                         STATE OF MICHIGAN

                          COURT OF APPEALS



HOWELL PROMENADE, LLC,                                            UNPUBLISHED
                                                                  June 9, 2015
              Petitioner-Appellant,

v                                                                 No. 321267
                                                                  Tax Tribunal
CITY OF HOWELL,                                                   LC No. 433125

              Respondent-Appellee.


Before: RIORDAN, P.J., and DONOFRIO and BECKERING, JJ.

PER CURIAM.

        This case stems from petitioner’s appeal of an assessment of its commercial property.
Petitioner appeals as of right the Tax Tribunal’s opinion and judgment, determining that the
property had a true cash value of $2,088,160 for the 2012 tax year. Because the Tribunal’s
findings were not supported by substantial evidence, we vacate the Tribunal’s opinion and
judgment, and we remand for further proceedings.

                                      I. BASIC FACTS

       This case involves the proper determination of a shopping center’s true cash value as of
December 31, 2011, under the General Property Tax Act (GPTA), MCL 211.1 et seq.
Respondent initially assessed the property to have a true cash value of $3,022,400. Petitioner
appealed that assessment, and the Tax Tribunal heard the appeal.

       At the Tax Tribunal hearing, only petitioner was allowed to present evidence and exhibits
because of respondent’s failure to comply with the court’s prior scheduling order. At the
hearing, petitioner presented three witnesses: John Breza, Richard O’Connor, and Jason
Krentler.

       Arguably, the most important witness was Krentler, as he was a certified appraiser.
Krentler’s methodology was to first calculate the true cash value of the property as if the
property was “stabilized and cured.”1 Then, because the property was not stabilized and cured,


1
  “Stabilized” refers to the property having a market vacancy rate, and “cured” refers to the
fixing of the “deferred maintenance” items. “Deferred maintenance,” in turn, is defined as the

                                              -1-
he would deduct from that interim value the lease-up costs and the deferred maintenance costs to
arrive at the property’s true cash value in its condition as of December 31, 2011.

         In calculating the stabilized and cured true cash values for the property, Krentler used
two different methods: the sales-comparison approach and the income-capitalization approach.
However, Krentler used the value derived from the income-capitalization approach because “as
an income-producing property, ultimately the income capitalization approach is [most]
determinative.” Krentler determined that the true cash value of the property (as if it were
stabilized and cured) was $2,100,000 under the income-capitalization approach.2 According to
Krentler, the next step was to deduct from that stabilized and cured value, the lease-up costs and
the deferred maintenance costs to arrive at the true value of the property in its actual condition,
i.e., not cured and not stabilized.

       Regarding the lease-up costs, Krentler explained the following:

               In order to determine the market value as is, lease-up costs must be
       deducted from the indicated value as-stabilized. Lease-up costs include lost rental
       income attributable to vacant suites, unrecovered expenses such as real estate
       taxes, insurance, and common area maintenance, free rent, tenant improvement
       allowances, and leasing commissions.

Krentler also explained that the lease-up costs are to be discounted to present value using a
discount rate of 5.0%.

       Krentler summarized the lease-up costs as follows:

       Rent Loss                                      $41,022
       Expense Recovery Loss                          $13,674
       Free Rent                                      $0
       Tenant Improvements                            $65,780
       Leasing Commissions                            $11,840
       TOTAL                                          $132,316
       Discount to Present Value (5.0%)               $125,378

Additionally, Krentler calculated an “entrepreneurial incentive,” which he estimated to be 5.0%
of the discounted lease-up costs, or $6,269, because “a buyer of the subject would expect a return
on the costs associated with leasing the property.”

        As a result, Krentler had a rounded-total of $130,000 ($125,378 + $6,269) in lease-up
costs, which he deducted from the stabilized and cured true cash value of $2,100,000.


“[n]eeded repairs or replacement of items that should have taken place during the course of
normal maintenance.” The Dictionary of Real Estate Appraisal (2010).
2
  The sales-comparison approach yielded a value of $2,200,000. Krentler noted that this value
simply “is utilized as support to the income approach conclusions.”


                                                -2-
        To account for the property not being “cured,” Krentler also deducted the amount of
money needed for “deferred maintenance” from the stabilized and cured value. Here, there was
evidence presented that the HVAC system, the roof, and the parking lot were in need of repair.
John Breza, who oversaw all management operations of the property, testified that these repairs
did not happen for a couple reasons. First, he explained that they lacked the funds to do the work
because of the property’s low occupancy. Second, he mentioned that he thought the entire
development may have to be knocked down and rebuilt, which would have made spending
money on the repairs not prudent.

        Breza supplied Krentler with estimates to repair the HVAC ($195,000), the roof
($111,500), and the parking lot ($170,152), which totaled a rounded amount of $480,000.
Krentler noted that the “items appear reasonably categorized as deferred maintenance based on
our inspection, but we are not engineers and are not qualified to opine on whether these items are
structurally failing.” As a result, Krentler then deducted the $480,000 in deferred maintenance
expenses from the stabilized and cured true cash value.

        In sum, Krentler took the property’s $2,100,000 stabilized and cured true cash value and
deducted $130,000 for lease-up costs and $480,000 for deferred maintenance to arrive at an “as
is” true cash value of $1,490,000.

        The Tax Tribunal noted that while it was not bound to accept either of the parties’
theories of valuation, it did agree with Krentler that the income-capitalization approach,
supported by the sales approach, was the appropriate method of valuation. As a result, the
Tribunal accepted Krentler’s stabilized and cured true cash value of $2,100,000 as accurate.
However, the Tribunal disagreed on the amount to deduct from that value.

         The Tribunal disallowed all of the deferred maintenance deductions for several reasons.
First, the Tribunal noted that “in both his sales and income approaches to value, Mr. Krentler
previously made condition adjustments for the difference in condition between the subject and
the comparables.” The Tribunal noted that in both the sales comparison approach and the
income capitalization approach, Krentler made adjustments to the property’s true cash value
based on its condition compared with the condition of the comparables.3 Thus, the Tribunal
found that Krentler was making adjustments for the condition of the property twice, which it
likened to “double dipping.”

       The Tribunal also found that Krentler provided conflicting testimony because he had
“indicated that the subject property required no expenditures immediately after purchase.”


3
  For instance, in the sales-comparison approach, Krentler noted that comparable 2 “is in similar
condition to the subject property and no adjustment is necessary. Sale comparables 1, 3, 4, and 5
are superior in terms of condition and negative adjustments are applied [to the price of those four
comparables].” And in the income-capitalization approach, Krentler stated that “[r]ent
comparables 1, 4, and 5 are in similar condition to the subject and no adjustments are necessary.
Rent comparables 2 and 3 are superior in terms of condition; therefore, negative adjustments are
applied [to the price of those two properties].”


                                                -3-
       Furthermore, the Tribunal found it questionable that taking a deduction for the actual cost
of deferred maintenance should be necessary in determining the fair market value of the subject
property. It opined that “[c]ost does not equal market value”; thus, the “$480,000 spent on
deferred maintenance does not equal a $480,000 increase in value.” The Tribunal surmised that
instead of being used to reduce the true cash value of the property, the costs for deferred
maintenance could have been spread over a number of years, could have been included by
Krentler in capital reserves, or it could have been included in the rental rate.

       The Tribunal also disallowed most of the $130,000 deduction for lease-up costs,
explaining:

         Mr. Krentler indicated in his appraisal that the market rate of vacancy and credit
         loss is 20%. He also noted that all his comparables were triple net leases. As
         indicated above, triple net leases include pro-rated amounts for CAM,[4] property
         insurance and property taxes. In his explanation of lease-up costs, Mr. Krentler
         includes unreimbursed CAM, property insurance and property taxes. As the
         aforementioned information suggests, the loss of those items was already
         accounted for in the vacancy and credit loss.

The Tribunal further noted that the rent comparables that Krentler used “all have similar tenant
improvement allowances or rental concessions as compared to the subject.” As a result, the
Tribunal concluded that “rental concessions and tenant improvements are already accounted for
in Mr. Krentler’s income approach and no additional under the line adjustment is required.” And
because the only category unaccounted for in the lease-up costs was the leasing commissions, the
Tribunal used that $11,840 deduction.

        Furthermore, the Tax Tribunal determined that any deduction for an “entrepreneurial
incentive” was not warranted because it found “it improbable that a purchaser of the property
would ‘expect a [5%] return on the cost associated with leasing the property.’” The Tribunal
reasoned, “The purpose of purchasing an income producing property is to make a profit. As
such, lease terms would be negotiated in order to make a property profitable.”

       Consequently, the Tribunal accepted Krentler’s $2,100,000 true cash value appraisal and
only deducted $11,840 for leasing commissions, resulting in a true cash value of $2,088,160.

       Petitioner moved for reconsideration on three grounds. First, petitioner argued that the
Tribunal misunderstood a portion of Krentler’s testimony because, contrary to the Tribunal’s
finding, he never stated that “no expenditures were needed immediately after the sale of the
subject property.” Next, petitioner argued that Krentler did not “double dip” his condition
adjustment. Finally, petitioner argued that Krentler properly deducted lost rent and tenant
improvements as lease-up costs.




4
    CAM stands for “common area maintenance.”


                                                -4-
        The Tribunal did not address petitioner’s contention that it misunderstood Krentler’s
testimony regarding the property not needing any expenditures immediately after the sale. But
the Tribunal conceded that it erred by characterizing Krentler’s methodology as “double
dipping” for any condition adjustments. Regardless, the Tribunal found that any error had no
effect because $480,000 repairs on a $2,100,000 property reflects a much more serious issue than
simple “deferred maintenance” and, as a result, this deeper problem should have been “reflected
in appropriate sales and rental comparables.” The Tribunal also ruled that “[l]ease-up costs,
other than leasing commissions, were properly disallowed as the property should not have been
valued as stabilized and cured.” In sum, the Tribunal found that (1) Krentler’s approaches
valued the property “as stabilized and cured” and (2) it did not improperly reject Krentler’s
“below the lines deductions for deferred maintenance and lease up costs.”

                                         II. ANALYSIS

        Petitioner argues that the Tribunal erred when it accepted the appraisal value of the
property as if it were in a stabilized and cured status but failed to make any deductions to reflect
its value in its actual, uncured and unstabilized, condition.

              Review of decisions by the Tax Tribunal decision is limited. 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. The Tax
       Tribunal’s factual findings are final if they are supported by competent, material,
       and substantial evidence on the whole record. [Mich Props, LLC v Meridian Twp,
       491 Mich 518, 527; 817 NW2d 548 (2012) (quotation marks and citations
       omitted).]

“Substantial evidence is any evidence that reasonable minds would accept as adequate to support
the decision; it is more than a mere scintilla of evidence but may be less than a preponderance of
the evidence.” Mich Ed Ass’n Political Action Cmty v Sec’y of State, 241 Mich 432, 444; 616
NW2d 234 (2000).

        Under the GPTA, the Tax Tribunal has a duty to determine the property’s “true cash
value,” which is synonymous with “market value.” Forest Hills Co-operative v City of Ann
Arbor, 305 Mich App 572, 587; 854 NW2d 172 (2014); see also MCL 211.27(1). Here, the
Tribunal accepted the methodology employed by petitioner’s expert, Krentler, which resulted in
an appraisal of $2,100,000. However, because Krentler viewed this $2,100,000 amount as the
value of the property as if the property were in a stabilized and cured status, he made some
deductions to reflect the actual unstabilized and uncured condition of the property. Krentler
deducted $480,000 for deferred maintenance costs and $130,000 for lease-up costs, resulting in a
final appraised value of $1,490,000. The Tribunal rejected all of these deductions, except for a
portion of the lease-up costs constituting leasing commissions. Thus, with the $11,840 deduction
for commissions, the Tribunal ended up with a true cash value of $2,088,160.

      Petitioner claims that the Tribunal’s ultimate finding on the property’s true cash value
was not supported by substantial evidence because the evidence clearly establishes that the


                                                -5-
$2,100,000 value is the property’s cured and stabilized value, and there is no dispute that the
property was not cured and stabilized.

                           A. DEFERRED MAINTENANCE COSTS

       The Tribunal denied any deductions to account for the condition of the property for three
reasons: (1) Krentler gave conflicting testimony regarding whether the property needed any
expenditures immediately after any sale, (2) the condition of the property was already taken into
account by Krentler’s methodology because he adjusted the comparable properties based on their
condition compared with the subject property, and (3) the cost of repairs does not translate to a
one-to-one ratio for market value.

       We agree with petitioner that the Tribunal’s view—that Krentler suggested that the
condition of the property made it so that no expenditures would be needed in the event of a
sale—was not supported by substantial evidence. The Tribunal quoted from page 37 of
Krentler’s report, which provided under the section “Expenditures Immediately After Purchase”:

       Some properties require the purchaser to make expenditures immediately after the
       acquisition of the property. For example, the local government may require safety
       problems to be corrected within a short period of time following the sale. Market
       participants consider these expenditures when buying and selling properties.

       No adjustments are necessary because none of the comparable sales required such
       expenditures immediately after the sale.

This section is located under the main heading, “Description of Adjustments,” and from a review
of that section, it is clear that these “adjustments” are for the price of the comparable properties.
This is evident because after Krentler discusses each of the adjustment components in the report,
the accompanying chart shows how the only prices that were adjusted were for the comparable
properties. For instance, under “Conditions of Sale,” because sale of property #3 appeared to be
a liquidation scenario, Krentler applied a positive 25% adjustment to that property’s sale price in
order to make it more representative of true market value. Thus, because none of the comparable
properties had any expenditures immediately incurred after the current owner acquired the
property, no adjustments to those comparable prices were made. As a result, the Tribunal clearly
erred when it concluded that Krentler was stating that no expenditures were necessary for the
subject property.5

       With respect to the Tribunal’s second reason for disallowing any deferred maintenance
deductions, it concluded that Krentler’s methodology already took into account the condition of
the property and that to make an explicit deduction was akin to “double dipping.” In other
words, the Tribunal opined that “Krentler is making adjustments for the present condition of the
property, twice,” i.e., in the condition adjustment and in the express “below the line” deduction


5
  As previously noted, the Tax Tribunal never addressed this aspect in its opinion denying
petitioner’s motion for reconsideration.


                                                -6-
for deferred maintenance. But in its opinion denying petitioner’s motion for reconsideration, the
Tribunal acknowledged that it erred when it found that Krentler’s methodology engaged in
“double dipping.”6 Regardless, the Tribunal found that its other reasons for disallowing the
deferred maintenance deduction were still valid. Consequently, we need not consider this reason
since the Tribunal itself has disavowed its prior reliance on it.

       Finally, the Tribunal relied on the fact that the costs for performing deferred maintenance
do not equate to an equal deduction to get market value. In other words, the Tribunal opined that

       $480,000 spent on deferred maintenance does not equal a $480,000 increase in
       value. In the alternative, why would its market value decrease by $480,000
       because of the potential costs of the repairs that are part of the cost of doing
       business?

The Tribunal’s point on repair costs not directly equating to market value is well regarded.
There was no evidence introduced that established that each dollar of needed repair costs results
in a like reduction in market value. It is not hard to envision that not all maintenance items
should be considered equally. Maintenance that needs to happen every year or two as opposed to
every decade or two likely should be considered differently when considering the property’s true
cash value. Furthermore, the Tax Tribunal is allowed to apply its own expertise when
determining the true cash value of property. See Great Lakes Div of Nat’l Steel Corp v City of
Ecorse, 227 Mich App 379, 389; 576 NW2d 667 (1998).

        However, the problem with the Tribunal’s ultimate finding is that while it recognized that
“repairs to the property are needed as suggested by Mr. Breza’s testimony and exhibits P-2, P-3
and P-4 detailing needed repairs,” it disallowed any deduction for the repairs.7 It should come as
no surprise that a property that is not cured should have less value than one that is cured, with all
other things being equal. The question then becomes how much less? Evidence was presented
that the property needed $480,000 in maintenance, but the Tribunal thought that a deduction of
$480,000 was not warranted because repair costs did not equate in a one-to-one fashion to loss
value. The difficulty is that the Tribunal never determined, given that the property purportedly


6
  Although the Tribunal did not elaborate on this, it appears that in order to avoid any “double
dipping,” the “Condition” adjustment that Krentler made on the comparable properties would
have to relate to things other than merely maintenance, such as nicer or more modern amenities.
For instance, if an upscale mall with modern amenities was being used to compare with an
average mall with older amenities, while both may have no maintenance issues, the upscale mall
likely will be considered as being in “superior” condition, thereby requiring a negative
adjustment to its price to bring it in line with the subject property.
7
  While this was understandable when the Tribunal thought that Krentler gave conflicting
testimony and that his appraisal already took the condition (or lack thereof) of the property into
account, these reasons have been discredited because we have determined that Krentler did not
give conflicting testimony and the Tribunal, itself, has acknowledged that it was wrong regarding
any double dipping.


                                                -7-
needed $480,000 in repairs, what percentage or portion of those repair costs would have been
proper to deduct from the cured value.

        In any event, we conclude that the substantial evidence does not support a deduction of
$0. The Tribunal accepted Krentler’s appraisal of $2,100,000 as if the property were stabilized
and cured. Because the Tribunal acknowledged that the property was not cured, it erred when it
concluded that no deduction was necessary to reflect its value in its uncured condition. On
remand, the Tribunal is to determine the true cash value of the property in its condition as of
December 31, 2011, which necessarily includes its state of repair. If the Tribunal concludes that
it has insufficient evidence to determine the how much of the repair costs can be deducted from
the cured value, it can elicit additional data from the parties.

                                     B. LEASE-UP COSTS

       At trial, Krentler testified that a $130,000 deduction from the property’s stabilized value
was needed to reflect the fact that the property was not stabilized. Of that $130,000, the Tribunal
found that only $11,840 in leasing commissions was appropriate to deduct. The Tribunal
explained:

                Mr. Krentler indicated in his appraisal that the market rate of vacancy and
       credit loss is 20%. He also noted that all his comparables were triple net leases.
       As indicated above, triple net leases include pro-rated amounts for CAM, property
       insurance and property taxes. In his explanation of lease-up costs, Mr. Krentler
       includes unreimbursed CAM, property insurance and property taxes. As the
       aforementioned information suggests, the loss of those items was already
       accounted for in the vacancy and credit loss. Further, in his rent comparables, Mr.
       Krentler indicates that, “The rent comparables all have similar tenant
       improvement allowances or rental concessions as compared to the subject and no
       adjustments are necessary.” In other words, . . . rental concessions and tenant
       improvements are already accounted for in Mr. Krentler’s income approach and
       no additional under the line adjustment is required. In his appraisal, Mr. Krentler
       describes lease-up costs as “lost rental income attributable to vacant suites,
       unrecovered expenses such as real estate taxes, insurances and common area
       maintenance, free rent [rental concessions], tenant improvement allowances and
       leasing commissions.” Of the highlighted items, the only category unaccounted
       for is leasing commissions of $11,840. [Citations omitted.]

The Tribunal also determined that the “entrepreneurial incentive” deduction, which Krentler
estimated as being 5% of the total of his calculated lease-up costs, was not warranted because a
purchaser would not “expect a [5%] return on the cost associated with leasing the property.”

        However, on appeal, petitioner does not address any of these reasons in challenging the
Tribunal’s decision to only deduct $11,840 for lease-up costs. Instead, petitioner cursorily avers
that a deduction was necessary because the property was 27.5% vacant, which was over the
“stabilized” rate of 18% and only focuses its argument on the lack of a deduction for the
$480,000 deferred maintenance. Accordingly, to the extent that petitioner challenges the lack of
deductions attributable to lease-up costs, that challenge is abandoned. See Ypsilanti Charter Twp

                                                -8-
v Kircher, 281 Mich App 287; 761 NW2d 761 (2008) (“[Appellant’s] failure to properly address
the merits of his assertion of error constitutes an abandonment of this issue on appeal.”).

                                      III. CONCLUSION

       Because the Tax Tribunal’s ultimate finding related to the true cash value of the property
was not supported by substantial evidence, we vacate the Tribunal’s opinion and judgment. We
remand for the Tribunal to determine the proper amount to deduct from the $2,088,160 cured
(but unstabilized) value8 to arrive at the proper true cash value. We do not retain jurisdiction.



                                                            /s/ Michael J. Riordan
                                                            /s/ Pat M. Donofrio
                                                            /s/ Jane M. Beckering




8
 Note, that because petitioner failed to properly challenge the deductions related to the lease-up
costs, the Tribunal’s handing of those lease-up deductions is unaffected.


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