As explained above, Indiana assesses real property based on its market value-in-use. Manual at 2. Thus, a party‘s evidence in an assessment appeal must be consistent with that standard. See id at 5. For example, a market-value-in-use appraisal prepared according to USPAP often will often be probative. Kooshtard Property VI, 836 N.E.2d at 506 n. 6. A party may also offer actual construction costs, sales information for the subject or comparable properties, and any other information compiled according to generally accepted appraisal principles. Manual at 5. Regardless of the type of evidence that a party relies on, the party must explain how its evidence relates to the property’s market value-in-use as of the relevant valuation date. O’Donnell v. Dep’t of Local Gov’t Fin., 854 N.E.2d 90, 95 (Ind. Tax Ct. 2006). Otherwise, the evidence lacks probative value. Id. For March 1, 2008 assessments, the valuation date was January 1, 2007. See 50 IAC 21-3-3(b)(2009) (“The valuation date is January 1 of the year preceding the year of the assessment date.”).
While the Assessor has the burden of proof in this appeal, both parties met their respective burdens of production by offering valuation opinions from qualified expert witnesses. Each party, of course, argued that its expert’s data and methodology was more reliable and better supported than the opposing expert’s data and methodology. The Board must therefore weigh the experts’ opinions to determine the true tax value of Wesleyan’s property.
The Board first notes that Lichtenberg and Bovee arrived at similar numbers in valuing the entire business enterprise (i.e., the real estate, intangible business assets, and FF&E)—Bovee valued the entire enterprise at $---------- as of January 1, 2007, while Lichtenberg valued it at $---------- as of that date.
To the extent that the appraisers differed in their methodologies for valuing the business enterprise as a whole, the Board generally finds Bovee’s opinion to be more credible. First, while both appraisers valued the property retrospectively, Bovee used information from around the January 1, 2007 valuation date. Lichtenberg, on the other hand, initially valued the property as of March 1, 2010, mostly using data from well after 2007, and trended his conclusions back to January 1, 2007. Bovee’s opinion therefore more closely mirrors the likely decision-making of an informed investor both on the March 1, 2008 assessment date and the January 1, 2007 valuation date applicable to that assessment.
Similarly, Bovee largely provided more support for various subjective judgments underlying his valuation of the business as a whole than did Lichtenberg. For example, while both appraisers found wide ranges of sale prices under their respective sales-comparison analyses, Bovee offered a more detailed and reasoned comparison between Wesleyan’s facility and his comparable sales. He also gave detailed explanations to support his adjustments to those sale prices, including adjustments for sales that were part of portfolio transactions. Lichtenberg did less to support his qualitative analysis. And he did little to explain his decision not to adjust the sale prices from his two comparable sales that were part of the same portfolio transaction. Instead, he simply indicated that the sale prices were buyer allocations. That does not mean that those allocated sale prices necessarily required an adjustment, but Lichtenberg’s summary treatment of the issue does not inspire confidence.
The gulf between the two experts’ opinions, however, stems mostly from how they valued the intangible assets, which in turn led them to allocate significantly different portions of Wesleyan’s overall business value to real property. Bovee valued Wesleyan’s assembled workforce and permits at $---------- and therefore assigned a significant portion of the entity’s overall NOI to those costs, leaving a relatively modest amount to capitalize in determining the real property’s value. Lichtenberg, by contrast, assigned only 15% of the business’s overall NOI to intangible assets, leading him to allocate most of the facility’s NOI to real estate and to value the intangible assets at only $----------.
The Board’s decision is complicated by the fact that there appears to be no single generally accepted approach to allocating a business’s overall value between tangible and intangible assets. The methodologies employed by Lichtenberg and Bovee both seem plausible. While Morlan and Bovee made much of the fact that Lichtenberg’s entrepreneurial- or proprietary-profit capitalization approach is not universally accepted, Tellatin’s book shows that at least some of the profession has accepted that methodology. Similarly, Bovee testified without impeachment or rebuttal that his methods for valuing Wesleyan’s assembled workforce and permits are supported by USPAP Standards 9 and 10 and are used in valuing intangible assets in various types of legal proceedings.
Ultimately, the Board finds Bovee’s allocation analysis to be the better reasoned and supported of the two. Lichtenberg simply deducted an estimated 15% of the overall NOI. Yet Lichtenberg did little to support why he chose that amount. He established a range of 10% to 20%, the low end of which he drew from his estimate of entrepreneurial incentive under his cost approach, and the high end of which he took from a seminar in which the authors apparently found that skilled nursing facilities typically rent for an amount between 80% and 85% of NOI. But Lichtenberg offered little or no support for his conclusions about entrepreneurial incentive. And he did not attempt to parse out the types of facilities on which the seminar’s vague aggregate data was based. Lichtenberg then settled on the middle of that range, which happened to equal the minimum amount that HUD deducts for proprietary profit when making federally insured loans on nursing home real estate.
Granted, Lichtenberg’s conclusions under the cost-approach, in which he directly estimated the real property’s value, were generally consistent with his ultimate allocation of the business’s overall value between real estate and other assets. But there are significant problems that detract from the reliability of Lichtenberg’s cost-approach analysis. As already explained, Lichtenberg did not support his choice to include entrepreneurial incentive equaling 10% of hard costs. Also, as Morlan pointed out, Lichtenberg summarily dismissed the presence of any functional or external obsolescence. Morlan, however, persuasively explained that a building the age of Wesleyan’s likely would have at least some functional obsolescence due to its lack of energy efficiency. Bovee, too, pointed out that the building was constructed in phases, with each phase creating a new plant design, duplicated interior and exterior walls, and new roof lines. And the Board is persuaded by Bovee’s opinion that retrofitting costs related to such additions generally cannot be recaptured on a dollar-per-dollar basis. Similarly, Morlan laid out the external economic issues impacting nursing homes in cities affected by the decline in the automobile industry, casting some doubt on Lichtenberg’s summary conclusion that the property did not suffer form any external obsolescence.
That is not to say that Bovee’s allocation analysis was perfect. He made several assumptions in his relief-from-royalty analysis, most significantly in choosing hotel franchise rights to serve as a proxy for Wesleyan’s licenses, permits and approvals. And he did not describe the licenses, permits and approvals at issue in any detail. Similarly, Bovee did little to support the capitalization rates that he used in determining what portions of the enterprise’s overall NOI to attribute to intangible assets and FF&E, although the Board notes that his 25% rate for the intangible assets was the same rate that Lichtenberg used in his analysis. On the whole, though, the Board finds Bovee’s allocation analysis to be better supported and more persuasive than Lichtenberg’s analysis.
The Board therefore finds that the true tax value of Wesleyan’s property for the March 1, 2008 assessment was no more than $3,006,100—the amount that Bovee estimated in his appraisal. In reaching this conclusion, the Board notes that Bovee appraised Wesleyan’s entire property, not just the main parcel. But Wesleyan offered nothing that would allow the Board to allocate that value between parcels.
