Southlake Ind., LLC v. Lake Cnty. Assessor
| Decision Date | 08 December 2020 |
| Docket Number | Case No. 18T-TA-00030 |
| Citation | 160 N.E.3d 1156 |
| Parties | SOUTHLAKE INDIANA, LLC, Petitioner, v. LAKE COUNTY ASSESSOR, Respondent. |
| Court | Indiana Tax Court |
ATTORNEYS FOR PETITIONER: DAVID A. SUESS, BENJAMIN A. BLAIR, FAEGRE DRINKER BIDDLE & REATH LLP, Indianapolis, IN
ATTORNEYS FOR RESPONDENT: MARILYN S. MEIGHEN, ATTORNEY AT LAW, Carmel, IN, BRIAN A. CUSIMANO, ATTORNEY AT LAW, Indianapolis, IN
Southlake Indiana, LLC has appealed the final determination of the Indiana Board of Tax Review valuing its real property for the 2011 through 2014 tax years.1 Upon review, the Court affirms in part, and remands in part.
Southlake owns the Southlake Mall, a super-regional shopping mall located in Hobart, Indiana, that opened in 1974. For purposes of this appeal, the Mall is comprised of twelve parcels that make up its land, surface parking lots, and retention ponds; the Mall's inline retail space and attached JCPenney and Dick's Sporting Goods stores; a detached movie theatre, Gander Mountain store, and Firestone store; and several other freestanding buildings situated on outparcel lots that are used as restaurants, a jewelry store, and a bank. (See generally Pet'r Pet. Jud. Rev. Fin. Determination Ind. Bd. Tax Rev. at 3 ¶¶ 11-12; Cert. Admin. R. at 741-42, 1067-1108.)2
In February of 2014, the Ross Township Assessor issued Form 113 Notices of Assessment Change to Southlake that retroactively increased the assessed values of eight of the twelve parcels from a combined $110,432,100 in 2010 to $239,200,000 for each of the 2011, 2012, and 2013 tax years. Southlake appealed those assessment increases, as well as the combined $3,690,500 assessment assigned to the remaining four parcels for the 2013 tax year. After the Lake County Property Tax Assessment Board of Appeals (PTABOA) denied the appeals, Southlake sought relief with the Indiana Board.
While those appeals were pending at the Indiana Board, Southlake filed an appeal with the PTABOA challenging the Mall's 2014 assessed value on all twelve parcels. The PTABOA did not act on the 2014 appeals and Southlake subsequently transitioned them to the Indiana Board pursuant to Indiana Code § 6-1.1-15-1(o). The Indiana Board conducted a hearing on all of Southlake's appeals in June and July of 2017.
During the Indiana Board hearing, the Lake County Assessor ("Assessor") acknowledged that he bore the burden of proving that the assessment increases were correct because the Mall's assessed value increased by more than 5% between 2010 and 2011. (See Cert. Admin. R. at 3661-62.) See also IND. CODE § 6-1.1-15-17.2(a), (b) (2017) (). To meet that burden, the Assessor presented an appraisal, completed in conformance with the Uniform Standards of Professional Appraisal Practice (USPAP), that valued the Mall for each of the years at issue. The Assessor also presented the testimony of Mark Kenney, a member of the Appraisal Institute (MAI), who prepared the appraisal.
Kenney's appraisal used the income capitalization approach to value the Mall. (See, e.g., Cert. Admin. R. at 1673, 1801-79, 3760-64.) The income approach, one of three generally accepted appraisal techniques for valuing real property, applies to "income producing properties that are typically rented[ and] converts an estimate of income, or rent, [a] property is expected to produce into value through a mathematical process known as capitalization." 2011 REAL PROPERTY ASSESSMENT MANUAL () at 2. Generally speaking, when an appraiser uses this approach to value a property, he first estimates the property's net operating income ("NOI") by deducting a vacancy and collection loss, as well as operating expenses, from its potential gross income. See Appraisal Institute, THE APPRAISAL OF REAL ESTATE 478-88 (14th ed. 2013) (, among other things, that potential gross income includes rents for space in a property as well as "all other forms of income to the real property – e.g., income from services supplied to the tenants, such as secretarial service, switch-board service, antenna connections, storage, and garage space, and income from coin-operated equipment and parking fees") (emphasis added). The appraiser then selects an appropriate capitalization rate to apply against the property's NOI. See generally id. at 492.
To estimate potential gross rental income from both the Mall's inline spaces and freestanding buildings on the outparcels, Kenney relied exclusively on their actual contract rents that he then averaged within tenant size categories. (See, e.g., Cert. Admin. R. at 1801-21 (), 1825 (concluding to one averaged rental estimate for all tenants within specified square footage categories), 1842, 1845, 1848, 1851 (indicating that the averaged values were then used to calculate the Mall's effective gross income ("EGI") for each of the years at issue), 4135-38, 4153-57.) To estimate the potential gross rental income from the JCPenney and Dick's Sporting Goods stores (as well as two restaurants, the movie theatre, and the Firestone store), Kenney relied on "comparable department store and ‘big box’ store ... rents[.]" (See, e.g., Cert. Admin. R. at 1822-25, 3848-50, 4091-92, 4117-18.)
In addition to these rental income estimates, Kenney estimated other forms of income to the Mall's real property, namely the income from "specialty leasing," i.e., retail merchandising units ("RMUs"), kiosks, inline spaces occupied by temporary tenants ("TILs"), and "Brand/Media." (See, e.g., Cert. Admin. R. at 1827-30, 1842, 1845, 1848, 1851, 3851-63, 4158-63.) After conducting a cost-of-occupancy analysis3 to confirm that the Mall's health was consistent with typical industry parameters, Kenney applied a single vacancy and collection loss rate to his overall income conclusion to arrive at the Mall's EGI. (See, e.g., Cert. Admin. R. at 1830-33.)
From EGI, Kenney subtracted operating expenses – which he estimated based on the property's actual operating history – to arrive at the Mall's NOI. (See, e.g., Cert. Admin. R. at 1833-36, 1841-52.) Kenney included a management fee in his expense estimate (ranging from 3% to 4% of his EGI) as he believed the Mall, if sold, would likely be leased and managed by an institutional owner or professional manager. (See, e.g., Cert. Admin. R. at 1835-36, 4034.) Kenney testified that while intangible value rarely exists in malls, his management fee deduction would adequately account for and remove the intangible value arising from the Mall's operation as a going concern. (See, e.g., Cert. Admin. R. at 3781-83.)
Kenney next considered investor surveys and performed a band-of-investment analysis to determine that a capitalization rate of approximately 6.45% should be applied against his NOI calculation. (See generally Cert. Admin. R. at 1839-79.) After capitalizing NOI, Kenney made two final deductions. First, he deducted the amounts reported on the Mall's business tangible personal property tax returns for its furniture, fixtures, and equipment ("FF&E").4 (See Cert. Admin. R. at 1836-37, 3974-77, 4035.) Second, Kenney deducted for tenant incentive allowances. (See, e.g., Cert. Admin. R. at 1837-39, 4034-35.) Kenney's income approach resulted in the following value conclusions for the Mall:
| 2011: | $224,273,000 |
| 2012: | $239,273,000 |
| 2013: | $227,273,000 |
| 2014: | $243,273,000 |
Southlake's evidentiary presentation to the Indiana Board had three parts. Specifically, Southlake presented 1) two independent reviews of Kenney's appraisal; 2) its own USPAP appraisal valuing the Mall for each of the years at issue; and 3) an analysis comparing the Mall's assessed value to those of ten other Indiana malls.
Southlake presented two reviews critiquing Kenney's appraisal. The first review was prepared by Alvin Benton, MAI. (See Cert. Admin. R. at 994-1012.) Benton's primary complaint was directed at Kenney's development of, and conclusions regarding, his rental income estimates for the Mall. (See Cert. Admin. R. at 1006-08, 1011.) Specifically, Benton asserted that Kenney's method of averaging actual contract rents to estimate the Mall's potential gross rental income was not "a meaningful analysis" and that he should have considered lease data from other malls instead. (See, e.g., Cert. Admin. R. at 4461-62, 4473-87.) Benton also alleged that in estimating the rental income from the anchor stores, Kenney relied on property and lease data that was not comparable to the Mall. (See Cert. Admin. R. at 4479-83.)
Southlake's second review was prepared by Dr. Jeffrey Fisher, Professor Emeritus at Indiana University's Kelley School of Business and founder/former director of its Center for Real Estate Studies. (Cert. Admin. R. at 1026-45, 4695-97.) Fisher alleged that Kenney failed to remove from his final value conclusion for the Mall the non-taxable intangible value generated through the Mall's operation as a going concern. For instance, Fisher explained that a mall's management creates intangible business value by developing an appropriate tenant mix that initially – and necessarily – hinges on the retention of anchor tenants. (See Cert. Admin. R. at 1026-28, 4711-16 ().) Fisher asserted that while deducting a management fee, as Kenney did, may have accounted for "maintaining" the value of the Mall's tenant mix, it did not account for – and remove – the value produced to create the mix in the first place. (See Cert. Admin. R. at 4715-16.) Fisher also asserted that a mall creates value through, among other things, its operating and cross-easement agreements,...
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