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Nov
26

The Silver Tsunami Portends Excessive Tax Assessments

What You Need to Know to Successfully Appeal Your Inordinate Property Taxes

By Stewart Mandell, Esq.

For some time, owners and operators of seniors housing properties have been aware of the staggering demographic statistics, such as the Census Bureau's projection that the baby boomer population will exceed 61 million when the youngest boomers reach 65 in 2029. This is truly the Silver Tsunami. Yet, even seniors housing professionals may be surprised by excessive property tax assessments that break otherwise carefully constructed budgets.

Before discussing what seniors housing owners can do to combat an excessive property tax assessment, it will help to review why some taxpayers will receive such unwelcome notifications. Factors include the large and increasing number and variety of seniors housing projects, coupled with the mass-appraisal methods that assessors typically employ.

With tens of thousands of units constructed each year, the country now has over 3 million seniors housing units ranging from independent living to assisted living, memory care and/or nursing care. Appropriate assessment methods depend on whether a property is an all-encompassing, continuing care retirement community; freestanding with only one component (such as independent living only); or comprising several (but not all) of these subtypes.

Unfortunately, assessors with limited resources usually use a cost-based methodology that is cost-effective for valuing a large number of properties. That may work for residential assessments in areas with similar homes, but given the significant differences between seniors housing properties, this approach can create an enormous tax problem for taxpayers who own seniors housing.

An outrageous assessment

In one recent case, the owner of a newly constructed property was shocked to receive an assessment valuing the property about 30 percent above its actual cost.The resulting taxes would have exceeded the owner's budget by over $250,000, not only ruining cash flow, but also destroying more than $2 million of market value.

Fortunately, there are measures taxpayers can take to counter excessive assessments. A critical initial step is to confirm any appeal deadline. Not only do rules differ across the country, but in many states the appeal deadline depends on when the notice is sent.

Further complicating this point is that more than one formal appeal may need to be filed, and taxpayers often have a narrow window within which to file. Generally, if a taxpayer receives a notice and misses a required appeal deadline, there are no second chances for that tax year.

Other important steps are to determine the applicable value standard and the assessment's basis. Usually (but not always) the standard will be market value, or the probable cash-equivalent price the property would fetch if buyer and seller are knowledgeable and acting freely. To determine that value, the assessor usually will have used an incomplete and improper cost approach that only adjusted for physical depreciation.

For these typical cases where the assessor has estimated market value using a flawed cost approach, drilling down deep into the assessor's cost methodology may produce a gusher of tax savings. In the aforementioned case, the assessor had used the costs for constructing a very expensive skilled nursing facility. Correctly using the assessor's cost estimator service for the subject property, which was mostly comprised of independent living units, reduced the cost by about $10 million.

Additionally, an assessor's cost-based valuation often will only account for depreciation from the property's physical condition. A proper cost approach must also account for any functional or external obsolescence.

Functional obsolescence can be substantial, especially for older properties, because consumer preferences change over time. What consumers may have desired years ago may now constitute a poor offering.

External obsolescence, which is often due to adverse economic conditions, can impact a property regardless of its age. For example, there will be external obsolescence if new properties overwhelm market demand in an area, or if the inevitable next economic downturn lowers market values.

Other scenarios

While atypical, sometimes assessors will use an income approach or sales comparison approach to value seniors housing properties. As with the cost approach, those approaches introduce many ways for assessors to reach erroneous and excessive value conclusions. One potentially large error is valuing the entire business and failing to remove the value attributable to services, intangibles or personal property.

In the previously mentioned case, the taxpayer's appraiser used the income approach and concluded that the seniors housing property had a total business value of approximately $22 million. The appraiser then determined that about $1 million of that value was attributable to services and intangibles and about $800,000 was attributable to tangible personal property as shown in the table below.

Market Value of Total Business Assets ---- $22M
Less Tangible Personal Property ---- ($800,000)
Less Services and Intangibles ---- ($1M)
Market Value of real property ---- $20.2M

In a similar vein, the Ohio Supreme Court recently reversed the Ohio Board of Tax Appeals in the case of a nursing home property where a taxpayer's appraiser had determined that only about sixty-two percent of the total paid for all assets was for the real property. The Board of Tax Appeals had summarily rejected the appraiser's analysis as a matter of principle. The Ohio Supreme Court reversed and ordered the Board to reconsider the appraiser's analysis, and determine what amount, if any, should be allocated to items other than real estate.

These cases underscore that an assessor who uses the income or sales comparison approach and mistakenly values the entire business, rather than the real property alone, can improperly inflate a real property assessment by a material amount.

Another step taxpayers can take to achieve tax justice is to involve experienced tax professionals and appraisers. As the above analysis shows, property tax valuation appeals have many procedural nuances as well as legal and factual issues that must be addressed. In addition, in some jurisdictions there may be a basis to obtain relief based on the assessments of comparable properties.

As the inevitable Silver Tsunami inundates markets, there will be more seniors housing properties and more instances of excessive tax assessments. To the extent that the surge in the elderly population depletes local government finances, whether due to government pension plan shortfalls or otherwise, there should be no surprise if property tax bills increase.

The owners and operators of seniors housing properties will need to carefully monitor their property tax assessments and remain vigilant to avoid painful and excessive taxation.
Stewart Mandell is a partner and leader of the Tax Appeals Practice Group at law firm Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel, the national affiliation of property tax attorneys.
Sep
12

Honigman State and Local Tax (SALT) - Michigan Legislature Responds to MBT Apportionment Case

Public Act 282 of 2014, which makes a number of "technical fixes" to the Michigan Business Tax (MBT), was quickly passed by the Legislature and signed by Governor Snyder last

night. Taxpayer advocates have pushed for the MBT changes for several years now, but the sudden movement of the bill is really the result of a special
enacting section that was added this week.

The enacting section repeals the Multistate Tax Compact (MTC), (PA 343 of 1969), retroactively to January 1, 2008. The MTC provides rules for the apportionment of the tax base of multistate taxpayers. The repeal of the MTC is intended to overturn the Michigan Supreme Court's recent decision in IBM Corp v Department of Treasury, where the Court held that the taxpayer could elect to use the MTC's three-factor apportionment formula, instead of the single factor sales formula dictated by the MBT. Although the MBT was replaced in 2011 and the MTC was amended that year to remove the election, the Department of Treasury claims that the state would be liable for an estimated $1.1 billion in tax refunds if the decision were allowed to stand. However, even though the legislation has become law, there are unresolved questions regarding whether the MTC changes are constitutionally valid. If you have an MBT apportionment case pending or are considering filing for a refund based on the IBM case, we suggest you contact one of our SALT attorneys to discuss the available options.

PA 282 also makes the following changes to the MBT. These changes are retroactive to January 1, 2010. The amendment requires that any taxpayer filing a claim for refund as a result of these changes must do so during the 2015 calendar year and provides that refunds will be paid in annual installments over 6 years beginning in 2016.

  • Allows gross receipts to be adjusted to exclude amounts attributable to a taxpayer arising from discharge of indebtedness per Section 61 (A)(12) of the Internal Revenue Code, including the forgiveness of nonrecourse debt.
  • Provides that, if the Investment Tax Credit (ITC) is claimed, the adjusted proceeds from the sale or other disposition of assets would be recaptured only to the extent that the credit was used and would be based on the ITC rate in effect when the credit was claimed.
  • Provides taxpayers more flexibility in calculating the MBT Renaissance Zone credit, if they were located within that zone prior to December 1, 2002.
  • Clarifies that, for purposes of sales apportionment, dock sales that are picked up by the purchaser within 60 days of the sale transaction are not considered to have been delivered to the purchaser at the dock and thus not treated as a sale made within the state.

If you have any questions or would like further information about the new law, please contact one of the SALT attorneys listed below:

Lynn A. Gandhi
313.465.7646
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June Summers Haas
517.377.0734
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Mark A. Hilpert
517.377.0727
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Stewart L. Mandell
313.465.7420
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Brian T. Quinn
517.377.0706
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Steven P. Schneider
313.465.7544
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Khalilah V. Spencer
313.465.7654
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Daniel L. Stanley
517.377.0714
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Alan M. Valade
313.465.7636
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Patrick R. Van Tiflin
517.377.0702
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Aug
13

Honigman Property Tax Appeals Alert - Michigan's Proposal 1 Could Phase Out Some Personal Property Taxes

Next Tuesday Michigan voters will decide whether to approve the phase out of personal property taxation involving small assessments and industrial taxpayers. Specifically, the ballot question asks whether a portion of the state's use tax should be assigned to local governments to reimburse them for tax revenues no longer collected on personal property. If the ballot question fails, the entire phase-out plan will be repealed.

The personal property exemption for small assessments actually started in 2014. Businesses with personal property having a true cash value of $80,000 or less in a particular assessing jurisdiction could claim an exemption for that property. If a business owned, leased or was in possession of personal property with a true cash value of more than $80,000 in that jurisdiction, the full tax was owed. Under the plan, taxpayers must file an affidavit with the local assessor each year by February 10 to claim the exemption for personal property with a true cash value of $80,000 or less. In a few instances this year, we did see assessors ask to see calculations using the State Tax Commission valuation tables to verify the exemption claim. If the voters approve the phase-out there could be such requests in the future.

The phase-out plan provides that industrial personal property placed into service after December 31, 2012 will become exempt in 2016. Any industrial personal property in place for at least 10 years will also be exempt. As a result, in each tax year after 2016 a new vintage year of industrial personal property will become exempt until all industrial personal property is exempt by 2023.

Proposal 1, even if enacted, does not completely eliminate the tax on personal property. Commercial personal property that is not otherwise exempt and utility personal property will remain taxable. In addition, the plan includes and is not currently limited to a state levied, special assessment on industrial personal property. The special assessment will be imposed on certain industrial personal property and will equate to approximately 20% of what the tax would have been if the personal property were not exempt.

Legislature to consider changes to tax appeal procedure

A state senator is proposing a number of changes to the property tax appeal process. The proposed changes include moving the annual appeal deadline to July 31 for all types of property (the current deadline is May 31 for commercial and industrial property). Proposals also include allowing 60 days to appeal administrative rulings, standardizing the appeal processes for various exemptions and allowing petitions for the correction of assessment errors to include the current year and three previous years. The Legislature will be pressed to address all of these issues before the end of the year, but at least some of them may well get a hearing and could be enacted this year.

For more information regarding this alert or any another property tax appeals related issue, please contact any of our Tax Appeals attorneys.

Last week Michigan voters overwhelmingly approved Proposal 1. While Proposal 1's passage will significantly reduce or eliminate personal property taxes for many Michigan businesses, contrary to some articles, it will not eliminate Michigan personal property taxation. The program consists of a phase-out of the tax on certain industrial and industrial related personal property. In addition, there is an exemption for businesses with small amounts of personal property in a given locality.

"Small Business Exemption"

Starting in 2014, businesses with personal property having a true cash value of less than $80,000 in a particular assessing jurisdiction can claim a personal property exemption for that property. If a business or a related entity owned, leased or was in possession of personal property with a cumulative true cash value of $80,000 or more in that jurisdiction, then the full tax is owed. Under the plan, taxpayers must file an affidavit with the local assessor each year by February 10 to claim the exemption for personal property with a true cash value of less than $80,000. If the claim is based on a valuation method that differs from the State Tax Commission's valuation tables, then the claimant must explain the method used. However, if the required affidavit is filed, the taxpayer does not have to file a personal property statement for that tax year. Claimants are subject to audit and must maintain adequate records for at least 4 years from the year the exemption was claimed. If a claim for exemption is denied, then the taxpayer may appeal to the local Board of Review and then the Michigan Tax Tribunal.

Industrial Processing and Direct Integrated Support Equipment

In 2016, a phase out of the personal property tax on Industrial Processing and Direct Integrated Support Equipment will begin. This exempt equipment is referred to as Eligible Manufacturing Personal Property (EMPP). EMPP placed into service after December 31, 2012 will become exempt in 2016. Going forward, any EMPP in place for at least 10 years also will be exempt. As a result, in each tax year after 2016 a new vintage year of EMPP will become exempt until all EMPP is exempt by 2023.

The exemption could be determined on a parcel-by-parcel basis, or a group of contiguous parcels. If over 50% of the original cost of the personal property on a parcel or group of contiguous parcels is used in industrial processing or direct integrated support, then the whole parcel or group is exempt. Use in industrial processing is determined by whether the asset would qualify for the industrial processing exemption under the Michigan Sales/Use Tax Acts. Direct Integrated Support involves functions related to industrial processing including R&D, testing and quality control, engineering, as well as some warehousing and distribution activities.

Taxpayers will be requested to file a form in 2015 estimating the amount of personal property they plan to claim for exemption for the 2016 tax year. If that form is filed, then the taxpayer will only have to file for the exemption in the first year (not each subsequent year) and will not be required to file personal property tax returns on the exempt parcels.

State Essential Services Assessment

The plan also creates a State Essential Services Assessment (SESA) which begins in 2016. The SESA is a special assessment applied to EMPP and used to offset some of the revenues lost from the new exemption. Generally, the SESA will amount to about 20% of what the tax would be if the EMPP were not exempt. An electronic filing and full payment to the Department of Treasury will be due by September 15 of each year. If payment is not made by November 1, then the tax exemption will be revoked.

Other Exemptions

The plan also addresses EMPP that is already exempt under other statutory provisions, including PA 198 industrial abatements and PA 328 personal property exemptions. Exemption certificates under these acts for EMPP that were in place prior to 12/31/12 will be automatically extended to the year that the EMPP would otherwise become exempt. For example, a twelve year PA 198 abatement for EMPP that was set to expire on 12/30/13 will now be extended to 12/30/15. Such a PA 198 abatement would expire at the end of 2015, but the EMPP will become exempt in 2016 under the new law. Also, the SESA will apply to some EMPP that is subject to PA 198 or PA 328 depending on which exemption applies and the date the certificate became effective.

As Proposal 1 is implemented, undoubtedly there will be many questions and issues that arise.

If you would like further information about this client alert or any other tax appeals related issue, please contact:

Scott Aston
313.465.7206
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Sarah R. Belloli
313.465.7220
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Mark A. Burstein
313.465.7322
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Jason S. Conti
313.465.7340
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Aaron M. Fales
313.465.7210
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Carl W. Herstein
313.465.7440
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Mark A. Hilpert
517.377.0727
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Jeffrey A. Hyman
313.465.7422
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Leonard D. Kutschman
313.465.7202
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Stewart L. Mandell
313.465.7420
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Steven P. Schneider
313.465.7544
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Michael B. Shapiro
313.465.7622
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Daniel L. Stanley
517.377.0714
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Aug
10

Honigman Real Estate Tax Appeals Alert - Michigan Enacts Historic Personal Property Tax Changes

"Michigan enacts historic personal property tax changes..."

Last week Michigan voters overwhelmingly approved Proposal 1. While Proposal 1's passage will significantly reduce or eliminate personal property taxes for many Michigan businesses, contrary to some articles, it will not eliminate Michigan personal property taxation. The program consists of a phase-out of the tax on certain industrial and industrial related personal property. In addition, there is an exemption for businesses with small amounts of personal property in a given locality.

"Small Business Exemption"  

Starting in 2014, businesses with personal property having a true cash value of less than $80,000 in a particular assessing jurisdiction can claim a personal property exemption for that property. If a business or a related entity owned, leased or was in possession of personal property with a cumulative true cash value of $80,000 or more in that jurisdiction, then the full tax is owed. Under the plan, taxpayers must file an affidavit with the local assessor each year by February 10 to claim the exemption for personal property with a true cash value of less than $80,000. If the claim is based on a valuation method that differs from the State Tax Commission's valuation tables, then the claimant must explain the method used. However, if the required affidavit is filed, the taxpayer does not have to file a personal property statement for that tax year. Claimants are subject to audit and must maintain adequate records for at least 4 years from the year the exemption was claimed. If a claim for exemption is denied, then the taxpayer may appeal to the local Board of Review and then the Michigan Tax Tribunal.

Industrial Processing and Direct Integrated Support Equipment  

In 2016, a phase out of the personal property tax on Industrial Processing and Direct Integrated Support Equipment will begin. This exempt equipment is referred to as Eligible Manufacturing Personal Property (EMPP). EMPP placed into service after December 31, 2012 will become exempt in 2016. Going forward, any EMPP in place for at least 10 years also will be exempt. As a result, in each tax year after 2016 a new vintage year of EMPP will become exempt until all EMPP is exempt by 2023.

The exemption could be determined on a parcel-by-parcel basis, or a group of contiguous parcels. If over 50% of the original cost of the personal property on a parcel or group of contiguous parcels is used in industrial processing or direct integrated support, then the whole parcel or group is exempt. Use in industrial processing is determined by whether the asset would qualify for the industrial processing exemption under the Michigan Sales/Use Tax Acts. Direct Integrated Support involves functions related to industrial processing including R&D, testing and quality control, engineering, as well as some warehousing and distribution activities.

Taxpayers will be requested to file a form in 2015 estimating the amount of personal property they plan to claim for exemption for the 2016 tax year. If that form is filed, then the taxpayer will only have to file for the exemption in the first year (not each subsequent year) and will not be required to file personal property tax returns on the exempt parcels.

State Essential Services Assessment  

The plan also creates a State Essential Services Assessment (SESA) which begins in 2016. The SESA is a special assessment applied to EMPP and used to offset some of the revenues lost from the new exemption. Generally, the SESA will amount to about 20% of what the tax would be if the EMPP were not exempt. An electronic filing and full payment to the Department of Treasury will be due by September 15 of each year. If payment is not made by November 1, then the tax exemption will be revoked.

Other Exemptions  

The plan also addresses EMPP that is already exempt under other statutory provisions, including PA 198 industrial abatements and PA 328 personal property exemptions. Exemption certificates under these acts for EMPP that were in place prior to 12/31/12 will be automatically extended to the year that the EMPP would otherwise become exempt. For example, a twelve year PA 198 abatement for EMPP that was set to expire on 12/30/13 will now be extended to 12/30/15. Such a PA 198 abatement would expire at the end of 2015, but the EMPP will become exempt in 2016 under the new law. Also, the SESA will apply to some EMPP that is subject to PA 198 or PA 328 depending on which exemption applies and the date the certificate became effective.

As Proposal 1 is implemented, undoubtedly there will be many questions and issues that arise.

If you would like further information about this client alert or any other tax appeals related issue, please contact:

Scott Aston
313.465.7206
This email address is being protected from spambots. You need JavaScript enabled to view it.

Sarah R. Belloli
313.465.7220
This email address is being protected from spambots. You need JavaScript enabled to view it.

Mark A. Burstein
313.465.7322
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Jason S. Conti
313.465.7340
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Aaron M. Fales
313.465.7210
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Carl W. Herstein
313.465.7440
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Mark A. Hilpert
517.377.0727
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Jeffrey A. Hyman
313.465.7422
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Leonard D. Kutschman
313.465.7202
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Stewart L. Mandell
313.465.7420
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Steven P. Schneider
313.465.7544
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Michael B. Shapiro
313.465.7622
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Daniel L. Stanley
517.377.0714
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American Property Tax Counsel

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