STATE OF MINNESOTA
IN SUPREME COURT
A15-0018
Tax Court Anderson, J.
KCP Hastings, LLC,
Relator,
vs. Filed: August 12, 2015
Office of Appellate Courts
County of Dakota,
Respondent.
________________________
Dan Biersdorf, Ryan Simatic, Biersdorf & Associates, P.A., Minneapolis, Minnesota, for
relator.
James C. Backstrom, Dakota County Attorney, Suzanne W. Schrader, Assistant County
Attorney, Hastings, Minnesota, for respondent.
________________________
SYLLABUS
1. The tax court did not clearly err by measuring the subject property using
the gross leasable area rather than the gross building area, because the court’s valuation
accounted for the lack of common area in comparable properties.
2. The tax court did not clearly err when it rejected relator’s valuation, which
was based on the sales-comparison approach, because a majority of the subject property’s
tenants have external entrances, unlike the tenants at the fully enclosed malls used by
relator as comparable properties.
1
3. The tax court clearly erred when it rejected relator’s discounted-cash-flow
analysis because relator introduced sufficient data into evidence for the court to verify
relator’s analysis or conduct its own analysis.
4. The tax court abused its discretion by relying solely on the sales-
comparison approach to valuation to determine the market value of an income-producing
property, when the parties rely heavily on the income approach and provide credible
reliable income data to the court.
Affirmed in part, vacated and remanded.
Considered and decided by the court without oral argument.
OPINION
ANDERSON, Justice.
Relator KCP Hastings, LLC (“KCP”), challenged respondent Dakota County’s
estimated assessment of the market value of its shopping mall for the assessment dates of
January 2, 2010, January 2, 2011, and January 2, 2012. After a 2-day trial, the tax court
adopted market valuations of the property that exceeded the County’s estimated
assessments. KCP asserts three grounds for error. First, KCP argues that the tax court
clearly erred by using the mall’s gross building area rather than its gross leasable area to
measure the property. Second, KCP argues that the tax court clearly erred when it
rejected KCP’s valuations using the sales-comparison and income approaches because
the court could not “replicate” KCP’s discounted-cash-flow analysis (“DCF analysis”).
Third, KCP argues that the tax court abused its discretion by determining the value of the
2
subject property relying solely on the sales-comparison approach. We affirm in part,
vacate, and remand.
KCP owns Westview Shopping Center (“Westview Mall” or “Mall”), a multi-
tenant retail strip mall in Hastings. Westview Mall was built in 1976; it has a gross
building area of 153,749 square feet1 and a gross leasable area of 129,475 square feet.
The Mall includes two larger tenant spaces, which were leased to Goodwill and Clancy’s
Drug on the assessment dates, and 23 smaller tenant spaces, 5 of which were vacant on
the date of the 2010 valuation, and 10 of which were vacant on the date of the 2012
valuation.
For property tax purposes, the Dakota County Assessor estimated the market value
of Westview Mall to be $4,791,600 as of January 2, 2010; $4,821,700 as of January 2,
2011; and $4,821,700 as of January 2, 2012. KCP challenged the estimated assessments,
and the matter proceeded to trial on June 3-4, 2014. Both parties hired appraisers, who
submitted appraisal reports to the tax court and testified at trial. The County’s appraiser,
Brian Ducklow, estimated the Mall’s property value using the three traditional
approaches: income, sales-comparison (or “market”), and cost. He opined that the
income approach was the “most relevant method for the subject property” and gave it
1
The parties’ appraisers differed on the scope of the gross building area of the Mall.
KCP’s appraiser measured the Mall at 153,749 square feet, and the County’s appraiser
measured it at 140,852 square feet. The parties stipulated to the County’s measurement
of 140,852 square feet, but the tax court independently verified through floor plans that
the correct measurement is 153,749 square feet. Although KCP notes in its brief that the
tax court deviated from the stipulated measurement, it does not assert that the court
clearly erred by doing so.
3
70% weight for his final valuation. He used a direct-capitalization technique to arrive at
his income-approach valuation. Ducklow gave 25% weight to the sales-comparison
approach, which compared Westview Mall to six malls located in the Twin Cities metro
area. He gave only a 5% weight to the cost approach.
KCP’s appraiser, Paul Bakken, also viewed the income approach as the most
pertinent for assessing the value of the Mall. He concluded that a DCF analysis was
more appropriate than a direct-capitalization analysis due to the “non-stabilized nature”
of the Mall’s income during the assessment years. Bakken also applied the sales-
comparison approach, comparing Westview Mall to fully enclosed shopping centers in
Bemidji, Brainerd, Worthington, Hutchinson, and Dickinson, North Dakota. But he gave
no weight to the sales-comparison approach in his final valuation; rather, he used that
approach to “confirm[] the values concluded in the income approach to value.” He did
not apply the cost approach “given the older age of the property and the amount of
functional obsolescence present at the property.”
The tax court gave no weight to the County’s cost-approach valuation because the
Mall’s age “mak[es] cost estimates inherently less than reliable.” The court also gave
“little weight” to KCP’s sales-comparison-approach valuation because all of Bakken’s
comparable properties were fully enclosed shopping malls, whereas the vast majority of
retailers at Westview Mall have external entrances. Next, the court accepted the
County’s valuation using the sales-comparison approach but adjusted the amount
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downward by about 12 percent after rejecting one of the comparable properties and
adjusting the value of the remaining comparable properties.2
Next, the tax court analyzed the County’s income-approach valuation. It gave
“little weight” to Ducklow’s direct-capitalization analysis because “[a] prospective buyer
of the subject property could not have concluded reasonably that on any of the valuation
dates, market rents or vacancy rates were stable.” By contrast, the tax court concluded
that a DCF analysis was an appropriate measure of the Mall’s value because the Mall’s
most likely purchaser was an individual investor, who “would have prepared a [DCF]
analysis” in deciding whether to purchase the property. But the tax court gave no weight
to the DCF analysis conducted by Bakken because the court was “unable to replicate”
many of the calculations included in the report. Although Bakken’s appraisal contained
all of the data needed to compute the DCF analysis, Bakken conceded at trial that the
calculations themselves were contained in a spreadsheet that was not provided to the
County or the court during discovery because it was not “asked for.” The County
objected to KCP’s attempt to introduce the spreadsheet at trial. The tax court sustained
the County’s objection and excluded the evidence on the basis of “unfair surprise,”
stating at trial that it would “muddle along without” the spreadsheet. The court later
rejected KCP’s income-approach valuation in its entirety in its final judgment.
2
The court also made an upward adjustment to the County’s sales-comparison-
approach valuation to account for Ducklow’s use of a smaller gross building area.
5
After giving little or no weight to the County’s valuations using the cost and
income approaches, and KCP’s valuations using the sales-comparison and income
approaches, the tax court arrived at a final valuation using only the County’s sales-
comparison-approach analysis. The court valued Westview Mall at $5,535,000 as of
January 2, 2010; $5,258,200 as of January 2, 2011; and $4,995,300 as of January 2, 2012.
A summary of the County’s assessed values, the parties’ appraisal opinions, and the tax
court’s final valuations is as follows:
County Appraisal Tax Court
KCP Appraisal
Assessment County (Sales- (Sales-
(DCF/Income
Date Assessor Comparison Comparison
Approach)
Approach) Approach)
Jan. 2, 2010 $4,791,600 $3,250,000 $6,684,700 $5,535,000
Jan. 2, 2011 $4,821,700 $2,850,000 $5,980,400 $5,258,200
Jan. 2, 2012 $4,821,700 $2,800,000 $5,303,900 $4,995,300
I.
First, KCP argues that the tax court clearly erred by measuring the Mall using its
gross building area of 153,749 square feet, rather than the gross leasable area of 129,475
square feet, resulting in an overvaluation of the Mall. We “will not disturb the tax court’s
valuation of property unless the tax court’s decision is clearly erroneous, meaning that the
decision is not reasonably supported by the evidence as a whole.” Theobald v. Cty. of
Lake, 712 N.W.2d 180, 182 (Minn. 2006). The tax court’s factual findings and
conclusions receive deference unless the court has “clearly overvalued or undervalued the
subject property, or has completely failed to explain its reasoning.” Id.
6
Gross building area and gross leasable area are two measurements used by
appraisers to determine the size of a building for tax purposes. See Appraisal Inst., The
Appraisal of Real Estate 225 (14th ed. 2013). Gross building area is the “[t]otal floor
area of a building, excluding unenclosed areas, measured from the exterior of the walls.”
Id. Gross leasable area, by contrast, is the “[t]otal floor area designed for the occupancy
and exclusive use of tenants.” Id. Although gross leasable area is “commonly used to
measure shopping centers,” there is no single correct method for measuring the size of a
building, and use of a particular method “varies based on local market practices.” Id.
KCP argues that, upon determining a market value of $36 per square foot, the tax
court should have applied that value to the Mall’s gross leasable area (129,475 square
feet) rather than its gross building area (153,749 square feet).3 KCP asserts that by using
gross building area, the tax court erroneously assessed a “large swath” of common area
that adds no value to the Mall. Moreover, KCP noted that most of the comparable
properties used in the County’s sales-comparison-approach valuation—which was the
only analysis considered by the tax court—lack a common area and therefore have a
higher value-per-square-foot than Westview Mall.
The record reveals, however, that Ducklow’s analysis, relied on by the tax court,
takes into account the lack of common area in the comparable properties. Ducklow
adjusted the price of each comparable property to account for differences between those
3
If the tax court had done so, its final valuations would have been $4,661,100 for
2010; $4,428,045 for 2011; and $4,206,642 for 2012.
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properties and Westview Mall. One adjustment category is “building efficiency,” which
resulted in a downward adjustment for comparable properties that lack common areas.
Put differently, Ducklow compensated for Westview Mall’s common area by adjusting
the price per square foot of those comparable properties that lack common areas. KCP
does not argue on appeal that Ducklow’s building-efficiency adjustments are unsupported
by the record,4 and the tax court accepted those adjustments without comment. Further,
the tax court noted that “Bakken’s calculations inconsistently mix gross building area and
[gross leasable area].” See also Appraisal Inst., supra, at 224-25 (“Failure to apply
measurement techniques and report building dimensions consistently within an
assignment can impair the quality of the appraisal.”). We conclude that the tax court did
not clearly err by using gross building area rather than gross leasable area in its
calculations of market value.
II.
Next, KCP argues that the tax court abused its discretion by rejecting KCP’s
valuation, which used the sales-comparison and income approaches. Minnesota law
requires that all property be assessed at its market value. Minn. Stat. § 273.11, subd. 1
(2014). The law also requires every assessor, “in estimating and determining the value of
lands for the purpose of taxation, to consider and give due weight to every element and
factor affecting the market value thereof.” Minn. Stat. § 273.12 (2014). We apply a
4
Indeed, the trial transcript reveals that KCP understood that the building-efficiency
adjustments relate to the common area, as KCP’s counsel asked Ducklow several
questions about those adjustments.
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deferential standard of review when reviewing the tax court’s determination of market
value. Eden Prairie Mall, LLC v. Cty. of Hennepin, 797 N.W.2d 186, 192 (Minn. 2011).
This court will not disturb the tax court’s valuation of property for tax
purposes unless the tax court’s decision is clearly erroneous, which means
the decision is not reasonably supported by the evidence as a whole. The
tax court’s decision should be considered clearly erroneous only when this
court is left with a “ ‘definite and firm conviction that a mistake has been
committed’ . . . .” The taxpayer has the burden of showing that the
valuation reached by the assessor is excessive. The inexact nature of
property assessment necessitates that this court defer to the decision of the
tax court unless the tax court has either clearly overvalued or undervalued
the subject property, or has completely failed to explain its reasoning.
Equitable Life Assurance Soc’y of U.S. v. Cty. of Ramsey, 530 N.W.2d 544, 552 (Minn.
1995) (citations omitted) (quoting Westling v. Cty. of Mille Lacs, 512 N.W.2d 863, 866
(Minn. 1994)).
A.
KCP first argues that the tax court clearly erred when it rejected KCP’s market
valuation using the sales-comparison approach. Although the tax court is not bound to
accept the valuation of a party’s appraiser, the reasoning for rejecting an analysis cannot
be “illogical.” Am. Express Fin. Advisors, Inc. v. Cty. of Carver, 573 N.W.2d 651, 658
(Minn. 1998). Rather, “the tax court . . . should carefully explain its reasoning for
rejecting the appraisal testimony . . . and adequately describe the factual support in the
record for its determination.” Eden Prairie Mall, 797 N.W.2d at 194.
The tax court did not clearly err by rejecting KCP’s valuation using the sales-
comparison approach. The court explained that Bakken included only fully enclosed
malls as comparable properties, and that these properties are too dissimilar from
9
Westview Mall, in which less than 20% of stores lack an external entrance. Further, the
court noted that all of Bakken’s comparable properties are located outside the Twin Cities
metro area, whereas all of the County’s comparable properties are located within the
metro area. This observation implied that KCP’s focus on fully enclosed malls located
elsewhere in Minnesota led to a selection of properties too geographically distant from
Westview Mall to be comparable to the subject property. Thus, the tax court did not
“completely fail[] to explain its reasoning.” Theobald, 712 N.W.2d at 182.
B.
KCP also argues that the tax court clearly erred by rejecting its DCF analysis,
which Bakken used to arrive at his income-approach valuation. In Northwest Racquet
Swim & Health Clubs, Inc. v. County of Dakota, we concluded that the tax court did not
clearly err by rejecting the parties’ income-approach valuations because the taxpayer
failed to submit essential revenue and expense data, making it “impossible to determine
actual . . . income and expense figures.” 557 N.W.2d 582, 587 (Minn. 1997).
We stated that, although the income approach “would have been useful” in valuing
the property, the court’s actions were justified given the lack of data available in the
record. Id. at 587-88. We reached the opposite conclusion in American Express
Financial Advisors, Inc. v. County of Carver, 573 N.W.2d 659, 658 (Minn. 1998), in
which the tax court rejected both parties’ income-approach valuations. We concluded
that the tax court’s reasoning for rejecting the parties’ income-approach data was
“illogical” in light of the “wealth of local and national income data” that the parties
presented to the court. Id. at 659.
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Here, the tax court rejected the DCF analysis because Bakken’s appraisal did not
include the spreadsheet showing his calculations, and therefore the court said it was
“unable to replicate Mr. Bakken’s calculations of base rental revenue, losses due to
absorption and turnover vacancy, [common area maintenance] charges, losses due to
‘general vacancy,’ expenditures for tenant improvements, or expenditures for leasing
commissions.” But, unlike in Northwest Racquet, in which vital revenue and expense
data was completely missing, 557 N.W.2d at 587, the substantive data needed here to
complete the DCF analysis was contained in Bakken’s appraisal, even though the
appraisal did not contain the calculations themselves. Put differently, the DCF data,
though perhaps not in its most accessible form, was available to the court. Indeed, the
court’s initial reaction when it excluded Bakken’s spreadsheet—that it would “muddle
along without it”—belies the court’s subsequent decision to reject the DCF analysis
because the court implied that it would be able to work out the calculations without the
spreadsheet or, at least, would not need the excluded exhibit. Moreover, we have stated
that the tax court need not disclose its spreadsheets when the court conducts its own
independent DCF analysis. Equitable Life, 530 N.W.2d at 558. Surely, then, a party
does not invalidate its DCF analysis by failing to introduce its spreadsheets into evidence.
The County argues that the tax court did not err by rejecting the DCF analysis
because Bakken’s appraisal was “not comprehensive” when predicting several values,
including discount rate, prospective net operating income, and total potential gross
revenue. But the tax court rejected the DCF analysis because it could not “replicate” the
calculations, not because the values were unsupported or unreasonable. The tax court
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need not accept an appraiser’s valuation in its entirety; instead, it may adjust the
calculations based on evidence in the record and its own expertise. See Montgomery
Ward & Co. v. Cty. of Hennepin, 450 N.W.2d 299, 308 (Minn. 1990) (“Rarely is one
appraiser’s methodology and opinion accepted in its entirety by the Court.”). For
example, the court made several adjustments to the County’s sales-comparison-approach
valuation before accepting it. The court could have similarly adjusted the values included
in Bakken’s DCF analysis, rather than rejecting his analysis outright. We therefore
conclude that the tax court clearly erred by rejecting KCP’s DCF analysis.
III.
Next, KCP argues that the tax court abused its discretion when it determined the
market value of Westview Mall using only the sales-comparison approach. We recognize
three basic approaches to determining the market value of real estate: income, sales-
comparison, and cost. Equitable Life, 530 N.W.2d at 552. Application of multiple
approaches to determine market value is “usually appropriate and necessary” because
“the alternative value indications derived can serve as useful checks on each other.” Id.
at 553. However, “neither judicial nor statutory law mandates the tax court give weight
to all three valuation approaches.” Id. at 554. Instead, the weight given to each approach
depends on “the quantity and quality of available data.” Nw. Racquet, 557 N.W.2d at
587. The tax court may therefore rely on a single approach under certain circumstances,
“provided the court clearly explains the weaknesses of the rejected approaches.” Id.; see
Equitable Life, 530 N.W.2d at 554 (affirming the tax court’s sole reliance on the income
approach).
12
KCP argues that the tax court abused its discretion by failing to consider the
income approach in its final valuation. We have “recognized the usefulness of the
income approach in valuing income producing properties.” Nw. Racquet, 557 N.W.2d at
587. In Equitable Life, we affirmed the tax court’s determination of market value using
only the income approach because both parties’ appraisers gave significant weight to that
approach, and the uncommon circumstances surrounding the property made other
approaches unreliable. 530 N.W.2d at 554. Similarly, in Montgomery Ward & Co. v.
County of Hennepin, we concluded that the “income approach estimate should have been
given over-riding weight” due to the “inherent weaknesses of the cost approach and the
absence of truly comparable sales.” 450 N.W.2d at 308.
This is not a case in which the tax court could value an income-producing property
without considering the income approach. Both parties relied heavily on the income
approach in their appraisals; it constituted 70% of the County’s valuation and 100% of
KCP’s valuation. Moreover, the tax court stated that a DCF analysis was appropriate
here because it “represents one approach by which prospective buyers and sellers of the
subject property would evaluate the subject property as an investment.” As explained
above, the court clearly erred by rejecting KCP’s DCF analysis. In light of this error, as
well as the “over-riding weight” often afforded to the income approach in valuations
involving income-producing properties, see Montgomery Ward, 450 N.W.2d at 308, we
conclude that the tax court abused its discretion by relying solely on the sales-comparison
approach.
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IV.
We conclude that the tax court clearly erred by rejecting KCP’s DCF analysis and
abused its discretion when it failed to consider the income approach in its final valuation.
The court’s valuation of Westview Mall therefore was not supported by the record as a
whole. Accordingly, we remand to the tax court for further proceedings consistent with
this opinion. The tax court may, if necessary, reopen the record and conduct a further
evidentiary hearing.5
Affirmed in part, vacated and remanded.
5
We note that the spreadsheet showing Bakken’s DCF calculations was excluded
from trial due to “unfair surprise,” and that this objection would not apply if KCP
introduces the spreadsheet in a future evidentiary hearing. See Montgomery Ward & Co.
v. Cty. of Hennepin, 482 N.W.2d 785, 788 (Minn. 1992).
14