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KCP Hastings LLC v. County of Dakota

Supreme Court of Minnesota

July 31, 2019

KCP Hastings, LLC, Relator,
v.
County of Dakota, Respondent.

          Tax Court Office of Appellate Courts

          Dan Biersdorf, Ryan Simatic, Biersdorf & Associates, P.A., Minneapolis, Minnesota, for relator.

          James C. Backstrom, Dakota County Attorney, Suzanne W. Schrader, Assistant County Attorney, Hastings, Minnesota, for respondent.

         SYLLABUS

         1. The tax court neither abused its discretion nor exceeded the scope of remand by admitting a discounted-cash-flow analysis prepared by the County.

         2. The tax court did not clearly err when it found that the appraisal conducted by the taxpayer's expert was a leased-fee appraisal.

          3. The tax court did not clearly err when it rejected the vacancy rates used by the taxpayer's expert.

         4. The tax court did not clearly err when it determined terminal capitalization and discount rates based on market-survey evidence.

         5. The tax court clearly erred when it assigned value to an outlot on the property on the basis that the outlot could be sold and developed.

         6. The tax court clearly erred when it used a gross building area other than the area stipulated to by the parties.

         7. The tax court did not abuse its discretion in deciding the evidentiary weight to place on differing valuation approaches.

         Affirmed in part, reversed in part, and remanded.

         Considered and decided by the court without oral argument.

          OPINION

          HUDSON, JUSTICE.

         In 2015, we remanded this case to the Minnesota Tax Court after concluding that the court's valuation of relator KCP Hastings, LLC's shopping mall was not reasonably supported by the record. KCP Hastings, LLC v. County of Dakota, 868 N.W.2d 268, 276 (Minn. 2015). Following the remand, the tax court received further evidence from the parties and ultimately reached a new valuation for KCP's property. KCP again appeals, arguing the tax court committed several errors that resulted in a valuation of its property that is not supported by the record. We conclude that the tax court did not err, with two exceptions: the assignment of value to an outlot on the property, and the use of a building area other than the one stipulated to by the parties. Accordingly, we affirm in part, reverse in part, and remand to the tax court for further proceedings.

         FACTS

         KCP owns real property in Hastings, which consists of a shopping mall and a surrounding parking lot. After the County assessed property taxes on the property for 2010, 2011, and 2012 based on the estimated market value of the property, KCP appealed each assessment to the tax court, which consolidated the appeals. Following a 2-day trial in 2014, the tax court adopted market valuations that exceeded the estimates in the County's original assessments.

         To reach these market valuations, the tax court considered five valuation approaches: the County's sales-comparison approach (based on the sales value of other, similar properties), the County's cost approach (based on the cost to build an equivalent property), the County's direct-capitalization approach (based on capitalizing one year's income), KCP's income approach, which more specifically was a discounted-cash-flow, or DCF, approach (based on forecasting income for several years), and KCP's sales-comparison approach. The tax court gave no weight to the County's cost approach, "little weight" to the County's direct-capitalization approach, and "little weight" to KCP's sales-comparison approach. Although the tax court concluded that a DCF analysis was an appropriate valuation method, it gave KCP's DCF analysis no weight because the court was "unable to replicate" many of the calculations included in KCP's expert's report. Notably, the data necessary to replicate those calculations was contained in a spreadsheet that KCP did not produce during discovery "because it was not 'asked for, '" and when KCP attempted to introduce it at trial, "[t]he tax court sustained the County's objection and excluded the evidence on the basis of 'unfair surprise,' stating . . . that it would 'muddle along without' the spreadsheet." KCP Hastings, LLC, 868 N.W.2d at 271. Consequently, of the five approaches considered in the 2014 trial, the tax court was left with the County's sales-comparison approach, upon which it based its valuations.

         KCP appealed, arguing that the tax court clearly erred by using the mall's gross building area rather than its gross leasable area, and in rejecting KCP's sales-comparison and DCF approaches. Id. at 270. KCP also asserted that the tax court abused its discretion by using only the County's sales-comparison approach to value KCP's property. Id. We affirmed in part and reversed in part, concluding that the tax court did not clearly err by using the gross building area or by rejecting KCP's sales-comparison approach. Id. at 269- 70, 273. But we concluded that the tax court clearly erred when it rejected KCP's DCF analysis and consequently the tax court abused its discretion by relying solely on the County's sales-comparison approach. Id. at 270. We therefore remanded the case to the tax court, giving it the option to reopen the record and conduct further evidentiary hearings. Id. at 276.

         Following the remand, the tax court invited the parties to brief whether it should reopen the record or permit supplemental briefing. The County moved to reopen the record so that it could submit its own DCF analysis. KCP argued that the record should be reopened only to permit it to admit its underlying DCF calculations and that the County should not be permitted to introduce evidence that the County had previously argued was speculative.[1] The tax court granted the County's motion and permitted both parties to supplement their appraisals with DCF analyses.

         On December 29, 2016, the tax court filed an order that calculated the valuations for KCP's property. KCP moved for amended findings, arguing that the tax court's capitalization rate was "illogical," that the court should not have assigned value to an unmarketable outlot, and that the gross building area used by the court was unsupported by the record. The County also moved for amended findings, asking the tax court to provide greater mathematical detail on how it arrived at its DCF value conclusions. Following a hearing, the tax court granted KCP's motion to correct the capitalization rate, but denied KCP's other motions. At the hearing, the tax court and parties agreed that instead of having the tax court provide greater mathematical detail on its DCF calculations, the court would instead "provid[e] the parties with specific parameters from which the parties could make their own DCF calculations, agree on the result if possible, and if not, submit their separate calculations to the court for resolution."

         After the tax court provided the parties with its parameters, the parties exchanged memoranda disputing the DCF calculations. On January 11, 2018, the tax court filed its final order, setting out its final valuation of the subject property:

County Assessor

2014 Tax Court

County Remand Appraisal

KCP Remand Appraisal

2018 Tax Court

2010

2010 $4, 791, 600

$5, 535, 000

$6, 167, 500

$3, 250, 000

$5, 307, 100

2011

$4, 821, 700

$5, 258, 200

$5, 514, 100

$2, 850, 000

$4, 856, 000

2012

$4, 821, 700

$4, 995, 300

$5, 033, 600

$2, 800, 000

$5, 221, 800

         KCP sought review by writ of certiorari. After briefing was completed in the spring of 2018, we stayed the appeal pending our decision in County of Hennepin v. Bhakta, 922 N.W.2d 194 (Minn. ...


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