Federated Retail Holdings, Inc. v. Cnty. of Ramsey, No. A11–2093.

• Decision Date: 19 September 2012
• Docket Number: No. A11–2093.
• Parties: FEDERATED RETAIL HOLDINGS, INC., Respondent, v. COUNTY OF RAMSEY, Relator.
• Court: Minnesota Supreme Court

820 N.W.2d 553

FEDERATED RETAIL HOLDINGS, INC., Respondent,

v.COUNTY OF RAMSEY, Relator.

No. A11–2093.

Supreme Court of Minnesota.

Sept. 19, 2012.

Syllabus by the Court

1. The tax court has subject-matter jurisdiction over a leasehold interest in an adjacent property provided that the leasehold constitutes real property of the tax parcel on appeal within the meaning of Minn.Stat. § 272.03, subd. 1 (2010).

2. An interest in real property that satisfies the criteria of a covenant that runs with the land is a right or privilege that belongs or appertains to the land within the meaning of Minn.Stat. § 272.03, subd. 1 (2010). Consequently, the contributory value of a covenant that runs with the land of an adjacent property is properly included in assessing all factors that contribute to the value of the tax parcel on appeal.

Thomas R. Wilhelmy, Christopher A. Stafford, Fredrickson & Byron, P.A., Minneapolis, MN, for respondent.

John J. Choi, Ramsey County Attorney, M. Jean Stepan, Assistant County Attorney, St. Paul, MN, for relator.

Considered and decided by the court without oral argument.

OPINION

DIETZEN, Justice.

The issue presented in this case is whether the tax court has subject-matter jurisdiction to consider the value of the leasehold interest in real property adjacent to the tax parcel on appeal. The Ramsey County Assessor determined that the fair market value of the tax parcel, which is improved by a Macy's department store operated by respondent Federated Retail Holdings, Inc., was $17,000,000 for the assessment dates of January 2, 2006, and January 2, 2007. The assessor included the value of a leasehold interest held by Federated in the parcel adjacent to the tax parcel in its value determination. Federated timely filed petitions under Minn.Stat. ch. 278 (2010), challenging the assessor's market value determinations. The tax court held that Federated's ownership interest in the tax parcel included the leasehold interest in the adjacent property, but concluded that the value of the leasehold interest was not subject to the jurisdiction of the tax court and therefore did not include it. The relator, Ramsey County, filed this certiorari appeal. We conclude that the tax court has subject-matter jurisdiction to consider the value of Federated's leasehold interest in adjacent property because it constitutes real property of the tax parcel under Minn.Stat. § 272.03, subd. 1 (2010), and affects the fair market value of the tax parcel. Consequently, we reverse and remand.

Federated has an ownership interest in the property now occupied and operated as a Macy's department store at the Rosedale Center Mall, 1815 Highway 36W in Roseville.¹ The Macy's department store propertyis the subject of this tax appeal. It is referred to as Parcel 0004 ² or the tax parcel.

Macy's is a three-level department store, with a gross leasable area of 259,453 square feet that is physically attached to the Rosedale Mall. The mall has approximately 164 stores encompassing a gross leasable area of 1,150,000 square feet. Macy's has 214,017 square feet of gross building area, and it is one of three major anchor department stores at the mall.

Additionally, Federated has a leasehold interest in Parcel 0005 at the Rosedale Mall,³ which is contiguous and adjacent to Parcel 0004. Parcel 0005 consists of 45,436 square feet of basement space that is physically attached to the tax parcel via an escalator. Generally, Parcel 0005 is improved with a structure that is used for common areas of the mall, and the basement space is used by Macy's as administrative/retail space.

The relevant ownership history of Parcel 0005, and the leasehold rights of the owner of Parcel 0004 to the exclusive use of the basement space of Parcel 0005, date back to a 1992 lease agreement ⁴ (the Equitable lease) between Equitable, as the owner-landlord of Parcel 0005, and Dayton's, as the tenant of Parcel 0005 and owner of Parcel 0004. The Equitable lease provided, among other things, that Dayton's would construct a new multi-level department store at the Rosedale Mall, and would receive leasehold rights to the exclusive use of the lower level of Parcel 0005 provided that the space is used “solely for an integrated part of the operation of tenant's department store.” The Equitable lease gave the new Dayton's department store on Parcel 0004 an additional 45,435 square feet of contiguous administrative/retail space on Parcel 0005. Eventually, the Equitable lease was assigned to Federated in accordance with its terms. Thus, Federated, as the current owner of Parcel 0004, has a long-term leasehold interest in the basement space of Parcel 0005, provided that the space is integrated into and operated as part of the department store on Parcel 0004.

The County Assessor determined that the fair market value for Parcel 0004 was $17,000,000 for the January 2, 2006, and January 2, 2007, tax assessment dates, which included the value of Federated's leasehold interest in Parcel 0005. Federated filed appeals for both tax years.

At trial, Federated and the County presented appraisal testimony.⁵ Federated's appraiser, Daniel T. Boris, presented an appraisal report that valued Parcel 0004 for the 2006 and 2007 assessments. He relied upon the market data and income approaches to determine the fair market value, but did not use the cost approach because he concluded it was not a reliable indicator of value due to the age of the building and its economic obsolescence in the marketplace. Boris concluded that the fair market value of Parcel 0004 was $12,600,000 as of January 2, 2006, and $13,700,000 as of January 2, 2007. Boris did not include any contributory value of leasehold rights for Parcel 0005 on the basis that the County Assessor had not consolidated the two parcels, and therefore it was not appropriate to transfer value from Parcel 0005 to Parcel 0004.

The County's appraiser, Dwight W. Dahlen, presented an appraisal report that valued Parcel 0004 at $19,465,000 for the 2006 and 2007 assessment dates. Dahlen testified that the most relevant approaches to valuation were the income capitalization approach and the direct sales comparison approach. Dahlen used a wider variety of regional department stores in the comparison approach than Boris, and testified that the tax parcel included the parts of Parcel 0005 that were part of the Macy's department store. Dahlen testified that since 1991 the leased basement space contained within Parcel 0005 had been included by the County as part of the value of Parcel 0004. Dahlen relied in part on a handwritten pencil notation concerning the leased basement space contained on the assessor's field card, which states: “division 63660 processed—new Dayton's and basement of old Dayton's on this description parcel 0004,” as evidence that Parcel 0004 and Parcel 0005 were to be considered together for purposes of the valuation of Parcel 0004.

In its post-trial brief, Federated argued that any valuation of Parcel 0004 that included the value of the leasehold interest in Parcel 0005 was not within the subject-matter jurisdiction of the tax court. Federated also argued that Dahlen's decision to include the leasehold value of Parcel 0005 in assessing Parcel 0004 was improper because no steps had been taken to consolidate Parcel 0004 and Parcel 0005 for tax purposes. The County responded that the value of the leasehold interest in Parcel 0005 was properly included in the valuation of Parcel 0004 because it added value to Parcel 0004 on appeal. The County also argued that the value of leasehold rights in Parcel 0005 satisfied the definition of real property in Minn.Stat. § 272.03, subd. 1.

The tax court filed findings of fact, conclusions of law, and an order concluding that the fair market value of the tax parcel was $14,894,830 and $15,245,024 for the January 2, 2006, and January 2, 2007, assessment dates, respectively. The tax court found that Federated's ownership interest in Parcel 0004 included its leasehold interest in Parcel 0005. Specifically, Federated was entitled to

rent-free use of approximately 45,436 square feet of store area located within an adjoining plat, which includes a first and second floor area of in-line retail shops and enclosed Rosedale Center Mall commons area. This area is currently subject to a year lease subject to renewals for up to 99 years and includes some Macy's administrative office area.

Federated Retail Holdings, Inc. v. Cnty. of Ramsey, Nos. 62–CV–08–5061, C0–07–4069, 2011 WL 3821296, at *1 (Minn. T.C. Aug. 23, 2011).

The tax court concluded, however, that the value of Federated's leasehold rights in Parcel 0005 was not subject to the jurisdiction of the tax court because no steps had been taken to follow the statutory process for consolidating the two tax parcels and the petition only referenced Parcel 0004. Id. at *4–5. Thus, the tax court concluded that the County's assessment should not include the value of the leased basement space in Parcel 0005.

Federated moved for amended findings of fact and conclusions of law, arguing that the tax court had erroneously included the square footage of the leased basement space in Parcel 0005 in reaching a value for Parcel 0004. The tax court granted Federated's motion and reduced the square footage of the building area for the tax parcel from 259,453 to 214,017 square feet to exclude Parcel 0005's square footage, and reduced Parcel 0004's valuation to $10,590,888 for January 2, 2006, and to $12,575,281 for January 2, 2007. This certiorari appeal followed.

I.

On appeal, the parties raise two issues. First, whether the tax court has subject-matter jurisdiction to consider the value of a leasehold interest in real property located adjacent to the tax parcel on appeal. Second, whether Federated's leasehold interest in Parcel 0005 should be included in the determination of the fair market value of Parcel 0004 pursuant to Minn.Stat. § 272.03, subd. 1. We first address...