Friday, June 29, 2012

Board Finds Petitioners Failed to Prove Value of Property with Allocated Purchase Price or Income Calculation

The Petitioners’ case nominally relies on the type of analysis done in most appraisals (income approach, cost approach, market approach), but they did not present an appraisal. More importantly, they did not establish that any of their methodology conforms to generally accepted appraisal principles. After considering everything that was presented in this case, it is clear that what the Petitioners mean by using those terms for their calculations is inconsistent with how appraisers use the terms.

Therefore, the amounts suggested by the Petitioners’ “cost approach,” “income approach,” “market approach,” and “other” calculations do not help to prove anything relevant to this case.

Often the purchase price for a property can be some of the best evidence of its market value-in-use. The Petitioners’ version of the cost approach in this case, however, does not help to make a case for several reasons. It is not really a cost approach. Mr. Richards testified that $625,000 of the total purchase price was for 25 acres of land that is not included in the assessment of the subject property. The Sales Disclosure Form appears to generally support the fact that the purchase price was $1,290,000 and it included 24.35 acres of land. The PRC shows that the assessment of the subject property includes no land. Accordingly, reducing the total purchase to account for the land conceptually makes sense. But the amount—$625,000—is problematic because the record contains no substantial evidence to support Mr. Richards’ conclusory calculation based on $25,000 per acre. Mr. Richards’ cost calculation also subtracted another $100,000 for the demolition of five structures on the property, but his statements about that part of the calculation were entirely unsupported conclusions. He offered no authority or substantial argument to support how subtracting demolition costs conforms to generally accepted appraisal principles. Furthermore, his anticipated $100,000 figure is merely a bald conclusion. Ultimately, the unsubstantiated conclusions at the heart of the Petitioners’ version of the cost approach leave the calculation with no probative value. See Lacy Diversified Indus. v. Dep’t of Local Gov’t Fin., 799 N.E.2d 1215, 1221 (Ind. Tax Ct. 2003); Whitley Products v. State Bd. of Tax Comm’rs, 704 N.E.2d 1113, 1119 (Ind. Tax Ct. 1998).

The Petitioners presented some factual evidence about the 2007 income and expenses related to the subject property. The Respondent did not dispute the accuracy of that information and for purposes of this analysis the Board will regard that income and expense data as accurate. Nevertheless, the Petitioners’ version of the income approach to value has serious problems and no probative value. There was a 79 percent vacancy rate. That number may be high, but from the record it is impossible to draw any legitimate conclusion about what it really means. For 2007 they had $136,013 gross operating income and $173,487 of expenses—a loss of $37,474. The Petitioners made no attempt to relate their own numbers to industry standards or establish what might reasonably be expected over a longer period of time. Most importantly, their income approach includes absolutely nothing about determining an appropriate capitalization rate and applying it to determine a value, which is an integral part of any generally accepted income approach to value. The Petitioners’ version of the income approach is not credible or relevant.

The market approach also frequently is called the sales comparison approach. It can be accomplished by comparing a subject property to other properties that have been sold in the same market. See, e.g., State Bd. of Tax Comm'rs v. Garcia, 766 N.E.2d 341, 343 n.3 (Ind. 2002). Similarities and differences such as date of sale, location of property, physical characteristics, and conditions of the sale must be noted in detail. See Long v. Wayne Twp. Assessor, 821 N.E.2d 466, 470-471 (Ind. Tax Ct. 2005) (explaining that in offering comparables one must establish the characteristics of the subject property, establish how those characteristics compare to the purportedly comparable properties, and establish how any differences affect the relative values). In this case the Petitioners offered no other sales to compare. As a market approach they simply relied on their own purchase price of $1,290,000 and subtracted the purported $900,000 cost to remediate asbestos, reaching a value of $390,000. For the reasons explained earlier, this single reference point does nothing to help prove the actual market value-in-use of the subject property. Furthermore, the Petitioners’ calculation assumes that the cost of the asbestos remediation relates to reducing value on a one for one basis, but provides no support for that assumption. Such a conclusion is not probative evidence. See Lake Co. Assessor v. U.S. Steel Corp., 901 N.E.2d 85, 94-95 (Ind. Tax Ct. 2009) (holding that failure to link the cost of remediating environmental contamination with an actual reduction in property value equivalent to what was spent on remediation left the remediation cost with no probative value for purposes of determining assessed valuation). The Petitioners’ purported market approach does nothing to support their claim.

The approach that the Petitioners identified as "other" is nothing more than subtracting the purported land value and environmental clean-up costs from their purchase price. Again, they failed to establish that this approach is in accordance with generally accepted appraisal principles. Furthermore, the record contains no substantial basis for attributing $625,000 to land value and it contains no substantial basis for attributing $900,000 remediation cost to a $900,000 reduction in the value of the subject property. The kind of unsupported conclusory statements that the Petitioners relied on are not probative evidence and do not help to prove that the existing assessment must be changed. See Lacy Diversified, 799 N.E.2d at 1221; Whitley Products, 704 N.E.2d 1119.

In summation, none of the Petitioners’ various valuation approaches are probative evidence. They do not prove the existing assessment is wrong or prove the lower value that was requested.