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Property Tax Legal Update

This edition of the E-Letter provides you with an update on developments in the area of property tax law.  As you will see, there have been recent decisions of the Michigan Supreme Court and Court of Appeals covering a variety of property tax matters.  We hope that this information will help you in any current or future matters facing your township.

Real Estate Transfer Tax Refunds for Arms-length Transactions

Real estate transfer taxes are often incurred during the conveyance of real property. A specific provision of the General Property Tax Act provided a refund for property owners that sold residential properties with a state equalized value (SEV) that was less than the SEV at the time of .purchase. If the property owner requested a refund and the sale price did not equal the property’s true cash value (TCV), some local treasurers were imposing a penalty.  It was unclear as to whether the sale had to be for the TCV or some other price. The Michigan Supreme Court weighed in on the language and determined that the exemption statute only requires a sale for fair market value, which is a price which a willing buyer and willing seller would arrive through arm’s-length negotiation. Gardner v Dept of Treasury, Supreme Court (July 9, 2015).

True Cash Value of Industrial Personal Property May Be Computed as Historic Cost Minus Depreciation

A city calculated the personal property tax due and owing on a piece of used industrial equipment based on the “historic cost” minus depreciation. The valuation method was challenged. In lieu of the city’s method, the property owner argued that the tax should be calculated on the price the owner paid for the used equipment. The Tribunal ruled that the property owner did not provide sufficient proof that the city’s assessment was in error, and made an independent determination that the assessment was correct.  The property owner then appealed to the Court of Appeals, which upheld the city’s valuation method. Although the Court noted that the purchase price may be evidence of TCV in an arms-length transaction, it is not determinative. In the instant case, the Court was aware that the industrial property was part of a much larger transaction involving a depressed business. The difficulty with the business likely lowered the purchase price of the industrial property and thus would not indicate a fair market value for the personal property.  Interestingly, the Court of Appeals was less concerned with what a willing able buyer would pay compared to the Michigan Supreme Court’s decision noted above JD Norman Industries v City of Leslie, Court of Appeals (June 23, 2015).

Local Municipality Assesses Leased Telephone Company Land

The General Property Tax Act provides that the State Board of Assessors is responsible for assessing telephone companies, if the property is owned, used, and occupied by the telephone company.  In one instance, a local municipality assessed the owner of real property, who had leased the property to a telephone company. The assessment was challenged by the telephone company, arguing that the State Board of Assessors must assess the land—not the local municipality. The Court of Appeals focused on the statutory language requiring the telephone company to “own,” “use,” and “occupy” the land. Since the telephone company only leased the land, and did not “own” it, the Court held that the city was the proper assessing authority. Accordingly, in these narrow circumstances, land used by telephone companies, but not owned, should be assessed by the local municipality. Lucre, Inc v City of Grand Rapids, Court of Appeals (April 28, 2015).

The Possibility of Some Future Municipal Event is Too Tentative for Highest and Best Use Valuation

Municipal assessors regularly struggle with highest and best use valuation. What is the highest and best use? The result can be very debatable. The Court of Appeals recently ruled that highest and best use cannot include property uses that would require a municipal waiver or variance to occur. In the specific facts presented to the Court, if a variance were granted by the municipality, a property’s highest and best use was commercial development. The Court of Appeals affirmed the Tribunal, noting that the issuance of a variance was too tentative to be used when valuing the parcel’s highest and best use. MS Brighton LLC v City of Brighton, Court of Appeals (April 21, 2015).

The Effect of Adult-Foster Care Facility Income Requirements on a Charitable Tax Exemption Determination

Adult Foster Care facilities are eligible for the nonprofit charitable institution tax exemption, provided they meet the specific criteria for the exemption, which includes providing charity in a non-discriminatory fashion.  A particular facility had an “income-based program” which required a monthly charge based on each resident’s income.  Prospective residents were required to prove that they had an ability to pay some amount toward living and care, and the facility never admitted a person that did not have some ability to pay.  The Court of Appeals ruled that, even though the facility did not charge more than was required for successful maintenance, and the overall nature of the facility was charitable, it still did not qualify for the exemption because it offered its charity on a discriminatory basis due to the fact that it did not admit individuals that had no ability to pay. It is important to keep in mind that, even though a facility may appear to be charitable in nature, it still may not meet the threshold required by state law to qualify for the tax exemption. Baruch SLS Inc. v Tittabawassee Township, Court of Appeals (April 21, 2015).

The Eligibility of For-Profit Educational Institutions for the Educational Institution Tax Exemption

Some officials may not be aware that there are two separate provisions under Michigan law that provide tax exemptions for an educational institution.  A for-profit college claimed a tax exemption under MCL 211.9(1)(a) of the General Property Tax Act, which generally exempts educational institutions.  The Tribunal ruled that the for-profit college was not entitled to the tax exemption for educational institutions under that provision, because of the language in another statutory provision, MCL 211.7n, which provides an educational exemption only for nonprofit entities.  The Court of Appeals disagreed with the Tribunal, finding that the nonprofit requirement in MCL 211.7n should not be read into MCL 211.9(1)(a).  Please keep this in mind the next time you have a claim for an educational exemption, particularly from a for-profit educational institution. SBC Health Midwest Inc., v City of Kentwood, Court of Appeals (March 19, 2015).

The Necessity of Evidence Establishing Construction Date in Assessing New Construction

A pole barn was included in the assessment of a property, but the owner argued that the pole barn was not constructed as of tax day, and therefore, should not be included in the assessment.  In making its independent determination of value, the Tribunal included the value of the pole barn in the valuation.  The Court of Appeals, however, reversed the determination of the Tribunal, finding that there was not competent, material, and substantial evidence to support the Tribunal’s decision to include the pole barn.  In fact, any evidence that was submitted to the Tribunal related to the pole barn was from after tax day.  Therefore, the Tribunal was not justified in including the pole barn in the assessment without any evidence showing that it actually existed in that tax year.  Therefore, when assessing property that includes relatively new construction, you should be able to provide evidence that establishes that the structure was actually constructed on or before tax day, otherwise it will be difficult to sustain a challenge in the Tribunal. Reichert v Chikaming Township, Court of Appeals (April 16, 2015).

An Individual or Entity Must be a “Party in Interest” to file in the Tribunal

A transfer of property can create some issues when there is an ongoing Tribunal matter involving the property.  A company, JMC, appealed its property’s 2012 assessment.  JMC then sold the property in December of 2012 to another company, 1642 Broadway.  In 2013, a motion to amend the appeal to add tax year 2013 was filed on behalf of JMC, as the only party listed in the matter.  The motion to amend was initially granted, until it discovered that JMC was no longer the property owner, at which point the motion to amend was vacated due to the fact that JMC was no longer a party in interest.  The Court of Appeals agreed, finding that the Tax Tribunal Act states that the Tribunal’s jurisdiction is only invoked when a party in interest files a written petition.  For 2013, JMC was not a party in interest because it no longer had a property interest in the subject property. 

This is something to keep in mind with any ongoing Tribunal cases in which motions to amend are being filed to amend subsequent years.  A new owner of property does not have an interest in a Tribunal matter that existed before he or she owned the property, even if it is ongoing.  Therefore, a new owner would have to file a new petition, and only for tax years in which he or she actually owned the property. JMC I, LLC and 1642 Broadway, LLC v City of Grand Rapids, Court of Appeals (May 12, 2015).

In another case involving the same issue, the Petitioners were Spartan Stores and Family Fare.  Spartan Stores was the owner of Family Fare, which leased a space in a shopping center for the purposes of operating a grocery store.  Both Spartan Stores and Family Fare claimed to be a party in interest for purposes of challenging the assessment of the shopping center in which the Family Fare was leasing space for its store.  The Court of Appeals held that Family Fare was a party in interest, because it had a leasehold in the shopping center, and therefore had a property interest in the overall shopping center that was being assessed.  On the other hand, Spartan Stores only had a financial interest in the tax assessment, as Family Fare’s corporate parent, but did not have a direct property interest, as it did not own the property or sign a lease. Again, this is an example of why it is important to verify that a party challenging an assessment or bringing another type of action in the Tribunal is actually permitted to bring such an action. Spartan Stores and Family Fare v City of Grand Rapids, Court of Appeals (October 30, 2014).

The Validity of Special Assessments for Certain Public Improvements

It is not uncommon for property owners to be unhappy about special assessments.  A common argument against special assessments is that the underlying project is not needed, thereby rendering the special assessment invalid.  A special assessment for street lighting was challenged, in part, on the basis that the assessment did not raise the market value of his property and did not constitute an improvement as required by statute.  The Court of Appeals upheld the assessment, finding first, that the petitioner merely recited market values of his property, but did not show the existence of a “substantial or unreasonable disproportionality” between the amount assessed and the value added to the land, or that there was any connection between the special assessment district and the decline in property value.  Further, the Court ruled that the street lighting did constitute an improvement, as it was a permanent addition to the betterment of real property that enhanced its value and was designed to make the property more useful or valuable. In challenges to the validity of special assessments, Townships have the benefit that courts will presume an assessment is valid, leaving the property owner with the very difficult task of showing substantial or unreasonable disproportionality of the assessment.  However, any time a project is undertaken that will require a special assessment, Townships should always be prepared to show, at a minimum, that the project is adding value or a benefit to the property. Landon v City of Flint, Court of Appeals (October 21, 2014).

Update: The Ability of a Township to Waive Interest on Delinquent Taxes without Authorization

We previously discussed a property tax dispute before the Tribunal, in which a township agreed to waive interest on delinquent taxes as part of a settlement agreement enforced by the Tribunal.  In that instance, the Court of Appeals ruled that the county would generally be bound by the agreement and unable to seek the interest from the taxpayer, due to the fact that the township and county are in privity. Sal‐Mar Royal Village, LLC v Macomb County Treasurer, Court of Appeals (May 30, 2013).

However, on April 23, 2014, the Michigan Supreme Court issued an Order granting the county’s appeal of the Court of Appeals ruling to determine: (1) whether interest and fees owed to the county for delinquent taxes can be waived in a Tribunal proceeding in which the county is not one of the parties, and (2) whether a township and county are actually in privity for purposes of waiving interest and fees related to delinquent taxes.

The Supreme Court ordered that a subordinate governmental unit (such as a Township) cannot bind a superior unit (such as a county) unless the subordinate unit is authorized to represent the superior.  The Court noted that the township was never empowered to represent the county in relation to delinquent tax collection.  In fact, the Court pointed out that, due to different obligations of the two units of government under the Property Tax Act, there could potentially be a conflict of interest if the county was unable to collect delinquent taxes for which it had previously reimbursed the township from its delinquent tax revolving fund. This development is important to keep in mind for any agreement that involves an interest waiver.  In certain circumstances, it may be necessary to seek approval from the county or other higher unit of government that might be affected by the agreement. Sal-Mar Royal Village LLC, v Macomb County Treasurer, Supreme Court, (November 26, 2014).

By: Steven Koski

Click here for a PDF version of this publication.

Fahey Schultz Burzych Rhodes PLC, Your Township Attorneys, is a Michigan law firm specializing in the representation of Michigan townships. Our lawyers have more than 150 years of experience in township law, and have represented more than 150 townships across the state of Michigan. This publication is intended for our clients and friends. This communication highlights specific areas of law, and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.

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