                           STATE OF MICHIGAN

                             COURT OF APPEALS



LARS ASSOCIATES, L.L.C.,                                               UNPUBLISHED
                                                                       January 27, 2015
               Petitioner-Appellant,

v                                                                      No. 318141
                                                                       Tax Tribunal
CITY OF CHELSEA,                                                       LC No. 00-414127

               Respondent-Appellee.


Before: MURPHY, P.J., and METER and SERVITTO, JJ.

PER CURIAM.

       Petitioner Lars Associates, L.L.C., appeals as of right an opinion and judgment issued by
the Michigan Tax Tribunal (MTT) that valued the Chelsea Shopping Center at a taxable value
(TV) of $1,482,875 in 2011 and at a TV of $1,509,700 in 2012. We reverse and remand to the
MTT.

                                        I.      OVERVIEW

        For both tax years 2011 and 2012, respondent City of Chelsea (the city) assessed the
shopping center at a TV of $2,167,400. At the hearing before the MTT, the city argued that, on
the basis of the testimony of its appraiser, the TVs for 2011 and 2012 should actually be
increased by approximately $200,000. Petitioner’s appraiser opined at the hearing that the TVs
for both 2011 and 2012 should be $1,030,000. The MTT ruled as indicated above, and
petitioner, while generally pleased with the MTT’s analysis, finds fault with three components of
the MTT’s computations relative to determining true cash value.

        II.     STANDARDS OF REVIEW AND APPLICABLE LEGAL PRINCIPLES

       The MTT “has exclusive and original jurisdiction over . . . [a] proceeding for direct
review of a final decision . . . relating to [an] assessment [or] valuation . . . under the property tax
laws of this state.” MCL 205.731(a). An appeal of an MTT decision is by right to this Court.
MCL 205.753(1); MCR 7.203(A)(2). With respect to our standard of review, the Michigan
Supreme Court in Mich Props, LLC v Meridian Twp, 491 Mich 518, 527-528; 817 NW2d 548
(2012), observed:

               Review of decisions by the Tax Tribunal is limited. In the absence of
       fraud, error of law or the adoption of wrong principles, no appeal may be taken to

                                                  -1-
       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. If the facts are not disputed and fraud is
       not alleged, our review is limited to whether the Tax Tribunal made an error
       of law or adopted a wrong principle. [Quotation marks and citations omitted.]

       “[A] Tax Tribunal decision that is not supported by competent, material, and substantial
evidence on the whole record is an ‘error of law.’” Great Lakes Div of Nat’l Steel Corp v City of
Ecorse, 227 Mich App 379, 388; 576 NW2d 667 (1998). “[W]e . . . defer to the MTT to assess
the weight and credibility of the evidence before it.” Drew v Cass Co, 299 Mich App 495, 502;
830 NW2d 832 (2013). We may not set aside the MTT’s factual findings that are sufficiently
supported by the evidence on the basis that alternative findings are also supported by the
evidence or because we would have reached a different result. Id. at 501. The interpretation and
application of tax statutes are legal issues subject to de novo review. Danse Corp v City of
Madison Hts, 466 Mich 175, 178; 644 NW2d 721 (2002).

       The taxing authority of the state emanates from the Michigan Constitution, which
provides in relevant part:

                The legislature shall provide for the uniform general ad valorem taxation
       of real and tangible personal property not exempt by law except for taxes levied
       for school operating purposes. The legislature shall provide for the determination
       of true cash value of such property; the proportion of true cash value at which
       such property shall be uniformly assessed, which shall not, after January 1, 1966,
       exceed 50 percent; and for a system of equalization of assessments. [Const 1963,
       art 9, § 3.]

       “[A]ll property, real and personal, within the jurisdiction of this state, not expressly
exempted, shall be subject to taxation.” MCL 211.1. “For the purpose of taxation, real property
includes . . . [a]ll land within this state, all buildings and fixtures on the land, and all
appurtenances to the land . . . .” MCL 211.2(1)(a). Additionally, MCL 211.27a(1) provides that,
generally, “property shall be assessed at 50% of its true cash value” under Const 1963, art 9, § 3.
MCL 211.27(1) addresses the meaning of “true cash value,” providing as follows:

                “[T]rue cash value” means the usual selling price at the place where the
       property to which the term is applied is at the time of assessment, being the price
       that could be obtained for the property at private sale, and not at auction sale
       except as otherwise provided in this section, or at forced sale. . . . In determining
       the true cash value, the assessor shall also consider the advantages and
       disadvantages of location; quality of soil; zoning; existing use; present economic
       income of structures, including farm structures; present economic income of land
       if the land is being farmed or otherwise put to income producing use; quantity and
       value of standing timber; water power and privileges; minerals, quarries, or other
       valuable deposits not otherwise exempt under this act known to be available in the
       land and their value.



                                                -2-
        “True cash value is synonymous with fair market value.” Great Lakes Div of Nat’l Steel
Corp, 227 Mich App at 389. Accordingly, an “assessment must reflect the probable price that a
willing buyer and a willing seller would arrive at through arm’s length negotiation.” Huron
Ridge LP v Ypsilanti Twp, 275 Mich App 23, 28; 737 NW2d 187 (2007). While a petitioner has
the burden to establish a property’s true cash value, the MTT has the obligation “to make an
independent determination of true cash value.” President Inn Props, LLC v Grand Rapids, 291
Mich App 625, 631; 806 NW2d 342 (2011). “Thus, even when a petitioner fails to prove by the
greater weight of the evidence that the challenged assessment is wrong, the Tax Tribunal may
not automatically accept the valuation on the tax rolls.” Id.

        “The Tax Tribunal is under a duty to apply its expertise to the facts of a case in order to
determine the appropriate method of arriving at the true cash value of property, utilizing an
approach that provides the most accurate valuation under the circumstances.” Great Lakes Div
of Nat’l Steel Corp, 227 Mich App at 389. The goal, ultimately, is for the MTT to employ a
valuation process that leads to a well-supported conclusion reflecting the study of all factors
influencing market value, which process can entail reasonable approximations and a considerable
amount of judgment, absent the need to quantify every possible value factor. Id. at 398-399.

       With respect to particular methods of valuation, our Supreme Court in Meadowlanes Ltd
Dividend Housing Ass’n v Holland, 437 Mich 473, 484-485; 473 NW2d 636 (1991), stated:

              There are three traditional methods of determining true cash value, or fair-
       market value, which have been found acceptable and reliable by the Tax Tribunal
       and the courts. They are: (1) the cost-less-depreciation approach, (2) the sales-
       comparison or market approach, and (3) the capitalization-of-income approach.
       Variations of these approaches and entirely new methods may be useful if found
       to be accurate and reasonably related to the fair-market value of the subject
       property. . . . Regardless of the valuation approach employed, the final value
       determination must represent the usual price for which the subject property would
       sell.

               Under each approach, the appraiser analyzes data mathematically to
       determine an estimate of the fair-market value of both the physical real estate and
       all the interests, benefits, and rights inherent in ownership of that real property.
       [Citations and footnotes omitted.]

       In this case, the MTT used the capitalization-of-income approach to calculate the
shopping center’s true cash value.1 “The income-capitalization approach measures the present
value of the future benefits of property ownership by estimating the property’s income stream


1
  The parties’ experts both employed a capitalization-of-income approach backed up with a
sales-comparison or market approach. The MTT decided to solely utilize the capitalization-of-
income approach, given that the appraisers primarily relied on said approach and because the
MTT found that neither appraiser adequately and credibly supported their conclusions using the
sales-comparison approach.


                                                -3-
and its resale value (reversionary interests) and then developing a capitalization rate which is
used to convert the estimated future benefits into a present lump-sum value.” Id. at 485 n 20.

       III.    CAPITALIZATION-OF-INCOME APPROACH AND OUR ANALYSIS

        As an overview of the MTT’s application of the capitalization-of-income approach to
determine true cash value, the MTT calculated, separately for each of the tax years at issue, the
shopping center’s potential gross rental income, subtracted vacancy and collection losses, added
expense reimbursements, subtracted operating expenses, applied a capitalization rate, and
subtracted lease-up costs for purposes of stabilization. Petitioner does not challenge the general
or overall formula employed by the MTT in applying the capitalization-of-income approach, as
reflected in the mathematical steps outlined in the preceding sentence. Petitioner does, however,
allege error with respect to certain amounts and calculations used by the MTT within those steps
in the process of determining true cash value. It is important to note that when calculating such
items as income, expenses, losses, costs, and reimbursements within the capitalization-of-income
approach, appraisers work in terms of projections and estimates in connection with firm
assessment dates. In doing so, appraisers take into consideration, in part, market comparables,
the history of the assessed property, and financial or other circumstances that actually developed
after the assessment date.2 Here, the assessment date for the 2011 taxes was December 31, 2010,
and the assessment date for the 2012 taxes was December 31, 2011. In conducting our analysis,
we shall examine each step in the capitalization-of-income formula taken by the MTT in
determining true cash value, defining and explaining certain concepts along the way and
stopping to entertain and resolve the three particular arguments posed by petitioner on appeal.

                       A.     POTENTIAL GROSS RENTAL INCOME

        In applying the capitalization-of-income approach, the MTT first found that the shopping
center had potential gross rental income in 2011 of $583,920 and potential gross rental income in
2012 of $612,345.3 In calculating those numbers, the MTT weighed the various market rent
comparables proffered by the experts, and the rental space was divided between in-line space


2
  Under MCL 211.27(1), an assessor, in determining true cash value, is required to consider
“present economic income.” MCL 211.27(5) provides, in part:
               “[P]resent economic income” means for leased or rented property the
       ordinary, general, and usual economic return realized from the lease or rental of
       property negotiated under current, contemporary conditions between parties
       equally knowledgeable and familiar with real estate values. The actual income
       generated by the lease or rental of property is not the controlling indicator of its
       true cash value in all cases.
3
  The MTT initially indicated that, in using the capitalization-of-income approach to calculate
true cash value, the parties’ appraisers generally disagreed with respect to virtually all of the
variables and numbers utilized in the approach. The MTT found, in general, that petitioner’s
appraiser’s conclusions “regarding rent rates, expenses and expense reimbursements, and
capitalization rates [were] better supported and generally more credible.”


                                               -4-
(space for smaller retailers), which encompassed 34,995 sq. ft. of the 91,845 sq. ft. in total rental
space available in the shopping center, and big-box space (anchors, large retailers), which
amounted to 56,850 sq. ft. The MTT, in determining the potential gross rental income,
calculated income at a rate of $11 per sq. ft. for the in-line space as to both 2011 and 2012,
calculated income at a rate of $3.50 per sq. ft. for the big-box space relative to 2011, and
calculated income at a rate of $4 per sq. ft. for the big-box space for 2012. Petitioner challenges
the $4 per sq. ft. rate in regard to 2012 big-box space. Before launching into petitioner’s
argument, we must first explain how the MTT settled upon the $4 per sq. ft. rate.

        As part of its analysis with respect to examining market rent comparables and projecting
income for the in-line and big-box spaces, the MTT referenced “triple net leases.” In his
appraisal that was admitted into evidence, petitioner’s expert stated that a triple net lease is one
in which “the tenant reimburses the landlord for their pro-rata share of real estate taxes,
insurance, and common-area maintenance [CAM].” These costs are not embedded in the rental
rate or payment. On the other hand, a gross lease is a lease in which the landlord agrees to pay
the expenses that are normally associated with the property, such as the CAM costs, taxes, and
insurance. With a gross lease, a tenant pays only the base rent and does not reimburse the
landlord for the tenant’s pro-rata share of CAM costs, taxes, and insurance. Both appraisers
conducted their respective analyses by using a “triple net lease” standard or framework, making
the necessary adjustments for any market rent comparables that involved gross leases. The city’s
appraiser stated in his appraisal that “[t]he preference was to analyze lease transactions with
triple net terms as this is most common in this market.” Petitioner’s appraiser observed in his
appraisal that “adjustments are applied to . . . [gross lease and other] comparables to reflect a
triple net expense structure.”

        In regard to the MTT’s reasoning in support of the $3.50 per sq. ft. rate for 2011 and the
$4 per sq. ft. rate for 2012 as to the big-box space, the MTT stated:

               With respect to market rents for the big-box space, the Tribunal finds that
       Petitioner’s rent comparables #1 and #4 should be given little weight as neither
       can be considered an anchor lease since both are stand-alone spaces . . . . The
       Tribunal further finds that Petitioner’s comparable #2 is the lease of 42,000
       square feet of the subject space [shopping center] to Family Farm & Home
       [FF&H] in March 2012. The Tribunal finds that comparables #3 . . . and #5 are
       comparable to the lease of 56,850 square feet of big-box space at the subject and
       support unadjusted market rent rates of $6 and $3.67 per square foot[,
       respectively]. However, as discussed above, Comparable #3 is not a triple net
       lease and therefore requires a substantial adjustment for expense reimbursement
       terms (as well as sizeable adjustments for location), and, . . . as such, is given
       minimal consideration by the Tribunal. Based primarily on comparable #5, which
       required minimal adjustments, the Tribunal finds that Petitioner’s appraiser’s
       concluded market rent of $3.50 for the 2011 tax year is credible and supported by
       the evidence and testimony presented [this calculation is not challenged on
       appeal]. However, after giving consideration to the lease of 42,000 square feet of
       space at the subject to [FF&H] for $4.2[7] per square foot, just three months
       after the December 31, 2011 assessment date, the Tribunal finds that an increase


                                                -5-
       in market rent per square foot to $4 for big-box space as of the December 31,
       2011 assessment date is supported by the evidence. [Emphasis added.]

         Petitioner’s first argument on appeal concerns the calculation of potential gross rental
income for 2012 relative to the big-box space and the MTT’s use of $4 per sq. ft., which, as just
quoted, was predicated on the rental rate charged to FF&H of $4.27 per sq. ft.4 Petitioner argues
that the MTT mistakenly proceeded on the basis that the FF&H lease was a triple net lease and
not a gross lease. Petitioner maintains that this mistake overinflated the “potential gross rental
income” figure, which in turn increased the true cash value and TV. Petitioner contends that the
MTT, in a different part of its analysis, had calculated “expense reimbursements” of slightly
more than $1 per sq. ft. According to petitioner, because petitioner would not actually enjoy any
expense reimbursements for CAM, taxes, and insurance under a gross lease and because a “triple
net lease” rate was the projection standard being employed by the MTT in the appraisal
approach, an adjustment was absolutely necessary in regard to the FF&H lease. Petitioner argues
that the $1 per sq. ft. expense reimbursement rate should have been subtracted from the $4.27 per
sq. ft. “gross lease” rate under the FF&H lease as a necessary adjustment in order to produce a
rate that was reflective of a “triple net lease” rate, thereby reducing the rate to $3.27 per sq. ft.5
To be clear, petitioner does not seek implementation of the $3.27 sq. ft. rate for 2012 big-box
space instead of the $4 sq. ft. rate actually utilized by the MTT. Rather, petitioner contends that,
consistent with its proofs and arguments presented below that contemplated all of its proffered
comparables as adjusted to reflect “triple net lease” rates, only one of which was the FF&H
lease, the MTT should have continued employing the $3.50 per sq. ft. rate that it had used in
calculating the potential gross rental income for the big-box space in 2011.

        Indisputably, the evidence established that the FF&H lease was a gross lease and not a
triple net lease. As reflected in the passage quoted earlier, the MTT itself recognized that a
substantial rate adjustment would be necessary due to expense-reimbursement issues if a
comparable rental property did not involve a triple net lease. Given the framing of its opinion
and judgment, it appears that the MTT operated on the mistaken belief that the FF&H lease was
a triple net lease. Clearly, the MTT intended to utilize a “triple net lease” standard and
associated rental rates.

        The MTT’s apparent inconsistent approach with respect to triple net and gross leases
reflected the adoption of wrong principles and is analogous to the problematic approach taken by



4
 In its findings of fact, the MTT stated that, as to the FF&H lease, it was entered into on March
27, 2012, and “[t]he effective lease rate (net of tenant improvements and commissions) was
$4.27 per square foot.” The record indicates that the rental rate for FF&H was $5.22 per sq. ft.,
which was adjusted downward to $4.27 per sq. ft. after subtracting $.95 per sq. ft. for costs
associated with tenant improvements and leasing commissions. Tenant improvements and
commissions are discussed in more detail below.
5
 As indicated in the MTT’s discussion, petitioner’s appraiser used the FF&H lease as one of his
big-box market rent comparables, and he actually set the rental rate at $3.32 per sq. ft. in his
appraisal after making an adjustment.


                                                 -6-
the MTT in Great Lakes Div of Nat’l Steel Corp, 227 Mich App 379, which resulted in a reversal
and remand. This Court explained:

               [T]he Tax Tribunal expressed an intent in its original opinion to use
       “gross” (rated) rather than “effective” capacity so as to render its formula “age
       and condition neutral” with regard to the machinery at the integrated steel mill.
       However, the formula ultimately adopted by the Tax Tribunal appears to use
       capacity levels at different stages of production and mixes “rated” and “effective”
       capacities. Indeed, GLD itself argues on appeal that the Tax Tribunal used the
       “effective” crude steel capacity for WCI and Weirton, but the “rated” capacity of
       the hot strip mill for GLD. The Tax Tribunal's adoption of an approach for
       comparing properties on the basis of different units of measurement further
       buttresses our conclusion that the Tax Tribunal's formula does not establish a
       reasonable, well-supported conclusion for true cash value. [Id. at 410-411.]

         We similarly hold that reliance on a “gross lease” rate, absent adjustment, when a “triple
net lease” rate is the standard intended to be employed in determining potential gross rental
income and ultimately true cash value, fails to establish a reasonable, well-supported conclusion
for the shopping center’s true cash value in 2012. Our hesitancy here arises out of uncertainty
about the MTT’s analysis. The MTT never expressly stated that it found the FF&H lease to be a
triple net lease, nor did it indicate that the FF&H lease was not a gross lease. The MTT, in
calculating the rental rate for 2012 big-box space, used a $4 per sq. ft. rate and not the entire
$4.27 per sq. ft. rate under the FF&H lease. Perhaps the MTT decreased the rate on the
unexpressed basis that the FF&H lease was a gross lease, although this would not explain the
limited extent of the decrease given the expense reimbursement rate of about $1 per sq. ft. We
also note that the MTT stated that it was “giving consideration to the [FF&H] lease” when
setting the $4 per sq. ft. rate, which did not necessarily mean that it was the “only” consideration
in setting the rate. The problem is that the MTT did not identify any other “consideration,” and
the MTT had expressly ruled that it gave “no weight” to the city’s appraiser’s opinion that the
rent rate for big-box space in 2012 should be $6 per sq. ft. If indeed the MTT relied solely on
the $4.27 per sq. ft. lease rate under the FF&H lease in setting the $4 per sq. ft. rate for 2012 big-
box space on the belief that the FF&H lease was a triple net lease, this would amount to the
adoption of a wrong principle necessitating reversal. Remand is necessary for purposes of
allowing the MTT to provide clarity on the matter. We shall now address the city’s arguments
on this issue in the context of an assumption that the MTT did adopt a wrong principle.

        The city argues that the MTT increased the rate for big-box space from $3.50 per sq. ft. to
$4 per sq. ft. on the basis of a growing and strengthening economy; however, nowhere in the
opinion and judgment is there support for such a contention. Indeed, the gist of the city’s
response to petitioner’s appeal is that there were sound reasons and supporting evidence for
using the $4 per sq. ft. rate. And while perhaps this is true, the city’s argument is pure
speculation, as the MTT did not voice any of the reasons or cite any of the evidence set forth by
the city in deciding upon the $4 per sq. ft. rate. Instead, as gleaned from the opinion and
judgment, the MTT only referenced the FF&H lease as the basis for the $4 per sq. ft. lease rate.

        We emphasize that we are not directing the MTT on remand to adjust the 2012 big-box
rate to $3.50 per sq. ft., nor are we precluding it from once again using the $4 per sq. ft. rate.
Rather, the MTT must provide some clarity as discussed earlier and must set the lease rate as
                                                 -7-
supported by the evidence, keeping in mind and recognizing the true nature of the FF&H lease as
a gross lease and not a triple net lease.

    B.    VACANCY AND COLLECTION LOSSES; EXPENSE REIMBURSEMENTS; AND
                          OPERATING EXPENSES

        The MTT next subtracted vacancy losses and collection losses from the shopping center’s
potential gross rental incomes, and it then added expense reimbursements for 2011 and 2012,
resulting in a determination that the shopping center had a projected total gross income of
$585,008 in 2011 and $609,645 in 2012. The MTT then subtracted the shopping center’s
estimated operating expenses for 2011 and 2012, resulting in a net operating income of $421,873
in 2011 and $445,988 in 2012. No appellate arguments are raised directly regarding these
calculations. But of course, the amounts for 2012 may have to be recalculated on remand
depending on the MTT’s reexamination of the potential gross rental income in 2012 in relation to
the square footage lease rate for the big-box space.

    C.   APPLICATION OF CAPITALIZATION AND TAX RATES; STABILIZATION AND
                              LEASE-UP COSTS

       The MTT next divided the shopping center’s net operating incomes ($421,873 in 2011
and $445,988 in 2012) by the shopping center’s combined capitalization rate and tax rate, 12.47
percent, thereby producing a “stabilized” true cash value in 2011 of approximately $3,383,100
and a “stabilized” true cash value in 2012 of approximately $3,576,500.6 The MTT, however,
continued by finding that because the shopping center was in fact not stabilized during the 2011
and 2012 tax years, i.e., it was not operating at typical market occupancy levels, it was necessary
to account for stabilization, or the lack thereof, in calculating the true cash values for those years.
The typical market vacancy rate was 15 percent (85 percent occupancy rate), but the shopping
center was only 21.4 percent occupied on the assessment dates of December 31, 2010, and
December 31, 2011. To account for stabilization and reach true cash values, the MTT subtracted
lease-up costs, under which category the MTT deducted lost rent (unrented space), expense
recovery losses, and tenant improvements and leasing commissions.7 Tenant improvements are


6
  A commercial property is “stabilized” when it is operating at typical market occupancy levels
based on the typical vacancy rate in the market. Thus, the stabilized true cash value would
reflect the shopping center’s value if it were operating at typical market occupancy levels.
7
  A concise explanation of lease-up costs was provided by petitioner’s appraiser in his written
appraisal:
                 In order to determine the market value as is, lease-up costs must be
         deducted from the indicated value as stabilized estimated via the direct
         capitalization method. Lease-up costs include lost rental income attributable to
         vacant suites, unrecovered expenses such as real estate taxes, insurance, and
         common area maintenance, . . . tenant improvement allowance, and leasing
         commissions. For example, in order to lease up a vacant suite, a potential buyer
         would consider the lost income during the time it takes to lease the space, the loss
         of expense reimbursement income from the tenant of that suite, . . . and additional

                                                 -8-
generally construction-related expenses that a landlord incurs in preparing a space to fit the
occupancy needs of a new tenant. And of course, leasing commissions are an expense related to
using realtors or other professionals in locating prospective tenants and closing leases with them.

         With respect to tenant improvements and leasing commissions, which were combined by
the MTT under the lease-up costs’ category, the MTT subtracted $54,000 from the stabilized true
cash values for both 2011 and 2012. The amount was calculated for both years under a formula
that multiplied 56,850 sq. ft. of space by a cost of $.95 per sq. ft. (equaling the $54,000 cost
amount). As part of the underlying basis of that calculation, the MTT took into consideration
$200,000 in tenant-improvement and leasing-commission costs that petitioner actually incurred
in leasing approximately 42,000 sq. ft. of the shopping center to FF&H in 2012 under a five-year
lease. The $.95 per sq. ft. rate that was multiplied by 56,850 sq. ft. was apparently derived
pursuant to a formula in which the MTT amortized the $200,000 in tenant improvements and
leasing commissions over the five years of the FF&H lease, and then divided that amortized
amount by the square footage leased to FF&H ($200,000 ÷ 5 yrs. = $40,000 per year ÷ 42,000
sq. ft. = $.95 per sq. ft. [rounded off]).

        On appeal, petitioner challenges the MTT’s determination to subtract only $54,000 in
lease-up costs for 2011 and 2012 associated with tenant improvements and leasing commissions
and, more particularly, petitioner criticizes the MTT’s employment of amortization in making the
calculations. Petitioner contends that the MTT should have simply used the $200,000 in tenant
improvements and leasing commissions, unamortized, for purposes of determining related lease-
up costs ($200,000 ÷ 42,000 sq. ft. = $4.76 per sq. ft. x 56,850 sq. ft. = $270,606). Accordingly,
petitioner maintains that it was entitled to a $270,606 deduction for lease-up costs associated
with tenant improvements and leasing commissions for tax years 2011 and 2012, not just
$54,000. Petitioner contends that the MTT’s use of an amortized rate of $.95 per sq. ft.
(resulting in $54,000 in costs) instead of an unamortized rate of $4.76 per sq. ft. (resulting in
$270,606 in costs), effectively applied only one-fifth of the tenant improvements and leasing
commissions a prospective purchaser of the shopping center would have had to incur in 2011 or
2012.

       We fail to understand why the MTT would have amortized the $200,000 in tenant
improvements and leasing commissions associated with the FF&H lease; the MTT provided no
explanation. The city argues that one of petitioner’s own witnesses, a property manager for the
shopping center, testified about amortizing the $200,000 in tenant improvements and leasing
commissions. However, on close inspection of the testimony, the witness was speaking of
amortization in connection with addressing the costs and economics of the lease transaction with
FF&H and determining the gross lease rate ($5.22 per sq. ft. – $.95 per sq. ft. as amortized =

       expenses for tenant improvements and leasing commissions. It is important to
       consider these costs as a potential investor in the subject would also consider
       them when determining a price they are willing to pay for the subject at its current
       occupancy level.




                                                -9-
$4.27 per sq. ft.; see footnote 4 above). The witness was not testifying about amortizing the
$200,000 in tenant improvements and leasing commissions for purposes of calculating lease-up
costs in connection with determining the property’s true cash value after stabilization.8
Petitioner’s appraiser opined that it was appropriate to consider the full cost of tenant
improvements and leasing commissions upfront in a “lump sum,” as a prospective purchaser
would not realistically be able to amortize those costs. We agree with this assessment, and
conclude that the MTT adopted a wrong principle. The use of amortization did not result in a
reasonable, well-supported conclusion for the shopping center’s true cash value. Great Lakes
Div of Nat’l Steel Corp, 227 Mich App at 411. We shall, however, entertain some additional
arguments posed by the city.

        The city vigorously maintains that the $54,000 amount in lease-up costs was reasonably
determined, given that, as part of considering stabilization, the 21.4 percent occupancy rate was
more fiction than reality, where a prior anchor, while no longer inhabiting space, actually paid
rent for the first five months of 2011, and where FF&H, while not signed to a lease on December
31, 2011, actually began renting the space in March of 2012. Initially, we note that the MTT did
not state that it amortized the $200,000, or only allowed $54,000 in costs, so as to reflect the
“reality” of the shopping center’s occupancy levels. Again, the city is offering reasons to affirm
that were never uttered by the MTT. Moreover, there was competent, material, and substantial
evidence on the record supporting the MTT’s findings that the shopping mall had an occupancy
rate of 21.4 percent on December 31, 2010 and 2011.9 We also note that the MTT took into
consideration the five months of rental payments in 2011 from the former anchor and the 2012
rental payments from FF&H in calculating the “lost rent” component of lease-up costs.

       The city finally maintains that the MTT should have used a yield-capitalization approach
instead of a direct-capitalization approach, given that consideration of lease-up costs in the



8
  We do note that the matter gives rise to a concern of possible double dipping. In calculating the
potential gross rental income as to 2012 for the big-box space, the $5.22 per sq. ft. rental rate
under the FF&H lease was reduced to $4.27 per sq. ft. after subtracting $.95 per sq. ft., which
amount represented amortization of the $200,000 in tenant improvements and leasing
commissions, with the MTT ultimately setting the lease rate at $4 per sq. ft. Thus, consideration
of the tenant improvements and leasing commissions, as part of the calculation of potential gross
rental income in 2012 relative to big-box space, reduced the potential gross rental income. If
petitioner also receives the requested increase for tenant improvements and leasing commissions
as part of the analysis of lease-up costs and stabilization, which will reduce the true cash value, it
would seem that petitioner would be realizing a double benefit arising out of the same tenant
improvements and leasing commissions. Because we are uncertain whether our concern is
sound, we at least direct the MTT to address it on remand, applying its expertise to the question.
9
  In its findings of fact, the MTT found that the shopping center was 27 percent occupied, but it
later indicated that the shopping center “was only 21.4% occupied on the two assessment dates.”
The initial reference to a 27 percent occupancy rate was clearly a typographical error, as there
was no evidence that the shopping center was ever 27 percent occupied, while the 21.4 percent
rate was supported by the record.


                                                -10-
direct-capitalization approach results in a “ridiculously large reduction in value.” As reflected in
the MTT’s opinion and judgment, the city’s own appraiser, as well as petitioner’s appraiser and
the MTT, relied on a direct-capitalization approach. Accordingly, the city has waived or
abandoned any claim that a yield-capitalization approach should now be used. The city asserts
that the MTT was “no doubt aware that applying [the] direct capitalization approach to a non-
stabilized income producing property led to wide swings in value that overstate the reduction in
value that is attributable to the lease up process.” The city is apparently suggesting that the MTT
employed amortization of the $200,000 in lease-up costs (those tied to tenant improvements and
leasing commissions), and only allowed $54,000 in those costs for the two tax years at issue,
because of the MTT’s knowledge that the direct-capitalization approach was problematic. The
opinion and judgment, however, does not in any way support this proposition, and the city’s
argument is entirely speculative. More likely, the MTT mistakenly interpreted the testimony of
petitioner’s property manager.

        In sum, in amortizing the $200,000 in tenant improvements and leasing commissions, the
MTT failed to apply “an approach that provides the most accurate valuation under the
circumstances,” Great Lakes Div of Nat’l Steel Corp, 227 Mich App at 389, and it adopted a
wrong principle, Mich Props, LLC, 491 Mich at 527-528. For purposes of clarity on remand, the
MTT is to reassess the lease-up costs with respect to tenant improvements and leasing
commissions, absent consideration of amortization and consistent with this opinion. But the
MTT is still free to set the amount at a lower dollar figure than that argued by petitioner, as long
as the MTT can provide a sufficiently sound and legally supportable basis for its calculation.

        Next, and again with respect to lease-up costs, in calculating lost rent for unrented space,
expense recovery losses, and tenant improvements and leasing commissions, the MTT based its
calculations on 56,850 sq. ft., which is equivalent to the amount of big-box space. For purposes
of stabilization, the amount of rental space that was not rented out to tenants would ordinarily be
considered, but only to the extent of achieving, in this case, a stabilized occupancy rate of 85
percent. Given the 21.4 percent occupancy rate for both tax years, which would amount to
19,655 sq. ft. of space, and considering that to reach 85 percent occupancy (78,068 sq. ft.), 63.6
percent more space would have had to been rented out to tenants, or 58,413 sq. ft., the MTT’s
reliance on 56,850 sq. ft. instead of 58,413 sq. ft. (1,563 sq. ft. difference) in calculating lease-up
costs would appear to have been erroneous. Petitioner makes this precise argument in its third
and final appellate challenge.10




10
   We do note that it is unclear whether petitioner extends this particular argument to lease-up
costs associated with tenant improvements and leasing commissions, considering that the very
formula which petitioner argued in favor of in its second claim of error was based on 56,850 sq.
ft. and not 58,413 sq. ft. The $200,000 in tenant improvements and leasing commissions
pertained to big-box space and not in-line space, but petitioner’s appraiser also presented cost
projections for tenant improvements and leasing commissions relative to in-line space. As
petitioner does not expressly limit its final argument to lost rent and expense recovery losses, our
ruling shall encompass those items along with tenant improvements and leasing commissions.


                                                 -11-
         The MTT decided to use the amount of big-box square footage, 56,850 sq. ft., in its lease-
up calculations, which did not result in achieving an 85 percent stabilized occupancy rate. This
resulted in a lower amount of lease-up costs being subtracted from the stabilized true cash
values, which in turn ultimately resulted in higher true cash values and TVs. The MTT did find
that it was “appropriate to account for stabilization . . . [as] the subject [was] operating below the
market in terms of stabilized occupancy.”

          On its face, the MTT’s lease-up calculations based on 56,850 sq. ft. instead of 58,413 sq.
ft. – a 1,563 sq. ft. difference – reflected the adoption of a wrong principle. In his appraisal,
petitioner’s expert added the 56,850 sq. ft. of big-box space to 1,879 sq. ft. (not 1,563) from a
particular vacant in-line suite located in the shopping center. In the MTT’s opinion and
judgment, it expressly rejected “inclusion of 1,879 square feet of in-line space . . . in calculating
lease-up costs.” The MTT indicated that petitioner’s appraiser failed to adequately support or
explain why 1,879 sq. ft. of in-line space should be included in calculating lease-up costs. As
now recognized and correctly argued by petitioner, only 1,563 sq. ft., not the 1,879 sq. ft.
referenced by its appraiser, needed to be added to the 56,850 sq. ft. of big-box space to achieve
an 85 percent stabilized occupancy rate. Using 1,879 sq. ft. would have eclipsed the 85 percent
mark. However, in light of the fact that the MTT expressly sought stabilization and recognized a
21.4 percent occupancy rate and an 85 percent stabilized occupancy rate, we see no logical
reason why it needed to ignore the entire 1,879 sq. ft., as opposed to simply limiting it to 1,563
sq. ft., as necessary to achieve an 85 percent stabilized occupancy rate.

        We reject the city’s argument that we should not remand on this particular matter under
the doctrine of de minims non curat lex, where the MTT ignored only a very small percentage of
the space necessary to stabilize the occupancy of the shopping center. Given that we are already
remanding the case for the MTT to address other matters, and considering that, even on this issue
alone, the additional lease-up costs for an extra 1,563 sq. ft. are not insubstantial, remand is the
proper course of action. We also note that the city apparently agrees with the substance of
petitioner’s argument, as it provides no counter argument whatsoever on the merits of the
claimed error.

                                  D.         TRUE CASH VALUES

        Finally, after subtracting the total lease-up costs from the stabilized true cash values, the
MTT determined that the shopping center had a true cash value in 2011 of $2,965,750 and a true
cash value in 2012 of $3,019,400. Based on those true cash values, and using the 50 percent
assessment rate mandated by the Michigan Constitution and statute, the MTT found that the
shopping center had a TV in 2011 of $1,482,875 and a TV in 2012 of $1,509,700. Given our
ruling on the appellate issues, the MTT will have to recalculate these numbers after conducting
proceedings on remand consistent with this opinion.

                                       IV.     CONCLUSION

       The MTT may have adopted a wrong principle with respect to triple net and gross leases
in calculating potential gross rental income for the big-box space as to tax year 2012, which
necessitates remand for clarification and/or possible correction. Additionally, the MTT adopted
wrong principles in calculating lease-up costs associated with tenant improvements and leasing
commissions by using amortization relative to 2011 and 2012, and in calculating lease-up costs
                                                 -12-
for both years by failing to consider the full amount of square footage necessary to achieve an 85
percent stabilized occupancy rate.

       Accordingly, we reverse and remand to the MTT for further proceedings consistent with
this opinion. We do not retain jurisdiction. Having fully prevailed on appeal, petitioner is
awarded taxable costs pursuant to MCR 7.219.

                                                            /s/ William B. Murphy
                                                            /s/ Patrick M. Meter
                                                            /s/ Deborah A. Servitto




                                              -13-
