Opinion ID: 1596506
Heading Depth: 3
Heading Rank: 1

Heading: Off-Site Expenses

Text: The county properly asserts that the issue is not whether a purchaser would take such expenses into account, but whether these expenses are properly attributable to the subject property. See Westling v. County of Mille Lacs, 512 N.W.2d 863, 867 (Minn.1994) (Keith, C.J. concurring) (approving an approach that allows the income stream to be adjusted to reflect the estimated annual cost of remedial work specific to the subject property   ) (emphasis added) (citation omitted). Nevertheless, the tax court concluded that the costs at issue were appropriately deducted in the year expended because a DCF Analysis is `a study of the anticipated movement of cash into or out of an investment' (quoting Uniform Standards of Professional Appraisal Practice (1992)). The tenth edition of The Appraisal of Real Estate supports the tax court's conclusion that capital expenditures are properly attributable to the subject property. The Appraisal of Real Estate explains: When cash flows are estimated for a discounted cash flow analysis, capital expenditures may be deducted from the net operating income in the year the expenditure is expected to occur. This is particularly important when the property's future net operating income is based on the assumption that the capital expenditures will be made. In this case failure to account for the capital expenditure could result in an overstatement of value. The Appraisal of Real Estate at 452. This admonishment, however, does not distinguish between on-site capital expenditures, which clearly can be deducted from the subject property's cash flows, and off-site capital expenditures, which are in question. The off-site expenses in question include expenses related to obtaining an extension of the operating covenant from each of the anchor department stores and Equitable's nonshareholder capital contribution to Dayton's. Patchin disagreed that Equitable would have to pay to renew the anchors' operating covenants in 1999, but if evidence supported that those payments should be expected to occur, he agreed with Leirness that the proper way to account for those payments would be to expense them in the DCF analysis for the year they were anticipated to occur. The county conceded that, in theory, such potential anchor-covenant-renewal payments could properly be deducted from the subject property's adjusted operating income, stating: [A]llowing a deduction for theoretical payments to the anchors for operating covenant renewal would not be inconsistent with [the County's] position that off-site expenses are not chargeable against the subject property's income. Pursuant to the operating agreements, certain property rights are exchanged between the mall and the anchors. For example, the mall has an interest in ingress and egress and parking on the anchor property. There has been an exchange of property rights that run with the land for the term of the operating covenant. So to the extent that a payment would be made to protect those rights of the mall, they could in theory properly be offset against mall property's income. (Respondent's post-trial brief at 56, # 18) (emphasis added). The tax court concluded the anchor store payments in 1999 would be necessary, and considering the county's position as evinced by both Patchin's testimony and its post-trial brief, the court did not clearly err in expensing those anticipated payments in its DCF analysis. The two expert appraisers disagreed on whether Equitable's nonshareholder capital contribution to Dayton's should be deducted from the subject property's cash flow. Leirness opined that such expense was properly deducted from the subject property's cash flow in the year it occurred. Patchin disagreed, however, distinguishing between the potential anchor store payments in 1999 and Equitable's nonshareholder contribution to Dayton's. But neither Patchin nor the county explained how the tax court could sensibly distinguish the two payments. The tax court refused to distinguish between the potential anchor store payments in 1999, which, as we have explained, both parties conceded were deductible, and the nonshareholder contribution to Dayton's. Both payments were made to maximize the income and value of the subject property. Both expert appraisers either explicitly or implicitly agreed it would be appropriate to allow Equitable's off-site expenditures to be deducted from its adjusted operating income as part of a DCF analysis. The court, therefore, deducted the amount of the nonshareholder capital contribution, concluding that deducting Equitable's nonshareholder capital contribution to Dayton's from the subject property's adjusted operating income was consistent with the appraisers' treatment of the operating covenant renewal payments forecasted to occur in 1999. Because the testimony of both expert appraisers supports the tax court's decision to deduct what it characterized as off-site expenses from its DCF analysis, we cannot conclude that deducting these expenses was clearly erroneous. We emphasize, however, that a super-regional shopping center's functioning as a unified entity greatly affects the value of the shopping center, and most contiguous parcels of real estate do not require such confederation.