Indiana Board of Tax Review adopts appraiser’s cost approach with “minimally credible” adjustments in valuing restaurant

Indiana Board of Tax Review adopts appraiser’s cost approach with “minimally credible” adjustments in valuing restaurant

Name:  L&R Enterprises, LLC v. Hancock County Assessor

Date Issued:  July 2, 2018

Property Type:  Restaurant (freestanding, approximately 5,500 sq. ft.)

Assessment Years:  2015, 2016

Point of Interest:  The Indiana Board of Tax Review assigns a value based on the cost approach in the Assessor’s appraisal, upon concluding the appraisal’s sales and income approaches were not reliable.  There was a lack of explanation and data supporting the sales and income conclusions – which concluded values were higher than the subject property’s replacement cost new.

Synopsis:  In a classic “battle of the appraisers,” both parties offered up competing appraisals prepared in accordance with USPAP.  The Assessor’s appraiser (Appraiser A) applied all three approaches to value.  The Board did not find Appraiser A’s sales and income approaches to be “convincing” and therefore his reconciled value was not reliable, but his cost approach provides the “most persuasive” evidence of the property’s true tax value.  Taxpayer’s appraiser (Appraiser B) agreed that Appraiser A’s land valuation was “excellent” and based on “great data,” as it relied on four sales within fairly close proximity to the subject.  The Board expressed “some concerns” regarding Appraiser A’s estimate of indirect cost and entrepreneurial profit, as he offered little explanation for his selections.  But the Board found the estimates “minimally credible.”  Perfect was not the enemy of the good enough, and the Board observed that Appraiser A adequately supported his conclusion under the cost approach.  Of importance to the Board was the fact that Appraiser A’s conclusion under the sales approach was higher than his replacement cost new and his conclusion under the income approach was barely below the cost new.  Therefore, even if the Board could not identify specific failings of Appraiser A’s sales and income approaches, the Board would “still doubt his conclusions.”

Appraiser A used leased fee sales, claiming they can be used to indicate a fee simple value without a property rights adjustment, if they were sold with market rents in place.  Appraiser A did little to show that the properties were leased at market rents.  The appraiser claimed that he did a “separate and distinct analysis” using unspecified properties, but offered no details.  Appraiser A claimed that including such data would add “another 50 pages” to his report.  Not so, the Board responded.  All relevant data need not be included in a report, but the appraiser should be prepared to address the “key judgments” supporting his opinion of value.  Appraiser A could not confirm the contract rent for two of the properties, but still claimed they were leased at market rates. Appraiser A failed to value the subject property’s fee simple interest under the sales approach.

Under Appraiser A’s income approach, he failed to account for vacancy and collection loss in determining NOI.  And he did not load his capitalization rate to account for the owner’s share of property taxes during vacancy.  The cap rate, he asserted, “implicitly reflected the risk of future vacancy.”  Appraiser A did not explain how this was the case.  The Board was “uncomfortable” guessing as to why he departed from accepted practice.  The Board could not “pinpoint” exactly how Appraiser A’s income analysis overstated the subject’s value, but it “likely did.”

Appraiser B did little to show that his comparable sales were sufficiently similar to the subject.  His adjustments were largely based on his “experience and judgment.”  The Board acknowledged that appraisers must rely on their experience and judgment, but “they must explain how they exercised their judgment in light of the data that was available to them.”  Appraiser B “repeatedly failed to do that.”  In his income analysis, Appraiser B relied on the subject’s actual income and failed to meaningfully compare that to market income, which must be done (particularly where, as here, the lease at issue may not have been negotiated at arm’s length).  Finally, Appraiser B developed a capitalization rate based on listings, not consummated sales, and used locations from across the country without explaining how their markets were similar to the subject’s market.  The Board was troubled with Appraiser B’s decision not to develop the cost approach – an “illustration of a general lack of thoroughness and reliability.”  He lacked basic information about his comparable properties.  Appraiser A was more credible than Appraiser B, and his cost approach was more persuasive than his sales and income approaches.  The Board adopted that cost approach value. 


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