In working with nonprofit organizations around the City, I have encountered several groups that are either misinformed about nonprofit property tax exemption or have been frustrated in their ability to be apply for nonprofit property tax exemption. This post will detail how food enterprises of all sorts, whether for-profit or nonprofit, can limit their tax liability under the Michigan General Property Tax Act.
Property taxes in Michigan are largely governed by the state constitution and the Michigan General Property Tax Act. Article IX, Section 3 of the Michigan Constitution states that the “legislature shall provide for the uniform general ad valorem taxation of real and tangible personal property not exempt by law…” Section 211.27a of the Michigan General Property Tax Act provides that “property shall be assessed at 50% of its true cash value.” True cash value is defined by the Act as “the usual selling price at the place where the property is located.” Once the assessment is made, real property is taxed according to local millage rates. Detroit’s millage rate for 2014 was one of the highest in the state at 84.5085.
A.) Legal Qualifications
Section 211.7o of the Michigan General Property Tax Act provides that “real or personal property owned and occupied by a nonprofit charitable institution while occupied by that nonprofit charitable institution solely for the purposes for which that nonprofit charitable institution was incorporated is exempt from the collection of taxes under this act.”
The legal language above can be broken into four basic requirements that a nonprofit organization must satisfy for its real property to be exempt from local property taxes:
- Nonprofit organization must own the real property
- Nonprofit organization must occupy the real property
- Nonprofit organization must be a charitable, educational, or scientific institution, and;
- Nonprofit organization must occupy the real property only for the purposes for which the nonprofit organization was created
1.) Nonprofit organization must own the real property
Many nonprofit organizations operate on property that is either owned by a partnering nonprofit organization or other entity, or operate on property owned by a founding stakeholder of the organization. However, in order to be eligible for real property tax exemption, the property must be owned by the nonprofit organization itself. The deed conveying the property to the nonprofit organization must also be recorded. Deed recording can be done at the Wayne County Register of Deeds.
2.) Nonprofit organization must occupy the real property
Michigan courts have interpreted “occupy”, as it is used in Section 211.7o, to require the nonprofit to maintain a regular physical presence on the property. This requirement is satisfied if at least one member or employee of the nonprofit regularly works on the property.
3.) Nonprofit must be a charitable, educational, or scientific institution
As an initial point, it is important to mention that even though an organization has received 501(c)(3) status from the IRS, it may still not be regarded as a “charitable” institution under the Michigan General Property Tax Act. The interpretations of Michigan courts and the IRS as to what is a “charitable” institution differ ever so slightly. Michigan courts have utilized the following six-factor test to make this determination:
- Organization must be a nonprofit organization
- Organization must be organized for charity
- This is determined by looking to a nonprofit organization’s purpose statement contained in its bylaws and articles of incorporation.
- Organization must operate as a charitable organization
- Under this factor, a tax assessor goes beyond looking at the organization’s bylaws and articles of incorporation and analyzes the operations of the organization. There is no threshold requirement; instead, the assessor will look to the overall nature of the organization and determine whether it is charitable.
- Organization cannot discriminate
- As a general rule, an organization must operate on a first-come-first-serve basis and cannot select who most deserves their services.
- Organization must lessen the burdens of government
- Organization must be educational or religious, offer medical services, help people establish themselves for life, construct buildings or works, or provide some other service that the government would or should provide
- Organization cannot charge fees greater than what is needed to successfully maintain the organization
- While an organization can have profits, the revenues must be directed back towards the effectuation of the organization’s exempt purpose
4.) Nonprofit must occupy the property for its charitable purpose
The last requirement is that the nonprofit organization must occupy the property for the purposes for which the organization was created. Once again, the organization’s articles of incorporation and bylaws will be key. If the organization’s use of the property is necessary for it to implement its purpose, then it will meet this last factor.
B.) Application Process
If you believe that a property owned by your nonprofit organization meets the 4 factor test described above, the next step is completing a nonprofit property tax exemption application and submitting it to the Detroit Board of Assessor’s. The application should contain the following documents:
- A cover letter asking that the property at a specific address be exempt from local real estate taxes and briefly describing why the property is exempt under the Michigan General Property Tax Act
- Nonprofit property tax exemption application form
- A résumé detailing the organization’s charitable purpose and how it utilizes the property at issue to further its charitable purpose
- Pictures showing the property being used for its charitable purpose
- Recorded deed to the property
- Articles of Incorporation
- Most recent Corporation Update
Applications can be mailed to or submitted in person at the following address:
Coleman A. Young Municipal Center
2 Woodward Avenue, Suite 804
Detroit, MI 48226
Generally, the property taxes for urban agriculture enterprises should be fairly low. Urban agriculture operations are generally located on vacant properties that have historically been assessed as having fairly low true cash value. However, many property assessments haven’t been adjusted in several years. Therefore, if you believe your property assessment is too high, you should look to file a Petition to Board Review (Michigan Department of Treasury Form 618).
There is also a real property tax exemptions that for-profit urban farms should be aware of. The qualified agricultural property exemption, while not a total tax exemption, could provide some tax relief for urban farmers. In order for a parcel of property to be regarded as qualified agricultural property, it either must be classified as agricultural on the current assessment role or devote more than 50% of the parcel’s total acreage to agricultural use. Owners of property that is not classified as agricultural, which would be all Detroit urban farmers, must file an affidavit (Form 2599) claiming the exemption with the local assessor by May 1st. As mentioned previously, the qualified agricultural property exemption is not a total exemption. For Detroit residents, it will reduce the millage rate from 86.7896 to 68.7896.
This is just a brief and basic overview of some of the ways nonprofit and for-profit urban farming enterprises in Detroit may be able to reduce the amount that an enterprise pays in taxes each year. For many urban farming enterprises, taxes are a large burden. If your enterprise is heavily burdened by its taxes, you should consider filing for the property tax exemptions described above and consult with an attorney to explore ways you can further limit your tax liability.