Ancillary services have become a crucial revenue generator in student housing and can help owners improve occupancy, justify higher rents and increase tenant satisfaction. In an industry that often correlates income with market value, however, it is critical to distinguish ancillary service revenue from real estate value and property tax liability.

Failure to properly distinguish between real estate and intangible business assets can lead to unfair valuations and excessive property tax bills. Simply put, real estate is land and improvements to that land, such as buildings. Intangible assets, as the term suggests, cannot be held or touched. Examples include business service operations and partnership contracts with third parties.

To help taxpayers recognize the intangible components of their private, off-campus student housing operations, we will review some of the most popular services that owners are using to boost revenue today. Then we will explore strategies for managing valuation and tax implications of these non-real-estate income streams.

Selling premium amenities and convenience

Owners and operators working to improve the financial performance of their off-campus properties know that increased rents and occupancy are not the only ways to drive revenue. By adapting to student renters' changing wants and needs, providers are turning ancillary services into significant revenue producers.

Here are a few of the key services at many properties today:

High-speed internet. Working with a provider to offer broadband internet connectivity as a premium feature can generate hundreds of dollars per unit annually for a student housing operator.

Fitness centers. Property managers know that offering tenants access to an on-site or nearby fitness center can justify increased rental rates. Some properties partner with a local fitness center to ensure access for their residents or to provide on-site programming such as yoga classes.

On-site laundry services. This revenue generator is a no-brainer, which is why landlords for decades have offered access to coin-operated washers and dryers. On-site laundry facilities at a 100-unit apartment building can easily generate $10,000 annually. With student housing's higher density, operators have the potential for more substantial revenue. Owners without laundry facilities may be able to partner with a nearby laundry or dry cleaner to offer these services.

Movers. When a new tenant signs a lease agreement, some student housing managers provide the new resident with an email link or advertising material from a local moving company offering moving kits, boxes, packaging tape or services. The referral agreement behind this relationship is yet another potential income producer for the landlord.

Advertising. Student housing managers often sell advertising to local businesses. Restaurants, retailers and service providers may buy ad space in tenant emails or plaster vinyl ads on the outside of the property's elevator doors. Partnerships with area restaurants or other businesses may also bring in referral fees or commissions.

Housekeeping: Many student housing owners have taken a page from assisted living operators' book by offering cleaning service options to their residents.

Separate ancillary revenue from real estate value

It is crucial for off-campus housing providers to differentiate ancillary services revenue from the real estate value of the property and to ensure the local tax assessor recognizes this distinction when valuing their property for taxation. This is important because ancillary service revenues represent money derived from intangible business assets rather than from the real estate.

The owner of a student housing property with ancillary revenue streams should track this income specifically and separately in record keeping. Resist the temptation to throw specific ancillary income into a catchall "other income" line item on the property's income and expense spreadsheet.

When student housing properties trade hands based, in part, on revenue attributable to ancillary services, their improved economic performance generates higher sale prices than do properties under less creative management. Over and above the total sale prices reported to the public, were an assessor or appraiser to include revenue from ancillary services in property valuations, it would lead to inflated assessments.

Accurate assessments should reflect only the real estate value excluding business income. And properties with extensive ancillary services might appear more valuable compared to those without, even if the actual real estate is comparable.

Owners and managers of private, off-campus student housing can help to ensure fair property valuations and tax liability by conducting annual reviews.

Regular and careful reviews of assessments can identify and help correct any discrepancies, saving the property owner money in reduced tax bills. If a property is over-assessed, consider challenging that assessment. Each jurisdiction presents unique rules, laws and challenges requiring careful and informed decision making, Taxpayers often find it helpful to consult an experienced, local property tax professional before deciding whether to begin a valuation challenge.

Outdated valuations create risk of assessment increases under Shelby County's 2025 reappraisal.

In late 1811 and early 1812, West Tennessee's New Madrid Fault produced several earthquakes greater than magnitude 7.0, swallowing the town of Little Prairie, Missouri, in liquefaction and temporarily reversing the flow of the Mississippi River to crest its banks and create Reelfoot Lake.

Almost 200 years later, pseudo-scientist Iben Browning infamously sparked an earthquake frenzy by predicting another major New Madrid quake would occur on Dec. 3, 1990. School children of the 1990's likely still remember earthquake drills in the classroom and "earthquake kits" (trash cans filled with food, water and medical supplies) assembled and stored in basements and garages for years after.

Fortunately, Browning's prognostication was a dud and nothing happened. Still, those living above the New Madrid Fault today know in the back of their minds that "The Big One" could hit at any time.

For taxpayers, that time may be 2025, when Shelby County Assessor Melvin Burgess will reappraise properties countywide to 100 percent of fair market value for the first time since 2021. It may not shake buildings to the ground or flood low-lying areas, but the 2025 reappraisal could do grievous damage to unprepared taxpayers.

Market heat builds pressure

During the Shelby County reappraisal in 2021, the market was recovering from the 2020 slow-down in lending and sales transactions due to COVID-19. The assessor seemed to take the pandemic into account, refraining from aggressively capturing all of the market's growth from 2017 to 2019.

Low interest rates helped transaction volume accelerate in 2021 and the first half of 2022, however, quickly putting distance between the assessor's mercifully low appraisals and actual market value. The real estate market cooled after interest rate hikes in late 2022, but the value differential was already significant. A sales ratio study by the Tennessee Division of Property Assessments indicated the overall level of assessor's value in Shelby County was 75.87 percent of actual market value by Jan. 1, 2023. That ratio could be even lower for individual properties.

Shelby County's 2025 reappraisal program will aim to eliminate such undervaluations. The bigger the current undervaluation, the bigger the taxpayer's potential increase next year.

This is a major flaw in long reappraisal cycles: Undervaluations expand over the course of the cycle like geothermal pressure until the difference suddenly, and sometimes catastrophically, vaporizes in a single year with a massive increase in assessed value.

These delayed assessment adjustments and resulting tax increases make budgeting more difficult than would more frequent but less dramatic reappraisals. The Tennessee Legislature has been considering shorter reappraisal cycles, but none of the proposals have passed both houses yet.

Bad timing for a big setback

Property tax increases are never convenient, but 2025 could be especially poor timing. If interest rates stay relatively high and operating expenses keep rising, tax increases may arrive when there is no room to accommodate them in over-stressed taxpayer budgets.

Even in 2024, a non-reappraisal year, the mayor of Memphis has proposed a monstrous tax rate increase for properties inside the city. It is doubtful the city will raise rates as much as the mayor wants, but a 2024 increase in city taxes before the assessor's 2025 reappraisal could create back-to-back blows that are hard to absorb.

Preparing for "The Big One"

Hiding under a desk or filling a trash can with supplies will not stop a major assessment increase in 2025, but there are other ways to prepare.

1. Understand the timeline. The assessor will formally certify 2025 values by April 20, 2025, but value-change notices are expected around mid-March or early April. Appeals must be filed to the Shelby County Board of Equalization, with a likely deadline of June 30. The city of Memphis sends tax bills around July that are due by the end of August. Shelby County taxes are due by the end of the following February.

2. Anticipate the increase. Don't be caught off guard by a higher tax bill. It is important to estimate the assessor's reappraisal value and develop a realistic 2025 property tax budget. If the assessor's new value is unreasonably high, it can be challenged through a timely appeal to the Shelby County Board of Equalization. Some amount of increase is likely to be fair and supportable, however, so adjusting tax escrows in advance would be prudent.

Property tax professionals can help

Preparing for the 2025 reappraisal needn't be a daunting process. A property tax professional can provide a tax estimate in preparation for the 2025 reappraisal, and if the assessor's new value is too high, file an appeal.

Taxpayers preparing for The Big One to rattle their real estate would be well served to consult a property tax professional in advance. An experienced advisor can help identify the fault lines of undervaluation and brace-up vulnerable budgets before the reappraisal strikes.

To tax assessors, an investor's single-family, build-to-rent neighborhood is a cluster of separately valued properties.

Multifamily investors are accustomed to paying property taxes based on an assessor's opinion of their asset's income-based market value. But for the growing number of developers and investors assembling communities of single-family homes and townhomes for rent, tax assessment is more complex and potentially troublesome.

The difficulty for these taxpayers is that most assessors shun the income approach to valuing single-family rental properties. In the following paragraphs, we examine the roots of this common assessor stance, and explore strategies that may help taxpayers argue for a more predictable, apartment-like treatment for their single-family rental communities.

Similar, but different

Multifamily construction has delivered a tremendous volume of apartment properties over the past decade. Once stabilized, these assets have been relatively simple to value by relying on market rents, occupancy, expenses, and cap rates.

On the heels of this apartment construction, the nation is seeing a proliferation of investor-backed, single-family construction and acquisitions of large blocks of homes and townhouses for use as rental properties. This may take the form of constructing a multitude of homes or townhomes in a single development. Alternatively, it may involve the acquisition of many existing homes or townhomes in a localized area.

A concentration of adjacent or proximate single-family residences operated as rentals can enable owners to achieve economies of scale for management, maintenance, groundskeeping, repair and similar costs, similar to the operation of a large apartment complex or group of complexes. In most jurisdictions, however, the similarity between apartments and communities of rental homes and townhomes doesn't extend to valuation for property taxation.

As a rule, houses and townhomes are individually platted and therefore have separate tax parcel numbers. For existing properties acquired from third parties, this is expected. When it occurs with new construction, however, it typically results from the developer's decision to create true townhouses and single-family houses, as opposed to a traditional rental complex. The reasoning for this decision may be complex, but at the gate it appears to be a protective measure to allow for subsequent sales of the units.

For taxing purposes, each separate parcel – house or unit – is valued separately and independently, just as if individually owned and occupied for personal use by a homeowner. The taxing authorities value these properties using a market-comparable-sale approach, just as if the units were individually owned for personal use.

This is causing a good deal of consternation among investors who seek to have the units valued utilizing the income approach, and for those who would like to value assembled units collectively. The owner of a row of inline townhomes, for example, may prefer to have the properties valued as one economic unit, in the nature of an apartment complex.

Case law insights

The North Carolina Property Tax Commission in two recent cases affirmed that assessors must use the comparable sales approach to individually assess independent, platted rental homes. In those cases, (Mingo Creek Investments III LLC and American Homes 4 Rent Properties One LLC), commissioners set forth numerous reasons for their decisions.

Those cited factors included a legal requirement that each separately platted parcel be separately taxed. Additionally, the common owner was able to sell off a single unit at any time, and lacked an apartment owner's common control over amenities and other units. Not all units in a particular development are necessarily owned by the same entity, and in the cited cases there was a history of buying or selling of the individual units or neighboring units.

Assessors often make the policy argument that where single-family rental units exist in common with units that are individually owned for personal use, applying a different valuation method to those held for rent would create inequitable results. It would also raise uniformity concerns, because similar properties would be taxed differently. The same inequity issue that applies to a rental residential unit also applies to homes used as vacation rentals. To value rental single-family residences using an income approach and the neighboring, owner-occupied, single-family residence by the comparable sale approach would create inequities and a lack of uniformity.

Taxpayer tactics

So, where is the investor to go from here?

The elements addressed in each of the two Property Tax Commission decisions issued thus far, together with the policy considerations, limit the taxpayer's options. An investor or developer could common-plat the residential rental units in the development stage, creating a single plat that could be more readily valued with an income approach.

If the owner or developer is unwilling to common-plat the assemblage of rental homes or townhomes but seeks to have them valued for tax purposes under the income approach, it appears they would at least have to consider imposing common control restrictions on the parcels to create, as nearly as possible, the functional equivalent of an apartment complex.

For example, a development or ownership regime could impose not only common ownership but also common control over all the units, including a prohibition on the sale of individual units, or perhaps restrictions that the sale of a specific unit would not release that unit from the common control mechanism. Such a mechanism would be akin to a 100 percent developer-controlled homeowners association.

From a practical perspective, the developer could prohibit investors from selling individual properties until the developer chooses to start divesting itself of the project piecemeal. At that time, the developer could amend the restrictions, since it would still have total control because no units had been sold, and therefore no third parties had vested rights. At that time, it is likely the taxing authority would change the valuation method to a comparable sales approach.

Further, the developer would most likely need to ensure that the units under such common ownership and control would be physically distinct from neighboring properties. For example, all the units could be in a designated subdivision or portion of a development, as opposed to being alongside units held for personal use by their owners. By so doing, the developer could hopefully remove the uniformity argument.

From a market perspective, the units held for rent under common ownership and control would never be for sale on the open market as single units, at least so long as the restrictions remained in place.

As to appraisal, the appraiser could either apply the income approach to each unit, or appraise the combined residences as one economic unit and then apportion value among the units, so that each tax parcel receives a separate value. This is not to say this approach would be accepted by a tax court, but it would address many of the concerns espoused to date against use of the income approach for separately platted residential units held for rent.

These valuation regimes described above may prove too restrictive for some investors, in which case they would appear stuck with the current process. In all events, before becoming wedded to any plan, taxpayers should at least run the numbers both ways – using income and comparable sale approaches – to be certain the value difference is worth the effort of contesting their assessment. 

Jaye Calhoun and Divya Jeswant of Kean Miller LLP on an assessment strategy that may help you trim your property tax bill.

Few states impose property tax on intangible assets such as a trade name, franchise, goodwill and the like. Indeed, some office buildings, industrial properties and big-box stores don't derive significant value from intangibles in the first place.

Intangibles are a significant income generator for many hotels, casinos, restaurants and other properties, however. For these assets, assessors are required to identify and exclude the value attributable to those nontaxable intangibles. The proper method to do so has been the subject of much debate.

Fortunately for taxpayers, recent case law is helping to clarify best practices for isolating and removing value attributable to intangibles from commercial assessments. By following the examples of taxpayers who have successfully applied alternative approaches, property owners across the country may be able to exclude a larger portion of overall property value as intangible and, in turn, lower the property taxes on their business real estate.

Scaling Rushmore

Although some assessors persist in applying the cost approach, most valuation professionals consider the income approach most appropriate for valuing income-producing properties. That is because a property's past, present and future or projected income inevitably impact its valuation.

Many assessors have traditionally applied the "Rushmore Approach" to exclude the value of intangibles from an income-based valuation. This essentially deducts management and franchise fees from a property's net income, treating those amounts as a proxy for the value of intangibles.

Many taxpayers reject the notion that the Rushmore Approach can account for the full value of intangibles. Some of these property owners and their appraisers have countered with the "Business Enterprise Approach," which seeks to remove the often significantly higher revenue generated by intangible assets. This approach is sometimes called the "Income-Parsing Approach" because it requires going-concern income attributable to intangibles to be parsed and stripped from taxable property income.

A spate of decisions over the last few years, particularly concerning hotel valuation, has created a growing momentum favoring the Business Enterprise Approach. Taxpayers should be aware of the potential for significant tax savings with this approach.

Business enterprise successes

The most significant recent cases in which taxpayers successfully argued for using the Business Enterprise Approach are in two states known for high property taxes: Florida and California.

The first is Singh vs. Walt Disney Parks and Resorts U.S. Inc., a 2020 case dealing with the valuation of the Disney Yacht & Beach Club Resort adjacent to Epcot. A Florida appellate court categorically ruled that the Rushmore Approach fails to remove all intangible business value from an assessment. The court was simply unconvinced by the assessor's arguments that deductions for franchise and management fees can remove the entire intangible business value.

Another encouraging decision occurred in 2023, SHR St. Francis LLC vs. City and County of San Francisco. A California appeals court considered various income streams of the Westin St. Francis hotel, including its management agreement, income from cancellations, no-shows and attritions, in-room movies, and guest laundry services.

The court held that it was insufficient to simply deduct the management fees because income from a nontaxable, intangible asset like a management agreement should include both a "return of" and a "return on" that asset. In other words, the owner would expect to generate a profit, or income-based value over and above the cost of the management agreement. The court found that the assessor failed to present evidence that the management agreement's value did not exceed management fees.

In dealing with the remaining items, the court drew a dividing line between "intangible attributes of real property" that merely allow the taxable property to generate income (cancellations/no shows/attritions) and are therefore includible vs. "intangible assets and rights of the business operation" utilizing the real property. These latter assets and rights, including in-room movies and guest laundry services, relate to the intangible business operation and are, therefore ,excludible from income-based, taxable property value.

Another widely reported decision from 2023 is Olympic and Georgia Partners LLC vs. County of Los Angeles. The appellate court in this case pointed out a key flaw in the Rushmore Approach. That it is unlikely the deduction of franchise and management fees could fully account for the value of intangibles because no owner would normally agree to fees "so high as to account completely for all intangible benefits to a hotel owner."

Half Moon Bay legacy

Several recent decisions cite SHC Half Moon Bay LLC vs. County of San Mateo, a 2014 California case involving the Ritz Carlton Half Moon Bay Hotel's workforce, leasehold interest in the employee parking lot, and agreement with a golf course operator. The appellate court explicitly acknowledged that the deduction of management and franchise fees from the hotel's projected revenue stream did not properly identify and exclude intangible assets.

Taxpayers throughout the country have successfully made these same arguments. In 1300 Nicollet LLC vs. County of Hennepin, a Minnesota court in 2023 took stock of case law across the country and observed that although the two methods have been competing for 20 years, there is an emerging preference for the Business Enterprise Approach and increasing skepticism of the Rushmore Approach.

Some states such as New Jersey continue to rigidly administer the Rushmore Approach, while other states consistently uphold the Business Enterprise Approach, at least in recent years. Yet other states view both methods as potentially reasonable for an assessor to apply; some of those cases may have more to do with the standard of proof during appellate review. There are also states such as Louisiana in which the issue is yet to be dealt with judicially, arguably giving taxpayers an opportunity to get ahead of the curve.

Clearly, taxpayers and their commercial appraisers should determine whether the assessor has properly excluded maximal value for intangibles in valuing their income-producing properties for property tax purposes. In particular, appropriately applying the Business Enterprise Approach can generate significant property tax savings on commercial real estate and may be worth pursuing.

Here are five of the most important dates and timelines to be aware of.

Local governments impose a staggering property tax levy on Texas' commercial and residential property owners, who are their primary source of operational funding. Property tax revenue totaled more than $73.5 billion for the 2021 tax year and represented 50.6 percent of all taxes levied by state and local governments, according to the state Comptroller's Office.

Property owners wanting to pay only their fair share of this immense burden must understand tax code deadlines or risk losing their opportunities to contest the values on which property taxes are based. 

Although the number and nature of key tax dates are nuanced and can be difficult to navigate, the following paragraphs offer a high-level overview of the most important deadlines to remember. 

Tax Lien Date 

The tax lien date is a crucial tax code milestone, even though it is not technically a deadline. For any given tax year, the lien date is Jan. 1 of that year. 

County appraisal districts determine the market value of all real estate on this date and establish the legal owner responsible for paying the taxes on each property that tax year. Property owners should understand that the timing of selling or buying properties has tax implications according to the lien date. 

Property taxes are a personal liability. That means that even if the Jan. 1 owner sold the property on Jan. 2 (or any other day that year), the Jan. 1 owner is still on the hook to pay the taxes for the entire year. 

One key exception applies when buying a property that carries an exemption: In that instance, unless the new owner is also eligible for an exemption on the property, the new owner will be responsible for property taxes prorated from the date of purchase to Dec. 31. 

Protest Deadline 

The protest deadline is the chief cutoff date for a property owner to actively meet in filing a protest. 

Each spring, appraisal districts send a notice of appraised value to every property owner. If the property owner disagrees with the assessment, they must file a formal protest with the appraisal district by the later of May 15 or 30 days after the date the notice was delivered to the property owner. 

Under the "good cause" exception, a property owner can file a late protest up until the date the appraisal review board approves the appraisal records. The property owner must show good cause for missing the original protest deadline. 

Unfortunately, the tax code does not define good cause as it relates to missing a protest deadline. The appraisal review board determines whether the property owner had good cause, and since it is unclear what cause the board would consider good, it is best not to rely on this provision. 

A common misconception by property owners who fail to file a timely protest is that they can simply sue to contest the tax appraisal. On the contrary, Texas courts cannot hear a property tax case unless the property owner filed a timely administrative protest and received an order on the same. A lawsuit without the preliminary protest will be dismissed, at which point the property owner is likely out of options for that tax year. 

Section 25.25 

The late protest deadline relates to another backstop provision that property owners can use if they miss the protest deadline. 

Section 25.25 of the tax code offers several options to file a late protest under specific circumstances. A frequently used provision is Section 25.25(d), which allows a property owner to file a late protest any time prior to the delinquency date. The delinquency date for tax year 2024 is Feb. 1, 2025, so the protest would need to be filed no later than Jan. 31, 2025. 

A major drawback to this provision is that the property owner must prove the assessor's value exceeds the correct appraised value by at least one-fourth for residences and one-third for all other property types, which is a difficult threshold to meet. 

Additionally, if the property owner successfully reduces the value beyond the threshold, the owner must pay a 10 percent correction penalty based on the amount of the correct appraised value. Although a viable option, this is not the ideal way to file a protest. 

Litigation Deadline 

The litigation deadline gives the property owner a window to file suit in district court following the appraisal review board's decision on an initial protest. 

The property owner must file no later than 60 days after they receive notice that the appraisal review board has entered a final order. If the property owner misses that deadline, they lose the ability to further contest the value for that year. 

Tax Payment Deadline 

The tax payment deadline is the final day owners can pay annual property tax bills without incurring penalties and interest. Bills are typically sent out starting in October, and owners must pay no later than Jan. 31 of the following year. The payment deadline for the 2024 tax year is Jan. 31, 2025. 

If a property owner fails to pay the tax by Jan. 31, the tax bill begins accruing penalties and interest on Feb. 1. Moreover, the owner could be subject to a delinquent tax lawsuit filed by the taxing authorities, and the owner's property could be foreclosed upon and sold to satisfy the delinquent tax. 

Taxing authorities may send a tax bill late, which creates a new payment deadline. Depending on when the late bill is initially sent, the property owner may have a new deadline after Feb. 1. However, to avoid the repercussions of late payments, property owners should set reminders to confirm that on-time tax payments have been made for the prior tax year on all real estate they own. 

The five critical dates presented here only scratch the surface of the many deadlines in the Texas tax code and do not explore the nuances that can alter those deadlines. That's why it is essential for property owners to consult with their property tax advisors early in the year and safeguard against missing any important deadlines associated with annual property tax notices, appeals and payments. 

Property owners who wait too long may forfeit the right to contest the assessed value or any other issues, even if that leaves them with an unfair tax burden.

Below is a property owner's guide to reducing the taxable value of contaminated real estate.

Valuing contaminated properties presents numerous challenges due to the complexity and uncertainty that contamination entails. The presence of hazardous substances or pollutants can affect both a property's value and potential uses. As an assessment must reflect market value, contamination can significantly impact taxable valuation.

Determining the extent of that impact requires careful consideration of legal, technical, and economic factors as the valuation of contaminated properties is governed by a combination of statutory law, regulatory guidance, and case law. Yet these are the fields a taxpayer with contaminated real estate must tread to evaluate assessments for fairness and, if necessary, to appeal an unfair assessment.

Tax assessment review proceedings are crucial mechanisms for all property owners to ensure fair and accurate assessments. These proceedings provide avenues to challenge property assessments they believe are incorrect or unfair. Understanding the process, timelines, and legal considerations involved is essential for property owners, assessors, and legal professionals alike.

Most real estate taxes in the United States are ad valorum or "according to value." Thus, the owner of a high-value property would expect to pay more real estate taxes than the owner of a lower-value parcel. While the exact procedures to file a tax appeal can vary by state, all give property owners the right to challenge property assessments through various means, including administrative review, grievance procedures, and judicial review.

Four Preparatory Keys

To prepare for a tax appeal, the following important considerations should be addressed:

1. Assess contamination levels: Determining the extent and severity of contamination on a property requires expertise in environmental engineering, so expert assistance is a must. Documentary evidence can significantly strengthen a property owner's case during the appeal process. Procure this with expert testimony from environmental consultants, appraisers, and other qualified professionals to establish the impact of contamination on the property's value. Assessors may need to rely on those reports to understand and truly appreciate the contamination's nature and scope.

2. Estimate remediation costs: The price tag to remove or contain pollutants can vary widely depending on the type, quantity and spread of the materials involved, as well as the chosen remediation method. While there are state statutes concerning remediation and liability, those matters are also codified at federal levels within the Comprehensive Environmental Response, Compensation & Liability Act (CERCLA) of 1980, commonly referred to as the Superfund Law. If a site is designated a "superfund site," it will typically have a remediation plan with anticipated cleanup costs, which assessment professionals can rely upon in determining market value.

3. Gauge market perception: Market perception can play a significant part in valuation since contamination can have a negative impact on the property's appeal to potential users or buyers. Known as "environmental stigma," this can severely depress market values. Prospective buyers are typically hesitant to purchase contaminated properties, often leading to decreased demand and lower market prices.

4. Don't sweat legal liability: Property owners may face legal liabilities for environmental contamination, which can also affect the property's value. This, however, should have no effect on valuation in a tax appeal proceeding, because the statutory mandate to value property in a tax appeal according to its market value cannot be subordinated to environmental property concerns. Most significantly, any liabilities for contamination or remediation must be addressed in a separate proceeding outside the tax appeal.

More to Consider

The three accepted approaches to valuation in the context of a tax appeal are income capitalization, sales comparison, and replacement cost less depreciation. Unfortunately, none of these truly account for the presence of contamination and its negative influence on value. The effects of environmental contamination, and even stigma from nearby contamination, must be part of the valuation equation.

Local case law also plays a significant role in shaping the legal landscape surrounding contamination in tax assessment review proceedings. Many courts have recognized the impact of contamination on property values and have upheld adjustments to tax assessments to account for this factor. Additionally, these same courts have established principles regarding the burden of proof and evidentiary standards in contamination-related tax appeals.

For example, the seminal case in New York is Commerce Holding vs. Board of Assessors of the Town of Babylon. In this 1996 case, a property owner filed a tax appeal contending the assessed values should be reduced to account for contamination by a former on-site tenant. While New York's highest court held that "any fair and non-discriminating method that will achieve [fair market value] is acceptable," they concluded that contaminated property in a tax assessment review proceeding shall be valued as if clean, then reduced by the total remaining costs to cure the contamination.

Clearly, valuing contaminated properties in tax assessment review proceedings requires a nuanced understanding of environmental regulations, property valuation principles, and market dynamics. Assessors and property owners must navigate complex legal and technical challenges to arrive at a fair and accurate valuation that reflects the unique circumstances of each contaminated property. By employing appropriate valuation strategies and seeking expert guidance, stakeholders can ensure that contaminated properties are assessed fairly and in accordance with applicable law. 

Market deterioration and municipal ineptitude are driving taxpayers to the courts for relief.

The New York City real estate market, once the pinnacle of economic health, has undoubtedly declined in recent years. Exploring the factors that brought the market to this point paints a clearer picture of what current conditions mean for property taxpayers and suggests strategies that may offer relief.

Five Causes of Decline 

The COVID-19 pandemic left an indelible mark. The coronavirus took a significant toll on New York City, which became an epicenter of U.S. infections. Many residents fled to suburban areas for more space and less harsh mandates from local authorities. According to a Cornell analysis of U.S. Census Bureau data, "New York City's population plunged by nearly 4 percent – more than 336,000 people – during the pandemic's first year as residents migrated to less dense areas in nearby counties and neighboring states."

The New York City Comptroller's Office estimated that the City lost an additional 130,837 residents from March 2020 through June 2021. This caused unprecedented vacancies in residential and commercial properties, and approximately 100 hotels in the City closed. Those that survived endured high vacancy rates and struggled to pay property taxes.

Economic uncertainty plagues the real estate market. The economic fallout of elevated vacancies and decreasing income has rendered investors and developers hesitant to invest in New York City real estate.

Remote and hybrid work slashed office demand. The decline in office usage that accelerated during the pandemic is ongoing and appears permanent. Most workplaces have loosened to a hybrid work environment, and many employers allow a full-time work-from-home option as well.

This means office buildings that once bustled with employees are now vacant or significantly emptier than they were in 2019. Midtown Manhattan lunch spots and after-work happy hour sbars and restaurants have also taken a hit. The National Bureau of Economic Research estimated in 2022 that New York office buildings had lost as much as $50 billion of value in the wake of reduced demand.

Crime is soaring. New York City police reported making 4,589 arrests for major crimes in June, a 9.3 percent increase from the same period a year earlier. In the first six months of 2023, officers made 25,995 such arrests – the most for any half-year period since 2000.

Property tax revenues are under threat. The previous trends have been slow to erode the municipal view of the tax base. The City's Department of Finance reported a tentative assessment roll of $1.479 trillion for fiscal 2024, a 6.1 percent increase from the previous tax year. For the same period, the department reported a 4.4 percent increase in citywide, taxable, billable assessed value, the portion of market value to which tax rates are applied, to $286.8 billion.

"New York City continues to show mixed signs of growth and economic recovery, with the FY 24 tentative property assessment roll reflecting improvements in subsectors of the residential market while key commercial sectors still lag behind pre-pandemic levels despite modest growth over the past year," Department of Finance Commissioner Preston Niblack said in a press release announcing the tentative tax roll.The decline in office occupancy continues to impact retail stores and hotels in the City contributing to the sector's slow recovery. At the same time, single family homes, which constitute a majority of residential properties, have exhibited a robust recovery and continued growth."

A study by NYU's Stern School of Business and Columbia University's Graduate School of Business calculated that a decrease in lease revenue, renewals and occupancy would cut the value of office buildings in the City by 44 percent over the next six years. Based on those findings, a worst-case analysis by New York City Comptroller Brad Lander found that a 40 percent decline in office property market values over the same six years would result in $1.1 billion less tax revenue for fiscal 2027, the last year of the City's current financial plan. Real estate taxes on office properties currently generate 10 percent of overall City revenue. The City expects office vacancies to peak at a record 22.7 percent this year, posing a potential threat to tax collections.

The result of the forgoing changes is that income is down, expenses are up, demand is evaporating, and market values have plunged by more than 50 percent for most commercial properties except perhaps multifamily (although sales of condominiums have stalled due to high mortgage costs).

How To Get Relief

The hotel industry anticipates a four-year recovery period. Hotel owners preparing arguments for reduced assessments should collect information for their team documenting closure dates, occupancy rates, and any specific pandemic-related expenses incurred during the reopening process.

It is inappropriate for assessors to evaluate hotels for property tax purposes solely based on non-real-estate income. A recent court ruling has affirmed the illegality of utilizing non-real-estate income generated by hotel businesses, leading to an overassessment of real estate taxes that must be refunded to owners. Business-related income, such as that from movie rentals, should not be considered in property tax assessments.

In addition, it is essential to identify and exclude income from personal property, furnishings, and the value of intangibles, franchises, trained workforce, and going concerns when determining real estate income.

The prevalence of empty stores and closures of local standby establishments in every corner of New York City underscores the severe economic impact on retail properties. Retail and office owners should be prepared to demonstrate declines in gross income and rents reported in their financial filings with the City. They are also required to provide a list of tenants who have vacated or are not paying rent. The Tax Commission now mandates an explanation for declines in rents exceeding 10 percent.

There is considerable potential for assessment reductions, but it is crucial for taxpayers to compile evidence of market value declines, and to collaborate with experienced advisors to secure warranted tax reductions.

There is no longer any absorption of vacant office space since demand is declining. That means that 80 percent occupancy or lower is the norm. Only an adjustment in property taxes to the actual earnings of the property will save the real estate, and over-leveraged properties may be lost.

Tax Process in a Tailspin

Extensive personnel turnover has hampered the review process that relies on action by City agencies, with inexperienced staff and numerous unfilled positions at both the Department of Finance (assessors) and the Tax Commission. Thus, expected remediation of excessive assessments often go unresolved. This leaves no alternative but to go to court.

Resorting to the courts is also difficult because in-person appearances are still relegated to video conferences, with few trials taking place.

The taxpayer's best approach is to push forward with all speed to demand a trial.  Only pressure to demand speedy trials will provide the needed result.

Office property owners should contest excessive assessments now, before a potential crisis drives up taxes.

The Great Recession, from December 2007 to June 2009, was the longest recession since World War II. It was also the deepest, with real gross domestic product (GDP) plummeting 4.3 percent from a peak in 2007 to its trough in 2009.

Entering that recession, unemployment was at an unalarming 5.0 percent, which is on par with historical averages, and interest rates hovered around 6 percent. The roots of the recession lurked at the intersection of risky subprime mortgages and the repeal of the Glass-Steagall Act, which allowed for the mega-mergers of banks and brokerages to escalate.

And here we are in January 2024, looking down a steep market slope. On the bright side, we are in a more advantageous position than at the beginning of the Great Recession. GDP was a respectable $25.46 trillion in 2022, up 19 percent from $21.38 trillion in 2019. Unemployment is at 3.7 percent, and values in the single-family housing market are increasing again, in part due to a lack of supply.

The investors standing on unstable ground this time around are those heavily leveraged in major metropolitan markets, such as New York, Chicago, and San Francisco, or other municipalities that rely on office values. (Think suburban office markets.) The sharp increase in interest rates under the Federal Reserve's tightening monetary policy, and the extreme drop in demand for commercial office space that accelerated during the pandemic, will have significant ramifications on all property types.

Dire developments

What ramifications? Assume a hypothetical "Metro City" that, like most major markets, has a tax base with 75 percent of its independent parcels classified as residential, and 25 percent as commercial real estate. However, the assessment values are strongly weighted on the commercial properties, with 30 percent of the entire assessment value born by office properties.

The municipality has a total tax levy of $16.7 billion and overall assessed property value of $83.1 billion. The office portion of the property makeup is 30 percent, or $24.9 billion in assessed value. The office share of the total tax levy is $5.0 billion.

Now assume that the city's overall office market value collapses by 50 percent. This leaves Metro City with a $2.5 billion deficit – not a small number. To recapture that $2.5 billion, the city must increase its tax rate by 15 percent. That means tax liability increases by 15 percent for every taxpayer, even if their property's assessed value is unchanged.

So, how can developers and owners protect themselves from excessive tax liability, given the current market conditions? One solution is to appeal property tax assessments aggressively. Regardless of the jurisdiction, regardless of property type, property owners must evaluate their opportunity for an assessment appeal.

Office-specific issues

Market transactions show vast valuation differences between Class A office properties, which are typically newer buildings with great amenities, versus "the others," or those office properties 10 or more years old and offering fewer amenities. Properties that fall in the latter category have many opportunities for assessment reductions. Here are key points to consider.

Ensure the appraiser or assessor is using the property's current, effective rental rates. In many instances, an owner will show a tenant's gross rent on the rent roll without disclosing specific lease terms contributing to effective rent. For example, the lease may have been negotiated at $27 per square foot, but the rent roll does not account for free rent, amortization, free parking or other amenities the tenant receives.

Additionally, although office leases historically pass through taxes and other costs to tenants, many negotiated leases now cap expenses for the tenant, potentially shifting a portion of expenses to the landlord. That is a key issue the taxpayer should address in the income analysis of an appeal, because it provides evidence for a reduction in effective rental rates, as well as an imputed increase a buyer would demand in the capitalization rate to reflect the additional risk.

Appraisers need to understand this issue for rental comparables as well as for the subject property. Typically, they will confirm public information posted by various data services, but if they lack the finer details of a transaction, the rates they derive could exceed the true market.

Address vacancy and shadow vacancy. Prior to the pandemic, office vacancy in most markets hovered between 5 percent and 14 percent, depending on the location and building class. As of the third quarter of 2023, vacancy is over 18 percent, according to CBRE.

In October 2023, CBRE reported that suburban Chicago's office vacancy rose 50 basis points to 25.9 percent in the third quarter. Manhattan's overall office vacancy rate including sublease offerings is 22.1 percent, according to Cushman & Wakefield.

Shadow vacancy, or space where the tenant is still paying rent but no one physically occupies the space, is the canary in the coalmine for an office building's future. If a building is 12 percent vacant, the assessor probably won't be sympathetic. But if the owner highlights that leases in the space expire in the next year or two, and/or they are large blocks of space, the assessor (or at least the owner's appraiser) should acknowledge that risk and apply a higher cap rate for the subject property.

Adjust for interest rates. Any investment-grade property is now worth less than it was two years ago, simply because of the rise in interest rates.

Because interest rates have increased significantly, the property owner can argue that the assessor should use the "band of investment" method, which calculates capitalization rates for the components of an investment to produce an overall cap rate by weighted average. This methodology takes into account not only the increase in market interest rates, but also equity demands of lenders. Interest rates have increased over 3 percentage points across the last 2 years, which in many cases equates to a 100 percent increase in interest rates.

Additionally, the equity requirements on commercial mortgages have increased from 30 percent to 50 percent. Increasing the base capitalization rate to reflect these changes in an income analysis will offer significant relief in the assessment.

Jurisdictions that rely heavily on office values to support overall assessment value in the tax base will be experiencing increasing tax rates. This increase in rate is factored into the loaded capitalization rate, which obviously means a lower market value for assessment purposes. Analysts and appraisers should review the increased rates annually.

The near term will be challenging for entities that invested in office properties prior to 2023, but the strategies outlined above can offer some protection in this stormy market.

Accounting for weak operations can buoy arguments to reduce taxable value, writes Baker Jarrell of Popp Hutcheson PLLC.

Property taxes are an ongoing headache for many commercial real estate owners, especially when their properties generate inadequate income. Assessors compound these frustrations when they value underperforming real estate as if it were operating on par with the market. By understanding the source of the poor performance, however, owners can build a compelling appeal to reduce their property's taxable value.

One of the main reasons taxing entities overvalue underperforming properties is their use of mass appraisal. The appraisal districts that value real estate for taxation typically deal with thousands of parcels contributing to hundreds of billions of dollars in market value. Mass appraisal allows these districts to systematically value large numbers of properties where performing individual appraisals would be unfeasible.

Understandably, this methodology can create confusion and frustration among property owners, who often feel their assessment does not accurately represent the specific real estate. Mass appraisal is a useful method but lacks the nuance necessary to determine the actual value of real estate and, thus, the appropriate tax levy.

Adjust to occupancy

With a standard property that operates at market-level occupancy, income and expenses create market value based on an expected rate of return. Assessors and appraisers know this as the income approach to valuation.

Additional losses should be factored into the value when the property performs below standard occupancy, however. This means that, when a property has vacancy well above the market rate, the final value must account for this gap.

The first remedy for excessive taxation on a poorly performing property is to adjust for rent loss in the income approach. For instance, if there are two otherwise comparable buildings but one maintains the market occupancy of 85 percent and the other is only at 50 percent occupancy, it does not make sense to appraise and value them equally.

Any buyer of a poorly performing property will incur significant costs to lease up the building to the market level. The costs typically include rent loss, tenant improvements and leasing commissions. In valuation, an appraiser would total the present value of these costs over the absorption period to arrive at the total discount for rent loss. The appraiser can then deduct the discount from the previously calculated value via the income approach to represent what a buyer would pay in an arm's length transaction.

Other factors

If the property's poor performance is attributable to factors other than vacancy, there are still options available in an appeal. Often, trends outside the property owner's control limit the income a particular property can generate and, consequently, the overall value. Shifts in legislation, supply and demand, or any industry-specific economics are all possible factors contributing to a reduction in earning potential. Incorporating economic obsolescence in the cost approach quantifies poor performance from these external factors.

For example, if a property has a depreciated improvement plus land value of $10 million and a market rate of return of 9 percent, it would be expected to generate $900,000 annually. If the stabilized net income before taxes is only $650,000, however, there is a deficit of $250,000. Dividing the difference by the rate of return (9 percent) determines the economic obsolescence adjustment of $2.8 million. In this scenario, the property taxes would be initially assessed at $10 million, but $7.2 million is the more accurate figure.

Lastly, what can owners do when the property is generating sufficient income today, but potential struggles loom on the horizon? The typical signal for approaching difficulty comes from a rent roll analysis, which will identify leases set to expire in the next few years. Without guaranteed rent for an extended period, property income can become volatile in tandem with economic conditions.

Potential volatility indicates an elevated risk, for which any buyer would demand an increased rate of return. As a result, the capitalization rate needs to be adjusted upward to account for the higher risk when compared to a similar property with greater cash-flow certainty. Because of their inverse relationship, a higher cap rate will result in a lower property value. Initially, the appraisal district will be unaware of the income volatility and will assess taxes at the incorrect value.

To illustrate, if a property in a specific market typically requires an 8 percent capitalization but is found to carry excess risk, the cap rate may need to be 9 percent or higher for that property. If the hypothetical building generates $600,000 in net operating income, the cap rate adjustment decreases taxable value by 11 percent. This shows how understanding the property's expected future performance helps estimate at a more accurate market value.

When it comes to determining the taxable value of real property, the owner is always going to have access to the most helpful information for showing how the property performs. It is unrealistic to assume an appraisal district can reach the same conclusion of value while using less specific information. As such, it is the responsibility of the owner's tax team to use this information in establishing a more accurate and fair opinion of value.

With competition from a growing supply of purpose-built student housing (PBSH) and student renters' ever-evolving preferences driving costs, property owners in the sector must guard against excessive tax assessments.

Assessors often treat this special asset class as a traditional multifamily development, while PBSH is designed specifically for university students. As such, the properties have distinct lease structures, design layouts, amenities, and services that differ from traditional multifamily properties and on-campus dormitories. This misclassification often leads assessors to select valuation metrics through mass appraisal that ignore the unique characteristics of this class of real property, resulting in inflated assessments.

Taxpayer teaching guide

Student housing owners should promptly review notices of taxable property value for fairness and decide whether to contest their assessment. If they choose to file a protest, the taxpayer must file their request by the deadline in their jurisdiction.

Whether a property owner is simply reviewing their tax assessment or preparing arguments to have an assessment lowered, it will ease the taxpayer's task to know the most common mistakes assessors make in valuing PBSH properties. Many of these problem areas relate to assessor assumptions based on market-rate multifamily properties, and how those properties, features and revenue models differ from dedicated student housing.

What follows are essential factors involved in calculating taxable value for a student housing project. The property owner should understand these points and be prepared to educate their assessor about how each affects market value.

Rent and revenue

PBSH rental-rate drivers that an assessor often overlooks include lease terms, unfurnished vs. furnished units, and amenity packages. The most notable difference from traditional multifamily apartments is that PBSH properties lease by the bed. Separate leases and deposits for each resident provide students and their parents with financial security in the event that a roommate transfers colleges, unenrolls, moves away, or does not pay their rent on time.

Leases also run parallel to the academic calendar. This makes cash flow seasonal and creates an expensive make-ready period right before the fall term, when all leases expire or start concurrently. Lease terms tied to semesters or school years rather than 12-month calendar years are among the main characteristics that make student housing rental rates and revenue streams incompatible with market-rate apartment properties.

Counting costs

On the expense side, student housing units and bedrooms may be unfurnished or fully furnished, with the latter often including a wide variety of smart appliances and furniture packages catering to the latest student preferences. The property owner should ensure certain furnishings are not doubly taxed by inclusion in both the overall property assessment and a separate business personal property account.

In addition to charging higher rent for fully furnished options to offset their higher cost, student housing landlords may include charges for certain amenities in the stated rental amount. Examples of these rent inclusions range from high-speed Wi-Fi throughout the building to cable TV, trash valet services, transportation, and utilities. Understanding these differences when analyzing the subject property and comparables is critical to arrive at an appropriate market rental rate and expense structure for an income-based valuation.

Like on-campus dormitory managers, PBSH property teams strive to promote socialization and a sense of community through the built unit mix, common area amenities and budgeting for social and academic events. While traditional apartments are typically comprised of mostly one-bedroom and studio units, developers build student housing primarily as multibedroom units.

This design difference, along with student expectations for 1:1 bedroom/bathroom parity, often make multifamily-to-PBSH conversions unfeasible. The inability to pursue conventional, market-rate multifamily renters represents additional risk for student housing owners in the event that occupancy decreases. Moreover, because one-bedrooms typically garner higher rents per square foot and achieve higher occupancies than three- and four-bedroom units, comparisons of PBSH rents to traditional multifamily rental rates are often inappropriate.

PBSH intangibles

The PBSH market is experiencing numerous emerging trends that impact an asset's overall value. While some of these considerations tie directly to the tangible real estate, other aspects are intangible – meaning they cannot be held – and are typically untaxable.

Intangible assets in student housing can relate to an associated school campus and can be more or less valuable depending on the institution. In addition, properties adjacent to a college campus typically command higher rents and property values than those where residents might require transportation to reach campus. Access to neighborhood amenities, property services, attractions, and public transit can also boost a property's rental demand.

Additionally, PBSH properties historically trade at capitalization rates approximately 50 basis points higher than traditional apartment complexes due to various risks not seen in traditional multifamily assets. Property values drop as cap rates increase.

Similarly, U.S. student housing properties at Power 5 schools can achieve significantly higher rents and sales than properties near non-Power 5 schools. (Power 5 refers to the major football conferences: Atlantic Coast, Big Ten, Big 12, Pacific 12 and Southeastern.)

Because traditional apartment valuations rarely need or include business value adjustments, assessors seldom adjust for the business value of intangibles not directly tied to the real estate during the initial assessment of a purpose-built student housing property. Yet, as we have presented, intangible benefits can be a factor in PBSH business models and may influence market valuations in the sector.

Finally, it is important to realize that various jurisdictions may have nuanced definitions of taxable value, tangible real estate, business personal property, and intangible business value. A local expert can provide valuable insight in forming and presenting arguments for an assessment reduction, and help to mitigate intangible business value in PBSH real estate assessments. 

Incurable obsolescence — the stealth killer of commercial real estate value — is all too often overlooked in property tax appeals.

Any obsolescence can affect a property's value. Normal obsolescence involves curable problems, such as outdated fixtures and finishes that reduce a building's desirability. In valuation, the anticipated cost to cure the obsolescence (in this case, with a refreshed interior) is deducted from the property's taxable value.

As the name suggests, incurable obsolescence cannot be cured within the boundaries of the property. The obsolescence stems from outside circumstances, whether next door or in the larger markets, and no change to the property itself can overcome the deficiency.

Perhaps the government is going to change the traffic pattern, or a hog farm is going in next door. The market value may rise if a good thing is coming to the area. It will surely decline if a bad thing is coming, and the market value declines in relation to the predictability of such an event.

Property owners who learn the common forms and causes of incurable obsolescence will be better equipped to recognize its symptoms in their own real estate. In arguing for a reduced tax assessment value, evidence of obsolescence weighing on a property's operations will often tip the scales in convincing an assessor, review board or court to grant a reduction.

Passing or permanent?

Owners should be aware of functional obsolescence and be prepared to discuss it when appealing assessments. If it is a problem that can't be cured within the boundaries of the property, it is incurable obsolescence and reduces the property's market value.

The condition may have existed from the inception of the property's development and use, but more typically it results over time from factors relating to design, usability, markets, traffic patterns, government takings or regulation. For example, economic need or a government requirement may leave a property without adequate parking to support commercial buildings on the site, rendering those structures incurably obsolete.

Incurable obsolescence can be partial and a handicap to the property's viability without entirely preventing its continued use. For example, an office building designed for single-tenant use will not accommodate multiple users. There is a very limited market for single-tenant, high-rise buildings. The cost of retrofitting such a building into separate leasable offices is infeasible.

The loss in value due to incurable obsolescence may be anticipatory. If the market's users and investors see imminent incurable obsolescence, it may already affect market value. The negative impact of incurable obsolescence occurs when the problem cannot be cured on site at any cost.

In evaluating a property for instances of incurable obsolescence, however, it is important to remember that the source of obsolescence may be offsite.

Owners concerned with the production and marketing of a product or service from their property may not be aware of external elements of incurable obsolescence affecting their property's value. Or they may simply regard the circumstance as a non-priority item — at least until they get their property tax bill.

Instances of the incurable

Incurable obsolescence takes many forms, but taxpayers are most likely to encounter it in one of a few common scenarios. Those include:

Property access changes. Typically imposed by a highway or street authority, moving or removing access points can reduce a commercial property's appeal to users and lower its market value.

Altered traffic patterns. Changes to surrounding roads or highways can reduce commercial value. Limiting the property's visibility and accessibility, for example, may reduce customer traffic and brand exposure for operators on the property.

Size modifications. The property may fail to meet the required property size in relation to improvements. Possible causes include changed government requirements or the physical loss of a portion of the property due to government taking. A simple change in setback lines may have a dramatic negative impact on a property's value.

Takings. Use of eminent domain may reduce the remainder of the property to a legal non-conforming use which may not be altered to accommodate a commercially viable use. Alternatively, commercial uses on a state highway may be untouched by highway takings, but diverting traffic to a new highway kills viable commercial use of properties on the abandoned roadway.

More examples

Other sources of incurable obsolescence span a wide range, from changing industry practices and preferences to evolving government regulations, markets and natural phenomena. Zoning or regulatory changes may restrict usage, for example. The property may no longer meet current tenant needs regarding loading dock height, or access by delivery and customer vehicles. Nearby development or street construction may inundate the property with surface water. Properties have incurred incurable obsolescence for their intended uses from light pollution, and from disruptive air traffic following a change in flight patterns.

Property owners discussing excessive taxable valuation with the assessor should recognize that the assessor has employed the cost approach to value. While cost may be a value indicator, it lacks relevance in situations involving incurable obsolescence. Help the assessor to look beyond cost by showing how obsolescence reduces the property's value in the marketplace.

In preparation for meeting with the assessor, an owner seeking a reduced assessment should look for negative conditions beyond the control or ability of the owner to correct within the boundary of the property. Be prepared to discuss with the assessor how the conditions affect the property value. Bring plat maps, photos, restrictive regulations and ordinances, and any documents that entail restrictions on the use of the property — legal, physical or otherwise — and an explanation of how these matters negatively affect the property's value.

While there is no cure for incurable obsolescence, there are treatments for unfair tax assessments. When incurable obsolescence results in lost improvement value, the owner is entitled to an appropriate downward adjustment of the assessed value. 

Taxpayers should look beyond fair market value in deciding whether — and how — to protest assessments.

Taxpayers usually appeal property tax assessments by proving a market value different from the assessor's finding, but they should not overlook constitutional guarantees of uniform and equal taxation.

As an ad valorem tax, real property taxes are charged on the value of the underlying real estate, usually measured as fair market value. In many states, taxpayers can demonstrate their property's market value with a recent, arm's-length sale price or by independent appraisal evidence.

Two potential concerns emerge for taxpayers in an assessment appeal centered on market value: the declining reliability of data in volatile and rapidly changing markets, and the trailing nature of market data used by assessors. Those data issues can skew the mass appraisal techniques tax assessors often use, including comparisons to sales of similar properties, when assessing real property.

Volatility and rapid change

Commercial property data can lose relevancy with surprising speed in a volatile market. For example, office properties continue to bear the consequences of increased remote work and occupants' shrinking footprints since the pandemic. Many office properties with mortgages maturing in 2023 have lost half or more of their previously underwritten asset values. Badge swipes tracked by Kastle Systems show an average office attendance of about 50 percent throughout 2023.

In early 2023, Cushman & Wakefield attributed slowing construction to uncertainty in the office market along with challenges related to higher interest rates, supply chain issues, and labor shortages. Office properties may be in danger of becoming "zombie" buildings with utilization of 50 percent or less, while market watchers warn of doom loops or a domino effect of property failures, especially in dense central business districts. Most market participants are waiting for the other shoe to drop and for the market to reveal its bottom.

Assessors are not immune to the valuation problems this market uncertainty creates. Assessors currently valuing properties are likely considering comparable sales that occurred as far back as 2019 or early 2020. Even more recent sales are likely to be based on leases executed years earlier, or on financing obtained prior to the pandemic.

Further undermining data reliability is the decline in sales activity after March 2020, when pandemic-related uncertainty and economic pressures like rising interest rates began to discourage participants from unnecessary transactions. As pre-pandemic leases expire and loans underwritten on those leases mature, transactional data will likely show drastic valuation declines within a short amount of time. The lag in sales data as these properties are brought to market will affect the accuracy of property tax assessments.

What can a taxpayer do when market activity is too chaotic and volatile to accurately price value? Taxpayers should not forget constitutional safeguards of equal protection and uniform taxation.

The U.S. and most state constitutions protect taxpayers against non-uniform and discriminatory tax policies. For example, the Ohio Constitution requires that "land and improvements thereon" are "taxed by uniform rule according to value." Ohio statutes also require that assessors appraise property according to "uniform rule" in both the "mode of assessment" and as a "percentage of value." The constitutions of Pennsylvania and Texas also contain uniformity clauses. The 14th Amendment of the U.S. Constitution prohibits the government from depriving any person of their property without due process or denying any person equal protection of the law.

These constitutional protections are important enough that federal and state courts have held that when the goals of uniform taxation and correctly assessing market value cannot both be met, the constitutional priorities of equity and uniformity prevail.

Uniform, equal taxation

There are a few ways to help ensure consistent and equitable property taxation, starting with regular reassessment cycles. Some Pennsylvania counties have not reassessed countywide since the 1960s. The lack of regular appraisals to determine market value results in fewer properties being taxed on their true market value, especially if recently sold properties are assessed at their sale price while others have not been reappraised in decades.

A related problem is variation in the taxed percentage of market value between similar properties, which leads to non-uniform assessment ratios. There have been a series of successful contests recently in Lackawanna County, Pennsylvania, by taxpayers demonstrating that other property owners with similar properties were not paying taxes based on similar market values. Therefore, properties with the same market values were not being assessed at the same ratio, leading to non-uniform assessments. "The problem in Lackawanna County was not caused by this assessor's office, but gets perpetuated when new construction is placed on the assessment rolls at 100% of construction costs based solely on permit information, while similar properties have not been property reassessed since the base year of 1967," explains James Tressler of Tressler Law LLC, the attorney who brought a number of these successful challenges.

Another way to ensure assessment uniformity is by valuing the unencumbered, fee-simple interest in the real property, regardless of whether a particular property is leased, owner-occupied, or vacant. Ohio amended its controlling legislation to clarify that assessors must value the market value of the fee simple interest for all properties. Valuing the same market-based fee simple interest for all properties safeguards real estate tax assessments from being influenced by the business value of a successful (or unsuccessful) enterprise conducted on the property.

Governments can check discriminatory treatment by allowing taxpayers to contest the unequal ratios of market value across similar properties, or by allowing taxpayers to challenge assessments based on the median assessments of a reasonable number of comparable properties. Texas law contains this type of protection for taxpayers, and similar legislative remedies are being discussed in Ohio.

These additional checks and balances to secure equal and uniform property tax systems assure taxes are not borne discriminatorily by a few. The Pennsylvania Supreme Court wisely reminds us of these protections in a 2017 decision involving Valley Forge Towers Apartments, stating: "As every tax is a burden, it is important that the public has confidence that property taxes are administered in a just and impartial manner, with each taxpayer contributing his or her fair share of the cost of government."

Differentiate personal property from real estate values for fair tax treatment.

North Carolina taxes both real estate and personal property, but differing valuation schedules and processes for the two types can lead to confusion and inflated tax bills for industrial property owners. Understanding how assessors value industrial properties can help those taxpayers detect issues and contest unfair assessments.

Dual processes

North Carolina requires assessors to revalue real property at least every eight years. The value as of Jan. 1 of the valuation year then remains constant until the next valuation, unless specified changes in the property occur to trigger a change in the assessment. Many counties revalue every four years, and a few, even more frequently.

Assessors use a market analysis to determine real property's taxable or fair market value. This involves applying one or more of the three valuation approaches: cost, comparable sales, or income.

The state requires annual valuation of personal property based on installed cost, which is subject to the applicable trending and depreciation schedules. For the most part, taxing authorities rely on the taxpayer's annual business personal property listing to determine what items of personal property are present, the installed cost, and the trending and depreciation schedule applied. The counties follow schedules for auditing the property tax listings, and most disputes that arise stem from these audits.

With industrial real estate, the two tax schemes can create conflicts based on property components that could be considered either real estate or personal property, depending on circumstances. For example, reinforced foundations or specialized wiring for unique machinery could be considered a real estate improvement, thereby adding value to the real estate, or they could be considered personal property subject to depreciation and trending.

Although the tax rate applied is the same for both real estate and personal property, categorization can significantly affect taxable value. Real property improvements enhance market value on a more permanent basis, while personal property value is generally presumed to decline because of annual trending and depreciation.

And of course, no one wants to be taxed twice on the same property: once by having a component or improvement included in the real estate value, and again by having it taxed as personal property.

Defining characteristics

How can a taxpayer determine what is real and what is personal in their industrial property? Generally, personal property items are movable and not permanently affixed to real estate. An issue of intent arises, however, if the item can be removed but not without causing serious damage to the real estate.

A rule of thumb in the North Carolina Department of Revenue's Personal Property Appraisal and Assessment Manual instructs assessors to classify all property and investment necessary for the operation of machinery and equipment as personal. Examples are wiring, venting, flooring, special climate control, conveyors, boilers and furnaces, dock levelers, and equipment foundations. Stated another way, property used as part of a process, or that is in place to support equipment, is generally personal property.

On the other hand, Department of Revenue staff regard items in the plant for lighting, air handling and plumbing for human comfort to be part of the real estate. The department's appraisal and assessment manual includes an extensive chart, and each county's published schedule of values may also provide a helpful listing.

It is often difficult to know whether the county has included what could be classified as personal property in its calculation of real property value. Regardless, if the taxpayer has not listed such items on the annual personal property submissions, it will be difficult to argue after the fact that they should have been excluded from the real estate value.

Taxpayer strategies

Taxpayers can argue for a reduced assessment by identifying personal property items improperly classified as real property in the assessor's calculations and seeking to have them treated as personal property subject to trending and depreciation. Knowing where to look for personal items will help the property owner in this task.

A critical item to be generally classified as personal property is any leasehold improvement. Leasehold improvements often look like real estate but are owned and controlled by the tenant for the lease term. These are items the tenant paid for and received under terms of the lease or other contract, and were installed for the tenant's use. Leasehold items almost always facilitate the tenant's business.

In deciding whether these items are real or personal property, the taxing authority will apply a test akin to a traditional fixture analysis, determining the manner of affixation, whether the item can be removed without serious damage, and whether it is intended to remain permanent. In the end, the assessor will apply a "totality of the circumstances" test, including the lease terms.

The tenant - as the owner of the leasehold improvements - is required to list those items as personal property. The landlord should monitor the tenant's personal property submissions to ensure that all tenant improvements are being listed. This will help to avoid leasehold items being considered as part of the current real estate valuation.

Unlike a traditional fixture analysis, and dependent on the lease terms, the improvements may be taxed to the tenant during the term of the lease. When the improvements are left to the landlord at the end of the lease term, the taxing authority will need to consider assigning any remaining value to the real estate.

The owner of an industrial property needs to be cognizant of how the assessor is valuing both the real estate and personal property, and how those components are taxed. This requires knowing what improvements are included in the valuation of the real property as of the valuation date, and tracking the annual personal property tax listings, especially those submitted by a tenant. Finally, taxpayers must be timely in correcting any erroneous assumptions or listings.

The often-overlooked band-of-investment argument helps taxpayers demand maximum capitalization rates to combat inflated property tax assessments.

When commercial property owners review assessments of their properties' taxable value for fairness, they typically look to the markets for context. This year, however, superficial market observations do little to clarify questions about property valuation. At the risk of understating the obvious, 2023 has been a confusing time in commercial real estate.

Most investors, brokers, appraisers, and even tax courts seem to agree that the office sector is under severe strain and unlikely to recover soon, even if they debate the extent or duration of damage to the property type. With other sectors, however, the wide range of perspectives today can be confusing and even contradictory.

Mainstream news reports of strong occupancy and tenant demand for retail space only tell part of the story. Many retail property owners continue to struggle with historically high tenant improvement costs and contend with tenants seeking concessions far more frequently than they did before the pandemic.

The multifamily and industrial sectors have remained robust relative to other property types, but inflationary construction costs and borrowing costs driven up by interest rate hikes have thinned margins and clouded projections in many deals.

Against that backdrop, economic forecasts garner a mixed reception. Predictions of an impending recession have felt like sage prophecy, foolish overreaction, or an echo chamber of crying wolf, depending on one's perspective or position in the markets.

Ideal time to review assessments

Clearly, the economics of operating investment properties are far less predictable than they were five years ago. Even within stronger property types, performance and pricing have become more volatile.

That kind of uncertainty means increased risk, which any appraiser will tell you should indicate elevated capitalization rates. Combine that risk with climbing interest rates, and the negative impact on overall commercial property value is undeniable. That makes this an ideal time to review property tax exposure and to contest assessors' overstated valuations.

Data trackers and analysts estimate that value losses among commercial property types range from 30 percent to more than 50 percent. Retail and office properties have suffered the greatest declines from their original appraised values, at 57 percent and 48.7 percent, respectively, according to CRED iQa commercial real estate analytics and valuation platform. In a study of $10 billion in assets across property types, CRED iQ noted an average 41.2 percent valuation decline from original appraised values.

And what's more, KC Conway, the principal of The Original Red Shoe Economist and 2018-2023 chief economist for the CCIM Institute, predicts "lots more (commercial real estate) value loss and bank failures to come."

A residential example helps to put these losses into context. The average 30-year fixed residential mortgage interest rate for the week ending Dec. 30, 2021, was 3.11 percent, compared to 6.42 percent for the week ending Dec. 29, 2022, according to Freddie Mac's Primary Mortgage Market Survey. At 3.11 percent, a homebuyer purchasing a $200,000 house with 20 percent down would have had a monthly mortgage payment of $684.

One year later, a homebuyer putting 20 percent down and using a mortgage with 6.42 percent interest would have to purchase a home for $109,138 to achieve the same monthly payment of $684. This is a roughly 45 percent decrease in purchasing power over the span of one year.

The same principle applies to commercial real estate, where climbing interest rates and a related spike in capitalization rates have rapidly hammered down property values.

Cap rate consequences

It is important for taxpayers to understand that assessors often draw the capitalization rates used in property valuation from cap rate surveys, which may not indicate true cap rates because surveys are backward-looking. And cap rates have risen quickly along with buyers targeted internal rate of return (IRR).

With an increase in interest rates, a potential deal that may have met a target IRR in early 2022 would no longer meet that same threshold at the end of 2022. Correspondingly, the buyer looking at a deal in early 2022 vs. the end of 2022 would likely have to lower their purchase price to meet their target IRR. Assuming net operating income remains constant, the cap rate for the deal in late 2022 would be higher than the cap rate reported for the early 2022 deal. This is a chief reason why cap rates tend to follow interest rates.

Taxpayers may be able to achieve a reduced assessment by arguing for a higher capitalization rate that more accurately reflects a buyer's expected rate of return. To support the highest possible cap rate, taxpayers should take a hard look at the mortgage-equity method, often called the "band-of-investment" technique.

Based on the premise that most real estate buyers use a combination of debt and equity, the mortgage-equity method calculates the weighted average of the borrower's cap rate and the lender's cap rate. Equity cap rates tend to be higher than those on debt, and with lenders offering lower loan-to-value mortgages, equity caps play a greater proportional role in today's acquisition pricing.

Until recently, the method had become disfavored by some tax courts and county boards of equalization. Common criticisms are that the methodology is too susceptible to manipulation, or that the equity component is too subjective and/or too difficult to support. Arguably, many critics just don't understand it. But in the current climate, the band-of-investment is increasingly accepted and perhaps more relevant than ever.

Band-of-investment strategies

Taxpayers can use the methodology in a few ways. For properties purchased or refinanced recently but before the Fed's interest rate hikes really accelerated, taxpayers may argue for straightforward adjustments to recent appraisals to reflect market changes. More complex situations may require a specialist's appraisal to support the value change.

Importantly, even properties which have maintained strong performance are subject to value loss from market changes, which may justify making the additional effort to prepare a mortgage-equity argument.

Before attempting such strategies, taxpayers should evaluate the jurisdictional laws and definitions that control property taxes, including the effective date of the challenged assessment. With 2024 looming and bringing with it a new lien date for measuring assessments in many jurisdictions, now is an ideal time to review portfolios for excessive property tax assessments.

2023 Municipal Revaluations

It is always important to carefully review your tax bill and/or notices of assessments, but even more so in the year in which your city or town conducts a revaluation.

Each assessment should be carefully reviewed, even if your assessment has not increased substantially, as an appeal immediately after a revaluation maximizes a property owner's potential tax savings.

Connecticut law requires that each municipality conduct a general revaluation of the real estate within its borders at least once every five years.The purpose of a revaluation is for a municipality to determine the market value of real estate to be used to calculate property taxes.

Once a property's value is set in a general revaluation, it remains constant over the entire five-year cycle, absent appeal, demolition, improvements or expansion. Of course, the annual taxes usually increase, as a municipality's mill rate increases incrementally from year to year. Municipalities across the state are on differing revaluation cycles. The following is a list of Connecticut municipalities conducting revaluations this year:

If your municipality is conducting a general revaluation for the October 1, 2023 Grand List you will receive a notice of tax assessment change soon, if you have not already.

Once the notices are issued there may be a chance to meet informally with the assessor to discuss the new assessment, which should represent 70 percent of the fair market value of your real estate. However, if a property owner wishes to challenge the assessment formally, a written appeal must be filed with the local Board of Assessment Appeals by the February 20, 2024 statutory deadline.

It is in your best interest to be proactive in monitoring the revaluation process and your new assessment so that you can take all necessary steps to ensure that the assessment is equitable.

News on the Newly Enacted Tax-Payer Appraisal Deadline

While we have deadlines and key dates fresh on the mind, 2023 was the inaugural year for a new deadline that was implemented into Connecticut's overvaluation statute, C.G.S. 12-117a, by the Connecticut General Assembly. Per the newly amended statute, if a taxpayer brings an overvaluation appeal on real property that has an assessed value over $1 million, the taxpayer is now required to file an appraisal of the property with the superior court by no later than 120 days after commencing the appeal.

It remains to be seen what relief, if any, a taxing authority may seek from the court if a taxpayer fails to meet this deadline, but expect some case law to develop on this subject if the statute is not amended in future legislative sessions. One recent superior court decision involving a tax appeal captioned as Shortline Properties, Inc. v. City of Stamford, FST-CV23-6060950-S discussed the implications of this deadline to a certain extent, but it did not squarely address the question of what judicial relief is available to municipal defendants.

The court did make clear, however, that appraisals filed for purposes of this statutory requirement must be from the grand list date from which the taxpayer commenced the appeal. In this case, the taxpayer's appraisal appeared to be from two years prior to the grand list date in question, and the court concluded that this did not meet the appraisal requirement. That said, the case remains pending and although the court rejected the appraisal, it allowed the plaintiff to proceed with prosecuting the appeal.

Hotel revenues are entering a post-pandemic rebound, but what about taxable property values? Although revenues are bouncing back, it does not mean hotel values for property tax assessments have reached pre-pandemic levels.

Recovering revenue is only part of the valuation story. To protect themselves from unfair tax bills, hotel owners may need to clarify to assessors how the pandemic's aftermath is affecting their properties. These taxpayers should point out factors that drag down their hotel's bottom line and provide grounds for reduced assessments.

Here are three factors that can offset increased revenue and lower market value. Hotel owners should consider each in preparing arguments for an assessment reduction.

A stabilized expense estimate calculates the ongoing operational costs of the property under typical, sustainable conditions. Obviously, expenses have been anything but typical, due to labor shortages, inflation and supply chain issues.

Operating expenses went through the roof during the pandemic and stayed there. Payrolls increased dramatically, for example, in large part due to the "Great Resignation" that sparked a labor shortage and higher wage demands from current and prospective employees. Historic inflation increased hotel costs for supplies, food and beverages, service delivery and amenity offerings. Utilities and maintenance expenses shot up as well. Taxpayers should show assessors how these swelling costs have lowered margins.

Some short-term pandemic-related measures require special attention. To bolster margins, many hoteliers reduced staff counts, services, and room turnover. It is unclear whether these changes are sustainable in the long term, as consumers demand lost services and amenities. It may be inappropriate to factor short-term cost-cutting methods into a value analysis because they do not reflect stabilized expenses and could distort the hotel property's true market value. In those situations, it may be necessary to use market expenses instead of actual expenses from the profit-and-loss statement.

As a corollary to expenses, consider a hotel's reserves for replacements as the industry emerges from the pandemic. A reserve for replacements is money hotels set aside to cover major capital expenditures beyond normal operating expenses. Recognizing that hoteliers were hurting during the pandemic, many hospitality brands temporarily relaxed property improvement requirements. In turn, hotel operators may have deferred capex for maintenance and renovations due to financial constraints.

Coming out of the pandemic, hotel owners may need to set aside a larger reserve percentage as the industry recovers. Reserves for replacements have historically been between 3 percent and 5 percent of revenue for full-service hotels and 4 percent to 6 percent for select-service hotels.

Depending on the individual property and its brand, it might be appropriate to increase those percentages briefly while the property is brought back up to standards. The increased deduction would lower net operating income, which consequently would lower the market value. If a property has fallen below brand standards, it should be factored into the hotel's valuation and brought to the local tax assessor's attention.

A benchmark for industry risk, cap rates are simply the relationship between NOI and value. When cap rates go up, values go down.

Interest rates have a direct impact on cap rates: As interest rates go up, raising the cost of debt and equity, cap rates climb. The Fed's recent interest rate hikes have driven up cap rates, pressuring down hotel values.

In many cases, the interest hikes have made it unviable to build or buy new hotels and have made hotel ownership riskier altogether. The question becomes, how should cap rates factor into property tax assessments?

There are several ways to derive cap rates for hotels, and taxpayers should consider all the methods to know which provides the most persuasive grounds for value reduction. Many tax assessors derive cap rates through market extraction by looking at the sale of comparable properties. That method ignores interest rate increases and incorporates intangible value, which is generally not taxable and hard to extract from overall value.

The band of investment method is a helpful way to derive cap rates and involves building up separate cap rates for a property's debt and equity components. This can be advantageous because it accounts for interest rate increases, which the market extraction method does not. Tax assessors need to consider the effect of interest rate hikes on cap rates, as it can create a path to lowering a hotel's tax burden.

Recent hotel revenue recovery only tells part of the story for property tax assessments. To control property taxes, hoteliers and asset managers must highlight how growing operating expenses, reserves for replacements and cap rates diminish market values. Each taxing assessor has a unique perspective on valuation, so it is always helpful to engage knowledgeable, local tax professionals to help ensure hotel owners are maximizing tax-saving opportunities.

Tax considerations often drive site selection and form an importance piece of the reshoring puzzle.

COVID-19 laid bare many problems inherent in offshore supply chains and spurred widespread interest in reshoring manufacturing to the United States. As companies and communities explore site selection and expansion opportunities, they should remember that manufacturing profitability often hinges on tax strategy.

Staging a comeback

For the first time in decades, industry and the public sector are working to make American manufacturing competitive in a rapidly changing global marketplace. The recent enactments of the Inflation Reduction Act, the Bipartisan Infrastructure Law and the CHIPS and Science Act have directed billions of dollars into enhancing domestic manufacturing capacity.

The semiconductor industry presents a high-profile case study. The United States holds 12 percent of the world's semiconductor manufacturing capacity, eroded from 37 percent in 1990. The CHIPS Act's $52 billion in federal funding is intended to strengthen domestic semiconductor manufacturing, design and research and reinforce the nation's chip supply chains, fortifying the economy and national security along the way.

Simultaneously, the United States is becoming a leading producer of electric vehicles and vehicle battery plants. Since 2021, announced U.S. investments in semiconductors and electronics exceed $166 billion, and announced U.S. investments in electric vehicles and battery manufacturing exceed $150 billion.

Deciding where manufacturing occurs depends partly on proximity to suppliers, available labor, distribution hubs and customers, and operating costs. Property tax is typically a significant component of operating costs. That's why tax abatements on real property and equipment are a commonly offered incentive.

Most states offer incentives to attract industry, and one of the hotbeds for increased American manufacturing has been the southeastern United States, specifically South Carolina, Georgia and North Carolina. All are leaders in foreign direct investment.

Abatements generally provide a manufacturer with predictable property taxes, helping to overcome the uncertainty of future tax liability that can put companies at a disadvantage. An example is South Carolina's "fee in lieu of tax" agreement (FILOT) which offers manufacturers predictable and consistent taxation. Generally, FILOT agreements fix tax rates and the value of real estate and improvements for the length of the agreement, while allowing manufacturers to depreciate the value of machinery and equipment.

FILOT agreements can have up to a 50-year term. However, by fixing a manufacturer's real property value at actual cost without depreciation, the owner's taxes over time may be higher than they would be without the agreement. That's because they do not account for depreciation, valuation changes or required improvements to accommodate changes in the marketplace for the manufacturer's product.By locking in the real property value, the manufacturer receives the benefits of predictability and protection from higher taxes on appreciating real property.In exchange, however, the manufacturer loses the benefit of any depreciation and takes the risk of a locked-in property value if the property's market value diminishes.

Other states offer different incentives including more traditional property-tax abatements, where a manufacturer receives a grant as a partial rebate or discount on the new property taxes the project creates. Since tax rates and taxable value assessments change over time, these systems can provide less certainty for manufacturers than FILOT-type agreements, but potentially offer more long-term flexibility to respond to changing tax rates, depending on how the agreements are negotiated.

As a manufacturer's industry evolves and demand for its products changes, flexibility to appeal tax assessments can be a key to maintaining profitability and competitiveness.

Committed but flexible

Certainly, a manufacturer is better off in an appreciating real estate market by fixing the value of the real estate and improvements. Organizations negotiating for incentives should protect their ability to protest unfair assessments of taxable value, however, because valuing a manufacturing plant in the traditional ad valorem system is challenging and subject to controversy.

For example, most state ad valorem property tax systems define "value" as a variant of "market value," assuming an exchange between a willing buyer and a willing seller. However, will the buyer of a manufacturing facility benefit from the features of a specialized building constructed for a different manufacturer's specific needs? The answer is usually "no."

Manufacturing facilities are special-purpose properties, which The Dictionary of Real Estate Appraisal defines as a "property with a unique physical design, special construction materials, or a layout that particularly adapts its utility to the use for which it was built." And changes in the manufacturing process can render many buildings economically obsolete.

If the facility's use is no longer viable, it should be appraised as an alternative use. This necessarily occurred as American industry declined. Often there were no manufacturers who could effectively use single-purpose buildings vacated by other manufacturers, necessitating drastic value reductions.

An assessor's three traditional valuation methods all have limitations. A sales comparison approach is difficult when the production facility has essentially been designed to produce specific products. Put differently, finding sales of comparable facilities can be extremely challenging.

An income approach requires a market rent calculation, but manufacturers historically own their facilities, making an income approach difficult. A cost approach using actual cost ignores that the same building might not be appropriate to respond to changes in the marketplace for the product being produced. The cost approach without depreciation also limits the manufacturer's flexibility in responding to changes in the marketplace for its product.

Remember, too, that a manufacturer must be nimble, as changes in the market or technology can render an entire plant (or industry) obsolete virtually overnight. Adapting processes may require equipment upgrades or replacement, structural modifications or other changes that affect property value.

The speed at which manufacturers need to be able to adapt to a changing marketplace, the strong desire for certainty in costs and the difficulties in valuing manufacturing facilities for tax purposes all argue in favor of valuing real property and improvements on the basis of cost less depreciation.

Successful reshoring will require focused efforts by the public and private sector, together with sensitivity to industry's need to be nimble and the implications of historical incentives to ensure that reshored industry remains competitive. Flexibility offers the key to long term success, and property taxes form an important piece of the puzzle.

Here are some property tax strategies owners can use in the rebounding apartment sector.

Multifamily construction and renovations are enjoying a resurgence after taking a pause during the pandemic. And with residential, apartment-style rental units back in vogue with renters and investors, developers are even converting underutilized office buildings and shopping malls into multifamily housing.

As developers step up construction spending to tempt renters with an assortment of amenities, tax assessors are having a field day, tabulating costs on renovations and new projects that they are using to justify ever-larger assessments of taxable value across the sector. Multifamily owners must look out for themselves to guard against unfair, blanket assessment increases founded on these gross generalizations about the industry.

New offerings, New Renters

The target demographics for today's projects include young professionals not yet equipped to buy their own homes; middle-aged, single-family homeowners looking for a more carefree housing option; and aging individuals looking to downsize and become part of a seniors community.

Apartment models have evolved to better suit today's renters. Gone are the cookie-cutter, brick-and-mortar, garden style structures with minimal common areas. New apartment communities are more often high-end projects boasting pools, gyms, lush landscaping, retail shops and other non-traditional apartment features.

The added expense to deliver amenity-rich apartments is only one of many rising costs for multifamily developers and owners. Supply chain breakdowns, material shortages, rising interest rates on commercial mortgages, governmental bureaucracy, and increased inflation have forced owners of apartments and other commercial buildings to search for avenues to reduce their costs. While costs associated with owning and maintaining apartment buildings are trending higher, real property taxes remain one of the largest expenses, warranting an annual review and challenge.

Fortunately, in ad valorem jurisdictions where a property's tax assessment is tied to its market value, the law allows taxpayers to appeal assessments and seek relief from onerous real estate taxes. The process involves the filing of an annual administrative grievance followed by a judicial action against the tax-assessing entity.

The Protest Process

In tax appeal proceedings, the aggrieved party or petitioner bears the initial burden of proof. Assessments are presumptively valid, so it is up to the taxpayer to provide substantial evidence that calls into question the assessment's correctness. Taxpayers often meet this minimum standard by submitting a qualified appraisal.

In a court setting, once the presumption of validity is rebutted, the judge must determine by a preponderance of the evidence whether the property was overvalued. However, most tax assessment cases reach a resolution through negotiation and settlement without the need for a formal expert report or judicial oversight. A tax advisor skilled in real property tax assessment challenges is more often than not all the taxpayer requires.

The three traditional approaches to real property valuation in a tax appeal are the income capitalization, comparable sales, and cost approaches. Absent a recent arm's-length sale of the subject property, appraisal professionals, practitioners, and the courts generally regard income capitalization as the preferred method to value income-producing properties.

In utilizing the income approach, a taxpayer's team is seeking to value the property based on its net-income-generating potential. In other words, what would a buyer pay on the valuation date for the future income stream?

Point-by-Point Analysis

There are several steps to properly arrive at a value conclusion through the income approach. Understanding and following the steps will not only inform the property owner's valuation, but also provides a checklist to review and question calculations in the assessor's conclusion.

To calculate potential gross income, it is important to analyze the subject property's actual rental data and test it against market rents to reflect the property's economics. Similarly, the assessor or appraiser must gather, review and analyze occupancy and collection data. The appraiser will need to deduct for vacancy and collection loss because many buildings are seldom at 100 percent occupancy, and some tenants may be behind in their rent payments.

The same process is applied to real estate-related expenses such as insurance, utilities, and replacement reserves. These should be deducted to arrive at a net operating income before the deduction of real estate taxes.

In analyzing data for a tax assessment challenge involving income-producing property, real estate taxes are not accounted for at this stage because this is the expense in question. In addition, since the property tax expense is a percentage of market value, it is accounted for in the capitalization rate along with an appropriate rate of return reflecting the risk of investment.

Appeal prospects

How can the taxpayer gauge a tax appeal's likelihood of success? Among other things, consider the size of the rental units, location, competition, and parking to form a reliable value opinion. Give special attention to the tax system in the state and local jurisdiction where the property is located to ensure the taxpayer meets all statutory filing requirements and deadlines. If a challenge is not timely and properly commenced, the aggrieved party will lose its right to real property tax relief for that tax year.

Given the complexity of commercial property valuations and the nuances involved in disputing the correctness of valuation calculations, savvy apartment building owners may benefit by discussing their property's economics with a specialist in real property tax assessment review challenges. 

Appraisals designed for lenders often inflate assessments of seniors living real estate for property taxation.

Appraisal methodologies for financing seniors housing properties factor in more than real estate to produce amounts that exceed property-only value. That means seniors housing owners may be paying real estate taxes on non-real-estate assets.

Everyone can agree that a seniors living operation—whether independent living, assisted living, memory care, skilled nursing or some combination—consists of a variety of assets. There are real estate assets (the land and building), personal property assets like furniture and kitchen equipment, and intangible business assets such as the work force, tenants, and operating licenses. These multiple assets and asset types present a challenge when developing an appropriate ad valorem tax valuation.

To appropriately value this asset type for property taxation, an owner must show the assessor the real estate's stand-alone value. Most states acknowledge that business assets are not subject to property tax, so the intangible business assets and their respective values must be identified and excluded.

The International Association of Assessing Officers, in its guide, "Understanding Intangible Assets and Real Estate: A Guide for Real Property Valuation Professionals," has developed a four-part test to help determine whether something intangible rises to the level of an asset. The IAAO test is as follows:

1. An intangible asset should be identifiable.

2. An intangible asset should have evidence of legal ownership, that is, documents that substantiate rights.

3. An intangible asset should be capable of being separate and divisible from the real estate.

4. An intangible asset should be legally transferrable.

The Appraisal Institute's current, 15th edition of "The Appraisal of Real Estate" recognizes the valuation methodology of separating the components of assets in a business or real estate transaction. Potential intangible business assets identified in the text include contracts for healthcare service, contracts for meals, and contracts for laundry assistance, all of which represent income streams or businesses. An assembled workforce is an intangible business asset with a quantifiable value. How long would it take an operator to staff-up a property prior to opening? What are the carrying costs during that time?

Many seniors housing owners and investors feel that the entire value associated with seniors living real estate is attributable to the business. While this may be a firm belief, the real estate must have some value. For fair taxation, the taxpayer must differentiate and value both the tangible and intangible components of the asset.

Multifamily comparisons

For 30 years, Ohio law has permitted appraisers to reference data obtained from traditional multifamily properties to value just the real estate in seniors housing. The theory has been that traditional apartments are primarily real estate and lack much of the associated business value that comes with seniors living assets. Therefore, an appraiser who takes the gross building area of a seniors living property can select, analyze, adjust, and apply multifamily data to determine fair market value.

This approach presents at least two issues. One, seniors living designs differ from traditional apartments. For instance, seniors living units are typically smaller, lack full kitchens, and require wider hallways to accommodate wheelchairs. Two, the multifamily market has generally prospered in recent years while seniors living properties have struggled to recover from pandemic-related losses.

This means Ohio appraisers are comparing seniors living properties to multifamily assets selling at higher and higher dollars per unit. Multifamily properties generally experience lower vacancy, credit loss, expenses and capitalization rates than do seniors housing assets. In short, these two product types often move in opposite market directions.

Difficulties with financing data

More and more, county assessors and school board attorneys throughout Ohio rely on appraisers who value seniors living properties as if done for lending purposes. While these going-concern valuations may satisfy lenders' needs, these same techniques are not reliable or accurate enough to support a state's constitutionally protected valuation and assessment process.

Going concern appraisal reports back into a real estate value. After first developing a total value for all assets present, the appraiser attempts to extract the business value.

There are several techniques routinely used in appraisals for financing that are inappropriate for determining taxable value. These include the lease fee coverage ratio approach, a management fee capitalization approach, and the cost residual approach. These appraisal techniques have been approved by banks, but they are largely untested in courts.

These approaches are tainted from the start because they look first to the total going concern value. That inherently requires an evaluation of business income, which should not be considered when determining a fee simple value of the real property.

Of the going concern methodologies, the cost residual method appears best suited to assess taxable property value. However, challenges and subjectivity abound when identifying and determining all aspects of depreciation that may impact market acceptance of the real estate asset, especially for an older property.

Starting with the business is problematic given the dollars involved in seniors housing resident services. Median asking rent for a conventional apartment was $1,000 per month in the Federal Reserve's 2022 Survey of Household Economics and Decision Making. By comparison, the median monthly rate for assisted living is $4,000, according to the American Health Care Association/National Center for Assisted Living. Importantly, that $4,000 excludes fees for additional services like medication management and bathing assistance.

Service fees constitute significant revenue in most seniors housing operations. A 2019 CBRE Senior Housing Market Insight report found that 65% of the revenue in assisted living properties comes from services provided above and beyond pure rent. The 2023 JLL Valuation Index Survey found that the average "Majority Assisted Living" asset class saw an expense ratio of 71%.

Owners and appraisers must closely examine operating statements to develop and support their opinions of value. Appraisers should consider looking at properties as having multiple income streams to verify whether their opinion of value for the real estate is reasonable and supportable. Operators and investors should be open and honest about return expectations.

Because the income generated by intangible business assets at seniors living properties are taxed in other ways, assessors must continue to carefully review seniors living real estate to ensure fair taxation. 

Spencer Fane's Michael Miller on the critical steps for finding tax relief.

This is a challenging time in the property tax world. Pandemic-era federal assistance programs have dried up, increasing communities' appetite for tax dollars to deal with crime, homelessness, transportation and other issues. Recognizing that inflation has put taxpayers under pressure, governments may offer tax relief to homeowners, their voters, but not to the commercial property owner.

In Colorado, a November ballot issue would reduce the valuation of a residential property by $40,000 and of a commercial property by $50,000. This will be little help to an owner of a $2 million commercial property.

Relief for the commercial property owner must instead come from a deep dive into the assessor's valuation, best performed by the property owner and an experienced property tax professional working as a team. What follows are key stages for preparing an appeal.

1. Understand and observe all filing deadlines.

Every state has a deadline for starting the appeal process. If a taxpayer misses that deadline, they lose the right to appeal. In some states, after paying their tax, a taxpayer might be allowed to file for an abatement sometime later.

It is important to provide the property tax professional with relevant information in sufficient time to analyze it before filing the appeal. This is a challenge in many cases, such as when the taxpayer receiving tax notices is out of state and their advisor is local. Contacting the advisor before tax notices go out can provide a head start, often enabling the advisor to find the property's taxable value before the notice arrives.

2. Critically analyze the assessment basis.

By itself, a substantial value increase does not qualify as a reason to appeal. Often, the assessor will justify the increase based on the general market strength shown in substantially rising prices. The taxpayer must ask, is this for the entire county, or for this specific type of property in this specific location?

A recent example illustrates how assessors' generalizations can overstate an individual property's value change. As our firm appealed a client's assessment in an expensive resort area, the local newspaper quoted the assessor stating that prices had increased 50% or even more. Available sales of comparable properties all occurred at least a year prior to the valuation period, while one was near the valuation period.

The assessor trended the earlier sales to the valuation period by making a 50% adjustment to each sales price. However, our team compared the most recent year-ago sale with the current sale of a comparable property in the same location, showing that the price per square foot only went up 14%. It was clear the 50% increase was a mass appraisal number covering the entire county, while prices in the subject property's submarket increased at a much slower pace. This deep dive yielded results in the appeal.

3. Analyze the assessor's comparable sales.

Most jurisdictions require assessors to value the fee simple estate, the real estate alone. Assessors have attempted to debate what this means, but what it clearly does not mean is a sale price based upon the income generated by a lease. Nor can the taxable value be based on the success of the business operated from the property.

Simply stated, fee simple value must be limited to the real estate, not the business. When applying this to an owner-occupied property, this means a fee-simple buyer would be purchasing a vacant property. Value is based on the price at which a willing buyer would buy, and a willing seller would sell, the property. And in the sale of an owner-occupied property, there is no lease.

Often in this situation, the assessor will nevertheless use the sale of a leased property as a comparable. It is not comparable, because the buyer is buying the income stream from the lease, not just the bricks and mortar. Moreover, the rent seldom reflects current market rent. Possibly the lease was signed when rents were higher than today, the lease escalated rents automatically, or the landlord agreed to build the property according to the tenant's specifications and increased the rent by the amortized cost. Every lease is unique. The sale of a leased property is simply not the same as the sale of a property without a lease.

While examining income properties within the assessor's comparable sales, be sure to analyze the income's source. Taxable values of income-producing properties are based on income derived from the real estate and not income derived from other sources.

A hotel buyer, for example, is buying not only the bricks and mortar, but also the flag or brand, and the hotel's reputation. These are intangibles included in the acquisition price. However, intangible value is not subject to a property tax.

Another example of this concept is seniors housing. Seniors housing has numerous profit centers beyond rent for the room. It may have a beauty shop, a physical therapy center, a recreation facility such as a bowling alley, special medical services and many other offerings. The resident pays rent, but also pays extra for the many services. For property tax purposes, the income used to determine value must be separated between business cashflow and income generated from the real estate.

Property tax in the current environment can indeed present a challenge, but it need not be overwhelming. The taxpayer must analyze the assessor's value in depth to find factors that would result in a successful appeal. It may start with sticker shock over the assessor's notice, but an experienced tax professional's analysis can level the playing field between the assessor aggressively pursuing increased funding and the property tax owner looking for tax relief.

Not long ago, assessors' student housing properties valuations generally struggled keeping pace with the rising market.College enrollment was high, rent growth outpaced expenses and student expectations lined up with most newer facility amenities. However, the COVID-19 pandemic and its fallout changed the game.

Property taxes are often the single highest expense on a property's profit and loss statement. When market changes make student housing less profitable, the tax burden should not be allowed to remain high. When this occurs, the assessor's property valuation needs to be challenged and reduced.

Projecting Income:Look Forward, Not Back

Many jurisdictions assess student housing properties' value using a cost approach.A computer system estimates the cost to build the property new, then deducts physical depreciation based on the property's age. Due to skyrocketing construction costs, those depreciation deductions are outpaced by base cost increases. It is common to see cost-based values increase despite struggles facing the real estate market. Owners can combat increases by appealing the assessor's value.

When a student housing property owner files an assessment appeal, the appeal review board often evaluates the three prior years' operating income. This allows the appeal board to develop an income model intended to represent stabilized operations. Then the net income is capitalized, producing an estimated market value. When the market rises and rent increases, looking at the past three year's performance is probably a favorable method for taxpayers. However, in a flat or falling market, determining value based on past success proves unfair. Property values' steady upward trajectory, by and large, has stalled out given the gut-punch of 2022 interest rate hikes. Capitalization rates have risen along with the interest rates, though it becomes difficult to see clearly because sales transaction volume slowed to a trickle. Sellers would rather sit on their property than swallow the loss the current market forced on them.

For student housing specifically, it is not uncommon for brokers to cite 15% to 20% market value declines from early 2022 to early 2023. In addition to general market woes, some developers expect college enrollment to drop in the near future due, in part, to fewer students graduating from high school.This will make leasing more difficult and put downward pressure on rents and occupancy. Falling rental income should be taken into consideration by the board or tribunal hearing a property tax appeal.

Projecting Expenses: The Compounding Costs of COVID

Waves of new development during the late 1990's and mid-2010's saw student housing units grow exponentially.At the time, they were state-of-the-art facilities with all the amenities a student could desire. For some, common areas evolved from utilitarian waiting rooms to shared workspaces or workout gyms.For others, bathrooms were no longer shared with a full suite, but only a single roommate.

When the property's design fails to meet changing tenant expectations, that produces functional obsolescence. Many boom-time properties now suffer functional obsolescence.Worrisome trends that predated COVID-19 have been fast-tracked by the pandemic, becoming major problems.

Most people, including future college students, were quarantined for months and developed new tastes and behaviors. Student tenants are not as tolerant of sharing a bathroom with a roommate. One-to-one bathrooms are no longer a luxury in most markets, but trying to retro-fit a property to achieve the best bed-to-bath ratio often fails the cost-benefit analysis. When a design deficiency can't feasibly be corrected, it is known as incurable functional obsolescence.

Online shopping became a near-necessity during quarantine, reshaping our consumer habits long-term. When a building full of button-clicking students receives more Amazon boxes than envelopes, there better be package lockers or another delivery management system to handle the volume. Maybe some unutilized common area space presents an easy opportunity to convert, making this type of obsolescence curable. Even so, the cure does not come without landlord expense.

Not all new expenses involve obsolete building design. New cleaning protocols originated during the pandemic but have not receded with the COVID case count. The "janitorial" line item has swollen, further narrowing landlord margins.

Even if the building is clean, it may not be tidy. Kids who were forced to stay home for meals tend not to go out as frequently. They order-in, and they party-in, too. That creates a lot of trash. Kids do not appreciate having to haul trash down a flight of stairs or ride with it down an elevator. Trash chutes appease them, but not if the building doesn't have one.

Rising operating costs are not all associated with COVID. For example, HVAC systems that use a coolant being phased out by new regulations will have to be upgraded to comply. Also, insurance, payroll, and other outside service costs have increased with general inflation.

Increasing operating expenses drive down a property's net income and should be accounted for by tax appeal decision-makers.

Question the Assessor's Valuation

When property owners appeal their assessment based on a drop in income, "bad management" becomes the common refrain heard from assessors. This implies the property is worth more than the income indicates, because it has been poorly operated. Sometimes this is true, but if a property suffers lackluster performance caused by unavoidable market changes, the assessment should account for that. Taxpayers would be wise to seek seasoned property tax counsel for advice as to what relief may be available.

The wrong method could leave owners with bigger bills than they should have.

Because industrial properties vary in design and function, not all valuation methods approaches apply to every property. When assessors choose an unsuitable method that inflates taxable value, the taxpayer's best appeal strategy may be to show flaws in the appraiser's approach by explaining the appropriate appraisal methodology.

Industrial properties are typically designed for a specific owner's use in manufacturing, distribution, research and development, or heavy industrial activities. These include standalone flex buildings, multiuse industrial complexes, high-tech facilities, steel mills, timber mills and other subtypes.

The basic valuation premise for property taxation is to determine what the property would sell for in an open-market transaction between a willing seller and willing buyer. Most buyers and sellers in the industrial market would have a thorough understanding of a property's best use before transacting a sale, but an assessor with a limited perspective may treat all industrial real estate as having uniform valuation characteristics.

Taxing authorities often overlook appraisal principles, that if properly applied would reduce the market value of industrial properties. Taxpayers should review their assessments to determine the assessor's valuation approach and evaluate if the appropriate input data was used and the calculations reflect the appropriate adjustments to value.

The appraiser must consider the highest and best use of the property when selecting the appropriate valuation method, considering what is legally and physically permissible and financially feasible for the property as of the valuation date. They will use one of three primary appraisal methods, which are the cost approach, sales-comparison approach, and income-capitalization approach.

Cost Approach

The cost approach is based on theory of substitution, would a prospective purchaser buy this property at a depreciated value or simply build a new facility? Using this approach, an appraiser determines the cost to build a new facility less all forms of depreciation.

A willing buyer would consider not only physical depreciation, but the property's functional operation and any external forces limiting its use. External or economic obsolescence are forces outside the property owner's control, such as government restrictions, consumer demand, or the availability of a raw product or steady labor force.

Functional obsolescence is value loss due to physical or functional deficiencies, such as an outdated building design, inefficient production layout, inadequate infrastructure or outdated equipment.

Most assessor cost models stop at physical depreciation and ignore external and functional obsolescence. They simply add up the component costs of the building, land, and equipment.

This typical cost model fails the "willing seller and willing buyer" test because a potential buyer is not going to evaluate a manufacturing facility by tallying the value of the property's components. A buyer will focus on output capacity, available raw product, available labor, and the market for the product. How many widgets can the facility produce as of the assessment date, and at what cost?

Thus, the often-missed analysis in the cost approach is to really look at theory of substitution. Would a new facility with new equipment and a better layout have higher production capacity? An appraiser should not simply reproduce the same equipment for the cost model if modern equipment offers benefits such as reduced labor, higher speed, or increased output. The appraiser must know the industry and the equipment capabilities of both the older, existing equipment and the new, technically advanced equipment.

Comparing apples to apples in the cost model seldom provides a reliable value. An example would be a plywood and veneer mill built in the 1960s that an assessor values by counting costs invested in the various add-ons and rebuilding of equipment. Simply trending the values would not capture rebuilt equipment or used-equipment purchases, overvaluing the equipment.

The appraiser should determine the cost for the widget capacity of the present facility as of the date of value and compare that to how many widgets a new facility could produce and at what cost. Next, the appraiser should consider all three forms of depreciation to arrive at the proper taxable valuation. Omitting these steps in the cost approach will overvalue the property and overtax the owner.

Sales-Comparison Approach

The sales-comparison approach compares the subject property with property that is similar to the subject. Appraisers often use this approach for single-use real estate with a high degree of market transferability such as warehouses and distribution centers. The appraiser must consider not just the comparable property's floor plate, type of construction and square footage, but also its location, market access and number of loading docks.

The sales comparison model is difficult to use for properties that lack a ready market or that suffer from external or functional obsolescence. Consider the research and development campuses built in the 1980s to house all a company's processes, from research to manufacturing and distribution. Most manufacturing and distribution moved overseas in the 2000s, leaving these campuses half empty.

Adapting these buildings for reuse depends on land-use restrictions, the market for alternative uses, available labor, and the functionality and cost feasibility of conversion. When searching for comparable sales, the appraiser should evaluate what is legally permissible and financially feasible and weigh external forces that impact demand and functional use. After selecting like-kind properties, the appraiser must adjust the sales to reflect the reality of the subject property, or it will be over-valued.

Income- Capitalization Approach

The income-capitalization approach estimates a property's value based on the income it generates, using a capitalization rate from comparable sales or market data. This approach is used for properties with long-term tenants or stable cash flows. The appraiser is to look not at what the value is to the owner, but at what a willing buyer would pay for the property. This requires carefully selected market data and proper adjustment to reflect market value.

Clearly, appraising industrial properties requires a thorough understanding of their unique characteristics and uses, as well as an awareness of economic and functional obsolescence. A knowledgeable appraiser can help the taxpayer ensure their property assessment is consistent with the marketplace to avoid overpaying property taxes. 

Cynthia Fraser is Co-Chair of Foster Garvey's Litigation Practice and the Oregon Representative of American Property Tax Counsel (APTC). The firm is the Oregon member of APTC, the national affiliation of property tax attorneys. Lisa Laubacher is a CMI and Director at Popp Hutcheson PLLC, the Texas member of APTC.

Here are the steps to start an informal discussion with the assessor that may lead to a tax reduction.

Owners of large commercial real estate portfolios typically have internal staff to deal with assessed property values and the resultant taxes on a regular basis. But what about owners of small or medium-value properties?

How can a taxpayer, without knowledgeable staff or outside assistance, determine whether their assessment is fair or if they should seek an adjustment? And if seeking a reduction seems appropriate, going it alone through discussion with the Assessor may be productive.

Any such informal review or discussion should be the result of careful consideration and preparation. The following points are essential in that review and will help the taxpayer build and present a strong case for a reduced valuation.

Getting started

A government representative, usually the county collector, issues a property tax bill based on the value the county assessor has placed on the taxpayer's real estate. The property owner may launch an appeal to contest that assessed value. However, in many states, the tax bill arrives after the due date for appealing the assessor's valuation.

Owners should review their property's assessed value each year. Begin the process as soon as the assessor posts new values to its website, usually in January. If there has been no increase, the assessor won't provide a statement of the assessed value until it is included in the tax bill sent later in the year, at which time the appeal period will have ended in most jurisdictions.

If the assessor's value opinion is less than the taxpayer believes it should be, they can simply pay the taxes due and plan to revisit the assessor's website the next year. If the assessor's opinion is approximately the same or greater than the property owner's value estimate, however, the taxpayer should investigate further and consider whether to seek a meeting with the assessor followed by an appeal.Some jurisdictions (states) have cycles of more than one year so the valuation for tax purposes may extend beyond the first year's valuation date into the following year or years.

Know dates and procedures

Missing the filing deadline is fatal to any potential relief from property tax. Most jurisdictions will notify taxpayers of an assessment increase and provide the timeline for review on appeal. Even when an assessed value is unchanged from previous years, the owner may still deem the assessment to be excessive and worth appealing.

While the owner is entitled to appeal an unchanged valuation, in most states there is no obligation for the assessor to notify the owner of altered assessed value—at least not until the time for appeal has run out.

Learn the lingo

Appraisers, assessors, attorneys, real estate brokers and other professionals dealing regularly with property tax matters frequently use words and phrases unique to the valuation of real estate. These terms and their interpretations fill volumes of legal writing and serve as linchpins in court decisions and business transactions.

Taxpayers who familiarize themselves with valuation lingo will be better prepared to discuss value with assessing officials. (For a list of key terms and definitions, see Property Tax Terms.)

Call the assessor

Most assessors or members of their staff will meet for informal discussions prior to, and sometimes during, a formal appeal. Call to request a meeting and provide the assessor with a heads-up about which property or properties will be discussed. This will save time by ensuring the assessor's team has an opportunity to review their work and supporting data for an informed discussion.

The meeting will be informal. The assessor or representative will be prepared to defend the assessed value. It is important for the taxpayer to realize that value was probably, in whole or in part, generated by a computer.

Bring relevant materials and documents in duplicate so that a set can be left with the assessor's office. They may not want to accept them but give it a try.

The informal meeting is often the property owner's first opportunity to show the property was overvalued in the assessment. The owner will need to support their proposed value using at least one of three standard approaches to valuation, which are cost, income, and sales comparison.

Of these, a non-appraiser is most likely to apply a sales comparison. While adjustments may be necessary in the application of a comparative sales calculation, it is less complex and dependent on expert analysis than either the cost or income approach. For the non-professional, the fewer adjustments required, the better.

For example, developing an informed opinion of a single-family home value based on the sale of two nearly identical homes on the same street does not present a great challenge. The further away the sales occur and the more they differ from the subject property, however, the greater the challenge and the less reliable the sales become as comparatives.(comparables is the term appraisers use)

The cost approach, unless it reflects the actual and recent construction cost plus the land value of the property in question, requires the application of factors best left to professionals in the valuation field. The income approach is even more complex, drawing a value conclusion not from actual rent at the subject property but by applying market rents to the initial rates of return that provide the basis for prices paid for acquisition of similar properties.

Like the cost approach, income-based valuation is best left to the experts. However, an owner who owns and invests in income-producing properties may very well be able to show a lower valuation using their own formulas learned through experience and practice. If such be the case, present that opinion and back-up information to the assessor.

Escalate as needed

Assuming informal discussions fail to achieve a value reduction, the taxpayer must file a timely appeal or accept the assessor's opinion. Filing requires the owner to know and conform to the prescribed filing date. The taxpayer must also decide when or if they will engage an attorney to pursue the appeal.Jurisdictions vary on the point at which an attorney is required to pursue a formal appeal.Filing dates and the required point to seek expert assistance are critical and vary by state. It is up to the taxpayer to learn these dates for their area, and to act while there is sufficient time remaining to file and win an appeal.

Property Tax Terms

A general understanding of real estate valuation terminology is intrinsic to discussions with the assessor.

Assessed Value: The taxable percentage (usually set by statute) of the assessor's opinion of fair market value.

Fair Market Value: What a willing and informed buyer would pay to a willing and informed seller. Fair market value is not value in use, sentimental value, or personal value unique to the owner.

Deferred Maintenance: The property needs a paint job, roof replacement or similar repairs, in which case the cost of correcting the deficiency is deducted from the property's value.

Obsolescence: A curable problem of which the anticipated cost to cure is deducted from the value of the property without the problem.

Incurable Obsolescence: A problem on the property that can't be cured at any cost, such as loss of parking or loss of access due to a road project.

Owners can use the hurting office market to their benefit.

It's no secret that the real estate market suffered in the COVID-19 pandemic, and no property type was hurt more than office buildings. While hospitality and entertainment properties nearly suffocated, their post-quarantine rebound has been impressive. Real estate professionals who projected multiyear recoveries for hotels and movie theaters back in 2020 and 2021 have been proven wrong. Offices, however, have not been so lucky.

The pandemic hastened a work-remote trend that was already leading office tenants to downsize their spaces, and the shift soon stifled any countervailing influx of tenants that landlords could have relied upon to stabilize their properties. Tenants have also realized that if they are using remote workers anyway, they can employ overseas workers for significantly less pay and with zero office requirements. As a result, many landlords have seen their occupancy and rents drop. Some have been able to maintain rent levels by giving away major concessions or tenant improvements. Some have not.

Falling rents and occupancy deflate property values. A trending loss in property value means it's time to review the tax assessor's value of an organization's property, and to challenge the assessment if appropriate.

Why care about the office market?

Perhaps your company owns or leases a building that it fully occupies. The difficulties of the post-COVID office market are unfortunate, but they don't impact you. Your building is full.

Wrong.

Most jurisdictions value the fee-simple property rights of an income-producing property. Basically, that means valuation is based on capitalization of the income stream that the property would produce if leased at market levels.

This is true for owner-occupied offices, too. If the property is leased after a build-to-suit or sale-leaseback transaction, those typically above-market rents or extended terms are irrelevant to a fee-simple analysis.

If the assessor values a property for property tax purposes based on fee-simple property rights determined using a market-derived income stream, and if current market rent levels and occupancy rates are dropping, then the property's tax assessment should be dropping, too – even if the building is full.

Inflation and interest rates

The problems specific to office buildings are not the only ones for the taxpayer to consider. Inflation has made it more expensive to do just about everything, and that includes operating an office building. Payroll, utilities, insurance: All of these costs are steadily rising, even for owner-occupied buildings.

Local governments are feeling the squeeze, too. Their budgets often depend largely on property tax revenue. When inflation reduces a budget's effectiveness, there will be pressure on the assessor to find ways to dig deep and expand the tax base.

The Federal Reserve's solution for inflation was an aggressive program of interest rate hikes over the course of 2022. The rising cost of money has a significant impact on capitalization rates, which investors and appraisers use to value a property's income stream. The higher interest rates go, the higher cap rates go. The higher cap rates go, the lower property values go.

Where are the sales?

The problem with attempting to demonstrate the impact of rising interest rates on cap rates is the sheer lack of sale transactions. Banks aren't bullish on office lending right now, and sellers would rather hang on to a struggling property than sell it for less than it would be worth if stabilized. How can a taxpayer know what kind of price an office building's income stream will bring if office buildings aren't selling?

This is where the assessors will use sales of office properties to support high values. In many markets, an office property that sold in 2021 is worth significantly less today. But today, there often aren't enough comparable office sales occurring to prove declining value. Assessors can point to the most recent office sales, albeit a few years old, and justify their value on a comparative basis.

What those older sales do not reflect is the more recent plague of dropping rents and rising vacancy. The taxpayer needs a way to discount those old sales and prove what the value is today, not three years ago.

Is it time to appeal?

Consider your office property. Could it sell today for the price it sold for two or three years ago? Probably not. Maybe the organization recently bought it, or even built it, for more than it could sell for today. This is not an uncommon problem anymore.

In many jurisdictions, the best way to challenge an office property's assessed value is by using the income approach. If the building were leased at market rent, what would that look like? If the building were occupied at current market occupancy levels, how much vacancy would there be? The taxpayer may need to talk to a broker or two to answer these questions.

The taxpayer may need help to turn market data into a viable appeal strategy. A property tax professional can prepare a fee-simple income approach and help estimate the current market value of the property. In the present situation, there is a good chance property tax relief is available, even if the office building is fully occupied.

Tax assessors are quick to increase self-storage property valuations when market conditions are strong, but they're much slower to adapt to factors that negatively impact an appraisal. Here are some items to understand and present as evidence when making the case to lower your tax assessment.

Until recently, many self-storage owners had grown accustomed to strong market conditions that resulted in steady increases to their property-tax assessments. However, now that industry fundamentals have begun to cool nationwide, they're finding that assessors don't recognize a downturn in property valuation nearly as quickly. To help defend against excessive valuations, you need to educate yourself on market trends and the impact of rental rates, capitalization (cap) rates and sales transactions on facility value.

For a decade or more, the self-storage industry has seen exponential growth in demand that ushered double-digit increases in rental rates and decreases in vacancies. Tax assessors were quick to account for this growth, pushing facility valuations higher. But now the major metropolitan markets are starting to report stagnant rates and mounting vacancy. At the same time, interest rates are rising, which depresses real estate prices and property values. Assessors should—but may not—recognize these conditions when calculating a market value.

In anticipation of an assessor's unrealistic interpretation of market conditions, self-storage owners should be ready to combat inflated assessments. You can prepare by learning your local assessment date and arming yourself with market data relevant to the valuation period.

When to Press the Assessor

Assessors use various tools to determine a property's market value, but there's subjectivity in how these resources can be used. Self-storage properties are traditionally evaluated based on their income-producing potential via a pro forma. An analysis begins with a study of market rental rates, typically derived from surveys and commercial real estate publications. Assessors will then estimate potential income using financials at comparable properties, or draw quoted rental rates from a facility's website.

As a taxpayer, you should vigilantly analyze an assessor's income-based valuation, specifically regarding the initial rental rate used. Assessors often overestimate potential income based on inaccurate survey information or by applying a rental rate that's associated with an inappropriate property classification. For example, they may classify a property as "superior" based on its location or perceived quality of construction. In reality, the facility could be "average" based on the actual rents achieved.

Potential vs. effective income is an important distinction property owners should be quick to flag. Assessors often overestimate potential rent and fail to recognize a proper vacancy factor. If helpful, you can present profit-and-loss statements as well as rent rolls to provide a true understanding of your asset's actual performance in contrast to assumed figures from unreliable sources. Doing this can lead to a substantially lower income-based assessment.

The assessor's final step in an income-based valuation is to apply a cap rate to net operating income. A cap rate is the initial, annual rate of return a buyer would receive on a property's purchase price. It measures risk and is tied to market dynamics in an ever-evolving economy. The lower the cap rate applied in an income pro forma, the higher the indicated value will be.

Assessors will always err on the side of aggressiveness by choosing low cap rates from the market. In fact, they usually derive these rates from market sales and secondary surveys, using data that often goes unvetted or is simply inaccurate. You should press appraisers to show support for the cap rates they use. Scrutinize sale data and highlight differences between your facility and the property that sold.

Be prepared to combat superficial survey information with real-world examples of how rising interest rates, inflation and other economic factors increase the risk associated with acquiring a self-storage property. Perhaps the most effective strategy for achieving a reduced assessment is to fight an assessor's aggressive cap rate with data that reflects the true risk associated with your property.

Market Value and Timing

In most jurisdictions, "market value" is tied to the concept of a willing buyer and seller. Self-storage owners should be mindful of how a purchase price will affect their valuation, as assessors will always assume that purchase price equals market value. Some states mandate sale-price disclosure to the assessor's office while others abide by non-disclosure rules. Regardless, assessors will adamantly pursue a property's sale price to support a tax assessment.

The timing of the purchase is important in relation to the assessment date. For example, if the state or county valuation date is Jan. 1, a sale subsequent to that date may not influence the valuation for that assessment period. Conversely, the basis for the assessor's valuation will likely be a sale or sales that occurred prior to the assessment.

You need to remind assessors that a sale price doesn't always represent a property's true market value. Examples of this are 1031-exchange transactions or portfolio acquisitions with prices allocated to component properties.

Remember, too, that assessors are typically tasked with finding a property's fee-simple market value. Facility purchases often include business value that is intangible and not taxable to the fee-simple estate. So, be prepared to describe the nuances associated with a sale to any assessor who makes value assumptions based on recent purchase prices.

Appraisals aren't an exact science, and assessors often turn the subjectivity inherent in the valuation process to the taxpayer's detriment. Self-storage owners and investors should be vigilant in monitoring the marketplace, their property's economic performance and transactions within their jurisdiction. This will arm them with the relevant data needed to combat aggressive valuations.