assessment Objection

Taxpayer raises two arguments on appeal regarding the rejection of relief for tax years1995 and 1996. The first argument is that the 1994 reassessment applied to 1995 and 1996 sincethe property was reassessed for the general assessment year in 1994, the property was notreassessed during the triennial and no physical changes to the property occurred. The taxpayer'ssecond argument is that the statutory limitations on the powers of assessing officials and thecustom and practice of the assessing officials support the finding that the assessment wasincorrect for the entire triennial period. Taxpayer contends that clear and convincing evidencewas presented that the 1994 triennial assessment was incorrect.

We note that one appraisal report was prepared to support the assessment objection forthe 1994, 1995 and 1996 tax years and Herman testified that the 1994 appraised value would notmaterially differ for 1995 and 1996. However, our conclusion that clear and convincingevidence was not presented that the 1994 assessment was incorrect disposes of taxpayer'scontentions that the assessment was incorrect for the entire triennial period. In light of ourconclusion regarding the 1994 assessment, an analysis of this issue on appeal is not warranted.

For all of the foregoing reasons, the judgment of the trial court is reversed regarding the1994 valuation objection (No. 1-02-0771) and affirmed regarding the 1995 and 1996 valuationobjection (No. 1-02-0687).

No. 1-02-0771, Reversed.

No. 1-02-0687, Affirmed.

O'MARA FROSSARD, P.J., and FITZGERALD SMITH, J., concur.

1. The 1994, 1995 and 1996 tax objection cases were consolidated for pretrial purposes byan order of the circuit court. The cases were "merged" for all further proceedings by court orderand the cases proceeded to trial together.