By ILSA MATTES

For The Daily News

ESCANABA – The city of Escanaba is preparing for more costs and legal battles after a number of businesses looking to take advantage of a “dark store” tax loophole filed Michigan Tax Tribunal cases against the city.

“We’re also working with legislators to have a bill introduced to fix it and close the loophole. … This originally, if you’ll recall, began with the big box stores. Just looking at this list you can see that it’s boiling over into other uses,” said City Manager Jim O’Toole during a recent work session.

The loophole allows businesses to challenge their current taxable values by being treated as “dark stores,” or stores that sit empty. The argument from these businesses is that their buildings are single use, and because of that have less value than half of the cost of construction, the usual method used to determine taxable value.

The issue is complicated by deed restrictions added to properties that limit how those properties can be used if the deed is transfered to a new owner. The practice is common among retail businesses that want to prevent competitors from moving into their buildings if the business closes, but the restrictions reduce the value of vacant properties used for market comparisons.

Escanaba was first hit with the effects of a Michigan Tax Tribunal ruling on the issue last year when Menards was awarded a $121,000 tax refund from the city. According to O’Toole, that’s roughly the same amount as the city had budgeted for major road repair this year.

The Menards case is currently being appealed, but new businesses in Escanaba are attempting to have their property values reassessed. Currently, the city is working on cases with AutoZone, O’Riley Auto Parts, and the Escanaba Country Club.

“The golf course is going to need an appraisal done by somebody outside of me if this goes to trial,” said City Assessor Daina Norden, explaining that golf courses require specialized knowledge to appraise and the cost of an appraisal is expected to be $8,500.

For AutoZone and O’Riley Auto Parts, the city is anticipating attorney’s fees between $10,000 to $15,000, and appraisals for both businesses around $10,000. Norden will be making a formal request to increase her attorney and appraisal budget to $58,000 at the next regular city council meeting.

“I don’t expect to have to spend that much money for these cases,” said Norden, explaining the funds were a precaution. “The city almost needs to take that step and get someone on retainer, and get your appraiser lined up … Hopefully we can settle and it doesn’t go to court, which is where it gets very expensive.”

Other businesses have also filed cases with the tax tribunal including the Delta Plaza Mall, which has scheduled a pre-hearing call in late February with a hearing following sometime in April of 2016; K-Mart; UP Health Systems; Tractor Supply; and Shopko, which will be represented by the same tax group that represented Menards. Those cases are anticipated to be addressed by the tribunal next year.

“That’s just so unintuitive,” said Council Member Ralph Blaiser. “Delta Plaza has a point. They are empty, so if they told me ‘we’re not worth $2.5 million anymore,’ they’re right, they’re not. But these other ones are making money had over (fist). … It’s crazy that we value these things as if they were derelict, when they’re not derelict.”

A bill addressing the loophole is expected to be introduced in the legislature in September. O’Toole noted he hopes the bill will include provisions to bring the tax review process back to the local level.

“These appeals are being filed directly through the Michigan Tax Tribunal and not through our local review process. It used to have to go through it, but then it was changed and now it doesn’t,” he said. “It’s a local issue that should at least follow somewhat of a chain of command.”

Concerns were raised by council members that even if the city won any or all of the cases filed with the tribunal, it might not be a permanent fix. Once a property value reduction is made it continues in perpetuity, but there is nothing to stop a business from filing new cases with the tax tribunal to seek a reduction year after year.

“If they lose and have to pay they’ll come back at us next year, and there are legal fees again,” said Council Member Pat Baribeau. “I’m playing the devil’s advocate, because I certainly do think we should move forward, but it’s a real concern of mine that it’s going to be an annual thing that we have to fight and pay for.”

While no formal action was taken on any issues during Thursday morning’s work session, the council agreed to seek the help of other taxing bodies to fund fighting the current cases.

Both Bay College and the county were also required to reimburse funds to Menards after last year’s ruling.

“Quite frankly, there’s communities having to roll over on this simply because they don’t have the financial means to address it. And that’s just a compromising position (that) nobody, no government should be in,” said O’Toole.