Northwood Apartments v. City of Royal Oak

• Decision Date: 22 July 1980
• Docket Number: Docket No. 78-5034-5
• Citation: 296 N.W.2d 639,98 Mich.App. 721
• Parties: NORTHWOOD APARTMENTS, Petitioner-Appellee, Cross-Appellant, v. CITY OF ROYAL OAK, a Michigan Municipal Corporation, and School District of City of Royal Oak, a School District of the Third Class, Respondents- Appellants, Cross-Appellees.
• Court: Court of Appeal of Michigan — District of US

Page 639

296 N.W.2d 639

98 Mich.App. 721

NORTHWOOD APARTMENTS, Petitioner-Appellee, Cross-Appellant, v. CITY OF ROYAL OAK, a Michigan Municipal Corporation, and School District of City of Royal Oak, a School

District of the Third Class,

Respondents- Appellants,

Cross-Appellees.

Docket No. 78-5034-5.

Court of Appeals of Michigan.

July 22, 1980.

Released for Publication Sept. 24, 1980.

David M. Black, Southfield, for School Dist.

Daniel Sawicki, Royal Oak, for City.

Thomas J. Beale, Southfield, for petitioner-appellee, cross-appellant.

Before J. H. GILLIS, P. J., and ALLEN and BEASLEY, JJ.

J. H. GILLIS, Presiding Judge.

The City of Royal Oak and the School District of Royal Oak appeal as of right ¹ from two decisions of the Michigan Tax Tribunal. Petitioner cross-appeals raising a completely separate issue.

The property involved here is a 121-unit apartment complex. The dispute centers on the valuation placed on that property by the respondent City of Royal Oak (hereinafter referred to as "City"). The tax years involved are 1975, 1976, 1977, and 1978. For those years, the City appraised the property at true cash values of $1,610,000, $1,610,000, $1,708,000, and $2,058,017 respectively.

In 1975, Northwood petitioned the Tax Tribunal for a review of the 1975 valuation of the apartment complex. Subsequent thereto, the original petition was amended for purposes of including tax years 1976, 1977, and 1978. At the commencement of the hearing on the petition, the City argued that Northwood had failed to protest the 1977 valuation before the City's Board of Review and that, accordingly, the Tax Tribunal was without jurisdiction to review the valuation as to that year. M.C.L. § 205.737(4); M.S.A. § 7.650(37)(4). The Tribunal took preliminary testimony on the issue and ruled that petitioner had not made a sufficient showing of protest to the local board of review and that, therefore, the Tribunal lacked jurisdiction as to the 1977 valuation. This ruling is the subject of petitioner's cross-appeal and will be discussed further in this opinion.

The Tribunal then considered the valuations for the remaining years. In a September 11, 1978, opinion, the Tribunal reduced the valuation of the property as follows: 1975-$1,250,000, 1976-$1,250,000, and 1978-$1,500,000. Judgment was entered pursuant to that opinion on the same date. On September 29, 1978, the respondent School District of the City of Royal Oak (hereinafter referred to as "School District") filed a motion to intervene. This motion was denied in an order dated November 9, 1978. That denial together with the Tribunal's reductions of valuation is the subject of respondents' joint appeal.

At the outset, we emphasize that this Court's authority to review a valuation decision of the Tax Tribunal is very limited. We are bound by the factual determinations of the Tribunal. Ironwood v. Gogebic County Board of Comm'rs, 84 Mich.App. 464, 469, 269 N.W.2d 642 (1978). Where, as here, no fraud is alleged, our review is limited to the questions of whether the Tribunal committed an error of law or adopted a wrong principle. Consolidated Aluminum Corp., Inc. v. Richmond Twp., 88 Mich.App. 229, 231, 276 N.W.2d 566 (1979); Consumers Power Co. v. Port Sheldon Twp., 91 Mich.App. 180, 184, 283 N.W.2d 680 (1979), Const.1963, art. 6, § 28.

For the purposes of taxation, property is to be assessed in accordance with its true cash value. Const.1963, art. 9, § 3, Ramblewood Associates v. Wyoming, 82 Mich.App. 342, 344, 266 N.W.2d 817 (1978). True cash value is defined as: " * * * (T)he usual selling price at the place where the property to which the term is applied is at the time of assessment, being the price which could be obtained for the property at private sale, and not at forced or auction sale." M.C.L. § 211.27; M.S.A. § 7.27. The legislative test, however, is not exclusive. Consumers Power Co. v. Big Prairie Twp., 81 Mich.App. 120, 129, 265 N.W.2d 182 (1978), lv. den. 403 Mich. 848 (1978).

The concept of true cash value is synonymous with fair market value. CAF Investment Co. v. State Tax Comm., 392 Mich. 442, 450, 221 N.W.2d 588 (1974). Any method for determining true cash value which is recognized as accurate and reasonably related to fair market valuation is an acceptable indicator of true cash value. Safran Printing Co. v. Detroit, 88 Mich.App. 376, 380, 276 N.W.2d 602 (1979).

The parties, as well as the Tribunal, agree that the capitalization of income method is the proper valuation method to be utilized here. We concur. The property in question is income-producing property. The capitalization of income method is the "method which is most appropriate to the individual case as the particular facts may indicate". Consumers Power Co., supra, 130, 265 N.W.2d 188. See CAF Investment Co., supra.

The capitalization of income method is based on the premise that there is a relation between the income a property can earn and the value of that property. This method estimates the present value of the amount of net income the property is expected to generate over its remaining useful life. Two techniques by which to apply this method are available. One is the annuity capitalization technique. An explanation of this technique is detailed in Consumers Power Co., supra, 134, 265 N.W.2d 182. This technique simply discounts the total of all future income. In the present case, one cannot accurately estimate the total of future income. Market factors affecting the desirability of the apartments in question render an estimate of future income necessarily speculative. Accordingly, the Tax Tribunal properly declined to utilize this technique.

A second technique for determining this value involves dividing the net income by the capitalization rate. We find this technique superior, under the facts of the present case, because it reflects actions of typical buyers and sellers in the current local market. The dispute here centers on the formula by which the capitalization rate was calculated.

The City contends that the rate is properly determined by comparing abstracted overall capitalization rates from similar properties. The petitioner contended and the Tribunal agreed that the mortgage-equity formula is properly applied. We note that this formula is also known as the band-of-investment formula.

The City's formula divides the net income of comparable properties by the fair market value (sale price) of those properties to compute a capitalization rate. The problem with this method lies in finding comparable properties. A small difference in the comparable property and the property in question will be reflected in the final estimate of fair market value.

The mortgage-equity formula, on the other hand, reflects a rate which accounts for changes in interest rates, mortgage terms, and cash flow requirements. This formula utilizes comparable properties only for the purpose of determining the cash flow rate. This rate is but one of several components in the formula. Hence, any difference between the comparables and the property in question will effect a smaller error in the estimate of fair market value. For these reasons we conclude that the Tribunal properly utilized the mortgage-equity formula to determine the capitalization rate. It cannot be said that the Tribunal committed an error of law or adopted a wrong principle in utilizing this formula.

The City also contends that the Tribunal erred in permitting the petitioner to deduct its actual expenses in calculating net income. The City argues that an expense ratio based on market data should have been utilized. The contention is factually and legally erroneous.

An examination of the Tribunal opinion, see infra, discloses that petitioner's actual expenses were adjusted downward. The claim that petitioner was allowed to deduct those actual expenses in calculating net income is, thus, factually in error. Furthermore, even had those expenses been allowed in full, such allowance would have been proper. M.C.L. § 211.27; M.S.A. § 7.27 requires that in determining value the "present economic income" of structures shall be considered. Economic income as used in the statute means actual income. CAF Investment Co., supra, 454, 221 N.W.2d 588. Since expenses are but elements of net income, we conclude that actual expenses may properly be utilized.

The City next contends that the Tribunal erred in permitting reserves for the replacement of capital items to be deducted as an expense item. The contention is without merit. By statute, the assessor must use the state tax assessor's manual as a guide in assessing property. M.C.L. § 211.721; M.S.A. § 7.40. Reserves for replacement are expressly allowed as an expense in the manual. Assessor's Manual, Michigan State Tax Comm., 1972, ch. 10, Capitalization of Income: The Income Approach Applied to an Apartment Building, p. 3. See also, American Institute of Real Estate Appraisers, The Appraisal of Real Estate (Chicago: Am. Inst. of Real Estate Appraisers, 7th ed. 1978).

The City next contends that the Tribunal failed to make sufficient findings of fact concerning petitioner's expenses. We disagree.

Section 51 of the Tax Tribunal Act, M.C.L. § 205.751; M.S.A. § 7.650(51), and § 85 of the Administrative Procedures Act of 1969, M.C.L. § 24.285; M.S.A. § 3.560(185), made applicable to the Tribunal by M.C.L. § 205.726; M.S.A. § 7.650(26), require the Tribunal to state the factual and legal basis for its decisions in order to facilitate appellate review. Almira Twp. v. Benzie County Tax Allocation Board, 80 Mich.App. 755, 760-761, 265 N.W.2d 391 (1978).

In the present case, the Tribunal found that:

" * * * (T)he Tribunal is not convinced that the allowable expenses contended by petitioner are fully justifiable and has therefore adjusted them downward in arriving at its finding of true cash value."

Under the circumstances of the present case, we deem this finding adequate for appellate review. With...