Lowe's Home Ctrs., LLC v. Cnty. of Hennepin, A19-0428

• Decision Date: 29 January 2020
• Docket Number: A19-0428
• Citation: 938 N.W.2d 48
• Parties: LOWE’S HOME CENTERS, LLC (PLYMOUTH), Relator, v. COUNTY OF HENNEPIN, Respondent.
• Court: Minnesota Supreme Court

938 N.W.2d 48

LOWE’S HOME CENTERS, LLC (PLYMOUTH), Relator,

v.COUNTY OF HENNEPIN, Respondent.

A19-0428

Supreme Court of Minnesota.

Filed: January 29, 2020

Thomas R. Wilhelmy, Judy S. Engel, Gauri S. Samant, Fredrikson & Byron, P.A., Minneapolis, Minnesota, for relator.

Michael O. Freeman, Hennepin County Attorney, Thomas F. Pursell, Deborah L. Russell, Assistant County Attorneys, Minneapolis, Minnesota, for respondent.

Mark R. Bradford, Edward F. Fox, Bassford Remele, P.A., Minneapolis, Minnesota, for amicus curiae Alliance Property Consultants, Inc.

Eric J. Magnuson, Robins Kaplan LLP, Minneapolis, Minnesota, for amicus curiae USAPTA, Inc.

Considered and decided by the court without oral argument.

OPINION

HUDSON, Justice.

This appeal involves the contested value of a Lowe’s store in Plymouth, Minnesota ("the subject property"). Relator Lowe’s Home Centers, LLC petitioned the tax court, asserting that Hennepin County’s assessment for the 2015 tax year—$11,755,000—overstated the fair market value of the subject property. The tax court agreed in part with Lowe’s, reducing the County’s valuation to $10,507,000 for the 2015 tax year. Lowe’s appeals that decision, arguing that the tax court clearly erred because it inflated the property’s fair market value by 1) primarily relying on the cost approach over the sales approach and 2) improperly applying adjustments to the comparable properties considered under both approaches. Lowe’s argues further that the tax court violated its due process rights by failing to rely on evidence in the record in reaching its conclusions. We conclude that the record supports 1) the tax court’s decision to place greater weight on the cost approach rather than on the sales approach and 2) its adjustments under both approaches. Accordingly, the tax court did not violate the due process rights of Lowe’s. We therefore affirm the tax court’s decision.

FACTS

The subject property comprises 12.89 acres—on which Lowe’s built a retail store and lawn and garden center in 2005—located at 3205 Vicksburg Lane North in Plymouth, Minnesota. Hennepin County assessed the property’s market value as of January 2, 2015, at $11,775,000. Lowe’s appealed to the tax court and retained Michael S. MaRous as its expert. MaRous estimated that the property’s fair market value for 2015 was $5,350,000. The County’s expert, Brett Hall, estimated that it was $11,950,000. Both parties’ experts considered all three valuation approaches—sales, cost, and income—to reach an estimate of fair market value. Both experts gave little to no weight to the income approach,¹ and determined that the subject’s highest and best use as improved was as a continued big-box retail property.

The experts disagreed on how to apportion weight between the sales approach and the cost approach. MaRous placed greater weight on the sales approach. Applying that approach, he relied on nine sales of comparable retail properties and adjusted their sales prices to account for age, size, location, date of sale, and other factors. Based on these sales and on his adjustments, MaRous concluded that the sales approach supported an estimated market value of $5,350,000 for the 2015 tax year. Hall, in contrast, relied on the cost approach, testifying that a big-box owner generally acquires land and builds a new store. After making adjustments for improvements and depreciation, Hall concluded that the cost approach supported an estimated market value of $11,950,000 for the 2015 tax year.

Beginning with the sales approach, the tax court rejected several of the experts’ comparable sales properties but ultimately relied on three: Walmart–Blaine, Lowe’s–Rogers, and Lowe’s–Cambridge. The tax court then adjusted the sales price for each comparable to account for the impact of deed restrictions, the date of sale, the age of improvements, and the combined impacts of traffic and location. These adjustments produced a market value estimate of $7,658,000 for the 2015 tax year.

The tax court then turned to the cost approach to determine an estimated fair market value based on the price a buyer would pay to construct new property with the same features as the subject property. The parties identified several commercial land sales, most of which the tax court rejected based on dissimilarities in size, use, or location. The tax court relied on three of the experts’ comparables for its cost approach analysis: Hy-Vee–Robbinsdale, Hy-Vee–New Hope, and Cabela’s–Woodbury. Using each comparable property’s land values, the tax court placed 70-percent weight on the Cabela’s–Woodbury property and 15-percent weight on the other comparable properties because they had less favorable locations. These calculations resulted in a weighted average price of $11.50 per square foot. The tax court then determined the value of the subject property’s improvements. It adopted MaRous’s calculation of $8,355,516. The last step in the cost approach requires the tax court to subtract the property’s depreciation. The tax court found that the subject property’s depreciation was $1,503,993, that its functional obsolescence was $2,500,000, and that it experienced no external obsolescence.

Considering the usefulness of these approaches and the quality of the data used to make these adjustments, the tax court applied 25-percent weight to the sales approach and 75-percent weight to the cost approach. It then concluded that the subject property’s 2015 fair market value was $10,507,000.

Lowe’s appeals on three issues. First, it asserts that the tax court erred in applying predominant weight to the cost approach. Second, it contends that the tax court erroneously calculated the adjustments under both approaches. Finally, Lowe’s argues that the tax court’s decision violated its right to due process.

ANALYSIS

We review the tax court’s market value determinations for clear error. Equitable Life Assurance Soc'y of the U.S. v. Cty. of Ramsey , 530 N.W.2d 544, 552 (Minn. 1995). "The tax court’s decision should be considered clearly erroneous only when this court is left with a ‘definite and firm conviction that a mistake has been committed’[.]" Id. (quoting Westling v. Cty. of Mille Lacs , 512 N.W.2d 863, 866 (Minn. 1994) ). The imprecision of market value determinations justifies our deference "unless the tax court has either clearly overvalued or undervalued the subject property, or has completely failed to explain its reasoning."

Harold Chevrolet, Inc. v. Cty. of Hennepin , 526 N.W.2d 54, 58 (Minn. 1995). The tax court must determine the experts’ credibility and weigh their testimony accordingly in determining market value. Menard, Inc. v. Cty. of Clay , 886 N.W.2d 804, 813 (Minn. 2016). We review the legal questions, such as the due process challenge, de novo. Equitable Life , 530 N.W.2d at 552.

I.

We turn first to whether the tax court erred in placing 75-percent weight on the cost approach compared to a 25-percent weight on the sales approach in determining market value. Minnesota Statutes § 273.11, subd. 1 (2018), states that "all property shall be valued at its market value." Market value refers to a property’s expected price in a private sale. Menard, Inc. , 886 N.W.2d at 819. We have consistently affirmed three approaches to determining market value—sales, cost, and income. Id. at 813, 819. Using the sales approach, an appraiser values property "based on the price paid in actual market transactions of comparable properties" after adjusting for "differences between the sold property and the subject property." Cont'l Retail, LLC v. Cty. of Hennepin , 801 N.W.2d 395, 402 (Minn. 2011). Using the cost approach, in contrast, an appraiser "determines the current cost of constructing the existing improvements on the property, subtracts depreciation to determine the current value of the improvements, and then adds the value of the land to determine the market value." Id.

Because each approach has strengths and weaknesses, we have encouraged the tax court to use at least two approaches to "serve as checks on each other." Menard, Inc. , 886 N.W.2d at 819. "[T]he weight placed on each approach depends on the facts of each case." Cont'l Retail, LLC , 801 N.W.2d at 402. The tax court discerns not only which approaches to apply, but also how to weigh each approach against the others based "on the quantity and quality of available data." KCP Hastings, LLC v. Cty. of Dakota , 868 N.W.2d 268, 275 (Minn. 2015) (citation omitted) (internal quotation marks omitted).

Lowe’s argues that the tax court erred in placing primary reliance on the cost approach, because only the sales approach accurately captures the fair market value of its property. It asserts that, because market participants do not rely on the cost approach in a private sale, the tax court, by favoring this approach so heavily, violated Minn. Stat. § 272.03, subd. 8 (2018) (defining the market value as "the usual selling price ... which could be obtained at a private sale"). Lowe’s argues further that the age of its building—9 years old—makes the cost approach particularly ill-suited for its property. See Guardian Energy, LLC v. Cty. of Waseca , 868 N.W.2d 253, 262 (Minn. 2015) (noting that the cost approach is best applied when "the improvements are new or suffer only minor depreciation" (quoting Cont'l Retail, LLC , 801 N.W.2d at 403 )).

The County disagrees, asserting that the cost approach is the most reliable method for the property because big-box stores in good retail locations do not sell often; thus, the sales approach is a less reliable indicator in this case of the subject property’s fair market value.²

We rejected the sales-approach-only argument as applied to a big-box retail property in Menard, Inc. 886 N.W.2d at 819–21. There, Menard appealed the assessments for four tax years. Id. at 809. The tax court applied 60-percent weight to the cost approach and 40-percent weight to the sales approach for the first two assessment years, and then equal weight in the last two...