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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.
Feb
29

Beware of Excessive Property Taxes After Government Condemnations

Easements negatively affect a property's utility and desirability, reducing its fair market value.

Property valuation for tax purposes shares a common basis with condemnation law when it comes to the impact on property owner rights.

In practical terms, imposing an easement or taking a portion of a property devalues that real estate.

Property owners have a clear legal remedy for compensation when the government takes any of the bundle of rights inherent to property ownership. There is no prescribed procedure, however, that automatically adjusts taxable property value when the government burdens the property through some form of taking.

The property owner must step up and declare that the property is being subjected to a double hit: (1) the loss of some property rights for which compensation presumably was paid; (2) the continued excessive tax burden resulting from the assessor's failure to recognize the value loss commensurate with the taking of some right or rights that contributed to the property's prior value.

The Other Shoe Drops

How do properties burdened by government easements and partial takings suffer a double value loss?

First, the use of the property for some public purpose limits its usefulness to the owner, and therefore reduces its marketability. Second, the property owner incurs an ongoing cost in unfair taxation when the assessor fails to adjust to the diminished value and reduce the value for assessment purposes.

A typical example is a taking for a utility easement across a property. The owner and government will either negotiate a price paid for the easement, or a condemnation proceeding will determine just compensation.

The government acquires the easement legally, typically paying money to do so. Yet the acquisition imposes a value loss on the remainder of the property, a loss that goes unnoted and unacknowledged by the taxing authority.

There are small differences between the loss in value resulting from the imposition of an ·easement or the taking of the fee interest in the affected property, but all takings for a public purpose result in value loss to the remainder of the real estate.

Encumbrances All Around

Some examples of loss resulting from the imposition of an easement, be it a power line, sewer line, green space or pipeline, are the interference with or elimination of future development or use of the property. There is a loss of peaceful enjoyment and use of the property during the construction and development stage, as well as the continued inhibition of full use of the property in perpetuity.

The holder of the easement rights will also have the power forever to re-enter the property to maintain, repair, alter and expand its use within the easement. That right of access usually includes a right of ingress or egress over the whole property as required to get equipment and personnel to the easement.

For instance, agricultural properties subservient to easements, such as for power lines, are subjected to maintenance and repair crews corning to repair the lines and crossing through cultivated fields. Since the lines are most often damaged during storms, the fields will be at their most vulnerable to damage and resultant crop loss.

The crop-loss scenario is equally adaptable to urban commercial property. A sewer line running under the parking lot of a big-box store, a power line across a convenience store entrance, a water line in front of a fast food restaurant, are all subject to failure or modification that could interfere with the enterprise operating on the property.

The point is that the encumbered property, if offered for sale, will not obtain the same price as a competing property that is unencumbered by such a burden.

Calculate the loss

The basic measure of compensation to acquire an easement is the fair market value of the property before the taking versus the fair market value after the taking. The difference between those values represents the compensable loss to the owner.

Assessors ignore this statutory standard, failing to recognize that a property burdened by public easements does not command the same value as unburdened or less burdened properties of similar use.

Properties that have lost size as a result of a taking for public use suffer an even greater value loss to the remainder of the asset. Assessors will typically use some database to justify their value assessment, confronting the taxpayer with statistics. The assessor will rely on market data such as asserting that hotels sell for $X per room, Class A office space for $Y per square foot, convenience stores on one-acre lots for $Z and so on.

But a commercial property diminished in size is invariably diminished in desirability, if not in outright utility.

A very small strip of land taken in front of a fast food restaurant may result in an inferior access. A taking from an office building parking lot may result in a lack of adequate parking that is usually required. The taking may render the entire property nonconforming because setback requirements and building-to-land ratios no longer meet local ordinances.

Assessors rarely, if ever, re-value properties after a taking through eminent domain or a threat of it, and lower the assessed value to reflect the property's lost competitiveness in the marketplace.

The fast food store owner knows that hamburger sales suffer after a street widening or change of access. A shopping center manager knows how diminished parking affects business. Hotel management knows the negative result of lost visibility due to a highway project. The list could go on.

The point is that easements and other takings inflict observable damage on a commercial property's utility and desirability. They all result in lost fair market value, with no acknowledgement by assessors.

Property owners appealing their tax assessments should quantify this value loss and present this data to property tax decision makers. Anything less than a fair adjustment would be an unfair, further burden to the property owner already encumbered by the public use.

Wallach90Jerome Wallach is the senior partner in The Wallach Law Firm based in St. Louis, Missouri. The firm is the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. Jerry Wallach can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Feb
17

Lighten the Load - How to Ease a Threat to Affordable Housing

Over the past three decades, the federal Low-Income Housing Tax Credit (LIHTC) Program has proven to be a crucial tool for creating housing for low- and moderate-income residents.  Yet the communities created under the program operate on a fine margin that can be jeopardized by unfairly high property taxes.  Unfortunately, taxpayers and taxing authorities have yet to reach consensus on how to value LIHTC assets.

In the face of this dilemma, stakeholders can take action by educating assessors on the mission of the LIHTC program and accurate valuation for property tax purposes.

Codified in the Tax Reform Act of 1986, the LIHTC program offers incentives to create rental housing for low-income residents.  Eligible developers earn annual tax credits for 10 years, in an amount equal to a percentage of development costs.  In order to raise capital for development or renovation, developers typically sell those credits to investors.

The tax credits are the linchpin of the LIHTC program, because the costs of the project far exceed the value it creates.  Given the often onerous demands of the federally funded, state-managed program, projects would otherwise be infeasible.

To begin with, the LIHTC program stipulates flat rents tied to the local median income and the average number of bedrooms per multifamily unit.  At the same time, developers must pay for mandatory reporting and fund community programs.  Failure to meet those requirements during the first 15 years after a project’s completion triggers a federal recapture of the tax credits, with interest.  As a result, net operating income at LIHTC properties is often flat for many years and then declines as expenses consume more and more capital.

Sadly, many authorities mistakenly believe that the guaranteed rents generated LIHTC communities reduce the owner’s risk and make the assets more valuable than market-rate properties.   This misconception leads to overvaluation, thus inflating tax liability and likely rendering a project infeasible.

Wanted: Consensus

When valuing LIHTC properties, taxing authorities should be mindful of the program’s goal: to help communities provide housing for financially challenged people.

The generally accepted approach to valuation is the income method, which applies in-place rents and, for vacant units, LIHTC-approved rents.  Gross rents at LIHTC properties are pegged to the local median income, so rent increases tend to be minimal.

On the debit side, assessors should use actual operating expenses, which for LIHTC properties are substantially higher than those of market-rate properties.  If assessors instead value an LIHTC property based on market rents or operating expenses, they will overstate NOI and therefore the property’s true market value.

Some authorities advocate including the depreciated value of the tax credits in property tax assessments.  Taxpayers have countered that the credits’ only real value is the intangible one of providing good-quality housing for renters with moderate and low incomes.  The tax credits merely bridge the gap between construction costs and the value created through development.

Including these tax credits in the assessment erroneously produces above-market valuations and excessive tax liability for properties that are clearly less valuable than those able to charge market rents and are unburdened by LIHTC programming and reporting costs.

Many legislatures have at least partially codified the proper valuation of LIHTC properties.  In many jurisdictions where the law is silent, courts have rendered decisions addressing, at least in part, the valuation of LIHTC properties.

Given the lack of consensus on valuation, a taxpayer challenging an assessment of an LIHTC property should know the relevant statutes and case law.  In jurisdictions that lack statutory or case law, the taxpayer must make sure that authorities understand the LIHTC program and the need for policies that further its goals.

In jurisdictions where legislation has not overturned unfavorable case law, or where the code is incomplete or silent, taxpayers need to organize and lobby their legislators to act.  Ask them to codify assessment principles that lead to reasonable taxes.  That step will contribute significantly to the LIHTC program’s mission.

Emily Betsill Emily Betsill is a partner in the Washington, D.C. law firm of Wilkes Artis Chartered.  The firm is the District of Columbia, Maryland and Virginia member of American Property Tax Counsel, the national affiliation of property tax attorneys.  You may reach Emily via email at This email address is being protected from spambots. You need JavaScript enabled to view it.

Jan
29

Seize Tax Opportunities When The Price Is Right

Reporting the sales price on a transaction for a real estate excise tax affidavit or refund petition can be tricky in the State of Washington, depending which side of the coin you’re on.

Seattle's hot real estate market presents two special tax-saving opportunities – or, for the unwary, two tax traps – involving Washington State's real estate excise tax.

The first arises when above-market rents in place at a property contribute to its selling price. The second occurs when the sale of a property experiences high vacancy. In both scenarios, some buyers and sellers report prices that are higher than they should be for the real estate excise tax. At nearly 1.8 percent of the property's sale price, real estate excise tax is a sizable trans-action cost that deserves attention.

Skewed By High Rents
With above-market rents, a portion of the sale price may reflect the value of contracts and business efforts. The tax only applies to the consideration paid for real estate, so the consideration paid for above-market contracts should be separated out as nontax-able.

Although we believe Washington law is clear on this, the Department of Revenue has been struggling to determine its position. The department recently agreed taxable value excludes the portion of the purchase price attributable to above-market rents, but then it changed its position.

Since these vacillations occur in the context of individual taxpayer cases, other taxpayers do not necessarily know what the department's position is at any given time. The department has not published any rules or guidance specific to this scenario.

Impaired By Vacancy
In the scenario involving the sale of a property with high vacancy, the buyer and seller frequently agree on a price as though occupancy were full and then deduct an amount for the vacancy shortfall. The deduction reflects the costs to lease the remaining space, and also the entrepreneurial profit the buyer requires for undertaking the risk and work required to achieve full occupancy.

Some parties to a transaction mistakenly report the stabilized value instead of the amount actually paid for the property. The only price they should report for tax purposes is the sum after deducting for vacancy, as that represents the actual amount paid.

Both parties have an incentive to ascertain and report the correct price on the real estate excise tax affidavit. Though the parties can negotiate who pays the tax, the seller is responsible for its payment by law. And yet, the Department of Revenue can enforce payment by placing a lien against the property, making the buyer indirectly liable.

Both buyer and seller sign the affidavit reporting the sales price, under penalty of perjury. Buyers may feel the ongoing effect of the reported price in the form of property taxes, since county assessors pay attention to the affidavits in determining property tax values. With this in mind, both parties should care about correctly reporting the transaction.

Buyers and sellers in either scenario can put themselves in a favorable tax position by presenting the information about the transaction carefully, whether in the affidavit or in a refund petition to the Department of Revenue. Note that a refund petition, if applicable, must be filed within four years of the transaction date.

Information about the transaction should be presented to the taxing authorities in a clear manner to establish the correct facts and legal analysis. In the first scenario, a detailed explanation of the facts ideally includes an appraisal that excludes the price paid for the value of the above- market leases in place, as opposed to the real property.

In reviewing the transaction, the Department of Revenue should presume the price paid is taxable, but the taxpayer can rebut that position. When the transaction price reflects more than the price for real estate alone, the department often next turns to the property's assessed value instead.

The taxpayer can argue that, by law, an appraisal as of the sale date trumps the assessed value as evidence of the taxable amount. For this reason, an appraisal is important for the above-market rent scenario.

In the high-vacancy scenario, however, the presumption applies that the price paid is taxable, and no appraisal should be needed. Therefore, the parties should report the actual price paid after accounting for the vacancy shortfall.

Recent experience indicates the Department of Revenue may choose to challenge an affidavit or deny a refund claim if it takes the position that the portion of the price attributable to above-market rent is untaxable. That does not mean the department is right, however, and its vacillations suggest its directors feel uncertain about their position. Taxpayers with strong facts should pursue the issue and work diligently to make a strong case that will help the department get to the right result.

Whether a sale involves the added value of contracts or a deduction for high vacancy, seeking professional advice about how to best report the transaction on the real estate excise tax affidavit, or in a refund petition, can turn the sale into a significant tax opportunity.

MDeLappeBrunsNorman J. Bruns and Michelle DeLappe are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local tax. Bruns is the Idaho and Washington representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
Jan
22

Multifamily Investors, Don't Forget About Property Taxes

The music continued to play in 2015 for the white-hot multifamily market, as many investors saw rents and occupancies climb higher and cap rates fall. Sales of apartment projects still under construction remain commonplace. Record-high sales prices seem to be the norm.

Accompanying the high prices, however, are rapidly increasing property tax valuations. Multifamily investors should be prepared for such increases, and be ready to combat overassessments. All multifamily investors should also be aware of the myriad property tax issues associated with the development, purchase or sale of their particular project.

The amount of attention property owners pay to property taxes often depends on the investor's specific situation. For instance, property taxes may indeed be the most pressing concern for a long-term owner of an apartment complex who receives a tax notice 50 percent higher than the previous year's bill, based on a lofty sales price paid for a new project down the road. Not only does this investor have to compete for tenants against a new development with better amenities; he or she now has to pay more in taxes because of that same development, effectively slashing the property's net operating income.

On the other hand, a developer might be preoccupied with his own, more immediate concerns, such as site selection, construction schedules and financing. Even so, the developer should be mindful of important property tax considerations: Are there property tax incentives available, such as affordable-housing exemptions, brownfield abatements and many others? What is the valuation date for assessment purposes? How do assessors assess the value of construction in progress? Will a change in use trigger any roll-back taxes, or increase the tax rate?

Careful property tax planning is of vital importance to purchasers of multifamily properties. A purchaser of a newly constructed apartment complex must determine how an assessor will value the property after closing. Will the assessor base the value on construction costs, sales of comparable properties, income information or a combination thereof?

Unfortunately, some investors wrongly assume that property tax values will remain unchanged following a transaction. Although a sale will not necessarily result in a new tax value, tax assessors are increasingly trying to catch up to sales prices that exceed current assessed market values.

Underestimating property taxes at the time of the purchase can significantly reduce the investor's actual return. For that reason, a purchaser should carefully scrutinize any tax estimate based on an assessed value that is lower than the purchase price.

Purchasers of low-income housing tax credit (LIHTC) properties should consult local counsel to confirm whether the jurisdiction allows assessors to consider rent restrictions and tax credits in determining fair market value. In some jurisdictions, local tax laws may compel the assessor to value an LIHTC property much higher than the actual sales price.

In states that require the deed to show the purchase price, assessors frequently rely upon these deed amounts in determining fair market values. The declared transaction value on the deed too often includes consideration not attributable to the real property, such as value for personal property or intangibles, although assessors rarely take this into account. Similarly, assessors may not look behind a sale to consider factors that distinguish the acquisition from a market transa<.1:ion, such as an allocated purchase price as part of a portfolio sale.

As the multifamily market continues to sizzle, lower rates of return diminish the margin for error when estimating property taxes. Investors must recognize the importance of appropriate property tax planning, or risk an unpleasant surprise at tax time that could jeopardize their property's cash flow.

By consulting knowledgeable local professionals, investors can equip themselves to make better-informed decisions when estimating taxes. A seasoned tax expert can review tax notices for accuracy and fairness, and navigate any local rules and deadlines to challenge unfairly high assessments.

  adv headshot resize Aaron D. Vansant is a partner in the law firm of DonovanFingar LLC, the Alabama 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.

Jan
10

Built-In Costs / Investors need to pay attention to transfer taxes when buying properties

There was a time when closing a real estate sale cost the seller a few hundred dollars for transfer tax stamps on the transfer deed, but those days are long gone.  Nowadays, transfer tax can be a major consideration in structuring and funding a property transaction.  And the requirements for complying with, or being excluded from, transfer taxes have multiplied.

In some markets, transfer tax can exceed the property tax burden in the first few years after an acquisition.  For example, in San Francisco the transfer tax on property transactions valued at more than $10 million is 2.5 percent of the sales price.

Historically, transfer taxes were only collected when the county recorder’s office recorded a deed.  If a transfer occurred through the acquisition of a legal entity that owned the property, and that entity continued to exist without requiring a transfer deed, then no transfer tax was owed.

Today, however, many real estate transactions occur through the buying or selling of ownership interests in legal entities which hold title to real property, and which continue to exist and hold property after the transaction has concluded.  Technically, there is an indirect change in ownership because the legal entity is now owned by a different entity or owner, even though the title for the real estate remains unchanged.

The proliferation of these indirect property transfers has spurred tax authorities to enact laws that assess transfer taxes on indirect sales.  The deed-recording process cannot capture indirect sales, so counties and cities now require buyers and/or sellers to report such transfers through other means.

The most common way of tracking indirect transfers is to align transfer tax reporting with the property tax system.  In California, for example, taxpayers must report legal entity transfers to the state Board of Equalization, which in turn reports the transfers to county assessors.  Counties and cities which collect transfer taxes on indirect sales can now access assessor databases to learn about indirect transfers in their jurisdictions.

Most transfer tax laws contain numerous exclusions.  For example, if there is a mortgage against a property, the amount financed is excluded from the purchase price when calculating the transfer tax.  Similarly, transfers of property between entities which have the same ownership percentages are excluded from transfer taxes.  A third example is the exclusion from transfer tax for marital dissolutions.

In recent years, however, tax authorities have repealed some exclusions from transfer tax. Some jurisdictions have deleted the mortgage deduction.  Likewise, gifts and transfers upon death, and transfers to non-profit entities, which were once generally excluded, are now subject to transfer tax.

The declining number of exclusions restricts a market participant’s ability to structure transactions to be exempt from transfer tax.  That task has grown only more difficult as variations in tax rules have increased between jurisdictions at the local level.

The transfer tax has traditionally been and continues to be a local tax.  Consequently, individual counties and cities determine what elements to include or not include in their transfer tax ordinances.  Transfer taxes are an attractive way for local governments to raise revenue, particularly when other sources of tax income are limited.

In California, most counties and cities operate under the traditional transfer tax laws that the state Legislature established almost 50 years ago.  But more than a dozen counties and cities have modified the transfer tax law enacted by the Legislature.  The courts have approved such changes under the home rule doctrine, which allows communities to govern themselves with laws that don’t conflict with state or federal law.

These modifications have two primary goals: The first is to impose transfer tax on indirect transfers of real property caused by changes in the ownership of legal entities.  The second goal is to repeal the exclusions that existed in the original transfer tax laws.  In addition, the modifications have often added penalties for failure to pay transfer taxes.

California, like most states, has dozens of counties and hundreds of cities, which means that buyers and sellers of real property must familiarize themselves with the specific provisions in local transfer tax ordinances.

Transfer tax compliance used to be as simple as checking a box.  But high transfer tax rates, the prevalence of indirect property sales and rising property values have increased the significance and complexity of transfer taxes in property transactions.  Awareness of tax rates, available exclusions from the transfer tax and compliance and reporting requirements is essential to maximize property value and avoiding reporting pitfalls.

 

Cris ONeall

Cris K. O'Neall is a shareholder at the law firm Greenberg Traurig, LLP and focuses his practice on ad valorem property tax assessment counseling and litigation.  The firm is the California member of the American Property Tax Counsel, the national affiliation of property tax attorneys.  He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Dec
31

How Do I Win My Property Tax Appeal?

If the compelling evidence is on your side, the record shows you have a fighting chance.

The best time to consider how an appellate court might view a property tax appeal is not after a trial court delivers an unwelcome decision.  Rather, as the taxpayer carefully plans the evidence to be submitted at trial, it is worthwhile to consider how the evidence will look to appellate judges.

The handling of tax cases in appellate courts receives comparatively little attention.  Yet an appellate court may well make the final decision in a property tax appeal.  That appellate court may even be a state’s highest court, typically (though not always) the state’s supreme court.

Based on the attention given to appellate court strategies in tax literature, the handling of appeals is a neglected orphan in the property tax process.  Innumerable property tax articles address how assessors mass appraisal methods can overstate a property’s market value.

Writers cover pitfalls of the typical cost and sales comparisons and income approaches to value, or detail valuation peculiarities by property type.  Little is written about the key issue that can help tax-payers prevail in the appellate courts.

The Record Rules

Everyone has heard that the three points of consequence for real property are location, location, location.  For a property tax appeal in an appellate court, those three points of consequence are the record, the record and the record.

Whether the taxpayer is the appellant or is responding to an appeal, the best chance of prevailing derives from a record filled with compelling evidence that covers the big-picture points, as well as all of the finer ones.

Some recent decisions confirm these points and show some of the opportunities and challenges that property tax appeals in appellate courts can entail.  In each case the appellate court found that the record showed the tribunal had adopted a wrong principle or made a decision not supported by competent and substantial evidence.

In one Midwestern case, the question at issue was whether the taxpayer had mistakenly reported personal property as taxable in a particular jurisdiction, even though the personal property was not only in other cities, but also in a different state.

At trial, counsel had the taxpayer testify in painstaking detail about the property and its location, including unusual costs the taxpayer incurred to maintain the property.  Notwithstanding this evidence, the tribunal held that the taxpayer had failed to satisfy its burden of proof.

At oral argument in the court of appeals, however, the taxpayer’s counsel was able to read compelling portions of the transcript to show that the trial judge had erred badly.

Sometimes judges cannot be swayed, no matter what is said at oral argument, but in this case the passages quoted grabbed the attention of all three appellate court judges, who seemed to fully understand the injustice that had occurred.  The resulting decision gave the taxpayer a complete victory.

Great Valuation Records

A second case involved a retail property in the Midwest that was almost 80 percent vacant on each of two valuation dates.  The initial tax tribunal decision adopted the appropriate methodology by using the income approach to first value the property at a stabilized occupancy of 85 percent, which the judge determined was the stabilized rate.  The judge then deducted the lost rent and costs involved over the time needed for the property to reach stabilized occupancy level.

Unfortunately, the tribunal’s decision included three technical flaws:

It deducted only a portion of the stabilization costs; it understated the area needed to be leased in order to achieve stabilization; and it included market rent that was inappropriately increased in the second tax year calculation because a gross lease was misconstrued as a net lease.

The record, including both the testimony of the taxpayer’s witnesses as well as a carefully documented appraisal, enabled the appellate court to see that the initial decision erred on all three points.  The taxpayer was fortunate that the three-judge panel deciding the appeal was willing to carefully analyze such technical valuation issues, rather than defer to a tax tribunal judge.  Yet this successful outcome hinged on compelling recorded evidence.

In a third and similar Midwestern case, the appraiser had initially valued a retail property as stabilized and then deducted stabilization costs.  Most of those costs were to cure the property’s extreme deferred maintenance, with a small amount relating to the leasing of vacant space to achieve stabilized occupancy.

The tribunal decision erroneously adopted the interim value before applying the stabilization deductions, With a record very much like the first case, the appeals court recognized that the cost of curing the deferred maintenance had to be accounted for, yet inexplicably failed to order the deduction of the modest costs related to the property achieving stabilized occupancy.

The taxpayer’s counsel made excellent lemonade from this decision by pointing out to the government’s counsel that, undeniably, the decision was logically inconsistent, because if the costs to cure deferred maintenance had to be deducted, then the same was true of the costs to cure the excessive vacancy.

Additionally, the taxpayer’s counsel argued that given the costs of further appeals and the likelihood that the taxpayer would ultimately prevail, a sensible solution would be for the government to agree to the value with the deferred maintenance costs de-ducted.  In fact, the government ultimately did agree and settled with the taxpayer on that basis.

While this case provided the taxpayer with an excellent result, it shows that a compelling record is a necessary – but not always sufficient – condition to prevail.

MandellPhoto90

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

Dec
31

Beware The Costs Of Hidden Capital

Owners Must Examine The Tax Consequences Of Making Capital Improvements Before Breaking Ground

For nearly 40 years, states have attempted to protect property owners from rapidly escalating property tax bills by limiting increases in the taxable value of real estate.  Often referred to as “caps,” these limitations are myriad and complicated, but share a tendency to distort the market for developers of new space and for property owners seeking to improve existing commercial properties.

How so?  Laws are state-specific, but taxpayers purchasing or improving real estate may lose the benefit of the cap on their property’s value, and incur a substantial tax increase on top of the acquisition or improvement cost.  In other words, caps discourage property owners from improving their properties, while owners who know how caps apply can access tremendous savings.

Caps in Action

Caps apply by limiting increases in taxable value for properties subject to reassessment that would otherwise rise to reflect the market.  For example:  California’s Proposition 13 generally limits annual valuation increases to 2 percent, even if the property’s market value is rising at a faster rate.  Common triggers for reassessment are an ownership change, countywide reassessment and improvements to the property.

Some states exempt a fixed percentage of any increased assessed value following an ownership change.  Ownership changes can include not only title transfers but also internal transfers of interests in the entity that owns the property.  To access this exemption, the taxpayer may need to take some timely action, such as filing a claim or meeting other state requirements.  Miss the deadline, and the exemption disappears.

Consequences of an oversight can be dramatic.  For example, an apartment complex previously assessed, capped or otherwise, at $20 million sells for $30 million.  Rather than incur taxes reflecting the full $10 million increase in value included in the sale price, the buyer qualifies for a 25 percent tax exemption, or $7.5 million.  Yet, failure to file a timely exemption application could result in taxation of that otherwise exempt $7.5 million of the total value.

Many jurisdictions cap value increases during periodic reassessment.  Florida generally limits annual increases to 10 percent of assessed value for the prior year.  South Carolina, which theoretically reassesses every five years, limits increases to 15 percent of the property’s prior assessed value unless there has been a property improvement or a change in ownership.

Some limits disappear if there has been an ownership change.  Florida generally defines an ownership change as any sale or transfer of title or control of more than 50 percent of the entity that previously owned the property.  South Carolina has adopted a much more complicated system of assessable transfers of interest (ATI’s).  The definition of an ATI runs for four full pages in the South Carolina Code.

Impaired by Improvements

With tax caps, taxpayers who improve their properties face even greater potential tax consequences, because states generally remove artificial caps on new construction and major renovations.  In other words, the total cost of improvements can include not only construction expenses but also a substantially heavier tax burden.  The result places an improved income-producing property at a serious disadvantage in competing with unimproved properties.

What constitutes an improved property? Florida has adopted a bright line test by examining whether the improvements increase value by at least 25 percent.  California law protects properties from reassessment so long as any work is normal maintenance or repair, or the improvement does not make the property “substantially equivalent to new.”

South Carolina is much more complicated and unclear.  The state requires assessors to include the value of new construction in valuing properties, but its statutes fail to define “improvements,” leaving interpretation to local taxing authorities.

The result is a patchwork quilt of inconsistency.  In order to circumvent South Carolina’s 15 percent cap on periodic reassessment, some counties have adopted a stepped approach to increases in value, although such a procedure is clearly unauthorized by statute.  Other counties simply add the value stated in building permits to existing assessed value in order to derive a new value, though the market would never see a sale on that basis.  Still other counties assume stabilization in valuing a new or improved income-producing property such as a hotel rather than accurately valuing the property before stabilization.  Clearly, a property owner improving a property faces a potential hidden cost in the form of increased taxes by loss of the statutory cap.

Reimplementation of tax caps on an improved income-producing property further complicates an owner’s prediction of costs.  Whatever the method of valuing the improvements, how does South Carolina’s 15 percent general cap apply to future valuations when the property value may be much greater?

If the taxing authority simply adds the cost of the increased value set forth in building permits, has the taxing authority fully captured an increase in value which, in turn, may be subject to re-imposed caps?  To state the obvious, an owner will not improve a property merely to re-cover the cost of improvements, but rather sees the potential of income gains exceeding improvement costs.

Most income-producing properties will generally require some period of time for lease up or stabilization.  Should the taxing authority be allowed to make assumptions of future income that the market would not make if the property sold prior to stabilization?  These questions have no easy answers.

Regardless of the system used for valuing new improvements, caps give a competitive advantage to owners of unimproved property in the form of lower costs.  Property owners must examine the obvious – and hidden – tax consequences of improvements to determine whether potential income from improvements justifies the costs.

Morris Ellison Photo Current july 2015Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. Morris Ellison can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Dec
10

Transfer Taxes Are Now a Costly Consideration in Real Estate Transactions

There was a time when closing a real estate sale cost the seller a few hundred dollars for transfer tax stamps on the transfer deed, but those days are long gone.  Nowadays, transfer tax can be a major consideration in structuring and funding a property transaction.  And the requirements for complying with, or being excluded from, transfer taxes have multiplied.

In some markets, transfer tax can exceed the property tax burden in the first few years after an acquisition.  For example, in San Francisco the transfer tax on property transactions valued at more than $10 million is 2.5 percent of the sales price.

Transfer tax scope widens

Historically, transfer taxes were only collected when the county recorder’s office recorded a deed.  If a transfer occurred through the acquisition of a legal entity that owned the property, and that entity continued to exist without requiring a transfer deed, then no transfer tax was owed.

Today, however, many real estate transactions occur through the buying or selling of ownership interests in legal entities which hold title to real property, and which continue to exist and hold property after the transaction has concluded.  Technically, there is an indirect change in ownership because the legal entity is now owned by a different entity or owner, even though the title for the real estate remains unchanged.

The proliferation of these indirect property transfers has spurred tax authorities to enact laws that assess transfer taxes on indirect sales.  The deed-recording process cannot capture indirect sales, so counties and cities now require buyers and/or sellers to report such transfers through other means.

The most common way of tracking indirect transfers is to align transfer tax reporting with the property tax system.  In California, for example, taxpayers must report legal entity transfers to the state Board of Equalization, which in turn reports the transfers to county assessors.  Counties and cities which collect transfer taxes on indirect sales can now access assessor databases to learn about indirect transfers in their jurisdictions.

Fewer exclusions, a patchwork of requirements

Most transfer tax laws contain numerous exclusions.  For example, if there is a mortgage against a property, the amount financed is excluded from the purchase price when calculating the transfer tax.  Similarly, transfers of property between entities which have the same ownership percentages are excluded from transfer taxes.  A third example is the exclusion from transfer tax for marital dissolutions.

In recent years, however, tax authorities have repealed some exclusions from transfer tax. Some jurisdictions have deleted the mortgage deduction.  Likewise, gifts and transfers upon death, and transfers to non-profit entities, which were once generally excluded, are now subject to transfer tax.

The declining number of exclusions restricts a market participant’s ability to structure transactions to be exempt from transfer tax.  That task has grown only more difficult as variations in tax rules have increased between jurisdictions at the local level.

The transfer tax has traditionally been and continues to be a local tax.  Consequently, individual counties and cities determine what elements to include or not include in their transfer tax ordinances.  Transfer taxes are an attractive way for local governments to raise revenue, particularly when other sources of tax income are limited.

In California, most counties and cities operate under the traditional transfer tax laws that the state Legislature established almost 50 years ago.  But more than a dozen counties and cities have modified the transfer tax law enacted by the Legislature.  The courts have approved such changes under the home rule doctrine, which allows communities to govern themselves with laws that don’t conflict with state or federal law.

These modifications have two primary goals: The first is to impose transfer tax on indirect transfers of real property caused by changes in the ownership of legal entities.  The second goal is to repeal the exclusions that existed in the original transfer tax laws.  In addition, the modifications have often added penalties for failure to pay transfer taxes.

California, like most states, has dozens of counties and hundreds of cities, which means that buyers and sellers of real property must familiarize themselves with the specific provisions in local transfer tax ordinances.

Transfer tax compliance used to be as simple as checking a box.  But high transfer tax rates, the prevalence of indirect property sales and rising property values have increased the significance and complexity of transfer taxes in property transactions.  Awareness of tax rates, available exclusions from the transfer tax and compliance and reporting requirements is essential to maximize property value and avoiding reporting pitfalls.

 

Cris ONeall

Cris K. O'Neall is a shareholder at the law firm Greenberg Traurig, LLP and focuses his practice on ad valorem property tax assessment counseling and litigation.  The firm is the California member of the American Property Tax Counsel, the national affiliation of property tax attorneys.  He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Dec
10

A Fair Share of Taxes

Frequent reassessments benefit Pittsburgh-area property owners.

Pittsburgh-area properties are being reassessed more frequently than in the past – and that is good news for property owners.  Periodic reassessment helps to keep property assessments current with actual values and ensure that everyone pays their fair share.

Unfortunately, frequent reassessments are not the norm throughout Pennsylvania.  Pittsburgh and surrounding counties are the exception, with Allegheny County (in which Pittsburgh is located) having four reassessments in the last 15 years.  Nearby Indiana County is undergoing a reassessment now for tax year 2016, its first since 1968, and neighboring Washington County is undergoing a reassessment for tax year 2017.

Pennsylvania lacks a mandatory revaluation cycle.  A revaluation or reassessment is a thorough analysis of every property in the entire county, with the objective of bringing each property’s assessment into line with its current market value.  Revaluations are often conducted by outside firms, usually with the assistance of the local assessment office.  Occasionally, in-house assessment offices conduct reassessments.

Without a mandate to reassess, some counties go decades without a reassessment.  Rural Franklin County, for example, last reassessed in 1961.   Assessors there attempt to keep properties equalized by placing newly constructed assets on the tax rolls for what they believe the properties would have been worth in 1961.

The more time that passes, however, the more tenuous this methodology becomes.  Further, assessors are prohibited from “spot assessing,” or changing assessments on existing properties without a countywide reassessment.  Thus, as different parts of the county appreciate at different rates, the equality of assessment becomes more and more skewed.

Blair County, west of Pittsburgh, decided to undertake a reassessment for tax year 2017 after commissioning a study from the attorneys at Weiss Burkardt Kramer.  Comparing actual sales in the county to assessments, the study concluded that Blair County’s more than 50-year-old assessments do not meet the constitutional uniformity requirement.

Says attorney M.  Janet Burkardt, a partner at Weiss Burkardt Kramer: “If assessment systems are not periodically adjusted, they become regressive so that properties appreciating at a higher rate are taxed at less than their fair share, and properties appreciating at a lesser rate or those who have depreciated in value, pay more than their fair share in taxes.”

Because properties that benefit from unfairly low assessments rarely appeal those values, inequities become locked in over time.  For instance, in one county where revaluation had not occurred in decades, major office buildings were, on the whole, dramatically under-assessed.

Some under-assessed buildings paid such low taxes that they enjoyed a competitive advantage in attracting tenants.  A neighboring office building, despite paying dramatically higher taxes than its competition, had no recourse to appeal because it was also under-assessed and could not meet the test that its market value was too high.  The solution? A county-wide reassessment.

The longer a county goes between reassessments, the harder the next reassessment becomes.  First, big increases in assessments spark taxpayer outrage, tempting county leaders to push the problem off to another day.

Infrequent reassessments are also more time-consuming and expensive; reassessments in Pennsylvania usually stem from litigation, which is expensive and inefficient.  Less frequently, county leaders prompt the reassessment, as Indiana County did when it had reached the statutory cap on its tax rate.

In marked contrast, Erie County, to Pittsburgh’s north, was the first county to impose a reassessment cycle on itself.  “Our goal in reassessing is to gain uniformity and accuracy,” said Scott Maas, Erie County’s chief assessor.  “We meet with property owners informally and we welcome the opportunity to update our data and make corrections.  We want to get it right.” Maas initiated the county’s periodic reassessment cycle and oversaw the 2003 and 2013 reassessments.

Pittsburgh’s record four reassessments in 15 years followed years-long litigation in two different cases that went all the way to the Pennsylvania Supreme Court.  Ultimately, the Supreme Court ordered the reassessment.  Pittsburgh’s reassessment in 2013 sparked 100,000 appeals; for 2015, only a few thousand taxpayers appealed, demonstrating that most properties’ assessments have been resolved to the property owners’ satisfaction.  If Pittsburgh were to continue to reassess in the next three to five years, building on this fresh data and satisfactory values, the likelihood is that there would be minimal appeals year-to-year.

Frequent reassessments benefit property owners.  When the appeals process corrects errors, the data under under-lying the assessments improves and yields more accurate values in the next reassessment.  Pennsylvania law requires that reassessments be revenue-neutral, meaning that rather than local governments enjoying a windfall when assessed values increase, governments must reduce tax rates, so many property owners see a reduction in taxes when reassessments occur.

Most importantly, reassessment yields more uniform assessments.  Uniformity of assessment is required by Pennsylvania’s constitution.  When assessments are uniform, everyone pays their fair share.  Pennsylvania’s Supreme Court spoke to this in 1909: “While every tax is a burden, it is more cheerfully borne when the citizen feels that he is only required to bear his proportionate share...”

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

 

Nov
30

Shrinking Retail Footprint Complicates Taxes

With other major retailers making similar announcements in 2015, this market shift will likely affect property owners and their property values for years to come.

As brick-and-mortar store operators respond to competition from online retailers, shopping center owners face a mounting risk of unfair taxation when assessors fail to account for retailers’ changing preferences for space.

In markets across the nation, select big box and junior big box retail tenants are changing their existing store concepts and shrinking the building footprints of retail shopping center and standalone locations.

Businesses that were once considered strong anchor or junior anchor tenants are even restructuring their business models, renegotiating leases for smaller spaces and closing stores that no longer meet viable internal metrics.

JC Penney, Barnes & Noble and Sears have all announced nationwide store closings in 2015, and the merger of Office Depot and Office Max has fueled additional store closings this year.

With other major retailers making similar announcements in 2015, this market shift will likely affect property owners and their property values for years to come.

Changes Threaten Values

Retailers’ new criteria for inline and freestanding stores will almost certainly present a property tax challenge for big box and junior big box space, as store closures and footprint reductions affect demand, market vacancy and lease rates in the sector.

Often, assessors will focus too much on the tenant and what the lease states, instead of remembering that the ultimate goal is to properly value the building and land as of the date of value.

When working with assessors, it is important to consider that calculations involving existing tenants constitute a leased fee analysis, which is inappropriate for calculating value for property taxes.

On a fee simple basis, which looks at the property and its market position, this type of space may have an entirely different market value.

With that in mind, it is important to know what the space would lease for if available for lease in an open market as of the date of value.

Another important factor to consider is what the property would sell for in an open market transaction on a fee simple basis. In reviewing the assessor’s calculations, consider whether any referenced sales of other properties reflect leased fee or fee simple pricing.

Blending leased fee and fee simple sales without a proper analysis can yield conflicting data points, compromising the integrity of subsequent conclusions.

These oversights often result in in-correct market value assumptions and metrics, and lead to artificially inflated property tax values.

Interest Shrinks for Big Boxes

Some tenants have reduced their store footprints by more than 20 percent over the past few years.  In part, this adjustment maximizes inventory turnover and sales per square foot.

When looking for new space, certain retailers have also set strict size limits with leasing brokers, and some stores that were once considered anchors are moving into inline retail space.

This type of size restriction can significantly impair a retail property’s overall market rent potential if an owner already has a vacant big box or junior box space. These factors are important metrics to consider when surveying rent to arrive at an appropriate market rental rate conclusion.

One way property owners are dealing with unmarketable big boxes is by subdividing the space into smaller suites that better accommodate the growing demand for small retail footprints.

This conversion can be costly, and if relevant, it is important to discuss the conversion costs with the assessor as of the date of value for the property.

It is also important to consider a proper lease up analysis if the property has substantial vacancy. With store closings triggering an increase in the available retail supply and online shopping continuing to gain market share, a lease up analysis that captures these factors is essential.

An additional issue to consider with the conversion into smaller suites is the depth of the original box and the potential for what some brokers term “bowling alley” space.

Often when the subdivision of big box or junior big box space is complete, new tenants will refuse to lease the excess depth the suite may provide.

In this instance owners are sometimes left with non-leasable space in the rear portion of the original building.

When this happens, it is important to consider excluding this space from the net rentable area of the analysis since the configuration often makes this space impossible to lease.

If subdivision is not an option, be realistic about the future lease up prospects for this type of space and use an appropriate, stabilized vacancy rate in addition to a proper lease up analysis.

Even after observing the points mentioned here, be sure to consider the particular characteristics of the local market before reaching any value conclusions.

As business models for big box and junior box retailers evolve, so must the assessor’s approach to valuation. Only after considering all of these factors can the assessor determine a proper market value to the fee simple estate.

 

kirk garza activeKirk Garza is part of the Member Appraisal Institute and a licensed Texas Property Tax Consultant with the Texas law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Reach him at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

American Property Tax Counsel

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