Recently, Michigan’s Supreme Court denied Menards’ application for leave to appeal a Court of Appeals decision rejecting Menards’ method of valuing its stores for the purpose of assessing taxes. The issue in Menard, Inc. v. City of Escanaba, 315 Mich. App. 512 (2016) was whether Menards would have to pay property taxes to the City based on the City’s valuation of its stores at $8 million using the “cost-less-depreciation” approach or Menards’ self-valuation of $3.3 million using the “market approach”.
The three valuation methodologies that have been found acceptable by the Michigan Tax Tribunal and the courts are the (1) cost-less-depreciation approach, (2) sales-comparison or market approach, and (3) capitalization of income approach. Regardless of the approach used, the final value determination must represent the usual price for which the subject property would sell.
The Court of Appeals ruled that the Michigan Tax Tribunal must reassess the property under a cost-less-depreciation method which remains most useful in determining value for industrial markets. It reasoned that the Tribunal incorrectly weighed Menards’ self-imposed deed restrictions and supposed depreciation based on functional obsolescence. The free-standing nature of the building, coupled with its functionality as a specialized industrial store led the Court of Appeals to believe that Menards undervalued its property in comparison to a replacement store, which would be fundamentally the same. In short, Menards failed to value the store as if the possibility of sale existed.
The Court of Appeals also found that the proper valuation method for the property must proceed “as if there were such a potential buyer, even if, in fact, no such buyer . . . actually exists.” Id. at 530. From here, the Court of Appeals ordered the parties to submit their relevant evidence to the Michigan Tax Tribunal for more review under the cost-less depreciation method.
This article was written by Nezar Habhab, Law Clerk.