C. A. F. Inv. Co. v. Michigan State Tax Commission

• Decision Date: 06 September 1974
• Docket Number: No. 6,6
• Parties: C.A.F. INVESTMENT COMPANY, a Michigan partnership, Plaintiff-Appellant, v. MICHIGAN STATE TAX COMMISSION and Township of Saginaw, Defendants-Appellees.
• Court: Michigan Supreme Court

Page 588

221 N.W.2d 588

392 Mich. 442

C.A.F. INVESTMENT COMPANY, a Michigan partnership, Plaintiff-Appellant, v. MICHIGAN STATE TAX COMMISSION and Township of Saginaw Defendants-Appellees.

No. 6.

Supreme Court of Michigan.

Sept. 6, 1974.

Honigman Miller Schwartz & Cohn, Detroit, for C.A.F. investment co.

Frank J. Kelley, Atty. Gen., Robert A. Derengoski, Sol. Gen., Richard R. Roesch, Asst. Atty. Gen., Lansing, for Mich. State Tax Commission.

Before the Entire Bench.

FITZGERALD, Justice.

At issue in this case is the property tax assessment upon 10.55 acres of land owned by taxpayer C.A.F. Investment Company and leased to the S. S. Kresge Company in 1963 for a 20-year term to be used for a K-Mart store. For purposes of 1971 ad valorem taxes, the assessor for Saginaw Township valued the property at $1,442,364 and fixed the assessment of $245,300. Property in the township at the time was valued at a percentage rate of 17.04%, resulting in this initial assessment. This assessment was thereafter adjusted by the state equalization factor of 50% Of true cash value resulting in a state equalized value of $721,182. The taxpayer appealed this initial determination to the State Tax Commission. ¹

At the hearing before the Tax Commission witnesses testified on behalf of both the taxpayer and the Tax Commission offering estimates as to the true cash value of the subject property ranging from $787,500 to $1,600,000. The State Tax Commission, in a brief opinion which acknowledged the testimony of the Tax Commission's witness as to a true cash value of $1,600,000, essentially sustained the earlier assessment of the township assessor determining that the true cash value was $1,440,000 and the initial assessment for the township, $245,300.

The taxpayer sought leave to appeal in the Michigan Court of Appeals, which leave was denied on February 13, 1973. Leave to appeal was thereupon sought from this Court and was granted by order of this Court dated June 20, 1973.

The evidence submitted to the State Tax Commission by expert witnesses was based upon both the capitalization of income method and the depreciated reproduction cost method of property valuation. The property owned by taxpayer was leased to the S. S. Kresge Company for a 20-year term commencing in 1963 and contains three 5-year renewal options at the same rental. The lease is not a 'favorable' lease for the lessor under 1971 economic conditions since it carries a low rent reflective of 1963 economic conditions. In submitting evidence of valuation on the capitalization of income method, Dean Nelson, an expert witness for taxpayer, based his valuation upon a rate of return equal to the actual income realized under the 'unfavorable' lease and arrived at a valuation of $787,500. Norman Daniels, the staff expert for the Commission, on the other hand, based his capitalization of income valuation upon the expected 1971 rental return from comparable properties and arrived at a valuation of $1,600,000.

In its opinion the State Tax Commission noted, among others, the following facts:

'The Commission staff's method of valuation consisted of an appraisal using the reproduction cost approach to value which resulted in a current adjusted reproduction cost of $1,321,900. This value was arrived at by the use of the Marshall Valuation manual along with the commonly accepted appraisal techniques. The land was appraised based upon a study of sales of comparable properties in the Saginaw township area, which resulted in a current true cash value of $274,450. Comparable sales were adjusted where necessary for differences when compared to the subject property. Total current true cash value of land and improvements is $1,600,000.

'The Commission's staff also made an appraisal utilizing the capitalization of income approach to value, which resulted in a current true cash value of $1,600,000.'

Ultimately the Tax Commission acknowledged that its conclusion that the true cash value of the property was $1,440,000 was arrived at after 'consideration of all the information contained (in the noted facts)'.

The principal question of jurisprudential significance on this appeal is whether, 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 market place 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'. A second question raised by taxpayer is whether reversible error was committed when 11 pages of a 17 page report by the Commission's examiner were not supplied to taxpayer prior to the hearing before the Commission.

I

Article 6, § 28 of the Michigan Constitution of 1963, speaking to the scope of judicial review of administrative decisions regarding the property tax, states in pertinent part:

'In the absence of fraud, error of law or the adoption of wrong principles, no appeal may be taken to any court from any final agency provided for the administration of property tax laws from any decision relating to valuation or allocation.'

See, also, M.C.L.A. § 211.152; M.S.A. § 7.210, citing the above as the standard of review in individual assessment cases before the State Tax Commission. The substantial question in this case is whether the income capitalization testimony of the Tax Commission's expert witness may be made a basis for the Commission's finding of 'true cash value'. While we exercise a limited review of administrative decisions regarding the property tax, such a question, dealing with the construction of pertinent constitutional and statutory provisions, warrants full review by this Court for alleged 'error of law'.

Art. 9, § 3 of the Michigan Constitution of 1963 states:

'The legislature shall provide for the uniform general Ad valorem taxation of real and tangible personal property not exempt by law. The legislature shall provide for the determination of true cash value of such property; the proportion of true cash value at which such property shall be uniformly assessed, which shall not, after January 1, 1966, exceed 50 percent; and for a system of equalization of assessments. * * *'

The legislative response to the mandate of this constitutional provision is found in M.C.L.A. § 211.27; M.S.A. § 7.27, which provides for the determination of 'true cash value', as follows:

"Cash value', means the Usual selling price at the place where the property to which the term is applied shall be at the time of assessment, being the price which could be obtained for the property at private sale, and not at forced or auction sale. Any sale or other disposition by the state or any agency or political subdivision of lands acquired for delinquent taxes or any appraisal made in connection therewith shall not be considered as controlling evidence of true cash value for assessment purposes. In determining the value the assessor shall also consider the advantages and disadvantages of location, quality of soil, zoning, existing use, Present economic income of structures, including farm structures and present economic income of land when the land is being farmed or otherwise put to income producing use, quantity and value of standing timber, water power and privileges, mines, minerals, quarries, or other valuable deposits known to be available therein and their value. Except as hereinafter provided, property shall be assessed at 50% Of its true cash value in accordance with article 9, section 3 of the constitution.' (Emphasis supplied.)

It is the position of appellant taxpayer that 'true cash value' within the meaning of the above provisions can not be determined in reliance upon a rental figure which has no relation to actual rental under an existing long-term lease. Such a rental figure, it is argued, has no reasonable relationship to the 'usual selling price' or the fair market value of the property, such being the constitutional and statutory standards for determining true cash value. Appellee State Tax Commission counters by arguing that appellant's actual rental figures posit an unreasonably low capitalized valuation, and furthermore, by adding that the Tax Commission's valuation approach is justified by the legislative approval of the assessor's consideration of the 'present Economic income of structures' (in M.C.L.A. § 211.27, Supra; emphasis added) in determining 'true cash value'.

In Allied Supermarkets v. State Tax Commission, 381 Mich. 693, 712, 167 N.W.2d 264, 273 (1969), a majority of this Court, in defining 'true cash value', quoted with approval the following from Helin v. Grosse Pointe Twp., 329 Mich. 396, 45 N.W.2d 338 (1951):

"As stated in Moran v. Grosse Pointe Township (1947), 317 Mich. 248, 254, 26 N.W.2d 763, the words 'cash value' as defined by C.L.1929, § 3415 (C.L.1948, § 211.27 (Stat.Ann.1950 Rev. § 7.27)), is the usual selling price that could be obtained at the time of assessment, but not the price that could be obtained at a forced or auction sale. See, also, Twenty-Two Charlotte, Inc. v. City of Detroit (1940), 294 Mich. 275, 283, 293 N.W. 647'.'

Similar language is incorporated in the definition of cash value embodied in M.C.L.A. § 211.27, Supra. The concepts of 'true cash value' and 'fair market value' in this state are synonymous. ²

In the face of constitutional and statutory language positing the standard of 'true cash value', the State Tax Commission argues that it is entitled to consider evidence of marketplace rental for similar properties and ignore the existence of the long-term lease, because such consideration is justified by statutory reference to the assessor's consideration of 'economic income' in M.C.L.A. § 211.27; M.S.A. § 7.27.

The appraisal report and hearing testimony of the sole expert witness for the Tax Commission, Norman Daniels, indicates that the Tax Commission determined the 'economic rent' ...