the past several years, Judge Sheryl Ramstad has decided no less than
seven cases in favor of government. Not only did those cases go against
the taxpayer - Judge Ramstad actually increased the assessment to values
higher than were estimated by assessors! Most
were decided on her own application of the data and approaches used by
individual appraisers representing a particular side of the argument. In
some cases, she selectively used portions of opposing appraiser's
viewpoints. A prime example is Eden Prairie Mall LLC v. County of Hennepin, 2009 Minn. Tax LEXIS 22 (Minn. T.C. Oct. 13, 2009).
the instant case, the subject of the appeal was the main mall building
and one of the anchor stores. The Eden Prairie Mall was originally built
in 1975 and was updated with a new food court and other interior finish
in 1989. In 1999, General Growth acquired the mall and promptly gutted
the interior and rebuilt all public and tenant space.
County Assessor estimated the value of the mall at $90 million and $100
million respectively for the 2005 and 2006 tax years. For the anchor
store, the values were set at $8.9 million and $9.4 million
respectively. In support of his assessment the assessor hired an
appraiser, Jason Messner, who estimated the value for the mall and
anchor at $110 million and $10 million for 2005 and $118.5 million and
$10.5 million for 2006. Here the appraiser relied on all three
approaches to value.
Prairie Mall and the anchor hired their own appraiser, David Lennhoff.
Their appraiser estimated the values of the mall and the anchor at
$68.75 million and $3.95 million respectively for 2005. For 2006, he
estimated $60.55 million and $4.75 million, respectively. The taxpayer's
appraiser used only the income approach to value.
outline of Ramstad's approach to this case will follow. First, however,
a brief background on the Honorable Sheryl Ramstad. She graduated from
North Dakota's law school in 1975 and worked in private practice for a
number of years. Ms. Ramstad once ran for County Attorney against now
Minnesota Senator Amy Kloubuchar and lost by less than one percentage
point. Jesse "The Governor" Ventura appointed her as the Commissioner of
the Minnesota Department of Corrections in the 1990's. She stayed there
until her brother, a congressman, began to push for her to become a
judge. The Honorable Sheryl Ramstad was appointed to the Minnesota Tax
Court in 2003.
relied largely on the Income Approach to Value based on the
perspectives brought out in testimony by each appraiser. In the
Appraisal Institute's Second Edition of Shopping Center Appraisal and Analysis,
the author indicates (page 197) that "Estimating market value for a
shopping center with the income capitalization approach is a two part
process. The appraiser first prepares an estimate of cash flows from the
asset and then selects a method for capitalizing these benefits into a
value estimate." The authors go on to say that malls owned by investors
are purchased or evaluated largely using a Discounted Cash Flow (DCF)
model because the income stream from a large population of tenants can
vary the income stream. DCF evaluates the income stream and associated
expenses over a holding period consistent with that of the typical
investor. Direct Capitalization, on the other hand, uses only one year
of income and expenses.
various components of a typical [mall] income stream include base
rents, additional rents accruing from percentage [rents] expense
recoveries, revenue from other services provided by the center operator
and miscellaneous income." Simply stated, it would be prudent for an
appraiser to use the DCF method versus the Direct Capitalization method
when valuing a shopping mall with many tenants. Similarly, when choosing
an appropriate capitalization rate, one must consider that (Shopping Center Appraisal and Analysis page
198) "the income stream can vary in their reliability and hence their
perceived risk..." There are many variables the appraiser must analyze
when evaluating the many tenants of a particular mall.
this case, neither appraiser completely followed the conceptual
framework as outlined above, and as such, neither did Ramstad! First,
Messner chose Direct Capitalization to value the subject! Judge Ramstad
agreed and cited Jason Messner's reasoning as the basis for her choice:
".... There was stabilized occupancy"! Contradicting their choice of
approaches, however, Messner indicated that "Mall sales generally
increased." If mall sales increased, that would mean that rents from
percentage rent clauses would increase. How could the income be stable
in light of that fact?
chose the DCF model, which appears to be a more appropriate method to
account for the variability in the income stream. With that said, there
is no detail in the opinion on neither how each appraiser arrives at an
initial Gross Income nor whether it comports itself with the market. In
fact, a major component missing from the discussion of the case is the
fact that any of the analyses and resulting value conclusions agree with
the current market and the value definition of Market Value in the
concept missing in this case was the treatment of intangible assets
within the context of the overall value of the enterprise. Lennhoff made
an attempt at it, but Judge Ramstad did not even acknowledge it. One
can imagine how Ramstad summarily dismissed the concept in choosing her
own approach to value the subject. Lennhoff prefaced his valuation with
the idea that there is more than just real estate when valuing a mall in
identifying it as an assignment that includes a "going-concern" value.
In the last chapter of Shopping Center Appraisal and Analysis,
the authors leave the concept of business enterprise value within the
context of shopping centers as an open question. While it is clear that
there are several schools of thought regarding the subject, it is
irresponsible for Ramstad to ignore it.
evaluates each appraiser's use of income and expenses within their
respective income approaches then goes on to calculate her own opinion
of value. First, in her calculation of income she uses income from all
sources including non-real estate related items such as kiosk income.
Again, there is no comment that indicates that income is consistent with
market rates --- a must when using Market Value as the definition of
Judge Ramstad tackled the estimate of expenses. Interestingly, she did
not include expenses for insurance, advertising, maintenance, leasing
commissions or an allowance for replacements - all as outlined in
Shopping Center Appraisal and Analysis (pp. 223 through 226)!
in choosing a capitalization rate Judge Ramstad relied on a rate from
Mr. Messner and his rating of the subject as a "B+" mall. Messner
obtained his capitalization rate from Korpacz, a quarterly
publication that details capitalization rates for several categories of
property and geographies. Use of this publication is widespread amongst
appraisers, but there is some subjectivity in choosing the rate. Messner
chose a rate that significantly overstates the desirability of the
subject mall, considering it is minutes from the Mall of America. Most
investors would ascribe greater risk as a result of the proximity to the
premier mall in the United States. Judge Ramstad did not even mention
the fact that the market is all but controlled by the Mall of America.
Ramstad concluded that the Eden Prairie Mall was worth almost $123
million for 2005 and just over $120 million for 2006. These value
conclusions are based bits and pieces of two opposing appraiser
viewpoints. To compound the matter, the resulting values chosen by Judge
Ramstad do not represent sound or complete accepted professional