Michigan Supreme Court To Hear Case Involving Cap On Real Property Taxes
The Michigan Supreme Court has agreed to hear a case where the lower courts ruled that, because the installation of a replacement roof on a commercial building constituted “new construction” and an “addition,” the property’s taxable value was properly increased beyond the statutory cap.
According to the Michigan Court of Appeals in Knier, Powers, Martin & Smith, LLC v City of Bay City (Docket No. 366114), the replacement roof was “new construction” and an “addition” as defined by the Michigan Constitution and MCL 211.34d(1)(b)(iii). As a result, the Court of Appeals held the defendant correctly increased the taxable value of the plaintiff’s property beyond the cap in MCL 211.27a(2).
The plaintiff’s “interpretation of ‘new construction’ is contrary to the plain language of the statute,” the Court of Appeals said in its 2024 published opinion. The plaintiff “added a new roof on commercial property. The new roof was property not in existence on the immediately preceding tax day. Consequently, the Tribunal did not err when it held that [the plaintiff’s] new roof was an ‘addition’ because it was ‘new construction’ under MCL 211.34d(1)(b)(iii).” Court of Appeals Judge James Robert Redford wrote the opinion, joined by Judge Allie Greenleaf Maldonado and Judge Kirsten Frank Kelly.
Now, the Michigan Supreme Court will review that decision, having directed the clerk in a recent order to schedule arguments on the application for leave to appeal (Docket No. 167593). “The parties shall file supplemental briefs …, addressing whether the installation of a new roof on the petitioner’s commercial property constituted an ‘addition[]’ within the meaning of art 9, § 3 of the Michigan Constitution and MCL 211.34d(1)(b).”
Building’s Roof Replaced
The plaintiff, KPMS, owns an office building in Bay City, Michigan. In 2021, the plaintiff hired a contractor to replace the roof on the building. The roof replacement included the installation of new shingles, a “60 MIL-EPDM” membrane and new plywood. The project cost approximately $70,000.
After the roof was installed, the defendant notified the plaintiff that it had assessed an increase in the taxable value of the property for tax year 2022. In 2021, the property had a taxable value of $161,262. In 2022, the defendant assessed the property at the taxable value of $181,283 (a 12.4152% increase). Notably, the property’s fair market value increased from $382,400 in 2021 to $444,600 in 2022. Also, although increases in taxable value are generally limited to a “cap” (the lesser of 5% or the inflation rate) during ownership, the defendant determined that additional taxation was permissible because the increased value arose from an “addition.”
The plaintiff challenged the assessment. After the defendant’s Board of Review affirmed the assessment, the plaintiff appealed to the Michigan Tax Tribunal. The plaintiff argued the defendant increased the taxable value of the property beyond the cap in contravention of Const 1963, art 9, § 3 and MCL 211.27a(2)(a). The plaintiff also asserted the defendant “overstated the cash value of the property.” Meanwhile, the defendant claimed that it properly and lawfully reassessed the property’s taxable value.
The plaintiff filed a motion for summary disposition, arguing the defendant could not exceed the cap because the roof replacement was not an “addition” as defined by MCL 211.34d or the Michigan Constitution. To support its argument, the plaintiff maintained that reference to the dictionary definition of “additions” was necessary because the Michigan Constitution did not define the term.
The defendant also filed a motion for summary disposition, claiming the cap did not apply because the new roof was an “addition” within the meaning of MCL 211.27a(2)(a) and MCL 211.34d(1)(b)(iii) and was considered “new construction.” The defendant did not respond to the plaintiff’s constitutional argument.
The Tax Tribunal issued a proposed order denying the plaintiff’s motion for summary disposition and granting the defendant partial summary disposition. The Tax Tribunal declined to apply a dictionary definition of the term “additions” because it said the term was defined by statute. Further, the Tax Tribunal found the roof replacement was “new construction” as defined by MCL 211.34d(1)(b)(iii) because it was property not in existence on the immediately preceding tax day and not “replacement construction” as defined in MCL 211.34d(1)(b)(v). The Tax Tribunal’s proposed order did not address the plaintiff’s constitutional argument.
The plaintiff filed exceptions to the Tax Tribunal’s proposed order, contending that it had ignored the constitutional argument and that reference to a dictionary definition was required to interpret the term “additions” in Const 1963, art 9, § 3 because the Legislature did not specifically define the term. In response, the defendant asserted the plaintiff failed to demonstrate error in the Tax Tribunal’s analysis.
The Tax Tribunal ultimately issued an opinion rejecting the plaintiff’s exceptions and adopting the reasoning from the proposed order. While the order was labeled as a “Partial Final Opinion and Judgment,” it did not dismiss the case because further proceedings in the Tax Tribunal were necessary to address the true cash value of the roof replacement.
The plaintiff appealed.
Court Of Appeals Opinion
In its August 2024 opinion, the Court of Appeals first addressed the plaintiff’s argument that the Tax Tribunal erred when it held the new roof was an “addition” for purposes of MCL 211.27a because it was “new construction” as defined by MCL 211.34d(1)(b)(iii).
The plaintiff claimed the roof was not “new construction” because the building had a roof before and after the replacement. On the other hand, the defendant asserted the Tax Tribunal’s ruling was correct because “the new, more valuable roof” did not exist on the immediately preceding tax day.
“We agree with [the defendant],” the Court of Appeals said. “The Tribunal and parties all agree that the roof was not ‘replacement construction’ as defined by MCL 211.34d(1)(b)(iii) because the roof was not replaced as a result of an accident or act of God. This leaves the question of whether the roof was ‘property not in existence on the immediately preceding tax day.’ … The answer is, the new roof falls within this statutory language.”
According to the Court of Appeals, the plaintiff contended that “property” as used in the statute only referred to “real property,” which it “narrowly defines as the land and the building” that sits upon that land. “Consequently, [the plaintiff] argues that a roof is not ‘property’ for purposes of the statute. This narrow interpretation of the term ‘property’ reads additional language into the statute that does not comport with the statutory text. … [The plaintiff’s] argument that a roof was not contemplated within the statutory term ‘property’ because it is not land or a building is without merit. The new roof was ‘property’ as contemplated by the statute.”
The plaintiff further argued the roof replacement was not “new construction” because a roof existed both before and after the replacement project. “In support of its argument, [the plaintiff] argues that under the Tribunal’s definition, every repair or replacement of worn materials, such as carpets or light fixtures, would be a basis for increasing a property’s taxable value,” the Court of Appeals observed. “[The defendant] argues that the Legislature intended to broadly define ‘new construction’ for purposes of taxation to include maintenance, replacements, and repairs that would result in an increase in a property’s taxable value beyond any ‘capped’ taxable value increase.”
The Court of Appeals agreed with the defendant’s argument. “Review of the plain language of MCL 211.34d(1)(b)(iii) and its surrounding statutory text shows that ‘new construction’ includes the new, more valuable roof that replaced an old roof. A comparison of the two categories of ‘construction’ — new and replacement — in its definition of ‘additions’ indicates the Legislature’s intent to broadly define ‘new construction.’ … ‘New construction’ expressly excludes the narrowly defined ‘replacement construction’ from its definition. If the Legislature wanted to exclude more typical repair, replacement, and maintenance from its definition of ‘new construction,’ it would have carved out more than ‘construction that replaced property damaged or destroyed by accident or act of God.’ Likewise, MCL 211.34d(1)(b)(iii) does not include the same carveout for new construction made of substantially the same materials found in ‘replacement construction.’ The inclusion of this language in MCL 211.34d(1)(b)(v) but not MCL 211.34d(1)(b)(iii) supports that the Legislature intended to include replacements, like the new roof, in ‘new construction.’ With the exclusion of ‘replacement construction,’ the statute widely defines ‘new construction’ as ‘property not in existence on the immediately preceding tax day.’ The roof meets this definition. It was an entirely new roof that was not in existence on the immediately preceding tax day.”
The Court of Appeals also rejected the plaintiff’s assertion that this interpretation of “new construction” would “too widely include every minor repair, such as new carpets or lighting fixtures.” The value added by new construction “only includes additions that actually increase the selling price of the property. … [T]his argument [also] ignores that the Legislature enacted a specific carveout for such repairs in residential property. MCL 211.34d(1)(b)(iii) includes within its definition of ‘new construction’ ‘the physical addition of equipment or furnishings, subject to the provisions set forth in section 27(2)(a) to (q).’ … If normal repairs, replacement, and maintenance on nonresidential property were not ‘new construction’ for purposes of MCL 211.34d(1)(b)(iii), MCL 211.27(2) would be rendered a nullity.”
In addition, the plaintiff claimed that MCL 211.27(2) did not support the inclusion of ordinary repairs in the definition of “new construction” because the statute only addresses the property’s “true cash value” and not “taxable value.” The Court of Appeals disagreed with this argument, noting that MCL 211.34d(1)(b)(iii) “expressly” says that “’[f]or purposes of determining the taxable value of property under section 27a, the value of new construction is the true cash value of the new construction multiplied by 0.50.’ Therefore, MCL 211.27(2)’s reference to the ‘true cash value’ without express reference to the taxable value does not render MCL 211.27(2) irrelevant to MCL 211.34d(1)(b)(iii).” Accordingly, the plaintiff’s “interpretation of ‘new construction’ is contrary to the plain language of the statute.”
Next, the Court of Appeals turned to the plaintiff’s constitutional argument, finding the new roof “fell within the definition of ‘additions’ in Const 1963, art 9, § 3.” The plaintiff’s argument that looking to a dictionary was necessary to define “additions” was “foreclosed by our Supreme Court’s decision in WPW Acquisition Co [v City of Troy, 466 Mich 117 (2002)]. … Because ‘additions’ already has a particular legal meaning, we decline to consider whether the new roof meets a lay definition of the term ‘additions.’ Notably, the current definition of ‘new construction’ tracks the language in the technical definition of ‘additions’ at the time Proposal A was adopted. Accordingly, the roof is ‘new construction’ such that it meets the technical definition of ‘additions’ in Const 1963, art 9, § 3.” Moreover, the definition of “new construction” in the statute “does not impermissibly expand the definition of ‘additions’ in contravention of Const 1963, art 9, § 3.”
In conclusion, the Court of Appeals stated: “Because the roof was ‘new construction,’ it was an ‘addition’ as defined by MCL 211.34d(1)(b)(iii) and Const 1963, art 9, § 3. The Tribunal did not err in granting [the defendant] summary disposition on the basis that [it] correctly assessed the property’s taxable value beyond the cap in MCL 211.27a(2)(a) and Const 1963, art 9, § 3. For these reasons, [the plaintiff] is not entitled to relief.”
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