Real Property Tax: Calculation of True Cash Value for the Purpose of Determining Assessed Value
October 6, 2006
Although there clearly are three common approaches to determining the assessed value of an improved property in Michigan, there is no one approach or test that is consistently applied to determine the property’s True Cash Value (herein defined). Courts have held that any method of determining the property’s “usual selling price," which is recognized as accurate and reasonably related to fair market valuation is an acceptable indicator of True Cash Value. The local assessor will likely use a combination of factors and/or methods in determining the property’s assessed value. As such, an appraisal of the new build offers the best rebuttal to any unfavorable valuation
In Michigan, real property is assessed once per year in December, and a Notice of Assessment of the valuation of the property is mailed to the property owner in February each year. The Notice of Assessment identifies the Taxable Value of the property, as well as the State Equalized Value. The State Equalized Value is one half (1/2) of the property's True Cash Value (as hereafter defined).
There are three different values that are calculated for each parcel of real property located within the city/county: the State Equalized Value (SEV), the Capped Value, and the Taxable Value. Real property taxes are calculated by multiplying the “Taxable Value” by the “tax mill rate” of the particular city/county that the property is located in. The “Taxable Value” is the lower of: (a) the “State Equalized Value” (as hereafter defined); or (b) the “Capped Value” (as hereafter defined). These values are used by the taxing authorities to determine the amount of taxes owed for real property.
The “State Equalized Value” is calculated as follows: the assessed value, as placed by the local assessing department, is reviewed by the county equalization department. The equalization department may add to, subtract from, or approve it as submitted. Upon their action, it becomes the county equalized value. The county equalized value is then reviewed by the Michigan State Tax Commission. The Tax Commission may add to, subtract from, or approve it as submitted. Upon their action, it becomes the State Equalized Value.
The “Capped Value” is calculated as follows: the previous taxable value, minus losses, multiplied by 1.05 or the consumer price index, whichever is less (the “Inflation Rate Multiplier”), plus any additions. The taxable value can increase from year to year by 5.0% or the amount of the consumer price index, whichever is less. Additions or losses to the property are also taken into consideration. “New construction” is encompassed within the statutory definition of “addition.” MCL 211.34d(1)(b)(iii) defines “new construction” as property not in existence on the immediately preceding tax day and not replacement construction. For purposes of determining the taxable value of property, the value of new construction is the true cash value of the new construction multiplied by 0.50.
True Cash Value (“TCV”) is statutorily defined as “the usual selling price at the place where the property to which the term is applied is at the time of assessment, being the price that could be obtained for the property at private sale.” The term “fair market value” (“FMV”) is functionally the same as TCV and “actual market value.”
There are three commonly used methods for determining True Cash Value: the capitalization-of-income approach, the sales-comparison or market approach, and the cost-less-depreciation approach. The capitalization-of-income approach is used for commercial properties and is based on the estimated income to be generated from the property. Cost-less-depreciation is the cost of construction minus depreciation which is generally two percent per year, except for new builds which have no depreciation value in year one. The sales-comparison or market approach places a per square foot value on the property based on a multiplier that is derived from the price per square foot of similar properties sold in the last 12 to 18 months based on a sales study.
The Michigan Supreme Court has noted that variations of the approaches for determining True Cash Value and entirely new methods may be useful if the variation is found to be accurate and reasonably related to fair market value. “Regardless of which approach is used, the value must be the usual price for which the property would sell.” “The task of approving or disapproving specific valuation methods or approaches has fallen to the courts because the Legislature did not direct that specific methods be used.” It is the duty of the Tax Tribunal to accept the approach which provides the most accurate valuation under the circumstances of each case. “It is the province of the Tax Tribunal to apply its expertise to the facts of each case to determine the appropriate method of arriving at the cash value, or fair market value, of the subject property. The factual findings of the tribunal are final, provided they are supported by competent and substantial evidence.”
The General Property Tax Act (the “Act”) defines “additions” to mean all increases in value caused by new construction or a physical addition of equipment or furnishings, and the value of property that was exempt from taxes or not included on the assessment unit’s immediately preceding year’s assessment role. In Desanto v. Township of Northville, the Tax Tribunal properly found that the true cash value ("TCV") of new construction is not its cost-plus profit, but rather is the increase in the FMV of the property attributable to the new construction.
The statutory definition of true cash value or "the usual selling price" requires that actual facts be a significant consideration in the valuation of property. These external factors influence and help determine the property’s real value. The Michigan Supreme Court has recognized the following to influence the True Cash Value of the property: neighborhood conditions, location, property tax, general economic conditions, the cost of borrowing and any tax benefits available to the owner. The courts have long recognized that “assessment decisions must recognize limitations or restrictions which have a bearing on the selling price of property.”
The Taxable Value for the real property can be appealed after the owner receives its Notice of Assessment from the assessor’s office. The Notice is usually mailed in late February and provides information on how to appeal. Generally, a property owner first appeals to the local board of review (either in person or in writing). In order to successfully argue that the new Taxable Value is too high the owner must present evidence of comparable properties in the area and the corresponding market value of these properties. Typically this comparison is done by an appraiser and the appraiser will select and eventually defend the method it chose for arriving at the property’s True Cash Value. In order to protect the right of appeal, the property owner must officially protest the assessed value of the property at the local board of review that is generally held in early March each year. If the property owner is unsuccessful with the local board of review, an appeal may be filed with the Michigan Tax Tribunal for valuation. “The Tax Tribunal has original and exclusive jurisdiction over those tax issues which involve the accuracy and methodology of the property tax assessment.” Under MCL 205.735(3), “[t]he jurisdiction of the tribunal in an assessment dispute is invoked by a party in interest, as petitioner, filing a written petition on or before June 30 of the tax year involved.” Failure to correct assessments and evaluations in the manner and time provided by statute precludes later attack upon the assessment.
CONCLUSION: In Michigan, any method of determining the property’s “usual selling price" which is recognized as accurate and reasonably related to fair market valuation is an acceptable indicator of True Cash Value. The assessor’s department will likely use a combination of factors and/or methods in determining the property’s assessed value. The assessor will likely start with the cost-less-depreciation method by reviewing the permits pulled for construction, location of the property, materials used in the construction, labor rates, the “footprint” of the structure and performing a visual inspection of the new build. The assessor will also likely perform a sales-comparison or market approach using a square footage multiplier of property that he or she considers to be similar according to a recent local sales study. From these two approaches, some assessors will simply select the method that derives the higher of the two valuation numbers. Others may use a combination of the two approaches by “massaging” the numbers to come up with a figure that reflects external factors that influenced the assessed value of the property either up or down. The best way to determine the True Cash Value is to hire an appraiser to do an appraisal of the property. An appraisal provides the best approach to rebutting any negative valuation for the property and is factual evidence that supports the owner in a property tax appeal filed with the Tax Tribunal. Because appraisals can be relatively expensive and taxing on budgets, local branches of government limit the number of appraisals performed each year. The owner’s appraisal then may be the best evidence available in a trial, which may facilitate a settlement with the local government. In order to appeal the properties assessed value, the property owner must first appeal to the local board of review either in person or in writing held by the board in early March each year. If the property owner’s appeal to the local board of review is unsuccessful, the property owner must file a written petition to the Tax Tribunal on or before June 30 of the tax year involved. Failure to follow the statutory procedures and deadlines will bar the property owner from appealing the assessment.