Presque Isle Harbor Water Co. v. Presque Isle Tp.

• Decision Date: 20 January 1984
• Docket Number: Docket No. 59316
• Citation: 344 N.W.2d 285,130 Mich.App. 182
• Parties: PRESQUE ISLE HARBOR WATER COMPANY, Petitioner-Appellant, v. PRESQUE ISLE TOWNSHIP, Respondent-Appellee. 130 Mich.App. 182, 344 N.W.2d 285
• Court: Court of Appeal of Michigan — District of US

Page 285

344 N.W.2d 285

PRESQUE ISLE HARBOR WATER COMPANY, Petitioner-Appellant, v. PRESQUE ISLE TOWNSHIP, Respondent-Appellee.

Docket No. 59316.

130 Mich.App. 182, 344 N.W.2d 285

Court of Appeals of Michigan.

Submitted Nov. 10, 1982.

Decided June 17, 1983.

Released for Publication Jan. 20, 1984.

[130 MICHAPP 184] Honigman, Miller, Schwartz & Cohn (by Charles H. Tobias), Detroit, for petitioner-appellant.

Gillard, Bauer & Mazrum (by James L. Mazrum), Alpena, for respondent-appellee.

Before T.M. BURNS, P.J., and BEASLEY and HANSEN, ^* JJ.

PER CURIAM.

Petitioner, Presque Isle Harbor Water Company, appeals as of right from a decision of the Michigan Tax Tribunal. The property involved here is a water supply system (pipes, hydrants, valves, fittings, pumps, tanks and well containment buildings) on land owned by petitioner's parent corporation, American Central Corporation. The dispute focuses on the valuation placed on that property by respondent, Presque Isle Township, for the tax years 1980 and 1981. For those years, respondent appraised the subject property at true cash values of $1,240,000 and $2,714,000 respectively. On July 23, 1981, the Tax Tribunal modified the true cash value of the property to $670,000 for the tax year 1980 and $2,080,000 for the tax year 1981.

A review of the record discloses the following chronology. In 1968, American Central Corporation ¹ purchased land in Presque Isle Township for approximately $800,000 to develop into a residential-recreational subdivision known as Presque Isle Harbor. Subsequent to the purchase of the undeveloped land, American Central divided the area into 12 subdivisions containing a total of 3,100 lots. When American Central attempted to record the plats for development in 1970, it was advised by the Michigan Department of Health that a [130 MICHAPP 185] water supply system or a sewage system would be required before the land could be subdivided. Thereupon, American Central immediately incorporated petitioner, Presque Isle Harbor Water Company, as a separate company with $50,000 in capital stock and a $2.7 million long-term loan.

At the time that American Central established petitioner, it intended petitioner to be an independent entity that would, at a minimum, break even financially. Nevertheless, the water company was formed initially in order for the parent firm to be able to subdivide the purchased land.

In 1978, petitioner decided to complete the water system earlier than required in order to avoid soaring construction costs. This decision was made despite the fact that, predicated upon the prior sales of the subdivision lots, the water system could not be effective for several years. By its accelerated construction of the water system, petitioner also sought to collect "availability" fees from lot owners to whom the system would be available.

The entire water supply system was completed in 1980 at a total cost of $2.5 million. Petitioner offered to donate the system to the county or township, along with $500,000 to complete a water tower and reservoir, but both entities rejected the offer.

Petitioner's evidence at the hearing established that, under existing conditions, there was no prospect of the water system's being profitable, since the fees charged to the lot owners did not equal the cost of producing the water. ²

[130 MICHAPP 186] While the project potentially could earn money if fees were increased to exceed costs, petitioner had not petitioned the Public Service Commission for an increase. Petitioner had considered the possibility of obtaining a fee increase, but rejected it in view of its collection problems. ³

Petitioner's testimony also established that the $2.5 million it spent for the installation of the water supply system was recovered through the sale of the subdivision lots. However, as the following colloquy shows, the increase in the value of the land went to American Central, rather than petitioner:

"MC DONALD: [Tax Tribunal Judge] Where is the gain on the sale of the land or is there no gain?

"DRATMAN: [Tax Manager, American Central] Well, whatever gain there is on the sale of land is properly reflected on the books of American Central Corporation, the fee owner of the property.

"MC DONALD: Correct. And in the consolidated statement it would appear as gain, would it not?

"DRATMAN: It would appear as income, yes sir."

To support its position that the subject property had a true cash value of zero for 1980 and $250,000 for 1981, petitioner presented the expert testimony of Roland Dean Nelson, the principal owner of Dean Appraisal Company. While considering three appraisal methods, Nelson concluded that the capitalization of income approach was the most accurate appraisal method because he viewed the property to be income producing with an income stream. Nelson described capitalization of income as "the present worth of the future benefits[130 MICHAPP 187] by capitalizing the stream of income that the property will produce in the foreseeable future".

Nelson expressed an opinion that the subject property had true cash values of zero as of December 31, 1979, and $250,000 as of December 31, 1980. He based his opinion on the price he believed the property would sell for on the open market. He further testified that, even though the water supply system had no or minimal value in 1979 and 1980, the value of the 3,100 lots owned by American Central Corporation was increased by the existence of the water system.

Disagreeing significantly with Nelson's appraisal was respondent's expert witness, John Burdett, the Presque Isle Township assessor. Burdett rejected the income approach used by Nelson in appraising the water system since (1) he did not know whether investors purchased commercial property based on the property's income-producing capability or on the replacement cost thereof, (2) he could not locate any property comparable to the water system, and (3) petitioner had not sought an increase in the rates it charged its customers. However, Burdett agreed that petitioner's property was income producing and that prospective purchasers would consider the potential income in determining the amount to pay. Furthermore, he conceded that he did not attempt to ascertain the water system's earnings potential.

In concluding that the true cash value of the subject property was $1,050,000 for the tax year 1980 and $2,730,000 for the tax year 1981, Burdett applied a cost approach, using historical data raised to current replacement values.

In its written opinion, the Michigan Tax Tribunal made the following pertinent findings of fact: (1) the proofs clearly showed that the only reason [130 MICHAPP 188] the water system was installed was to enable petitioner's parent firm, American Central Corporation, to develop the land; (2) exclusive reliance on the capitalization of income approach was not justified because cost data was available; (3) petitioner probably would not realize a profit from the system, but this was not relevant, since the system was erected as part of the overall American Central plan; (4) petitioner was not exempt from taxation solely because the water system may have enhanced the value of the lots; (5) respondent's cost approach did not allow the tribunal to determine the property's usual selling price; and (6) respondent improperly rejected information relating to water systems of other states in appraising the property.

After summarizing the testimony and making findings of fact, the Tax Tribunal concluded:

"There is little question but what the subject property is unique and presents difficult challenges to both parties in attempting to value it, or to find for such an atypical property the 'usual' selling price required by Michigan law. The problem is ornery, and it becomes no less so when the Tribunal is confronted with its statutory obligation to provide a solution.

"Having considered all of the evidence, determining what weight and credibility should be given it, and in particular recognizing appropriate cost and income data available to it, the Tribunal finds the true cash value of the subject property to be $670,000 for the tax year 1980 and $2,080,000 for the tax year 1981; applying the average levels of assessments of 50% for both years results in revised assessments (as opposed to the actual assessments on the rolls) as follows:

                "Tax Year  Assessments on Rolls  Revised Assessments
                ---------  --------------------  -------------------
                  1980         $  620,000            $  335,000
                  1981          1,357,000             1,040,000"
                

[130 MICHAPP 189] On appeal, petitioner maintains that the Tax Tribunal failed to consider the only testimony concerning the usual selling price of the subject property and arrived at an arbitrary assessment unsupported by the record. Petitioner asserts that the Tax Tribunal should have equated the water supply system to a permit which a developer must purchase in order to develop property, since after the development of the land is completed, the permit must be evaluated on its own.

Respondent argues that the testimony of petitioner's expert witness is not binding on the Tax Tribunal and, in fact, was contradicted by the testimony of respondent's appraiser. Respondent also contends that the tribunal correctly rejected the capitalization of income approach in appraising the usual selling price of the subject property.

Appellate review of Tax Tribunal decisions is circumscribed by Const.1963, art. 6, Sec. 28, which provides:

"In the absence of fraud, error of law or the adoption of wrong principles, no appeal may be taken to any court from any final agency provided for the administration of property tax laws from any decision relating to valuation or allocation."

For the purposes of taxation, property is to be assessed according to its true cash value. ⁴ Under M.C.L. Sec. 211.27; M.S.A. Sec. 7.27, the standard for determining[130 MICHAPP 190] the true cash value is...