In a few months the season of property tax assessment appeals will be upon us. For the uninitiated, this is the time when property owners can challenge a local government’s valuation of their real estate, usually for the purpose of reducing the owner’s tax liability. Generally speaking, a property owner will present evidence that his or her real estate is worth less than the assessed value based on market conditions, blight, vacancy, etc. In my experience, assuming you have a good argument, most local governments will give you a break and lower the assessment, although almost never as much as you had requested. The assessor can also just flat out deny your request, which is fairly common, especially considering that a lower assessment means less cash for that municipality. A property owner can appeal these decisions to the Michigan Tax Tribunal, then to the Michigan Court of Appeals. However, such appeals usually only make sense when dealing with higher value commercial property.
Recently big box retailers have been seeking to reduce their property tax liability by appealing their assessments with so called "dark store" arguments, and they have been successful. The basic premise of this argument is that one retailer’s big box store is less valuable to another retailer (or really any potential buyer) and thus has a relatively low market value. Thus, the argument goes, a retailer should only have to pay taxes on the actual true market value, regardless of how much the store actually cost to build.
As an example, let’s say Lowe’s builds a store at a cost of $10 million and then at some point decides to sell and open another store elsewhere. In theory, Home Depot wouldn’t pay as much for the building because it’s a custom built structure. Additionally, before selling the property, Lowe’s would typically place restrictions on the deed prohibiting any buyer from selling competing merchandise at that location. In practice, the shuttered store would end up sitting vacant for years until it had degraded in value far enough that a buyer would tear it down and repurpose the site (hence the term "dark store"). The result is that the local government that approved the permit to build the store, counting on the tax revenue from a $10 million market value, will only receive, at most, about half of that.
This issue here isn’t so much that the dark store argument is wrong, or even that big-box retailers are inherently bad for taking advantage of the loophole. After all, once one of them succeeds at it, their competitors pretty much have to follow suit. As noted by ICLE contributor Jack Van Coevering, who often represents local governments, the issue seems to be more with the tax tribunal's actually accepting this argument and moving away from the “cost approach” of tax valuation it has historically used.
The state legislature is now trying to catch up to the issue with Senate Bill 524 and House Bill 4909, although significant amounts of anticipated tax revenue have already been lost. SB 524 essentially seeks to amend section 27 of the General Property Tax Act (MCL 211.27) to add a “highest and best use” standard when assessing limited use property. HB 4909 seeks to amend the Michigan Zoning Enabling Act (MCL 125.3101 et seq.) to prohibit the negative use deed restrictions mentioned above. Both bills were introduced and referred to committee in September 2015, where they have remained.
For more information on property tax appeals check out:
Chapter 15: Taxes (Michigan Real Estate Practice and Forms)
Appeal a Commercial or Industrial Property Tax Assessment
Appeal a Property Tax Assessment for Residential Real Estate