Cooperative v. City of Ann Arbor

Decision Date12 June 2014
Docket NumberDocket Nos. 305194,306479.
Citation305 Mich.App. 572,854 N.W.2d 172
CourtCourt of Appeal of Michigan — District of US

Hoffert & Associates, PC, Farmington Hills, (by Myles B. Hoffert, David B. Marmon, Gregory M. Elliott, and Paige R. Harley ), for Forest Hills Cooperative.

Steven K. Postema, Corporation Counsel, and Kristen D. Larcom, Assistant Corporation Counsel, for the city of Ann Arbor and the Ann Arbor City Assessor.




These consolidated cases involve property tax assessments for nonprofit cooperative housing units located in the city of Ann Arbor (City) and owned by petitioner/plaintiff Forest Hills Cooperative. In Docket No. 305194, Forest Hills appeals as of right the June 1, 2011 judgment of the Michigan Tax Tribunal concerning the property tax assessments for tax years 2000 through 2009. In Docket No. 306479, Forest Hills appeals as of right the September 28, 2011 circuit court order granting summary disposition pursuant to MCR 2.116(I)(2) in favor of defendants—the City and the Ann Arbor City Assessor (City Assessor)—with respect to Forest Hills' constitutional claim concerning the property tax assessments.


The nonprofit housing cooperative property underlying this tax dispute consists of 39 residential buildings, one building with an office and meeting rooms, and one service and maintenance building on 30.78 acres in the City. The property is divided into eight parcels, each with an assigned number, for the purposes of assessing property taxes. One parcel is vacant land zoned for commercial uses.

Forest Hills obtained mortgage financing for the property through a federally subsidized program under the National Housing Act of 1959 known as Section 236.” To obtain the financing, Forest Hills was required to enter into regulatory agreements with the United States Department of Housing and Urban Development (HUD).

In June 2000, Forest Hills filed a petition in the Tax Tribunal to challenge the assessments on the eight parcels for tax year 2000. Forest Hills alleged that the assessments were based on a true cash value of $7,622,000 for the eight parcels, but that the true cash value should be no more than $7,232,000. On September 29, 2000, the tribunal entered an order holding the case in abeyance until after the tribunal decided another factually similar case. The similar case was ultimately subject to an appeal in this Court. In 2007, this Court affirmed the tribunal's determinations in that case regarding the property tax assessments for a housing cooperative for tax years 1984 to 2002. See Branford Towne Houses Coop. v. City of Taylor, unpublished opinion per curiam of the Court of Appeals, issued April 19, 2007 (Docket No. 265398), 2007 WL 1160189. In pertinent part, this Court rejected the petitioner's argument that the capitalization-of-income method for assessing property must be used to assess nonprofit housing cooperatives. Id. at 6.

On March 27, 2008, the Tax Tribunal entered an order removing this case from abeyance. By the time this case was heard by a hearing officer on January 12, 2010, and February 17, 2010, tax years 2001 through 2009 had been added to Forest Hills' petition. A stipulation of facts and exhibits were submitted to the hearing officer.

A supervising project manager employed by HUD testified that Section 236 housing is intended to create affordable housing for individuals with low or moderate income by subsidizing the owner's mortgage payments for the property. In exchange for the subsidy, a mortgagor is required to sign a regulatory agreement that gives HUD various rights to inspect financial records, inspect the property, and approve alterations of the buildings. If the mortgage is paid off early, the mortgagor is required to sign a use agreement to preserve the restrictions on the property for the original term of the mortgage. If the property is sold, the restrictions would still apply. Although HUD would expect the property to be sold as a nonprofit housing cooperative, HUD would consider a transfer to a for-profit purchaser if a nonprofit purchaser could not be located.

The project manager testified that the mortgagor is also required to use an occupancy agreement, approved by HUD, for individuals to pay carrying charges to live in units of the housing cooperatives. If any individual leaves, some housing cooperatives buy back the individual's membership, while others require the individual to continue making payments until another acceptable person moves into the unit.

The managing agent at Forest Hills testified that Forest Hills repurchases units when a member leaves the housing cooperative. At the time of the hearing, 15 units were vacant, which represented a vacancy rate of approximately 5%. During past periods, a waiting list existed for residential units. The agent testified that each of the five mortgages for the Forest Hills property had a 40–year term with a due date in 2012 and that one mortgage was paid off in accordance with its amortization schedule in 2008. Another mortgage was paid off in 2009 according to its amortization schedule. The maturity dates for the five mortgage loans were in September 2008, October 2009, May 2010, February 2012, and May 2012. The federal subsidy to reduce the interest rate on the mortgage notes from 7% to 1% was $287,186. HUD approved a request by Forest Hills in 2006 to retain excessive income in order to build a fund to replace aluminum siding. Forest Hills also obtained a flexible subsidy loan through HUD in 1999 for major structural repairs and replacements, payable on the maturity date of the mortgage notes.

Ernest Gargaro, an expert in accounting functions, testified that he prepared Forest Hills' proposed valuations using two methods that are purely computational in nature. One method used by Gargaro was a computation of the annual “transfer values” for particular types of residential units at Forest Hills, using Forest Hills' bylaws and occupancy agreements to obtain the subscription price for an individual to become a member of the housing cooperative and the value of the occupancy agreement. The other method used revenue from “tenants” and expenses in Forest Hills' annual, audited financial statements to arrive at Forest Hills' net operating income. Gargaro then applied a capitalization rate to the annual net operating income to arrive at a capitalization-of-income valuation for the individual tax parcels.

The City Assessor testified as an expert property appraiser and assessor. He concluded that the highest and best use of the property would be (1) a market-rate housing cooperative or (2) a conversion to condominiums. He opined that the cost of converting the property to a market-rate housing cooperative would be minimal and that Forest Hills was not prohibited from prepaying its mortgage loans. The City Assessor testified that he did not use an income approach to value the property on the basis of his determination that housing cooperatives are not typically held for investment.

He found a cost approach inappropriate on the basis of his determination that a typical buyer would not “take into consideration what something would cost initially to build or currently to build minus depreciation.”

The City Assessor determined that ample sales data for housing cooperatives existed to allow use of a market approach to value most of the property, except that he made a deduction for his estimate of the cost of converting the property to a market-rate housing cooperative. He valued the “interest of the individual co-op interest and then basically summ[ed] that value of the individual units to come up with a value for the whole.” If a “move-in” had occurred during the prior year, he considered this to have been a transfer and, accordingly, used the same amount for the taxable value and the assessed value of that residential unit during the following year. He believed that Michigan law allowed this “uncapping” of taxable value for partial transfers of the ownership of a housing cooperative. He valued the vacant parcel, which was zoned for commercial use, separately using a market approach to value.

The City Assessor indicated that the property had been assigned more than one parcel number for property tax assessment purposes because of the manner in which the property was bisected by streets. He testified that parcels typically are not contiguous across streets. Separate parcel numbers were not assigned to individual residential units because the property has only one owner and individual ownership interests are not generally “tracked.” Additionally, the use of separate parcel numbers would be contrary to the manner in which Forest Hills allocates taxes to its members.

Following the hearing, the hearing officer determined the true cash values, assessed values, and taxable values for the property in a proposed opinion and judgment dated July 1, 2010. The hearing officer determined that shareholders and members of Forest Hills are residents of the units and that the highest and best use of the property was its current use. A cost-less-depreciation approach was used to value the property, as set forth in the City's property record cards for the developed property, and the hearing officer recommended a partial uncapping of the taxable value of each parcel when a unit is transferred. The assessed value of the vacant parcel was affirmed because Forest Hills did not offer any evidence that could be used to determine the value. The hearing officer determined values for each of the eight parcels for each of the disputed tax years. The parties were given notice that they had 20 days from entry of the proposed opinion to notify the Tax Tribunal in writing if they disagreed with the proposed opinion and the reason for...

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