ATTORNEYS FOR PETITIONER: ATTORNEY FOR RESPONDENT:
MARILYN S. MEIGHEN BETH H. HENKEL
ATTORNEY AT LAW LAW OFFICE OF BETH HENKEL LLC
Carmel, IN Indianapolis, IN
BRIAN A. CUSIMANO
ATTORNEY AT LAW
Indianapolis, IN
IN THE
INDIANA TAX COURT
MADISON COUNTY ASSESSOR, )
)
Petitioner, )
)
v. ) Cause No. 18T-TA-00012
FILED
May 22 2019, 11:30 am
)
) CLERK
Indiana Supreme Court
SEDD REALTY COMPANY, ) Court of Appeals
and Tax Court
)
Respondent. )
ON APPEAL FROM A FINAL DETERMINATION
OF THE INDIANA BOARD OF TAX REVIEW
FOR PUBLICATION
May 22, 2019
WENTWORTH, J.
The Madison County Assessor has challenged the Indiana Board of Tax Review’s
final determination that reduced the assessed value of Sedd Realty Company’s River
Ridge shopping center for each of the 2009 through 2012 assessment years. Specifically,
the Assessor claims that the Indiana Board erred by applying a capitalization rate in its
income approach that was different than the capitalization rates offered by either of the
parties. Upon review, the Court reverses the Indiana Board’s final determination.
RELEVANT FACTS AND PROCEDURAL HISTORY1
The subject property, referred to as River Ridge, is part of the larger River Ridge
Plaza retail center in Anderson, Indiana. (See Cert. Admin. R. at 712, 717-18, 1181.)
River Ridge consists of ten buildings grouped into two main strip shopping centers (north
and south) both with corresponding freestanding outlot improvements. (See Cert. Admin.
R. at 718, 1181, 3178 ¶¶ 8-9, 3440.) The property has approximately 350,000 square
feet of building area, over 300,000 square feet of leasable space, and 75 acres of land.
(See Cert. Admin. R. at 718, 1181.)
River Ridge, owned by Sedd Realty Company, Sedd Anderson, LLC, Dori
Development Co., Neal Development Co., and S&I East Development Co., (collectively,
“Sedd”), was constructed by Sidney Eskenazi over several decades beginning in the
1960’s. (See Cert. Admin. R. at 1106-34, 4453-56.) While River Ridge was located in
Anderson’s primary retail corridor when it was built, retail development has since
proceeded southward causing River Ridge’s daily customer traffic and tenant occupancy
to decline. (See Cert. Admin. R. at 726, 1229, 3744, 3850-53.) Consequently, its
occupancy had fallen to 55% during the years at issue. (See Cert. Admin. R. at 4548-49.)
The Madison County Assessor valued River Ridge at $12,469,000 for 2009,
$11,778,110 for 2010, $11,968,600 for 2011, and $9,950,400 for 2012. (See Cert. Admin.
R. at 1106-34, 3178 ¶ 7.) Believing those values to be too high, Sedd filed appeals first
1
Portions of the administrative record are confidential; consequently, this opinion will only provide
the information necessary for the reader to understand its disposition of the issues presented.
See generally Ind. Administrative Rule 9.
2
with the Madison County Property Tax Assessment Board of Appeals (“PTABOA”) and
thereafter with the Indiana Board.2 (See Cert. Admin. R. at 1-406.)
In February and March of 2017, the Indiana Board conducted a hearing on Sedd’s
appeals. While the parties could not agree on the property’s assessed value, they did
agree that 1) as a lower-tier shopping center, the original assessments were too high and
2) the Assessor bore the burden of proof with respect to the 2009 assessment. (See
Cert. Admin. R. at 3416-19, 3443, 3826-27.) Both parties presented appraisals that
valued River Ridge for each of the years at issue using the income approach, the sales
comparison approach, but not the cost approach. (See Cert. Admin. R. at 712-1054,
1178-2885, 3463-64, 3837-38.) The Indiana Board afforded no weight to either parties’
sales comparison valuations, finding the analyses were not credible. (See Cert. Admin.
R. at 3220-22 ¶¶ 147-52.) On appeal, neither party has challenged that finding.
The Assessor’s Income Approach Valuations
The Assessor’s appraisals were prepared by David Hall, a member of the
Appraisal Institute (MAI). (See Cert. Admin. R. at 3432-34.) Under the income approach,3
Hall first determined River Ridge’s net operating income (“NOI”) for each year at issue.
(See Cert. Admin. R. at 1359, 1786, 2213, 2640, 3549-50.) Specifically, Hall estimated
2
Indiana Code § 6-1.1-15-1 allowed Sedd to pursue its 2009 through 2012 appeals with the
Indiana Board without first receiving a final determination from the PTABOA. See IND. CODE § 6-
1.1-15-1(o) (2009) (explaining that because the PTABOA failed to conduct a hearing on Sedd’s
appeals within 180 days of their filing, Sedd could appeal directly to the Indiana Board) (repealed
2017).
3
The income approach, which “is used for income producing properties that are typically rented[,
] converts an estimate of income, or rent, [a] property is expected to produce into value through
a mathematical process known as capitalization.” See 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 3; see also 2011 REAL PROPERTY ASSESSMENT MANUAL
(“2011 Manual”) (incorporated by reference at 50 IND. ADMIN. CODE 2.4-1-2 (2011)) at 2.
3
River Ridge’s annual potential gross income and then subtracted the vacancy and
collection losses and total operating expenses to conclude that the NOI was $998,718 for
2009, $968,610 for 2010, $966,428 for 2011, and $948,725 for 2012. (See, e.g., Cert.
Admin. R. at 1355-59, 1781-88, 2209-15, 2635-40, 3549-50, 3571-80.)
Next, Hall developed capitalization rates by averaging the rates he extracted from
1) four selected retail sales, 2) Pricewaterhouse Coopers (PwC) national investor surveys,
3) the CoStar analytic survey data for Madison County, and 4) an analysis using the band
of investment method. (See, e.g., Cert. Admin. R. at 1364, 3580-84.) Hall then loaded
each year’s capitalization rate by 1.35% to account for Sedd’s share of the real estate tax
expense. (See Cert. Admin. R. at 1364, 1791, 2218, 2645, 3499-500, 3584.) Hall
concluded that the capitalization rate was 11.25% for tax years 2009, 2011, and 2012
and 11.70% for 2010. (Cert. Admin. R. at 1364, 1791, 2218, 2645.) After applying his
capitalization rates to the property’s NOI, Hall added $100,000 to each year’s value to
account for the property’s 39-acre tract of surplus floodplain land. (See Cert. Admin. R.
at 1365, 1792, 2219, 2646, 3501-02, 3584.) Accordingly, Hall determined the appraised
values of River Ridge were $8,980,000 for 2009, $8,380,000 for 2010, $8,690,000 for
2011, and $8,530,000 for 2012. (See Cert. Admin. R. at 1365, 1792, 2219, 2646.)
Sedd’s Income Approach Valuations
Sedd’s appraisals were prepared by Jay Allardt, a certified general appraiser and
real estate broker. (See Cert. Admin. R. at 3830, 3832.) Allardt completed his first set of
appraisals in 2013, but revised them more than once to adjust for, among other things,
his treatment of property rights under net lease contracts and his capitalization rates.
(See Cert. Admin. R. at 3837, 4170-71 (explaining that Allardt changed the appraisals
4
after learning more about the process of appraising properties for real estate tax appeal
purposes).)
Under the income approach, Allardt determined River Ridge’s NOI using its actual
income and expense information, instead of estimating potential gross income and market
vacancy and collection losses from market-level data. (See Cert. Admin. R. at 764, 890,
964, 1036, 3907, 3911-3921.) He deducted River Ridge’s operating expenses from its
income, and made adjustments and revisions to his initial appraisal conclusions to arrive
at a NOI of $950,000 for 2009, $890,000 for 2010, $830,000 for 2011, and $690,000 for
2012. (See Cert. Admin. R. at 1152 (revised NOI conclusions); but see Cert. Admin. R.
at 772, 898, 972, 1044 (Allardt’s original NOI conclusions).)
To determine annual capitalization rates, Allardt first identified eleven properties
that had been sold in Indiana and Ohio between 2001 and 2011 and two properties that
were listed for sale in Indiana. (Cert. Admin. R. at 773-75, 899-902, 974-75, 1045-47.)
The properties consisted of manufacturing facilities, office buildings, and retail shopping
centers with capitalization rates ranging from 10.90% to 16.26%. (Cert. Admin. R. at 774,
900, 974, 1046.) Allardt chose a 14% overall capitalization rate for 2009 and 14.5% for
2010-2012 based on the rates of the market sales “that bracketed closer in size” to River
Ridge and had similar occupancy levels. (See Cert. Admin. R. at 776, 902, 975, 1047,
4424-25.) He then confirmed the reasonableness of his capitalization rates by comparing
them with survey information published by CB Richard Ellis (CBRE) for Indianapolis retail
centers. (See, e.g., Cert. Admin. R. at 3962-65, 3967-70, 4425-27.)
To account for Sedd’s property tax expense, Allardt loaded his capitalization rates
by the same percentage that Sedd’s tenants paid in total insurance expense
5
reimbursements. (See Cert. Admin. R. at 1152, 4427-33 (stating that tax reimbursements
are typically similar to insurance reimbursements).) As a result, Allardt applied
capitalization rates ranging from 15.69% to 16.22% for resulting property values of
$5,900,000 for 2009, $5,300,000 for 2010, $4,900,000 for 2011, and $4,100,000 for 2012.
(Cert. Admin. R. at 1152, 3990-93, 4037-38, 4060.)
The Indiana Board’s Final Determination
The Indiana Board issued its final determination on February 20, 2018. After
reviewing the parties’ competing income approaches, the Indiana Board found that Allardt
“essentially valued a leased-fee interest, rather than a fee-simple interest in the property”
and assigned no weight to his determination of net operating income or his conclusions
under the income approach. (Cert. Admin. R. at 3226-27 ¶¶ 167-73.) The Indiana Board
found Hall’s approach “more credible and his data and judgments generally more
persuasive[,]” ultimately adopting his conclusions of NOI for each of the tax years at issue.
(See Cert. Admin. R. at 3219 ¶ 145, 3226 ¶ 166.)
Regarding the competing capitalization rates, the Indiana Board had “misgivings
about Hall’s market-extracted [capitalization] rate[s]” because even though they “involved
retail centers of roughly the same vintage as River Ridge, they all had significantly higher
occupancy rates than River Ridge.” (See Cert. Admin. R. at 3228 ¶¶ 176-77 (stating “we
disagree that sales of buildings with occupancy rates of 90% to 100% necessarily
compare very closely to property with a market occupancy rate of 55%”).) Accordingly,
the Indiana Board turned to Allardt’s analysis for help in determining an appropriate
overall rate. (See Cert. Admin. R. at 3229 ¶¶ 179, 181.)
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The Indiana Board used three retail properties from Allardt’s original thirteen
comparable properties to arrive at a 12% capitalization rate for all the years at issue. (See
Cert. Admin. R. at 3229 ¶¶ 179-82 (finding Allardt’s remaining ten properties irrelevant
because they were either non-retail properties, a freestanding big-box building, or too far
removed from the assessment dates at issue).) Then, the Indiana Board added Hall’s
1.35% load to its 12% capitalization rate and applied the resulting 13.35% to Hall’s NOI
conclusions for each year at issue. (Cert. Admin. R. at 3229-30 ¶¶ 183-84.) After trending
the 2009 valuation to the January 1, 2008 assessment date, the Indiana Board
determined the proper value of River Ridge was $7,421,200 for 2009, $7,255,500 for
2010, $7,239,200 for 2011, and $7,106,600 for 2012. (Cert. Admin. R. at 3230-31 ¶¶
184-86 3231 ¶ 186.)
The Assessor initiated this original tax appeal on April 5, 2018. The Court
conducted oral argument on November 1, 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, the Assessor must
demonstrate to the Court that the Indiana Board’s final determination in this matter 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
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required by law; or unsupported by substantial or reliable evidence. See IND. CODE § 33-
26-6-6(e)(1)-(5) (2019).
LAW AND ANALYSIS
On appeal, the Assessor claims the final determination must be reversed because
the Indiana Board determined the assessed value of River Ridge using capitalization
rates that are arbitrary and capricious, an abuse of discretion, and unsupported by
substantial evidence. (See Pet’r Br. at 1.) Specifically, the Assessor argues that the
Indiana Board arbitrarily applied its subjective opinion that 12% was the correct
capitalization rate for each year at issue, a rate that neither party’s expert witness offered
into evidence. (See Pet’r Br. at 1, 8-9, 12; Oral Arg. Tr. at 7-8.)
The Legislature has specifically authorized “the Indiana Board as trier of fact, to
review the probative value of an appraisal report.” IND. CODE § 6-1.1-15-4(p) (2017).
When reviewing an assessment, the Indiana Board is required to “determine the
relevance and weight to be assigned to the evidence” before it. 52 IND. ADMIN. CODE 2-
7-2(c) (2017). Moreover, the Indiana Board “may correct any errors that may have been
made and adjust [an] assessment . . . in accordance with the correction.” I.C. § 6-1.1-15-
4(a).
Upon weighing the parties’ evidence and competing capitalization rates, the
Indiana Board stated that “while Hall’s analysis and underlying data say something about
what an appropriate [capitalization] rate might be,” it would look to Allardt’s capitalization
rate calculation to see if it was more persuasive. (See Cert. Admin. R. at 3229 ¶ 179.)
The Indiana Board, however, did not adopt Allardt’s capitalization rate, but instead,
selected three of Allardt’s eleven market sales that it considered relevant and
8
incorporated “the upper ends” of the PwC survey data to develop its own unique
capitalization rate:
Of the three retail properties that sold between 2008 and 2011, the
overall rates ranged from 10.9% to 16.24%, with an average of
12.94% and a median of 11.7%. The properties’ occupancy rates
ranged from 60% to 82%[.] . . . While we have little faith in Allardt’s
analysis in general, we find that those three sales are relevant to
determining an appropriate overall rate. [ ] Looking at the upper ends
of the ranges indicated by Hall’s [survey] analyses (excluding the Co-
Star Analytics survey) and the rates extracted from Allardt’s [three]
recent sales for retail centers, we find that 12% is a reasonable overall
rate for each year.
(See Cert. Admin. R. at 3229 ¶¶ 181-82.) The Indiana Board provided no further
explanation of how it arrived at its 12% capitalization rate.
The overall rates from Allardt’s three selected comparable properties ranged from
10.9% to 16.24%, but the Indiana Board did not choose the average of 12.94% or even
the median of 11.7%. Moreover, the Indiana Board never explained how it incorporated
“the upper ends” of the PwC survey data into its rate conclusion. Accordingly, the Court
finds that the Indiana Board’s 12% capitalization rate is unsupported by any evidence and
thus, arbitrary and capricious - little more than throwing a dart at a board. See CVS
Corporation (#6689-02) v. Monroe Cty. Assessor, 83 N.E.3d 1281, 1284 (Ind. Tax Ct.
2017) (“[a] final determination is arbitrary and capricious when there is no basis in the
record that would lead a reasonable person to the same conclusion”) (citation omitted).
See also, e.g., Western Select Properties, L.P. v. State Bd of Tax Comm’rs, 639 N.E.2d
1068, 1073-74 (Ind. Tax Ct. 1994) (finding that the State Board’s failure to explain its
rationale for choosing a 75% obsolescence adjustment rather than 95% was unsupported
by any evidence and therefore arbitrary and capricious).
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CONCLUSION
In light of the Court’s finding that the Indiana Board’s capitalization rate is improper
and the Indiana Board’s finding that Allardt’s rate conclusion from his comparable
properties was not reliable, Hall’s rate conclusion is the only remaining probative evidence
of River Ridge’s capitalization rates. (See Cert. Admin. R. at 3229 ¶ 179 (stating that
Hall’s “analysis and underlying data say something about what an appropriate overall rate
might be”).) Consequently, the Indiana Board’s final determination is REVERSED and
REMANDED with instructions for the Indiana Board to apply the capitalization rates stated
in the Assessor’s appraisal.
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