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Pitfalls in Price Disclosure on Real Estate Acquisitions

Reported transaction prices tend to show up again as overstated taxable property values, advises attorney Jerome Wallach.

The old maxim that no good deed goes unpunished might well be applied to official disclosure of the acquisition price on real estate.

Many jurisdictions require the disclosure of a property's sale price after the sale closes. All too often, buyers respond by reporting a number which includes non-real-estate components. Although they are acting in good faith, these investors seldom realize that the local tax assessor may use the acquisition price they report in determining the property's market value for ad valorem tax purposes. That can result in an overstated assessment when the price reflects the value of the going concern constructed on the property rather than the real estate alone.

Disclosure exposure

There are several reasons a buyer will broadcast the exchange price for acquired real estate to the public domain. The new owner may want the number known because it will enhance the public image of the buyer's business. It may be a legal requirement to report the purchase price. Many jurisdictions require the filing of a certificate of value, for example. Whatever the reasons, the buyer and soon-to-be owner closing on a real estate acquisition should be careful how the deal is characterized when reported.

Tax assessors, appraisers and other real estate professionals are skilled at tracking down sale prices. There are also services that regularly publish sale prices gleaned from a variety of sources. Taxpayers should assume that the assessing authorities will learn the price of their property acquisition.

While purchasers of real property typically factor in the effect of property taxes on the net cash flow, they may not consider the impact the exchange price can have on property taxes in the coming years. Frequently, the higher the published transaction value, the more that news will bolster the buyer's business reputation. Not so for property tax consequences, however, because assessments and ongoing property tax liability will often increase in proportion to the published transaction amount.

An assessor seeing a certificate of value or reading a published sale price can and frequently will rely on that number as the property's market value, against which ad valorem taxes are levied. Unfortunately, that number may not fairly represent the taxable value of the real estate if it includes value from non-real-estate components, which are not subject to ad valorem taxes.

Differentiate real estate value

Hotels provide an example of how the reported sale price differs from the real estate value. Appraisers cite comparable hotel sales in terms of value per room, which may include the television, beds and other items in each room as well as the hotel's brand and other components of business value that are exempt from property taxation. Some analysts adjust for the non-realty components of per-room sales data, but most do not.

However, the problem isn't unique to the hospitality sector and may apply equally to other property types.

In the larger view, the same miscalculation could apply to other properties where non-realty components were part of the transaction. Non-real-estate sources of transaction value can include leases in place, brand recognition, in-place management and trained workforce, personal property such as vehicles and furniture, and ongoing business operations within the property. The assessor may have included all these elements, inappropriately, in the value of the real estate. This is a situation the taxpayer could have avoided by correctly reporting that the price exchanged for the property included non-real-estate items.

Disclose with care

Exercising some foresight in describing the elements of the sale at the time of closing could mitigate the unwanted effect of triggering an inflated tax assessment on the subject property. In reporting, the buyer should pay attention to how they characterize the acquisition price, with a view toward how the information may influence an assessor's calculation of taxable value.

It is predictable that the assessor will be aware of the purchase price. In fact, the number is required public disclosure and will, in all probability, become the assessor's opinion of market value. At any hearing or proceeding resulting from the taxpayer challenging the assessor's opinion of market value, the assessor will likely put forth the public disclosure document as prima facie evidence of market value.

The new owning entity can protect itself by laying the groundwork for assessment appeals when it discloses the transaction amount. When appropriate, the closing statement should clearly represent that the acquisition is for going-concern value, which encompasses both real estate and the business operating in that real estate. An asterisk after the number, with an accompanying footnote, would suffice as long as there is a clear indication that the number relates to enterprise value.

Assessors frequently rely on the acquisition price of a going concern as equaling the value of the real estate alone. When that occurs, a buyer's footnote on a price disclosure can pay dividends in any proceeding challenging the assessor's opinion of value.

Jerome Wallach is principal at The Wallach Law Firm in St. Louis. The firm is the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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