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State Transfer Tax Now Applies to Entity Interest Transfers
From J. Scott Timmer, Member, Miller Johnson
2008 Public Act 473, approved on January 9, 2009 (the “Act”), amends the state real estate transfer tax (“SRETT”) (MCL 207.522, 207.523 and 207.526) to impose the SRETT on transfers of a “controlling interest” in an entity, if the entity has 90% or more of its value in commercial, residential, or industrial real estate as determined by generally accepted accounting principles (“GAAP”). “Controlling interest” is defined to include ownership of 80% of the stock of a corporation, or 80% of the membership interests of a limited liability company. The typical assignment of a 100% membership interest in a “drop down” entity formed to consummate a real estate sale is now subject to the same SRETT as a conveyance by deed.
Section 3(1)(c) of the Act requires that “contracts for transfer or acquisition” “shall be recorded.” Presumably, a memorandum will suffice. The Act is retroactive to January 1, 2007, which may result in a “due process” challenge if the State pursues payment of SRETT on transactions completed in 2007 or 2008. The Act includes the same exemptions as the original SRETT statute, but adds new exemptions for transfers effecting a dissolution, and transfers where the ownership doesn’t change.
The definition of the term “value” under the Act, with its reference to GAAP, raises issues as to the effect of depreciation and borrowings, and attribution as to entities that own membership or stock interests in other entities that own real property. As to the 80% “controlling interest” test, there are questions as to how installment transfers will be treated, and whether SRETT applies only to the transfer that puts the property owner “over the top” as to the 80% requirement, or if the tax applies to all previous transfers. For more details relating to the Act and these issues, see “The Application of State Transfer Tax to Entity Interest Transfers,” J. Scott Timmer, Michigan Real Property Review (Summer 2009, p. 84).
Michigan to Homeowners: Your Options are Not Foreclosed
Michigan changed its foreclosure by advertisement statute (2009 PA 29 through 31), effective July 5, 2009. The revised procedures give homeowners an opportunity to negotiate with their lender to modify their primary residence mortgage loan before foreclosure. Prior to initiating foreclosure proceedings, the lender must send a notice of opportunity to discuss a workout to the borrower by certified and 1st class mail., and must publish the notice within 7 days. The borrower has 14 days to request a meeting with the lender through a housing counselor, and the counselor must notify the lender within 10 days of the borrower’s request. The borrower’s request stays foreclosure for 90 days.
The lender must meet with the borrower to discuss workout of the loan. The lender may request financial information from the borrower before the meeting. The borrower may ask a housing counselor to attend the meeting. If the borrower and lender agree to a workout, the documents to modify the loan must be signed within 14 days of agreement.
The target for modification offered by the lender is a plan that lowers the borrower’s payment to 38% of gross income. The lender may foreclosure if the defaulting borrower does not accept a suitable modification that satisfies this target. The lender may foreclose judicially if it is unwilling to offer a suitable loan modification.
The statute has several shortcomings. Few borrowers can afford payments of 38% of income, especially when the borrower pays other consumer debts. Housing counselors may be too busy to meet with the borrower and lender. The lender’s cost of travel to meet with the borrower face to face is expensive. The published notice will allow foreclosure rescue scam artists to contact homeowners directly with fraudulent products.
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