A residential rental property with more than four rental units receives the benefit of specific valuation alternatives authorized by Ind. Code § 6-1.1-4-39(a), which provides that its true tax value is the lowest valuation determined from the three generally accepted approaches to value: cost, sales comparison, or income capitalization.1 The Petitioner claims to qualify for this statute and nobody disputed that the subject property is the type of property to which this provision applies. Consequently, by statute the market value-in-use for an assessment of this kind of property can be proved based on whichever of those three approaches produces the lowest value. Nothing in the Assessment Manual or Assessment Guidelines changes or limits that specific statutory authority.
Because Ind. Code § 6-1.1-4-39(a) specifies how the assessed value must be determined, this is not a case where an assessor’s valuation according to the Assessment Guidelines is presumed to be accurate. This is not a case where an assessor has discretion to choose among the cost method, the comparable sales method, the income capitalization method, or other generally accepted appraisal principles. And this is not a case where an opinion of value based on some combination of those three approaches to value would be determinative. Again, the lowest value from the cost, sales comparison, or income capitalization approaches determines the proper assessed value. Therefore, the Respondent’s request to set the 2009 and 2010 assessments at the final, reconciled values concluded in Mr. John’s appraisal is inconsistent with the applicable statute.
Some time ago the Petitioner successfully appealed the 2008 assessment of the subject property and got the assessed value reduced to $3,097,300. That final determination of value was based on evidence of the Petitioner’s 2005-2006 costs trended up to January 1, 2007. In that earlier case the Petitioner’s cost evidence was not disputed by the Respondent and the Board determined it was sufficient to make a prima facie case. But each tax year stands alone. See Thousand Trails Inc. v. State Bd. of Tax Comm’rs, 747 N.E.2d 1072, 1077 (Ind. Tax Ct. 2001). Furthermore, the evidence and arguments presented for these 2009 and 2010 appeals is substantially different from what was presented for 2008. Consequently, these appeals will not be determined based on the Petitioner’s bare-bones assertion that the 2008 assessed value should be carried forward for 2009 and 2010.
Rather, the 2009 and 2010 appeals must be determined from the rule specified in Ind. Code § 6-1.1-4-39(a) and weighing the evidence from both sides. In other words, because the lowest value indicated by the cost approach, the income capitalization approach, or the sales comparison approach is required, the credibility of the cost approach offered by the Petitioner must be weighed against the credibility of the income capitalization approach offered by the Respondent. Weighing the credibility of evidence involves a great number of considerations. There are no general rules that one type of evidence is always more credible than another. The Board has established no such general rules of priority in past cases, nor will it do so here. Specifically, the language the Petitioner relied on in the Roop v. Monroe County Assessor determination does not mean actual construction costs for the subject property always outweigh other types of evidence.
Indiana Code § 6-1.1-4-39(a) does not require anybody to present evidence related to all three approaches to value. In this case the Petitioner indicated that reducing the assessments to the value indicated by its cost approach would be satisfactory and chose to rely totally on that approach. The Petitioner offered absolutely no evidence regarding income capitalization. The Respondent offered evidence (in the appraisal) regarding both cost and income capitalization. Neither party offered any evidence of a value based on comparable sales.
First we consider the evidence based on the cost approach. The Petitioner submitted documentation of the actual construction costs for each building as well as its land costs. Exhibit 5 summarizes the information and provides references to the more detailed cost information in Exhibit 9, which is a 31-page itemized list with site development costs and actual costs of constructing the garden apartments. In addition, Exhibit 5 shows how the calculation added another 10% for “entrepreneurial profit.” It also shows those costs were trended to a value as of January 1, 2007, by adding 10% to the 2005-2006 costs. This calculation results in a value of $3,097,300. Mr. Kropp concluded that no further trending was required because the Respondent did not make changes for trending for 2009 or 2010. The Petitioner prevailed in the 2008 appeal with this evidence. In that instance it was sufficient to make a prima facie case and the Respondent offered nothing substantial to rebut or impeach it.
The Respondent’s case in the 2009 and 2010 appeals is much different. Most of the Respondent’s case is focused on the certified appraisals of the subject property prepared by Phillip Johns, who is an Indiana Certified General Real Property Appraiser and a member of the Appraisal Institute. His appraisals were completed in conformance with the Uniform Standards of Professional Appraisal Practice (USPAP). He appears to be a well-qualified, credible witness who has no financial interest in the outcome of these appeals. His appraisals’ final conclusions of value for each year are problematic because they are not consistent with the statutory mandate to use the lowest value indicated by the three standard approaches. But within each appraisal he developed a value based on the cost approach (Exhibit 5 at 28-32). In contrast to the actual construction cost evidence offered by the Petitioner, Mr. Johns cost approach looked at sales of other vacant land in the Mooresville area and estimated replacement cost from Marshall Valuation Service for the improvements.
The two versions of the cost approach lead to dramatically different conclusions about the value of the subject property—they are over $1 million apart. Both the land component and the improvement component of the conflicting cost approaches differ significantly. In such circumstances, credibility is an extremely important point. Neither side, however, pointed to any specific errors the other had made or offered any meaningful analysis regarding which cost approach is more credible. It is unfortunate that the parties neglected their obligations in this regard. See Indianapolis Racquet Club, Inc. v. Washington Twp. Assessor, 802 N.E.2d 1018, 1022 (Ind. Tax Ct. 2004) (explaining one must “walk the Indiana Board . . . through every element of the analysis”).
In spite of the Respondent’s failure to walk the Board through the analysis, several factors weigh against the credibility of the cost valuation presented by the Petitioner.
Mr. Kropp is a certified tax representative. The record does not disclose how he is being compensated. In the absence of such disclosure, it is presumed that a contingent fee arrangement exists between the taxpayer and Mr. Kropp. 52 IAC 1-2-4(c). Therefore, he has a financial stake in the outcome.
Nothing in the record indicates that Mr. Kropp had direct, first hand knowledge about the Petitioner’s land acquisitions, the construction of the subject property or the associated costs.
It is not clear who prepared the Petitioner’s cost figures or how they were obtained.
Nothing in the record indicates that Mr. Kropp is a certified appraiser.
Nothing in the record indicates the Petitioner’s cost approach methodology was prepared according to generally accepted appraisal principles or satisfies USPAP requirements.
The cost approach developed in Mr. Johns’ appraisals is more credible for several reasons.
Mr. Johns is an Indiana Certified General Appraiser.
Although he was paid for doing these appraisals, it was not on a contingent fee basis.
His analyses, opinions, and conclusions were developed, and his reports were prepared, in conformity with the USPAP.
His estimates for the improvements were based on the Marshall Valuation Service Manual.
Therefore, we conclude that when the cost approach is applied according to generally accepted appraisal principles, it indicates the value of the subject property was approximately $4.1 million, rather than the $3,097,300 calculated by Mr. Kropp.
Because of the specific mandate in Ind. Code § 6-1.1-4-39 to use the lowest value from the three generally accepted approaches, another part of Mr. Johns’ appraisals must be considered. His income capitalization approach concludes the value of the subject property is less than the value indicated by the cost approach. The income capitalization approach value was $3,892,000 as of March 1, 2009, and $3,968,000 as of March 1, 2010. Even though the Petitioner did not provide the income and expense data that Mr. Johns would like to have considered with this approach, the value that he developed using the income capitalization approach is still credible. Significantly, the Petitioner made no attempt to rebut or impeach Mr. Johns’ income capitalization approach. Based on everything offered in the present cases and the weight of the evidence, we conclude that this income capitalization approach is what the statute requires for this kind of property.
One small additional step in the analysis is necessary. The required valuation date for the 2009 assessment was January 1, 2008. Mr. Johns related the overall conclusion in the appraisal back to that date, but he did not do so just for the value indicated by the income capitalization approach. Nevertheless, the calculation is fairly simple. He trended a value of $4,000,000 as of March 1, 2009, to $3,950,000 as of January 1, 2008. That calculation reduced the value by $50,000 (1.25%). A similar calculation for the relevant value based on the income capitalization approach results in the value of $3,843,400 (rounded) as of January 1, 2008.
