Opinion ID: 485541
Heading Depth: 1
Heading Rank: 2

Heading: fair market value

Text: 41 When Olga's submitted what it deemed to be a fair market value for the equipment and leasehold improvements, it quoted a figure of $34,147.00 based upon an appraiser's evaluation; the movable equipment was valued at $13,880.00 and the improvements were valued at $20,312.00. The district court noted the basis for the first appraiser's assessment of fair market value: 42 The equipment was valued by taking the initial cost, adjusting such cost to today's figures, and then deducting straight line depreciation on each item over its estimated useful life with a factor for functional and economic obsolescence. In general, the equipment was considered to have an eight-year useful life, so that approximately 5/8ths of its computed original cost was deducted. As a check the appraiser estimated that restaurant equipment of the kind involved after five years is worth about ten percent of its initial cost. 43 The leasehold improvements were valued by adjusting initial cost to original cost as of May 30, 1983, and then depreciating them over what the appraiser thought was a ten year term of the underlying lease. When it was pointed out that this term was fifteen years, the $20,312.00 was adjusted to $60,323.00. 44 At trial plaintiff's second appraiser testified in response to a question posed by Judge Cohn that the leasehold improvements really had no fair market value at the end of the five year term, because they could not be removed from the premises and, therefore, there was no one to purchase them. 7 45 The district court then noted Papo's valuation contentions: 46 Defendant obtained an appraisal for the first time in the fall of 1984, more than a year after plaintiff filed suit. While defendant's appraiser initially was instructed to use fair market value as the criteria for valuation, he was subsequently instructed to use value-in-use or use value. As explained in defendant's interrogatory answer, defendant valued the leasehold improvements and equipment at $350,000.00 based on the value of the equipment in use as an integral part of an operating enterprise. 47 At trial, defendant's appraiser testified that the equipment had a value of $86,600.00, based upon value-in-use, and the leasehold improvements had a value of $229,963.00, based on depreciated reproduction cost for an aggregate value of $316,536.00. In his post-trial proposed findings, defendant asserts the value of the equipment as $51,092.00, and the leasehold improvements have a value of $158,272.00, for a total value of $209,364.00. 48 Value-in-use, which is the underlying principle of defendant's approach, is defined by his appraiser as the value of assets in use as an integral part of the operating enterprise with consideration given to the age, condition and utility and the used market value insofar as applicable without consideration as to whether the earnings justify an investment in the assets as they stand. 49 Use value or value-in-use has also been defined as the value of property designed to fit the specific requirements of the owner, but which would have little or no value to another. See Boyce, Real Estate Appraisal Terminology, Ballanger Publishing Company (rev. ed.). 50 The district court rejected the value-in-use theory and testimony and indicated what he believed to be the parties' intent in setting fair market value for the leased equipment: 51 Any amount received by defendant for the leasehold improvements and equipment after the expiration of the five-year term is a windfall. Defendant entered into the lease with the expectation of getting back his $376,636.00 investment over a five year period while he earned 16 percent and while he received the tax benefits of ownership. Defendant did not and could not control the shopping center premises. The leasehold improvements were not removable. In substantial part, they were not identifiable. As for the equipment, once removed, it was no more than secondhand. There is no warrant for using the value-in-use approach to determine fair market value under the record made at trial. Defendant's method of valuation is not credible. 52 The court then set forth its analysis and definition of fair market value of the improvements and equipment under Michigan law: 53 a. the highest price estimated in terms of money that the property will bring if exposed for sale in the open market with a reasonable time allowed to find a purchaser buying with knowledge of all of the uses and purposes to which it is adapted and for which it is capable of being used. 54 b. the amount which the property would bring if it were offered for sale by one who desired, but was not obligated, to sell and was bought by one who was willing, but not obliged, to buy. 55 c. what the property would bring in the hands of a prudent seller, at liberty to fix the time and conditions of sale. 56 d. what the property would sell for on negotiations resulting in sale between an owner willing, but not obliged, to sell and a willing buyer not obliged to buy. 57 e. what the property would be reasonably worth on the market for a cash price, allowing a reasonable time within which to effect a sale. 58 Under this analysis, the court found that the leasehold improvements have no value. They cannot be removed and, therefore, cannot be sold. There is simply no market for something which cannot be marketed. At the same time, the court found the fair market value of the movable equipment to be $13,835.00. 59 Papo contends that the district judge ignored the parties' true intent when he found no fair market value of the leasehold improvements. Furthermore, Papo relies on Olga's initial proposal to purchase the leasehold improvements for approximately $20,312.00 as an indication that the parties intended for fair market value to be greater than liquidation value. 8 Although those arguments have some force, Papo exposed himself to this risk by not specifying in the lease agreement how the equipment and improvements were to be valuated, and by not testifying at trial as to his intent. The record supports the district judge's conclusion that the improvements had no value under the Michigan definition of fair market value. Judge Cohn's finding that the parties' lease arrangement was actually a financing agreement, moreover, undercuts Papo's argument that the leasehold improvements had substantial value at the conclusion of the lease term. As a financing arrangement, Papo had recouped his initial investment with a 16% return together with tax benefits over the five years of the term. 60 Underlying Judge Cohn's analysis is a reasoned belief that the parties did not formulate a true lease. Looking at the substance of the arrangement, the court reasonably could conclude that the parties entered a financing arrangement in which Dr. Papo, an investor and not a dealer in restaurant equipment, would put up the funds to set up Olga's restaurant in the Hayward mall and receive a fixed 16% return on this investment. 61 Courts are often called on to look beyond form and into the substance of an agreement. In many leasing contexts, courts determine that a true lease was not intended; rather the parties sought to clothe their financing agreement in terms of a lease to garner various tax benefits. Judge Cohn recognized that Papo's interpretation of the agreement, if adopted, would result in an apparent windfall. We find no demonstrated error in the district judge's interpretation and in his determination of fair market value, although we might have reached the higher appraisal figure suggested by plaintiff if asked to make a de novo determination.