J C PENNEY COMPANY INC V CITY OF ANN ARBOR
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STATE OF MICHIGAN
COURT OF APPEALS
J C PENNEY COMPANY INC,
UNPUBLISHED
March 11, 2010
Petitioner-Appellee,
v
No. 288536
Michigan Tax Tribunal
LC No. 00-301999
CITY OF ANN ARBOR,
Respondent-Appellant.
Before: FITZGERALD, P.J., and CAVANAGH and DAVIS, JJ.
PER CURIAM.
Respondent appeals as of right from the judgment of the Michigan Tax Tribunal holding
that the true cash value of petitioner’s leasehold property for the 2003 through 2006 tax years
must be determined on the basis of actual rents received. Petitioner brought the instant tax
appeal because it contended that respondent improperly valued its property by using market rent
rather than actual rental income. The Tax Tribunal concluded that petitioner was correct. We
affirm.
This Court’s review of the Tax Tribunal’s decision is limited to determining whether the
Tax Tribunal misapplied the law or adopted a wrong legal principle, and its factual findings are
“conclusive if they are supported by ‘competent, material, and substantial evidence on the whole
record.’” Liberty Hill Housing Corp v City of Livonia, 480 Mich 44, 49; 746 NW2d 282 (2008),
quoting Const 1963, art 6 §28. Evidence is “substantial” if, after a thorough review of the entire
record, a reasonable person would find the agency’s factual findings legitimately supported by
“more than a scintilla” of evidence. In re Payne, 444 Mich 679, 692-693; 514 NW2d 121
(1994). The amount of evidence necessary to require this Court to affirm “may be substantially
less than a preponderance” thereof, and this Court may not reverse “merely because alternative
findings also could have been supported by substantial evidence on the record.” Id., 692. An
agency’s interpretation of law is entitled to “respectful consideration,” but it is not binding on
this Court, and this Court remains obligated to review statutes de novo. In re Complaint of
Rovas Against SBC Michigan, 482 Mich 90, 102-109; 754 NW2d 259 (2008).
The parties have not explicitly stipulated to the facts in this case. However, a careful
review of their briefs shows that they are in effective agreement as to the salient underlying facts
and the controlling documentary evidence. The parties accuse each other of misrepresenting the
contents and significance of the documents–in particular, the purchase offer provision in
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petitioner’s lease–but they both ultimately rely on the documents themselves. There is no
assertion of fraud and no genuine dispute as to the facts.
Prior to 1974, a wholly owned subsidiary of petitioner owned a parcel of property and
several buildings thereon in respondent city. That property would eventually become part of the
Briarwood Mall. On March 1, 1974, petitioner’s subsidiary simultaneously (1) leased the land
to, and subleased the land back from, an independent and unrelated entity called PennArbor; (2)
sold the buildings to, and leased them back from, PennArbor; and (3) assigned its interests to
petitioner. Both leases ran until March 31 or April 1, 2004, and both made similar extensions
available. The ground lease and its extensions run one day longer than the building lease and
extensions. The building lease gives petitioner a repurchase option. The leases have not been
renegotiated,1 and the leases have been extended and are presently still in effect.
For the 2003 through 2006 tax years, respondent valued petitioner’s property at several
times the value petitioner believed its property was worth. The reason for the disparity in values
was that respondent utilized a “market rent” valuation method, whereas petitioner utilized an
“income capitalization” valuation method. In a nutshell, this means that respondent valued the
property by calculating its theoretical value, based on comparisons to the income other properties
could generate; whereas petitioner valued the property based on actual rents received under the
lease. Both parties contend that their valuation methodology is the most accurate. But more
significantly to this appeal, petitioner contends that the lease is a “long-term, economically
disadvantageous” encumbrance, thus triggering a legal requirement to value the property using
actual rents (the “CAF doctrine”2). Respondent argues that the lease is not an “unfavorable longterm” lease because of the purchase option available to petitioner.3 Notwithstanding the other
matters discussed by the parties, whether the lease is an “unfavorable long-term lease” is the only
issue on appeal.
The leading case law on point held that the income-producing property in that case,
which was subject to “an existing unfavorable long-term lease with an actual rate of return which
is substantially less than the present ‘going rate,’” must have its true cash value4 determined on
1
An amendment to MCL 211.27 would have changed the applicable law, but the amended
version of that statute “does not apply to property subject to a lease entered into before January
1, 1984 for which the terms of the lease governing the rental rate or tax liability have not been
renegotiated after December 31, 1983.” Carriage House Co-op v City of Utica, 172 Mich App
144, 149; 431 NW2d 406 (1988), abrogated on other grounds by Georgetown Place Co-op v City
of Taylor, 226 Mich App 33, 44-46; 572 NW2d 232 (1997). The parties do not dispute that the
lease here was “grandfathered.”
2
CAF Investment Co v Mich State Tax Comm (CAF I), 392 Mich 442; 221 NW2d 588
(1974); CAF Investment Co v Saginaw Twp (CAF II), 41 Mich 428; 302 NW2d 164 (1984).
3
Respondent argued in the Tax Tribunal that the sale-leaseback arrangement was a
disguised mortgage, but the Tax Tribunal rejected that argument and on appeal respondent
“accepts the Tribunal’s ruling on the mortgage argument.”
4
Const 1963, art. 9, §3; MCL 211.27.
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the basis of the property’s actual rental income. CAF Investment Co v Mich State Tax Comm
(CAF I), 392 Mich 442; 221 NW2d 588 (1974); CAF Investment Co v Saginaw Twp (CAF II), 41
Mich 428; 302 NW2d 164 (1984). The “true cash value must equal the fair market value of the
property to the owner.” CAF II, supra at 459 (emphasis added). Valuing the property as if “the
property was available to rent in the marketplace” was impermissible because that valuation
would ignore “the fact that the piece of property in question is not available in the rental
marketplace by virtue of existence of a long-term lease.” CAF I, supra at 451-452. Our
Supreme Court discussed the general principle that the Tax Tribunal simply could not “consider
and give weight to evidence of valuation based upon a rate of return which comparable,
unencumbered property could earn in the present marketplace” if, due to an unfavorable longterm lease, the property was not, in fact, actually available to the marketplace. CAF I, supra at
447; CAF II, supra at 459-460.
Our Supreme Court left open the possibility that actual rental income might not be the
most appropriate valuation methodology under some circumstances. See CAF I, supra at 455456; CAF II, supra at 460-461. The Tax Tribunal is required “to determine which approaches
are useful in providing the most accurate valuation under the individual circumstances of each
case, so long as “the final value determination [represents] the usual price for which the subject
property would sell.” Meadowlanes Ltd Dividend Housing Ass’n v City of Holland, 437 Mich
473, 485; 473 NW2d 636 (1991). The gravamen of the CAF cases is that theoretical market
value of income-producing property cannot be used to value that property if the property is in
some way not practically available to the market. If the property is not practically marketable, its
value should be based on its actual income. The actual income of rental property is its rent,
unless there is some reason why the rent is speculative or otherwise shown not to be truly
reflective of the property’s value.
The outcome of this matter is governed by the purchase option and what effective rights
it actually gives to petitioner. The purchase option, found in §15(b) of the building lease, as
follows:
On any Basic Rent Payment Date on or after March 31, 1994, Lessee shall
have the option, exercisable by notice to Lessor not less than 90 days prior to the
date of purchase, to purchase Lessor’s interests in the Leased Premises. The
purchase price payable by Lessee upon the purchase of such interests pursuant to
this paragraph 15(b) shall be an amount equal to the greater of (i) the then
applicable purchase price determined in accordance with paragraph 3 of Schedule
C hereof, or (ii) the fair market value as of the date of such notice of the Leased
Premises, considered as encumbered by this Lease with the right to all Extended
Terms exercised by Lessee (whether or not such right to extend shall, in fact, have
been exercised), as determined by an appraiser or appraisers selected in the
following manner: [procedure for selecting appraisers omitted].
On such Basic Rent Payment Date, Lessor shall convey and assign its
interests in the Leased Premises to Lessee in accordance with paragraph 16 and
Lessee shall pay Lessor such purchase price, together with all instalments [sic] of
Basic Rent and all other sums then due and payable under this Lease to and
including such Basic Rent Payment Date. On such Basic Rent Payment Date this
Lease shall terminate except with respect to obligations and liabilities of Lessee
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under this Lease, actual or contingent, which have arisen on or prior to such Basic
Rent Payment Date, but only upon payment by Lessee of all Basic Rent and other
sums due and payable by it under this Lease to and including such Basic Rent
Payment Date.
The above purchase option would terminate the ground lease as well.
Respondent makes the interesting argument that despite the purchase price being the
greater of a scheduled price or fair market value, “fair market value” must be “considered as
encumbered by this Lease.” Respondent also argues that this case is distinguishable from the
CAF cases simply because petitioner has a purchase option that it can use to get out of the lease.
Respondent concludes that the effect of the purchase option is that petitioner has the right to
become the fee owner of the entire property for a paltry sum at any time it wishes. Therefore,
the property is not truly encumbered by a long-term disadvantaged lease, because it is not really
encumbered at all.
The Tax Tribunal did note the limitation on how “fair market value” should be appraised,
and it recognized that the existence of the purchase option was a distinguishing characteristic of
this case. But the Tax Tribunal made additional, independent factual findings that under the
circumstances of this case, the purchase option did not add anything to the value of the property
to petitioner. We decline to overturn the Tax Tribunal’s findings. The record contains enough
evidence for a reasonable mind to support the conclusion that petitioner cannot economically get
out of the lease and that a potential purchaser of the property would be interested in the
property’s income-producing potential rather than its theoretical value in fee.
This Court must not “‘invade the province of exclusive administrative fact-finding by
displacing an agency’s choice between two reasonably differing views.’” In re Payne, supra at
693, quoting MERC v Detroit Symphony Orchestra, Inc, 393 Mich 116, 124; 223 NW2d 283
(1974). The Tax Tribunal’s record in this case contains evidence from which a reasonable mind
could conclude that petitioner’s property is encumbered by a disadvantageous long-term lease
and that petitioner’s technical ability to purchase the property is of no practical value.
Respondent has at most shown that the record might also support an alternative conclusion. The
Tax Tribunal therefore did not err in concluding that the only basis for calculating the property’s
value was its actual rental income.
Affirmed.
/s/ E. Thomas Fitzgerald
/s/ Mark J. Cavanagh
/s/ Alton T. Davis
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