Tax Detectives

Falling property values and rising tax appeals are a boon for lawyers and accountants, but they’re causing major headaches for businesses and communities across metro Detroit.
Illustration by Joseph Daniel Fiedler

Nino Licari is a popular figure these days. Like many city assessors in metro Detroit and elsewhere, Licari’s office is being overrun by tax reps — a collection of lawyers, accountants, and tax advisers who are seeking property tax reductions for their clients.

As Troy’s assessor for 31 years, Licari has been through the drill a thousand times before. But this time, things are different. “It’s a huge business right now,” he says. “When the market goes down, there’s a greater chance for these guys to make some money. When the market is skyrocketing, it’s a lot harder to get an assessment reduction and, subsequently, save their clients some money. When the market goes down, these guys come popping up out of the woodwork.”

In August, the Southeast Michigan Council of Governments (SEMCOG) reported property values in the region fell by $16 billion. The overall taxable value in Wayne, Oakland, Macomb, Washtenaw, Monroe, Livingston, and St. Clair counties was $149.6 billion, a 10-percent decline from the $166 billion recorded in 2009. The previous year saw a 3.5-percent drop in taxable values — the first such decline in history.

“In my 35 years of practicing real estate, this is the most dynamic drop in residential, commercial, and industrial property valuations that southeastern Michigan has ever experienced,” says Mark McGowan, a partner at Plunkett Cooney, a large law firm in Bloomfield Hills. “Our practice has grown as a direct result of this.”

However, the trend has put many communities in a bind. As appeals pour in for property tax relief, municipalities already strapped for cash due to falling tax receipts must marshal their limited resources to defend the current values. Escalating the number of appeal filings is the growing legion of tax reps, who take a percentage of any reductions in tax bills they find for their clients.

Smaller communities, which don’t have the internal capacity to handle the entire tax appeal process, are being hit especially hard. Last July, for example, Orion Township authorized spending up to $50,000 to hire a special appraiser to combat appeals involving more than $60 million worth of properties.

“A lot of times tax reps will just sign up a bunch of people, appeal taxes for all of them, and then they will start sorting through the (financial) data to see if they have a case,” Licari notes.

Such broad-brush tactics are a sharp contrast to the methods employed by tax detectives like Tim Miscovich, managing partner of Hospitality Asset Advisors in Clarkston, with clients that include national hotel chains, country clubs, golf resorts, and office centers.
In a suit and tie, spectacles on his nose, and a briefcase full of documents, Miscovich looks like the accountant that he is — someone who would seemingly relish nothing more than spending hours on end wading through file after file of tedious financial records.

But his professional appearance can be deceiving. Miscovich prides himself on getting out in the field and tromping around properties to gauge their physical characteristics. He also talks to employees and neighboring property owners to learn all he can about a particular operation. His mission? Look for unaccounted situations that affect property tax values.

Miscovich’s field trips have paid off for his clients in millions of dollars in tax reductions that could not have been found sifting through financial records or property appraisals.

Take, for instance, the case of two northern Michigan golf clubs where Miscovich got substantial tax relief for the owners. In one situation, a club had 325 acres that the assessor had classified as commercial and developable land. By walking the property, Miscovich noted that 120 acres of the property was protected wetlands that had no potential use and should not have been included as developable in the assessor’s calculations.

At a second golf club, Miscovich surmised during a walkabout that the course had a lot fewer paved cart paths than the assessor had cited in calculating the improvement value he assigned. The course had 2.8 miles of paved paths — not the 17 miles listed by the assessor. That discrepancy meant a sizable reduction on the tax bill.

“Unless you physically go out there, put your boots on, and walk around and look at things, you won’t find those reductions,” Miscovich says. In his nearly two decades in what once was a specialized field, assessors and his clients have come to appreciate his approach.

“A lot of times (tax reps) are shooting from the hip to see where things are going to fly,” says Independence Township Assessor Beverly Shaver, “whereas Miscovich has already [done] his homework, and we have a base to start talking from when he gets in here. It’s not just friendly chitchat and feeling each other out to see where we go with this.”

Larry Burnell, CFO of White Lodging Services Corp. in Merrillville, Ind., which owns nine hotels in Michigan, including the Auburn Hills Marriott Pontiac at Centerpoint (White Lodging operates 50 hotel chains in 22 states), says Miscovich is a valued consultant. “It’s a specialized business in terms of understanding and evaluating the appropriateness of real estate and property tax assessments, and because of that you have to have a tremendous attention to detail,” he says.

Burnell notes Miscovich has a unique talent for adapting to his surroundings. “What makes his job very difficult is that some localities have different applications of different rules, so there is a lot of stuff he has to navigate to get to the right answer.”

Miscovich says the nature of his business has changed as the number of tax abatement specialists has mushroomed around the country. Twenty years ago, there were a half-dozen companies doing tax abatements, he says. “Then everyone saw that it was a business where you could hang your shingle out at low costs — no license, no anything — and make some money. In the state of Texas alone, there are over 3,500 incentive firms that do what we do. It’s like the largest tax consulting haven in the country.”

Because Michigan capped real property taxes in 1994, under Proposal A, the state hasn’t experienced wild upward swings in values.

“We’ve had years when we get 3, 5, 10 percent appreciation of annual value, but other states like Florida, Texas, and California, they had periods of five, six, or seven years where the properties appreciated 30, 40, and 50 percent (annually). A condo that was worth $300,000 one year was valued at $500,000 three to five years down the road.”

Now, as Michigan is experiencing declining values, property owners are perplexed.

Norm Shinkle, a sole practitioner in Williamston, near Lansing, and chief judge of the Michigan Tax Tribunal from 1991 to 1998, says the drop in real property values in recent years, combined with changes to the Tribunal under the Granholm administration, have made it more difficult — and costly — to pursue an appeal.

“When I started as chief judge of the Tribunal, (former) Gov. (John) Engler said to me: ‘Justice delayed is justice denied,’ ” he says. “In recent years, it has taken two to three years to complete an appeal at the Tribunal. No one should wait more than 18 months to get through the Tribunal. You have to remember all the while you’re fighting the state, you’re paying taxes at the higher assessment.”

What especially irks Shinkle are the changes Gov. Granholm made that served to drive up costs. “You now have to bring your own court reporter to the Tribunal, which is something that never happened before,” he says. “For small-claims cases, we used contract referees, and that was very efficient. But Gov. Granholm assigned administrative law judges, which was a lot more expensive. They have since gone back to the referees. It was too costly.”

On a related front, in December 2009 the state filed motions to change the property classification of more than 10,000 industrial facilities across Michigan to commercial — a measure that would serve to raise taxes on job providers, Shinkle says.
The move affected a large production facility he represents in Webberville, as the company operated a small retail center in front of the plant.

“This was an attempted money grab on behalf of the state, and we’re fighting it,” Shinkle says. “A commercial classification would serve to raise taxes if the state got its way. The problem here is that the state can attempt to change the classification and doesn’t have to pay any fees. They can do it all day long. They leave it up to the property owners to fight it.”

Lynn A. Gandhi, a partner at Honigman Miller in Detroit, says she and several of her colleagues work on property assessments and reclassifications, mostly as they relate to industrial real estate. “When times get tough, people are looking to minimize their costs and spend their dollars where they get the best return,” Gandhi says. “The difficulty with the state is when they contest the valuation or classification of a piece of property, it’s a matter of being guilty until you prove yourself innocent.”

Like commercial property owners, residential property owners in Michigan are best served if they can reach an agreement on reductions with assessors at the local level to avoid taking cases to the Michigan Tax Tribunal, Miscovich says. “Michigan has a very long appeal cycle. There are (some) 25,000 outstanding appeals now. In 2008, it was 22,999. So it’s just a horrendous number, and the sheer volume of appeals drags out the process.”

One particularly thorny case Miscovich was able to settle without going to the Tax Tribunal involved a sprawling apartment complex in a western metro Detroit suburb. The local assessor was suspicious of how little profits were being generated at the complex, given the community charged a tangible tax of 7 percent against earnings.

The first error Miscovich uncovered was a simple one: The assessor’s count of the number of apartments was over by 150 units.

The other major error he discovered came from talking with the maintenance staff. As it turned out, renovating apartments between tenants was not the usual inexpensive cosmetic job of repainting the walls and ceilings.

“The apartments had lead-based paint, and when a tenant moved out they had to get an environmental company to come in with hazmat suits and strip the paint, and then repaint the apartments,” Miscovich notes. “Instead of spending $200 to paint the units, they were spending $5,000 to mitigate the lead-based paint. It was detracting from their income.”

In addition, the prior owners of the complex had deferred needed maintenance. When a water heater went bad in one apartment, rather than replace it, they extended the water pipes to a neighboring water heater. “They would have three apartments hooked to one water heater, which caused their utility bills to go way up,” he says. “The profitability of the apartment went down because their expenses were so high.”

Instead of 30 percent of the average month’s rent of $800 going to expenses, the repairs and upgrades were consuming 60 percent.

“They had so many problems with the deferred maintenance that we had to get the assessor over there and walk him through and document what happened,” Miscovich says. As a result, he was able to garner significant tax savings.

But not all property tax cases he handles involves that much legwork, Miscovich admits. Some, as in the case of two different national hotel chains, are more of the variety of low-hanging fruit.

“We had a national chain hotel in Memphis, Tenn. that had been doing well, and then the revenue went down and the tax bill stayed the same,” he recalls. “We went and looked the property over and immediately spotted the problem. A strip club had opened right next door, driving away guests. Corporate didn’t know there was a strip club next door.”

In another instance, a hotel in Indianapolis had a tax bill that seemed unusually high.

“Three other firms had looked at it and didn’t get any relief,” Miscovich says. “The owner thought something was still wrong, so he called us. We went down and looked at it and found the assessor had made a calculation error. He listed it as a 40-story hotel. It only had four stories. They ended up getting a tax refund of several hundred thousand dollars, and the story ended up on the front page of the paper. The bottom line is [that] the devil is in the details.”