Inland Edinburgh Festival, LLC, Relator, vs. County of Hennepin, Respondent
Michael O. Freeman, Hennepin County Attorney, Rebecca L. Holschuh, Assistant County Attorney, Minneapolis, Minnesota, for respondent.
S Y L L A B U S
- The tax court did not abuse its discretion by deciding to afford no weight to relator‘s expert opinion on the income approach.
- The tax court abused its discretion by relying on a single sales transaction, of the subject property, to determine the value of relator‘s property under the sales-comparison approach.
Based on the evidence in the record, a remand is necessary to determine the fair market value of the taxpayer‘s property.
Affirmed in part, reversed in part, and remanded.
Considered and decided by the court without oral argument.
O P I N I O N
ANDERSON, Justice.
This is a dispute about the value of a shopping center as of January 2, 2015. Relator Inland Edinburgh Festival, LLC sought review in the tax court of respondent Hennepin County‘s assessed value for Inland‘s retail shopping center property. The tax court concluded that the market value of Inland‘s two parcels of improved real estate was higher than either the initial assessed value determined by Hennepin County or the valuation opinion presented by the sole appraiser to testify at trial. On appeal from that decision, Inland argues that the tax court‘s value determination is excessive because the tax court rejected Inland‘s expert‘s opinion under the income approach and relied on a single 2017 sale, of Inland‘s property, to value the property under the sales-comparison approach. We affirm the tax court‘s decision to afford no weight to the expert‘s opinion on the income approach, reverse the tax court‘s valuation determination based on the sales-comparison approach, and remand for further proceedings.
FACTS
Inland owned real property in Brooklyn Park, improved with a retail shopping center that includes two adjacent strip malls. The shopping center contains an anchor grocery store tenant and sixteen tenant spaces in the malls, of varying sizes, with a total of 91,563
While the tax court proceeding was underway, Inland sold the property on June 1, 2017, for $9,600,000. The sale was completed as a “like-kind” tax exchange under
A trial was held before the tax court on May 2, 2018. During trial, Inland introduced the expert appraisal testimony of Daniel T. Boris, who estimated the 2015 market value of the property at $7,100,000 using both an income approach and a sales-comparison approach. His initial expert report, which was admitted at trial, contained mathematical errors related to rental rates and other errors that the tax court determined affected his analysis of the value of the property. Inland thus offered into evidence a second report by Boris that corrected some of the errors contained in the initial report.
Before trial, the County notified the tax court that it did not intend to call an expert, and thus asked to be excused from the pretrial requirement to provide an expert report. The County‘s request was granted, and at trial, the County called no witnesses and offered only one exhibit—the rent rolls that Inland had produced. The County also waived the prima
In its Findings of Fact, Conclusions of Law, and Order for Judgment and accompanying memorandum of law, the tax court declined to give any weight to Boris‘s expert opinion on the income approach based on the computational errors in his report and the lack of an explanation regarding his methodology. The tax court also concluded that Boris‘s credibility was undermined by his revised analysis, concluding that the corrections offered at trial were “masquerading wholesale changes in Boris‘s opinion as mere ‘corrections’ when they were obviously engineered to support predetermined outcomes.” Then, relying on a single transaction—the June 2017 like-kind exchange of Inland‘s property—the tax court found that the fair market value of the property for the January 2015 assessment was $8,490,720, i.e., approximately $106,000 higher than the initial assessment by the County Assessor. After granting Inland‘s motion for rehearing in part to adjust certain mathematical errors, the tax court otherwise denied that motion, resulting in a final valuation determination for Inland‘s property of $8,461,400, i.e., approximately $77,000 higher than the initial assessment by the County Assessor. Inland appeals from that decision.
ANALYSIS
This appeal requires consideration of the tax court‘s valuation decisions. We generally defer to the tax court‘s valuation decision in light of the inexact nature of real property appraisal. Cont‘l Retail, LLC v. Cty. of Hennepin, 801 N.W.2d 395, 399
Real property is generally assessed at its “market value,”
I.
We first consider the tax court‘s decision regarding the income approach. In this case, the tax court gave no weight to the value proposed by Boris under the income approach. The tax court concluded that Boris‘s opinions lacked foundational reliability based on a failure to properly explain the data on which he relied, a failure to explain the basis for his opinion, and a lack of credibility stemming from numerous errors in the opinions.
The income approach may be indicative of the market value of income-producing properties, such as a retail mall, because “[i]ncome-producing real estate is typically purchased as an investment, and from an investor‘s point of view earning power is the critical element affecting property value.” Appraisal Inst., The Appraisal of Real Estate 439 (14th ed. 2013); see TMG Life Ins. Co. v. Cty. of Goodhue, 540 N.W.2d 848, 852 (Minn. 1995) (explaining that the income approach relies on “the net operating income attributable to the property” and that retail properties generally derive income from rental payments). When the tax court relies solely on one method, as it did here once it assigned no weight to the income approach, it must “clearly explain the weaknesses of the rejected approaches.” Equitable Life Assurance Soc‘y of U.S., 530 N.W.2d at 554–55.
Inland argues that the tax court erred when it failed to give the income approach any weight by its wholesale rejection. The tax court did not state that its decision was a
II.
Having decided to give the income approach no weight, the tax court was left with only the sales-comparison approach to reach a market value determination for Inland‘s property. “The tax court may rely on a single method of appraisal when the other methods are not supported by accurate and reliable data.” Archway Mktg. Servs., 882 N.W.2d at 894. The sales-comparison approach is indicative of market value because, when a
Inland contends that the tax court erred in its application of the sales-comparison approach because the court relied solely on the June 2017 sale of the property, as adjusted, to reach a valuation determination. The sales-comparison approach, as the title suggests, analyzes and compares the sale price paid for multiple comparable properties in market transactions. See, e.g., Archway Mktg. Servs., 882 N.W.2d at 894 (explaining that an expert compared the sales of three nonsubject properties in addition to the sale of the subject properties for sales-comparison approach); KCP Hastings, LLC v. Cty. of Dakota, 868 N.W.2d 268, 274 (Minn. 2015) (concluding that the tax court did not err by rejecting a valuation under the sales-comparison approach where only noncomparable sales were used in valuation). Then, adjustments are made to reflect differences between the subject property and the comparable properties. Menard, Inc., 886 N.W.2d at 817. The sale price of the property in question may be “an important fact to consider when valuing real estate.” Archway Mktg. Servs., 882 N.W.2d at 895.
In this case, the tax court relied solely on the single sale of Inland‘s shopping center in June 2017 to arrive at the valuation. Inland argues that the use of this single transaction
We need not reach this issue, as the 2017 sale of Inland‘s property cannot serve that purpose, at least based on the record before us. A recent sale of the property is probative of market value only when it qualifies as an arm‘s-length transaction. Compare
It may well be that the sale price from a
Finally, we conclude that the tax court erred in its adjustments made to the 2017 sale price to determine the 2015 market value for Inland‘s property. The tax court is not precluded from arriving at a value determination that is lower or higher than the appraisal testimony presented at trial, provided the court adequately explains its reasoning and its determination is supported by the factual record. Eden Prairie Mall, LLC, 797 N.W.2d at 194; Am. Express Fin. Advisors, Inc. v. Cty. of Carver, 573 N.W.2d 651, 658 (Minn. 1998) (noting that the tax court is not bound to accept the valuation opinion of an appraiser); Hertz v. Hertz, 229 N.W.2d 42, 44 (Minn. 1975) (stating that a trial court can make adjustment to an expert‘s valuation opinion “if it falls within the limits of credible estimates made by competent witnesses“). In Eden Prairie Mall, LLC, we recognized that “the tax court brings its own expertise and judgment in valuation matters, and its
In this case, the tax court took the June 2017 sale of the property as a “base” and then adjusted that sales price to reach a value determination for the assessment date of January 2, 2015. For example, the tax court adjusted the sales price to account for market condition changes between 2015 and 2017. See Appraisal Inst., supra, 379 (noting that economic conditions between the date of sale and the assessment date may affect value because “[p]eriods of economic growth and economic decline influence property values“). The tax court considered, but did not rely on, the methodology and market data Boris used for these adjustments, using instead a modified time-adjustment calculation by extrapolating data from 2016 to 2017. In doing so, the tax court erred because it did not have any market data submitted by the parties on which to rely for periods in which it assigned a value.
Similarly, the tax court made an age adjustment to reflect the shopping center‘s purported physical deterioration between January 2015 and June 2017, noting that “[t]here is no dispute that the building was two and a half years older when sold in June 2017, compared to the valuation date of January 2015.” It is, of course, true that the shopping center was older, but the record does not establish what amount, if any, of deterioration occurred between 2015 and 2017 or what effect, if any, the 2-year interval would have on
The sale of Inland‘s property is an important factor to be considered in valuation, but on this record, and given the largely unexplained
III.
In summary, the tax court did not err by assigning no weight to Boris‘s expert opinion on the income approach, but it did err in its valuation determination under the sales comparison approach. Thus, a remand is necessary to determine the market value of Inland‘s property as of January 2, 2015.
We appreciate the challenges the tax court faced in this case, in which scant reliable evidence was available to make an accurate valuation decision. When the record closed, the tax court had the opinion of a single expert, who prepared a second report (which was also admitted at trial) to correct the substantial errors in the first disclosed report.
Inland‘s evidence was minimal, to be sure. But the County provided no assistance to the tax court; rather than offering affirmative evidence or an alternative proposed
We have encouraged the tax court to exercise its independent skill and judgment because of the particular expertise of that court. See, e.g., Eden Prairie Mall, LLC, 797 N.W.2d at 194. We have not endorsed the tax court‘s exercise of its independent judgment and skill without any credible or reliable evidence from the parties who ask for that court‘s decision, nor do we believe the Legislature envisioned that approach. See S. Minn. Beet Sugar Coop., 737 N.W.2d at 559–60 (explaining that on remand the tax court “must determine for itself the market value,” reopening the record as necessary to determine “the true market value“);
Accordingly, on remand, the tax court must decide whether to re-open the record for the purpose of making a value determination based on admissible, credible evidence.5
CONCLUSION
For the foregoing reasons, we affirm the tax court in part, reverse the tax court in part, and remand for further proceedings as necessary to determine value.
Affirmed in part, reversed in part, and remanded.