Inland Edinburgh Festival, LLC v. Cnty. of Hennepin, A19-0567

• Decision Date: 12 February 2020
• Docket Number: A19-0567
• Citation: 938 N.W.2d 821
• Parties: INLAND EDINBURGH FESTIVAL, LLC, Relator, v. COUNTY OF HENNEPIN, Respondent.
• Court: Minnesota Supreme Court

938 N.W.2d 821

INLAND EDINBURGH FESTIVAL, LLC, Relator,

v.COUNTY OF HENNEPIN, Respondent.

A19-0567

Supreme Court of Minnesota.

Filed: February 12, 2020

Thomas R. Wilhelmy, Christopher A. Stafford, Fredrikson & Byron, P.A., Minneapolis, Minnesota, for relator.

Michael O. Freeman, Hennepin County Attorney, Rebecca L. Holschuh, Assistant County Attorney, Minneapolis, Minnesota, for respondent.

Considered and decided by the court without oral argument.

OPINION

ANDERSON, Justice.

This is a dispute about the value of a shopping center as of January 2, 2015. Relator Inland Edinburgh Festival, LLC sought review in the tax court of respondent Hennepin County’s assessed value for Inland’s retail shopping center property. The tax court concluded that the market value of Inland’s two parcels of improved real estate was higher than either the initial assessed value determined by Hennepin County or the valuation opinion presented by the sole appraiser to testify at trial. On appeal from that decision, Inland argues that the tax court’s value determination is excessive because the tax court rejected Inland’s expert’s opinion under the income approach and relied on a single 2017 sale, of Inland’s property, to value the property under the sales-comparison approach. We affirm the tax court’s decision to afford no weight to the expert’s opinion on the income approach, reverse the tax court’s valuation determination based on the sales-comparison approach, and remand for further proceedings.

FACTS

Inland owned real property in Brooklyn Park, improved with a retail shopping center that includes two adjacent strip malls. The shopping center contains an anchor grocery store tenant and sixteen tenant spaces in the malls, of varying sizes, with a total of 91,563 square feet of net rentable area. For property tax purposes, the Hennepin County Assessor estimated the market value of Inland’s property, as of January 2, 2015, to be $8,384,300. Inland timely petitioned the tax court, challenging the assessment and asserting that the County’s assessed value for the shopping center exceeded its actual market value.

While the tax court proceeding was underway, Inland sold the property on June 1, 2017, for $9,600,000. The sale was completed as a "like-kind" tax exchange under 26 U.S.C. § 1031 (2018).¹ At the time of the 2017 sale, the shopping center had only a few tenant vacancies, and several leases were at above-market rates.

A trial was held before the tax court on May 2, 2018. During trial, Inland introduced the expert appraisal testimony of Daniel T. Boris, who estimated the 2015 market value of the property at $7,100,000 using both an income approach and a sales-comparison approach. His initial expert report, which was admitted at trial, contained mathematical errors related to rental rates and other errors that the tax court determined affected his analysis of the value of the property. Inland thus offered into evidence a second report by Boris that corrected some of the errors contained in the initial report.

Before trial, the County notified the tax court that it did not intend to call an expert, and thus asked to be excused from the pretrial requirement to provide an expert report. The County’s request was granted, and at trial, the County called no witnesses and offered only one exhibit—the rent rolls that Inland had produced. The County also waived the prima facie validity of its initial tax assessment. The County urged the tax court to review the information in the report from Boris and to "take the credible information from that report and disregard the rest."

In its Findings of Fact, Conclusions of Law, and Order for Judgment and accompanying memorandum of law, the tax court declined to give any weight to Boris’s expert opinion on the income approach based on the computational errors in his report and the lack of an explanation regarding his methodology. The tax court also concluded that Boris’s credibility was undermined by his revised analysis, concluding that the corrections offered at trial were "masquerading wholesale changes in Boris’s opinion as mere ‘corrections’ when they were obviously engineered to support predetermined outcomes." Then, relying on a single transaction—the June 2017 like-kind exchange of Inland’s property—the tax court found that the fair market value of the property for the January 2015 assessment was $8,490,720, i.e., approximately $106,000 higher than the initial assessment by the County Assessor. After granting Inland’s motion for rehearing in part to adjust certain mathematical errors, the tax court otherwise denied that motion, resulting in a final valuation determination for Inland’s property of $8,461,400, i.e., approximately $77,000 higher than the initial assessment by the County Assessor. Inland appeals from that decision.

ANALYSIS

This appeal requires consideration of the tax court’s valuation decisions. We generally defer to the tax court’s valuation decision in light of the inexact nature of real property appraisal. Cont'l Retail, LLC v. Cty. of Hennepin , 801 N.W.2d 395, 399 (Minn. 2011) ; EOP–Nicollet Mall, LLC v. Cty. of Hennepin , 723 N.W.2d 270, 285 (Minn. 2006). The tax court "brings its own expertise and judgment to the hearing, and its valuation need not be the same as that of any particular expert as long as it is within permissible limits and has meaningful and adequate evidentiary support." Montgomery Ward & Co. v. Cty. of Hennepin , 482 N.W.2d 785, 791 (Minn. 1992). We will sustain the tax court’s factual findings as to market value unless they are clearly erroneous. Equitable Life Assurance Soc'y of U.S. v. Cty. of Ramsey , 530 N.W.2d 544, 552 (Minn. 1995). The tax court clearly errs when its decision is not reasonably supported by the record as a whole. Lewis v. Cty. of Hennepin , 623 N.W.2d 258, 261 (Minn. 2001). When the tax court has "clearly misvalued the property" or "completely failed to explain its reasoning," we accord the tax court no deference. Nw. Nat'l Life Ins. Co. v. Cty. of Hennepin , 572 N.W.2d 51, 52 (Minn. 1997).

Real property is generally assessed at its "market value," Minn. Stat. § 273.11, subd. 1 (2018), which is "the price which could be obtained at a private sale" or another "arm’s-length transaction," Minn. Stat. § 272.03, subd. 8 (2018). Generally, we recognize three basic approaches to determining the market value of real property: (1) the sales-comparison approach, which compares the subject property to similar properties recently sold in actual market transactions; (2) the cost approach, which estimates value by finding the current cost to construct a new facility with the same features as the subject property; and (3) the income approach, which determines the value of income-producing property by capitalizing the income the property is expected to generate over a specific period at a specific capitalization or yield rate. See Eden Prairie Mall , LLC v. Cty. of Hennepin , 797 N.W.2d 186, 192–93 (Minn. 2011) ; S. Minn. Beet Sugar Coop. v. Cty. of Renville , 737 N.W.2d 545, 555 (Minn. 2007). Only the sales-comparison and income approaches are at issue here.

I.

We first consider the tax court’s decision regarding the income approach. In this case, the tax court gave no weight to the value proposed by Boris under the income approach. The tax court concluded that Boris’s opinions lacked foundational reliability based on a failure to properly explain the data on which he relied, a failure to explain the basis for his opinion, and a lack of credibility stemming from numerous errors in the opinions.

The income approach may be indicative of the market value of income-producing properties, such as a retail mall, because "[i]ncome-producing real estate is typically purchased as an investment, and from an investor’s point of view earning power is the critical element affecting property value." Appraisal Inst., The Appraisal of Real Estate 439 (14th ed. 2013); see TMG Life Ins. Co. v. Cty. of Goodhue , 540 N.W.2d 848, 852 (Minn. 1995) (explaining that the income approach relies on "the net operating income attributable to the property" and that retail properties generally derive income from rental payments). When the tax court relies solely on one method, as it did here once it assigned no weight to the income approach, it must "clearly explain the weaknesses of the rejected approaches." Equitable Life Assurance Soc'y of U.S. , 530 N.W.2d at 554–55.

Inland argues that the tax court erred when it failed to give the income approach any weight by its wholesale rejection. The tax court did not state that its decision was a wholesale rejection of this approach as a method of valuing Inland’s property; rather, the tax court rejected its application in this case only after identifying a lack of evidentiary support and lack of credibility that deprived those opinions of foundational reliability. See Cty. of Aitkin v. Blandin Paper Co. , 883 N.W.2d 803, 810 (Minn. 2016) (noting that an appraisal expert’s opinion must have foundational reliability). The tax court is free to accept all or only part of an expert’s report to determine valuation, as "property valuation is an inexact science." Menard, Inc. v. Cty. of Clay , 886 N.W.2d 804, 821 (Minn. 2016). We therefore afford the tax court broad discretion to rely on or disregard the evidence presented at trial, particularly when credibility is at issue. Id. ; Archway Mktg. Servs. v. Cty. of Hennepin , 882 N.W.2d 890, 896 (Minn. 2016) ("Ordinarily, we defer to the tax court’s credibility determinations."). Here, the tax court gave no weight to Boris’s use of the income approach because of the methodological inconsistencies, data errors, and general lack of explanation in his report. All of these errors could significantly impact the accurate valuation of Inland’s property. Thus, the tax court’s credibility determination has adequate support in the record. We therefore hold that the tax court’s decision to give no weight to the...