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Partially Built Properties Raise Property Tax Issues

As the commercial real estate industry continues its slow but steady recovery, investment in large, speculative real estate developments and new construction is returning, and surpassing pre-recession levels in many markets.  By their nature, large developments often take longer to construct than smaller projects, and this lengthy construction time can generate higher carrying costs for a developer at a time when the property is not generating income.

One of the largest expenses for commercial real estate is property tax.  The property tax burden can be even more onerous when the development does not yet have tenants, who ordinarily would reimburse the developer for taxes, or whose rent would otherwise provide the funds to pay taxes on the property.

As the number of large-scale construction projects ramps up, many properties will be under construction on a given assessment date, on the date on which an assessor values the property for that year’s property taxes.  This raises questions as to how and whether the property should be assessed, and the answers to those questions may provide opportunities for taxpaying developers to reduce their carrying costs.

Most states value property using a fair market value standard, and assess a property based on its value to the market.  Other states apply a market-value-in-use standard, which seeks to value the property’s current use.  In both systems, a property that is partially build on the assessment date would arguably have limited or no value because it is unable to generate income for its owner.  Further, as seen in many markets during the recent recession, few buyers are willing to purchase a partially constructed building.

In either circumstance, the property’s in-progress status would significantly hinder its value.  Even the value of the land would be impaired, because a buyer wanting that land would have to demolish the existing construction to begin anew.

Nevertheless, many states authorize local tax assessors to value developments for tax purposes while still under construction.  The means employed by assessors vary, and some states lack explicit guidance on how assessors should perform such a valuation.

Despite the many issues involved in valuing a property that is only partially built, some assessors create another layer of difficulty by assessing only some partially constructed projects on any given assessment date.  A recent review of the assessments in one midsized US market revealed that only one of the many projects in the construction pipeline was assessed as “construction in progress.”  Every other partially built property maintained its prior value until the project was completed and placed in service.

Aside from the apparent inequity of this situation, it raises potential legal ramifications as well.  Nearly every state’s constitution requires that property taxes be assessed and administered uniformly and equally.  Under these provisions, which are at the heart of the modern data-based property tax system, if two properties are identical, then the process by which they are assessed should be identical and the resulting values should be identical.  The techniques used to value one property in a jurisdiction should apply to all similar properties.

As the recovery continues for commercial real estate, assessors are eager to restore the tax rolls to pre-recession values or higher.  But that restoration of tax rolls should not come at the expense of developers who have major projects under way.

Whether in-progress buildings should even be assessed is questionable, but if they are, then every property should be subject to the same standard.  Increasing the value of only select projects violates state constitutions.  Fortunately, those same constitutions give developers an avenue to challenge their unfair tax liabilities.

Reprinted with permission from the “ISSUE DATE” edition of the “PUBLICATION”© 2016 ALM Media Properties, LLC. All rights reserved.

Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 - This email address is being protected from spambots. You need JavaScript enabled to view it..

paul Ben Blair jpg

Stephen Paul is a partner and Benjamin Blair is an associate in the Indianapolis office of the law firm of Faegre Baker Daniels, LLP, the Indiana and Iowa member of American Property Tax Counsel. They can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..  The views expressed here are the authors' own.

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