"Property owners can take steps to protect themselves from assessments that include business income by carefully reviewing the form of the income information they provide to the assessor..."

By Robert L. Gordon, Esq., as published by Commercial Property Executive, December 2010

A recurring challenge to prevent over-assessment of commercial property is to separate true real estate value from business value. True real estate value is assessable for property taxation, while business value is not.

Commercial property owners who conduct businesses on their property must be vigilant to ensure that the assessor is not capturing the value of their business operations in the guise of assessing their real estate. This can occur if the assessor assesses the property under an income approach and includes the owner's business income in his or her computations, claiming that this income is attributable to the real estate rather than to the owner's independent business operation.

The objective for property owners is to ensure that income solely attributable to the owner's business is excluded from real estate income. In general, courts are more likely to allow assessors to treat business income as real estate income where it can be demonstrated that the land itself, rather than the business skill of the owner, is primarily generating the income.

Property owners can take steps to protect themselves from assessments that include business income by carefully reviewing the form of the income information they provide to the assessor. Owners should structure their operating statements so that all income sources not directly pertaining to the real estate are reported and categorized separately.

Taking this step makes it easier to argue to the assessor that the separately reported income should not be included in the real estate assessment. By failing to categorize income properly, owners allow their real estate income and other income to be blurred together in a single entry in their operating statement. This needlessly gives the assessor an opportunity to point to the operating statement as proof that the other income is intertwined with the real estate income and is thus assessable.

Robert L. Gordon is a partner with Michael Best & Friedrich LLP in Milwaukee, where he specializes in federal, state and local tax litigation. Michael Best & Friedrich is the Wisconsin member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at rlgordon@michaelbest.com.