State Tax Commission Bulletin No. 8 of 2002
DATE: July 17, 2002
TO: Assessors, Equalization Directors
FROM: State Tax Commission (STC)
RE: PUBLIC ACT (PA) 415 OF 2000 - BUILDINGS ON LEASED LAND AND CERTAIN
LEASEHOLD IMPROVEMENTS ASSESSED ON THE REAL PROPERTY ROLL STARTING IN ASSESSMENT
YEAR 2003.
Attached is a copy of PA 415 of 2000 which was signed by Governor Engler on
January 8, 2001 with an effective date of January 8, 2001. (The language of
the law that was added by PA 415 of 2000 is underlined on the attached copy
of the act.)
PA 415 of 2000 states that, STARTING IN ASSESSMENT YEAR 2003, buildings on
leased land and certain leasehold improvements shall be assessed on the real
property roll, NOT on the personal property roll.
This bulletin will address the implementation of PA 415 of 2000 under the following
5 headings:
- Buildings on Leased Land
- Tenant-Installed Leasehold Improvements and Structures Affected
by the Provisions of Michigan Compiled Law 211.8(h)
- Property Tax Classification of Buildings and Improvements on Leased
Land and Tenant-Installed Leasehold Improvements
- Buildings and Improvements on Leased Real Property Which are Located
in the City of Detroit AND Are Exempt as NEW PERSONAL PROPERTY Under the Provisions
of MCL 211.9f.
- Delinquent Taxes on Buildings on Leased Land and Tenant-Installed
Leasehold Improvements
A) Buildings on Leased Land (BLL) Assessed on the Real Property Roll
PA 415 of 2000 provides that, STARTING IN ASSESSMENT YEAR 2003, buildings located
on leased real property shall be assessed on the real property roll TO THE OWNER
OF THE BUILDINGS (EXCEPT for certain buildings located in the City of Detroit
and discussed in Paragraph D of this bulletin.)
PRIOR TO PA 415 OF 2000, buildings located on leased real
property were assessed on the PERSONAL PROPERTY ROLL (unless the owner of the
building was also obligated to pay the taxes on the land).
IMPORTANT NOTE: The provisions of PA 415 of 2000 DO NOT apply
to the IFT roll.
QUESTION #1: How will buildings on leased land be described on the
real property roll?
The STC recommends that the same legal description be used that is used to
describe the land on which the building is located EXCEPT that the description
should be preceded by the words "Building on Leased Land".
Therefore, if a building on leased land is located on Lot 1 of Assessor's
Plat #1, the description on the assessment roll should read as follows:
Building on Leased Land
Lot 1 of Assessor's Plat #1
This means that if there are several buildings owned by the same person,
but located on different parcels of leased land, each would have to be separately
described.
If there are several buildings on the same parcel of leased land owned by
different parties, it will be necessary to assess them separately and to expand
the description to include more precise information such as the address of
each separately assessed building.
QUESTION #2: To whom is the building on leased land assessed?
Buildings on leased land are still assessed to the owner(s) of the building,
NOT to the owner of the land. This same procedure was used when buildings
on leased land were assessed on the personal property roll. Starting in assessment
year 2003, there is no longer a provision in the law which provides for the
assessment of the land on which a BLL is located to the owner of the BLL.
QUESTION #3: Should improvements such as freestanding communication
towers, freestanding outdoor advertising signs and freestanding billboards be
treated the same as buildings on leased land?
Yes, freestanding communication towers, freestanding outdoor advertising
signs and freestanding billboards located on leased land shall be assessed
on the real property roll to the owner of the improvement, STARTING IN ASSESSMENT
YEAR 2003.
QUESTION #4: Should improvements to a mobile home (such as porches,
decks, etc.) located in a licensed park which is subject to the $3.00/month
fee be treated the same as buildings on leased land?
Yes, STARTING IN ASSESSMENT YEAR 2003, improvements to a mobile home located
in a licensed park, that are not exempt due to the $3.00/month specific tax,
shall be assessed on the real property roll to the owner of the improvements.
QUESTION #5: How are buildings on leased land valued for assessment
purposes?
Buildings on leased land (including structures and mobile home improvements
described in Question #4) continue to be valued using the
same procedures that are used for buildings which are owned by the landowners.
IMPORTANT NOTE: When a building on leased land is being
separately assessed to the owner of the building, the assessor is advised
to review the assessment on the land to assure that the building is not also
assessed with the land.
QUESTION #6: What parcel code should be assigned to buildings on leased
land assessed on the real property roll?
The STC recommends that the parcel code for a building on leased land should
be the same as the parcel code of the land on which the building is located
EXCEPT that the code should be followed by the initials BLL.
It will be necessary to include additional information with the parcel code
when there is more than one BLL under different ownership
on the same parcel of land. This can be accomplished by following the initials
BLL with numbers such as BLL1, BLL2,
etc.
While the STC recommends this procedure, it also recognizes that there are
various coding systems that may not be easily adapted to this recommendation.
Therefore, an alternative parcel coding may be used provided that it meets
ALL of the following requirements:
- The code is recognized as a real property code.
- The code is not exactly the same as the code for the land on which the
building is located and is not exactly the same as the parcel code for any
other building on leased land on this parcel.
- The code is recognized as being for a building on leased land located
in the same section or subdivision as the land on which it is located. This
can be accomplished by having a legal description as described in Question
#1 above.
- There is a recognizable connection between the building on leased land
and the parcel code for the land on which the building is located that associates
the building with the land. This can be accomplished by having the legal
description for the building reference the parcel code of the land on which
the building is located.
EXAMPLE: If the parcel code for Lot 1 of Assessor’s Plat #1 is
13-16-24-128-001, the building on leased land could be described as follows:
Building on Leased Land
Lot 1 of Assessor’s Plat #1
Parcel Code of Land: 13-16-24-128-001
NOTE: If there are several buildings on the same parcel
which are owned by the same person, they can all be included under one
parcel code.
Question #7: Will the STC continue to require that the capitalized
costs of buildings and other structures on leased land be reported on the personal
property statement?
Yes, the STC will continue to require that the capitalized costs of buildings
and other structures on leased land be reported on the personal property statement
because this is sometimes the way the assessor discovers the existence of
these buildings.
QUESTION #8: How does the change from assessing buildings on leased
land on the personal property roll to assessing them on the real property roll
affect NEW and LOSS for equalization purposes and ADDITIONS and LOSSES for capped
value and millage rollback purposes?
1) Equalization NEW and LOSS:
When a building or other structure on leased land is assessed in 2003 on
the real property roll, a change in classification has occurred (i.e., the
property changes from classification as personal property in 2002 to classification
as one of the 6 classifications on the real property roll in 2003.) This change
in classification is treated as an equalization LOSS from the personal property
classification and as equalization NEW to the real property classification
that it fits into.
2) Capped Value ADDITIONS and LOSSES
When a building or other structure on leased land is separately assessed
on the real property roll in 2003, it will typically be assessed to the same
person that it was assessed to in 2002 on the personal property roll. That
being the case, the capped value calculation for the building on leased land
will be unaffected by the change. This means that the change from being assessed
on the personal property roll to being assessed on the real property roll
will NOT result in any capped value ADDITIONS or LOSSES. This answer assumes
that there are not also structural changes to the building in 2002 such as
adding or removing a garage. A structural change would typically result in
capped value ADDITIONS or LOSSES.
3) “Headlee” (MCL 211.34d) and “Truth in Taxation”
(MCL 211.24e) Millage Rollback Additions and Losses
When a building on leased land is assessed in 2003 on the real property roll,
a change in classification has occurred (i.e., the property changes from classification
as personal property in 2002 to classification as one of the 6 classifications
of real property roll in 2003.) Changes in classification ARE NOT “Headlee”
or “Truth in Taxation” ADDITIONS and LOSSES. This answer assumes
that there are not also structural changes to the building in 2002.
B. Leasehold Improvements (LHI) and Structures Affected by the Provisions
of MCL 211.8(h)
PRIOR TO PA 415 OF 2000, MCL 211.8(h) provided that certain
tenant-installed leasehold improvements were assessable to the tenant
on the PERSONAL PROPERTY ASSESSMENT ROLL.
STARTING WITH 2003 ASSESSMENTS, PA 415 of 2000 provides that
the leasehold improvements and structures assessable under MCL 211.8h are assessable
TO THE OWNER on the REAL PROPERTY ASSESSMENT ROLL (EXCEPT for
certain improvements located in the City of Detroit and discussed in Paragraph
D of this bulletin.)
Question #9: Describe the tenant-installed leasehold improvements of
a real property nature that are assessable under MCL 211.8(h).
It has become commonplace in the rental of various types of real estate
for a tenant to lease unfinished (shell) space and then pay to finish that
space to meet his or her requirements with his or her personal funds. Usually,
leases state that these tenant-installed leasehold improvements become the
property of the landlord upon installation. These are the tenant-installed
leasehold improvements that are assessable under MCL 211.8(h), provided they
are not already included in the assessment of the real property. These improvements
are real in nature. The following are examples: floors, floor finish, walls,
permanent wall finish, permanently-installed storefronts, normal building
mechanical systems (heating and cooling, plumbing, ventilation), etc.
Trade fixtures are articles installed by a tenant that
are needed for the tenant’s business and can be removed by the tenant
at the end of the lease. The following are examples of trade fixtures: 1)
a ceiling light that is custom made and identifies the business, 2) removable
wall coverings, 3) many costs incurred by a tenant related to telephone and
security systems, 4) most signs.
Tenant-installed leasehold improvements of a real property nature generally
DO NOT include attached personal property such as certain telephone systems,
signs, certain security equipment and other trade fixtures, all of which can
be removed and taken by the tenant when the tenant vacates the premises. The
reporting and assessment of trade fixtures should be separated from the reporting
and assessment of LHI. Trade fixtures continue to be reported as personal
property and will typically be valued using the appropriate original cost
multipliers from Tables A through F.
NOTE: Assessable Leasehold Improvements DO NOT include
machine foundations and electrical drops from the main electrical line (or
bus duct) down to a machine. These items should be reported along with the
piece of machinery they serve.
IMPORTANT NOTE: In the past, when a property was subject
to a long term market lease made prior to 1984, tenant-installed leasehold
improvements could not be assessed to the owner of the real estate. They could
only be assessed to the tenant on the personal property roll. Starting
in 2003, PA 415 of 2000 requires that tenant-installed leasehold
improvements of a real property nature be assessed to the owner of the leasehold
improvements, even if the property is subject to a long term market lease
made prior to 1984.
Question #10: Who is the owner of tenant-installed leasehold improvements
of a real property nature?
Typically, tenant-installed leasehold improvements of a real property nature
become the property of the landlord upon installation. This means that, STARTING
IN 2003, these tenant-installed leasehold improvements of a real property
nature are typically assessable to the landlord as part of the real property
assessment.
QUESTION #11: How will leasehold improvements (LHI) assessable under
MCL 211.8(h) be described on the assessment roll?
There are two answers to this question depending on whether the LHI are owned
by the landlord or the tenant.
1) Tenant-Installed Leasehold Improvements (LHI) of a Real Property
Nature Which Become the Property of the Landlord Upon Installation.
As discussed earlier in Question #10, tenant-installed leasehold improvements
of a real property nature typically become the property of the landlord upon
installation. The tenant will report these LHI in a separate section of the
personal property statement.
Since the landlord will already have a real property assessment, the additional
assessment for tenant-installed LHI of a real property nature should be added
to the landlord’s existing real property assessment. No separate description
on the real property assessment roll will be needed. However, the STC recommends
that the assessor keep separate subsidiary records for the LHI of each tenant
to assist in the valuation of these LHI and to assure that they are handled
properly in the income approach to value.
2) Tenant-Installed Leasehold Improvements (LHI) Which Remain the Property
of the Tenant
While tenant-installed leasehold improvements (LHI) of a real property nature
typically become the property of the landlord upon installation, occasionally
they may remain the property of the tenant. When this occurs, the tenant will
indicate that this is the case by checking a box in Section M of the personal
property statement.
Since the tenant does not already have a real property assessment on this
land parcel, it is necessary that a description be created.
The STC recommends that the same legal description be used that is used
to describe the land on which the leasehold improvements are located EXCEPT
that the description should be preceded by the words “Leasehold
Improvements on Real Property”. Usually, the name of the owner
of the LHI will indicate which property is being assessed. However, there
may be instances where the business name of the tenant needs to be included
such as when one company operates several different shoe stores in the same
shopping center.
Therefore, if leasehold improvements assessable under MCL 211.8(h) are located
on Lot 1 of Assessor’s Plat #1, the description on the assessment roll
should read as follows:
Leasehold Improvements on Real Property
Lot 1 of Assessor’s Plat #1
This means that if there are multiple leasehold improvements installed by
the same person but located on different parcels of land, each would have
to be separately described. The same is true for multiple leasehold improvements
under separate ownership that are located on the same real parcel (for example,
an incubator development).
QUESTION #12: What parcel code should be assigned to tenant-installed
leasehold improvements assessed to the tenant on the real property roll?
The STC recommends that the parcel code for tenant-installed leasehold improvements
should be the same as the parcel code of the land on which the leasehold improvements
are located EXCEPT that the code should be followed by the initials LHI.
It will be necessary to include additional information with the parcel code
when there is more than one assessment for LHI on the same
parcel of land. This can be accomplished by following the initials LHI
with numbers such as LHI1, LHI2, etc.
While the STC recommends this procedure, it also recognizes that there are
various coding systems that may not be easily adapted to this recommendation.
Therefore, an alternative parcel coding maybe used provided that it meets
ALL of the following requirements:
1) The code is recognized as a real property code.
2) The code is not exactly the same as the code for the land on which the
leasehold improvements are located or for other LHI under separate ownership
on the same real property parcel.
3) The code is recognized as being for leasehold improvements located in the
same section or subdivision as the land on which they are located. This can
be accomplished by having a legal description as described in Question
#11 above.
4) There is a recognizable connection between the leasehold improvements and
the parcel code for the land on which they are located that associates the
leasehold improvements with the land. This can be accomplished by having the
legal description for the leasehold improvements reference the parcel code
of the land on which they are located.
EXAMPLE: If the parcel code for Lot 1 of Assessor’s Plat #1 is 13-16-24-128-001,
the leasehold improvements could be described as follows:
Leasehold Improvements
Lot 1 of Assessor’s Plat #1
Parcel Code of Land: 13-16-24-128-001
QUESTION #13: How are tenant-installed leasehold improvements (assessable
under MCL 211.8(h)) valued for assessment purposes?
Michigan Compiled Law (MCL) 211.8(h) specifically cautions the assessor not
to add a separate value for LHI if the value of the LHI is already included
in the assessment of the real property (in other words AVOID DOUBLE ASSESSING).
Caution: The assessor must exercise great caution when assessing
the value of leasehold improvements of a real property nature to the landlord
on the REAL PROPERTY roll. This is true because, if the assessor is using
the cost schedules contained in Volume II of the Assessor’s Manual to
appraise the building, the REAL PROPERTY assessment will frequently already
include these same items. This could result in double taxation.
EXAMPLE: When pricing a store using the Calculator Section of Volume II of
the Assessor’s Manual, the assessor is including the value of a certain
amount of floor finish and wall finish etc., with the REAL PROPERTY assessment
on the building. If the assessor is also including these items as an addition
(for LHI) to the real property assessment of the landlord, DOUBLE ASSESSING
will occur which is illegal.
Tenant-installed leasehold improvements assessable under MCL 211.8(h) are
still appraised using Table A of the STC personal property multiplier tables
found on page A-2 of STC Bulletin 12 of 1999. This table typically results
in valid indicators of true cash value for tenant-installed leasehold improvements
of a real property nature.
Question #14: Will the STC continue to require that tenant-installed
leasehold improvements be reported on the personal property statement?
Yes, the STC will continue to require that tenant-installed leasehold improvements
be reported on the personal property statement because this is frequently
the way the assessor discovers the existence of these improvements.
QUESTION #15: How does the change from assessing tenant-installed
leasehold improvements of a real property nature on the personal property roll
to assessing them on the real property roll affect NEW and LOSS for equalization
purposes and ADDITIONS and LOSSES for capped value and millage rollback purposes?
1) Equalization NEW and LOSS
When tenant-installed leasehold improvements of a real property nature are
assessed in 2003 on the real property roll, a change in classification has
occurred (i.e., the property changes from classification as personal property
in 2002 to classification as one of the 6 classifications on the real property
roll in 2003.) This change in classification is treated as an equalization
LOSS from the personal property classification and as equalization NEW to
the real property classification that it fits into. However, since equalization
NEW and LOSS is typically calculated for personal property by comparing last
year’s assessment for individual properties to this year’s assessment
and treating the total difference as either NEW or LOSS, the loss of assessed
value for LHI may be offset by new acquisitions in the most recent year or
personal property moved in from another location.
2) Capped value ADDITIONS and LOSSES
There are 2 separate scenarios involving tenant-installed leasehold improvements
(LHI) of a real property nature. The first is when the LHI become the property
of the landlord upon installation. The second is when the
LHI remain the property of the tenant.
Scenario #1: When the LHI become the property of the landlord
upon installation, they are an ADDITION in the capped value formula because
they represent new property never before assessed to the landlord (and now
assessed along with other real property already assessed to the landlord in
the prior year.) The amount of the ADDITION is the same amount as would have
been assessed to the tenant if it were not for the change caused by PA 415
of 2000. However, the LHI would generally not be treated as capped value LOSSES
to the personal property assessment of the tenant because it is not ordinarily
necessary to calculate capped value for personal property. This is true because
the state equalized value of personal property is typically lower than the
capped value of the property. (Please see pages 4 and 5 of STC Bulletin 1
of 2000 for exceptions to this rule for personal property that increases in
value from year to year.)
Scenario #2: When the LHI remain the property of the tenant
upon installation, they will typically be separately assessed to the tenant
as real property in 2003. This is true because usually the tenant does not
own any other real property at this location. Since these tenant-installed
LHI are usually valued using Table A of the STC personal property multiplier
tables, they will be expected to go down in value from year to year. That
being the case, it will usually not be necessary to calculate capped value
for these LHI assessed on the real property roll because the state equalized
value will be lower than the capped value. For the same reason, it will typically
not be necessary to calculate capped value for the personal property still
assessed to the tenant on the personal property assessment roll.
3) “Headlee” (MCL 211.34d and “Truth in Taxation”
(MCL 211.24e) Millage Rollback ADDITIONS and LOSSES
When tenant-installed leasehold improvements of a real property nature are
assessed in 2003 on the real property roll, a change in classification has
occurred (i.e., the property changes from classification as personal property
in 2002 to classification as one of the 6 classifications of real property
in 2003.) Since changes in classification ARE NOT “Headlee” or
“Truth in Taxation” ADDITIONS and LOSSES, the increase on the
real property roll would not be ADDITIONS. (This answer assumes that there
are not also structural changes to the property in 2002.) The procedure for
the calculation of the “Headlee” Millage Reduction Fraction for
most personal property states that all changes in taxable value are to be
treated as either ADDITIONS or LOSSES. (This procedure does not apply to buildings
on leased land.) However, there is an exception to this procedure
for assessment year 2003.
For assessment year 2003 only, the assessor is advised that
the taxable value of leasehold improvements removed from the personal property
roll and transferred to the real property roll shall not be treated as LOSSES
in the “Headlee” and “Truth in Taxation” calculations.
In order to implement this exception, the assessor shall use the following
procedure:
1) Determine the “Headlee” and “Truth in Taxation”
taxable value totals for personal property by using the regular procedure
which states that all changes in taxable value on the personal property roll
are either ADDITIONS or LOSSES.
2) Calculate the 2002 taxable values for the LHI that will
be transferred to the real property roll in 2003.
3) Total the amount of the 2002 taxable values calculated
in step 2.
4) Deduct the amount in step 3 from the taxable values of LOSSES for the taxing
jurisdiction.
C. Property Tax Classification of Buildings and Improvements on Leased
Land and Tenant-Installed Leasehold Improvements Assessed on the Real Property
Roll
STARTING IN ASSESSMENT YEAR 2003, PA 415 of 2000 provides that buildings on
leased land (EXCEPT for certain buildings located in the City of Detroit) shall
be classified the same as the land upon which the buildings are located. (Please
see Paragraph D of this bulletin regarding certain buildings located in the
City of Detroit.)
The requirement to classify a building on leased land the same as the land
upon which the building is located applies only to BUILDINGS. It DOES NOT apply
to other improvements such as freestanding communication towers, freestanding
outdoor advertising signs and freestanding billboards, and tenant-installed
leasehold improvements. These items are classified according to the previously
existing law dealing with classification contained in section 34c of the General
Property Tax Act (MCL 211.34c). For example, freestanding communication towers,
freestanding outdoor advertising signs, and freestanding billboards would generally
be classified as commercial real property starting in 2003.
Occasionally, a building on leased land may be located on land that is exempt.
An example would be a house built on land-owned by the State of Michigan. In
this situation, the STC recommends that the building on leased land be classified
based on the most probable use of the building (in this case residential) since
the exempt land is not classified.
IMPORTANT NOTE: If a building on leased land which is used
for industrial purposes is located on land classified agricultural, the law
requires that the building shall be classified agricultural (because the land
is classified agricultural). However, this does not mean that the building will
receive the Qualified Agricultural Property Exemption from the 18 mills of local
school operating tax. This is true because MCL 211.7dd(e) states that property
used for commercial or industrial purposes does not qualify for the exemption
even though it is classified agricultural. Please see pages 3 and 4 of STC Bulletin
4 of 1997.
D. Buildings and Improvements on Leased Real Property Which Are Located
in the City of Detroit AND are Exempt as NEW PERSONAL PROPERTY Under the Provisions
of MCL 211.9f.
PA 415 of 2000 makes special provisions for certain buildings and improvements
exempt under section 9f. These special provisions only apply to certain
property located in the City of Detroit. Because they only apply to the City
of Detroit, these special provisions will not be covered in this bulletin. Anyone
requiring information about these special provisions may call Ms. Dianne Wright,
Manager of the Exemption Programs Section at (517) 373-2408.
E. Delinquent Taxes on Buildings on Leased Land and Tenant-Installed
Leasehold Improvements
Attached to this bulletin is a copy of Public Act (PA) 479 of 2002 which was
signed by Governor Engler on June 27, 2002 with an effective date of June 27,
2002.
Public Act 479 of 2002 provides that, starting with 2003 taxes, delinquent
taxes on buildings on leased land and on separately assessed tenant-installed
leasehold improvements of a real property nature shall be collected in the same
manner as unpaid taxes levied on personal property. The State Tax Commission
does not consider this to apply to most tenant-installed leasehold improvements
of a real property nature that become the property of the landlord upon installation
because they would typically be assessed to the landlord along with other real
property including the land. In this latter case, delinquent taxes should be
collected in the same manner as unpaid taxes on real property.
Please see the underlined language of PA 479 of 2002 for more information about
delinquent taxes.
