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Our members actively educate themselves and others in the areas of property taxation and valuation. Many of APTC attorneys get published in the most prestigious publications nationwide, get interviewed as matter experts and participate in panel discussions with other real estate experts. The Article section is a compilation of all their work.

RETAIL SUFFERS FROM EXCESSIVE TAX ASSESSMENTS Assessors attempt to ignore market realities when valuing retail property.

Retail property owners' pursuit of fair treatment in real estate taxation seems to generate a river of appeals and counter-appeals each year. What makes this ongoing melee especially perplexing and frus­trating for property owners is a sense that taxing entities will often ignore market realities and established valu­ation practices to insist upon inequi­table, inflated assessments. This tendency to forsake indus­try norms is rampant, and calls for a dose of reality. This article uses the term "real value" to describe that of­ten ignored element of true property value or genuine value of the real es­tate only, meaning the market value that buyers and sellers recognize as a product of an asset's attributes and the real-world conditions affecting it. Real value in this usage is not a legal term, but encompasses issues that real estate brokers, property owners, appraisers, lawyers and tax managers regularly discuss in retail valuation. The array of issues that affect real value or market value range from the influence of ecommerce on in-store sales to build-to-suit leases, sales of vacant space, capi­talization rates for malls of varying quality, proper ac­counting for eco­nomic or functional obsolesce and more.

All of these important and timely issues find their way into an age-old discussion of how to properly value the real estate, and only the real estate, in retail properties for property tax purposes. Although these topics may involve complex calcula­tions or judgments, buyers and sell­ers regularly use these concepts to ar­rive at mutually agreeable transaction prices, which is exactly the sort of real value that assessors should recognize for taxation. Some taxpayers may be surprised to learn that the arms-length sale of a property on the open market isn't universally accepted among taxing entities as representing that property's real or taxable value. The path to rem­edying assessors' tendency to avoid finding the real value of the real estate only is to educate tax authorities and their assessors by appealing unjust as­sessments, and by sharing the details of beneficial case law that continues to shape tax practices across the country.

Cases in Point
Tax laws vary from state to state so that the applicable principle that comes from the case decision in one region may not fit neatly in another region. Nevertheless, trends and con­cepts are always important guideposts that need to be recognized. Taxpayers who present case law from other re­gions to their local courts can begin the process of introducing the truth of real value in their market. A number of new retail property tax cases have come from the Midwest. These cases deal with issues that tax­ payers coast to coast have argued and continue to argue in the struggle to establish real value in court for retail property. ln 2016, the Indiana Tax Court heard an appeal from the Marion County tax assessor, who was unhappy with an Indiana Board of Tax Review decision that granted lowered assessments on Lafayette Square Mall for the 2006 and 2007 tax years. The assessor had origi­nally valued the property at $56.3 mil­lion for 2006, but the county's Property Tax Assessment Board of Appeal re­duced that amount by more than half. Simon Property Group, which owned the mall during the years in question, appealed to the Board of Tax Review, which further reduced the property's taxable value to $15.3 million for 2006 and $18.6 million for 2007. During the appeal, taxpayer, Simon Property Group, presented evidence of the mall's $18 million sale in late 2007. It stated it had begun to market the property for sale because it was suffering from vacancy and leasing is­sues and the property no longer fit its investment mission. The taxpayer's appraiser indepen­dently verified the sale and concluded it to be arms-length, having been ad­equately marketed and there being no relationship between buyer and seller and no special concessions for financ­ing.This scenario seems like what most of us in the tax assessment community would consider a textbook example of market-defined value. Yet the county assessor appealed the review board's conclusion to the tax court.

What is noteworthy here is that the court affirmed the tax board's conclu­sions, which were also in line with the taxpayer's evidence from a real-world transaction. The sad part about this event is that it required years of review and expense to prove that a sale in the open market reflected value. In Michigan in 2014, the Court of Appeals heard a case presented at the Michigan Tax Tribunal which con­cluded in favor of the taxpayer, Lowe's Home Centers. The case is significant because the court accepted a market­ based value as true taxable value. The taxpayer's expert testified re­garding its appraisals and indicated that they were appraising fee simple interest or the value of the property to an owner, and at the highest and best use as a retail store, valued as vacant. They distinguished between existing facilities and build-to-suit facilities, ex­plaining that the subject property is an existing facility and that the build-to­ suit market rent or sale price is based upon cost of construction, whereas the existing market sale price or rent is a function of supply and demand in the marketplace. Basing his analysis on the above fun­damental premise, the taxpayer's ap­praiser valued the property in detail. Again, what makes this case signifi­cant is that the tribunal accepted the taxpayer's argument, and the court af­firmed that decision.

Incremental Acceptance
While these principles seem univer­sal, they have been rejected in many regions of our country. Tax-assessing communities wage battles to impose excessive values based on a rejection of the actual market. As most tax systems are based in the market value concept, the only resource for these taxing juris­dictions is to distort the concept. These issues are as old as dirt, but resolution remains elusive. The lesson here for the retail prop­erty owner appealing an assessment is to advance arguments that reflect real-world conditions supported by evi­dence. The decisions in these cases and others tell us that someone is listening to those arguments, and taking heed.

​Philip Giannuario is a partner at the Montclair New Jersey, law firm Garippa, Lotz & Giannuario. the New Jersey and Eastern Pennsylvania member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Philip Giannuario can be reached at  This email address is being protected from spambots. You need JavaScript enabled to view it.

Struggling with Vacancy? You May Get a Break on Property Taxes

To determine whether your property may qualify for relief, identify the market occupancy rate for that property type and submarket.

In many states, abnormally high vacancy at commercial properties should mean a lower tax bill. Market transaction evidence essentially dictates this result: States that assess taxable value on commercial properties based on market value, as though leased at market rents, should allow a deduction from that value when the property incurs above-market vacancy and collection losses.

Would buyers pay as much for a vacant income-producing property as they would for an identical property that is fully leased at market rates? Of course not. For the same reason, in states that value the property as though leased at market rents, below-market occupancy should result in a lower property tax assessment.

To determine whether your property may qualify for relief, identify the market occupancy rate for that property type and submarket. Loan underwriting is a good source of this information because lenders underwrite property loans based on the normal, stabilized occupancy rate.

For example, in many areas lenders assume 95 percent stabilized occupancy for shopping centers. In those areas, a shopping center that is only 80 percent occupied has below-market occupancy and, therefore, is worth less than otherwise similar properties with the higher market occupancy rates.

Similarly, the prospect of the imminent departure of a major tenant reduces the price a buyer would pay, even if the property currently enjoys market occupancy. And a vacant anchor space diminishes value even when the owner continues to receive rent on the dark space. All these circumstances signal an opportunity for property tax relief.

Start the process

If any of these circumstances apply, the best first step is usually to contact the tax assessor's office and inform the appraiser responsible for valuing the subject property. Providing data about the vacancy problem may be all it takes to reduce taxable value in the next assessment.

If this fails to achieve a reduced value, consider a property tax appeal. Engaging counsel experienced with property tax matters will help the owner evaluate the merits of appeal opportunities. Counsel may also be able to give the conversation with the assessor's office a fresh try.

An appraisal may be necessary to support a property tax appeal. The property owner's counsel should help select a good appraiser who can testify, if necessary. Counsel will also instruct the appraiser on what will be needed for property tax purposes.

Deduct a vacancy shortfall

In states where below-market occupancy affects property tax valuation, the appraiser should engage in a two-step analysis. First, determine the property's stabilized value. Then estimate the amount of vacancy shortfall to deduct from the stabilized value to account for the costs, risk, effort and skill that a buyer of the property would require to bring it to stabilized occupancy.

The three components of a vacancy shortfall deduction are direct costs, indirect or opportunity costs and entrepreneurial incentive. Direct costs include tenant improvements and leasing commissions that would be required to lease up the vacant space. Indirect costs include lost rent until the space is leased, lost expense recoveries and any free rent or other concessions the new tenants would require, based on market lease terms.

Finally, the entrepreneurial incentive profit margin represents the additional deduction from the stabilized value that value-add investors require for the extra risk, skill and effort required to bring the property to stabilized occupancy. The entrepreneurial incentive profit margin can range from as little as 20 percent to over 100 percent of the vacancy shortfall costs.

Another approach to account for entrepreneurial incentive is to increase the capitalization rate used in the income approach to calculating stabilized value during the first step. That does not show the effect of the abnormal vacancy as clearly. Ideally, step one includes several valuation approaches rather than relying on the income approach alone and concludes a reconciled value as if stabilized. Then the full effect of the abnormal vacancy can be isolated in the second step of the appraisal (i.e., in the vacancy shortfall analysis).

To value property with below-market occupancy, the appraiser must understand how buyers and sellers treat such properties in actual transactions. The appraiser will need to verify comparable sales prices directly with buyers and sellers or their brokers to determine how they determined the selling price for properties that sold subject to below-market occupancy. Though each party to the transaction may differ in its analysis, both will likely have performed this two-part examination to determine the as-is selling price of the struggling property. This market evidence will bolster the subject property's tax appraisal.

Just as a buyer typically would negotiate a lower price for deferred maintenance such as a leaky roof, buyers pay less for properties struggling with vacancy issues. Typically value-add investors expect a significantly higher return to compensate them for the elevated risks of trying to create additional value. Many states appropriately recognize this in lower property tax assessments.

Michelle DeLappe and Norman J. Bruns are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local taxes. Bruns is the Idaho and Washington representative 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.  DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..​

Oregon Law Offers Potential For Property Tax Reductions

Properties under construction and projects subject to governmental restriction can take advantage of legislative provisions the state provides.

The Portland metropolitan area is undergoing an unprecedented boom in commercial construction that extends from downtown to the suburbs and into just about every product type.Many taxpayers are preparing to pay larger tax bills, either because they are developing one of those new projects, or because they own properties that are becoming more valuable in response to growing demand for redevelopment sites. This is particularly common in developed areas where infill construction is hot.

Taxpayers in either of those positions may be missing out on significant tax savings if they are unaware of two provisions of Oregon law that could offer some respite. The Oregon legislative has carved out property tax provisions for a property under construction and for a property subject to a governmental restriction. The savvy property owner needs to know about these opportunities and comply with the statutory requirements to achieve the tax benefit.

The provisions are especially relevant to Portland's latest round of development, much of which is concentrated around infill in neighborhoods and on properties that were once used for industrial activities.

It is important to remember that Oregon law bases property taxes on the real market value of the property or the maximum assessed value under the Oregon Limits on Property Tax Rates Amendment of 1997. Also known as Measure 50, this amendment imposed restrictions on future increases in assessed values and on tax rates. Taxing entities multiply the assessed value by the tax rate to calculate the taxes owed.

The state defines "real market value" as the price an informed buyer would pay to an informed seller in an arms-length transaction. The statute goes on to state that if the property is subject to a governmental restriction as to use, "the property's real market value must reflect the effect of those restrictions."

That brings us to the tax-saving opportunities associated with usage restrictions and construction. Taxpayers typically think of government restrictions only as zoning law or a conditional land-use limitation. Often overlooked are environmental restrictions on a property's use, such as when the federal Environmental Protection Agency or the Department of Environmental Quality has identified the land as a contaminated site.

When a property is governed by a qualified environmental remediation plan, it is subject to a governmental restriction on the property's use. Obviously, the contamination and the future costs of remediation or containment significantly reduce the property's real market value.

One way to measure the reduction in market value caused by the government's environmental restrictions is to calculate the present value of the future clean-up costs. The assessing authority will consider the responsibility and costs of remediation or containment, and will usually reduce the real market value of the property significantly.

Another common governmental usage restriction occurs when a governmental agency provides low-interest loans or tax incentives as a means of encouraging development of certain types of public interest projects, such as low-income housing. The government loan will typically require that the property reserve a number of units for lease at a below-market rent.

In Oregon, the statute allows the property owner to choose whether it wants to enter into the special assessment program for low-income housing. A caution to the property owner that enters into the special assessment program for low-income housing is that the property could become subject to back taxes if it later fails to meet the requirements of the county, or of the loan.

Importantly, the statute does not require the property owner to enter the special assessment program to achieve the tax benefit of certain low-income housing units, as long as the loan meets certain statutory requirements and is properly recorded.

Not to be missed is the construction-in-progress exemption, which is available for income-producing properties. Most states encourage the development of commercial and industrial facilities by sheltering construction projects from the payment of taxation until the property is in use or occupied, and therefore generating rental income or enabling an owner-occupier to pursue business activities there.

The construction exemption requires strict compliance with the statute, and inadvertently failing to meet one of the criteria could cost the property owner a year of tax savings. The exemption isn't limited to manufacturing facilities; the Oregon Tax Court has held that this tax exemption is also available to a condominium under construction, provided that the units were held for sale until its completion.

While taxpayers in Portland's hot construction market enjoy many opportunities to take advantage of tax reductions, owners all across the state should be on the alert for these potential reductions.

Cynthia M. Fraser is a partner at the law firm Garvey Schubert Barer where she specializes in property tax and condemnation litigation. Ms. Fraser is the Oregon representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Ms. Fraser can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Property Taxes Should Reflect Retail’s Apocalyptic Times

Instead, assessors continue to ignore the clear fact that brick-and-mortar retail is in massive decline.

The retail sector is experiencing its darkest period ever, and taxing entities must come to grips with declining shopping center values.

News reports confirm that national retailers are closing stores at a record pace. In 2017 alone, retail mainstays such as JC Penney, Sears and Macy's have shuttered hundreds of stores. Leading market analysts including Credit Suisse and Cushman & Wakefield have predicted the closing of some 10,000 brick-and-mortar stores.

Even worse, many national retailers are filing for bankruptcy protection, with several others on analysts' watch lists. The more than 300 retailers reported to have filed for bankruptcy protection in 2017 include several major brands, from Payless ShoeSource to Gymboree and Wet Seal. These dire conditions have spurred some economists to describe the ongoing blood-bath as a retail apocalypse.

Double Trouble

There are two main reasons for the retail sector's decline:

First, consumer preferences are migrating from shopping at brick-and-mortar stores to more online shopping. Online sales increased by about $40 billion in 2016 and accounted for nearly 42 percent of all retail sales growth that year. Amazon alone accounted for 53 percent of that growth, reportedly quintupling its North American sales to $80 billion in 2016 from $16 billion in 2010.

Second, today's consumers would rather spend their money on experiences than on material goods. They prefer dining out, going to movies and travel over buying more shoes, jeans, and electronics. And when they buy goods, they are increasingly likely to buy them online.

These ongoing changes in consumer behavior have resulted in a disturbingly high inventory of vacant retail space, made worse by years of over-building in the sector. The United States reportedly has 40 percent more retail space per person than Canada, five times more than the United Kingdom and 10 times more than Europe.

Shopping malls have been particularly affected. Once popular destinations, many regional malls now scramble to find quality tenants and to attract shoppers. To survive, some malls have taken desperate measures to steer customers to their stores, such as hosting amusement parks and concerts. Sadly, analysts predict 20 to 25 percent of U.S. shopping malls will close within the next five years. The market is simply oversaturated.

Value Questions

Consequently, retail property value has plummeted. What once was seen as a safe investment is now fraught with risk. Suffering national retailers have made retail real estate riskier as the chances of store closures and tenant bankruptcies have increased. Investors only value retail properties highly when those assets are generating a reliable stream of rental payments from high-quality tenants. But with department stores, electronics retailers and apparel shops boarding up, there is insufficient demand to sustain the rental rates and occupancy levels necessary for many properties to support historical values.

Unfortunately, tax assessors are turning a blind eye to this new reality, continuing to assume that there is a viable market with robust buyer demand for this property type.

In many jurisdictions, tax assessors have even raised taxable values on retail properties. This has obviously created confusion among property owners, as the values assessed by taxing jurisdictions conflict with selling prices that owners can garner on the open market.

When vacant properties go up for sale, they may linger on the market for years. And when they do sell, they are often sold to unconventional users, such as hospitals, trampoline parks, call centers, churches and schools. These buyers know that they can leverage the market oversupply to achieve low acquisition prices.

When owners point to sales of comparable — and often vacant — retail properties as evidence of market value, tax assessors accuse them of applying the "Dark Store Theory," which many assessors have mischaracterized as a tax loophole. Assessors have even convinced news media organizations of this misconception, evidenced by headlines such as "Sinister-Sounding Dark Store Theory Is Corporate Welfare and "How Big-Box Retailers Weaponize Old Stores."

This has fueled an ongoing debate concerning how to properly value the fee-simple interest in income-producing property, which in most jurisdictions is the taxable value.

In essence, tax assessors claim that retail property owners are trying to escape taxation by calculating taxable value based on the asking rents and sales of vacant retail locations, rather than on actual rents and sales of occupied properties. Tax assessors contend that property owners are comparing apples to oranges.

Property owners counter that assessors are overstating real estate value by capturing the additional value of non-taxable assets, such as long-term leases with brand-name retailers.

Despite this debate, there is no hiding the fact that retail is going dark. Shopping malls and oversized big box stores have become largely obsolete, bankruptcies and store closures plague the industry, and the glut of retail space grows. Preferences for on-line shopping and consumer purchasing patterns are here to stay.

We are reaching a point where the "dark store is the norm. The market has turned previous assumptions about variables such as market exposure, vacancy, capitalization rates and market rents on their heads, resulting in a retail meltdown.

Daniel R. Smith is a principal with and general counsel for Austin, Texas law firm Popp Hutcheson PLLC, the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. James Johnson is a graduate student at Texas A&M University's Real Estate Center and tax analyst for Popp Hutcheson. They may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Where Has All The Value Gone In Retail?

Telltale signs can signal opportunities for tax reductions in declining retail properties.

For a number of years the mantra in the retail industry has been that retail property values and shopping center values, in particular, will continue to decline because consumers make purchases online rather than in brick-and-mortar stores. While this may be true, simply reciting the words to property tax authorities rarely succeeds in arguing for a reduced assessment.

The best strategy to obtain significant tax reductions for declining retail properties is an analysis of indicators that measure the mall's or shopping center's health. These factors come in four categories: anchor tenants, in-line tenants, tenant occupancy costs and prevailing lease agreements. While these dynamics may not be readily apparent, their analysis is the key to obtaining property tax relief.

Anchor Tenants

Mall anchor tenants have a significant say in how the property is configured, and in the mix of inline tenants. Consequently, when a national chain department store or other anchor tenant starts to experience a decline in sales per square foot, it can send tremors through the entire shopping center. Declining anchor tenant sales grow more serious when the anchor tenant's sales per square foot fall below the national chain-wide average. If the anchor consistently underper­forms the chain-wide average, the store is often deemed a candidate for closure.

Inline Tenants

Inline tenants are the bread and butter of most shopping centers. No other group receives more scrutiny than tenants occupying 10,000 square feet or less. The first thing mall evaluators look for is the types of inline tenants, as well as the trends in those tenant types. Landlords and investors prefer permanent inline tenants over temporary tenants. It is also better to have retail inline tenants than non-retail users, such as offices, government agencies and the like. Of course, the level of inline vacancy is also important because higher vacancy levels may trigger co-tenancy clauses in leases, thereby permitting tenants to vacate before their leases expire.

Tenant Occupancy Costs

The trend in tenants' cost of occu­pancy (COO) may be the best predictor of inline tenants' future performance. By extrapolating COO trends, it is also possible to project a mall's performance several years into the future.

The COO measures the ratio between gross sales and real estate ex­penses, including rent, maintenance charges and other costs that a tenant bears. The COO ratio for Class B and higher malls is usually in the 13 per­cent to 17 percent range, depending on the strength of the tenants, and between 10 percent and 12 percent for lower-end Class C malls.

COO ratios that are higher than these ranges indicate tenants are spending more of their gross revenues to pay property occupancy costs. This reduces the available revenues to pay other operating expenses and, obviously, limits the tenant's profits. Year-over­year increases in COO ratios means tenants are experiencing increasing financial pressure. Eventually, COO ratios become so high tenants will either ask for rent relief or other lease conces­sions, or just walk away.

Prevailing Lease Agreements

Most inline tenants enter into triple­net lease arrangements with the prop­erty owner when a shopping center first opens. Triple-net leases require tenants to pay for maintenance, insur­ance, real estate taxes and other property operating expenses, including the cost for operating common areas within the mall. As a mall declines, inline tenant sales per square foot dwindle, rental rates for new tenants decline and COO ratios increase. At some point, tenants will be unable to pay their rent and still make a profit. At this point, they are likely to ask the mall owner for some type of rent relief.

Rent relief for inline tenants takes different forms, but usually consists of converting triple-net leases to leases paying a percentage of sales, or some­times to gross leases, both of which make the mall owner bear more operating costs. An increase in the number of percentage and gross leases shows that inline tenants are unable to generate enough sales to pay rent and other occupancy expenses.

As more and more leases become percentage or gross leases, the expense burden on the mall owner increases, and the likelihood grows that the mall will close. During this time, the mall owner may replace departing inline tenants with new tenants that demand gross lease arrangements, which further contribute to the mall's decline.

Seek Early Property Tax Relief

The four factors discussed above are interrelated. The progression of falling dominoes starts when the anchor tenant's sales begin to decline. This then leads to a fall in the number of permanent inline retailers, a rise in COO ratios, and the replacement of preferred triple-net leases with percentage or gross leases. All these factors put downward pressure on a retail property's value, which typically reduces the property's tax assessment.

Most of this sequence cannot be observed because it happens below the surface, but it may be the precursor to a mall's failure. Thus, the local property tax authority may not realize a mall is in decline until it falls off the cliff, as when an anchor tenant closes its doors or high-end retailers fail to renew their leases and move to other malls.

Astute retail property owners and operators will identify the underlying problems in a mall or shopping center early on, and bring those difficulties to the attention of the local tax assessor. Doing so may reduce taxes - and mall operating expenses - well before a property is in free-fall mode. If the tax relief is significant and obtained early in the process, it may even extend the life of the mall.

Cris K. O'Neall is a shareholder at the law firm Greenberg Traurig, LLP and focuses his practice on ad valorem property tax assessment counseling and litigation. The firm is the California member of the 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..

Louisiana: Tax Exemption For Partially Completed Construction?

Passage of a new ballot initiative will confirm exemption of partially completed property from taxation."

Any taxpayer planning to develop a new property must consider how local taxing entities will treat the project during construction, but the question is especially important in evaluating and comparing overall costs of potential development locations during an industrial site search.

States generally recognize Construction Work in Progress (CWIP) as property that is in the process of changing from one state to another, such as the conversion of machinery, construction materials and other personal property from inventory into an asset or fixture by installation, assembly or construction. There is no clear consensus among taxing jurisdictions as to whether (or how) a tax assessor should value such par­tially completed construction on the applicable assessment date.

Many states including Alabama, Missouri and North Carolina value CWIP based on the value or percentage of completion on the assessment date. Kansas values incomplete construction based on the cost incurred as of the assessment date. Florida, Maryland, Virginia and West Virginia assess CWIP when the work has progressed to a degree that it is useful for its eventual purpose. And in South Carolina, improvements are only assessed upon completion.

With the exception of a few errant assessments in the early 1930s, Louisiana has never assessed partially completed construction for property tax purposes. Rather, taxing jurisdictions assess and add the completed property to tax rolls as of January 1 of the year immediately following completion of construction. This complements Louisiana's industrial tax exemption program, which exempts certain manufacturing property from ad valorem taxation for a specified number of years.

Unfortunately, properties on which ad valorem taxes have been paid are ineligible for participation in the exemption program. Thus, if a taxpayer has paid taxes on a project as partially completed construction, the property is no longer eligible for the industrial tax exemption and remains on the taxable rolls, subject to assessment each year. Obviously, assessing projects with partially finished construction in this manner would significantly diminish the value of the exemption pro­gram to taxpayers and undermine its usefulness to economic develop­ment agencies as an incentive tool.

In 2016, a local assessor broke with established practice and initiated an audit that included construction work in progress on a major industrial taxpayer. This audit raised statewide and local uniformity concerns over the assessment of a single taxpayer's partially completed construction in a single parish, and jeopardized the taxpayer's existing industrial tax exemption.

The taxpayer immediately filed an injunction action in district court, and the Louisiana Legislature took up the situation during its regular 2017 legislative session. Recognizing the need to formalize the exemption, the Legislature referred to voters a constitutional amendment that would codify the exemption of construction work in progress from assessment. Louisiana is one of 16 states that require a two-thirds supermajority in each chamber of the Legislature to refer a constitutional amendment to the ballot, so their vote underscores the strong support among lawmakers to codify the exemption.

Act 428 would add a subsection to Article VII, Section 21 of the Louisiana Constitution, which lists property that is exempt from ad valorem tax assessment. The new provision would exempt from ad valorem tax all property delivered to a construction project site for the purpose of incorporating the property into any tract of land, building or other construction as a component part. This exemption would apply until the construction project is completed (i.e. occupied and used for its in­tended purpose).

The exemption would not apply to (1) any portion of a construction project that is complete, available for its intended use, or operational on the date that property is assessed; (2) for projects constructed in two or more distinct phases, any phase of the construction project that is complete, available for its intended use or operational on the date the property is assessed; (3) certain public service property.

If voters approve the ballot item, CWIP will be exempt from property taxes until construction is "completed." The proposed amendment defines a completed construction as occurring when the property "can be used or occupied for its intended purpose." The exemption would thus remain effective until the construction project or given construc­tion phases of the project are ready to be used or occupied.

A constitutional amendment does not require action by the Governor. This constitutional amendment will be placed on the ballot at the state­wide election to be held on Oct. 14, 2017.

Angela Adolph is a partner in the law firm of Kean Miller LLP, the Louisiana 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..

Misnaming, Misusing The Dark Store Theory

What's in a name? Discussing valuation principles with concise language avoids misunderstanding.

Dark store theory is being used incorrectly to name what is standard, accepted, and proper appraisal practice. It is most often employed by news media to mistakenly suggest that big-box storeowners are taking advantage of a property tax loophole and arguing that a property should be valued as if it were vacant even when the store is open and operating.

While the words "dark store" evoke images of villainous or nefarious activity, assessors and taxpayers should see through this provocative language.

The phrase often confuses the fee simple (absolute ownership of the real estate subject only to governmental powers) market value of the real es­tate with other types of quantifiable value, such as investment or insurable value.

Investment value reflects value to a specific investor based on his own in­vestment requirements, while insur­able value reflects improvements or the portion of the property that may be destroyed.

Typically, property taxes should only be assessed on the real estate value. That's why it's important to differentiate property value for real estate tax assessment from other types of value.

What local law deems real estate value often is different from the property's value to a lender or investor. For example, an owner may include large manufacturing equipment as part of collateral for a mortgage.

This equipment may be valued along with the real estate in determin­ing a loan amount, and may even be included in a financing appraisal; yet the value of that equipment should not be taxed as real estate.

Although this careless and unsys­tematic misapplication of dark store theory concerns commercial real es­tate, we will use examples of single­family homes to illustrate its con­cepts.

Comparable sales valuation

In many jurisdictions, assessors value the land, building and improve­ments for real estate tax purposes. If using sales of comparable proper­ties to determine value, the assessor should examine exactly how much was paid, by whom, for what.

If the sale price of the compara­ble property includes value for an above-market lease, for unusually favorable financing terms, or for an above-average credit rated tenant, the assessor must adjust the sale price to reflect market conditions. The flip side is also true: a sales price based on below-market rent should also be adjusted.

Users of the "dark store theory" label often argue that a busy store deserves a higher real estate tax as­sessment because a large and sophis­ticated company is running a suc­cessful business there. But excluding business value from the real estate as­sessment doesn't mean that the prop­erty owner made ill-advised business decisions.

The adjustments recognize that the sale included additional sources of value or achieved valuable business objectives in addition to the exchange of real estate. The value of these items is separate, and must be excluded from the real estate value for tax pur­poses.

Consider this residential example: a buyer pays 20 percent more than the high end of the market range to buy the house next door to the buyer's brother. The two families have chil­dren of similar ages and expect to save money by carpooling and shar­ing child care and other expenses.

The buyer is acting in his own self­interest and values the proximity to the brother's household, and the ob­jectives the buyer will meet by living next door. That does not mean that the additional money the buyer paid for those considerations increases the value of the house itself to the typical buyer.

lf an appraiser uses this purchase price as a comparable sale to value a similar house across the street, the purchase price should be adjusted to reflect a more typical market partici­pant.

Similarly, any sales of comparable properties used to value big-box retail stores must be adjusted to exclude any value paid for items that are not real estate, whether they are an above­market-quality tenant, atypically long lease duration or other intangible property.

Income approach valuation

Two distinct and important issues get muddied by dark store adherents in valuations based on potential in­come generation.

The first is whether the properties are valued as if vacant, or as if occu­pied at market terms. Valuation as if occupied at market terms by a typi­cal market tenant does not include a landlord's lease-up time and costs, which are factors in the value of a va­cant property.

Secondly, there will generally be a correlation between better retail properties in better locations and the financial strength of the tenants in those properties and areas. Howev­er, the business success or failure of a specific tenant cannot be the basis of a real estate tax assessment if that tenant is not representative of the market.

Returning to the single-family world, houses in desirable areas with good schools, municipal servic­es and low crime rates are generally occupied by people with higher in­comes than homes in less-desirable areas.

However, that does not mean that the income of a specific resident deter­mines the value of the house that he or she occupies. If a brain surgeon and a retail cashier are next-door neighbors in similar houses, the values of the homes do not change.

If two similar retail stores are located in a similar area, but one is gener­ating extremely high store sales while the other is vacant because of a business decision to exit the local market, the value of the properties for real es­tate tax purposes should be the same.

Valuing property is always fact intensive, and the array of specifics dif­fers from situation to situation. There are no shortcuts to an accurate and fair tax assessment value. If the data used is bad and valuation process sloppy, the value conclusion will also be wrong. Consistent and rigorous analysis is vital.

Don't be fooled by labels

Proper appraisal methodology does not become nefarious just because it is erroneously called a "dark store loop­hole." A rose by another name would smell as sweet. Taxpayers need to pay attention when the term "dark store" is bandied about - it is often used to confuse important appraisal concepts and practices.

To be fair and uniform, property taxes must be assessed only against the real estate, and be based on accurate data reflecting typical market participants. Value related to the success of the retailer's business is captured by other taxes levied on income, sales or commercial activity.

To include those items as part of the property tax assessment is not closing a tax loophole; it amounts to double taxation.

Ignore incendiary language and apply appraisal methodology consistently and diligently to arrive at a fair value for real estate taxes.

Cecilia Hyun is an attorney at the law firm Siegel Jennings Co, L.P.A., which has offices in Cleveland and Pittsburgh. The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Don't Let Taxing Authorities Kill Your Deal

Tips from a veteran attorney on handling the assessments that can spell the difference between a successful closing and coming up short.

Almost every week, I get calls from brokers or investors who want to know how property taxes could impact a potential purchase. With property taxes forming the largest variable expense in most real estate acquisitions, investors should question the tax implications of every deal.

In some jurisdictions, the effective property tax can reach 5 percent of market value, so an unexpected increase can cause a deal to go under. With planning and an understanding of the local environment, however, investors can fully appreciate the risks and expenses, and may be able to come in with a winning bid in a tight market.

Most of the inquiries I receive relate to properties in Ohio or Pennsylvania, where school districts can, and do, file appeals to raise taxes on real estate. In those states, the aggressor is often a school board that seeks to value an asset based on its recent sale price. In other states, it may be the county assessor. Some states have deemed it unconstitutional to "chase" sales in setting taxable value.

Know your district

Knowing which states have aggressive taxing authorities can reveal potential problems, but familiarity with those agencies and their personnel is the key to deciding whether to walk away from a deal or to stay and find a creative solution, resulting in a deal that is favorable to everyone.

An examination of any real estate purchase, whether office, retail, hotel, etc., in the context of various taxing districts' behavior illustrates the importance of thoroughly knowing your taxing authority. In all the following examples, assume that the property is uniformly assessed and that the current assessment is consistent with the value of competing properties.

Also assume that the property is assessed for less than the proposed sale price, and that increasing taxable value to the amount of the purchase price would ruin the deal.The first example takes the case of a taxing district with an aggressive, unyielding district attorney. The tax district's counsel is unwilling or unable to see that the tax increase will end up lowering the property's value below the purchase price.

In this scenario, the assessment is raised to the purchase price, which becomes part of the tax budget. Since taxing entities typically establish tax rates based on the overall assessment of the community, the tax district only gets a single year's increase in tax revenue. In subsequent years, the newly increased tax burden weighs down the property's market value, ending in an eventual refund of taxes. The net effect is a loss for the district and a loss for the taxpayer, though the taxpayer eventually recovers some of those losses. It is altogether a lose-lose situation.

Big gambles

The relatively passive school district occasionally files an increase appeal and generally isn't driven to get the last penny from the taxpayer. At first this seems like a good situation. Although a passive district may be less difficult to deal with than a more aggressive counterpart, it still leaves the buyer with a great deal of uncertainty. Risking large sums of money on chance is gambling, not investing.

The advice to the investor in a passive district rests greatly upon the taxpayer's risk tolerance, and upon local counsel's experience with how cases are typically settled. In some instances, the investor could assume that the case would be settled similarly to past cases. This requires counsel that has enough experience with the district to gauge the risk as well as the possible outcome. It also requires that the buyer fully understand the nature of the risk.

Finally, there are districts with counsel that is both reasonable and creative. In that situation, attorneys have been able to resolve tax questions with the district in advance of closing. This allows for the obvious decrease in risk. As in the previous example, it takes a great deal of experience with the opposing attorney.

Of note, approaching a district early can produce a better result. Taxing authorities have become more likely to pursue appeals of assessments, and the chances that a sale will go unnoticed—and that an assessment will go unchanged—are becoming slimmer.

Due diligence means more than determining what might happen; it requires arranging the deal to whatever extent is possible to bring about the desired outcome. Paper the file with an appraisal that satisfies any allocations, and make notations in the purchase agreement that support the tax strategy.

Being able to explain the nature of the purchase later in a tax hearing is important, but having facts and documents that support those assertions is much more valuable. With the right opportunity and preparation, an investor may be able to enter into an acquisition while eliminating risk that has driven away the competition.

J. Kieran Jennings is a Partner at the law firm Siegel Jennings Co, L.P.A., which has offices in Cleveland and Pittsburgh. The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. Kieran can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Delaware Court Unlocks Opportunities to Reduce Property Tax Burden

Reducing property tax assessments can be challenging under the best of circumstances, and distinctions between state tax systems make minimizing that burden across an office or industrial portfolio especially daunting. But a recent Delaware Supreme Court decision provides taxpayers with a new, yet surprisingly familiar, opportunity to ease the tax burden on properties in The First State.

Delaware's Tax Assessment System Shows its Age

Under Delaware law, property must be valued at its "true value in money," a term interpreted to mean the property's "present actual market value." However, in order to implement the Delaware Constitution's mandate of tax uniformity, the state applies a base­year method of assessing property. That means that all property in a jurisdiction is assessed in terms of its value as of a certain date, and that value remains on the books indefinitely until the jurisdiction performs a general reassessment. For Delaware's northernmost county, New Castle County, the last reassessment occurred in 1983, so all property therein is valued as of July 1, 1983.

A major challenge to contesting assessments in Delaware is that a taxpayer must determine the property's 1983 market value. Determining what a property is worth today is not always easy, but proving a property's value as of three decades ago has proven increasingly difficult. Furthermore, in the absence of regular adjustments to a property's assessed value, the county asserts that a property should be valued either as it existed in 1983 or, if it was built after 1983, as if it is new and undepreciated.

Delaware's courts have explained that taxpayers have two options in assessment appeals. The first option is to use data from the base year. The property owner could, for example, find sales of comparable properties in or around 1983, or using prevailing market rents and capitalization rates from 1983. The alternative route is to calculate the current market value of the property and "trend back" that amount to 1983. The County Board of Assessment Review has expressed a near-absolute preference for 1983 data, and rarely finds a taxpayer's trending formula acceptable.

The inequities of this practice are blatant. Under the county's interpretation of the base year system, a building constructed in 1983 and located next door to a similar new building should be assessed and taxed at the same level, even though buyers, sellers and tenants are likely to value the buildings quite differently. If the owner of the 34-year-old building wanted to contest its assessment, the owner would have to identify data for new buildings in 1983. Of course, as time marches on and years turn to decades, relevant data from the base year becomes increasingly difficult to find.

Taxpayers Highlight the System's Obsolescence

Taxpayers have raised many challenges to Delaware's assessment system, but most successful challenges have been fact-specific, and no recent court has gone so far as to order Delaware's counties to complete a reassessment. But after several attempts, the taxpayers in Commerce Associates LP v. New Castle County Office of Assessment successfully underscored the largest flaw in the system.

One Commerce Center is an office condominium building in Wilmington, Delaware. The county originally assessed each office condominium upon construction in 1983. After keeping the same tax assessment for decades, the owners of several of the condominiums challenged their assessments in 2015.

Before the County Board of Assessment Review, the owners presented five different analyses. Two analyses relied on comparable sales transactions, one using 1983 sales of buildings that were about 32 years old, and one using modern asking prices trended back to 1983 using the Consumer Price Index (CPI). Two analyses relied on income, one using 1983 data and one using 2015 data trended back to 1983 using the GPI. The fifth analysis employed a cost approach using the original construction expense and reflecting depreciation. These approaches showed that the properties were over-assessed by more than 40 percent.

The county presented evidence of the condominiums' sale prices in 1985, when each unit was relatively new. The county also presented an income approach using 1983 data and a cost approach reflecting no depreciation. The county's approaches all supported the original assessed values, and the board ultimately denied the taxpayers' appeals.

State Supreme Court Approves a Decrease

After having their appeals denied by the Superior Court, the taxpayers brought their challenge to the Delaware Supreme Court. In a tersely worded decision, the Supreme Court reiterated that assessors must consider all relevant factors bearing on the value of a property in its current condition. While the County argued that no depreciation was needed because the properties were brand new in 1983, the court noted that the properties were, in reality, more than 34 years old. Failing to account for their age and any resulting depreciation or appreciation resulted in a flawed value.

Although the county has yet to implement the court's decision, the effects of the decision will likely be widespread. Most properties in New Castle County built after 1983 are assessed without any depreciation. Because each tax year brings with it a new opportunity to challenge an assessment, property owners can bring a new appeal reflecting the property's current depreciation to the Board of Assessment Review every year. Ultimately, this could result in the downfall of the decades-old base-year assessment, as the county finds it necessary to update assessments for a larger number of properties.

A number of questions remain unanswered by the court's ruling. How should assessors value properties in areas that were rural in 1983 but are now highly developed? How can taxpayers quantify and reconcile appreciation and depreciation?

Future cases will need to resolve these questions, but for now, owners of Delaware property should evaluate their portfolios and determine whether opportunities exist to improve profitability by reducing property taxes.

Benjamin Blair is an attorney in the Indianapolis office of the international law firm of Faegre Baker Daniels, LLP, the Indiana and Iowa 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..

Property Owners Celebrate Fair Taxation Ruling by Pennsylvania Supreme Court

"Nearly every state constitution requires uniformity in taxation, meaning that two like properties should receive the same assessment, no matter how they are owned, occupied, built or financed."

Commercial property owners around the country are cheering a recent Pennsylvania Supreme Court decision that breathes new life into constitutional guarantees of uniformity in taxation.  Overruling a decade of lower court decisions, the ruling reestablishes the primacy of constitutional uniformity protections to taxpayers in the strongest possible language, fittingly issued just one day after the July 4 holiday.

Nearly every state constitution requires uniformity in taxation, meaning that two like properties should receive the same assessment, no matter how they are owned, occupied, built or financed.  Yet commercial property owners across the nation have been under attack by assessors attempting to alter appraisal theory in order to pin higher assessments and higher real estate taxes on specific owners.

These assessors have been singling out occupied commercial properties by setting assessments based on financing mechanisms that fail to meet standard appraisal definitions of market sales, incorrectly basing taxable value on data relating to sale-leasebacks, turnkey leases and contract rights arid duties associated with tenant financing.

In Pennsylvania and Ohio, the only states that provide school districts a statutory right to file increase appeals, the school districts have been targeting specific commercial owners for higher assessments using this same flawed methodology.  These selective or “spot” appeals disrupt constitutionally required uniformity in assessment.  Many Pennsylvania school districts have been paying contingency fees to behind-the-scenes consultants to select properties for appeal.

Commercial Portfolio Owners Beware

The consultants’ favorite repeat targets are national real estate portfolio owners that cannot vote in local school board elections.  The practice has gained traction over the past five years, with national companies being forced to defend against an ever-increasing number of increase appeals in which school districts seek discovery of the property owner’s confidential real estate information and then use it against the owner to justify an increase in assessment.

This practice violates fundamental fairness and puts targeted commercial owners at a competitive disadvantage with commercial owners whose assessments are not increased.  It also shifts more of the tax burden from residential to commercial owners, since most school districts are loathe to sue voting residential owners to increase their assessments.

In Valley Forge Towers Apartments LP vs. Upper Merion Area School District, the school district filed increase appeals only against commercial property owners and not against residential owners.  The district selected properties for appeal after consultation with Keystone Realty Advisors, a New Jersey tax consultant that employs trained appraisers and takes a 25 percent contingent fee on any increase in taxes resulting from its recommended appeals.

Four apartment building owners that had been targeted for these appeals challenged the school district’s selection of only commercial owners for appeals as violating the Pennsylvania Constitution’s uniformity in taxation requirement.  Both the trial court and the first-level appellate court denied the taxpayers’ challenge, holding that the school districts goal of increasing revenue justified the selective nature of the appeals.

The Pennsylvania Supreme Court reversed those rulings.  The court stated that all taxpayers must be uniformly treated, whether they are residential or commercial owners, and that no assessment scheme can systematically treat residential and commercial taxpayers differently.

The court stated no less than 13 times that all real estate is a single class.  The court observed that this constitutional tenet has been in place since 1909 and was reaffirmed by the court on multiple occasions, and that the court had no intention of discarding it.  The court then stated that the government may not create sub-classifications of property for different tax treatment, a point it repeated nine more times in its decision.

What the Ruling Means Going Forward

The ruling makes it abundantly clear that all real estate must be taxed uniformly, and that this constitutional protection is for the benefit of the taxpayer:

“First, all property in a taxing district is a single class, and as a consequence, the uniformity clause does not permit the government, including taxing authorities, to treat different property sub-classifications in a disparate manner,” the court stated.  “Second, this prohibition applies to any intentional or systematic enforcement of the tax laws and is not limited solely to wrongful conduct.”

The court then remanded the case to determine if there was a systematic disparate treatment of the Valley Forge taxpayers.  It will be unnecessary to show that the school intended to treat the taxpayers differently from other taxpayers.

The principal takeaway from the case is that all taxes must be uniformly assessed, and that any purposeful or unintentional systematic assessment that treats taxpayers in a disparate manner is unconstitutional.

The Pennsylvania Supreme Court’s decision underscores the need for a real estate taxation standard that treats residential and commercial properties uniformly.  In current practice, assessors around the country assess commercial and residential properties using different standards.  Residential property is taxed on a fee-simple, unencumbered basis: that is, the property is assumed to be vacant and available for purchase as of the assessment date.

Commercial property, on the other hand, increasingly has been assessed on the assumption that it is occupied by a successful business.  In those instances, the assessment reflects the way that the business finances its occupancy, whether it chooses to lease the building or own it outright.  Commercial property frequently trades as part of an ongoing business or with long-term leases, deed restrictions or other use restrictions in place.  But to be uniform, property taxes must rely upon a single interest valued for tax purposes.

The only interest that is uniform across all categories is the fee-simple, unencumbered value.  As the Valley Forge decision makes clear, there can only be one standard because all real estate is a single class.

Now, across the country, tax professionals can use the Valley Forge decision to bring fairness to commercial property owners.

Sharon DiPaolo

Sharon DiPaolo is a Partner in the law firm Siegel Jennings Co, L.P.A., which has offices in Cleveland and Pittsburgh.  The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. Sharon can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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