Is the value premise of the Michigan property tax still 'exchange value'?

Robert F. Rhoades
BridgeTower Media Newswires

Section 27 of the General Property Tax Act, MCL 211.27(1), defines true cash value as the “usual selling price” or the price “at which the property would sell in a private sale.” True cash value has been held to be “synonymous with fair market value,” per CAF Investment Co v State Tax Commission, 392 Mich 442, 450; 221 NW2d 588 (1974).

Since First Federal Savings and Loan v City of Flint, 415 Mich. 702; 329 N.W.2d 755 (1982),  it appears to have been settled that the market value standard is to be based on “value in exchange” and not “value in use.”

To illustrate the reasoning of the two valuation premises, if a factory, store or other building contains features that are used by and useful to the owner, but would not bring additional value in the marketplace, the value-in-use premise would ascribe value to those features and the value-in-exchange approach would not. The value-in-use approach would result in higher assessed values for any property containing special features that are desired by their owners but would not be desired in the marketplace.

While the Court of Appeals in Clark Equip Co v Leoni Township, 113 Mich App 778; 318 NW2d 586 (1982), approved of “value in use” as a proper value premise for specialty properties, such as factories, it did so relying on a then-recent 1981 COA decision in First Federal, which, the Supreme Court reversed shortly after the Clark court relied upon it.

The Supreme Court’s ultimate rejection of the value-in-use approach in First Federal was also the basis for the 2000 decision of the appellate court in Meijer, Inc v City of Midland, 240 Mich App 1, 5; 610 NW2d 242 (2000).

The recent decision of the Court of Appeals in Menard Inc v Escanaba, __Mich App__ (May 26, 2016, COA No 325718), however, cited Clark 12 times and adopted its value-in-use reasoning, suggesting that the issue is not entirely resolved.

The COA’s decision is also unusual in the lack of deference afforded the factual determinations of the Michigan Tax Tribunal. The court reversed both the rejection of the city’s expert’s conclusions and the adoption of the conclusions of the taxpayer’s expert and remanded for an additional evidentiary hearing, at which the parties may present additional evidence about the effect of deed restrictions and functional obsolescence.

The court’s rejection of the taxpayer’s expert was premised upon his failure to adjust restricted sale prices upward. The expert did not make such an adjustment because he concluded that the restrictions had not affected the prices, and the Tribunal accepted that.

The court observed that because the two unrestricted sales sold for higher prices than the restricted sales, it was error to conclude that an adjustment was not needed. The court did not, and was in no position to, consider and weigh whether other differences between the restricted and unrestricted sales might have explained the higher prices. For example, if the two unrestricted sales were smaller than the others, the smaller size, and not the lack of restrictions, may have explained the higher per-square-foot sale prices that the court observed.

The court’s reversal of the Tribunal’s rejection of the city’s appraisal appears to be a product of the court’s value-in-use premise. The city’s expert computed costs and made no adjustment to costs for functional obsolescence to reflect that any other user would minimally not want Menard to have specific features. The Tribunal rejected the city’s cost approach because it did not account for any functional obsolescence.

The COA concluded that there was no evidence of functional obsolescence. It also reasoned that there would be no such obsolescence if the benchmark for measuring obsolescence was the owner’s use consistent with Clark. The court did not apply Meijer or First Federal, in which the Supreme Court held that owner-specific features that would not cause an increase in the usual sale price should not be included in the assessed value.

The rule that Tribunal decisions must be supported by evidence is nothing new. Whether the property tax should be based on “value in use” or “value in exchange,” however, has broad implications — and the COA decision in Menard may reopen an issue which appeared to have been settled.

On Feb. 1, 2017, the Supreme Court ruled that it would hear oral arguments on the application for leave and it ordered supplemental briefs to be submitted on the issues of “(1) whether the Court of Appeals exceeded its limited appellate review of a decision of the Michigan Tax Tribunal; and, if so, (2) whether the Michigan Tax Tribunal may utilize a valuation approach similar to that recognized in Clark Equipment Company v Leoni Twp, 113 Mich App 778 (1982).”

The issue of whether to apply a value-in-use or value-in-exchange approach to determining assessed values affects more than just large retail stores. It potentially affects every property with special features desired by the owner, that would add little to, or perhaps even reduce, value if the property were offered for sale.

Owners of such properties may want to consider filing protective appeals as the May 31, 2017, deadline for commercial, industrial and developmental valuation appeals approaches.

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Robert F. Rhoades is a member in Dickinson Wright PLLC’s Detroit office, where he practices in the property tax field. Contact him at (313) 223-3046 or rrhoades@dickinsonwright.com.