Office tower likely to stay with mortgage holder

January 14, 2011
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The odds are that no outside entity will buy Bridgewater Place next week. But if someone does buy the office building from the mortgage holder at the foreclosure auction, it will be reassessed for tax purposes.

“If it transfers ownership, then it will result in an uncapping of the assessment. Of course, the taxable value after a transfer is set to the assessed value for that year. Now, that doesn’t necessarily mean that it’s going to go up or necessarily mean it’s going to go down,” said Matt Woolford, director of the Kent County Bureau of Equalization. “It will transfer in 2011. So the 2012 assessed value is what the new assessment would be set at.”

In addition, Woolford said the new assessment might not relate to the auction price. “The assessor is required to value the property by the method used for every other property, and they cannot tag value to the individual sale,” he said.

“The other complicating fact in this is, an auction sale is not considered an arms-length transaction, and so it could not be recognized directly because of the nature of the transfer. However, it certainly will influence an assessor’s decision. But it would be illegal for an assessor to set the value at the sale price,” he added.

A state law, MCL 211, prohibits an assessor from doing that: “Beginning on Dec. 31, 1994, the purchase price paid in a transfer of property is not a presumptive true cash value of the property transferred. In determining the true cash value of the transferred property, an assessing officer shall assess the property using the same valuation method used to value all other property in that same classification in the assessing jurisdiction,” reads the law, which was enacted at the same time Proposal A was passed.

“One of the most common misperceptions among the general public is the fact that once it sells, that sets the value. It kind of makes sense, as a sale is an indicator of value. But it would be illegal for the assessor to set it to that,” said Woolford.

As an example of why that law is in place, Woolford said if all the homes on a block were valued at, say, $100,000, and one sold at foreclosure for $10,000, the assessor could not assess the sold house at the selling price because an inequity would clearly enter into the valuation system. The other homeowners on the block would be justified in complaining about their tax assessments.

The city of Grand Rapids will reassess Bridgewater Place’s value if the building is sold at auction.

In 2010, the building’s State Equalized Value and Taxable Value were identical at $22.5 million, meaning the structure’s market value last year was approximately $45 million. Both values were down from 2009 when they were assessed at $27.3 million. So according to the records held at Kent County, the market value of Bridgewater Place fell from roughly $54.6 million in 2009 to $45 million last year — a loss of $9.6 million, or nearly 18 percent, in just 12 months.

The foreclosure notice listed SH-2 LLC, BT-2 LLC and Bridgewater Place LLC as the firms that defaulted on the loan, and GMAC Commercial Mortgage Securities Inc. as the mortgage holder. The debt amount is listed at $36 million, or $9 million below the building’s 2010 estimated market value. The auction is set for Jan. 26.

If Bridgewater Place is sold next week, the foreclosed ownership groups will have six months to buy it back.

“It’s a process called redemption. With commercial properties, it’s six months from the date of foreclosure sale,” said Bruce Courtade, a partner, litigator and member of the construction law group at Rhoades McKee PC.

Typically, redemption seldom occurs. “Normally what will happen is, whoever holds the debt will bid their debt level. So if it is $36 million, they will bid $36 million and it’s just an exchange of their debt. They will extinguish their debt in exchange for the building,” said Courtade.

If the foreclosed owners had the necessary funds to cover the mortgage, chances are they wouldn’t have gone into default and be forced to redeem their ownership. Although the six-month period could give the owners time to find new investors and financing to repurchase the building.

And it’s highly unlikely that anyone will be able to buy Bridgewater Place for less than the debt amount because GMAC is all but certain to bid to protect its investment. If someone does top the bid that GMAC is expected to make, Courtade said that buyer will have to pay the mortgage holder $36 million in cash.

“Whoever has the first priority debt, whether it’s the first mortgage or the first construction lien, they get paid out with cash if a secondary debtor bids at auction,” he said. “So that’s why 99 times out of 100 with commercial foreclosures like this one where you actually have a valuable property, the primary debtor is the one who gets the property. And all they do is bid their debt load.”

When Kent County commissioners were putting together the 2011 general operating budget last fall, Woolford told them to expect less property-tax revenue for the year. He said he felt the commercial real estate market hadn’t hit bottom yet.

“I’m anticipating additional decreases in most classes of property this year, and commercial and industrial are still on the forefront of that. So, we have not seen the bottom yet,” said Woolford last week. “The 2011 assessments will reflect decreases across the board. So, unfortunately, that is the case.”

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