STATE OF MICHIGAN
COURT OF APPEALS
MENARD, INC., FOR PUBLICATION
May 26, 2016
Petitioner-Appellee, 9:10 a.m.
v No. 325718
Tax Tribunal
CITY OF ESCANABA, LC No. 00-441600;
14-001918-TT
Respondent-Appellant,
and
MICHIGAN MUNICIPAL LEAGUE,
MICHIGAN TOWNSHIPS ASSOCIATION,
MICHIGAN ASSOCIATION SCHOOL
BOARDS, MICHIGAN SCHOOL BUSINESS
OFFICIALS, MICHIGAN ASSOCIATION OF
COUNTIES, and MICHIGAN ASSESSORS
ASSOCIATION,
Amici Curiae.
Before: TALBOT, C.J., and HOEKSTRA and SHAPIRO, JJ.
PER CURIAM.
This case arises out of ad valorem property tax assessments for the tax years 2012, 2013,
and 2014. The subject property is a 166,196 square foot “big-box” store built on 18.35 acres and
located in Escanaba, Michigan. After a hearing on petitioner Menard, Incorporated’s challenge
to respondent City of Escanaba’s tax assessment, the Michigan Tax Tribunal (the tribunal)
rejected Escanaba’s assessment and found in favor of Menard. Because we conclude that the
tribunal made an error of law and its decision was not supported by competent, material, and
substantial evidence, we reverse.
I. FACTS
Menard filed a petition to appeal the ad valorem property tax assessments for tax years
2012, 2013, and 2014 for property located in the City of Escanaba. Escanaba made the
following valuations of the property: (1) in 2012 the true cash value (TCV) was $7,815,976; (2)
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in 2013 the TCV was $7,995,596; and (3) in 2014 the TCV was $8,210,938. Menard contended
that the TCV for each year was only $3,300,000.
In support of its position, Menard submitted a valuation appraisal prepared by Joseph
Torzewski, a commercial real estate appraiser. Torzewski opined in his report that the property’s
highest and best use (HBU) was “for continued use of the existing improvements as a free-
standing retail building.” Torzewski stated that he appraised the “fee simple interest” in the
subject property.
Torzewski reached his opinion on the property’s TCV by developing the sales-
comparison and income approaches to valuation.1 In his sales-comparison approach, Torzewski
provided eight comparable sales. Because he found no other big-box stores in the Upper
Peninsula, he used buildings primarily located in southeast Michigan. The record contains the
following information on the eight comparables used by Torzewski:
1. Comparable 1 was a former Home Depot built in 2006, located in Holland,
Michigan, and had 103,000 square feet. The structure was sold in 2014. The
record does not contain any information on the current or intended future use of
the building, but does state that deed restrictions limit its ability to be used as a
retail space;
2. Comparable 2 was a former Circuit City built in 1996, located in Westland,
Michigan, and had 63,686 square feet. The structure was sold in 2013 to the City
of Westland which turned it into a city hall;
3. Comparable 3 was a former Wal-Mart built in 1989, located in Alma, Michigan,
and had 122,790 square feet. The building was sold in 2012 for redevelopment as
industrial property. The property contained deed restrictions that prohibited use
of the property as a grocery store over 35,000 square feet or a discount store over
50,000 square feet;
4. Comparable 4 was a former Sam’s Club built in 1986, located in Madison
Heights, Michigan, and had 113,262 square feet. The building was sold in 2012
for redevelopment as industrial property;
5. Comparable 5 was a former Wal-Mart built in 1995, located in Auburn Hills,
Michigan, and had 151,017 square feet. The building was sold in 2011 for
redevelopment as industrial property. The property contained deed restrictions
that prohibited use of the property as a grocery store over 35,000 square feet or a
discount store over 50,000 square feet;
1
The parties stipulated that, because the subject property was not income-producing, the income
approach was inapplicable. In its final opinion and judgment, the tribunal gave no weight to the
income approach. That decision has not been challenged on appeal.
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6. Comparable 6 was a former furniture store built in 1986, located in Flint,
Michigan, and had 53,474 square feet. The building was sold in 2010 and
continues to function as a furniture store;
7. Comparable 7 was a former Kroger built in 1981, located in Dearborn, Michigan,
and had 55,474 square feet. The building was sold in August 2010, but no detail
is contained in the record about the current or future use of the building other than
that it is intended for future retail use; and
8. Comparable 8 was a former Wal-Mart built in 1993, in Monroe, Michigan, and
had 130,626 square feet. The building was sold in 2009 to be divided into multi-
tenant space with current tenants being Dunham’s Sports and Hobby Lobby. The
property contained deed restrictions that prohibited use of the property as a
grocery store over 35,000 square feet or a discount store over 50,000 square feet.
In his valuation report, Torzewski mentioned that Comparable 1 had deed restrictions.
He did not reference deed restrictions with regard to any of the other comparables, nor did he
make any adjustments for the existence of deed restrictions. At the hearing, however, Torzewski
testified that most of the properties contained deed restrictions. Specifically, he acknowledged
that Comparables 1, 3, 5, and 8 had use restrictions, but Comparables 6 and 7 did not.2 He
testified that he took the deed restrictions into account, explaining that in selecting comparables,
he would inquire if the deed restrictions affected the sales price. He stated that if he could not
get that information he would not use the sale as a comparable. He testified that “in many cases”
deed restrictions did not “have any effect on the sales price because the restrictions that were in
place aren’t anything really out of the ordinary or would affect the secondary user of the
property, so, therefore, we—in the conditions of the sales adjustment . . . grid there are no
adjustments for that condition of sale factor.” Torzewski explained that it was “pretty common
for build-to-suit owners” to put deed restrictions on their property “to exclude any sort of use that
might be a competitive use.” He testified that, after speaking to the brokers, sellers, and buyers,
he was satisfied that the deed restrictions had no impact on the price obtained for the
comparables used in the valuation for Menard. However, Torzewski’s appraisal report showed
that Comparables 6 and 7, the ones he noted had no restrictions, had the highest selling price per
square foot.
After making adjustments for other differences in the comparables, Torzewski concluded
that the subject premises should be valued at $20 per square foot for tax years 2012, 2013, and
2014.
Diana Norden, the city assessor for Escanaba, opined that the comparables used by
Torzewski were “not great.” She testified that, after researching Menard’s comparables, she
learned: Comparable 1 was subject to a building easement and had use restrictions, Comparable
2 was not a freestanding unit but had multiple storefronts, Comparable 3 looked like someone
2
According to Torzewski, the “larger, more big-box-type stores did have some deed restrictions
in place” as opposed to “a couple of the smaller [comparables],” which did not have restrictions.
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buying themselves out of a lease, Comparable 4 had been foreclosed on, and Comparables 5 and
8 had use restrictions. Criticism of Menard’s comparable selection was also offered by Miles
Anderson, an expert in appraisal review. He, like Norden, testified that Comparable 1 had use
restrictions. More generally, he criticized Menard’s appraisal for failing to state, explain, or
make adjustments for use restrictions on the sales comparables.
In support of its assessment of value, Escanaba submitted a valuation summary prepared
by Norden. Norden primarily used the cost-less-depreciation approach to value the property.
She testified that she used the cost-less-depreciation approach because there were insufficient
comparable sales and because the building being valued was a newer construction. She opined
that properties with deed restrictions should not be compared to the subject property, which had
no use restrictions in place. She testified that she adjusted the value for depreciation, but that she
did not adjust for functional obsolescence. Norden, who was admitted as an expert in appraisal,
opined that there was no functional obsolescence in the property because, if purchased for its
existing use, other retailers would use the components of the existing building.
By contrast, Torzewski testified that he did not use the cost-less-depreciation approach
because functional obsolescence is built into built-to-suit big-box stores, and because, in a down
market, a property like the subject property would have external obsolescence. He testified that
both the functional and external obsolescence need to be accounted for in depreciation under the
cost-less-depreciation approach, but that with this building, accounting for the obsolescence
would be difficult. Torzewski also stated that the buyers of similar buildings do not use the cost-
less-depreciation approach and that owners of properties like the subject property are typically
not concerned with reselling, but are instead looking to maximize their floor space. Torzewski
did not, however, identify any specific features of the building that created functional
obsolescence, nor did he identify any economic factors in the subject market that would account
for external obsolescence.
Following a hearing, the tribunal concluded that the TCV for 2012 was $3,325,000, the
TCV for 2013 was $3,490,000, and the TCV for 2014 was $3,660,000. In its reasoning, the
tribunal concluded that Escanaba’s cost-less-depreciation approach should be given no weight
because Norden did not account for functional or external obsolescence. The tribunal also
credited Menard’s assertion that the cost-less-depreciation approach should not be used to value
the subject property because (1) functional obsolescence is difficult to calculate and (2) first-
generation users are concerned with optimizing sales, not with optimizing market value to the
property. The tribunal also concluded that Norden’s sales-comparison approach did not provide
sufficient data for the tribunal to arrive at an independent conclusion because Norden did not
make any analytical adjustments for differences in the properties. By contrast, the tribunal
concluded that the sales-comparison approach advanced by Menard was persuasive and was
meaningful to an independent determination of market value. On reconsideration, the tribunal
specifically found that the deed restrictions in Menard’s comparables did not require an
adjustment because it found credible Torzewski’s testimony that the deed restrictions had no
effect on the sales price of the deed-restricted comparables.
II. STANDARD OF REVIEW
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In the absence of fraud, our review of Tax Tribunal determinations “is limited to
determining whether the tribunal 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). “The tribunal’s
factual findings are upheld unless they are not supported by competent, material, and substantial
evidence.” Id. Substantial evidence is “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 (1995). “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 City of Warren, 193 Mich App 348, 352-353; 483 NW2d 416 (1992). “Failure to
base a decision on competent, material, and substantial evidence constitutes an error of law
requiring reversal.” Meijer, Inc, 240 Mich App at 5. The entire record, “not just the portions
that support the agency’s findings,” must be reviewed when evaluating the tribunal’s final
determination. Stege v Dep’t of Treasury, 252 Mich App 183, 188; 651 NW2d 164 (2002).
Further, cursory rejection of evidence is also erroneous. Jones & Laughlin Steel Corp, 193 Mich
App at 354.
The petitioner, Menard, bears the burden of proving the true cash value (TCV) or the
property. MCL 205.737(3).
The burden of proof encompasses two concepts: “(1) the burden of persuasion,
which does not shift during the course of the hearing; and (2) the burden of going
forward with the evidence, which may shift to the opposing party.” Jones &
Laughlin Steel Corp, [193 Mich App at 354-355]. Nevertheless, because Tax
Tribunal proceedings are de novo in nature, the Tax Tribunal has a duty to make
an independent determination of true cash value. Great Lakes Div of Nat’l Steel
Corp[ v City of Ecorse, 227 Mich App 379, 409; 576 NW2d 667 (1998)]. 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. at 409. Regardless of the method employed, the
Tax Tribunal has the overall duty to determine the most accurate valuation under
the individual circumstances of the case. Meadowlanes Ltd Dividend Housing
Ass’n v City of Holland, 437 Mich 473, 485–486, 502; 473 NW2d 636 (1991).
[President Inn Props, LLC v City of Grand Rapids, 291 Mich App 625, 631; 806
NW2d 342 (2011).]3
3
Menard asserts that Escanaba, as the appellant, now bears the “burden of proof” in establishing
the TCV of the subject property. This is not strictly accurate. On appeal, in order for the
appellant to receive relief, it has the burden to demonstrate that the lower court erred as governed
by the relevant standard of review. However, at the tribunal, initially and on remand, the burden
of proof to establish TCV is on the petitioner. President Inn Props, 291 Mich App at 631.
Menard relies on Drew v Cass Co, 299 Mich App 495; 830 NW2d 832 (2013) in suggesting that
the “burden of proof” is on the taxing authority when it is the appellant. Indeed, in Drew, we
stated, “[t]he appellant bears the burden of proof in an appeal from an assessment, decision, or
order of the Tax Tribunal.” Id. at 499 (quotation omitted). In that case, however, the petitioner,
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III. APPROACHES TO VALUATION
“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, 227
Mich App at 389. TCV “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 . . . or forced sale.” MCL 211.27(1). TCV is the
equivalent of the property’s fair market value. Great Lakes, 227 Mich App at 389.
“[T]o determine true cash value, the property must be assessed at its highest and best
use.” Huron Ridge, LP v Ypsilanti Twp, 275 Mich App 23, 33; 737 NW2d 187 (2007) (emphasis
added). The concept of “highest and best use . . . recognizes that the use to which a prospective
buyer would put the property will influence the price that the buyer would be willing to pay for
it.” Great Lakes, 227 Mich App at 408. “The concept . . . is fundamental to the determination of
true cash value.” Detroit Lions, Inc v Dearborn, 302 Mich App 676, 697; 840 NW2d 168
(2013). “Highest and best use” is defined as “ ‘the most profitable and advantageous use the
owner may make of the property even if the property is presently used for a different purpose or
is vacant, so long as there is a market demand for such use.’ ” Id., quoting Detroit/Wayne Co
Stadium Auth v Drinkwater, Taylor & Merrill, Inc, 267 Mich App 625, 633; 705 NW2d 549
(2005). The tribunal is required to make a determination of a subject property’s highest and best
use. Detroit Lions, 302 Mich App at 697.
The parties agree that the highest and best use of the property is as an owner-occupied
freestanding retail building.4 Their disagreement lies in the valuation methodologies to be
not the respondent, was the appellant. Id. at 496. The Drew Court cited ANR Pipeline Co v
Dep’t of Treasury, 266 Mich App 190, 198; 699 NW2d 707 (2005) in support of the proposition.
The petitioner, not the respondent, was the appellant in ANR Pipeline. Id. at 191. The ANR
Pipeline Court cited Dow Chem Co v Dep’t of Treasury, 185 Mich App 458, 463; 462 NW2d
765 (1990) in support of the proposition. In Dow Chem, however, the petitioner was also the
appellant. Dow Chem Co, 185 Mich App at 459. The Dow Chem Court cited Holloway Sand &
Gravel Co Inc v Dep’t of Treasury, 152 Mich App 823, 831 n 2; 393 NW2d 921 (1986), another
case where the appellant and the petitioner were the same party. Id. at 831. Critically, the
Holloway Sand & Gravel Court relied on MCL 205.7, which, at the time had already been
repealed by 1980 PA 162. Prior to its repeal, MCL 205.7 provided that “[t]he burden of proof in
any appeal from any assessment, decision or order shall rest with the appellant,” but, critically,
the statute referred to the appellant and the taxing authority as separate entities. See 1941 PA
122, § 7, now codified at MCL 205.22. Accordingly, we conclude that the statement in Drew
that the burden of proof is on the appellant does not shift the burden to establish TCV from
petitioner to respondent. Rather, in its proper context, it is apparent that the reference to
“appellant” in Drew and its progeny actually refers to petitioner.
4
Escanaba and the amicus argue that the tribunal failed to make an explicit determination of the
property’s HBU. However, we find that such a finding is implicit in the tribunal’s decision,
which recounted in the findings of fact that the parties did not dispute the HBU. Given that the
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employed and the data relevant to the valuation. The three valuation methodologies that have
been “found acceptable and reliable by the Tax Tribunal and the courts” are the cost-less-
depreciation approach, the sales-comparison or market approach, and the capitalization of
income approach. Meadowlanes Dividend Housing Ass’n, 437 Mich at 484-485. While, if
possible, all three methods should be used, the “final value determination must represent the
usual price for which the subject property would sell” irrespective of the specific method
employed. Id. at 485.
As noted, the parties and the tribunal agreed that the income approach does not apply in
this case. The tribunal also rejected the cost-less-depreciation approach advanced by Escanaba,
but found the values in Menard’s sales-comparison approach to be meaningful.
A. SALES-COMPARISON APPROACH
We first examine whether the tribunal’s reliance on the sales-comparison approach
advanced by Menard was supported by competent, material, and substantial evidence.
Menard owns a fee simple interest in the subject property. The property, as it currently
exists, is not subject to any use restrictions. However, half of the comparables in Torzewski’s
sales-comparison valuation contained deed restrictions that limited the use of the properties for
retail purposes, thereby preventing sale of an entire fee simple interest in the property.
Torzewski failed to mention all the deed restrictions in his valuation report, did not make any
adjustments for their existence, and, during his testimony, he insisted that the restrictions did not
affect the value of the comparables because the parties involved in the comparable sales told him
that the restrictions did not affect the sale price. The tribunal accepted Torzewski’s testimony
and used the deed-restricted comparables in its determination of value. We conclude that the
tribunal’s finding was based on an error of law and was not supported by competent, material,
and substantial evidence.
In Helin v Grosse Pointe Twp, 329 Mich 396, 407-408; 45 NW2d 338 (1950), our
Supreme Court recognized that deed restrictions in property that prohibited its use for an
“apartment house, multiple residence, or institutional purposes” would have an effect on the
value of the property. Accordingly, it would be error to fail to consider “deed restrictions in
establishing assessments[.]” Kensington Hills Dev v Milford, 10 Mich App 368, 372; 159 NW2d
330 (1967). This Court emphasized further in Lochmoor Club v Grosse Pointe Woods, 10 Mich
App 394, 397-398; 159 NW2d 756 (1968), that all factors, including “restrictions imposed” on
property must be considered in determining a property’s TCV.
Although Torzewski testified that he considered the deed restrictions, the record is
insufficient to support his assertion that they had no effect on the sales price for the restricted
comparables. His testimony is that he consulted the brokers, sellers, and buyers of the
comparables. Thus, that testimony is only sufficient to establish that to the parties involved in
the actual transaction, the deed restrictions did not affect the sales price they were willing to
matter was not contested and that the tribunal recognizes the agreed-upon HBU, we conclude
that the tribunal did not err by not expressly stating the HBU.
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pay. In other words, the market for sale was limited to those purchasers who were willing to
accept the restrictions and so did not reflect the full value of the unrestricted fee simple.
However, in assessing TCV, the property “must be assessed at its highest and best use,”
Huron Ridge, 275 Mich App at 33, which in this case is as an owner-occupied freestanding retail
building. Deed restrictions that limit the ability of prospective buyers to use the comparable
properties for the subject property’s HBU necessarily limit, if not eliminate, the willingness of
those buyers to purchase the restricted property. Those who would be interested in buying the
property with restrictions would need to make modifications to convert the building from retail
to something else, like industrial use. Given the need to convert, the buyers would necessarily
pay a lower price.
For the same reasons, the anti-competitive nature of the deed restrictions means that the
deed-restricted comparables could not be sold for their HBU. The potential buyers of the
comparables were therefore limited to buyers willing to accept the use restrictions. Further,
because of the prevalence of the self-imposed deed restrictions on big-box stores, there is
essentially no market for big-box stores being sold for the HBU of the subject property. Thus,
half of Torzewski’s comparables were not evaluated at the HBU of the subject property because
the deed restrictions expressly prohibited their use as a freestanding retail center.
On this record, there is no evidence to account for the impact of the deed-restricted
properties being sold for purposes other than the HBU of the subject property. It is plain that no
adjustments were taken for this major difference in the subject property and the restricted
comparables. Accordingly, we conclude that the tribunal erred in finding Menard’s sales-
comparison approach meaningful to its determination of the subject property’s TCV. The
tribunal did not value the subject property at its HBU, an owner-occupied freestanding retail
building, but instead valued it as a former owner-occupied freestanding retail building that could
no longer be used for its HBU and could best be used for redevelopment for a different use. In
doing so, the trial court made an error of law by failing to value the subject property at its HBU.
B. COST-LESS-DEPRECIATION APPROACH
The tribunal rejected the cost-less-depreciation approach advanced by Escanaba.
However, because the deed restrictions imposed by other big-box store owners drastically
limited the actual market for such properties, it is appropriate to look at the cost-less-depreciation
approach.5
5
Menard argues that use of the sales-comparison approach over the cost-less-depreciation
approach is supported by this Court’s two recently issued unpublished opinions on the valuation
of similar “big-box” stores in Lowe’s Home Ctrs v Twp of Marquette, unpublished opinion per
curiam of the Court of Appeals, issued April 22, 2014 (Docket Nos. 314111 and 314301), and
Lowe’s Home Ctrs Inc v Grandville, unpublished opinion per curiam of the Court of Appeals,
issued December 30, 2014 (Docket No. 317986). We disagree. In those cases, the salient issue
was whether, using the sales-comparison approach, comparables should be to the fee simple
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“The adjusted-cost-of-reproduction-less-depreciation method is most suitable for
industrial facilities for which no market, an inadequate market, or a distorted market exists.”
Tatham v Birmingham, 119 Mich App 583, 591; 326 NW2d 568 (1982). Here, although there is
evidence of a market for big-box stores when they are sold for secondary purposes, there is
limited evidence as to whether there is a market for big-box stores at the subject property’s HBU.
Instead, Torzewski testified that large big-box stores commonly had deed restrictions for anti-
competitive purposes, and Norden testified that she could not locate a sufficient number of
unencumbered comparables to make adjustments in her sales-comparison approach. As such, the
cost-less-depreciation approach is appropriate to value the TCV of the property.
In Clark Equip Co v Leoni, 113 Mich App 778, 782-783; 318 NW2d 586 (1982), this
Court approached the problem of determining the TCV of an industrial facility. In that case, all
of the property’s appraisers determined that the industrial property’s current use was “also its
highest and best use.” Id. at 782. This Court described the difficulty in determining the TCV to
such property and the appropriate solution as follows:
The reality is that these types of industrial plants are rarely bought and sold . . . .
However, as we construe MCL 211.27; MSA 7.27, to the extent that an industrial
plant is not so obsolete that, if a potential buyer did exist who was searching for
an industrial property to perform the functions currently performed in the subject
plant, said buyer would consider purchasing the subject property, the usual selling
price can be based upon value in use. . . . To construe MCL 211.27; MSA 7.27,
as requiring the taxing unit to prove an actual market for a property’s existing use
would lead to absurd undervaluations. Large industrial plants are constructed to
order, in accordance with the exact specifications of the purchasing user. . . . It is
ludicrous to conclude, however, that such a brand new, modern, industrial facility
is worth significantly less than represented by its replacement cost premised on
value in use because, in actuality, such industrial facilities are rarely bought and
sold. Thus, we hold that, to the extent a large industrial facility is suited for its
current use and would be considered for purchase by a hypothetical buyer who
wanted to own an industrial facility which could operate in accordance with the
subject property’s capabilities, said facility must be valued as if there were such a
potential buyer, even if, in fact, no such buyer (and therefore no such market)
actually exists. [Id. at 784-785 (emphasis in original).]
In other words, Clark provides that (1) when the HBU of the property is its existing use and (2)
when because the property is built-to-suit there would be little to no secondary market for the
alone or the fee simple plus the value to an occupier of an already existing leasehold or operating
business. We determined in both cases, over the objection of the taxing authority, that because
the subject premises was owner occupied, it must be valued as if vacant and available. Lowe’s
Home Ctrs v Twp of Marquette, unpub op at 1, and Lowe’s Home Ctrs Inc v Grandville, unpub
op at 7. In other words, those cases held, as do we, that what must be valued is what would
actually be sold. In those cases, the sales would be of the property without an existing lessee or
operating retail business. In this case, what is being valued is the property without deed
restrictions limiting its use.
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property where it would still be used at its HBU, then the strict application of the sales-
comparison approach would undervalue the property, so the cost-less-depreciation approach is
more appropriate.
In Great Lakes, this Court elaborated that “valuation can be determined strictly on a
hypothetical basis, with the hypothetical buyer looking at the costs of building a new facility to
determine the usual price of an existing facility even if a real buyer would not consider building
such a facility.” Great Lakes, 227 Mich App at 403. However, the hypothetical buyer need not
“be presumed to have considered building an industrial facility as an alternative to purchasing an
existing one when no such facility would be built and that hypothetical buyer has the ability to
see what is occurring in the marketplace of existing facilities.” Id. (emphasis in original). Thus,
Great Lakes states that the holding of Clark should not be applied when (1) no facility like the
subject facility would actually be built, and (2) a buyer has the ability to see what is occurring in
the marketplace of existing facilities. In the present case, there is no indication that “big-box
stores” like the subject are not being built. Additionally, because such big-box stores are not
typically sold on the marketplace for use as “big-box stores,” a buyer does not have the ability to
see what is occurring in the marketplace of existing facilities. Thus, the limitation in Great
Lakes does not apply and this case is governed by Clark.
In the present case, given that multiple valuation methods should be used when possible,
Meadowlanes, 437 Mich at 485, and that the analysis in the first issue shows that the
comparables that the tribunal used in this case were not appropriate, the tribunal committed error
in refusing to consider Escanaba’s evidence under the cost-less-depreciation approach. The
evidence demonstrates that owner-occupied freestanding retail buildings like the subject, which
Menard describes as “big-box stores,” have many similar qualities to the industrial properties
that this Court addressed in Clark. Both are constructed or built to order to conform to the
specifications of the purchasing user and are rarely sold on the open market for their current use.
Similar to the plant at issue in Clark, there is no indication in the record that the subject premises
is not a new, modern facility capable of fully functioning as a freestanding retail center just as
the industrial center in Clark was modern enough for continued use of the industrial purpose it
was designed for. Clark, 113 Mich App at 782-783. Therefore, like the industrial plant in Clark,
it would not be appropriate to value the subject property significantly less than its replacement
costs simply because owner-occupied freestanding retail spaces are rarely bought or sold for use
as owner-occupied freestanding retail spaces on the open market. Like the industrial plant in
Clark, the subject premises is well-suited for its current use and would be considered by a
hypothetical buyer who wished to own a freestanding retail building in accordance with the
subject’s capabilities, and, therefore, the property must be valued “as if there were such a
potential buyer, even if, in fact, no such buyer . . . actually exists.” Id. at 785.
Additionally, Menard’s and the tribunal’s reliance on the concept of functional
obsolescence to discredit using the cost-less-depreciation approach is misplaced. The tribunal
rejected the cost-less-depreciation approach advanced by Escanaba in part because it concluded
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that Norden failed to adjust for functional obsolescence.6 Norden, however, testified that she did
not adjust for functional obsolescence because there was none in the subject property. She
explained that, considering the property’s HBU, the same building would be built by Menard if it
were to build a new store. Further, she testified that the existing building would be used in
essentially the same fashion if a competitor were to purchase the property. Although Torzewski
testified that it would be difficult to value functional obsolescence, he did not identify any
functional obsolescence presently in the subject property, other than to suggest that the building
was automatically functionally obsolete the moment it was completed. He also suggested in
general terms that there was external obsolescence because the market for big-box stores was a
“down market” because there was little to no demand for the properties.
There was no evidence in the record of any deficiency in the subject premises that would
inhibit its ability to properly function as an owner-occupied freestanding retail building. The
functional obsolescence to which Menard refers appears to be the fact that, due at least in part to
self-imposed deed restrictions that prohibit competition, such freestanding retail buildings are
rarely bought and sold on the market for use as such but are instead sold to and bought by
secondary users who are required to invest substantially in the buildings to convert them into
other uses, such as industrial use. However, as stated in Clark, to read MCL 211.27 “as
requiring the taxing unit to prove an actual market for a property’s existing use would lead to
absurd undervaluations.” Clark, 113 Mich App at 785 (emphasis in original). Therefore, the
tribunal erred by failing to consider evidence under the cost-less-depreciation approach.7
IV. CONCLUSION
6
To determine the present TCV of property under the cost-less-depreciation approach,
depreciation must be subtracted from the replacement costs. Teledyne Continental Motors v
Muskegon Twp, 145 Mich App 749, 755; 378 NW2d 590 (1985). Depreciation includes
functional obsolescence. Id. “Functional obsolescence is a loss in value brought about by failure
or inability to deliver full service.” Id. It can include loss of value due to “shortcomings or
undesirable features contained within the property itself. . . . such as poor floor plan, inadequate
mechanical output, or functional inadequacy or superadequacy due to size or other
characteristics.” Id.
7
Escanaba also argues that the tribunal’s decision should be reversed because it accepted a non-
authoritative definition of the phrase “big-box” store. Menard’s expert relied on a definition of
“big-box store” from the Dictionary of Real Estate Appraisal, whereas Escanaba’s expert in
appraisal review relied on definitions from Investopedia, Wikipedia, and businessdictionary.com.
However, the closest the tribunal came to addressing the debate over the definition of the term
“big-box” store was when it criticized Escanaba’s expert’s use of “internet definitions.” The
tribunal did not, however, adopt the definition of “big-box” store advocated by Menard or base
its conclusions regarding the sales-comparison approach or the cost-less-depreciation approach
on Menard’s definition of “big-box” store.
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The tribunal committed an error of law requiring reversal when it rejected the cost-less-
depreciation approach and adopted a sales-comparison approach that failed to fully account for
the effect on the market of the deed restrictions in those comparables. Given this error, and the
fact that there is little if any evidence in the record as to the impact of the deed restrictions on the
comparables, we conclude that it is inadequate to simply remand to the tribunal for a new
determination as to value. Instead, on remand, the tribunal shall take additional evidence with
regard to the market effect of the deed restrictions. If the data is insufficient to reliably adjust the
value of the comparable properties if sold for the subject property’s HBU, then the comparables
should not be used. The tribunal shall also allow the parties to submit additional evidence as to
the cost-less-depreciation approach.8 After allowing the parties the opportunity to present
additional testimony in light of the deficiencies identified in this opinion, the tribunal shall make
an independent determination of the property’s TCV using correct legal principles. In doing so,
the tribunal must “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, 227 Mich App at 389.
Reversed and remanded. We do not retain jurisdiction.
/s/ Michael J. Talbot
/s/ Joel P. Hoekstra
/s/ Douglas B. Shapiro
8
As noted above, the parties agree that the income approach is inapplicable.
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