Missouri employs a two-year reassessment cycle with the critical valuation date being January 1, 2007. Owners and investors who have bought property with the intent of converting it to condominiums or those already in the process of completing condo conversions should be wary.

They now face the problem of how the assessor's office will treat their property for ad valorem tax purposes on the coming valuation date. The issues outlined below provide developers with approaches and methodologies for contesting their property tax assessments on condo conversions.

In all likelihood, the St. Louis assessor will value the condo conversion properties at the acquisition price.

However, based on the rapid acceleration of condo conversion sale prices, the assessor may increase the assessed value to a figure much in excess of the acquisition cost.

The fact of the matter is that the assessor's office could be closely tracking the trend in market sale prices and volume of sales, which could lead to a decision that acquisition prices are lower than market values. Remember, the condo conversion market remains hot throughout the St. Louis market.

Developers should not fail to strongly point out to the assessor that they have bought a substantially deteriorated building with the dream of turning it into desirable residences. As the property stands at purchase, it is nothing but an empty shell.

The owner's argument to the assessor must rest on her cost of holding the property over time and the fact that holding costs offset to some extent the increase in the property's valuation for property tax purposes. For example, the assessor sees market value rising at some percentage rate, while the owner experiences holding cost that represents some percent of acquisition cost. Therefore, developers should argue for deducting from the assessor's property valuation the amount of the owner's holding cost.

Another argument to make to the assessor lies in the uncertainties of labor costs, materials costs, cost of money, etc., which can negatively impact the present value of a shell building suitable for condominium conversion. for instance, the cost of studs and sheet rock unexpectedly increase due to some commodity market changes.

At the time of purchase, the owner's intent was to sell the finished unit at market value, let's say $250,000. Out of the $250,000, the owner is looking for an entrepreneurial profit and needs to cover his cost of materials and labor, cost of the shell and miscellaneous costs including financing. If materials and labor costs expand, it forces down the value of the shell, perhaps making the project no longer feasible at the original cost of the shell. Thus, the fair market value of the shell is driven down by the increased costs of completing the units. This offers the owner an argument that the shell is no longer worth its acquisition cost and the value of the property for property tax purposes should be reduced.

An argument for reductions in property valuations exists even for owners in the process of completing or having fully completed their condo conversions. It contends that valuation for property tax purposes must not be based on the number of units in the condominium multiplied by the asking prices.

Instead, the fair market value on the effective tax date can only be determined by the future sale price less the cost of holding the property until the sale. Several cost factors need to be considered to determine the fair market value of the condominium units an owner is holding for sale. The owner takes responsibility for costs including financing, insurance, maintenance, heating, air conditioning and security in addition to direct management expenses. The duration of these ongoing expenses can only be estimated by market analysis and observation, leading to a quantification of an expense number for use in adjusting a property's fair market value.

The argument that a holding cost adjustment must be made is neither new nor unique. It is well established in the valuation of manufactured personal property items held for sale by its maker that adjustments must be made relative to the holding cost while awaiting sale.

Likewise, the law recognizes that the value of subdivided lots should be adjusted for tax purposes by taking into account the cost of holding them until sale. Make no mistake; developers should act with authority in putting forth their argument relative to holding costs.

While the adjustment for carrying costs argument as it relates to condo conversions has not yet wended its way through the court system, it is, nonetheless, just as valid in this area as it is in personal property or subdivided lots.

In the last analysis, the assessor's assumptions about future selling prices of condo units must not go unchallenged.

Owners need to muster all their resources (appraisers, property tax professionals, real estate brokers and real estate researchers) to determine the most probable future sale price for their condominium conversions. This puts them in the position to forcefully present to the assessor the facts that can help them reduce their property valuations.

Jerry Wallach is the senior partner in The Wallach Law Firm based in St. Louis, Missouri. The firm is the Missouri member of American Property Tax Counsel, a national affiliation of property tax attorneys. Wallach can be reached at jwallach@wallachlawfirm.com.