Tax Court reverses valuations of Merrillville Kohl’s property

Valuations of a Merrillville Kohl’s store have been reversed after the Indiana Tax Court found error in a state board’s analysis.

The case of Southlake Indiana LLC v. Lake County Assessor, 18A-TA-16, traces back to 1992, when Southlake Indiana first executed a build-to-suit lease with a Kohl’s store on a retail building in Merrillville. From 2007 to 2012, the Lake County assessor valued the property at roughly $16.8 million, then lowered the valuation to $13.7 million in 2013 and 2014.

Southlake appealed all of those valuations as too high, and the Lake County Property Tax Assessment Board of appeals reduced the assessments for 2007 through 2012. Southlake appealed again, this time to the Indiana Board of Tax Review.

Southlake’s appraiser, Sara Coers, used three methods, including calculating rent as a percentage of gross sales, to estimate the property’s rent and determined its net operating income was $4.88 to $6.09 per square foot. But the assessor’s appraiser, Mark Kenney, used a market-rent analysis to estimate an NOI of $8.19 to $9.58 per square foot. The appraisers each used differing capitalization rates.

In evaluating the appraisals, the Indiana board created its own evaluation method that compared 16 leases to Coers’ and Kenney’s estimate market rents, and determined Kenney’s were better suited. The board also found that if Coers’ gross-sales-percentage analysis was “corrected,” it supported Kenney’s. Thus, the board adopted Kenney’s income approach values.

But the Indiana Tax Court reversed the board on Monday, with Judge Martha Blood Wentworth finding the board’s reliance on Kenney’s market rent estimates to be contrary to law.

Specifically, Wentworth pointed to testimony from Kendall Lees, a Kohl’s real estate expense manager, which the judge said showed that “Kohl’s build-to-suit rents are often above market because they actually reflect non-property interests.” That meant that, under Grant Cty. Assessor v. Kerasotes Showplace Theatres, LLC, 995 N.E.2d 876 (Ind. Tax Ct. 2011), Kenney and the board should have adjusted the build-to-suit leases they relied upon, but they did not do so.

“…(W)hile Coers included unadjusted build-to-suit leases in her market extraction analysis, she explained that she ultimately did not consider them because they were old leases and she did not have a ‘great way’ to adjust them to market levels,” Wentworth said. “…Coers further explained that she would not consider build-to-suit rental data in her analysis unless she could confirm that the leases were motivated by market terms, that the potential above-market rent could be isolated, or how the increment of tenant quality could affect the sales price.

“…This evidence shows that Coers exercised caution – as required by Kerasotes – whenever build-to-suit rental data was included in her analyses, and the record is devoid of relevant evidence that shows otherwise,” Wentworth continued. “…Accordingly, the Indiana Board’s finding that Coers relied on build-to-suit leases that did not reflect market rent is unsupported by the record evidence.”

The Tax Court also agreed with Southlake that the board’s adjustment of Coers’ percentage-of-gross-sales market rent estimates was unsupported by substantial and reliable evidence, saying the board provided “little basis” to prove the alleged errors in Coers’ analysis. “Moreover,” Wentworth said, “the Indiana Board cited no evidence or authority to support its methodology or show that it actually corrected the alleged error in Coers’s analysis.”

Thus, the case was remanded to the board “with instructions to assign the subject property a market value-in-use under the income approach that: 1) calculates the property’s NOI each year at issue by replacing Kenney’s market rents with market rents derived by Coers through her reconciliation of her market extraction and gross percentage of sales estimates; and 2) applies Coers’s capitalization rates for 2010, 2011, and 2012, but Kenney’s capitalization rates for 2007, 2008, 2009, 2013, and 2014.”