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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.
May
01

IPT's 2017 Property Tax Article of the Year

The Institute for Professionals in Taxation has awarded Brent A. Auberry, Esq., Stewart L. Mandell, Esq., and Daniel L. Stanley, Esq. with the 2017 Property Tax Article of the Year Award for their article entitled, “Invalid “Dark Box” Property Tax Claims Misinform Indiana and Michigan Legislatures,” which was published in the July 2016 issue of IPT’s monthly publication, IPT Insider.

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Dec
15

Market-Value Tax Assessments Under Attack

Governments increasingly seek tax increases through value-in-use property taxation.f the compelling evidence is on your side, the record shows you have a fighting chance.

An unprecedented national debate is raging as vocal proponents of additional government revenue seek significant property tax changes that will be costly to taxpayers.

A recent Michigan Court of Appeals decision in Menard Inc. v. Escanaba (the “Menard decision”), which involved a Menards hardware store in the Michigan Upper Peninsula City of Escanaba, confirms that proponents of greater taxation are masking their true goals with claims that they merely seek equitable taxation. Consequently, it is important for property owners to understand the issues involved.

Typically, property taxes reflect market value rather than a property’s value-in-use, which is the value to the owner. The market value standard bases taxes on the amount the property probably would fetch, after reasonable market exposure, in a sale between two knowledgeable, unrelated parties.

With the exception of the right to appeal under due process, no property tax component is more essential to taxpayers than basing taxation on market value, and not on value-in-use. The market value standard provides a framework for equitable and uniform property taxation.

Market value bases taxes on what is achievable in a market sale, determined through objective information such as comparable sales, rental income, operating expenses, capitalization rates and other market information.

Important distinctions

With market value taxation, a property’s value is unaffected by who owns the property, or whether the owner is able to use the property to operate a successful business. For example, a retailer, manufacturer, or cloud data storage provider may use intangible and tangible property, including real estate, in a way that achieves extraordinary income from business operations. This does not change the market value of the real property used.

In contrast, value-in-use taxation is inequitable and non-uniform. Consider two identical, neighboring residential properties that have the same market value. Their value-in-use would most likely differ, and the differences could be dramatic. The disparity could be because one house has more occupants, or because one property is used only part of the year.

Alternatively, one house could have greater value-in-use because a resident generates significant income from work done while in the home, such as in a home office or studio. Also, when one of these identical properties sells, the property’s value-in-use could substantially increase or decrease.

Those who seek value-in-use taxation might argue that such taxation is equitable because owners who obtain more value from using their properties should pay higher property taxes. But consider some of this position’s enormous failings:

  • Most people would readily agree that the most equitable system is one in which all properties are uniformly valued based on their usual selling price, rather than their differing values in use.
  • Value-in-use taxation is highly subjective and inherently inequitable. Imagine the problems and disputes if properties were valued based on the value each owner experienced.
  • Value-in-use assessment would result in duplicative taxation. If a property is used in conjunction with a business, whether the property is a residence or otherwise, value-in-use property taxation will reflect the business’s income and success. Yet, there will be duplicative taxation where other taxes are imposed on the business, such as income taxes, gross receipts taxes and value-added taxes.

Given the enormous problems with value-in-use taxation, taxpayers could understandably think there is little risk that such taxation would be adopted.

Unfortunately, those seeking value-in-use taxation have shrewdly focused on the taxation of large big-box retail properties, which they claim have been unfairly valued based on sales of vacant properties that allegedly had value-depressing deed restrictions.

The proponents of greater taxation have even tried to divide taxpayers by suggesting that some taxpayers will pay higher taxes because big-box taxpayers are not paying their fair share.

Keys to the truth

Developers build big-box retail properties to the owner’s specific needs, typically with a layout matching the owner’s other stores. Buyers of such properties invariably pay far less than the cost to construct such properties. They do so because they will spend large sums for renovations the new owner desires, in particular to fit a business image.

Also, there is reduced demand for these properties. It’s what appraisers call external obsolescence – especially with growing industry disruption from Internet sales. There are numerous sales of big-box properties without deed restrictions that confirm the selling prices for these properties are low compared with their construction costs.

Notwithstanding these irrefutable truths, the Menard decision held that an assessor could value the property under a cost approach, as if the property had no functional obsolescence. According to the Michigan Court of Appeals decision, a buyer would consider a property suitable for its own needs, merely because the property satisfied the needs of its original owner.

Such reasoning obviously values the property based on its value to the original owner – i.e., value-in-use, not its market value. These principles are the same whether dealing with a non-residential property or a home that has been custom built to an owner’s unusual tastes.

Significantly, the Menard decision specified that value-in-use taxation also could apply to a large industrial property. And a prior Michigan Court of Appeals decision endorsed value-in-use for the headquarters of a financial institution. Once the value–in-use genie is out of the bottle, it can cause above-market valuations and increased taxes for virtually any type of property.

Notably, the pro-government briefs that oppose Menards appeal to the Michigan Supreme Court deny that the decision endorses value-in-use taxation. These denials, like those in the press made by advocates of greater taxation, disregard that the Menard decision itself uses the very words “value-in-use" in endorsing such taxation. It remains to be seen if the Michigan Supreme Court will review the Menard decision, and it could be a year or more before the case’s ultimate outcome is known.

High stakes game

Some in the business community are responding to today’s property tax debate as they would to any intense effort to broadly raise property taxes. Such groups understand what is at stake and are defending market value-based property taxation for all properties.

Yet those who seek higher taxes appear to be strongly united. Whether they succeed in imposing value-in-use taxation may well depend on whether the business community itself will unite to oppose what eventually could become an enormous tax increase.

To paraphrase Abraham Lincoln, a business community divided against itself will inevitably succumb to the united forces that seek greater taxation.

Mandell Stewart jpg

Stewart Mandell is a Partner of the Tax Appeals Practice Group Leader, in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Jul
13

The Logical and Proper Determination of The True Cash Value of Big Box Stores

I. The Valuation Problem
 
In Michigan, the property tax valuation standard is true cash value (“TCV”), statutorily defined as “usual selling price” (MCL 211.27). There are no exceptions. The valuation standard applies to all taxable property including, for example, apartment complexes, office buildings, shopping centers, single family homes and the subject of this article: “big box retail stores.” As used in this article, big box retail store means the real property comprising an existing free standing retail store with a building area of approximately 80,000 square feet or more.

It is imperative that value to the owner not be substituted for TCV (i.e. usual selling price or market value). In Rose Bldg Co. v. Independence Twp. 436 Mich. 620; 462 N.W.2d 25 (1990), the Michigan Supreme Court held:

The Constitution requires assessments to be made on property at its cash value. This means not only what may be put to valuable uses, but what has a recognizable pecuniary value inherent in itself, and not enhanced or diminished according to the person who owns or uses it. [Emphasis in original.]

Before a big box store’s usual selling price can be concluded, the identity of the interest in the property being appraised must be identified. Different interests in any given property can have significantly different values. Paraphrasing well-known author and real property appraiser David Lennhoff, “you can’t get the right value unless you value the right rights.”

This article focuses specifically on owner-occupied big box stores. Because the properties are owner-occupied, there is no lease in place and no leased fee interest. TCV for owner-occupied property is based on the fee simple interest in the property. Fee simple interest is defined as follows:

Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat. The Dictionary of Real Estate Appraisal (5th ed., 2010).

Thus, this article discusses the usual selling price of the fee simple interest in an owner-occupied large free standing store real property, unaffected by the person who owns or uses the property.

II.    Big Box Stores Are All Built To Suit And Not Built To Thereafter Be Sold Or Leased.

The above section of this article addressed the legal principles governing the TCV of big box stores and other types of property. This section addresses ways in which big box stores are factually unlike most property types. Big boxes are all built to suit or custom built for a specific retailer’s business. They are either constructed by (1) a retailer or (2) for a retailer pursuant to a pre-construction contract whereby the retailer agrees to lease the property after construction under terms that allow the contractor to recover its costs and profit. Unlike many property types (apartment complexes, shopping centers, warehouses, office buildings, houses, etc.), big box stores are never built for the purpose of selling or leasing after construction is completed.

Although this gets us ahead of the story, the question should be asked why, unlike many other property types, are big box stores not built to thereafter be sold or leased. The answer is quite simple. Big box retail stores are custom built to accommodate a particular user’s image and marketing strategies. For reasons discussed below, no one could reasonably expect to profit from custom construction of a big box store and thereafter selling or leasing it in the market.

Although an existing big box store is most often clearly suitable for retail use by another retailer, the market tells us a buyer of the fee simple interest in an existing big box store, at a minimum, is going to make substantial modifications to the property. One not familiar with sales of fee simple interests in big box stores will ask why after sale of the fee simple interest in a big box store are big box store buildings either demolished or substantially modified when the building was suitable, as is, for retail use. The answer is that each big box store retailer has its own business image and desired store layout and design - façade, flooring, lighting, location of restrooms, etc. Each big box retailer wants all its stores to look alike and not like another retailer’s stores.

In short, the market tells us that when the fee simple interest in an existing big box store is sold or leased, one of two things almost always happens - (1) the building is demolished or (2) the building is substantially modified.

III. Valuation Of The Fee Simple Interest

Borrowing a quotation from the late William Kinnard, a professor, author, and well-known real property appraiser, “An appraisal is the logical application of available data to reach a value conclusion.” It is useful to keep this truism in mind when valuing property, including the fee simple interest in a big box store property.

A.    Sales Comparison Approach.

In valuing the fee simple interest of a big box store by the sales comparison approach, ideal comparable sales are fee simple sales of similar properties, i.e. sales of the same interest in property as the interest in the big box store being valued.

The Michigan Tax Tribunal has consistently used comparable fee simple sales of properties that were vacant and available when valuing a subject big box store. See Home Depot USA, Inc. v. Twp. of Breitung, MTT Docket No 366428 (2012), affirmed by the Michigan Court of Appeals in an unpublished opinion, Home Depot USA, Inc., v. Twp. of Breitung, Michigan Court of Appeals Docket No. 314301, (April 22, 2014) (“Petitioner’s selected comparables were vacant and available at the time of sale. The Tribunal finds that these sales best represent the fee simple interest in the subject property. Vacant and available at the time of sale is not an alien term: an appraiser’s analysis of exchange value must account for this eventuality. Not all properties transition instantaneously from seller to buyer like a light switch. Moreover, vacant and available for sale does not automatically present a negative connotation.”) (Emphasis added.)

As the Michigan Court of Appeals further explained:

The tribunal properly valued the properties by valuing the fee simple interest of the properties as if they were vacant and available. By comparing the subject properties to similar big box retail properties that were vacant and available, with various adjustments made to compensate for differences between the properties, Allen [taxpayer’s appraiser] was able to determine what the fair market value would be of the subject properties, if they were to be sold in a private sale, as required by MCL 211.27(1). Therefore, Allen’s sales-comparison approach properly valued the TCV of the fee simple interest of the subject properties.

Home Depot USA, Inc., v. Twp. of Breitung, unpublished opinion per curiam of the Court of Appeals, issued April 22, 2014 (Docket No. 314301).

Below are some common issues and errors in concluding to the TCV of the fee simple interest in big box stores using the sales comparison approach:

1.     Leased Fee Sales. A leased fee comparable may not be a valid indicator of a fee simple interest. Income producing real estate is often subject to an existing lease or leases encumbering the title. By definition, the owner of real property that is subject to a lease no longer controls the complete bundle of rights, i.e., the fee simple estate. The price paid for a leased fee sale is a function of the contract rent, the credit worthiness of the tenant, and the remaining years on the lease. If the sale of a leased property is to be used as a comparable sale in the valuation of the fee simple interest in another property, the comparable sale can only be used if reasonable and supportable market adjustments for the differences in rights can be made. The Appraisal of Real Estate, p. 323 (13th ed.); p. 406 (14th ed).

2.     Sale - Leasebacks. Sale/Leasebacks are typically financing transactions and always transactions between related parties, i.e. in addition to seller and buyer, the parties are tenant and landlord to each other. Thus, a price paid for a sale/leaseback comparable sale is typically based upon a financial transaction not reflective of the fee simple interest value and is always a transaction between related parties.

3.     Expenditures after sale. Misapplication of reimaging costs as “expenditures made immediately after purchase” results from failure to make a logical application of available data.

a.     It is appropriate to adjust a comparable sale price for expenditures that “have to be made” when such expenditures do not have to be made for the subject property

b.     It is not appropriate to adjust for expenditures made after the sale to “reimage” or customize the big box store for the buyer’s specific business purposes. An adjustment for a buyer’s expenditures after sale are erroneously included when the subject has the same or similar physical features and condition because both the comparable sale and the subject would typically be modified to satisfy the buyer’s business plan and image.

4.     Zoning and Deed Restrictions. Real property in Michigan is restricted in use by zoning. Other means of restricting a property’s use also exist. One is deed restrictions. A deed restriction, like a zoning restriction, may have a negative effect on a property’s value. However, like a zoning restriction, a deed restriction may not affect a property’s value. Where a deed restriction exists on a comparable sale property, it is appropriate to determine if the restriction caused a diminution in price when considering using the sale as a comparable sale to value a subject big box store property. However, typically when big box stores sell with a deed restriction, the restriction is negotiated as part of the sale so as to not affect the buyer’s intended use of the property and does not affect the sale price for the property.

5.     Highest and Best Use Issues. The highest and best use (“HBU”) of an existing owner-occupied big box store is likely going to be for retail use. In valuing big box store real property by the sales comparison approach, ideally each improved comparable sale would have the same or a similar HBU as the improved subject property. The Appraisal of Real Estate, p. 43 (14th ed. 2013). A big box store comparable sale not purchased for the subject’s same or similar HBU (retail) should be investigated to determine what evidence it provides about the value of the subject big box store property.

For example, if the improved comparable sale is physically comparable and suitable for retail use but the property sells for a use other than retail, the sold property’s HBU (as reflected by the sale) may not be even similar to subject’s HBU - retail. When that sale is used as a comparable sale without adjustment for this fact (but appropriate other adjustments), its use may result in overvaluation (but not an undervaluation) of the subject. If the comparable sale property suitable for retail use was offered for sale in the market and not bought for retail use, then the comparable property’s selling price for retail use (the subject property’s HBU) would have been equal to or less than its selling price for some other use - this is simply a logical application of available data.

B.    The Income Approach.

The most contested issue involving the valuation of the fee simple interest in big box stores by the income approach is typically the determination of market rent. To the extent the Tribunal has relied on the income approach to value these properties, it has considered only arms length transactions between unrelated parties resulting in agreed upon rent for an existing building not rent for a non-existent store to be built to a tenant’s specifications. The subject of this article is existing big box stores and not stores to be built. Rental terms from build-to-suit leases and sale/leaseback transactions would not reflect market rent (except by accident). Similarly, landlord provided tenant improvements or tenant improvement allowances so the tenant can reimage or reconstruct space for its business purposes must be adjusted from stated rent for a rent comparable so that the concluded market rent is for the subject property as is (without additional rent that may be realizable by the landlord for providing for more than the subject property, e.g. a landlord provided tenant improvement allowance).

C.    The Cost Approach.

1.             The Cost Approach to value big box store properties is generally agreed to by appraisers to be inapplicable due to the fact that it is not used by buyers and sellers and because of issues relating to the quantification of total depreciation. If used, then replacement cost is the basis from which all depreciation must be deducted. Quantifying this depreciation including, proper functional obsolescence and external (economic) obsolescence determinations, typically must be done through information obtained through comparable sales and/or income approach:

2.             Comparable Sales can be used to derive market extracted depreciation.

3.             Income deficiency or capitalization of rent loss (the difference between rent at market and the rent required to justify investment based on cost new) can also be used.

Big box store real property TCVs are adversely impacted by substantial obsolescence. The question has been asked why do the fee simple interests in big box store properties sell for so little as a % of cost new? There are multiple explanations for this market fact which are generally applicable regardless of the property’s age:

a.         All freestanding big box stores are custom built for the original owner’s business purposes and business model and the modified cost for a buyer’s business model/image is expensive.

b.         Upon sale, at a minimum, there is modification for reimaging (when the building is not demolished). (Sometimes the modification is for a use other than retail.)

c.         Fast growing e-commerce sales - In general, even big box retailers are not building new stores and when they are building, they are generally constructing smaller stores.

Significantly, the loss in value attributable to these obsolescence factors further explains why build-to-suit lease rental rates will typically be at rental rates above the market rental rate for an existing big box store property.

IV. Summary

In conclusion, the logical application of available data is required to answer the question: As of the valuation date, what is the usual selling price that would be paid for the fee simple interest in the subject existing big box store property?

The usual selling price is most appropriately determined from fee simple interest sales of similar existing properties and through market rent based on rents agreed to for other similar existing properties. The cost approach is generally not used. But when it is used, it would not likely provide a reliable result unless sales and/or income approaches to value are used to account for total depreciation.

districts in Ohio and Pennsylvania can come in and file their own tax appeal to raise the value of a given property." Landlords must diligently review property taxes yearly, looking at assessments based on current marketplace ' conditions, Shapiro says. "My clients are fighting assessments," he said, "because assessors were ignoring the function obsolescence of their properties, which in some cases meant a 50 percent reduction in value."

 

 

 

 

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Michael Shapiro is of counsel at the Michigan law firm Honigman Miller Schwartz and Cohn LLP. The firm is the Michigan member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Apr
30

FIGHTING BACK - Big-Box Owners Contest User-Based Tax Assessments

The big-box concept changed the face of retail in the 1960s. It also skewed the way that assessors value retail property for tax purposes. To this day, taxpayers across the United States have been fighting back—and in Wisconsin, Kansas and Michigan, they are winning.

The problems arose out of financing arrangements such as prearranged sale-leasebacks or build-to-suit transactions to construct or develop a big box. Companies used these methods to keep cash available for core business purposes, and repaid the sale proceeds as rent.

These arrangements created financing rents that assessors mistakenly adopted as market rents. Further, once the above-market lease was in place, owners typically sold the lease and property to an investor at a sales price reflecting the value of the longterm, above-market lease in place to a high-credit tenant. The sales never reflected the fair market value of bricks and sticks alone, because the transaction transferred more than real estate.

Assessors then relied upon these sales without adjustment to calculate fee-simple value. Finally, assessors used the above-market rents and leased-fee sales to value owner-occupied retail stores, spreading the problem to all retail.

Guiding Principles

The concept of valuing property at its fair market value of the fee simple vanished in many locations as governmental assessors adopted this leased-fee concept, occasioning substantial valuation increases for property tax purposes. The user of the property and their contract rent trumped longstanding appraisal concepts of use and market rent. The trend eroded the requirement for a uniform and equal rate of assessment and taxation at fair market value. The same land and building could now have vastly different real property values, depending on the tenant.

For instance, a building leased to Walmart would have a higher value than if the same were leased to a local department store. How was it possible that the value of a building depended on the name of the tenant? Assessors could not distinguish between sales of properties with an income stream related to the property and sales of properties with an income stream related to the business value of the tenant.

Taxpayers successfully fought back in Wisconsin, Kansas and Michigan.

In 2008, the Wisconsin Supreme Court agreed with Walgreens that the assessor had not valued its properties in fee simple. The court focused on the issue of an above-market lease and the impact on valuation, and concluded that a “lease never increases the market value of the real property rights to the fee simple estate.”

The ruling directed assessors to use market rents, not the contract or financing rents. The court was not persuaded to move away from fee-simple valuation to a business valuation, as argued by the assessor. The assessor’s methodology could cause “extreme disparities and variations in assessments,” something the court was not willing to tolerate.

The Kansas Court of Appeals case followed in 2012, prosecuted by Best Buy, the single tenant in the building. The decision made three things clear for commercial property owners. First, Kansas is a fee-simple state. The court rejected the county appraiser’s argument for a leased-fee value. Second, build-to-suit rates are not market rents and cannot be used unless after review of the lease it can be adjusted to market rental information. Finally, market rents are those rents that a property could expect to pay in an open and competitive market. Market rent is not whatever financing arrangements a tenant can procure based on their costs and credit ratings.

Most recently, the Michigan Supreme Court addressed how these financing arrangements are impacting valuations of owner-occupied big-box retail. In 2014, the court ruled on cases brought by Lowe’s Home Improvement and Home Depot, both owner-occupants.

The court dismissed the township’s argument to consider the user of the property, rather than the use of the property. The county method would mistakenly arrive at a value in use, rather than a market value, the court found.

The court concurred with the taxpayers that the sales comparison approach to value was the most appropriate method to value owner-occupied properties, noting the approach must be developed using market sales of fee-simple interests. Leased fee sales may only be used if adjusted to reflect fee simple. The court was unimpressed by the township appraiser’s conclusion that no adjustments were necessary, with the court finding his report to be shockingly deceptive on this point.

Whether it was failing to understand basic appraisal theory or the desire to inflate values, assessors plugged bad information into market-based valuation models, and it has taken years to begin unwinding the damage and restoring basic appraisal concepts of fee simple, uniformity and equality. Taxpayers are taking the lead from Wisconsin, Kansas and Michigan, and have cases pending in many, if not all, jurisdictions.

TerrillPhoto90Linda Terrill is a partner in the Leawood, Kansas. law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Jan
12

Michigan Provides Property Tax Lessons for Big Box Retail

"Probably the most important concept affirmed in these Michigan decisions is that assessors must value big box properties based on their value-in-exchange and not their value-in-use."

Owners of big box retail buildings can take lessons from Michigan on the proper way to value these large, free-standing stores for property tax purposes. The state’s well-developed tax law offers a clear model that is applicable in any state that bases its property tax valuation assessments on the fee simple, value-in-exchange standard.

Many states, including Michigan, base real estate taxation on the market value of a property’s fee simple interest using value-in-exchange principles. In other words, a property’s taxable value is its market value, and market value is commonly considered the property’s probable selling price in a cash-equivalent, arms-length transaction involving willing, knowledgeable parties, neither of whom is under duress.

In recent years, the Michigan Tax Tribunal has decided with remarkable consistency a dozen cases involving big box stores. In 2014, the Michigan Court of Appeals affirmed two of these Tax Tribunal decisions, recognizing that the Tribunal’s key rulings in this area rested on established law.

Probably the most important concept affirmed in these Michigan decisions is that assessors must value big box properties based on their value-in-exchange and not their value-in-use. Assessors and appraisers hired by local Michigan governments repeatedly — and improperly — reached value conclusions based on value-in-use rather than value-in-exchange principles.

The violation of this fundamental point was not obvious from a cursory review of the valuation evidence. For example, the assessor’s evidence included both big box property sales with nigh per-square-foot prices and big box properties with high rental rates. Consequently, for the Michigan Tribunal to decide these cases correctly, taxpayers needed to present evidence, including from expert witnesses, which convincingly established the following:

  1. Each big box retailer either builds or remodels its stores to be consistent with the retailer’s marketing, branding and merchandising operations (built-to-suit);
  2. When a big box property sells, the buyer will spend substantial dollars reimaging the property so that it conforms to the new owner’s appearance, layout and other specifications;
  3. Given that big box properties can be costly to build because of their built-to-suit nature, and that the subsequent purchasers will make substantial modifications at significant cost, these properties sell for far less than their construction cost; and
  4. Actual sales confirmed that these properties sell for far less than construction cost.

With evidence establishing each of these points, the Michigan Tribunal has repeatedly recognized that taxable value for a big box property must reflect its value-in-exchange.

For example, the Tribunal could grasp that a sale would not reflect market value if the property had a rental rate designed to compensate the developer for construction to the retailer’s specifications, rather than a rent negotiated between a landlord and tenant for an existing building.

Similarly, with such evidence the Michigan Tribunal could discern that a sale would not reflect market value if the original owner/user of the property sold and leased back the space. A sale-leaseback is typically a financing transaction between two parties with multiple relationships (landlord/buyer and seller/tenant) that are different from an arms-length transaction. That means the rent in a sale-leaseback does not reflect the property’s market rent, which would be used in an income approach to determine value. Similarly, the sale price in such a transaction is not evidence of market value.

Likewise, the Michigan Tribunal recognized that if the assessor used leases with above-market rents to value these properties, it would impermissibly be valuing something other than the property’s fee-simple interest. This is important because it applies anytime a property with above-market rent is used as either a comparable sale or a rent comparable.

Finally, the Michigan Tribunal rejected the claim that each property’s highest and best use as improved was the continued use by the specific retailer that occupied the property. Generally, highest and best use is that which is legally permissible, financially feasible, maximally productive, and physically possible.

To define that use as the continued use by the retailer occupying the property would improperly make the value depend on the identity of the property’s owner. Additionally, it would lead to a value conclusion that reflected the value of the property to that owner, or its value in-use. Thus, the Michigan Tribunal concluded that the highest and best use was simply retail use.

Michigan’s many recent big box property tax decisions spotlight issues applicable to many types of properties, wherever the law requires assessors to value properties based on the market value of a property’s fee simple interest. Perhaps the most important takeaway is that in such cases, taxpayers need to provide evidence from appraisers and other experts to carefully document a property’s market value, and where that value is significantly less than construction cost, explain why this is true.

MandellPhoto90

Stewart Mandell is a Partner and Tax Appeals Practice Group Leader, in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Jan
01

Michigan Property Tax Updates

UPDATED september 2018

Important October 15 Michigan Deadline For EMPP

For qualifying taxpayers, Michigan’s eligible manufacturing personal property (EMPP) exemption can provide significant tax savings.  The Essential Service Assessment, which is a state assessment imposed instead of the ad valorem personal property tax, will usually be modest compared to the ad valorem personal property tax.  However, qualifying taxpayers have multiple deadlines that have to be satisfied to obtain the savings.  Generally, the initial reporting deadline is February 20 each year. The deadline to certify and pay without penalty was August 15th.  If, by October 15, the Michigan Department of Treasury does not receive a certified statement and full payment (including interest and late fees if not paid by August 15), the taxpayer’s EMPP exemption will be rescinded.  For taxpayers who still need to act, they should do so quickly.  Though 2015 was the first year the  exemption took effect, each year taxpayers have missed critical deadlines and lost the personal property tax exemption.

If there are any questions about this, the professionals in Honigman’s tax appeal group are very experienced with Michigan property tax matters, including those involving EMPP.

Sarah Belloli and Stewart Mandell
Honigman, Miller, Schwartz and Cohn LLP

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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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