The Los Angeles County Assessor's Office has tentatively concluded that it failed to detect $25.9 million in taxable income and improvements at the Queen Mary and Spruce Goose site in 1982-84, saving operators of the tourist attractions about $860,000 in property taxes.
A special audit shows that Wrather Port Properties Inc. escaped reassessment that should have pushed the value of its twin attractions to $44.3 million by March, 1984, rather than the $18.4 million figure on the tax roll, said Assessor Alexander Pope.
But those findings--which echo some of the conclusions in a city auditor's report earlier this year--remain tentative until the figures are placed on the tax roll, Pope said.
"Barring some major factor that Wrather would bring up, those will probably be the final numbers," Pope said in an interview. "We've gone over it with (Wrather) pretty thoroughly . . . . We've reviewed all the legal problems, so our appraiser has a number he is satisfied with."
County appraisers met with Wrather representatives again Tuesday, capping weeks of discussions between the two parties, said Paul Hannah, director of assessor operations. "We're still talking to the Wrather people, receiving new information," he said.
New Issues Raised
Charles Ajalat, a Los Angeles attorney Wrather brought into the case last week, said that he has raised significant issues this week that had not previously been considered. Hannah said appraisers are analyzing the new information.
If the audit-generated values are entered on the tax roll, Wrather properties would be billed for the $860,000 in back taxes, Pope said.
Ajalat said that if the assessor sticks with those values, Wrather will appeal the decision to the county Assessment Appeals Board or, on some issues, directly to Superior Court.
"We feel those proposed values are not legally sustainable," he said. "We feel that they do not reflect the fair market value, which is dramatically lower."
On appeal, Ajalat said, Wrather would argue that the assessor is wrong in maintaining that extension of the Queen Mary lease from 40 to 66 years in 1982 allowed reappraisal of the Queen Mary site.
State Assessment Law
In general, state law allows real estate to be reassessed only when it is sold or improved or when control of it is transferred by long-term lease.
Ajalat insisted that the 1982 lease extension was "not a reappraisable event because the original lease (signed in 1981) contemplated the extended term."
Whether the lease extension allows reappraisal is an important issue because most of the proposed $25.9-million increase in assessed value is based on projections of profitability gleaned from Wrather financial reports for 1982, not from previously undetected physical improvements to the site, said Pope. State law allows profitability to be considered in placing values on commercial real estate.
According to tentative figures released by the assessor, the taxable value of Wrather's port site was $25.3 million in 1982-83, not the $3.2 million on the tax roll. Its value in 1983-84 was $33.7 million, not $12.7 million, and its value for 1984-85 was $44.3 million, not $18.4 million as the roll indicates.
"I'm sure that if Wrather tries to appeal, they're going to argue that we're using hindsight here," said Pope. "But the numbers are strong enough from 1981 to 1982 to indicate profit. With income stream analysis we are trying to predict out over a number of years . . . what their profit is going to be."
Joseph Prevratil, president of Wrather Port Properties, has acknowledged that his company is now profitable, making in the "low millions" in 1984 even after subtracting property depreciation of more than $3 million from earnings. (Wrather lost about $1 million in 1983 after depreciation, Prevratil said. Attendance at the Queen Mary rose from 500,000 before the Spruce Goose was added in 1983 to about 1.7 million last year.)
Wrather's current profitability with the tourist attractions is irrelevant for purposes of reappraisal, however, because the Queen Mary site has not been sold or its long-term lease altered since 1982. Only financial figures from that year can be used for reappraisal, the assessor said.
When analyzing Wrather Port Properties' 1982 "income stream," county appraisers did not sufficiently consider several important factors that should have reduced assessed value, Ajalat said.
In addition, the "extraordinarily high" cost of maintenance at the Queen Mary site, about $2.5 million a year, also needs more consideration, he said.
The amount of risk taken by Wrather in leasing the Queen Mary after a decade of enormous losses also is an issue not properly considered by appraisers, he said. The city lost $3 million operating the attraction the year before Wrather leased it in 1981 and tens of millions over the previous decade.
Questioned in February
Wrather's taxes on the Queen Mary site were first questioned in February, when Long Beach City Auditor Robert Fronke maintained in an annual audit report that $15 million of the $30 million Wrather had spent to improve the site by March, 1984, had not been placed on the tax rolls. Fronke maintained that the resulting loss in property taxes to local and state government was $150,000 a year.
In an interview then, Fronke also said his evaluation of the profitability of the Queen Mary properties indicated a potential increase in taxes of another $250,000 annually.
Pope was critical of Fronke's comments at that time, but the assessor recently said that Fronke's "red flag" prompted the special audit. Pope said that although his department's figures differ somewhat from Fronke's, many of his points were substantiated.
Appraisers were aware in 1982 of the change in the Queen Mary lease, but they had revalued the property just the year before, when Wrather first leased the site, and assumed the value could not have increased much, Pope said.
'Very Little Value'
"The problem really was that the appraiser was dealing with a turnaround situation," Pope said. "The previous operator lost money there and the whole operation appeared to have very little value."
The appraiser thought a new appraisal would be an effort in futility also because past efforts to increase the Queen Mary's assessed value had failed, said Mark Ryavec, an assistant to Pope.
"Over a decade, the City of Long Beach had invested $80 million in that project, but courts and appeals boards allowed us to value it at only $1 million," said Ryavec. "So there was a dramatic history of great sums of money being spent on it and it not resulting in increased value."