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Property Tax Resources

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.
Sep
11

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..
Sep
01

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..
Aug
22

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..
Aug
03

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..

Jul
10

Tax Rules Clarified For Section 42 Housing

"Wisconsin Supreme Court reaffirms subsidized housing valuation methods."

In a major victory for subsidized housing developers and investors, the Wisconsin Supreme Court has reaffirmed longstanding principles governing the assessment of these properties.

The Dec. 22, 2016 decision in Regency West Apartments LLC v. City of Racine confirms that the assessment of a subsidized housing project is a property-specific exercise that must take into account the type of federal program involved, specific restrictions on the property and actual property income and expenses.

The decision also affirms that the value of a subsidized property cannot be determined by comparison to conventional apartment properties that have no restrictions and can charge full market rents.

Historical context

The Wisconsin Supreme Court first upheld these principles in a 1993 case involving a Milwaukee apartment project subject to rental and other restrictions imposed by the U. S. Department of Housing and Urban Development (HUD).

The assessor had valued the property based on market rents at conventional apartments, ignoring the property owner’s inability to legally charge market rents. The Supreme Court nullified the assessment, stating that the assessor had illegally assessed the property by “pretend[ing]” that the HUD restrictions did not apply.

The new decision

In the December 2016 decision, the Supreme Court reaffirmed the 1993 decision and announced additional rules governing what assessors cannot do in assessing subsidized housing.

That case involved 72 rental units regulated under Section 42 of the Internal Revenue Code, which provides federal income tax credits for investors in affordable housing. Regulations governing the property restricted both rent and tenant income levels, and required the owner to enter into a 30-year land use restriction agreement.

For the first of the two tax years in issue, the assessor valued the project under an income approach but failed to consider the owner’s actual income and expense projections. Instead, the assessor estimated vacancy and expenses using a mass-appraisal model comprised of market vacancy rates and market expenses for unrestricted properties.

The assessor also used a low 6 percent base capitalization rate, likewise derived from a mass appraisal model consisting of market-rate properties.

For the second year in issue, the assessor used a comparable sales approach based on sales of three properties that the assessor claimed were comparable to the subject property. However, none of those properties was a Section 42 project: Two were rent-subsidized HUD Section 8 properties, and the other was a mixed-use property consisting primarily of market-rate apartments with a few Section 42 units.

The Supreme Court nullified the assessments for both years, concluding that neither approach the assessor used complied with the rule that an assessor cannot value subsidized housing by “pretend[ing]” that the restrictions on the property do not exist.

For the income-based assessment, the Supreme Court found two fatal flaws in the assessor’s methodology.

First, the court found that the assessor violated Wisconsin law by using estimated market-based vacancy and expenses instead of the property’s projected actual vacancy and expenses. The court reaffirmed that its 1993 decision “unambiguously” requires assessors to use actual income and expenses when valuing subsidized housing under an income approach.

The court further held that by using mass appraisal estimation techniques instead of income and expense information specific to the subject property, the assessor violated the statutory requirement that assessors must use the “best available” information.

Second, the court found that the assessor violated Wisconsin law by deriving a capitalization rate from market-rate properties instead of from the specific market for Section 42 properties. The court explicitly held that Wisconsin assessors valuing federally regulated properties “may not” derive a capitalization rate from market-rate properties.

For the comparable sales-based assessment, the court likewise concluded that the three sales the assessor relied on were not “reasonably comparable” to the subject property, as Wisconsin law requires. The court definitively rejected the assessor’s claim that Section 42 properties and Section 8 properties have similar restrictions and similar rates of rent and are there-fore comparable.

In rejecting the assessor’s claim that those two programs have similar restrictions, the court engaged in a lengthy analysis of the fundamental differences between them.

The court emphasized that the two “are vastly different” programs with “different risks for the owners,” since Section 42 is an income tax credit pro-gram while Section 8 is a rent subsidy program; thus, Section 42 properties are “riskier investment[s]” because the government does not insure against nonpayment of rents.

The court likewise rejected the assessor’s claim that the two programs have similar rents, holding that the comparison was invalid because the assessor failed to recognize that Section 8 rents are subsidized by the government while Section 42 rents are not. The Court thus concluded that as a matter of law, Section 8 and Section 42 properties are not reasonably comparable because they do not have the same restrictions.

Key takeaways

The decision is a major victory for subsidized housing developers and investors for several reasons. First, it reaffirmed the 1993 decision that subsidized housing cannot be valued under an income approach based on the income and expenses of conventional apartments. It also provided additional guidance as to what assessors cannot do, including developing a capitalization rate from sales of non-subsidized properties.

Second, the decision addressed for the first time what assessors cannot do in assessing subsidized housing under a comparable sales approach, since the 1993 case only addressed assessment under an income approach.

Finally, and perhaps most significant for investors in these properties, the decision specifically held that different types of subsidized housing programs – Section 42 and HUD Section 8 in particular – are vastly different, and that assessors cannot consider a property under one program to be reasonably comparable to a property in a different program just because they both involve a form of subsidized housing.

Gordon Robert 150Robert Gordon is a partner in the Milwaukee office of Michael Best & Friedrich LLP.  He is also the designated Wisconsin member of Amercican Property Tax Counsel.  Robert can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Jul
07

Lifting the Veil on Chicago and Cook County Real Estate Taxes

It seems like politics watchers and the news media like to establish a veil of mystery around Cook County tax assessments. And although it sells papers and conjures an atmosphere of the unknown, the most important thing to know about tax relief in Cook County is the role of market value in assessments and how taxes are  calculated.

On June 13, taxing entities announced that tax rates in the City of Chicago would be going up approximately 10 percent. The second installment 2016 tax bills were scheduled to be published around July 1 with a very short payment deadline of Aug. 1, 2017. Those bills will reflect all changes to assessments, as well as the new tax  rates.

Tax increases make good headlines, but the increases were not a real surprise. The large anticipated property tax increases arise from a local ordinance designed to recapture a portion of the City of Chicago's and Chicago Public Schools' large budget deficits and pension plan deficits. This local real estate tax increase resulted from the absence any current resolution of the continuing budgetary stalemate between the general assembly and the governor's office in Springfield, Illinois.

The table below illustrates the potential real estate tax increase that could result from the projected 9.3 percent 2016 tax increase from the previous year's tax bills. It addresses a commercial property in Chicago which had a $10 million assessor's fair market value in 2015, considering the projected 2016 property tax increase of about 10  percent.

Projected Tax Bill
$10 million commercial property

 

2015

2016

Market value

10 million

10 million

x 25 percent assessment ratio

  

Assessed value

2.5 million

2.5 million

Equalization factor

2.6685

2.8032

Equalized assessment

$6,671,250

$7,008,000

Tax rate

6.867 percent

7.145 percent

Tax bill (increase 9.3 percent)

$458,114.74

$500,721.60

News outlets made a splash over the approximate 10 percent increase in the tax rate. However, to satisfy the needs associated with funding police, fire and schools, it is likely that there will be future tax increases over and above that initial 10 percent.

What to do? First, understand that a tax challenge is not surrounded by intrigue. Individuals can very easily appeal their assessments to the assessor. Taxpayers that present good facts and arguments following sound appraisal theory will often find some tax relief. Property owners can take a further appeal to the board of review and beyond. However, at the board level, corporate taxpayers require an attorney.

There are a number of practical arguments to consider. One is to pursue an argument based solely on the assessment as compared to the actual market value of the property, considering the contract rents in  place.

Another is taking what appears to be the opposite approach. When arguing about uniformity, taxpayers look toward the general market. In short, assessments should reflect current market rents and not necessarily the actual contract rent at the subject property.

Taxpayers should also consider market occupancy with an eye toward the limitations of the subject property. These arguments  work best when submitted to the board along with reliable appraisal evidence as supporting material.

From a practical standpoint, a uniformity argument hits close to the response that most taxpayers want, which is to be taxed in a similar manner as their neighbors or competitors in similarly situated  properties.

Most assessments are sub-arguments to the income, sales and cost approaches to determining value. The assessors and boards heavily favor the income approach for commercial properties.

Thus by understanding the limitations of the subject property, the taxpayer can argue his own case or be better able to assist tax professionals in establishing the most accurate assessment for the property. There are no smoke and mirrors required, just sound judgment.

 

jbrown kieran jennings

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..   Jeffrey Brown is an attorney at the law firm of Fisk Kart Katz and Regan LTD.  The firm is the Illinois member of American Property Tax Counsel.  Jeffrey can be reached at jbrown@proptax.

Jul
01

Are You Leaving Property Tax Savings On The Table

" In Texas, don't fail to appeal your assessment because the state gives taxpayers unusual advantages as a tax protest. "

Texas enjoys one of the most fair property tax protest systems in the country.

Suing to appeal an unsatisfactory appraisal review board decision is straightforward in Texas. The state property tax system provides taxpayers with a pragmatic approach to air their valuation disputes before the courts, without the delay and headache frequently experienced in other types of litigation. Yet many taxpayers choose not to appeal, relinquishing the opportunity to achieve significant tax savings. Do not be so shortsighted.

Texans enjoy one of the most fair property tax protest systems in the country, beginning with the right to  contest their appraised values through an administrative process. If they do not like the result, they can file a law-suit that provides a fresh start, turning the valuation issue over to a judge or jury, whichever the parties prefer. And if the taxpayer is unsatisfied with the court's decision, he or she can seek review from a state appellate court and even the State Supreme Court.

Not all states provide such a favorable review process. Texas is special.

Built into the Texas Tax Code are processes and requirements that make litigating property tax appeals more efficient and less procedurally burdensome for taxpayers, even if an appeal advances to the state's highest court. Here are a few of Texas' answers to common taxpayer worries.

Are you concerned that your property tax appeal will be a years-long slog?

Property owners who have been involved in lawsuits before may fear that a property tax appeal means protracted litigation, mired in delay and gamesmanship. Fortunately, the Texas Tax Code limits such behavior by providing numerous tools that can help bring the litigation to a quick resolution, like the ones mentioned below. These features do not apply in the initial filing to appeal an assessment, and are peculiar to property tax lawsuits.

Was your lawsuit filed in the wrong property owner's name?

In most types of litigation, a defect in parties could be fatal to a claim, especially if there is a tight window of time in which to file the lawsuit. In Texas, however, a property tax appeal continues despite having the wrong plaintiff so Tong as the property itself was the subject of an administrative order, the lawsuit was filed on time and the lawsuit sufficiently describes the property at issue. There is no jurisdictional problem.

Did you miss the deadline to protest the appraised value?

There are deadline-driven, jurisdictional prerequisites to pursuing a property tax protest, but Texas law provides some limited "back stop" protection in the event these deadlines are missed. For instance, at any time before Feb. 1, when the taxes become delinquent, a property owner may file a motion with the appraisal district to change an incorrectly appraised value that exceeds the correct appraised value by one-third. This is consistent with other statutes designed to be fair, so that property owners can efficiently challenge excessive appraised values.

Would you like to have something akin to a trial, but not necessarily be bound by the result?

The Texas Tax Code allows a property owner to take the dispute to non-binding arbitration. This is particularly helpful when the parties would like to get a sense of what might happen if the matter goes to trial. An independent, third-party arbiter decides who is right and issues a ruling on the valuation question. This procedure can drive more serious settlement discussions. Although the result is non-binding, it may nonetheless be admitted into evidence at trial for the judge and jury to see.

Would you like the appraisal district to meet with you early in the case to discuss settlement?

Upon written request by either side, the parties or their attorneys must meet and make a good-faith effort to resolve the matter. The meeting must take place within 120 days after the written request is delivered. If the appraisal district cannot meet this deadline, the deadline for property owners and the appraisal district to meet will be moved closer to the trial date — 60 days before trial for parties seeking affirmative relief to their complaint, 30 days before trial for all other experts. This allows more time for the parties to discuss settlement with a temporary reprieve from the pressure of having to engage experts and pay for costly appraisals.

Would you like to ensure that both sides produce their expert reports at the same time?

Property owners can do this by, within 120 days of filing suit, making a written settlement offer and identifying which cause of action is the basis for its appeal, meaning a claim for either excessive appraisal or unequal appraisal. At this time, the taxpayer must request alternative dispute resolution, such as mediation.

By triggering this process, property owners may protect their expert's valuation work from being used against them by the appraisal district's expert appraiser when preparing an opposing report. If property owners had to produce their expert appraisal reports first, the appraisal district's expert would likely try to discredit them in its opposing analysis. This "simultaneous exchange" requirement removes the unfair advantage that the appraisal district would otherwise have.

Property owners should not hesitate to continue their property tax protests beyond the appraisal review board level. In Texas, litigation adds numerous tools to the taxpayer's toolbox that can help property owners achieve fair property tax assessments.

 

daniel smith active at popp hutcheson

Daniel R. Smith is a principal with and general counsel in the Austin law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He represents commercial property owners in property tax appeals across the state, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Jun
20

Taxation of New York City Real Property

Introduction

This article provides an overview of real estate taxation in New York City (the “City”) including (i) the process by which the City assesses real property, (ii) how property owners challenge the City’s assessments, (iii) benefit programs available to reduce property owners’ real estate tax burdens, and (iv) the importance of understanding real estate taxes in lease negotiations. In New York City, real estate taxes have become an increasingly greater expense for property owners and landlords in recent years. As such, they are an ever-growing factor that any potential purchaser or tenant must account for in its business decisions. Counsel on either side of any real estate transaction should possess at least a basic knowledge of the real estate taxation process to be able to appropriately account for such taxes in negotiations. The process is complex, involves interaction with many government agencies, and is often counter-intuitive. Therefore, a working knowledge of the process is also important in order to understand that, for more complex transactions, specialized real estate tax representation might be necessary and appropriate.

New York City’s Department of Finance (DOF) is the agency charged with assessing all real property in New York City. DOF reassesses all real estate (over one million parcels) each year. Income generated from real estate taxes is the top source of revenue for the City, currently comprising over 40% of the City’s revenue. As a result, real estate taxes are a major factor to account for in the sale / purchase, and leasing of real estate. Furthermore, the City offers numerous real estate tax benefit programs that builders, developers, purchasers, landlords, and tenants need to be aware of in considering any transaction.

Procedures for assessing real property, challenging real estate tax assessments, and qualifying for the various tax benefit programs are governed by the New York State Real Property Tax Law (RPTL) and the New York City Charter, Administrative Code, and Rules.

Arriving at a Tax Assessment

Unlike most jurisdictions around the country, New York City reassesses every property on an annual basis and adheres to a strict and consistent calendar for publication of its assessment roll. Below is a summary of the key dates in the assessment process.

  • Taxable Status Date. DOF assesses real property as of its status and condition each January 5, also known as the taxable status date. This date is particularly important when assessing properties that are experiencing large vacancies as of January 5 or are in various stages of construction and/or demolition. Since the status and condition of these types of properties are likely to change dramatically over the course of the year, their assessments the following year may experience similarly dramatic changes.
  • Tentative vs. Final Assessment Dates. Each parcel of real property subject to assessment is identified on the New York City Tax Maps by a specific block and lot number. An individual tax lot may range from multiple buildings to just one residential or commercial unit in a condominium. On January 15, the City publishes tentative assessments for each tax lot. Between January 15 and May 24 the City has the authority to increase or decrease any assessment for any reason. This is called the change by notice period. During this time period taxpayers can also request a review of assessments if they feel such assessments were made due to usage of erroneous factors (i.e., incorrect square footage). Any changes to the tentative assessment made during this time must be sent to the taxpayer, in writing. The assessment roll closes on May 25 of each year, at which time the final assessment roll is published. This final assessment is the one upon which a taxpayer’s property tax bill is based and the one from which any challenge to the assessment will arise.

It is important for counsel to note that the tentative assessment published on January 15 is not the final word on a property’s tax burden. This assessment should be reviewed for potential errors that should be brought to the City’s attention in advance of the final roll’s publication on May 25. While the City sometimes adjusts errors on its own, there is an opportunity to alert them to potential issues. It is also important to note that this change by notice period exists separately and apart from the administrative and legal challenges to an assessment that take place later and have different deadlines associated with them. That process is discussed in greater detail below.

The Property Tax Bill

When the tentative assessment roll is released each January, DOF provides taxpayers with a notice of value. The notice of value includes many numbers and terms which may cause confusion, but which are important to understand for purposes of what a taxpayer’s real estate tax obligation will ultimately be based upon. Below is a summary of the key terms to understand in the notice of value.

Equalization Rate: In assessing properties, DOF first derives a parcel’s market value which is the City’s determination as to what the property is worth. The City, other than the few exceptions discussed below, assesses properties at 45% of their market value. This is the City’s equalization rate.

Actual Assessment: The City applies the 45% equalization rate to a property’s market value to arrive at its actual assessment.

Transitional Assessment: To shield taxpayers from sudden and drastic annual fluctuations in assessed value, the City provides for a five-year “phase-in” of every property’s actual assessment. Other than an important exception discussed below, this number is generally an arithmetic average of the five most recent years’ actual assessments and is known as the transitional assessment for a property. A property’s real estate tax liability is based on the lower of the actual vs. transitional assessment. As a result, if a property’s actual assessed value increased by $1 million over the previous year’s assessment, the transitional assessment would really only be incorporating 20% of that increase into this year’s transitional assessment. The taxpayer will not bear the full brunt of that large increase immediately.

As an example, take a hypothetical apartment building in Manhattan with the following values and assessments:

Tax Year

Market Value

Actual Assessment

Transitional Assessment

17/18

$8,100,000

$3,645,000

$2,587,500

16/17

$6,400,000

$2,880,000

$2,173,500

15/16

$5,500,000

$2,475,000

 

14/15

$4,750,000

$2,137,500

 

13/14

$4,000,000

$1,800,000

 

12/13

$3,500,000

$1,575,000

 

As you can see, the actual assessment increased by almost $1 million from $2.88 million in tax year 16/17 to $3.645 million in tax year 17/18. However, because the transitional assessment incorporates the five most recent actual assessments, the transitional assessment only increased by about $400,000. The real estate taxes for the property will therefore be based on this lower ($2,587,500) amount. Note that tax years 12/13 – 15/16 would also have transitional assessments based on actual assessment of years not listed. For purposes of illustration only, the focus of this chart is on the two most recent tax years (15/16 and 16/17).

An important exception to note regarding transitional assessment phase-ins comes up when there is construction or demolition being done on a property. In those instances the City adds or subtracts what is called a “physical increase” or “physical decrease” to the property based on the value added or subtracted for the construction or demolition taking place. This physical increase or decrease is not subject to a five-year transitional phase-in and is taxable in the year in which it took place.

Tax Rate: After determining the appropriate billable assessment, a tax rate is applied to the billable assessed value to come up with the real estate tax liability for a particular property. The tax rates vary depending on the class of property being assessed (see below). The rates are set annually by the New York City Council and are not subject to challenge.

Assessment of Different Classes of Property

Real property in New York City is divided into four classes, each with distinct assessment rules as detailed below:

  • Class 1. Properties in tax class 1 consist of primarily residential properties with three or fewer residential units. Essentially these are one, two, and three family homes. Properties in class 1 enjoy highly favorable treatment from a real estate tax perspective. As discussed above, while the City assesses the vast majority of properties at 45% of their city-determined market values, properties in class 1 are assessed at only 6% of their market values. This generally makes their assessed value (and as a result, their real estate tax bill) much lower as compared to the other classes of property. Furthermore, state law places caps on the amount the assessed value for class 1 properties is permitted to increase each year. Specifically, properties in tax class 1 cannot see their assessment increase by more than 6% year over year and by more than 20% over any five year period. As with all other properties, any physical changes to the property are not subject to these statutory limitations on increases and can result in increases that are larger than 6%.
  • Class 2. Properties in class 2 are primarily residential properties with more than three units. Class 2 includes residential apartment buildings as well as cooperatives and condominiums. Within class 2 is a subset of properties (class 2a, 2b, and 2c) that enjoy limitations on assessment increases similar to those that properties in tax class 1 enjoy. Specifically, primarily residential properties in class 2 with fewer than 11 units cannot see their assessments increase by more than 8% per year and by more than 30% over any five year period. These properties include rental properties as well as cooperatives and condominiums. Class 2a properties contain 4-6 residential units; class 2b properties contain 7-10 residential units; class 2c properties are cooperative or condominium properties with 3-10 units. While they are still assessed at 45% of market value (as opposed to the 6% equalization rate for class 1), the statutory caps still provide a benefit to these smaller residential properties. Transitional assessments do not apply to this subclass.

Many of these smaller residential properties that may qualify for favorable tax treatment by being within class 2a, 2b, or 2c also contain a commercial component. Since commercial properties fall within tax class 4 (see below) and do not enjoy any statutory limitations on increase, it is important for an owner hoping to qualify for these statutory caps to make sure the property is considered primarily residential. There is no explicit definition of primarily residential and, over the years, the City has had various policies in determining whether something should be considered primarily residential or commercial. Previously, the City looked at which component generated greater rental income for the building and considered that to be its “primary” function. More recently, greater weight seems to be given to overall commercial vs. residential square footage as well as to the total number of commercial versus residential units within the building in determining whether it would be considered primarily residential for purposes of receiving class 2a, 2b or 2c status.

On April 25, 2017 a coalition seeking tax reform called Tax Equity Now filed suit against New York City and New York State in New York State Supreme Court seeking a declaratory judgment that the entire New York City real property tax system is unconstitutional on various grounds. Specifically, the lawsuit targets the inequity and alleged constitutional infirmities created by the beneficial treatment of class 1 properties and smaller class 2 properties (described above) at the expense of other real estate tax payers among the other tax classes. Furthermore, the suit goes on to claim that this unequal treatment among the tax classes has a disparate impact on minorities. Tax Equity Now claims that since minorities in the City are predominantly tenants in larger class 2 rental apartment buildings which are not subject to any favorable tax treatment, minorities pay a disproportionate share of the City’s tax burden. As a result, wealthier, predominantly non-minority homeowners pay a disproportionately lower real estate tax burden. While this lawsuit will likely take years to be resolved and is not of immediate concern to the accuracy of the information in this practice note, it something to be mindful of as it works its way through the courts.

  • Class 3. Properties in tax class 3 consist primarily of utility properties (i.e., power plants). These are also assessed at 45% of market value.
  • Class 4. Class 4 is all properties that do not fall within tax class 1, 2, or 3. These are essentially all commercial properties, including office buildings, retail spaces, hotels, parking garages, etc. Under New York State law, certain utility related equipment is also considered real property for the purposes of assessment and falls into tax class 4. This property is known as Real Estate Utility Company (REUC) property and is separately assessed by the City of New York. The most common type of property that is assessed as REUC property is emergency backup generators. The assessment of these generators has become increasingly important in the wake of Super Storm Sandy as the sheer number of generators in the City has increased exponentially. From an assessment policy perspective, the City actually differentiates between tenant-owned and building-owned generators. Specifically, generators that are owned by the building are not separately assessed, as they are considered part of the building and, therefore, their presence is deemed to have already been incorporated into the building’s assessment. Conversely, tenant-owned generators are separately assessed and given their own unique REUC Identification Number, which is basically the equivalent of an individual tax lot for assessment purposes. These generators are considered more portable, are more likely to travel with the tenant, and are, therefore, not reflected in the overall assessment of a building.

Particularly with respect to REUC properties, counsel should understand and be aware of the intentions of both sides with respect to backup generator equipment. Do tenants plan to install their own backup generating systems? Will they use some other backup system already in place in the building? These backup generators are not traditionally the type of item one would consider “real estate,” however, New York State Law defines them as such. Furthermore, City policies treat these generators differently based on their ownership status. As a result, they may be subject to additional real estate taxes not initially contemplated in any deal.

Three Methods of Real Property Valuation

Set forth below are the three methods of valuation typically used in assessing real property.

  1. Income Capitalization Approach. The City assesses the vast majority of properties using the income capitalization approach. By law, most owners of income-producing properties are required to provide annual real property income and expense statements to the City (referred to as RPIE). In the simplest cases, the City reviews and adjusts these numbers to arrive at a net operating income for the property. It then applies a capitalization rate to the property to arrive at a market value for the property. As discussed above, the City then generally takes 45% of that market value to arrive at an assessment. However, strictly and blindly applying RPIE numbers to arrive at an assessment becomes difficult when issues of vacancies, construction, and other factors result in the RPIE numbers not necessarily being a reflection of a property’s true value. In these cases, DOF will generally make various adjustments to a property’s net operating income based on annual guidelines and parameters DOF establishes for the various types of properties it is responsible for assessing.

Obviously residential co-ops and condos do not report rental income. Therefore, in order to arrive at a net operating income (and ultimate assessment) for these properties, New York State law requires that co-ops and condos are to be valued and assessed as if they were rental properties. This results in City assessors looking to the rental income market of what they deem to be comparable buildings and applying those rents to the co-ops and condos to arrive at their assessments. A successful challenge to the assessment of a residential co-op or condo would require finding other comparable rentals that more closely reflect and mirror the situations at the subject property being assessed. Since commercial condominium units typically do pay rent, the City assesses them as they would any other individual block and lot. The one caveat is that, since an individual commercial condominium unit is usually part of a larger building containing many condominium units, DOF will generally assess a specific unit based on its percent interest in the common elements of the building as a whole. This percentage figure is listed in the condominium’s declaration. As a result of this methodology, the percent interest of a particular condominium unit is an important factor in the unit’s ultimate tax bill and the ultimate allocation should be considered carefully when drafting and reviewing the condominium offering plan.

  1. Cost Approach. City assessors primarily use the cost approach in valuing specialty properties or equipment (power plants, generators, etc.). They arrive at the assessment by determining what the current cost would be to build a new identical specialty property and then deduct from such cost for depreciation.
  2. Sales Approach. The City has a policy to not reassess properties based on sales prices. Property sales may be used as evidence of value when challenging a property’s assessment; however, they are not the basis of an assessment. The City does review sales when valuing class 1 properties (1, 2, and 3-family homes) and to arrive at market values for those properties. However, as discussed above, since the permissible annual assessment increases for class 1 properties are capped, the market value the City applies based on comparable sales generally has no bearing on the assessment.

How to Challenge an Assessment

As discussed above, DOF publishes tentative assessments for all properties on January 15 of each year. A property owner (or other party with standing) who wishes to challenge that assessment must do so by filing an application with the New York City Tax Commission (the Tax Commission) by March 1 (note that for class 1 the deadline is March 15). Most properties also require the filing of an income and expense statement, which must be filed by March 24. Failure to timely meet these deadlines is a jurisdictional defect which precludes an owner from challenging that year’s assessment.

In order to challenge an assessment, a party must have standing to do so. Generally, any party claiming to be aggrieved by an assessment has the right to challenge that assessment. This has been defined as anyone whose pecuniary interest may be affected by an assessment. As a result, not just property owners, but tenants, partial tenants, and other parties responsible for the payment of real estate taxes may have standing to challenge the assessment upon which those taxes are based.

The Tax Commission is the administrative agency charged with reviewing the assessments issued by DOF. It schedules hearings to review the assessments of all properties that file timely challenges each year. These hearings are held from late spring to early fall each year. At the hearings, the Tax Commission generally reviews the two most recent years’ assessments. However, legally, the agency has jurisdiction to review any two of the five most recent assessments. The Tax Commission may decide to offer a reduction in an assessment or confirm DOF’s assessment. The Tax Commission is prohibited from raising a property tax assessment as a result of a hearing.

DOF publishes its final assessment roll on May 25 of each year.

By June 1 of each year property owners are required to file income and expense statements with DOF, reporting their numbers from the prior calendar year. This is the RPIE filing (discussed above), which must be completed online through DOF’s website.

If an owner is unable to resolve its assessment challenge with the Tax Commission in a particular year, the owner must file a petition in New York State Supreme Court by October 24 of each year in order to preserve its right to litigate over the assessment.

Grounds for Court Challenges/Trials

If an assessment challenge proceeds to trial there are four grounds under which that assessment may be challenged. The assessment must be alleged to be: (i) excessive, (ii) illegal, (iii) unequal, or (iv) misclassified. The vast majority of trials involve a claim of overvaluation.

Trials over an assessment are generally bench trials. The City agency responsible for handling assessment-related litigation is the New York City Law Department. At trial, generally, each side submits an expert appraisal report with conclusions of value and the expert real estate appraiser who prepared the report testifies at the trial. Testimony is usually limited to the four corners of the report.

City assessments are deemed presumptively valid so the burden is on the petitioner to show the assessment was incorrect. Much as in the case of administrative review of the assessment at the Tax Commission, a court is prohibited from raising an assessment as the result of a trial. The City’s assessment can only be confirmed or reduced at trial.

Recently, DOF has provided an additional administrative avenue to challenge an assessment on the grounds that it was based on a clerical error or error of description. New York State law has had a longstanding procedure by which to challenge assessments based on clerical error, however, those sections of the RPTL were inapplicable to New York City. As a result, the City recently amended its rules to codify and apply similar procedures. The types of errors DOF considers under these rules include, but are not limited to, errors in assessments due to: computation errors, incorrect square footage, incorrect number of units, incorrect building class, as well as all other clerical errors specified in Article 5 of the RPTL. DOF will specifically not consider clerical error challenges if the challenges have to do with valuation methodology, incorrect comparables and other valuation-related challenges that are more appropriately challenged in the standard ways described above. Much like New York State law, the new City rules allow DOF to look back up to six years prior to the time a clerical error challenge was filed when considering changing an assessment on these grounds.

Benefit, Abatement, and Exemption Programs

The City offers a wide variety of real estate tax exemption/abatement programs to encourage development of new buildings and renovation of existing buildings, among other things. Below is a summary of the most commonly utilized programs.

  • Industrial Commercial Abatement Program (ICAP). ICAP provides tax abatements for renovating commercial buildings and, in some parts of the City, for building brand new industrial/commercial buildings. In some instances even renovated or newly built retail space can qualify for ICAP benefits. Abatements can last as long as 25 years in some cases and protect a developer from the large increases in value (and consequently, real estate tax assessments) that normally results from these large development projects. There are complex filing procedures and requirements to be met and maintained during the duration of the project in order to qualify for the benefit, including minimum required expenditure amounts and requirements for soliciting Minority and Women-Owned Businesses (MWBE) for the work being done.
  • 420 Benefits. This program provides various tax abatements/exemptions for properties owned by charitable and not-for-profit entities. There are initial requirements that must be met and substantiated in order to qualify as well as certification of continuing charitable or non-profit use in order to ensure the benefits remain in place each year.
  • J-51Program. This program provides a property tax exemption and abatement for renovating and upgrading residential apartment buildings. The benefit varies depending on the building’s location and the type of improvements.
  • 421-a Program. In April, 2017 legislation was signed amending and replacing the previous 421-a program to create the new Affordable New York Housing Program. This program applies to new construction of multi¬family residential buildings and eligible conversions and provides eligible projects with substantial tax savings, in some cases up to 35 years of real estate tax abatements (in addition to a three year abatement during construction).       To benefit from the tax savings, some significant requirements must be met - for example, all projects must be comprised of at least 25% affordable units. For projects located in specific areas and comprised of more than 300 units, certain wage requirements for construction workers also apply. The program applies to both rental and condominium/co-op projects though the eligibility for condo/co-op projects has more restrictions. (3) This new version of the 421-a program applies to eligible projects that commence between January 1, 2016 and June 15, 2022. As of May, 2017, the law is brand new and there are nuances that will likely need to be resolved by the City in its rule making process, however, the key point is that this benefit for new residential projects will once again be available to developers.
  • Exemptions for Individual Homeowners. Many individual home and apartment unit owners may qualify for certain property tax reductions pursuant to programs such as the cooperative/condominium abatement, School Tax Relief Program (STAR), Senior Citizen Exemption, Disabled Homeowners Exemption, Veterans Exemption, and Clergy Exemption. Applications for benefits must be made annually as changes in circumstances (i.e., transfers) each year may take a unit out of eligibility for the various programs.
  • Progress Assessments. While not part of any formal exemption or abatement program, New York City law does allow for some tax relief for the construction of new commercial and residential buildings. It is a general rule of assessment in the City that a building in the course of construction, commenced since the preceding fifth day of January and not ready for occupancy on the fifth day of January following, shall not be assessed unless it shall be ready for occupancy or a part thereof shall be occupied prior to the fifteenth day of April. All newly constructed commercial and residential buildings are entitled to at least one year of this so-called “progress assessment” whereby any building assessment placed on the property would be removed. With the exception of hotels, new commercial buildings can actually get up three years of progress assessments while in the course of construction if the building is not ready for occupancy each April 15. This essentially allows for up to three years of no building assessments while in the course of construction.

The programs noted above are important for counsel to be aware of. When representing an owner, any discussion regarding major construction projects and changes to a building should be considered in the context of potential availability of some of these benefit programs. They can play a huge role in reducing an owner’s tax burden and making contemplated projects more economically feasible. Similarly, counsel representing a purchaser should be aware of any plans the purchaser may have as far as construction and/or converting the nature of the building (i.e., from commercial to residential) as these types of changes have substantial property tax ramifications as well as potentially substantial benefit programs that may help mitigate potential increased liability.

Tax Certiorari Lease Provisions/Exemption Lease ICAP Provisions

Real estate taxes in New York City are becoming an increasingly large portion of landlords’ and tenants’ investment calculations and it is vital to account for real estate tax issues in commercial leasing. Determining whether a landlord or a tenant is responsible for payment of the taxes and who has the right to challenge the taxes is just one issue. Tax escalation clauses and how payments are spread among the tenant and the landlord, as well as choosing an appropriate base year from which said real estate tax escalations begin, are essential components to any commercial leasing negotiation and often make or break deals.

Knowledge of assessment procedures and DOF calendars for when rental figures will be used in assessments is vital in determining base year real estate tax payments and how increases in tax payments are to be determined on a going-forward basis. These issues must also be accounted for in commercial leases. Finally, provisions regarding which party benefits from any abatement programs (if applicable) need to be negotiated in any lease.

This will certainly affect overall rental and tax payments. Many negotiated real estate transactions hinge on real estate tax projections going forward. Projecting future real estate taxes is fraught with uncertainty. However, with comprehensive knowledge of how the system works, one can make reasonable estimates. It is these estimates and projections that are frequently the basis for lease negotiations. Specialized real estate tax counsel may be retained to assist in these projections and to review drafts of leasing documents.

Conclusion

At the very least, when entering into a real estate transaction involving property in New York City, counsel should be aware of New York City’s complex real property tax process and how the issues surrounding that process may affect his or her clients. The process of challenging property taxes involves a complicated assessment procedure system on the part of the City as well as multiple required filings throughout the course of the year, which must be complied with in order to even have the opportunity to challenge one’s assessment.

An understanding of the assessment process, how real estate taxes are calculated, and the benefit programs the City makes available to property owners will allow counsel to better negotiate on behalf of clients. Failure to accurately and meticulously account for the increasingly important role that real estate taxes play will put counsel at a major disadvantage.

Tishco image

Steven Tishco is an associate at Marcus & Pollack, LLP. Mr. Tishco concentrates his practice on real estate tax assessment and exemption matters (tax certiorari). He handles all types of real estate tax disputes and appears regularly before the Courts of the State of New York and various New York City agencies. His experience includes litigation and trial work involving the valuation of residential and commercial properties.  The law firm of Marcus & Pollack LLP, is the New York City member of American Property Tax Counsel (APTC), 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.

Jun
10

Presentation at Appraisal Institute and Appraisal Institute of Canada Annual Conference

Summary

The logical and proper valuation of big box stores for assessment purposes is not based on the income stream. We believe the cost approach with adjustments for obsolescence is the most satisfactory methodology. This conclusion was arrived at after lengthy discussions and negotiations amongst appraisers that took place outside the usual litigation environment, subject to the supervision of legal counsel and overriding purview of the Assessment Review Board in Ontario.

We examined the current value assessments of 162 big box freestanding stores in the Province of Ontario owned by a single operator. There were outstanding assessment appeals by the taxpayer for the 2008 base year (2009-2012 taxation), and the 2012 base year (2013-2016 tax years). Most significantly, we settled those appeals on the basis of the cost approach, including going forward to the 2016 base year (2017-2020 tax years).  The settlement process began in 2013 and resolution was achieved in 2016.

Background

Big box stores are large discount stores, including WalMart, Home Depot and our own Canadian Tire. These stores generally exceed at least 40,000 square feet in area. Unlike most property types, the buildings are built to suit or custom built for a specific retailer’s business. The boxes are not built on a speculative basis to be sold or leased in the marketplace after development.

Upon sale of the fee simple interest in the big box store, the original use may be modified for the new user, or the building may be demolished. Such stores are rarely purchased to be leased by a single tenant after the purchase (for retail purposes or otherwise).

There has been much litigation in the United States relating to the big box store valuation conundrum.  Kennard and Fisher asked:

“. . . if it cost $70.00 per square foot to build an anchor department store, then why is it they sell for about half of their replacement cost new?”

This question led, in part, to the so-called “dark store” theory of valuation which resulted in numerous decisions of courts and tribunals concluding that the sales comparison approach, based on market sales of the big box store resulted in an objective determination of market value. Invariably these sale prices were substantially less than the cost to construct. Application of the “dark store” theory has devastated assessments of big box stores in many American jurisdictions.

In Ontario, the assessment standard is “current value”. Current value in essence means the same as what you might know as fair market value, or appraised value, or actual value.  Current value is defined in the Assessment Act as follows:

“Current Value means in relation to land, the amount of money the fee simple, if unencumbered, would realize if sold at arm’s length by a willing seller to a willing buyer.”

There has been much litigation in the Province of Ontario as to the meaning of current value. It is clear that this valuation standard is an objective, market based concept.

The value to the owner, or the subjective value of the real estate, is irrelevant for assessment purposes. The statutory standard of value is based on objective analysis of data from the marketplace. The identity of the occupant is not relevant.

Historical Reliance on Income Approach

“An appraisal is the logical application of available data to reach a value conclusion.” (borrowed from William Kennard)

The data showed that these big box properties are never built speculatively and then put on the market for rent or sale. Once the property is rented by the developer to a retailer, the real property may be sold from investor to investor. Generally the developer and the retailer are either related or the same person. The attractiveness of the purchase to investors is a function of the lease amount – rent amount, terms and quality of tenant – rather than the fee simple interest in the real estate.

Frequently the developers/retailers sell the real estate for financing purposes, and lease it back.

Sales-leasebacks are financing arrangements rather than pure fee simple real estate transactions. Sales of real estate occupied by a long-term tenant reflect the value of the leased fee of the real estate and, implicitly, the quality of the tenant. However, for assessment purposes we are searching for the fee simple value – not the leased fee interest.

Municipal assessments in Ontario are undertaken by a single corporation collectively owned by all the municipalities – MPAC. The three statutory parties to the appeals are the property owner (ie. the taxpayer), MPAC and the municipality in which the property is located.

Notwithstanding the above concerns regarding the income approach, Ontario big box stores had been valued by assessors using an income approach with rents derived from available financing transactions. The basis for determining market rent was a mystery. The capitalization rates relied upon by the assessor seem to have been drawn from sales of shopping centre regional malls. Frequently, the rents applied by MPAC were nothing more than the previous base year’s economic rent indexed to the next base year. The number of open- market lease transactions available was extremely limited and, therefore, data extracted to support the appraised value came from a very shallow pool. The assessed values were based more on hokum-pokum than objective data reflective of a true market.

To a great extent, historically the resolution of assessment appeal litigation with MPAC regarding big box stores in Ontario was based upon comparability and equity as between similar properties. Eg. Is a WalMart store worth $1 per square foot less than Home Depot? Is the Toronto market for big box stores worth $2 per square foot more than in Ottawa?

2008 Base Year

In order to prepare for the 2008 CVA reassessment, the Municipal Property Assessment Corporation (“MPAC”) determined a scale of fair market rents applicable to big box retailers based on the name of the occupant and “bench marking” of rents according to market area (ie. land values) and notional base rents for WalMart stores. An extract from that analysis produced by MPAC is set out below:

Market Area (b) 500,000 – 750,000 per acre – Regions 3, 13, 16, 19, 21, 22

Tenant

Base Rent

Adjustment

Final Rent

Comments1

WalMart

$11.00

0

11.00

Base benchmark rent

CTC

$11.00

+0.50

11.50

Base + 0.50 – higher building cost2

Lowes

$11.00

+1.00

12.00

Base + 1.00 – higher building cost2

Home Depot

$11.00

+1.00

12.00

Base + 1.00 – higher building cost2

Rona

$11.00

+1.00

12.00

Base + 1.00 – higher building cost2

Costco/Sams

$11.00

+1.25

12.25

Base + 1.25 – higher building cost3

1 Adjusted rate may be further adjusted if effective age greater than 20 years.

2 Higher buildings = higher building costs

3 Plus 0.24 for coolers and freezers

We commenced the appeals litigation with the assertion that the income approach utilized by MPAC was invalid because there was insufficient data regarding fair market rents available to support it. The taxpayer relied upon the cost approach as the most appropriate measure, conditional upon a full measure of obsolescences being accounted for in the valuation process.

Although we left open the option of referring to the “dark store theory”, that path was not pursued. The expectation was that a settlement could be negotiated using the cost approach with appropriate adjustments for obsolescence. It was also our view that the scorched earth results of the dark store theory were based on a faulty assumption regarding non-compete clauses registered on title for the big box stores.

The Settlement Process

In 2013, negotiations began between MPAC and the big box property owners.

The big box operators had retained the services of appraisers familiar with assessment practices. MPAC similarly directed experienced appraisers within its organization to grapple with the appeals. Counsel for both the taxpayers and MPAC agreed to suspend ordinary litigation proceedings and litigation tactics to permit an open and frank exchange of views between the parties, in particular amongst appraisers without counsel present. Counsel for both the property owner and MPAC agreed from the outset that full disclosure of information and candid, without prejudice exchanges of opinions amongst the appraisers would be the hallmarks of the negotiations. Furthermore, counsel agreed that the consensual results of the appraisal discussions would guide the terms of settlement of outstanding appeals and future assessments.

As part of our negotiations, and after an initial state of discussions, MPAC and the property owner invited municipal representatives to form a Municipal Working Group (“MWG”) and participate in the negotiations.  The MWG included seven (7) representatives from some of the affected municipalities. Each representative signed an undertaking of confidentiality and non- disclosure.

As a prelude to those negotiations, MPAC and the property owner issued a Joint Communique to the MWG, which became the starting point for negotiations. The Joint Communique provided a current status report of the initial negotiations, which included the following statements:

  1. MPAC and the taxpayer have agreed that the cost approach is the most reliable determinant of current value for these properties.
  2. MPAC and the taxpayer have agreed that the appropriate approach to determine economic life of the buildings is the market extraction method.
  3. MPAC and the taxpayer have agreed that the MPAC automated cost approach to determine RCN of the buildings overstates actual construction costs.
  4. MPAC and the taxpayer are reviewing 300 land sales and the assessments of approximately 600 comparable land parcels to respond to municipal concerns that land values may have been understated in the comparative sales analysis.

The property owner and MPAC invited the MWG to review and challenge the various data files and analyses undertaken jointly by the property owner and MPAC.  In 2016, the property owner and MPAC entered into a Memorandum of Understanding as to principles for resolution of outstanding appeals for 2008 and 2012 base years, and the principles for assessment going forward with the 2016 CVA reassessment. The Memorandum of Understanding was endorsed by the MWG.

The Memorandum of Understanding was widely distributed to the municipalities, and published in the Canadian Property Tax Association’s monthly newsletter as an article authored by an MPAC officer. A copy of that article is attached.

The result of this process has been to resolve two cycles of assessment appeals (2008 and 2012), and to set in place assessment principles for the 2016 cycle.  The process was based on three elements not commonly found in assessment appeals:

  1. Candid and transparent disclosure of information, on a multi-party basis.
  2. Involvement of municipalities relatively early in the appeal process to provide a forum for their concerns and understanding.
  3. Most importantly, establishing a protective zone where appraisers could meet, share data, exchange views and analysis, all without tactical advocacy of their respective client’s interests.

In summary, the participants in the process found success when:

  1. Legal counsel provided interest based general counsel to their respective clients and facilitated the process, rather than simply litigating conventionally.
  2. Appraisers appraised with open minds, rather than advocating for or against the status quo.
  3. Trust and patience was maintained, even when unexpected developments created log-jams, hurdles or delays.

In other words, the appraisers were not advocates, and legal counsel were not experts.  The result was a happy resolution to a thorny assessment problem.

J. Bradford Nixon

Brad Nixon is a Member of the law firm Nixon Fleet & Poole LLP which has an office in Toronto, Canada.  The firm is the Canadian member of American Property Tax Counsel. Brad can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.                                       

 

 

May
31

Tax Exemptions Draw Scrutiny

Owners face hidden pitfalls when applying for commercial property tax exemptions.

Municipalities are taking a hard look at real estate tax exemption applications, hoping to offset revenue losses stemming from a rash of successful assessment challenges.

It’s unsurprising that taxpayers are mounting protests in record numbers, considering the dollars at stake. Commercial real estate taxes in the Northeast are among the highest in the nation, and the high cost of living in the area compounds the financial pressure on property owners. That also explains why many property owners are seeking relief from those costs by applying for exemptions.

Most states provide an avenue which exempts religious, educational and not-for-profit entities from the payment of real estate taxes. Some states, such as Maine, limit tax exemptions to a dollar amount. Others including Rhode Island impose a property size limitation, while some states have no discernible limits on the property size or exemption amount, which is the case in New York. Despite these limitations, tax exempt applications represent a significant loss of potential tax revenue for a municipality.

To qualify for the tax exemption, each state has its own application, which must be filed with the proper agency, typically the assessor or assessment department. Many states require taxpayers to file a new application each year, along with supporting documentation.

Once submitted, there are three possible outcomes: The application may be granted in full, meaning the property is 100 percent exempt from real estate taxes; it may be granted in part, meaning only a portion of the property will receive tax-exempt status; or it may be denied.

Provided the exempt organization is operated exclusively for the purposes specified in its enabling statute, and the entire property is wholly used for its specified purpose and no profit is made by the property owner, the application should be granted. Many courts have determined that all parts of the exempt property must be used in connection with its exempt purpose to qualify for a 100 percent exemption. Any property not utilized in this respect will be placed back on the assessment roll.

If a building or portion of the property is not being used or is vacant, the property may still qualify for the exemption, provided that a clearly defined plan is in place to utilize the property in the near future for exempt purposes. Construction plans, grading of the property, renovations and the like would  satisfy this requirement.

In recent practice, these three conditions have been strictly interpreted, with municipalities seizing every opportunity to place previously tax-exempt property back on the assessment roll.

Praying for Relief

Recently, a small yet nationally recognized church of about 75 congregants in New York needed to retain legal counsel to defend its tax-exemption application. The 13-acre property was improved with a number of free standing buildings used for administration, housing for the pastor and places of worship. The church had owned the property for decades and always received a 100 percent tax exemption.

Sometime in the winter of 2015, a pipe not properly winterized burst in one of the buildings. The property flooded and sustained considerable damage. To save on renovation costs, the church and its members took on the repair of the building themselves. The church’s subsequent application for the real property tax exemption duly related this information, and as a result, the application was denied in part.

The municipality reasoned that because the building was now vacant and not being used for an exempt purpose (it could not be used while under renovation), it was no longer entitled to tax-exempt status. The taxing entity placed the property back on the assessment roll and issued a tax bill totaling more than $100,000.

The church did not have the funds to pay, and faced the distinct possibility of foreclosure and the loss of the property by tax lien sale. Negotiations by the local attorney for the reinstatement of the 100 percent tax exemption stalled. Ultimately, the church successfully challenged the partial denial in court via motion for summary judgment.

Tax-exempt Lessees

Problems can also arise when a privately owned property is leased to a tax-exempt entity seeking a tax exemption. In other words, would a taxable building be entitled to an exemption based on a lessee’s status as an exempt entity? The answer is unequivocally “no.”

New York Real Property Tax Law 420(b)(2) carves a limited exception to the above, however. If a for-profit entity that owns a property leases the entire parcel to a non-profit, the only time the property would be entitled to tax-exempt status would be if any money paid for its use is less than the amount of carrying, maintenance and depreciation charges on the property. However, the terms “carrying charge,” “maintenance charge and “depreciation charge are undefined in the statute.

Nevertheless, courts have interpreted carrying charges as outlays necessary to carry or maintain the property without foreclosure, such as insurance, repairs and assessments for garbage disposal, sewer, and water services. Amortization of mortgage principal for these purposes should be excluded from carrying charges, as should corporate franchise taxes, which are crucial to the corporation’s existence but not to the maintenance of the building. Legal expenses for the collection of rent or penalties and late fees should also be excluded.

Maintenance charges include costs to maintain and repair the property. They may not include enhancements that increase the property’s value, replacements that suspend deterioration, or changes that appreciably prolong the life of property.

Depreciation can be defined as a decline in property value caused by wear and tear, and is usually measured by a set formula that reflects these elements over a given period of useful property’s life.

Clearly, while real property tax exemptions are becoming more popular, potential applicants would be wise to contact an attorney or expert familiar with applicable statutes and case law before submitting an application for property tax exemption.

 

Jason Penighetti 217x285Jason M. Penighetti is an attorney at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLP, the New York State member of Amercian Property Tax Counsel, the national affiliation of property tax attorneys.  Contact Jason at This email address is being protected from spambots. You need JavaScript enabled to view it.

American Property Tax Counsel

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