Marion Cnty. Assessor v. Wash. Square Mall, LLC, 49T10–1211–TA–00070.

• Decision Date: 30 December 2015
• Docket Number: No. 49T10–1211–TA–00070.,49T10–1211–TA–00070.
• Citation: 46 N.E.3d 1
• Parties: MARION COUNTY ASSESSOR, Petitioner, v. WASHINGTON SQUARE MALL, LLC, DeBartolo Realty Partnership, LP, and Simon Capital, LP, Respondents.
• Court: Indiana Tax Court

46 N.E.3d 1

MARION COUNTY ASSESSOR, Petitioner
v.
WASHINGTON SQUARE MALL, LLC, DeBartolo Realty Partnership, LP, and Simon Capital, LP, Respondents.

No. 49T10–1211–TA–00070.

Tax Court of Indiana.

Dec. 30, 2015.

46 N.E.3d 2

John C. Slatten, Marion County Assessor's Office, Indianapolis, IN, Attorney for Petitioner.

Paul M. Jones, Jr., Matthew J. Ehinger, Ice Miller, LLC, Indianapolis, IN, Attorneys for Respondent.

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

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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

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each of the three anchors had ended and that one of them, Macy's, left in 2008 citing underperformance³ ), 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:

(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

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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:

(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

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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...