Antisdale v. City of Galesburg

• Decision Date: 15 January 1985
• Docket Number: Docket No. 68104,No. 5,5
• Citation: 362 N.W.2d 632,420 Mich. 265
• Parties: William S. ANTISDALE and Marvin DeVrou, Petitioners-Appellants, v. CITY OF GALESBURG, Respondent-Appellee. Calendar420 Mich. 265, 362 N.W.2d 632
• Court: Michigan Supreme Court

Page 632

362 N.W.2d 632

William S. ANTISDALE and Marvin DeVrou Petitioners-Appellants, v. CITY OF GALESBURG, Respondent-Appellee.

Docket No. 68104.

Calendar No. 5.

420 Mich. 265, 362 N.W.2d 632

Supreme Court of Michigan.

Argued April 3, 1984.

Decided Dec. 28, 1984.

Released Jan. 15, 1985.

Katz, Victor & Yolles, P.C. by Norman D. Katz, Southfield, for petitioners-appellants.

Morris, Culver & Yokom, P.C., William H. Culver, Kalamazoo, for respondent-appellee.

BRICKLEY, Justice.

This case concerns the ad valorem taxation of a federally subsidized apartment complex, a complex covered by a mortgage which, in effect, bears a 1% interest rate. We must decide the permissibility of determining the true cash value of the property under a variant of the market approach to valuation. This variant approach values the subject property by reference to the selling price of properties also subject to mortgages bearing interest rates well below the market rate. The selling price of the comparable properties is determined by adding the outstanding mortgage balance assumed by the purchasers, the low interest rate notwithstanding, to the consideration to the seller above the mortgage balance assumed. We hold that this approach is impermissible.

Petitioners are the owners of a federally subsidized apartment complex. A number of parcels, having different tax identification numbers, are involved. Together, these properties make up an 8.36 acre piece of property. An apartment complex sits on the land and consists of 120 one and two bedroom apartments built in four phases between 1973 and 1976. There are a total of fifteen buildings, which are surrounded by vacant farmland. The complex is located in the City of Galesburg, between the cities of Battle Creek and Kalamazoo.

The apartment buildings are wood frame, "garden" type structures with patios and balconies. The complex is generally well maintained, carefully landscaped, and in good condition. It is 100% occupied and there is a waiting list.

Each phase of construction was separately financed. The Farmers Home Administration (FmHA) loaned 95% of the funds needed for each phase.

                The mortgages carry the following terms
                Phase 1 (1973):  $295,900 to be paid in 50 years
                                   at 7 3/4%
                Phase 2 (1974):  $425,600 to be paid in 50 years
                                   at 8 3/4%
                Phase 3 (1975):  $451,000 to be paid in 40 years
                                   at 8 1/8%
                Phase 4 (1976):  $464,000 to be paid in 40 years
                                   at 9%.
                

The stated interest rates, however, are never paid. Instead, the FmHA waives all amounts of interest in excess of 1%, except in certain circumstances.

The FmHA imposes a rent schedule on the owners. Rental payments are determined by taking 25% of the tenant's income or a basic fixed rent set by FmHA, whichever is greater. The fixed rate is well below the market rate for similar apartments. Also, evidence was received which showed that the interest rate was increased whenever a tenant paid 25% of income as rent and that amount was over the basic fixed rent. There was, therefore, no incentive for the owners to rent apartments to persons with high incomes. Other restrictions nearly guarantee that the project will be nonprofit.

In the present case, for the sake of simplicity, the parties have treated the four mortgages as one large mortgage. We will continue that practice. Over the life of the project, the interest rate has never been in excess of 1 1/2%.

We are concerned with the valuation of this property for tax years 1978 and 1979. As of the 1978 tax day (December 31, 1977), the "mortgage" had a principle balance of $1,553,467 and had 40 years of payments remaining at the rate of $3,956 per month ($47,472 per year). Of that amount, 1% constituted interest, with the remaining amount going to pay off the principal. As of the 1978 tax day, the payment schedule and interest rate remained the same, but the principal balance of the mortgage remaining at that date was $1,509,488.

The City of Galesburg assessor, using the cost of reproduction less depreciation method, assessed the subject property for 1978 as having an assessed valuation of $855,000 with a true cash value of $1,710,000. The assessed value for 1979 was $878,000, with a true cash value of $1,756,000.

Petitioners protested both assessments before the local board of review, but received no relief. Separate petitions for review by the Michigan Tax Tribunal were filed and later consolidated on motion of the petitioners. Respondent abandoned its assessor's valuation prior to trial and instead had an appraisal prepared.

Petitioners' appraisal, relying on a report of the Michigan Chapter of American Institute of Real Estate Appraisers, used an income approach to value the subject property. The cost approach was rejected because a

"Cost Approach to value without measuring the deficiencies of the property in the competitive market would not measure the True Cash Value. To properly measure the obsolescence would require a measurement of deficient income. The resulting value would thus be a reciprocal of the Income Approach."

The market approach to value was also rejected, for the reason that there was a "lack of sales of similar properties * * * around Kalamazoo". The appraisal found that a comparison with other apartments "would require adjustments for different rent and demand levels" and "building characteristics and financing".

In using an income approach to value, petitioners did not capitalize the existing government mandated rents. Instead, the appraisal used a market rent, expenses, and capitalization method. That is, the appraisal assumed the property had no rent schedule or government regulated operation. Under such an approach, the assessed valuation of the property was determined to be $553,000 for 1978 and $555,500 for 1979, with true cash values of $1,106,000 and $1,111,000 respectively.

Respondent's appraisal used the market approach. The income approach was rejected because the property was rent controlled. The use of market rents and expenses were rejected because

"[t]o try to assign an assumed or fictitious rental rate to the apartments, and an equally fictitious schedule of expenses, in order to arrive at a pseudo, or assumed, net income, as if the project were not subject to the FmHA restrictions, is not a realistic approach to valuing the subject--particularly when the market demonstrates how such properties should be valued."

Respondent's appraisal found that the primary value of the projects was its value as a tax shelter. Respondent found, consistent with the idea that the property value was a heavily leveraged tax shelter, that the value of the property was a function of the amount of the mortgage remaining, in essence, that the mortgage was being purchased. Respondent then set about determining the value of the subject property by comparing it to the sale of other similar government regulated properties.

Six unrecorded sales of FmHA properties on land contract, the details of which are not disclosed by respondent's appraisal, show the average sale price as being 110% of the outstanding mortgage on each property. Sales of interests in three other FmHA and FHA properties show a range of price from 115% to 126% of the assumed mortgage balance. These percentage figures were arrived at by adding the outstanding mortgage balance of each property to the amount over the mortgage balance paid to the seller and, expressing that sum as a percentage of the mortgage balance. Respondent concluded, after applying this formula, that the value of the subject property was 112% of the outstanding mortgage on the subject property. This percentage resulted in a valuation for tax year 1978, of $870,000, with a true cash value of $1,740,000. The 1979 valuation was $845,500, with a true cash value of $1,691,000.

A hearing was held on November 26, 1979, before a Tax Tribunal hearing officer. The hearing officer held in favor of petitioners. His proposed judgment found that respondent's approach to valuation would destroy the principle of uniformity of taxation. Moreover, the officer found that the financing terms could not be considered in determining the true cash value of the property:

"There is a distinction to be made between a property itself and the financing terms under which the property is bought and sold. Respondent would have us believe that the 'usual sale price' can refer to 'FmHA projects.' The statute however contemplates the usual sale price of the property, not the financing which accommodates its purchase or sale. Thus, the usual sale price requirement refers to multi-unit apartment buildings in this case, not buildings which happen to be financed with a government subsidy.

"Similarly, the usual sale price must be interpreted to mean that sale which is usual in the open market. If exceptions are carved out, as in the instant case, where only a minute segment of comparable properties have this particular financing arrangement, the 'usual sale' requirement would become so diluted as to render the term meaningless.

"To require the assessor to analyze the complex financing restrictions noted in the instant case would impose a burden far more onerous than contemplated by the statutory requirements of MCLA 211.27[; MSA 7.27]. The duty of the assessor is to assess primarily the property."

The Tax Tribunal accepted the hearing officer's factual findings, but rejected his conclusions. It found respondent's appraisal persuasive. The "abundance" of market information showed the true cash value of the subject property:

"This Tribunal has always recognized the existence of three sound approaches to value, those being the proper application of the 'cost approach,' 'income approach' and 'market data approach.'

"All three methods should be utilized when the necessary data is available as it is in the instant case.

"It appears to this Tribunal that it flies in the face of...