A trailing twelve month statement from a Michigan seller almost always needs adjusting before an exchanger can trust the net operating income line, and the adjustments are rarely the same twice. Twenty years of reading these statements across this state has shown us where sellers, sometimes without meaning to, present a rosier number than the property actually delivers.
Winter Expenses Get Buried More Often Than They Should
Snow removal, salt, and heating costs swing significantly from a mild Michigan winter to a hard one, and a T12 pulled after an unusually light snow year can understate what an investor should expect to spend going forward. We look at multiple years of expense history where available, stretching well beyond the most recent twelve months, to see whether the trailing statement reflects a typical winter or a lucky one.
A single-year snapshot can also miss a winter where a boiler or furnace failure drove a one-time repair spike, which needs to be separated from the recurring baseline rather than treated as a normal annual cost going forward.
Property Tax Uncapping Hits the NOI Line Directly
Because Michigan resets a property's taxable value to the state equalized value on transfer, the tax expense line in the seller's T12 often understates what the new owner will actually pay, sometimes significantly on a building that hasn't traded in many years. We calculate the post-transfer tax estimate and rebuild the NOI around that number before an investor relies on the seller's broker package for pricing.
This shows up most dramatically on long-held buildings in Detroit's older commercial corridors, where a seller who's owned a property since before the last major reassessment can be paying a fraction of what the taxable value would reset to under new ownership.
What Gets Checked Line by Line
A thorough T12 review across property types typically covers:
- separating one-time repair costs from recurring maintenance expenses
- confirming which expenses are actually recoverable from tenants under the lease
- rebuilding the tax expense line using post-transfer assessed value
- comparing insurance premiums against current market quotes rather than the seller's older policy
- flagging any missing months or unexplained gaps in the statement
University and Seasonal Markets Need Their Own Read
A property near Michigan State in East Lansing or the University of Michigan in Ann Arbor can show expense patterns tied to the academic calendar, with turnover costs concentrated around August, while a Traverse City property's utility and staffing costs may swing with the tourist season. Applying a flat, evenly distributed expense assumption to either type of property produces a misleading monthly picture even when the annual total is accurate.
Getting the Corrected Numbers to the Right People
Once the T12 has been rebuilt with real tax, insurance, and seasonal adjustments, we send the corrected NOI bridge to the lender and the investor's advisor together, so financing terms and the exchange decision are both based on the same defensible numbers rather than the seller's original marketing package.
Common 1031 Exchange Questions
Why does a seller's T12 sometimes understate the property tax expense?
Michigan resets taxable value to the state equalized value when ownership transfers, so a seller's own tax bill, especially on a property that hasn't sold in years, can be well below what the new owner will actually be assessed. We rebuild that line using a post-transfer estimate rather than the seller's historical figure.
Should I trust a T12 that was pulled after an unusually mild Michigan winter?
Not without a second look. Snow removal, salt, and heating costs vary meaningfully year to year, and a T12 from a light winter can make ongoing operating costs look lower than they typically run. We check multiple years of expense history when it's available.
What's the difference between a recoverable and a non-recoverable expense on a T12?
Recoverable expenses can be billed back to tenants under the lease's reimbursement structure, while non-recoverable expenses come straight out of the owner's net income. Confusing the two overstates the effective NOI, so we separate them explicitly rather than accepting the seller's net figure as presented.
Do you compare the seller's insurance costs against current market rates?
Yes. An older policy can significantly understate what a new owner will pay to insure the same property today, particularly given how insurance pricing has shifted in recent years, so we get a current quote range rather than relying on the seller's existing premium.
How do you handle a T12 for a property with strong seasonal swings, like one near Traverse City?
We look at the monthly pattern rather than the annual total on its own, since utility costs, staffing, and revenue can all shift meaningfully between peak season and the off-season. A flat monthly average would misrepresent how the property actually performs.
What if a one-time repair, like a boiler replacement, shows up in the trailing twelve months?
We pull that cost out of the recurring expense baseline and note it separately, since folding a one-time capital repair into ongoing operating expenses would understate the property's typical annual profitability going forward.
How many years of expense history do you typically request beyond the trailing twelve months?
Two to three years when the seller can provide it, which is usually enough to tell whether the most recent winter's snow and heating costs were typical or unusually light, and to catch any one-time repair spikes that shouldn't be treated as a recurring expense.
