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Property Tax Resources

Nov
16

Tax Pitfalls, Opportunities in Pittsburgh

Here's what investors should know before buying or developing in the Steel City.

Over the past decade, Pittsburgh has been named the most livable city in the continental U.S., a hipster haven, a tech hub and other trendy titles. Publications laud the city's affordable housing stock in a stable real estate market, access to the arts in an established cultural community, and world-class healthcare and higher education that place the Steel City at the forefront of medicine and robotics.

This attention has drawn real estate investors to submarkets well beyond downtown Pittsburgh's Golden Triangle. Even in the midst of the pandemic and the economic uncertainty that has come with it, a surprising amount of new development has continued in the region.As investors from outside the region consider investing in this real estate market, they should be aware of idiosyncrasies and pitfalls lurking in Pennsylvania tax law.

Welcome, Stranger

As in most states, assessors in Pennsylvania cannot independently change a property's assessment upon its transfer. However, Pennsylvania lets local taxing districts appeal assessments and request value increases, which they often do following a sale. Locals call this the "welcome stranger" tax.

"One of the most common reactions I hear from our out-of-state clients who are new to this market is disbelief that school districts can appeal assessments," says Sharon F. DiPaolo, Esq., the managing partner of Siegel Jennings' Pennsylvania property tax practice. "Of course, in most states that's called a spot assessment, but in Pennsylvania it's just another appeal."

In fact, local school districts (which take the largest piece of the property tax pie) filed more assessment appeals than property owners in 2017-2019, according to The Allegheny Institute for Public Policy data. "The most difficult part for buyers is accurately estimating what is obviously a large part of a property's value equation," DiPaolo explains. "Buyers can budget for the legal costs of defending against an appeal by the government, but it's much harder to underwrite the real estate taxes when they can't know where the assessment will eventually be set. We have seen many investors choose not to enter this market because of the uncertainty."

Allegheny County in particular is unusual in that it has a March 31 assessment appeal deadline, and Pennsylvania uses the filing date as the effective date of value for assessment appeals.This means that properties already under appeal for 2020 should be valued as affected by the early fallout from COVID-19, and 2021 appeals will have to consider the pandemic's continuing impacts on property values.

Understanding the local legal landscape can help investors budget for potential risks, and thoughtfully structuring a deal can sometimes help reduce that risk. For instance, when appropriate, transferring a property's holding company rather than the property itself can avoid triggering an increase appeal.

Further, properly allocating a purchase price—either among multiple properties in a portfolio or among the different components of a going concern—can avoid misinterpretation of deeds and transfer tax statements by local taxing authorities. This also ensures Pittsburgh's 5% transfer tax is applied to the real estate only.

Net lease investors should also be aware that, while many states can be described as "fee simple" or "leased fee" jurisdictions, Pennsylvania is unique in that, in practice, its courts will usually tax a leased property according to whichever of those values yields greater taxes. Through a series of cases over 15 years, Pennsylvania's appellate courts have struggled to base a property's taxation on its "economic reality."

Currently, a property achieving above-market rent is assessed according to its leased fee value (which will be greater than the fee simple value), while a property with below-market rent will be taxed at its fee simple value (which will be greater than its leased fee value). Under this system, two physically identical properties within the same taxing district can be assessed at wildly different values.

Neighborhood Discrepancies

Anthony Barna, senior managing director of Integra Realty Resources Pittsburgh, cautions investors to vet property specifics. "People keep saying,'Pittsburgh's hot,' but it's not the whole region," he says. "It's not even the whole city."

While office vacancy in the CBD had reached a 10-year high even before the onset of the pandemic, some nearby neighborhoods including Oakland and the Strip District can barely satisfy demand. Similarly, new apartments in popular neighborhoods like Lawrenceville are stabilizing quickly at record rental rates, yet rents and occupancies in other neighborhoods remain flat.

"The lack of a significant population increase in the city, coupled with the large number of new residential units coming online, threatens the economic balance and risks an oversupply," Barna observes.

Even more fundamentally, Barna says "a lot of our neighborhoods don't yet have the infrastructure to actually support what someone might want to build." In fact, Amazon cited infrastructure concerns as a major factor in its decision to drop Pittsburgh as a final contender in its HQ2 search.

Similarly, developers should investigate available tax breaks, which vary by location. Frequently these come in the form of Tax Increment Financing (TIF) or Local Economic Revitalization Tax Assistance (LERTA). In 2019, Pittsburgh opened all neighborhoods to potential tax benefits for new developments that meet certain employment or affordability requirements.

Tammy Ribar, Esq., Director at Houston Harbaugh who concentrates her law practice in commercial real estate transactions, advises that additional opportunities are available through various government bodies and can entail program-specific deadlines. "I think the best advice I can give to buyers is to research and understand in advance what programs are available and be informed about applicable deadlines, so that a relatively easy opportunity for savings is not missed," says Ribar.

Based on the recent pace of construction throughout the city, many investors have clearly decided that Pittsburgh's anticipated rewards outweigh its risks. And as many have learned, working with knowledgeable locals during planning can help to avoid headaches – and create significant savings later.

Brendan Kelly is an attorney in the Pittsburgh office of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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Oct
05

Unjust Property Taxes Amid COVID-19

​Cris K. O'Neall Esq. of Greenberg Traurig LLP discusses why multifamily property taxes are excessive and what taxpayers should do about it.

While COVID-19 has diminished value and property tax liability for all types of real property, it has been especially hard on multifamily housing owners.

State and local shelter-in-place orders that limited business operations have contributed to reduced rental income and vacancies for most commercial property types. In extreme cases, residents have gone out of business or into bankruptcy, eliminating revenues. Many owners have shuttered vacant commercial properties during the pandemic, which at least allowed them to curb spending on utilities and other operating costs.

Few multifamily owners have had that luxury. People still need a place to live, so they continue to occupy their apartments even though they may not be paying rent. As a result, many multifamily operations have lost revenue without reducing occupancy, exacerbating anemic rent collections by compelling landlords to pay operating expenses on fully occupied complexes.

THE PROBLEM: RESIDENTIAL EVICTION MORATORIUMS

In March, COVID-19 prompted the federal government and many states to declare emergencies; counties and cities immediately placed moratoriums on evictions of apartment dwellers for nonpayment of rent. California's experience was typical, with over 150 cities and nearly all metropolitan counties in the Bay Area and Southern California passing eviction moratoriums. Similar restrictions adopted throughout the nation prevented residential landlords from evicting residents for not paying rent.

The specter of millions of apartment dwellers forced from their homes remains very real. With over 45 million renter households in the U.S., the magnitude of potential evictions and the possibility of creating a huge homeless population overnight is staggering.

In August, Stout Risius Ross LLC estimated that 42.5 percent of renter households nationwide were unable to pay their rent and at risk of eviction due to the economic impact of COVID-19. Mississippi showed the highest percentage of renters in distress at 58.2 percent, while Vermont had the lowest at 20.0 percent. Percentages in the major states ranged from the low 30s to 50s.

MORATORIUMS EXTENDED

Many eviction moratorium ordinances either expired by June or were set to expire in early September. The Centers for Disease Control and Prevention responded by issuing an order on Sept. 2 (85 FR 55292) that, prior to Jan. 1, 2021, courts must not evict renters for failure to pay rent. Two days prior to the CDC order, the California Legislature passed an emergency statute (AB 3088) prohibiting nonpayment evictions through March 31, 2021.

California's governor asserted the state's statute takes precedence over the CDC's order. The statute preempts similar county and city ordinances, and the CDC's order states that eviction moratoriums in states that provide greater health-care protections than the CDC calls for are to be applied in lieu of the CDC's order.

The CDC's order and California's new law set renter income thresholds, but only to require greater documentation of need due to COVID-19's effect on a household. In California, the threshold is $100,000 for individuals or 130 percent of the median income in the county.

Renters below these thresholds need only submit a short hardship declaration to their landlord. The CDC's order and California's statute do not absolve residents, who must pay back-rent by Jan. 31, 2021 (CDC), or March 31, 2021 (California). In addition, California requires residents by Jan. 31, 2021, to pay 25 percent of rent owed for September 2020 through January 2021.

EVICTION MORATORIUMS AND PROPERTY TAXES

The National Apartment Association in 2019 estimated 14 cents of every dollar of rent goes to property taxes. Property owners receive 9 cents, while 27 cents pays property operating expenses and 39 cents goes to the property's mortgage.

Obviously, if there is no rent being paid but properties are still being occupied, owners must continue to pay property taxes, operating expenses, and their mortgages (mortgage relief is generally only available, under the CARES Act, to small property owners or owners with government-backed mortgages).

How will these moratoriums affect multifamily property taxes? Whether residents will resume paying rents early next year is far from certain, and back rent may never be paid. These unknowns will affect what multifamily properties' taxable values should be in 2020 and what they will be in 2021.

County assessors generally value multifamily properties using an income approach, starting with gross income netted against operating expenses. Capitalizing that income indicates a value that is the basis for determining the amount of property tax owed. The capitalization rate is based in part on the anticipated risk associated with the property's ownership, or the likelihood the property will continue to generate income.

The difficulty with using the income approach right now is that gross income declined precipitously and remains depressed many months later while operating expenses continue unabated, and there is no assurance back rents will be paid in 2021. The result in many cases is negative net income, which implies negative values and lower property taxes. In addition, capitalization rates are difficult to forecast because no one knows when COVID-19 health restrictions and related eviction moratoriums will be lifted. This uncertainty increases capitalization rates which, in turn, lower property values.

APPEAL ASSESSMENTS NOW

Given the economic challenges confronting renters, any multifamily property is highly likely to have declined in value in the short term, and potentially for the next year or longer. While assessors have promised "to take a hard look" at values in 2021 to see if they should reduce values and lower taxes, whether they will do so remains to be seen.

In view of this, multifamily property owners and managers would do well to appeal their property tax bills this year or during the next available appeal season. This will help ensure tax assessments for this year and future years account for the damage COVID-19 eviction moratoriums have inflicted on multifamily property values.

Cris K. O'Neall is an attorney shareholder in the law firm of Greenberg Traurig LLP, the California member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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  • Cris K. O’Neall Esq. of Greenberg Traurig LLP discusses why multifamily property taxes are excessive and what taxpayers should do about it.
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Sep
28

How to Fight Excessive Property Taxes During COVID-19

Cash-strapped municipalities may look to extract more revenue from commercial properties.

It would be difficult to conceive of a more impactful event for the commercial real estate market than the coronavirus pandemic. Short of finding a cure for COVID-19, the tremendous state of flux in the sector will test the resourcefulness of commercial property owners and operators for months or years to come.

Market changes always create winners and losers; the more dramatic the shift, the greater the wins and losses. In the current market shakeout, commercial property owners are asking how to best position themselves to land on the winning side. The old standby that "cash is king" is sure to apply as the economic fallout settles, and reducing the real estate tax burden is a great way to conserve capital.

But it won't be easy. Taxpayers who plan to contest high taxable values on their commercial properties face an uphill climb. Here are some common difficulties to expect, along with opportunities to consider in tax appeals.

Valuation date dilemmas. The first problem for many owners who want to reduce their tax burden relates to the timing of the pandemic. Most U.S. communities began feeling the impact of COVID-19 in March or later. However, most jurisdictions had already assessed properties with a fixed valuation date of January 1, 2020. Also, most assessors are unwilling to consider the coronavirus in valuation until January 2021.

Damage provisions. Some jurisdictions have statutory provisions that may apply to properties for the damage done by COVID-19. There is a push to clarify Ohio's statute to recognize the effects of COVID-19, for example. There are similar provisions under consideration in Illinois. Additionally, Pennsylvania has valuation dates that could prove useful for taxpayers. NAIOP and other real estate organizations have supported these actions at various levels. Owners should determine whether they can claim pandemic-related damages in contesting tax bills they are now receiving.

What about next year? Even if a taxpayer cannot pursue a challenge on the current assessment, they can take steps to reduce future assessments. This means meeting with the local assessor to establish a proper assessment before it becomes final.

For taxpayers who choose to follow this advice and address future assessments now, make sure to treat any informal meeting as if it were a hearing. Come prepared — with accurate data demonstrating the impact on property value. Discussing anecdotally that stay-at-home orders and other restrictions affected the property value is insufficient — these circumstances are the reason the taxpayer can begin the conversation, but not the substance of a compelling case for revaluation.

Substantiate arguments. Show the assessor hard numbers demonstrating how COVID-19 or the post-COVID economy affected the specific property. Have social-distancing measures, residential migration or other changes created density challenges? Is there a measurable decline in occupier demand, or a decline in foot traffic and business activity at tenants' businesses? What is the economic feasibility of the tenant base? Whatever the reasons for revisiting the valuation, the property owner should be prepared to show the impact with the same supporting material they would use to pitch the project to investors or lenders. Use facts and figures. Bring in experts. Many taxpayers are fighting for the survival of their investment, and they should act accordingly.

Vet the team. Insist that any outside tax counsel or consultants understand the taxpayer's position. This is not business as usual, so educate advisors about the real estate's value. Work as a member of the team and communicate with its members, from local counsel to the valuation expert, and talk with the individual who will meet with the assessor. Formulate a plan together and then be flexible, allowing people to pivot when they see something changing. If the team understands how to determine assessed value and understands the owner's position, then trust them to make changes in the moment as they see fit.

Anticipate challenges. How can a taxpayer prove what the assessment should be amid so much uncertainty, and with little to no sales evidence to assist in determining value? Always attack the obvious head on. For instance, if the price paid for a recently purchased property is unhelpful, analyze the sale using the same expectations established in due diligence. This may eliminate the sales price as an indicator of market value, allowing the team to then present more beneficial and relevant points. Use the law, use facts and use prior experience where similar facts lined up.

Prepare for resistance. State and local governments are in a tough spot. All over the country, there are budgetary shortfalls at the local level because of the pandemic. Many communities and schools rely on income tax, sales tax and property tax, but in the current environment there is little sales tax revenue, and it appears income tax will take a hit. Property tax is all that is left.

Appeals will not be easy. The team's appraiser must be able to establish a value and defend it. Their testimonial skills, whether in court, at a hearing or informally, are as important or more important than the valuation itself. Also, contact a local expert; market value may not be the only available avenue to a fair and uniform assessment. Owners fortunate to have their commercial properties fairly and uniformly assessed (and not negatively impacted in the pandemic) can perhaps refrain from filing an appeal. In a state where a board or court can raise assessments, an unwarranted appeal may lead to an increase in assessment, although in most states, increased assessment from a tax appeal is rare.

J.Kieran Jennings is a board member of Ohio and Northern Ohio NAIOP and a partner in the Cleveland, Ohio office of the law firm Siegel Jennings Co. L.P.A., the Ohio, Western Pennsylvania and Illinois member of American Property Tax Counsel (APTC), the national affiliation of property attorneys.
Greg Hart is an attorney in the Austin, Texas law firm Popp Hutcheson, PLLC, the Texas member of APTC.

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Sep
01

Intangibles Are Exempt from Property Tax

Numbers of lawsuits remind taxpayers and assessors to exclude intangible assets from taxable real estate value.

A recent case involving a Disney Yacht and Beach Club Resort in Orange County, Florida demonstrates how significantly tax liability can differ when an assessor fails to exclude intangible assets. For Disney's property, the tax assessor's and Disney's valuation of the property differed by a whopping $127.8 billion.

Real estate taxes are ad valorem, or based on the value of the real property. And only on real property.

The precise definition of real property varies by jurisdiction but generally is "the physical land and appurtenances affixed to the land," which is to say the land and any site and building improvements, according The Appraisal of Real Estate, 14th Edition.

Your real property tax assessment, then, should exclude the value of any non-real-estate assets. That includes tangible personal property like equipment, or intangible personal property like goodwill.

When real estate is closely linked to a business operation, such as a hotel, it can be difficult to separate business value from real estate value. If the business activity is subject to sales, payroll, franchise, or other commercial activity taxes, then the assessor's inclusion of business value in the property assessment results in impermissible double taxation.

In Singh vs. Walt Disney Parks and Resorts US Inc., the county assessor appraised the Disney resort using the Rushmore method, which accounts for intangible business value by excluding franchise and management expenses from the calculation of the net income before capitalizing to indicate a property value.

Disney argued the Rushmore method did not adequately separate income from food, beverage, merchandise and services sold on the real estate, not generated by leasing the real estate itself. Disney also argued that the assessor included the value of other intangible assets like goodwill, an assembled workforce, and the Disney brand in the valuation.

The trial court did not rule on the propriety of the Rushmore method but found its application in this case violated Florida law. Referencing an earlier case involving a horse racing track (Metropolitan Dade County vs. Tropical Park Inc.), the court agreed with Disney that "[w]hile a property appraiser can assess value using rental income or income that an owner generates from allowing others to use the real property, the property appraiser cannot assess value using income from the taxpayer's operation of business on the real property."

The trial court decision was appealed to the district court (appeals court). The appeals court found the Rushmore method, not just its application, violated Florida law by failing to remove all intangible business value from the tax assessment. When the case returned to the trial court on another issue, the appeals court instructed that the Rushmore method should not be used to assess the property.

In deciding Disney, both courts found SHC Halfmoon Bay vs. County of San Mateo instructive. That case involved the Ritz Carlton Half Moon Bay Hotel in California. The California court had rejected the Rushmore method because it "failed to identify and exclude intangible assets" including an assembled workforce, leasehold interest in a parking lot, and contract rights with a golf course operator from the property tax assessment.

The Disney trial court also looked to the Tropical Park horse track case, where the tax assessment improperly included income generated from the business betting operation not the land use.

Similarly, in an Ohio case involving a horse racing facility, the state Supreme Court rejected a tax valuation that included the value of intangible personal property in the form of a video-lottery terminal license (VLT) valued at $50 million by the taxpayer's expert (Harrah's Ohio Acquisition Co. LLC vs. Cuyahoga County Board of Revision). The property had a casino and 128-acre horse racing facility including a racing track, barns, and grandstand.

The Ohio Court recognized that the VLT had significant value that should be excluded from the real property tax assessment. It rejected the argument that the license was not an intangible asset because it could not be separately transferred or retained. Looking at its prior decisions, the Court had recognized a non-transferable license could still be valuable to the current holder of that license, and that value should be exempt from real property taxation.

Experts continue to disagree about the best method to appraise assets with a significant intangible business value component.Nonetheless, these court cases underline again how important it is for your tax assessment to exclude intangible assets. With most commercial property owners facing onerous tax burdens based on pre-COVID-19 valuation dates, it is even more critical that intangible assets are removed from valuations for property tax purposes. Work closely with assessors, knowledgeable appraisers, and tax professionals to ensure you only pay real estate taxes on the value of your real estate.

Cecilia J. Hyun is a partner with Siegel Jennings Co., L.P.A. The firm is the Ohio, Illinois and Western Pennsylvania member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Cecilia is also a member of CREW Network.

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Jul
09

Expect Increased Property Taxes

Commercial property owners are a tempting target for cash-strapped governments dealing with fallout from COVID-19, writes Morris A. Ellison, a veteran commercial real estate attorney.

Macro impacts of the microscopic COVID-19 virus will subject the property tax system to unprecedented strains, raising the threat that local governments will turn to property tax increases as a panacea for their fiscal woes.

Local governments face formidable financial challenges. One article by Smart Cities Dive suggests that the crisis will blow "massive holes" in municipal budgets, with 96 percent of cities seeing shortfalls due to unanticipated revenue declines. The Washington Post reported that more than 2,100 U.S. cities expect budget shortfalls in 2020, with associated program cuts and staff reductions. The National League of Cities recently estimated that the public sector has lost over 1.5 million jobs since March. Governmental temptation to increase the tax burden on commercial properties will be difficult to resist.

Commercial property owners face similarly unprecedented challenges. Many owners of properties that traditionally served long-term uses for hospitality, retail, office and restaurant activities are now questioning whether those uses will continue. Many properties will need to be repurposed, but to what? Some owners are reportedly considering converting hotels to apartments, for example.

Property taxes are a major component of the costs landlords must examine in determining when and how to reopen. High property taxes, which are generally passed along to commercial tenants, will exacerbate those business' economic problems. While owners can influence some occupancy costs, others, such as taxes and insurance, are largely beyond their control.

RATES, DATES AND VALUES

Real estate taxes reflect both taxation rates and assessed values, but property tax appeals must focus on a property's value. Values hinge on key concepts such as valuation dates, capitalization rates, and highest and best use. The property tax system assumes that values change only gradually, often assessing a property's value by creating a fictitious sale between a willing buyer and seller on a statutorily defined valuation date.

With valuation dates set in the past, assessors tend to value through the rearview mirror. Looking to make a deal, investors, by contrast, look prospectively in deciding whether to buy or sell a property. These viewpoints can clash, particularly when events affecting value occur after the valuation date.

That is why the commercial property owners clamoring for immediate property tax reductions will likely be disappointed, at least until a tax year when their statutorily mandated valuation date postdates COVID-19's onset.

For example, if a taxpayer's bill is based on a fictional sale occurring on Dec. 31, 2019, before the black swan of COVID-19, the assessor is statutorily bound to value the property at its pre-pandemic value.

Some jurisdictions maintain a valuation date for years. That value may change substantially once the valuation date postdates early March 2020, but few state statutes will authorize revaluations based on COVID-19 as a "changed circumstance." A pre-COVID-19 valuation could therefore burden a property for years.

Like the systemic market downturn of 2008, the COVID-19 pandemic will create great uncertainty in capitalization rates, which reflect risk associated with a property's income. This will provide good fodder for argument in tax appeals. The difference this time may be the added uncertainty surrounding the highest and best uses of various commercial properties.

In negotiating a transaction involving income-producing properties, prudent parties analyze future trends. Looking forward, they would interpret weakening tenancy with heightened risk associated with occupancy, rent collections and overall tenant credit-worthiness. They would know that tenants' missed rent payments can lead owners to miss mortgage payments, which can lead to foreclosure.

Contrary to this real-world tendency to look ahead in a transaction, assessors have often assumed a property's highest and best use is its traditional or current use. Trends of working remotely, social distancing, and the rapid, dramatic shift to online retailing turn this assumption on its head.

OBSOLESCENCE ISSUES

Some businesses that closed during the pandemic, including many retailers, may never reopen. Anecdotal evidence of the market shift is manifold. Even before the COVID-19 pandemic, analysts were describing the shift to online retail as "apocalyptic" for many brick-and-mortar stores. Seasoned retailers including Neiman Marcus, Pier 1 Imports and J. C. Penney have declared bankruptcy. Many hotels have only been able to meet debt service obligations by tapping heretofore sacrosanct capital reserves, and airline travel has fallen off a cliff. In April, CNBC estimated that 7.5 million small businesses may not reopen. UBS projects that 20 percent of American restaurants might close permanently.

Social distancing rules that reduce restaurants' serving capacity may remain in place indefinitely. Combined with the loss of clientele, such as office workers that no longer work nearby, these conditions could mean closures for low-margin restaurants. Increasing occupancy costs and revenue declines accompanied by increased taxes could tip the balance.

Office values have historically been less volatile than retail property values, but this may change with the move to remote work. Change will be less apparent where many tenants remain subject to long lease terms, but some form of remote working is likely here to stay, and this suggests office tenants may well need less or different space.

Will an office tenant renew its lease? If so, at what rate? And will the tenant downsize? A key indicator of a weakening market is when tenants with long terms remaining on leases sublet space. In a declining market, tax assessors seldom look behind historic income statements to consider these weaknesses, which should be a risk reflected in the capitalization rate.

DON'T DELAY TAX PLANNING

Retail, office, and hospitality property values almost certainly will decline, at least in the short run. For transactional and property-tax purposes, commercial property owners should examine carefully whether the property's "highest and best use" has changed. Local governments that ignore these market changes in an effort to generate short-term tax revenues may exacerbate their long-term revenue problems.

Smart property owners may be able to mitigate the fallout by focusing tax appeals on the concepts of valuation date and highest and best use. They should also note the uncertainty inherent in capitalization rates.

Tax appeals in 2020 may prove especially challenging for cash-strapped commercial taxpayers because statutorily mandated valuation dates likely predate COVID-19. However, the longer-term risk rests with local governments. If they ignore changes in highest and best uses, and if taxing authorities fail to account for the increased risk in capitalization rates, governments may unwittingly increase the pandemic's economic damage.

Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Bond Dickinson (US) LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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  • Commercial property owners are a tempting target for cash-strapped governments dealing with fallout from COVID-19, writes Morris A. Ellison, a veteran commercial real estate attorney.
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Jul
08

ATTN OWNERS: BEWARE OF PROPERTY TAX INCREASES DURING COVID-19

What do you need to know to fight excessive increases in Texas this year and next?

As if a global economic contraction and what is most likely an unfolding recession across the United States were not enough, many commercial real estate owners across Texas have seen their taxable property values increase this year. While many of these owners are calling for property tax relief to offset the financial burden they are suffering due to stay-at-home orders and business closures triggered by the COVID-19 pandemic, they may be unsure of potential remedies to pursue or arguments to make.

Given that the date of valuation is Jan. 1, 2020, property owners searching for relief are limited as to the information that appraisal districts will consider for this tax year. Potentially limited relief in 2020 does not mean taxpayers lack options, however.

There are three key strategies that commercial property owners need to implement in 2020 if they want to maximize reductions in taxable value for this and future years.

1. Consider filing a 2020 appeal – even if the taxable value did not increase from the prior year. The state was already shutting down non-essential activities as appraisal districts were preparing to mail out their 2020 Notices of Appraised Value. Most appraisal districts delayed the mailings while exploring various options, including freezing property values and granting temporary exemptions for properties affected.

In the end, most appraisal districts conducted reappraisals as originally planned and the Texas Attorney General shot down the idea of temporary exemptions as, in his view, the statutory authority allowing issuance of exemptions did not cover purely economic, nonphysical damage to property. The result of this was that, in the majority of cases, the values sent out had no consideration for losses due to the pandemic.

A taxable value that did not increase year over year in an up market may not warrant an appeal during ordinary times, but these are not ordinary times. In 2020, such appeals are important to taxpayers for several reasons.

First, the focus on the pandemic has shifted the narrative that dominated the news cycle in the months in and around the date of valuation. Does anyone remember the retail apocalypse? According to Business Insider, over 9,300 stores closed in 2019 and thousands more were slated for closure in 2020. This was all before COVID-19. If your property was affected by this or other economic factors, a freeze in value may not appropriately reflect the market value of the asset.

Secondly, appealing now may be a sound decision because the 2020 value may be used as a benchmark for future relief. In Texas, each year stands on its own and is valued independently of prior years. However, given that the effects of the pandemic are unlike anything we have seen before, it is reasonable to predict that in order to track the decline in value, appraisal districts may look to the 2020 appraisal roll as a starting point.

In Texas, the deadline to appeal property tax values is May 15, or 30 days from the date the Notice of Appraised Value was delivered to the property owner. Given that some jurisdictions delayed their mailings, it is important to review your Notice of Value to determine your deadline to appeal.

2. Consider the tax rate as well as taxable value. It is important to remember that a value freeze without a freeze in tax rates may still result in an increase in taxes. While actions taken by the Texas Legislature in 2019 promised relief by addressing tax rates, even those measures are currently up for debate as local districts are questioning whether the pandemic allows them to exceed the revenue-raising limits put in place by the Legislature.

Texas may not resolve this dispute until it assesses the full extent of economic damage and weighs it against the needs of the taxing units to meet their budgets. The appeals process will still be the first avenue for relief, but a very close second will be to lobby the local taxing jurisdictions to not raise, and perhaps even lower, property tax rates.

3. Keep track and provide documentation of COVID-19 losses. Even though COVID-19 losses may not be fully considered for tax year 2020, taxpayers need to initiate conversations about the economic impact to the property's financials so that appraisal districts can start building the valuation models for 2021 with these factors in mind.

In 2021, property owners should be ready to present documentation demonstrating any declines in occupancy or revenue, as well as any bankruptcies affecting the property. If the taxpayer's current record keeping does not reflect slow-paying or non-paying tenants, consider tracking those items. Changes to business models, such as adding patio seating or curbside pick-up lanes, may also affect the ultimate indication of value for 2021, so keeping track of those expenses will be equally important.

As property owners go through the 2020 appeals process, it may be beneficial to consider keeping the option open to file a lawsuit in district court to seek additional relief. The longer the property owner and its advisors have to gather information and calculate the depth of the economic impact, the better positioned the team will be to obtain a fair 2020 value.

In the end, being proactive during these times is essential to obtaining relief where it appears there may be no relief in sight.

Darlene Sullivan is a Principal in Austin, Texas, law firm Popp Hutcheson PLLC, which represents taxpayers in property tax matters. The firm is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.

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Jun
09

Navigating D.C.’s Tax Rate Maze

An evolving and imperfect system has increased property taxes for many commercial real estate owners.

If you own or manage real property in the District of Columbia and are wondering why your real estate tax bill has gone up in recent years, you are not alone. One common culprit is rising assessed value, but that may not be the main or only source of an increase.

A less obvious contributor may be a new, different, or incorrect tax rate. Since tax rates vary greatly depending on a property's use, staying diligent when it comes to your real estate's tax class and billed rate is critical.

The District of Columbia applies differing tax rates to residential, commercial, mixed-use, vacant and blighted properties. Why is this important? Because the classification can make a considerable difference in annual tax liability – even for two properties with identical assessment values.

For example, a multifamily complex assessed at $20 million incurs a tax liability of $170,000 per year while the same property, if designated as blighted, incurs an annual tax liability almost twelve times greater at $2 million. Therefore, the assessed value is just one piece of the puzzle.

Keeping a sharp eye on a property's tax bill for the accuracy of any tax rate changes is paramount. This requires knowledge of current rates, the taxpayers' legal obligations, and how to remedy or appeal any issues that arise.

New Rates for Commercial Property

Property owners in the District should be aware of a recent change to tax rates on commercial real estate. The Fiscal 2019 Budget Support Emergency Act increased rates for commercial properties starting with Tax Year 2019 bills.

Prior to the enactment of this legislation, the District taxed commercial properties with a blended rate of 1.65% for the first $3 million in assessed value and 1.85% for every dollar above $3 million. The new measure replaces the blended rate with a tiered system, taxing a commercial property at the rate corresponding to the level in which its assessed value falls. Those levels are:

Tier One, for properties assessed at $0 to $5 million, taxed entirely at 1.65%;

Tier Two, for properties assessed at $5 million to $10 million, taxed entirely at 1.77%; and

Tier Three, for properties assessed above $10 million, taxed entirely at 1.89%.

The residential tax rate for multifamily properties remained flat at 0.85%.

Mixed Use

The District of Columbia Code requires that real property be classified and taxed based upon use. Therefore, if a property has multiple uses, taxing entities must apply tax rates proportionally to the square footage of each use. However, it is ownership's legal obligation to annually report the property's uses by filing a Declaration of Mixed-Use form. Owners of properties with both residential and commercial portions should be hypersensitive to this issue.

The District typically mails the Declaration of Mixed-Use form to property owners in May, and the response is due 30 days thereafter. If the District fails to send a form to an owner, it is the owner's responsibility to request one. Remember, the owner must recertify the mixed-use asset each year. Failure to declare a property as mixed-use may result in the entire property including the residential portion being taxed at the commercial tax rate (up to 1.89%).

Vacant & Blighted Designation

If you have ever opened a property tax bill and faced a staggering 5% or 10% tax rate, congratulations, your property was taxed at one of the District's highest real estate tax rates.

Each year the Department of Consumer and Regulatory Affairs (DCRA) and the Office of Tax and Revenue are charged with identifying and taxing vacant and blighted properties in the District. The D.C. Code defines vacant and blighted properties for this purpose, and there is a detailed process governing why and when DCRA may classify a property as vacant. Nonetheless, in each tax cycle DCRA wrongfully designates properties as vacant or blighted, so it is paramount that the taxpayer understands their appeal rights.

To successfully appeal a vacant property designation, an owner must comply with one of the specifically enumerated and highly technical exemptions. One such exemption applies if the property is actively undergoing renovation under a valid building permit. However, the taxpayer should consult with an attorney, as there may be other requirements to qualify for an exemption. An owner wishing to appeal this designation must file a Vacant Building Response form and provide all applicable supporting documentation to DCRA.

Moreover, an owner may appeal a property's blighted designation by demonstrating that the property is occupied or that it is not blighted. Since an appeal of a blighted designation requires a more detailed review of the condition of the property itself, photographic evidence must be used to supplement any documentation provided.

Fixing Erroneous Rates

When dealing with local government and statutory deadlines, time is not on the taxpayer's side. It is important that as soon as an error is identified, the property owner understands the next steps. In some situations, the D.C. code or official government correspondence will lay out the process precisely for the property owner, identifying the who, what, where, when, why and how's of appealing a property's tax designation. However, sometimes a taxpayer will receive a bill without explanation.

In both scenarios, it is best to consult with a local tax attorney.  These professionals have experience dealing with these issues, as well as with the corresponding governmental entities.  A knowledgeable counselor can be an invaluable resource to guide you through any tax issue.

Sydney Bardouil is an associate at the law firm of Wilkes Artis, the District of Columbia member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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  • An evolving and imperfect system has increased property taxes for many commercial real estate owners.
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May
04

Texas' Taxing Times

​How changes to the Texas property tax law may impact you, and how COVID-19 plays a role this season.

Property taxes are big news in Texas. Last year, property taxes were a primary focus of the 86th Legislature, and Gov. Greg Abbott deemed property tax relief so important that he declared it an emergency item.

The 2019 legislative session produced significant modifications to tax law. Here's a rundown on the most noteworthy changes affecting taxpayers in 2020, along with a look at how fallout from the COVID-19 pandemic may complicate the taxpayer's position.

Removing the Veil

Property taxes are not only big news, but they are also confusing, particularly given the "Texas two-step" appraisal and assessment process. After an appraisal district values a property, taxing entities separately tax that property based upon the final determined value. For a single property, a taxpayer may owe five or more taxing entities spread among three assessors' offices. Understanding the ultimate tax liability for such a property can be a monumental task for taxpayers.

Senate Bill 2 addressed the confusion and promoted transparency and truth in taxation, earning it the title of "The Texas Property Tax Reform and Transparency Act of 2019." Each appraisal district is now required to maintain a website with useful information that allows taxpayers to better understand their tax bills. The website must include the three pertinent tax rates summarized in the table below (the names of which Senate Bill 2 also revised for clarity). Additionally, appraisal districts will calculate the effect that each taxing entity's proposed rate would have on its overall tax collection and include an estimate for any proposed increase's effect on a $100,000 home. Finally, the websites must provide the date and location of public hearings to address concerns with any proposed increases.

 Revenue Increase Limits

In addition to transparency, lawmakers fought to create some avenue of property tax relief. What ultimately passed between Senate Bill 2 and House Bill 3 was a limit on tax revenue increases by jurisdiction. This restricts the amount that taxing entities can increase revenues through tax rate setting.

Beginning in 2020, most taxing entities will have a maximum revenue increase limit of 3.5% year over year. To adopt a tax rate that increases revenue over 3.5%, that taxing entity must call an election for approval. This new cap is significantly lower than the prior law, which allowed for up to an 8% increase in tax rates year over year without voter approval. Junior college districts, hospital districts and other small taxing units including those with tax rates of 2.5 cents or less per $100 of valuation retain their 8% permitted increase. (For clarity, this article expresses tax rates in dollars per $100 of assessed value.)

Relief from school district taxation falls under a separate calculation, which was revised by House Bill 3. For the 2019-2020 school year, maintenance and operations (M&O) rates will be compressed by 7%. For school districts with a Tier 1 $1.00 M&O rate, the rate drops by 7 cents to 93 cents on the dollar.

For 2020-2021, local school district rates will compress by an average of 13 cents, based on statewide property value growth exceeding 2.5%. The M&O rate caps will vary across school districts, and the Texas Education Agency will publish all maximum compressed rates.

Other Relevant Procedures and Policies

While tax system demystification and revenue increase limits were the major reforms, lawmakers enacted many administrative and procedural changes as well. Administrative process changes now prohibit value increases at an Appraisal Review Board (ARB) hearing, add ARB member training requirements, and create special ARB panels to hear protests for complex properties. Additionally, the business personal property rendition date moved to April 15.

In a win for those litigating appraised values, the state revised Section 42.08 of the property tax code, allowing a taxpayer to pay less than the full amount of tax on a property with pending litigation. Previously, if the final property value from a lawsuit resulted in a tax burden exceeding the amount originally paid, the taxpayer incurred delinquent penalties and interest on the remaining amount owed. The revision removes the taxpayer's risk for attempting to discern where a litigated value may settle by eliminating the possibility of penalties and interest on the additional tax due.

Uncertain Times

Despite changes enacted in the 2019 Legislative Session, at least some of those reforms are on hold as the state and its communities respond to the coronavirus pandemic. Gov. Abbott's Mar. 13 disaster declaration allows cities, counties and special districts to use the old 8% threshold on revenue increases rather than the new 3.5% limit.

Further, the governor has the authority to change deadlines during a disaster. As of Mar. 19, Texas had suspended in-person Appraisal Review Board hearings and may extend that suspension into the normal administrative protest season.

Rapid developments may continue to disrupt the property tax assessment and appeal process in 2020. How the disaster will ultimately affect the 2020 property tax cycle remains to be seen, but the recent changes enacted in law will shape the property tax process in Texas for years to come.

For more detailed information on property tax law changes, please refer to the 2019 Texas Property Tax Code, additional resources on the Texas Comptroller's webpage, and consult with a property tax professional.

Rachel Duck, CMI, is a Director and Senior Property Tax Consultant at the Austin, Texas, law firm Popp Hutcheson PLLC. Popp Hutcheson devotes its practice to the representation of taxpayers in property tax matters and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.

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  • How changes to the Texas property tax law may impact you, and how COVID-19 plays a role this season.
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Apr
17

Higher Property Tax Values in Ohio

The Buckeye State's questionable methods deliver alarmingly high values.

A recent decision from an Ohio appeals court highlights a developing and troubling pattern in the state's property tax valuation appeals. In a number of cases, an appraiser's misuse of the highest and best use concept has led to extreme overvaluations. Given its potential to grossly inflate tax liabilities, property owners and well-known tenants need to be aware of this alarming trend and how to best respond.

In the recently decided case, a property used as a McDonald's restaurant in Northeast Ohio received widely varied appraisals. The county assessor, in the ordinary course of setting values, assessed the value at $1.3 million. Then a Member of the Appraisal Institute (MAI) appraiser hired by the property owner calculated a value of $715,000. Another MAI appraiser, this one hired by the county assessor, set the value at $1.9 million. The average of the two MAI appraisals equals $1.3 million, closely mirroring the county's initial value.

Despite the property owner having met its burden of proof at the first hearing level, the county board of revision rejected the property owner's evidence without analysis or explanation. The owner then appealed to the Ohio Board of Tax Appeals (BTA).

In its decision on the appeal, the BTA focused on each appraiser's high-est and best use analysis. The county's appraiser determined the highest and best use is the existing improvements occupied by a national fast food restaurant as they contribute beyond the value of the site "as if vacant." The property owner's appraiser determined the highest and best use for the property in its current state was as a restaurant.

With the county appraiser's narrowly defined highest and best use, the county's sale and rent examples of comparable properties focused heavily on nationally branded fast food restaurants (i.e. Burger King, Arby's, KFC and Taco Bell). The BTA determined that the county's appraisal evidence was more credible because it considered the county's comparables more closely matched the subject property.

By analyzing primarily national brands, the county's appraiser concluded a $1.9 million value. Finding the use of the national fast food comparable data convincing, the BTA increased the assessment from the county's initial $1.3 million to the county appraiser's $1.9 million conclusion.

On appeal from the BTA, the Ninth District Court of Appeals deferred to the BTA's finding that the county's appraiser was more credible, noting "the determination of [the credibility of evidence and witnesses]…is primarily within the province of the taxing authorities."

Questionable comparables

Standard appraisal practices demand that an appraiser's conclusion to such a narrow highest and best use must be supported with well-researched data and careful analysis. Comparable data using leased-fee or lease-encumbered sales provides no credible evidence of the use for which similar real property is being acquired. Similarly, build-to-suit leases used as comparable rentals provide no evidence of the use for which a property available for lease on a competitive and open market will be used. However, this is exactly the type of data and research the county's appraiser relied upon.

A complete and accurate analysis of highest and best use requires "[a] n understanding of market behavior developed through market analysis," according to the Appraisal Institute's industry standard, The Appraisal of Real Estate, 14th Edition. The Appraisal Institute defines highest and best use as "the reasonably probable use of property that results in the highest value."

By contrast, the Appraisal Institute states the "most profitable use" relates to investment value, which differs from market value. The Appraisal of Real Estate defines investment value as "the value of a certain property to a particular investor given the investor's investment criteria."

In the McDonald's case, however, the county appraiser's highest and best use analysis lacks any analysis of what it would cost a national fast food chain to build a new restaurant, nor does it acknowledge that the costs of remodeling the existing improvements need to be considered.

If real estate is to be valued fairly and uniformly as Ohio law requires, then boards of revision, the BTA and appellate courts must take seriously the open market value concept clarified for Ohio in a pivotal 1964 case, State ex rel. Park Invest. Co. v. Bd. of Tax Appeals. In that case, the court held that "the value or true value in money of any property is the amount for which that property would sell on the open market by a willing seller to a willing buyer. In essence, the value of property is the amount of money for which it may be exchanged, i.e., the sales price."

Taxpayers beware

This McDonald's case is not the only instance where an overly narrow and unsupported highest and best use appraisal analysis resulted in an over-valuation. To defend against these narrow highest and best use appraisals, the property owner must employ an effective defense strategy. That strategy includes the critical step of a thorough cross examination of the opposing appraiser's report and analysis.

In addition, the property owner should anticipate this type of evidence coming from the other side. The property owner's appraiser must make the effort to provide a comprehensive market analysis and a thorough highest and best use analysis to identify the truly most probable user of the real property.

Steve Nowak, Esq. is an associate in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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  • The Buckeye State’s questionable methods deliver alarmingly high values.
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Apr
16

Property Tax Crush Demands Action

Without steps by government officials, coronavirus-related property devaluations won't be taken into consideration, warns veteran tax lawyer Jerome Wallach.

U.S. businesses and lawmakers face an array of challenges related to the COVID-19 pandemic. Looking ahead, let's add one more legislative task to that list which, if addressed early, will better enable the economy to bounce back from the current disruption: Provide tax relief for the owners and tenants of commercial properties devalued by vacancy stemming from the virus and efforts to slow its spread.

One of the only tools available to federal, state and community leaders seeking to slow the spread of the disease has been to limit opportunities for person-to-person transmission. Ever-tightening restrictions, either voluntary or enforced, limit or halt the use of commercial properties ranging from restaurants, bars and hotels to call centers, office buildings, stores, entertainment venues and other structures.

While necessary, these measures will drive growing numbers of tenants into distress up to and including closing their doors, defaulting on lease payments or both. Near term, this will slash property income streams and reduce property owners' ability to pay expenses including property tax on partially or fully vacated properties. Longer term, companies struggling to regain their footing and new tenants moving into spaces vacated during the crisis can expect much of their monthly occupancy costs to include a weighty property tax burden based on assessments completed when real estate values were near all-time highs.

Widespread devaluations likely

Even before President Trump declared a national emergency related to the coronavirus on March 13, researchers were tracking widespread commercial real estate devaluations as reflected in REIT performance. The day before the emergency declaration, economists at the UCLA Anderson School of Management concluded that the U.S. had already entered into a recession. The following Tuesday, March 16, news reports of a Green Street Advisors presentation conveyed that the performance of REITs and drop in share prices suggested investors had marked down asset values, on average, by 24% over the course of the previous month. According to news coverage, a Green Street presenter predicted that private market real estate values would decline by another 5% to 10% over the next six months.

Such a rapid decline in property income and market value creates worrisome property tax implications for taxpayers in most jurisdictions. In months to come, when landlords and tenants may anticipate struggling to recover from the pandemic in a flat or recessionary economic environment, they can also expect to receive property tax bills (or tax liability passed through and attached to their lease obligation) based on pre-crisis property values. In many cases, those assessed values will far exceed current fair market value.

Assessors in the jurisdiction in which this writer practices value real property for ad valorem tax purposes as of the first year in a two-year cycle. This means that, for most local owners, property tax bills they receive this year and last year both reflect their property's fair market value as of Jan. 1, 2019. The time to appeal the 2019 value as set by the assessor has long since run out. Short of an intervening event such as a fire or tornado damage, or perhaps construction or addition of a building or other physical improvement, the Jan. 1, 2019, base value is effectively carved in stone and is no longer subject to legal review or modification.

In those jurisdictions where the value may be determined later, it is most typically set on Jan. 1 of the current year. Even if time remains to contest those values, however, most tax statutes would treat any change in value occurring after the effective valuation date to be irrelevant to tax bills based on that valuation date.

Appeal to lawmakers

COVID-19's impact on property values will be profound if not catastrophic. It would seem to be a callous response for a government official to say, in effect, "So what? The assessor followed the law and valued your property before the pandemic."

A storied law professor used to tell his students, this writer among them, that "there is no wrong without a remedy." Paying taxes based on a value that no longer exists is a wrong, yet there seems to be no immediate remedy.

Indeed, few tax codes will provide taxpayers with relief from the unfair burden they face in the wake of this sudden, global crisis. Remedy will require educating lawmakers and the public about this pending tax dilemma.

Phone calls, letters, texts and emails to government officials at any level may help. Perhaps, together, we will find a solution that balances government revenue requirements with current property values.

Jerome Wallach is a partner at The Wallach Law Firm in St. Louis, the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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  • Without steps by government officials, coronavirus-related property devaluations won’t be taken into consideration, warns veteran tax lawyer Jerome Wallach.
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