Walgreen Co. v. City of Madison

• Decision Date: 08 July 2008
• Docket Number: No. 2006AP1859.,2006AP1859.
• Citation: 752 N.W.2d 687,2008 WI 80
• Parties: WALGREEN CO., Plaintiff-Appellant-Petitioner, v. CITY OF MADISON, Defendant-Respondent.
• Court: Wisconsin Supreme Court

752 N.W.2d 687

2008 WI 80

WALGREEN CO., Plaintiff-Appellant-Petitioner, v. CITY OF MADISON, Defendant-Respondent.

No. 2006AP1859.

Supreme Court of Wisconsin.

Argued February 26, 2008.

Decided July 8, 2008.

For the plaintiff-appellant-petitioner there were briefs by Don M. Millis, Reinhart Boerner Van Deuren S.C., Madison; James H. Gilbert, James H. Gilbert Law Group P.L.L.C., Eden Prairie, Minn.; and Robert A. Hill, Robert Hill & Associates, Eden Prairie, Minn., and oral argument by Robert A. Hill.

For the defendant-respondent there was a brief and the cause was argued by Larry W. O'Brien, assistant city attorney, Madison.

An amicus curiae brief was filed by Robert Horowitz and Stafford Rosenbaum L.L.P., Madison, on behalf of Wisconsin Association of Assessing Officers, League of Wisconsin Municipalities, City of Brookfield, City of Cudahy, City of Eua Claire, City of Greenfield, City of Kenosha, City of Lake Geneva, City of Milwaukee, City of New Berlin, City of Oshkosh, and Village of Pleasant Prairie, and oral argument by Robert Horowitz.

An amicus curiae brief was filed by David D. Wilmoth, Patricia Hintz and Quarles & Brady L.L.P., Milwaukee, on behalf of the Wisconsin Merchants Federation, Inc., and oral argument by David D. Wilmoth.

¶ 1 LOUIS B. BUTLER, JR., J

Walgreen Co. (Walgreens) seeks review of a published court of appeals opinion¹ affirming a judgment of the Dane County Circuit Court, the Honorable Diane M. Nicks presiding. The judgment adopted assessments of two Walgreens stores located in Madison, Wisconsin, conducted by the City of Madison (City) for tax purposes. Walgreens challenged the assessments and sought a refund of taxes paid on the properties for 2003 and 2004, but the Madison Board of Review rejected its challenges. Walgreens filed a Wis. Stat. § 74.37(3)(d)(2005-06)² action, and the circuit court and court of appeals both upheld the City's assessments.

¶ 2 On review, we must determine whether a property tax assessment of retail property leased at above market rent values should be based on market rents (as Walgreens argues) or if such assessments should be based on the above market rent terms of Walgreens' actual leases (as the City argues). We are also asked to address whether the City violated the uniformity clause of the Wisconsin Constitution in its assessment of Walgreens' properties, and whether Walgreens was barred by Wis. Stat. § 70.47(7) from challenging the 2004 property tax assessments. Because the other issues in this case are dispositive, we do not reach the uniformity clause issue.

¶ 3 We conclude that the issue under Wis. Stat. § 70.47(7) regarding whether Walgreens was barred from challenging the 2004 tax assessments has been waived and is moot. As to the issue regarding the proper method of property tax assessment, we reaffirm the holding of Flood v. Bd. of Review, 153 Wis.2d 428, 431, 451 N.W.2d 422 (1990), that Wis. Stat. § 70.32(1) "proscribes assessing real property in excess of market value." This holding is consistent with the nationally recognized principle that "[a] lease never increases the market value of real property rights to the fee simple estate." Appraisal Institute, The Appraisal of Real Estate 473 (12th ed.2001). We also affirm that § 70.32(1) requires adherence to the Wisconsin Property Assessment Manual³ (the Property Assessment Manual) absent conflicting law. The Manual is consistent with both statutory and case law in this state requiring an income approach assessment of a leased retail property's fair market value of the fee simple interest to be based on market lease rates, not actual contract rates, as long as encumbrances to the property do not cause its leased fee value to fall below a market rate value. We conclude that the circuit court in this case failed to apply these well-established rules of property assessment. Therefore, we reverse the decision of the court of appeals and remand for further proceedings consistent with this opinion.

I

¶ 4 The following facts are taken from the findings and uncontested factual descriptions in the circuit court's June 26, 2006, decision in this case. Walgreens leases properties located at 2909 and 3710 East Washington Avenue in Madison, Wisconsin. In addition to lease payments, Walgreens is also responsible for paying the property taxes for those properties.

¶ 5 The lease for each of the properties is for a term of 60 years, terminable after 20 years. The lease for the 2909 East Washington property has a stated monthly rent as of June 2006 (the date of the circuit court's opinion) at $35,833.33. The lease for the 3710 East Washington property has a stated monthly rent of $29,987.

¶ 6 The properties were constructed by a developer at Walgreens' direction, pursuant to a uniform business model followed by Walgreens. Under that business model, Walgreens rents property rather than purchasing it, working with developers who find sites for Walgreens' stores at prime locations in heavily trafficked areas, buy out existing businesses located at the desired sites, purchase the property, and build and/or develop it with "super adequacies"⁴ to suit Walgreens' needs. Walgreens' lease payments under this business model include compensation to the developer for all such financing, land acquisition, construction, development and financing costs, together with a profit margin. The parties do not dispute that the inclusion of such costs into the lease terms results in higher than market rate rental payments; as the circuit court described it, the rent in the Walgreens leases is "higher than normal" in part because "the developer is recovering his development costs on a building that contains the superadequacies demanded by Walgreen." Both of the East Washington properties were developed and their leases based on this business model.

¶ 7 The procedural history of this case begins with the City's 2003 and 2004 property tax assessments of the two properties. The City's assessment reports for the properties describe the "market value" of the 2909 East Washington property at $4,618,000 and the "market value" of the 3710 East Washington property at $3,860,000 for the years 2003 and 2004. The assessor's reports also contain former assessment values for 2003 that were revised to match the 2004 valuations, and describe the methodology followed in the assessments. Specifically, the appraisal report for each property describes rejecting the "cost approach" to valuation in favor of an "income approach" utilizing a "direct capitalization" method, based on actual income, but using market-based expense and vacancy estimates.

¶ 8 Walgreens attempted to appeal the 2003 assessments to the Madison Board of Review pursuant to Wis. Stat. § 70.47, but the Board sustained the assessments after informing Walgreens that it could not appear before the Board of Review to object to its assessment because Walgreens had failed to comply with Wis. Stat. § 70.47(7)(af)'s requirement that it provide necessary income and expense information requested by the assessor's office. As to the 2004 assessments, Walgreens appealed to the Board of Review, and appeared at a hearing held on September 9, 2004. The circuit court in this case described the hearing in terms of the Board sustaining the assessments after Walgreens "presented estimated valuations, but did not provide any evidence supporting its estimated valuations."

¶ 9 After unsuccessfully pursuing claims against the City for excessive assessments, Walgreens filed suit in the Dane County Circuit Court under Wis. Stat. § 74.37(3)(d) seeking a refund of $150,625.47 plus interest and litigation expenses for the alleged excess taxes paid on the East Washington properties for 2003 and 2004.

¶ 10 At trial, Walgreens and the City presented conflicting appraisals of the properties' market values. As the circuit court described it, Walgreens' assessor "appraised the fee simple interest in the two properties without consideration of the lease, while [the City's appraiser] appraised the leased fee interest."⁵ The appraisals presented by Walgreens described using all three primary appraisal approaches discussed in more detail in our analysis — the cost approach, sales comparison approach, and income approach — while placing the greatest emphasis on the latter two approaches. In contrast, the City appraisal used only sales comparison and income approaches for the 2909 East Washington property, while ultimately basing its assessment solely on numbers derived from its income approach analysis.⁶ It used only an income approach for the 3710 East Washington property, after concluding there were no comparable property sales.

¶ 11 The income approach analyses of both Walgreens' and the City's appraisals acknowledged that the property at issue is income-producing real estate, the value of which should take into account the property's expected cash flow through a capitalization technique. However, the primary difference between the appraisal approaches of the parties is that the income approach analysis in Walgreens' appraisals analyzed the market rent, as opposed to the contract rent, while the City's appraisals specified that they were "[u]sing the actual income from the [Walgreens property] lease." As a result of their different methodologies, Walgreens' appraisals assessed the 2909 and 3710 properties as valued in 2003 at $1,980,000 and $1,790,000, respectively, and as valued in 2004 at $2,070,000 and $1,870,000, respectively, i.e., significantly lower than the previously described assessments by the City.

¶ 12 In a decision dated June 26, 2006, the circuit court ruled in favor of the City, issuing the following three conclusions of law:

1. Walgreen[s] has failed to comply with the procedures in Wis. Stat. § 70.47(a) and (ae) with regard to its claims for the 2004 assessments and is, therefore, barred by Wis. Stat. § 74.37(4)(a) from challenging such assessments.

2. Wis. Stat. § 70.32(1) re...