Meadowlanes Ltd. Dividend Housing Ass'n v. City of Holland

Decision Date01 October 1990
Docket NumberNo. 9,Docket No. 86122,9
Citation473 N.W.2d 636,437 Mich. 473
PartiesMEADOWLANES LIMITED DIVIDEND HOUSING ASSOCIATION, Petitioner-Appellant, v. CITY OF HOLLAND, Respondent-Appellee. Calendar,
CourtMichigan Supreme Court
Concurring Opinion of Justice Levin July 17, 1991.

Rehearing Denied Sept. 17, 1991.

Kenneth W. Beall, Norman C. Witte, Loomis, Ewert, Ederer, Parsley, Davis & Gotting, Lansing, for petitioner-appellant.

Andrew J. Mulder, Cunningham, Mulder & Breese, Holland, Peter S. Sheldon, Jeffery V. Stuckey, Kim D. Crooks, Dickinson, Wright, Moon, Van Dusen & Freeman, Lansing, for respondent-appellee, City of Holland.

Thomas J. Beale, Frederick M. Baker, Jr., Honigman, Miller, Schwartz and Cohn, Detroit, for amici curiae, Congresshills Apartments, Builders Ass'n of Southeastern Michigan and Apartment Ass'n of Michigan.

Richard D. Reed, Patricia Mason, Early, Lennon, Fox, Thompson, Peters & Crocker, Kalamazoo, for amicus curiae, Michigan Townships Ass'n and Michigan Mun. League.

BOYLE, Justice.

This is a dispute over the assessed value of Meadowlanes Limited Dividend Housing Association's federally subsidized low-income housing complex. The issue before the Court is whether the Michigan Tax Tribunal properly computed the true cash value of petitioner's property for the purposes of assessing ad valorem taxes for the years 1981, 1982, and 1983. We hold that although it is proper for the Michigan Tax Tribunal to take into account the value, if any, of a federal government mortgage subsidy, the tribunal and the Court of Appeals adopted a wrong principle by determining the true cash value of the subject real property under a flawed appraisal method. Thus, we reverse the decisions of the Tax Tribunal and the Court of Appeals and remand this case to the Tax Tribunal for redetermination of the true cash value of Meadowlanes' real property consistent with this opinion.

I
A. Background and Facts

This appeal originated with petitioner-appellant' challenge to the real property tax assessments imposed by the City of Holland on its 22-building, 118-unit, federally subsidized housing complex for the tax years 1981 through 1983. 1

In 1973, Meadowlanes purchased the housing complex from its original developer, Holland-Zeeland Area Nonprofit Housing Association. It paid $31,532 in cash, contributed $400,000 in equity into reserve accounts, and assumed the complex's underlying mortgage with the Michigan State Housing Development Authority (MSHDA), which carried a 6.35 percent interest rate and had a balance of $2,232,537. MSHDA also approved a $400,000 increase in the mortgage amount so Meadowlanes would have additional funds to correct prior construction defects. Thus, Meadowlanes' total mortgage indebtedness at the time of purchase was $2,624,500.

The Meadowlanes housing complex was financed, built, and operates under Sec. 236 of the National Housing Act, 12 U.S.C. Sec. 1715z-1; 24 CFR 236.1 et seq. It also receives a rental assistance subsidy under Sec. 8 of the United States Housing Act of 1937, 42 U.S.C. Sec. 1437f, for some of its units. 2 The rent subsidies are not at issue in this appeal. Both of these programs were designed to induce and assist developers in constructing and operating quality housing for low- and moderate-income families.

In return for various benefits, the property owner voluntarily entered into a regulatory agreement which subjects it to federal regulations and restrictions which include (1) a maximum return of six percent on initial equity investment in the property, 3 and (2) rent 4 and operating restrictions. 5 The Meadowlanes property is also subject to MSHDA regulations because it is financed with a MSHDA mortgage.

The benefits that accrue to the owner of a Sec. 236 property include: (1) federal mortgage insurance of a private, long-term (forty-year) mortgage loan in an amount not in excess of ninety percent of the FHA-determined certified cost of the project, 6 and (2) monthly interest reduction payments made by HUD directly to the private mortgagee-lender on behalf of the mortgagor-owner for all interest due under the mortgage in excess of one percent (the "interest subsidy"). 7 12 U.S.C. Sec. 1715z-1(c). The Internal Revenue Code was also amended to provide several tax benefits. 8

B. Proceedings

Meadowlanes filed a petition with the Michigan Tax Tribunal, challenging the City of Holland's assessment of the value of its housing complex for the tax years 1981 through 1983. Following an evidentiary hearing, the Michigan Tax Tribunal issued its opinion and judgment which determined that the true cash value of the property was $800,000 for 1981, $1,000,000 for 1982, and $1,100,000 for 1983. 9 In reaching its decision, the tribunal approved the valuation approach utilized by Meadowlanes' appraiser, Laurence Allen, and adopted his final estimates of true cash value for the years at issue. Allen described his valuation approach as a variant of the traditional income approach using a "mortgage/equity" component formula.

The city appealed the Tax Tribunal's 1984 decision raising four issues. 10 The Court of Appeals rejected the city's first three arguments, but reversed on the fourth, and remanded the case to the tribunal for reconsideration and directed it to "take into account the value, if any, of the 5.35 percent mortgage interest subsidy." 156 Mich.App. 238, 252, 401 N.W.2d 620 (1986) (Meadowlanes I ).

This Court denied Meadowlanes' application for leave to appeal from Meadowlanes I stating: "The Court [is] not persuaded that the questions presented should now be reviewed...." 428 Mich. 866 (1987).

On remand, the Tax Tribunal issued a supplementary judgment which once again adopted Meadowlanes' appraiser's mortgage/equity component method, but recomputed the value of the mortgage component to include, rather than exclude, the value of the Sec. 236 interest subsidy. 11 Thus, the tribunal determined that the true cash value of the subject real property was $1,600,000 in 1981, $1,800,000 in 1982, and $1,900,000 in 1983. 12

The Tax Tribunal denied the parties' motions to vacate the supplementary judgment and their motions for rehearing. Both parties then appealed in the Court of Appeals. 13 The Court of Appeals affirmed the tribunal's supplementary judgment on remand. 14

This Court granted Meadowlanes' application for leave to appeal from the Court of Appeals decision after remand in 176 Mich.App. 536, 440 N.W.2d 71 (1989) (Meadowlanes II ), "[l]imited to the issue whether, in computing the true cash value of real property, the Michigan Tax Tribunal may take into account the value, if any, of a federal government mortgage subsidy." 434 Mich. 900, 453 N.W.2d 541 (1990).

II

This case presents issues similar to those addressed by this Court in Antisdale v. City of Galesburg, 420 Mich. 265, 362 N.W.2d 632 (1984). Once again we must evaluate the ad valorem taxation of a federally subsidized housing complex. Before we can address the issue on which leave was granted, we must first evaluate the valuation method adopted by the Tax Tribunal and the Court of Appeals. 15 This approach deviates from the three traditional approaches to valuation of real property and is proper only if it is accurate and is reasonably related to the fair-market value, or true cash value, of the subject real property. Safran Printing Co. v. Detroit, 88 Mich.App. 376, 380, 276 N.W.2d 602 (1979); Presque Isle Harbor Water Co. v. Presque Isle Twp., 130 Mich.App. 182, 190, 344 N.W.2d 285 (1983).

After we analyze the appropriateness of the valuation approach, we must determine whether, in computing the true cash value of real property, the Tax Tribunal may rely on an approach that takes into account the value, if any, of a federal government mortgage subsidy.

A. Appellate Scope of Review

We begin by acknowledging that appellate review of Tax Tribunal decisions, as set forth in Const. 1963, art. 6, Sec. 28, is limited. All factual findings are final if supported by competent and substantial evidence. When fraud is not alleged, appellate courts are limited to determining whether the tribunal made an error of law or adopted a wrong principle. Antisdale, supra 420 Mich. at 277, 362 N.W.2d 632. Our review here addresses whether the tribunal committed an error of law or adopted a wrong principle by accepting a method of valuation which deviates from the three traditional approaches to value and whether it adopted a wrong principle when it adopted a valuation approach which values the interest reduction subsidy under a Sec. 236 property.

B. Applicable Valuation Principles

The basic principles of valuation apply to the assessment of value of federally subsidized housing complexes in the same manner as they apply to all other real property. In this case, as in all other appeals from the Tax Tribunal, the fundamental principles concerning ad valorem taxation set out in art. 9, Sec. 3 of the Michigan Constitution provide the appropriate analytical framework. 16 This section mandates: (1) that the Legislature is to provide a uniform system of real property taxation, (2) that the tax must be assessed on the basis of the true cash value of the property, and (3) that the Legislature is to provide a determination of true cash value.

The Legislature complied with this constitutional mandate by enacting M.C.L. Sec. 211.27(1); M.S.A. Sec. 7.27(1), which provides in pertinent part:

" '[C]ash value' means the usual selling price at the place where the property to which the term applied is at the time of assessment, being the price which could be obtained for the property at private sale, and not at auction sale.... 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...." (Emphasis added.)

As evidenced above, the Legislature has provided...

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