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Macy's Retail Holdings Inc. v. County of Hennepin

Supreme Court of Minnesota

April 5, 2017

Macy's Retail Holdings, Inc., Relator,
County of Hennepin, Respondent.

         Tax Court Office of Appellate Courts.

          Thomas R. Wilhelmy, Judy S. Engel, Fredrikson & Byron, P.A., Minneapolis, Minnesota, for relator.

          Michael O. Freeman, Hennepin County Attorney, Jane N.B. Holzer, Thomas F. Pursell, Assistant Hennepin County Attorneys, Minneapolis, Minnesota, for respondent.


         1. The tax court did not clearly err in determining the highest and best use of the property.

         2. The tax court did not abuse its discretion when it refused to strike portions of an expert witness's report and testimony.

         3. The tax court did not clearly err in disregarding the sale of a nearby commercial property when it evaluated the comparable-sales data provided by the parties.



          STRAS, JUSTICE.

         Macy's Retail Holdings, Inc., challenges the Minneapolis Assessor's valuation of its downtown Minneapolis property for the 2008, 2009, and 2010 tax years. Following a trial, the tax court reduced the valuation of the property, but not to the extent urged by the testimony and appraisal report of Macy's expert witness. Macy's appeals the tax court's decision and argues that the tax court clearly erred in its determination of the property's highest and best use and in its consideration of comparable-sales data. Macy's also claims that the tax court abused its discretion when it declined to strike portions of the appraisal report and testimony of the County's expert witness. Because the tax court did not commit reversible error on any of these grounds, we affirm.


         The parties in this case disagree about the taxable value of Macy's downtown Minneapolis property. The property consists of three tax parcels located on Nicollet Mall between 7th and 8th Streets in Minneapolis. The property is improved by a 12-story structure, originally built between 1902 and 1929, that housed a department store on the first 5 floors. The remaining floors included a combination of office space (6th, 7th, 9th, 10th, and 11th floors), storage (8th floor), and 2 restaurants (12th floor).

         The Minneapolis Assessor's Office valued the property at $22, 700, 000 for 2008, $19, 500, 000 for 2009, and $17, 700, 000 for 2010. Macy's challenged the Assessor's determination for all 3 tax years, claiming that it overstated the property's market value. In the ensuing litigation, Hennepin County and Macy's both retained experts who appraised the property. Todd Reid, who performed the appraisal on Macy's behalf, valued the property at $12, 800, 000 for 2008, $10, 000, 000 for 2009, and $9, 800, 000 for 2010. Hennepin County's expert, Paul Bakken, valued the property at $25, 000, 000 for 2008, $16, 000, 000 for 2009, and $17, 000, 000 for 2010.

         Despite the significant differences in value placed on the property by the parties' experts, their appraisal reports reflect that some of their underlying conclusions were the same. Both experts generally agreed that the highest and best use of the property was to operate it on an as-is basis in 2008, in anticipation of later developing the site to include an office tower along Nicollet Mall and a high-rise residential tower on 8th Street.[1] Both also concluded that renovation of the property was not financially feasible for any of the years in question. Additionally, each expert concluded that the appropriate way to value the property for 2009 and 2010 was through a market approach, which compares the property with the "prices paid in actual market transactions involving comparable properties." Equitable Life Assurance Soc'y of U.S. v. Cty. of Ramsey, 530 N.W.2d 544, 552 (Minn. 1995). The experts, however, disagreed on three key points.

         First, for 2008, the experts differed on which method would provide the most accurate value of the property. Bakken applied the income approach, "which is predicated on the capitalization of the income the property is expected to generate." Id. In contrast, Reid applied the market approach because he determined that the income approach was not a reliable method of determining the property's value. The tax court agreed with Reid and determined that the market approach was the appropriate method of valuing the property for each of the 3 years in question.

         The second dispute between the two experts was the date on which it would have been economically feasible to begin the development of a new downtown office tower. Reid's view was that the Minneapolis rental market did not have an adequate number of available commercial tenants or sufficiently high market rents to justify the construction of the new office tower until 2013 or 2014. Even so, Reid still believed that the highest and best use of the property during 2009 and 2010 would have been to tear down the existing structure in anticipation of future development. Because Reid believed that the property was best left vacant during 2009 and 2010, he deducted holding costs for those 2 years, which resulted in a lower overall valuation of the property. See Jack P. Friedman et al., Barron's Dictionary of Real Estate Terms 80 (8th ed. 2013) (defining holding costs as "expenses necessary for holding property, such as taxes and interest on idle property or property under construction").

         Although Bakken acknowledged that the overall real-estate market in Minneapolis was "soft" during 2008 and 2009, he emphasized that the property had a number of characteristics that would have made it an appealing development site, even as early as 2009. As he observed, the property is located in what he called "Targetville, " a reference to its proximity to Target's corporate headquarters. According to Bakken, commercial properties located in Targetville had lower vacancy rates and higher rents in 2008 and 2009 than non-Targetville properties. Bakken also pointed out that reports casting doubt on the viability of developing a new office tower in 2009 were specific to other available sites, none of which were located near Target's corporate headquarters or directly on Nicollet Mall. Bakken was of the overall view that the Macy's property was part of a sub-market that was resistant to general declines in the Minneapolis commercial-property market, which made it realistic to commence the construction of the office tower in 2009. Based on his view of the health of the property's sub-market, Bakken disagreed that having the property sit as a vacant lot in 2009 and 2010 was the property's highest and best use. Accordingly, unlike Reid, he did not deduct holding costs for 2009 or 2010.

         The tax court thought it was a "close call" whether development of the new office tower could have commenced as early as 2009. Ultimately, however, the court was persuaded by Bakken's theory that the property belonged to a desirable sub-market that was less vulnerable to declines in the overall commercial-property market. Because the tax court concluded that it was feasible to have commenced the construction of the office tower in 2009, the court rejected Reid's proposed deduction for holding costs for 2009 and 2010.

         The third and final disagreement between the two experts was the choice of comparable sales under the market approach. Both experts divided the property into separate office-tower and residential components, which reflected the property's highest and best use. The tax court relied exclusively on Reid's analysis to value the residential component. For the office-tower component, Reid analyzed five commercial properties, but he placed particularly heavy emphasis on just two of those properties. Bakken considered seven comparable sales, but relied on only three of them in his report. The experts relied on two common sales: 50 South 6th Street and 800 Nicollet Mall, both in downtown Minneapolis.

         In valuing the office-tower component, the tax court focused on the two common sales, and did not discuss any of the other properties considered by the experts, including a sale of a nearby commercial building located at 1000 Nicollet Mall. Based on its analysis of the two comparable sales, the tax court valued the property at $20, 100, 000 for 2008, $15, 800, 000 for 2009, and $15, 400, 000 for 2010. These figures ...

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