                          STATE OF MICHIGAN

                           COURT OF APPEALS



MAIN STREET BUSINESS CENTER AT                                      UNPUBLISHED
CELEBRATION VILLAGE, LLC,                                           February 9, 2016

               Petitioner-Appellant,

v                                                                   No. 323927
                                                                    Tax Tribunal
CITY OF GRAND RAPIDS,                                               LC No. 00-440757

               Respondent-Appellee.


Before: BOONSTRA, P.J., and K. F. KELLY and MURRAY, JJ.

PER CURIAM.

         Petitioner appeals by right the judgment of the Tax Tribunal determining that petitioner’s
property was not over-assessed and setting the true cash value (TCV) for petitioner’s property in
tax years 2012 and 2013 as the values reflected on the property record cards for those tax years,
i.e., $6,099,400 and $6,192,400, respectively, and setting the state equalization value (SEV) and
taxable value for petitioner’s property in tax years 2012 and 2013 at $3,049,700 and $3,096,200,
respectively. We vacate the Tribunal’s judgment and remand for further proceedings.

                   I. PERTINENT FACTS AND PROCEDURAL HISTORY

        Petitioner’s property is classified as commercial property. The property is a three-story
building in which the first floor is comprised of retail space, the second story is mixed use of
office space and retail space, and the third story is office space. Property taxes on the property
are levied and collected by respondent. Petitioner brought a petition alleging that the ad valorem
property tax assessed for the property for the tax years 2012 and 2013 was excessive.

        At the hearing on petitioner’s petition, the parties presented a narrow dispute. Counsel
for petitioner described the issues as follows:

       [Petitioner’s counsel]: Your Honor, there’s not a whole lot actually at dispute, I
       don’t believe, when it comes to what we’re here to ascertain. I believe both
       parties have the same square footage on the property, have the same acreage on
       the property, use the same rent rolls, went on the same tour with the manager of
       the property to value the real estate. I think they both think it’s somewhere
       between class A and class B office space. They both agree that it’s – the property

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       is a mixed use investment property with a mix of office and retail space in the
       premises. Substantially what we’re here to talk about and to have the Tribunal
       make a ruling on today is what the appropriate cap rate is that should be applied
       to the net operating income, and that is primarily what we’re going to have to go
       over today and have your Honor make a ruling on. So that’s just a brief
       statement of where I think we’re going to be going today. Thank you.

Respondent’s position was similar:

       [Respondent’s counsel]: Okay. Well, generally speaking, your Honor, the City’s
       position is in agreement with what [petitioner’s counsel] just said. This hearing is
       primarily about what the appropriate capitalization rate is to be applied to this
       property and the quality of the property. For the most part, there are no
       underlying facts in dispute actually that I can think of. This really boils down to
       cap rate and net operating income. Thank you.

        The only witnesses presented at the hearing were therefore the parties’ respective
appraisers. Each party’s appraiser offered slightly different testimony regarding the square
footage of the building. Petitioner’s appraiser testified that the property had 32,513 square feet
of retail space and 16,518 square feet of office space, totaling 49,031 total leasable square feet.
Respondent’s appraiser testified that the property had 49,020 total leasable square feet of which
two thirds was retail and the remainder was office. Respondent’s appraisal states that the tax
records for the property show a gross square footage of 54,388 with 49,020 square feet of
leasable space as of December 31, 2011 and 48,936 square feet of leasable space as of
December 31, 2012.

        Respondent’s appraisal report also contained copies of the 2014 property record cards for
the subject property. Although tax year 2014 is not at issue, information related to that year’s
cost approach assessment was included on the record cards. Additionally, neither party disputes
that the state equalization value (SEV) of the subject property in tax years 2012 and 2013 was
$3,049,700 and $3,096,200 respectively. Therefore, the TCV as reflected on the property record
cards for those years was $6,099,400 for tax year 2012 and $6,192,400 for tax year 2013.

        As is apparent from the parties’ framing of the issues as relating to the appropriate
“capitalization rate” and the “net operating income” (NOI) to which that rate would be applied,
both parties’ appraisers believed the income valuation technique to be the appropriate
mechanism for valuing the property. And in applying the income valuation technique, both
parties’ expert appraisers appraised the property for a lower amount than the 2012 and 2013
assessed values reflected on the property record cards.

       Respondent’s expert appraiser testified that his appraisal showed a TCV for the subject
property of $5,285,000 as of December 31, 2011 and $5,500,000 as of December 31, 2012. In
determining his appraisal, he tried as best as he could to utilize an approach that used market
numbers. He testified that he examined “[a]ctual income expense statements” but also examined
“income expense comparables” and “rent comparables.” In determining the capitalization rate,
he looked to “RealtyRates.com,” which is a company that surveys rates throughout the nation.
Respondent’s appraisal looked at comparable capitalization rates that were used in properties

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throughout the country. Respondent’s expert appraiser tried the sales comparison approach, but
did not put much credence on his findings in that approach, and testified that the cost approach
was not an appropriate technique for valuing the subject property.

        In calculating the NOI that the subject property would generate, respondent’s appraiser
included property taxes as an expense. However, because the lease terms for the property are
typically on a “triple net” basis,1 where tenants reimburse the landlord for property taxes,
respondent’s appraiser also included the projected amount tenants would reimburse a lessor for
property taxes as income. Respondent’s appraiser stated that he then did not make an adjustment
for property taxes to the capitalization rate.

        Following petitioner’s examination of respondent’s appraiser, whom petitioner had called
as an adverse witness, petitioner made multiple requests to stipulate to the NOI contained in
respondent’s appraisal. At each point, respondent’s counsel explicitly stated that it would not
enter into such a stipulation.

        Petitioner’s appraiser, who relied exclusively on the income approach, testified that he
relied more on actual numbers from the subject premises in his calculations than on market
numbers. Petitioner’s appraiser stated that he did this because he put himself in the position of a
potential buyer of the property and stated that, in that position, he would be more interested in
how the actual subject property was doing than on how other buildings in the area were doing.
Petitioner’s appraiser testified that he did not give as much credit to published reports because
they are based on national numbers that focus on larger metropolitan areas and not localized
numbers. Instead of looking at published reports to determine a capitalization rate, he talked to
local participants in the market “who deal with properties in and out every day.”

        Petitioner’s appraiser testified that the income approach was the most appropriate
approach for valuing the subject property. In regard to handling property tax calculations,
petitioner’s appraiser agreed with respondent’s appraiser that the lease terms in the market were
triple net terms where the tenants reimburse the lessor for property taxes. However, contrary to
respondent’s appraiser’s approach, petitioner’s appraiser stated that because property taxes
would show up both as an expense and as income, in the form of tenant reimbursements, he did
not include them at all in his calculations. Petitioner’s appraisal determined a TCV for the
subject property of $4,515,000 as of December 31, 2011 and $4,560,000 as of December 31,
2012.

       The Tribunal issued a written opinion following the hearing. The Tribunal began its
opinion by concluding that it would give “little credibility to Petitioner’s appraisal as [its]
income approach utilizes actual rounded income and expenses to arrive at a value-in-use to its
owner.” It concluded that this was not the correct approach to measuring the market value of the
property. The Tribunal stated that respondent’s valuation and appraisal by its appraiser did have
a “market-based valuation disclosure that include[d] the source for every input.” The Tribunal


1
 “Triple net” leases are leases that require tenants to pay all property tax, insurance, and
maintenance costs for the leased property.


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did rule that respondent’s appraisal erred by considering the property taxes in determining NOI.
The Tribunal held that it was inappropriate to deduct the property taxes as an expense because
petitioner was contesting the value of the property for property tax purposes. The Tribunal found
“that the inclusion of the effective tax rate adjusted for the time that the subject [property] is
vacant and that the owner pays for the taxes is the more appropriate methodology.”

         The Tribunal then recalculated the value of the property under respondent’s income
approach, without deducting the property taxes from the expenses and adjusted the capitalization
rate to include the effective tax rate less the vacancy. The Tribunal determined that the TCV for
the property in tax years 2012 and 2013 was $6,496,624 and $6,740,942, respectively. However,
the Tribunal declined to actually apply the income approach to valuation it had discussed in its
opinion (and that the parties had agreed was applicable), stating:

               This Tribunal is reluctant to increase the true cash value of the subject
       property when the economy is just starting to recover. Therefore, recalculation of
       respondent’s income approach (albeit with a higher result) reflects a value in-line
       with the original assessment. The property record cards and cost approach
       calculations were included in Respondent’s valuation disclosure and have been
       reviewed by the Tribunal. The Tribunal is making an independent determination
       of value, having considered the flaws in Petitioner’s appraisal and issues with
       Respondent’s income approach finds [sic] that the subject property is not over
       assessed and the value as placed on the roll is at 50% of market value.



The Tribunal further concluded, without explanation and contrary to both its discussion of the
income approach and its Findings of Fact that each party’s appraiser had applied an income
approach, that the “cost less depreciation approach, as supported by the income approach, is the
correct method to utilize in valuing the subject property for the two tax years in question.” The
Tribunal therefore ordered the TCV of the property to be set at the numbers that were on the tax
rolls for the respective tax years. The Tribunal ordered the property’s TCV for tax years 2012
and 2013 be set at $6,099,400 and $6,192,400, respectively, and the SEV and taxable value for
those years be set at $3,049,700 and $3,096,200, respectively. This appeal followed.

                                 II. STANDARD OF REVIEW

        This Court reviews a decision of the Tax Tribunal to determine if it “made an error of law
or adopted a wrong legal principle.” Meijer, Inc v City of Midland, 240 Mich App 1, 5; 610
NW2d 242 (2000). “[F]actual findings are upheld unless they are not supported by competent,
material and substantial evidence.” Id. “Substantial evidence must be more than a scintilla of
evidence, although it may be substantially less than a preponderance of the evidence.” Jones &
Laughlin Steel Corp v Warren, 193 Mich App 348, 352-353; 483 NW2d 416 (1992).
”‘Substantial’ means evidence that a reasoning mind would accept as sufficient to support a
conclusion.” Kotmar, Ltd v Liquor Control Comm, 207 Mich App 687, 689; 525 NW2d 921
(1994). Generally the Tribunal’s valuation is supported by competent and material evidence if it
is within the range of valuations in evidence. President Inn Props, LLC v City of Grand Rapids,
291 Mich App 625, 642; 806 NW2d 342 (2011).

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                                         III. ANALYSIS

        On appeal, petitioner has argued that the Tribunal’s decision was not based on substantial
and competent evidence. Additionally, petitioner alleges that the Tribunal’s decision violated its
constitutional right to due process. We agree that the Tribunal’s decision was not based on
substantial and competent evidence and therefore do not reach petitioner’s constitutional
arguments.

         “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 v Encorse, 227 Mich App 379, 389; 576 NW2d 667 (1998). TCV is the
equivalent of the property’s fair market value. Id. “It is the Tax Tribunal’s duty to determine
which approaches are useful in providing the most accurate valuation under the individual
circumstances of each case.” Meadowlanes Dividend Housing Ass’n v Holland, 437 Mich 473,
485; 473 NW2d 636 (1991). If possible, all three methods should be used, but irrespective of the
specific method employed, the “final value determination must represent the usual price for
which the subject property would sell.” Id. “The Tax Tribunal is not bound to accept the
parties’ theories of valuation,” and the Tribunal has a “duty to make its own independent
determination of true cash value.” Great Lakes, 227 Mich App at 390. The Tribunal “cannot
merely affirm the assessment as placed upon the rolls by the assessing authority.” Oldenburg v
Dryden, 198 Mich App 696, 699; 499 NW2d 416 (1993). “For the Tax Tribunal to accord
presumptive validity to a property’s assessed valuation on the tax rolls would conflict with the
statutory requirement that the proceedings before the Tribunal are ‘original and independent
and . . . de novo.’ ” President Inn Props, 291 Mich App at 640, quoting MCL 205.735(2).
Nevertheless, the assessed valuation on the tax rolls may be adopted “when competent and
substantial evidence supports doing so.” Id.

        Here, both parties presented evidence related to the income valuation approach.
Additionally, respondent provided the 2014 property record cards and, according to the Tribunal,
the calculations used by respondent in assessing the property under the cost-less-depreciation
approach. However, the 2012 and 2013 property record cards and underlying valuation
calculations were not entered into evidence.

       As petitioner points out, the Tribunal published an “Administrative Guidance” on March
16, 2015, addressing in relevant part the issue of property cards used as evidence of value
without accompanying documentation:

       Property Record Cards

       The Tribunal is experiencing an increase in the number of property record cards
       submitted as evidence of value using the cost-less-depreciation approach that fail
       to display all of the calculations made in determining value, usually containing
       the notation “Calculations too long. See Valuation printout for complete pricing.”
       Unfortunately, in most of these instances parties are not submitting the “valuation
       statement” with the property record card. After discussing this issue with the
       State Tax Commission and BS&A, it is clear that in these situations complete

                                                -5-
       calculations of value will be displayed only on the valuation statement.
       Therefore, it is important that parties submit both the property record card and the
       valuation statement, where appropriate. In those situations where only a property
       record card has been submitted and that card does not fully display value
       calculations, the Tribunal will disregard the property record card, as it does not
       constitute credible evidence. [See Admistrative Guidance, March 16, 2015,
       located     at     https://www.michigan.gov/documents/taxtrib/govdelivery_3-16-
       15_484128_7.pdf (last accessed January 28, 2016).]

        While we are not bound by the Tribunal’s guidance, we find it persuasive in light of the
Tribunal’s duty to base its decision on “evidence that a reasoning mind would accept as
sufficient to support a conclusion.” Kotmar, Ltd, 207 Mich App at 689. We do not believe a
valuation provided without accompanying calculations meets that standard. Here, the 2014
property record card provided in respondent’s valuation in fact contains the statement
“Calculations too long. See Valuation printout for complete pricing.” The valuation printout
was not entered into evidence. Additionally, the 2012 and 2013 property record cards were not
entered into evidence, nor were the associated valuation printouts, if any. And none of the
evidence presented by either party, nor the Tribunal’s own calculations, resulted in the values
ultimately adopted by the Tribunal. The approach employed by the Tribunal further ignored the
narrow scope of the issues presented by the parties and the parties’ agreement that the income
approach was the appropriate methodology to be employed. Notwithstanding the Tribunal’s
duty to make independent determinations, in this case the Tribunal appears to have done so not
by employing sound legal reasoning, but rather to avoid the resulting valuation determinations
that would exceed both the range of values proffered by the parties and the current (higher)
valuations. Therefore, the Tribunal’s factual findings and decision to adopt the 2012 and 2013
assessed values for petitioner’s property were not supported by competent, material and
substantial evidence. Meijer, Inc, 240 Mich App at 5. Although the Tribunal conducted a
detailed analysis of the evidence presented at the hearing concerning the income approach to
valuation, it essentially discarded that analysis and adopted TCVs for the property that were
unsupported by the evidence and indeed outside the range of the valuation evidence provided by
either party. See President Inn Props, 291 Mich App at 642. The Tribunal instead should have
employed an analysis that was supported by competent, material and substantial evidence,
subject to appropriate adjustments, if any, required by law or correct legal principles.

         We therefore vacate the Tribunal’s opinion and order and remand for further proceedings.
Accordingly, we need not address petitioner’s remaining claims. We do note briefly that the
Tribunal’s findings concerning the property’s leasable square footage was supported by
competent, material, and substantial evidence. Meijer, Inc, 240 Mich App at 5. Further, while
we express no ultimate opinion on the Tribunal’s approach to the income valuation method (that
it ultimately discarded), we note that the inclusion of an effective tax rate in the capitalization
rate is generally not appropriate for triple-net leased property, because the tenants are responsible
for real estate taxes.2 Therefore, it is unnecessary to add the effective tax rate (even adjusted for


2
 The Tribunal has stated as much. See Jackson Nat Life Ins Co v Lansing¸(MTT Docket No.
336090, entered December 22, 2010) Chrysler Realty Corp v Royal Oak, (MTT Docket No.

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vacancy) to the capitalization rate if the vacancy rate, tax rate, and tax reimbursements are
appropriately accounted for in the NOI. Should the Tribunal on remand nonetheless wish to
utilize an effective tax rate added to the capitalization rate, it should explore whether it is
appropriate, in applying the income valuation method, to remove the property tax expenses from
the NOI without also removing the property tax reimbursement income. It appears to this Court
that adjusting the effective tax rate for the vacancy rate already accounts for the amount of
property tax the owner of the property would not have to pay; i.e., property tax reimbursements
from tenants. Thus, including property tax reimbursements as income in the NOI appears to
double-count the property tax reimbursements. Finally, we decline to address petitioner’s
constitutional arguments as we resolve petitioner’s claim on non-constitutional grounds. See
Booth Newspapers, Inc v Univ of Mich Bd of Regents, 444 Mich 211, 234; 507 NW2d 422
(1993).

        Vacated and remanded for further proceedings consistent with this opinion. We do not
retain jurisdiction.



                                                          /s/ Mark T. Boonstra
                                                          /s/ Kirsten Frank Kelly
                                                          /s/ Christopher M. Murray




2226470, entered April 26, 2002). This Court is unable to find an example where the approach
used by the Tribunal in the instant case was applied to triple-net leased property.


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