Property Tax Litigation 2020Wauwatosa
Wauwatosa
Milwaukee
POLLING QUESTIONS
1. Do you have pending Wis. Stat. § 74.37 actions in your municipality?
Yes
No
2. Have you testified in circuit court in regard to a Wis. Stat. § 74.37 action?
Yes
No.
Mass Appraisal.
Single Property Appraisal
4. Do you have pending Uniformity Clause challenges in your municipality?
Yes.
No.
5. Have other municipal departments assisted in defending a Wis. Stat. § 74.37 action in your municipality?
Yes.
No.
Mayfair Mall LLC v. City of Wauwatosa Background Case No. 14-CV-3776
2019AP1232 (awaiting decision Ct. of Appeals
Fee Simple
Regency West ¶19 argument
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City’s Arguments
Mayfair reliance on Walgreen vs. Madison is misplaced – assessors may use actual market based income/expenses
Fee simple valuation does not mean the lease must be ignored
Leased fee and fee simple the same value if rent approximates market
Amicus Brief references IAAO Position Paper on Fee Simple
Leased property is sold in fee simple
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City’s Arguments
Mayfair has the burden to show that existing leases contain compensation for non-realty items or business value
Mayfair experts offered no evidence of above market rents
With 160 tenants the Mall is its own market- each individually negotiated
Hypothetical pretend rents cannot be used to determine market value – because market does not do that
Regency West, ¶39 – “The assessor must value properties individually, not based on hypothetical income and expenses.”
Manual states with mass appraisal can assume contract rent is at market
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Clarification of Walgreen Madison ”fee simple” - “leased fee” distinction
Clarification of Walgreen Madison – a “lease never increases the market value of real property rights to the fee simple estate” ¶47 and “Leases are encumbrances upon a property’s bundle of rights, not part of the bundle itself.” ¶44
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Wisconsin & Milwaukee Hotel v. City of Milwaukee
Other Court Decisions
Background to Case
Ultimate Question in a Wis. Stat. § 74.37 action
Importance of Assessor Affidavit
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Mass Appraisal v. Single Property Appraisal
“Mass appraisal is the systematic appraisal of groups of properties, as of a given date, using standardized procedures and statistical testing.” 2020 WPAM Chapter 9 at 9- 39.
“Mass appraisal stands in contrast to single property appraisal, which is the valuation of a single particular property as of a given date.” Metropolitan, 379 Wis. 2d 141, ¶ 30.
“A single property appraisal focuses on the unique characteristics of the subject property within the strictures of the methodology set forth in Markarian, 45 Wis. 2d 683, 173 N.W.2d 627.” Metropolitan, 379 Wis. 2d 141, ¶ 30.
“Mass appraisal is the underlying principle that Wisconsin assessors should be using to value properties in their respective jurisdictions.” 2020 WPAM Chapter 9 at 9-39.
“The assessor needs mass appraisal skills for producing initial values, whether during a reappraisal year or not, and single property appraisal skills to defend specific property values or to value special purpose properties that do not lend themselves to mass appraisal techniques.” 2020 WPAM Chapter 9-39.
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Mass Appraisal v. Single Property Appraisal
Mass appraisal is accepted at the initial assessment stage. Metropolitan, 379 Wis. 2d 141, ¶ 38.
Best information the assessor can “practicably” obtain. Id., ¶ 45.
“Completing annual assessments in a major metropolitan area would simply not be feasible without the use of mass appraisal.” Id., ¶ 43.
“Single-property appraisal is necessary (1) after the initial mass appraisal has been challenged by the taxpayer or (2) if the property being valued is a ‘special-purpose’ property that does not lend itself well to mass appraisal.” Id., ¶ 38.
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Court recognized differences in mass appraisal value compared to single-property appraisal value.
“Requiring a single property appraisal after a taxpayer challenges an assessment does not mean that the value of the property must be set in accordance with the single property appraisal.” Metropolitan, 379 Wis. 2d 141, ¶ 39.
“The question on appeal in a Wis. Stat. § 74.37 action is not whether the initial assessment was incorrect, but whether it was excessive.” Id., ¶ 40.
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Importance of Assessor Affidavit
Wisconsin Stat. § 70.49(2) provides: “The value of all real and personal property entered into the assessment roll to which such affidavit is attached by the assessor shall, in all actions and proceedings involving such values, be presumptive evidence that all such properties have been justly and equitably assessed in proper relationship to each other.”
“Wisconsin Stat. § 70.49(2) provides that a tax assessment being challenged pursuant to Wis. Stat. § 74.37 is entitled to a presumption that it was ‘justly and equitably’ made, giving rise to a presumption of correctness.” Metropolitan, 379 Wis. 2d 141, ¶ 50.
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Mass Appraisal during Maintenance Years
Taxpayers argue that in order for Metropolitan to apply, the assessor must have used mass appraisal to set the assessment.
Taxpayers rely on footnote 19 to the Regency West decision to assert that expert opinions offered to show an assessment is not excessive cannot be considered by the court if the assessment was not determined using “mass appraisal”
City’s position – Assessors do not conduct “single property” appraisals, instead by definition, always do mass appraisals
Metropolitan ¶9 “Whereby an assessor values entire groups of property using systematic techniques and allowing for statistical testing.”
AAR report and statistical testing supplied to DOR
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Wisconsin & Milwaukee Hotel v. City of Milwaukee
Other Court Decisions
Pending Appeals in other municipalities
City of Delevan
Village of Plover
City of Wauwatosa
Issues:
Assessment Not Entitled To Presumption of Correctness If “carried over” from prior year(s)
Comparable Sales Must Share Same Highest and Best Use and Be Reasonably Comparable
Single – Not Multiple HBUs
2015 maintenance year
§70.05(5) – full revaluation required once in every five year period
Revaluation becomes the base model and is adjusted each year until the next revaluation.
Court found the the base model continued to be the best information available to the assessor and was justly and equitably applied to the subject’s assessment.
Bottom line is whether the assessment is excessive – Metropolitan, ¶40. Assessment can be incorrect and still upheld so long as not excessive.
AAR report is proof of mass appraisal because it shows statistical testing and reports assessments “en mass’
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Highest & Best Use
A property’s HBU must be not highly speculative and marketable for that use. Nestle, ¶20, ¶49.
The burden is on the taxpayer to prove with substantial contrary evidence that no market exists for the continued use of the property in its current configuration.
In Lowe’s, the HBU was found to be a home improvement store.
Once the HBU is determined the assessor can determine the proper market data and valuation methodology that is appropriate to use.
Sales in the sales comparison approach must have similar HBU for the use of the property after the sale
The court rejected Lowe’s HBU as conversion to an alternative big box user or to redemise the space to multi-tenant retail because:
HBU must be singular
HBU cannot be speculative
HBU as a home improvement store reflects the narrowest use for which there is a market, is not speculative and will provide the greatest net return to the owner.
$30-60 sq. ft. to convert to another big box use with no need for 25 ft. ceilings, 45 by 50 ft. truck bays, a heavily reinforced floor, and lawn and garden center.
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Market Segment Assessments
WPAM refers to market segmentation to determine the appropriate market or submarket
A proper market analysis is critical to getting the HBU correct.
Market segmentation is focuses on the use of the property based on an analysis of supply and demand.
Stephen Fanning Article in the Appraisal Journal used in the Lowe’s trial
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Conclusions/Implications for other cases
A property should be valued as if stable if the property is occupied and stable on the valuation date.
In general, an occupied property will sell for a higher amount than an unoccupied unstable property.
Valuing a property as occupied is not assessing the business concern that is using the property.
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Wisconsin & Milwaukee Hotel v. City of Milwaukee
Other Court Decisions
Uniformity
Wisconsin & Milwaukee Hotel LLC v. City of Milwaukee Case Study
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What is Uniformity?
“The rule of taxation shall be uniform but the legislature may empower cities, villages or towns to collect and return taxes on real estate located therein by optional methods.” WIS. CONST. art. VIII, § 1.
“The Uniformity Clause requires that there be one class of taxable property and that all property within that class must, as nearly as practicable, be taxed uniformly, unless otherwise provided in Article VIII, Section 1.” Northwest Airlines, Inc. v. Wisconsin Department of Revenue, 2006 WI 88, ¶ 62, 293 Wis. 2d 202, 717 N.W.2d 280.
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What is Uniformity?
“Uniformity—The constitutional requirement that the taxable property must bear its proportionate share of ad valorem basis taxes. As applied to assessing, a condition wherein all properties are assessed at the same ratio to market value, or other standard of value depending upon the particular assessing practices. ….” 2020 WPAM Glossary at G-7 (emphasis added).
“Uniformity occurs when all property is assessed at full value or when all classes of property are assessed at the same percentage of full value.” 2020 WPAM Ch. 9 at 9-9.
“The ideal of every single property being valued at exactly 100% of its value, no more, no less, is a practical impossibility. The statutes have acknowledged this by allowing assessments to range from 90% to 110% of full value.” Id.
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What is Uniformity?
“Uniformity does not require that the identical method or approach be used in determining what the assessed value should be.” 2020 WPAM Ch. 9 at 9-10.
“What is critical for uniformity is not the methodology used, but that the tax burden of each dollar’s worth of one sort of property is liable for exactly the same tax as a dollar’s worth of any other property in that statutory class.” Id.
Ultimate goal is equality between the tax burden of each property owner.
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Uniformity Violations
“The uniformity clause is violated where the assessor has significant differences between assessment to full value ratios of statutory classes (residential as compared to commercial or personal property, for example), or strata within a statutory class (on water vs. off water residential; newer vs. older homes).” WPAM Chapter 9 at 9- 10
Noah’s Ark Family Park v. Bd. of Review of the Vill. of Lake Delton, 210 Wis. 2d 301, 318, 565 N.W.2d 230 (Ct. App. 1997) aff ’d 216 Wis. 2d 387, 573 N.W.2d 852 (1998).
State ex rel. Levine v. Bd. of Review of Vill. of Fox Point, 191 Wis. 2d 363, 528 N.W.2d 424 (1995).
U.S. Oil Co. v. City of Milwaukee, 2011 WI App 4, 331 Wis. 2d 407, 794 N.W.2d 904.
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How to Prove a Uniformity Violation
A taxpayer bears the burden of proving a uniformity violation. Noah’s Ark, 210 Wis. 2d at 318.
The Wisconsin supreme court “has rejected challenges alleging violations of the rule of uniformity where the claim was based on comparing one taxpayer’s appraised value to the value assigned to an inadequate number of other properties in the assessment district.” Allright Props, Inc. v. City of Milwaukee, 2009 WI App 46, ¶ 54, 317 Wis. 2d 228, 767 N.W.2d 567.
Taxpayer must demonstrate a general undervaluation of properties located within the taxing district. Id.
State ex rel. Algoma Hous. Co. v. Bd. of Review, 166 Wis. 2d 675, 682–83, 480 N.W.2d 786 (Ct. App. 1991) (taxpayer “has not proven a violation of the uniformity requirement by comparing its property to two smaller buildings across the street from its property”).
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Wisconsin & Milwaukee Hotel LLC v. City of Milwaukee Case Study No. 2018AP1744, unpublished slip. op. (WI App Sept. 10, 2019)
Downtown Marriott Hotel’s 2014-2015 assessments
WMH argued City’s assessments violated the Uniformity Clause for the following reasons:
Differences in assessment per room
Differences in taxes per room
Method of Assessment (using actual expenses within range v. average expenses)
Court of Appeals found no Uniformity Clause violation, noting:
“WMH’s Uniformity arguments ‘ignored’ the central component of the Uniformity Clause, which is to examine the ratio of fair market value to assessment.” Id., ¶ 24.
Comparisons of assessment per room or taxes per room are not deciding factors in a fair market value determination and WMH provided no evidence of what it believed the Marriott’s fair market value to be. Id.
“No evidence that the City Assessor used an arbitrary method of assessment.” Id., ¶ 24. “WMH’s preference for a different assessment method is not required by the assessment manual.” Id.
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Wisconsin & Milwaukee Hotel v. City of Milwaukee
Other Court Decisions
Other Court Decisions
Exemption
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Hotel
Milwaukee Block 10 LLC et al. v. City of Milwaukee No. 2019AP1424, unpublished slip. op. (WI App June 16, 2020).
Downtown Aloft Hotel 2016 Assessment
Hotel did not own the ramp it used to generate hotel parking income.
Whether parking income was inextricably intertwined
Court of Appeals concluded the income was inextricability intertwined and properly included in the hotel’s assessment.
“What is relevant is whether a new owner of the hotel property would have the ‘ability to exploit the income- producing capacity that inherently exists’ at a hotel that attracts guests who require parking services.” Id., See id. at ¶ 19.
“The concept of inextricable intertwinement allows business value to be included within the assessment of real property where the income-generating capability can be transferred with the real estate. .... Whether certain income may be included in the property assessment of a business ‘hinges on whether the value appertains to the property.’ …. A ‘value that appertains to property is one that is transferable with the property,’ as opposed to value that ‘is, in effect, independent of the property so that the value either stays with the seller or dissipates upon sale.’” Id., ¶ 15 (citations omitted).
Inextricable Intertwinement:
2015 Assessment of Office Building
Taxpayer purchased property in December 2014 for approximately $4.7 million
Intention to convert to SpringHill Suites hotel
2015 assessment based on sale of the subject
Taxpayer argued property was worth $0
City’s Assessment was sustained
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Hotel
2016 partially completed hotel assessment
64% complete
Taxpayer’s appraiser used sales comparison approach and income approach
City’s assessment was sustained
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Hotel
2016 assessment of Marriott Hotel
Untimely tax installment payment
Wis. Stat. § 74.37(b): “No claim or action for an excessive assessment may be brought or maintained under this section unless the tax for which the claim is filed, or any authorized installment of the tax, is timely paid under s. 74.11 or 74.12.”
City’s Treasurer’s Office established taxpayer’s installment payment was untimely and judgment was entered in favor of the City.
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Taxpayer’s Position:
Leased fee sale that could not be considered
Rent was above market at time of sale which inflated the sale price by over 100%
Sale was invalid because part of IRC §1031 exchange
Sale not arm’s length because buyer not sophisticated
Assessor’s mass appraisal model was flawed because relied upon portfolio sales
City’s Position:
Taxpayer ignored sale because property leased
Mass appraisal model used a formula built around sales prices equitably applied
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Court Decision:
Target’s Expert’s sales were not comparable to subject
No economic obsolescence because of location in Oconomowoc – work force assertion
No functional obsolescence due to size because during holiday season facility is fully utilized – eg. all 252 truck bays are needed.
No economic obsolescence shown to exist
Taxpayer has the burden to prove TIF incentives depress sale prices – could not show . Just because other new distribution centers around the state received TIF money to build is not proof that center would not have been built but for the TIF.
City’s Position:
Distribution warehouses near major freeway in a strong locations between Milwaukee and Madison are in demand.
City’s expert provided an accurate and credible Tier 2 sales comparison approach.
City’s expert supported tier 2 conclusion with reliable tier 3 cost and income approaches.
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Court’s Decision:
No functional obsolescence due to higher end finishes
No economic obsolescence due to mall owner subsidies
Dark store sales not appropriate to consider for a brand new premier department store
City’s mass appraisal cost approach was just and equitable and did not contain any additional value for Nordstrom branding
City’s Position:
No proof that receipt of subsidy from mall owner reduced value of real estate for the funds received.
Agreement showed Nordstrom and Mall each had benefits and responsibilities under the Agreement that enhanced the values of both parcels
Land restrictions can enhance value as well as reduce value
MVS costs were used to eliminate any possibility of branding costs
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Court’s Decision:
HBU is an electronic store- not generic retail
Use of dark store sales not permitted – no tier 2 sales
No proof of functional obsolescence – only anecdotal unsupported statements by taxpayer’s expert that building configuration and parking garage significantly reduced value.
Accepted City’s determination of physical, functional and economic/external depreciation
City’s Position
Straight line depreciation is not market based
Fee simple does not mean value as if dark and vacant
HBU as an electronic store is proven through supply and demand analysis where the demand is generated by customers willing to shop at that location based on the current use.
Purchase price for land does not include business value
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Court decision
A lease arising from a build to suit arrangement does not automatically disqualify a sale as not a market sale
A lease established as part of a build to suit transaction does not by definition contain above market rents.
Taxpayers misapplied Walgreen/Madison decision.
Walgreen/Madison does not hold that a sale of a property subject to a lease cannot ever be considered a Tier 1 market sale.
Per Walgreen/Madison If rents approximate the market then leased fee value is the same as fee simple value
Taxpayer’s position
Per the Walgreen/Madison decision, the sale of the subject could not be a Tier 1 sale because the lease arose out of a build to suit arrangement.
City’s Position
Economic rent arises from build to suit leases and can be considered synonymous with market rent so long as the lease does not contain compensation for non-realty items or extraordinary costs.
Burden is on taxpayer to prove with substantial evidence that the lease compensates for non-realty items.
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Exemption
Central United v. City of Milwaukee No. 2019AP778 unpublished slip op. (Mar. 17, 2020)
Partial assessment of a church parking lot—church began using the parking lot to provide parking for concertgoers (asking for a donation to park in the lot).
City argued that by providing parking to concertgoers, church was not exclusively using its parking lot for religious purposes (concertgoers were instead using the property).
Central United argued that because it was using the revenue from the parking lot for benevolent purposes, it was exclusively using its property, or, alternatively, its parking use was incidental.
Circuit court agreed with City and sustained the assessment.
Court of appeals reversed and found that, although the donations Central from the parking operation were substantial, the donations supported the functioning of the Church and were therefore incidental. The court of appeals exempted the property.
Supreme Court denied the City’s petition for review.
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Exemption
Key issues:
Each year stands on its own
Fact that property was exempt in the past is not controlling in current year
Property must fit the statutory exemption in the tax year questioned
Court rejected taxpayer’s argument that if the use does not change from the prior year – the assessor is estopped from revoking the exemption and assessing the property.
Facts: Wauwatosa was undergoing a citywide review of its exempt properties and discovered that the residence was being used by the custodian – not the pastor. This change had occurred several years earlier but the assessor was not notified.
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Exemption
Recently received decision
Masters Gallery Foods, Inc. vs. Wisconsin Department of Revenue 19-M- 067
Test case defining exemption under §70.111(27) for machinery which are not used in manufacturing.
Not to be confused with §70.11(27) exemption
TAC held machinery, patterns and tools used in the manufacturing process, even though not exclusively, are not exempt from assessment.
Machinery and tools used by a manufacturer but not in the manufacturing process are exempt from PP tax
Position of Taxpayer
Position of DOR
Only equipment used directly in manufacturing is exempt under 70.11(27). Other equipment used by a manufacturer is not exempt
Position of Amicus for certain Cities that intervened
Legislature did not intend to further exempt any other equipment used by a manufacturer which can be proven through Legislative history and budget analysis of coordinating shared revenue to municipalities for lost revenue.
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Exemption
Medical College of Wisconsin v. City of Wauwatosa
New construction of 6 story medical office building
MCW failed to apply for exemption in first year of construction
Court interpreted §70.11 preamble in light of Manual language to hold that if property was exempt in prior year there is no requirement to file a new application
This decision is contrary to Wauwatosa Avenue Methodist Church case
44TEACH A COURSE
REVIEW
6. Must a fee simple valuation assume a property is vacant on the valuation date?
Yes
No
7. In order for a sale property to be considered reasonably comparable must the sale property share a similar highest and best use as the subject?
Yes
No
8. When considering whether a sale property is reasonable comparable should the assessor look to the former use or the use to which the property will be put following the sale to determine if the sale property shares a similar highest and best use?
Former Use
Future Use
9. If a sale property is not reasonably comparable should an assessor make adjustments to the sale price to make the sale property reasonably comparable?
Yes
No
10. If a property is sold with an above market rent should the sale be thrown out or should the sale price be adjusted to eliminate the above market rent?
Throw Out the Sale
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QUESTIONS
Fee Simple
Conclusions/Implications for Future Years
Ultimate Question in a Wis. Stat. § 74.37 action
Importance of Assessor Affidavit
Session PROGRESS
Carryover of An Assessment
What is Uniformity?
What is Uniformity?
What is Uniformity?
How to Prove a Uniformity Violation
Wisconsin & Milwaukee Hotel LLC v. City of Milwaukee Case Study No. 2018AP1744, unpublished slip. op. (WI App Sept. 10, 2019)
Session PROGRESS