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Marion County Assessor v. Washington Square Mall, LLC

Tax Court of Indiana

December 30, 2015

MARION COUNTY ASSESSOR, Petitioner,
v.
WASHINGTON SQUARE MALL, LLC, DEBARTOLO REALTY PARTNERSHIP, LP, and SIMON CAPITAL, LP, Respondents

          ON APPEAL FROM A FINAL DETERMINATION OF THE INDIANA BOARD OF TAX REVIEW.

         FOR PETITIONER: JOHN C. SLATTEN, MARION COUNTY ASSESSOR'S OFFICE, Indianapolis, IN.

         FOR RESPONDENT: PAUL M. JONES, JR., MATTHEW J. EHINGER, ICE MILLER, LLC, Indianapolis, IN.

          OPINION

          WENTWORTH, J.

         The Marion County Assessor has challenged the Indiana Board of Tax Review's final determination that lowered the assessed value of the Washington Square Mall for each of the 2006 through 2010 assessment years. Upon review, the Court affirms in part and reverses in part.

         FACTS AND PROCEDURAL HISTORY[1]

         Constructed in the mid-1970's, Washington Square Mall (" Mall" ) is located on the east side of Indianapolis. The Mall, situated on approximately 72 acres, is comprised of an enclosed regional shopping mall and two junior anchor stores. (See, e.g., Cert. Admin. R. at 675, 1092-1149.) The Mall's listed owners are Washington Square Mall, LLC, DeBartolo Realty Partnership, LP, and Simon Capital, LP, all three of which are a part of the Simon Property Group (collectively, " Simon" ). (See Cert. Admin. R. at 57, 63, 186-87, 675, 1092-1149, 1158, 2046.)

         The Marion County Assessor valued the Mall at $32,865,400 for 2006, $28,034,200 for 2007, $28,051,300 for 2008, $28,054,000 for 2009, and $26,832,600 for 2010. (See, e.g., Cert. Admin. R. at 360-61 ¶¶ 16-19, 456, 1092-1149, 1808-10, 1879-80.) Believing those values to be too high, Simon filed appeals with the Marion County Property Tax Assessment Board of Appeals (" PTABOA" ). While the PTABOA issued a determination that decreased the Mall's 2006 assessment to $29,528,800, it took no action on Simon's 2007 through 2010 appeals. (See, e.g., Cert. Admin. R. at 357-58 ¶¶ 2, 5, 360 ¶ 15.)

         Simon subsequently challenged its assessments for each of the years at issue with the Indiana Board.[2] In March of 2012, the Indiana Board conducted a consolidated hearing on Simon's appeals.

         The Indiana Board Hearing: Simon's Evidence

         During the Indiana Board hearing, Simon presented a Summary Appraisal Report, completed in conformance with the Uniform Standards of Professional Appraisal Practice (USPAP), that valued the Mall for each of the years at issue. Simon also presented the testimony of Peter Korpacz, a member of both the Appraisal Institute (MAI) and the Counselors of Real Estate (CRE), who prepared the Summary Appraisal Report (the " Korpacz Appraisal" ).

         Korpacz, who had appraised approximately 450 regional malls in 29 different states, testified that his primary assignment in valuing the Mall was to determine what an investor would be willing to pay to purchase the property. (See Cert. Admin. R. at 1980-81, 2090-92.) He identified several factors that would lead a potential buyer to perceive his investment in the Mall as high-risk, thus impacting what he would be willing to pay. For instance, the Mall was suffering from a great deal of physical deterioration and deferred maintenance. (See, e.g., Cert. Admin. R. at 1944 (indicating that the Mall's pavement was damaged), 2009-11 (indicating that the Mall's HVAC system was more than thirty years old), 2091 (explaining that the roof has leaked and caused interior damage).) Additionally, the Mall's customer base had dwindled due to impeded access from U.S. Highway 40 and because there was competition from numerous other retail facilities within fifteen miles of the Mall " with better quality tenants[.]" (See Cert. Admin. R. at 672, 691.) Finally, changes in the immediate area's demographics not only altered the Mall's tenant make-up from being fashion-oriented to discount-oriented, but also contributed to an overall poor occupancy rate. (See, e.g., Cert. Admin. R. at 686 (indicating that one of the junior anchors informed the Mall that it would be terminating its lease effective in 2011 due to poor retail sales), 1944-45, 2013-16 (indicating that the operating agreements for each of the three anchors had ended and that one of them, Macy's, left in 2008 citing underperformance[3]), 2019-33, 2043.) Given these factors, Korpacz surmised that the Mall ultimately would not sell to a " Simon-like" investor, but rather to a " well-heeled entrepreneur-speculator" who would likely redevelop the property for a different purpose. (See Cert. Admin. R. at 2230, 2247, 2268-69.)

         To value the Mall, Korpacz first employed a sales comparison approach.[4] Under this approach, he examined the property data of numerous regional malls that sold throughout the country during each of the years at issue. (See Cert. Admin. R. at 694-98, 714-17, 724-28, 737-40, 749-52, 2050-56, 2232-34, 2245-48, 2316-18, 2331-32, 2347-48.) He then ranked these malls based on both their unadjusted sales prices per square foot and whether they were superior or inferior to the Mall.[5] (See, e.g., Cert. Admin. R. at 696, 2053-54.) In turn, Korpacz arrived at a per square foot value conclusion for the Mall for each of the years at issue by placing it " between the lowest superior [indication] and the highest inferior indication." (See Cert. Admin. R. at 696, 716, 726, 739, 751, 2055.) Based on this analysis, the Korpacz Appraisal presented the following overall values for the Mall under the sales comparison approach:

2006:

$12,000,000

2007:

$20,000,000

2008:

$16,500,000

2009:

$14,000,000

2010:

$14,000,000

(See Cert. Admin. R. at 643, 697, 714, 724, 737, 749.)

         Korpacz also employed the income approach to value the Mall.[6] Under this approach, Korpacz first determined an estimate of the Mall's net operating income: he used market-based rental and occupancy rates but his operating expenses tracked both historical and management-budgeted performance. (See, e.g., Cert. Admin. R. at 699-705, 2249-50.) Korpacz concluded it was more appropriate to use market-based rental rates because using the actual contract rents -- which were admittedly higher than his market rate estimates -- reflected a different economic reality (i.e., the 1990's, when those leases were signed, was a more economically robust period). (See, e.g., Cert. Admin. R. at 700 (stating he found support for this conclusion by comparing his market-rental rate estimates to the actual rental rates that were in place at Lafayette Square Mall, another Simon Mall located in Indianapolis, that suffered from similar issues (i.e., low occupancy rates, declining retail sales, and above average occupancy costs)), 2284-85.) Korpacz then analyzed investor surveys and comparable mall sales to determine what discount, terminal, and overall capitalization rates to apply against his net operating income estimates. (See, e.g., Cert. Admin. R. at 707-10.) The Korpacz Appraisal presented the following values for the Mall under the income approach:

Yield Capitalization Method

Direct Capitalization Method[7]

2006:

$13,000,000

$12,000,000

2007:

$15,000,000

$14,000,000

2008:

$16,000,000

$14,500,000

2009:

$11,500,000

$10,500,000

2010:

$9,000,000

$10,000,000.

(See Cert. Admin. R. at 643, 712, 721, 734, 746, 758.)

         Given that Korpacz determined three separate valuations for the Mall (one under the sales comparison approach and two under the income approach) for each of the years at issue, he reconciled them into a final value conclusion for each year. (See, e.g., Cert. Admin. R. at 643, 712.) He then trended each of those reconciled values (except the one for assessment year 2010) back to January 1 of the prior year to reflect the appropriate valuation date for assessment purposes. (Cert. Admin. R. at 712-13, 721-22, 734-35, 746-47, 758, 2048.) See also 50 Ind. Admin. Code 21-3-3(b) (2006) (see http://www.in.gov/legislative/iac/ ) (indicating that prior to 2010, a property's March 1 assessment was to reflect a property's market value-in-use on January 1 of the preceding year) (repealed 2010); 50 Ind. Admin. Code 27-5-2(c) (2010) (see http://www.in.gov/legislative/iac/ ) (indicating that in 2010, property valuation and assessment dates were the same (i.e., March 1)). Korpacz's final valuation estimates for the Mall were $12,250,000 for 2006, $14,200,000 for 2007, $14,900,000 for 2008, $12,000,000 for 2009, and $9,500,000 for 2010. (See, e.g., Cert. Admin. R. at 643.)

         The Indiana Board Hearing: The Assessor's Evidence

         During the Indiana Board hearing, the Assessor presented, among other things, a written review of the Korpacz Appraisal along with the testimony of its preparer, Will L. Stump (the " Stump Appraisal Review" ). Stump, also an MAI, testified that he had been appraising property for nearly 43 years and while his practice did not specialize in retail properties, he had appraised approximately four or five regional malls within the last ten years. (Cert. Admin. R. at 1824-26, 1887-88, 2180-82.) He explained that he had been engaged by the Assessor to determine whether the valuations provided in the Korpacz Appraisal were " appropriate and reasonable" and if not, to provide his own valuations of the Mall. (See Cert. Admin. R. at 1155.)

         After reviewing the Korpacz Appraisal, Stump first explained that he disagreed with Korpacz regarding the amount of negative impact that several factors had on the Mall's value. For instance, Stump inspected the property and found it well-maintained for its age. (Cert. Admin. R. at 1162, 1830-31 (concluding, as a result, that given the Mall's physical depreciation, the property should have been considered in " average to good" condition as opposed to Korpacz's belief that it was in " fair" condition).) Stump also stated that while Korpacz believed the Mall suffered because it had to compete with other nearby retail facilities, he believed that most of those other facilities were not comparable and therefore did not really compete with the Mall. (See Cert. Admin. R. at 1161-62, 1829-30.) Stump also disagreed with Korpacz's conclusion that the Mall's occupancy rate was poor; indeed, Stump found that during the years at issue, overall occupancy at the Mall actually increased from approximately 84% to 90%.[8] (See, e.g., Cert. Admin. R. at 1162, 1833-34.)

         Next, Stump analyzed the Korpacz Appraisal's valuation approaches. With respect to the sales comparison approach, Stump did not believe that the properties Korpacz used were truly comparable to the Mall: none were located in Indiana and their occupancy levels and net operating income figures per square foot were much lower than those of the Mall. (See, e.g., Cert. Admin. R. at 1165-67, 1835-37.) Consequently, Stump performed his own sales comparison approach, utilizing data from the September 2005 through November 2008 sales of five retail properties located in Indiana and Illinois. (Cert. Admin. R. at 1183-85.) While these five properties were grocery-anchored strip centers and not regional malls, Stump maintained that they were more comparable to the Mall than the properties used by Korpacz because they were similar in age, they were remodeled at approximately the same time within their respective life spans, they were sold during the years at issue, and they all had similar occupancy rates. (See Cert. Admin. R. at 1184-85, 1933-37.) Based on the sales prices per square foot for these five properties, Stump concluded that during the years at issue the Mall would have sold for somewhere between $52 and $72 per square foot, or for a total of between $23,348,000 and $32,328,000. (Cert. Admin. R. at 1184-85.)

         Stump also noted his disagreements with the value conclusions in Korpacz's income approaches. For example, he thought it was " unconscionable" to assume, as Korpacz had, that the Mall's actual (or contract) rents did not reflect market rents. (See Cert. Admin. R. at 1170, 1839-40 (contending that Simon, as " undoubtedly one of the most competent and experienced mall operators in the country," would have only negotiated market-based rents).) Moreover, Stump disagreed with the fact that Korpacz did not include as income any of the expense reimbursements received by the Mall during the years at issue for common area maintenance and real estate taxes.[9] (See, e.g., Cert. Admin. R. at 1169-70, 1837-39.) As a result, Stump asserted that Korpacz utilized net operating income figures in his income approaches that were too low.[10] (See Cert. Admin. R. at 1171.)

         Stump also maintained that the capitalization rates Korpacz used in his income approaches were too high.[11] For instance, Stump specifically noted that under his direct capitalization method, Korpacz used overall capitalization rates ranging from 14% to 16%, which he then loaded with another almost 3%.[12] (See, e.g., Cert. Admin. R. at 643, 2366-67.) Nonetheless, Stump explained that the investor surveys and comparable sales upon which Korpacz relied indicated that rates ranging from only 7% to 10.85% were appropriate. (See, e.g., Cert. Admin. R. at 818-19, 2366-68.)

         Given these disagreements, Stump performed his own income approach (direct capitalization method) to value the subject property during each of the years at issue.[13] In calculating net operating income, Stump, unlike Korpacz, utilized the Mall's actual rents and expenses. (See Cert. Admin. R. at 1171, 1177, 1180.) Stump also included various expense reimbursements received by the Mall as income (e.g., common area maintenance recoveries and real estate taxes). (See, e.g., Cert. Admin. R. at 1177, 1837-39.) Stump then deducted for replacement reserves. (See Cert. Admin. R. at 1179-80, 1845 (observing that while Simon had not deducted for replacement reserves, investors consider such a deduction appropriate).) Then, based on the national investor surveys and his comparable sales, Stump applied capitalization rates ranging from 10.25% to 12%. (See Cert. Admin. R. at 1176, 1178, 1180.) In doing so, Stump estimated the Mall's value to be $22,015,000 for 2006, $32,150,000 for 2007, $24,000,000 for 2008, and $25,750,000 for 2009. (See Cert. Admin. R. at 1190, 1845-46, 1874.)

         Stump did not offer a value of the Mall for the 2010 assessment. (See, e.g., Cert. Admin. R. at 1190, 2362.) Nevertheless, the Assessor presented a direct capitalization income approach performed by his deputy, Eve Beckman, a former Simon employee. (See, e.g., Cert. Admin. R. at 1483, 2149, 2152.) Beckman testified that in performing her approach, she essentially used Korpacz's data but made an adjustment to account for actual expense recoveries and then unloaded the capitalization rate. (Cert. Admin. R. at 1483, 2426-27.) Beckman arrived at a value of $17,000,000 for 2010. (Cert. Admin. R. at 1483.)

         The Indiana Board's Final Determination

         The Indiana Board issued its final determination on September 24, 2012. In it, the Indiana Board explained that because both Simon and the Assessor presented USPAP-compliant appraisals that valued the Mall as of the appropriate valuation dates, " both parties submitted evidence sufficient to raise a prima facie case[.]" (Cert. Admin. R. at 390 ¶ 27.) As a result, the Indiana Board found that it simply needed to weigh the competing appraisals and determine which one was more persuasive. (See Cert. Admin. R. at 390-91 ¶ 27.)

         After analyzing each of the parties' sales comparison approaches, the Indiana Board found Korpacz's to be more persuasive than that of Stump's. Indeed, it stated that Korpacz's analysis was reasonable, as it " was based on timely sales of regional malls deemed comparable to the subject property that were qualitatively adjusted to determine the likely sale price in terms of a price per square foot for the [Mall]." (Cert. Admin. R. at 394-95 ¶ 37.) The Indiana Board was further persuaded by the fact that Korpacz refined his sales comparison values " by graphing each [comparable] property's sales price with its net operating income per square foot of gross leasable area." (Cert. Admin. R. at 395 ¶ 37.) (See also Cert. Admin. R. at 695-98, 715-717, 725-728, 738-40, 750-52, 2055-56.)

         In contrast, the Indiana Board explained that it could not give much weight to Stump's analysis because he not only utilized the sales of non-comparable properties (i.e., grocery store-anchored retail centers), but also failed to make any adjustments to account for that difference. (See Cert. Admin. R. at 394 ¶ 36, 395 ¶ 38.) Moreover, the Indiana Board continued, Stump failed to calculate a specific value under the sales comparison approach for any of the years at issue; rather, he merely calculated a " range of ...


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