PINELAKE HOUSING COOPERATIVE v CITY OF ANN ARBOR
Docket No. 85376
Michigan Court of Appeals
Submitted August 11, 1986. Decided March 23, 1987.
159 Mich App 208
REFERENCES
Am Jur 2d, State and Local Taxation §§ 761, 762.
Requirement of full-value property taxation assessments. 42 ALR4th 676.
The Court of Appeals held:
1. The Tax Tribunal did not err as a matter of law by adopting a method of appraisal which analogizes the subject properties to income-producing properties and then employing an income approach. It was, however, error for the Tax Tribunal to accept respondent‘s income-approach appraisal which did not use the actual incomes and actual expenses but rather used normalized incomes or expenses.
2. The rate of capitalization of approximately six percent as used by the valuation accepted by the Tax Tribunal is absurdly low given the facts presented and, despite the assertions to the contrary, reflect a capitalization rate that is improperly based on the existence of the subsidy.
3. It cannot be said that the Tax Tribunal erred as a matter of law in not accepting the petitioners’ appraisals.
4. The resolution of the problems created by attempting to place valuations for tax purposes on properties which are subject to federal regulations and subsidies is best left to the Legislature.
Reversed and remanded.
SHEPHERD, J., agreed that the matter must be remanded to the Tax Tribunal, but he would have the Tax Tribunal make a determination of whether the interest subsidies within the total context of the facts of the cases have any impact on the market values of the properties.
TAXATION — AD VALOREM TAXES — TAX TRIBUNAL — CAPITALIZATION OF INCOME — GOVERNMENT SUBSIDIES.
It is not an error of law for the Tax Tribunal to adopt for the
Michaelene K. Young, for petitioners.
John K. Van Loon, for respondent.
Before: DANHOF, C.J., and SHEPHERD and D. L. HOBSON,* JJ.
PER CURIAM. This appeal involves consideration of the method adopted by the Tax Tribunal to assess the value of two low-income, government-subsidized housing projects for property tax purposes.
Petitioners, Pinelake Housing Cooperative and Forest Hills Housing Cooperative, are both located in the City of Ann Arbor, which is the respondent in this matter. Pinelake contests its tax assessments for 1981, 1982, and 1983. Forest Hills disputes its assessments for 1981, 1982, 1983, and 1984. Respondent contends that the true cash value of the projects is roughly three times the amount which the petitioners assert is the proper valuation for each of the tax years in question.
Pinelake and Forest Hills received separate hearings before a Tax Tribunal hearing officer. With the exceptions of the values derived, the hearings were virtually identical. The attorneys, the experts, and their propounded theories were
I
Pinelake is a federally-regulated low-income housing cooperative, consisting of 129 units. When built in 1975, the original mortgage balance was $2,871,900, payable at seven percent interest over forty years, and represented one hundred percent of the property‘s cost. The mortgage was guaranteed by the federal government through the Department of Housing and Urban Development pursuant to
The cooperative association contracted for the construction of the complex and owns the buildings and the land. Residents gained the right to possess units by purchasing membership certificates. To qualify as a member, an individual‘s income must be below limits set by HUD.
A membership certificate conveys some indicia of ownership to the occupants. The conveyed interest is analogous to owning a share in a corporation; a member does not own the specific unit in which he lives, but rather an intangible portion of the whole.
When a member leaves the co-op, he may transfer his interest to another person who meets the income requirement and other requirements of the co-op. However, members are not free to set their own price. Rather, the bylaws of the cooperative
Another indicium of ownership is that the members gain some measure of control in the management of the cooperative. They can vote for directors and can run for such offices. The board of directors makes management and administrative decisions within the limits of the regulatory agreement with HUD. However, control ultimately lies in the hands of HUD, which reviews the co-op‘s budget line by line and has power to reject any portion of it, to increase the percentage of income which a member must pay as monthly “carrying charges” (what the members pay instead of rent), to freeze the transfer value of a membership, and to require the co-op to make increased payments to reserves and so forth.
The carrying charges are applied to the co-op‘s operating expenses and the mortgage. The carrying charges are adjusted annually and are set at a level sufficient to cover the operating expenses and the co-op‘s obligation on the one percent mortgage. The charges are not designed to generate any “profit.” If expenses increase or decrease, the carrying charges are adjusted in the following year‘s budget.
Despite the substantial federal subsidy, Pinelake is not without problems. As previously mentioned, the transfer value of its memberships was frozen sometime between 1979 and 1981 at the request of the cooperative at a range of between $688 and $820. The freeze was necessitated by the fact that Pinelake was having trouble finding low-income
Verna Spath, the co-op‘s president, testified that “very, very frequently” the residents do not give the required sixty-days notice of their intention to leave but instead simply stop paying the monthly carrying charge. By the time the residents move, the past due carrying charges plus the amount charged for damage to the unit “almost always” exceeds the transfer value of the membership.
Brady Caputo, the co-op‘s manager, testified that it costs an average of $1,500 to rehabilitate a unit after a member moves out. He also testified that, since the project was nine years old, it was beginning to require large maintenance expenditures. The tile floor and carpeting in the units needed to be replaced. The porches and sidewalks were in need of repair. The exterior needed repainting. Refrigerators were beginning to wear out.
Laurence Allen, petitioners’ appraiser, testified that Pinelake was “generally in poor condition.”
Steven Breshgold, the co-op‘s accountant, testified that the co-op was one month behind in paying bills.
II
Forest Hills is a similar but larger (306 units) cooperative housing project, subject to the same
The makeup of Forest Hills’ member population is somewhat different than that of Pinelake‘s. While eighty percent of the units at Pinelake were occupied by single-parent families, Forest Hills has a “high rate of couple occupants.” Laurence Allen, petitioners’ appraiser, testified that he considered Forest Hills to be superior to Pinelake in both location and “property.”
Unlike Pinelake, at the time of the hearing, Forest Hills had not frozen the transfer value of its membership. However, Forest Hills permits new members to initially pay only fifty percent of the membership fee, with the balance being paid off in installments. Even so, Forest Hills found that the high initial cash payment was burdensome and was in the process of seeking approval from HUD to freeze the transfer value. Forest Hills’ vacancy losses for both 1980 and 1981 were less than one percent. Vacancy losses were 5.9 percent for 1982 and 4.5 percent for 1983.
Terry Lewis, Forest Hills’ president, testified that the co-op repurchases the membership when a resident leaves. She testified that repurchases were necessary because the co-op had a one-third annual turnover rate. She did not believe memberships would be marketable if new members were not guaranteed a buyer at resale.
Like Pinelake, Forest Hills is undergoing a period where extensive repairs are becoming necessary due to the increased age of the project. There was no testimony that Forest Hills was behind in paying its creditors. However, there was testimony that, because of the increased vacancy loss problem, the co-op did have to hold off on a preventa-
III
At the hearings before the Tax Tribunal hearing officer, both petitioners’ appraiser and respondent‘s appraiser testified that valuation of the subject properties was made more difficult because, except for foreclosures, they were unaware of any such property which had ever been sold.
Laurence Allen, petitioners’ appraiser, presented two approaches. In the first, which he called the “cooperative approach,” Allen theorized that the value of a
| YEAR | PINELAKE | FOREST HILLS |
| 1981 | $ 914,732 | $2,140,000 |
| 1982 | 780,539 | 1,920,000 |
| 1983 | 1,023,203 | 2,440,000 |
| 1984 | 2,550,000 |
The second approach Allen employed was the
| YEAR | PINELAKE | FOREST HILLS |
| 1981 | $1,070,000 | $1,275,000 |
| 1982 | 880,000 | 2,065,000 |
| 1983 | 1,260,000 | 2,545,000 |
| 1984 | 2,770,000 |
Allen‘s final conclusion was that the cooperative approach more accurately represented the true cash values of the subject properties than did the Congresshills approach.
Respondent‘s appraiser, David Geragosian, presented a cost approach and three variations of the income approach. In the cost approach, Geragosian used the Marshall Valuation Service Manual and determined that the value for Pinelake under a cost approach was $3,029,200 and the value for Forest Hills was $8,630,600. In Geragosian‘s opin-
Because of the lack of sales of comparable properties, Geragosian was unable to provide a traditional market approach.
Geragosian relied principally upon the income approach, of which he presented three variants. However, Geragosian did not use actual income and actual expenses in his computations, but rather used “normalized” figures.4 The “normalized” income and expense figures were used in all three variants of the income approach.
In Geragosian‘s first variation (Variant I), Geragosian included the interest reduction subsidy as part of petitioners’ income. For total capitalization rates, Geragosian used 15.30 percent, 16.08 percent, and 14.95 percent5 for tax years 1981 to
| YEAR | PINELAKE | FOREST HILLS |
| 1981 | $2,136,000 | $4,660,500 |
| 1982 | 2,068,000 | 4,172,400 |
| 1983 | 2,264,000 | 5,051,000 |
In Variant II, Geragosian used the same net income figures, i.e., he again included as income the interest-reduction subsidy. However, he employed a different total capitalization rate. For Pinelake he used 10.7 percent and for Forest Hills he used 10.99 percent. He applied the same rate to all years in dispute.7 Using this approach, Geragosian gave only a range of values for the tax years 1981 to 1983:8
| PINELAKE | FOREST HILLS |
| $3,050,000 to | $6,488,200 to |
| $3,160,000 | $6,871,000. |
Geragosian acknowledged that his Variant I and Variant II valued the federal subsidy. However, he asserted that Variant III did not value the subsidy. In that approach, Geragosian deducted the interest-reduction subsidy from the income amount. However, Geragosian used much lower total capitalization rates: 6.134 percent, 6.024 percent, 6.187
| YEAR | PINELAKE | FOREST HILLS |
| 1981 | $3,030,000 | $6,562,200 |
| 1982 | 3,183,000 | 5,987,900 |
| 1983 | 3,196,000 | 7,196,800 |
| 1984 | 7,433,400 |
Geragosian testified that he did not use the Congresshills approach and that he didn‘t “know what the Court of Appeals is purporting to do in determining value with that approach.”
Geragosian‘s final conclusion was that the cost method was a meaningful approach and a strong indicator of value, but that Variant III most accurately reflected true cash value.
The hearing officer rejected the appraisal submitted by the petitioners and adopted Geragosian‘s final conclusions of value. With one minor exception not relevant here, the Tax Tribunal adopted the proposed judgment of the hearing officer.
IV
Petitioners claim on appeal that the Tax Tribunal committed an error of law or adopted a wrong principle by accepting respondent‘s method of valuation. Petitioners also claim that the Tax Tribunal erred by rejecting their valuation approach.
The Michigan Tax Tribunal has exclusive and original jurisdiction to review final decisions relating to assessments under the property tax laws.
This Court‘s standard of review of tribunal decisions is set forth in
All final decisions, findings, rulings and orders of any administrative officer or agency existing under the constitution or by law, which are judicial or quasi-judicial and affect private rights or licenses, shall be subject to direct review by the courts as provided by law. This review shall include, as a minimum, the determination whether such final decision, findings, rulings, and orders are authorized by law; and, in cases in which a hearing is required, whether the same are supported by competent, material and substantial evidence on the whole record. Findings of fact in workmen‘s compensation proceedings shall be conclusive in the absence of fraud unless otherwise provided by law.
In the absence of fraud, error of law or the adoption of wrong principles, no appeal may be taken to any court from any final agency provided for the administration of property tax laws from any decisions relating to valuation or allocation.
The Legislature is charged with the duty of providing a uniform system of real property taxation based on assessment of true cash value.
Generally, there are three accepted methods of valuation: the capitalization-of-income approach, the cost-less-depreciation approach, and the market approach. These approaches are briefly described in Antisdale v Galesburg, 420 Mich 265, 276-277, n 1; 362 NW2d 632 (1984). It is the duty of the Tax Tribunal to accept the approach which provides the most accurate valuation under the circumstances of each case. 420 Mich 277. Any method for determining true cash value which is recognized and reasonably related to the fair market value of the property is an acceptable indication of true cash value. Presque Isle Harbor Water Co v Presque Isle Twp, 130 Mich App 182, 190; 344 NW2d 285 (1983).
Regardless of the valuation method employed, the value determination must represent the amount for which the subject property would sell. 130 Mich App 192-194; Safran Printing Co v Detroit, 88 Mich App 376; 276 NW2d 602 (1979), lv den 411 Mich 880 (1981). In other words, the valuation must be based on current market conditions. CAF Investment Co, supra, p 455. If the property is burdened by some restriction, such as a below-market long-term lease, CAF Investment, supra, or a deed restriction, Lochmoor Club v Grosse Pointe Woods, 3 Mich App 524; 143 NW2d 177 (1966), the impaired value of the property cannot be ignored and the property must be valued as restricted. More specifically, federal restrictions on rental income must be considered in determining the true cash value of the property.
Three reported appellate decisions which have reviewed the valuation of
In Antisdale, supra, pp 283-284, the Supreme Court explained that a cost approach to valuation is generally an inappropriate method to value low-income, government-subsidized housing projects:
The Tax Tribunal seemed startled at the possibility that the subject property might be worth less than 70 percent of the principal balance of its mortgage. Together, petitioners and the federal government spent $1,718,325, to build the complex on the subject property. Using the cost of reproduction less depreciation method, respondent‘s as-
Without the federally subsidized mortgage such properties would be nearly worthless. Evidence showed that such projects are typically constructed in areas where rents, if at market rates, would be beyond the financial capability of the local population to afford. Furthermore, evidence was introduced which showed that the quality of construction in such projects was greater than usually seen in non-federally subsidized projects, thus increasing their cost, but adding little value which would command greater rents if the market could bear them. As stated in Meadowlanes Limited Dividend Housing Ass‘n, [unpublished opinion of the Tax Tribunal, decided January 6, 1984 (Docket No. 55933)]:
“Without the federal subsidy, neither [the owner] nor any other prudent investor could have been induced to invest in the project. The cost to build these units would require rental income far in excess of what could be obtained in the marketplace (and still generate sufficient profit so as to be economically viable). In fact, without the subsidy, debt service would be so high, there would be substantial negative cash flow which could reduce the tax shelter benefit to a point where the shelter was no longer an incentive to purchase.”
Even the most desirable structure, if, for example, placed in an undesirable location, may be immediately worth much less than its cost to construct. Other factors can lead to the same result.
That is not to say that these subsidized properties, nearly guaranteed by federal rent ceilings to generate no income, have no value. The market approach, when properly used, demonstrates that there is a value to these properties, although
In Congresshills I, this Court held that when the income approach is used to value
The appraisers of both parties have testified that the Congresshills approach does not accurately reflect value. Respondent‘s appraiser did not really explain his objection, but simply stated that he did not understand what the approach was meant to value. Petitioners’ appraiser‘s chief complaint was that the Congresshills approach fails to recognize the effect of the government regulation which prohibits
The monthly carrying charges which residents of the subject properties pay are adjusted once a year during a budgetary process in which estimates of the succeeding year‘s income and expenses are made. The carrying charges for the next year are then based on this estimate. No allowance for “profit” is figured into the charges. The fact that revenues are tied to expenses in this
To determine net income under the income approach, operating expenses are subtracted from gross income. However, mortgage payments are not considered to be an operating expense, but rather an expense of financing the property. Because the annual budget process makes gross income a function of expenses so that the project generates no cash flow, the result is that when actual expenses are subtracted from actual income, all that is basically left are the annual payments on the mortgage.11 The concern is that the capitalization of the total annual mortgage payment has no relationship to the property‘s value.
However, it is our opinion that such a result nevertheless represents the values that such properties possess. Such projects, when solvent, are able to generate sufficient income to retire the mortgage debt at the one percent effective rate. The ability of a property to generate sufficient income to pay off its underlying financing is value. The fact that “net income” under the Congresshills approach represents little more than the annual debt service is simply an expression of our belief that under the regulatory restrictions such projects have little other value.12
We conclude that the Tax Tribunal did not err as a matter of law by adopting a method of appraisal which analogizes the subject properties to income-producing properties and by employing an income approach. There was substantial evidence that the membership fees were in essence nothing more than large security deposits. It was shown that memberships were not transferred to third parties by the members but were merely reclaimed by the cooperatives when residents left.
However, for the following reasons, we conclude that the Tax Tribunal committed several errors of law by accepting respondent‘s conclusions of true cash value;
(1) The valuation approach which the Tax Tribunal accepted did not use actual income and actual expenses as required by Congresshills I.
(2) The valuation approach which the Tax Tribunal accepted used a total capitalization rate of approximately six percent, which this Court held in Congresshills II, supra, p 286, was absurdly low and erroneous as a matter of law. Use of such a low capitalization rate is at least equally absurd given the facts of the instant case. Respondent‘s own appraiser wrote in both of his appraisals:
In a federally subsidized, nonprofit cooperative there is no cash flow dividend (prohibited by the agreement). There is no tax shelter to the nonprofit cooperative association, and a very uncertain and unknown possibility of a capital gain at the end of the regulated holding period (40 year mortgage).
Given the total lack of attractiveness of the prop-
and expenses during the budgeting process when the annual carrying charge schedules are established. Any error in forecasting would appear to be compensated for in the succeeding year‘s budget.
(3) Respondent‘s appraisals, upon which the Tax Tribunal relied, are internally inconsistent on their face and unreliable as a matter of law. Geragosian testified that Variant I and Variant II valued the subsidy while Variant III excluded the subsidy‘s value. Yet Variant III generated values substantially the same as Variant II and Variant I produced values which were substantially lower than Variant III. It is not logical that the interest-reduction subsidy, which generated income equal to thirty percent to thirty-eight percent of the income which the projects generated from carrying charges (depending upon the project and the year) had either no value or a negative value.
(4) Contrary to Geragosian‘s testimony, Variant III did value the subsidy. While Geragosian subtracted the amount of the interest-reduction subsidy from the income amount in Variant III, he offset the subtraction by lowering the capitalization rate. Geragosian justified selection of a lower capitalization rate on the basis that this approach relied upon an analysis which assumed a one percent mortgage, which was the “actual mortgage of the subject properties.” However, the one percent mortgage is the subsidy. To derive a capitalization rate based on the assumption of a one percent mortgage is to value the subsidy. The interest subsidy is an intangible asset and is not a
VII
As to petitioners’ argument that the Tax Tribunal erred as a matter of law in rejecting the appraisals of their expert, this Court‘s standard of review does not permit it to hold that the Tax Tribunal committed an error of law by not accepting petitioners’ appraisals. Other methods which have not been presented here might better reflect true cash value.14 It is the duty of the Tax Tribunal to make its own finding of true cash value.
VIII
Having considered the arguments of the parties, we note that our decision was not reached without concern. Philosophically, we adhere to the belief that everyone should pay their fair share. We realize that the possibility exists that this decision might result in the petitioners’ paying less in property taxes than necessary to supply the services which they require. The fact that the federal government subsidizes such projects does not seem
However, our conclusion is compelled because under our ad valorem system of taxation, a property owner‘s level of taxes is determined by the property‘s fair market value. The market value of
SHEPHERD, J. (concurring). I agree that this case must be remanded and I accept the rationale of the majority with one exception. The majority says:
However, the one percent mortgage is the subsidy. To derive a capitalization rate based on the assumption of a one percent mortgage is to value the subsidy. The interest subsidy is an intangible asset and is not a proper subject to be taxed under Michigan‘s property tax laws.
In Meadowlanes Limited Dividend Housing Ass‘n v City of Holland, 156 Mich App 238; 401 NW2d 620 (1986), we remanded to the Tax Tribunal and required that it take into account the value, if any, of the mortgage interest subsidy. In Meadowlanes we expressed no opinion as to the effect of that subsidy in the particular case since that decision is to be made initially by the Tax Tribunal.
Similarly, in this case I would have the Tax Tribunal make a determination of whether the interest subsidy within the total context of the facts of this case has any impact on market value.