"By demonstrating the scale of the reduction in income to the property and quantifying the precise loss in value through the process of income capitalization, a taxpayer can often reduce its tax burden..."

By Stephen Paul , Esq., as published by Real Estate Forum, September 2012

The clearest way to convey the bright side of declining commercial real estate values is through a residential example. At the height of the real estate boom in 2007, my wife and I received an unsolicited offer for a condominium we owned in Florida. The buyer was persistent and eventually paid us three times what we had paid only four years earlier. But because we still wanted a vacation place in Florida, we purchased a new condo as the market was topping out.

As soon as we moved into our new condo, the market crashed. Similar units in our development were soon selling for half the amount we had paid for ours. When my wife saw our first tax assessment, she was dismayed that our condo's value had dropped so far below our purchase price. But because we intended to hold onto the property for many years, and because our property taxes had decreased, the decline in assessed value actually improved our position.

For commercial real estate, the post-2008 increase in vacancy rates and the collapse of the capital markets have led to a substantial value loss. Value-weighted US commercial property values in June this year were down 30.7% from the peak of January 2010, according to the CoStar Commercial Repeat Sales Index. This cloud has a silver lining for property owners, however. The decline in the market creates an opportunity to reduce taxable value, increase the bottom line and begin to turn the property's value upward. To everything there is a season.

Real estate values, much like the real estate market itself, are largely cyclical. Tax assessors usually calculate commercial property value by capitalizing the property income. As rents decline, property value declines, both for business valuation and tax purposes. A lower assessment also reduces the tax bill.

Logically, any reduction in a major expense will raise net income. Other than debt service, the largest expense for most real estate is property tax. Consequently, as the tax load decreases, the property owner's bottom line increases.

Few local governments assess properties annually. Most properties are reassessed every three or four years, and the tax authority simply adjusts values annually to reflect general market changes. A property may carry an assessment from the market's peak or from a time when the property had less vacancy, thereby overstating the current value.

Assessors will not always reduce a property's assessed value simply because hard economic times have fallen on a region. The problem is further compounded because assessors rarely have access to a property's rent roll. When assessors choose to reduce values generally, the reduction may not be tied to a specific property's actual reduction in tenancy.

In most jurisdictions, however, when a building suffers from an inordinate loss through vacancy, the taxpayer can file a real estate tax appeal requesting an adjustment of the building's assessed value. By demonstrating the scale of the reduction in income to the property and quantifying the precise loss in value through the process of income capitalization, a taxpayer can often successfully and substantially reduce its tax burden. A successful tax appeal and the resulting reduction in tax burden can in turn help offset the loss of income caused by the building's excessive vacancy. Additionally, the lower assessment may remain in effect even as the market improves, resulting in savings for future years.

The tax reduction will boost the property's net operating income. In turn, this will raise the property's market value once the building's increased net operating income is capitalized into anindication of value. This cyclical cause and effect is a built-in economic buffer for owners whose properties suffer from above-normal vacancy rates.

Outside of the tax arena, if a property's expenses decrease and its net income increases, the owner may seek a professional appraisal of the property. An appraisal that accounts for the reduced tax burden may be used to secure more favorable financing, particularly for properties with underwater mortgages. Further, for owners looking to sell their properties, the decrease in the real estate tax load may counterbalance higher-than-average vacancy. A potential buyer will see a better return on investment with a lower tax burden and may be willing to pay more for the property than the occupancy alone would suggest.

By recognizing that there is a silver lining to excessive vacancy and by acting to secure a more favorable assessment, owners can better manage their taxes and keep their property's value elevated in lean times.

Stephen Paul is a partner in the law firm of Faegre Baker Daniels, the Indiana member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it., associate, contributed to this article.

Strategies for differentiating between LIHTC and conventional apartments

"In most jurisdictions, the assessor's statutory responsibility is to value a property at its market value as of a particular date. Assessors often have difficulty incorporating the restrictions spelled out in a tax credit property's Land Use Restriction Agreement (LURA)..."

By Gilbert D. Davila, Esq., as published by Affordable Housing Finance, July/August 2012

Owners of low-income housing tax credit (LIHTC) properties face an unending struggle to keep their property tax assessments at a reasonable level. The fight continues because local assessing authorities receive little guidance from state legislatures and courts on how to account for the unique characteristics of a LIHTC project. Thus, assessors derive a tax credit project's assessment from traditional methods of valuing conventional apartments. Unfortunately, this approach can lead to inflated assessments.

No uniform approach

There is often little consensus across state taxing jurisdictions regarding how to account for tax credits in the valuation equation. Some jurisdictions include the value of the LIHTC allocation as part of a property's net operating income under the contention that the tax credits enhance a project's value in a way that a prospective buyer would take into account when estimating the property's value. The resulting higher property taxes make low-income housing less economically feasible, which undermines the credit program's goal of encouraging the development of affordable housing.

Other jurisdictions exclude tax credits from a project's income, arguing that inclusion of the tax credits leads to excessive assessments. LIHTC property owners should educate themselves on how their local assessor accounts for tax credits in the valuation process. Only then can they begin a meaningful conversation about LIHTC valuations versus conventional complex assessments.

In most jurisdictions, the assessor's statutory responsibility is to value a property at its market value as of a particular date. Assessors often have difficulty incorporating the restrictions spelled out in a tax credit property's Land Use Restriction Agreement (LURA) into their valuation analysis, so they fall back on three classic approaches to value: cost, sales comparison, and income.

It often falls on the LIHTC property owner to show the assessor why tax credit properties defy conventional market value definitions and approaches to value. In that discussion with the assessor, the property owner should incorporate the following points:

Cost and sales-comparison approaches inapplicable

The cost and sales approaches to value are almost never reliable methodologies for tax credit projects, and owners should aggressively protest valuations derived from these approaches.

A cost-based assessment is rarely a reliable value indicator for any multifamily project, much less a tax credit property. And development costs for a LIHTC project usually exceed those of similarly sized conventional projects, given the additional amenities required under the LURA. In addition, a replacement or reproduction cost estimate excludes value associated with the future tax credits and ignores income lost due to restrictions in the LURA.

It is easy to apply the salescomparison approach to a conventional complex because these properties trade frequently in the open marketplace. Sales of LIHTC projects are rare, and the terms and conditions may render the sales data unreliable.

For example, a transfer may occur under a "right of first refusal," in which case the sale price is negotiated well before the transfer date and may not relate to current market value. If the transfer is under a "qualified offer," then the price is based on a statutory formula unrelated to market conditions.

The modified income approach for LIHTC properties

The income approach is the most reliable valuation methodology to derive a tax credit project's property tax assessment, but it requires some special treatment. Typically, assessors using this approach will apply market rents, expense ratios, and capitalization rates into a direct-income pro forma to value the real estate. Owners of tax credit properties should argue for a modified income approach to account for key differences between conventional and LIHTC apartment projects. Here are the major differences:

1. Rents. A tax credit property operates under limited income potential due to the restrictions associated with the LURA and LIHTC regulations. Specifically, rental rate restrictions cause rents per unit to be much lower for a LIHTC project than for conventional properties.

A market rent factor derived from rental data associated with conventional apartment projects will lead to an inflated indication of effective gross income for a LIHTC project and, ultimately, an excessive assessment. Tax credit owners should argue for the use of their actual restricted rent amounts in the income analysis to arrive at a realistic representation of the property's income potential.

2. Expenses. Tax credit properties require management expertise and administrative duties that run up operating costs above those of conventional projects. Tax credit properties also see higher turnover rates than conventional apartments, so make-ready costs are greater.

Finally, rental rates are limited but expenses are not, so the actual expense ratios for tax credit projects are often well above the ratios assessors are willing to use for conventional apartments. LIHTC owners should provide the assessor with a copy of the LURA and point out the requirements that cause expenses to exceed conventional levels.

3. Marketability and capitalization rate. In their income analyses, assessors rely on a capitalization rate, or a buyer's initial annual rate of return based on price and the property's net income.

Assessors typically derive capitalization rates from sales of conventional apartments sold under the willing buyer, willing seller concept associated with most market value definitions.

As previously discussed, tax credit properties rarely sell. If a LIHTC complex does sell, the LURA dictates who the property can be sold to. What's more, tax credits expire after 10 years, but the restrictions may last for another 20 years, and the property's restrictions survive a sale. A purchaser would, in effect, be buying only the restrictions without getting the benefit of the credits. These factors make for an extremely illiquid and unmarketable asset.

A tax credit owner should argue that the assessment take into account the subject property's illiquidity, and the most logical place to do that is in the capitalization rate. The capitalization rate for a tax credit property should be higher than the rates used for conventional projects.

Using these talking points will help LIHTC owners demonstrate to the assessor the differences between tax credit and conventional apartments, which will ultimately lead to reduced assessments and property taxes.

Gilbert Davila is a partner with Austin, Texas, law firm Popp Hutcheson, PLLC. The firm devotes its practice to the representation of taxpayers in property tax matters and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. Davila can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

With assessors often in denial about the decline in valuations, a well-constructed tax appeal can pay off.

By Stewart L. Mandell, Esq., as published by Heartland Real Estate Business, August 2012

We've all heard the old saw: "Denial ain't just a river in Egypt." Yet with property taxation, it is no laughing matter when assessors are in denial about the substantial decline in property values both during and even following the Great Recession. Fortunately, tax attorneys who presented appropriate evidence have succeeded in many recent cases.

A 2011 Michigan Tax Tribunal decision involving a grocery-anchored retail building is particularly telling. The tribunal reduced each assessment about 85 percent because the vacant building was worthless on each of the Dec. 31 valuation dates in 2007, 2008 and 2009. The evidence the owner's tax appeal counsel submitted was compelling. Among the highlights:

• A contractor testified about the property's significant structural problems, calculating that a partial demolition and reconstruction to restore the asset's value would cost almost $1.7 million.
• An architect, who was qualified as an expert, corroborated the contractor's cost estimate as reasonable.
• The broker who had tried to lease or sell the property testified about the lack of interest in the building. The only purchase offer received was well below the government's position, and was withdrawn after the prospective buyer's property inspection and due diligence.
• An appraiser testified that it would be more economical to demolish the building and use the parcel as a new site rather than renovate. Based on the foregoing, the appraiser valued the land using the sales comparison valuation method and deducted the cost of demolishing the existing structure.
• Pictures of the building supported the testimony of the property owner's witnesses.

The tribunal found the taxpayer's evidence convincing, even though the government's parade of witnesses included its assessor, a professional planner, a building inspector, the city manager and an appraiser who supported the assessor's assessments. None of the government's witnesses, however, could disprove the property owner's most important evidence that the cost of renovating the building would have exceeded the value added.

In three other recent cases the tribunal also ruled for the taxpayer based on the sales-comparison-based valuations submitted by each taxpayer's appraiser.

One case involved a big-box retail store of more than 135,000 square feet and the property's valuations for the tax years 2009 through 2011. The appraisers for both parties considered all three approaches to value, but the tribunal found the analysis of the property owner's appraiser convincing.

This included the conclusion that the sale prices of leased big-box stores reflect the value of the leased fee interest, which in a property tax appeal is irrelevant to the valuation of an owner-occupied property's fee simple interest. In summarizing the errors of the government's appraiser, the tribunal concluded that "there is nothing so frightening as ignorance in action."

Two other recent decisions show the importance of selecting truly comparable properties for sales comparisons of properties under appeal. In one case, the tribunal used the sales comparison approach to substantially reduce the value of the taxpayer's industrial building of more than 200,000 square feet located in a small city well outside of the Detroit metropolitan area.

Comparing Apples to Apples

The key to the taxpayer's victory was having documentation of sales of industrial properties whose size and location made them comparable. Properties in the Detroit metropolitan area, which were a key part of the appraisal the government submitted, were not comparable.

Similarly, in a case involving the Dec. 31, 2009 value of 36 acres of vacant land near Detroit Metropolitan Airport, the tribunal rejected all of the purported comparable sales cited by the government's appraiser.

The most important flaw of all of those sales was that they occurred before the Great Recession had ruined property values.

Ultimately, the tribunal found most persuasive a recent listing of property that was relatively close to the subject property and of similar size.

To be sure, many taxpayers have not prevailed in their tax appeals in Michigan and across the country. Taxpayers typically bear the burden of proof and can easily lose without appropriate valuation evidence and an experienced tax appeal counsel. However, as the Michigan cases show, taxpayers are able to obtain tax justice with the right evidence and representation.

Stewart L. Mandell is a partner in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"Investigating potential exemptions before structuring a real estate transaction can create a large tax savings. Some jurisdictions tax not only real estate transfers but also the transfer of an interest in an entity that owns real estate. A controlling interest transfer may be sufficient to trigger a real estate transfer tax..."

By Norman J. Bruns, Esq., and Michelle DeLappe, Esq., as published by Affordable Housing Finance News, July/August 2012

Whether it is called a documentary stamp tax or a transfer tax, most states and some local jurisdictions tax conveyances of real property. In connection with transfers of interests in low-income housing, transfer taxes often create opportunities for tax savings or, for the unwary, looming traps.

Here are the two most common issues, along with taxpayer strategies to approach the tax as an opportunity rather than a pitfall.

The first scenario relates to special exemptions that may be available but that may require special care in planning the transaction. The second relates to how the parties report the transfer price to tax authorities and the potential to adjust the nominal price to account for the value of below-market financing that is part of some low-income housing programs. State tax laws vary considerably, but the following strategies will work in many jurisdictions.

Take advantage of exemptions

Investigating potential exemptions before structuring a real estate transaction can create a large tax savings. Some jurisdictions tax not only real estate transfers but also the transfer of an interest in an entity that owns real estate. A controlling interest transfer may be sufficient to trigger a real estate transfer tax.

Parties to a potentially taxable transaction should explore exemptions from transfer taxes from the outset because the availability of an exemption may influence negotiations and terms. An exemption may depend on how the transaction is structured, and altering the structure after the parties execute the agreement is often impossible.

Washington state, for instance, exempts from tax a transfer that under federal income tax rules does not involve the recognition of gain or loss for purposes of entity formation, liquidation, dissolution, or reorganization.

Consider an investor who plans to divest its controlling interest in a partnership, the sole asset of which is a Sec. 42 tax credit project. In this hypothetical example, the remaining partners want to avoid bringing in a new partner.

Correctly structuring the transaction as the liquidation of one partner's interest for federal income tax purposes would avoid some or all of Washington's real estate transfer tax. But if the departing partner simply sells its interest to the remaining partners, the real estate transfer tax applies. All the federal tax reporting must be consistent with the position for state tax purposes to qualify for this exemption. Though many states do not have this particular exemption, careful investigation of exemptions may reveal significant potential tax savings in any state.

Adjust the reported price

The second common opportunity or trap revolves around proper reporting of the value of the real estate transferred, which can reduce transfer tax incurred. Of more lasting importance to the buyer of a low-income housing project, proper price reporting can also help prevent over-assessments later, as assessors often rely on recorded transfer prices to set values for property taxes.

Many states base the transfer tax on the property's market value, which is not always the same as the sales price. One way market value can differ from the sales price is when the buyer pays a higher nominal price by using below-market financing. Embedded in the concept of market value as defined by the American Institute of Real Estate Appraisers is the concept of cash equivalence, that is, the most probable price in cash or in terms equivalent to cash.

Several state courts have agreed with that definition. New Jersey's Tax Court in 1984 held in Presidential Towers vs. City of Passaic that market value requires adjustments to account for favorable financing. The following year, Michigan's highest court reached the same conclusion in Washtenaw County vs. State Tax Commission, requiring "a method of valuation that separates the cost of ... artificially low financing from the sales price to achieve the 'true cash value of such property.—

Wisconsin's highest court, in its 1990 decision in Flood vs. Lomira Board of Review, similarly concluded that "cash equivalency adjustment is applicable whether the analysis is of the market value of comparable property or the market value of the taxpayer's property." For states that base transfer taxes on market value, adjustments for cash equivalency should apply.

Cash equivalent adjustments should apply to low-income housing programs that receive mortgage subsidies. One such program is the U.S. Department of Agriculture's Rural Development program, which provides long-term loans at an effective 1 percent interest rate to what are called Sec. 515 projects. Under certain circumstances, owners of Sec. 515 properties can transfer the project to a new owner who assumes the subsidized loan and preserves the low-income housing restrictions.

Transactions involving below-market financing, such as Sec. 515 preservation transfers, reflect not only the value of the real estate but also the very valuable subsidized financing. Before a Sec. 515 transfer, the federal program usually requires an appraisal to ensure that the property's value will provide adequate security for the assumed loan. Rural Development appraisals separate asset value from the value of the financing to reach the cash-equivalent value of the property.

Reliance on such an appraisal should help in reporting the market value of the transferred property, but reporting an adjusted value can be complicated. Tax authorities may be unfamiliar with cash equivalency adjustments or simply resist accepting anything but the nominal purchase price. Competent state tax counsel should be able to present the information appropriately to the tax authorities.

Exemptions and proper price reporting can minimize the tax impact for both sellers and buyers. Engaging legal counsel familiar with locally applicable tax laws and practices early in the planning of a transaction may significantly reduce the parties' immediate costs and the buyer's future property taxes.

Norman J. Bruns and Michelle DeLappe are attorneys in the Seattle office of Garvey Schubert Barer, the Idaho and Washington member of American Property Tax Counsel, the national affiliation of property tax attorneys. Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Jurisdictions Vary in Approach to Taxing Sustainable Measures

"Governments are trying to strike a balance between encouraging (sustainability) and finding taxable value."

By Philip J. Giannuario, Esq. & Brian A. Fowler, Esq., Commercial Property Executive, July 2012

As energy prices soar, the search for economical alternative energy has become a pressing issue for all consumers, including businesses. Solar power represents a burgeoning alternative to fossil fuels. "Green" is all the rage in society today. But it can take a toll in the tax department.

With plentiful open rooftops on big-box retail and warehouse buildings across the country, installation of solar arrays makes sense, on its face, for both the building owner and the solar provider. The building owner can obtain low-cost electricity for its business, while the solar provider benefits from federal tax credits. Solar panels make use of available real estate with zero negative impact on the environment.

But there are assessment issues surrounding structures erected to deliver the new energy.Property tax treatment of this evolving building attribute varies by jurisdiction. Governments are trying to strike a balance between encouraging greater use of sustainable energy systems and finding taxable value in the equipment that generates and transmits the new energy. It stands to be a new source of revenue for taxing authorities if the state is silent as to its taxability.

California has exempted systems built between 1999 and 2016. For the property owner in New Jersey, a renewable energy system that provides all or a portion of the building's energy needs can be deemed to have no effect on the building's assessed value. (While unstated, it is anticipated that a third party would be obligated to pay taxes on the equipment's value.) In Texas, onsite systems are exempt. In states like New Hampshire and Virginia, the effect on property taxation is left to local rule. Some states, such as Utah, have not specifically passed legislation on the matter.

Most jurisdictions have dealt with property tax issues by writing legislation that embraces many forms of sustainable energy. Pennsylvania, by contrast, has focused more on wind turbines, designating the turbine, tower—and even the foundation—as tax exempt.

In states that have remained silent on the issue, the question of taxability is often reduced to an argument over the definition of business personal property versus real property. This frequently centers on the issue of whether the property can be removed.

For the owner-user, solar panels are easily moved from one location to another and could be considered business personal property, but the structure that connects them to the building and its electrical system—or to the electrical grid—is not. The municipality could choose to assess those components of the system as it does electrical systems. Most states have legislation in place to provide the assessor with guidance on addressing business personal property if it is to be taxed as real property.

New Jersey, which exempts business personal property as real property, is also representative of a more disconcerting circumstance: the extension of an exemption only to the owner-user of the power. While the owner-user is entitled to special protection from ad valorem taxation, it is withheld from for-profit entities such as an investor or utility company.

Furthermore, often the owner-occupier that opts to lease its rooftop for the installation of a solar array where the power supplies the building and the excess power is sold to the market could receive an added assessment notice. There are many situations in which a solar firm owns the panels and obtains federal tax credits that can be sold to utilities, all while selling the energy to the building occupants or to the local utility company.

Is the income approach available to the assessor based on the lease rates on the rooftops? Or should the cost approach be implemented to reflect the cost to install the system? Will assessors attribute more value to the roofs of buildings without solar arrays because there is unrecognized potential there? It will be interesting to see how the assessing community reacts to these evolving trends in energy production. Will they go green or go for the green?

Philip J. Giannuario is a partner and Brian A. Fowler an associate at the Montclair, N.J., law firm Garippa, Lotz & Giannuario, the New Jersey member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Giannuario can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Fowler at This email address is being protected from spambots. You need JavaScript enabled to view it..

"It is not unusual to find situations where appraisers are brought in to assist tax assessors in setting assessments. This is certainly understandable when complicated properties are being appraised..."

By John E. Garippa, Esq., as published by National Real Estate Investor - Online, July 2012

Property owners throughout New Jersey have observed that more tax appeals are headed to trial. More than ever, cases that would have been settled had they occurred a few years ago are now routinely in the litigation track.

What's behind this trend? The most significant reason is that government is under increasing pressure to preserve the municipal treasury. And as the drive for tax revenue brings more taxpayers to court, many of those property owners find an uneven playing field during litigation. The assessment is presumed to be correct until it is overcome by the preponderance of the evidence. The level of proof the taxpayer must provide to reach this standard has become increasingly more difficult to attain.

One useful aid in arguing a property owner's appeal is often overlooked because it comes right out of the appraiser's tool box. The Uniform Standards of Professional Appraisal Practice (USPAP) can help to level the playing field for the property owner. Taxpayers need to understand this set of regulations because it affords opportunities to attack the credibility of the taxing jurisdiction's presentation.

Any licensed appraiser in the state of New Jersey is subject to USPAP, which mandates that an "appraiser shall ensure that all appraisals shall, at a minimum, conform to the Uniform Standards of Professional Appraisal Practice." An appraiser's failure to comply with the provisions of USPAP may be construed to be professional misconduct in violation of New Jersey tax law.

For example, USPAP sets minimal standards for the retention of records, referred to as the "recordkeeping rule." An appraiser must prepare a work file for each appraisal, appraisal review or appraisal consulting assignment. A work file must exist prior to the issuance of any report, and a written summary of any oral report must be added to the work file within a reasonable time after the issuance of the oral report. Such a work file must include the report as well as the information used in creating the report.

The standards set time requirements as well. The work file must be retained for at least five years after preparation or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last. Any appraiser who willfully or knowingly fails to comply with the obligations of this recordkeeping rule is in violation of the state's ethics rule.

In further clarifying the recordkeeping rule, USPAP states that it applies to "appraisals and mass appraisal, performed for ad valorem taxation assignments."

USPAP is adopted by statute, so a violation of its standards may leave a violating appraiser susceptible to sanctions imposed by the governing professional association. In addition, New Jersey's tax statute provides explicitly that for engaging in an act of professional misconduct, the professional licensing board may penalize the offender by suspending or revoking any certificate, registration or license.

It is not unusual to find situations where appraisers are brought in to assist tax assessors in setting assessments. This is certainly understandable when complicated properties are being appraised. Now, however, as the appraiser advises the assessor as to value in setting an assessment, that advice and conclusion is now discoverable by the taxpayer. This presents a significant opportunity for taxpayers to discern the machinations behind the setting of an assessment.

Under USPAP, the appraiser must have a work file demonstrating all of the evidence relied upon to determine that value. It does not matter whether the advice given the assessor is written or oral; the work file must contain written evidence supporting the advice and conclusions given to the assessor. This now becomes a potential gold mine of information that can be used to damage the presumption of correctness of the assessment.

In another common scenario, taxing jurisdictions that rely on outside appraisers to assist the assessor in setting the assessment will typically retain those same appraisers to defend the assessments before the tax court. Because of the backlog of cases in the tax court, this means that an appraiser that originally assisted in setting an assessment could be testifying about value several years after the assessment was set.

This presents an opportunity for the taxpayer to probe the appraisal report prepared for trial and compare it to the work file prepared when the assessment was made. Was the value predetermined because of the early work in setting the assessment? Does the early work erode the conclusions of the later work?

These are all important considerations, and will significantly help to level the playing field against recalcitrant taxing jurisdictions. Appraisers who lend their licenses and credibility to taxing jurisdictions in setting assessments need to be aware that there could be a day of reckoning.

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair, N.J. The firm is the New Jersey and Eastern Pennsylvania member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

How Wisconsin Supreme Court decision on assessments of specialized manufacturing plants affects owners

"The critical aspect of the case for property owners is the Supreme Court's conclusion that there was a market for continued use of the property, when neither party could identify an example of such a sale..."

By Robert L. Gordon, Esq., as published by Heartland Real Estate Business, July 2012

Wisconsin tax law requires assessors to assess real estate at its fair market value. Whenever possible, that value must reflect recent sales of reasonably comparable property. Longstanding Wisconsin Supreme Court decisions have held that real estate cannot be assessed based on an imaginary or hypothetical market, or at its intrinsic value to the current owner, if that value differs from fair market value. Under those decisions, real estate can only be assessed at what market evidence indicates a third party would pay for the property in the open market.

In the recent case of a specialized plant, the Wisconsin Supreme Court rejected the property owner's argument that the plant was assessed at its intrinsic value to the owner's manufacturing business and not at its fair market value as real estate.

The Background

The plant was built to manufacture a highly specialized food product, using a process regulated by the U.S. Food and Drug Administration. The manufacturer incorporated unique real estate features — at tremendous cost — to meet FDA standards. These included a spray dryer more than 100 feet tall housed in an 8-story tower, as well as concrete surfaces specially treated to eliminate any air pockets where moisture with microbial growth could reside.

At trial before the Wisconsin Tax Appeals Commission, neither the assessor with the Wisconsin Department of Revenue nor the manufacturer's appraiser could identify a single instance anywhere in the United States where a similar plant had sold for continued use to manufacture the same product. The manufacturer's appraiser concluded that there was no market to sell the property for continued use, and that the highest and best use of the plant was as an ordinary food processing plant.

The assessor, however, speculated that one of the manufacturer's few competitors could be a likely purchaser of the plant, and that there was a market for the plant for continued use. The assessor thus valued the property based on its cost to the manufacturer, including the expensive features added solely to support production of its one specialized product, but disregarding the lack of value of those improvements to a purchaser buying the plant for any other use.

The Decision

The Tax Appeals Commission upheld the Department of Revenue's conclusion that there was a market for continued use of the property to manufacture the same specialized product, thereby upholding the assessment based on the plant's cost to the manufacturer.

The Wisconsin Supreme Court affirmed the Tax Appeals Commission and rejected the manufacturer's arguments that the plant was being assessed at its intrinsic value to the owner's manufacturing business and that this was inconsistent with prior Supreme Court decisions.

The critical aspect of the case for property owners is the Supreme Court's conclusion that there was a market for continued use of the property, when neither party could identify an example of such a sale. The court held that a "market can exist for a subject property, especially a special-use property, without actual sales data of similar properties being available." The court further stated that "markets are necessarily forward-looking" and that "empirical evidence of past sales activity is certainly informative, but it is not conclusive."

The Net Effect

Traditionally, owners of properties with expensive features included solely to support the business conducted on the property have pointed to a lack of comparable property sales as evidence that the features do not translate into real estate value.

Because of the Wisconsin Supreme Court's conclusions that markets are forward-looking, that lack of evidence of sales is not conclusive, and that a market can exist without actual sales data, it may now become more challenging for taxpayers to contest assessments. This may be especially true for assessments that are primarily based on the cost of features that are valuable only to the current owner.

In the Wisconsin Supreme Court case, the manufacturer argued that affirming the Tax Appeals Commission decision would place an impossible burden on property owners to prove a negative, which is the absence of a market. The court disagreed, stating that taxpayers are only required to present "sufficient contrary evidence" to demonstrate that an assessor's highest and best use conclusion is incorrect based on the existence of a particular market.

As a result, the Wisconsin Supreme Court has left the door open for property owners to claim that there is no market to sell their plant for continued use. In light of the decision, and the statutory presumption that an assessor's conclusions are correct, property owners should be prepared to make a strong case if they intend to establish the absence of a market.

That case might include an analysis of the industry in which the manufacturer operates. Such analysis could attempt to show that there is no one who would purchase the plant to manufacture the same product. Thus, no one would pay what the plant is worth to the current owner to buy the plant as real estate.

Robert L. Gordon is a partner at the Milwaukee law firm of Michael Best & Friedrich LLP, the Wisconsin member of the American Property Tax Counsel. You can contact him via email at This email address is being protected from spambots. You need JavaScript enabled to view it..

By Stephen H. Paul, Esq. and Benjamin A. Blair, Esq. as published by IPT - Tax Report, July 2012

On June 4, 2012, the Supreme Court of the United States issued a significant decision in Armour v. City of Indianapolis, No. 11-161, finding that a city's forgiveness of sewer assessments for some property owners without offering refunds to others did not violate the Equal Protection Clause. Applying a rational basis standard of review, the Court held that administrative concerns can be sufficient to justify tax-related distinctions without running afoul of the Constitution.

Introduction
On June 4, 2012, the Supreme Court of the United States decided Armour v. City of Indianapolis, No. 11-161, which affirmed the Indiana Supreme Court's ruling that when a city switches from one method of infrastructure financing to another, the city's decision to forgive certain financial obligations arising under the prior financing method may be justified by administrative concerns even when the forgiveness creates disparate consequences. Although ostensibly a sewer-financing case, the Supreme Court's decision directly affects the scope of state and municipal taxing authority and the impact of the Equal Protection Clause on tax-related distinctions.

Facts
For more than a century, cities in Indiana have been permitted to apportion the costs of infrastructure projects among all affected property owners by a statute called Barrett Law. When a city built a Barrett Law project, the city would divide the total cost of the project equally amongst the affected lots. The city would issue a lot-by-lot assessment and would collect payment of the assessment in the same manner as other taxes. Barrett Law allowed lot owners to pay the assessment either in a single lump sum or as installment payments over a period of 10, 20, or 30 years with accruing interest. Until fully paid, an assessment constituted a lien against the property, and the city could foreclose on the property in the event of a default.

For several decades, the City of Indianapolis (the "City") used the Barrett Law system to fund sewer projects. One of the Barrett Law projects was the Brisbane/Manning Project, which began in 2001. It connected about 180 homes to the City's sewer infrastructure, and in July 2004, the homeowners were sent formal notice of their payment obligations. Each property was assessed $9,278 for the project, with options for 10-, 20-, and 30-year payment plans at 3.5% interest. Thirty-eight homeowners paid the assessment in full.

In 2005, the City adopted a new system of sewer-financing, the Septic Tank Elimination Program ("STEP"), in which each homeowner was charged a flat fee and the remainder of the cost was financed by bonds paid by all taxpayers. STEP had the advantage of lowering sewer-connection costs for individual lot owners. However, more than 40 Barrett Law sewer projects had been constructed before STEP was adopted, and more than half of those projects still had installment paying lot owners, including the Brisbane/Manning Project, which had been in place for only a year. In enacting STEP, the City decided to forgive all outstanding assessments under the Barrett Law system because the system presented financial hardships on lower income homeowners who most needed sanitary sewer service. However, no refunds would be issued for assessments already paid. Thus, while 38 of the homeowners in the Brisbane/Manning project had paid $9,278, others paid as little as $309.27 for the same sewer connection.

The homeowners who had paid in a lump sum brought a lawsuit seeking a refund from the City, claiming that the City's refusal to provide refunds at the same time that the City forgave outstanding assessments of other homeowners violated the Federal Constitution's Equal Protection Clause, which provides that "no state shall ... deny to any person within its jurisdiction the equal protection of the laws." The trial court granted summary judgment in favor of the homeowners, and the Indiana Court of Appeals affirmed that judgment. The Indiana Supreme Court reversed the lower court, finding that the City's distinction was "rationally related to its legitimate interest in reducing its administrative costs, providing relief for property owners experiencing financial hardship, establishing a clear transition from Barrett Law to STEP, and preserving its limited resources." Slip op. at 5. The homeowners appealed to the U.S. Supreme Court to consider the equal protection question.

Holding
In a 6-3 decision, the Supreme Court held that the City's tax-related distinction was supported by a rational basis and thus did not violate the Equal Protection Clause.

Analysis
The Court began by finding that the proper question was whether the City's distinction between homeowners had a rational basis. Although the Equal Protection Clause strongly protects individual rights in certain circumstances, a classification that does not involve fundamental rights and which does not proceed along suspect lines "cannot run afoul of the Equal Protection Clause if there is a rational relationship between the disparity of treatment and some legitimate purpose." Slip op. at 6. Rational basis review requires deference to reasonable underlying legislative judgments, and legislatures have "especially broad latitude" in creating classifications and distinctions in tax statutes. Id.

The City's classification involved neither a fundamental right nor a suspect classification. "Its subject matter is local, economic, social, and commercial." Id. The City did not discriminate against out-of-state commerce or new residents, actions which would have increased the degree of scrutiny the Court would give to the City's action. The distinction between fully-paid homeowners and those who had their debt forgiven was simply "a tax classification." Id. Hence, the Court found that the case fell directly within the scope of its precedents holding such a law constitutionally valid

if there is a plausible policy reason for the classification, the legislative facts on which the classification is apparently based rationally may have been considered true by the governmental decision maker, and the relationship of the classification to its goal is not so attenuated as to render the distinction arbitrary or irrational.

Slip op. at 7 (quoting Nordlinger v. Hahn, 505 U.S. 1, 11 (1992)).

The Court found that the City's decision to stop collecting outstanding Barrett Law debts was based on rational administrative concerns. Administrative considerations can justify a tax-related distinction. The City's administrative burdens would have included the need to maintain parallel and expensive administrative systems to monitor both the new and the old financing systems, with the possible need to track down defaulting debtors and bring legal action. The fixed administrative costs would have continued to increase on a per-debtor basis as debts were paid off. Further, the City would have to calculate and administer refunds, which would require appropriating funds from other city programs. In other words, the entire purpose of transitioning from Barrett Law to STEP would have been defeated. While the homeowners put forth systems they deemed superior to the one implemented by the City, the Court noted that "the Constitution does not require the City to draw the perfect line nor even to draw a line superior to some other line it might have drawn... only that the line actually drawn be a rational line." Slip op. at 11.

Although the Indiana court held that relieving financial hardship was also a rational governmental concern, the Court noted that it did not need to consider that argument, explicitly holding that "the administrative considerations we have mentioned are sufficient to show a rational basis for the City's distinction." Slip op. at 10. The homeowners correctly stated that administrative considerations could not justify a system where a city arbitrarily allocated taxes among a few citizens while forgiving others simply because it is easier to collect taxes from a few people than from many. "But that is not because administrative considerations can never justify tax differences." Slip op. at 11. "The question is whether reducing those expenses, in the particular circumstances, provides a rational basis justifying the tax difference in question." Slip op. at 12. The Court held that the homeowners had not met their burden of showing that there was no rational basis justifying the distinction.

In a spirited dissent, Chief Justice Roberts noted that the Court had never before held that administrative burdens alone justify grossly disparate tax treatment of those who should be treated alike. "The reason we have rejected this argument is obvious: The Equal Protection Clause does not provide that no State shall 'deny to any person within its jurisdiction the equal protection of the laws, unless it's too much of a bother.'" Dissent at 4. Similarly, the City's argument that the unequal burden was justified because it would have been "fiscally challenging" to issue refunds "gives euphemism a bad name." Dissent at 5. The dissent disagreed that the City could evade returning money to its rightful owner by the "simple expedient of spending it." Dissent at 6.

The City had been presented with three choices: 1) continue to collect installment payments from all homeowners; 2) forgive the debts of installment-plan homeowners and give equivalent refunds to lump-sum homeowners; or 3) forgive future payments and offer no refunds of past payments. "The first two choices had the benefit of complying with state law, treating all of Indianapolis' citizens equally, and comporting with the Constitution." Dissent at 2. The City chose the third option, and the dissent saw the equal protection violation as plain.

The Ongoing Vitality of Allegheny
The Court's decision in Armour will have a significant impact beyond the limits of Indianapolis' sewer system, particularly in the realm of equal protection challenges to state tax regimes.

The most substantial disagreement between the majority and the dissent, and the area where some commentators have expressed concern, is the continuing vitality of Allegheny Pittsburgh Coal Co. v. Commission of Webster County, 488 U.S. 336 (1989). That case involved a county assessor who valued real property on the basis of its recent purchase price, except where the property had not been recently transferred, in which case the assessment for each property remained essentially flat. The system resulted in gross disparities in the assessed value of generally comparable properties. The Constitution allows a State to divide property into different classes, but the division must not be arbitrary and the distinctions in practice must follow state law. The Supreme Court held that the assessments violated the Equal Protection Clause because the Clause requires that similarly situated property owners achieve rough equality in tax treatment.

The majority in Armour distinguished the earlier decision by emphasizing that Allegheny was "the rare case where the facts precluded any alternative reading of state law and thus any alternative rational basis." Slip op. at 13. There, the assessor "clearly and dramatically violated" a clear state law requirement of equal valuation. In contrast, the City in Armour followed state law by apportioning the cost of its Barrett Law projects equally. State law said nothing about how to design a forgiveness program or how to draw rational distinctions in doing so. Thus, to adopt the view of the homeowners "would risk transforming ordinary violations of ordinary state tax law into violations of the Federal Constitution." Slip op. at 13-14.

The dissent found the equal protection violations to be identical between Armour and Allegheny. Whereas the majority spent little time on the Allegheny decision, the dissent saw the cases as direct analogs, even down to the levels of disparity. Whereas the majority found that the City complied with state law, the dissent viewed the state law as requiring the assessment to be equally apportioned amongst the homeowners. The result of the City's decision was that some homeowners were charged 30 times what the City charged their neighbors for the same service.

The fundamentally different treatments given by the majority and the dissent treatments to Allegheny show that Allegheny is still an important case in equal protection claims relating to taxation. The sides disagreed about how central Allegheny is to the argument for rational basis and the manner in which compliance with state law demonstrates a rational basis.

The majority seems to have taken steps to avoid dealing with Allegheny, despite the obvious parallels between the cases. The Court only discussed Allegheny after finding that the City had a rational basis for the distinction. Whereas Allegheny stands for the notion that failure to comply with state law demonstrates a lack of rational basis, the majority found a rational basis and then read the state law in a way that supported its finding.

The dissent viewed compliance with state law as central to the argument for rational basis. If a City's tax regime fails to comply with state law, it fails rational basis review. Thus while the majority took a broad view of compliance, saying that the assessment itself complied with state law, the dissent took a narrow view of compliance, saying that the end result of the tax regime must comply with state law.

Allegheny, though a "rare case", has long provided taxpayers with some guidance on how to proceed in an equal protection challenge to an unequal tax regime. The decision in Armour shows how rare Allegheny truly is, and how difficult the path for future taxpayers will be. The most significant lesson for taxpayers seeking to overturn a tax regime on equal protection grounds is that the bar is set extremely high. Taxpayers who attack legislative line-drawing have the burden of showing that it was not rational for the City to draw the line to avoid an administrative burden. Slip op. at 12. Taxpayers must show that the administrative burden on the municipality is "too insubstantial to justify the classification." Id. The homeowners in Armour were unable to do so. The discriminatory effect in future cases will need to be egregious in order for taxpayers to successfully show an equal protection violation in light of Armour.

The Impact of Armour on Amnesty Programs
The Court's decision in Armour is also significant because it may be broadly interpreted to give state and municipal governments a wide berth in crafting amnesty programs and other tax policies.

The Court drew a parallel between Indianapolis' assessment forgiveness and other common amnesty programs involving mortgage payments, taxes, and parking tickets. Slip op. at 9-10. The City's distinction between past payments and future obligations is a line consistently drawn by courts between actions previously taken and those yet to come. The Court implied that to overturn the City's sewer-financing distinction would require overturning tax amnesty programs that are regularly used by governments.

The dissent, however, emphasized that the Court's analogy to typical amnesty programs was misplaced. "Amnesty programs are designed to entice those who are unlikely ever to pay their debts to come forward and pay at least a portion of what they owe." Dissent at 5. Because administrative convenience alone does not justify those programs, their constitutionality would not be in question.

The Court's decision continues the line of cases allowing under the Equal Protection Clause distinctions between taxpayers in forgiveness situations. As more states offer tax amnesty programs to increase tax revenues and encourage future compliance, they can feel secure that their programs should receive broad support from the courts, so long as they serve a rational purpose.

Conclusion
The question in Armour was summarized by Justice Breyer, the eventual author of the decision, near the close of oral argument as whether the City's choices were rational. To the majority of the Court – including, notably, Justice Thomas who broke with the conservative wing of the Court – found that administrative considerations alone can justify a tax-related distinction between taxpayers and a city's decision to stop collecting on certain assessments. Despite an invitation by the dissent, the Court refused to say "enough is enough" to continuing pressures on the Equal Protection Clause. The Supreme Court rarely grants certiorari to state tax cases, and the decision in Armour shows that taxpayers will continue to have an high burden when they do reach the courthouse steps.

Benjamin A. Blair, Esq. is a partner in the Indianapolis office of Faegre Baker Daniels, the Indiana 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.

Stephen H. Paul is a partner in the Indianapolis office of Faegre Baker Daniels, the Indiana 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..

One useful aid in arguing a property owner's appeal is often overlooked because it comes right out of the appraiser's tool box. The Uniform Standards of Professional Appraisal Practice (USPAP) can help to level the playing field for the property owner.

By John E. Garippa, as published in National Real Estate Investor Online, June 2012.

Property owners throughout New Jersey have observed that more tax appeals are headed to trial. More than ever, cases that would have been settled had they occurred a few years ago are now routinely in the litigation track.

What's behind this trend? The most significant reason is that government is under increasing pressure to preserve the municipal treasury. And as the drive for tax revenue brings more taxpayers to court, many of those property owners find an uneven playing field during litigation. The assessment is presumed to be correct until it is overcome by the preponderance of the evidence. The level of proof the taxpayer must provide to reach this standard has become increasingly more difficult to attain.

One useful aid in arguing a property owner's appeal is often overlooked because it comes right out of the appraiser's tool box. The Uniform Standards of Professional Appraisal Practice (USPAP) can help to level the playing field for the property owner. Taxpayers need to understand this set of regulations because it affords opportunities to attack the credibility of the taxing jurisdiction's presentation.

Any licensed appraiser in the state of New Jersey is subject to USPAP, which mandates that an "appraiser shall ensure that all appraisals shall, at a minimum, conform to the Uniform Standards of Professional Appraisal Practice." An appraiser's failure to comply with the provisions of USPAP may be construed to be professional misconduct in violation of New Jersey tax law.

For example, USPAP sets minimal standards for the retention of records, referred to as the "recordkeeping rule." An appraiser must prepare a work file for each appraisal, appraisal review or appraisal consulting assignment. A work file must exist prior to the issuance of any report, and a written summary of any oral report must be added to the work file within a reasonable time after the issuance of the oral report. Such a work file must include the report as well as the information used in creating the report.

The standards set time requirements as well. The work file must be retained for at least five years after preparation or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last. Any appraiser who willfully or knowingly fails to comply with the obligations of this recordkeeping rule is in violation of the state's ethics rule.

In further clarifying the recordkeeping rule, USPAP states that it applies to "appraisals and mass appraisal, performed for ad valorem taxation assignments."

USPAP is adopted by statute, so a violation of its standards may leave a violating appraiser susceptible to sanctions imposed by the governing professional association. In addition, New Jersey's tax statute provides explicitly that for engaging in an act of professional misconduct, the professional licensing board may penalize the offender by suspending or revoking any certificate, registration or license.

It is not unusual to find situations where appraisers are brought in to assist tax assessors in setting assessments. This is certainly understandable when complicated properties are being appraised. Now, however, as the appraiser advises the assessor as to value in setting an assessment, that advice and conclusion is now discoverable by the taxpayer. This presents a significant opportunity for taxpayers to discern the machinations behind the setting of an assessment.

Under USPAP, the appraiser must have a work file demonstrating all of the evidence relied upon to determine that value. It does not matter whether the advice given the assessor is written or oral; the work file must contain written evidence supporting the advice and conclusions given to the assessor. This now becomes a potential gold mine of information that can be used to damage the presumption of correctness of the assessment.

In another common scenario, taxing jurisdictions that rely on outside appraisers to assist the assessor in setting the assessment will typically retain those same appraisers to defend the assessments before the tax court. Because of the backlog of cases in the tax court, this means that an appraiser that originally assisted in setting an assessment could be testifying about value several years after the assessment was set.

This presents an opportunity for the taxpayer to probe the appraisal report prepared for trial and compare it to the work file prepared when the assessment was made. Was the value predetermined because of the early work in setting the assessment? Does the early work erode the conclusions of the later work?

These are all important considerations, and will significantly help to level the playing field against recalcitrant taxing jurisdictions. Appraisers who lend their licenses and credibility to taxing jurisdictions in setting assessments need to be aware that there could be a day of reckoning.

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair, N.J. The firm is the New Jersey and Eastern Pennsylvania member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

As high-tech companies downsized in the US, their campuses were left with significant excess space.

"Therein lies the problem for property owners and tax assessors: What is the market value of these older high-tech campuses that were built without an exit strategy as single-user, special purpose properties?..."

By David Canary, Esq., and Cynthia M. Fraser, Esq., as published by Real Estate Forum, May 2012

In the 1970s and 1980s, the explosive growth of technology in the US touched off a construction frenzy of special-purpose, high-tech buildings in campuses designed for single users.

Dubbed flex manufacturing space, these buildings provided large floor plates to accommodate research and design, manufacturing and assembly, storage and distribution. Flex campuses came with fully integrated and interconnected utility systems, with office space typically arranged in what came to be known as cube farms.

These campus headquarters were built at a time when it was desirable and economically feasible for all of these functions to be under one roof, or one location, to facilitate internal communication, maintain control and security of specialized processes and promote internal efficiency.

By the early 2000s, however, demand for these sprawling hightech campuses declined. It became more cost effective to move manufacturing and assembly functions overseas and to reduce transportation costs by locating near emerging global markets. As high-tech companies downsized their operations in the US, their campuses were left with significant excess space.

Therein lies the problem for property owners and tax assessors: What is the market value of these older high-tech campuses that were built without an exit strategy as single-user, special purpose properties? An investigation into the market value of one of these campuses must begin with an analysis of the property's highest and best use.

There are only three scenarios for highest and best use of any improved property, and they are (a) continuation of the existing use; (b) conversion to an alternative use; or (c) demolition of the improvements and redevelopment of the site. A single property may also incorporate some combination of these alternatives. What follows are key points to consider with each approach.

Continuation of existing use. This valuation scenario assumes the owner would be selling or leasing excess space. There may be legal prohibitions and physical limitations to this alternative, however. Although communities embraced these campuses for the jobs they brought to the local economy, zoning ordinances enacted to establish these projects often contain provisions insuring that the properties maintain their campus-like setting, including limitations on ingress and egress, the percentage of accessory uses not directly connected to the high-tech use, signage and parking ratios that are inconsistent with a multi-use property. Frequently, utilities, security systems and the physical configuration of the campus are interconnected, making it impossible to convert the property to a multi-use or multi-tenant facility. In some cases, it is not financially feasible for the owner of a hightech campus to sell or lease excess space because the revenue generated from a sale or leasing would not justify the expense required to convert to a multi-use facility. These costs include tenant improvements, separate metering of utilities and leasing costs. Thus, the excess space becomes functionally obsolete and it is more cost effective to let it go dark.

Converting to an alternative use. An owner/user could consider vacating the entire campus and selling it on the open market. However, potential users for these types of properties are limited due to the property's excessive size (typically 700,000 to two million square feet), age and condition, large floor plates, outmoded technology and lack of demand due to globalization. A campus property may sell if the price is low enough to justify a significant expenditure in converting the campus to an alternative, multi-tenant use. In 2007, for example, real estate developer Benaroya purchased Microchip Technology Inc.'s wafer manufacturing facility, a 700,000-square-foot, 10-building campus in Puyallup, WA, for $30 million, far less than Microchip's asking price of $93 million. Thereafter, Benaroya reportedly invested $45 million to convert the facility into a multi-tenant, state-of-the-art business and technology center. Today, a significant portion of Benaroya's renovated facility remains vacant. Thus, the financial feasibility of converting a high-tech campus property to an alternative use is problematic.

Demolish the improvements and redevelop the site. Because the previous two alternatives may not be legally permissible, physically possible or financially feasible, a number of large high-tech campus properties have been shuttered or demolished. Reported examples are Motorola's manufacturing plant in Mesa, AZ, and IBM's research park in Poughkeepsie, NY. For these reasons, high-tech campuses have been described as white elephants. Their current use is no longer in demand, and they are not suitable for conversion to an alternative, or second generation, use. The valuation and the assessment of these campuses must account for their inherent functional and economic obsolescence, which directly affect their market value.

David Canary is Of Counsel to Garvey Schubert Barer, the Washington, Oregon and Idaho member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. Cynthia M. Fraser is an owner at Garvey Schubert Barer. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. They are based in Portland, OR