Alstores Realty, Inc. v. State

• Decision Date: 20 March 1970
• Docket Number: No. 41708,41708
• Citation: 286 Minn. 343,176 N.W.2d 112
• Parties: ALSTORES REALTY, INC., Appellant, v. STATE of Minnesota and County of Hennepin, Respondents.
• Court: Minnesota Supreme Court

Page 112

176 N.W.2d 112

286 Minn. 343

ALSTORES REALTY, INC., Appellant, v. STATE of Minnesota and County of Hennepin, Respondents.

No. 41708.

Supreme Court of Minnesota.

March 20, 1970.

Syllabus by the Court

1. In determining valuation of land for tax purposes, an assessor is enjoined by statute to value each article or description of property separately, and at such sum or price as he believes the same to be fairly worth in money. Land and structures are to be valued separately as well as the aggregate value of the property, including all structures and improvements. Assessors are required to consider and give due weight to every element and factor, including market value, and give due weight to lands which are comparable in character, quality, and location, to the end that all lands similarly located and improved will be assessed upon a uniform basis. Minn.St. 273.08, 273.11, and 273.12.

2. The value of improved real estate is affected by a wide variety of circumstances, including income, market value, and reproduction costs. While none of these factors alone can be used to assess the value of all property, the assessor may exercise his discretion in using some or all of them.

3. Even though the record may indicate that the assessor did not follow the statutory mandates in arriving at the estimates of value, the trial court's findings on the issue of value must be sustained upon review if reasonably supported by the evidence as a whole.

Johnson & Eastlund and Douglas J. Carney, Minneapolis, for appellant.

George Scott, County Atty., David E. Mikkelson, Asst. County Atty., Minneapolis, for respondents.

Heard before KNUTSON, C.J., and NELSON, MURPHY, OTIS, and FRANK T. GALLAGHER, JJ.

OPINION

MURPHY, Justice.

This is an appeal from an order of the district court denying petitioner's motion for a new trial in proceedings instituted by petition for review of 1966 real property tax assessments pursuant to Minn.St. 278.01. Petitioner contends that the assessor's determination of value of the property for tax purposes is in error in that it fails to take into consideration factors relating to market value, as reflected by sales of comparable property, income or return on the owner's investment, and cost of replacement. Petitioner also contends that the trial court's reduction of the appraiser's valuation for tax purposes in the sum of $75,000 is unfair and wholly inadequate.

From the record it appears that petitioner, Alstores Realty, Inc., owns a 15-acre tract in an 80-acre shopping center complex, Southdale Shopping Center, which is located in the village of Edina. Alstores acquired its interest in 1954 and 1955 from the Dayton Company. While petitioner carries the cost of this purchase on its books as a nominal $1 consideration, there is evidence in the record of additional consideration. Petitioner put up a 4-story structure on this land, which it has used in the operation of a department store since the latter part of 1956. The original cost of the building was $2,468,993. In 1961, the basement level was developed at an additional cost of $228,663. A car-care center and a garden center were later added at $58,226 and $22,773, respectively.

Alstores Realty, Inc., is a wholly-owned subsidiary of Allied Central Corporation, a national chain of department stores which operates locally as Donaldson's. In 1966, the year with which we are concerned, Donaldson's Southdale grossed between $9.3 and.$9.4 million. The land was purchased subject to a restrictive covenant which requires its use as a department store for a period of 35 years. The land not encompassed by the building is devoted primarily to parking facilities which, by virtue of contracts and ordinances, is required to be maintained at 6 parking spaces per 1,000 feet. The parking area actually will hold between 1,200 and 1,500 cars.

Ordinarily, three methods are employed in evaluating commercial property for tax purposes. They include economic or income analysis, cost of replacement, and the market approach. The income method attempts to determine valuation on the basis of a capitalization of income in relation to investment. As the term suggests, the cost of replacement approach attempts to establish value on the basis of the sum which would necessarily be expended to replace the structure. The third method, the market approach, determines value in relation to sales of comparable property.

The evidence disclosed a great disparity between the assessor's values and those of the petitioner's appraisers. The assessor was obviously conservative in his appraisal of the building. He appraised it at $1,545,675 as opposed to the petitioner's appraisal of $1,676,600. A greater difference occurred in the valuation of the land, which the assessor established at $1,215,200, as opposed to the petitioner's valuation of $563,400. In support of its petition, Alstores called four witnesses. The first two were executives of the Allied Central Corporation. They testified that they considered petitioner's property had a value of $2.2 million. Petitioner's main witness was Howard C. Shenehon, a qualified professional appraiser and experienced witness. In arriving at his appraised value he utilized the income approach with respect to the land and buildings, the market approach with respect to the land, and the cost approach with respect to the structures.

In his estimation based on the income approach, he utilized a projected lease figure of $187,400, which was equivalent to 2 percent of petitioner's gross sales. He testified that such a percentage is a standard rental and he had compared it to 17 comparable properties. By use of what he considered a formula accepted by investors to arrive at a capitalization on the basis of income, he determined that.$2.3 million was a fair valuation for the land and property.

He then used the cost approach by considering the construction costs of several department stores, cost data from national information services available to appraisers, and the actual cost figures. He assumed there had been a 40-percent depreciation of the property, and he allowed for a 10-percent increase in building costs.

His market approach included sales of 24 tracts of land, 22 of which were in the Twin City area, and 2 of which were in Rochester. The size of these parcels varied from 8.76 acres to 486 acres. They differed in important respects. They were not the same type of land with the same type of zoning, and the shopping areas were not of the same quality as to price and variety of merchandise. One of the petitioner's executives referred to Southdale Shopping Center as 'number one' in 1966 of the three prime locations in the metropolitan area from the standpoint of '(l)ocation, know-how, a great many factors.' Moreover, the largest tracts included in the petitioner's comparables were assembled through numerous purchases. Petitioner's valuation of the land was $653,400 or $1 per square foot. Petitioner's final witness, Charles M. Upham, corroborated Shenehon's testimony that the normal department store percentage rental lease commanded 1 1/2 to 2 1/2 percent of gross sales.

While the assessor testified that he considered all three approaches in arriving at his assessment, it is clearly evident from his testimony that, although he considered the reproduction approach with respect to the buildings, he relied entirely upon the market approach with respect to the land. In arriving at the value of the land, he depended upon his knowledge and experience as well as records of real estate transactions in the area. In answer to the question, '* * * you do attempt in your assessments of your property in Edina to equalize it one to another?', he answered:

'Well, we attempt to secure all of the sales that we can that are occurring in our area and relate them to the particular parcel of real estate that has been transferred from one owner to another, and for how much and what date and how large an area that might be; what the local zoning is on the various parcels and so forth to attempt to keep up the market.'

He also testified:

'We attempt to gather all of the revenue, warranty deed sheets that show the revenue stamps. We obtain multiple listing, sales offerings and listings; all of this type of stuff.'

He testified that he confirms current sales to the best of his ability and that when he became assessor of Edina in 1959 he started a card index of property transfers in his area. On direct examination, he said he used this information in determining market value, but on cross-examination he could give only two comparables that he used. They included sales of two parcels of land in the vicinity of the Southdale Shopping Center. One involved 2.5 acres sold on August 18, 1965, while the other involved 2 acres transferred on September 6, 1962.

In determining the value of the property by the cost approach, the assessor used figures found on a card in his files. These figures, the assessor assumed, 'were costs as used by the State Tax Department in the original appraisal of Southdale.' It appears that the original records of the State Tax Department from which this information was taken were not available, and no attempt was made to reconstruct the figures. By applying a 2 1/2- percent-per-year depreciation rate to the original cost figures found in his office, he arrived at the present value.

We have not attempted to set out in detail the elaborate formulae of professional standards and criteria used by petitioner's appraisers in reaching the figures they assert to be the fair value of the property. It is sufficient to say that the evidence was carefully reviewed by the trial court in a memorandum which contains, in part, the following analysis and conclusions:

'After carefully studying the testimony of Mr. Shenehon (petitioner's appraiser) and Mr. Kearns (village assessor), and reviewing the testimony of Messrs. Humphrey, Brouillette and Upham...