Background
DRSN Real Estate GP LLC owns a continuing senior care retirement center (CCRC) known as the River of Grosse Pointe Woods. The property was financed in part with tax-exempt bonds issued under 26 USC § 142, which requires that 20% of residential units be set aside for low-income individuals or families. A land-use restriction agreement (LURA) imposed these rental restrictions for a 15-year period following initial occupancy, and the restrictions ran with the land binding any successor owners.
DRSN challenged the City of Grosse Pointe Woods’ 2021 tax assessment of the property before the Michigan Tax Tribunal. The company argued that the federally mandated rent restrictions—which reduced the market rents it could charge on certain units—constituted an intangible factor that should reduce the property’s assessed true cash value. The tribunal disagreed and valued the property at $29,550,000 in true cash value, setting its taxable value at $14,081,355, declining to discount the value to account for the rental restrictions.
The tribunal reasoned that while both appraisers acknowledged the LURA, its impact was not quantifiable and the lost rental income had not been shown to exceed the tax benefits from the tax-exempt bond financing. DRSN appealed, arguing the tribunal made an error of law by failing to consider an intangible factor that affects fair market value.
The Court’s Holding
The Michigan Court of Appeals reversed, holding that the tribunal erred in law by failing to consider the rental restrictions as an intangible factor affecting the property’s true cash value. The court emphasized that under Michigan Constitution Article 9, Section 3 and MCL 211.27(1), property must be assessed based on its “usual selling price” at private sale, and assessors must consider “present economic income of structures” along with other factors. The court cited its own precedent holding that certain intangible factors, while not taxable in themselves, can increase or decrease property value and must be reflected in the assessment process.
Crucially, the court distinguished this case from an earlier 2019 dispute involving the same parties. In that prior case, the tribunal had excluded the LURA evidence due to petitioner’s insufficient proof of its impact. The appeals court held that because the merits of the LURA claim were never decided in the prior case—only the evidentiary sufficiency—the doctrines of res judicata and collateral estoppel did not preclude relitigation. Here, DRSN had provided evidence demonstrating the specific difference between market rents and the reduced low-income rents actually charged, satisfying the evidentiary burden.
The court remanded to the tribunal to reconsider the property’s valuation while accounting for the rental restrictions as a negative factor affecting fair market value. The tribunal may also consider offsetting tax benefits from the tax-exempt bond financing if supported by sufficient evidence.
Key Takeaways
- Rental restrictions imposed as a condition of tax-exempt bond financing constitute an intangible factor that must be considered in assessing a property’s true cash value for tax purposes when evidence of the impact is presented
- Res judicata and collateral estoppel do not bar relitigation of a claim when the prior proceeding rejected it on evidentiary grounds rather than on the merits
- A property’s fair market value assessment must reflect the reduced income-generating capacity resulting from legally mandated rent restrictions affecting a percentage of units
- Tax benefits from bond financing may offset lost rental income if both are supported by competent evidence
Why It Matters
This decision clarifies that property tax assessments for buildings financed with tax-exempt bonds cannot ignore the economic impact of federally mandated rental restrictions. Many senior housing facilities, affordable housing projects, and other qualified residential rental properties rely on tax-exempt bond financing, making this ruling significant for tax assessment practices across Michigan. Assessors must now actively consider the reduced earning capacity created by rent restrictions when determining true cash value, provided taxpayers submit adequate evidence of the disparity between market and restricted rents.
The ruling also reaffirms that evidentiary insufficiency in a prior proceeding does not prevent a party from relitigating an issue on the merits in a subsequent case. This gives taxpayers a second opportunity to present better evidence if the underlying legal theory remains sound, provided they can satisfy the evidentiary burden. For tax-exempt bond-financed properties, the decision underscores that owners must carefully document the rent differential to support property tax reduction arguments.