                               STATE OF MINNESOTA

                                    IN SUPREME COURT

                                        A15-0018

Tax Court                                                                    Anderson, J.


KCP Hastings, LLC,

             Relator,

vs.                                                               Filed: August 12, 2015
                                                               Office of Appellate Courts
County of Dakota,

             Respondent.

                              ________________________

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 did not clearly err by measuring the subject property using

the gross leasable area rather than the gross building area, because the court’s valuation

accounted for the lack of common area in comparable properties.

      2.     The tax court did not clearly err when it rejected relator’s valuation, which

was based on the sales-comparison approach, because a majority of the subject property’s

tenants have external entrances, unlike the tenants at the fully enclosed malls used by

relator as comparable properties.


                                            1
       3.     The tax court clearly erred when it rejected relator’s discounted-cash-flow

analysis because relator introduced sufficient data into evidence for the court to verify

relator’s analysis or conduct its own analysis.

       4.     The tax court abused its discretion by relying solely on the sales-

comparison approach to valuation to determine the market value of an income-producing

property, when the parties rely heavily on the income approach and provide credible

reliable income data to the court.

       Affirmed in part, vacated and remanded.

       Considered and decided by the court without oral argument.

                                       OPINION

ANDERSON, Justice.

       Relator KCP Hastings, LLC (“KCP”), challenged respondent Dakota County’s

estimated assessment of the market value of its shopping mall for the assessment dates of

January 2, 2010, January 2, 2011, and January 2, 2012. After a 2-day trial, the tax court

adopted market valuations of the property that exceeded the County’s estimated

assessments. KCP asserts three grounds for error. First, KCP argues that the tax court

clearly erred by using the mall’s gross building area rather than its gross leasable area to

measure the property. Second, KCP argues that the tax court clearly erred when it

rejected KCP’s valuations using the sales-comparison and income approaches because

the court could not “replicate” KCP’s discounted-cash-flow analysis (“DCF analysis”).

Third, KCP argues that the tax court abused its discretion by determining the value of the




                                             2
subject property relying solely on the sales-comparison approach. We affirm in part,

vacate, and remand.

       KCP owns Westview Shopping Center (“Westview Mall” or “Mall”), a multi-

tenant retail strip mall in Hastings. Westview Mall was built in 1976; it has a gross

building area of 153,749 square feet1 and a gross leasable area of 129,475 square feet.

The Mall includes two larger tenant spaces, which were leased to Goodwill and Clancy’s

Drug on the assessment dates, and 23 smaller tenant spaces, 5 of which were vacant on

the date of the 2010 valuation, and 10 of which were vacant on the date of the 2012

valuation.

       For property tax purposes, the Dakota County Assessor estimated the market value

of Westview Mall to be $4,791,600 as of January 2, 2010; $4,821,700 as of January 2,

2011; and $4,821,700 as of January 2, 2012. KCP challenged the estimated assessments,

and the matter proceeded to trial on June 3-4, 2014. Both parties hired appraisers, who

submitted appraisal reports to the tax court and testified at trial. The County’s appraiser,

Brian Ducklow, estimated the Mall’s property value using the three traditional

approaches: income, sales-comparison (or “market”), and cost. He opined that the

income approach was the “most relevant method for the subject property” and gave it

1
       The parties’ appraisers differed on the scope of the gross building area of the Mall.
KCP’s appraiser measured the Mall at 153,749 square feet, and the County’s appraiser
measured it at 140,852 square feet. The parties stipulated to the County’s measurement
of 140,852 square feet, but the tax court independently verified through floor plans that
the correct measurement is 153,749 square feet. Although KCP notes in its brief that the
tax court deviated from the stipulated measurement, it does not assert that the court
clearly erred by doing so.




                                             3
70% weight for his final valuation. He used a direct-capitalization technique to arrive at

his income-approach valuation. Ducklow gave 25% weight to the sales-comparison

approach, which compared Westview Mall to six malls located in the Twin Cities metro

area. He gave only a 5% weight to the cost approach.

      KCP’s appraiser, Paul Bakken, also viewed the income approach as the most

pertinent for assessing the value of the Mall. He concluded that a DCF analysis was

more appropriate than a direct-capitalization analysis due to the “non-stabilized nature”

of the Mall’s income during the assessment years.        Bakken also applied the sales-

comparison approach, comparing Westview Mall to fully enclosed shopping centers in

Bemidji, Brainerd, Worthington, Hutchinson, and Dickinson, North Dakota. But he gave

no weight to the sales-comparison approach in his final valuation; rather, he used that

approach to “confirm[] the values concluded in the income approach to value.” He did

not apply the cost approach “given the older age of the property and the amount of

functional obsolescence present at the property.”

      The tax court gave no weight to the County’s cost-approach valuation because the

Mall’s age “mak[es] cost estimates inherently less than reliable.” The court also gave

“little weight” to KCP’s sales-comparison-approach valuation because all of Bakken’s

comparable properties were fully enclosed shopping malls, whereas the vast majority of

retailers at Westview Mall have external entrances.       Next, the court accepted the

County’s valuation using the sales-comparison approach but adjusted the amount




                                            4
downward by about 12 percent after rejecting one of the comparable properties and

adjusting the value of the remaining comparable properties.2

      Next, the tax court analyzed the County’s income-approach valuation. It gave

“little weight” to Ducklow’s direct-capitalization analysis because “[a] prospective buyer

of the subject property could not have concluded reasonably that on any of the valuation

dates, market rents or vacancy rates were stable.” By contrast, the tax court concluded

that a DCF analysis was an appropriate measure of the Mall’s value because the Mall’s

most likely purchaser was an individual investor, who “would have prepared a [DCF]

analysis” in deciding whether to purchase the property. But the tax court gave no weight

to the DCF analysis conducted by Bakken because the court was “unable to replicate”

many of the calculations included in the report. Although Bakken’s appraisal contained

all of the data needed to compute the DCF analysis, Bakken conceded at trial that the

calculations themselves were contained in a spreadsheet that was not provided to the

County or the court during discovery because it was not “asked for.”          The County

objected to KCP’s attempt to introduce the spreadsheet at trial. The tax court sustained

the County’s objection and excluded the evidence on the basis of “unfair surprise,”

stating at trial that it would “muddle along without” the spreadsheet. The court later

rejected KCP’s income-approach valuation in its entirety in its final judgment.




2
      The court also made an upward adjustment to the County’s sales-comparison-
approach valuation to account for Ducklow’s use of a smaller gross building area.




                                            5
       After giving little or no weight to the County’s valuations using the cost and

income approaches, and KCP’s valuations using the sales-comparison and income

approaches, the tax court arrived at a final valuation using only the County’s sales-

comparison-approach analysis. The court valued Westview Mall at $5,535,000 as of

January 2, 2010; $5,258,200 as of January 2, 2011; and $4,995,300 as of January 2, 2012.

A summary of the County’s assessed values, the parties’ appraisal opinions, and the tax

court’s final valuations is as follows:

                                                   County Appraisal          Tax Court
                                 KCP Appraisal
 Assessment        County                               (Sales-                (Sales-
                                 (DCF/Income
    Date           Assessor                          Comparison             Comparison
                                  Approach)
                                                      Approach)             Approach)
 Jan. 2, 2010     $4,791,600        $3,250,000        $6,684,700             $5,535,000
 Jan. 2, 2011     $4,821,700        $2,850,000        $5,980,400             $5,258,200
 Jan. 2, 2012     $4,821,700        $2,800,000        $5,303,900             $4,995,300

                                             I.

       First, KCP argues that the tax court clearly erred by measuring the Mall using its

gross building area of 153,749 square feet, rather than the gross leasable area of 129,475

square feet, resulting in an overvaluation of the Mall. We “will not disturb the tax court’s

valuation of property unless the tax court’s decision is clearly erroneous, meaning that the

decision is not reasonably supported by the evidence as a whole.” Theobald v. Cty. of

Lake, 712 N.W.2d 180, 182 (Minn. 2006).            The tax court’s factual findings and

conclusions receive deference unless the court has “clearly overvalued or undervalued the

subject property, or has completely failed to explain its reasoning.” Id.




                                             6
       Gross building area and gross leasable area are two measurements used by

appraisers to determine the size of a building for tax purposes. See Appraisal Inst., The

Appraisal of Real Estate 225 (14th ed. 2013). Gross building area is the “[t]otal floor

area of a building, excluding unenclosed areas, measured from the exterior of the walls.”

Id. Gross leasable area, by contrast, is the “[t]otal floor area designed for the occupancy

and exclusive use of tenants.” Id. Although gross leasable area is “commonly used to

measure shopping centers,” there is no single correct method for measuring the size of a

building, and use of a particular method “varies based on local market practices.” Id.

       KCP argues that, upon determining a market value of $36 per square foot, the tax

court should have applied that value to the Mall’s gross leasable area (129,475 square

feet) rather than its gross building area (153,749 square feet).3 KCP asserts that by using

gross building area, the tax court erroneously assessed a “large swath” of common area

that adds no value to the Mall. Moreover, KCP noted that most of the comparable

properties used in the County’s sales-comparison-approach valuation—which was the

only analysis considered by the tax court—lack a common area and therefore have a

higher value-per-square-foot than Westview Mall.

       The record reveals, however, that Ducklow’s analysis, relied on by the tax court,

takes into account the lack of common area in the comparable properties. Ducklow

adjusted the price of each comparable property to account for differences between those


3
      If the tax court had done so, its final valuations would have been $4,661,100 for
2010; $4,428,045 for 2011; and $4,206,642 for 2012.




                                            7
properties and Westview Mall. One adjustment category is “building efficiency,” which

resulted in a downward adjustment for comparable properties that lack common areas.

Put differently, Ducklow compensated for Westview Mall’s common area by adjusting

the price per square foot of those comparable properties that lack common areas. KCP

does not argue on appeal that Ducklow’s building-efficiency adjustments are unsupported

by the record,4 and the tax court accepted those adjustments without comment. Further,

the tax court noted that “Bakken’s calculations inconsistently mix gross building area and

[gross leasable area].” See also Appraisal Inst., supra, at 224-25 (“Failure to apply

measurement techniques and report building dimensions consistently within an

assignment can impair the quality of the appraisal.”). We conclude that the tax court did

not clearly err by using gross building area rather than gross leasable area in its

calculations of market value.

                                            II.

       Next, KCP argues that the tax court abused its discretion by rejecting KCP’s

valuation, which used the sales-comparison and income approaches. Minnesota law

requires that all property be assessed at its market value. Minn. Stat. § 273.11, subd. 1

(2014). The law also requires every assessor, “in estimating and determining the value of

lands for the purpose of taxation, to consider and give due weight to every element and

factor affecting the market value thereof.” Minn. Stat. § 273.12 (2014). We apply a

4
       Indeed, the trial transcript reveals that KCP understood that the building-efficiency
adjustments relate to the common area, as KCP’s counsel asked Ducklow several
questions about those adjustments.




                                             8
deferential standard of review when reviewing the tax court’s determination of market

value. Eden Prairie Mall, LLC v. Cty. of Hennepin, 797 N.W.2d 186, 192 (Minn. 2011).

      This court will not disturb the tax court’s valuation of property for tax
      purposes unless the tax court’s decision is clearly erroneous, which means
      the decision is not reasonably supported by the evidence as a whole. The
      tax court’s decision should be considered clearly erroneous only when this
      court is left with a “ ‘definite and firm conviction that a mistake has been
      committed’ . . . .” The taxpayer has the burden of showing that the
      valuation reached by the assessor is excessive. The inexact nature of
      property assessment necessitates that this court defer to the decision of the
      tax court unless the tax court has either clearly overvalued or undervalued
      the subject property, or has completely failed to explain its reasoning.

Equitable Life Assurance Soc’y of U.S. v. Cty. of Ramsey, 530 N.W.2d 544, 552 (Minn.

1995) (citations omitted) (quoting Westling v. Cty. of Mille Lacs, 512 N.W.2d 863, 866

(Minn. 1994)).

                                            A.

      KCP first argues that the tax court clearly erred when it rejected KCP’s market

valuation using the sales-comparison approach. Although the tax court is not bound to

accept the valuation of a party’s appraiser, the reasoning for rejecting an analysis cannot

be “illogical.” Am. Express Fin. Advisors, Inc. v. Cty. of Carver, 573 N.W.2d 651, 658

(Minn. 1998).    Rather, “the tax court . . . should carefully explain its reasoning for

rejecting the appraisal testimony . . . and adequately describe the factual support in the

record for its determination.” Eden Prairie Mall, 797 N.W.2d at 194.

      The tax court did not clearly err by rejecting KCP’s valuation using the sales-

comparison approach. The court explained that Bakken included only fully enclosed

malls as comparable properties, and that these properties are too dissimilar from



                                            9
Westview Mall, in which less than 20% of stores lack an external entrance. Further, the

court noted that all of Bakken’s comparable properties are located outside the Twin Cities

metro area, whereas all of the County’s comparable properties are located within the

metro area. This observation implied that KCP’s focus on fully enclosed malls located

elsewhere in Minnesota led to a selection of properties too geographically distant from

Westview Mall to be comparable to the subject property. Thus, the tax court did not

“completely fail[] to explain its reasoning.” Theobald, 712 N.W.2d at 182.

                                           B.

       KCP also argues that the tax court clearly erred by rejecting its DCF analysis,

which Bakken used to arrive at his income-approach valuation. In Northwest Racquet

Swim & Health Clubs, Inc. v. County of Dakota, we concluded that the tax court did not

clearly err by rejecting the parties’ income-approach valuations because the taxpayer

failed to submit essential revenue and expense data, making it “impossible to determine

actual . . . income and expense figures.” 557 N.W.2d 582, 587 (Minn. 1997).

       We stated that, although the income approach “would have been useful” in valuing

the property, the court’s actions were justified given the lack of data available in the

record.   Id. at 587-88.    We reached the opposite conclusion in American Express

Financial Advisors, Inc. v. County of Carver, 573 N.W.2d 659, 658 (Minn. 1998), in

which the tax court rejected both parties’ income-approach valuations. We concluded

that the tax court’s reasoning for rejecting the parties’ income-approach data was

“illogical” in light of the “wealth of local and national income data” that the parties

presented to the court. Id. at 659.


                                           10
       Here, the tax court rejected the DCF analysis because Bakken’s appraisal did not

include the spreadsheet showing his calculations, and therefore the court said it was

“unable to replicate Mr. Bakken’s calculations of base rental revenue, losses due to

absorption and turnover vacancy, [common area maintenance] charges, losses due to

‘general vacancy,’ expenditures for tenant improvements, or expenditures for leasing

commissions.” But, unlike in Northwest Racquet, in which vital revenue and expense

data was completely missing, 557 N.W.2d at 587, the substantive data needed here to

complete the DCF analysis was contained in Bakken’s appraisal, even though the

appraisal did not contain the calculations themselves. Put differently, the DCF data,

though perhaps not in its most accessible form, was available to the court. Indeed, the

court’s initial reaction when it excluded Bakken’s spreadsheet—that it would “muddle

along without it”—belies the court’s subsequent decision to reject the DCF analysis

because the court implied that it would be able to work out the calculations without the

spreadsheet or, at least, would not need the excluded exhibit. Moreover, we have stated

that the tax court need not disclose its spreadsheets when the court conducts its own

independent DCF analysis. Equitable Life, 530 N.W.2d at 558. Surely, then, a party

does not invalidate its DCF analysis by failing to introduce its spreadsheets into evidence.

       The County argues that the tax court did not err by rejecting the DCF analysis

because Bakken’s appraisal was “not comprehensive” when predicting several values,

including discount rate, prospective net operating income, and total potential gross

revenue. But the tax court rejected the DCF analysis because it could not “replicate” the

calculations, not because the values were unsupported or unreasonable. The tax court


                                            11
need not accept an appraiser’s valuation in its entirety; instead, it may adjust the

calculations based on evidence in the record and its own expertise. See Montgomery

Ward & Co. v. Cty. of Hennepin, 450 N.W.2d 299, 308 (Minn. 1990) (“Rarely is one

appraiser’s methodology and opinion accepted in its entirety by the Court.”).         For

example, the court made several adjustments to the County’s sales-comparison-approach

valuation before accepting it. The court could have similarly adjusted the values included

in Bakken’s DCF analysis, rather than rejecting his analysis outright. We therefore

conclude that the tax court clearly erred by rejecting KCP’s DCF analysis.

                                           III.

      Next, KCP argues that the tax court abused its discretion when it determined the

market value of Westview Mall using only the sales-comparison approach. We recognize

three basic approaches to determining the market value of real estate: income, sales-

comparison, and cost. Equitable Life, 530 N.W.2d at 552. Application of multiple

approaches to determine market value is “usually appropriate and necessary” because

“the alternative value indications derived can serve as useful checks on each other.” Id.

at 553. However, “neither judicial nor statutory law mandates the tax court give weight

to all three valuation approaches.” Id. at 554. Instead, the weight given to each approach

depends on “the quantity and quality of available data.” Nw. Racquet, 557 N.W.2d at

587. The tax court may therefore rely on a single approach under certain circumstances,

“provided the court clearly explains the weaknesses of the rejected approaches.” Id.; see

Equitable Life, 530 N.W.2d at 554 (affirming the tax court’s sole reliance on the income

approach).


                                           12
       KCP argues that the tax court abused its discretion by failing to consider the

income approach in its final valuation. We have “recognized the usefulness of the

income approach in valuing income producing properties.” Nw. Racquet, 557 N.W.2d at

587. In Equitable Life, we affirmed the tax court’s determination of market value using

only the income approach because both parties’ appraisers gave significant weight to that

approach, and the uncommon circumstances surrounding the property made other

approaches unreliable. 530 N.W.2d at 554. Similarly, in Montgomery Ward & Co. v.

County of Hennepin, we concluded that the “income approach estimate should have been

given over-riding weight” due to the “inherent weaknesses of the cost approach and the

absence of truly comparable sales.” 450 N.W.2d at 308.

       This is not a case in which the tax court could value an income-producing property

without considering the income approach. Both parties relied heavily on the income

approach in their appraisals; it constituted 70% of the County’s valuation and 100% of

KCP’s valuation. Moreover, the tax court stated that a DCF analysis was appropriate

here because it “represents one approach by which prospective buyers and sellers of the

subject property would evaluate the subject property as an investment.” As explained

above, the court clearly erred by rejecting KCP’s DCF analysis. In light of this error, as

well as the “over-riding weight” often afforded to the income approach in valuations

involving income-producing properties, see Montgomery Ward, 450 N.W.2d at 308, we

conclude that the tax court abused its discretion by relying solely on the sales-comparison

approach.




                                            13
                                            IV.

       We conclude that the tax court clearly erred by rejecting KCP’s DCF analysis and

abused its discretion when it failed to consider the income approach in its final valuation.

The court’s valuation of Westview Mall therefore was not supported by the record as a

whole. Accordingly, we remand to the tax court for further proceedings consistent with

this opinion. The tax court may, if necessary, reopen the record and conduct a further

evidentiary hearing.5

       Affirmed in part, vacated and remanded.




5
        We note that the spreadsheet showing Bakken’s DCF calculations was excluded
from trial due to “unfair surprise,” and that this objection would not apply if KCP
introduces the spreadsheet in a future evidentiary hearing. See Montgomery Ward & Co.
v. Cty. of Hennepin, 482 N.W.2d 785, 788 (Minn. 1992).




                                            14
