The Board is Persuaded by Ramsland's Valuation
Opinion
The parties offered a significant
amount of evidence over the better part of two days. But the Board's conclusion
boils down to this: Ramsland, a highly qualified appraiser with significant
experience in appraising anchor department stores, valued the subject property at
$16,500,000 as of the relevant valuation date for the 2006 assessment. 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 analysis. And he explained his analysis in
significant detail, offering market data to support most of his key judgments.
The Assessor did not
significantly discredit Ramsland's 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. Beckman took issue
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. And 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-today 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 $30,000 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 his 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, though, 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.
Beckman also challenged
Ramsland's 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. The
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 reviewed.
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, 2006 value estimate back to
January 1, 2005. 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 without much support. Ramsland used the same adjustment
when he applied the CPIU.
Ramsland's valuation opinion is more persuasive than
any of the Assessor's evidence
Against Ramsland's opinion, the
Assessor offered: (1) the assessment itself, which Beckman testified met the
requirements of the "DLGF Manual" and regulations; and (2) Beckman's
valuation opinion. Beckman's testimony about the assessment has little or no probative
value; at most, it amounts to a claim that someone in the Assessor's office followed
the Real Property Assessment Guidelines for 2002 — Version A and other administrative
regulations. The Tax Court has previously rejected that type of evidence. See
Eckerling v. Wayne Twp. Assessor, 841 N.E.2d 674, 678 (Ind. Tax Ct. 2006)
(holding that a strict application of the regulations was not enough for the
taxpayers to meet their burden of proof and pointing to the Manual in
explaining what types of evidence can be used to demonstrate a property's
market value-in-use). Even if such an approach were generally allowable,
Beckman's testimony would still lack probative value. Beckman offered only her
conclusory opinion that the assessment complied with the Guidelines and
regulations; she did not walk the Board through the calculations and judgments underlying
that assessment.
Beckman's own valuation
opinion is more substantial, if ultimately unconvincing. Beckman analyzed the
subject property's value using the income and sales-comparison approaches. And
she adhered to those approaches in form, if not always in substance. Nonetheless,
various shortcomings make her opinion far less reliable than Ramsland's. For
example, she gave no support for some of her adjustments to her comparable properties'
sale prices. In other instances, she pointed only to her experience. And 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 the comparable stores in connection with the
valuation assignment at issue. Also, as Ramsland explained, the type of
maintenance that Beckman cited does not change the useful life of a store's
"bone structure." Tr. at 236.
Of course, like Ramsland, Beckman
ultimately relied most heavily on her conclusion under the income approach, and
she offered more support for the various judgments that she made in applying
that approach. Thus, she derived her imputed rent from the subject property's
actual sales and market data reported in Dollars & Cents. And 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 solely on Macy's actual
experience. 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 comparable 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 reaching an accurate valuation.
Also, 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 anchor department 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, 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 cutoffs 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
accounted 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 forms
of rent—guaranteed minimum rent, percentage rent, and combinations
thereof." Ex.
P-12 at 8; Tr. at 190. Beckman's final justification—that her 3% figure was
designed to stabilize a rental stream in light of the subject property's sales
history, which included higher volume both before and immediately after FY 06
fares no better. The subject property's sales volume [ ] approached the cut-off for Dollars &
Cents' top
10%. Under Beckman's own calculation, rent for the top 10% was only 2.55% of
sales per square foot—well below her 3% figure.
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.
Also, Beckman did not dispute
that replacement reserves are a legitimate expense. Nonetheless, she did not
separately deduct any amount for those reserves. And the Board is not persuaded
by her claim that her 3% expense ratio was somehow designed to account 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.
As with most of the other elements in Beckman's
analysis, her choice of a capitalization rate was less persuasive than
Ramsland's. Ramsland (1) extracted an overall rate from the market, (2)
calculated a rate using the Ellwood Mortgage-Equity Technique, and (3) checked
those rates against what was reported in Korpacz for properties with similar risk profiles.
By contrast, Beckman simply took her rate from Korpacz.
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
underlying 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 and that the
property's 2006 assessment must be reduced to $16,500,000—the amount that
Ramsland estimated.
