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Use Restrictions Can Actually Lower A Tax Bill

Savvy commercial owners are employing use restrictions as a means to reduce taxable property values.

Most property managers and owners can easily speak about their property's most productive use, in addition to speculating on a list of potential uses. Not all of them, however, are as keenly aware of their property's specific use restrictions; even fewer realize how those limitations affect the property's value for tax assessment purposes. 

Government-Imposed Restrictions

Local zoning laws impose the most common use restrictions. Their impact on property uses and potential values is commonly understood. A property zoned for development as a retail power center, for example, will generally have a higher market value than a property that is limited to uses, such as auto repair or animal kenneling. Market values are often used to set tax assessment values, so a use restriction that increases or reduces market value will also increase or reduce a property's tax assessment value. 

Less common restrictions that can impair a property's value include covenants or agreements entered into with a municipality. Whether this pertains to the future development of a parking structure, to meet open-space standards, or to fire department ingress and egress lanes these covenants typically limit the owner's ability to fully develop the property and, thereby, reduce its market value. Historical designations by local government also generally reduce a property's market value. This is because they limit the owner's ability to configure the property to produce maximum rental income. 

Even fire suppression requirements reduced market value for one commercial property. This multi-building campus was constructed to suit a technology company, with all fire suppression controls located in a single building. When the technology firm moved out, regulations enforced by the local fire department prohibited the new owner from leasing or selling individual buildings because all but one of the structures lacked onsite control of the existing sprinkler system, those being in another building. 

Semi-private Restrictions 

The complexities of government imposed restrictions pale in comparison with semi-private restrictions that are often created during a property's development. Consider the covenants, conditions and restrictions (CC&Rs) on use imposed when property is subdivided for development. 

CC&Rs are not typically classified as "government-imposed," as they are based on an agreement between the developer and property owners within a development. Yet, these covenants do limit how the property may be used. While CC&Rs often govern planned residential developments, they also regulate property usage in some industrial parks and retail centers. Because CC&Rs lack the uniformity of government-imposed zoning laws which, theoretically, would apply equally to competing commercial properties, the restrictions in CC&Rs usually impact property market values negatively by limiting potential uses. 

Another complex area involves easements between adjacent property owners or among multiple owners within a larger development. Like CC&Rs, easements limit property uses and can reduce market value.

Private Restrictions 

The most common private usage constraint is the deed restriction, which prevents the buyer of a property from using it for certain purposes. The treatment of deed restrictions and other limitations imposed by property owners varies by state. In some states like California, property tax assessors must ignore private use restrictions, while in other states, such restrictions are taken into consideration when assessing properties. 

Deed restrictions and other privately imposed usage limitations can significantly affect real estate values. A property restricted to residential use where neighboring properties are allowed retail or industrial uses will have a lower market value. However, if the local tax assessor is prohibited from considering such private restrictions, the property's assessed value may be much higher than the market would otherwise indicate. 

State, Local Laws Often Prevail 

Clearly, use restrictions — whether government-imposed or privately imposed — will usually impact a property's market value. From a property tax perspective, however, an assessor may or may not consider use restrictions in determining taxable value. 

Whether and how an assessor considers use restrictions in an assessment usually depends on state and local tax laws. In California, property tax regulations, court decisions and guidance documents issued by the State Board of Equalization assist property owners in understanding how use restrictions may or may not affect their property's taxable value. 

In some cases, the treatment of use restrictions is based on local tax assessment policies that are not set forth in any particular statute, regulation or court decision. Tax or legal advisers who interact regularly with local tax assessors can be invaluable resources in those jurisdictions. 

Use restrictions play a significant role in property tax assessments. Knowing a property's use restrictions and how those restrictions affect value is crucial to obtaining a fair property tax assessment. Armed with information about their particular use restrictions, savvy property managers and owners will find out how the local assessor uses those restrictions to determine taxable value. In most cases, that will involve collaborating with a professional experienced in handling local property taxes. 

Cris K. O'Neall is a shareholder with the law firm of Greenberg Traurig LLP in Irvine, California. The firm is the California member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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