This article appeared in the September 2020 issue of MiMfg Magazine. Read the full issue and find past issues online.

The Michigan Tax Tribunal recently issued a significant win on property tax valuation methods for manufacturers. In Menard, Inc. v City of Escanaba, MMA has been engaged for many years in ensuring property values for manufacturing facilities accurately reflect the relatively low market value for property tax purposes.

We have been working in the Legislature and in the courts to defend the ability to appeal property tax assessments if they don’t reflect market values. The Menard case was on remand from the Court of Appeals in a decision that initially excited local units of government by mandating consideration of a cost-based valuation and requiring a review of the impact of deed restrictions. However, on remand, the Tribunal utilized the cost approach, but also appropriately accounted for reduced value due to obsolescence, substantially reducing the assessed value of the property. The result provides an improved climate for property values for manufacturers.

In Menard, Inc. v City of Escanaba MTT Docket No. 14-001918, the Michigan Tax Tribunal, through a 128-page opinion, reduced the value of an owner- occupied and owner-designed big box store that was less than six years old to $5 million or approximately $30/SF. The City sought a value at approximately the property’s claimed replacement cost of $13.7 million or approximately $82/SF.

The City supported its higher replacement cost value by a “dark store” theory —by assuming that property occupied by a business is necessarily more valuable than property that is vacant. Pursuant to dark store theory, the City presented no valuation evidence from sales of properties vacant or available for occupancy as of the sale date nor rents negotiated for already-existing space. Because tax jurisdictions have tried to use the same theory to disqualify comparable sales and rental rates of industrial properties, this decision is important to MMA members.

The City utilized investor sales of leased big box stores where the purchase price reflected both the value of the physical property and cash flow from a build-to-suit lease entered into between the original developer and the original big box retailer for whom the developer built the store. These sales were not adjusted for the fact they were leased when the subject was not, nor for the fact that the leases in place at the time of sale would provide above-market rents that a purchaser could not anticipate from the subject property. 

The Tribunal found the “dark store” theory was not clearly articulated by the City and was not recognized in either Michigan law or appraisal principles. The Tribunal utilized, with some modification, the retail market rent data (that did not reflect build-to-suit rates) presented in the taxpayer’s appraisal. The Tribunal found that the subject big box was larger than was typically demanded in the marketplace and had numerous features specific to the owner’s business model for which a typical market purchaser would have no reason to pay replacement cost. The Tribunal also found a typical purchaser would not anticipate being able to achieve rents high enough to recover replacement cost based upon the prevailing market rents for already-existing retail space. The same considerations are often present with industrial properties.

This ruling by the Michigan Tax Tribunal delivers a win for taxpayers* by clarifying the process of valuations with respect to comparable properties and the low impact of deed restrictions.

Contact Mike Johnston

Vice President of Government Affairs
Call 517-487-8554
E-mail johnston@mimfg.org