The Petitioners offered a lot of data and other information about Goshen Commons, including the following:
The property‘s actual tenant census, lease rates, and vacancies as of March 1, 2008;
The property‘s actual expenses for several years; and
Various characteristics that affect the property’s ability to generate income, such as its obscured visibility and limited access to a street with relatively low traffic.
Of course, that raw information does not, by itself, translate into any particular value or range of values. To that end, the Petitioners also offered valuation opinions from two witnesses: Mr. Sante, a certified appraiser who prepared an appraisal report and also testified at the Board‘s hearing, and Ms. Meade, Hoogenboom Nofziger’s vice president, who modified a valuation opinion originally prepared by Dana Fisher.
The Board turns first to Mr. Sante’s opinion. Mr. Sante prepared a report in which he estimated Goshen Commons’ value using solely the income approach. For his underlying income data, Mr. Sante used the property‘s actual income from 2008. Apparently because he was relying on the property’s actual income, Mr. Sante did not subtract anything for vacancy or collection loss. And Mr. Sante did not indicate either in his appraisal report or in his testimony that he compared the property’s actual income or vacancy level to the market. Although Mr. Sante also used a three-year average of the property‘s actual expenses (minus certain adjustments), he compared the property’s actual operating expense ratio to similar ratios that he extracted from the market. Finally, Mr. Sante certified that he prepared his appraisal in conformity with USPAP.
At first blush, Mr. Sante’s opinion might appear to be probative of Goshen Commons’ market value-in-use. But the Assessor’s expert witness, Mr. Voss, persuasively explained myriad ways in which Mr. Sante departed from USPAP or otherwise relied on questionable judgments. Some of Mr. Voss’s critiques address relatively minor points. For example, Mr. Voss took issue with Mr. Sante’s failure to name the Assessor as an intended user of the appraisal and his failure to explicitly say that he was giving a retrospective opinion of value. But both of those points were obvious from the context of Mr. Sante’s report. To the extent those omissions departed from USPAP, those departures do little to affect the credibility of Mr. Sante’s opinion.
Mr. Voss, however, pointed to other, more-troubling departures. For example, Mr. Sante did not spell out the standard of value that he was estimating. Mr. Voss generously described Mr. Sante’’s report as indicating that he was estimating the property’s market value, but Mr. Voss noted that Mr. Sante failed to cite to the source information for his definition of market value. A closer review of Mr. Sante’s appraisal, however, shows that he failed to specify that he was estimating “market value.” Instead, Mr. Sante alternately referred to the property‘s “assessed value” and simply to the property’s “value.” Pet’rs Ex. 2. At the Board‘s hearing, Mr. Sante explained that the purpose of the appraisal was to determine the property‘s “market value-in-use” or its “value-in-use.” Sante testimony. But he did not explain how he measured that standard.
Mr. Sante’s omission is significant. This is particularly true given the fact that Mr. Sante used the subject property’s actual income without attempting to compare that income to the market. In doing so, Mr. Voss explained that Mr. Sante was really valuing a leased fee interest in Goshen Commons rather than a fee simple interest. And as the Board has previously recognized, that creates the risk of valuing a property owner’s relative management acumen instead of the property’s inherent characteristics:
[U]sing actual rent from a long-term, below-market lease could result in non-uniform values for properties within the same class and cause identical properties to have different values for tax purposes in violation of constitutional uniformity requirements. Courts in other jurisdictions have noted the absurd results of employing such a system of valuation and have concluded that owners who enter into prudent leases are in effect penalized for good negotiating skills, while the lessors with the below-market leases are rewarded for bad management and poor negotiations by a lower valuation.
Schooler v. Boone County Assessor, Pet. No. 06-003-07-1-5-00444 (Ind. Bd. Tax Rev., May 7, 2010); see also, Merrick Holding Corp. v. Board of Assessors, 382 N.E.2d 1341, 1344 (N.Y. App. Div. 1978); Sanford, 694 A.2d 456 (“[V]aluations of properties for local taxation cannot vary with the managerial successes or failure of the owners.”); and Martin v. Liberty Cty. Bd. of Tax Ass’rs, 262 S.E.2d 609, 612 (Ga. Ct. App. 1979) (“[I]f tax assessments on the same property were to fluctuate according to the varying terms of a lease, the computation of ad valorem taxes on the basis of such assessments would result in a tax penalty for one who, through business acumen or fortuity, succeeds in leasing his property for an amount in excess of its ‘fair market value’ and a tax windfall to one who, through bad business judgment, leases far below his property’s ‘fair market value.’”).
Thus, by using only the property’s actual income, without attempting to compare that income to the market, Mr. Sante risked valuing something other than the real property itself. The Petitioners, however, mitigated that risk somewhat through Mr. Letherman’s testimony that market rent for Building 1 (the big box building) was between $4.00 and $5.00/sq. ft. and that the rent that the Petitioners received for that building was within the market range. While Mr. Letherman’s testimony was fairly conclusory, he testified to his expertise and experience with commercial leasing in the area. The Petitioners also offered extensive testimony about the various challenges that detract from Goshen Commons’ ability to generate income. Of course, both Dana Fisher and Gavin Fisher testified that they believed market rent for Goshen Commons was much higher. However, neither showed that the properties on which they based their opinions faced challenges similar to what Goshen Commons faced.
Nonetheless, while the Petitioners mitigated concerns that the rental rates charged by Goshen Commons might be below market rates, they did almost nothing to alleviate the concern that, by using the property’s actual income, Mr. Sante attributed a much higher vacancy rate to Goshen Commons that what is reflected in the market. As of March 1, 2008, Goshen Commons had a vacancy rate of 45.5%. Thus, Mr. Sante valued the property on the assumption that only a little more than half of the property would produce any income. Put another way, Mr. Sante essentially posited that potential investors would assume that the former Big Lots space, as well as a portion of Building 3 that was not yet finished on March 1, 2008, would remain vacant in perpetuity, or at least over a likely holding period.
That assumption profoundly affected Mr. Sante’s valuation opinion; yet there is little support for the notion that Mr. Sante’s effective vacancy rate reflected the market. Granted, the same challenges that the Petitioners’ witnesses pointed to in justifying Goshen Commons‘ rental rates might apply equally to its vacancy rate. But even Mr. Letherman did not testify that a 45.5% vacancy was an appropriate market vacancy rate for Goshen Commons. He instead testified that the 10% rate that Ms. Fisher used in her analysis was “a little unrealistic.” Letherman testimony.
Mr. Sante might have allayed those concerns had he at least checked his conclusions under the income approach by applying another generally accepted valuation approach. But he did not. Indeed, Mr. Voss considered Mr. Sante’s failure to do so to be a significant flaw.
Finally, the Board is swayed by the fact that the Petitioners did not even ask Mr. Sante to respond to Mr. Voss’s pointed critiques of his appraisal or to otherwise explain how his appraisal conformed to USPAP. Thus, in light of the myriad ways in which Mr. Sante’s appraisal departed from USPAP and the likelihood that at least some of those departures significantly affected his valuation opinion, the Board finds Mr. Sante’s opinion insufficient.
That leaves Ms. Meade’s valuation opinion. Ms. Meade, however, did little independent analysis; instead, she plugged different data into an income-approach analysis that Ms. Fisher had performed in connection with the Petitioners’ appeal of Goshen Commons’ March 1, 2010, assessment. But Ms. Meade did not explain how mixing Goshen Commons’ income data from 2008 with Ms. Fisher’s March 1, 2010-based analysis related to the property’s market value-in-use as of the January 1, 2007, valuation date that applies to this appeal. Her opinion therefore lacks probative value.
Even if Ms. Meade had sufficiently explained how her opinion related to Goshen Commons’ value as of January 1, 2007, her opinion would still lack probative weight. A probative valuation opinion is not merely a mathematical calculation; it includes the exercise of significant judgment. One cannot simply plug different data into an expert’s analysis to reach a different conclusion without the risk of seriously distorting the expert’s underlying analysis. In any case, Ms. Meade’s opinion is necessarily based on the assumption that Ms. Fisher’s analysis was otherwise sound, except for her estimate of net operating income. But Ms. Meade offered scant information to support that notion. Instead, she pointed to documents that simply list Ms. Fisher’s conclusions about the property’s income, expenses, and vacancy rate together with a capitalization rate. Finally, Ms. Meade’s opinion suffers from one of the same problems that plagues Mr. Sante’s opinion—she used the property’s actual income, and along with that, its 45.5% vacancy rate, without comparing that actual income or vacancy rate to the market.
Thus, while the Petitioners offered evidence of various factors that tend to depress Goshen Commons’ value, they did not offer any probative method to translate those factors into a likely value or range of values. The Petitioners therefore failed to rebut the presumption that Goshen Commons, assessment accurately reflected its market value-in-use as of January 1, 2007.
