Opinion ID: 2187269
Heading Depth: 2
Heading Rank: 2

Heading: creative financing

Text: There seems to be no argument that it is the goal of the assessment process to determine, in the abstract, the usual selling price of a given piece of property between a willing buyer and a willing seller and to develop methodologies that make it possible to achieve uniformity in making such determinations within and between counties. The consensus flounders in this case when presented with the question whether the reported sales price of property may be examined to determine if it represents more than the value of the property being sold. The commission argues that the Legislature has set forth, pursuant to Const 1963, art 9, § 3, the definition of true cash value as the usual selling price, MCL 211.27(1); MSA 7.27(1), and that even if creative financing has an effect on the sales price of a piece of property, it will in time become part of the usual selling price. The commission points out that it has been their policy to allow for the exclusion of individual sales from sales-ratio studies if the terms of financing are unusual. This, they contend, protects the ratio studies and the equalization figures from distortion by such unusual transactions. The commission thus concludes that when, as is admitted here, the market contains a preponderance of sales which are `creatively' financed, then those sales and their attendant `prices' are the market and the `usual selling price' or `cash value'.... The counties argue that an amount added to the sale of property to compensate for obtaining below-market financing can never be part of the sales price of the property, regardless of how usual it becomes. The authority and framework for the assessment and equalization of property is founded in the constitution. Const 1963, art 9, § 3 provides in part: The legislature shall provide for the determination of true cash value of such property; the proportion of true cash value at which such property shall be uniformly assessed, which shall not, after January 1, 1966, exceed 50 percent; and for a system of equalization of assessments. The Legislature has determined the true cash value referred to in Const 1963, art 9, § 3 in § 27(1) of The General Property Tax Act: [C]ash value means the usual selling price at the place where the property to which the term is applied is at the time of assessment, being the price which could be obtained for the property at private sale, and not at forced or auction sale. [MCL 211.27(1); MSA 7.27(1).] The constitution clearly states that the Legislature shall determine the true cash value of such property (emphasis added). The implementing legislation refers to the price which could be obtained for the property (emphasis added). It is evident to us from these plain words of both the constitution and the statute that any method of assessment or equalization of real property that ignores significant and ascertainable components of a sales price which are relevant to the cash value of the property  be they usual components or not  is flawed. There is no dispute that the cost of borrowing in 1981, with mortgage rates in excess of fifteen percent, contributed to the depressed value of property that was reflected in the sales-ratio studies of the plaintiffs. It is also a safe assumption that the disparity between the prevailing cost of a mortgage and a land contract, limited by law to an interest rate of eleven percent, explained the prevalent use of that most common form of creative financing in 1981. In contrast to the more conventional transactions, where the buyer buys the property from the seller and finances the purchase through a financial institution, the buyer under a land contract or other form of creative financing purchases both the real property and the financing from the seller. While an individual property owner/seller is not normally in a position to earn on a secured investment an amount equal to the mortgage lending rate of a financial institution, in 1981 it was possible, if not probable, that a land contract vendor was giving up something of value by loaning money at eleven percent interest. It is also possible that the vendor was selling property that, without creative financing, would not have sold at all or that would have sold for a lower price. As to the land contract purchaser, it is not speculative to say that borrowing at eleven percent, instead of at fifteen percent or more, represented considerable value. [2] It is obvious that in 1981 a land contract at eleven percent had a positive value to the purchaser and a negative or, at best, a neutral value to the vendor. We cannot gainsay the possibility that any such value for the below market rate financing would normally be reflected in the sales price of the property. There are many factors external to property that influence and determine its real value; they include neighborhood conditions, location, property tax, general economic conditions, and the cost of borrowing. However, unlike those factors that influence value but are external to the transaction, creative financing by its nature is part of the transaction between the parties to the sale. And, to the extent that it represents something of value to one of them, it is not part of the real property and cannot be included in the determination of the true cash value of property. We have made it clear in the past that the sales price of property does not necessarily determine the true cash value of the property. Fisher-New Center Co v State Tax Comm, 380 Mich 340, 362; 157 NW2d 271 (1968). In analyzing a somewhat analogous problem, in Antisdale v City of Galesburg, 109 Mich App 627; 311 NW2d 432 (1981), rev'd 420 Mich 265; 362 NW2d 632 (1984), where the Michigan Tax Tribunal [3] had refused to factor out unusually low interest rates on a federally subsidized mortgage in arriving at its value, we reversed the Michigan Tax Tribunal and stated: To say that the mortgage balance had a value of $1,500,000 when it could be entirely assumed by giving up the use of $433,232 is to give an entirely new and foreign meaning to the word value. By failing to discount the outstanding mortgage balance of the comparable properties to the actual cost to the investor the Tax Tribunal adopted a wrong principle. [ Antisdale, supra, pp 282-283.] Even though that case involved the assessment of an individual piece of property, rather than equalization, the principle announced there applies with equal force here. The same general rules of valuation apply to both assessment and equalization. See MCL 211.27(3); MSA 7.27(3). The common denominator for either assessment or equalization is market value. Assessor's Manual, Chapter VI, p 127. We note with interest that in Woodgate Associates v City of Lansing, 1 MTTR 488 (Docket No 6719, June 13, 1978), where, in establishing the petitioner's assessment, comparable sales that included creative financing were not discounted accordingly, the Tax Tribunal, in interpreting the statutory definition of true cash value, MCL 211.27(1); MSA 7.27(1), said: This statutory limitation is obviously intended to avoid an undervaluation of property as a consequence of using, for comparison properties, sales that are of a distress [ sic ] nature, where the sale price is apt to be below the normal market value. If artificially low sale prices are not indicators of true cash value, then it follows that artificially high sale prices are equally offensive and inappropriate. [ Id., p 491. Emphasis added.] The Tax Tribunal further noted, It makes little difference whether the comparative sale price is artificially inflated (because of a trade off of favorable terms at sale) or artificially depressed (because of a forced sale), because both result in something other than true cash value as defined by statute and case law. If the net effect is that a reported sale price is either artificially depressed or elevated, and if that sale price directly affected the computation of true cash value (and therefore assessment) of another property, such assessment is erroneous. [ Id., p 492.] The objectionable favorable terms referred to in Woodgate included assumption of outstanding mortgages and land contracts by the buyer at considerably lower interest rates than what were available at the dates of sale, balloon payments, and a payback to a buyer from a seller of a portion of the reported sale price as a commission fee. [ Id., p 491.] The Attorney General makes a further argument to the effect that since the constitution has given the Legislature responsibility for defining true cash value, the Legislature has done so without allowing for across-the-board discounting of creative financing. Therefore, such discounting is not permissible. In furtherance of that argument, the defendant points to another statutory provision, § 27(3) of The General Property Tax Act, MCL 211.27(3); MSA 7.27(3), which deals specifically with the cost of financing included in the sales price of property. That statute, in relevant part, provides: Beginning December 31, 1978, a city or township assessor, a county equalization department, or the state tax commission before utilizing real estate sales data on real property purchases, including purchases by land contract, for the purpose of determining assessments or in making sales ratio studies for the purpose of assessing or equalizing assessments shall exclude from the sales data the following amounts allowed by subdivisions (a), (b), and (c) to the extent that the amounts are included in the real property purchase price and are so identified in the real estate sales data or certified to the assessor as provided in subdivision (d): (a) Amounts paid for obtaining financing of the purchase price of the property or the last conveyance of the property.    (d) The purchaser of real property, including a purchaser by land contract, may file with the assessor of the city or township in which the property is located 2 copies of the purchase agreement or of an affidavit which shall identify the amount, if any, for each item listed in subdivisions (a) to (c). One copy shall be forwarded by the assessor to the county equalization department. The affidavit shall be prescribed by the state tax commission. [Emphasis added.] The defendant claims that the constitutional language The legislature shall provide for the determination of true cash value is a grant of power to the Legislature to alter or in general define the meaning of true cash value. The defendant has advanced no authority, nor are we aware of any, that would permit such an expansion of the words to provide for the determination of. The general meaning of true cash value predated the Constitution of 1963, and it is not likely that the drafters would incorporate that phrase, with its long history of interpretation and settled meaning, only to have its future left to the whim of the Legislature. [4] The constitution specifies that property shall not be assessed beyond fifty percent of true cash value and to hold that true cash value can be defined by the Legislature would, for all practical purposes, make the fifty percent limitation meaningless. As Justice COOLEY said, A constitution is made for the people and by the people. The interpretation that should be given it is that which reasonable minds, the great mass of the people themselves, would give it. `For as the Constitution does not derive its force from the convention which framed, but from the people who ratified it, the intent to be arrived at is that of the people, and it is not to be supposed that they have looked for any dark or abstruse meaning in the words employed, but rather that they have accepted them in the sense most obvious to the common understanding, and ratified the instrument in the belief that that was the sense designed to be conveyed.' (Cooley's Const Lim 81). [Quoted in Traverse City School Dist v Attorney General, 384 Mich 390, 405; 185 NW2d 9 (1971). Emphasis deleted.] Limitations on taxes and assessments often play a prominent role in deliberations leading to a constitution's adoption or rejection. It is not likely or probable that the voters, in adopting the Constitution of 1963, would understand that true cash value would be what the Legislature said it was, rather than its historical if not literal meaning. [5] We thus examine § 27(3) with the view that, if it derogates from art 9, § 3, it cannot be valid. And, our interpretation remains consistent with the principle that, whenever possible, interpretations that result in constitutional invalidity will be avoided. People v McLeod, 407 Mich 632, 657; 288 NW2d 909 (1980). See Thoman v City of Lansing, 315 Mich 566, 576; 24 NW2d 213 (1946) (presumption of constitutionality following taxing statutes is stronger than applies to laws generally ...). Under § 27(3), [a]mounts paid for obtaining financing of the purchase price of the property when identified in the real estate sales data or certified to the assessor as provided in subdivision (d) (emphasis added) must be excluded when utilizing real estate sales data in the process of equalizing assessments. The key words here are real estate sales data. The commission argues that it is clear that individual sales in a sales ratio study may be adjusted for amounts paid by the purchaser for obtaining financing ... if the purchase price includes such amounts and if such amounts are either certified to the assessor by affidavit, provided to the assessor by means of delivering copies of the purchase agreement, or included on the face of the deed or contract. (Emphasis deleted.) The defendant would, therefore, narrowly construe this phrase to mean the documents of an individual transaction specifically identifying such costs, whereas the plaintiffs construe it as referring to the kind of real estate data they have accumulated to support their figures which purport to identify a higher selling price for creatively financed transactions. The defendant also construes § 27(3)(a) to refer to mortgage initiation fees, appraisal costs, credit checks, attorney fees, and so forth. We find the plaintiffs' position more persuasive for the following reasons. First, the statute clearly and unequivocally refers to excluding the costs of financing before utilizing real estate sales data ... for the purpose of assessing or equalizing assessments ... This certainly suggests that such exclusions of the cost of financing would have to include across-the-board adjustments, because equalizing almost always does just that. The equalization process does not deal with individual assessments. Second, real estate sales data is the term used most frequently, even in the commission's Assessor's Manual, supra, Chapter VI, p 129, to mean the kind of data relied upon in the studies offered by the plaintiffs in support of their finding of price inflation due to the cost of financing. Possible sources for obtaining data are listed in the manual as realtors, lending institutions, and individual property owners. Third, the term real estate sales data is not the most precise and, therefore, the most likely way to describe the documents used in a real estate transaction. The words, in and of themselves, argue against the more narrow interpretation that they refer to an individual transaction. Finally, when this statute was adopted in 1976, subsection (d) employed the word shall. In 1978, shall was changed to may. 1978 PA 25. Subsection (d), in its original form, then, provided that all purchasers of real property would furnish copies of the purchase agreement or an affidavit identifying, among other things, the amounts paid for financing of the purchase price, as required in subsection (a). If by using sales data the Legislature meant the data of an individual transaction, then, adding the words or certified to the assessor as provided in subdivision (d) would have been repetitious. Under the defendant's interpretation, the Legislature would only have had to refer to data identified in a real estate transaction, whether or not furnished to the assessor in subsection (d), or, if they had intended sales data to be confined to information that was furnished to the assessor, they would only have had to refer to the costs of financing identified in the information furnished to the assessor under subsection (d). A more logical and literal reading of § 27(3) is that amounts paid for financing shall be excluded, if they can be identified in real estate sales data that are gathered in assessment and equalization studies or if they can be identified in the documents of individual transactions. Reading § 27(3) in its entirety, consonant with the constitutional mandate to achieve true cash value, it is our conclusion that § 27(3) excludes the cost of creative financing from the valuation of property. [6] We thus find that both § 27(1) and § 27(3) are within the constitutional mandate to determine true cash value and that both, the former by implication and the latter by expression, require the exclusion of creative financing from the equalization process to the extent such financing affects the sales price of real property.