Kohl's Department Stores, Inc. v. County of Washington, 82-CV-08-2738

Decision Date27 June 2012
Docket Number82-CV-08-2738,82-CV-10-2155,82-CV-09-2582
CourtTax Court of Minnesota

Heard April 24, 2012.

Submitted April 30, 2012

The Honorable George W. Perez, Chief Judge of the Minnesota Tax Court, heard this matter on April 24, 2012, at the Minnesota Judicial Center, St. Paul, Minnesota.

Thomas R. Wilhelmy, Attorney at Law, represented the Petitioner.

James Zuleger, Assistant Washington County Attorney, represented the Respondent.

This matter was submitted to the Court for decision on April 30 2012.

The Court, having heard and considered the evidence adduced at the hearing, and upon all of the files, records and proceedings herein, now makes the following:


Petitioner's Motion for Amended Findings of Fact is granted in part:

1) We allow a decrease of $12, 306 in estimated gross income accounting for 2.2% of the Subject Property's estimated gross income.
2) We affirm our Decision in all other respects.
3) Annual net operating income in 2007, 2008, and 2009 is decreased from $502, 224 to $490, 779. The capitalization rate remains the same from the original decision, at 8% in 2007 and 2008, and 8.5% in 2009. We apply the capitalization rate of 8% to $490, 779 and add $700, 000 for the Culver's Outlot, [1] arriving at an amended indicated value of $6, 834, 700 (rounded) for 2007 and 2008, and apply the capitalization rate of 8.5% to $490, 779, arriving at an amended indicated value of $5, 773, 900 (rounded) for 2009. In addition, we reduce the 2009 market value of $5, 773, 900 by 5.4% to account for previously determined unequal assessment relief, arriving at a taxable value of $5, 462 100 (rounded).



GEORGE W. PEREZ, Chief Judge.


This case involves the valuation of the Kohl's Department Stores, Inc. (Petitioner), located at 7990 Hardwood Avenue South, Cottage Grove, Minnesota (“Subject Property”), for January 2, 2007 January 2, 2008, and January 2, 2009. In our Decision of March 16, 2012, we found: 1) the assessor's estimated market value for the Subject Property as of January 2, 2007 shall be increased on the books and records of Washington County from $6, 322, 200 to $6, 977, 800; 2) the assessor's estimated market value for the Subject Property as of January 2, 2008, shall be increased on the books and records of Washington County from $6, 455, 300 to $6, 977, 800; and 3) the assessor's estimated market value for the Subject Property as of January 2, 2009, shall be decreased on the books and records of Washington County from $6, 455, 300 to $5, 908, 500. In addition, we found that the Subject Property is entitled to a reduction of 5.4% to its market value of $5, 908, 500 for January 2, 2009, in accordance with Minn.Stat. § 278.05, subd. 4, for a taxable value of $5, 589, 441.

Petitioner brings this Motion for amended findings of fact, conclusions of law, or a new trial in response to our Decision. Petitioner does not enumerate any findings of fact to be amended, rather, restates four arguments submitted in its post-trial briefs.

For the reasons set forth below, we make a downward adjustment to the estimated gross income (“EGI”) of the Subject Property under the income approach and affirm our Decision in all other respects. We address each argument in turn.

Operating Expenses

First, Petitioner maintains that this Court, under the income approach, deducted for both vacancy and collection losses, and management fees and reserves, but not for “other expenses”-specifically operating expenses pertaining to periods of vacancy. We agree. Both Petitioner and Respondent agree the vacancy rate of the Subject Property is 5%.[2] Respondent's expert made an estimate on operating expenses on the vacant portion of the building at 2.22% of EGI.[3] The EGI is $554, 331 for each of the three assessment years, so 2.22% is $12, 306 for each assessment year. Therefore, the EGI for each assessment year is reduced by $12, 306 to $542, 025.

We then determine net operating income (“NOI”) by subtracting vacancy and collection rates, management fees and reserves for replacement from the EGI. The parties agreed to a vacancy and collection rate of 5%, management fees of 2%, and reserves for replacement of $0.15 per square foot.[4] We, therefore, subtract $27, 101 for vacancy and collection loss, $10, 841 for management fees, and $13, 304 for replacement reserves. We thus arrive at a NOI of $490, 779 for 2007, 2008, and 2009.

Capitalization Rate Adjustment for Vacant Space

Second, Petitioner requests reconsideration of the capitalization rate (“cap rate”) determined in the original decision, asking that the cap rate be increased, or “loaded, ” in order to reflect property taxes paid during periods of vacancy. In considering both experts' cap comparables, we arrived at a cap rate that included the property tax rate. Thus, we find a change in the cap rate is not warranted.

Market Rent Rates

Third, Petitioner re-states its argument from post-trial briefs that the market rent rate be based on a percentage of store retail sales, rather than rent comparables. Respondent counters that the market rent rate was properly determined based on both experts' rent comparables, and that the concept that non-reliance on “percentage of retail sales” method is not contrary to law. We agree with Respondent. We, therefore, do not give any weight to the percentage of store retail sales method.

Petitioner also re-argues that Kohl's Oak Park Heights, Kohl's Burnsville, and Kohl's Woodbury should not be used as rent comparables. Respondent counters that the three rent comparables were verified by its expert and are reflective of the market, and that the Court's conclusion to give weight to these rent comparables is supported by the record and not contrary to law. We agree.

Capitalization Rate Adjustment for Risk

Fourth, Petitioner requests we make an upward adjustment to the cap rate to reflect the risk in having a single-tenant property, rather than multi-tenant properties, as a tenant failure causes the occupancy rate to immediately go from 100% to 0%. We made an upward adjustment to the cap rate due to the risk of the single-tenant nature of the Subject Property, having written, [s]ince the Subject Property is...

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