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

• Decision Date: 09 March 1987
• Docket Number: Docket No. 76133
• Citation: 401 N.W.2d 620,156 Mich.App. 238
• Parties: MEADOWLANES LIMITED DIVIDEND HOUSING ASSOCIATION, Petitioner-Appellee, v. CITY OF HOLLAND, Respondent-Appellant. 156 Mich.App. 238, 401 N.W.2d 620
• Court: Court of Appeal of Michigan — District of US

Page 620

401 N.W.2d 620

MEADOWLANES LIMITED DIVIDEND HOUSING ASSOCIATION Petitioner-Appellee, v. CITY OF HOLLAND, Respondent-Appellant.

Docket No. 76133.

156 Mich.App. 238, 401 N.W.2d 620

Court of Appeals of Michigan.

Submitted May 7, 1985.

Decided Oct. 16, 1986.

Leave to Appeal Denied Feb. 23, 1987.

Released for Publication March 9, 1987.

[156 MICHAPP 239] Loomis, Ewert, Ederer, Parsley, Davis & Gotting by Kenneth W. Beall, Lansing, for petitioner-appellee.

Cunningham, Mulder & Breese, P.C. by Andrew J. Mulder, Holland, for respondent-appellant.

Before SHEPHERD, P.J., and MAHER and PETERSON, ^* JJ.

PER CURIAM

Respondent, City of Holland, appeals as of right from a January 6, 1984, opinion and judgment of the Michigan Tax Tribunal in a controversy over assessments for the years 1981, 1982 and 1983 on a 118-unit apartment project owned by petitioner, Meadowlanes Limited Dividend Housing Association, and located in Holland, Michigan.

Petitioner purchased the apartment project in March, 1973, by paying the original developer, the Holland Zeeland Area Nonprofit Housing Association, $31,532 in cash, assuming the housing authority's[156 MICHAPP 240] $2,232,000 mortgage and placing about $400,000 into reserve accounts in escrow.

The mortgage was obtained through the Michigan State Housing Development Authority (MSHDA). It was subject to federal regulation as part of a section 236 program under the National Housing Act, 12 U.S.C. Sec. 1715z-1, and a section 8 program under the United States Housing Act of 1937, 42 U.S.C. Sec. 1437f. Those programs are designed to assist developers in constructing housing for low income families. Under the programs, the Department of Housing and Urban Development (HUD) subsidizes the mortgage by paying interest over one percent. In this case, although the interest rate was 6.35 percent, petitioner paid only one percent, HUD subsidizing 5.35 percent as an interest reduction payment under 12 U.S.C. Sec. 1715z-1(c). In return for the subsidy, federal regulations limit the maximum return on plaintiff's investment to not more than six percent. Moreover, rents charged by petitioner are regulated by a prescribed formula. Other restrictions also apply.

In 1981 petitioner disputed its real property tax assessment but was denied a review or reduction of the assessment by the city. On June 26, 1981, petitioner petitioned the tribunal to review and reduce the 1981 assessment. Later, petitioner amended its petition to seek review and reduction of the 1982 and 1983 assessments. The assessed values on the rolls for 1981 through 1983 were:

Tabular or graphic material set at this point is not displayable.

At the August 8, 1983 tribunal hearing, respondent, City of Holland, presented the testimony of [156 MICHAPP 241] appraiser Richard Cherney, who had analyzed the true cash value of Meadowlanes pursuant to cost, income and market approaches. In making his appraisal, Cherney deviated from the city's original valuation and based his final valuation on his determination that subsidized housing projects in general sell for approximately 124 percent of the mortgage balance. Under this methodology, according to Cherney, the true cash value of the property in question was $3,104,992 for 1981, $3,076,258 for 1982, and $3,045,697 for 1983, based upon the mortgage balance that existed during each of those years.

Petitioner presented the testimony of appraiser Laurence Allen who advocated what he termed an "income approach ... using the mortgage equity method." Under this method, Allen testified that the true cash value of Meadowlanes could be determined by computing the present cash value of the mortgage assumed by petitioner, the present cash value of petitioner's equity in the land determined by calculating the value of the cash flow, the present cash value of the property as a tax shelter and the present cash value of the reversions. The sum of those figures constituted the true cash value of the property. Using Allen's analysis, Meadowlanes contended that the true cash value of the apartment complex was $860,000 for 1981, $1,000,000 for 1982, and $1,100,000 for 1983.

The tribunal accepted petitioner's appraisal method and adopted true cash values as follows:

[156 MICHAPP 242]

The city raises four issues on appeal.

I

The city contends that the tribunal judge improperly allocated the burden of proof between the parties, resulting in an improper review of the evidence at trial. Therefore, the city says, the case should be remanded to the tribunal for a new trial or review of the evidence under the proper statutory evidentiary standard.

At trial, the city contended that the assessments imposed upon petitioner for years 1981 through 1983 were erroneous because they were below the normal fifty percent assessment rate. Hence, the city offered no proof to support the original assessments but only evidence to show that they were erroneous. In its post-trial brief respondent claimed that the burden of proof was upon petitioner to establish the true cash value of its property. The tribunal judge, however, in her opinion and judgment stated that the burden of proof fell equally upon the parties since respondent did not offer any proof to support the original assessments but rather sought to have the tribunal increase them.

M.C.L. Sec. 205.737(3); M.S.A. Sec. 7.650(37)(3) provides that the burden of proving the true cash value of the property in question in all tax assessment cases is upon the petitioner. However, this case differs from the typical case since the city also disputed the original assessments even though it did not file a cross-petition. If the city had filed a cross-petition to have the tax assessments raised, it would have been a petitioner just like Meadowlanes and [156 MICHAPP 243] would have had the burden of proving that the true cash value of the apartment project was higher than its original valuations. However, because respondent did not file a cross petition, it was not a petitioner. Hence, the question arises whether the city should have been allocated an equal portion of the burden of proof.

The cases cited by respondent are distinguishable since in those cases the assessing agencies did not dispute the original assessments. Rather, the assessing agencies argued that their original tax assessments were entirely appropriate. See Ahli Development Co. v. Orion Twp, 110 Mich.App. 764, 314 N.W.2d 479 (1981); Consolidated Aluminum Corp, Inc. v. Richmond Twp, 88 Mich.App. 229, 276 N.W.2d 566 (1979). Therefore, since this case is distinguishable from the typical case and because respondent attempted to establish a new cash value for the property, it was appropriate for the tribunal judge to place the burden of proof upon respondent to at least establish that the original assessments were too low. Moreover, the tribunal judge found that petitioner's theory was acceptable and "the best indication" of the value of its property. The tribunal judge found that petitioner met its burden of proof to establish the true cash value of its property. Therefore, any error she may have made in allocating the burden of proof was harmless. MCR 2.613(A).

II

The city argues that the tribunal judge committed reversible error by adopting petitioner's variant valuation approach because it is not reasonably accurate and was not supported by proof of comparable sales to establish fair market value.

Petitioner's appraiser asserted, and the Tax Tribunal[156 MICHAPP 244] accepted and adopted, a variation of the traditional approaches to valuation. The approach values the subject property by computing two components: 1) the equity component; and 2) the mortgage component.

The equity component is obtained by determining three figures. First, the present value of the project's cash flow in the form of distributions to the owners is computed. Second, the tax shelter value to the investor is determined. Finally, the negative impact of federal income tax recaptures rules is established and subtracted from the sum of the cash flow and tax shelter components. The addition of these three figures establishes the equity component.

The second component, the mortgage component, is essentially derived by determining the amount of money a prospective purchaser would need to invest as of each tax date in order to produce enough income to pay off the mortgage according to its terms. Once the mortgage component is established it is added to the equity component to determine the true cash value of the property.

Applying the above methodology to the subject property, petitioner's expert found for the year 1983:

Tabular or graphic material set at this point is not displayable.

In addition, petitioner's appraiser determined that the present value of the $2,456,207 mortgage was approximately $660,000, based upon the price at which a purchaser of the mortgagee's interest would buy the one percent subsidized mortgage. The addition of the equity component ($444,320) [156 MICHAPP 245] and the mortgage component ($660,000) resulted in a true cash value rounded off to $1,100,000.

This Court's review of decisions of the Tax Tribunal, in the absence of fraud, is limited to determining whether the tribunal made an error of law or adopted a wrong principle; the factual findings of the tribunal are final, provided they are supported by competent and substantial evidence. Antisdale v. City of Galesburg, 420 Mich. 265, 277, 362 N.W.2d 632 (1984).

Const. 1963, art. 9, Sec. 3, requires the Legislature to provide for a determination of true cash value of property that is subject to uniform general ad valorem taxation. The Legislature carried out that constitutional command by enacting M.C.L. Sec. 211.27; M.S.A. Sec. 7.27, which provides that the term "cash value" means the usual selling price at the place where the subject property is at the time of assessment. As a result of that broad definition of true cash value, the duty to...