Lead Opinion
OPINION
Relator McNeilus Truck & Manufacturing, Inc. (“McNeilus”) owns real estate located in Dodge County, Minnesota. McNeilus operates a large manufacturing plant in Dodge Center, and alleges that the Dodge County Assessor overvalued the McNeilus property for the tax years 2001 and 2002. Dodge County valued the property at $6,739,900 for 2001 and $6,743,900 for 2002. After trial, the Minnesotа Tax Court held in favor of respondent Dodge County, concluding that McNeilus’s real estate was valued at $8,800,000 as of January 2, 2001, and $9,000,000 as of January 2, 2002. McNeilus Truck & Mfg. Inc. v. County of Dodge, Nos. C4-03-287, C5-02-241,
We “will not accept comparables from outside Minnesota unless the circumstances warrant * * * and unless differences in the markets and tax rates are explained.” For the reasons set forth below, wе do not accept McNeilus’s use of out-of-state comparables in this case.
Id. at *7 (citations omitted). McNeilus contends that the tax court erred when it rejected the use of out-of-state comparable sales based on an unpromulgated rule of evidence, and that the valuations of the tax court were clearly erroneous. We reverse and remand.
The property at issue in the appeal is a large light manufacturing facility in Dodge Center, Minnesota, 70 miles southeast of the Twin Cities and 25 miles from both Interstate 35 and Interstate 90. Buildings and improvements total approximately 645,734 square feet, and are of steel frame cоnstruction with steel siding. The facility is used to manufacture cement drums and refuse containers for use with cement and refuse trucks. The majority of the improvements are used for manufacturing, although some smaller structures are devoted to storage, research,- development and office space.
Dodge County presented evidence of value through the expert testimony of certified appraiser Dennis W. Jabs. Jabs primarily employed a sales comparison approach to valuation, selecting ten comparable sales of large industrial properties resembling the subject property from a total of nearly fifty industrial sales. Jabs selected his comparables from the market he determined included the McNeilus plant, specifically, a market for large industrial manufacturing facilities centering at the intersection of' Interstates 35 and 90, and extending across southern Minnesota, into northern Iowa and eastern South Dakota. The properties, nine in Minnesota and one in South Dakota, were of dissimilar sizes and uses. One comparable was a manufacturing facility much smaller than the subject property, four were warehouse distribution centers, and five were combination warehouse/manufacturing facilities. Two com-parables were in the Twin Cities metrо area, and several were close to interstate freeways. Jabs concluded that the highest and best use of the McNeilus property was manufacturing, but also considered that buyers often use light manufacturing space interchangeably for warehousing. But because warehousers are not willing to pay full value for somе of the more costly manufacturing improvements that would not be used in a warehouse, Jabs adjusted the comparables involving warehousing down by 10%. Using five of these comparables, he arrived at a value of $9,350,000. Using all of the compara-bles, Jabs performed an alternative valuation analysis, considering the value of thе property if split and sold in separate, smaller parcels. Using this approach, he came to a value of $8,850,000. Jabs gave the alternative approach lesser weight, and arrived at a sales approach valuation of $9,300,000 as of January 2, 2002.
Jabs also performed a cost approach analysis, beginning with the cost of replacing the improvements and then considering depreciation. Jabs performed this analysis building by building, as each building has different uses and characteristics. He concluded that the value of the property, using a cost approach analysis, was $9,200,000 as of January 2, 2002.
Relator McNeilus offered thе expert testimony of certified appraiser Steven M. DeCaster. DeCaster utilized a sales comparison and a cost approach to valuation, using seven comparable sales from a market larger than that identified by Jabs. Unlike Jabs’ comparables, all of DeCaster’s comparables were pure manufacturing facilities. Two comparables, one in Hopkins, MN, and one in Chicago Heights, IL, were in large metropolitan areas. Two of DeCaster’s comparables were in Minnesota and one was in Wisconsin. The remainder were in Illinois. All but one of De-Caster’s comparables were at least 100 miles from Chicagо. All were either of steel or steel and masonry construction. DeCaster made adjustments to account for age, location, size of the buildings, and quality of construction. He did not make any adjustments for local tax rates or mar
II.
The tax court, in rejecting DeCaster’s out-of-state sales, stated, “we will not accept comparables from outside Minnesota unless the circumstances warrant * * * and unless differences in the markets and tax rates are explained.” McNeilus Truck & Mfg. Inc.,
It is fair to say, viewing tax court precedent, that the tax court has created a de facto rule prohibiting the use of compa-rables from outside of Minnesota. But this informal rule against the use of sales transactions from states other than Minnesota, without further explanation, violates the tax court’s obligation to use its independent judgment in evaluating all testimony and evidence before the court. See Am. Express Fin. Advisors, Inc. v. County of Carver,
More specifically, application of a rule barring out-of-state comparables violates the tax court’s duty to assess property at market value. The tax court is required to follow Minn.Stat. § 273.11, subd. 1 (2004), which provides that “all property shall be valued at its market value.” Fair market value for property assessment purposes is the compensation which a willing purchaser not required to buy the property would pay to an owner willing but not required to sell it, taking into consideration the highest and best use of the property. Ferche Acquisitions, Inc. v. County of Benton,
When utilizing the comparable sales approach to valuation, the appraiser must “consider and give due weight to lands which are comparable in character, quality, and location, to the end that all lands similarly located and improved will be assessed upon a uniform basis and without discrimination.” Minn.Stat. § 273.12 (2004). The appraiser must assess the actual market a hypothetical buyer of the subject property would look at, and cоnsider comparable sales of properties in that market. The scope of the market depends on the kind of property being sold — two sales of land separated by great physical distance may nonetheless be comparable sales depending on the intended use of the property. For exаmple, a buyer searching
Courts in other states have also rejected the notion that comparable sales may be ignored purely because they occurred аcross a political boundary. See Bartlett & Co. Grain v. Bd. of Review of Sioux City,
Of course, as the tax court also recognized, adjustments to price may be necessary to account for differences in local tax rates and policies amongst comparable sales across state lines. But the same kinds of adjustments may need to be made with regard to comparable sales in different counties or different cities within Minnesota. There is nothing particularly salient about the state line that justifies what amounts to a presumption of non-comparability. While, all other things being equal, a Minnesota comparable is likely superior to an out-of-state comparable, effectively excluding out-of-state comparable sales is arbitrary and distorts valuation in contravention of the tax court’s duty to assess fair market value and treat lands similarly situated on a uniform basis. Minn.Stat. §§ 273.11, 273.12. We hold that the tax court’s de facto evidentiary rule barring out-of-state comparables violates the tax court’s obligation to assess property at market value.
III.
But even where, as here, the tax court inaрpropriately excluded evidence, we will not reverse unless the exclusion materially prejudiced the appealing party. Marquette Bank Nat’l Ass’n v. County of Hennepin,
Moreover, the tax court considered all of Jabs’ comparables, despite the fact that all but one of those comparables were constructed using materials and methods different from the McNeilus property. Likewise, thе tax court’s opinion highlights environmental problems with De-Caster’s comparables without noting that the McNeilus plant itself is subject to similar environmental issues and is designated by the Environmental Protection Agency and the Minnesota Pollution Control Agency as a high volume generator of hazardous wastes. Further, the tax court’s opinion сriticizes some of DeCáster’s comparables but inexplicably fails to comment on the remainder. The tax court’s alternative reasons, therefore, are insufficient and cannot support the tax court’s property valuation analysis.
Because of the rejection of the evidence of value offered by McNeilus and the difficulties associated with the analysis given by the tax court on the remaining expert evidence, we are unable to reach a conclusion as to the appropriateness of the property valuation at issue here. Accordingly, we remand to the tax court with instructions to consider all prоperly offered and admitted comparable sale evidence and to apply the samé standard to comparable evidence offered by either party and to evaluate in detail the expert evidence offered by both parties. We take no position as to the eventual outcome of this property valuation dispute.
Reversed and remanded.
. We note, however, that this holding does not preclude the tax court from exercising discretion in the admission of evidence and excluding, in the appropriate case, out-of-state comparable sales on relevance or other grounds.
Concurrence Opinion
(concurring).
I concur with the' decision of the majority. ’ However, I write to emphasize that there is no legal or economic basis to automatically exclude out-of-state compa-rables whether they are offered by either
The tax court’s de facto rule does not automatically exclude out-of-state compa-rables, but it sets up a presumption against their use. In SPX Corp. v. County of Steele, No. C1-00-350,
Here, on the one hand, the tax court cited its de facto rule to exclude McNeilus’ out-of-state comparаbles, and, on the other hand, again citing its de facto rule, it admitted the evidence into the record, and then, using its rule as a presumption against out-of-state comparables but not in-state comparables, found that relator had not met its burden to show that circumstances warrant an exception and to explain thе differences in the markets and tax rates. Further, the tax court did not hold respondent to the same standard when it presented evidence of an out-of-state comparable.
When utilizing the comparable sales approach to valuation, all factors relevant to determining market value should be considered and weighed and appropriate adjustments should be made for the differences in the comparable sales whether instate or out-of-state. See Minn.Stat. § 273.12 (2004).