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Jun
16

June 13, 2019

Board of Directors IAAO
IAAO Headquarters 314 West 10th Street
Kansas City, Missouri 64105

Re: IAAO May 2019 Exposure Draft: Setting the Record Straight on Fee Simple

Dear Board Members:

American Property Tax Counsel is the preeminent organization of real estate tax attorneys in North America.Please accept this letter as our official comments in response to the May 2019 Exposure Draft entitled Setting the Record Straight on Fee Simple promulgated by the IAAO Fee Simple Task Force.Consistent with our professional focus, these comments will address property tax policy and the legal implications of the Exposure Draft. As attorneys, our concern is the accuracy of the legal arguments advanced in the paper. The starting point is to ask the question, "why would the assessor's organization attempt to write a paper addressing legal theory and not one on appraisal methodology?"The paper appears to be nothing more than an attempt to support new legal/appraisal theories to gain an advantage in pending litigation and to shape public opinion to support a new way of valuing and taxing commercial properties.

1.The Exposure Draft Advocates for Uneven Assessments Over Sound Tax Policy


This Exposure Draft reads like a solution in search of a problem.The Fee Simple Task Force has done little to disguise the Exposure Draft as anything but an attempt to tax certain commercial taxpayers differently than all other taxpayers.While perhaps intended as primarily a public relations vehicle, the Exposure Draft undermines the credibility of the IAAO as an organization purportedly dedicated to education and research, and its official adoption would do a disservice to the IAAO's respected assessors.[1]

Sound tax policy requires common ground and uniformity.As recognized in the Exposure Draft, fee simple estate is the foundation of what assessors are often asked to measure.However, while the Draft's authors posit a false premise that "it is essential to clarify fee simple in order to maintain accuracy, consistency, and uniformity in assessment practices," the truth is fee simple requires no further clarification.The most glaring flaw in the Exposure Draft is the unchecked presumption there is some conflict or digression between how the legal and appraisal professions define fee simple.There isn't.[2]

Context matters, and many terms can differ from the legal to the technical or industrial uses.Liabilities in accounting, for instance, can mean short-term or long-term payables.Within the law, a liability in an income tax dispute is understood to mean something different than a liability in a tort case.Similarly, title companies will speak of a fee simple estate or fee simple title and understand that it describes how title will pass to heirs.Appraisers, being in the profession of valuation, must define and communicate how fee simple impacts an asset's value.[3] Even within the legal environment, fee simple can mean that property passes as an inheritable estate in the context of a will, or that a fee simple interest in property is to be valued in the context of assessment or eminent domain.While the phrase "fee simple" can have different implications depending upon the setting in which it is invoked, there is no conflict between the legal and appraisal definitions—in any setting, it is understood to describe the "largest possible estate," "absolute ownership," "broadest interest," and so on.No experienced lawyer or judge is confused by whether "fee simple" in the assessment context invokes questions of inheritability.

States vary somewhat in the terminology used to describe the measure of assessed property, using phrases like "true value," "fair cash value," "actual value," etc., but such phrases are generally understood to mean fair market value.As to what must be assessed, states overwhelmingly agree that the taxable estate should be fee simple.Fee simple is important as a base because the fundamental aspect of assessment in most states is uniform treatment of taxpayers within a class.Some states treat residential, agricultural, and commercial/industrial property as different classes.In other states, all real estate is considered one class.Regardless, the measure of the tax must be the same across the class, and the object being measured must also be the same across the class.Where uniformity is required, one taxpayer cannot be assessed on a fee simple with no lease while a neighbor pays taxes on the fee simple subject to a lease.[4]And in law, the unencumbered fee simple is the only standard that returns uniform assessments.

2.The Definition of Fee Simple Is Already Clear

The Exposure Draft's authors make much ado about the historical evolution of the definition of fee simple but fail to consider the modern evolution of real estate as a tradeable asset.Again, it is worth noting why context is important.Real estate was not a particularly sophisticated investment until the advent of modern financing arrangements, sale-leaseback transactions, and the trading of leases as investment vehicles.As the real estate industry grew increasingly complex, it became necessary for its definitions to get specific.Similarly, the accountants among APTC's membership have observed that the accounting profession and the federal courts interpreting the Internal Revenue Code were also compelled in the early-1980s to address the growing prevalence of sale-leaseback transactions.

The Task Force argues that practitioners are confused by the word "unencumbered," yet the only cases it cites are not even on point.As a matter of law, the Ohio cases in the Exposure Draft have been superseded by the enactment of that state's amended assessment code.Contrary to the Task Force's interpretation, those cases stood for the fact that the prior statute required valuation based on a property's recent sale price even when the sale price reflected atypical circumstances or included the value of non-realty assets.The change in the statute eliminated that issue, as Ohio now mandates that assessors value the fair market value of "the fee simple estate as if unencumbered." R.C. 5713.03, as amended by 2012 Am. Sub. H.B. No. 487 (emphasis supplied to indicate new words added).[5] As for the 9th Circuit case cited in the Exposure Draft, it is unclear what the Task Force means to suggest by its partial quotations.[6] The rest of the cited paragraph actually recognizes that a freehold estate can be "encumbered or unencumbered," and nothing in the full text of that case indicates the court is confused by that premise or by the definitions it discusses.City of Los Angeles v. San Pedro Boat Works, 635 F.3d 440, 450 (9th Cir. 2011).

As a practical matter, several states have approvingly cited (and sometimes even adopted [7]) the Appraisal Institute's definitions of fee simple and leased fee.In those jurisdictions which have explicitly relied on the recent editions of The Appraisal of Real Estate and/or The Dictionary of Real Estate Appraisal to explain these concepts, this Exposure Draft would directly conflict with applicable law.And even in states which have not adopted those definitions, most appraisers have been using the Appraisal Institute's definition of fee simple for over 35 years at minimum.No industry or professional association can force upon a state a definition which conflicts with existing laws, and the IAAO should take care not to encourage its members to violate the rules of their jurisdictions.

3.The Bundle of Sticks Endures Because It Is a Useful Metaphor

The example of the bundle of sticks is almost sacrosanct.As a technical matter, the statement, "The bundle of rights or bundle of sticks metaphor originated as a description of real estate, not a fee simple absolute estate" is incorrect.While legal historians debate the origin and evolution of the bundle metaphor there is consensus it came into common usage around the turn of the 19th century to describe ideas of ownership and rights in property, both real and personal.The fact that the bundle metaphor may be misused or misunderstood by some does not necessitate its abandonment or overhaul.As a descriptive tool, it helps most students and practitioners to visualize the interplay between the interests and the encumbrances that impact property rights and affect value.

4. Fee Simple Unencumbered Is the Basis for All Property Tax Liens

It should go without saying, but the value on which the property tax is determined should match the basis for the property tax lien to which it is attached.In every jurisdiction, property tax is a liability of the property, not the owner.When any property is valued for tax purposes, the resulting assessment gives rise to a tax lien that attaches to that property.This in rem obligation means that if the tax is not paid, the lien can be sold for the unpaid taxes.If the owner fails to take steps to satisfy the lien, the purchaser of the tax lien can become the owner of the property.These basic principles underlie every assessment of property tax.

However, the position in the Exposure Draft would cause a valuation of assets that the tax lien does not attach to.When a tax lien is sold, it is sold free and clear of all other liens and encumbrances.The buyer receives title known as "fee simple absolute."That title does not include any liability on a mortgage or any liability (or benefit) arising from a lease. None of those private, contractual rights are part of the lien.Leases and encumbrances are expressly made subordinate to the tax lien. This is because the entire premise of the property tax is that the government can seize and sell "the property" to satisfy the tax lien.

How then, can the value on which the property tax is computed include assets that the tax lien does not attach to?The answer is obvious – it cannot.Respectfully, the position in the Exposure Draft contravenes this basic principle of ad valorem taxation, further demonstrating why that position is incorrect as a matter of property tax law.

5.The paper raises ethical issues that need to be properly addressed.

The IAAO Code of Ethics raises many concerns relative to the paper.For instance, the Code provides:

"It is unethical for members to conduct their professional duties in a manner that could reasonably be expected to create the appearance of impropriety …

It is unethical to perform any appraisal, assessment, or consulting service that is not in compliance with the IAAO governing documents or the Uniform Standards of Professional Appraisal Practice

It is unethical for members to accept an appraisal or assessment-related assignment that can reasonably be construed as being in conflict with their responsibility to their jurisdiction, employer, or client, or in which they have an unrevealed personal interest or bias …

It is unethical to accept an assignment or responsibility in which there is a personal interest without full disclosure of that interest …

It is unethical to accept an assignment or participate in an activity where a conflict of interest exists and could be perceived as a bias, or impair objectivity …

It is unethical to knowingly fail to observe the requirements of the Uniform Standards of Professional Appraisal Practice …"

There are pending cases across the country on this very issue, including many in the home states of the authors of this report and members of the Board of Directors.This paper imbeds the IAAO into pending litigation with no acknowledgment of that in the report.The report is silent on the pending matters where one or more authors are a party or are expert witnesses.The paper should not be silent on the conflicts of interest of the authors, the Board of Directors and the organization.

Given its significant authoritative status in the appraisal industry, all appraisers are encouraged to follow the standards in the Appraisal Institute's treatise, The Appraisal of Real Estate. Advocating to specifically reject the definitions in the Appraisal of Real Estate, 14th edition, the Dictionary of Real Estate Appraisal, 6th ed., and local law is antithetical to the IAAO's mission and responsibilities to their membership.

6. Conclusion

As with the IAAO's 2017 white paper on Commercial Big Box Retail, the Fee Simple Task Force is attempting to legislate through its latest paper, without regard to the nuances in each jurisdiction. Fortunately, under the constitutions of nearly all states, the fundamental aspect of assessment is uniformity and the ideas expressed in the Exposure Draft are legally untenable.

The constitutional mandate of uniformity requires that real estate be assessed upon the fee simple, unencumbered, because that is the only definition applicable to all real estate.Office buildings that are leased can be assessed based on fee simple, unencumbered.Single-family homes that are owned can be assessed upon that same standard.Properties held as tenants-in-common can be assessed upon that same standard.Without this "white canvas" standard, assessors would be left with no basis on which to comply with uniformity requirements.

The paper raises issues of ethics, USPAP compliance and creates confusion even within the publications of the IAAO[8].

We urge the IAAO reject the adoption of the May 2019 Exposure Draft Setting the Record Straight on Fee Simple.

Respectfully submitted,

American Property Tax Counsel
BY: Linda Terrill, President


[1] The Exposure Draft's authors are all involved in litigation concerning this issue. Indeed, several are serving as expert witnesses for taxing authorities advocating for the position set forth in the Exposure Draft. Given USPAP's clear prohibition against "Advocacy" by appraisers, the IAAO should not be taking sides in this manner.The paper gives the appearance of "creating" supporting authority because none exists.

[2] Unfortunately, the Exposure Draft's authors fail to cite any authoritative legal definitions of fee simple, relying instead on references to secondary sources.While seemingly obvious, we feel it is necessary to point out that Black's Law Dictionary is binding nowhere.Similarly, although the Restatements are generally more respected, they are likewise nonbinding except in the limited jurisdictions where limited sections have been adopted.Moreover, it is unclear why the Task Force cites to an outdated Restatement.

[3] Brokers and agents may use the term loosely or even incorrectly, but that is not a reason for the appraisal or assessment professions to change a long-accepted definition.

[4] Beyond the problem of non-uniformity, because most states recognize contracts as personal property, such a framework seems doubly unworkable in states where personal property is not taxable.

[5] Importantly, the Ohio cases cited were in large part the basis for the legislative clarification.

[6] The Task Force fails to discuss California's property tax regulations pertaining to fee simple, such as the inclusion of "unencumbered or unrestricted fee simple interest" in the definition of fair market value, the adjustment of the sale price for a property encumbered with a lease to its unencumbered-fee price, and the capitalization of unencumbered net income in the application of the income approach.(18 Calif. Code of Regs., §§ 2(a), 4(b)(2) and 8(d).)The City of San Pedro case does not discuss any of these property tax regulations.

[7] See, for example, In re Equalization Appeal of Prieb Properties, 47 Kan. App. 122, 275 P. 3d 56 (2012).The IAAO cannot advocate for its members to adopt a definition and value real property in violation of their law.

[8] The positions set forth by the taskforce are inconsistent with other IAAO publications below:

Page 12, Property Assessment Valuation 3 ed., starts with a paragraph titled Fee Simple Interest. "The owner of a fee simple absolute interest holds the title to the property free and clear of all encumbrances. The assessor typically values property as an estate in fee simple, unless statutes or administrative rules dictate otherwise. The bundle of sticks example, as well as the acronym SLUGGER stating how the rights in the bundle can be bargained away, is located at page 10, Property Assessment Valuation 3 ed.

At page 11 leases are described as being private encumbrances able to affect fee simple ownership of property. Property Assessment Valuation, 3 ed.

Again, at page 11 both Leased Fee and Fee Simple interests are discussed and the caution that "before a property is valued, the appraiser must know which interests are to be valued." Absolute Ownership—Ownership of all real property rights and interests in a real estate parcel. See fee simple. P. 1, IAAO Glossary for Appraisal and Assessment, 2d ed. Fee Simple—In land ownership, complete interest in a property, subject only to governmental powers such as eminent domain. Also fee simple absolute. See estate in fee simple; fee; and absolute ownership. Page 67, IAAO Glossary for Appraisal and Assessment, 2d ed.

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Jun
08

"Regardless of property type, commercial owners should vigilantly review assessment notices upon receipt and determine whether the particular property has indeed increased in valuation, or if assessors using mass appraisal techniques have over generalized..."

By Lisa Stuckey, Esq., as published by Southeast Real Estate Business, June 2013

Under a recently enacted law, taxpayers who purchased property in Georgia in 2011 or 2012 face potentially steep hikes on upcoming tax bills. The new statute, which took effect on Jan. 1,2011, provides that the sale amount paid or real estate in an arms-length transaction shall be the property's maximum allowable fair market value for property tax purposes for the following tax year. That means owners of properties purchased in 2011 received ad valorem assessment notices for 2012 at a value no higher than the purchase price.

For tax year 2013, however, the county assessors' offices were free from this limitation on valuation for those specific properties purchased during 2011. For those properties, assessors were required to review the market, make a determination of fair market value as f Jan. 1, 2013, and issue assessment notices based on the new review for those properties. The same is true for owners of properties purchased in 2012. The assessment notices those owners receive for 2014 will be unfettered by the sale amount limitation that held values in check for those properties in 2013. Clearly, new property owners in Georgia must guard against a false sense of security based on property valuations and tax bills received during the year after the purchase of their property.

Georgia property owners need be mindful that tax authorities issue assessment notices in April, May and June, and taxpayers will only have 45 days from the date of the notice to file an appeal if they disagree with the county's valuation. Taxpayers cannot appeal tax bills. If an owner fails to timely file an appeal, there is no further opportunity to appeal the valuation or have any input into the amount of property taxes.

A review of the last few years of commercial sales tracked in the CoStar Group database for tl1e metropolitan Atlanta area, as well as discussions with the major metro Atlanta county assessors' offices, suggests that the property type with the greatest potential for increases in valuation over the next few years is office, but other property types are potentially subject to valuation changes as well.

Regardless of property type, commercial owners should vigilantly review assessment notices upon receipt and determine whether the particular property has indeed increased in valuation, or if assessors using mass appraisal techniques have over generalized. Be aware of the specific attributes affecting the value of the individual property, and ensure that the county appraisal staff has properly considered those factors in determining value.

Worthwhile points to review with the appraiser include a significantly higher vacancy rate at the property compared with other properties in the area, as well as how long the vacant space in the subject property has gone untenanted. Discuss any real or perceived reasons why the vacant space cannot be leased. What rent has been lost? What rent is in arrears, and for how long?

Also make the appraiser aware of any tenant instability or perceptions of tenant instability based on the type of company, and any necessary rent or expense concessions. How does the length of new lease terms compare with older leases? What will be needed in terms of capital improvements cost? And be sure to point out noteworthy or w1usual common area maintenance expenses, or unsuccessful marketing attempts and unsatisfactory responses to that marketing. There are plenty of other fact-specific arguments that will vary by property. When comparing your real estate to sold properties, various important considerations which may be relevant include geographic desirability and demographic comparability (or lack thereof) between the properties; actual and effective age; quality or class of the asset; and size. Consider, too, each property's condition, which may include any physical depreciation or property-specific peculiarities, and the presence of any intangible assets such as branding that affect value. Are the properties functionally equivalent, or is there disparity between the subject and the sold properties, such as differing qualities or quantities of parking, traffic anomalies, and other distinctions?

There are many promising areas for taxpayers to draw from in arguing with county assessors to reduce property valuations, and thus a decrease in the property tax burden. But in Georgia, it is critical for new owners to be diligent about taking appropriate action upon receipt of the county assessment notice.

StuckeyLisa Stuckey is a partner in the Atlanta law firm of Ragsdale, Beals, Seigler, Patterson & Gray LLP, the Georgia member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Jun
06

"The actual expenses, coupled with the rent restrictions, would cause a willing buyer to pay less for this type of a housing project as opposed to a market-rate apartment complex. Thus, the taxpayer carried its burden in proving that its property tax assessment was excessive..."

By Gregory F. Servodidio, Elliott B. Pollack as published by Affordable Housing Finance Online, June 2013

Property owners and assessment authorities continue to clash over the proper valuation for property tax purposes of rent-restricted, low-income housing. One of the most recent disagreements flared up in the small town of Beattyville, the county seat of Lee County in east central Kentucky.

A developer had converted a former Beattyville school into 18 units of low-income housing apartments. In connection with that conversion, authorities placed a restrictive covenant on the land use, to remain in place for 30 years. Under the restrictions, the Beattyville School Apartments could only take in tenants with incomes equal to or less than 50 percent of the local median income.

The Lee County property valuation administrator valued the property for tax purposes at $662,700, or about $37,000 per unit, in 2011. This value appropriately excluded any value attributable to the issued tax credits. Nevertheless, it was still well above the value of $130,000, or about $7,200 per unit, that the taxpayer presented on appeal. What created such a dramatic gap between those opinions?

The Kentucky Constitution mandates that assessors must value all property for tax purposes at fair cash value, meaning the price that the property is likely to bring at a fair voluntary sale. In arriving at fair cash value, the assessor is not obligated to consider every characteristic of a particular property, but the law requires her to consider those factors that most impact the property's value. In the case of rent-restricted, low-income housing, this requires considering those property characteristics that differentiate the asset from market-rate housing.

Interestingly enough, Lee County's assessor and the taxpayer agreed on just about all of the steps in estimating the property's fair cash value. Specifically, they agreed that the income approach to value was the most appropriate valuation methodology for this property type. They further agreed that the property's actual restricted rents should be used in the development of the income approach. They even agreed that the income approach should use a 10 percent capitalization rate, which is surprising, considering that capitalization rate selection is often a subjective determination and a point of contention between opposing valuation professionals.

The consensus broke down on the issue of expenses. The county's assessor had obtained the property's actual audited expenses as reviewed and approved by both the Department of Housing and Urban Development and the Kentucky Housing Corp. The assessor deemed those expenses to be excessive and decided to cap the expenses used in her valuation model at 35 percent of income. The assessor used the same expense ratio to value other businesses in Lee County. Using lower, capped expenses as opposed to actual expenses produced a value that was five times higher than the taxpayer thought it should be.

On appeal, the hearing officer for the Kentucky Board of Tax Appeals sided with the property owner on the expense issue. He concluded that it was inappropriate to cap the expenses used in the income approach since these expenses are to a certain extent a function of applicable state and federal law, which pushes them higher than those at market-rate apartments. To ignore the actual expenses is to overlook an important characteristic of the property that has a significant impact on its value.
If the assessor felt that the actual expenses were excessive for specific reasons, she could have provided evidence to that effect at the appeal hearing. Simply arguing that they were too high, however, was insufficient to convince the hearing officer to reject the use of audited and approved expenses.

The actual expenses, coupled with the rent restrictions, would cause a willing buyer to pay less for this type of a housing project as opposed to a market-rate apartment complex. Thus, the taxpayer carried its burden in proving that its property tax assessment was excessive.

In concluding that the complex should be valued at $150,000, the hearing officer and in turn the Board of Tax Appeals were mildly critical of the taxpayer's valuation presentation. The hearing officer noted that the taxpayer's appeal petition valued the property between $110,000 and $150,000. During the hearing, the taxpayer refined its value position to $130,000, but in a way that was not entirely clear from the record.

Citing an earlier Kentucky court ruling, the Board of Tax Appeals refused to put the taxpayer in a more advantageous position on appeal than the position it had staked out in its filing. This serves as yet another confirmation that a taxpayer should place the lowest supportable value on its appeal form, so as not to place a floor on its value position during the appeal process.

 

GServodidio pollack

Gregory F. Servodidio, CRE, and Elliott B. Pollack represent clients in property tax appeals and eminent domain matters at the Connecticut law firm of Pullman & Comley, LLC, the Connecticut member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Servodidio can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Pollack at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

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May
15

"The replacement cost approach has enabled property owners to obtain reduced assessments for steel mills, hospitals and other property types. The same theory can apply to an enclosed mall..."

By Brent A. Auberry, Esq., as published by REBusinessOnline.com, May 2013

This is not your mother's shopping experience. In the never-ceasing cycle of trying to stay hip and cool (or perhaps just relevant), mall owners in recent years have shifted away from the traditional, inward-facing enclosed mall to today's outward-facing lifestyle center. This change in design for new shopping centers brings with it a potential change in valuation techniques for older malls.

Assessors often apply a modified reproduction cost to malls, basing value on the cost of recreating the property's identical shape, size, design and layout. A more relevant value is replacement cost, or the cost to replace the asset with a modern shopping center with the same utility. In other words, in certain circumstances assessors should assess large enclosed malls as if they were the less costly, more efficient lifestyle centers that could be developed on the same site. The difference might result in property tax savings for the owner.

Lifestyle centers typically range between 150,000 and 500,000 square feet of leasable retail area and include at least 50,000 square feet devoted to upscale national chain stores, according to the International Council of Shopping Centers. Many rely on multiplex theaters or other entertainment components rather than traditional anchor stores.

Most importantly, lifestyle centers are open, with streets or outdoor pedestrian walkways rather than enclosed corridors, and are easily accessible from the parking area. There is no common entrance, no massive food court, no inline space or mezzanines — and none of the costs that go with those expensive construction items.

According to Sara Coers, managing director at Valbridge Property Advisors in Indianapolis, lifestyle centers reflect a pedestrian-centric, Main Street idea where customers can park near and access their favorite retail properties from the exterior. Shoppers avoid the extra time needed to find and enter a common entrance, traverse a long stretch of the mall's interior to find a particular store, and then reverse the process after making a purchase. For these reasons and others, lifestyle centers are the new, trendy kid on the shopping block.

Costs Are Key Consideration

Large interior spaces make enclosed malls bigger and more expensive to build and operate. That interior space must be heated and cooled, lit, cleaned, secured and insured. Those higher costs can translate into a lower property tax assessment, and here is how. Under the cost approach, the assessor should value the enclosed mall as a modern property of the same utility as the existing property, and the mall's modern equivalent may very well be a smaller and more efficient lifestyle center.

A penalty for the property's excess construction cost is only part of the equation. The assessor should also consider reducing the enclosed mall's assessment based on its excess operating costs, which penalize the existing mall's value. An assessment for property tax purposes should be adjusted downward to reflect that penalty.

However, not every enclosed mall should be replaced with a lifestyle center for assessment purposes. The demographics of the market served must support the case. Lifestyle centers will be sustained by a higher-income customer base. Consider the competition as well. Would customers flock to a lifestyle center, if another regional mall were nearby?

Is the climate compatible? A developer might replace an enclosed mall with a lifestyle center in Florida but not necessarily in Minnesota, where indoor shopping is a significant customer draw during severe winter weather.

The replacement property must have the same utility as the existing, assessed property. How utility is measured is open for discussion, and might be leasable square footage, the number of customers served, or something else. A utility measuring stick of some kind is a necessity, however.

How To Bolster Your Case

Sometimes property owners need to speak the language of the local assessor. That language is often cost, and applying cost means looking at replacement value. Enclosed mall owners must ask themselves, "What would a modern replacement for this property be?" If the answer is "a lifestyle center," then there may be an opportunity to negotiate a property tax reduction.

The replacement cost approach has enabled property owners to obtain reduced assessments for steel mills, hospitals and other property types. The same theory can apply to an enclosed mall. Even if the mall would not be "replaced" with a lifestyle center, a reduction is likely justified if the property is overbuilt or inefficiently configured and a smaller enclosed mall design would support the same utility.

Property owners shouldn't be afraid to ask themselves if a lifestyle choice might reduce their property tax assessment.

auberryBrent A. Auberry is a partner in the Indianapolis office of the law firm Faegre Baker Daniels LLP, the Indiana member of American Property Tax Counsel (APTC). Brent A. Auberry can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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May
10

"New York City has launched an all-out effort to deprive taxpayers of hard fought tax exemptions and find new ways to impose high penalties for late and defective filing. The measures are all calculated to bring in additional revenue..."

By Joel R. Marcus, Esq., as published by National Real Estate Investor - online, May 10th, 2013

The New York City Department of Finance has generated millions of dollars in additional revenue for the city coffers by directing new and greater efforts to serve penalties and remove tax exemptions from property owners who fail to make complete and timely filings of routine information statements. In the process, however, the city has deprived many property owners of valuable tax exemptions that they were entitled to, or charged stiff penalties for what amount to minor infractions and late or incomplete returns.

Late last year, property owners received notices to file a certificate of continuing use for commercial tax exemptions like the Industrial and Commercial Incentive Program and the Industrial and Commercial Abatement Program. The notices warned that even though a property owner may qualify for continued benefits on these multi-year, legislative as-of-right incentive programs, failure to timely file the renewal form would result in the exemption's cancellation.

This form only asked a few routine questions, requiring the property owner to list the square footage of commercial or industrial space, the number of permanent employees at the building, and report the number of employees who were New York City residents. In fact, the city had discontinued the form for the past 10 years.

Many owners were either unfamiliar with the form or failed to receive notices that were mailed to the wrong address, in many cases because the city failed to note a change in ownership that occurred during the past decade. To complicate matters, only a form specifically generated by the Department of Finance for each property could be used, requiring those who did not receive it to request a duplicate. So where a property owner had multiple parcels and lacked the correct form for one or more of its properties, the city refused to accept a standard form that did not carry its barcode.

The city allowed no margins for error. If the property owner left even one question blank, as in the number of permanent city residents that worked in a shopping center or office building, this was grounds to declare the form incomplete and invalid.

Not-for-profits received a similar request to renew Educational, Charitable and Religious exemptions by returning a different renewal form on a timely basis. Many houses of worship and schools that failed to receive the notice or were negligent in completely filling out and returning the form on time saw their exemptions removed.

Many not-for-profit organizations had enjoyed an exemption for decades, if not longer, and considered the exemptions to be granted by the State Constitution and state legislation. Some of those organizations were unfamiliar with this new policy and ill-equipped to delineate details of tax exempt uses and purposes. After all, this information previously was only required on the initial exemption application, filed long ago by people long since departed.

In the process, a great many of these venerable institutions lost an exemption for which they were absolutely qualified. In many instances they were forced to engage counsel and file appeals at the tax commission, which found that the removals were unjustified.

The most severe of the form-failure penalties fell on Real Property Income and Expense (RPIE) filers. The RPIE is a mandatory report of income and expenses, but some properties fall into one of several filing exemptions, such as those with new owners. Although exempt from filling out the entire form, new owners had to check a box on the form affirming that they were exempt from filing. Therefore a failure to report back to the city that they weren't required to file the form became a reason to charge a penalty for failing to file a form on time. Here the penalties, rarely if ever experienced before, became commonplace.

Last year the city collected fines of $100,000 or more for minor infractions of the filing deadlines. To make matters worse, the city imposed many penalties a year or more after the alleged infractions, with the unfortunate result of saddling new owners with penalties because the previous owners failed to file two years earlier. Filing errors not being of record, title companies are unable to insure against such losses.

Notwithstanding that for more than 20 years RPIE compliance has been greater than 99 percent and only three examples of fraud are on record, the Department of Finance now is proposing legislation to tighten the screws again. The department refuses to trust taxpayers to file these returns themselves, and has asked the City Council to move the annual due date up from Sept. 1 to June 1, with a new requirement that the form be completed and certified by a certified public accountant (CPA).

Property owners who submitted RPIE statements digitally on the Department of Finance website each September previously will now have to file using a CPA ertificate by June 1 each year. That means owners will incur certification fees for all commercial properties with an assessed valuation of $1 million or more (a CPA fee is usually $10,000 or more depending on the property). This burden never existed before.

Since the Department of Finance online entry system doesn't adhere to generally accepted accounting principles, and because it excludes large categories of income and expense, it may prove impossible for many CPA's to comply. Also, by excluding these categories, the report doesn't mirror the owner's actual operating information, making it impossible for anyone to sign or attest to it.

These policies elevate "form over substance" to an entirely new — and sinister — level.


JoelMarcusJoel R. Marcus is a partner in the New York City law firm Marcus & Pollack, LLP, the New York City member of American Property Tax Counsel(APTC), the national affiliation of property tax attorneys. He may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
13

"What assessors may try to ignore is how unsteady this recovery truly is in light of stalled economic growth."

How to Avoid Unfair Tax Assessments Due to the Economic Recovery

By Darlene Sullivan Esq., as published by Commercial Property Tax Executive, April 2013

Property taxes are the largest expense for many commercial real estate owners, so in today's stagnant economic climate, it would be wise to take initiative to ensure that tax assessments fairly represent property values.

Property tax systems vary from state to state, but no matter how the local system operates, there are some key things to keep in mind. As the nation's commercial real estate market continues its slow recovery, local assessors will try to capitalize on what appears to be a visible improvement in the availability of capital and an increased number of real estate transactions. What assessors may try to ignore, however, is how unsteady this recovery truly is in light of stalled economic growth.

One way assessors may attempt to reflect the market's recovery is by applying a lower capitalization rate to an inflated net operating income in order to arrive at a higher assessed value. Capitalization rates are a buyer's expected annual rate of return on a property purchase. Assessors observing improvement in the commercial real estate market will expect a stronger cash flow from the property combined with a decreased risk. Whether or not that expectation applies to the property, it will likely affect assessed value. While it is true that absorption levels have improved across property categories over the past year, rents have remained flat or decreased from pre-recession levels, and revenue growth still has not caught up to what it was five years ago. Local assessors need to be reminded that with revenues still struggling to recover, the absorption gains should not automatically translate into higher assessed values.

Strong performances recently by real estate investment trusts provide another way assessors may try to increase values unfairly. In this scenario, an assessor unfairly applies the limited number of REIT property sales within a sector to all of the assets in the area that fall within the same property code. Yet such a comparison may be inapplicable to a particular asset.

Following are some guidelines to ensure fair treatment from an assessor: First, review the 2013 property assessment promptly and do not miss any appeal deadlines. Most local assessing jurisdictions have Web sites and online resources to guide taxpayers through the appeal process. When reviewing your assessment, ask yourself: Did the value increase, decrease or stay flat from the previous assessment? Scrutinize it and consider an appeal of any increases in assessed value from 2012 to 2013. Second, evaluate the property's individual characteristics: Was occupancy up or down? Did revenues and expenses increase or decrease? Are there any significant items of deferred maintenance? Any changes, either positive or negative, may impact assessed value.

Third, in many states the expectation is that assessed values will increase significantly in 2013. For example, in three of the largest counties in the state of Texas, assessed values increased between 2.5 percent and 9 percent across property types from tax year 2011 to tax year 2012. Given the increased number of transactions and the signs of recovery, property owners should expect increases in 2013 at least equal to those in 2012.

In some cases, however, assessors will be even more aggressive to compensate for what they now perceive to be modest increases in 2012. If an assessment increases significantly, make sure to have the proper tools and a property tax professional to fight that assessment.

Finally, recognize that the management of property taxes may impact how quickly a particular asset recovers from the recession. A lower property tax expense means a higher net operating income and more cash flow. The money can then go back into the asset to cover any capital expenditures or can be distributed back to investors. As an added benefit, lower property taxes can impact other aspects of the property, such as occupancy. For example, keeping the property tax expense under control may allow a shopping center owner to quote lower expenses to prospective tenants, providing an edge over the competition when it comes to attracting and retaining quality retailers.

Be vigilant when it comes to property tax expense in 2013, and don't let the signs of an improving commercial real estate market drive assessed value to distorted proportions. Be aware of tactics your local assessor may be using to increase values, and know how to counter them.

DarleneSullivan140 Darlene Sullivan is a partner in the Austin-based law firm of Popp Hutcheson P.L.L.C. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Sullivan can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
09

"Washington is unique in its reliance on property taxes, and in particular commercial property taxes, for a disproportionate share of its revenue. This is due in large part to factors outside of the council's control, such as the large amount of federally owned, tax-exempt property in the district, and to Congress' decision to prevent the district from taxing income earned in the district by non-residents..."

By Scott B. Cryder, Esq., as published by National Real Estate Investor - online, April 9th, 2013

Most property owners in the District of Columbia would welcome a plan to increase the accuracy of tax assessments by providing assessors with the most up-to-date information available. But if that plan also reduced the time D.C. assessors have to conduct their assessments to two months, rather than the current six months, many of those same taxpayers might reconsider. And if this plan would also reduce the time for assessors to handle initial administrative appeals, which has been an efficient mechanism to pare down the number of formal appeals, to six weeks instead of the current four-month window, most reasonable people would likely balk at the entire notion.

The truth is, legislation mandating these exact changes is pending before the Council of the District Columbia. And if statements from key councilmembers and District officials are any indication, this legislation has a good chance of becoming law in the next few months. How did we get here?

First, understand that Washington is unique in its reliance on property taxes, and in particular commercial property taxes, for a disproportionate share of its revenue. This is due in large part to factors outside of the council's control, such as the large amount of federally owned, tax-exempt property in the district, and to Congress' decision to prevent the district from taxing income earned in the district by non-residents.

Nonetheless, this heavy reliance on property taxes has created the public perception that Washington's assessment division is a revenue-generating department. Misplaced as this view may be—and it is misplaced—it has resulted in the assessment division being subject to frequent charges of "giving away" taxpayer dollars.

The most recent iteration of this line of criticism came to a head last year when the Washington Post published a series of articles suggesting that the Real Property Assessment Division was improperly settling commercial assessment appeals. To pile on, the Washington D.C. Office of the Inspector General issued a report shortly thereafter roundly criticizing many key practices and policies in the Assessment Division.

Although many of the criticisms levied at the Assessment Division were unmerited, the top staff of the Assessment Division determined that action needed to be taken. Naturally, one would anticipate that a working committee of stakeholders was convened and suggestions of the assessors sought, since they would be implementing any changes.

One would also expect such a committee, or someone in authority, to thoroughly review implications of any proposed changes. Unfortunately, though not unsurprisingly, none of this occurred. Instead of engaging in an "all—of-the-above" type of conversation, district officials quickly rolled out a wholesale overhaul of the assessment process without anything resembling the thorough vetting needed.

Good intentioned as those public servants proposing these changes may be, most professionals involved in the assessment and appeal process (including every assessor the author has queried) agree that the recommended changes will have a negative impact on the quality of assessments, and will ultimately increase both the number of appeals and the average time required to resolve an appeal. While this is surely not the outcome that district officials desire, it will likely be the one they achieve.

Cryder600 Scott B. Cryder is an associate in the law firm of Wilkes Artis Chartered, the District of Columbia member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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Mar
08

Changing cap rate spreads may inflate property taxes.

"Accurate capitalization or cap rates (the ratio between the annual net operating income of an asset and the capital cost or market value) enable an appraiser or investor to calculate an asset's value from its net operating income..."

By Michael Shalley, as published by Shopping Center Business, March 2013

A scarcity of comparable sales data is driving many property tax assessors to rely on historical rules of thumb that may threaten inflated tax bills for shopping center owners. Studying the problem requires a clear understanding of the events that have weighed down transaction volume, how mass appraisal software works, and how extrapolations from the few property sales available today can lead appraisers astray.

A Recipe for Confusion

The recent credit crunch may be regarded as one of the worst in American history. The crisis hit hard in March 2008, as investment bank Bear Stearns became the first of dozens of major American financial institutions to fail or be bailed out by the Fed. The causes were many, starting with subprime mortgages and extending to consumer credit, commercial mortgage backed securities and credit default swaps. But one of the greatest impacts for the commercial real estate market came in the form of uncertainty regarding property values and future access to credit.

This vast uncertainty that followed the crisis halted or cratered most transactions in commercial real estate, making it almost impossible to accurately appraise property and peg asset prices. Appraisers and property tax assessors struggled to find comparable sales, and many times looked back to historical rules of thumb to extrapolate data gathered from a few current sales for application in a wide range of assessments. It is the use by property tax assessors of these old standards in mass appraisal valuation models that may overburden some property owners.

MShalleyweb300

Accurate capitalization or cap rates (the ratio between the annual net operating income of an asset and the capital cost or market value) enable an appraiser or investor to calculate an asset's value from its net operating income. So an assessor who knows the cap rate from a recent property sale can use that data in assessing similar properties.

In normal and functioning commercial real estate markets, the spread in capitalization rates between Class A, B and C properties has generally held a consistent range. Historically, the variance or spread in cap rates between Class A or investment-grade properties and Class B properties typically averaged between 75 basis points and 150 basis points. A similar cap rate spread existed between Class B and C properties. However, these old rules of thumb have become at least temporarily obsolete.

There has been a flight to quality among investors and well-leased Class A shopping centers' cap rates are getting really aggressive," says Rafi Zitvar, a principal at Global Fund Investments LLC, which specializes in retail real estate. On the other hand, "Class B and B-minus centers have to be priced very attractively, say 200 to 300 basis points above Class A centers, for us to even look at them." The PWC Real Estate Investor Survey — compiled quarterly by PricewaterhouseCoopers and formerly known as the Korpacz Real Estate Investor Survey — reveals this widening trend for cap rates among asset classes in the national strip shopping center category. The survey data confirms that the average cap rate spread between institutional grade and non-institutional grade properties has increasingly widened for the past six years (as shown in the chart).

Modeling Mishaps

Many property tax assessors use a mass appraisal income approach model that uses cap rates to assess shopping centers. The model breaks down various components of each shopping center that are usually predicated on the classification of the center. The rental income, expenses and a corresponding cap rate for each shopping center are driven by the class inputted into the valuation model. Cap rates for each classification of shopping center are calculated off a sliding scale, where the base rate is usually a Class A cap rate supported by a sale or sales in the market, and then all other classes are modeled out using a scale based on typical spreads. It is the scaling or setting of cap rates for Class B and C shopping centers using a Class A cap rate that can result in overvaluation.

Clearly, the cap rate spreads between the top-quality shopping center assets and other classes have significantly changed over the past few years. Therefore, when assessors use historical cap rate spreads between different classes of shopping centers, the mass appraisal model overvalues properties from all but the highest class. It takes some experience, diligence and a detailed understanding of the assessor's model to ensure that a shopping center is being accurately appraised using today's standards.

ShalleyMichael Shalley is a principal at the Austin, Texas, law firm of Popp Hutcheson PLLC., which focuses its practice on property tax disputes, and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar
07

"...as in the United States, local counsel is essential to understanding the tax system and use best means of pursuing a positive outcome..."

By Bradford Nixon, as published by Real Estate Forum, March 2013

The key to understanding ad valorem property assessment and taxation in Canada is to recognize that each province has its own unique system adhering to me basic principles of market value and equity. Each of the J 0 provinces has established a distinct regime of municipal assessment and property taxation. Although each province has different terminology, the general principle of market value derived from a value in exchange is consistently applied.

A second, crucially important principle which applies in nine of the 10 provinces (except Quebec) requires an equitable distribution of assessments and property taxes amongst similar properties. In the United States, this concept is known as uniformity.

Most provinces limit real estate tax levies to the assessed value of real property. Personal property is generally non-taxable in Canada except in Alberta, which taxes personal property in the oil and gas industry.

While the goal of the assessment is to obtain a correct current value as a conclusion, every individual taxpayer is entitled to an assessment that is equitable with comparable properties. As in the individual stales in the US, provincial legislation dictates how to properly determine the correctness and fairness of a property assessment. In a few provinces such as Ontario, the property tax system is complicated by tax caps and clawbacks, or legislative phase-ins of assessment increases or decreases.

Generally, each province provides taxpayers with a level of administrative appeal to a quasi-judicial tribunal, which is in turn subject to appeal on questions of law to the superior court of the province. The tribunals are independently appointed and usually separate from the local municipality. The assessment function may be performed by a provincial corporation in some cases, as it is in Ontario and British Columbia; or alternatively, the assessment roll may be prepared and defended by public or private sector agents of the local municipalities, as in Alberta, Manitoba and Quebec.

Each province has established its own set of exemptions from property taxation, which will include property owned by the federal and provincial governments or by churches, universities, schools and various nonprofit organizations.

Representatives performing assessment and tax services on behalf of taxpayers are coming under increasing scrutiny and regulation. For instance, in Quebec, only licensed appraisers may give opinion of value evidence before the assessment appeal tribunals.

In Ontario, only lawyers or paralegals licensed to provide legal services by the Law Society of Ontario may file and prosecute appeals.

Deadlines for assessment appeals will vary from province to province. For instance, in Ontario, there is an annual right of appeal and an appeal in the initial year of the four-year cycle will be deemed in effect for the subsequent 3 years, whereas in Quebec an appeal of the tri-annual assessment can only be made in the first year of the cycle. Knowing the local laws and practices are critical Thus, as in the United States, local counsel is essential to understanding the tax system and use best means of pursuing a positive outcome.

BradNixon2Brad Nixon is a partner in the Toronto law firm Walker Poole Nixon LLP, the Canadian member of American Property Tax Counsel, the national affiliation of properly tax attorneys. He may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it.. The views expressed here are the author's own.

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Jan
01

"The first step toward making a tax-informed decision on a real estate purchase is to consult with a property tax professional knowledgeable in the market..."

By Sharon DiPaolo, Esq., as published by rebusinessonline.com, January 2013

Someone buys a commercial property after months of research and negotiation, and soon afterward the property's real estate taxes skyrocket. The pattern — or at least the degree of the tax increase — often catches even sophisticated buyers unaware because rules that govern real estate assessments vary from state to state and town to town.

Investors who blindly assume that real estate taxes will remain flat after a sale risk disastrous consequences. Tax increases of 50 percent or more are not uncommon following a sale. A clear understanding of how the taxes could change can significantly influence what a buyer is willing to pay for real estate.

"It happens every day," says J. Kieran Jennings, managing partner of Cleveland-based law firm Siegel Jennings, which specializes in commercial property tax. "The phone rings and it's the new owner of a property who has just been hit with a huge tax increase, wanting to know what happened. Sometimes we can fight the tax increase after the fact, but it's always better to know what to expect before you buy. We prefer to get the phone call before the purchase, when we can help plan."

Know the market

Real estate taxes are based on a property's assessment, but tax rules vary widely by location. Some states ban the assessor from changing a property's assessment to match the sale price. Other states automatically raise the assessment to the sale price. Some states have a hybrid system in which a taxing district can file an appeal to increase the assessment after a sale. Knowing the rules of the particular jurisdiction is critical to proper tax planning.

Pennsylvania, for example, has a hybrid system. Pennsylvania law prohibits the county assessor from spot assessing, or independently changing the assessment of only one property. Under another Pennsylvania statute, however, taxing districts can file appeals to increase specific assessments, and many districts use sales to cherry-pick which properties to appeal.

Within Pennsylvania, and even within a particular county, school districts diverge in their practices of filing appeals. In Pittsburgh alone, one district might file appeals on all properties with sales greater than a certain percentage of the assessment, while another district might not file any appeals where the sale price is less than $1 million. A few districts have decided not to file any appeals.

Across the state line, in Ohio, the situation is a little different. Ohio has 88 counties and county auditors set assessments. "It boils down to knowing the county," says Jennings. Ohio has a six-year reappraisal cycle when every property gets a new assessment, and a three-year update cycle when the assessment can be modified.

Owners should expect the sale to be taken into account in a reappraisal year. Mid-cycle, the county auditor also can change an assessment to reflect a sale price. Just as in Pennsylvania, districts can file increase appeals, and many do. Generally, Pennsylvania and Ohio see more increase appeals by taxing districts than do other nearby states.

In New Jersey, the law is similar to Pennsylvania's, but the practical effect is different. "It's a trap for the unwary," says Philip J. Giannuario, a property tax lawyer with Garippa Lotz & Giannuario in New Jersey.

Giannuario cautions property owners to investigate the tax climate carefully before buying. Under New Jersey law, assessments are set by towns. A town's assessor cannot use a recent sale as a reason to change a property's assessment.

Just as in Pennsylvania, such spot assessments are banned. The towns can, however, opt to file assessment appeals to increase the assessments of properties that sell. With more than 650 towns in the state, Giannuario says that whether a particular town actually files increase assessment appeals depends on the town. The key is to know each town's practice.

Budget for worst-case scenario

The first step toward making a tax-informed decision on a real estate purchase is to consult with a property tax professional knowledgeable in the market. Based on the nuances of the particular jurisdiction, if an increase in an assessment is a possibility the tax professional can help the buyer to project a budget as if the assessment were raised to the potential sale price. That analysis could reduce the sum that the potential buyer is willing to offer for the property.

Knowing the worst-case scenario also can help the buyer notify tenants about potential outcomes so that they, in turn, can budget or even escrow funds. A little preparation goes a long way and is an easy step to avoid surprises down the road.

sdipaolo150Sharon F. DiPaolo is a partner in the law firm of Siegel Jennings Co., L.P.A., the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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