As renewable energy assets become more prevalent in commercial real estate portfolios – especially among industrial and data center users – property owners face a critical challenge: ensuring that intangible assets are not mistakenly included in the taxable value of real and personal property.

Wind farms, solar installations, battery energy storage systems and nuclear facilities often involve complex ownership structures and revenue models. While these facilities are physically tangible, much of their value derives from intangible elements such as power purchase agreements, state and federal tax incentives including investment tax credits and production tax credits, software and regulatory rights. Misclassifying these intangibles as taxable property can result in inflated assessments and unfair tax burdens.

Most state property tax systems are designed to assess only tangible property, namely land, buildings and physical equipment. Intangible assets, such as contractual rights or intellectual property, are generally exempt. However, in practice, the line between tangible and intangible value can blur, especially when assessors rely on valuation methods that do not clearly separate the two.

For example, values calculated using the cost approach may include development premiums or acquisition expenses that reflect intangible value. Add to that federal tax incentives that can provide up to a 30% credit for development costs. When assessors fail to exclude any or all of these elements from transaction comparisons or a final assessments, their conclusions will skew high and produce inflated values. Similarly, the income approach will capture revenue streams tied to intangible assets, unless carefully adjusted.

In reviewing assessments on renewable energy projects, taxpayers should be on the lookout for any intangible components contributing to the assessor's valuation. Power purchase agreements, for example, are contracts that guarantee future revenue but are financial instruments, not physical assets.

Other examples include interconnection rights, because the ability to connect to the grid is often secured through regulatory approvals or agreements, not through tangible infrastructure. Likewise, software and control systems including proprietary algorithms and digital platforms used to manage energy production and storage are intangible.

Intangibles common to many commercial properties include cost of capital, as well as brand and developer reputation. Market trust and recognition may influence value but are not taxable property.

To ensure fair assessments, owners should adopt valuation strategies that clearly separate intangible value. Here are essential steps to include:

Disaggregate costs when using the cost approach. Break down construction costs from development premiums and intangible acquisition expenses.

Adjust for risk. In finance, the term "risk" refers to the ability to forecast the cash flows accurately. Both wind and solar cash flows are riskier than those of the electricity generating companies upon which assessors, and the appraisers they hire to defend their assessments, tend to rely to estimate a discount rate.

Review depreciation tables. Many assessor tables fail to reflect the rapid technological obsolescence of renewable assets or the non-depreciable nature of intangibles.

Identify economic or external obsolescence, which is something external to the property that limits its value. The most compelling evidence of economic obsolescence is insufficient income to justify the cost. The historical cost says little about what a property is worth today.

Adjust income models when applying the income approach to isolate the portion of net operating income attributable to tangible assets. This may involve modeling scenarios that exclude intangible inputs.

Document intangibles by providing contracts, licenses, regulatory filings or other clear evidence that demonstrates the presence and value of intangible property.

In many jurisdictions, statutes or case law explicitly prohibit the taxation of intangible property. Even where the law is less defined, taxpayers can often succeed by showing that assessors have included intangible value in their assessments.

Key strategies include arguing for valuation based on actual use rather than theoretical capacity, especially in underutilized facilities. Does the project use pollution controls? Identify exemptions or reduced assessments for equipment that mitigates environmental impact.

And finally, challenge the assessor's inclusion of any intangibles. Appeal assessments that include tax incentives, goodwill, assembled workforce, software or contractual rights as part of the taxable base.

As data centers and other high-demand users increasingly rely upon onsite renewable energy, understanding how to separate intangible value becomes essential. Accurate valuation not only ensures compliance with tax law but also protects property owners from excessive taxation.

Moreover, as renewable technologies evolve, so, too, must the appraisal methodologies used to assess them. Taxpayers must stay informed, adaptable and vigilant in distinguishing between what is taxable and what is not.

The rise of renewable energy in commercial real estate brings new complexity to property tax valuation. By applying disciplined appraisal techniques and understanding the legal boundaries of taxable property, owners can ensure fair assessments that reflect only the value of tangible assets. This approach supports both fiscal equity and the continued growth of sustainable infrastructure.

When a property's current use isn't highest and best, New Jersey jurisdictions can assess and tax based on hypothetical redevelopment.

It's hard to imagine a more dystopian world than one in which governments base real estate tax upon a hypothetical use other than a property's current and actual use. Unfortunately, taxing jurisdictions in New Jersey are doing precisely that, attempting to sustain inflated property tax assessments based upon unrealized development potential.

In New Jersey, property taxation is based upon real estate's fair market value. In simple terms, fair market value is the most probable sale price that a property would fetch in an open market transaction between a willing buyer and a willing seller. But simple terms, in commercial property valuation, can be misleading.

Taxable property value should reflect the bricks and sticks of real estate. The reality is that the purchase price for an income-producing property often includes consideration for more than bricks and sticks.

Untangling a Bundle of Sticks

When income-producing properties trade, the real estate is often encumbered by leasehold interests, service contracts, management agreements, personal property and other intangible business assets. These non-real-estate components affect value for buyers and sellers, but that value is not subject to property tax. To correctly isolate the taxable property value portion of a transaction price, assessors must identify and exclude consideration paid for non-taxable intangibles.

Allocating the purchase price paid to these various interests can prove challenging, especially when the transacted property is going to be redeveloped and the sale is made subject to approvals and permitting. A change to more favorable zoning can drastically affect overall market value and shift the values a potential buyer would ascribe to a property's various tangible and intangible components.

It's exceedingly difficult to assign a monetary value to redevelopment approvals in New Jersey, as the process can be long, arduous and incredibly complex. After an applicant's initial presentation to request general development plan approval from the zoning and planning boards, the time required to put shovels in the ground varies wildly from town to town and is contingent upon the scope, scale and nature of the redevelopment.

Just as it's difficult for buyers and sellers to assign value to the approval process, taxing authorities face similar challenges trying to come up with fair and reasonable tax assessments for properties that are in redevelopment limbo. In valuing the real estate, they must also value the redevelopment prospects woven into the selling price like extra branches intertwined in the property's bricks and sticks.

Analyzing Highest, Best Use

Ascertaining true fair market value often requires a highest-and-best-use analysis. New Jersey jurisdictions task municipal tax assessors with assessing real estate in a manner that reflects its true fair market value at its highest and best use. This requires the sequential consideration of all possible uses for the real estate that are legally permissible, physically possible, financially feasible and maximally productive.

But just as fair market value is in a constant state of flux, so too is highest and best use a fluid concept. Changes in market conditions, economic climate, consumer trends and even local politics can impact highest and best use. Some property owners actively seek redevelopment approvals to maximize their real estate's value, but other properties sit unused or underutilized until a buyer acquires the asset for redevelopment.

Valuing Redevelopments

A fact pattern that plays out regularly in the Garden State is that a redeveloper acquires a piece of underutilized real estate for redevelopment. The "as is" purchase price is severely discounted due to the lack of market demand for the property's current use and configuration. The redeveloper is also investing time, money, and risk in applying for rezoning and redevelopment approvals.

The redeveloper invariably wants to file a property tax appeal seeking an assessment reduction based upon the discounted purchase price and the lack of market demand for the property in its current condition. But taxing jurisdictions are not so quick to concede massive tax assessment reductions under this scenario.

New Jersey caselaw enables taxing jurisdictions to argue that where there is a reasonable probability of securing a zoning change for the redevelopment, the municipal tax assessor can value the subject property under an alternative highest-and-best-use theory. In other words, if the redevelopment is imminent or a foregone conclusion, the taxing authorities can attempt to value and tax the property as if those approvals were already in place.

Reasonable Expectation

Fortunately, the courts give municipalities a relatively high bar and difficult burden of proof to sustain property valuations based upon an alternative highest and best use and the reasonable probability of securing a zoning change. The caselaw is careful to distinguish reasonably probable use cases from those that are only remotely possible, aiming to deter unbridled speculation and pie-in-the-sky redevelopment scenarios that would yield unrealistic property valuations.

Notably, the Tax Court of New Jersey has identified specific factors that impact the probability of securing a zoning change for a redevelopment. Those include: emergent trends in land use and development; market interest in the development or redevelopment of the subject property or similarly situated properties; complexity and likelihood of success in securing approvals from local zoning and planning authorities; community support for the potential redevelopment activity; regulatory restrictions at the property; and timing of approvals.

Before pursuing a property tax appeal, property owners should be mindful of highest and best use. Just as redevelopers see an opportunity to revitalize or repurpose an income-producing property, taxing jurisdictions may see an opportunity to bolster tax rolls by reassessing an underutilized asset with redevelopment potential. Understanding the legal and practical implications associated with alternative highest-and-best analysis is critical to navigating disputes and ensuring accurate valuations.

The Empire State's exemptions can undoubtedly be subject to interpretation, and some communities ultimately opt out.

Property taxes are a substantial expense for businesses and commercial property owners in New York, and taxpayers in the state are contesting property assessments in record numbers. Many owners are going the extra mile, however, by exploring exemption opportunities. Exemptions can significantly reduce property taxes and free capital to invest in new developments, renovations, and long-term growth.

State and local governments offer commercial property owners a variety of tax exemptions, all of which reduce a property's taxable assessed value and thereby lower the taxpayer's overall liability. Full exemptions eliminate the entire tax obligation, while partial exemptions reduce the taxable amount.

Since local governments administer many exemptions, eligibility requirements and benefits often depend on the municipality. Generally, owners must prove that the property is being used for the exempt purpose specified in the governing statute; that all portions of the property contribute to that purpose; and that no profit derives from its operation. For a full exemption, the entire property must be used for the exempt purpose. Any portion not meeting this requirement is typically returned to the tax rolls.

Qualifying scenarios

Taxpayers must decide not only which exemption to pursue, but also whether the property and ownership structure qualify. Here are several provisions and programs that have helped New York property owners garner tax exemptions.

A temporarily vacant or unused property could qualify for an exemption if the owner can demonstrate its imminent use with an exempt purpose. Municipalities may accept proof such as construction plans, site grading, or renovation projects as evidence of intended use. In recent years, however, local governments have tightened their interpretations of these requirements and are actively seeking opportunities to return exempt properties to the taxable assessment roll.

A common question arises when a taxable property is leased to a tax-exempt entity: Does the property qualify for an exemption based on the tenant's nonprofit status? The short answer is, sometimes. In New York, the prevailing legal interpretation is that ownership, rather than tenancy, determines exemption eligibility. However, Section 420-b of the New York Real Property Tax Law (RPTL) includes an important exception. The statute holds that a property owned by a for-profit entity and leased to a nonprofit organization may still qualify for an exemption—but only if the rent does not exceed the actual costs of carrying, maintaining, and depreciating the property. Since the statute does not precisely define these terms, courts have been left to interpret their meaning, leading to legal disputes over compliance.

Economic development.

Section 485-b of NY RPTL provides property tax relief to encourage economic development. This provision benefits property owners who undertake construction, renovations, or improvements to commercial properties by offering a partial exemption on increased property taxes resulting from these enhancements. The exemption follows a declining scale over 10 years, starting with a 50% exemption on the increased assessed value in the first year and decreasing by 5% each subsequent year. To qualify, projects must meet specific criteria set by local governments, which also have the authority to opt into or out of the statute.

Industrial development agencies or IDAs provide various incentives to businesses that create jobs and stimulate the local economy. 

For projects that contribute to economic development, potential benefits include exemptions on sales tax for construction materials and equipment purchases, and exemptions that can substantially reduce or eliminate mortgage recording taxes. IDA offerings can also include real estate tax exemptions under a payment-in-lieu-of-taxes or PILOT agreement. The latter typically requires the property to be removed from the taxable assessment roll and the owner to make scheduled, agreed-upon tax payments for the term of the agreement as opposed to less predictable property taxes, which can change based on the budgetary needs of the taxing municipality. Apply directly to the local IDA for these benefits and be prepared to demonstrate how the project will benefit the community. Manufacturing and industrial projects typically qualify, and other commercial developments may be eligible, such as rental housing.

For commercial property owners, reducing tax liabilities can lower costs and support business growth. Whether through annual assessment appeals, Section 485-b exemptions or IDA incentives, avenues exist that can yield significant tax savings. While navigating these opportunities, pay special attention to nuanced statutory language and keep abreast of evolving judicial interpretations. An experienced, local advisor can help property owners identify and pursue exemptions, ensure compliance and maximize tax savings.

While in the process of navigating these various and sundry opportunities, it is critical to pay special attention to nuanced statutory language and keep abreast of evolving judicial interpretations. To that end, having an experienced, local advisor can also be instrumental in helping property owners identify and pursue exemptions, ensure compliance and maximize tax savings.

Valuing hotels for property taxation is one of the most complex and contested areas in real estate appraisal. And unfortunately for hotel owners, improper assessment is common and costly.

Unlike office buildings or warehouses, hotels are not just physical assets — they are operating businesses. This distinction requires appraisers to carefully separate the taxable real estate, which is land and improvements, from the nontaxable business enterprise and intangible assets. Failing to do so risks unlawfully taxing the business itself, a critical concern for Texas hotel owners and property tax professionals.

Texas law mandates that assessors appraise property at its fee-simple market value, excluding exempt intangibles and business value. For hotels, this means appraisers cannot simply capitalize the income of the operating business. Rather, they must make adjustments to remove components tied to franchise affiliation, management expertise, brand recognition and other intangibles.

The challenge is clear: How can assessors, taxpayers and their appraisers correctly isolate the real property value from the going concern? What follows are several common approaches and their inherent weaknesses, which can skew an assessor's conclusions or provide bases to challenge inflated assessments.

Management Fee Method

One widely used — but flawed — method is the management fee method, also named the Rushmore Approach after Stephen Rushmore, founder of hospitality consulting firm HVS. Developed in the 1980s and originally designed for financing valuations, this method deducts management and franchise fees, reserves for replacement and minor residual intangibles from a hotel's net operating income, then capitalizes the remainder as the real property's rental Texas value.

While seemingly straightforward, this approach has a critical failing. As explained by appraiser David Lennhoff, a leading authority on separating intangible business value, franchise and management arrangements, these intangible items are not just expenses but also investments designed to generate returns. By deducting only the costs, the Rushmore method leaves intangible returns embedded in the income stream, resulting in inflated taxable values that include business enterprise value.

In practice, this often leads to over-assessment, effectively taxing the hotel's business operations rather than just its real estate.

Business Enterprise Approach

Lennhoff created an alternative called the Business Enterprise Approach (BEA) and asserts that hotel income includes a quantifiable return on intangibles including brand, goodwill and a trained workforce. Appraisers and assessors must deduct these intangible-derived returns to arrive at true real property value, he contends.

The most prominent debate in hotel valuation today pits the Rushmore Approach against Lennhoff's BEA. The latter's supporters argue Rushmore leaves too much business value in the taxable base, while critics claim BEA valuations remove too much.

Rushmore proponents argue their method sufficiently strips business value, and courts in New Jersey and other states have accepted it. However, courts in California and elsewhere have rejected Rushmore for assessment purposes.

One way to frame the difference: Rushmore values the hotel as a business, while BEA values the real estate used to operate a hotel.

O'Connor Offers Middle Ground

Texas practitioners have recently advanced the O'Connor Approach, developed by Mary O'Connor, principal-in-charge of the forensic and valuation practice at professional services company Sikich. This method quantifies the incremental revenue impact of a hotel's brand by analyzing changes in average daily rate, occupancy and revenue per available room when a flag is added or removed. The model then nets out associated costs like franchise and loyalty program fees.

The resulting net gain is treated as nontaxable business value and removed from the income stream before capitalization. This approach avoids Rushmore's under-adjustment and BEA's alleged "double dipping." Courts outside of Texas, including Arkansas, have accepted this framework, which sometimes cuts assessed values in half.

Still, the O'Connor Approach faces scrutiny. Some appraisers question whether brand impact can be cleanly isolated, given overlapping factors like location, management quality and capital improvements. Others worry that aggressive application could shift too much value into the intangible category, risking under-taxation of real property.

Equal and Uniform, a Texas Twist

Another strategy for Texas hotel owners is pursuing an equal-and-uniform (E&U) appeal under Section 42.26 of the state's tax code. Rather than challenge market value directly, this appeal tests whether the property is assessed equitably compared to comparable hotels.

A common E&U tool is the room revenue multiplier. By dividing appraised or sale values of comparable hotels by room revenue, consultants can establish benchmark ratios. If a subject hotel's assessed value per room or per-revenue dollar materially exceeds the median of its peers, the owner may demonstrate nonuniform treatment and secure a reduction.

While powerful, E&U appeals have limitations. They do not fully adjust for brand affiliation or loyalty programs, which influence revenue. As such, E&U works best as a complement to fee-simple valuation arguments, not as a replacement.

The preceding review of valuation methods offers clear implications for Texas hotel owners. Foremost, those taxpayers should review assessments with a skeptical eye, ideally with a local tax adviser, and contest inflated values. If an appraisal district relies on the management fee method, it may be unlawfully taxing intangibles. Likewise, challenge Rushmore-only valuations. While Rushmore has judicial support, it may not fully exclude nontaxable components as required by Texas law.

For the taxpayer's appraisal, consider the O'Connor approach. Its blend of brand-driven revenue analysis and expense offsets align well with Texas' fee-simple standard. An E&U appeal as a parallel strategy can improve the taxpayer's chances for success. Revenue room multiplier comparisons can secure reductions based on inequitable treatment, even if income-based arguments stall.

Hotel valuation for property tax purposes is a high-stakes exercise where appraisal theory meets statutory law. Properly excluding business enterprise value and intangibles can mean millions in tax savings or overpayments.

Texas hotel owners and advisors should pursue both market value challenges and equal-and-uniform appeals as complementary strategies. Together, these approaches create a stronger defense than either can alone.

As valuation debates evolve, hotel owners must remain vigilant, understand the flaws of shortcut methods, and advocate for assessments that reflect both economic reality and legal boundaries. Property taxes should be levied on real property, and not on the brand equity, goodwill, and operating acumen that make a hotel succeed.

Lawmakers allow retroactive property tax exemption on religious grounds.

North Carolina has little sympathy for taxpayers that miss filing deadlines, but a new law eases the potential repercussions for property owners otherwise qualifying for religion-based tax exemptions. Under the new measure, taxpayers can apply for the religious exemption from property taxes going back five years from the law's adoption date earlier this year.

It will be interesting to see whether the General Assembly extends a similar grace period to other exemptions over time. Regardless, the new measure provides welcome relief to a segment of taxpayers and offers a possible model for lawmakers to adjust the regulation of other exemptions down the road, if they choose to do so.

And for all taxpayers, the recent change provides a good opportunity to review how North Carolina grants and regulates property tax exemptions.

Machinery of Taxation

As a rule, North Carolina subjects all real and personal property to property tax unless the General Assembly or the state constitution exempts the property, or it falls into a special class of exempted property. Most exemptions are set out in the Machinery Act, a framework of tax rules within the North Carolina General Statutes.

The Machinery Act allows for several types of exemptions from property taxation. Exemption is automatic for property that is government owned, burial property, non-business personal property, intangible property, and certain inventories. There is no filing requirement or action required by the taxpayer to receive these exemptions.

Relief is available for other uses including charitable, historic, religious and educational properties, as well as for the present-use value of property used for certain agricultural purposes, but these common exemptions require action on the taxpayer's part. To obtain exemption for these uses, the taxpayer must file the appropriate formal application during the listing period, which generally is the month of January.

The act allows late filings for "cause," a term not clearly defined, but approved late filings only apply to the calendar year during which the application is made. That means that if a late filing is allowed for cause in a given year, the taxpayer must file again – and before the deadline – in a later year to maintain the exemption going forward.

Once a taxpayer has correctly filed and received an exemption for a charitable, historic, religious or educational property, subsequent annual filings are unnecessary to maintain the specified property's exempt status while the property, ownership and use remain unchanged. The law does require a new filing in the event of a change in the property, such as land being added or deleted, or if there is a change in use or ownership.

Lapses and religion

Woe to the taxpayer who fails to file a new application for a previously exempt property when there is a change affecting the exemption, such as a usage alteration or ownership restructuring. The taxpayer is then at risk of a "discovery" that the exemption no longer applies and, if the lapse persists, the levy of back taxes for five years with exponential penalties.

Historically there was no relief for the taxpayer who failed to make the required filing or missed the deadline. There was no escape from this liability, until now. In 2025, the legislature added a relief valve, limited to religious exemption.

Session Law 2025-20 (HB91) changed North Carolina law to allow a taxpayer claiming a religious exemption to file a late application that would apply to the previous five years. Any relief accorded is limited to a release of liability for the taxes levied, however; there is no provision for refund of any taxes already paid.

This provision appears targeted to situations where a property would qualify for the religious exemption if the taxpayer had correctly followed the application process. Examples could include an owner establishing a qualified religious use of a property who failed to apply for an initial exemption or missed the filing deadline. Alternatively, a new owner may have continued an existing exempt use but failed to file a new application on time after taking over the property.

Other scenarios could include an owner of an exempted property who expanded the parcel by acquiring an adjacent tract, then failed to reapply on the reconfigured real estate. Similarly, discovery may have revealed that a filing error excluded a portion of a property from its original exemption application.

A taxpayer granted a retroactive exemption should not expect a refund of taxes already paid. The "release" described in the measure would free the taxpayer from having to pay any back taxes they would have otherwise owed for the past five years without the exemption, however.

This new law took effect June 26, 2025, without amending the existing statutes. Because it is uncodified, a taxpayer or researcher would not learn of it simply by reading the statutes making up the Machinery Act. Hopefully, any researchers will be using a new version of the statutes with explanatory notes describing the bill, or will be familiar with the new law through other research.

With the number of public-private partnerships for constructing public facilities on the rise, communities across the country wrestle with the question of how to treat such arrangements for ad valorem property tax purposes. In most instances, private developers and taxing entities take opposing positions on the issue.

Public-private joint ventures have become a popular strategy to achieve community objectives through collaboration with private developers. To construct a particular facility, a municipality or other government will typically provide subsidies or other financial incentives to encourage participation in the project by a private-industry partner or partners.

These subsidies, which may come in the form of grants or tax credits, often lead to property tax contention. Some taxing authorities include the subsidies or tax benefits granted to the private developer in the taxable assessed value of the real property.

In contrast, private developers view such subsidies or benefits as tax-exempt intangible property that should not be included in assessed values.

Here are a few common incentives and their property tax implications:

Low-Income Housing Subsidies

The treatment of federal subsidies for operation and construction of low-income housing became an early battleground in the ongoing conflict over property tax and subsidies. Michigan, Kansas, Idaho and some other states account for subsidies in assessing low-income housing for property tax purposes. Taxing authorities in these states argue that subsidies are tax credits that artificially depress values and prevent assessment of such properties at market value.

However, Arizona and some other states disregard subsidies in assessing such properties. Those states assert that subsidies are transferable, meaning the incentives are not intertwined with the real property, and that subsidies enhance the value of low-income housing in the marketplace.

Renewable Energy Subsidies

States have taken a somewhat different view of government subsidies and tax incentives used to finance construction of renewable energy facilities. Particularly in states that promote alternative or green energy, taxing authorities exclude subsidies from the taxable property, choosing instead to classify such incentives as tax-exempt, intangible property.

For example, California's State Board of Equalization in 2017 issued guidelines excluding the federal cash grants and income-tax credits from inclusion in the valuation and assessment of windfarm properties. In 2014, the Arizona Legislature approved a similar subsidies exclusion in the assessments of solar power properties.

More recently, the Oklahoma Supreme Court in Kingfisher Wind LLC vs. Wehmuller held that production tax credits are intangible personal property and are not subject to ad valorem taxation. Production tax credits are federally issued subsidies to help finance construction of windfarms.

The reasons for not including subsidies in the assessed values of renewable energy properties vary. Some taxing authorities assert that subsidies are not bargained for between buyers and sellers of such properties, and that the statutes governing incentives often impose sunset dates.

Notably, some taxing authorities identify subsidies as a needed financial incentive for construction of high-cost properties that would otherwise be economically infeasible to build.

'If You Build It, They Will Come'

Local governments have found that, in many cases, the only way to construct public facilities that will attract a sports franchise or similar occupants to host concerts, sporting events and other large, public events is to subsidize a portion of the construction cost. The development cost for football stadiums, basketball and hockey arenas, indoor theaters, convention hotels and similarly sized public venues often do not pencil out for a private developer without government subsidies. Joint ventures with private developers allow governments to gain the facilities they need by making projects feasible for developers.

Subsidies or grants, perhaps funded by municipal bonds, are one avenue governments use to promote construction of public facilities. But tax credits and similar incentives can be — and are — used to encourage public venue development.

In a similar vein, governments can increase a developer's available funding to construct a desired project by allowing developers to pursue additional revenues at the public venue. An example would be to allow construction of additional outdoor advertising assets associated with the facility that are not assessable for property taxation.

California Decision Pending

California's Supreme Court is currently addressing the property tax treatment of government subsidies. In Olympic and Georgia Partners LLC vs. County of Los Angeles, the court is considering whether the assessed value of a convention center hotel should include a subsidy the City of Los Angeles provided to the developer and owner for its construction.

The city based the subsidy on an amount of transient occupancy tax the hotel was expected to generate for a period of years after it opened. City leaders reasoned that the hotel would not be economical to build without the subsidy.

The court is wrestling with this question: Is the subsidy the city provided an intangible benefit that is not subject to taxation, or is it a part of the real property and assessable for property tax purposes? The court's decision is expected later this year.

Taxable Property or Exempt Intangible?

Like the California Supreme Court, communities across the country continue to grapple with the fundamental question of whether government development incentives contribute taxable property value to a completed project. The answer to this question has significant implications.

If assessors subsume subsidies into the assessed values of real property, it may significantly limit local governments' ability to induce private developers to construct public venues needed to revitalize city centers and rejuvenate local economies. If government subsidies are to be tax-exempt and excluded from the assessed value of real property, however, tax authorities must address a few key points in determining the treatment of individual properties.

First, is the subsidy being used to further the goal of local government, particularly when the subsidy is essential to make the project's construction feasible? Second, will the subsidy's benefit continue throughout the life of the completed property?

When the subsidy funds a project that is not economical to build otherwise, and when the incentive is a one-time construction subsidy that will not be transferred to a subsequent owner, there is good reason for excluding the subsidy from the project's assessed value for property tax purposes.

Rate increases to offset a shrinking property tax base will further erode commercial real estate values.

Across the country, local governments are struggling to maintain revenue amid widespread property value declines, as a result they are resorting to tax rate increases. This funding challenge increases the burden on owners of commercial properties that are already suffering and ultimately degrades property values and the overall tax base. Let's examine how this unfortunate and predictable scenario plays out, and the negative impact it inflicts on commercial real estate values.

Rate-to-value dynamics

A commercial property's taxes depend on its assessed value, which represents the property's market value determined by a local government assessor. The assessed value multiplied by the tax rate determines the property tax owed.

Taxing entities calculate the tax rate by dividing the budget, or dollar amount levied for an area, by the total assessed value of all properties within the jurisdiction. Taxpayers can multiply the resulting tax rate, also known as a mill rate, by the assessed value of their individual property to determine the tax owed.

How can decreasing assessed property values lead to an increase in tax rates? When property values decline, the overall property tax base shrinks. The local government's fiscal needs remain stable, however, or might increase due to inflation and the growth of public services. If the government does not reduce either its budget or levy requirements, tax rates will rise as the tax base declines.

Tax levying methods vary from state to state and can differ across real estate classes, so there are few convenient, apples-to apples-comparisons available. However, a chart of year-over-year changes in the property tax rates of Boston, Minneapolis and Denver captures the beginning of an upward trend. The percentages in the chart represent an increase or decrease from the year before.

Sources: City of Boston published commercial tax rates; Hennepin County published tax rate cards; City of Denver published abstract of assessment and summary of levies.

Property taxes trail the market because assessed values reflect market data from before the assessment year. For example, taxes payable in 2025 may be based on values set in 2024 and based on data from 2023. As a result, with values continuing to decline, tax rates are likely to continue rising.

This scenario creates a challenging environment for commercial property owners, who face increased tax rates as property values decline, affecting investment decisions and lowering market stability.

Impact on real estate value

Increasing tax rates affect commercial properties in two significant ways: One is to reduce net operating income (NOI) for gross-leased properties, in which the landlord pays expenses; the second way is to increase occupancy costs for tenants in net-leased properties, which pass expenses through to tenants.

In gross-leased properties such as apartments, the landlord pays all expenses including real estate taxes. Higher tax rates consume more of the landlord's income, and that NOI reduction decreases the property's market value. For example, if the effective tax rate increases from 2.0% to 2.15% on a $10 million building, the taxes would increase by $15,000.

The additional $15,000 in taxes will come straight off the building's net income, which translates directly into a value loss.

Tenants with triple-net leases pay a base rent plus all expenses. In reference to commercial property taxes, it is not uncommon to hear, "the tenant pays it anyways, so it doesn't matter to the landlord." However, just as landlords are sensitive to cost increases in gross-leased buildings, tenants are sensitive to increases in total occupancy cost (rent plus expenses).

For example, a tenant with $25 per-square-foot net rent and $15 per square foot in operating expenses has a total occupancy cost of $40 per square foot. If the taxes increase by $1 per square foot, then their total occupancy cost will increase to $41 per square foot.

For tenants, a rise in occupancy cost is akin to a rent increase. If expenses become too high, they may demand a rent reduction or relocate to a more affordable building. Thus, the increased tax rate impacts building value through reduced rent or lower occupancy.

Clearly, increasing property tax rates have a significant impact on commercial real estate values. As assessed values decline and local governments let tax rates rise to meet their fiscal needs, the environment for commercial property owners grows more challenging. This leads to reduced income for landlords and increased occupancy costs for tenants, ultimately diminishing asset values, impeding investment decisions and eroding market stability.

A tax case in Allegheny County also spurs a judge to limit government's ability to initiate reassessments of individual properties.

Pennsylvania taxpayers recently scored an important victory when the Allegheny County Court of Common Pleas reasserted taxpayers' right to protection against property overassessment, while limiting taxing authorities' ability to proactively raise individual assessments.

Pennsylvania is the only U.S. state (besides California) that does not mandate periodic reassessments. Instead, it employs a county-by-county method: Each county annually submits sales data to the State Tax Equalization Board, which then creates a "common level ratio" between market value and the previous reassessment value.

Intervals between reassessments vary widely, with Butler County conducting its last reassessment in 1969 and others currently in reassessment. This results in a stilted system that assesses many new owners' properties at the sales price (which may or may not reflect market value), and leaves other assessments unaltered, without updates to reflect changes in the economy and submarket.

Pennsylvania's constitution requires uniform taxing schemes and prohibits government from distinguishing between residential and commercial properties when levying property taxes. As such, all taxing authorities dealing with assessments must administer the laws "in a spirit to produce as nearly as may be uniformity of result."

Actions in Allegheny County

Allegheny County, home to Pittsburgh, has faced extensive litigation over the sales data it submitted annually to the state equalization board for calculating the county's common level ratio. This ultimately resulted in its 2022 common level ratio being retroactively reduced after a county judge held that the county had been "cooking the books" by sending skewed data to the state board. Taxpayers received a special lookback period to appeal their 2022 assessments, and thousands had their property taxes reduced after applying the statistically correct ratio.

Pennsylvania is also one of the few jurisdictions that permit taxing bodies to file assessment appeals against specific properties to raise taxpayers' assessments. In Bhardway vs. Allegheny County, a residential property owner's assessment increased after a school district in Allegheny County filed a tax assessment appeal on the taxpayer's property, and the owner appealed to a higher court. The taxpayer then filed a motion to use an alternative ratio, highlighting the county's lack of transparency and history of sending artificially inflated data to the state equalization board. Finally, the taxpayer argued that it would be financially burdensome for taxpayers to disprove the county's ratio.

Specifically, the taxpayers in the Bhardway case sought to prove non-uniformity under the common-law method by introducing evidence of the assessment-to-value ratios of similar properties in the neighborhood, rather than from the entire county. The Pennsylvania Supreme Court had already approved using such evidence to protect taxpayers from high assessment ratios and to promote uniformity. Allowing this evidence also showed that justices recognized that ratios can vary greatly by location within a county.

In May 2024, the trial judge entered an order granting "parties" permission "to utilize the common law method for establishing common level ratios." This ruling would have been an affront to taxpayers by seemingly allowing taxing bodies to establish various common level ratios for different property classes, in contravention of the Pennsylvania Constitution and established jurisprudence.

Fortunately, taxpayers successfully argued that the Pennsylvania Supreme Court's approval of the common level method did not extend to, or approve of, taxing bodies' disparate treatment of residential and commercial property owners. Allowing taxing entities that ability would instead disrupt uniformity, create confusion, and result in more litigation, they argued.

On Sept. 3, 2024, the judge amended his original order in the case and limited taxing bodies' ability to use the common law method. As it stands, taxing authorities can now only use such evidence if it does not sub-classify properties, or to dispute a taxpayers' evidence by using similar properties of the same nature in the neighborhood.

While the judge's ruling protects taxpayers from the long reach of taxing entities, only legislation mandating periodic reassessments statewide will solve the problems that naturally arise from Pennsylvania's outdated base-year system, which does not accurately reflect the ebbs and flows of the real estate market. The state's current system burdens taxpayers with non-uniform and outdated assessments, while taxing authorities struggle to balance their budgets.

Until the state corrects these fundamental flaws to ensure fairness for all, it is essential that taxpayers continue to file tax appeals that assert their protections against overassessment and right to uniformity in taxation as guaranteed by the Pennsylvania Constitution and courts. 

The seniors housing sector can't seem to catch a break. Owners grappling with staffing shortages and other operational hardships lingering from the pandemic are facing new challenges related to debt and spiraling costs. High interest rates and loan maturations loom over the industry, with $19 billion in loans coming due within the next 24 months, according to Cushman & Wakefield's "H1 2024 Market Trends and Investor Survey" on senior living and care.

Factors driving high costs include wage pressures, inflation and — incredibly — rising property taxes. Despite operational challenges and declining occupancy at many facilities during the COVID-19 pandemic, property tax relief for seniors housing was mixed. Many assessors resisted downward adjustments to taxable values, maintaining that recovery was around the corner. Now, seniors housing operators face property tax assessments that equal or exceed pre-pandemic levels.

As in the hospitality sector, most seniors housing owners understand that their operating properties include more value components than real property alone. In evaluating whether a tax assessment is reasonable and fair, however, owners need to realize that how an assessor addresses their real estate, personal property and intangible assets can drastically affect property tax liability.

Intangibles have value

The Appraisal Institute's "The Appraisal of Senior Housing, Nursing Home, and Hospital Properties" states that the valuation of a going concern in the sector includes real property, tangible personal property and intangible personal property. Real property or real estate equates to fee-simple, leased-fee or leasehold interests; tangible personal property is furniture, fixtures and equipment.

Intangible personal property can include assembled workforces, licenses, certifications, accreditations, approvals such as certificates of need, employment contracts, medical records, goodwill and management.

The Appraisal Institute's text also cites a requirement from the Uniform Standards of Professional Appraisal Practice in stipulating that the market value of real estate must be identified and valued separately, apart from the tangible and intangible personal property. Adopted by Congress in 1989, the Uniform Standards serve as ethical and performance standards for appraisal professionals in the United States.

Assessors and real estate appraisers are familiar with the process of separating real property and tangible personal property for purposes of valuation. Valuing intangible personal property, however, is often less clear.

Top-down vs. ground-up valuation

Appraisers often back into an intangible personal property value by first developing a going-concern value and then subtracting values for real property and tangible personal property. In practice, the whole does not always equal the sum of the parts.

Appraisers frequently opt for this "top-down" approach, so described because the appraiser develops a value opinion for the total going concern and then works "from the top down," assigning values to the various components based on market statistics or other data.

By contrast, some appraisers take a "ground-up" approach by valuing all the components independently and then adding those amounts to value the going concern. If done properly, both methods should yield similar value indications for each component.

For especially difficult property tax cases, taxpayers may find it worthwhile to have two appraisers perform independent appraisals using each method and then present both conclusions to the trier of fact.

Either method can help to demonstrate the considerable investment value imbued in many elements of intangible personal property. The assembled workforce may have taken several months to adequately staff and train, for example, while acquiring and maintaining licenses requires investments of time, capital and effort to overcome regulatory and adherence challenges. The loss of licenses or a portion of the workforce at a seniors housing facility can impair its operation and send effects rippling throughout the business, reaching beyond intangible personal property.

Business appraisers, who are accustomed to valuing intangible assets as part of mergers, acquisitions and similar activities, can provide clarity for taxpayers building a case for a tax assessment reduction on their seniors housing property. A business appraiser can be invaluable in these circumstances, allowing for a ground-up approach to valuing the elements of the intangible personal property and even working alongside real estate appraisers to come up with a clearer picture of the going concern.

Accounting counts

Most seniors housing operators fastidiously follow Generally Accepted Accounting Principles (GAAP) and strive to maintain compliance with accounting rules from the Internal Revenue Service (IRS) and Securities and Exchange Commission (SEC). These taxpayers would be wise to include a fourth consideration for their accounting team, which is to understand how their state and local governments define taxable real estate.

Tax definitions may vary slightly from one jurisdiction to another. Thus, it is possible to have one allocation for IRS, SEC or GAAP guidelines while having a different allocation for property tax purposes that corresponds to tax practices in the area. This type of nuance is one of the reasons seniors housing owners or operators can improve their odds of success in a property tax dispute by working with an adviser who understands both local case law and the area assessor's approach to valuing components of seniors housing properties.

In several states and municipalities across the country, assessors will simply increase a property's assessment to the purchase price entered in county records. This can lead to sticker shock when an operator receives their first tax bill after an acquisition.

By working with tax professionals and valuation experts during the due diligence and acquisition process, and by documenting the consideration paid for each component of an acquired asset's value, operators can limit upside exposure for future increases in property taxes and retain the necessary documentation to support these allocations.

Property assessments change. Are you keeping up with them?

Benjamin Franklin has been credited (dubiously) with the saying, "in this world nothing can be said to be certain, except death and taxes." The Greek philosopher Heraclitus has been credited (also dubiously) with the saying, "the only constant in life is change." To synthesize dubious quotes from two brilliant minds, "you will certainly have to pay taxes, and they will constantly change."

With property tax bills subject to constant change, property owners hoping to predict and plan for future tax liability have their work cut out for them. Here are the chief factors taxpayers should consider in tax planning.

Track reassessments

Governments base property taxes on two things: assessed value and tax rate. Both elements change on a regular basis, and it can be mind-boggling for taxpayers to stay on top of just exactly when and by how much their properties' taxes will increase.

Reappraisal systems vary. While most jurisdictions reappraise either annually or on a regular, multiyear cycle, some jurisdictions do not. Famously, California's Proposition 13 requires reappraisal based on changes in ownership and other triggers, rather than on any regular cycle.

A jurisdiction's reappraisal history is no guarantee of its future cycle. For example, the Arkansas Legislature amended its reappraisal statute in 2023, transitioning from counties being on either 3-year or 5-year cycles to mandated 4-year cycles for all. However, even this information is not enough to know when a particular county's next reappraisal will be, because the transition will be phased to reach a substantially equal number of counties reappraising each year.

Various variables

While knowing the jurisdiction's reappraisal cycle is important, the taxpayer's team has many other local rules to follow, including potential caps on annual increases. For example, in Alabama, which reappraises properties annually, the legislature recently capped annual increases at 7%, effective in Tax Year 2025.

Once the taxpayer knows a jurisdiction's reappraisal cycle and methodology, there is still the question of how much assessed values will change from one reappraisal to the next. For jurisdictions that have longer cycles, value changes can be drastic.

For example, Tennessee assessors reappraise properties on a cycle of four, five, or six years, depending on the county. Nashville, one of the fastest-growing cities in the country, will undergo a reappraisal in 2025 for the first time in four years. Based on the exponential growth that has occurred in that interim, property owners will likely experience sticker shock once assessments come out in May.

Across the United States, all taxpayers receiving revised assessments in 2025 face uncertainty about how current events will affect new valuations. How Donald Trump's election and initiatives will affect the real estate market is unclear.

The Federal Reserve reduced the fed funds rate three times in 2024 after more than a year of tightening, but the future impact of their tinkering is uncertain. Office market fundamentals have deteriorated to an alarming degree, and multifamily transaction volume has slowed from a firehose blast in 2024 to a trickle today. Will the assessors of America take macro-economic changes into account, or will they fixate on conditions in early 2022, before interest rate hikes and the decimation of the office market?

Rate watch

After assessors establish taxable value, taxpayers still face the question of the tax rate. Rates can change in any year, whether there is a reappraisal or not. However, one important thing to know about any jurisdiction undergoing a reappraisal is whether it has a truth-in-taxation law.

These laws aim to ensure transparency by requiring local governments to inform taxpayers in advance about potential increases. Tennessee, for example, requires local governments in a reappraisal year to certify a tax rate that will result in revenue remaining neutral, or equal to the previous tax year's revenue. Then, if leaders wish to increase the tax rate to generate more revenue than the prior year, they must take a separate vote later.

Typically, values increase greatly in the reappraisal and the tax rate plummets to generate neutral revenue, due to the truth-in-taxation law. This prevents local governments from obscuring a potential tax windfall following reappraisal, because they must vote to increase the tax rate before anticipated revenue can exceed the neutral amount.

In the end, every jurisdiction is different. Staying on top of a portfolio's upcoming reappraisals requires the taxpayer or their advisors to understand and follow a host of variables, from the reappraisal cycle to potential caps, exemptions, truth-in-taxation laws and more. A seasoned, local advisor can help property owners understand current laws, monitor proposed changes, maintain relationships with local assessors, and identify the most effective strategies for limiting potential overassessments due to reappraisals in each property's jurisdiction.