Equitable Life Assur. Soc. of U.S. v. County of Ramsey

• Citation: 530 N.W.2d 544
• Decision Date: 28 April 1995
• Docket Number: No. C3-94-52,C3-94-52
• Parties: The EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, Respondent, v. COUNTY OF RAMSEY, Relator.
• Court: Supreme Court of Minnesota (US)

Page 544

530 N.W.2d 544

The EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, Respondent, v. COUNTY OF RAMSEY, Relator.

No. C3-94-52.

Supreme Court of Minnesota.

April 28, 1995.

Syllabus by the Court

Assessors must consider and give due weight to every element and factor affecting the market value of real property for purposes of taxation. Under appropriate circumstances, however, a single approach to value may be used to determine the market value of the real property being appraised.

The tax court did not abuse its discretion by relying on a discounted cash flow analysis ("DCF") to determine the market value of the real property in question and did not clearly err in preparing its own DCF analysis.

Sufficient evidence supported the tax court's compromise valuation, and the court was not required to disclose its own DCF analysis spreadsheets.

Tom Foley, Ramsey County Attorney, M. Jean Stepan, Heidi M. Westby, Asst. County Attys., St. Paul, MN (Ralph W. Peterson, St. Paul, of counsel), for relator.

Kenneth A. Larson, Thomas V. Seifert, Head, Seifert, Vander Weide, Minneapolis, for respondent.

Kim Mastro, Assoc. of MN Counties, St. Paul, William Jeronimus, MN County Attys. Assoc., St. Paul, for amicus curiae.

Considered and decided by the court en banc without oral argument.

OPINION

ANDERSON, Justice.

This case comes to us on certiorari to the Minnesota Tax Court. Equitable Life Assurance Society of the United States challenged the Ramsey County assessor's 1990 and 1991 estimated market values of two contiguous parcels of real property that are part of the Rosedale Shopping Center, a super-regional shopping center. Relying on a discounted cash flow ("DCF") analysis, a form of the income capitalization approach to determining the market value of real estate, the tax court reduced the subject property's assessed values from $64,054,900 to $33,300,000 for 1990 and from $65,595,600 to $47,300,000 for 1991. The County of Ramsey appeals from the court's order denying its motion for amended findings of fact and conclusions of law or, in the alternative, a new trial. The county contends the court erred as a matter of law in relying solely on a DCF analysis to determine the market value of the subject property. The county further contends that if the tax court may, as a matter of law, determine the subject property's market value based solely on a DCF analysis, the DCF analysis prepared by the court was flawed. We affirm.

The real property in question consists of two contiguous parcels that are part of a 72-acre improved site operated as the Rosedale Shopping Center in the City of Roseville, County of Ramsey, Minnesota. The two contiguous parcels include a 19.2-acre parcel ("Parcel A") and a 2.17-acre parcel ("Parcel B") (the "subject property"). Equitable owns Parcel A and holds a ground lease on Parcel B. ¹

The subject property primarily consists of Rosedale's common mall area, which includes both general common areas and 322,116 square feet of mall tenant retail space. The mall tenant retail space, also known as gross leasable area, is leased by Equitable to retail tenants. Rosedale also includes four anchor department stores connected by the common mall area. On the assessment dates in question, the anchor department stores were Dayton's, Carson Pirie Scott, J.C. Penney, and Montgomery Ward. The subject property does not include any of the four anchor department stores, which are situated on land that was not owned by Equitable on either of the assessment dates in question.

A Restatement of Operating Agreement ("Operating Agreement") governs the operations and maintenance of Rosedale's general common areas. ² In addition to maintenance provisions, the Operating Agreement and its amendments contain a series of covenants, cross-easements, conditions and restrictions that make it possible for Rosedale to function as a unified entity. For example, each of the four anchor department stores agreed to operate stores at the current location under specified names until July 31, 1999. These provisions are known as operating covenants.

In 1985, a developer publicly announced plans to develop a multi-million square foot shopping and entertainment complex in Minnesota, today known as the Mall of America. The site proposed for the Mall of America was in the City of Bloomington, County of Hennepin, Minnesota, within five miles of Southdale Shopping Center, another super-regional shopping center that was then and is now owned by Equitable. Like Rosedale, Southdale retained Dayton's as an anchor department store. In August 1987, Dayton-Hudson Corporation, ³ the owner of Dayton's department store, informed Equitable that it intended Dayton's to be one of the four anchor department stores in the Mall of America.

Fearing that the presence of Dayton's in the Mall of America would detrimentally affect retail sales at Rosedale and Southdale, Equitable devised a strategy to keep Dayton's out of the Mall of America. On March 2, 1988, Dayton's and Equitable entered into an informal letter-agreement whereby Equitable promised to pay Dayton's a $28,750,000 nonshareholder capital contribution to construct "a new three level Dayton department store to be located adjacent to the existing Dayton department store * * * [at] Rosedale Shopping Center." ⁴ Equitable agreed to renovate Rosedale's general common areas and also agreed to spend up to $3 million securing consent for the renovation from the other three anchor department stores. If Equitable obtained the consents and any balance of the $3 million remained unspent, Equitable promised to pay that balance to Dayton's as an additional contribution to capital. Equitable also agreed to build two parking decks at Rosedale, one partly located on the subject property adjoining the new Dayton's store, and the other located off the subject property.

In consideration for Equitable's promises, Dayton's agreed to operate a "full line department store" at Rosedale, improving the quality of its operating covenant and effectively precluding Dayton's from replacing its Rosedale Dayton's store with one of its value retail divisions, such as Target. Dayton's also agreed to extend its operating covenant at Rosedale for 15 years, measured from the day Dayton's opened its new Rosedale store. Most significantly, Dayton's promised not to construct or otherwise operate a department store under the name "Dayton's" within a five (5) mile radius of Southdale Shopping Center for the life of its extended operating covenant. This "radius clause" provision effectively kept Dayton's out of the Mall of America. If Dayton's violated the radius clause, the agreement provided that Dayton's would return the capital contribution received relating to both the Rosedale and the Southdale expansion projects.

Dayton's further agreed to convey its old Rosedale store to Equitable for $2 million upon completion of its new Rosedale store. Equitable agreed to convert the top two floors of the old Dayton's store into additional tenant retail space. The agreement contemplated that the basement of the old Dayton's store would be integrated with the new Dayton's store, and Equitable promised both to remodel the basement at its own expense and to lease back the basement area to Dayton's for $1.00 a year. By amendment, Equitable and Dayton's incorporated the letter-agreement's provisions into the Operating Agreement on September 20, 1990.

Equitable split its expansion and renovation of Rosedale into two phases. Phase I entailed upgrading and renovating the existing mall's interior general common areas. During Phase I, Dayton's built its new store while its old store remained open. Phase II entailed converting the upper two levels of the old Dayton's store to approximately 74,000 square feet of additional tenant retail space.

Phase I began in July 1990. It entailed adding new handrails, three new 40 by 50-foot skylights, a new marble and limestone floor, five new rooftop heating, ventilating, and air-conditioning units ("HVAC"), and a new rooftop emergency generator. It also entailed removing asbestos from the subject property's general common areas.

In August 1991, Phase I was complete, and Dayton's opened its new store. Dayton's then conveyed its old store to Equitable, and Phase II of the project began--renovating the old Dayton's store into new mall tenant spaces and general common area. The Phase II expansion space opened in August 1992, which incidentally was the same month the Mall of America opened.

Income-producing real estate, such as a super-regional shopping center like Rosedale, is typically purchased as an investment, and from an investor's point of view, earning power is a critical element affecting property value. The Appraisal Institute, The Appraisal of Real Estate 409 (10th ed. 1992). A property's earning power includes its expected annual cash flow, cumulatively accruing over the term of ownership, or "holding period," plus the proceeds from the resale, or "reversion," of the property upon terminating ownership. Id. at 413.

Appraisers use a DCF analysis to estimate the value of income-producing property that does not have a stabilized stream of income. Id. at 531-32. Generally, a DCF analysis is based on the principle of anticipation, forecasting the annual cash flows expected over the holding period, and discounting those cash flows at a required rate of return to derive an indication of present value. ⁵

In preparing a DCF analysis, an appraiser uses sophisticated computer software to create detailed spreadsheets that show the property's cash flows for every year during the presumed holding period. The appraiser uses these spreadsheets to account for both the amount and the timing of all cash flows into and out of the property being appraised. The appraiser then accounts for the time-value of money by discounting the property's annual net cash flows to derive an indication of present value....