mar commercial tax abatement

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veryone likes a tax break. Here’s one that you need to add to your “tool box” that may help in making your next commercial building sale.

A Little History LessonBack in old days, 1978 to 1988, the Michigan

legislature allowed local units of government to issue tax abatement on the increased real estate

taxes levied on commercial building rehabilita-tion projects. The local units of government could issue 50% tax abatement for one but not more than 12 years. The Act, P.A. 235 of 1978 was “sunsetted” in 1988.

Fast forward to 2005. With renewed interest in revi-talization of Michigan downtown business districts, the legislature enacted a new Commercial Rehabilitation Tax Break Act (P.A. 110) giving local units of government the ability to abate 100% of real estate taxes (except for the state education tax) on the increased real estate taxes lev-ied due to rehabilitation of obsolete commercial buildings.

While well intentioned, the “obsolete” building require-ment meant that for a building to qualify it most likely was is such poor condition that a private investor or devel-oper would likely demolish the building based purely on economic reasons, or move to a lower cost green fi eld site.

Fast forward again, to 2008, where public Act 8 changed the “obsolete” requirement to allow any building15-years or older in a Downtown Development Authority District (DDA) or a commercial area of 3 acres or more in size to qualify for a commercial rehabilitation tax abatement.

How it worksA property owner of a building 15-years or older may re-

quest a commercial rehabilitation tax abatement if the prop-

erty is located in a Downtown Development Authority Dis-trict or if the building is located in a commercial area 3 acres or larger in size by fi ling Michigan Treasury Form 4507 with the Clerk of the local government where the property resides.

Upon receipt of the request, the clerk notifi es the tax assessor and City or Village Council or the Township Board. They notify the county and any other body whose taxes could be abated then schedule a public hearing to form a commercial rehabilitation tax abatement dis-trict. This district can contain one or more properties.

Upon approval of the tax abatement district, the City or Village Council or the Township Board and then a schedules a second public hearing and subsequently make a decision to approve or deny the tax abatement.

So what’s the advantage?To illustrate the potential tax savings, let’s look at this

vacant building in downtown Bridgman. Built in the 1960’s, it is in relatively good repair and listed “for sale” with a local Realtor. A buyer is interested but will need to make substantial interior improvements and also desires to “spruce up” the exterior facade to be consistent with the downtown development theme proposed by the City.

As shown in Table 1, the tax assessor has de-termined the state equalized value of this build-ing to be $50,000 (which is also the taxable value) resulting in a 2008 tax bill totaling $2,012.

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Now let’s assume the buyer purchases the building for $100,000, spends another $50,000 for the needed interior and exterior improvements and the tax as-sessor determines the taxable value will increase by one-half of these improvement costs. As shown in Table 2, the buyer should expect a 50% increase in taxes, if the market value increases by the $50,000, the cost of the improvements, since taxable value by Michigan law represents 50% of market value.

Now assume the local unit of government grants a commercial rehabilitation tax abatement, abat-ing county, library and college taxes totaling $575. As show in Table 3 this would result in a 19% tax sav-ings based on the total tax bill or a 57% percent saving on the new taxes that would normally be levied due to building rehabilitation for a 1 to 10 year period.

Taking the Analysis Further.Since our purchaser is a good “real estate inves-

tor” buying the building at a price below market value and intending to make some profi t in the fu-ture on the increased market value resulting from

the rehabilitation, the tax abatement become more important. Let’s assume the $50,000 rehabilita-tion costs increases the market value of the build-ing to just under $200,000, resulting in a $30,000 to $40,000 profi t. We can assume the 2009 taxes would about double maybe as much as $3,500–$3,800 and the tax abatement would increase to maybe $1,150, resulting in a tax total tax savings around 33%.

Cautionary Note: No Simple Rule.Unfortunately, there is no simple formula or

rule to estimate actual savings resulting from ap-proval of a Commercial Rehabilitation Tax Abate-ment. The actual abatement will depend on how much increased taxable value the assessor adds to the current assessment and the actual tax mill-age rates set each year by the taxing entities

The Bridgman illustration assumes the market value of the building would go up dollar for dollar of the rehabilitation costs. As anyone who watches HGTV knows, that’s not necessarily true and that some improve-ments may not add anything to the building market value. In fact, as we all know, in some instances the building value many even decline after rehabilitation.

With this said, the best guidance appears to be that we can expect about a 20% to 33% overall tax savings on commercial rehabilita-tion projects where a tax abatement is given.

Some fi nal thoughts.It must be pointed out that some communities may

not warmly support issuance of tax abatements. Most Michigan Downtown Development Authorities uti-lize tax increment fi nancing, a method whereby the taxes levied on new investments in the DDA district are captured and used by the DDA for projects benefi t-ing the DDA area. Issuance of tax abatements stops the same taxes that would otherwise be captured by the DDA, resulting lost revenue when taxes are abated.

All across Michigan, local governments will soon, if not already, evaluate whether to publicly promote this new tax abatement program as an incentive to in-vest in older buildings in their commercial districts.

With this background, Realtors can encourage lo-cal communities to review this new tax abatement law and be ready to inform both buyers and sell-ers of older commercial properties of the advantages a tax abatement may provide to a sale or purchase.

Chuck Eckenstahler is a Senior Consultant with McKenna Associates and serves as an instructor for MAR’s Land Use Leadership Academy. He is a 35 year veteran real estate and municipal planning consultant. He teaches economic development subjects in the Graduate School of Business at Purdue North Central, Westville, Indiana and serves on the faculty of the Lowell Stahl Center for Commercial Real Estate Studies at Lewis University, Oakbrook Illinois. He can be contacted at [email protected] or by phone at 219-861-2077.

if youcan fi x it,

What every REALTOR® needs to know about Commercial Rehabilitation Tax Abatements

B Y C H U C K E C K E N S T A H L E R

TABLE 1: Bridgman Building 2008 Tax Information

TABLE 3: Bridgman Building 2009 Estimated Tax Savings

TABLE 2: Bridgman Building 2008 Tax Information for Improvements

Sale Price of Building $100,000

State Equalized Value $50,000

Taxable Value $50,000

2008 Taxes On Original Building $2,012

2008 Taxes On Improvements $1,006

Total 2009 Taxes On Building & Improvements $3,018

Commercial Tax Abatement $575

Total Taxes After Abatement $2,443

% Savings In Annual Taxes 19%

ABATABLE TAXES

Market Value of Improvements $50,000

Taxes Levied

County $120 YES

City $367 YES

Library $44 YES

State Education $372 NO

College $44 YES

Intermediate School $59 NO

Total 2009 Taxes On Improvements $1,006 $575