74. Between them, the parties
offered four expert opinions, two of them by licensed appraisers who testified
that they followed USPAP in reaching their conclusions. Thus, each party
generally met its burden of production, and we must weigh those various opinions
to determine which one most reliably estimates the subject property’s market value-in-use.
1. Malancuk and
Berkemeier’s opinions
75. We start with Malancuk’s
valuation opinion. First, we note that Malancuk was being paid a contingent
fee. An expert’s opinion should be unbiased. Where the expert has a financial
interest in the outcome of a case, such as when he is paid a contingent fee,
that fact is an appropriate consideration in weighing the credibility of the
expert’s opinion. See Wirth v. State Bd. of Tax
Comm’rs,
613 N.E.2d 874, 876 (Ind. Tax Ct. 1993). Thus, we find that Mr. Malancuk’s fee
arrangement detracts from the credibility of his valuation opinion.
76. Regardless, there is a more
compelling reason to disregard Malancuk’s valuation opinion—he simply
re-calculated the subject property’s assessments using GCK rather than GCI cost
schedules for a significant portion of the main building. Thus, his opinion amounts
to little more than a challenge to the Assessor’s methodology and a strict application
of the Guidelines. The Tax Court cautioned against that type of approach in Eckerling.
Malancuk’s valuation opinion therefore carries little or no probative weight. The
same is true for at least part of Berkemeier’s valuation opinion. He too did a
cost approach analysis using the Guidelines and Nexus’s cost tables.
77. Berkemeier, however, also
analyzed the subject property’s value under the sales comparison and income
approaches. Berkemeier generally followed the basic methodology underlying the
sales-comparison approach, at least in form. He identified properties that he
believed were similar to the subject property, relying most heavily on their
close proximity to each other. And he adjusted each property’s sale price to
account for arguably relevant ways in which the property differed from the
subject property. But Berkemeier did little to explain how he quantified his
adjustments, saying only that he relied on his experience and knowledge in
working on property tax appeals. For example, Berkemeier justified his
5%-per-year market adjustment on grounds that appraisers, tax representatives,
and other real estate professionals commonly use that same adjustment in
appeals, even though both Tillema and Mitchell explained that the valuation
dates at issue in these appeals spanned a significant recession. Berkemeier’s sales-comparison
analyses therefore carry little or no probative weight.
78. Berkemeier’s analyses under
the income approach similarly lack persuasive force. Berkemeier did little to
support several key judgments underlying his conclusions. For example,
Berkemeier based his rent estimates solely on listings without knowing if any
of those asking rents were actually realized. He did not even know whether the
listings were for single-tenant or multi-tenant properties. Similarly,
Berkemeier assumed that the listings were for triple net leases without knowing
anything about the lease terms that accompanied the listings. And Berkemeier
did even less to support his estimates for vacancy and collection losses and
expenses.
2. Mitchell’s appraisal
79. That leads us to the
appraisals from Mitchell and Tillema/Bryant. We start with Mitchell’s appraisal.
Mitchell is an MAI with significant experience appraising industrial properties.
He certified that he complied with USPAP. And he considered all three generally
accepted valuation approaches while reasonably explaining why he ultimately decided
not to develop the cost or income approaches. Mitchell walked the Board through
his sales-comparison analyses and generally explained both how the properties that
he relied on compared to the subject property and why he adjusted the
comparable properties’ sale prices. Thus, we find Mitchell’s valuation opinion
to be generally reliable.
80. The Assessor, and her expert
witness, Tillema, challenged Mitchell’s appraisal on two main grounds: (1) that
Mitchell determined the subject property’s market value rather than its true
tax value, and (2) that Mitchell double dipped in making his adjustments for the
main building’s uneven floor and relative lack of loading docks. We disagree on
both counts.
81. To support his claim that
Mitchell determined the subject property’s market value instead of its true tax
value, Tillema asserted both that Mitchell did not clearly lay out his valuation
standard in his appraisal report and that Mitchell’s adjustments for the main building’s
uneven floor and relative lack of loading docks were unnecessary in light of 500
N. Rangeline’s use of the facility as a massive repair shop. Contrary to
Tillema’s reading of Mitchell’s appraisal report, however, Mitchell expressly
estimated the property’s “market value-in-use.” See e.g. Pet’r Ex. 6 at 61 (“Therefore, it
is the opinion of the appraiser that the retrospective market value in use of
the fee simple in the subject property was expected to have been . . . .”)
(emphasis added).
82. We likewise see no
incongruity between Mitchell’s adjustments and the true tax value standard.
Mitchell adjusted for things such as the main building’s comparative lack of loading
docks and uneven floor because those things matter for warehouses. Although Tillema
believed that the property’s location away from interstates made it an unlikely
candidate as a warehouse, the property’s leasing history showed that tenants
had used it both as a manufacturing facility and as a warehouse. Indeed, Summit
advertised the property as a manufacturing facility with warehouse space. And
Dell explained that the lack of loading docks and the uneven floor had both
been deterrents to Summit leasing or selling the property. We recognize that
Kempf did not identify those concerns in his separate broker’s opinion. Indeed,
the “basic cleanup” that Kempf identified as being necessary to maximize the
property’s value involved less drastic repairs. Pet’r Ex. 7 at 24, 33. But as
Mitchell explained, Summit was the broker that actually listed the property and
Dell therefore had a fuller understanding of how potential lessees and buyers
viewed the property.
83. Thus, we disagree with the
Assessor’s claim that Mitchell’s adjustments somehow violated the standard of
true tax value by looking at the value of the property to a “second generation”
user rather than to 500 N. Rangeline. We believe that the Assessor’s position misunderstands
both the facts of this case and Indiana’s true tax value standard. 500 N. Rangeline
was motivated purely by market considerations; it was actively trying to lease or
sell the property to the highest bidder. And those bidders likely cared about
the main building’s floor and the number of docks.
84. In Meijer Stores Ltd. P’ship v. Wayne Twp. Assessor, 926 N.E.2d 1134
(Ind. Tax Ct. 2010), the Tax Court rejected a position similar to the Assessor’s
protestations about a “second generation” users in this case. In that case,
Meijer, which operated “big box” stores, appealed from the Board's
determination rejecting the opinion of the taxpayer’s appraiser, who also
happened to be Lawrence Mitchell. Meijer, 926 N.E.2d at 1337. The Board
had rejected the appraisal because Mitchell’s sales-comparison analysis did not
establish what another Meijer or comparable big box retailer would have paid
for the property. Id. The Tax Court, however, explained,
This rejection was improper.
Indeed, in formulating an estimate of value under the sales comparison
approach, an appraiser need only “locate[] sales of comparable [] properties
and adjust[] the selling prices to reflect the subject property’s total
value. Here, Meijer’s appraisal utilized five big-box properties in Indiana
that were used for retail purposes both pre and post-sale. Wayne County’s
cross-examination of Mitchell did not solicit any testimony as to any other
sales. Accordingly, it was improper to discount the appraisal’s sales
comparison approach because “secondary users” purchased vacated big-box
properties instead of entities like Wal-Mart.
Id. (citations
omitted) (italicized emphasis in original, bold emphasis added).
85. We also put little stock in
Berkemeier and Tillema’s claims that if having more loading docks and a more
even floor were important to the main building’s use, 500 N. Rangeline would
have added docks and repaired the floor. There are many reasons, such as a lack
of funds, why a property owner might not cure an inutility. Indeed, functional obsolescence—a
concept that the Tax Court, Guidelines, and generally accepted appraisal principles
all recognize—presupposes that buildings might have both curable and incurable
inutilities that are not captured by assigning normal depreciation. See GUIDELINES, app. F at 4,
8-11; Canal Square Ltd. P’ship v. State
Bd. of Tax Comm’rs,
694 N.E.2d 801, 806 (Ind. Tax Ct. 1998); Westwood Lanes, Inc. v. Garwood
Borough, 24 N.J. Tax 239, 262 (N.J. Tax Ct., 2008) (quoting THE APPRAISAL OF REAL ESTATE (12th ed. 2001) (“functional
obsolescence, which may be curable or incurable, can be caused by a deficiency,
which means that some aspect of the property is below standard in respect to
market norms.”). Taken to its logical conclusion, Berkemeier and Tillema’s position
would preclude an appraiser from ever accounting for curable functional obsolescence;
a building would never have a curable inutility because the owner’s failure to
cure automatically means that there is no inutility.
86. Second, Tillema believed that
Mitchell double dipped when he first adjusted each comparable property’s sale
price to account for various ways in which it differed from the subject
property and then subtracted an additional $200,000 from the weighted average
of his adjusted sale prices to account for the main building’s uneven floor and
relative lack of loading docks. While we find Mitchell’s approach unusual—it is
unclear why he made the $200,000 adjustment to the weighted average of his
adjusted sale prices rather than adjusting each comparable property’s sale
price independently—we do not agree that he adjusted for the same differences
twice. Mitchell compared the subject property to other properties that were
average within the relevant market while the main building’s uneven those
characteristics to make the properties truly comparable. There is nothing to
suggest that Mitchell’s other adjustments somehow already accounted for those
differences.
87. That being said, Mitchell’s
choice of comparable properties gives us some pause. He focused on properties
with predominately warehouse uses rather than manufacturing uses. But the
subject property was located at least 10 miles form the nearest interstate. And
the property was originally built as a manufacturing facility. Similarly, it
was leased by an ethanol manufacturer when 500 N. Rangeline bought it, and as
explained above, Summit advertised the property as a manufacturing facility
with warehouse space. As already explained, there is nothing in the record to
indicate that 500 N. Rangeline was motivated by non-market factors in using the
property; to the contrary, it sought to sell or lease the property for the
highest amount it could get, which presumably might include bids from buyers
who planned to use the property for manufacturing. Nonetheless, the property’s
leasing and listing history demonstrates that market participants used, and likely
would continue to use, the property at least partly as a warehouse. Thus, to
the extent that Mitchell’s somewhat narrow view of the property’s use might
have caused him to exclude otherwise comparable sales from his analysis, it
does not detract too greatly from his opinion’s reliability.
3. Tillema and Bryant’s appraisal
88. That leaves Tillema and
Bryant’s appraisal. Like Mitchell, Tillema is an MAI with significant knowledge
and experience in appraising industrial properties, and he and Bryant certified
that they prepared their appraisal in conformity with USPAP. Also like Mitchell,
Tillema and Bryant developed only the sales-comparison approach in estimating
the subject property’s value.
89. Unlike Mitchell, however, the
explanation that Tillema gave at the Board’s hearing for his and Bryant’s
decision to develop only the sales-comparison approach differed from what he
and Bryant had indicated in their appraisal report. At the hearing, Tillema testified
that while he would ordinarily develop the cost approach, he and Bryant were engaged
to develop only the sales-comparison approach and that he understood the Assessor
had gotten someone else develop the cost and income approaches. But Tillema emphasized
that true tax value looks first to the cost approach and that value-in-exchange
and the income approach are used to add credibility. That is inconsistent with
Tillema and Bryant’s appraisal, where they explained that the cost approach was
not a good indicator of the subject property’s true tax value. And that
inconsistency detracts from the reliability of Tillema and Bryant’s valuation
opinion.
90. In any case, Tillema and
Bryant identified what they felt were comparable properties, and they adjusted
those properties’ sale prices for various ways in which the properties differed
from the subject property. Tillema, however, acknowledged several errors in his
and Bryant’s adjustments. While those errors may not have greatly affected
Tillema and Bryant’s ultimate valuation opinion, they do at least show a degree
of carelessness.
91. But Tillema and Bryant’s
valuation opinion suffers from problems that are more fundamental. Given
Tillema’s belief that 500 N. Rangeline was using the property as a massive
repair shop, Tillema and Bryant did not make any adjustments to account for differences
in the number of loading docks or the presence or absence of an operable sprinkler
system. We find that position a little curious, given that Tillema and Bryant described
the property’s use as “warehouse space” in their appraisal report. Resp’t Ex. A at 38. Regardless, as
already explained, the record does not support Tillema’s understanding of the
subject property’s use as a massive repair shop.4 If operators using the property
for manufacturing or as a warehouse would find the number of loading docks or the
lack of an operational sprinkler system significant, Tillema and Bryant needed
to consider adjusting their comparable properties’ sale prices on those
grounds.
92. Tillema and Bryant’s failure
to make those adjustments is even more troubling given Tillema’s acknowledgment
that some of his and Bryant’s comparable properties were probably used for
manufacturing post sale and that the sale prices may have included premiums for
the presence of additional loading docks. Tillema off-handedly justified his
and Bryant’s decision by arguing that the premiums would only be a problem if
one was concerned with a typical buyer and seller and that, in any case, the
sales-comparison approach is only used as support for the cost approach under
Indiana’s true tax value system.
93. We do not agree with Tillema’s
willingness to so easily brush off the concerns of typical buyers and sellers.
500 N. Rangeline was motivated by the same concerns as a typical market
participant. Indeed, we believe that Tillema unduly focused on language in the Manual
indicating that market value-in-use “may be thought of as the ask price of property
by its owner, because this value more clearly represents the utility obtained
from the property, and the ask price represents how much utility must be
replaced to induce the owner to abandon the property.” MANUAL at 2. As the Tax
Court has explained, however, “[i]n markets where property types are frequently
exchanged and used by both the buyer and seller for the same general purpose, a
sale will be representative of utility, and market value-in-use will equal
value-in-exchange.” Stinson v. Trimas Fasteners, 923 N.E.2d 496, 501 n.
10 (Ind. Tax Ct. 2010) (citing MANUAL at 2-3). While the Tax Court recognized
that the Manual makes exceptions for special purpose properties where sales generally
will not represent utility, there is nothing in the record to even remotely
suggest that the subject property is a special purpose property.
94. In any case, Tillema’s view
of true tax value still does not excuse his and Bryant’s failure to account for
premiums in their comparable properties’ sale prices that were associated with
the presence of additional docks. If anything, those premiums tend to show that
Tillema and Bryant’s purportedly comparable sales were not sufficiently
comparable because the sale prices were not based on uses that were similar to
use that Tillema and Bryant ascribed to the subject property. Indeed, given
that ascribed use, where Smith Projects was occupying 22,560 square feet of the
main building to store construction equipment, it is difficult to see why
Tillema and Bryant sought out sales of facilities with between 75,000 and
150,000 square feet of manufacturing space. While Tillema gave several answers
to that question, none of them was persuasive.
4. The subject property’s sale and listing prices
95. Thus, while far from perfect,
we find Mitchell’s valuation opinion the most persuasive of the various
opinions offered at the hearing. But that does not end our inquiry; we still need
to address the following two things: (1) the property’s listing history during
which 500 N. Rangeline offered the property for sale at asking prices ranging
from $1.3 million to $2 million, and (2) subject property’s December 19, 2006
sale price of $1,586,995.
96. The property’s listing
history does little to show its actual market value-in-use, or even a reasonable
range of values. The broker listings, however, were for substantially more than
Mitchell’s value estimates for each year. And Mitchell himself recognized that
final sale prices are often 85% to 90% of list prices. Thus, the list prices
arguably at least tend to impeach Mitchell’s valuation opinion. Nonetheless, the
listings proved unsuccessful, and Dell’s letter reflects his belief that the
property would be unlikely to bring much more than $5 per square foot in its
then-current condition (or to net $5 per square foot after the cost of
necessary repairs). Under those circumstances, we give little weight to the
list prices either as independent evidence of the property’s market
value-in-use or as impeaching Mitchell’s valuation opinion.
97. That leaves us with the
property’s actual sale price. Like a USPAP-compliant appraisal, a property’s
sale price is often compelling evidence of its market value-in-use. But the sale
price must not include consideration for things excluded from ad valorem
taxation, or if it does, the price must be allocated between the various
interests included in the sale. Similarly, the sale must have been at arm’s
length and must reflect other important indicia of a market value transaction.
Thus, for example, the sale should involve typically motivated, well-informed
parties and the property should be exposed to the market for a commercially
reasonable period. See MANUAL at 10 (setting forth a definition of
market value that includes typically motivated parties and a reasonable time for
exposure to the market). And like any other evidence in an assessment appeal,
there must be something to relate the sale price to the sold property’s market
value-in-use as of the relevant valuation date.
98. The record contains little
information about the December 19, 2006 sale beyond the parties’ names and the
sale price. Smith testified that the price was based solely on Greenfield
Biofuel’s long-term lease and that he would not pay anywhere near the same price
without that lease. But Smith did little to back up his claim. We recognize
that the sale price for a leased property might involve interests beyond the
fee-simple interest in real property. For example, the sale price might include
consideration for personal property or contractual interests in an above-market
lease. But there is no evidence of that here. We therefore give little weight
to Smith’s self-serving testimony.
99. Of course, the Assessor did
not treat the sale as valid. But nobody actually identified the Assessor’s
underlying reason for invalidating the sale. Berkemeier’s speculation as to why
the Assessor might have treated the sale as invalid is just that—speculation.
And while there is nothing to imply that the parties to the sale were related
to each other, the record is silent regarding the various other indicia of a
market value sale.
100. The sale also occurred more
than a year before any of the valuation dates at issue in these appeals, and
the Assessor did little to relate the sale price to those valuation dates. Berkemeier
testified that property generally appreciated at an annual rate of 5%. But the basis
for his conclusion—that appraisers, tax representatives, and other
professionals often use that adjustment in tax appeals—does nothing to address
the rate of appreciation in the subject property’s market during the specific
period in question. On the other hand, both Mitchell and Tillema used sales
from 2007 in their respective analyses for the March 1, 2009 assessment date
without making any time-related adjustments. Indeed, Tillema even used one sale
from May 2007 in his analysis for the March 1, 2010 assessment date.
101. Of course, market conditions
are not the only thing that can change between a sale date and an assessment
date—the property itself may change. That happened in this case when water
pipes froze in December 2008 causing significant damage to the main building.
The Assessor did nothing to address how that damage affected the property’s market
value-in-use. Granted, the damage that Smith most clearly identified—the disabling
of the building’s sprinkler system—did not actually figure in Mitchell’s valuation
conclusion and therefore might not fully explain the difference between his opinion
and the property’s sale price. But considering (1) the intervening damage to
the property, (2) the general lack of information about the sale and the reasons
that the Assessor viewed it as invalid,
and (3) the sale’s tenuous relationship to the valuation dates at issue
(especially for the March 1, 2010 and March 1, 2011 assessments), we are more
persuaded by Mitchell’s valuation opinion. Thus, we find that the subject property’s
true tax value was no more than what Mitchell estimated for each assessment date
and that the property’s assessments must be adjusted accordingly.
