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Property Tax Resources

Nov
19

Property Taxes Are Not A Fixed Expense

If you have taken an accounting class, your professor likely explained that property taxes are one of the fixed expenses on real estate financial statements. While your professor was technically correct that property taxes are considered a fixed expense in accounting, many property owners, asset managers and investors are finding out that "fixed" certainly doesn't mean always consistent or predictable.

In a recent third quarter earnings call of a large, publicly traded hotel REIT, the discussion contained all the typical metrics on financial performance and forward-looking guidance. The call was overall very positive; however, one particular comment from the chief financial officer raised a critical issue. The REIT had significantly missed its pro forma expenses on property taxes, which had negatively impacted actual earnings. The REIT's miscue on projecting property taxes and the sizable impact on its financial results indicated that planning for this expense item can be particularly difficult, especially during an upswing in the current real estate cycle.

Hotel performance has bounced back from a cyclical low in late 2008, and many U.S. markets are approaching the peak performance levels last reached in 2006. Additionally, investment capital in-flows into the hotel sector are at record highs for public and private REITs, private equity funds and other investors. All these factors have led to record investment volume and investors chasing after a limited number of deals (especially in top-tier markets) and subsequently are driving up hotel asset pricing.

While all this is good news for existing hotel owners and investors, it often creates a budgeting challenge for changes in property taxes. With strong market fundamentals, improving performance metrics and sales volume on the rise, assessors have been quick to increase tax valuations on hotels. Many assessors are recouping much of the value lost during the downturn and have typically been more aggressive than in past cycles.

For example, in late 2013, a mid-sized hotel investor had just acquired its first Texas hotel. The investor had done its own due diligence and projected property taxes to increase by 3 percent ever year of ownership — sound familiar? In early 2014, after closing on the acquisition, the investor reached out for help when the hotel's tax valuation notice had increased 100 percent, almost whiping out projected cash flow. Had the investor called for help prior to closing he could have been warned about the possibility of an increase and properly budgeted for the future tax years.

So, what can owners and investors do to help identify pitfalls in underwriting for property taxes? Here are a few budgeting points that will help to avoid surprises:

Understand the assessment laws and practices in the jurisdiction. All states and many assessors within the same state operate differently, so get the facts straight on local practices. For example, some assessors reappraise at the time of transaction and others only revalue on a set cycle that could vary dramatically from every year to multiple years between a revaluation.

Is there a disclosure requirement? And to what degree will it be used to establish future tax valuations? In Texas, sales disclosure is not required by law. Therefore, a deal with non-disclosure agreements between the parties can be an important aid to budgeting.

Get to know the local political landscape and legislative undercurrents. Any proposed law changes or political pressures on a specific property classes can be a major influence on a prudent budget. Recently, there has been a push in a few areas around the country to increase taxes on commercial properties to try to reduce the escalating tax burden on residential properties.

Find out what is taxable. Hotels are a truly unique asset class and present a major appraisal challenge that could significantly impact property tax projection. Hotels contain real estate, business personal property and intangible value. Some states don't tax personal property (furniture, fixtures and equipment) and others don't tax business intangibles, value associated with a business operation and related to the brand affiliation, contracts, trained workforce, loyalty programs, etc.

Make reasonable assumptions. Using a standard 3 percent growth rate or some other unsupported assumption "just to push the deal through" almost always comes back to haunt budgets later.

Enlist help from a local and knowledgeable expert. If you are budgeting for an acquisition then make sure to consult the experts prior to going under contract on a deal. Make sure the expert understands hotel taxation and valuation. Ask about the specific valuation models and techniques employed by local assessors. If your expert doesn't know those answers, then find an expert who does. Taxpayers managing an existing hotel should seek expert tax advice every budget season.

While no list is exhaustive for every situation, these points will make sure you are on the right path to proper and more accurate budgeting for property taxes.

michael-shalley-activeMichael Shalley is a principal in the Austin, Texas law firm of Popp Hutcheson PLLC, which focuses representation of taxpayers in property tax disputes and is the Texas Member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Shalley can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Nov
18

How Government Machinations Can Slash Property Tax Liability

Taxpayers and tax professionals researching market conditions to determine fair market value should consider any impending government actions. Even a rumor of a government project that would require acquisition of a property through eminent domain, or would impose restrictions on future use, can reduce the property's market value and taxable value.

Property values begin to suffer even before community leaders approve the final plans or begin work on such a project. That's because the belief that the project will occur places a cloud on the property owner's ability to sell and on the price attainable in a sale.

A potential buyer would be reluctant to acquire a property that will be involved in future condemnation litigation, with its inherent costs and delays, nor would a buyer welcome the uncertainty that those plans place on the property's future use.

The government taking may not involve acquisition of the property as a whole. Rather, it may remove some rights of use through restricting zoning, creation of conservation corridors or the diversion or rerouting of traffic, for example.

The property value declines because the wheels are turning to take away some of the rights of ownership, perhaps as much as 100 percent of those rights. The property owner carries the burden of convincing the taxing authority of diminished value resulting from rumored or pending acts of government.

Fair market value determinations must match reality. A title search would not reveal the threat of a government taking, but the valuation process cannot assume clear title in the face of the cloud imposed by the contemplated taking of some of the owner's bundle of rights.

An array of public improvements has the potential to affect property values, with an equally wide range of implications for taxable value. "They sky is falling because a highway is coming through here someday" is at the extreme, but other property owners may learn of the future imposition of a conservation easement on coastal properties, or a restriction on land use, allowable sign dimensions, or other rights. Any of these limitations would have a direct and immediate effect on value.

Calculate the damage

When the reality of a government action hits, it may take up to 100 percent of the property's fair market value. The taxpayer should weigh the seriousness of the threat and the probability and timing of it actually occurring. Then the taxpayer should measure the weighted estimate against the value of the property without the threat.

If the property is in "the path of progress," questions to consider in determining its value are: Who will buy it? What is its anticipated economic life? And what purpose will it serve?

First, determine the seriousness of the threat. What is the likelihood of it occurring? Next, calculate the remaining life of the present use of the property in the face of the impending government action. If it is going to happen, when will that be?

In the case of projected highway takings, the probability is high. Once announced, the highway's completion is almost assured. The present use has a limited and uncertain life.

Market observations show that buyers avoid properties in the path of progress. The development of a highway project is a time-consuming process that can hang over a property for years, suppressing value.

Another diminishing value aspect of an impending road taking is that the property/s neighbors may defer, or altogether cease, to maintain their properties, a condition sometimes called "condemnation blight." Broken windows won't be replaced, leaking roofs won't get patched and buyers won't buy. Buyers will purchase, however, a competing property unthreatened by condemnation.

Regulatory threats

Anticipated or threatened taking for regulatory reasons likewise diminishes market value. Suppressed industrial expansion is one example, such as when a local authority announces it doesn't want noise or the use of industrial-use pollutants in proximity to a new residential development.

The force of regulation frequently drives industrial uses away from new residential development or expanding metropolitan uses. Community leaders may deem junkyards or outdoor storage undesirable and force those uses away. Forcing such uses away from the metropolitan area threatens future use of local properties, and therefore limits property value.

Taxpayers need to help taxing authorities understand that the portion of the government that weakens property values by taking away property rights should suffer the resulting loss of property taxes.

Wallach90Jerome Wallach is the senior partner in The Wallach Law Firm based in St. Louis, Missouri. The firm is the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. Jerry Wallach can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Oct
29

New York Tax Uncertainty

The future of New York City's 421-a tax exemption is highly uncertain, particularly in light of the election of Mayor Bill de Blasio, whose initiatives appear to call for sweeping changes to the program.

The 421-a program, which is scheduled to expire on June 14, 2015, provides substantial real estate tax exemption benefits for the developers of new multifamily buildings. Currently, the city determines the level of exemption provided to an eligible building under 421-a; that determination is based on a geographical and functional basis.

That could change under de Blasio's proposed "Five-Borough, 10-Year Plan." The proposal, relating to the creation or preservation of 200,000 units of affordable housing, frequently references the 421-a program, alluding to its future presence in the real estate market.

The city created the 421-a program in 1971 to encourage multifamily construction by granting a partial tax exemption for the property owner. In 2008, changes to the program had a prospective effect on 421-a projects. These modifications included a dramatic expansion of the Geographical Exclusion Areas (GEA), in which properties must meet additional requirements to qualify for an exemption. The amended laws eliminated as-of-right, or automatic, benefits for new multifamily construction throughout Manhattan. In addition, significant sections of the outer boroughs became part of the GEA, effective for buildings that commenced construction after June 30, 2008.

The law created exceptions for projects within the GEA to obtain a tax exemption. To qualify, at least 20 percent of the units must be affordable to families whose income at initial occupancy does not exceed 6o percent of the area median income adjusted for family size. In addition, projects located in a GEA could qualify for benefits via the purchase of negotiable certificates. Under the negotiable certificates program, affordable housing developers can sell negotiable certificates to market-rate developers, who use the certificates to access tax abatements.

Hints of Change

Based on Mayor de Blasio's proposal, the percentage of affordable housing required per project may increase to provide for more affordable units.

The proposal highlights the establishment of a new, mandatory Inclusionary Housing Program, which will serve a broader range of New Yorkers with varying income levels. The Inclusionary Housing Program offers an optional floor area bonus to developers of new residential buildings, in exchange for the creation or preservation of affordable housing.

The new residential housing can be onsite or offsite, so long as it is within the same community board jurisdiction or within a half-mile radius of the site receiving the floor area compensation. The program seeks to promote economic integration in areas of the city undergoing significant new residential development. In order to qualify under the current Inclusionary Housing Program, the affordable units must be affordable to households at or below 80 percent of the area median income.

In contrast to the current Inclusionary Housing Program, some observers speculate that the mayor's proposed program would require all developers to put aside at least 20 percent of their units for low-income families. These units would then remain permanently affordable.

Currently, developers are able to layer 421-a benefits on top of inclusionary housing benefits, therefore allowing developers to take advantage of both programs. By allowing this double-dipping of benefits, the city creates a greater incentive for developers to provide onsite affordable housing.

However, de Blasio's plan may change the way developers use multiple subsidy programs together. The proposal states that in situations where a developer pursues multiple subsidies, the city will increase the percentage of affordable units required for eligibility and/or require that the developer provide deeper affordability.

No automatic exemptions?

Some observers have speculated that the mayor's plan may expand the GEAs of the city and reduce, if not completely eliminate, any as-of-right areas for 421-a construction. As Manhattan is already a GEA, this proposal would affect those areas in the outer boroughs that were not classified as GEAs in 2008. Moreover, developers in the expanded GEAs would be required to provide a higher percentage of affordable units (some proposals call for as much as 50 percent affordability) and offer apartments to families at 40 percent to 50 percent of area median income.

Proposed changes to the program also include eliminating some of the strict requirements that developers must meet in order to receive a 421-a Certificate of Eligibility. For example, under the current program, a qualifying property must meet one of the following three conditions:

  • All affordable units must have a comparable number of bedrooms to the market rate units, and a unit mix proportional to the market rate units. Or
  • At least go percent of the affordable units must have two or more bedrooms, and no more than go percent of the remaining units can be smaller than one bedroom. Or
  • The floor area of affordable units is no less than 20 percent of the total floor area of all dwelling units.

Mayor de Blasio's proposal seeks to modify or eliminate what the administration terms inefficient regulations," since existing requirements may force developers to build larger units than the market dictates.

Overall, the filing process to receive a Certificate of Eligibility is time consuming, due to regulations such as the unit distribution requirement. Mayor de Blasio's proposal states that it seeks to "streamline the 421-a program, improving its usefulness to developers and its ability to promote affordability, by eliminating outdated and unnecessary programmatic, eligibility, and oversight requirements."

JoelMarcusJoel R. Marcus is a partner in the New York City law firm of Marcus & Pollack LLP, the New York City member of American Property Tax Counsel (APTC), 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..

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Sep
30

Why Assisted Living Is The New Property Tax Frontier

"Like hotels, these facilities feature non-taxable intangibles."

Assisted living is moving to the forefront of the ongoing debate over the role of intangible assets in property taxation. Over the past 10 or more years, property tax professionals and the courts have focused discussions of intangible assets on hotel and resort properties, which tend to rely on brands, assembled workforces and other intangible assets in their operations.

Intangibles are exempt from property taxation in most states, so hospitality property owners have fought to exclude the value of those intangibles from their property assessments.

The courts have resolved the question of whether the value of intangibles can be included in the value of hospitality properties, establishing case law through key decisions such as those by California's Supreme Court and Court of Appeal in Elk Hills Power vs. Board of Equalization and SHC Half Moon Bay v. County of San Mateo.

In those cases, the courts have explained that assessors must remove the value of non-taxable intangible assets and rights from a property's value so that only real property is assessed for property tax purposes.

Owners should take page from hotel playbook

Now tax industry professionals are asking whether the principles used to exclude intangibles from hospitality property assessments can also apply to assisted living properties. The answer to that question might have been "no" just 15 years ago, prior to the explosion in the number and sophistication of assisted living communities. At that time, it would have been impossible to argue that there were significant intangible assets and rights involved in the operation of most assisted living facilities.

But assisted living operations have become more sophisticated in recent years, incorporating more valuable and more numerous intangibles. That trend has created opportunities to reduce property taxes in the same way that hospitality operators limit tax exposure for their properties.

Today's assisted living facility is much more than a building with a license to provide convalescent care. Top-rated facilities employ staffs with a variety of expertise in caring for the aged, including highly specialized skills to care for residents suffering from memory loss due to dementia or Alzheimer's disease.

Staff-to-resident ratios can be as high as 2-to-1. And the personal care for residents occurs 24 hours a day, seven days a week, so the number of employees needed to operate an assisted living facility has greatly increased.

In addition, high-end assisted living facilities offer more services to their residents today than properties typically provided in the 1990s, making them increasingly similar to hospitality businesses. Nowadays, residents have full food and beverage services, often with a choice of several meal plans.

Assisted living facilities also offer hairdressing and barber services, laundry, housekeeping, transportation and, in some cases, staff-coordinated activities. The operator provides all of the services mentioned above in addition to any medical supervision, physical therapy or other healthcare offerings.

Nearly all of the recent improvements in assisted living reflect the increased number of intangible assets and rights that assisted living facilities must use in order to deliver the services that their residents require — and the residents' families demand.

Much like a high-end hotel or resort, the many services that upscale assisted living facilities provide to residents bear little relation to the building and location where the service delivery occurs. Rather, the trained workforce provides those services.

Generally speaking, only the building and land are subject to property taxation. Consequently, value created by the workforce and the services it provides is a non-taxable intangible asset, which must be excluded for property tax purposes.

To identify assisted living intangibles, first consider that the facility is an income-producing property. The income produced there derives from more than the rental of space. In fact, rent for residents' living space accounts for as little as one-quarter or one-third of the revenue an assisted living facility generates.

The balance of the income that assisted living facilities receive is payment for services that the workforce provides. In addition, some assisted living properties likely benefit from brand recognition or have accumulated business goodwill.

Three ways to remove intangibles from equation

Property tax practitioners have three primary ways of removing identifiable, non-taxable intangible assets and rights from the value of an assisted living enterprise.

1. Determine the cost of the land and buildings that the facility uses. This method directly values the "sticks and bricks" at the facility, and works well if the facility is fairly new so that there has been little physical deterioration. Some taxing authorities recommend this method, as does a textbook on the appraisal of assisted living facilities, published by the Appraisal Institute.

2. Identify facilities where an operator leases the land and buildings, so the rental payment only represents rent for use of the land and building. Similarly, professionals who appraise or value assisted living facilities for property tax purposes should seek sales of assisted living center land and buildings only for a proper comparison. Unfortunately, leases and sales of only land and buildings for assisted living tend to be elusive.

3. Value the specific intangible assets and rights in use and deduct the value of those intangibles from the full business enterprise value of the facility. This method applies to most assisted living facilities. Assessors already use this method for hospitality properties, so it is readily applied to assisted living.

Property taxes are a significant expense for assisted living operators. Fortunately, the hospitality industry has already blazed the path to tax relief. With some ingenuity, the taxpayer can borrow the same methods that help control hospitality property taxes and use them to reduce taxes on assisted living facilities as well.

 

CONeallCris K. O'Neall is a partner with Cahill, Davis & O'Neall LLP, the California member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Sep
30

How To Discover Whether Your Tax Assessment Is Fair

Many taxpayers pay more than their fair share of property taxes. Yet in a tax arena fraught with nuance, it can be difficult for a taxpayer to recognize an inflated assessment. The key to spotting a bad assessment lies in knowing precisely what the assessor is measuring and the requirements of the state's property tax law.

What, then, is being assessed? The simplistic answer is that real estate is being assessed, but that response doesn't fully address commercial real estate, where values often hinge on contracts, encumbrances and regional legal definitions.

That said, all states attempt to tax at similar levels properties that are similar to one another.

The challenge to meeting that goal is that commercial real estate is subject to a variety of contracts and encumbrances, creating situations where nearly identical properties are taxed at significantly different assessments. Causing more trouble is assessors' tendency to rely on recent sales to determine values, resulting in tremendous differences in assessments among similar properties.

In a Pennsylvania case, an owner filed to reduce his property's taxable value based on a long-term lease in place at below-market rent. The Pennsylvania Supreme Court held that assessors must weigh all the interests associated with a parcel, specifically the impact of leased-fee interests and leasehold interests on value. However, the typical commercial property sale only reflects the leased-fee portion of the sale, because the buyer is essentially buying a rental income stream.

Kentucky has yet to fully address the uniformity problem. The Kentucky constitution states that "all property, not exempted from taxation by this Constitution, shall he assessed for taxation at its fair cash value, estimated at the price it would bring at a fair voluntary sale." As a result, nearly identical buildings could be taxed at significantly different amounts.

Ohio legislators recently passed a statute to achieve uniform taxation. Ohio simply stated that the assessor must assess all real property at the fee-simple value as if it were unencumbered. In this way the state is requiring the assessor to use market terms regardless of above-market or below-market rents in place at the property.

The remedy to unfair taxation based on recent sales is to tax all property using market terms and market rates applied to the conditions specific to the property. Without knowing what the assessor is measuring, however, a taxpayer may consider a sales price to be a fair assessment value. As demonstrated by these examples, understanding how the states assess properties goes a long way to knowing whether a taxpayer is paying a fair share in that particular state.

KJennings90J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania 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..

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Sep
23

Does a Property's Sale Price Really Equal the Taxable Market Value

The question arises all too often: Is the recent sale price of a property the best evidence of the property's taxable value?

Basic appraisal principles dictate that market value is the price upon which a willing buyer and willing seller would agree. Coming out of the recent recession, however, assessors continue to question whether the purchase prices paid for commercial or industrial properties reflect the properties' market value.

The confusion derives from the distressed sales that dominated commercial real estate transaction activity during the recession. As tenants defaulted on leases and property incomes plummeted, many owners were either compelled to sell their real estate in order to avoid foreclosure, or gave their underwater properties back to lenders. A number of lenders simply sold those assets after foreclosure at liquidation prices, adding to the volume of sales at distressed pricing levels.

Where the majority of sales of similar types of property are distressed, those sales may become the market, establishing pricing even for non-distressed sellers. To assert a higher taxable value on a property in this scenario, the assessor would have to demonstrate that these sales defy current economic conditions.

Now, as the country's economy begins to improve and property owners remain cautiously optimistic that the recession is ending, which recent sales truly represent market value? It is a challenging question for property owners and assessors seeking to use recent transactions for sales comparisons in order to determine current market value and taxable value of a property.

In many parts of the country, there was a complete dearth of sales and little construction activity during the downturn. In those areas, the sale of a property may have been the only transaction that occurred in that market in several years, with no other sales available for comparison.

With the uptick in the economy, assessors are latching onto recent transactions as fully indicative of a new market, and are inflating assessed taxable values in the process. Distinguishing the value indicated by a property's sale price remains vital to having it correctly assessed.

One reason that evaluating a sale for tax purposes requires more than just looking at the closing price is that the sale price may reflect financial incentives and tax-exempt components included to motivate the buyer or seller. For example, sale prices paid for restaurants, hotels, nursing homes and some industrial plants may reflect the value of the business enterprise, as opposed to just the real estate.

In Oregon, California and Washington, many intangible assets may be exempt from taxation for most properties. Thus, for purposes of determining the property's taxable market value, the appraiser or assessor must determine and exclude the value of the intangible rights relating to the business.

In Oregon, properties other than those used in power generation or other utility services may have tax-exempt intangible assets including goodwill, customer contract rights, patents, trademarks, copyrights, an assembled labor force, or trade secrets. Properly separating real estate value from the business enterprise value can substantially reduce the assessed value.

Additionally, an often overlooked influence on the sale price may be the existence of a sale- leaseback provision. In Oregon and many other states, real market value for tax purposes involves a willing seller and willing buyer in an open-market transaction, without consideration of the actual leases in place.

Thus, in the sale of a building fully leased to an ongoing enterprise that sets the buyer's anticipated rate of return, the assessor must extract the existing lease value and instead apply market lease and occupancy rates to arrive at the real market value for taxation purposes. In other words, whether the leases in place at a sold property are at, above, or below market rates affects the relationship of its sale price to taxable value.

Assessment requires more than simply assuming that the sale price is the sole indicator of value. For a vacant property, the sale price may be the best indicator of value. But any transaction used to establish market value for tax purposes needs to be thoroughly vetted. Taxpayers should keep these principles in mind when reviewing the assessor's process to set the taxable value of their real estate.

CfraserCynthia M. Fraser is a partner at the law firm Garvey Schubert Barer where she specializes in property tax and condemnation litigation. Ms. Fraser is the Oregon representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Ms. Fraser can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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

Jason S. Conti
313.465.7340
This email address is being protected from spambots. You need JavaScript enabled to view it.

Aaron M. Fales
313.465.7210
This email address is being protected from spambots. You need JavaScript enabled to view it.

Carl W. Herstein
313.465.7440
This email address is being protected from spambots. You need JavaScript enabled to view it.

Mark A. Hilpert
517.377.0727
This email address is being protected from spambots. You need JavaScript enabled to view it.

Jeffrey A. Hyman
313.465.7422
This email address is being protected from spambots. You need JavaScript enabled to view it.

Leonard D. Kutschman
313.465.7202
This email address is being protected from spambots. You need JavaScript enabled to view it.

Stewart L. Mandell
313.465.7420
This email address is being protected from spambots. You need JavaScript enabled to view it.

Steven P. Schneider
313.465.7544
This email address is being protected from spambots. You need JavaScript enabled to view it.

Michael B. Shapiro
313.465.7622
This email address is being protected from spambots. You need JavaScript enabled to view it.

Daniel L. Stanley
517.377.0714
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Jul
16

Ohio Property Owners Face "Adversarial Culture" Over Taxes

Schools, board of revision routinely thwart efforts aimed at "fair taxation."

When is the best time to submit an appraisal and other evidence in a tax appeal? That depends largely on tax policy and government culture, which dictate how taxpayers manage tax appeals.

In a perfect world, taxing entities would embrace fairness and equality, remembering that their mission is ultimately to serve the taxpayers. The reality is that government tax policy - and more importantly, governmental practice - is subject to the culture that permeates a department.

In Ohio, state lawmakers have been trying to make the state more taxpayer-friendly. For instance, legislators created a more equitable measure of tax by clarifying that property tax is based on the fee-simple, unencumbered market value of the real estate. So from a policy standpoint, Ohio appears to be becoming more taxpayer-friendly. At the local government level, however, taxpayers can face a different and often adversarial culture.

In a perfect world, taxing entities would embrace fairness and equality. The reality is that government tax policy is subject to the culture that permeates a department.

Schools, Counties Have Clout

Ohio taxpayers face two principal antagonists that seem equally determined to thwart the state legislature's pursuit of fair taxation. One opponent is the schools. In Cleveland as well as in other local tax districts, taxpayers encounter resistance and aggression from the schools. School districts routinely file complaints and tie up taxpayers in litigation lasting years.

The Ohio taxpayer's second foe is the county board of revision, which is effectively the judge and jury for tax cases at the local county level and becomes a party to subsequent appeals at the state level.

Recently, Cleveland's Cuyahoga County began posting on its website the evidence that taxpayers submitted in contesting tax assessments. That evidence often includes sensitive information about income and expenses, as well as rent rolls.

And although evidence submitted to a public body becomes a public document and is subject to Freedom of Information Act requests, there is a significant difference between burying evidence in a file and posting taxpayers' private information on the Internet.

The Catch-22 is that the taxpayer must provide sufficient evidence in order to prevail in a tax appeal, and typically that evidence is private income, expenses and rent rolls. Taxpayers understandably want that data to be closely protected, but under the new rules in Cuyahoga County, that personal information will be posted online.

Transparency Versus Privacy

A major hurdle taxpayers have to contend with is that Ohio law requires a complainant to provide the board of revision with all relevant information or evidence within the knowledge or possession of the complainant.

The law further states that if complainants don't provide the information in their initial appeal, they will be precluded from doing so later (unless good cause is shown). The challenge is, how can a taxpayer protect private information and yet still receive due process?

The requirement of private information, combined with the inevitability of it being posted online, can have a dramatic chilling effect. And for certain taxpayers, that prospect of prominent public disclosure becomes an Achilles' heel that prompts them to withdraw their cases, or simply let their assessments go uncontested. The county will have thus won the war without ever having gone to battle.

Tactical Maneuver

Although the facts will dictate how an attorney protects the taxpayer, in certain instances a taxpayer can refrain from hiring an appraiser and submitting sensitive data until after the board of revision hearing. By delaying the production of the appraisal, the taxpayer can still get the data into evidence at the state level via the appraisal even though it did not produce the data earlier.

Thus, the taxpayer can protect the data from Internet exposure and still use it on appeal. The down side of this tactic is the taxpayer does not present its best evidence at the county level.

There is no easy answer to the county board of revision's Catch 22. Each case presents its own set of facts that determine how to protect the taxpayer's privacy and yet prevail. As with all litigation, knowing the opposition, addressing the taxpayer's own weaknesses and understanding the rules and culture surrounding the case goes a long way toward achieving success.

KJennings90J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co., LPA, with offices in Cleveland, Columbus and Pittsburgh. The firm is the Ohio and Western Pennsylvania member of the 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..

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