“Creative financing” argument fails in property tax assessment case against Milwaukee

By Joe Forward, Legal Writer, State Bar of Wisconsin

Dec. 17, 2010 – A limited partnership that claimed property sale prices in Milwaukee were inflated to account for “creative financing” in sale-leaseback transactions recently lost its appeals fight for tax refunds assessed by the City of Milwaukee.

Great Lakes Quick Lube LP (Great Lakes) acquired rights to purchase 47 Valvoline Instant Oil change businesses, located on 29 parcels of real estate, for $26.6 million in 2004. Great Lakes assigned the real estate purchase rights to CRIC Great Lakes Acquisition LLC (CRIC).

In 2004, the parties agreed that CRIC would lease the real estate to Great Lakes for rent. The agreement stated that it was a “true lease” and not representative of a “financing arrangement.” Three of the real estate parcels are located in the City of Milwaukee.

CRIC filed Wisconsin Real Estate Transfers Returns (WRETR) for the three acquired properties, and a fourth acquired in 2005, reporting the sale price of each property.

The returns did not indicate whether the transfers involved financing. The sale price for all four properties totaled approximately $4.067 million.

In 2005 and 2006, CRIC sold the four real estate properties and again filed WRETRs for each of the sales. CRIC reported the sale price for all four properties at approximately $4.73 million.

The City of Milwaukee used the sale amounts to determine the property tax assessments on each of the four properties for both 2006 and 2007. Great Lakes paid the taxes and sued for a refund, claiming the taxes were excessive based in light of actual fair market value.

At trial, Great Lakes argued that its sale-leaseback transaction required “creative financing” and as a result, sale prices were inflated. Great Lakes argued that taxes should have been assessed at approximately $1.144 million, the total fair market value of all four properties. The city assessed taxes for both 2006 and 2007 based on a total fair market value of about $4.4 million.

Assessment was proper

In Great Lakes Quick Lube, LP v. City of Milwaukee, 2009AP2775 (Dec. 14, 2010), the District I Wisconsin appeals court held that the city’s assessments were correct based on the methodology required by Wis. Stat section 70.32(1) and the Property Assessment Manual.

Under the manual, an arm’s length sale is the best evidence of the property’s true cash value. If no recent sale has occurred, the assessor examines comparable properties. If no comparable properties exist, an assessor may use a third-tier assessment methodology.

The property sale prices were inflated because of “creative financing arrangements,” Great Lakes argued, which disqualified those sales as a proper basis for appraisal. Specifically, Great Lakes argued that the sale-leaseback arrangement inflated the sales price because “the leases involved above market rate rents.”

Great Lakes’ appraisal expert examined “market rents” to value the property and calculated property value based on a belief that the original transactions involved sale-leasebacks. The city based its property value assessment on sale prices of the properties, and comparable sales.

The appeals court agreed with the circuit court that there were no sale-leasebacks or creative financing costs that pushed the leases beyond market rates.

Thus, the court held that the trial court “properly rejected [Great Lakes’] formula because there were recent arm’s length sales of the subject properties.”

Uniformity clause

The appeals court also rejected Great Lakes’ constitutional Uniformity Clause challenge. Art. VIII, section 1 of the Wisconsin Constitution provides that cities, villages, and towns can collect uniform taxes on real estate through optional methods. The modes or methods of taxing real property must be applied uniformly.

“[T]here is no evidence that all other similarly zoned properties were systematically assessed at less than fair market value,” Judge Joan Kessler wrote.