Capitalization rates determined by the Indiana Board of Tax Review for an Anderson shopping center were found to be improper by the Indiana Tax Court and were thus reversed Wednesday.

In Madison County Assessor v. Sedd Realty Company, 18T-TA-12, the Madison County Assessor appealed the Board’s final determination that reduced the assessed value of Sedd Realty Company’s River Ridge shopping center for the 2009, 2010, 2011 and 2012 assessment years.

The Assessor valued River Ridge at $12,469,000 for 2009; $11,778,110 for 2010; $11,968,600 for 2011; and $9,950,400 for 2012. Sedd argued the values were too high based on River Ridge’s more than 50 percent occupancy decline during the years at issue, as well as its status as a lower-tier shopping center.

The parties agreed the assessments were too high based on the latter fact and presented appraisals that valued River Ridge for each of the years at issue using the income and sales comparison approach, but not the cost approach.

David Hall of the Appraisal Institute prepared the assessor’s appraisal, concluding under the income approach that River Ridge’s net operating income was $998,718 for 2009; $968,610 for 2010; $966,428 for 2011; and $948,725 for 2012. He estimated the shopping center’s annual potential gross income and subtracted the vacancy and collection losses and total operating expenses to reach that conclusion.

In developing the capitalization rate, Hall averaged the rates from four selected retail sales, two surveys and an analysis using the band of investment method. He then loaded each year’s capitalization rate by 1.35 percent to account for Sedd’s share of the real estate tax expense and concluded that the capitalization rate was 11.25 percent for tax years 2009, 2011, and 2012 and 11.70 percent for 2010.

After applying his capitalization rates to the property’s net operating income, Hall added $100,000 to each year’s value to account for the property’s 39-acre tract of surplus floodplain land. He determined the appraised values of River Ridge were thus $8,980,000 for 2009; $8,380,000 for 2010; $8,690,000 for 2011; and $8,530,000 for 2012.

Jay Allardt, however, crafted the appraisals for Sedd by instead determining River Ridge’s net operating income using its actual income and expense information.

Allardt deducted River Ridge’s operating expenses from its income, adjusting and revising his initial appraisal conclusions to arrive at a net operating income of $950,000 for 2009; $890,000 for 2010; $830,000 for 2011; and $690,000 for 2012.

In concluding the capitalization rates, he identified 13 properties sold in Indiana and Ohio between 2001 and 2011 that consisted of manufacturing facilities, office buildings, and retail shopping centers with capitalization rates ranging from 10.90 percent to 16.26 percent.

Allardt chose a 14 percent overall capitalization rate for 2009 and 14.5 percent for 2010-2012 based on the rates of the market sales “that bracketed closer in size” to River Ridge and had similar occupancy levels.

Allardt ultimately applied capitalization rates ranging from 15.69 percent to 16.22 percent for resulting property values of $5,900,000 for 2009; $5,300,000 for 2010; $4,900,000 for 2011; and $4,100,000 for 2012.

The Board favored Hall’s approach and adopted his conclusions. But it offered misgivings about Hall’s market-extracted capitalization rates.

It thus took three retail properties from Allardt’s original comparable properties and arrived at 12 percent capitalization rate for all the years at issue. It then added Hall’s 1.35 percent load to its 12 percent and applied the resulting 13.35 percent to Hall’s net operating income conclusions.

The Board concluded that the proper value of River Ridge was $7,421,200 for 2009; $7,255,500 for 2010; $7,239,200 for 2011; and $7,106,600 for 2012. But the Indiana Tax Court reversed the final determination, finding the board’s capitalization rate was improper and that Allardt’s rate conclusion from the comparable properties was unreliable.

“The overall rates from Allardt’s three selected comparable properties ranged from 10.9% to 16.24%, but the Indiana Board did not choose the average of 12.94% or even the median of 11.7%,” Judge Martha Blood Wentworth wrote.

“Moreover, the Indiana Board never explained how it incorporated ‘the upper ends’ of the PwC survey data into its rate conclusion,” Wentworth continued. “Accordingly, the Court finds that the Indiana Board’s 12% capitalization rate is unsupported by any evidence and thus, arbitrary and capricious — little more than throwing a dart at a board.”

The tax court thus remanded with instructions for the Board to apply the capitalization rates stated in the Assessor’s appraisal, finding Hall’s rate conclusion to be the sole remaining probative evidence.