Medline Indus., Inc. v. Cnty. of Hennepin, A19-1420

• Decision Date: 01 April 2020
• Docket Number: A19-1420
• Citation: 941 N.W.2d 127
• Parties: MEDLINE INDUSTRIES, INC., Relator, v. COUNTY OF HENNEPIN, Respondent.
• Court: Minnesota Supreme Court

941 N.W.2d 127

MEDLINE INDUSTRIES, INC., Relator,

v.COUNTY OF HENNEPIN, Respondent.

A19-1420

Supreme Court of Minnesota.

Filed: April 1, 2020

Grover C. Sayre, III, Thomas C. Atmore, Jordan W. Sayre, Leonard, O’Brien, Spencer, Gale & Sayre, Ltd., Minneapolis, Minnesota, for relator.

Michael O. Freeman, Hennepin County Attorney, Sara Bruggeman, John March, Assistant County Attorneys, Minneapolis, Minnesota, for respondent.

Considered and decided by the court without oral argument.

OPINION

LILLEHAUG, Justice.

This case is about the market value of a distribution-warehouse property in Rogers, Minnesota. Medline Industries asserts that, in valuing the property, the tax court erred in four ways. We affirm.

FACTS

Medline owns a 300,000-square-foot warehouse on a 915,000-square-foot site in Rogers (the Property) that is used to distribute medical supplies. Hennepin County assessed the Property to be worth $15,912,000 in each of tax years 2014 and 2015 (for taxes payable in 2015 and 2016). Medline timely filed petitions with the tax court to challenge the assessments. The tax court consolidated the two petitions into one case.

At trial, the tax court received into evidence the appraisal reports prepared by the parties’ experts. Medline’s main appraisal was prepared by Paul Bakken. The County’s main appraisal was prepared by Joseph Mako. After receiving all testimony and exhibits, the tax court concluded that the County’s valuation in 2014 and 2015 was overstated, by $274,000 in 2014, and by $315,000 in 2015.

In its memorandum, the tax court first addressed the highest and best use of the Property. The parties agreed that, in general, the highest and best use was continued use as a distribution warehouse. The tax court, however, rejected the County’s position that the highest and best use was as a multi-tenant facility.

The tax court then turned to the market valuation. The tax court considered the three traditional approaches to determine market value: the cost approach, the sales-comparison approach, and the income approach.

Under the cost approach, "the 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." Cont'l Retail, LLC v. Cty. of Hennepin , 801 N.W.2d 395, 403 (Minn. 2011). In this case, the tax court found the building to be of Class C average construction, and then subtracted depreciation. The tax court found no evidence in the record to support a reduction in value for functional obsolescence. The tax court gave roughly equal weight to the parties’ expert opinions on economic obsolescence and reduced the value by 20 percent for each tax year. After adding land value, the resulting market value under the cost approach was $18,605,669 in 2014, and $17,886,320 in 2015.

The sales-comparison approach requires the analysis of recent sales of other properties to determine their comparability, and adjusts sale prices as necessary for age, size, location, and condition. See Appraisal Inst., The Appraisal of Real Estate 381–82 (14th ed. 2013). Using the sales-comparison approach, the experts reached different conclusions. Bakken considered the sales of 9 warehouse properties, but relied heavily on the 2017 sale of a former Walgreens distribution center in Rogers. Mako relied on the sales of 14 other warehouse properties. After selecting and analyzing the sales prices for comparable properties, the tax court arrived at a value of $15,924,000, in each of the two tax years at issue.

As to the income approach, the tax court first determined the potential gross income, represented by market rent attributable to the real property at full occupancy, before vacancy and operating expenses are deducted. The tax court found that the market rent for the Property was $1,153,916 per year as of January 2014 and 2015.

The tax court then reduced the potential gross income by vacancy losses and by operating expenses. The tax court concluded that the appropriate capitalization rate was 6.25 percent in 2014 and 6 percent in 2015. The tax court found the value of the Property under the income approach to be $13,480,245 as of January 2, 2014, and $15,048,121 as of January 2, 2015.¹

In arriving at a final reconciliation of value, the tax court gave "relatively more weight to the income and sales-comparison approaches, and relatively less weight to the cost approach." The tax court opined that the cost approach was less reliable because "the building does not fit neatly into a particular cost category, with some features typical of ‘good,’ of ‘average,’ and of ‘low-cost’ construction."

Medline Indus., Inc. v. Cty. of Hennepin , Nos. 27-CV-15-6887, 27-CV-16-5829, 2019 WL 3241566, at *22 (Minn. T.C. July 12, 2019). Accordingly, the tax court placed the greatest reliance on the sales-comparison approach, but "temper[ed] that reliance" with the income approach, "which yielded somewhat lower values." Id. The tax court concluded that the market value of the Property was $15,638,000 as of January 2, 2014, and $15,597,000 as of January 2, 2015. Medline appealed the tax court decision.

ANALYSIS

Our review of the final order of the tax court is limited. Hutchinson Tech., Inc. v. Comm'r of Revenue , 698 N.W.2d 1, 6 (Minn. 2005). We determine only whether the tax court lacked jurisdiction, whether the tax court’s order is supported by the evidence and in conformity with the law, and whether the tax court committed any other error of law. Minn. Stat. § 271.10, subd. 1 (2018) ; Jefferson v. Comm'r of Revenue , 631 N.W.2d 391, 394 (Minn. 2001). We will not disturb the tax court’s decision unless it is clearly erroneous, that is, when "the evidence as a whole does not reasonably support the decision." Menard, Inc. v. Cty. of Clay , 886 N.W.2d 804, 811 (Minn. 2016) (citation omitted) (internal quotation marks omitted). Specifically, we have recognized that property valuation is an "inexact" science and thus we "defer to the decision of the tax court unless the tax court has either clearly overvalued or undervalued the subject property, or has completely failed to explain its reasoning." Macy’s Retail Holdings, Inc. v. Cty. of Hennepin , 899 N.W.2d 451, 455 (Minn. 2017) (citation omitted) (internal quotation marks omitted); see Eden Prairie Mall, LLC v. Cty. of Hennepin , 797 N.W.2d 186, 192 (Minn. 2011).

Medline argues that the tax court’s decision should be reversed and the case should be remanded because the tax court erred in four ways.² The County disagrees.

First, Medline argues that the tax court clearly erred by crediting some of Mako’s opinions, despite rejecting his opinion about the highest and best use of the Property as a multi-tenant facility. Medline argues that Mako’s incorrect opinion on highest and best use permeated all aspects of the County’s appraisal.

Our role is not "to reweigh the evidence, and it is firmly within the tax court’s province, as the factfinder, to weigh the evidence and assess the credibility of the witnesses." Macy’s Retail Holdings, Inc. , 899 N.W.2d at 457 ; see Lewis v. Cty. of Hennepin , 623 N.W.2d 258, 262 (Minn. 2001) ("[T]he tax court is in the best position to evaluate the credibility of witnesses."). "The tax court need not accept an appraiser’s valuation in its entirety; instead, it may adjust the calculations based on evidence in the record and its own expertise." KCP Hastings, LLC v. Cty. of Dakota , 868 N.W.2d 268, 275 (Minn. 2015). Thus, we have squarely rejected the argument that, "because the tax court rejected a portion of [ ] expert analysis, it was clearly erroneous for the tax court to accept any of it." See Macy’s Retail Holdings, Inc. , 899 N.W.2d at 457–58.

After carefully reviewing the record, we conclude that the tax court did not err by crediting some of Mako’s expert opinions after it had rejected his highest and best use analysis. Medline has not demonstrated that Mako’s incorrect opinion on that issue fatally tainted his other opinions, or that the tax court gave them too much weight.

Second, Medline argues that the tax court erred in the sales-comparison approach by not considering the May 2017 sale of the former Walgreens distribution center as a comparable sale. Here, the respective experts chose their comparable sales differently. Bakken relied primarily on the former Walgreens sale. Mako relied on the sale of 14 other warehouse properties, which occurred before the valuation dates, and he did not include the later Walgreens transaction.

The tax court did not rely on either expert’s selection of comparables, but chose its own. The tax court considered the properties presented as comparables and assigned different weights to each property depending on size, clear height, multi-tenant vs. single tenant, and sale date. The tax court then selected what it considered to be the best four comparable sales, of which the former Walgreens property was not one.

The tax court can abuse its discretion by refusing to consider comparable sales. See S. Minn. Beet Sugar Coop. v. Cty. of Renville , 737 N.W.2d 545, 556 (Minn. 2007) (holding that the tax court erred when it failed to make "any findings or conclusions related to ... comparable sales evidence" because it "violated the tax court’s duty to ‘use its independent judgment in evaluating all testimony and evidence before the court’ ") (citation omitted); McNeilus Truck & Mfg., Inc. v. Cty. of Dodge , 705 N.W.2d 410, 413–14 (Minn. 2005) (holding that the tax court abused its discretion in refusing to consider comparable out-of-state sales). But we cannot conclude that that was the case here.

It is not quite accurate to say that the tax court refused to consider the 2017 Walgreens sale, as Medline argues. Instead, the tax court considered the "universe" of properties presented by the...