Down Market is the Time to Challenge Michigan Real Estate Tax Assessments

You may hear the term “Proposal A” thrown around when people discuss Michigan property taxes.  Proposal A was a referendum passed by the people of Michigan in 1994 which amended the State Constitution in a variety of ways related to the funding of public schools.  As relates to the administration of real property taxes, Proposal A created what we now commonly refer to as “capped value”.  Capped value is the concept which makes the recent downturn in the real estate market an ideal time to appeal the assessed value of your real estate with the Michigan Tax Tribunal. 

Due to the changes in the law created by Proposal A, Michigan real estate values are “capped” for property tax purposes until the property is sold, or otherwise transferred.  Unless there is a change of ownership, the Taxable Value of Michigan real estate cannot increase in any year by more than the lesser of (1) inflation, as measured by the Consumer Price Index or (2) 5%.  In the simplest terms, this means that your property’s Taxable Value can be adjusted downward to match a rapid decline in property values but it cannot be adjusted upward to match a rapid increase in property values.  That is why the recent downturn in the Michigan real estate market makes it a perfect time to appeal the assessed value of your real estate—these low Taxable Values can be locked in for as long as you own the property. 

For example, assume a factory is purchased in 2011 for $500,000 (the same analysis applies to commercial and residential real estate) and the local Assessor agrees that the property is worth $500,000.  The Taxable Value in the year after the purchase is equal to 50% of the True Cash Value, or in this example, $250,000.  If the millage rate for the municipality in which the factory is located is 60 mills (or $60 per $1,000 of Taxable Value), then the 2012 property taxes on that factory will be $15,000.  Assume further that the real estate market makes a comeback and the value of the factory increases by 6% per year for the next 5 years, while inflation is at a modest 2% per year for that same 5 year period.  The taxes on that factory (assuming a constant millage rate) will only increase by 2% per year for that 5 year period, instead of the 6% by which the value of the factory increased.

The Michigan real property taxes on the factory in the example above are as follows:

2012    -           $          15,000

2013    -                       15,300

2014    -                       15,606

2015    -                       15,918

2016    -                       16,236

Total                 $          78,060

Now, assume the same factory is purchased in 2011, in the same municipality, but the local Assessor says that the property is really worth 20% more than the purchase price, or $600,000.  In this example, the Taxable Value in 2012 is $300,000 (50% of the True Cash Value).  The taxes on this factory, using the same assumptions as in the first example, are as follows:

2012    -           $          18,000

2013    -                       18,360

2014    -                       18,727

2015    -                       19,102

2016    -                       19,484

Total                 $          93,673

Because of the “capping” concept created by Proposal A, the difference between getting the factory assessed at its true value in the first year (the first example), and allowing the Assessor’s numbers to go unchallenged (the second example), is a savings of nearly $16,000 over 5 years; those savings will continue to grow for as long as the property is owned by the same party (unless Proposal A is changed via a vote of the people of Michigan). 

While we cannot guarantee that any given property will have a $3,000 savings in the first year (as in the examples above), we have been successful in obtaining first year tax savings of more than $10,000 on commercial property, which equates to a 5 year savings in excess of $52,000 for the property owner (using the assumptions from the examples). 

Michigan property tax assessment notices are mailed to property owners in February.  If you feel the assessment on your property is greater than 50% of the true value of the property, we can sit down with you and discuss the process for appealing the assessment and do some hypothetical calculations to show the potential savings which an appeal may yield.  Keep in mind that there are very strict deadlines for appealing an assessment so the sooner you decide whether to proceed with an appeal, the better.

Penzien & McBride, PLLC is a Michigan law firm serving Michigan businesses and individuals primarily in Macomb, St. Clair and Oakland Counties, near Detroit.

Estate Planning Myth v. Fact

We hear a lot of misinformation while assisting families with estate planning and probate proceedings.  Unfortunately, it is often the case that important decisions are made based on this misinformation.   Below are just a few of the many estate planning myths we hear on a regular basis:

Myth #1:  A Large portion of my estate will go to the government in the form of Estate Taxes

This statement is true for a very small percentage of Americans.  The reality, under current tax law, is that only those who die with a net worth in excess of $5 million ($10 million for a married couple) will owe Federal Estate Tax upon death.  As very few people in today’s world are worth $5 million, very few people should go out of their way to structure their estate plan to avoid this tax.

Myth #2: I have a Will so my estate will avoid probate

This statement is blatantly untrue.  All property titled in the name of a deceased individual will have to be probated.  A Will does not avoid probate.  A Will merely directs your Personal Representative (the person many call an “Executor”) in dealing with your property in probate.  There are methods to eliminate the need for probate but a Will, by itself, does not accomplish this goal.

Myth #3: If I am incapacitated my spouse can make end of life decisions for me

A good Estate Plan should address more than just post-death matters.  Many people will find themselves in situations, whether temporary or permanent, which render them incapable of making financial or medical decisions for themselves.  These situations can be addressed through various Estate Planning tools.  One such tool is called a Patient Advocate Designation, sometimes called a Medical Power of Attorney.

In Michigan, a traditional Medical Directive, giving health care professionals specific instructions on how they should act under certain circumstances, has no legal effect.  What we have, in lieu of these directives, is the Patient Advocate Designation.  This document allows you to name a loved one or friend who is authorized to make medical decisions on your behalf if you are incapable of making those decisions for yourself.  Contrary to common belief, a married person’s spouse is not automatically authorized to make these decisions.  Without a Patient Advocate Designation, specifically authorizing the spouse to make these decisions, a guardian must be appointed by a judge.  This guardian will likely be the spouse of a married person but the spouse, unless named in a Patient Advocate Designation, has no authority until a judge gives him or her that authority.

There are certainly many other myths surrounding the estate planning and probate process.  These are only a few select pieces of false information we encounter on a regular basis.  Other myths will be addressed in future articles.

Penzien & McBride, PLLC is a Michigan law firm serving Michigan businesses and individuals primarily in Macomb, St. Clair and Oakland Counties, near Detroit.

Short Sale Basics

The term “short sale” has become a household term in the post real estate bubble market.  But what exactly is a short sale, and why would a property owner or a bank want to do a short sale?

A short sale is simply a sale of real estate with a sales price of less than the outstanding balance on the mortgage loan.  The problem, of course, is that the bank holding the mortgage will generally not allow a sale to take place if the bank is not going to receive full payment for its loan.  This makes a short sale seem quite impossible, yet they are happening on a regular basis in today’s economy.  This is because the banks do not want to foreclose on bad mortgages, as explained in more detail below.

As a property owner with an upside-down property (which merely means that the mortgage balance is greater than the value of the property), you may be tempted to just walk away from an unwanted home or business property and let the bank take it in foreclosure.  The problem with this strategy is that, in some jurisdictions, foreclosure does not prevent the bank from suing the borrower to recover the deficiency (the difference between what you owe and what your property is worth).  Foreclosure could also destroy the property owner’s credit rating.  So, the motivation for the property owner to enter into a short sale transaction might be to negotiate a contractual elimination of the mortgage loan deficiency, or it might be that the owner wants to preserve his or her credit rating.  Often it is both.

The banks have a great deal of motivation to agree to a short sale, as well.  It costs the bank a lot of money and time to foreclose on real estate.  After a foreclosure, the bank is left with an illiquid asset, the real estate, which it does not want.  The bank wants cash, and in order to convert the real estate into cash, it will cost the bank even more money and even more time to sell the foreclosed property.  Banks hate repossessed properties (or REO properties) and usually end up selling them at a discounted price to get rid of them.  The banks would often rather have you sell the property for them, at a reasonable price, than to spend all the time, money and effort to foreclose on property they do not want to own.  This is true even when the bank stands to lose money on its loan.

The three main goals when considering a short sale transaction, whether it is your home or a business property, should be: (1) a contractual elimination of the bank’s right to sue for the deficiency; (2) minimization of the tax consequences of walking away from debt (yes, having the bank forgive debt can be taxable income, and the banks will report it to the IRS); and (3) minimizing the negative impact of the transaction on your credit rating.

Penzien & McBride, PLLC is a Michigan law firm serving Michigan businesses and individuals primarily in Macomb, St. Clair and Oakland Counties, near Detroit.

FINRA Investor Alert -- Non-Traded REIT Investments

FINRA has issued an investor alert regarding the issues associated with non-traded REIT investments.  REITs are real estate investment trusts that pool investors money to purchase, manage or invest in income producing real estate such as office buildings, apartments or shopping centers.  

FINRA makes the point that non-traded REITs are often very complex investments that can lead to problems for investors such as high fees and liquidity problems.  

As always, an investor should review all available information before deciding to move forward with any particular investment.  Non-traded REITs should be carefully examined to ensure that they satisfy the investors goals and objectives.  Any investor considering such an investment should review FINRA's guidance before moving forward.

FINRA Fines Citigroup $500,000 for Failing to Supervise Sales Assistant Who Misappropriated Customer Funds

Below is the content of a news release issued by FINRA regarding regaulatory action taken against Citigroup:

WASHINGTON – The Financial Industry Regulatory Authority (FINRA) announced today that it has fined Citigroup Global Markets, Inc. $500,000 for failing to supervise Tamara Moon, a former registered sales assistant at the firm's branch office in Palo Alto, California. Over an 8 year period, Moon misappropriated $749,978 from 22 customers, falsified account records and engaged in unauthorized trades in customer accounts.  

Moon took advantage of Citigroup's supervisory lapses at the branch and targeted elderly, ill or otherwise vulnerable customers whom she believed were unable to monitor their accounts. Moon's victims included elderly widows, a senior with Parkinson's disease and her own father. FINRA previously barred Moon for her actions and is continuing to investiga te other individuals involved in the supervision of Moon.

FINRA found that Citigroup failed to detect or investigate a series of "red flags" that upon further inquiry should have alerted the firm to Moon's improper use of customer funds. The red flags included exception reports highlighting conflicting information in new account applications and customer account records reflecting suspicious transfers of funds between unrelated accounts. Citigroup also failed to implement reasonable systems and controls regarding the supervisory review of customer accounts, thus enabling Moon to falsify new account applications and other records.

Brad Bennett, Executive Vice President and Chief of Enforcement said, "Tamara Moon used her knowledge of Citigroup's lax supervisory practices at the branch to take advantage of some of the firm's most vulnerable customers, including the elderly. Citigroup had reason to know what she was doing and could have stopped her."

In one incident, Moon misappropriated nearly $80,000 from an elderly widow's account. An exception report highlighted two address discrepancies in the customer's account documents where the street address did not correspond to the city and zip code provided for the address and the telephone prefix did not match the zip code of the address. Moon, who had entered the account information, attempted to explain to Citigroup that the discrepancies arose because the client had moved to Arizona, an explanation that did not seem reasonable. Nonetheless, Citigroup accepted Moon's explanation without further inquiry, thus enabling Moon to continue her misappropriation of customer funds.

Citigroup also failed to detect suspicious activity involving transfers and disbursements in the accounts Moon used to misappropriate customer funds.  

In another instance, Moon created an account in the name of a deceased customer even after Citigroup had been notified that the customer was deceased. Moon then created a fraudulent account in the name of the deceased customer's widow. Moon transferred $10,440 from the deceased customer's fraudulent account to the widow's fraudulent account. A few weeks later, Moon had checks issued for $5,000 and $2,500 from the fraudulent account set up in the widow's name to Moon's personal bank account.

In a separate incident, Moon transferred $150,000 from an account held by a customer to a fraudulent account Moon created in her father's name. Two days later, Moon transferred $90,000 from the fraudulent account in her father's name to an account Moon controlled. Citigroup's review of customer account records was deficient and prevented the firm from detecting red flags concerning Moon's misconduct.

In concluding these settlements, the firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

FINRA's investigation was conducted by Jessica Hopper, Anthony Trambley and Sandra Del Buono.