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Menard Inc. v. County of Clay

Supreme Court of Minnesota

November 9, 2016

Menard, Inc., Relator,
v.
County of Clay, Respondent.

         Tax Court Office of Appellate Courts

          Eric J. Magnuson, Katherine S. Barrett Wiik, Robins Kaplan L.L.P., Minneapolis, Minnesota; and Robert A. Hill, Robert Hill Law, Ltd., Maplewood, Minnesota, for relator.

          Brian J. Melton, Clay County Attorney, Jenny M. Samarzja, Chief Assistant County Attorney, Moorhead, Minnesota; and Thomas J. Radio, Felhaber Larson P.A., Minneapolis, Minnesota, for respondent.

          Took no part, Stras, J.

         SYLLABUS

         1. The tax court's finding that the highest and best use for the taxpayer's property was continued use as a big-box retail store was well supported by the record.

         2. The tax court's depreciation calculations using the cost approach were supported by the evidence in the record.

          3. The tax court's determination that only three of the comparable sales offered by the parties were truly comparable was supported by the record.

         4. The tax court's use of the cost approach and the way it weighted the cost and sales comparison approaches were within the tax court's broad discretion for determining the property's value because, whenever possible, the tax court should employ at least two methods to determine property value and a final determination of value may require that one approach be given greater emphasis.

         Affirmed.

         Considered and decided by the court without oral argument.

          OPINION

          CHUTICH, JUSTICE.

         Relator Menard, Inc. appealed to the tax court from respondent Clay County's assessment of the market value of Menard's Moorhead home improvement retail store for the assessment dates of January 2, 2011; January 2, 2012; January 2, 2013; and January 2, 2014. Following a trial, the tax court adopted market valuations below the County's assessment values but above Menard's expert appraiser's valuation. Menard appealed.

         In this appeal from the tax court's final order and judgment, Menard asserts that the tax court erred in several respects: (1) the tax court rejected Menard's expert appraiser's highest and best use determination, (2) the tax court made improper calculations when it determined the fair market value of the property using the cost approach, (3) the tax court used a "de facto averaging" of the cost approach and the sales comparison approach when it determined the fair market value of the property, and (4) the tax court failed to adequately explain its reasoning.

         The County also appealed, asserting that the tax court erred in its calculations and conclusions of value using the sales comparison and cost approaches. Because the tax court did not err in its findings and did not fail to adequately explain its reasoning, we affirm the tax court's value determinations.

         I.

         This appeal concerns the tax value of a Menards home improvement retail store in Moorhead as of January 2, 2011 through January 2, 2014. The store is located on a parcel of approximately 771, 350 square feet with two structures. The first structure, the main building, consists of a single-story heated retail space with an additional mezzanine space and a covered and unheated garden center. The second structure is an open-air detached shed, used as a warehouse. Built in 2007, the structures were in good condition as of each assessment date, and are visible and accessible from the nearby interstate highway. The Clay County Assessor valued the property at $11, 200, 000 for all four assessment dates. Menard challenged these assessments, and a trial ensued before the tax court.

         Menard retained Michael MaRous to prepare an appraisal and opinion as to market value, and Timothy Vergin prepared an appraisal and opinion as to market value on behalf of the County. MaRous conducted a sales comparison analysis and an income capitalization analysis as part of his appraisal, but ultimately relied on the sales comparison approach in his final valuation reconciliation. Vergin conducted a sales comparison analysis, an income capitalization analysis, and a cost analysis, assigning one-third weight to each approach in his final valuation reconciliation. In their valuation conclusions, the appraisal experts differed as to a key point: the highest and best use of the subject property. MaRous concluded that the property was not viable as a big-box retail store if sold by Menard, while Vergin concluded that the property was viable as a big-box retail store.

         Finding that Menard overcame the prima facie validity of the Clay County Assessor's valuation, the tax court then considered the appraisal opinions of each expert. The tax court rejected Menard's highest and best use determination and instead adopted the County's view that the highest and best use of the property as-vacant was commercial property and as-improved was continued use as a big-box retail store. The tax court rejected the County's income capitalization analysis.[1] After rejecting most of the comparable sales used in the parties' sales comparison analyses, and making adjustments to the sales price of the remaining comparables, then making adjustments to the parties' cost analyses, the tax court gave its cost approach calculation a 60-percent weighting and its sales comparison approach a 40-percent weighting for appraisal years 2011 and 2012. The tax court assigned each approach a 50-percent weighting for valuation years 2013 and 2014.

         The parties moved for amended findings of fact and conclusions of law, but the tax court adjusted its order only to account for inaccurate calculations for physical deterioration and to grant Menard its unopposed request for equalization relief. The assessed values, appraised values, and the tax court's values for the property are as follows:

Appraisal Year

County Assessor

County's Appraiser (Vergin)

Menard's Appraiser (MaRous)

Tax Court Order

Tax Court Amended Order

2011

$11, 200, 000

$12, 000, 000

$4, 000, 000

$7, 432, 100

$7, 516, 600

2012

$11, 200, 000

$12, 300, 000

$4, 000, 000

$7, 585, 800

$7, 681, 300

2013

$11, 200, 000

$12, 500, 000

$4, 000, 000

$7, 219, 000

$7, 331, 300

2014

$11, 200, 000

$12, 700, 000

$4, 000, 000

$7, 393, 600

$7, 556, 200

         Menard appealed the tax court's decision, arguing that the tax court erred in rejecting MaRous's highest and best use determination, in its cost approach calculations, in averaging the sales comparison and cost approaches, and in failing to adequately explain its reasoning. The County also appealed, contending that the tax court erred in accepting parts of MaRous's appraisal report and testimony, in excluding post-sale expenditures and other comparable sales in its sales comparison approach, and in excluding indirect soft costs in its cost approach.

         "Our review of [a] final order of the tax court is limited." S. Minn. Beet Sugar Coop v. Cty. of Renville, 737 N.W.2d 545, 551 (Minn. 2007). We will not overturn a tax court's valuation unless the valuation is clearly erroneous. Equitable Life Assurance Soc'y of U.S. v. Cty. of Ramsey, 530 N.W.2d 544, 552 (Minn. 1995). The tax court's valuation is clearly erroneous when "the evidence as a whole does not reasonably support the decision, " Lewis v. Cty. of Hennepin, 623 N.W.2d 258, 261 (Minn. 2001), and we are "left with a 'definite and firm conviction that a mistake has been committed, ' " KCP Hastings, LLC v. Cty. of Dakota, 868 N.W.2d 268, 273 (Minn. 2015) (quoting Equitable Life Assurance Soc'y, 530 N.W.2d at 552).

         Our deferential review is rooted in the separation of powers and the inexact nature of real estate appraisal. Cont'l Retail, LLC v. Cty. of Hennepin, 801 N.W.2d 395, 399 (Minn. 2011). We have accepted even abbreviated explanations of the tax court's reasoning. See Kohl's Dep't Stores, Inc. v. Cty. of Washington, 834 N.W.2d 731, 734-35 (Minn. 2013); Harold Chevrolet v. Cty. of Hennepin, 526 N.W.2d 54, 58 (Minn. 1995) ("The inexact nature of property assessment necessitates that this court defer to the decision of the tax court."). We will reject the tax court's reasoning, however, when the tax court's decision is "clearly against the weight of the evidence, " Am. Express Fin. Advisors, Inc. v. Cty. of Carver, 573 N.W.2d 651, 659 (Minn. 1998), or the tax court has "completely failed to explain its reasoning, " Nw. Nat'l Life Ins. Co. v. Cty. of Hennepin, 572 N.W.2d 51, 52 (Minn. 1997).

         II.

         We first consider the tax court's rejection of Menard's highest and best use determination. All property must be valued at its market value, Minn. Stat. § 273.11, subd. 1 (2014), which is the "usual selling price at the place where the property . . . shall be at the time of assessment, " Minn. Stat. § 272.03, subd. 8 (2014). "Appraisers must perform a highest and best use analysis when appraising commercial real estate." Berry & Co. v. Cty. of Hennepin, 806 N.W.2d 31, 34 (Minn. 2011). Thus, the market value of property requires consideration of the property's highest and best use. Cty. of Aitkin v. Blandin Paper Co., 883 N.W.2d 803, 810 (Minn. 2016); see also Appraisal Institute, The Appraisal of Real Estate 332 (14th ed. 2013) (explaining that a property's highest and best use is "[t]he reasonably probable use of property that results in the highest value"). The highest and best use of a property is the one that is physically possible, legally permissible, financially feasible, and maximally productive. Cty. of Aitkin, 883 N.W.2d at 810.

         Highest and best use analysis can be approached in two ways. The first assumes that the property is vacant or can be made vacant by demolishing present improvements. Appraisal Institute, supra, at 336; see also Ferche Acquisitions, Inc. v. Cty. of Benton, 550 N.W.2d 631, 634 (Minn. 1996) (explaining that highest and best use can consider "whether it would be best to sell [the property] vacant on the open market"). The second, "as-improved, " focuses on the use of the property that should be made with its current improvements. Appraisal Institute, supra, at 336. As-improved analysis is narrower, focusing on whether to retain, modify, or demolish existing improvements. Id.

         Both experts provided opinions on the highest and best use of Menard's property "as-vacant" and "as-improved."[2] MaRous found that the highest and best use of the property as-improved was continued use as a single-tenant retail building with Menard as its occupant-owner. But if Menard were to vacate the property, MaRous concluded that it was "highly likely the building would remain vacant." In other words, continued use as a big-box retail store was not viable for the property if Menard left. In reaching this conclusion, MaRous considered national economic conditions and trends, particularly regarding big-box retailers. These considerations include a nationwide oversupply of big-box properties; the impact of the 2008 recession on big-box retailers; a trend away from big-box retail, in part because ...


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