Tuesday, June 30, 2015

Several downtown Detroit companies challenge property assessments; over $4 million in revenue at stake

Posted By on Tue, Jun 30, 2015 at 9:16 AM

click to enlarge Blue Cross Blue Shield says Detroit has assessed an inflated value of its 22-floor skyscraper at 600 Lafayette. - WIKIPEDIA
  • Wikipedia
  • Blue Cross Blue Shield says Detroit has assessed an inflated value of its 22-floor skyscraper at 600 Lafayette.

The Detroit Downtown Development Authority (DDA) could lose over $4 million in annual revenue if property assessment appeals by several companies are approved by the Michigan Tax Tribunal. 

Some of Detroit's corporate residents have contested at least $50 million in assessed values of downtown properties, according to tribunal records reviewed by MT

City officials say the cases take months, if not years, to work their way through the Michigan Tax Tribunal (MTT), and assessing the risk can be difficult because its unknown how the court will rule. Companies also say the tax bill challenges are just a part of doing business, and correct assessments will make the city more "competitive" in attracting businesses.

But the cases pose a potential financial risk for the DDA, an issue that first came to light during a brief meeting in March, when the authority's board approved a parking subsidy to facilitate the consolidation of Ally Financial's operations inside the historic One Detroit Center building

According to meeting minutes, a board member pointed out, before approving the Ally deal, that "there are a substantial number of Michigan Tax Tribunal cases open against the City that could have gotten lower revenue, and so it would be prudent now that cash flow is really tight, and we've got a really good working model, to quantify what the risk is so that we can at future meetings help the Board understand what the risk is."  

That risk — if the tribunal sides entirely with the companies' opinion of what the assessments should be — could cost the DDA as much as $4.35 million in annual revenue, based on current tax rates.

(The net millage rate for taxing entities located in downtown Detroit is 84.505, or about 8.5 cents per $1. The DDA also levies an additional 1-mill tax on property owners within its district. Detroit assesses and collects property taxes in downtown and then is statutorily required to send them to the DDA; therefore, the city is named as the respondent in the tribunal petitions. Under state law, the DDA captures the majority of those property taxes, known as tax-increment financing. While assessments can be complicated, the general formula for calculating property tax estimates is: (assessed value) multiplied by (the millage rate) divided by (1,000). In this case, it would be $50,859,366 x 85.5085 divided by 1,000, which equals $4,348,908 million) 

To be sure, the cases over downtown properties represent a mere fraction of the 1,5000 ongoing assessment challenges against Detroit — and the petitions are something property owners in Michigan are legally entitled to commence. But the disputes over downtown buildings are significant because the DDA has committed the majority of its incoming revenue to several ongoing projects in downtown — chiefly, a $450 million new arena for the Detroit Red Wings. In that deal, the DDA will spend approximately $15 million annually to pay off bonds issued to support the arena's construction. As a result, in the coming years, the DDA currently projects a tight cash flow. 

The DDA, whose taxing district encompasses the city's Central Business District, operates almost entirely off property taxes it captures from other entities — including the City of Detroit, Detroit Public Schools, and the Detroit Public Library. The authority received about $29 million in revenue last year and expenditures exceeded $34 million, according to a recent audit.

In a statement to MT, a spokesperson for the Detroit Economic Growth Corporation, which provides staff services for the DDA, said the authority has always monitored MTT appeals as part of its budget process.

"Its primary focus is the development area within the DDA, not the entire DDA district, because the development area is the source of tax increment revenue to retire bonds, etc.," the spokesperson said. "The distinction is an important one." 

The DDA can't confirm how much revenue might potentially be affected by future decisions of the MTT, the spokesperson said. 

"While in any given year the DDA might have to adjust its revenues as a result of the tax tribunal’s decisions, the DDA has been, and continues to be well positioned to meet all of its financial obligations because staff and consultants budget and forecast conservatively to allow for potential revenue lost to appeals," the spokesperson said. 

The most substantial appeals have been filed by Blue Cross Blue Shield, companies affiliated with Quicken Loans, and Boydell LLC, a firm owned by local developer Dennis Kefallinos. Those petitions comprise 90 percent of the assessed values at stake. 

Under a petition to the tribunal filed in 2014, Blue Cross Blue Shield alleges the taxable value — the figure used to calculate property taxes — of its 22-floor skyscraper at 600 E. Lafayette, as well as an adjacent property, is "substantially" higher than the state equalized value (SEV), defined as 50 percent of the property's selling price. In 2013, Republican Gov. Rick Snyder signed a bill that transformed Blue Cross from a nonprofit into a mutual insurer, a move that forced the health care provider to begin paying an estimated $90 million annually in state and local taxes, of which $2.6 million would be paid to Detroit. 

Blue Cross says state law prohibits the taxable value of a property from exceeding the SEV. 

"[T]he tribunal should grant this correction as interim relief, so that Summer Tax Bills will not be based on a patently erroneous taxable value," wrote Blue Cross in its May 2014 petition. The case remains pending.

In a statement to MT, a BCBS executive said the health care provider conducted independent appraisals on every property it owns after it became a nonprofit mutual insurer on Jan. 1, 2014.

"With only two exceptions, the first assessments came out very close to the appraisals," said Tricia Keith, senior vice president of BCBS corporate secretary and services. " The Detroit number was significantly different than our appraisal; therefore we met with the city and decided to appeal."

BCBS maintains a strong relationship with the city, Keith said, "but this is an important baseline for one of the many taxes we pay to support the city."  

"BCBSM is a huge supporter of the city of Detroit," she said, noting the company has been headquartered in the city since 1939 and has added 3,000 jobs to downtown since 2011.

The job relocation was spurred by a tax incentive from the DDA. The amount of tax breaks the DDA has given to entities challenging their assessments is unclear, but city records show several have received public assistance to conduct business in Detroit.

In 2010, the DDA agreed to provide Blue Cross a $30 million incentive for relocating 3,000 employees to vacant space in the Renaissance Center. The incentive is doled out by the DDA in annual payments of $3 million. Blue Cross is required to certify those workers remain employed in downtown Detroit and show their total payroll exceeds $180 million per year.

Still, Keith said, "All told, we have over 7,000 employees and contractors in the downtown district. Our track record of financial support for the city through M1, the DIA Grand Bargain and the public safety vehicles are just a few of the examples of our city support. But we still have a responsibility to our members to run an efficient business, and that includes paying the correct amount in property taxes."

Boydell — which owns the Russell Industrial Center and several loft buildings in Detroit — wants the assessment of the Greektown Lofts at 743 Beaubien slashed in half. The company contends the building's market value is $2.1 million less than what Detroit assessed. 

In a June 2014 petition, Boydell wrote it will present evidence that supports a "significant reduction" of the building's assessment. That case also remains pending.

Kefallinos also contests the assessment of a property at 1346 Broadway, which houses the Paris Bar, saying the assessment should be cut by $93,000. A representative for the company couldn't be reached for comment.

Meanwhile, straw buyers affiliated with Quicken Loans founder Dan Gilbert have sought to lower assessments by $37.6 million for several buildings and parking lots.

The companies — which all list James Ketai, managing partner for Quicken's real estate arm Bedrock Real Estate Services, as their registered agent — use similar language in each appeal.

In one petition for the property at 1550 Woodward, the company summarizes the 2014 assessment as "invalid and unlawful and operate[s] as a fraud upon the taxpayer" because it exceeds amounts permitted under Michigan statute. The petition asks for Detroit to refund the corresponding amount to the reduction, "plus interest and costs." 

The city has rejected the argument and the case remains pending. In a statement to MT, a city spokesperson said, "This is something we are monitoring very closely, but can't speculate on potential revenue loss because we can't predict how the MTT will rule."

A straw buyer for Quicken and Meridian Health — 1000 Webward LLC — recently purchased the Compuware Building and, last month, launched a petition to cut the property's assessed value nearly in half. Quicken and Meridian paid about $142 million for the building in 2014

According to the petition filed by 1000 Webward, the Compuware Building's assessed value in 2014 was $59.29 million; the company is asking the state tribunal to reduce that assessment to $31.5 million. The city has yet to respond to the petition. 

A spokesperson for Bedrock Real Estate Services, the real estate arm of Quicken, said the city benefits from an influx of new income tax revenue generated as a result of the business brought to downtown in recent years, and getting property tax assessments "right" is integral to the well-being of Detroit. 

"Like all diligent commercial property owners and operators, Bedrock routinely analyzes the assessed values of our properties relative to the marketplace and appeals those we believe are out of sync with the fair market value of comparable buildings. Keep in mind, taxes are passed on to tenants both small and large, in the form of annual rent payments," said spokeswoman Robin Schwartz, in a statement. "Detroit commercial properties MUST be competitive with the numerous surrounding markets we are competing against to keep attracting and growing businesses and their employee bases in Detroit, not to mention the huge benefit the income taxes and spending of these new businesses bring to the city.

"Many of our tenants’ employees are beginning to relocate closer to their downtown jobs which also means more residents moving into the city. Property taxes are a big part of this entire equation. Getting this right is very important for the ultimate economic well-being of downtown and all of Detroit."

By making property taxes "competitive," Schwartz asserted, it will generate "MORE all-around tax dollars to Detroit and the DDA, not less."

Quicken has also received incentives from the DDA. For example, the company received a 10-year personal property tax abatement for  the Madison Theatre Building — another property that's the subject of a pending MTT challenge — that cuts personal property taxes by 50 to 100 percent, city records show. That aid is slated to expire in December 2022.

Schwartz said the company isn't appealing the Madison building's assessment, only the parking lot, and "we have always paid real estate property taxes for the Madison Building and the adjacent parking lot." 

Speaking generally about the influence of Michigan Tax Tribunal decisions, Davie Hieber, manager of Oakland County's tax assessing arm, said an influx of reductions can be a "significant" problem for a community.

"Obviously, it's a challenge," Hieber said.

When the economy entered a recession in 2007-2008, Oakland County created a fund to account for potential losses at the tax tribunal.

"We took our best estimate as to what we could realize as a loss of value due to tax tribunals, and accounted for that, so we had the appropriate funds to pay taxpayers back," Hieber said.

"So, our preference was to be prepared for that, as opposed to react to that when it happens."

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