TMG Life Ins. Co. v. County of Goodhue

• Decision Date: 22 December 1995
• Docket Number: No. C9-95-373,C9-95-373
• Citation: 540 N.W.2d 848
• Parties: TMG LIFE INSURANCE CO., Relator-Petitioner, v. COUNTY OF GOODHUE, Respondent.
• Court: Minnesota Supreme Court

Page 848

540 N.W.2d 848

TMG LIFE INSURANCE CO., Relator-Petitioner, v. COUNTY OF GOODHUE, Respondent.

No. C9-95-373.

Supreme Court of Minnesota.

Dec. 22, 1995.

Syllabus by the Court

1. The tax court's decision to admit a summary of leases for local retail stores as evidence of market rents for similar properties was not an abuse of discretion.

2. The tax court's estimation of fair market value for the property, a department store in a community shopping center, was supported by the evidence and was not clearly erroneous.

John F. Bonner III, Minneapolis, for Relator-Petitioner.

Carol K. Lee, Assistant Goodhue County Attorney, Red Wing, for Respondent.

Considered and decided by the court en banc without oral argument.

OPINION

KEITH, Chief Justice.

This case, on certiorari from the Minnesota Tax Court, concerns the fair market value for real estate tax purposes of the J.C. Penney Company, Inc. department store and adjacent land located in the Red Wing Mall in Goodhue County, Minnesota. On appeal, the owner of this property, TMG Life Insurance Co. ("TMG"), challenges the decision by the Minnesota Tax Court valuing the property at $740,600 for real estate taxes due and payable in 1994. TMG Life Ins. Co. v. County of Goodhue, File No. C9-94-479, 1994 WL 725485 (Minn.Tax Dec. 15, 1994). We affirm the tax court's decision.

I.

TMG is a North Dakota life insurance company based in Fargo, North Dakota. After a merger with another insurance company, TMG acquired a 1987 mortgage, promissory note, assignment of lease and guarantee from Red Wing Mall Associates for the department store and adjacent land at issue in this case. On February 25, 1994, the Goodhue County District Court issued default judgment in favor of TMG after Red Wing Mall Associates defaulted on the terms of the mortgage. The court determined that Red Wing Mall Associates owed TMG in excess of $440,000 in principal, interest and attorney fees. A public auction of the property was held on May 3, 1994. TMG submitted a successful bid of $156,000. TMG moved for an order from the district court confirming the sale, and Red Wing Mall Associates challenged TMG's winning bid, arguing that the bid was too low, and therefore lacked good faith. The district court confirmed the sale, finding that in light of TMG's appraisal of the property at $415,000 and the existence of over $200,000 in outstanding real estate taxes, the $156,000 bid "does not by itself suggest any lack of good faith."

Concurrent with the foreclosure proceedings, TMG commenced this action in the Minnesota Tax Court to reduce the Goodhue County Assessor's January 2, 1993 estimated market value for the property of $740,600. A one-day trial before the tax court was held on November 8, 1994. At trial, each party submitted an appraisal report by an expert witness. The county's appraiser determined that the "unencumbered, fee simple market value of the subject property as of 2 January 1993, is: $755,000." TMG's expert appraiser opined that the "estimated Market Value, effective February 28, 1994, is: $415,000." His appraisal of the property was originally prepared for TMG's use during the foreclosure sale in early 1994.

The portion of the Red Wing Mall now owned by TMG consists of two lots covering a total of 156,816 square feet. The J.C. Penney store was constructed in 1985-86 and is roughly 22,204 square feet in size; the remainder of the property consists of parking area. J.C. Penney entered into a 20-year lease agreement with the Red Wing Mall Associates in 1985, with the option to extend the lease for several additional 5-year periods. The lease provides for payment of $77,714 in base rent each year, plus a common area maintenance charge of $.35 per square foot of leased space. The base rent does not fluctuate over the term of the lease, including any extensions exercised by J.C. Penney. In addition to the base rent, J.C. Penney is required to pay a small percentage of its actual retail sales whenever sales exceed approximately $3.9 million per year, a figure that has not been reached to date. TMG must pay for certain maintenance costs and base year real estate taxes. After deducting costs and taxes from the yearly rent paid by J.C. Penney, TMG receives approximately $1.97 per square foot in "triple net" rent.

At trial, TMG's first witness was an employee of the court-appointed receiver for the J.C. Penney portion of the Red Wing Mall. He estimated the annual net operating income from the property to be $41,500. TMG's real estate appraiser then testified that he arrived at his $415,000 estimated market value for the property by capitalizing its annual net operating income ($41,500) at a rate of 10%. He also noted that he determined the market rent for the property to be $6.50 per square foot and calculated the actual rent paid under the lease to be $3.50 per square foot before taxes. His appraisal therefore described J.C. Penney's triple net rent as "considerably below current market levels." On cross-examination, TMG's expert stated that his estimate only reflected the value of the "leased fee interest" (TMG's interest as a landlord) and that the value of the "leasehold interest" (J.C. Penney's interest as a tenant) "doesn't come into play in the definition of market value."

Counsel for Goodhue County did not dispute TMG's estimation of the expenses and income generated by the property, but argued that the issue before the court was the proper way to interpret this information. The county assessor testified that his appraisal reflected the value of the unencumbered fee simple interest in the property, which included all rights and privileges pertaining to the land as required by Minn.Stat. § 272.03, subd. 1 (1994). The county assessor used a summary of leases for other tenants in the Red Wing Mall to estimate the market rent for retail stores in the area. He selected the other anchor store in the mall, K-Mart, as the best indication of market rent for an anchor department store like J.C. Penney. K-Mart's rent under its 1992 lease was $3.50 per square foot after deducting taxes and maintenance expenses, compared to J.C. Penney's rent of $1.97 per square foot triple net. Other smaller stores in the Red Wing Mall paid much higher rents than the two anchor stores, with an average of $5.63 per square foot triple net. The assessor testified that in light of these figures, he concluded that J.C. Penney's rent was substantially below market. Therefore, he selected $3.50 per square foot as the market rent for an anchor store like J.C. Penney. This rent produced a net operating income of $72,386 which he capitalized at a rate of 9.59% for a total estimated market value of $755,000.

In its decision, the tax court described the fundamental dispute between the parties as "what interest should be valued for tax purposes, the fee, or the leased fee interest." TMG's expert, the court found, considered only the owner's "leased fee interest" in reaching his estimated value of $415,000, instead of considering the entire fee simple interest in the property. The court concluded, however, that assessors are required to value the entire fee interest in the property, not the partial interests held by either owner or renter. In addition, the court agreed with the county that J.C. Penney's lease was at below-market rent, and that the assessor therefore must use market rents, rather than the actual rents, in valuing the property. Accordingly, the court affirmed the original estimated market value for the January 2, 1993 assessment, or $740,600, a figure slightly lower than the appraisal prepared by the county's expert for trial.

II.

TMG's first contention is that the tax court erroneously admitted and considered the lease summary for another portion of the Red Wing Mall because TMG was not provided with a copy of the actual lease documents. After TMG's trial counsel received the county assessor's appraisal, he requested a copy of the lease summary relied upon by the assessor to determine the rents paid by other tenants in the mall. The tax court subsequently ordered Goodhue County to supply TMG with a copy of this lease summary. Then, the day before trial, TMG's trial counsel called the county attorney's office and asked for a copy of the K-Mart lease itself. However, neither the county attorney's office nor the county assessor had the actual lease in its possession. At trial, TMG made an oral motion in limine to prohibit reference to the K-Mart lease at trial, claiming that it needed a copy of the actual lease to effectively cross-examine the county assessor concerning his appraisal methods. The tax court denied the motion because the county assessor's opinion was based upon the rent information in the lease summary alone, which TMG had received, and because he saw no grounds for an objection to a document not within the county's files.

The decision whether to admit or exclude evidence rests with the trial court, and the ruling will not be disturbed absent indications of an erroneous legal view or abuse of discretion. Uselman v. Uselman, 464 N.W.2d 130, 138 (Minn.1990). The Minnesota Rules of Evidence require that the contents of a writing be proven from the document itself, unless the document is lost, destroyed, or unavailable through any judicial procedure, or pertains to a collateral matter. Minn.R.Evid. 1002, 1004. Therefore, TMG asserts that proof of the rent paid by K-Mart under its lease requires admission of the lease itself. The Minnesota Rules of Evidence, however, are subject to modification by the Minnesota Tax Court "when in its opinion the best interests of the parties involved may be thereby served or the determination of the cause expedited." Minn.R. 8600.0400 (1994). Accordingly, the Minnesota Tax Court has enacted a rule which permits the admission of oral testimony as evidence of "the contents of books, documents, records and other papers." Minn.R. 8600.0900 (1994). The decision...