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Condo Converters Face a Taxing Question

"Projects Being Assessed at Full-Market Value During Renovation"

Developers who buy rental properties with the intention of converting them to condos and reaping a handsome profit may be forking over more than their fair share of that future gain to local governments.

In a sense, condo converters have become victims of their own success, according to Andy Raines, a partner with Stokes Bartholomew Evans & Petree in Memphis, Tenn., whose firm is a member of American Property Tax Counsel (APTC), the national affiliation of property-tax attorneys. The public perception of condo markets works against developers in cash-strapped municipalities.

"Condo developments are seen as being high-end and lucrative and local governments are saying: 'Hey, we can get a piece of that pie,'" said Raines.

What is happening is that many condo-conversion projects are being assessed at their full, future, market value during the months-lo9ng (or even years-long) renovation state - and well before the developer is ready to sell the units.

"Some assessors come in and essentially value or tax the individual units as if they've been totally renovated and the conversion is complete and estimate what the units would sell for based on market information," said Gilbert Davila of Popp & Ikard in Austin, Texas, a law firm that specializes in the field of property tax and also a member of the APTC.

Davila said that's a mistake because the assessment should be a "snapshot in time" of the property. If a property is only 50percent complete at evaluation time, the assessor should not approximate or speculate what it will be worth at a future date, he added.

"[Assessors] can't predict the future," said Davila. "There might be problems, construction delays, a myriad of different problems on the road to getting a project completed."

What's a developer to do? With property tax laws varying so widely from state to state, it's difficult to give blanket advice. But Raines did say that "timing is very important. To the extent the developer can postpone [assessment] at the full value, they may sell the units by then, and after they sell, it's the buyers issue."

And both Davila and Raines stressed that developers should be aware of their state's legal process for challenging assessments they don't agree with.

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