Credibility in the Tax Court

By Timothy A. Rye, Appraiser

Three recent tax appeal cases illustrate that comprehensive research and attention to detail are key components of credibility in the Tax Court. The burden of proof weighs heavily on the appraiser; indeed, it may make or break a case. To prevail in court, the appraiser must submit evidence that the assumptions, comparable data, and methodologies used in the appraisal are relevant and accurate.

Eden Prairie Mall LLC v. County of Hennepin
October 13, 2009

The assessor’s estimated market value, upon which property taxes are based, is presumed accurate until proven otherwise. In this 2009 case, the Eden Prairie Mall tax assessments for tax years 2005 and 2006 were challenged. After hearing evidence from both sides, the Court did not find either appraiser’s opinion credible. Rather, the Court relied on selected components from each expert’s appraisal to arrive at its own value conclusion. In the final analysis, the Court’s value for tax year 2005 was nearly $23 million higher than the 2005 assessed value, and its value for tax year 2006 was $20 million higher than the 2006 assessed value.

The Court determines credibility based on, “the quality of the work, the adherence to relevant meaningful industry standards, the witness’s comportment and persuasiveness on the stand, their candor and ability to explain their analyses.” Further, the Court states that it will “rely upon the testimony and appraisals of the experts to assist us in our determination of value.” If the Court is not satisfied with the work of either side’s appraiser, it may take on the role of appraiser. The Court took bits and pieces from the experts’ appraisals and cobbled them together to arrive at an alternative value. When the Court, rather than the appraiser, determines value, it sends a strong message to attorneys, appraisers, and property owners. In this decision, it appears that the whole was greater than the sum of its parts.

The Shoppes of Woodbury Village v. County of Washington
November 12, 2009

In this tax appeal case, the assessor’s estimated market values for tax years 2006 through 2008 were upheld. The subject property, built in 2001, is a 15-unit retail building with a net rentable area of 21,836 square feet. In addition to the building, there is a pipeline easement on the edge of the property. Although the exact location of the pipe is unknown, half of the easement (30 feet) encumbers the subject property. At trial, the county’s expert was found ineligible to testify. Further, the Court determined that the Petitioner’s appraisal report was fatally flawed in all three approaches to value and could not be used to refute the assessor’s estimated market value.

According to the Court, an assessor’s estimate of market value is assumed valid unless credible evidence that the assessor’s value is incorrect is introduced. Although the Court did not explain how much or what type of evidence is sufficiently credible to overcome that presumption, it detailed the fatal flaws in the taxpayer’s appraisal report as follows:

The sales comparison approach: the Court determined that the comparables were substantially different from the Subject (different uses, different sizes, and different classifications – one comparable was a condominium); additional adjustments were necessary; and the appraiser excluded a more recent sale (at a higher price) of one of the comparables from the report without justification.

The income approach: the appraiser used only 11 of the 14 leases in place for the Subject, but did not provide evidence to support the decision to exclude the remaining leases; the actual vacancy rates were considerably lower than the vacancy rates used; the capitalization rate was distorted because the data was accumulated from the sale of older buildings; and the appraiser did not use appropriate expenses.

The cost approach: the appraiser did not rely on final construction costs despite the fact that the subject is a “fairly new” building (2001); reported physical deterioration was not supported by the photographs or the testimony; and the land valuation was not based upon comparable properties (according to the Court).

The pipeline easement on the property: the appraiser accounted for the presence of a pipeline by applying a discount to the comparable land sales and adding 50 basis points of risk to the capitalization rate. The Court did not accept the negative impact of the pipeline due to the lack of evidence presented. Thus, adjustments for the pipeline constituted an additional flaw.

Despite the fact that the Respondent’s witness was disqualified, the Petitioner did not prevail. The appraiser’s failure to pay attention to detail and several erroneous judgments on his part resulted in the Court’s upholding the assessed market value. The Court cited the relevancy, completeness, and timeliness of data presented; the relationship between the Subject’s actual rental rates and the ones upon which the appraiser relied; and the justification of adjustments or assumptions. Attention to detail sets the stage for a successful tax appeal and, in this case, the Petitioner’s expert did not produce a reliable appraisal for the client.

Geneva Exchange Fund XVII, LLC, v. County of Dakota
November 19, 2009

Accurate data is essential to the expert’s credibility. In this tax appeal, the subject property is a Class C multi-tenant single-story office/warehouse built in 1996. The building is approximately 50,283 square feet of which 52% is office space and 48% is warehouse space. Due primarily to inadequate verification of data and a lack of attention to detail, the Petitioner’s expert failed to sway the Court. The Petitioner’s sales comparison analysis was flawed. Although he used the net rentable area (NRA) as the unit for comparison, he did not verify the NRA for his comparables. As a result, he potentially understated the value conclusion. In addition, the comparable sales had significantly lower office percentages than the subject and the locations of the comparables were further from the subject than the comparables selected by the Respondent’s expert. The Court found this approach to be lacking in sufficient detail and no weight was given to the sales comparison approach of the Petitioner’s expert.

In the cost approach to value, the Petitioner’s appraisal included a flawed land analysis. He failed to inspect the land comparables, which led to inaccurate adjustments. In addition, his comparables were located in superior zoning districts further from the subject than the comparables in the Respondent’s report. Thus, the Court questioned the reliability and the quality of the cost approach by the Petitioner’s expert.

In the income approach, the Court noted that the Petitioner’s expert did not investigate all of the leases for each comparable building, leaving the possibility that the leases used were not representative of the building as a whole. The Court also suggested that the comparable rentals’ lack of similarity with the subject resulted in an inaccurate rental rate. The capitalization rate of the Petitioner was found unreliable because the appraiser failed to identify the sources used to calculate the capitalization rate via the band of investments method and he failed to identify what information from the comparable sales was included in the capitalization rate calculation. Thus, the capitalization rate conclusion was found unreliable.

In sum, the Court found the Petitioner’s expert unreliable and/or not adequately credible due to insufficient detail and the failure to verify the information upon which he relied.

In summary:

  • The success of the expert relies not only on the validity of the value conclusion, but on the quality of the individual building blocks of the appraisal.
  • The assessor’s estimate of market value is presumed correct unless proven otherwise.
  • The Court is willing to reject the experts’ appraisals and conduct its own valuation.