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May 31, 2016

COA: Where property has deed restrictions a cost-less-appreciation is more appropriate than sales-comparison approach to valuation

In assessing ad valorem property taxes, courts must rely on the cost-less-depreciation approach, not the sales-comparison approach, when the property comparables have deed restrictions while the subject property has none.  In Menard Inc. v. City of Escanaba, No. 325718, the Court of Appeals held that the Michigan Tax Tribunal erred in adopting a sales-comparison approach because it failed to consider the market effect of deed restrictions in comparables.
 
Menard, Inc. (Menard) challenged the City of Escanaba’s (Escanaba) ad valorem property tax assessments for the tax years 2012, 2013, and 2014.  Menard submitted a valuation appraisal based on the sales-comparison approach, using eight comparable sales figures.  In contrast, Escanaba used the cost-less-depreciation approach, arguing that there were insufficient comparable sales since the building being valued was a newer construction.  Further, Escanaba rejected Menard’s comparison of the property in question to properties with deed restrictions, since the subject property had no deed restrictions in place.
 
The Court of Appeals rejected the Tribunal’s use of Menard’s sales-comparison approach in its determination of the subject property’s true cash value (TCV).  In so doing, the Tribunal failed to value the subject property at its highest and best use (HBU), an owner-occupied freestanding retail building.  Instead, the Tribunal valued the property as a former owner-occupied freestanding retail building that could no longer be used for its HBU, but could best be used for redevelopment for a different use.
 
Due to the dearth of evidence on the impact of deed restrictions on comparables, the Court reversed the Tribunal’s ruling, and remanded the case back to the Tribunal.  The Court tasked the Tribunal with taking additional evidence on the market effect of the deed restrictions and the cost-less-depreciation approach.  After allowing the parties the opportunity to present additional testimony, the COA stated that the Tribunal would have to make an independent determination of the property’s TCV to calculate the correct ad valorem property taxes.

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