Tag: taxable value assessment

Michigan Court of Appeals Confirms Commercial Roof Replacement is “New Construction” for Property Tax Purposes

In a recent decision that clarifies the scope an “addition” for property tax purposes, the Court of Appeals held that installing a new roof on a commercial building constitutes “new construction” that triggers an increase in the property’s taxable value beyond the standard legislative cap. The case, Knier, Powers, Martin, & Smith, LLC v. City of Bay City, addressed both statutory and constitutional challenges to this interpretation, ultimately affirming the Michigan Tax Tribunal’s ruling that such improvements fall within the meaning of “additions” under both Michigan tax law and the state constitution.

Case Background

In 2021, Knier, Powers, Martin, & Smith, LLC (KPMS) undertook a $70,053 roof replacement project on their commercial office building in Bay City, Michigan. The project involved installing new shingles, a “60 MIL-EPDM” membrane, and replacing the underlying plywood.

Following this improvement, Bay City assessed an increase in the property’s taxable value for the 2022 tax year:

    • 2021 taxable value: $161,262
    • 2022 taxable value: $181,283
    • Increase: $20,021 (12.4152%)
    • Fair market value increase: from $382,400 to $444,600

Under Michigan law, increases in taxable value are generally limited to the lesser of 5% or the inflation rate during an owner’s period of ownership. However, Bay City determined that this “cap” didn’t apply because the increased value resulted from an “addition” to the property.

KPMS contested this assessment before the Bay City Board of Review, which affirmed the city’s position. KPMS then appealed to the Michigan Tax Tribunal, arguing two main points:

    1. The city had increased the taxable value beyond the cap in violation of both state law (MCL 211.27a(2)(a)) and the Michigan Constitution (Const 1963, art 9, § 3).
    2. The city had overstated the property’s cash value.

Before the Tribunal, KPMS moved for summary disposition, while Bay City requested summary disposition in its favor. The Tribunal granted partial summary disposition to Bay City, holding that the roof replacement qualified as “new construction” and therefore constituted an “addition” under Michigan law. While the Tribunal’s order left open the issue of the roof’s true cash value, KPMS appealed the legal determination about whether the improvement qualified as an “addition.”

The Court’s Analysis

The Court of Appeals addressed both statutory and constitutional arguments raised by KPMS, focusing primarily on whether a roof replacement qualifies as “new construction” under the relevant legal framework.

First, the court first addressed KPMS’s argument that the roof replacement did not constitute “new construction” under MCL 211.34d(1)(b)(iii). KPMS presented two main contentions:

  1. The term “property” in the statute refers only to real property, narrowly defined as land and buildings, not components like roofs.
  2. The roof replacement could not be “new construction” because a roof existed both before and after the project.

The court rejected both arguments. On the first point, it found that KPMS’s narrow interpretation conflicted with the General Property Tax Act’s (GPTA) definition of real property, which includes “all buildings and fixtures on the land, and all appurtenances to the land” (MCL 211.2(1)(a)). Moreover, the court noted that throughout the GPTA, the Legislature uses “real property” or “personal property” when intending to single out those categories, but uses the broader term “property” when incorporating both types.

On the second point, the court found that the Legislature intended to broadly define “new construction” for taxation purposes. This conclusion was supported by:

    • The statute’s narrow definition of “replacement construction” (limited to property replaced due to accident or act of God).
    • The specific carve-out for residential property repairs in MCL 211.27(2).
    • The fact that this residential carve-out would be meaningless if such repairs weren’t otherwise considered “new construction.”

KPMS also argued that even if the statute permitted the increased assessment, such an interpretation would conflict with the term “additions” in Article 9, § 3 of the Michigan Constitution. The court rejected this argument as well, relying heavily on the Michigan Supreme Court’s decision in WPW Acquisition Co v City of Troy.

The court explained that when Proposal A was ratified, “additions” was already a technical legal term with a specific meaning in property tax law. At that time, the term included “all increases in value caused by new construction or a physical addition of equipment or furnishings.” Because the current statutory definition of “new construction” tracks this historical meaning, the court found no constitutional conflict.

Importantly, the court distinguished this case from situations where the Legislature had impermissibly expanded the constitutional meaning of “additions.” For example, in WPW Acquisition Co, the Supreme Court had struck down a provision that treated increased occupancy rates as “additions” because such changes fell outside the technical meaning of the term when Proposal A was adopted.

Conclusion

By confirming that even basic building improvements like roof replacements constitute “additions” that can trigger increased tax assessments, the ruling clarifies a power that local tax assessors have long possessed but may not have consistently exercised. While the underlying legal framework isn’t new, the court’s explicit confirmation that such improvements qualify as “new construction” may embolden local authorities to more aggressively reassess commercial properties following renovations. Commercial property owners should therefore carefully consider the potential tax implications of planned improvements, recognizing that even necessary maintenance could trigger assessment increases beyond the standard caps imposed by Proposal A. If you have any questions, please contact Paul McCord or your Fraser Trebilcock attorney.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

Headshot of Fraser Trebilcock attorney Paul V. McCordFraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Uncapping of Commercial Real Estate Assessments

Most are aware that the taxable value assessment of a commercial property is uncapped on its sale, but it can also uncap in the event of certain other transfers which do not involve the sale of property and the recording of a deed.

By way of background, Michigan real property taxable value assessments are “capped” and can only increase year-to-year at the lesser of 5% or the rate of inflation. Section 211.27a(6) of the General Property Tax Act defines “transfer of ownership” generally as the conveyance of title to or a present interest in property, the value which is substantially equal to the value of the fee interest. Section 211.27a(6) provides a variety of examples of what constitutes a transfer of ownership for taxable value uncapping purposes.

Many are unaware that the sale or transfer of an ownership interest in an entity which owns real property is a transfer of ownership of the entity’s real estate for tax purposes if the ownership interest sold or transferred is more than 50% of the total ownership interest in the entity. In other words, if you sell or transfer more than half of the ownership interest in an entity owning real property, you have created a “transfer of ownership” of the entity’s real property for real estate tax purposes. This provision is applicable to stock in a corporation, membership interests in a limited liability company and percentage ownership in a partnership. Such a sale or transfer will result in the “uncapping” of the property tax assessment of all real property owned by the entity. By way of example, suppose John Doe owns a majority of the ownership interest in Universal Widget and transfers it as a gift to his son, Peter Doe. The transfer will result in the uncapping of the property tax assessment on all real property owned by Universal Widget. If the transfer occurs in increments over time, the lifting of the taxable value cap occurs at the point John Doe no longer owns the majority interest in Universal Widget.

When a majority ownership interest in an entity has been sold or transferred, a Real Estate Property Transfer Affidavit must be filed with the local assessor. Section 10 of the Affidavit states “Type of Transfer: Transfers include, but are not limited to, deeds, land contracts, transfers involving trusts or wills, certain long-term leases and business interest.” Failure to timely file the Affidavit permits the assessor to go back and increase prior tax assessments (after the transfer took place) to adjust the property tax assessment, possibly resulting in (i) an increased assessment resulting in increased property taxes, (ii) interest on the difference on the tax that was paid and the tax that should have been paid and (iii) penalties.

Any time you are contemplating a sale or transfer of an ownership interest in an entity which owns real estate you should consult with your attorney about the means and ramifications of your proposed transaction.

Fraser Trebilcock’s Real Estate team has a depth of experience in advising clients on all issues of property law, and they strive to have their clients’ interests protected. You can contact them at (517) 482-5800, or by filling out the contact form here.