Clark Cty. Assessor v. Dillard Dep't Stores, Inc.

236 N.E.3d 771

CLARK COUNTY ASSESSOR, Petitioner,

v.DILLARD DEPARTMENT STORES, INC., Respondent.

Cause No. 22T-TA-00011

Tax Court of Indiana.

June 5, 2024

ON APPEAL FROM A FINAL DETERMINATION OF THE INDIANA BOARD OF TAX REVIEW

ATTORNEY FOR PETITIONER: AYN K. ENGLE, ATTORNEY AT LAW, Indianapolis, IN

ATTORNEY FOR RESPONDENT: PAUL M. JONES, JONES PYATT LAW, LLC, Greenwood, IN

MCADAM, J.

The Clark County Assessor (the "Assessor") challenges the Indiana Board of Tax Review’s (the "Indiana Board") final determination reducing the 2018 through 2020 assessments of Dillard Department Stores, Inc.’s ("Dillard") anchor department store in Clarksville, Indiana. The Assessor claims that the appraisal methodology used by Dillard’s appraiser is inconsistent with generally recognized appraisal principles and inappropriately included intangible business value in the property valuation. The Assessor also contends that the final determination was unsupported by substantial evidence because the appraisal the Indiana Board adopted was based on an arbitrarily chosen assumption. After reviewing each claim, the Court rejects the Assessor’s challenge and affirms the Indiana Board’s final determination.

FACTS AND PROCEDURAL HISTORY

Dillard owns and operates a 204,500 square foot one-level retail anchor store sited on approximately thirteen acres of land at the Green Tree Mall in Clarksville, Indiana. The Assessor assigned the property an assessed value of $9,850,200 for tax year 2018, $9,925,500 for tax year 2019, and $9,766,900 for tax year 2020.

Dillard appealed those assessments first to the Clark County Property Tax Assessment Board of Appeals and then to the Indiana Board. During the Indiana Board hearing, Dillard and the Assessor presented competing appraisals prepared by professional appraisers valuing the subject property. Dillard’s appraisal used the income and sales comparison approaches but did not develop a cost approach, believing that it would be time-consuming and would not accurately reflect the value of the property. That appraisal leaned most heavily on the income approach estimate and valued the property at $5,200,000 for 2018 and $5,110,000 for 2019 and 2020. In response, the Assessor submitted an appraisal using all three approaches. It gave the most weight to the cost and sales comparison approaches and valued the property at $10,773,000 for 2018, $10,500,000 for 2019, and $10,332,000 for 2020.

In its final determination, the Indiana Board expressed significant reservations about Dillard’s sales comparison valuation estimate and all three of the Assessor’s valuation estimates. It ultimately found Dillard’s "income approach as a whole to be a reliable estimate of value," although it did express some concerns with the analysis. (See Cert. Admin. R. at 1172-73 ¶ 68.) The Indiana Board concluded by reversing the Assessor’s 2018 through 2020 assessments and adopting Dillard’s appraisal values of $5,200,000 for 2018 and $5,110,000 for 2019 and 2020.

The Assessor then filed this appeal.¹

STANDARD OF REVIEW

The Court’s review of Indiana Board decisions is governed by Indiana Code § 33-26-6-6, the provisions of which closely mirror those controlling the judicial review of administrative decisions governed by Indiana’s Administrative Orders and Procedures Act ("AOPA"). Compare Ind. Code § 33-26-6-6(e) (2024) with Ind. Code § 4- 21.5-5-14(d) (2024). Under Indiana Code § 33-26-6-6, the party seeking to overturn a final determination of the Indiana Board bears the burden of demonstrating its, validity. I.C. § 33-26-6-6(b). The challenger must demonstrate that it has been prejudiced by a final determination of the Indiana Board that is arbitrary, capricious, an abuse of discretion, or otherwise with-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. I.C. § 33-26-6-6(e)(1)-(5).

[1] The Legislature has specifically designated the Indiana Board as the trier of fact, charged with determining the relevance and weight to be assigned to the evidence before it. See Ind. Code § 6-1.1-15-4(p) (2024). Like the review of administrative decisions subject to AOPA, this Court reviews legal conclusions de novo but affords deference to the factual determinations of the Indiana Board if they are supported by substantial and reliable evidence. See I.C. § 33-26-6-6(e)(5); Indiana Alcohol & Tobacco Comm’n v. Spirited Sales, LLC, 79 N.E.3d 371, 375 (Ind. 2017) (articulating the standard of review of administrative actions under AOPA); Kellam v. Fountain Cnty. Assessor, 999 N.E.2d 120, 122 (Ind. Tax Ct. 2013) (articulating the standard of review for Indiana Board decisions), review denied. The Court may not substitute its judgment for that of the Indiana Board by reweighing the evidence or reevaluating the credibility of witnesses. See Ind. Code § 33-26-6-3(b) (2024); Kellam 999 N.E.2d at 122.

DISCUSSION AND DECISION

The dispute in this case centers around the income approach estimate prepared by Dillard’s appraiser to establish the value of its property. In its final determination, the Indiana Board determined that Dillard’s income approach estimate was "the best evidence of value" for the subject property and adopted it as its own. (See Cert. Admin. R. at 1176, ¶78.) On appeal, the Assessor challenges the methodology employed by Dillard’s appraiser to calculate the market rent used in preparing his income approach estimate.

The income approach converts an estimate of income (e.g., rent) that a property is expected to produce into an estimated value of the property through a mathematical process known as capitalization. Real Property Assessment Manual for 2011 ("Manual") (incorporated by reference at 50 Ind. Admin. Code 2.4-1-2 (2011) (amended 2020)) at 2. Dillard’s appraiser applied what he called the "percentage of sales method," to approximate the market rent for the subject property by reference to industry norms regarding the ratio of rent-to-retail sales.² (See Cert. Admin. R. at 1218.) He found that similarly situated department stores typically agree to pay rent equal to 2% to 3% of their retail sales and concluded that a 2.5% ratio was appropriate for the property at issue in this case.

(See Cert. Admin. R. at 240, 249-50.) He then applied that 2.5% ratio to a separately developed estimate of the expected retail sales for similarly situated anchor stores. (See Cert. Admin. R. at 240, 249-50.) This resulted in estimated market rents for the subject property of $2.50 per square foot for 2018 and $2.40 per square foot for 2019 and 2020.³ (See Cert. Admin. R. at 250.)

The Assessor first contends that the "percentage of sales method" Dillard used in its income approach is not a generally recognized appraisal methodology. He then argues that the methodology, by relying on the level of retail sales, improperly includes intangible business value in the property value. He concludes by arguing that there was not substantial evidence to support the 2.5% ratio that Dillard ultimately selected to estimate the market rent for its income approach.

Dillard’s Use of the "Percentage of Sales Method"

Under Indiana law, real property is assessed according to its "true tax value." See, e.g., Ind. Code § 6-1.1-1-3(a) (2018). The General Assembly has delegated the task of defining the term to the Department of Local Government Finance ("the Department"), see Ind. Code § 6-1.1-31-6(f) (2018), which defines true tax value in its administrative regulations as "[t]he market value-in-use of a property for its current use, as reflected by the utility received by the owner or by a similar user, from the property." Manual at 2. The rules specify that the three standard appraisal methods (i.e., the cost approach, the sales comparison approach, and the income approach) may be "used to determine market value-in-use" and "shall be applied in accordance with generally recognized appraisal principles." Manual at 2. The rules point to "[s]tandard appraisal and valuation texts such as those published by the Appraisal Institute and the [International Association of Assessing Officers]" as "acceptable sources for determining such principles." Manual at 2.

[2] The Assessor argues that the Indiana Board acted contrary to law in adopting Dillard’s income approach appraisal because the "percentage of sales method" is not consistent with generally recognized appraisal principles. (See Pet’r Br. at 4.) However, whether something is consistent with generally recognized appraisal principles is necessarily a question of fact. Walmart Stores, Inc., 316 Kan. 32, 513 P.3d 457, 476 (2022) (noting that whether "an expert utilizes a legally accepted methodology to determine value" is a question to be determined by the factfinder). Such appraisal principles are not set forth in statute or regulation. Nor are they collected in a single source. Manual at 2 (acknowledging that there are multiple "texts" containing generally recognized appraisal principles). Moreover, recognized appraisal principles are not static but are dynamic and continually evolving. The Appraisal Foundation, 2024 Uniform Standards of Professional Appraisal Practice (USPAP) ("2024 USPAP Standards") at 18, available at https://appraisalfoundation.sharefile.com/share/view/sa9a85f26098c4f7ab01e927b647ec962.) ("[T]he appraisal profession is constantly reviewing and revising appraisal methods and techniques and devising new methods and techniques to meet new circumstances.").

[3] In this case, the Indiana Board determined that Dillard presented an appraisal compliant with the Uniform Stan- dards of Professional Appraisal Practice.⁴ Those standards require an appraiser developing a real estate appraisal to apply generally recognized appraisal practices. See 2024 USPAP Standards, Standards Rule 1-1 (a) (requiring an...