Shelby County Assessor v. CVS Pharmacy, Inc. 6637-02
994 N.E.2d 350, 2013 WL 5309145, 2013 Ind. Tax LEXIS 22 (2013)
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Rule of Law:
For property tax assessment purposes under Indiana's 'market value-in-use' standard, the income capitalization approach must use market-derived rent rather than contractual rent from a sale-leaseback agreement if the contractual rent includes value attributable to business operations or investment interests beyond the real property itself.
Facts:
- In 2001, Hook-SupeRx, Inc. (Hooks) built a general retail store and pharmacy in Shelbyville, Indiana.
- Upon completion, Hooks sold the property to SCP 2001A-CSF-19 LLC (SCP).
- Immediately after the sale, Hooks leased the property back from SCP for a twenty-two year term to operate as a CVS pharmacy.
- The lease agreement set an effective monthly rent of $27.20 per square foot and made Hooks (the tenant) responsible for all annual property taxes.
- CVS presented evidence that it uses sale-leaseback transactions as financing tools and that its lease payments reflect the broader business value of CVS, not just the real estate.
- CVS also provided evidence that 24 similar, vacant drug stores were being marketed for rent at approximately $10.00 per square foot.
Procedural Posture:
- The Shelby County Assessor assessed the CVS property at $2,375,600 for 2007 and $2,459,700 for 2008.
- CVS appealed these assessments to the Shelby County Property Tax Assessment Board of Appeals (PTABOA).
- The PTABOA affirmed the Assessor's original assessments.
- CVS appealed the PTABOA's decision to the Indiana Board of Tax Review.
- During an administrative hearing before the Indiana Board, CVS argued for a lower valuation based on market rent, while the Assessor argued for an increased valuation based on contractual rent.
- The Indiana Board of Tax Review issued a final determination that upheld the original assessments but explicitly rejected the Assessor's methodology of using contractual rent.
- The Shelby County Assessor, as petitioner, initiated this original tax appeal in the Indiana Tax Court to challenge the Indiana Board's final determination.
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Issue:
Does Indiana's 'market value-in-use' standard for property tax assessment require using market-derived rent instead of contractual rent in an income-capitalization approach when the contractual rent is part of a sale-leaseback transaction that reflects business and investment value?
Opinions:
Majority - Fisher, Senior Judge
Yes. Indiana's 'market value-in-use' standard requires that an assessment reflect only the value of the tangible real property, not the value of intangible business interests. When a sale-leaseback agreement results in contractual rent that includes a return on investment in the business tenant, that rent cannot be used for valuation. The court affirmed the Indiana Board's conclusion, reasoning that CVS provided probative evidence that its contractual rent was part of a financing transaction that captured more than the value of the real property. The Assessor's reliance on this contractual rent improperly included non-taxable business and investment value, contrary to Indiana law and precedent which distinguish between the value for a property's use (based on objective market data) and the value of its specific use to a particular user. The court emphasized that market value-in-use should be measured against properties with a comparable use, not properties with identical users.
Analysis:
This decision solidifies the legal distinction between taxable real property value and non-taxable intangible business value in property tax assessments. It provides crucial guidance for valuing properties subject to sale-leaseback agreements, a common financing strategy for national chain retailers. The ruling prevents tax assessors from using above-market contractual rents as a shortcut for valuation, forcing them to analyze whether such rents are inflated by factors like the tenant's creditworthiness or business success. This precedent creates a more complex valuation process but protects businesses from being taxed on their intangible enterprise value through real estate assessments.
