Opinion
No. 338200 No. 338201 No. 338202
03-20-2018
KARTER LANDON, Petitioner-Appellant, v. CITY OF FLINT, Respondent-Appellee.
UNPUBLISHED Tax Tribunal
LC Nos. 16-004851; 16-004852; 16-004856 Before: O'CONNELL, P.J., and HOEKSTRA and SWARTZLE, JJ. PER CURIAM.
In these consolidated dockets, petitioner Karter Landon appeals as of right from three opinions of the small claims division of the Michigan Tax Tribunal (the Tribunal) determining the True Cash Value (TCV) of three of petitioner's rental properties in Flint, MI. In Docket No. 338200, the Tribunal concluded that the TCV of petitioner's property at 1301 Lincoln was $11,700; in Docket No. 338201, the Tribunal concluded that the TCV of petitioner's property at 2664 Corunna was $10,800; and, in Docket No. 338202, the Tribunal concluded that the TCV of petitioner's property at 2902 Plainfield was $14,600. We affirm.
I. TAX ASSESSMENTS
A property tax assessment is based upon the property's TCV. In general, the TCV is synonymous with the property's Fair Market Value (FMV). Jones & Laughlin Steel Corp v City of Warren, 193 Mich App 348, 353; 483 NW2d 416 (1992). A percentage of the TCV, usually around 50% for residential property, may then be assessed for tax purposes. This percentage is commonly referred to as the property's taxable value.
Assessors use three methods to evaluate a property's TCV. Under the market approach, the property's value is determined by comparing it with values of similar properties. Under the cost-less-depreciation approach, the property's value is a function of the cost it would take to build the property anew minus any depreciation. Under the income approach, the property's value is determined by the potential income that the property can be expected to produce.
The Gross-Rent Multiplier (GRM) is a tool used to evaluate investment property under the income approach. GRM is estimated by dividing the values of comparable properties by the annual rents that could be earned. This typically results in a GRM range, and a figure within the range is then used to estimate the value of the subject property.
II. BACKGROUND
For tax year 2016, respondent City of Flint assessed the following TCVs on each of petitioner's rental properties located in the city: $20,800 on petitioner's property at 1301 Lincoln; $15,800 on petitioner's property at 2664 Corunna; and $20,200 on petitioner's property at 2902 Plainfield. Petitioner appealed each of those assessments to the Tribunal. According to petitioner, the TCV on those properties should have been: $4,500 on petitioner's property at 1301 Lincoln; $4,600 on petitioner's property at 2664 Corunna; and $6,000 on petitioner's property at 2902 Plainfield. Before the Tribunal, respondent held true to its TCV calculations. Both parties argued that the market theory supported their valuations and provided evidence to that effect. For each subject property, petitioner presented a printout of 10 to 30 properties he believed were comparable to that subject property. The list included both private and bank sales and petitioner made minor adjustments to account for various differences between the comparable properties and each subject property. Similarly, respondent presented a list of four comparable properties for each subject property and made minor adjustments to account for various differences between the properties.
Respondent also presented calculations under the income approach. According to respondent, under the income approach, the TCV for the property at 1301 Lincoln was $11,700; the TCV for the property at 2664 Corunna was $10,800; and the TCV for the property at 2902 Plainfield was $14,600. Respondent's representative testified before the administrative law judge (ALJ) and explained that respondent calculated those figures by searching zillow.com, apartment.com, and its own records from landlords to reach an estimated annual market rent for each subject property. The market rents were then multiplied by GRMs, which were similarly calculated using respondent's research. While petitioner did not provide his own income-approach calculations, petitioner did provide the Tribunal with the actual rent he collected from each property, which was substantially lower than the market rent respondent calculated.
The ALJ determined that, because the property was a rental property, the income approach was the most appropriate one for all three cases. The ALJ cited several texts from the Chicago Appraisal Institute which suggested that the income approach is appropriate for residential income-producing property when sufficient data is available. Although the specific properties used in respondent's market research were not presented to the Tribunal, the ALJ found credible respondent's representative's testimony regarding respondent's valuation calculations. The ALJ noted that petitioner had not provided any documentation supporting his claimed actual rents and that, in any case, the income approach favors market-rent data over actual, contractual rent, the latter which can be set artificially low to gain a tax advantage. Accordingly, the ALJ adopted respondent's income-approach values as the TCV for each of the subject properties.
In turn, the ALJ rejected the market and cost-less-depreciation approaches. The ALJ concluded that the market approach was inappropriate for this type of residential rental property and noted several problems with the parties' evidence. According to the ALJ, petitioner's market-approach calculations improperly relied on auction sales and appeared to be bound by an upward range, meaning that petitioner's value was not representative of the actual market. The ALJ found respondent's calculations, which included properties that were more than a year old, to be out-of-date, and noted that respondent did not explain some of its price adjustments. Accordingly, the ALJ declined to employ the market approach. The ALJ similarly declined to employ the cost-less-depreciation approach, noting that the properties were built in the 1920s and 1950s and that, according to the Chicago Appraisal Institute, the cost-less-depreciation approach is relatively inaccurate when used to value older properties.
Petitioner filed exceptions to the ALJ's conclusions, arguing that his market-approach calculations were the most accurate under the circumstances. The Tribunal denied petitioner's exceptions, adopting the reasoning of the ALJ. These consolidated appeals followed.
III. ANALYSIS
A. Standards of Review
"This Court's ability to review decisions of the Tax Tribunal is very limited." President Inn Properties, LLC v City of Grand Rapids, 291 Mich App 625, 630; 806 NW2d 342 (2011). In the absence of fraud, this Court's review "is limited to determining whether the tribunal made an error of law or adopted a wrong principle." Id. at 631 (internal citation and quotation marks omitted). This Court must "accept the tribunal's factual findings as final, provided they are supported by competent, material, and substantial evidence. Substantial evidence must be more than a scintilla of evidence, although it may be substantially less than a preponderance of the evidence." Id. at 642 (internal citation and quotation marks omitted).
A petitioner challenging an assessment bears the "burden of establishing the property's true cash value." Forest Hills Co-operative v City of Ann Arbor, 305 Mich App 572, 588; 854 NW2d 172 (2014). "The burden of proof encompasses both the burden of persuasion, which never shifts during the course of the hearing, and the burden of going forward with evidence, which may shift to the opposing party." Id. "In a property tax dispute, the petitioner must prove by the greater weight of the evidence that the disputed assessment was too high on the basis of the Tax Tribunal's findings of true cash value." Id.
Proceedings before the Tribunal are original, independent, and de novo. Great Lakes Div of Nat Steel Corp v City of Ecorse, 227 Mich App 379, 389; 576 NW2d 667 (1998). Accordingly, the 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." Id. The "Tribunal may not automatically accept a respondent's assessment in a property-tax proceeding." Forest Hills, 305 Mich App at 587. Rather, the Tribunal "has a duty to make its own, independent determination of true cash value." Great Lakes, 227 Mich App at 389. This independent determination is not bound by the parties' theories of value. Id. at 389-390. The Tribunal "may accept one theory and reject the other, it may reject both theories, or it may utilize a combination of both in arriving at its determination of true cash value," id. at 390, so long as there is evidence on the record that the Tribunal's finding is the usual price for which the subject property would sell, Meadowlanes Ltd Dividend Housing Ass'n v City of Holland, 437 Mich 473, 485; 473 NW2d 636 (1991); President Inn Properties, 291 Mich App at 641. B. Property Valuation
The basic principles of property valuation originate from Article 3, § 9 of Michigan's 1963 Constitution. "This section mandates: (1) that the Legislature is to provide a uniform system of real property taxation, (2) that the tax must be assessed on the basis of the true cash value of the property, and (3) that the Legislature is to provide a determination of true cash value." Meadowlanes, 437 Mich at 483. The Legislature enacted MCL 211.27(1), which defines TCV to mean "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." Thus, it is said that TCV is synonymous with FMV. Jones, 193 Mich App at 353. Nonethless, "[t]he rule in Michigan, as in many other states, is that the selling price of a particular piece of property is not conclusive as evidence of the value of that piece of property." Antisdale v City of Galesburg, 420 Mich 265, 278; 362 NW2d 632 (1984). Because the Legislature has broadly defined TCV without directing assessors to employ any specific method, "the task of approving or disapproving specific valuation methods or approaches has fallen to the courts." Meadowlanes, 437 Mich at 484. "Courts have generally recognized that the three most common approaches to valuation are the capitalization-of-income approach, the sales-comparison or market approach, and the cost-less-depreciation approach." President Inn Properties, 291 Mich App at 639 (internal citation and quotation marks omitted).
As recognized by the Supreme Court in Antisdale, 420 Mich at 276 n 1, the three approaches have been previously defined by the Michigan State Tax Commission. "The income approach is based on the premise that there is a relation between the income a property can earn and its value. . . . The income approach to value translates the estimated future income of a property into total present value by the use of various data and organized mathematical computations." Id. (internal citation and quotation marks omitted). Under the market approach, the valuation of a property "is estimated by comparison with similar properties which have recently been sold or offered for sale in the open market. The principle of substitution is applied, i.e., when property is replaceable, typical buyers will not purchase it at a higher price than those paid for similar properties with comparable locations, characteristics, and future earning capabilities." Id. (internal citation and quotation marks omitted). Finally, the cost-less-depreciation approach begins with the "reproduction or replacement cost of the improvements [on the land] developed by comparison with the cost of new improvements, based on current prices of labor and materials for construction of similar improvements." Id. (internal citation and quotation marks omitted). Because an older property is, ceteris paribus, "less valuable than a similar new property," depreciation is then subtracted from the cost to account for the property's physical deterioration and functional and economic obsolescence. Id. (internal citation and quotation marks omitted). "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." Meadowlanes, 437 Mich at 485.
C. The Parties' Arguments
Petitioner's primary argument on appeal is that the Tribunal erred by using the income approach over the market approach. We disagree.
The Tribunal Did Not Err by Using the Income Approach. The Tribunal concluded that the most accurate valuation method under the circumstances was the income approach. To support its decision, the Tribunal cited texts from the Chicago Appraisal Institute showing that the income approach is appropriate for residential income-producing property when income data is available. Petitioner challenges the Tribunal's reading of the cited texts. The Tribunal, however, "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." Great Lakes Div of Nat Steel Corp v City of Ecorse, 227 Mich App 379, 389; 576 NW2d 667 (1998). Under the substantial-evidence standard, we defer to the Tribunal's reading of relevant trade publications as an exercise of the Tribunal's relevant expertise in real-estate appraisal. Accordingly, the Tribunal's conclusion that the income approach is generally the best method to value residential income-producing property is supported by substantial record evidence, i.e., the texts from the Chicago Appraisal Institute.
Still, to employ an assessment approach in a particular case, not only must the assessment approach be appropriate for the type of property generally, but the approach must be supported by substantial evidence on the record for the specific property at issue. See President Inn Properties, 291 Mich App at 641. Pertinent to this case, to determine a property's value using the income approach, the assessor needs data regarding the market value of properties comparable to the subject property and annual market rent for those comparable homes. From these values, the assessor may determine the subject property's GRM. By multiplying the subject property's estimated annual market rent by the GRM, the assessor may estimate the subject property's TCV.
Here, respondent's representative testified that he searched apartment-rental websites and used rental data provided by landlords to determine the annual market rent for petitioner's properties and that he similarly used market data to determine the various GRMs. The Tribunal found this testimony credible and this Court must defer to that credibility determination. Id. at 636; Great Lakes, 227 Mich App at 408.
Petitioner argues that respondent's valuation data did not take into account certain differences between the comparable properties and the subject properties. The GRM is a function of ranges and averages, however, and therefore using a GRM accounts for some differences in properties. See Arnold, Valuation: The Gross Rent Multiplier, 36 No. 5 Mortgage & Real Estate Executives Report 5 (2003). With respect to the accuracy of the annual market rent calculated for the subject properties, respondent's representative explained that he searched apartment-rental websites and landlord-rental information of comparable properties. Petitioner argues that his market approach was sounder than respondent's income approach because petitioner presented evidence of more comparable properties than respondent. Nonetheless, under the substantial-evidence standard, "it does not matter that the contrary position is supported by more evidence, that is, which way the evidence preponderates," McBride v Pontiac Sch Dist, 218 Mich App 113, 123; 553 NW2d 646 (1996), but only that the position adopted by the Tribunal is supported by more than a scintilla of evidence on the record, President Inn Properties, 291 Mich App at 642. Respondent's representative's testimony regarding respondent's income-approach analysis—found to be credible by the Tribunal—provided more than a scintilla of evidence supporting the Tribunal's valuation of the subject properties under the income approach. Accordingly, we conclude that the Tribunal's choice of valuation approach and its ultimate conclusion regarding the properties' TCVs were supported by substantial evidence.
The Tribunal Properly Rejected the Market Approach. According to petitioner, the market approach is generally the more appropriate approach to valuing residential property. Removed from the individual characteristics of each case, there is some evidence that the market approach is the favored evaluation method of assessors in this jurisdiction. In Antisdale, our Supreme Court quoted the Michigan State Tax Commission as reporting that "[o]f all appraisal methods the market data approach is the most direct, the best understood, and the only one directly reflecting the balance of supply and demand for a whole property in actual market place trading." Antisdale, 420 Mich at 276 n 1, quoting 1 State Tax Comm. Assessor's Manual, Ch. VI, pp. 1-2; see also id. at 278-279 (stating that the market approach has the capacity to cure the problems of using sale price as evidence of FMV). Nonetheless, the decision of which approach to use for a particular property lies in the expert discretion of the Tribunal, which is in the best position to weigh the assessment approaches in light of the evidence presented on the record. President Inn Properties, 291 Mich App at 641; Great Lakes, 227 Mich App at 389.
Here, the Tribunal evaluated the comparables presented by the parties and found that, under the market approach, neither party had presented properties that adequately measured the value of the three rental properties at issue. The Tribunal noted that petitioner's list of sales included sales of auction properties and appeared to be bound by an upward range. Sales of auction properties may only be used to determine the FMV when the sale is a public auction held by a nongovernmental agency and the sales have become a common method of buying the type of property in the relevant geographic area. MCL 211.27(1). In this case, petitioner presented no evidence that the auction sales were private sales or that auction sales were common for buying this type of residential property in Flint. Moreover, petitioner presented no evidence of any search parameters supporting his list of sales. Regarding respondent's evidence, the Tribunal noted that some of respondent's comparables were over a year old and that respondent failed to explain some of its price adjustments. Because the TCV of a property is the usual selling price of the property "at the time of assessment," MCL 211.27(1), it follows that, when ample sales data is available from the current tax year, an assessor should not rely on outdated information. Additionally, respondent only presented four comparable properties for each subject property. When a small number of comparables is used, the need to analyze the differences between the properties is heightened. See Great Lakes, 227 Mich App at 399-400. Accordingly, the Tribunal did not err in concluding that the parties' market analyses were unreliable.
Where the methodology used to analyze the prices of comparable properties is flawed or unreliable, "the result of the market approach to valuation will also be flawed." Antisdale, 420 Mich at 279. Because several problems existed with the evidence provided by the parties, substantial evidence supported the Tribunal's decision that the market approach was not the most-accurate valuation method under the circumstances.
The Tribunal Properly Rejected the Cost-Less-Depreciation Approach. Neither party argues on appeal that the Tribunal erred by not using the cost-less-depreciation approach. Similarly, we find no error. The Tribunal rejected the cost-less-depreciation approach because petitioner's properties were considerably aged and the cost-less-depreciation approach is less accurate when it is used to value older properties. The Tribunal supported this assertion with citations to relevant trade publications. Thus, substantial evidence supports the Tribunal's rejection of the cost-less-depreciation approach.
The Tribunal Performed Its Duty to Review the Valuation De Novo. Petitioner next argues that the Tribunal erred by adopting the income approach in light of several previous decisions employing the market approach. The Tribunal, however, has a duty to choose the valuation method that renders the most-accurate valuation under the circumstances. Indeed, the deference inherent in the substantial evidence standard accepts that there will logically be more than one acceptable valuation of a given property. Petitioner presented evidence of those previous decisions to the Tribunal, and, after considering the evidence, the Tribunal still concluded that the specific properties in these three cases were best evaluated under the income approach. Because more than a scintilla of evidence supports the Tribunal's conclusion, this Court will not disturb the Tribunal's valuation because it declined to follow previous valuations. If anything, the Tribunal's decision to depart from those valuations indicates that the Tribunal properly performed its obligation to consider each case de novo given the specific circumstances of the property and the evidence presented by the parties.
Decline to Address Petitioner's Notice Argument. Petitioner argues that respondent failed to set forth facts supporting its income analysis in its answer and therefore should have been precluded from presenting an income analysis. Because petitioner failed to present this issue below, however, we will not address it on appeal. Tingly v Kortz, 262 Mich App 583, 588; 688 NW2d 291 (2004) (stating that appellate courts generally do not address issues not raised before the trial court).
Petitioner Has Shown No Evidence Of Fraud. Petitioner argues that the Tribunal's decision was fraudulent because the Tribunal was biased against him. Petitioner has presented no evidence of bias, instead relying on the adverse decisions as well as a bald assertion, unsupported by any record evidence, that the Tribunal stated falsehoods in its opinions. Petitioner's argument is without merit. See Cain v Michigan Dep't of Corrections, 451 Mich 470, 496; 548 NW2d 210 (1996) (stating that adverse rulings, standing alone, do not establish the bias of a judge).
Decline to Address Respondent's Standing Argument. Finally, in a brief filed after oral argument, respondent argues that petitioner does not have standing to challenge the assessments. This issue, however, is unpreserved and we decline to address it on appeal. See Tingly, 262 Mich App at 588.
Affirmed.
/s/ Peter D. O'Connell
/s/ Joel P. Hoekstra
/s/ Brock A. Swartzle