Tax Court Upholds Board Finding that Taxpayer's "Income Value" Failed to Support Lower Assessment

On appeal, Indiana MHC argues that the Indiana Board’s final determination is arbitrary and capricious because it disregarded the “substantial evidence” it presented demonstrating that Amberly Pointe’s 2007 assessment should have been much lower: it had an occupancy rate of only 40% and its green space was “worthless.” (Pet’r Br. at 1, 5-8.) Indiana MHC is incorrect.

An assessment, determined using the cost approach as set forth in Indiana’s Property Assessment Manual and Guidelines, is presumed accurate. 2002 REAL PROPERTY ASSESSMENT MANUAL (2004 Reprint) (“Manual”) (incorporated by reference at 50 IND. ADMIN. CODE 2.3-1-2 (2002 Supp.)) at 5. Nevertheless, a taxpayer that appeals an assessment

shall be permitted to offer evidence relevant to the fair market value-in-use of the property to rebut such presumption[.] . . . Such evidence may include actual construction costs, sales information regarding the subject or comparable properties, appraisals that are relevant to the market value-in-use of the property, and any other information compiled in accordance with generally accepted appraisal principles.

Id. (emphasis added). Thus, when contesting an assessment, a taxpayer may present evidence demonstrating its property’s value using the income capitalization approach. See Manual at 3. See also APPRAISAL INSTITUTE, THE APPRAISAL OF REAL ESTATE 62-64 (12th ed. 2001) (explaining that the three generally accepted appraisal techniques for valuing property are the sales comparison approach, the cost approach, and the income capitalization approach).

The income capitalization approach values property based on its earning power and is informed not only by the principle of anticipation3 but also by the expectations and behaviors of typical market participants. See id. at 471-72 (footnote added). See also Manual at 14. Indeed, in applying the income capitalization approach, the income expected to be earned by [a] subject property is estimated, allowing for reasonable expenses, vacancy, and/or collection loss, to arrive at net operating income (NOI). The NOI is subsequently converted to a present value by dividing it by a capitalization rate. The capitalization rate generally reflects the annual rate of return necessary to attract investment capital and is influenced by such factors as “apparent risk, market attitudes toward future inflation, the prospective rates of return for alternative investments, the rates of return earned by comparable properties in the past, the supply of and demand for mortgage funds, and the availability of tax shelters.”

Hometowne Assocs., L.P. v. Maley, 839 N.E.2d 269, 275 (Ind. Tax Ct. 2005) (citation omitted) (emphasis added). Consequently, to 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. See THE APPRAISAL OF REAL ESTATE at 493, 501, 509, 511-12.

Here, Indiana MHC’s income capitalization approach failed to comply with generally accepted appraisal principles because it did not consider the occupancy rates of comparable properties in the market. In fact, the administrative record contains evidence that indicates Amberly Pointe’s low occupancy rate of 40% was actually the anomaly in the market place. (See Cert. Admin. R. at 424 (showing that five other mobile home communities in the immediate vicinity had occupancy rates between 70% and 95%, despite the fact they charged higher rents).) As the Indiana Board explained, “[w]here the 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 . . . [in order] to protect against distortions and inaccurate value estimates that might be caused by extraneous factors (such as bad management or poor business decisions) that really have nothing to do with the inherent value of a property.” (Cert. Admin. R. at 238.)

Based on Indiana MHC’s failure to examine, analyze and reconcile its 40% occupancy rate in light of the much higher occupancy rates prevalent in the marketplace, the Indiana Board did not err in finding that Indiana MHC’s income capitalization approach lacked probative value. Because Indiana MHC’s income capitalization approach lacked probative value, the Indiana Board was correct in determining that Indiana MHC failed to prove its 2007 real property assessment was incorrect.

http://www.in.gov/judiciary/opinions/pdf/05031302mbw.pdf

The Board's Final Determination may be found here:

http://www.in.gov/ibtr/files/Indiana_MHC_72-007-07-1-5-00003_to_8_.pdf