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July 7 2020

New Developments in Big Box Property Tax Valuation – Menard v City of Escanaba

By: Andrea D. Crumback

On May 28, 2020, the Michigan Tax Tribunal issued a long-awaited decision in the Menard v City of Escanaba case impacting property tax valuations for big box stores. The case was on remand from the Michigan Supreme Court, which required the Tribunal to take additional evidence from the parties on the market effect of deed restrictions on the sales’ prices for the sales used in the sales comparison approach and to take additional evidence concerning the cost approach, rather than rejecting this approach out of hand. The Tribunal ultimately raised the average per square foot value of the Escanaba Menard’s store from $20.00/square foot to $30.00/square foot. Below are the key questions answered and left unanswered by the Tribunal in the decision.

  1. What methods of valuation should be employed to value a big box store? The Tribunal found that a big box store can be valued using the sales comparison approach or the cost approach. In Menard, the Tribunal rejected the sales comparison approach due to the lack of comparable sales.
  2. What is the highest and best use of a big box store? The Tribunal found that the highest and best use (“HBU”) of this Menard store is as an “owner-occupied freestanding big box retail store,” not as a big box home improvement store. The Tribunal also determined that whether a property is occupied or not at the time of sale is not indicative of the HBU because HBU looks forward to what use the property purchaser puts to the property, not its former use by the seller.
  3. When are sales sufficiently comparable for use in the sales comparison approach? The Tribunal found that sales are not comparable when they: 1) do not sell for the same HBU; 2) are significantly different in size; and 3) when they are not subject to normal market pressures. Therefore, none of the sales selected for use in the sales comparison approach provided reliable data to undertake a sales comparison approach.
  4. How and what portion of a building’s square footage is calculated in the cost approach?  The Tribunal found that the buildings and improvements should be calculated by using the Marshall Valuation Services Class C warehouse discount store rate for low cost construction. In addition, the Tribunal found that an even lower square foot cost should be used for all canopy areas, mezzanine, and elevator areas and that not all canopy areas should be valued. The Tribunal found that no value should be assigned to the lumber storage area, which was 26,240 square feet.
  5. When can the assessor’s cost approach be relied upon?  The Tribunal did not rely on the Assessor’s cost approach because: 1) the Assessor’s calculation sheets were not admitted into evidence to show complete pricing (only the front pages of the record cards were); and 2) the Assessor did not include the vacant land studies and sales relied on for the economic conditions factor with her valuation evidence. This serves as a good reminder that assessors involved in property tax appeals should take care to provide the Tribunal with all of the calculation sheets, as well as all vacant land studies and sales relied upon for the economic conditions factor and for land sales.
  6. How does the Tribunal “cross-check” the cost approach for reliability? The Tribunal found that when the cost approach yields a value significantly higher than what reported construction costs are, this is a red flag that the cost approach valuation is unreliable.
  7. What impact do deed restrictions have on sales used in the sales comparison approach? The Tribunal found that the greater weight of the evidence showed that the deed restrictions on the restricted properties used by the Menard’s appraiser in the sales comparison approach had no negative impact on the value of the properties. Indeed, the Tribunal stated that “vacant big-box stores are professionally marketed to obtain the best price and exceptions to any restrictions are carved-out for the purchaser.” Thus, the deed restrictions on the sales used by the appraiser had a neutral effect on sales price and ultimately on value.
  8. Can leased fee properties be used without adjustment to determine obsolescence? The Tribunal held that leased fee properties are different from fee simple properties and sales must be adjusted to reflect the differences in ownership rights presented by the leased fee, including the contract rent, creditworthiness of the tenant and the remaining years on the lease if the sales are used to measure economic/external obsolescence in the market.
  9. What methods can be used to calculate functional obsolescence? The Tribunal found that the cost to modify the buildings for use by another retailer if the buildings were leased or sold is one way to measure its functional obsolescence.
  10. What methods can be used to calculate external/economic obsolescence?  The Tribunal upheld the capitalized rent loss method as an appropriate method of calculating obsolescence. However, the Tribunal stated that in arriving at net income, common area maintenance, insurance and property taxes should not be deducted. Further, the Tribunal cautioned that unadjusted leased fee, passive investor sales should not be used.
  11. Calculation of physical deterioration. The Tribunal adopted depreciation based on Marshall Valuation Service’s 30-year depreciation table, which depreciates on a curvilinear line, rather than a straight line, with deterioration being calculated beginning on the date construction is completed.
  12. What land sales will be given greater weight?  The Tribunal utilized land sales in the geographic area (here the UP) and rejected out of state land sales.
  13. Where are we with the dark store theory?  The “dark store theory” is the assumption that big box stores that have failed due to their poor location and lack of desirability and were vacant for a significant period of time before their sale to another non big box user are generally acceptable sales comparables that can be used in determining the market value of existing and thriving big box stores. The Tribunal side-stepped addressing the viability of the dark store theory and claimed that it could not debunk or affirm the theory, because it was not addressed during the hearing other than in the opening and closing argument of the City’s attorney.

If you have any questions regarding property tax valuation or about how the Menard decision might impact assessments for big box retailers in your community, please contact Andrea Crumback at .