Property tax assessors in nation's capital city ignore post-COVID freefall in office pricing, asset values.

Commercial property owners in the District of Columbia are crawling out of a post-pandemic fog and into a new, harsh reality where office building values have plummeted, but property tax assessments remain perplexingly high.

Realization comes slowly

Immediately following the pandemic, many office property owners adopted a wait-and-see attitude toward the volatility permeating the sector, clinging to hopes that the rising popularity of remote work and similar office worker practices would prove temporary. Once the Federal Reserve began raising interest rates to combat generational inflation in 2022, however, hopes for a "return to normal" vanished and a grim reality set in.

Recent transactions involving office properties in the District clearly indicate that investors recognize the negative impact these market forces have exerted on office building valuations and are now pricing those changes into the amounts they are willing to bid for acquisitions. These recent sales show office building values have declined by more than 50 percent from pre-pandemic levels.

The other shoe began to drop on office market pricing in early 2023 with a rise in distress transactions, in which the office owner sells or forfeits the property to resolve some form of trouble, typically financial. These turnovers in ownership have continued to increase and now exert a growing influence on office pricing and valuations. Although properties have continued to transfer by traditional, arm's length transactions, the occurrence of foreclosures, deed-in-lieu arrangements, and lender takebacks is increasing. The proliferation of these non-standard transfer mechanisms is irrefutable and has a direct effect on the overall office market.

Denying reality

So, how has the District of Columbia adjusted its methodology to properly value office assets in this new and more challenging environment? In short, it hasn't.

A quick look at the 2025 tax year's assessment values (valued as of Jan. 1, 2024) shows the District largely ignored any change to the market. Among properties that traded in 2023 and 2024, the District's assessment-to-sale-price ratio is close to 200 percent! In other words, the District's methodology is producing assessments that are twice the values those properties are trading for.

This divergence from market evidence is perplexing, given that District of Columbia Courts have ruled that a recent purchase price provides the best indication of a property's value. In its 1992 decision in Levy vs. District of Columbia, the D.C. Superior Court observed that "a recent arms-length sale of the property is evidence of the 'highest rank' to determine the true value of the property at that time."

How does the District get around this decision when valuing office properties today? By ignoring any sales that it finds inconvenient and disqualifying them from inclusion in its assessment model.

Setting aside the impropriety of disqualifying these marketed, arm's-length transactions, the District has also excluded distressed transfers from its model. These exchanges of property, which may involve a lender's sale of real estate obtained through foreclosure, may not involve a sale between a conventional buyer and seller but they nevertheless establish value for the transferred real estate.

When non-standard transfers have become standard, as they have in the post-pandemic office market, assessors should include these transfers in their valuation models. That's according to the International Association of Assessing Officers (IAAO), which provides guidance on the topic in its Standards on Verification and Adjustment of Sales (2020 edition).

The publication states that when non-standard sales become more common, sales "in which a financial institution is the seller typically should be considered as potentially valid for model calibration and ratio studies if they account for more than 20 percent of sales in a specific market area."

The IAAO's Standards echo this qualification when addressing short sales. In that section, the IAAO states, "these sales should be treated like other foreclosure-related sales and considered for model calibration and ratio studies when, in combination with other foreclosure-related sales, they represent more than 20 percent of all sales in the market area, but only after a thorough verification process for each sale."

This 20 percent threshold is the IAAO's acknowledgement that when the market evolves, mass appraisal models must reflect the market's change. That means the District of Columbia can no longer ignore distressed transfers and should recalibrate the mass appraisal model used to value commercial properties in the District to include these types of transactions.

Despite these non-standard transfers representing well over 20 percent of DC's office market, the District has failed to adjust its model in accordance with IAAO guidance. As a result, assessors overwhelmingly base assessments on years-old data that does not reflect current market conditions.

Next steps

Moving forward, the most effective avenue for change will be aggressive advocacy by office market participants. Owners of commercial properties in the District must continue to engage with elected officials and actively appeal their assessments.

Fortunately, independent third parties administer the Real Property Tax Appeals Commission and D.C. Superior Court – two of the three levels of real property tax appeals in the District. If the District is unable or unwilling to change with times, the tax appeal process gives taxpayers the opportunity to force its hand.

Commercial property owners can maximize returns by minimizing property taxes, writes J. Kieran Jennings of Siegel Jennings Co. LPA.

Investing should be straightforward—and so should managing investments. Yet real estate, often labeled a "passive" investment, is anything but. Real estate investment done right may not be thrilling, but it requires active management, particularly in controlling one of the largest ongoing expenses, property taxes.

In recent years, the real estate industry has faced numerous challenges that harbored opportunities for savvy investors. From the COVID-19 pandemic and interest rate spikes to the work-from-home trend and increased vacancies, these disruptions were not just problems to solve—they were openings to reassess strategies, particularly regarding property taxes. Investors who seized these moments to reduce their tax burdens likely reaped significant benefits.

Consider the advice of the late judicial philosopher, writer and judge Learned Hand, who famously said: "Anyone may so arrange their affairs that their taxes shall be as low as possible; they are not bound to choose that pattern which will best pay the Treasury. There is not even a patriotic duty to increase one's taxes."

For real estate investors, this principle underscores the importance of addressing their largest tax expense: annual property taxes. These taxes not only erode returns year after year but can also negatively affect refinancing terms and eventual sales prices.

The best time to act? Now

Opportunities to reduce property taxes arise from shifting markets, new tax laws, court decisions, and even turnover among local assessors and prosecutors. Staying proactive means regularly reviewing these factors to determine whether each new assessment warrants a challenge.

To illustrate how market conditions and legal frameworks create opportunities, consider the following scenarios. Although these are hypothetical, they derive from true situations and case histories.

Tax is for tangibles: Soon after an investor purchased a hotel in Florida four years ago, the local assessor valued the property at 80 percent of its purchase price—a reasonable valuation for tax purposes at the time. Recent case law casts that value in a different light, however. Assessors must now exclude intangible business value, which can constitute up to 50 percent of a hotel's total value, from property tax liability. Ensuring the assessor valued their property correctly under the new directive enabled the subject property's owner to achieve a substantial reduction in the hotel's taxable valuation, saving tens of thousands of dollars annually.

Interest rates reconsidered: A multifamily complex acquired in 2021 was assessed at 90 percent of its purchase price. Although the owners had secured favorable interest rates at the time of acquisition, the taxpayer was still able to obtain a 30 percent assessment reduction in 2023. How? By citing the impact of rising interest rates on market conditions, which had suppressed property values due to buyers' increasing cost for debt financing. This assessment reduction helped improve the owners' cash flow and property valuation during refinancing negotiations.

Advanced to obsolescence. A newly constructed industrial facility in Ohio built to serve a rapidly developing industry faced obsolescence challenges as the needs of its intended tenant base changed in the evolving subsector. Under Ohio law, such properties are classified as special-use and must be assessed based on value to the user. The owners demonstrated significant economic obsolescence, effectively reducing the property's valuation. Additionally, the owners showed that many fixtures the assessor had initially included in the valuation were personal property. With strict adherence to legal definitions in revisiting the assessment, the assessor excluded the personal property from taxation. Understanding the legal definitions of assessable property and providing evidence of obsolescence enabled the owners to achieve meaningful tax savings.

These three examples highlight how market shifts and legal precedents create opportunities to lower tax burdens, even when the immediate need for action isn't obvious.

How to recognize a fair assessment

The methods for determining whether a property is fairly assessed depend on local and state laws, which vary widely and change frequently. Staying informed requires continuous monitoring of tax laws and local tax authority practices.

A taxpayer or tax advisor determined to stay current on local tax conditions should be sure to follow three key steps as part of their inquiries:

1. Understand local laws and definitions. Assessors calculate fair market value based on jurisdiction-specific guidelines.
2. Identify potential exemptions. Elements such as business fixtures might be reclassified as personal property and excluded from taxation.
3. Evaluate risks. Be aware that challenging an assessment involves risks, which can range from minimal to significant, depending on local laws and circumstances.

Combining a thorough understanding of jurisdictional laws with an analysis of property-specific facts is critical. This approach ensures taxpayers know what evidence to produce and will know when they're being fairly assessed.

The bottom line is that commercial property owners must exercise vigilance, expertise and a proactive mindset to manage their property taxes effectively. By viewing challenges as opportunities, property owners can minimize expenses, maximize returns, and protect the long-term value of their assets. Regardless of whether an assessment appeal requires an attorney, thinking like a lawyer will yield dividends.

Anemic transaction volume complicates taxpayers' searches for comparable sales data.

Evaluating the feasibility of a property tax appeal becomes increasingly complex when property sales activity slows. While taxpayers can still launch a successful appeal in a market that yields little or no recent sales data, the lack of optimal deal volume does require a thorough understanding of valuation methods beyond the sales-comparison approach.

This article will provide critical information for taxpayers in a low-transaction-volume market to successfully contest property tax assessments directly or to better vet industry experts to assist in those appeals. Many of the concepts are valuation-oriented, underscoring the need for an in-house or outsourced expert to guide appeals that venture outside the parameters of conventional, comparison-based valuations.

Brave new markets

The market for commercial office space changed, perhaps irrevocably, during the COVID-19 pandemic. Occupier demand in the sector has steadily decreased since then. The widespread adoption of remote work, space sharing and similar practices have persisted and, as a corollary, physical and economic occupancy rates for office space have plummeted, along with rents.

Much of the recent transaction volume for office properties has been by distressed sellers forced to sell due to their inability to refinance. Moreover, assessment boards or courts generally reject these sales as poor evidence of fair market value.

Conversely, at the high end of the market there has been a flight to quality; historically, the top-scale properties have always found both buyers and tenants. Valuing buildings that occupy the middle space between these two extremes is perhaps the most challenging, however, and demands a more complex approach suited to the scarcity of comparable market transactions.

Dealing with data

The key to establishing value under these circumstances can be to expand the geographical area of the transaction search and to include less-recent sales for comparison. While those may seem like easy solutions, as in most nuanced situations, the devil is in the details.

These details include the need to vet the accuracy and defensibility of the appraiser's adjustments once a wider net has snared potentially comparable sales. Or more generally, how should the appraiser adjust expanded sales areas and older deals to demonstrate accurate value for the building in the current market?

In a sales-comparison approach, an appraiser can expand the geographic area for current sales beyond the immediate vicinity of the subject property. There is no hard-and-fast rule that comparable sales need to be in the same city, or county, for that matter.

Real estate appraisers often establish a market area that includes not only the county of the subject property but also several surrounding counties, as long as they are "similar." For most commercial properties, similarity for valuation purposes depends on key geographic and demographic qualities.

The appraiser may use analyses of population data, household incomes and traffic patterns to justify adjustments to expanded sales areas for the current market. These are universally accepted valuation elements for retail properties but can also apply to other property types to aid in adjusting market areas.

Sales from previous calendar years, such as those going back five years or so, can still be relied upon to establish current market value if the properties share similar structural and geographic qualities. Using these older sales as a starting point, the appraiser must make critical adjustments for changes in the market conditions which have occurred since the date of the prior sales.

Needed adjustments typically include allowing for current market occupancy rates, both economic or leased rates and physical, onsite occupancy. Elevated levels of unleased space or leased but underutilized offices create a major risk to buyers, driving them to demand higher capitalization rates (and lower asset prices) to reflect increased risk.

In valuation, rising cap rates trigger downward adjustments in overall market value. Also, operational costs have increased markedly in the past few years, especially for insurance. Appraisers must reflect these additional costs in their adjustments to older transaction data.

Complementary approaches

Appraiser training teaches multiple valuation methods, providing alternative methods for establishing value when deal volume is low. These include surveying of market participants, analysis of brokers' for-sale listing volumes, length of market exposure, and analysis of rent or net-income differentials. When taken together, this data will provide reliable information that enables an appraiser to make accurate adjustments and demonstrate current market value for a subject property.

In addition to the sales-comparison approach, commercial property owners can and should consider other valuation methods to establish the current market value of their property. With knowledge of current market rental rates, expense ratios, lending requirements and capitalization rates, an owner can value their commercial property using the income approach, for example.

The more recent the respective leases were negotiated and signed, the more indicative of the current market rental rate. Current expense statements and capitalization rates can be used to ultimately present a credible, current market value of the property.

Taxpayers deciding whether to appeal a property tax assessment may be frustrated or confused by the market's low deal volume. Property tax professionals are equipped to provide advice and assessment appeal strategies in any market type, however. That means tax relief may be available despite the difficulty the current market has placed on the sales comparison approach to valuation.

Understand the issues in filing strategic property tax appeals to reduce property tax.

Data centers are the current darling of CRE – which makes them a targeted sector of commercial real estate on which local assessors are laser focused. Due to the nature of the investment, there is less political heat for putting the tax burden on data centers. These taxpayers comprise a distant-faceless corporation, unlike other real estate classes who either have local employees or residents who can be affected by higher taxes. Combine the political ease with the fact that it is one of the few sectors that seems to have a clear growth forecast for the next several decades, ensuring that it's in for a tough battle with assessing offices. But the growth flurry in this marketplace shouldn't cause taxpayers to be unfairly taxed.

Data centers are a relatively new sector, compared to office, industrial and retail. The majority of assessors have likely had few, if any, of this property type in their townships. Thus, the probability that assessors have the understanding and expertise regarding the nuance and specialization of this property is highly unlikely, and a recipe for illegal taxation. It is critical that owners annually fight to keep their taxes at a reasonable level. A compelling argument, focusing on depreciation, business value and personal property allocation is critical.

Accelerated Depreciation

As Artificial Intelligence, AI, enters into its Golden Era, new requirements for data centers have exploded. The convergence of AI, autonomous driving vehicles, and smart residential properties will more than double the need for global storage capacity by 2027, according to JLL's Data Centers 2024 Global Outlook. But second generationcenters will have a difficult time getting their piece of the windfall.

AI clustered servers are much more powerful than previous servers and emit significantly more heat.Thus, the electrical and cooling requirements will be markedly different from the data center designs of the past. Energy efficient designs, locations in areas with affordable and reliable power supplies, sustainable power supplies, as well as local development incentives, will be the main drivers of demand moving forward.But as the new design requirements evolve in the future, the older centers will lose value quickly.

Depreciation is much more rampant on special use properties like data centers. Typically, an industrial building has as economic life of 50-60 years, with 2% annual depreciation. However, data centers will depreciate 5-10% annually. This is due to functional issues associated with the special use, according to Ed Kling, MAI Appraiser at Caton Valuation.

For example, the requirements of the mechanical and electrical hardware will be out of date within 15-20 years, according to Malcolm Howe, critical systems partner at engineering consultancy Cundall. Accelerating depreciation on 30% to 50% of the capitalized costs is typically achievable. Factors such as the level of security, the complexity of cooling systems, the number of redundant systems, and site improvements will determine this percentage.

Business Value

Assessors will wrongly assume that the rents associated with data centers, or their value in the market, is solely based on the bricks and stick of the real estate itself. However, as any operator is well aware, one can't disregard the business reputation of the owners and operators, as well. Much like hotels and self-storage, where the value differentials in many cases are due to the level of service, data center operators are known for their expertise. Users base their choice of vendors on criteria such as scalability (how can your needs grow with this provider), reliability (what is the historical uptime of the provider), deployment efficiency (can your infrastructure be set up timely and efficiently), network ecosystem (simplicity of multi-cloud interconnection and management) and financial stability (does the provider have a strong history or could it close within a year).

Unlike other commercial real estate, data center operators are actively monitoring every aspect of their properties to ensure that the client's data is secure. Generally speaking, if any building system fails in another real estate sector in the short term, the harm to the commercial tenant is minimal. However, short term system failure in data storage could mean the complete operations of an organization could be decimated permanently. Therefore, much like the energy costs to operate, the insurance costs are extremely high due to the multitude of risks inherent in providing services.

Similar to Hotels and Self Storage, data center owners are allowed to have a "return of" and a "return on" their personal property and operations investments, as well as deductions for management and reserves for replacement. Thus, some profits should be deducted with other expenses in calculating Net Operating Income.

But more importantly for the savvy operator, the appraiser should account for the stellar reputation of the operator compared to the general market. Logically, a provider with excellent business practices, highly functioning property management and historical success should be able to garner higher rents than other operators. But that escalated rent is due to the business of the operator, not the real estate itself.

Taxation as Personal Property

Data center operators also need to thoughtfully identify real property from personal property for taxation purposes. Forgoing this exercise may result in double taxation in states with personal property tax, or over taxation in states without personal property taxes where such property is wrongfully taxed by local assessors.

And the time is... now

Based on the strategies listed above, owners of data centers must thoughtfully appeal their assessed valuations on an annual basis. This sector must be looked at through a completely different lens than any other property type, due to the accelerated depreciation issues, strategic business value integrated into the property and potential for double taxation. Investors must work with seasoned professionals who understand the complexities of this product type and present the nuanced argument thoughtfully and convincingly to assessing official, or else the bottom line will be unfairly affected.

State's replacement-cost valuation methodology skews some property assessments, thwarting uniform and equal taxation.

Pivotal property tax rulings by the Nevada Supreme Court presume that strict adherence to valuation methodology ensures that similar properties are assigned similar taxable values. But what if the state's required valuation methodology results in differing taxable values for similar properties?

Uniform and Equal

The Nevada Constitution protects property owners from arbitrary tax assessments by requiring the Legislature to "provide by law for a uniform and equal rate of assessment and taxation" and "prescribe such regulations as shall secure a just valuation for taxation of all property, real, personal and possessory."

Twenty years ago, in what was called a "tax revolt," property owners in Incline Village relied on this provision of the Constitution to successfully challenge the methodology the Washoe County Assessor used to value their properties. The revolt found its way to the Nevada Supreme Court, which ultimately issued two opinions.

In State, Board of Equalization vs. Bakst, the Nevada Supreme Court in 2006 rejected the assessor's property valuation because the methodologies he used had not been approved by the Nevada Tax Commission, were not applied uniformly in Washoe County, and were not the same as the methods used by assessors in other counties. The Court noted "the Constitution clearly and unambiguously requires that the methods used for assessing taxes throughout the state must be 'uniform'."

In 2008, the success achieved in the Bakst case was reaffirmed in State, Board of Equalization vs. Barta, where the court stated that "like properties' taxable values must be obtained using uniform assessment methods." In the same ruling, the Court elaborated that "a property value determined using unconstitutional and nonuniform methods is necessarily unjust and inequitable."

An Imperfect Process

In Nevada, the taxable value of improved property is calculated using a replacement-cost approach that is defined by state law. Under this statutory approach, assessors value the land component and improvement component separately. The land component is valued "consistently with the uses to which the improvements are being put," while the improvement is valued at replacement cost, less depreciation.

Assessors must determine replacement cost using Marshall & Swift cost manuals. And, instead of relying on market-derived depreciation, state law requires assessors to depreciate improvements at the rate of 1.5% per year for 50 years. Assessors compute a parcel's final taxable value by adding the value of the land component and the value of the improvement component.

In Barta, the Court expressed an assumption underpinning both the Bakst and Barta cases when it stated that this replacement-cost approach, if "properly applied, will necessarily produce the same measure of taxable value for like properties."

Does it, though? If this assumption fails to prove consistently true, then the statutory replacement-cost approach is burdening some property owners with more than their fair share of property tax.

Inequity in Action

To test whether this is the case we compared the taxable value of two homes which recently sold in Washoe County. We chose single-family residences because of the availability of sales data, but the conclusion we draw from this data should be just as applicable to commercial properties.

One property sold for $1 million, and the other for $975,000. The attributes of the two homes were different but their market values were roughly equivalent.

One would expect the taxable values of the two homes to be similar as well, but that is not what we found. The house which sold for $975,000 is assigned a taxable value which is more than twice the taxable value of the home which sold for $1 million.

More likely than not, the difference in the taxable value assigned to the two properties is the result of strict adherence to the statutory replacement-cost approach. That approach requires the assessor to reduce the value of a home by depreciation, even if the home is appreciating in value.

In our example, the house which sold for $1 million was built in 1970 and is assigned a taxable value which is 26.2% of its sales price, while the one which sold for $975,000 was built in 2021 and is assigned a taxable value which is 58.0% of its sales price.

Similar examples abound. Among the sales we reviewed, the average sales ratio (calculated by dividing taxable value by sales price) for homes built before 1971 is 31.6%, while the average sales ratio for homes built after 2012 is 65.5%.

This problem extends to all property types including commercial, because the assessor is required to follow the same statutory replacement-cost approach.

What does this mean for taxpayers? Property owners with improvements constructed relatively recently should evaluate whether the taxable value of their property is unreasonably high when compared to the taxable value of other properties put to the same use.

If an assessment is inequitable, redress is available by filing a timely protest. The county boards of equalization have the authority to reduce the taxable value of property where it has been assessed at a higher value than other property with identical usage and a similar location.

In summary, adherence to the statutory replacement-cost methodology is not resulting in evenly measured taxable values for like properties. Instead, the methodology has created systemic inequality. Properties with older improvements which have appreciated are systematically undervalued. As a result, some properties are assessed at less than half the value of comparably priced properties with newer improvements.

This disparity calls into question whether Nevada is achieving its Constitutional promise of a just valuation and uniform and equal taxation. Property owners should make certain their tax assessment meets the constitutional requirements of uniform and equal or seek help from a property tax professional to make that determination.

As rising interest rates and other challenges worry commercial property owners with loans nearing maturity, a running theme in the real estate industry is to "survive until '25." For hotel owners, however, the year-to-year struggle to stay afloat has been ongoing.

Hoteliers that survived the industry's downturn from the COVID-19 pandemic may have thought their troubles were ending, only to be slammed with record-setting inflation and skyrocketing interest rates. During the pandemic and the uncertainty it unleashed on hospitality operations, many jurisdictions across the country provided hotel owners with some form of property tax relief. For example, one jurisdiction removed all improvement value from hotel assessments and only applied land value in determining property tax liability.

Relief measures are winding down, however. Many jurisdictions have begun to value hotel properties as they did prior to COVID, claiming that the hospitality industry has rebounded.

While in many instances, industry statistics such as occupancy and revenue per available room or RevPar show some markets recovering, it is important to know that each hotel property is unique. That's why it is critical for property owners to review individual property tax assessments annually and determine whether the asset may be a good candidate for a reduction.

Competing approaches

Many jurisdictions have recognized that hospitality properties are operating businesses, with real estate serving as only one component of the overall valuation. Property owners typically must prove the proper allocation of that real estate component when challenging their tax assessments.

Over the last two decades, appraisers, tax assessors and property owners have employed two competing methodologies to allocate value to the real estate component of hotel properties in calculating taxable value. Those are the Rushmore Method and the Business Enterprise Value Method.

Taxing jurisdictions often value hospitality properties using the Rushmore Method, which removes management and franchise fees from the income stream as part of an income-based assessment. Proponents of this method argue that removing management and franchise fees offsets the business value, and that all remaining income should be applied to the real estate value.

By contrast, the Business Enterprise Value Method applies a more in-depth analysis to identify income streams attributable to each component of a hotel's going-concern value. The appraiser or assessor can then capitalize the remaining income stream, which is attributable to the real estate alone, to determine taxable property value.

A hotel owner should be sure to differentiate and clearly communicate the business' various income streams on a profit-and-loss statement. This will ensure that their property tax counsel and appraiser adequately understand and allocate income to appropriate components of the business.

While these methodologies may seem foreign to some hotel owners or taxing jurisdictions, they are familiar to business valuation professionals. These experts apply similar methods to valuing business components during mergers or the outright acquisition of a business.

In a conventional, income-based real estate valuation, an appraiser applies a market capitalization rate to a property's income stream to determine value. In the valuation of a business, experts can develop an appropriate capitalization rate for components of the business' income by taking the weighted average cost of capital, less an appropriate long-term growth rate, such as an inflation forecast. A similar approach can derive a going-concern or valuation of non-realty components from individual income streams within a larger hotel operation.

On top of analyzing the income streams for a hospitality property, it is important for the taxpayer's appraiser to analyze property improvement plan requirements. Hotel owners report anecdotally that as the effects of COVID have waned, hotel brands have grown stricter in enforcing post-COVID property improvement plan requirements.

Taxing jurisdictions often review building permits pulled during these renovation periods to gauge improvements made to the property. This often translates into higher property tax assessments. Depending on a jurisdiction's laws, however, these improvement plans carried out for brand compliance do not necessarily increase real estate value.

Business Enterprise Value advances

Rushmore was taxing authorities' go-to method for valuing hospitality properties for a long time because of it simplistic and straightforward nature. Over the past decade, however, significant legal decisions have found the Business Enterprise Value Method preferable over the Rushmore Method.

The first major decision in this area was SHC Half Moon Bay LLC vs. County of San Mateo. In this 2014 California case, the court found that the county's real property valuation methodology failed to properly exclude business values for the hotel's workforce, the hotel's leasehold interest in the employee parking lot, and the hotel's agreement with a golf course operator.

The second major decision occurred in 2020 in Florida. In Singh vs. Walt Disney Parks and Resorts U.S. Inc., the court found that in using the Rushmore Method, the county's appraiser failed to remove all intangible business value from the real property assessment.

Although taxpayers have notched key victories in employing the Business Enterprise Value Method to allocate value to the real estate component of hotels, there are still jurisdictions that steadfastly apply the Rushmore Method to hotel property tax assessments.

Hospitality owners seeking to improve their odds of success in a property tax dispute should consider working with tax counsel that intimately knows both the case law in their jurisdiction and the differences between competing valuation methodologies. This knowledge is critical to communicating strong arguments to tax tribunals and assessors.

Commercial property owners may still reduce taxes based on COVID-era interest rate cuts, but that window may be closing.

The Federal Reserve finally delivered a much-needed reprieve for investors by lowering the federal funds rate by 0.5% on Sept. 5. This reduction is especially welcome after an extended period of rapid interest rate hikes. For commercial property owners, however, a window may be closing on the opportunity to reduce property tax assessments based on the low interest rates that reigned during the COVID-19 pandemic.

Mortgage rates have eased slightly this year from a peak in October 2023. The average 30-year mortgage rate reached a 23-year high of 7.79% the week ending Oct. 26, 2023, marking the end of its climb from a staggering historical low of 2.66% in December 2020, according to the Freddie Mac Primary Mortgage Market Survey.

This striking contrast is crucial for commercial property owners, particularly those who bought their properties between early 2020 and the summer of 2022. That's when historically low interest rates had the 30-year mortgage rate bouncing along as low as 2.10%.

An investor who purchased commercial real estate in this timeframe may still be enjoying a favorable mortgage rate locked with their acquisition. By the same token, the property tax assessment on that transaction might still reflect an inflated purchase price from those years, owing to the effect that ultra-low-cost debt was having on market pricing at the time.

Today, taxpayers in this position may be able to argue that current market conditions no longer support that valuation, providing an opportunity for an assessment reduction and tax savings.

Learn the law on assessments

A taxpayer deciding whether to appeal their assessment should begin with an understanding of the objectives and legalities governing the assessor's actions. Most jurisdictions assess property based on a percentage of its fair market value at a specific date, often Jan. 1 of the tax year.

Assessors frequently rely on market sales data to estimate value, giving significant weight to recent sales involving the subject property. But the sharp change in interest rates, coupled with stricter lending standards, recently has led to a significant slowdown in commercial real estate transactions.

Because the assessor relies on sales data, this lag in transaction activity means they may not fully capture the impact of today's financial environment on current pricing and property values. For taxpayers, this presents an exciting opportunity to argue for reduced assessments.

To successfully claim a reduction, it is critical for the taxpayer to understand how the assessor valued their property and how current market conditions differ from those at the time of acquisition. For instance, if the property is being taxed based on transaction values from 2020-2022, the taxpayer could reasonably argue that its worth has since decreased due to inflation, the rise in interest rates, and tightened lending standards.

In preparing arguments for a reduced assessment, the property owner should be ready to show how conditions and trends that drive commercial real estate value support their call for a lower valuation. Several key factors are weighing down real estate values today, including rising interest rates, inflation, elevated operational costs, and anemic rent growth.

Vacancy rates remain high across many commercial sectors and rent growth has slowed. Lenders are adhering to strict terms on allowable loan-to-value ratios, reserves and other requirements, even after the Federal Reserve's recent rate cut. The Federal Reserve's July 2024 Senior Loan Officer Opinion Survey reflects that tighter lending standards and limited demand for commercial real estate loans are still in effect.

Commercial property prices fell by 7% over the past year and are down 21% since March 2022, according to Green Street's Commercial Property Price Index. Taxpayers can leverage this valuation decline when seeking a property tax assessment reduction.

Show effects of change

When meeting with the assessor or tax review panel, demonstrate the property's decreased value by comparing the lending environment and market conditions from the time of purchase with those at the most recent assessment date. Additionally, present any other salient factors, like the inflationary pressure on insurance, maintenance, and operational costs. While rents may have risen, assess whether that increase is sustainable or inflated considering today's higher tenant improvement costs.

Taxpayers should decide whether they need third-party experts to support their case. An experienced appraiser can provide an objective valuation and serve as an expert witness if necessary.

Even taxpayers who believe they have a good grasp of their property's worth can benefit from the advice of a recognized third-party expert, who can strengthen their case by explaining and substantiating the data to the assessor. An appraiser who is educated about the local submarket and who can convey that knowledge in a format this is easily digestible will likely raise the chances of success.

The window is closing

This opportunity will not last long. The further removed the assessment year is from the low-interest-rate period associated with the property's inflated assessment, the less relevant those conditions will be in seeking and supporting a property tax reduction. Moreover, the longer a property's assessed value remains unchanged, the harder it becomes to argue for a reduction.

Taxpayers can increase their chances of success by working with knowledgeable local appraisers and advisers familiar with property tax law in the subject property's jurisdiction. Preparing for a possible trial will often lead to a favorable settlement before reaching that stage.

Taxpayers should seize this chance now to secure the tax savings they deserve, before the opportunity is gone.

Highest and best use analysis can be a key to reduced property tax valuations, observes Timothy A. Rye of Larkin Hoffman.

Ad valorem property taxes reflect real estate value, and in most states, assessors value a subject property at market value based on its highest and best use. Although assessors often assume the current use is highest and best, taxpayers who analyze their property's usage may discover an opportunity to reduce their assessment by showing its optimal use has changed.

What is highest and best use?

Highest and best use is the "reasonably probable use of property that results in the highest value," according to the Dictionary of Real Estate Appraisal, 6th Edition. Along with that definition the publication includes four criteria the highest and best use must meet, requiring that the use be legally permissible, physically possible, financially feasible, and maximally productive.

For property tax valuation, assessors, appraisers and property tax attorneys need to consider each factor in a highest-and-best-use analysis. For most properties, determining whether the current use is legally permissible or physically possible is easily ascertained by answering the question, "Can the property do what it is doing?"

Determining whether a use is financially feasible or maximally productive is trickier. Financial feasibility of the current use may be as simple as identifying whether the property generates a positive net operating income, or if it would be cost prohibitive for the user to replace the space with an alternative property.

The analysis gets more complicated when trying to determine whether the use is maximally productive.

Take the example of an aging office building with declining occupancy. Should the owner invest money in building improvements with the goal of attracting more tenants, or is it better to vacate the building and convert it to multifamily use?

In this example, the first option would require a discounted cash flow analysis that considers an extended period of renovations, tenant improvements, vacancy loss during lease-up, and leasing commissions. In other words, the building would be valued as though it were stabilized at some point in the future, the costs associated with achieving stabilization would be deducted, and the future value and investment costs would be present valued to the valuation date.

Alternatively, the property could be valued like a new development with the projected use as multifamily. Whichever use has a greater value in today's dollars is the winner, or maximally productive use, and therefore the highest and best use.

The tipping point

When does a property's current use stop being its highest and best use? It could be when new development is in high demand and buyers will pay more for the land alone than they will for the property with existing structures.

It could be when the property is losing tenants and accumulating significant vacancy. The market sees the building as less appealing, and the remaining tenants start looking for more vibrant properties. Or it could be when the building is simply worn out and the cost to fix or restore it is greater than its value would be after repairs.

Every property will have its own unique set of circumstances to signal the practical end of its current use, but once a usage starts to tip, it seldom comes back. When the tipping point arrives, the highest and best use changes, and can have a profound impact on valuation.

Usage drives taxable valuation

When a property's current use is no longer highest and best, the property tax valuation likely should change too. While property tax assessments are generally based on the highest and best use, the mass appraisal techniques assessors employ to value properties are unlikely to incorporate highest and best use changes. The volume of properties assessors must value is simply too large to include individual highest and best use analyses.

As a result, it is up to taxpayers and their property tax counsel to identify when the highest and best use has changed and bring it to the assessor's attention, either informally or through a property tax appeal. In preparing arguments for such a meeting, remember that valuations based on highest and best use require data reflecting the highest and best use.

For example, if an office building is no longer viable as an office, but rather its highest and best use is conversion for multifamily residences, then the comparable sales should comprise sales of buildings that are also facing a change to multifamily. Using sales of stabilized office buildings as comparable sales would result in improper valuation of the subject property hypothetically stabilized with office tenants, rather than pursuant to its actual highest and best use.

Commercial real estate markets are experiencing significant changes, straining many property operations and owner cash flows. As a result, it is critical to carefully analyze highest and best use when reviewing property tax assessments.

Justices recognize owner rights extend to surplus proceeds from properties sold after tax sales.

Federal courts rarely adjudicate property tax matters, which have traditionally been the province of state courts. In May 2023, however, the U. S. Supreme Court issued a unanimous decision in a case that squared state property tax law up against the Fifth Amendment takings clause, which prohibits taking private property for public use without just compensation.

Taken for taxes

The events leading to Tyler vs. Hennepin County, began in 1999, when Geraldine Tyler purchased a Minneapolis condominium that she occupied until she moved into a seniors housing community in 2010. Ms. Tyler retained ownership of the condominium but failed to pay property taxes on it for several years, resulting in approximately $2,300 in unpaid taxes and $13,000 in interest and penalties.

Acting in accordance with Minnesota tax forfeiture procedures, Hennepin County seized the condominium and sold it for $40,000. This extinguished Ms. Tyler's $15,000 tax debt, and Hennepin County kept the remaining $25,000.

Minnesota's tax forfeiture procedure required the county to give the delinquent taxpayer adequate notice of the tax sale; notably, the procedure lacked a mechanism for a delinquent taxpayer to assert a claim to any sale proceeds remaining after paying off the tax debt.

Ms. Tyler brought a putative class action suit against Hennepin County in Minnesota federal court alleging that Hennepin County's retention of $25,000 in excess proceeds from the sale of her condominium was a taking of property without just compensation, and therefore an unconstitutional violation of the takings clause. The lower courts rejected her claims, and the case made its way to the U.S. Supreme Court.

The Supreme Court first noted that the takings clause does not itself define private property which, if taken by a state, requires compensation. The Court then conducted a thorough analysis of historical practice and traditional property law principles to determine that the surplus value remaining after a forfeiture sale constituted compensable property under the takings clause.

The Court concluded that the right to surplus proceeds is simply an extension of the corresponding interest in the underlying property. Thus, the Court recognized that a taxpayer's compensable interest in property applies to the underlying property itself and to equity in that underlying property in the form of excess proceeds generated from a forfeiture sale of that property.

Accordingly, while Hennepin County had the power to sell Ms. Tyler's home to recover the unpaid property taxes, it could not use the tax debt "as a toehold" to confiscate more property than was due, the Court stated. Doing so effected a "classic taking in which the government directly appropriates private property for its own use," such that Ms. Tyler was entitled to just compensation from Hennepin County.

Mechanisms mandate?

Unfortunately, the Supreme Court's recognizing a property right in surplus proceeds does not mean that states must now automatically return surplus proceeds to delinquent taxpayers. Nor does it directly address how states should administer their tax forfeiture sales to prevent infringing on taxpayers' constitutional rights.

But the Court did give some guidance in Tyler as to what statutory measures might prevent a takings clause violation. The Court cited Nelson vs. City of New York, decided in 1956, in which the city foreclosed on properties for unpaid water bills. Under the applicable ordinance, the aggrieved property owners had an opportunity to request the surplus from any sale by filing a timely answer in the foreclosure proceedings asserting that the properties had a value exceeding the amount due.

The property owners failed to do so, however. The Supreme Court held that, because the owners did not take advantage of this procedure, they forfeited their right to the surplus. Because the ordinance did not absolutely preclude an owner from obtaining the proceeds from a judicial sale but simply defined the process through which an owner could claim the surplus, there was no takings clause violation.

States are already reacting to the Tyler decision. In New Jersey and Virginia, courts have struck down state court tax sale procedures as unconstitutional under Tyler. Nebraska has amended its tax sale statutes to conform with Tyler.

Louisiana is following suit: Under current law, a tax sale grants the purchaser a prospective ownership interest in the form of a tax lien. This lien represents a claim on the property but does not confer immediate ownership rights. The purchaser can acquire full ownership after the redemption period has passed.

After Tyler, the Louisiana Legislature proposed amending the state's constitution to require adding to the state's tax sale procedures a process for delinquent taxpayers to claim any excess proceeds from a tax sale. The measure must be approved by the electorate and is on the December ballot for voter consideration.

Chief Justice John Roberts noted in Tyler that a taxpayer must render unto Caesar what is Caesar's, but no more. While states are conforming their laws to Tyler, taxpayers and aggrieved property owners must still comply with governing statutory procedures to claim their surplus and prevent Caesar from getting more than he is entitled to.

Lawmakers have the opportunity to transform onerous tax mechanisms into programs that boost affordable housing development.

Together with high rent and exorbitant property values, the real property taxes that fund necessary services in New York State make housing affordability a significant concern for low- and middle-income residents. To ensure a sufficient supply of affordable housing, the state must address the ad valorem levy, whereby taxes derive from a property's market value.

This article examines the critical interplay between New York's property tax policies and housing affordability. While some taxing mechanisms hinder the development and availability of affordable housing, adjustments and a few additions to those practices have the potential to promote the affordable sector.

Exemptions, Incentives

New York's real property tax system supports a complex framework of entities that rely significantly upon property tax levies to generate revenue and fund their budgets. Property taxes, assessed at the local level, support essential services such as public schools, police, libraries, highway departments, fire districts, open space preservation, out-of-county college tuition and the New York State Metropolitan Transportation Authority, among others.

To encourage the development of affordable housing and ease the burden that real property taxes can impose on developers and owners in the sector, New York offers several tax exemptions and incentive programs. Availability and benefits for some of the programs vary depending on a project's location.

One such option for developers is the 421-a Tax Incentive Program, also known as the Affordable New York Housing Program. Aimed at developers of new-construction multiunit housing, the program can provide full property tax exemptions during construction, followed by a graduated phase-in to normal taxation once the project is completed. In exchange, applicants must reserve a portion of the units to rent at affordable rates.

Another option, originally enacted by the federal Tax Reform Act of 1986, is the Low-Income Housing Tax Credit Program. This gives state and local agencies the authority to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households. Developers receiving these credits can then sell them to investors, generating equity for the project and reducing their need for debt financing. While this may not be a direct property tax exemption, it can significantly promote the financial feasibility of affordable housing developments.

A third initiative was created by The Housing Trust Fund Corp. as a subsidiary public benefit corporation of the New York State Housing Finance Agency. It provides funding to eligible applicants to construct low-income housing or to rehabilitate vacant, distressed, or underutilized residential or non-residential property to residential use for occupancy by low-income individuals. These funds often come with property tax exemptions or abatements, reducing operating costs for affordable housing providers.

In addition to these broad exemptions, individual homeowners may qualify to ease high property tax costs via incentives such as the School Tax Relief Exemption or exemptions for senior citizens, veterans, people with disabilities, clergy, and certain agricultural properties, among others. A property tax professional can help developers or homeowners determine what programs are available to reduce the tax burden for their property.

Challenges, Criticisms

Despite the evident benefits these programs bring to communities, critics argue that property tax exemptions can create inequities in the tax system. Large developers might benefit disproportionately from programs like 421-a, for example, while smaller property owners bear a more significant tax burden. Additionally, critics argue that tax-abatement-based programs fail to address other challenges that impede the creation of new affordable housing. Affluent neighborhoods, for instance, often resist new affordable housing projects, thwarting development efforts and perpetuating socioeconomic divides.

Administering property tax exemptions and deciphering potential incentives can be complex and burdensome. Developers must navigate convoluted application processes and compliance requirements, which can delay projects and increase costs. Local governments also face challenges in ensuring proper implementation and monitoring of these programs. Real or perceived complexities associated with application processes for permitting, financing and incentives often constitute a barrier in themselves, discouraging developers from undertaking new affordable housing projects.

Ongoing underserved renter demand for affordable housing suggests the current assortment of incentives is failing to achieve the desired outcome, which is to ensure an adequate supply of affordable housing. Rising construction costs, limited availability of suitable land, and community opposition exacerbate this imbalance, resulting in a persistent gap between the number of affordable units needed and those available.

A Call to Action

New York lawmakers have the opportunity to boost affordable housing efforts by enhancing the effectiveness of property tax policies that promote the sector. Simplifying the application and compliance processes for tax incentives would be a significant first step that would encourage more developers to participate.

Following on the theme of simplification, the state should consider creating a centralized information hub with dedicated support for all development incentives. This would give developers a single resource to help them navigate the bureaucratic landscape and complete new affordable projects successfully.

Answering the call for more affordable housing will require more than tax abatements, however. Leaders must find ways to increase funding for affordable housing programs. Additionally, offering low-interest loans, grants, and technical assistance to non-profit developers would enhance their capacity to deliver affordable units.

New York State's real property tax system plays a crucial role in shaping the affordable housing landscape. While current tax exemptions and incentive programs provide some essential support, challenges remain in achieving equity, efficiency, and adequate supply. By refining these policies and addressing systemic issues, New York should be able to make significant strides toward ensuring that affordable housing is accessible to all its residents.