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Michigan Provides Property Tax Lessons for Big Box Retail

"Probably the most important concept affirmed in these Michigan decisions is that assessors must value big box properties based on their value-in-exchange and not their value-in-use."

Owners of big box retail buildings can take lessons from Michigan on the proper way to value these large, free-standing stores for property tax purposes. The state’s well-developed tax law offers a clear model that is applicable in any state that bases its property tax valuation assessments on the fee simple, value-in-exchange standard.

Many states, including Michigan, base real estate taxation on the market value of a property’s fee simple interest using value-in-exchange principles. In other words, a property’s taxable value is its market value, and market value is commonly considered the property’s probable selling price in a cash-equivalent, arms-length transaction involving willing, knowledgeable parties, neither of whom is under duress.

In recent years, the Michigan Tax Tribunal has decided with remarkable consistency a dozen cases involving big box stores. In 2014, the Michigan Court of Appeals affirmed two of these Tax Tribunal decisions, recognizing that the Tribunal’s key rulings in this area rested on established law.

Probably the most important concept affirmed in these Michigan decisions is that assessors must value big box properties based on their value-in-exchange and not their value-in-use. Assessors and appraisers hired by local Michigan governments repeatedly — and improperly — reached value conclusions based on value-in-use rather than value-in-exchange principles.

The violation of this fundamental point was not obvious from a cursory review of the valuation evidence. For example, the assessor’s evidence included both big box property sales with nigh per-square-foot prices and big box properties with high rental rates. Consequently, for the Michigan Tribunal to decide these cases correctly, taxpayers needed to present evidence, including from expert witnesses, which convincingly established the following:

  1. Each big box retailer either builds or remodels its stores to be consistent with the retailer’s marketing, branding and merchandising operations (built-to-suit);
  2. When a big box property sells, the buyer will spend substantial dollars reimaging the property so that it conforms to the new owner’s appearance, layout and other specifications;
  3. Given that big box properties can be costly to build because of their built-to-suit nature, and that the subsequent purchasers will make substantial modifications at significant cost, these properties sell for far less than their construction cost; and
  4. Actual sales confirmed that these properties sell for far less than construction cost.

With evidence establishing each of these points, the Michigan Tribunal has repeatedly recognized that taxable value for a big box property must reflect its value-in-exchange.

For example, the Tribunal could grasp that a sale would not reflect market value if the property had a rental rate designed to compensate the developer for construction to the retailer’s specifications, rather than a rent negotiated between a landlord and tenant for an existing building.

Similarly, with such evidence the Michigan Tribunal could discern that a sale would not reflect market value if the original owner/user of the property sold and leased back the space. A sale-leaseback is typically a financing transaction between two parties with multiple relationships (landlord/buyer and seller/tenant) that are different from an arms-length transaction. That means the rent in a sale-leaseback does not reflect the property’s market rent, which would be used in an income approach to determine value. Similarly, the sale price in such a transaction is not evidence of market value.

Likewise, the Michigan Tribunal recognized that if the assessor used leases with above-market rents to value these properties, it would impermissibly be valuing something other than the property’s fee-simple interest. This is important because it applies anytime a property with above-market rent is used as either a comparable sale or a rent comparable.

Finally, the Michigan Tribunal rejected the claim that each property’s highest and best use as improved was the continued use by the specific retailer that occupied the property. Generally, highest and best use is that which is legally permissible, financially feasible, maximally productive, and physically possible.

To define that use as the continued use by the retailer occupying the property would improperly make the value depend on the identity of the property’s owner. Additionally, it would lead to a value conclusion that reflected the value of the property to that owner, or its value in-use. Thus, the Michigan Tribunal concluded that the highest and best use was simply retail use.

Michigan’s many recent big box property tax decisions spotlight issues applicable to many types of properties, wherever the law requires assessors to value properties based on the market value of a property’s fee simple interest. Perhaps the most important takeaway is that in such cases, taxpayers need to provide evidence from appraisers and other experts to carefully document a property’s market value, and where that value is significantly less than construction cost, explain why this is true.

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Stewart Mandell is a Partner and Tax Appeals Practice Group Leader, in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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