Lowe’s Home Centers, LLC (Plymouth), Relator, vs. County of Hennepin, Respondent
Michael O. Freeman, Hennepin County Attorney, Thomas F. Pursell, Deborah L. Russell, Assistant County Attorneys, Minneapolis, Minnesota, for respondent.
Mark R. Bradford, Edward F. Fox, Bassford Remele, P.A., Minneapolis, Minnesota, for amicus curiae Alliance Property Consultants, Inc.
Eric J. Magnuson, Robins Kaplan LLP, Minneapolis, Minnesota, for amicus curiae USAPTA, Inc.
S Y L L A B U S
- As a whole, the record reasonably supports the tax court‘s decision to place greater weight on the cost approach than on the sales approach.
The record supports the tax court‘s adjustments to the comparable properties considered in reaching a valuation determination. - The tax court‘s decision did not violate the taxpayer‘s due process rights.
Affirmed.
Considered and decided by the court without oral argument.
O P I N I O N
HUDSON, Justice.
This appeal involves the contested value of a Lowe‘s store in Plymouth, Minnesota (“the subject property“). Relator Lowe‘s Home Centers, LLC petitioned the tax court, asserting that Hennepin County‘s assessment for the 2015 tax year—$11,755,000—overstated the fair market value of the subject property. The tax court agreed in part with Lowe‘s, reducing the County‘s valuation to $10,507,000 for the 2015 tax year. Lowe‘s appeals that decision, arguing that the tax court clearly erred because it inflated the property‘s fair market value by 1) primarily relying on the cost approach over the sales approach and 2) improperly applying adjustments to the comparable properties considered under both approaches. Lowe‘s argues further that the tax court violated its due process rights by failing to rely on evidence in the record in reaching its conclusions. We conclude that the record supports 1) the tax court‘s decision to place greater weight on the cost approach rather than on the sales approach and 2) its adjustments under both approaches. Accordingly, the tax court did not violate the due process rights of Lowe‘s. We therefore affirm the tax court‘s decision.
The subject property comprises 12.89 acres—on which Lowe‘s built a retail store and lawn and garden center in 2005—located at 3205 Vicksburg Lane North in Plymouth, Minnesota. Hennepin County assessed the property‘s market value as of January 2, 2015, at $11,775,000. Lowe‘s appealed to the tax court and retained Michael S. MaRous as its expert. MaRous estimated that the property‘s fair market value for 2015 was $5,350,000. The County‘s expert, Brett Hall, estimated that it was $11,950,000. Both parties’ experts considered all three valuation approaches—sales, cost, and income—to reach an estimate of fair market value. Both experts gave little to no weight to the income approach,1 and determined that the subject‘s highest and best use as improved was as a continued big-box retail property.
The experts disagreed on how to apportion weight between the sales approach and the cost approach. MaRous placed greater weight on the sales approach. Applying that approach, he relied on nine sales of comparable retail properties and adjusted their sales prices to account for age, size, location, date of sale, and other factors. Based on these sales and on his adjustments, MaRous concluded that the sales approach supported an estimated market value of $5,350,000 for the 2015 tax year. Hall, in contrast, relied on the cost approach, testifying that a big-box owner generally acquires land and builds a new store. After making adjustments for improvements and depreciation, Hall concluded that
Beginning with the sales approach, the tax court rejected several of the experts’ comparable sales properties but ultimately relied on three: Walmart–Blaine, Lowe‘s–Rogers, and Lowe‘s–Cambridge. The tax court then adjusted the sales price for each comparable to account for the impact of deed restrictions, the date of sale, the age of improvements, and the combined impacts of traffic and location. These adjustments produced a market value estimate of $7,658,000 for the 2015 tax year.
The tax court then turned to the cost approach to determine an estimated fair market value based on the price a buyer would pay to construct new property with the same features as the subject property. The parties identified several commercial land sales, most of which the tax court rejected based on dissimilarities in size, use, or location. The tax court relied on three of the experts’ comparables for its cost approach analysis: Hy-Vee–Robbinsdale, Hy-Vee–New Hope, and Cabela‘s–Woodbury. Using each comparable property‘s land values, the tax court placed 70-percent weight on the Cabela‘s–Woodbury property and 15-percent weight on the other comparable properties because they had less favorable locations. These calculations resulted in a weighted average price of $11.50 per square foot. The tax court then determined the value of the subject property‘s improvements. It adopted MaRous‘s calculation of $8,355,516. The last step in the cost approach requires the tax court to subtract the property‘s depreciation. The tax court found that the subject property‘s depreciation was $1,503,993, that its functional obsolescence was $2,500,000, and that it experienced no external obsolescence.
Lowe‘s appeals on three issues. First, it asserts that the tax court erred in applying predominant weight to the cost approach. Second, it contends that the tax court erroneously calculated the adjustments under both approaches. Finally, Lowe‘s argues that the tax court‘s decision violated its right to due process.
ANALYSIS
We review the tax court‘s market value determinations for clear error. Equitable Life Assurance Soc‘y of the U.S. v. Cty. of Ramsey, 530 N.W.2d 544, 552 (Minn. 1995). “The tax court‘s decision should be considered clearly erroneous only when this court is left with a ‘definite and firm conviction that a mistake has been committed‘[.]” Id. (quoting Westling v. Cty. of Mille Lacs, 512 N.W.2d 863, 866 (Minn. 1994)). The imprecision of market value determinations justifies our deference “unless the tax court has either clearly overvalued or undervalued the subject property, or has completely failed to explain its reasoning.” Harold Chevrolet, Inc. v. Cty. of Hennepin, 526 N.W.2d 54, 58 (Minn. 1995). The tax court must determine the experts’ credibility and weigh their testimony accordingly in determining market value. Menard, Inc. v. Cty. of Clay, 886 N.W.2d 804, 813 (Minn. 2016). We review the legal questions, such as the due process challenge, de novo. Equitable Life, 530 N.W.2d at 552.
We turn first to whether the tax court erred in placing 75-percent weight on the cost approach compared to a 25-percent weight on the sales approach in determining market value.
Because each approach has strengths and weaknesses, we have encouraged the tax court to use at least two approaches to “serve as checks on each other.” Menard, Inc., 886 N.W.2d at 819. “[T]he weight placed on each approach depends on the facts of each case.” Cont‘l Retail, LLC, 801 N.W.2d at 402. The tax court discerns not only which approaches to apply, but also how to weigh each approach against the others based “on the quantity and quality of available data.” KCP Hastings, LLC v. Cty. of Dakota, 868 N.W.2d 268, 275 (Minn. 2015) (citation omitted) (internal quotation marks omitted).
The County disagrees, asserting that the cost approach is the most reliable method for the property because big-box stores in good retail locations do not sell often; thus, the sales approach is a less reliable indicator in this case of the subject property‘s fair market value.2
We rejected the sales-approach-only argument as applied to a big-box retail property in Menard, Inc. 886 N.W.2d at 819–21. There, Menard appealed the assessments for four tax years. Id. at 809. The tax court applied 60-percent weight to the cost approach and 40-
Here, the tax court applied similar logic to attribute greater weight to the cost approach than the sales approach. The tax court noted the undisputed fact that big-box retailers do not frequently buy one another‘s properties. See Montgomery Ward & Co. v. Cty. of Hennepin, 450 N.W.2d 299, 303 (Minn. 1990) (holding that the sales approach is “questionable” as applied to anchor department stores because they rarely sell and because the price often includes “fixtures and inventory“). Just like in Menard, Inc., the tax court was concerned that even among the comparable sales that it adopted, none were for property located in a strong retail location like Plymouth. It reasoned that the cost approach is superior when sales comparables are weak. See Menard, Inc. (Coon Rapids) v. Cty. of Anoka, Nos. 02-CV-15-2043, 02-CV-16-1997, 2019 WL 237158, at *26–29 (Minn. T.C. Jan. 15, 2019) (finding that “confidence in the sales approach is badly undermined by the inferior quality of the available evidence[,]” including dissimilar comparables). Finally, the tax court found that the 9-year-old retail building on the subject property qualified as “relatively new construction.” See Menard, Inc., 886 N.W.2d at 809, 813–16 (affirming the tax court‘s adoption of the cost approach for a big-box store between 4 and 7 years old).
Because the tax court adequately explained its reasoning and the record supports the tax court‘s determination, the tax court did not clearly err by primarily relying on the cost approach over the sales approach.
II.
Lowe‘s also challenges the tax court‘s adjustments to the sales prices of the comparable properties considered under each approach. We defer to the tax court‘s factual findings unless it has clearly overvalued the property or “completely failed to explain its reasoning.” Nw. Nat‘l Life Ins. Co. v. Cty. of Hennepin, 572 N.W.2d 51, 52 (Minn. 1997). We also defer to the tax court‘s credibility determinations. Menard, Inc., 886 N.W.2d at 818 (affirming the tax court‘s deed-restriction findings because they involved credibility determinations). The tax court may diverge from expert evidence with careful explanation and “factual support in the record.” Eden Prairie Mall, LLC v. Cty. of Hennepin (Eden Prairie I), 797 N.W.2d 186, 194 (Minn. 2011).
A.
Lowe‘s challenges the tax court‘s adjustments to the sales prices of the comparable properties to account for deed restrictions, the date of the sale, and traffic and location. We begin with the adjustments for deed restrictions.
The record, however, supports the tax court‘s finding that deed restrictions did impact the sales prices of these comparable properties. First, the tax court noted that we upheld a 15-percent deed-restriction adjustment on the sales price for Lowe‘s–Rogers. See id. (noting that the 15-percent adjustment “adequately reflected the constraint imposed by the [7-year] restriction“). It then reasoned that, despite similarities in age and size between Lowe‘s–Rogers and Lowe‘s–Cambridge, the property with a 3-year use restriction sold for more than the property with a 7-year use restriction. This discrepancy, the tax court said, suggests that the longer a deed restriction‘s duration, the lower the property‘s value. The
The tax court also explained why it found the County‘s proposed deed-restriction adjustment (70 percent) “problematic.” In rejecting both experts’ recommendations in part, the tax court explained that it arrived at an alternative adjustment for deed restrictions on Lowe‘s–Cambridge and Lowe‘s–Rogers because other factors—such as traffic and location—contributed to the differences in their sales prices. The tax court did not clearly err in these findings.
Next, Lowe‘s challenges the tax court‘s 7.5-percent per year date-of-sale adjustment, between the valuation date (2015) and the sales dates for the comparable properties (2016 for one property and 2012 for the other two). A date-of-sale adjustment neutralizes the differences in the sales prices for the comparable properties and the value of the subject property based on each property‘s change in value over time. See Carson Pirie Scott & Co. (Ridgedale) v. Cty. of Hennepin, 576 N.W.2d 445, 450 (Minn. 1998) (concluding that certain properties were not sufficiently comparable because many “were
The tax court adequately explained why it applied a 7.5-percent date-of-sale adjustment using sufficient evidence from the record. It relied on Hall‘s evidence, showing that sales of Minnesota‘s metro-area big-box stores for continued retail use were “trending upward . . . in the years before the valuation date.” The tax court explained that even though Hall‘s date-of-sale adjustment data included regional or dissimilar properties, it was superior to MaRous‘s, because MaRous‘s data contained only general national trends. The record therefore supports the tax court‘s 7.5-percent date-of-sale adjustment.
Finally, Lowe‘s challenges the tax court‘s location adjustment. Location adjustments control for the differences in market area between the subject property and the comparable properties. Appraisal Inst., The Appraisal of Real Estate 417 (14th ed. 2013) (describing how “a residential property with a pleasant view of a park and one located two blocks away with a less attractive view” may affect value). To determine its adjustment, the tax court evaluated factors such as demographics and traffic counts in the general area, as well as the overall location and desirability of the trade area. The parties’ experts agreed that the subject property‘s location is superior to that of the comparable properties in terms of population, income demographics, and traffic counts. The difference is a matter of degree. The tax court applied a higher location adjustment than MaRous suggested because it generally found Hall‘s location data to be more reliable.
The tax court explained that it accepted Hall‘s evidence because, compared to MaRous, he applied more factors and used more detail to describe the desirability of Plymouth‘s location for a big-box retailer. Although the tax court did not explain in detail its decision to adopt a midpoint adjustment, we cannot conclude that the tax court “ignor[ed] the record evidence and the expert appraisal testimony.” Guardian Energy, LLC, 868 N.W.2d at 266. In Guardian Energy, we concluded that the tax court‘s external obsolescence finding was clearly erroneous because the methodology it adopted over the experts’ testimony had “virtually no record support or explanation.” Id. Here, the tax court explained that Hall‘s evidence was more reliable, and we defer to the tax court on credibility determinations. Menard, Inc., 886 N.W.2d at 813. Because the tax court used the experts’ conflicting evidence to arrive at a value within Hall‘s proposed range of land-value prices, the tax court did not choose an entirely new methodology. See Nw. Racquet Swim & Health Clubs, Inc. v. Cty. of Dakota, 557 N.W.2d 582, 588 (Minn. 1997) (“[A] court confronted with conflicting appraisals may conclude that a compromise in
B.
Lowe‘s also challenges the tax court‘s calculations and adjustments made under the cost approach, including the value of the land and depreciation.
The cost approach requires determining the value of the land. See Harold Chevrolet, Inc., 526 N.W.2d at 56. The tax court accepted two of Hall‘s comparables and one comparable used by both experts to find that the subject property‘s land was worth $11.50 per square foot. It applied 70-percent weight to one comparable (Cabela‘s–Woodbury) and 15-percent weight to the other two based on their inferior locations.
Lowe‘s argues that, because the parties’ experts used land values of $11 and $7 per square foot, the tax court‘s finding of $11.50 per square foot lacks factual support in the record. Lowe‘s asserts that the tax court weighed Cabela‘s–Woodbury too heavily because it did not explain why it adopted Hall‘s square-footage measurement for this property over MaRous‘s, which resulted in a higher price per square foot.
The County asserts that the tax court adopted a value within the range of Hall‘s land-value prices ($10.73 to $14.34 per square foot). It argues that the record supports the tax court‘s decision to apply 70-percent weight to Cabela‘s–Woodbury because Hall testified that he confirmed his square-footage measurement with the County while MaRous miscalculated his value.
The record supports the tax court‘s land-value determination. The tax court‘s value was within Hall‘s range of land-value prices based on six properties that he evaluated and
The tax court also explained that it weighed Cabela‘s–Woodbury at 70 percent because it was the strongest comparable. Finally, the tax court concluded that MaRous failed to provide the necessary detail, such as property rights, financing, or market conditions, to apply his adjustments. Given the tax court‘s role in assessing witness credibility, and because the record supports the tax court‘s conclusion, we reject the argument that the tax court‘s land-value findings lack factual support in the record. See Eden Prairie I, 797 N.W.2d at 194 (“We conclude that the tax court is not precluded from arriving at a value determination that is lower or higher than the appraisal testimony presented at trial, provided that the court adequately explains its reasoning and its determination is supported by the factual record.“).
Next, Lowe‘s challenges the tax court‘s calculations for depreciation, focusing on functional obsolescence and external obsolescence. Depreciation reflects decreases in value for a property due to age, wear and tear, and other factors. Menard, Inc., 886 N.W.2d at 815. Functional obsolescence is a form of depreciation that considers diminution in value due to the function and utility of the property. See, e.g., Marquette Bank Nat‘l Ass‘n v. Cty. of Hennepin, 589 N.W.2d 301, 305–06 (Minn. 1999) (affirming the tax court‘s
Lowe‘s argues that the tax court erred in reaching these depreciation values because it relied on an “unrelated” case to find a functional-obsolescence value advocated by neither expert. It asserts that the tax court should not have developed its own calculation of total depreciation without support in the record. Further, Lowe‘s argues that the 50-percent difference in value between the tax court‘s sales approach and cost approach determinations demonstrates that the tax court did not properly calculate functional or external obsolescence.
We are not persuaded by this argument. The tax court adequately explained why it rejected both experts’ recommendations for functional obsolescence. It rejected Hall‘s market-extraction method because his comparables were too dissimilar. It rejected MaRous‘s recommendation because he did not explain how a well-performing property in
III.
Finally, we turn to the due process challenge. A “relator‘s constitutional right to due process is at stake” in property tax cases. Montgomery Ward & Co., 450 N.W.2d at 306. Lowe‘s argues that the tax court violated its due process rights by adopting values that neither party advanced, which prevented Lowe‘s from rebutting the evidence the tax court relied on until after it made its decision.4
But the tax court did not adopt values that were unsupported or unexplained. When the tax court diverged from adopting an expert‘s specific recommendation, it adopted a value within the range of that expert‘s data in the record. It did not seek new data (i.e., land value) or adopt a different methodology without explaining why it rejected an expert‘s approach (i.e., functional obsolescence). Lowe‘s had, and took, the opportunity to rebut Hall‘s evidence, which the tax court ultimately relied upon in many instances. That the tax court drew a somewhat different conclusion from that evidence in a few of its determinations does not mean that it violated the taxpayer‘s right to due process.
CONCLUSION
For the foregoing reasons, we affirm the decision of the tax court.
Affirmed.