The Petitioner’s claim depends on
a value calculation purportedly using the income capitalization approach to
determine the actual market value-in-use of the subject property. An income
capitalization approach that conforms to generally accepted appraisal
principles would be an acceptable way to prove the market value-in-use of a
property and overcome the presumption in favor of the existing assessment.
MANUAL at 3.
Mr. Welton apparently prepared
the income capitalization calculation that is shown on Petitioner Exhibit C.
The credibility of his work and valuation opinion is critical to the
Petitioner’s case. Several things, however, negatively impact that credibility.
Mr. Welton acknowledged that he is paid on a contingency basis and has a
financial interest in the outcome of the appeal. Although he testified that he
has completed class work on the income approach and mass appraisal techniques
(without providing any details), Mr. Welton is not an appraiser and his
calculations do not purport to be a certified appraisal. Even though his
testimony and his income capitalization calculations resemble the kind of
processes appraisers commonly perform, under these circumstances the evidence
from Mr. Welton does not have the same kind of impact that an independent,
professional, certified appraiser/appraisal likely would have.
Further, Mr. Welton failed to
prove that the evidence he offered conforms to generally accepted appraisal
principles. The failure involves all three major segments of this income
capitalization approach: the potential gross income, the net operating income,
and the nine percent capitalization rate. Mr. Welton conclusory asserted that
the market capitalization rate should be nine percent and provided no
underlying support or analysis as to how he arrived at that figure.
Mr. Welton failed to show that
the potential gross income in his calculation is consistent with the kind of
income similar properties in the market would be expected to bring. Indiana
MCH, LLC. V. Scott County Assessor, 987 N.E.2d 1182, 1185-86 (Ind. Tax Ct.
2013). Instead, his calculation included actual revenues received by the
Petitioner, which casts additional doubt on the credibility of the potential
gross income figure that Mr. Welton used.
Considering historic and
projected income as well as expense data of the subject property can be
appropriate in the income capitalization approach, but it is also necessary to
consider data from other comparable properties in order to make accurate,
realistic projections about the income stream a property can be expected to
produce. Where income and expense data for the subject property is out of step
with what the market data shows, generally accepted appraisal principles
require further examination and analysis to determine why. Considering both
types of income and expense data helps to protect against distortions and
inaccurate value estimates that might be caused by extraneous factors (such as
bad management or poor business decisions) that have nothing to do with the
inherent value of a property. Id. at 1184. This point is particularly
significant when coupled with the testimony that this data was supplied by the
Petitioner’s office manager, who would also have an interest in the outcome of
the appeal. But here that kind of evidence and comprehensive analysis is
lacking. Thus, Mr. Welton’s income capitalization approach failed to comply
with generally accepted appraisal principles because it did not consider the
income and expenses of comparable properties in the market. Id. at 1186.
Mr. Welton also failed to
establish that his method of determining net operating income satisfies
generally accepted appraisal principles. He deducted the actual operating
expenses and management fees of the subject property. There is no indication of
how those actual operating expenses compare to what is normal for the market.
Conclusory statements that expenses are “normal” are not probative. Whitley
Products, Inc. v. State Bd. of Tax Comm’rs, 704 N.E.2d 1113, 1119 (Ind. Tax
Ct. 1998). If the actual expenses are unusually high (for example, because of
bad management or poor business decisions), it would be inappropriate to
consider only the actual expenses in determining a net operating income figure
to capitalize. In this case, based on the evidence presented, or lack thereof,
it is simply impossible to determine whether the net operating income figure
Mr. Welton used conforms to generally accepted appraisal principles. This point
is another significant failure in the Petitioner’s case.
Selecting an appropriate capitalization
rate for this kind of calculation is fundamental to the credibility of the
result. Making an appropriate selection, however, is not a simple matter.
Nevertheless, in this case the Petitioner offered only limited, conclusory
explanation in attempting to support the selected capitalization rate. Mr.
Welton’s testimony provided no explanation or analysis for his use of nine
percent, contending only that the rate was based on other transactions in which
he had been involved.
This explanation is problematic
for several reasons. The Petitioner failed to establish when these transactions
occurred or the type of properties involved. The record contains nothing to
establish comparability with the subject property. Accordingly, it is not clear
that Mr. Welton’s use of that data conforms to generally accepted appraisal
principles. The biggest problem, however, is the complete failure to establish
how this data of capitalization rates from other transactions might relate to
the relevant valuation dates of January 1, 2008, and March 1, 2010. This
failure alone entirely destroys the probative value of Mr. Welton’s income
capitalization approach. See Long, 821 N.E.2d at 471. The Petitioner did
not make a case for any assessment change.
