One of the most difficult challenges property tax practitioners face is to convince a particular state tribunal that relying upon comparable sales from other states is a proper method for determining the market value of large manufacturing plants. In McNeilus Truck & Mfg. v. County of Dodge, 705 N.W.2d 410, 414 (Minn. 2005), the Minnesota Supreme Court addressed this issue by stating that “the tax court’s de facto evidentiary rule barring out-of-state comparables violates the tax court’s obligation to assess property at market value.” The Minnesota Supreme Court thus reversed the tax court’s decision to ignore such sales, reasoning that the “market real buyers examine is not always limited by distance or location, nor by state lines. Such an arbitrary and artificial limit may not reflect market principles and creates grave risk of distorting property valuation.” Id. (emphasis added).
The property the Minnesota Tax Court assessed in the McNeilus case was a 650,000-plus square foot manufacturing/assembly plant located in Dodge Center, Minnesota. Given the fact there had been only one confirmed sale of a 500,000-plus square foot manufacturing plant in Minnesota in the decade prior to the 2001-2002 assessment dates under appeal, our expert had little choice but to include five sales of 500,000-plus square foot manufacturing facilities located in Illinois and Wisconsin in his sales comparison approach to value.
Not surprisingly, the county objected to the use of any of these out-of-state comparable sales, despite the fact that each of these manufacturing facilities bore many of the same physical characteristics and locational attributes as the subject, and, perhaps more importantly, despite the fact that each plant sold for prices that clearly reflected the sales price the McNeilus plant would likely have achieved if it were ever placed on the open market. The Minnesota Tax Court agreed with the county’s position that such sales were not relevant regardless of their similarity to the subject, and in the process created the de facto evidentiary rule prohibiting the use of comparable sales outside of Minnesota the Minnesota Supreme Court later rejected.
In rejecting such a per se exclusionary rule of market evidence, the McNeilus court recognized that “the appraiser must assess the actual market a hypothetical buyer of the subject property would look at, and consider comparable sales of properties in that market.” Id. at 413-414. The court pointed out that “a buyer searching for a distribution center to serve a national market for the buyer’s products might consider properties located in places as far apart as Denver and St. Louis as similarly situated …. Thus, what commentators have termed ‘economic proximity’ and not mere physical proximity, makes two pieces of real estate comparable.” Id. Since the tax court had failed to consider any of the economically proximate sales we offered to demonstrate the market value of the subject property, the Supreme Court remanded the case so that the tax court could exercise its “obligation to assess property at market value.” Id.
Following the Minnesota Supreme Court’s decision, the tax court was able to accept the principle that out-of-state sales do reflect actual market conditions for large manufacturing facilities, and that a prudent purchaser will not pay more for a property than it will cost to buy a similar substitute property, regardless of whether it’s located in Minnesota or in economic proximity to our state. As such, the single digit sale prices presented to the trial court did indicate what a prudent buyer would pay to purchase a parcel of real property that bears the same set of physical and geographic characteristics as the comparable sales. As a result, there was a 50 percent reduction in the client’s assessment; a significant market value reduction – and property tax savings – the owners of the McNeilus plant continue to enjoy to this day.