May 31 is the deadline for filing property tax assessment appeals in the Michigan Tax Tribunal on commercial and industrial real property. Assessment notices sent in February show the assessed value and state equalized value which should not exceed 50% of market value.
The notices also shows the taxable value (the “TV”). The TV is the lesser of the State Equalized Value (the “SEV”) or the previous year’s TV adjusted for additions, losses, and inflation. Once property is transferred, its TV is reset at the SEV. In other words, the TV set in the assessment following a transfer is capped, and, absent an addition, cannot be increased by more than the inflation rate. Taxes are based on the TV. If the TV is capped at substantially less than the SEV, a decrease in the SEV obtained in an appeal may not reduce the TV, or it may reduce the TV, but not as much as it reduced the SEV. As a practical matter, tax savings are generated when the taxpayer can establish that market value is less than 50% of the TV on the assessment roll.
While the determination of market value is property specific, recent events suggest that this may be a good year to consider an appeal. As of December 31, 2020 – the 2021 property tax valuation date – the pandemic had shut down much of the economy for ten months. Commercial office and retail property was adversely affected. The fact that many businesses leasing commercial space have failed or reduced staffing and space requirements has adversely affected demand for commercial space.
Even successful businesses will have reduced demand for commercial space because of the growing popularity of remote work. The popularity of working from home was growing well before the pandemic; and now that many workers have done it for a year, many predict that those who can will want to work from home permanently, causing a downward pressure on demand for office space and rents. This trend will also affect the obsolescence of many tenant improvements, as shared-space office concepts become more common.
The fact that more retail shopping is now done online coupled with more business failures in the brick-and-mortar retail sector is expected to be reflected in lower demand for retail space.
Determining the extent to which these trends and projections may have lowered demand for office and retail space as to reduce the value of any one commercial property and whether the property tax assessment may now be unreasonably high requires a judgment as to the likely impact of these predicted market forces on sales prices. Pre-pandemic sales would not reflect these market conditions and would have to be adjusted. Even if the expected pandemic-related vacancy passes in five to ten years as growth eventually offsets the work from home trend, that could represent a substantial reduction to a property’s projected revenue stream as of the 2021 valuation date, making this a good year for owners and managers of commercial real property to consider an assessment appeal.