CNL Hotels & Resorts, Inc. v. Maricopa County

SUPREME COURT OF ARIZONA
En Banc

CNL HOTELS AND RESORTS, INC., a ) Arizona Supreme Court
Maryland corporation; and ) No. CV-11-0072-PR
MARRIOTT DESERT RIDGE RESORT, )
LLC, a Delaware limited ) Court of Appeals
liability company, ) Division One
) No. 1 CA-TX 09-0003
Plaintiffs/Appellants, )
) Arizona Tax Court
v. ) Nos. TX2007-000057
) TX2007-000177
MARICOPA COUNTY, a political ) (Consolidated)
subdivision of the State of )
Arizona, )
) O P I N I O N
Defendant/Appellee. )
)
__________________________________)

Appeal from the Arizona Tax Court
The Honorable Dean M. Fink, Judge and Thomas Dunevant, Retired
Judge

VACATED AND REMANDED
________________________________________________________________

Opinion of the Court of Appeals Division One
226 Ariz. 155, 244 P.3d 592 (2010)

VACATED
________________________________________________________________

BALLARD SPAHR LLP Phoenix
By Brian W. LaCorte
Joseph A. Kanefield

And

GALLAGHER & KENNEDY, P.A. Phoenix
By Mark A. Fuller
James G. Busby, Jr.
Attorneys for CNL Hotels and Resorts Inc and Marriott Desert
Ridge Resort LLC
HELM LIVESAY & KYLE LTD Tempe
By Roberta S. Livesay
Raushanah Daniels
Attorneys for Maricopa County

LASOTA & PETERS, PLC Phoenix
By Donald M. Peters
Kristin M. Mackin
Attorneys for Amicus Curiae Arizona Association of School
Business Officials

GUST ROSENFELD P.L.C. Phoenix
By David A. Pennartz
Attorney for Amicus Curiae Paradise Valley Unified School
District No. 69

JONES SKELTON & HOCHULI, P.L.C. Phoenix
By Timothy J. Bojanowski
Attorney for Amici Curiae Rodger Dahozy, Philip S. Leiendecker,
Chris Mazon, Darlene Adler, Linda Durr, Keith E. Russell, Cammy
Darris, William Staples, Paul Larkin, Felipe A. Fuentes, Jr.,
Pamela J. Pearsall, and Joe Wehrle

THOMAS C. HORNE, ARIZONA ATTORNEY GENERAL Phoenix
By Paula S. Bickett, Chief Counsel, Civil Appeals
Daniel P. Schaack, Assistant Attorney General
Attorney for Amicus Curiae State of Arizona
________________________________________________________________

B R U T I N E L, Justice

¶1 Improvements on land leased from the state qualify for

a reduced ad valorem tax rate if they “become the property of

the . . . state . . . on termination of the leasehold interest

in the property.” A.R.S. § 42-12009(A)(1)(a) (2009). We hold

that this provision applies when, at the time of taxation,

improvements exist on the land that, under the terms of the

lease, would become the state’s property upon lease termination.

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 I.

¶2 In 1993, the predecessor-in-interest to CNL Hotels and

Resorts Inc. (“CNL”) entered into two ninety-nine year leases of

state trust land to build the Desert Ridge Resort and Spa and

adjacent golf course. The leases provide that the property “may

only be used for the construction, operation, maintenance,

renovation and/or reconstruction of a hotel or other similar

resort facility.” Although CNL owns all structures and

improvements on the land, at lease termination, CNL must

“surrender peaceable possession of the [p]remises,” including

the improvements, and quitclaim to the state “any right, title

or interest in the leasehold.” During each lease term, CNL has

the right “to remove or demolish all or any part of”

improvements on the property without any obligation to

reconstruct them.

¶3 After the leases were entered into, the legislature

created a property tax classification (“Class Nine”) in which

property is taxed at a rate of one percent, significantly lower

than that generally applicable to commercial property. See

A.R.S. §§ 42-12001, -12009 (defining Class One and Class Nine

properties); A.R.S. §§ 42-15001, -15009 (prescribing lower tax

rate for Class Nine than for Class One). From 2003 through

2006, the tax years at issue here, Maricopa County classified

the Desert Ridge improvements under Class One, the

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classification applicable to general commercial property, and

taxed CNL accordingly.

¶4 CNL appealed the County’s 2006 tax assessment to the

State Board of Equalization, requesting Class Nine

classification. The Board denied the request, concluding that

the improvements would not “unequivocally become the property of

the state” when the leases ended. CNL then filed a declaratory

judgment action in the tax court. The County moved for summary

judgment, arguing that Class Nine did not apply because CNL had

the unqualified right to remove or destroy improvements during

the lease term. Neither the County’s motion nor CNL’s response

addressed whether Desert Ridge is used primarily for the

purposes described in § 42-12009(A)(1)(b) (the “primary use

requirement”) or the appropriate tax classification of the golf

course. See § 42-12001(9) (including golf course property

within Class One); § 42-12002(1)(d) (including golf courses

within Class Two). The tax court granted summary judgment for

the County based on CNL’s failure to meet the requirements of

§ 42-12009(A)(1)(a).

¶5 The court of appeals reversed and directed the tax

court to instead enter summary judgment for CNL. CNL Hotels &

Resorts, Inc. v. Maricopa Cnty., 226 Ariz. 155, 164 ¶ 41, 244

P.3d 592, 601 (App. 2010). It held “that § 42-12009 requires

the existence of a demonstrable reversionary interest at the

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time of taxation,” id. at 160 ¶ 19, 244 P.3d at 597, and that

the CNL leases meet this requirement, id. at 162 ¶ 29, 244 P.3d

at 599. It further concluded that the evidence in the record

supported the tax court’s “finding” that CNL meets the primary

use requirement. Id. at 163 ¶ 35, 244 P.3d at 600. Moreover,

the court of appeals held that the County had waived review on

the primary use issue by not cross-appealing. Id. at 163-64

¶¶ 37-38, 244 P.3d at 600-01. The court also rejected the

County’s argument that CNL was not entitled to seek relief for

back taxes under A.R.S. § 42-16251(3), the “error correction”

statute. Id. at 162-63 ¶¶ 30-33, 244 P.3d at 599-600.

¶6 We granted review to address issues of statewide

importance concerning the interpretation of the property tax

statutes.

II.

A.

¶7 The first issue involves the proper interpretation of

§ 42-12009(A)(1)(a), which applies Class Nine to:

1. Improvements that are located on federal, state,
county or municipal property and owned by the lessee of
the property if:

a. The improvements become the property of the
federal, state, county or municipal owner of
the property on termination of the leasehold
interest in the property.

b. Both the improvements and the property are
used primarily for athletic, recreational,

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 entertainment, artistic, cultural or
convention activities.

¶8 To qualify for Class Nine tax status, improvements on

government land must become the governmental landowner’s

property on the lease’s termination. The parties dispute,

however, whether Class Nine applies to improvements that may no

longer exist at the end of a lease, although they will become

the government’s property if they do. CNL asserts, and the

court of appeals held, that sub-paragraph (a) requires only that

the taxed improvement will become government property if it

exists upon lease termination. See CNL Hotels, 226 Ariz. at 160

¶ 18, 244 P.3d at 597 (requiring tax assessment to focus “on the

present existence of a demonstrable reversionary interest”).1

The County, however, argues that the Class Nine statute also

requires proof the improvement will in fact exist at the end of

the lease.

¶9 Both readings are consistent with the language of

§ 42-12009(A)(1)(a); the statute does not specify whether Class

Nine status requires certainty that the government lessor will

receive now-existing improvements when the lease later

terminates. Because § 42-12009(A)(1)(a) is subject to “two

1
The parties and courts below use the term “reversionary
interest” to describe the sub-paragraph (a) requirement of
future ownership, but this terminology is technically inaccurate
because the government could not hold a “reversionary” interest
in improvements it did not previously own.
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plausible interpretations,” it is ambiguous. Hayes v. Cont’l

Ins. Co., 178 Ariz. 264, 268, 872 P.2d 668, 672 (1994).

Accordingly, we must interpret the statute in light of its

“context, subject matter, and historical background; its effects

and consequences; and its spirit and purpose.” Id.

¶10 We conclude that CNL’s interpretation is the more

reasonable one. Section 42-12009 is a property tax statute.

Our property tax laws generally do not assign immutable tax

classifications; instead, property taxes are assessed annually.

See A.R.S. § 42-13051 (requiring tax assessor to yearly list

property and assess its value for purposes of the tax roll).

Because a property’s appropriate classification is reevaluated

each year the property is taxed, § 42-12009 is reasonably

interpreted as contemplating that tax classifications will

consider the circumstances at the time of taxation. Speculating

about hypothetical future events is unnecessary. If the

government landowner’s right to receive the improvement at the

termination of the lease, in fact, terminates, so will the

taxpayer’s entitlement to Class Nine status.

¶11 The County’s interpretation also creates

administrative difficulties. Tax assessors would be required to

scrutinize each lease, covenant, contract, and statute governing

the leasehold to determine whether a future contingency could

prevent the lessor from actually receiving the improvement. See

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Killebrew v. Indus. Comm’n of Ariz., 65 Ariz. 163, 168, 176 P.2d

925, 928 (1947) (considering “difficulties in the practical

operation of the law” to discern correct interpretation of

statutory text). The County’s position would also likely

require tax assessors to inquire into rebuilding requirements in

the event of natural or manmade disasters such as fire, flood,

earthquake, war, or terrorist attack.

¶12 The County’s rationale for its interpretation is

equally unpersuasive. It contends that unless the state

actually receives the improvement taxed under § 42-12009, it

will not receive sufficient economic value to justify the

lessee’s tax benefit. We disagree.

¶13 The County characterizes the state’s future ownership

as consideration for the one percent tax rate the lessee

receives. But neither § 42-12009 nor the property tax scheme

generally evinces any legislative intent to require taxpayers to

compensate the government when they benefit from favorable tax

rates. And in any event, it was not unreasonable for the

legislature to determine that reducing property taxes for Class

Nine would benefit the state by encouraging the lease of

government land and spurring development. See Ariz. Const. art.

10, §§ 1-11 (prescribing management of state trust lands); see

also Turken v. Gordon, 223 Ariz. 342, 348 ¶ 23, 349 ¶ 29, 224

P.3d 158, 164, 165 (2010) (acknowledging that city council could

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reasonably conclude increased tax base benefits public).

¶14 In contrast, the court of appeals’ and CNL’s

interpretation of subsection (A)(1)(a) avoids these analytical

and administrative pitfalls. Similarly, it comports with the

state’s duty to responsibly manage trust land.

¶15 Reading § 42-12009(A)(1)(a) to require only that, at

the time of taxation, an improvement exist on the land that,

under the terms of the lease, would become the property of the

government landowner at the lease’s termination results in a

statute that is easy to apply and understand. Tax assessors

would be faced with a manageable task, consistent with their

statutorily defined duties. See § 42-13051 (describing duties

of county tax assessors as determining names of owners and cash

value of properties). Their inquiry would be limited to

examining each tax year what exists on the land and determining

whether the government landowner at that time has the right to

own any improvements upon termination of the lease.

¶16 Applying this interpretation, CNL has satisfied § 42-

12009(A)(1)(a)’s future ownership requirement. Desert Ridge

sits on state trust land. Upon the termination of each lease,

CNL must quitclaim the premises, including any improvements, to

the state.

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 B.

¶17 The County also argues that the court of appeals erred

in ordering summary judgment in favor of CNL because no evidence

was presented to show CNL met the primary use requirements of

§ 42-12009(A)(1)(b). The County’s motion for summary judgment

had specifically reserved the right to litigate that issue, and

the County asks that we vacate the court of appeals’ opinion,

allowing it to litigate whether Desert Ridge is used primarily

for “athletic, recreational, entertainment, artistic, cultural

or convention activities.” § 42-12009(A)(1)(b).

¶18 In granting the County’s motion for summary judgment,

the tax court stated that CNL met the primary use requirement,

but did not explain this assertion or cite any authority or

evidence supporting it. The court of appeals interpreted the

tax court’s statement as a finding establishing primary use even

though this issue had neither been briefed nor argued in the tax

court.

¶19 “[I]t is incorrect to direct entry of summary judgment

on issues not raised by the movant in the trial court and on

which the parties have therefore not had an opportunity to

marshal and present evidence.” City of Phoenix v. Yarnell, 184

Ariz. 310, 320, 909 P.2d 377, 387 (1995). The County,

therefore, is entitled to fully litigate this issue in the tax

court on remand.

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¶20 The court of appeals also erred in concluding that the

County was required to file a cross-appeal on the primary use

issue. CNL Hotels, 226 Ariz. at 163-64 ¶ 37, 244 P.3d at 600-

01. Arizona’s long-settled rule is that “if [an] appellee in

its brief seeks only to support or defend and uphold the

judgment of the lower court from which the opposing party

appeals, a cross-appeal is not necessary.” Maricopa Cnty. v.

Corp. Comm’n, 79 Ariz. 307, 310, 289 P.2d 183, 185 (1955). A

cross-appeal is required only if the appellee seeks “to attack

[the] judgment with a view of either enlarging his rights

thereunder or lessening the rights of his adversary.” Id.

(internal quotations omitted). Merely seeking to support a

lower court’s judgment for reasons not relied upon by it “is not

attempting to enlarge [an appellee’s] own rights or lessen those

of [an] adversary,” and a cross appeal is unnecessary.

Santanello v. Cooper, 106 Ariz. 262, 265, 475 P.2d 246, 249

(1970); see also Ariz. R. Civ. App. P. 1, 13, State Bar

Committee Note. As a prevailing party not seeking to expand its

own rights, the County was not required to file a cross-appeal.

C.

¶21 We also granted review on the County’s claim that the

Desert Ridge golf course property should be classified

separately from the resort property because golf course property

is listed as belonging to Class One or Class Two under §§ 42-

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12001(9) and 42-12002(1)(d). Rather than decide this issue, we

leave it to the tax court to address in the first instance when

it considers the primary use of the Desert Ridge property for

purposes of § 42-12009(A)(1)(b).

D.

¶22 Finally, we address the County’s argument that CNL was

not entitled to relief under the error correction statute.

Section 42-16251(3) authorizes correction of “any mistake in

assessing or collecting property taxes” when the error is caused

by any circumstance listed in subsections (3)(a) through (3)(e).

The County maintains that the court of appeals wrongly concluded

that the statute applies to the kind of “errors” CNL alleged.

¶23 Subsection (3)(b) includes “[a]n incorrect designation

or description of the use or occupancy of property or its

classification.” The court of appeals correctly concluded that

because Desert Ridge had been wrongly categorized under Class

One, CNL could avail itself of the error correction statute.

CNL Hotels, 226 Ariz. at 162 ¶ 30, 255 P.3d at 599.

¶24 The County, however, contends that subsection (3)(e)

bars CNL’s recovery. Subsection (e) states that error exists

when “a valuation or legal classification [of property] is based

on an error that is exclusively factual in nature or due to a

specific legal restriction . . . and that is objectively

verifiable without the exercise of discretion, opinion or

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judgment.” The County argues that CNL cannot qualify for relief

under subsection (3)(e) because meeting the primary use

requirement for Class Nine involves factual determinations

subject to discretion, opinion, or judgment. But even assuming

arguendo that the County is correct about subsection 3(e),

nothing in § 42-16251 suggests that a taxpayer’s inability to

seek relief under one subsection bars relief under another.

III.

¶25 For the foregoing reasons, we vacate the court of

appeals’ opinion and remand the case to the tax court for

further proceedings consistent with this opinion. We deny CNL’s

request for attorney fees, without prejudice to CNL requesting

the tax court to award it fees for this stage of proceedings if

it prevails on remand. See Ariz. R. Civ. App. P. 21(c); Leo

Eisenberg & Co. v. Payson, 162 Ariz. 529, 535, 785 P.2d 49, 55

(1989).

_____________________________________
Robert M. Brutinel, Justice

CONCURRING:

_____________________________________
Rebecca White Berch, Chief Justice

_____________________________________
Scott Bales, Vice Chief Justice

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_____________________________________
A. John Pelander, Justice

_____________________________________*

*
Before his resignation on June 27, 2012, as a result of his
appointment to the United States Court of Appeals for the Ninth
Circuit, Justice Andrew D. Hurwitz participated in this case,
including oral argument, and concurred in this opinion’s
reasoning and result.

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