1. if you
can fix it,
What every REALTOR® needs to know about
Commercial Rehabilitation Tax Abatements
B Y C H U C K E C K E N S TA H L E R
veryone likes a tax break. Here’s one that you need to erty is located in a Downtown Development Authority Dis-
add to your “tool box” that may help in making your next trict or if the building is located in a commercial area 3 acres
commercial building sale. or larger in size by filing Michigan Treasury Form 4507 with
the Clerk of the local government where the property resides.
Upon receipt of the request, the clerk notifies the tax
A Little History Lesson assessor and City or Village Council or the Township
Board. They notify the county and any other body whose
Back in old days, 1978 to 1988, the Michigan
taxes could be abated then schedule a public hearing
legislature allowed local units of government to
to form a commercial rehabilitation tax abatement dis-
issue tax abatement on the increased real estate
trict. This district can contain one or more properties.
taxes levied on commercial building rehabilita-
Upon approval of the tax abatement district, the City
tion projects. The local units of government could issue
or Village Council or the Township Board and then
50% tax abatement for one but not more than 12 years.
a schedules a second public hearing and subsequently
The Act, P.A. 235 of 1978 was “sunsetted” in 1988.
make a decision to approve or deny the tax abatement.
Fast forward to 2005. With renewed interest in revi-
talization of Michigan downtown business districts, the
So what’s the advantage?
legislature enacted a new Commercial Rehabilitation Tax
Break Act (P.A. 110) giving local units of government the To illustrate the potential tax savings, let’s look at this
ability to abate 100% of real estate taxes (except for the vacant building in downtown Bridgman. Built in the
state education tax) on the increased real estate taxes lev- 1960’s, it is in relatively good repair and listed “for sale”
ied due to rehabilitation of obsolete commercial buildings. with a local Realtor. A buyer is interested but will need to
While well intentioned, the “obsolete” building require- make substantial interior improvements and also desires
ment meant that for a building to qualify it most likely to “spruce up” the exterior facade to be consistent with
was is such poor condition that a private investor or devel- the downtown development theme proposed by the City.
26 oper would likely demolish the building based purely on As shown in Table 1, the tax assessor has de-
economic reasons, or move to a lower cost green field site. termined the state equalized value of this build-
Fast forward again, to 2008, where public Act 8 changed ing to be $50,000 (which is also the taxable value)
MICHIGANREALTOR® | MARCH 2009
the “obsolete” requirement to allow any building15-years resulting in a 2008 tax bill totaling $2,012.
or older in a Downtown Development Authority District
(DDA) or a commercial area of 3 acres or more in size to
qualify for a commercial rehabilitation tax abatement. TABLE 1: Bridgman Building 2008 Tax Information
Sale Price of Building $100,000
How it works
State Equalized Value $50,000
A property owner of a building 15-years or older may re-
quest a commercial rehabilitation tax abatement if the prop- Taxable Value $50,000

2. Now let’s assume the buyer purchases the building the rehabilitation, the tax abatement become more
for $100,000, spends another $50,000 for the needed important. Let’s assume the $50,000 rehabilita-
interior and exterior improvements and the tax as- tion costs increases the market value of the build-
sessor determines the taxable value will increase by ing to just under $200,000, resulting in a $30,000 to
one-half of these improvement costs. As shown in $40,000 profit. We can assume the 2009 taxes would
Table 2, the buyer should expect a 50% increase in about double maybe as much as $3,500–$3,800 and
taxes, if the market value increases by the $50,000, the tax abatement would increase to maybe $1,150,
the cost of the improvements, since taxable value by resulting in a tax total tax savings around 33%.
Michigan law represents 50% of market value.
Cautionary Note: No Simple Rule.
Unfortunately, there is no simple formula or
TABLE 2: Bridgman Building 2008 Tax Information for Improvements
rule to estimate actual savings resulting from ap-
ABATABLE TAXES proval of a Commercial Rehabilitation Tax Abate-
ment. The actual abatement will depend on how
Market Value of Improvements $50,000
much increased taxable value the assessor adds to
Taxable Value $25,000 the current assessment and the actual tax mill-
age rates set each year by the taxing entities
The Bridgman illustration assumes the market value
Taxes Levied
of the building would go up dollar for dollar of the
County $120 YES
rehabilitation costs. As anyone who watches HGTV
City $367 YES knows, that’s not necessarily true and that some improve-
ments may not add anything to the building market
Library $44 YES
value. In fact, as we all know, in some instances the
State Education $372 NO building value many even decline after rehabilitation.
With this said, the best guidance appears
College $44 YES
to be that we can expect about a 20% to 33%
Intermediate School $59 NO
overall tax savings on commercial rehabilita-
tion projects where a tax abatement is given.
Total 2009 Taxes On Improvements $1,006 $575
Some final thoughts.
It must be pointed out that some communities may
Now assume the local unit of government grants
not warmly support issuance of tax abatements. Most
a commercial rehabilitation tax abatement, abat-
Michigan Downtown Development Authorities uti-
ing county, library and college taxes totaling $575. As
lize tax increment financing, a method whereby the
show in Table 3 this would result in a 19% tax sav-
taxes levied on new investments in the DDA district
ings based on the total tax bill or a 57% percent saving
are captured and used by the DDA for projects benefit-
on the new taxes that would normally be levied due
ing the DDA area. Issuance of tax abatements stops
to building rehabilitation for a 1 to 10 year period.
the same taxes that would otherwise be captured by the
DDA, resulting lost revenue when taxes are abated.
TABLE 3: Bridgman Building 2009 Estimated Tax Savings All across Michigan, local governments will soon,
if not already, evaluate whether to publicly promote
2008 Taxes On Original Building $2,012
this new tax abatement program as an incentive to in-
2008 Taxes On Improvements $1,006 vest in older buildings in their commercial districts.
With this background, Realtors can encourage lo-
Total 2009 Taxes On Building & Improvements $3,018
cal communities to review this new tax abatement 27
Commercial Tax Abatement $575
law and be ready to inform both buyers and sell-
Total Taxes After Abatement $2,443 ers of older commercial properties of the advantages
a tax abatement may provide to a sale or purchase.
% Savings In Annual Taxes 19%
Chuck Eckenstahler is a Senior Consultant with McKenna Associates and
serves as an instructor for MAR’s Land Use Leadership Academy. He is a 35 year
Taking the Analysis Further. veteran real estate and municipal planning consultant. He teaches economic
development subjects in the Graduate School of Business at Purdue North
Since our purchaser is a good “real estate inves-
Central, Westville, Indiana and serves on the faculty of the Lowell Stahl Center
tor” buying the building at a price below market
for Commercial Real Estate Studies at Lewis University, Oakbrook Illinois. He
value and intending to make some profit in the fu-
can be contacted at ceckenstahler@mckc.com or by phone at 219-861-2077.
ture on the increased market value resulting from
MAR
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