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In our March E-Letter, we recounted the serious setbacks that big box stores have been handing to taxing jurisdictions in the Michigan Tax Tribunal (MTT) for the last five years. The MTT has been assigning low taxable values to big box stores by comparing them to “dark” stores that sold for lesser uses. But recently there have been some positive developments, both in court and in the legislature. Although we are still far from solving this problem, we can offer some ideas for townships to turn the situation around in the months and years ahead.
The Rocky Road Before 2016
Big box stores started to successfully challenge their property tax valuations in the MTT in late 2010. After a case out of Novi, MTT cases and settlements began to slash the taxable values of big box stores by 50% or more of their prior valuations.
The new valuation method used by the MTT in these big box cases incorrectly compares operating big box stores with “dark stores.” Dark stores are obsolete or failed stores that have become vacant or gone out of business and then are converted to some other use. For example, one dark stores the MTT used to value operating big box stores was a former Sam’s Club that closed, then sold, partially converted to an indoor go-cart track but never opened, then resold for use as a warehouse. Another dark store used by the MTT was purchased by a congregation for conversion to a church.
In other words, instead of using an “apples to apples” approach to set big box store values, the MTT has been improperly comparing “rotten apples to good apples,” valuing them as if they are the same. In case after case, the MTT used the same rotten apples to falsely prove that “apples just aren’t worth very much.”
The Impact of Deed Restrictions: First Chink in the Armor
As we advised in our March E-Letter, several dark stores the MTT used to value big box stores were not just old and obsolete, but they were sold with “deed restrictions” that prevented their future use for big box stores. So not only were they “rotten apples,” but they couldn’t be used as “apples” under any circumstances. Thus, the prices paid for these dark stores could not possibly reflect what a willing buyer would pay for a potential big box store.
Late last month, in a case involving the Menards in Escanaba, the Court of Appeals finally gave some careful consideration to the MTT’s new method of valuing big box stores. Although the MTT again valued that big box store based on a set of bad apples, the Court of Appeals held that it was inappropriate to use properties as comparables that were burdened by deed restrictions that did not allow use of the properties for retail stores. Therefore, since the MTT (and Menards) heavily relied on deed-restricted comparables in that case, the Court of Appeals reversed the MTT’s decision.
In place of the sales comparisons of the deed-restricted comparables relied on by the MTT, the Court of Appeals based the store’s value on the cost analysis used by Escanaba’s assessor. The cost approach, including a factor for depreciation, reached a more reasonable assessment of the property’s value, in the Court’s opinion.
After suffering this setback, we can expect future big box stores to avoid deed-restricted comparables in their sales comparison analysis. But we do not expect the big box stores (or some of the MTT judges) to entirely give up their “dark store” approach to valuation in future cases.
Half of the dark store “comparables” used by Menards in the Escanaba case did not have deed restrictions. Therefore, in future cases we expect to see big box store appraisers continue to use the “bad apples” that do not have deed restrictions as their comparables. So, although Escanaba was a good first step to return sanity and equity to big box cases, still more needs to be done.
Legislative Efforts to Overturn the MTT’s Big Box Bungle
As we reported in March, a number of attempts were made in 2015 to introduce legislative bills to solve the problems of big box store valuations. Unfortunately, none of those bills were able to achieve a level of support necessary to move forward.
But that all changed in April 2016, when Rep. David Maturen (R-Brady Twp) introduced HB 5578 in the House. His bill gained quick acceptance and momentum, moving to the House floor and receiving an overwhelming vote of passage in the House earlier this month. The bill is now in the Senate, waiting to be considered by the Senate Finance Committee.
HB 5578 attempts to re-emphasize appraisal principles that the MTT has unfortunately lost sight of in its line of big box cases. It does not apply only to big boxes, but attempts to apply principles that should guide the MTT in every case. It requires the MTT to, among other things:
- Pay more attention to the markets of the subject property and the comparables.
- Give more appropriate consideration to the highest and best use of the subject property and only use comparables with the same highest and best use.
- Give appropriate weight to the replacement or reproduction cost of the subject property.
- Give less weight or no weight to comparables with deed restrictions or other restrictions.
- Disregard vacant comparables unless they meet reasonable standards designed to make them valid measures for the subject property.
- Use, weigh and reconcile each of the methods of valuation—comparable sales, capitalization of income and cost less depreciation.
HB 5578 merits considerate review and adoption by the Senate, in our opinion, because it rationally explains how appraisal science requires property values to be determined. And although it does not focus on big box cases, it demonstrates everything that has been wrong about the MTT’s handling of big box cases over the last several years.
Other Ideas for Winning Big Box Cases
- Whether HB 5578 is finally adopted or not, there are a number of measures that townships can take in your pending and future big box cases to make better records to persuade the MTT or a reviewing court to reject the valuations being offered by big box stores. Here are some suggestions you should consider:
- Attack the comparability of any dark stores used in the petitioner’s appraisal. Dark stores have a different highest and best use and should not be used as comparables.
- Point out whether any of the dark stores used in the petitioner’s appraisal are subject to deed restrictions that make them unusable for stores.
- Consider hiring a separate review appraiser to critique the petitioner’s appraisal.
- In the township’s appraisal, avoid characterizing the existing use as a “Home Depot” or a “Lowe’s.” It is a big box home improvement store.
- Attempt to correlate the store value to the strength of the store’s retail sales compared to other similar stores, since this can demonstrate the strength and value of the store’s location.
- Consider using as comparables the purchases by big box retailers of their own buildings; this is rare but occasionally occurs.
- Demonstrate a value relationship between “sale-leaseback” transactions or “leased fee” sales and “fee simple” sales. This will allow you to use these higher-value sales as comparables in the sales comparison approach. Appropriate downward adjustments may need to be made to such comparables.
- Demonstrate a value relationship between market leases and build-to-suit leases. This will allow you to use build-to-suit leases in the income approach. Downward adjustments may need to be made to such leases to reflect the current market and the age of the building.
- Always use the cost approach as one of your alternative valuations. Plentiful cost data is available and costs can be calculated relatively easily. If there are inadequate sales and lease comparables, the MTT and the courts may often default to the cost approach.
— William K. Fahey
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Fahey Schultz Burzych Rhodes PLC, Your Township Attorneys, is a Michigan law firm specializing in the representation of Michigan townships. Our lawyers have more than 150 years of experience in township law, and have represented more than 150 townships across the state of Michigan. This publication is intended for our clients and friends. This communication highlights specific areas of law, and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.
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