The Board is Persuaded by
Ramsland's Valuation Opinion
Ramsland, a highly qualified
appraiser with significant experience in appraising anchor department stores,
offered his opinion that the subject property's market value-in-use was $17,800,000
and $18,200,000 as of the relevant valuation dates for the 2007 and 2008 assessments.
His opinion is by far the most persuasive evidence in the record. He thoroughly
analyzed the property's value under all three generally recognized valuation approaches,
taking care to verify important information, such as the terms of sales and leases
that he used in his analyses. And he explained his analyses in significant
detail, offering market data to support most of his key judgments.
The Assessor did not
significantly discredit Ramsland's valuation opinion
The Assessor, however, challenged
some of those judgments. For example, his witness, Beckman, criticized several
aspects of Ramsland's analysis under the income approach. First, Beckman
claimed that Ramsland's methodology of determining a rent per square foot and
then applying that to the subject property ignored the significance of sales as
a driver of rents. The Board disagrees. Ramsland determined his rental rates
after consulting Dollars & Cents for contextual information and
examining the subject property's sales volumes as well as sales volumes for
comparable anchor department stores. He similarly examined the specific lease
terms for those comparable properties. That is a far more reliable methodology
than Beckman's decision to simply multiply the subject property's sales by a
flat percentage that she took from the Dollars & Cents tables.
Second, Beckman pointed out that
Ramsland's stabilized rent increased between 2006 and 2007 at a much lower rate
than the rate by which subject property's sales increased during the same
period. But that scenario is consistent with what Ramsland described as a
fundamental reality about the structure of anchor department store leases: as
sales increase so does rent, but at a decreasing rate. The lease data from
Ramsland's comparable properties supports that proposition.
Third, Beckman disagreed with
Ramsland's decision to deduct management fees and vacancy and collection loss
in estimating net operating income. But Ramsland explained that the Appraisal
of Institute and IAAO both require appraisers to deduct at least something for
those expenses. Indeed, the publication from which Beckman took her own
expenses, Dollars & Cents, includes management fees as an expense.
Beckman acknowledged that anchor department stores all go dark at some point,
meaning that the store's owner will have to deal with vacancy. The Board is
persuaded that Ramsland was warranted in deducting some amount from the subject
property's potential gross income to account both for management fees and for
vacancy and collection loss.
Beckman also challenged the size
of Ramsland's adjustments. As she explained, day-to-day management of a
single-tenant building leased on a triple-net basis may not take a significant
amount of time. Yet because Ramsland calculated the expense at 2% of sales, he
actually deducted more than $3 0,000 for those fees. Nonetheless, Ramsland used
the low end of Korpacz's range of management fees for power centers. He
therefore had at least some market-based support for deduction, albeit not as
strong as the support for many of his other decisions.
Ramsland's calculation of a proxy
for vacancy and collection loss gives the Board a little more pause. As
Ramsland himself admitted, his methodology - determining the annual fluctuation
in sales around a mean—is not generally accepted by his peers. That methodology
has some logical appeal—it accounts for fluctuations in rent collections that prudent
investors likely would anticipate. But it is also one sided. As Ramsland's calculations
show, the fluctuation includes sales volumes both above and below the mean, yet
his deduction accounts solely for those below the mean. Perhaps Ramsland accounted
for fluctuations above the mean elsewhere in his analysis. If that is the case,
however, he did not explain where. Ultimately, thought, Ramsland's decision to
deduct at least something for vacancy and collection loss appears sound, and
the questions surrounding his methodology in calculating a proxy for those
losses does not detract significantly from his opinion's reliability.
Finally, Beckman disagreed with
Ramsland's decision to use the same capitalization rate for all three years
that he addressed. Ramsland did little to explain that decision. The data and
calculations that he referenced in his appraisal report related to 2006.
Indeed, he said almost nothing about what, if anything, changed in ensuing
years other than to note that the rate "ticked up modestly" between
2006 and 2007. Ex. P-4 at 63. On the other hand, the Assessor offered
nothing to show that capitalization rates changed significantly between the
years at issue. Indeed, although they did not span exactly the same dates, the rates
that Beckman took from Korpacz varied by only .26%.
Turning to Ramsland's
sales-comparison analysis, Beckman challenged his use of multiple regression
analysis to quantify adjustments to his comparable properties' sale prices. Her
criticism centered more on the soundness of applying such an analysis to a single
property than on any issues with Ramsland's underlying mathematics. But other than
testifying that she had not seen multiple regression analysis used in the way Ramsland
used it, Beckman did little to show that Ramsland departed from generally accepted
appraisal practices. Indeed, Ramsland testified that while far from being universally
accepted, his methodology is sound under generally accepted appraisal principles
and that his article in the Appraisal Journal laying out that
methodology has been cited in both the 12th and 13th editions of THE APPRAISAL
OF REAL ESTATE.
The Assessor did try to impeach
Ramsland's regression analysis using an article from the Appraisal Journal. That
article's author found specification errors in a multiple regression analysis
performed by another appraiser who had cited to Ramsland's earlier article. Of
course, as Macy's pointed out, the author was not there to testify, and Ramsland
had not seen underlying data used by the appraiser whose work the author critiqued.
At best, the Assessor showed that Ramsland's methodology is not universally accepted.
But that fact does not significantly undermine Ramsland's conclusions under the
sales-comparison approach. Even if it did, he did not rely heavily on those conclusions
in forming his ultimate valuation opinion.
Finally, the Assessor criticized
Ramsland's use of the CPIU to trend his March 1, 2007 and March 1, 2008 value
estimates back to the relevant valuation dates. The Board has been expansive in
recognizing methods for trending values in assessment appeals. And as Macy's
pointed out, using the consumer price index is one those methods. Indeed, Beckman
uniformly adjusted sale prices by 5% per year in her sales-comparison analysis,
albeit with little support. That is an even larger adjustment than the 3.8%
index that Ramsland used for 2007 and only .5% less than what he used for 2008.
Beckman's valuation opinion is
less reliable than Ramsland's opinion
The Assessor, however, did not
just attack Ramsland's opinion, he offered Beckman's valuation opinion as well.
Beckman analyzed the subject property's value using the income and
sales-comparison approaches. But various shortcomings make her opinion far less
reliable than Ramsland's.
The Board turns first to
Beckman's sales-comparison analysis. Beckman gave no support for some of the
adjustments that she made to her comparable properties' sale prices. In other
instances, she pointed only to her experience. Her claim that she did not need
to adjust for significant age differences because anchor department stores are
well maintained is unconvincing, particularly in light of the fact that she did
not inspect any of her comparable stores in connection with the valuation
assignment at issue. Also, Ramsland explained that the type of maintenance
Beckman cited does not change the useful life of a store's "bone
structure." Tr. at 236.
Like Ramsland, however, Beckman
ultimately relied most heavily on her conclusions under the income approach,
and she offered more support for the various judgments that she made in
applying that approach. She derived her imputed rent from the subject property's
actual sales and from market data reported in Dollars & Cents. She
took her capitalization rate from Korpacz. But while sales may be the
driver for rents, the focus should be on the market rather than on how Macy's
actually fared in managing the subject property. See Indiana MHC, LLC v.
Scott County Assessor, 987 N.E.2d 1122, 1185-86 (Ind. Tax Ct. 2013)
("[T]o provide a sound value indication under the income capitalization
approach, one must not only examine the historical and current income, expenses,
and occupancy rates for the subject property, but the income, expenses and occupancy
rates of comparable properties in the market as well.") (emphasis in
original). Beckman did little to check Macy's sales against the market for
anchor department stores in similar locations. Although she testified that she
did not have sales-volume information for comparable properties readily
available, that fact does not make the information any less important to an
accurate valuation.
While both Beckman and Ramsland
acknowledged that Dollars & Cents is an authoritative source, that
fact does not mean simply taking rental data from that report without further
analysis leads to a particularly reliable value estimate for a given store. The
Board is more persuaded by Ramsland's approach in which he consulted Dollars
and Cents data for context but estimated market rent based on sales volumes
and rental rates for specific comparable stores.
In any case, Beckman appears to
have misinterpreted how Dollars & Cents reports its data. She
imputed rent to the subject property based on 3% of its sales volume. She chose
that rate largely based on her calculation of rent as a percentage of sales for
the top 10% and top 2% of sales volumes reported in Dollars & Cents. The
subject property's sales volumes of $[
](FY 07) and $[ ](FY 08),
however, were actually [ ] those cut-offs. Beckman tried to
allay that concern by claiming that the numbers for the top 10% and top 2% were
are not really cut-offs but rather medians of the sales reported by all the
stores falling within the top 10% and top 2%. Thus, she reasoned that the top
10% includes sales volumes falling below the reported figure of $283.39/sq. ft.
But as explained above, her claim flies in the face of how Dollars and Cents
describes its reporting methodology.
Beckman alternately justified her
3% figure on grounds that she was accounting for base rent together with all
percentage rent, while Dollars and Cents' numbers account only for base
rent and the first percentage rate tied to sales above a designated cut-off.
Again, her interpretation contradicts Dollars & Cents, which
explains that its reporting of total rent per square foot includes "all
fowls of rent—guaranteed minimum rent, percentage rent, and combinations
thereof." Ex. P-12 at 8; Tr. at 190.
Beckman's estimate of expenses
also lacks credibility. While her qualms about the size of Ramsland's deduction
for management fees are at least debatable, those qualms do not justify
completely excluding management fees as an expense. The same is largely true for
her decision to ignore vacancy and collection loss, although she offered at
least some support for that decision by explaining that several investors
listed in Korpacz did not account for vacancy and credit loss when
investing in single-tenant buildings.
Beckman did not dispute that
replacement reserves are a legitimate expense. Nevertheless, she did not
separately deduct any amount for those reserves. The Board is not persuaded by
her claim that her 3% expense ratio somehow accounted for replacement reserves.
At most, she testified that her 3% ratio allowed for additional landlord
expenses, such as those associated with the parking lot. But given that the insurance,
HVAC, and roof expenses that she took from the Dollars & Cents tables
ranged from 2.89% to 3.11%, her claim appears to be an after-the-fact
justification.
In short, Ramsland is a
more-qualified and experienced expert who based his decisions on significant
research and market data. By contrast, Beckman failed to point to market data
for many of her judgments. Even where she relied on market data, she simply
took that data from national publications without further analyzing it in the
context of the subject property's specific characteristics. Finally, Beckman
was simply a less reliable witness than Ramsland. She was far more guarded with
her answers than Ramsland, and Macy's repeatedly impeached her with prior
inconsistent statements from her depositions. See Tr. at 74, 109, 404, 406. Taken
as a whole, the Board has little trouble concluding that Ramsland's valuation
opinion is the most reliable evidence of the subject property's market
value-in-use.
