Thrifty Royal Oak, Inc. v. City of Royal Oak
| Decision Date | 20 January 1984 |
| Docket Number | Docket No. 59034 |
| Citation | 344 N.W.2d 305,130 Mich.App. 207 |
| Parties | , 16 Ed. Law Rep. 280 THRIFTY ROYAL OAK, INC., a Michigan corporation, and Meijer, Inc., a Michigan corporation, Petitioners-Appellants Cross-Appellees, v. The CITY OF ROYAL OAK, a Michigan municipal corporation, Respondent-Appellee, and School District of the City of Royal Oak, a School District of the Third Class, Respondent-Intervenor Cross-Appellant, and Oakland County Treasurer, Court Ordered Appellee. |
| Court | Court of Appeal of Michigan — District of US |
Miller, Johnson, Snell & Cummiskey by Jon G. March, Eric J. Thorsen and Robert J. Christians, Grand Rapids, for Thrifty Royal Oak, Inc., and Meijer, Inc.
Teresa E. Schafer, City Atty., Royal Oak, for the City of Royal Oak.
Shifman & Goodman, P.C. by Burton R. Shifman and John A. Carlson, Southfield, for the School District of the City of Royal Oak.
Before ALLEN, P.J., and BRONSON and WAHLS, JJ.
Petitioners appeal by right a judgment of the Michigan Tax Tribunal entered May 19, 1981, establishing the real property valuations and assessments of a Meijer Thrifty Acres discount store and related buildings in the City of Royal Oak for the tax years 1978, 1979, and 1980. Respondent intervenor, School District of the City of Royal Oak, cross-appeals from the Tax Tribunal's denial of the school district's motion to intervene.
The true cash value of the properties at issue had been established by the City of Royal Oak at $6,238,000 for 1978; $6,312,000 for 1979, and $6,706,000 for 1980. The assessed value of the properties was set at 50% of the thus-established true cash values. Believing that the valuations established by the City were too high, petitioners appealed to the Tax Tribunal, which, following extensive hearings, not only rejected petitioners' claim that the valuations were too high, but increased the true cash values as follows:
True Cash Value Increase Over City Valuation
--------------- ----------------------------
1978 $8,300,000 $2,062,000 (33%)
1979 $8,900,000 $2,588,000 (41%)
1980 $9,700,000 $2,944,000 (44%)
Assessments were established at 50% of the MTT's determinations of true cash value.
The property consists of a 27 acre site on which sits a retail shopping center building with an area of some 247,000 square feet. The store building is operated by petitioner Meijer, Inc., the parent company. Thrifty Royal Oak, Inc., is an affiliated real estate company controlled by Meijer, Inc., and organized to finance the Royal Oak development. Thrifty Royal Oak leases the store and underlying land to Meijer, Inc., for a basic rental of $275,000 quarterly ($1,100,000 annually) and additional rental of 1.25% on all gross sales in excess of the basic rental. It is unlikely the additional rental will be triggered in the near future. The basic rental exceeds the amount necessary to amortize the loan on the building by $232,000 each year. The excess is used for internal purposes unrelated to the property. According to petitioners, the Meijer organization as a whole received credit financing, as opposed to mortgage financing, for $8,050,000 at 9.375% interest over a 25 year period, on the strength of Meijer's credit and not on the security of the property being purchased. The lease between Thrifty Royal Oak, Inc., and Meijer, Inc., was, however, made part of the financing document, thus serving as a guarantee of repayment. Respondent disagreed that the property was superfluous as collateral and pointed to an "Indenture of Mortgage and Deed of Trust between Thrifty Royal Oak, Inc., and Michigan National Bank as Trustee" which reserved to the trustees security in the improvements themselves and the lease on the improvements.
Respondent argues that this indenture bound Meijer, Inc., to remain as a tenant until 1988 unless Meijer, Inc., substituted a fee simple or leasehold estate in other property of fair market value at least equal to the outstanding balance of the loan or with lease rental at least equal to that of the lease and terminating no earlier than December 31, 1999. After January 1, 1988, Meijer, Inc., could cancel the lease and pay off the balance of the loan. Finally, the underlying land is owned by an unaffiliated corporation, Oaks Construction Company, which leased the property to a Meijer, Inc., subsidiary (Applewood Company), which in turn assigned the lease to Thrifty Royal Oak, Inc. Under the terms of this lease, Thrifty Royal Oak, Inc., pays $85,000 in annual rent for a lease term of 25 years.
Thrifty Royal Oak, Inc., also has an option to purchase the land for $900,000 between June 1984 and 1989. Under the terms of the lease between Oak Construction and Applewood Company, the property may be used for specified commercial uses and "any other lawful commercial purpose". The owner of Oak Construction Company stated that he did not interpret this lease to prohibit an industrial use provided that use was "lawful". Meijer, Inc., pays Thrifty Royal Oak, Inc., the $85,000 annually in addition to the building "rental" of $1,100,000 per year. According to petitioners, no effort was made to determine fair market rent, and Thrifty Royal Oak, Inc., would never sell the property to an unrelated party with the lease still in effect while Meijer, Inc., continues its retail operations on the premises.
Fred Meijer, Chairman of the Board of Meijer, Inc., testified that the Meijer organization had erred in choosing this site, especially for so large a store. The location has proven to be accessible only with difficulty from several directions and was completely inaccessible from one direction. Traffic flow in the area is poor, and the lack of other retailers in the area means fewer customers are attracted to the store. Consequently, this Meijer store has had to use "extraordinary sales incentives", and spend a great amount of money (4% to 6% of its sales versus 1.5% of sales at other Meijer's stores) for advertising to generate sales. Despite these expenditures, petitioners claim that the store has lost over $5,100,000 before taxes in its first 2 1/2 years of operation and is doing "very much worse" than other Meijer's stores did during their two-year "start-up" period. These figures were the same ones used by the Meijer organization in evaluating its 27 stores and deciding whether to continue a store's operation. Meijer's will continue to absorb these losses until it must "give up hope that [Meijer's] can make it" at the Royal Oak location. Mr. Meijer stated that, if sales losses continued at the 1980 rate, Meijer's would have to close this store and sell the building, although he knew of no other single retailer who would be in the market for a store this large in the Detroit area.
From the foregoing, it is not at all surprising that the appraisers for petitioners, Donald Hartman and Eldon Nedeau, and the appraiser for the City of Royal Oak, Leo Goldstein, reached widely disparate true cash values for the property.
TAX PETITIONERS' APPRAISERS RESPONDENT'S RESPONDENT'S
YEAR HARTMAN/NEDEAU ORIGINAL TCV APPRAISER
GOLDSTEIN
---------------------------------------------------------
1978 $3,488,000/$3,256,500 $6,238,000 $11,200,000
1979 $3,432,000/$3,540,500 $6,312,000 $11,400,000
1980 $3,441,000/$3,904,500 $6,706,000 $11,400,000
Hartman testified that, because the property was in an industrial neighborhood, its highest and best use would be industrial. Using an income approach (supported by a market sale approach), he arrived at the true cash value determination set forth above. In addition, assuming a continued commercial retail use and using comparable sales of five other large discount stores, he found the market value of the property to be significantly lower if the property were put to commercial use rather than industrial use.
Nedeau, unlike Hartman, felt that the highest and best use of the property was commercial. Relying primarily on an income approach, he determined the true cash value to be substantially less than either the reproduction cost or the replacement cost.
Goldstein concluded that, even though the surrounding area was industrial, the highest and best use of the property was commercial. Using the Meijer, Inc.,--Thrifty Royal Oak, Inc., lease as the basis for his income approach, Goldstein divided the annual rent of $1,185,000 by the gross leasable area and determined that the rental rate under the lease was $5.06 per square foot per year. He then compared this rental with that of five other new commercial complexes with either a Kroger or K-Mart store as a primary tenant within two to three miles of plaintiffs' store. From this comparison and from the cost of the property, he concluded petitioners' $1,185,000 lease rental was a fair market rental. The lease rental was reduced to $1,141,300 because the lessors of the comparables were responsible for certain expenses, thus reducing the rent to $4.87 per square foot of gross leasable area. The net income was then capitalized at an overall rate of 10%. Goldstein's estimates of value under the income approach were:
12/31/77 12/31/78 12/31/79
-------------------------------------
$11,235,000 $11,413,000 $11,413,000
These figures were closely mirrored by Goldstein's market approach. In both approaches, Goldstein used shopping center comparables of admittedly significantly smaller size and somewhat better locations for commercial purposes.
Goldstein also appraised the property by the reproduction cost approach (the cost of replacing the property with an exact duplicate). The final true cash value contentions (including land) under this approach were:
12/31/77 12/31/78 12/31/79
-----------------------------------
$8,358,000 $9,075,000
...To continue reading
Request your trial
-
Prudential Ins. Co. of America v. Oak Park School Dist.
...absolute right to intervene. Northwood Apartments v. Royal Oak, 98 Mich.App. 721, 296 N.W.2d 639 (1980); Thrifty Royal Oak, Inc. v. Royal Oak, 130 Mich.App. 207, 344 N.W.2d 305 (1983), remanded on other grds. 419 Mich. 915, 353 N.W.2d 478 (1984). The School District has failed to cite any c......
-
Xerox Corp. v. Oakland County, Docket No. 116684
...of an assessment results in a finding of underassessment. Except for Judge Bronson's statement in Thrifty Royal Oak, Inc. v. City of Royal Oak, 130 Mich.App. 207, 344 N.W.2d 305 (1983), that the legality of an assessment cannot be determined "until all appeals" have [191 MICHAPP 440] been r......
- Thrifty Royal Oak, Inc. v. City of Royal Oak