*1 MEADOWLANESLIMITED DIVIDEND HOUSING ASSOCIATION CITY OF HOLLAND 4, (Calendar 9). Argued No. Docket 86122. October No. Decided 16, Levin, J., 17, July Concurring opinion by July 1991. filed Rehearing 1991. 438 Mich denied Association, Housing Meadowlanes Limited Dividend owners of federally housing complex City subsidized low-income in the Holland, challenged city’s property assessment of its for the years approved petitioner’s tax 1981-83. The Tax Tribunal formula, mortgage-equity component adopting its final esti- P.J., Appeals, mates of true cash value. The Court of Shepherd, JJ., opinion and Maher R.W. Peterson, reversed in an curiam, per remanding the case to the tribunal to take into value, any, percent mortgage account the if of the 5.35 interest provided Act, Housing under 236 of § the National 76133). (Docket remand, again USC 1715z-l No. On the tribunal adopted petitioner’s assessment, recomputed method of but include, mortgage component the value of the rather than exclude, remand, subsidy. the value the 236§ After Appeals, the Court of L. Olzark, (Danhof, Hood and R. JJ. C.J., (Docket concurring), opinion per affirmed an No. curiam 101787). appeals, whether, The association limited to the issue computing the true cash value of real the Tax value, any, Tribunal take into account if of a federal government mortgage subsidy. opinion by joined an Boyle, Justice Chief Justice Cavanagh Riley, and Justices Brickley, Griffin, Supreme Court held: Although proper it is for the Tax Tribunal take into any, government mortgage account the aof federal subsidy, Appeals adopted wrong the tribunal and the Court of principle by determining the true cash value of the appraisal under a flawed method. findings sup- 1. All factual of the Tax Tribunal are final if ported by competent fraud, and substantial evidence. Absent appellate determining courts are limited to whether the tribu- adopted principle. wrong nal made an error of law or principles apply basic of valuation to the assessment of value federally housing complexes in the same manner as Mich 9, 3 mandates they apply Const art § to all real true system based on the of real taxation a uniform private at a could be obtained which cash value *2 given determining the should be consideration sale. In soil, location, disadvantages quality advantages of zon- of and use, present ing, existing income of struc- the economic and traditional, acceptable, reliable methods of tures. The three market) (or determining are the cost-less- true cash fair market) (or sales-comparison ap- depreciation approach, the capitalization-of-income approach. proach, Whenever and the used, possible, approaches should be and the values all three correlated, reconciled, weighed, a final in order to reach study of all factors influ- of value which reflects the estimate appraisal encing of the An which the market value disregards approach incomplete. an case, Appeals of 2. this the Tax Tribunal and the Court deciding adopted wrong principle in that the true cash value a mortgage-equity property by the of the could be determined approach petitioner. component the valuation advocated is the true cash value or touchstone of uniform assessment property, equivalent selling price not the cash usual discounting underlying selling price. By the value of the principle mortgage, petitioner ignores the assumable the leverage property’s which enhances a value. The value financing underlying relevant to the in a sales transaction is property’s only if market data shows that true cash value comparable property price a includes consideration the sales discounting present feature. In cash value of of such a underlying mortgage, petitioner’s appraiser property’s used cash-equivalency analysis application, outside its normal i.e., financing the stated that the terms of a sale influence analyze price comparable property. Nor did he sales comparable properties atypical financing. Fur- for evidence of ther, erroneously mortgage assumptions in he assumed that financing are conclusive evidence of creative and of themselves arrangements buyer and seller which would affect between the adjust- selling price require price the usual and thus sales approach petitioner’s is flawed because ment. property by valuing underlying its in a theo- values paper retical commercial market which influenced rate, mortgage interest rate and the stated interest current uniformity violating mandate of in real thus the constitutional principles, Contrary taxation. to basic pur- petitioner’s approach a value for ad valorem tax derives likely poses parallel valuation estimate derived that fails circumstances, purposes. the numbers for other Whatever the Meadowlanes v Holland associated with the defined value must be the same. Because approach underlying mortgage involves valuation of the paper, property, potential rather than the it has the for creat- ing disparities irrational prop- in the true cash value of real erty. remand, On the true cash value of the is to be using approaches. redetermined the three traditional valuation interest-subsidy payments Because made on behalf of the owner-mortgagor price, selling 236§ affect its usual proper it is for the tribunal to consider them in the valuation process. approaches The values derived under the various are correlated, reconciled, weighed. to be Because there is no single approach determining correct the true cash value of federally appraiser subsidized real should use approaches, valuing variants of all prop- three traditional erty private apartments both federally as and as a housing complex, any approach or other that can be demon- reasonably strated as accurate and related to the fair market value. Levin, concurring, although Justice stated that the Tax may rely Tribunal on an *3 that takes into account the any, government mortgage if of a federal in the process, although and on remand evidence of an entirely presented new of method evaluation also be reasonably is accurate and related fair market value or value,” true of cash value "cash as used MCL 211.27(1); 2.27(1), MSA does not mean that a subsidized mort- gage that reflects historical cost rather than the cash value be should included at face value. The lodestar is the usual selling price cash, paper generally for and a should be equivalent. reflected at its cash Reversed and remanded. part
Justice Mallett took no in the decision of this case. 536; App 176 Mich NW2d reversed. Parsley, Gotting Loomis, Ewert, Ederer, Davis & Witte) (by Kenneth W. Beall and Norman C. for petitioner. Cunningham, (by Mulder & Breese J. Andrew Mulder) Wright, Dickinson, Moon, Van Dusen (by Jeffery & Freeman Sheldon, Peter S. V. Stuckey, Crooks), and Kim D. co-counsel, for the respondent. Opinion of Court
Amici Curiae: (by Honigman, Miller, & Cohn Schwartz Jr.) Baker, M. for J. and Frederick
Thomas Beale Congresshills Apartments, of Builders Association Apartment Michigan, Associa- Southeastern Michigan. tion of Thompson, Early, Lennon, Fox, Peters & Mason) (by D. and Patricia Richard Reed
Crocker Michigan Michigan Townships for Association League. Municipal dispute a over the assessed J. This is Boyle, Housing Limited Dividend
value Meadowlanes federally hous- subsidized low-income Association’s ing complex. the Court is whether
The issue before computed properly Michigan Tax Tribunal petitioner’s property for the true cash value of assessing purposes for ad taxes valorem although years 1981, 1982, hold that and 1983. We proper Michigan Tax take it is for the Tribunal govern- any, value, into ment federal account the mortgage subsidy, the tribunal and Court adopted wrong principle by Appeals determin- of ing the true cash value appraisal Thus, we
under flawed method. reverse Tax and the Court of the decisions Tribunal Appeals this Tax Tribunal and remand case true cash value redetermination property consistent with this Meadowlanes’ real opinion.
i FACTS A. BACKGROUND AND originated petitioner-appel- appeal with This Meadowlanes Court challenge lant’s tax assess- imposed by City ments building, of Holland on its 22- federally housing
118-unit, complex years through for tax 1983.1 purchased housing 1973, complex original developer, from its Holland- Nonprofit Housing Zeeland Area Association. It paid eq- $31,532 cash, $400,000 in contributed in uity accounts, into reserve and assumed the com- plex’s underlying mortgage Michigan with the Housing Development Authority (mshda), State percent which carried a 6.35 a interest rate and had approved $2,232,537. balance Mshda also a mortgage $400,000 in increase amount so Mea- dowlanes would have additional funds to correct prior construction defects. Meadowlanes’ to- purchase tal indebtedness at the time of $2,624,500. was housing complex
The Meadowlanes was operates financed, built, §236 under Housing Act, National 1715z-l; USC 24 CFR seq. 236.1 et It also receives rental assistance Housing § under 8 of the United States 1937, Act 1437f, 42 USC for some of its units.2 appeal. rent subsidies are not at issue this programs designed Both of these were to induce developers constructing operat- and assist ing housing quality for low- and moderate-income families.
In return benefits, for various attractive, property’s design is modern and and all but the one-bedroom units are townhouses with basements. It also has a community building, pool, swimming and a "tot lot.” The tenants families, many are lower-income with small children. Department Housing Development Under § and Urban pays directly to the owner of fair § market rental twenty percent for of all units where the rental exceeds fifteen to twenty-five percent of a tenant’s annual income. See USC 1437f(C)(l)-(3). complex, twenty percent In the Meadowlanes apartments are reserved 8 tenants. § *5 473 478 Opinion of the Court regulatory agree- voluntarily entered into a owner regulations subjects it to federal ment which restrictions which include of (1) maximum return percent equity in six on initial investment operating property,3 and rent4 5and restrictions.6 is also Meadowlanes regulations because it is financed with a mshda mortgage. mshda § The benefits that accrue to the owner of a mortgage property include: federal insurance of long-term mortgage private, (forty-year) a an amount not FHA-determined loan in ninety percent in excess of of the project,6 certified of the cost 3 operating expenses higher anticipated, percent If are than the six equity period owner’s However, distribution for that is or eliminated. decreased equity the limited rate of return on investment is cumula permit payment tive in the sense that if cash flow does not three of at least percent, deficiency year is carried over to a later when cash is sufficient. flow eligibility Rent restrictions include both tenant restrictions and charged. eligibility the amount of rent that can trolled limited to tenant’s Tenant is con be by regulations. income limits determined Rent hud charge” twenty-five percent or a "basic rental income, higher, whichever is but cannot exceed the "fair charge” necessary market rental.” The "basic rental is the rent costs, costs, operating profit recover determined as if the percent and a limited construction and is project operated by were the owner under a one rental,” hand, mortgage. "Fair market on the other is deter mined on the basis that subsidy. the owner received no interest reduction note, housing: See Low income Section 236 of the National 1969, Housing the Tax 31 U Pitt L R Act and Reform Act of 448- (1970). result of the rental formula is that tenants projects pay monthly compara- rental of from 66 to 100% rates, depending [Halperin
ble market Tucker, on their incomes. & (FHA 236) housing programs: income Low One few left, (1972).] opportunities tax shelter 36 J Taxation 5Operating prohibition prepayment restrictions include a mortgage twenty years prepay without hud’s consent for unless the qualified cooperative facilitate a sale to a tenant or ment nonprofit group. Tucker, Halperin n 4 at 2-3. See & easily property cannot be converted to other uses even if the owner profitable. another use would be more decides project’s long-term mortgage ninety percent of This cost Holland op
(2) monthly payments reduction made directly private mortgagee-lender to the hud mortgagor-owner behalf for all interest due (the percent under the excess one 1715z-l(c). subsidy”).7 "interest 12 USC The Inter- *6 provide nal Revenue Code was also amended to several tax benefits.8
B. PROCEEDINGS petition Michigan
Meadowlanes filed a with the challenging City Tribunal, Tax of Holland’s housing complex assessment of the value of its for years through Following the tax an evidentiary hearing, Michigan Tax Tribunal creates a
high tional ble basis to period enabling . . loan-to-value ratio . a smaller than conven- equity leverage higher deprecia- investment to a ratio of Furthermore, equity. forty year amortization early year payments greater component loads the with a of deductible interest than obtains under conventional 20-25 year financing. [Pennsylvania Lynn, App 288, 305, v 163 US DC 57; (1974).] n 501 F2d 848 project mortgage owner contracts with lender and secures bearing loan interest at the current market rate. Hud then contracts payments with the lender to make interest reduction each month in equal an payment amount to the diiference between the due under mortgage required note and what be would if the note carried a 1715z-l(c). percent Comm’r, one interest rate. 12 USC See Graff 743, (1980), (CA 5,1982). TC 749-750 aff’d 673 F2d 784 case, the instant the stated interest rate is 6.35 percent. pays principal owing all the under the mort- gage plus percent pays remaining one the stated interest. Hud percent directly mortgagee-lender 5.35 interest to the on Meadow- lanes’ behalf. (1) right advantage The tax benefits include: the owner’s to take percent double-declining-balance the two-hundred tion depreciation deprecia method of (§ 167), right special regarding the owner’s treatment i.e., recapture, years, if the was held for ten no depreciation recaptured 1250(a)(l)(C)(ii), excess in former § cur 1250(d)(8), rently right paying the owner’s to defer taxes on capital gain project from the sale of the if certain conditions are met 1039). (§ Graff, supra at 750. For a detailed discussion tax incentives associated with 236§ see, note, generally, advantages Tax under section 236 of Act, (1971). Housing the National 8 Hous L 911R Opinion of the Court judgment opinion which deter its issued mined that the true cash value 1981, $1,000,000 $800,000 for for was reaching decision, the its $1,100,000 1983.9 In for approved utilized the valuation tribunal appraiser, Allen, and Laurence Meadowlanes’ adopted for true cash value final estimates of his years his valuation Allen described the approach approach at issue. of the traditional income
as a variant component using "mortgage/equity” formula. city appealed 1984 deci the Tax Tribunal’s Appeals raising The Court of four issues.
sion
arguments,
city’s
rejected
re
first three
but
fourth,
the case to
and remanded
versed on
the tribunal
it to
and directed
reconsideration
any,
value, if
of the 5.35
into account the
"take
App
percent mortgage
subsidy.” 156 Mich
I).
(1986) (Meadowlanes
238, 252;
method, but value component exclude, include, rather than the the subsidy.11 §236 value of the interest tribunal determined that the the true cash value of $1,600,000 1981, real was in $1,800,000 $1,900,000 in in 1983.12 parties’
The Tax Tribunal denied the motions to supplementary judgment vacate the and their mo- rehearing. parties appealed tions for the Court of Both then
Appeals.13 Appeals The Court of af- supplementary judgment firmed the tribunal’s on remand.14 granted application
This Court Meadowlanes’ for appeal Appeals leave to after remand from the Court of decision App 536; 176 Mich NW2d (1989) (Meadowlanes II), "[l]imited to the issue computing whether, in the true cash value Michigan Tax Tribunal take any, govern- into account the of a federal (1990). mortgage subsidy.” ment value. mortgage component using commercial the true cash the present Meadowlanes’ the interest-reduction nal did than the one present entered mand 11Supplemental mortgage After On as it remand, January value of the value of an city’s appeal remand, receive additional paper remand. was directed on component percent appeal, 23,1987. market. The net result Judgment Tax ordinary on the other property’s underlying mortgage paper Court focused on Meadowlanes interest each tax subsidy Tribunal under the the full evidence on rate in the year. annuity. Remand, Michigan used hand, mortgage/equity 6.35 II originally Tax Tribunal’s bearing the same formula subject property’s percent anwas It focused on the inclusion of simply observed that used to on true cash value. $800,000 interest the recalculated the method, i.e., Tax refusal calculate rate rather increase in true cash Tribunal, discount the in the tribu re that, The tribunal found when the *8 account, apartment taken
was into the true cash changed original figures. unit had decision ... dence. from the tribunal’s This supported competent is and substantial evi- App 536, 542-543; (1989).] Mich 440 71 [176 NW2d 473 Mich
II presents those ad similar case issues This City of Gales this Court in Antisdale v dressed (1984). burg, Once 265; 420 Mich 362 NW2d again must the ad valorem taxation we evaluate housing complex. federally we Before granted, leave was address issue on which can method the valuation must first evaluate we adopted by and the Court Tax Tribunal Appeals.15 three from the This deviates prop approaches valuation of real traditional erty reasonably proper only if it is and is accurate value, or fair related to the market Saf true cash Printing App 376, Detroit, 380; 88 Mich Co ran (1979); Presque Water Isle Harbor 276 NW2d Presque App Twp, 182, 190; 344 Isle Co v (1983). NW2d appropriateness analyze After we approach, whether, must determine we computing the true value of real cash may rely approach on an the Tax Tribunal any, value, if a federal into account the takes government mortgage subsidy. A. APPELLATE SCOPE OF REVIEW acknowledging appellate begin by re-
We decisions, forth of Tax Tribunal as set view 28, 6, § art is limited. All factual Const findings supported by competent
are final if alleged, fraud not evidence. When substantial determining appellate courts limited to are curiae, Michigan Michigan Townships Amici Association and League participated argument. Municipal filed a at oral brief and argument Tax Tribunal and the Court of of their was that focus Appeals appraiser’s adopted wrong principle they adopted when Meadowlanes’ assessing cash the Meadow- method for the true value of housing complex years through for the tax lanes *9 Opinion op the Court
whether the tribunal an of made error law or adopted wrong principle. Antisdale, a at 277. Our review here addresses committed an error of law or principle the whether tribunal
adopted wrong accepting method ap- which from deviates the three traditional proaches adopted wrong to value and whether it principle adopted when a valuation which the values interest reduction under property. §a 236
B. APPLICABLE VALUATION PRINCIPLES principles apply The basic of valuation to the federally housing assessment of complexes they apply in the same manner as to all case, other appeals In real this as in all other Tribunal, from Tax the the fundamental principles concerning ad valorem taxation set out Michigan provide 9, § art Constitution appropriate analytical framework.16 sec- This Legislature pro- tion mandates: is to system property vide a uniform taxation, (2) that the tax must be assessed basis the true cash value of the Legislature provide is to a determination of true cash value. Legislature complied with this constitu- enacting 211.27(1);
tional mandate MCL MSA 7.27(1), provides pertinent part: which value” means the usual at selling price ”[C]ash 9, provides: Const art 3§ provide legislature general shall for the uniform ad tangible personal valorem property taxation of real and not exempt by legislature provide law. The shall property; for the determina- proportion tion of true cash value such of true assessed, uniformly cash value at which such shall be percent . which shall not . . exceed 50 .... 437 Mich Court to which term place where the assessment, being time of is at applied for the could be obtained price that .... sale, not at auction sale private con- also the assessor shall determining disadvantages of loca- advantages sider use; present soil; zoning; existing tion; quality of [Emphasis .... of structures economic income added.] *10 provided Legislature a listed a above, has evidenced
As true value and has definition of cash broad variety in the valuation to be considered of factors Legislature not direct did determination. approv- specific ing Thus, the task of be used. methods specific disapproving or methods or Antisdale, approaches has to courts. fallen acknowledged supra that it has at 276. This Court determine, in goal process to of the assessment abstract, selling price given of a the usual willing buyer and piece of between methodologies develop willing seller and making uniformity in to achieve possible make Co v State .... such determinations [Washtenaw Comm, 346, 363; 373 NW2d Tax (1985).] of determin- three traditional methods There are ing value,17 which or fair market true cash acceptable the the reliable found and been have Tax cost-less-depreciation (1) They are: the courts. Tribunal and approach,18 the sales-com- concepts and of "true cash value” has ruled that This Court synonymous this CAF Investment Co are in state. market value” "fair (1974). 442, 450; Comm, 392 Mich NW2d Tax State by adding approach, derived true cash value is Under the cost reproducing the current cost value to an estimate of estimated land deducting from replacing improvements the loss in value and then or depreciation structures, i.e., physical functional deterioration and in or economic obsolescence. Opinion or the Court
parison approach,19 capitali- or Diarket approach.20 zation-of-income Variations of these approaches entirely new methods be reasonably useful found be accurate and related to the fair market value of the property.21 supra Antisdale, n 1. It is the duty ap- Tribunal’s determine which Tax proaches providing are useful the most accurate valuation under the individual circumstances of Regardless Antisdale, each case. at 277. approach employed, the valuation the final value represent price determination must the usual subject property which the would sell. Safran Printing, supra at 380. approach, appraiser analyzes
Under each mathematically data to determine an estimate of physical the fair market value of both the rights interests, benefits, estate and all ownership property.22 inherent of that real All approaches possi- three be should used whenever appraisal disregards ap- ble, and an which an proach by mere statements and without research justifying incomplete.23 nonuse is considered *11 approaches values derived under the various are 19 sales-comparison approach by The indicates true cash value ana lyzing properties, comparing recent sales of similar them with the subject property, adjusting price comparable the the sales of properties properties. to reflect differences between the two 20 income-capitalization approach present The measures the value of ownership estimating the future property’s benefits of the interests) (reversionary income stream and its resale value and then developing capitalization a rate which is used to convert the esti present lump-sum mated future benefits into a value. description approaches An additional of the three traditional Antisdale, provided supra 276-277, at n 1. see, appraisal approach, generally, For discussion of a new Kirk Smith, Using approach appraise & the reversion/shelter 1983). housing, Appraisal (July, The Journal 326 Appraisers, Appraisal of American Institute Real Estate The of ed) 1987). (9th (Chicago, Real Estate VII, Manual, Training p 34; State Tax See Comm Assessor’s ch Estate, Appraisal supra n of Real at 61-75. 437 Mich op weighed reconciled, in order to correlated, goal The ultimate final estimate value.24 reach a process well-supported conclu- a of the valuation sion that study factors that of all reflects subject value of the market influence OF THE "MORTGAGE/EQUITY” C. VALIDITY ALLEN APPROACH COMPONENT ques- interest-subsidy can
Before we address tion, Tri- the Tax must first evaluate whether we wrong adopted Appeals a bunal and Court principle it decided the true cash value when determined could be by Meadowlanes’ advocated appraiser, the Tax Allen. We hold Laurence Appeals did fact Tribunal and the Court of wrong they adopt principle when determined property us- true ing of the Meadowlanes cash value component approach. mortgage/equity Allen’s components approach, this Under two "mortgage” compo- "equity” component and a an nent, sepa- separately and then were calculated present finally rately value and discounted together true value of to arrive at the cash added "mortgage/equity” subject property. Allen’s component is to be distin- method of valuation capitaliza- guished under the from variant used ap- approach. latter Under tion-of-income appraiser mortgage/equity proach, tech- uses nique capitalization develop rate. an overall steps under the traditional There are two basic capitalization-of-income approach: net calculate (2) develop appropriate operating income, and an capitalization generally True cash value is rate. Estate, arriving Appraisal After at Real n 22 appraiser approach, examines the under each a value estimate spread among spread may value. A wide the various estimates of *12 truly applicable. approaches is not that one or more of the indicate v Holland Opinion of the Court by dividing operating
derived net income capitalization developing rate. One method of an capitalization "mortgage/ overall rate is the equity” method which blends six . . . together factors algebraic an formula. (1) Holding The factors are: period, a limited term of ownership selling, refinancing before or ex- (2) rate, changing property; Equity-yield rate of return invested; maturity on actually dollars term, Loan the dollar amount of the mortgage as percentage purchase of the value or (4) (5) price; term, length Loan of loan in terms of years; rate; Loan Appreciation/ and depreciation, percentage estimated possible change value within the projected holding Johnson, period. I. Mortgage- See Instant Equity, Co, 1980), (Lexington, p Mass: DC Heath & 73. component parts The six are derived from the market falls into .... [Dowa-
giac Ltd
Housing
Dowagiac,
Dividend
Ass’n v
App
239;
(1987).]
Under Allen’s the owner’s com- ponent adding together pres- is determined Appraisal Estate, of Real n 22 *13 473 op Opinion (1) property’s maximum allowed the of ent value operations, Allen determined which flow from cash percent return on the own- maximum six was the equity investment, the the value to initial er’s of benefits, the value of tax shelter investor reversionary property’s the interests which the negative appraiser in the a value determined was anticipated thus, case; the he subtracted instant upon disposition of incur tax the owner would cost compo- equity property.26 the Each element of the using capitalization of rate a nent was discounted percent.27 20.5 component mortgage his of
Under the appraiser simply approach, calcu- Meadowlanes’ proper- cash-equivalent the the value of lated ty’s underlying mortgage mortgage current in the assuming percent paper it carried a one market mortgage adjusted He balance interest ($2,456,207 rate. 1982) derived the on December mortgage component value of the determining of essentially ... the amount prospective purchaser need to in would [cash] government-insured as of vest [in investment] enough produce income tax date in order to each to pay portion off of] [Meadowlanes’ I, supra at mortgage .... 244.][28] [Meadowlanes Meadowlanes follows: appraiser $11,712 Applying this Tax cost due For years determined description cash flow X I, supra at 246-247. tax shelter method disposition of how these years present to the value equity features were subject property, = = = the three Meadowlanes’ ( 19,908) — $ elements 410,579 valued, 53,649 see as Total Present Value $444,320 Component Equity equity figure slightly initial investment This the above owner’s I, supra at 243-244. Meadowlanes only valuing mortgage component, Allen considered payments portion each month under of the owed Meadowlanes Court approach, Using Allen this concluded that mortgage component $659,000 value of the was together, equity Added components derived a true cash for 1983 value $1,100,000. mortgage component of Allen’s method is
premised faulty notion that true cash value represented by price likely selling is not subject property assumption
if a sale involves the mortgage.29 otherwise, of a low-interest len discounted the Stated Al- assumable mort- *14 gage, and assumed true cash value is determined forty-year mortgage percent 11.8 used an discount derived from yield secondary government-insured the mortgages. in the rates market I, supra at "likely selling price” The record reveals that Allen calculated the subject property adding by present of component equity the the However, value mortgage to the balance. he went to state: projected price represent The sale not does the market value or the assumption Cash True Value of the The sale involves the (1%) mortgage of a low interest has a value significantly necessary is less than the balance. It is to by arrive at the True Cash Value indicated sale. the mortgage of upon yield valued is based rates derived from the sale government mortgages open insured on the market .... discussing mortgage One commentator the treatment of indebted- federally complexes ness in concluded if the current housing the valuation of has property reasonably expected can be to remain indebtedness, existing on its the must be worth at remaining mortgage inappropriate least that balance. it is to remaining simply discount the indebtedness it because carries a below-market interest rate for two reasons: 1) explicitly permits The Internal Revenue Code bona fide depreciable debt to be taken into basis or in included determinations, provided the interest rate it carries is reason- government. financing able or is fixed subsidized the favorable housing originates govern- transactions from the ment, taking par so into is value at correct. 2) financing financing Favorable adds value. Unfavorable adjustment detracts from value. To make discounted second reflect the financing, cost of unfavorable or the discounted financing, counting. value of favorable would in effect be double Smith, & n 21 [Kirk 334.] Mich Opinion of the Court selling likely equivalent cash the cash or payment the cash price, i.e., cash down mortgage. This equivalent approach ignores the assumable value of the "touchstone fact that usual value or the true cash is uniform assessment selling price equiva- property,” cash not the selling price. Co v Investment CAF of that lent Saginaw Twp, 428, 463; 302 NW2d 410 Mich (1981). discounting approach, the under- Allen’s principle ignores mortgage paper, lying leverage also ability recognizes to invest that the which necessary funds, of one’s own the smallest amount earnings from rest, and use borrow pay purchased off the loan enhances subject property’s value.30 a new not discount that he would Allen testified approach, mortgage. Therefore, under his mortgage the real value of new, true cash selling approximate reasonably property price. its will however, assumed, the the If the be will true cash value equivalent payment to the added down of its cash mortgage. underlying We value of its discounted find no reason distinguish, as Meadowlanes appraiser assumed mort- does, new and between *15 logical end, gages. Carrying to its ad valorem Allen’s required pay only persons taxes to the approaching upon predicated selling price usual the a value unfor- will be those of their mortgages got or new either owners who tunate paid uniformity resulting in the lack of The cash. tax for ad valorem real of assessment purposes 9, 1963, § 3. art violates Const discounting justified appraiser
Meadowlanes’ necessary claiming mortgage component by it was comply in decision this Court’s to with to do so Estate, supra at 512-513. See also Appraisal of Real n 22 See supra. Lynn, Pennsylvania n 6 op supra.
Washtenaw, Washtenaw, this Court held price that a market data shows sales of comparable property both of includes value real or the value of a creative atypical financing arrangement buyer between the price compara- seller, and the then sales adjusted ble must be to exclude the value arrangement. financing attributable to the creative underlying financing Thus, the value of the in a property’s sales transaction is relevant to the true only cash if the market data shows that the price comparable property sales includes dollar amount for both of above features.31 application cash-equivalency analysis
In his of a discounting determining present in or cash subject property’s underlying value of the gage, mort- appraiser acknowledge failed to several important principles. contrary accepted First, procedures, cash-equivalency analysis Allen used application, outside i.e., its normal the sales- comparison approach. theory behind con- cept equivalency of cash is similar this Court’s holding Washtenaw, i.e., rationale that the financing terms of a sale influence stated price comparable property.32 sales Under Washtenaw, 366, This Court n cautioned: say any disparity This is not to between an interest rate prevailing necessarily facilitated seller and the rate will purchase price. financing add to the ... If is no there creative then, price, course, effect on sales method need not take into account. 32Cash-equivalency adjust analysis typically used to the sales price comparable properties where there market evidence that price artificially by atypical financing the sales Appraisers was enhanced terms. rigorously are cautioned to test their under calculations analysis always adjustment this remember the final must be derived from the market. *16 op "mortgage/equity” component mortgage of his compara- analyze approach, however, Allen did not financing. properties "atypical” for evidence ble Instead, assumptions mortgage erroneously assumed Allen are conclusive in and of themselves financing arrangements be- of creative evidence tween the prop- buyer affect the and seller which require selling price erty’s that a and thus usual price adjusted. be sales cash-equivalency analysis,
Second, under this appraiser principle Meadowlanes’ under the the violated a basic by adjusting comparable-sales approach subject property rather than comparable price elaborate, To sales under approach, sales-comparison cash true by analyzing sales of simi- is derived recent value lar properties, comparing properties those with adjusting price the sales comparable properties to reflect differences. adjusted prices fall within The range sales should appraiser the true allow the to estimate subject property. Once ascer- cash value of subject property tained, true cash value adjusted. itself not above, Allen’s flawed
As evidenced large part by property because it values the valuing underlying mortgage in a theoretical its paper primary The and over- commercial market. riding is the influence this method of valuation The most current rate. second important value influence is the stated interest Estate, Appraisal the cash of Real n 22 discusses equivalency analysis provides: employs Estimating equivalency cash market evidence direct appropriate appraiser adjustments. to make the tries financing, adjust- atypical makes locate sales with and without items, remaining ments for other to the and attributes the differential financing guide terms. This method can be used as special with and without substantial data transactions financing are available. Holland *17 Opinion the of Court mortgage property’s underlying rate on the note. By placing great weight such on the discounted underlying mortgage note, value of the two identi- properties, cal one built at a time when interest high rates are and the other when interest rates disparate vastly are low have will estimates of approach. Thus, value under Allen’s it violates the uniformity prop- constitutional mandate of in real erty taxation.33
We find further evidence that Allen’s valuation approach is flawed because it derives value for purposes parallel ad likely poses, tax valorem that fails pur- valuation estimate derived other for price, financing, i.e., insurance, a sales cal- culating statement, worth net in a financial or purposes. contrary federal tax income This is principles emphasize basic valuation which the appraisal conclusion, i.e., estimate adjusted ap- not praisal. accommodate the use circumstances,
"Whatever the num- bers with [i.e., associated the defined value market value] fact, will be same.”34 in the context of federally housing, the tax courts and generally require the Internal Revenue Service independent purchase price verification that property’s does not exceed the market value as a ensuring buyer overpay- means of that not ing so that he take inflated tax deductions.35 mind, With this in we note the Meadowlanes housing complex did sell in for million.36 $3.7 erroneously disparity claims that is related to’ percent the tribunal’s use of the note’s stated 6.35 rate. This however, phenomenon, strictly is mathematical and results from valuing mortgage paper property. than the rather real It occurs original approach under either Allen’s or the modification approach applied by the Tax Tribunal remand. Estate, Appraisal supra, p of Real n 22 9. Smith, supra, p See Kirk & n 21 cash, $700,000 assump- The consideration for the included sale portion reasons, find that we
For the above approach appraiser’s which val- of Meadowlanes’ ues the nal Tax Tribu- is flawed.37 using wrong principle by adopted Allen’s approach component "mortgage/equity” in deter- mining value of the the true cash assump- invalid part makes a number of This large allowing the under- it to value tions lying prop- mortgage paper rather than the creating potential doing, erty. In so has disparities value of real in the true cash irrational property man- the constitutional and thus violates uniformity in of ad valorem the assessment date taxes. *18 SUBSIDY D. THE INTEREST-REDUCTION approach, Meadowlanes’ Under his valuation appraiser $8,520.74 into account the did not take mortgage payments portion monthly which subsidy paid by represented hud the interest Initially, mortgagee-lender.38 Tribunal the Tax subsidy from its final also excluded interest property’s subject true cash value. estimate of However, remand, its the tribunal recalculated on taking property, account into final valuation of the mortgage compo- subsidy interest under the of the Allen method. nent adopted a the tribunal Meadowlanes claims ap- adopted wrong principle it a valuation when balance, promissory $2,423,242 and a tion of the note in the amount of (sic). million $3,733,242 $650,000 price a total sales 1985, 8, Assessor, p Michigan August, No. equity regarding validity express opinion no We component component "mortgage/equity” method. of Allen’s subsidy appraiser amount excluded the because Meadowlanes’ intangible subsidy was an he the interest-reduction concluded property, it properly in the value of real thus not included owner of the to the tenants and not the was a benefit which flowed Meadowlanes Holland Opinion of the Court proach which took into account the value of a government mortgage federal property § to it as available owner. We have adopt wrong concluded that tribunal did principle appraiser’s when it used Meadowlanes’ approach. However, valuation not this does end necessary it our discussion. We find answer granted. issue which leave was remand, On the true cash value using is to be redetermined the three approaches. recognize traditional valuation that We evaluating the tribunal when the value esti- approaches, especially mates derived under these capitalization-of-income approach, will once again appro- be faced with the issue whether it is priate any, consider the of the interest subsidy. hold, We similar to our decision in Antis- dale, subsidy mortgagor that because the interest-
payments
made on behalf of the owner-
§236
affect the usual
selling price
proper
for the
payments
Tax Tribunal
to consider those
in the
process.
Antisdale,
this Court addressed the true cash
value of
similar
to the housing complex
legislative
and focused on the
211.27(1);
definition of true
cash value
MCL
7.27(1).
MSA
number
We noted that
that statute lists a
*19
value-influencing
zoning
of
factors such as
and location that should be considered when deter-
mining
selling price”
property.
the "usual
of real
particular,
recognized
although
In
we
that
these
intangibles,
are
factors
not
and
taxable in and of
they
themselves,
can
or
increase
decrease the
value of
that
We concluded
tax shelter
value-influencing
and,
benefits are also
factors
although intangibles,
be
in
should
reflected
the
process
they
assessment
extent
the
in-
op
Court
the
real
the
or decrease
value
crease
supra
property. Antisdale,
284-285.
at
mortgage-interest
although
Similarly,
sub-
intangible,
sidy
in
not
and
an
and
taxable
value-influencing
Antisdale,
itself, it is a
factor.
recognized
that without
sub-
at
we
properties
sidy
types
would not exist.
these
subsidy,
any,
Therefore,
of the
should
value
process.
agree
We
in the assessment
be reflected
I
conclusion:
with the Meadowlanes Court’s
selling price
as tax
affect
Just
benefits
federally
does
so
the existence
subsidy
mortgage
to a
of an interest
assumed
attached
purchaser.
being
[Id. 250.]
subsidy
above,
clarified
is not taxed
As
intangible
merely
and
itself. It
an
value
in the
influencer
be considered
process in
same
as tax
assessment
manner
zoning,
intangible
benefits,
location,
and other
Thus, Meadowlanes missed the
value influences.
point
argued
when it
that consideration
subsidy value
process constitutes double taxation.
assessment
argument
reject
also
Meadowlanes’
We
prop-
subsidy
erty
does not affect the value of the
§ 236
the owner of a
derives
because
no
it. The interest
reduces the
benefit from
operating
property’s
total
costs
adds
increasing
the amount of debt the
can
possible
carry.39 Thus, it makes lower rents
§
to take advan-
allows
tage
owner of
leveraged
highly
rate of
on his
of a
return
reaping
equity
in addition to
a number
investment
Smith,
supra, p
Kirk &
n 21
See
*20
497
op
Opinion
the Court
Despite
of tax shelter benefits.40
the fact that
the
subsidy
tenants
from
benefit
the
in the form of
statutory language creating
rent,
reduced
subsidy
government’s
interest
payment
clarifies that
(in
percent
of all
in
interest
of one
excess
month)
per
$8,520.74
this case
benefit to the owner of 236
is a considerable
property.41
§
supported
position by
Meadowlanes also
its
erro-
neously claiming
subsidy
that
is not income
taxable
Comm’r,
to the owner.42In Graff v
74 TC
(1980),
(CA 1982),
743
aff’d
673 F2d 784
specifically
United States Tax Court
concluded
payments
that the interest reduction
made
hud
§
on behalf of a 236
owner were taxable
to the owner as income.43 The Graff court found
payments
the interest
reduction
"took the
place of rents that otherwise would have been
charged
payments
such,
the tenants. As
were a
recogniz-
substitute for rent.” Graff at
757.
ing
their value
owner,
to the
the Tax
subsidy
Court held that
the interest
amount
both includable as income and deductible as an
expense
purposes.44
for federal income tax
Since the benefits of the
inure to the
40
Pennsylvania
Lynn,
supra.
Graff, supra
See
n 6
See also
at 753-
1715z-1(a),
(e).
(c),
See USC
case,
House,
Meadowlanes relies on a Massachusetts
Morville
Inc
Taxation,
Corp
928;
(1976),
v Comm’r of
&
369 Mass
ments on his he as benefited owner legal obligation and he benefited since he was relieved of his payments. receipt make such of such benefits causes such payments gross to be includable in his income. 76-75, Accord Rev Rul 1976-1 CB 14. Mich op properly owner, their considered of the true cash value of the determination real *21 contrary Furthermore, to Meadowlanes’ asser- financing” tions, the term "creative as defined supra, Washtenaw, in this Court the federal interest does not include subsidy simply by virtue of its program designed private presence in a to induce operation housing construction and of low-income projects. The I Court not err Meadowlanes did subsidy when found that the interest was closer value-influencing prop- in nature to factors such as borrowing erty appropriately typical tax and costs of which are process. considered in the valuation I, Meadowlanes appraiser’s case, instant decision to subsidy
exclude the evidence of sales of similar was not based on market-data
properties where the price required adjustment sales eration ment between the to exclude consid-
given financing arrange- atypical for an
buyer and seller. To the con- trary, subsidy applies § 236 the interest to all negotia- property and is This is not a transferable. term that would allow a seller to extract an ble price upon artificially Thus, enhanced a sale. Mea- in dowlanes’ reliance on Washtenaw this context misplaced. survey jurisdictions A from other decisions supports appropriate our conclusion that it is subsidy compu- consider the federal interest in the purposes. for real tax tation of value example, For Rebelwood, Co, Ltd v Hinds 544 So 2d (Miss, 1989), taxpayer-owner of a feder- ally housing complex subsidized low-income chal- lenged purposes. its assessed value for tax emphasized that The Rebelwood court the valua- process any must consider circumstance that tion tends to affect the property’s It value. found op that both the 8 rent and mortgage § § subsidies were to be considered the valuation process since they were transferable and they made ownership more desirable than it would be without them.45
Several other jurisdictions have determined that rent subsidies affect the value of federally subsi- dized housing complexes because affect its they income-earning capacity, since they are transferable, they will be a willing considered by buyer seller determining when fair market value. these courts have concluded that rent must be considered in the valuation process.46 The same rationale applies the inter- est-reduction subsidy since its availability makes 236 property economically feasible and desir- § *22 able.47
An overriding in theme the decisions addressing the ad valorem taxation of federally process the valuation must consider the positive negative both aspects and of
45 Rebelwood, supra at 1365.
46
Bd,
Property
Appeal
Kankakee Co Bd of
v
Review
Tax
163 Ill
811;
App
(1987),
1, 16-17;
3d
process.48Thus,
note that
we
emphasizing:
in
I
correct
Court was
unique
properties
are
Section
them, including
advantages. All
restrictions
feature,
at
least
must be
the subsidized
considered
process.
the assessment
[Meadow-
I, supra
lanes
at 251.]
argument
Finally,
reject
advanced
wé
that consid-
curiae on Meadowlanes’ behalf49
amici
subsidy in the valuation
of the interest
eration
process
public policy.
courts have
frustrates
Other
argument.
rejected
After
considered and
reviewing
this same
legis-
statutory
relevant
scheme and
history,
there is
these courts have concluded
lative
no
Congress
intended to create subsidies
indication
government
in addition to the
local units of
provided
significant
to in-
incentives it
economic
operate
private developers to construct and
duce
quality
housing.50
Tax Tribunal
low-income
Allenstown,
492;
(citing
dized Apartments proj- judicially-mandated . . . "would amount to a legislative subsidy by government, beyond ect local that which policy has established.” Meadowlanes Opinion op the Coukt has also considered rejected public this policy argument in the context of a 236 property.51 § reasons,
For the above we hold that comput- ing the true cash value of real the Michi- property, gan Tax Tribunal take into account of a any, government federal mortgage subsidy. affirm portions We those of the decisions of the in Mea- Tax Appeals Tribunal and the Court of I dowlanes Meadowlanes II comport with this ruling.
hi Although the tribunal and the Court of Appeals correctly considered the value sub- sidy, did using so they a flawed method. we part, affirm in part, reverse in and remand to the Tax Tribunal new hearing. remand,
We direct
the tribunal be pre-
sented with factually
supported estimates
fair market value of the
derived from the three recognized
ap-
proaches:
replacement-cost-less-depreciation
Rebelwood,
1365,
supra
Graff,
755,
See also
Appeal
at
In re
Associates,
supra,
Housing
of Johnstown
n
Coopera-
and Pinelake
Arbor,
208, 228-229;
App
(1987),
v
tive Ann
159 Mich
NW2d
panel
Appeals rejected
public
where a
policy
the Court of
a similar
argument
government
on the basis that
the mere fact
the federal
housing projects
require
subsidizes these
is not sufficient reason to
townships
they
cities and
where
are
located
bestow an additional
in the form of reduced
taxes.
Apartments
Kentwood,
(1977),
In Kentwood
1 MTTR
part:
the tribunal stated in relevant
receipts
To the extent
that federal income tax
are utilized
subsidize the owners and tenants of Petitioner’s
City
already contributing
support
citizens of the
of
logical
. . . are
subject property,
such,
indirectly.
albeit
As
there is no
legal
why
expected
or
reason
citizens . . .
be
should
required
property by
or
externally
to further
subsidize such
means
imposed
relief.
tax
*24
The values derived under the various proaches correlated, reconciled, are to be weighed in order to reach final estimate value. duty It is the Tax Tribunal’s to determine which approaches provide the most accurate valuation under the individual circumstances of each case. appraisal approach disregarded only An tois be justifying there is addition, research its nonuse. repre- the final estimate of true cash value must physical sent the real interests, estate and all the rights ownership benefits, and inherent subject property. real principles mind,
With basic these we acknowl- edge single approach there is no correct determining federally the true cash value of subsi- appraiser dized Therefore, ap- should use variants of all three traditional proaches, valuing private both as apartments federally housing and as a complex. any Also, other demonstrated reasonably to be accurate and related the fair acceptable. market provide We it is best believe the tribunal with compare, all the relevant data so as allow it to Rebelwood, supra See cited in cases ns 46 Holland Opinion op the Court correlate, and reconcile the information and make an informed decision. remand, presented the tribunal is to be
with using value estimates approach, cost *25 (2) valuing subsidized; the real as property the cost approach, valuing the real property private as (3) apartments; the capitalization-of-income ap- proach, using figures all and valuing the real risk, as subsidized property and considering the leverage and yield maturity factors that are (4) developed from the housing market; subsidized capitalization-of-income approach, valuing the (5) real a private housing as complex; sales-comparison approach, using prop- subsidized erties as comparables; sales-comparison approach, using private housing complexes or apartments comparables; as and other new approaches. using
When approach (1), economic or external calculated, obsolescence should be recognizing that the real devoted to its highest and best use as housing If property. there is market for subsidized housing location where it is built sufficient number of individ- uals who can afford to pay the required, rent then there will be little economic obsolescence under this approach. Finally, using when sales-compar- ison approach, appraiser adjust should price sales of comparables size, for differences age, condition, location, and other value influences that buyers and sellers real property take into account as opposed to the value influences consid- by ered buyers and sellers of commercial paper. We reverse the decisions of the Tax Tribunal and the Court of Appeals and remand the case to the tribunal for a redetermination of the true cash value of in a manner consistent opinion. with this Levin, J. C.J., Brickley, Riley, Cavanagh, JJ., J. Boyle, Griffin, concurred with Supreirie following opinion was filed with the Clerk 17, 1991, opinion July of the Court after the release of the Court on 16,1991 Reporter. July — response majority’s to leave to J. I concur Levin, granted question the appeal ity on which this Court major- the remand ordered that on may rely on an "the Tax Tribunal any, of a into account that federal takes government mortgage subsidy”1 or that "proper to consider would be those Tax Tribunal process.”2 payments in the remand evidence of an I also concur that on entirely method of evaluation also be new reasonably presented . . . "accurate and value”3 or "true cash related to the fair market value”4
Although provides that "cash value” the statute *26 "private selling price” sale,”5 the "usual means that does not mean that a subsidized rather than the the historical cost reflects at face value. The value should be included cash lodestar paper selling price cash, for and a is the usual generally at its be reflected "value” should might Leverage equivalent. tax benefits cash equivalent of all to the cash value the cash add selling price paper for the usual values exceeded cash. replacement cost
An "value” reflects insurance selling price for value or usual not the true cash cash, in a financial state- and "values” set forth generally purposes income tax ment or for federal 1Ante, p 482.
2Ante, p 495. Ante, pp 4Ante, p 482. 7.27(1) ante, 211.27(1); pp quoted 483-484.
5 MCL MSA Opinion by Levin, J. depreciation, reflect historical cost less and often are unrelated to true cash value or the usual price. selling
Uniformity by valuing is achieved all assessable proportion at the same of true cash value selling price or the usual for cash. may ap-
Whatever be the flaws the Allen praisal, foregoing principles general, are, immutable. events,
In all I am believe, inclined to persuaded being otherwise, the true cash selling price value cannot exceed the usual longer cash were the no subsidized and longer subject no to the restrictions and benefits of project §236 with a rental assistance under and whatever restrictions mshda §8 imposed. have part J., took no in the decision of this Mallett, case.