Name:  Madison County Assessor v. Sedd Realty Company

Date Issued:  May 22, 2019

Property Type: Shopping Center

Assessment Dates: 2009-2012

Point of Interest:  The Indiana Board of Tax Review acted arbitrarily and capriciously by applying a capitalization rate that no appraiser relied upon and that was unsupported by the record evidence. 

Synopsis: Sedd Realty Company (SRC) owned a shopping center comprised of ten buildings with 350,000 square feet, grouped into two main strips, on 75 acres of land and known as River Ridge. For the contested tax years, occupancy at River Ridge was 55%. Its assessments during those years ranged from $9.95 Million to $12.5 Million. Recognizing the property was situated in a declining retail area and suffered from a low occupancy, the parties agreed the assessments for River Ridge, a lower-tier shopping center, were excessive.

Parties offer competing capitalization rates. On appeal to the Indiana Board of Tax Review, both parties offered appraisals that relied on the sales comparison and income approaches. The Board rejected both appraisers’ sales comparison approaches. Under their respective income approaches, Assessor’s appraiser (based on various sources and analyses) concluded to loaded capitalization rates of 11.25% and 11.7%. In contrast, SRC’s appraiser concluded to loaded capitalization rates (extracted from the market) of 15.69% and 16.22%.

The Board rejected SRC’s appraisal, in part noting that it measured a leased-fee interest – not the property’s fee simple interest.

Indiana Board determined and adopted its own capitalization rate. Assessor’s appraiser was more credible, the Indiana Board concluded. But it had “misgivings” about the appraiser’s market-extracted capitalization rates, because they were derived from sales of retail centers with significantly higher occupancy rates. Consequently, the Board relied on three sales identified by SRC’s appraiser, as well as the “upper ends” of PwC survey data referenced by Assessor’s appraiser, to conclude to a 12% capitalization rate for all years, which it loaded by 1.35% (the same as Assessor’s appraiser) to arrive at a final capitalization rate for each year of 13.35%. The Board concluded to final values of $7.1 Million to $7.4 Million.

The Board was “throwing darts.” Before the Tax Court, the Assessor argued that the Board arbitrarily applied its subjective opinion that an unloaded 12% capitalization rate was correct, a rate that no expert witness opined on and no party offered into evidence. The Board is authorized “to review the probative value of an appraisal report.” (citing Ind. Code § 6-1.1-15-4(p)). In addition, the Board can determine the relevance and weight assigned to the evidence, and it may adjust the assessments under review. (citing Ind. Code § 6-1.1-15-4(a), 52 IAC 2-7-2(c)).

The Board developed its own 12% capitalization rate. It adopted neither the average nor the median rates derived from the sales used by SRC’s appraiser. Moreover, the Board failed to explain how it incorporated “the upper ends” of the PwC survey data in reaching its rate conclusion. The Court found that the Board’s 12% capitalization rate was “unsupported by any evidence and, thus, [was] arbitrary and capricious – little more than throwing a dart at a board.” (emphasis added).

The only probative evidence of the appropriate capitalization rate was in Assessor’s appraisal. The Court reversed the Indiana Board’s final determination and ordered application of the capitalization rates from that appraisal.