C. A. F. Inv. Co. v. Saginaw Tp.

• Citation: 302 N.W.2d 164,410 Mich. 428
• Decision Date: 24 February 1981
• Docket Number: No. 3,Docket Nos. 60744,60745,3
• Parties: C. A. F. INVESTMENT COMPANY, a Michigan Partnership, Petitioner-Appellee, v. TOWNSHIP OF SAGINAW, Respondent-Appellant. Calendar
• Court: Supreme Court of Michigan

Page 164

302 N.W.2d 164

410 Mich. 428

C. A. F. INVESTMENT COMPANY, a Michigan Partnership Petitioner-Appellee, v. TOWNSHIP OF SAGINAW, Respondent-Appellant.

Docket Nos. 60744, 60745.

Calendar No. 3.

Supreme Court of Michigan.

Argued Jan. 11, 1979.

Decided Feb. 24, 1981.

Honigman, Miller, Schwartz & Cohn by Charles H. Tobias, Michael B. Shapiro, Detroit, for petitioner-appellee.

Crane, Kessel & Crane by William A. Crane, Saginaw, for respondent-appellant.

RYAN, Justice.

We address a conflict which has a long and protracted history arising out of Saginaw Township's 1971 tax assessment of appellee's property. The original dispute between the parties was initially resolved by this Court in 1974 in a unanimous opinion written by Justice Fitzgerald. C. A. F. Investment Co. v. State Tax Comm., 392 Mich. 442, 221 N.W.2d 588 (1974). The Court reversed the decision of the tax commission and remanded to the tax tribunal ¹ for proceedings consistent with the opinion.

The tax tribunal thereafter conducted two weeks of hearings culminating in a lengthy opinion dated April 5, 1976. On appeal as of right to the Court of Appeals, the tax tribunal was again reversed and the case was remanded for redetermination. The Court of Appeals concluded that the tribunal failed to follow the dictates of this Court's earlier decision. C. A. F. Investment Co. v. Saginaw Twp., 79 Mich.App. 559, 262 N.W.2d 863 (1977).

We have again granted leave to appeal. 403 Mich. 801 (1978).

I

The facts giving rise to this dispute are extensively stated in our prior decision and need not be repeated at length here.

It suffices to say that C. A. F. disagrees with Saginaw Township's assessed valuation of commercial property owned by the company. The property is encumbered by a long-term lease with the S. S. Kresge Company for a K-Mart store. The lease is not expected to expire until 1998 if available options are exercised. Under the economic conditions for the assessment years now in dispute, 1971-1975, actual income under the lease is relatively low. Expert witnesses for both parties conceded, however, that the lease fairly reflects 1963 economic conditions, the year the lease was made.

When this case was here before, C. A. F. was challenging Saginaw Township's true cash valuation of $1,442,364 for the subject property. ² That determination had been appealed to the state tax commission which essentially sustained the township's earlier assessment. In making that decision, the tax commission relied heavily upon the testimony of Norman Daniels, a staff appraiser. Daniels had submitted a true cash valuation of $1,600,000 based upon both the capitalization of income and the depreciated reproduction cost methods of appraisal. The basis for Daniels' calculation of capitalized income value was a projection of the expected 1971 rental return for comparable property. Reduced to its simplest terms, this represented an "economic rental" value of $2.00 per square foot based upon the operations of similar K-Mart properties. ³ Implicit in the valuation was that the property was then available to rent in the marketplace, which of course was not the case.

On appeal to this Court, C. A. F. contended that "true cash value", as defined by statute, could only be determined by reference to the actual income realized under the terms of the lease with S. S. Kresge. Basing his calculations of capitalized income value on actual income, the C. A. F. appraiser, Dean Nelson, arrived at a valuation of $787,500. C. A. F. contended that this figure accurately reflected true cash value. The tax commission's reliance upon an "economic rental" or "hypothetical income" as a basis for appraisal, C. A. F. argued, had no reasonable relationship to the usual selling price or fair market value of the property which is the constitutional and statutory standard for determining true cash value.

The tax commission defended its valuation by pointing out that C. A. F.'s actual rental figures under the lease resulted in an unreasonably low capitalized valuation. The tax commission equated the statutory language "economic income" with the appraisal term "economic rental". Thus, the tax commission contended that if property is leased under a long-term lease for a rental which in later years proves unduly low in the face of economic changes, actual rent could be ignored and the potential rental income of the property on the open market could be utilized.

Justice Fitzgerald incisively framed the issue presented to this Court as follows:

"(W)hether, under Michigan law, the tax commission was entitled to consider and give weight to evidence of valuation based upon a rate of return which comparable, unencumbered property could earn in the present marketplace in the face of an existing unfavorable long-term lease with an actual rate of return which is substantially less than the present 'going rate'." 392 Mich. 442, 447, 221 N.W.2d 588.

This Court held that under the circumstances of the case presented, the answer was, "No". It was held that, as used in the statute, "economic income" meant "actual income". Id., 454, 221 N.W.2d 588. To the extent that the capitalization of income method is used for determining true cash value, the assessor was obligated to use the actual income under the existing long-term lease as the basis for his calculations. Id. The record indicated that the lease was the product of an arm's-length transaction and fairly reflected economic conditions at the outset. To the extent that the tax commission permitted actual income to be ignored, the township's valuation was clearly in error. A hypothetical rental income based on comparable properties leased at more favorable rates was an improper basis for determining true cash value. Id., 455, 221 N.W.2d 588.

This Court reversed the tax commission and remanded for a determination of true cash value based upon actual income. Due to a procedural error also committed by the tax commission, a full de novo hearing was held by the tax tribunal.

Not surprisingly, evidence developed at the hearing on remand essentially mirrored that taken at the original hearing. The C. A. F. appraiser, Dean Nelson, testified on behalf of C. A. F. and again arrived at a 1971 assessed valuation of $787,500 by capitalizing actual income under the existing long-term lease. Nelson expanded his appraisal to cover the intervening years to 1975. The highest valuation under his calculations was $950,500 for the assessment year 1974. These figures, according to Nelson, represented the fair market value of the property to a commercial investor. Nelson opined that investors would look at the cash flow under the existing lease to determine the fair market value of the property.

Norman Daniels again testified on behalf of the township. His testimony and appraisal were corroborated by a fellow tax commission appraiser, Russell Galvin. Both testified that the most reliable method of determining the fair market value of the property was by the capitalization of income method. Two alternative methods of valuation were utilized to check the validity of the capitalization of income method. ⁴ Both witnesses determined that the valuations for the assessment years in question were as follows: $1,509,000 in 1971; $1,570,000 in 1972; $1,640,000 in 1973; $1,705,000 in 1974; and $1,771,000 in 1975.

Daniels and Galvin testified that these figures reflected the true cash value of the entire property and not just the value of the lessor's interest under the lease as reflected by use of actual rental income alone as suggested by the C. A. F. appraiser. On cross-examination both experts explained that, in essence, this meant that they looked to the hypothetical rental income of the subject property to make their calculations and ignored actual rent received under the lease. They even went so far as to say that to determine the total value of the subject property, actual rent received was irrelevant. Daniels admitted that with the exception of a change in the vacancy factor, there was no difference between the first appraisal submitted originally to the tax commission and the second appraisal provided to the tax tribunal at this hearing.

After taking the above testimony the tax tribunal made supplemental findings of fact, none of which are pertinent to the resolution of the present appeal. ⁵ The tax tribunal then framed the legal issue which it deemed necessary for it to resolve in the dispute presented: "Where real property is subject to a long-term lease which currently provides less than the normal market rent, is such property to be assessed on a value predicated on the actual level of income?"

After a lengthy statutory analysis, the tax tribunal essentially reaffirmed the tax commission's earlier assessment of the C. A. F. property. With modification to the capitalization rates and expense figures, the tax tribunal predicated the value of the property on the capitalization of income method of appraisal as employed by the tax commission appraiser, Norman Daniels. Market rent in lieu of actual income was utilized to reach a valuation of $1,389,452 for the assessment years 1971-1974. The 1975 assessment year valuation was determined to be $1,473,506.

Emphasized throughout the opinion was the tax tribunal's belief that the Legislature did not intend the use of actual income to determine true cash value when that figure represented only a portion of the commercial income potential of the property involved. The appraisal submitted by C. A. F. appraiser Dean Nelson, consisting of a capitalization of actual income under the long-term lease, was considered to be "of little, if any, evidentiary value". The foremost reason for its rejection was the appraisal's failure to predicate valuation on "the amount of income the subject property is capable of producing".

The Court of Appeals reversed the decision of the tax tribunal and again remanded. The Court reasoned that...