Southlake Ind. LLC v. Lake Cnty. Assessor

• Decision Date: 25 November 2019
• Docket Number: Cause No. 18T-TA-00016
• Citation: 135 N.E.3d 692
• Parties: SOUTHLAKE INDIANA LLC, Petitioner, v. LAKE COUNTY ASSESSOR, Respondent.
• Court: Indiana Tax Court

135 N.E.3d 692

SOUTHLAKE INDIANA LLC, Petitioner,

v.LAKE COUNTY ASSESSOR, Respondent.

Cause No. 18T-TA-00016

Tax Court of Indiana.

FILED November 25, 2019

ATTORNEYS FOR PETITIONER: MATTHEW M. ADOLAY, WOODEN MCLAUGHLIN LLP, Indianapolis, IN, THOMAS M. ATHERTON, BOSE MCKINNEY & EVANS LP, Indianapolis, IN

ATTORNEYS FOR RESPONDENT: CURTIS T. HILL, JR., ATTORNEY GENERAL OF INDIANA, WINSTON LIN, MEREDITH B. MCCUTCHEON, DEPUTY ATTORNEYS GENERAL, Indianapolis, IN

WENTWORTH, J.

Southlake Indiana LLC challenges the Indiana Board of Tax Review's final determination that valued its real property for each of the 2007 through 2014 tax years. Upon review, the Court reverses the Indiana Board's final determination.

RELEVANT FACTS AND PROCEDURAL HISTORY

Southlake owns a 7.23 acre parcel with a 90,000 square-foot, two-story building located in a premier retail location in Merrillville, Indiana. (See Cert. Admin. R. at 282, 576.) The property is a freestanding outlot building of the Southlake Mall, a large regional mall with several anchor stores. (See Cert. Admin. R. at 293, 845-54.) The property sits near a heavily traveled intersection at US 30 and Mississippi Street, with access and visibility from both streets. (See Cert. Admin. R. at 573-74, 577.)

In 1992, Southlake entered into a build-to-suit lease with a Kohl's discount department store, which was renewed in 2012. (See Cert. Admin. R. at 397-98, 1457-58, 1707.) In its build-to-suit leases, Kohl's requires its properties to be developed according to its national specifications. (See Cert. Admin. R. at 1704-06.) To determine a rental rate, Kohl's applies a mortgage constant to the construction costs, compensating both the developer and owner for their investments. (See Cert. Admin. R. at 1706.) Under the terms of the Southlake lease, Kohl's paid a fixed rental rate plus an additional 1.5% of its retail sales above $14,500,000. (See Cert. Admin. R. at 397, 546.)

For each tax year from 2007 through 2012, the Lake County Assessor valued the property at $16,775,300 and for 2013 and 2014 valued the property at $13,700,000. (See Cert. Admin. R. at. 533-34.) Believing those values to be too high, Southlake filed appeals with the Lake County Property Tax Assessment Board of Appeals ("PTABOA"), which reduced the assessments to $11,600,000 (2007); $12,500,000 (2008); $15,200,000 (2009); $11,500,000 (2010); $12,000,000 (2011); $12,700,000 (2012); $13,700,000 (2013); and $13,700,000 (2014). (See Cert. Admin. R. at 4, 12, 23, 38, 51, 64, 78, 81-82, 87.) Still believing the property was over-assessed, Southlake appealed to the Indiana Board.

In February and December of 2016, the Indiana Board conducted its hearing on Southlake's appeals. The parties each presented appraisals that valued the property using the cost, sales comparison, and income approaches to value; both appraisals, however, relied primarily on the income approach¹ on the basis that investors would be the most likely purchasers of the property. (See Cert. Admin. R. at 445, 551, 738-42, 1474, 2162.)

Coers Appraisal

Southlake presented a USPAP-compliant appraisal prepared by Sara Coers, a member of the Appraisal Institute (MAI). (See Cert. Admin. R. at 274-75.) In her income approach, she estimated the subject property's rent using three different methods: 1) averaging extracted market rents of other Indiana properties, 2) calculating rent as a percentage of gross sales, and 3) calculating a cost-based rent. (See Cert. Admin. R. at 400-17, 1459-65.) Based on these methods, Coers determined that the subject property's contract rent was actually below market rents that ranged from $5.50 to $7.00 per square foot. (See Cert. Admin. R. at 397, 416-17.)

After accounting for expenses, Coers concluded that the property's net operating income (NOI) ranged from $4.88 to $6.09 per square foot. (See Cert. Admin. R. at 423-30, 1470-71.) She then selected loaded overall capitalization rates ranging from 7.15% to 8.65% that were based on rates extracted from market sales in Indiana, Ohio, and Kentucky as well as investor surveys. (See Cert. Admin. R. at 432-40, 1471-73.) After applying the capitalization rates to her NOI values, Coers estimated the property's market value-in-use as follows: $6,460,000 (2007); $6,240,000 (2008); $5,350,000 (2009); $5,090,000 (2010); $5,970,000 (2011); $6,500,000 (2012); $7,050,000 (2013); and $7,160,000 (2014). (Cert. Admin. R. at 438-39, 1473.)

Kenney Appraisal

The Assessor presented a USPAP-compliant appraisal prepared by Mark Kenney, MAI. (See Cert. Admin. R. at 525-28, 1739-40, 1760.) In his income approach, Kenney assumed that both the subject property's category and its location near the Southlake Mall limited the types of comparable leases to those with similar users. (See Cert. Admin. R. at 576, 2286-87, 2289-90.) Kenney then concluded that the subject property's highest and best use was as a discount department store and that leased fee sales were the most relevant comparable sales for estimating its market rent. (See Cert. Admin. R. at 551.)

Kenney averaged market rents extracted from sale-leaseback and build-to-suit leases of several Kohl's stores and other national discount department stores and big box stores, estimating that the market rent ranged between $9.00 to $10.50 per square foot. (See Cert. Admin. R. at 655-68.) Using these market rent estimates, Kenney concluded that the property's NOI ranged from $8.19 to $9.58 per square foot during the years at issue. (See Cert. Admin. R. 674-81.)

Finally, Kenney developed overall capitalization rates that ranged from 6.7% to 7.6%. (See Cert. Admin. R. at 674-81.) He applied the capitalization rates to his NOI estimates to arrive at final values for the subject property of $11,700,000 (2007); $11,800,000 (2008); $10,900,000 (2009); $12,100,000 (2010); $12,100,000 (2011); $11,000,000 (2012); $12,300,000 (2013); and $13,000,000 (2014). (See Cert. Admin. R. at 714-16.)

The Indiana Board's Final Determination

On May 10, 2018, the Indiana Board issued a final determination. In it, the Indiana Board assigned no weight to either party's sales comparison or cost approaches. (See Cert. Admin. R. at 3372 ¶ 130, 3379 ¶ 151.) In considering each appraisal's income approach, the Indiana Board noted that Kenney provided a more detailed market rent analysis than Coers by offering more relevant comparable properties. (See Cert. Admin. R. at 3374-75 ¶¶ 136-37 (stating that Coers's reliance on a month-to-month lease for a fireworks store in a soon-to-be demolished building cast significant doubt on her analysis).) To determine which appraiser's estimate of market rent was best supported, however, the Indiana Board used its own unique evaluation method.

First, the Indiana Board selected sixteen leases, five from Coers's data and eleven from Kenney's data, that it found most relevant to the subject property's market. (See Cert. Admin. R. at 3374-75 ¶ 137.) Of those leases, nine were Kohl's build-to-suit leases from various locations across the United States with rents ranging from $6.40 to $11.97 per square foot, and two leases involved properties that were located close to the subject property (i.e., Gander Mountain and The RoomPlace) with rents of $7.42 and $9.75 per square foot. (See Cert. Admin. R. at 3374-76 ¶¶ 137-39.)

Next, the Indiana Board compared the rents from its selected leases with Coers's and Kenney's estimated market rents and concluded that Kenney's estimates were better supported than Coers's. (See Cert. Admin. R. at 3376 ¶ 140.) The Indiana Board explained that once it "corrected" and "reconstructed" Coers's gross sales percentage rent analysis, Coers's rent estimates themselves supported Kenney's. (See Cert. Admin. R. at 3376-77 ¶¶ 141-43 (stating that Coers's analysis was flawed because she based her findings on gross rent clauses and not rent as a percentage of gross sales).)

Finding Kenney's estimated market rents more credible, the Indiana Board adopted Kenney's income approach values.² As a result, the Indiana Board valued the property as follows: $11,700,000 (2007); $11,800,000 (2008); $10,900,000 (2009); $9,600,000 (2010); $9,600,000 (2011); $10,400,000 (2012); $12,300,000 (2013); and $13,000,000 (2014). (See Cert. Admin. R. at 3380 ¶ 153.)

Southlake initiated this original tax appeal on June 22, 2018. The Court conducted oral argument on December 20, 2018. Additional facts will be supplied when necessary.

STANDARD OF REVIEW

The party seeking to overturn an Indiana Board final determination bears the burden of demonstrating its invalidity. Osolo Twp. Assessor v. Elkhart Maple Lane Assocs., 789 N.E.2d 109, 111 (Ind. Tax Ct. 2003). Accordingly, Southlake must demonstrate to the Court that the Indiana Board's final determination is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; contrary to constitutional right, power, privilege, or immunity; in excess of or short of statutory jurisdiction, authority, or limitations; without observance of the procedure required by law; or unsupported by substantial or reliable evidence. See IND. CODE § 33-26-6-6(e)(1)-(5) (2019). On review, however, the Court may not reweigh or assess the credibility of evidence absent finding an abuse of discretion. See Clark Cty. Assessor v. Meijer Stores LP, 119 N.E.3d 634, 642 (Ind. Tax Ct. 2019).

LAW

In Indiana, real property is assessed on the basis of its "market value-in-use." 2002 REAL PROPERTY ASSESSMENT MANUAL (2004 Reprint) ("2002 Manual") (incorporated by reference at 50 IND. ADMIN. CODE 2.3-1-2 (2002 Supp.) (repealed 2010)) at 2; 2011 REAL PROPERTY ASSESSMENT MANUAL ("2011 Manual") (incorporated by reference at 50 IND. ADMIN. CODE 2.4-1-2 (2011) at 2. See also IND. CODE § 6-1.1-31-6(c) (2007) (amended 2016). Market value-in-use is defined as the value "of a property for its current use, as reflected by the utility received by the owner or a similar user, from the property." 2002 Manual at 2; 2011 Manual at 2. Because Indiana's property...