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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:

  1. Buildings on Leased Land
  2. Tenant-Installed Leasehold Improvements and Structures Affected by the Provisions of Michigan Compiled Law 211.8(h)
  3. Property Tax Classification of Buildings and Improvements on Leased Land and Tenant-Installed Leasehold Improvements
  4. 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.
  5. 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:

  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 building is located and is not exactly the same as the parcel code for any other building on leased land on this parcel.
  3. 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.
  4. 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.