SPECIAL ISSUES AFFECTING MUNICIPALITIES IN REAL ESTATE

Transcription

1 SPECIAL ISSUES AFFECTING MUNICIPALITIES IN REAL ESTATE 1 Opportunity Zones Program Issues when buying/selling real property Fees & Costs in Condemnation Dark Property Theory 2 1

2 Purpose: Designed to promote the infusion of long-term capital to low-income communities by using tax incentives to encourage private investment Enacted in 2017 as part of the Tax Cuts and Jobs Act 3 Opportunity Zone: A census tract which has been designated as eligible to receive private investments through Opportunity Funds Opportunity Fund: Private investment vehicle used to deploy the capital into Opportunity Zones Opportunity Zone Property: Asset types eligible for investment under the program 4 STEP ONE: A QO Fund is formed and certified by the Department of Treasury Must be a partnership or a corporation What about an LLC? STEP TWO: An investor(s) with realized capital gain elects to invest the gain into the QO Fund by taking stock or a partnership interest in return STEP THREE: The QO Fund uses the investment to acquire Opportunity Zone Property STEP FOUR: The investor holds the interest in the QO Fund as long as he/she desires 5 2

3 Stock or partnership interest in an QO Fund Business property tangible property used in a trade or business of the QO Fund that substantially improves the property 6 INVESTMENT LENGTH Fewer than 5 years BENEFITS Deferred payment of capital gains until date investment is sold or exchanged 5 7 years Benefits above plus 10% of capital gains is canceled 7 10 years Benefits above plus 15% of capital gains is canceled Greater than 10 years Taxpayer receives a step-up basis in the investment equal to the FMV of the investment 7 Taxpayer sells real property for $2 million with a basis of $1 million Sales price Basis = $1 million in capital gains Taxpayer invests $1 million into QO Fund Taxpayer sells the investment before holding for 5 years Scenario 1: Sales price = $1 million Capital gain recognized is $ 1 million Scenario 2: Sales price = $2 million Capital gain recognized is $ 2 million ($1 million in deferred gain + $1 million in asset appreciation) 8 3

4 Taxpayer sells the investment with holding period of 6 years Scenario 1: Sales price = $1 million Capital gain recognized is $900k (10% basis bump up) Scenario 2: Sales price = $2 million Capital gain recognized is $1.9 million ($900k in deferred gain + $1 million in asset appreciation) Taxpayer sells investment after holding for 10+ years In 2026, taxpayer recognizes $850k in capital gains (15% basis bump up) No gain recognized on appreciation (basis steps up to FMV) census track designations representing 44 counties, 60 municipalities and two tribal reservations 10 Enable open data platform Municipalities should be creative in making data about their zones available to investors and researchers Track and monitor the pace and character of change in the zones No protection in the program to protect against gentrification Will provide valuable information to investors to understand which local models work best with the program 11 4

5 ISSUES WHEN BUYING/SELLING LAND 12 AUTHORITY The governing body of any city may acquire property for any other public purpose; may acquire real property within or contiguous to the city, by means other than condemnation, for industrial sites; may improve and beautify the same; may construct, own, lease and maintain buildings on such property for public purposes; and may sell and convey such property. 13 Selling Land WI SC has held that a sale of municipal property authorized by the governing body may be voided if a taxpayer can establish (1) illegality, (2) fraud or (3) a clear abuse of discretion on the part of the governing body Newell v. Kenosha (1958) 14 5

6 Continued Buyer of the real estate: Municipality can list the property and solicit bids, or can negotiate exclusively with an interested party Purchase price No requirement that municipality select the highest purchase price offer Appraisal can help show no abuse of discretion Referring sales to the plan commission Scanlon v. Menasha 15 Acquiring Land The acquisition of land must be for a public purpose The use of funds for the acquisition must be a public necessity, convenience or welfare Factors which may be considered include the course or usage of the government, the objects for which taxes have been customarily levied, the objects which have been considered necessary for the support and proper use of government, the extent to which the expenditure results in competition with private enterprise, the presence or absence of a general economic benefit, the number of citizens benefited, and the necessity and infeasibility of private performance Hopper v. City of Madison (1977) 16 FEES & COSTS IN CONDEMNATION Changes Under 2017 Wis. Act

7 Just Compensation Wis. Const. art. I, 13, provides, The property of no person shall be taken for public use without just compensation therefor. Under Wis. Stat , just compensation is synonymous with the fair market value of the property, which is defined as the value reflected by an arm s-length sale on the open market between a seller then willing, but not forced, to sell, to a buyer who was then willing and able, but not forced, to buy. Wis. JI Civil Just Compensation In addition to just compensation, the condemning authority can be responsible for a property owner s expenses, including litigation expenses (under Wis. Stat ) or displacement, relocation, or replacement expenses (Wis. Stat ). In some circumstances, these expenses can be fair greater than the amount of the disputed claim Wis. Act 243 Governor Walker recently signed 2017 Wis. Act 243 into law. Act 243, which took effect April 5, 2018, makes various changes relating to housing and local regulation of property development, including making the most significant changes to Wisconsin s condemnation statutes in decades. 20 7

8 Litigation Expenses In the condemnation context, litigation expenses means: The total sum of all costs, disbursements, and expenses, including reasonable attorney, appraisal, and engineering fees, necessary to prepare for or participate in actual or anticipated proceedings before the condemnation commissioners, a board of assessment, or any court under Wis. Stat Litigation expenses have to be reasonable how is that determined? 21 Litigation Expenses The two purposes of awarding litigation expenses: (1) Discourage low jurisdictional offers, and (2) Make the condemnee whole when the condemnee is forced to litigate to get the full value of the property. Legislature sought to provide just compensation by ensuring that part of the award would not have to be used to pay for litigation expenses. An award of attorney fees to the successful litigant is mandatory, not discretionary. 22 Litigation Expenses Per 32.28, successful landowners are entitled to recover litigation expenses in any of the following circumstances: Condemnor abandons the proceeding. Court determines the condemnor does not have the constitutional right to condemn part or all of the property described in the jurisdictional offer or there is no necessity for its taking. The judgment is for the plaintiff pursuant to an inverse condemnation claim under Wis. Stat , and 23 8

9 Litigation Expenses the amount of just compensation found by the court exceeds the jurisdictional offer or the highest written offer before the jurisdictional offer by at least $2,700 (such amount to be adjusted for inflation annually each January 1st) and 15%. Act 243 increased the amount of compensation to at least $2,700 (up from $700). Perhaps an attempt to address circumstances where the case is really about the litigation expenses. 24 Litigation Expenses Servin v. DOT Court finds compensation owed to plaintiff by DOT is $20,000. DOT had previously paid plaintiff $15,500 pursuant to an award of damages. Lawsuit yielded plaintiff an additional $4,500 in just compensation. Plaintiff s attorney sought $53, in fees and expenses, including an attorney fee of $38, Litigation Expenses Anderson v. DOT DOT had previously paid plaintiff $4,620 pursuant to an award of damages. Settlement yielded plaintiff an additional $10,000 in just compensation, for a total award of $14,620. Plaintiff s attorney sought $39, in fees and expenses. 26 9

10 Displacement, Relocation and Replacement Wis. Stat cover relocation assistance, procedures, and payments. Fair and reasonable relocation payments must be made to displaced persons, business concerns, and farm operations. Wis. Stat (3). Relocation payments are separate from the just compensation owed for the taking of property. 27 Displacement, Relocation and Replacement Filing the Claim with the Displacing Agency Wis. Admin. Code Adm specifies the procedure for claiming a relocation payment. A displaced person may file a claim for payment after a move, but not later than two years after (1) the date of displacement (for tenants), or (2) the date of final payment for the purchase of the real property or the date of displacement, whichever is later (for owners). 28 Displacement, Relocation and Replacement Action in Circuit Court Wis. Stat requires that claims for damages itemized in Wis. Stat and , including claims for relocation payments, be filed first with the condemnor. All such claims must be filed after the damages on which they are based have fully materialized, but not later than two years o after the condemnor takes physical possession of the entire property acquired, or o such other event as determined by the Department of Administration by rule

11 Displacement, Relocation and Replacement Action in Circuit Court If the condemnor denies the claim or does not respond within 90 days after the filing of the claim, the claimant has a right of action against the condemnor, and must commence that action in the county in which the damages occurred Act 243 Changes New Project Costs for Business Relocations Act 243 creates a new category of payments available to businesses forced to relocate as a result of public projects. Includes reasonable project costs that the business must reasonably incur to make the business operation a comparable replacement property. The costs could include not only actual capital costs for construction of new buildings, but also financing costs, land preparation costs, architectural and engineering costs, and utilities. The Act does not say who decides whether the project costs are reasonable Act 243 Changes New Project Costs for Business Relocations Villages, towns, and cities responsibility for these payments is capped at just $80,000 for tenants and $100,000 for owner-occupants. For all other condemning authorities such as utilities, co-ops, and the State Department of Transportation, there is no cap

12 2017 Act 243 Changes Business Replacement Payments Uncapped Eliminates caps for payments known as business replacement payments for most condemning authorities. Those payments are intended to help bridge the gap between the amount of compensation paid for a business property and the business s cost to purchase or rent a replacement property Act 243 Changes Business Replacement Payments Uncapped Previously capped at $30,000 for tenants and $50,000 for owner-occupants. Now uncapped for condemning authorities such as utilities, co-ops, and the State Department of Transportation. Villages, towns, and cities will be subject to increased caps of $80,000 for tenants and $100,000 for owneroccupants. These are the same caps not a second, cumulative cap that limit payments for reasonable project costs Act 243 Changes Fee-Shifting for Relocation Claims But Not Forever. Allows prevailing owners to recover litigation expenses, including attorney fees and other costs, for relocation claims. Under the new language in Wis. Stat , the court shall award litigation expenses if the court awards relocation payments that are 15% higher than the payments allowed by the condemning authority. Previously, owners had to bear their own costs to litigate relocation claims, which made litigation over those claims rare

13 2017 Act 243 Changes Fee-Shifting for Relocation Claims But Not Forever. The fee-shifting provision applies to claims filed after April 5, Interestingly, the provision expires on January 1, So unless the legislature acts again, the fee-shifting provision will be short-lived Act 243 Changes Courts Required to Consider the Income Approach. Act 243 requires courts to consider appraisals using an income approach or cost approach when determining just compensation for a taking. Income approach evaluates the income derived from the property in order to determine the market value of the property. Wisconsin courts previously found the income approach to be too speculative to be admissible evidence in most cases. 37 DARK PROPERTY THEORY 38 13

14 Assessing Commercial Property Section 70.32(1) of the WI Statutes: Real property shall be valued by the assessor in the manner specified in the Wisconsin property assessment manual under s (2a) from actual view or from the best information that the assessor can practicably obtain, at the full value which could ordinarily be obtained therefor at private sale 39 Assessing Commercial Property Market Value "is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale... " WPAM. at G-40. Sometimes, this is called value in exchange and it is contrasted with use value which is the value "to a specific owner, as opposed to its value in exchange." WPAM at G-48. WPAM is short for the WISCONSIN PROPERTY ASSESSMENT MANUAL published annually by the Department of Revenue. 40 Assessing Commercial Property FeeSimpleInterest"is the fullest form of private ownership subject only to certain government limitations." WPAM at 7-1. For example, most homeowners own their homes in fee simple. That is, their ownership is limited only by customary powers of government, such as zoning, and common easements such as utility easements

15 Walgreens Co. v. City of Madison Wisconsin's Supreme Court has held that the lease is not part of the bundle of rights that is to be assessed for purposes of the property tax. WalgreenCo.v.Cityof Madison, 2008 WI 80, 45-46, 752 N.W.2d 687, 311 Wis. 2d 158 (2008). The "dark property" argument is an outgrowth of the Walgreen's Supreme Court decision in Proposed Legislation Introduced in 2 bills: LRB-0372/6: For property tax purposes, real property includes any leases, rights, and privileges pertaining to the property, including assets that cannot be taxed separately as real property, but are inextricably intertwined with the real property. Specifically reverses Walgreen Co. v. City of Madison Redefines "arm's-length sale" 43 Proposed Legislation LRB-0373/9: A property is not comparable to the property being assessed if: the seller has placed restrictions on the highest and best use of the property, or the property is dark property and the property being assessed is not dark property. The bill defines dark property as property that is vacant or unoccupied beyond the normal period for property in the same real estate market segment

16 Proposed Legislation Should a new thriving store be valued for property tax purposes like an abandoned store? 45 Proposed Legislation Should a commercial property (like a Walgreens) location that sells for $5,000,000 be assessed any less than its sale price? Should a court valuing a property whose highest and best use is big box retail consider a sale of a property with a deed restriction that forbids future big box retail use? 46 Proposed Legislation Shifts Burden on Other Taxpayers Estimated Tax Increase for Homeowners Per League of Municipalities materials supporting proposed legislation 47 16

17 Bricks, Sticks & Mud Appraisal science has long held that a "'lease never increases the market value of the real property rights to the fee simple estate.'" Walgreen Co., at 3(quoting Appraisal Institute, THE APPRAISAL OF REAL ESTATE 473 (12th Ed. 2001)). Considering leases when assessing real property adds significant complexity to assessment practices and volatility to assessment rolls. 48 Bricks, Sticks & Mud Proponents of "Dark Property Theory": Best Method to Value Stable Tax Base Avoids Taxing Business Value Less Intrusive 49 Questions Adam F. Jardine ajardine@reinhartlaw.com N. Water Street, Suite 1700 Milwaukee, Wisconsin Richard W. Donner rdonner@reinhartlaw.com N. Water Street, Suite 1700 Milwaukee, Wisconsin 50 17