Property owners are costing the city of Madison millions of dollars by taking advantage of a loophole in a state law created in 2001.
By registering the property as a limited-liability corporation, such as Steve Brown Apartments, LLC, rather than as a parcel of land, owners are allowed to sell property without filing the selling price with the city of Madison. The owner is then automatically exempt from real estate transfer fees and can easily avoid high property taxes because no sale price is recorded and the city does not know the property’s actual value.
Shielding the actual value often results in an underestimation by the city of the property assessments and a lowering of the amount owners must pay in property tax.
“It reduces taxes paid to Madison Area Technical College, the Madison School District and various entities on the property tax bill. Theoretically they’re getting away with not paying their fair share,” said City Council President Mike Verveer.
Verveer said the city’s yearly assessments are normally at least the selling price of the property. Since this loophole was created, LLCs have multiplied downtown.
Verveer said several of the buildings in his district with code violations are LLCs because the state does not know the true owner and will only see an authorized agent who is required to register with the Department of Financial Institutions.
A LLC provides limited liability for its members, so business owners can only lose the financing they contribute to the company without putting their personal finances at stake.
City of Madison chief assessor Mike Kurth said LLCs are a typical type of ownership. More than 4,000 buildings in the city are owned by LLCs, including the owners of both The Regent and The Towers, who sold the buildings to Steve Brown Apartments earlier this year without filing the selling price.
Kurth said the last time the properties were sold in 1997, they were valued at more than $13 million, but would probably now be valued much higher than that assessment.
Estimates on the price Steve Brown paid for the two buildings range from $26.5 to $50 million, meaning Brown saved himself hundreds of thousands in property taxes while the seller saved thousands in real estate transfer fees.
Kurth said he couldn’t speculate on the accuracy of estimates because the purchase price was not recorded on the deeds, but he suspects more was involved than just the real estate value if the price was that high.
Kurth said the best indicator of property value is its selling price. The second best indicator is the sale of comparable properties.
Without knowing when properties registered as LLCs have been sold, Kurth said the city can only track transfers by a change in a mailing address or a change in the authorized agent.
“We’re at the beginning of a process to try to come up with a way to track these transfers, I wish I knew more,” Kurth said.
State Rep. Terese Berceau, D-Madison, is working to draft legislation to close the loophole. She is planning to draft a proposal that would require an LLC to file its real estate assets if 50 percent or more of those assets are sold.
“We want to make sure that if someone is selling a company, but the company only exists of that building, that they, just like you and I, have to pay real estate transfer fees,” Berceau said.
Steve Brown Apartments did not return phone calls to comment for this story.
