Marion County is granting Simon Property Group Inc. a $2.4 million refund, after a tax review board cut the value of two ailing malls roughly in half.
Simon prevailed before the Indiana Board of Tax Review in each of two cases, which covered Lafayette Square Mall and Washington Square Mall for multiple years.
“We were surprised it went completely their way,” Marion County Assessor Joseph O’Connor said. In each case, the review board chose Simon’s values over the county’s, rather than arriving at an in-between value, which is also an option.
O’Connor plans to appeal both decisions to the Indiana Tax Court, but said Simon will get its refund in the meantime because he doesn’t want to risk racking up interest charges while cases are pending.
The two malls’ declines are well-documented, but the county and Simon were nowhere close to agreement in their appraisals.
Marion County had valued Lafayette Square at $35 million in 2006, for example, while Simon argued it was worth $15 million.
Likewise, the county’s appraiser valued Washington Square at $22 million for 2006, while Simon’s appraiser pegged it at $12 million.
The lowest value that Indianapolis-based Simon presented for Washington Square was $9.5 million for 2010.
Located in older Marion County suburbs, the malls have about four decades behind them. Lafayette Square opened in 1968 at Lafayette Road and West 38th Street, and Washington Square opened in 1974 on East Washington Street.
Simon didn’t build either mall, but acquired them in 1996 through its $1.6 billion purchase of Ohio-based DeBartolo Realty.
Household spending power in both areas has declined, especially around Lafayette Square. Simon took its name off the mall in 2005 and sold it in 2007 to New York-based Ashkenazy Acquisition Corp. for $18 million.
Simon still owns Washington Square. Though Simon’s appraiser made a strong case that it will continue to decline, spokesman Les Morris said the company hasn’t turned its back on the property.
“We’re very actively leasing it and managing it,” he said. “It’s a solid area.”
The three-member tax review board handed down its decision on Washington Square, which covered 2006 through 2010, in September. The ruling on Lafayette Square, for 2006 and 2007, came out Oct. 3.
Simon’s arguments don’t appear to have swayed the county’s current assessments—$22.9 million for Lafayette Square and $24.9 million on Washington Square.
As long as an assessor calculates new values each year, the taxpayer has to start the appeals process from scratch, said Larry Stroble, a partner at Barnes & Thornburg who was not involved in the Simon appeals.
The depressed state of commercial real estate could give the mall owners a strong incentive to pursue more appeals.
“All major owners of commercial real estate are monitoring their expense levels as closely as they can,” said James Sullivan, managing director and senior analyst covering real estate companies for Cowen Group in New York. “It’s certainly been, over the last couple of years, a pretty active part of many of these companies’ strategies.”
The $2.4 million, which doesn’t include interest, is a relatively small figure for Simon, which is the world’s largest real estate company and has revenue topping $4.5 billion. While Marion County is strapped for cash, it will have no problem writing the check, said Richard Hunter, director of settlements for the Marion County auditor.
Marion County has refunded $20 million to $40 million in property taxes a year since the state-mandated reassessment of 2007, Hunter said. The county has made multimillion-dollar refunds to other prominent companies, including Eli Lilly and Co.
Ashkenazy Acquisition Corp. is appealing the county’s 2010 and 2011 assessments of Lafayette Square, O’Connor said. A company representative couldn’t be reached for comment.
Simon’s expert testimony on Washington Square in the Marion County tax case begs the question of how much longer the mall can stay open.
Washington Square has lost 17 national tenants since 2006, including Macy’s in 2008, nationally recognized appraiser Peter Korpacz testified.
While Simon continues to lease the space, none of the newer tenants is a national brand. Recent additions include the Indiana Nursing Academy, Women’s Consignment Shop, AxisMundi and Lavish, Morris said.
Occupancy rates for inside-facing stores—which are where mall owners earn their profits—were exceedingly low from 2004 to 2009, ranging from 57 percent to 71 percent, according to Korpacz, who runs Maryland-based Korpacz Realty Advisors. Sales from inside stores fell more than 40 percent over the period, Korpacz said.
He argued that Washington Square was a Class D property in poor shape. Deteriorating pavement had damaged underground wiring. The roof leaked. Heating and cooling systems were more than 30 years old.
Simon in 2010 split the mall’s $27.8 million in debt into two loans—an interest-bearing note for $15 million and a no-interest note for $12.8 million. The latter note is considered a “hope note,” meaning the lender has low expectations for repayment.
The debt load far exceeds a lender’s 2010 appraisal of $14.1 million, lending records compiled by Bloomberg show.
Sometimes it pays to let a property go back to the bank, Sullivan said. If a property is worth less than the mortgage, writing off that liability increases a company’s book value, he said.
“Just about all owners of retail real estate will have this circumstance occur,” he said.
Korpacz calculated Washington Square’s values for 2006 through 2010 using three approaches. Marion County hired local appraiser Will Stump to review Korpacz’s work, but O’Connor said the county could not afford to conduct its own, new appraisal.
The tax board took note of what Stump argued was a major flaw in the Korpacz analysis—the assumption that Simon recovers none of the mall operating expenses from its tenants. That led Korpacz to understate the income on Washington Square by 48 percent for 2006, Stump testified.
In the end, however, the board decided Korpacz’s data showing how much comparable malls fetched when they were sold was more thorough, and that his credentials were stronger than those of the county’s in-house analyst, Eve Beckman.
In the case of Lafayette Square Mall, Simon’s expert used the $18 million sale to calculate values for 2007 and 2006. Marion County argued the transaction data shouldn’t be relevant, since it wasn’t available at the time of the assessments.
The tax board seems to have ignored that fact, O’Connor said.
“You can’t connect dots that don’t exist,” he said. “You shouldn’t be able to.”
O’Connor will be making his appeal on a shoestring budget. One reason it’s even feasible, he said, is that one of his analysts, John Slatten, is also an attorney and CPA who can dedicate his time to the cases.
Marion County has defended appeals before the tax court, but O’Connor said he can’t remember the last time the county carried the burden of proof as petitioner.
“I feel lucky to have such great people,” O’Connor said. “I’ll put a so-called government worker up against private industry people any day.”•