Opinion ID: 1596506
Heading Depth: 3
Heading Rank: 2

Heading: Reliance On A DCF Analysis

Text: Whenever possible, appraisers should apply at least two approaches to market value because the alternative value indications derived can serve as useful checks on each other. The Appraisal of Real Estate at 79-80. In a given valuation assignment, more than one approach to value is usually appropriate and necessary. Id. at 77. A final determination of value, however, may require that one approach be given greater emphasis in making a final value estimate. Id. The appraiser's judgment and experience, and the quantity and quality of data available, may determine which approach or approaches are used and what weight each deserves. Id. This court has stated that the three valuation approaches `are suggested but are neither exclusive nor mandatory upon either the assessor or the factfinding court.' Alstores Realty, Inc. v. State, 286 Minn. 343, 352, 176 N.W.2d 112, 118 (1970) (quoting Great Plains Supply Co. v. County of Goodhue, 268 Minn. 407, 409, 129 N.W.2d 335, 336 (1964)). In considering each of the three valuation approaches, the priority and quantum of reliance depends on the facts of each case. Recently, this court has stated: With respect to the propriety of placing greater weight on the replacement cost approach, according the market data approach minimal weight, and of considering the income approach not at all helpful, we note that, at best, appraisal is an inexact value determination. It must be conceded, we believe, that an appraisal is an estimate of value. That is the reason for the development of three approaches to value. Viewing value from three different perspectives may help the appraiser arrive at an estimate closer to actual market value than if the property were viewed from a single perspective. Whatever weight priority may usually attach to each approach, the priority and quantum of reliance depends on the facts of each case. Lewis & Harris v. County of Hennepin, 516 N.W.2d 177, 180 (Minn.1994). Minnesota law requires every assessor to consider and give due weight to every element and factor affecting the market value of real property for the purpose of taxation. Minn.Stat. § 273.12 (1992). The term due weight implies that every element and factor deserves only so much weight as is appropriate to the valuation problem at issue. Minnesota law does not require an appraiser to give weight to all three valuation approaches in every appraisal assignment. This court's decision in Crossroads Ctr. v. Commissioner of Taxation, which applied a prior version of this statute, also does not mandate that an appraiser give weight to all three valuation approaches. 286 Minn. 440, 176 N.W.2d 530 (1970). Consequently, although the circumstances will rarely warrant giving weight to only one approach to value, we hold that, under appropriate circumstances, a single approach may be used to determine the market value of the property being appraised. See In Re McCannel, 301 N.W.2d 910 (Minn.1980) (holding it was not error to rely on a single-emphasis approach in appraising a special purpose building); Federal Reserve Bank of Minneapolis v. State, 313 N.W.2d 619, 624 (Minn.1981) (relying solely on cost approach not clearly erroneous in context of special purpose property). In determining whether the circumstances warrant giving weight to only one approach to value, Minnesota law requires an appraiser to consider all three valuation approaches, as well as other factors relating to the subject property's market value. Both expert appraisers in this case testified that they considered all three valuation methods; but ultimately, both expert appraisers either explicitly or implicitly gave weight only to the income capitalization method (DCF analysis). [10] Because the expert appraisers of both parties in this case relied on a DCF analysis in determining the market value of the subject property, because of the uncommon circumstances facing the subject property on the assessment dates in question, and because neither judicial nor statutory law mandates the tax court give weight to all three valuation approaches, we conclude the court did not abuse its discretion in determining the market value of the subject property based solely on a DCF analysis. We emphasize that if the tax court is persuaded that the traditional valuation approaches deserve no weight because they do not accurately reflect the value of the property, then the court must clearly explain the weaknesses of the rejected approaches. See Westling v. County of Mille Lacs, 512 N.W.2d 863, 866 (Minn.1994). Because the court explained the weaknesses involved in using the market and cost approaches to value, and because evidence in the record is sufficient to support the court's conclusion that those approaches would not be helpful in valuing the subject property, we hold the court was within the bounds of its discretion in relying solely on a DCF analysis in this case. In sanctioning the use of a DCF analysis in this case, we do not intend to give the method universal approval. We recognize that accurate forecasting is a crucial part of any income capitalization method, and that income and expense projections that are not warranted by market evidence can result in unsupported market values. See Donald R. Epley, Minimum Market Data Needed and Recommendations for an Accurate Discounted Cash Flow Analysis, The Real Estate Appraiser and Analyst (Fall 1988). A DCF analysis can only provide accurate results if the forecasts are based on accurate, reliable information. We further recognize that the compounding effects in the projection of income and expenses can magnify even slight errors to produce unreasonable results. The Uniform Standards of Professional Appraisal Practice, Statement  2 (1992). Consequently, we admonish that routine reliance on a DCF analysis alone is not justified, and we reiterate that consideration of all three valuation approaches helps the appraiser and the court arrive at an estimate that is closer to actual market value than if the property were viewed from a single approach.