Menu

Property Tax Resources

Our members actively educate themselves and others in the areas of property taxation and valuation. Many of APTC attorneys get published in the most prestigious publications nationwide, get interviewed as matter experts and participate in panel discussions with other real estate experts. The Article section is a compilation of all their work.

Aug
08

How to Challenge Your Property Tax Assessments

A step-by-step guide from a veteran attorney to navigating the process of disputing real estate valuations by local government.

In most jurisdictions, taxpayers may meet with the assessor or assessor's representative to deliberate and possibly resolve issues concerning taxable real estate valuation.

First, contact the assessor's office to request a meeting. Getting past recorded messages may be a challenge in some instances, but talking to a human being is necessary.

During that initial phone call, be prepared to describe the problem and point of the discussion, then ask for a date and time to meet. Be sure to request the meeting in sufficient advance of filing deadlines for any appeal process.

Before the meeting, identify an objective (typically a lower assessment) and a plan to achieve that outcome. Be optimistic, but recognize that the assessor's office may reject the taxpayer's position. During the discussion, be reasonably flexible; passion and anger are seldom persuasive and will detract from an otherwise sound argument.

Fix the facts

There are a number of valid concerns other than overvaluation which, if properly addressed and corrected, can result in significant savings.

The most obvious reason to discuss the property with the assessor is the need to correct a simple mistake on the part of the assessor's office. Computer-generated assessed values are now widely used and accepted. The resulting values are no better than the data fed into the database, so review assessments with an eye on the broad picture.

Pay particular attention to the address and all measurements, which are common sources of error. Be sure the property hasn't been confused with some other property of greater value. If the property is improved, review the records available on the assessor's website to see if the improvements are accurately described and that the land is properly measured. Call any mistake of fact to the assessor's attention.

Most jurisdictions recognize varying degrees of assessment value depending on property classification. Typical classifications are commercial, residential and agricultural. Each class is assessed at a different percentage of its market value.

Usage is the primary classification determinant. For instance, undeveloped property zoned commercial may be a productive farm, in which case its classification would be agricultural. Point out to the assessor that the property is being farmed and was so used on the tax valuation day. Bring photos and records to establish that farming was the use on value day, and continues to be so.

Make a similar argument in any situation where the assessor classified the property higher than its actual use. Along the lines of classification, some properties are exempt from taxation if used regularly for charitable, religious and educational purposes.

Unless the use is easily recognized and accepted, it is unlikely the assessor's office will alter its opinion in an informal meeting. The meeting is an effort to convince the assessor that the property is overvalued for tax purposes.

Study the concepts

Unless the taxpayer is a valuation expert, it's probable he or she is meeting with someone who knows more about property values than the owner does, or at least believes that to be the case. A fundamental understanding of valuation methods is critical to a meaningful dialogue.

Volumes are written on the subject and the law books are full of cases dealing with value concepts. The following provides a thumbnail sketch of these concepts.

The three approaches accepted by all valuation experts are cost, income, and market or sales comparison. Assessors use these approaches daily, and look at property through these lenses.

Cost. If the property was purchased and improved with a new structure or structures within the last five years, the total cost of acquisition and improvement is a good indicator of what the property is worth and how it should be valued for tax purposes.

In the absence of a recent transaction, a credible opinion of the cost to replace the improvements on the property may be useful. There are manuals recognized by value experts that may assist in obtaining and presenting such an opinion as evidence.

Market. If the house next door, built just like the subject home, sold yesterday, then that sale price is a good indicator of the value of the subject house. On its face, the method of seeing what similar properties sell for seems the simplest and most direct way to determine a property's value.

If only it were so. The more variances there are between the properties, the greater the comparison challenge. Differences can include location, date of sale, condition of the property—the list goes on.

In dealing with the assessor, present listings and recent sales of properties similar to the subject property, if possible.

Income. In short, this is the present value of future benefits, and is the price a knowledgeable person would pay to acquire the future income stream of a given property.

Under this approach, value is typically determined by dividing the net income by the capitalization rate, or the buyer's initial annual rate of return. The capitalization rate, or cap rate, provides a formula for value calculation, and the higher the cap rate, the lower the value conclusion. The assessor will have a firm opinion of the cap rate and is unlikely to be swayed, but it's worth a try.

In many instances, arguing the general market cap rate with the assessor is futile. A better approach may be to show why the assessor's cap rate should be adjusted because of conditions unique to the property. Look for conditions that are beyond the owner's control and constitute risk to future income.

Arguments challenging the assessor's cap rate could include the greater risk of lost income due to external factors, such as a highway change or a major demographic shift.

Assessors and their staff consider themselves professionals meriting respect as public servants. To achieve any result from conversing with them, they should be dealt with accordingly.

At the conclusion of the meeting, be sure to document any agreement reached.



Jerome Wallach is a partner at The Wallach Law Firm in St. Louis, the Missouri State member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Deck - Summary for use on blog & category landing pages

  • A step-by-step guide from a veteran attorney to navigating the process of disputing real estate valuations by local government.
Aug
08

Oversupply, Taxes Choke Self-Storage Growth

 According to Gilbert Davila, principal at Popp Hutcheson PLLC, an Austin-based law firm specializing in property taxes, the hikes are primarily attributable to basic increases in construction and investment in self-storage properties across Texas. Based on how pricing for commercial real estate in Texas has generally skyrocketed in recent years, appraisal districts are now able to derive very low cap rates for many of the properties they assess. In addition, Davila says appraisal districts are only just beginning to have access to comprehensive data to use in valuing properties in this sector. "Prior to the last couple years, appraisal districts weren't very aggressive on self-storage owners, and now they're playing a  game of catch-up" he says. "However, we should be past the worst of the exponential increases and should see more stagnant property tax valuations for the year 2018."

Davila also points out that many self-storage owners are now protesting their assessments in court. Because Texas law requires all properties within a certain jurisdiction to be assessed equally and uniformly with facilities of similar sizes, this litigation should help lower the median level of valuation for self-storage assets.

Jul
23

Ohio’s Misguided Tax Fix

A proposed law to close the "LLC Loophole" from real estate transfer taxes is a solution in search of a problem.

Ohio legislators are drafting a measure to apply the state's real estate transfer tax to the transfer of any ownership interest in a pass-through entity that owns real property. This proposal will cause more problems than it solves.

Ohio assesses its transfer tax, called a conveyance fee, on each real estate transaction based on the purchase amount reported on a conveyance fee statement and filed with the deed. If a pass-through entity owns the property, a sale of interest in that entity is exempt from transfer tax. The proposed changes would apply the conveyance fee to those transfers, however.

Also, if the property purchase price exceeds currently assessed value, recording the conveyance fee statement and deed with the county will usually trigger a lawsuit by the school district to increase the assessment and tax bill.

Transfers exempt from transfer tax include gifts between spouses or to children; sales to or from the U.S. government, the State of Ohio or any of its political subdivisions; transfers to provide or release security for a debt or obligation; and sales to or from a non-profit agency that is exempt from federal income tax, when the transfer is without consideration and furthers the agency's charitable or public purpose. Generally, the policy is to impose the transfer tax only after a market transaction with market consideration.

What's the problem?

Lawmakers consider the proposal on transfer tax and pass-through entities a tool to fix the problem of real estate value escaping taxation, both at the time of transfer and, more importantly, as part of the assessment. The two supposed loopholes that the proposal aims to close are:

  1. The transfer tax loophole argument assumes that some buyers may structure their purchase as an entity transfer, in part, to avoid the transfer tax, which can be significant for a highly valuable property.
  1. The property tax loophole describes the more likely "problem" the proposed law purports to address. This argument suggests that some buyers attempt to avoid real estate tax increases when the purchase price is higher than the current tax assessment by structuring the deal as an entity transfer

Ohio assumes that a recent, arm's length sale price is the best evidence of property value for real estate taxation. Filing the deed and conveyance fee statement prompts the school district to file a lawsuit to increase the taxes. The conveyance fee statement indicates the purchase price, carries evidentiary weight and is presumed to be completed under oath, even though as a practical matter it is more like a clerical function and seldom completed by any party to the sale.

When interest in the ownership entity transfers without direct conveyance of the real estate, the transfer tax is inapplicable under current law and no purchase price is recorded. Some sales may be structured this way, trying to avoid exposure to an increase in property taxes by filing a conveyance fee statement.

Everyone should bear their share of the tax burden based on fair property valuation, but this proposed bill does not solve the problem of people skirting their responsibility. It also can lead to unintended consequences including the loss of privacy, increased transaction costs, implementation and enforcement costs, and less real estate investment.

A multilayered dilemma

There is no indication that using a pass-through entity is even an effective way for investors to avoid triggering an increased assessment. Ohio school districts file increase complaints not only when deeds and conveyance fee statements are recorded, but also in response to mortgages, LLC transfers, SEC filings, and sometimes the opinion of outside consultants. There is little evidence that significant numbers of sales are missed because they are the transfer of ownership interests. Thus, there is no loophole that needs to be closed.

The proposal disrupts uniformity, because using a recent purchase to set the assessment midway through Ohio's three-year valuation cycle treats taxpayers who've recently bought their properties differently than others. This is non-uniform treatment, which the Ohio Constitution prohibits.

The conveyance fee statement is often completed and filed by someone not a party to the sale. Common errors occur, usually in allocating the total asset purchase price. Historically, these incorrectly reported purchase prices were being applied to set real estate tax values with increasing rigidity, leading to assessments that did not accurately reflect the value of the real estate.

Assessments should only value real estate, but assessments based on these total asset prices would include the value of non-real estate items as well. To the extent that the value of these other items -- for example, an ongoing, successful business operation -- were also being taxed through sales taxes or a commercial activity tax, these taxpayers were subjected to double taxation.

The solution exists

A recent amendment to the tax law mandates that a real estate assessment reflect the unencumbered fee simple interest. The Ohio Supreme Court recently confirmed in its Terraza 8 LLC vs. Franklin City Board of Revision decision that the amendment requires assessors and tribunals to evaluate all circumstances of a sale, and not blindly apply the number reported on the conveyance fee statement.

The appraisal of the unencumbered fee simple interest provides uniform assessment for all taxpayers, while acknowledging the circumstances of real world transactions. It limits double taxation by making sure real estate tax is based on real estate value only, and yields consistent results whether a sale price is higher or lower than the current assessment.

It ensures uniform measurement and taxation for everyone; just as you would not impose taxes based on gross profits for one taxpayer and net profits for another. It also ensures that the tax is applied consistently, whether the owner just bought the property, has owned it for decades, leases it, occupies it, owns it individually or owns it through interests in a pass-through entity. Valuing the unencumbered interest also results in predictability, aids budgeting, and alleviates deal-killing uncertainty.

There are legitimate reasons to convey property through the transfer of ownership interests in an LLC or other pass-through entity, including privacy or other tax planning. The proposed bill undercuts those legitimate concerns without addressing the perceived problem of real estate value escaping taxation. Consistently valuing the unencumbered fee simple interest of real property through uniform assessment and uniform application ensures that no real estate value escapes taxation, and that no taxpayer bears more than their fair share of the burden.

Cecilia Hyun is a partner at the law firm Siegel Jennings Co. L.P.A., which has offices in Cleveland, Pittsburgh, and Chicago. The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Deck - Summary for use on blog & category landing pages

  • A proposed law to close the "LLC Loophole" from real estate transfer taxes is a solution in search of a problem
Jul
10

Reduce Property Taxes Through Acquisition and Capital Project Planning

Savvy commercial real estate professionals keep property-tax planning on their checklists for acquisitions and capital projects.

Why? Because they know that considering property taxes early can save money and reduce hassle later, whether the project is acquiring a business that owns real estate, developing real estate, remodeling a property or adding to existing improvements. And given that businesses overall spend more on property tax than any other state and local tax, considering property tax while planning these projects is a valuable opportunity to improve the bottom line.

The first step is to identify how the acquisition or other proposed actions might affect the property's taxable value. This depends on the local jurisdiction's assessing practices and on how an assessor will relate the sale price or project cost to taxable market value.

States treat sales information in varying ways. Ohio, for example, presumes a property's sale price to be its market value for calculating property taxes. Other states include the sale price in the overall algorithm for all properties but do not use it to determine the value of the specific property that sold. Still others ignore the price altogether.

There are several ways that price may differ from value. For one, the transaction may include non-taxable elements, such as a business, in addition to real property. Or the sale price of an office building may reflect added value for a lease at an above-market rental rate.

In a common scenario, the price paid for a portfolio of senior-living facilities will include the value of each facility's real property, the value of each facility's tangible personal property, and the value of each facility's resident lists, service arrangements, goodwill and other intangible (and therefore untaxable) personal property. The allocation of the purchase price among the various components may not reflect the market value of each component, even when the overall transaction price reflects market value. And sometimes a buyer pays more for a property than it is worth generally on the market. This is often due to the buyer's own investment strategies and thus requires an assessor to distinguish between investment value and market value.

A buyer should ideally evaluate how the price relates to the property's market value in the lead-up to the transaction. This is key to projecting property taxes going forward, in light of the transaction and the way the particular jurisdiction reacts to (or ignores) different types of transactions. It is also important to ensuring that the assessor receives accurate information in states where assessors learn of and react to sales prices.

This early planning can influence the portion of the price allocated to taxable value and help limit it to market value. Part of this is specifically identifying nontaxable, intangible components in the transaction documents in a way that conforms to the jurisdiction's property tax laws.

Another key step is to make sure any documents filed for real estate transfer taxes reflect the value of the taxable component instead of an overall value, thereby managing both the real estate transfer tax and future property taxes. Opportunities may exist to avoid or minimize the transfer tax, depending on the specific laws in each jurisdiction.

Many a buyer has reported the full sale price (or allowed the seller to do so, in jurisdictions where the seller reports the transaction), realizing too late that the reported sum included components that should have been reported differently. The buyer should also consider property taxes when reviewing any press release about the transaction. The new owner may find itself bound to what was reported, whether to government or the media, in later property tax appeals.

Also, preserving certain transaction details, such as the valuation analysis and rationale, may help later as support material or to dispute errors in discussions with the assessor.

Lastly, if information about the transaction goes public in a way that may lead to a misunderstanding by the assessor, reacting promptly can be crucial. This often involves discussing the information with the assessor to provide additional context, such as explaining when a buyer paid a premium above the property's market value.

Similar considerations apply to other types of project strategies, such as plans to develop real estate, renovate or remodel a property, or add to existing improvements. In each instance, early consideration of property taxes often proves useful. Doing so not only aids in projecting future property taxes, but can also guide the owner in reducing those taxes through choices made while carrying out the project.

Norman J. Bruns and Michelle DeLappe are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local tax. Norman Bruns is the Idaho and Washington representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Norman Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. Michelle DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Deck - Summary for use on blog & category landing pages

  • Savvy commercial real estate professionals keep property-tax planning on their checklists for acquisitions and capital projects.
Jun
27

Is the New Federal Tax Law a Boon for Residential Rentals?

The federal government has long encouraged owning a home over renting. Housing subsidies in the tax code effectively lower the after-tax cost of homeownership, which has helped taxpayers move out of residential rentals and into their own homes. The Jeffersons might not have credited tax policy for it in their 1970's sitcom, but it has assisted taxpayers in "moving up" to bigger and better homes. The Tax Cuts and Jobs Act of 2017 (TCJA) makes sweeping changes to the tax code for individual taxpayers that directly impact their ability to transition from renting to owning their home.

About 34 million households, or 44 percent of U.S. homes, carry a mortgage with annual interest charges that exceeded the prior standard deduction. With the new standard deduction, that group shrinks to around 14 million, or 15 percent of U.S. households, according to the National Association of Realtors (NAR).

And while the TCJA nearly doubles the standard deduction, it caps the deduction for state and local taxes -- including income, sales, and property taxes -- at $10,000 for both single and married taxpayers. This one-two punch could significantly impair some taxpayers' appetite for homeownership.

Two household examples

NAR prepared an analysis that illustrates this potential impact. In the first of two examples, a single taxpayer earns $58,000 per year, rents an apartment, and claims the standard deduction. Her tax liability for 2018 under the prior law would have been $7,491 but, under the TCJA, she pays just $6,060 and enjoys a tax cut in the amount of $1,431.

Now assume she purchases a home for $205,000, putting down 3.5 percent with a 30-year mortgage fixed at 4 percent interest. Further assume her first-year mortgage interest would total $7,856 and she would pay property taxes of $2,050.

As a first-time homeowner, her tax liability under the prior law would be $5,393. The tax benefits under the prior law save $2,098, which effectively lowers her monthly mortgage payment by $175 per month. Under the TCJA, her tax would be $5,423 (a $30 increase!) and the differential between renting and owning a home, which was $2,098 under the prior law, has shrunk to just $637 or $53 per month.

In the second NAR example, a married couple with three children and an annual household income of $120,000 leases a home and takes the standard deduction. Their tax liability for 2018 under the prior law would have been $11,370 but, under the TCJA, they pay $8,999 and enjoy a tax cut in the amount of $2,371.

Now assume they purchase a home for $425,000, putting down 10 percent with a 30-year, fixed rate mortgage at 4 percent interest. Further assume their first-year mortgage interest would total $15,189 and they would pay property taxes of $4,250.

Under the prior law, the couple would lower their tax liability for 2018 by $3,219 by purchasing a home instead of renting. This amount effectively lowers their monthly mortgage payment by over $268 per month. Under the TCJA, their tax would be $8,051 (a $100 decrease) and the differential between renting and owning a home, which was $3,219 under the prior law, has shrunk to just $948 or $79 per month. (For NAR's analysis and further discussion of Apartment Lists' examples, visit https://www.nar.realtor/tax-reform/the-tax-cuts-and-jobs-act-what-it-means-for-homeowners-and-real-estate-professionals.)

As these examples illustrate, the TCJA offers an incentive to homeownership, but it is considerably less valuable than the previous incentive. Thiseffectively levels the playing field between renting and owning a residence. In fact, after accounting for additional costs associated with homeownership such as maintenance, neighborhood association dues and local district fees, the scales may now tip in favor of renting.

Thus, taxpayers may forego the traditional path, and choose not to move up from renting to purchasing a home. Instead, they may choose to climb within the rental market. That is, they may move to bigger and better residences and may spend more on their residences , but they are likely to rent rather than buy.

At the same time, the TCJA is fueling investors' interest in the rental market so that more options will likely be available for taxpayers who forego owning a home in favor of renting. To that end, the TCJA offers more favorable treatment of pass-through income. And, income property owners are still able to deduct interest payments on mortgages, with no cap.

These factors make it more profitable for investors to own income-generating property such as multifamily apartments or single family rentals. So, while the TCJA may increase taxpayer demand for renting homes, it also encourages investors to invest in residential properties and make bigger and better rental units available to renters. Whether by accident or design, the TCJA is likely to result in significant benefits to the rental market.

Angela Adolph is a partner in the law firm of Kean Miller LLP, the Louisiana member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
May
29

Cash in on Tax Savings for Green-Buildings

Energy-efficient buildings may not yet command premium rents and prices in smaller markets, but green features could mean property tax savings.

A growing number of commercial properties incorporate energy-efficient attributes that exceed basic code requirements. While conserving resources, these sustainable building strategies can also enhance the owner's bottom line by reducing operating costs. As investors consider developing or buying green properties in certain markets, though, they should consider a less-obvious source of savings – their property tax bills.

No single set of attributes defines a green building; rather, sustainable structures lie on a spectrum. At one end are otherwise-conventional buildings with modest upgrades, ranging to a high end of properties employing comprehensive design and operational strategies that approach zero net consumption of energy or water.

The features most commonly associated with green building tend to be efficient heating and cooling equipment, better insulation, rainwater catchment and on-site power generation methods such as solar, wind, or geothermal. While roof-top solar panels garner attention, other design attributes including passive solar collection, drought-tolerant landscaping, and building-control systems can be equally effective at achieving sustainability objectives. Ultimately, each attribute adds costs to the construction or operation of a property, while not necessarily generating the same incremental gain in value.

How green is the market?

Green design and operations have become standard for Class A properties in many primary markets. With above-average adoption rates, the investment premium for energy-efficient attributes may disappear and properties lacking those attributes may decline in value. Similarly, buildings without green features may be at a competitive disadvantage in attracting potential tenants and buyers.

In many secondary and tertiary markets including across the Midwest, Southeast, Great Plains and elsewhere, however, buyers and tenants have not shifted their preferences toward green construction. This greatly reduces the direct economic benefits of green features. When the pool of tenants willing to pay premium rent for energy-efficient features approaches zero, the pool of buyers demanding those features likewise declines.

Accordingly, whether green attributes have an overall positive or negative impact on a property's market value is highly dependent on the local market, even when the nation overall shifts demand toward such features. Energy-efficient construction may be a market prerequisite in one location, while constituting over-engineering and over-building in another. The question for owners of sustainable buildings evaluating their tax assessments, then, is how buyers and sellers in that market react to specific green features.

Necessary, adequate or superadequate?

Assessors often value properties, at least initially, based on the costs of construction, using either replacement cost tables or information from construction permits. But most green buildings have higher upfront costs, with a goal of achieving long-term efficiency objectives. A green building assessed purely on a cost basis, without considering whether its features are above-market, may be over-assessed and, as a result, overtaxed.

Any cost-based property valuation must account for all depreciation, from ordinary wear-and-tear to obsolescence brought about by market factors. One type of functional obsolescence is superadequacy, which applies to an attribute that exceeds current market requirements. Essentially, a superadequacy is a cost without a corresponding value increase.

Importantly, obsolescence is measured against the market, so even a newly constructed property with no physical deterioration could suffer from substantial obsolescence. A particular green feature might represent a positive value element, a market requirement, or functional or external obsolescence, depending on the property type and location.

Of course, as market demands evolve, some features that were superadequate when originally constructed may become standard. Tax assessments must reflect property and market conditions on a certain date, however, and until the market changes, must account for superadequacies.

And while superadequacy is an element of the cost approach to value, it should be a consideration in income- or sales-based analyses as well. The value of green features, like everything else in an appraisal, must be supported with market research and data. If no demand is found for the property's features, that must be reflected in the value conclusion.

Getting the value right

Assessors may ask: "If a green building has an out-of-pocket cost of $1 million, how can it appraise for only $750,000? Why would an investor spend the extra money?"

Certain items may motivate a particular owner, but property tax assessments are usually based on the real estate's market value alone, regardless of business value or intangible value. If the market does not recognize a feature as valuable, then the value a particular user assigns to that feature is irrelevant for property tax purposes.

In questioning how a green feature affects a property's market value (as opposed to its value to the user), consider whether the feature creates a direct monetary benefit to the property owner or user, either in the form of higher income or lower expenses. Sustainability features may boost the owner's business, perhaps resulting in goodwill or broader market recognition, but that increase will not necessarily accrue to the real property itself. And indirect benefits – those nonmonetary benefits to the community or environment – are unlikely to change real estate value.

Valuing a green building involves most of the techniques used for conventional properties, but the nuances and complexities require greater knowledge and training. Local tax assessors, particularly in smaller jurisdictions where sustainable features have not reached market acceptance, often lack that requisite knowledge. It is no wonder that assessments often fail to consider all of the relevant market factors, creating opportunities for taxpayers to appeal excessive assessments.

As demand for sustainable buildings expands, assessors want to capture that growth in the local tax base. But by focusing on whether the local market demands or ignores energy-efficient features, diligent owners can reduce their property's tax assessments and achieve significant savings.


Benjamin Blair is an attorney in the Indianapolis office of the international law firm of Faegre Baker Daniels LLP, the Indiana and Iowa member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Deck - Summary for use on blog & category landing pages

  • Energy-efficient buildings may not yet command premium rents and prices in smaller markets, but green features could mean property tax savings.
May
24

Use obsolescence to lower hospital property taxes

Property taxes based on excessive valuations are smothering traditional hospital owners.

All too often, tax assessors ignore functional and economic obsolescence that increasingly afflict hospitals, instead treating these assets as financially productive institutions that hold their value. Hospital owners, however, can leverage obsolescence to reduce taxable values and property tax bills.

Click the link below to continue reading.

https://www.beckershospitalreview.com/finance/use-obsolescence-to-lower-hospital-property-taxes.html

Daniel R. Smith, Esq., is a principal with and general counsel for Austin, Texas law firm Popp Hutcheson PLLC, the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. Kevin Shalley, CMI, is a tax consultant and manager with Popp Hutcheson PLLC, specializing in healthcare properties.

 Contact Daniel at This email address is being protected from spambots. You need JavaScript enabled to view it. and Kevin at This email address is being protected from spambots. You need JavaScript enabled to view it..

Deck - Summary for use on blog & category landing pages

  • Property taxes based on excessive valuations are smothering traditional hospital owners.
May
08

How the New Tax Law Affects Property Taxes

Due diligence is required to determine whether possible tax increases can be abated.

President Trump's Tax Cuts and Jobs Act is the first sweeping reform of the tax code in more than 30 years. Signed into law on Dec. 22, the plan drops top individual rates to 37 percent and doubles the child tax credit; it cuts income taxes, doubles the standard deduction, lessens the alternative minimum tax for individuals, and eliminates many personal exemptions, such as the state and local tax deduction, colloquially known as SALT.

While Republicans and Democrats remain divided on the overhaul's benefits, there is a single undeniable fact: The sharp reduction of the corporate tax rates from 35 percent to 21 percent will be a boon for most businesses. At the same time, employees seem to be benefiting too, with AT&T handing out $1,000 bonuses to some 200,000 workers, Fifth Third Bancorp awarding $1,000 bonuses to 75% of its workers, Wells Fargo raising its minimum wage by 11% and other companies sharing some of the increased profits with employees.Companies are showing understandable exuberance at the prospect of lower tax liability, but investments many firms are making in response to the changes may trigger increases in their property tax bills.

Some companies already are reinvesting in their own infrastructure by improving and upgrading inefficient machinery or renovating aging structures. Renovations to address functional or economic obsolescence can help to attract new tenants and, most significantly, command higher rentals for the same space.

The real property tax systems in place for most states are based on an ad valorem (Latin for "according to value") taxation method. Thus, the real estate taxes are based upon the market value of the underlying real estate. Since the amounts on tax bills are based on a property's market value, changes or additions to the real estate can affect the taxes collected by the municipality.

Generally speaking, most renovations such as new facades, windows, heating or air conditioning will not change the value or assessment on a property. The general rule is that improvements which do not change the property's footprint or use, such as a shift from industrial to retail, shouldn't affect the property tax assessment. However, an expansion or construction which alters the layout of a property can – and usually does – result in an increased property assessment. Since real estate taxes are computed by multiplying the subject assessment by the tax rate, these changes or renovations can significantly increase the tax burden.

Recognizing that this dynamic could chill business expansions, many states offer a mechanism to phase-in or exempt any assessment increases. This can ease the sticker shock of a markedly higher property tax bill once construction is complete.

New York offers recourse in the form of the Business Investment Exemption described in Section 485-b of the Real Property Tax Law. If the cost of the business improvements exceeds $10,000 and the construction is complete with a certificate of occupancy issued, the Section 485-b exemption will phase-in any increase in assessment over a 10-year period. The taxpayer will see a 50 percent exemption on the increase in the first year, followed by 5 percent less of the exemption in each year thereafter. Thus, in Year 2 there will be a 45 percent exemption, 40 percent in Year 3 and so on.

Most other states have similar programs to encourage business investments and new commercial construction or renovations. The State of Texas has established state and local economic development programs that provide incentives for companies to invest and expand in local communities. For example, the Tax Abatement Act, codified in Chapter 312 of the tax code, exempts from real property taxation all or part of an increase in value due to recent construction, not to exceed 10 years. The act's stated purpose is to help cities, counties and special-purpose districts to attract new industries, encourage the development and improvement of existing businesses and promote capital investment by easing the increased property tax burden on certain projects for a fixed period.

Not long ago, the City of Philadelphia, Pennsylvania, enacted a 10-year tax abatement from real estate taxes resulting from new construction or improvements to commercial properties. Similarly, the State of Oregon offers numerous property tax abatement programs, with titles such as the Strategic Investment Program, Enterprise Zones and others.

Minnesota goes a step further and automatically applies some exemptions to real property via the Plat Law. The Plat Law phases-in assessment increases of bare land when it is platted for development. As long as the land is not transferred and not yet improved with a permanent structure, any increase in assessment will be exempt. Platted vacant land is subject to different phase‑in provisions depending on whether it is in a metropolitan or non‑metropolitan county.

Clearly, no matter where commercial real estate is located, it is prudent for a property owner to investigate whether any recent improvements, construction or renovations can qualify for property tax relief.

Deck - Summary for use on blog & category landing pages

  • Due diligence is required to determine whether possible tax increases can be abated.
May
08

Don’t Forget Obsolescence in Property Tax Appeals

It's critical for owners to identify both economic and functional obsolescence in order to fight unfair tax assessments.

New technologies, shifting markets and aging buildings can drive economic obsolescence across entire industries. Equally important for the taxpayer, these factors also affect individual property values from a functionality perspective. Understanding both economic and functional obsolescence is essential to properly evaluate tax assessments for accuracy.

Determining functional obsolescence requires an analysis of the property's layout and technologies in use. This exercise attempts to quantify any adjustment in value that amplifies or outpaces downward trends occurring in the market, or accelerates depreciation beyond a straight-line basis. This may include external trends having a unique negative effect on the property's functionality.

Likewise, economic obsolescence can affect a property's value.Such an analysis involves external factors not necessarily specific to the property that may compromise its value on the open market.Declining trends in markets within an industry can signify reasons for impaired values both nationally and regionally.Moreover, international competition may underscore weaknesses within an industry that explain a reduction in a particular property's value.

In ascertaining the decline in a property's value due to economic obsolescence, the analysis must attempt to quantify that decline and offer reasons explaining it.These reasons need to be identified and reasonable, a rationale correlating values assigned to those reasons. For example, a facility may have a decline in excess of industry averages, such as changes in transportation costs and infrastructure in comparison to other supplying markets.It could become much less expensive to ship product from South America than to ship by rail in parts of the United States.

In an uncertain economic climate or a declining or stagnant real estate market, the need to evaluate obsolescence in property assessments is obvious. But even in times of growth and rising real estate prices, taxpayers should consider functionality in reviewing an assessment.

In Georgia, for example, regulations governing property assessments require local taxing authorities to take obsolescence into account. The statute lacks any description of the precise mechanics involved in measuring obsolescence, however, and assessors often forego such an evaluation.

A given jurisdiction's tax return may apply depreciation schedules, but those may not incorporate the concept of functionality. If unaddressed in depreciation schedules, then functional obsolescence needs to be captured as an adjunct to depreciation. Poor economic times or deterioration in a property's utility will exacerbate normal depreciation.

The degree of functional obsolescence is reflected in the utilization of the property. A comparison between full versus actual property usage can indicate the degree of functional obsolescence. Look for evidence of the gap between full and actual historical changes in operating income and production.

Functional vs. Economic Obsolescence

Given that the discrepancy between full and actual property utilization is unique to the facility and not industry-wide, it is functional. This could be explained by technological differences between competing facilities and the subject property. At the same time, external economic factors may contribute to the property's comparative decline.

For example, a printer may use antiquated equipment and technology that require it to keep large facilities for both production and warehousing. Comparisons will identify a gap in functionality between the property and those of more modern competitors using smaller facilities and newer technology. Faster production at newer printing operations may also require less warehousing, because projects are completed more quickly for shipping. The impact of this obsolescence on value is unique to the subject property, reflecting reduced functionality.

On the other hand, great changes are transforming the printing industry. These external factors may be detected in exactly the same way as functional change, but on an industry-wide basis.

Declining demand for an industry overall can impair a particular property's value. Such a sea change can exist within a robust economy, too: In our example, a digital culture has rejected the traditional model for printing to a significant degree, as the widespread use of electronic records and communication has reduced demand for paper printing.

A mine provides another example. Over time, miners extract the most accessible minerals using the least costly means. The layout and operation would have been originally set up to facilitate this process.

As mining continues, the remaining minerals may become more expensive to extract per unit of raw material. This added cost reduces operating income. The mine may require new infrastructure to continue operations. These periodic expansions may be inefficient, again increasing processing costs.

It may be true that, were the mine to be redesigned from scratch, no one would duplicate the existing operation because of the production costs. This reflects deteriorating functionality. On the other hand, industrial demand for the mined product may evaporate due to innovations that make the material unnecessary in processes that once required it.

Changing market forces can impact value. Until recently, the United States was a net importer of natural gas, supporting demand for facilities that enabled the import of liquid natural gas. Now that the United States is a net exporter of natural gas, those same facilities that handled the import of natural gas are more obsolete and less valuable.

Obsolescence is an important consideration in valuing property, regardless of economic conditions. This is especially true for functional obsolescence, but can also be true for economic obsolescence. In valuing property, it is important to remember there is significant overlap between the two, and many factors and influences may explain overall obsolescence.

Brian J. Morrissey is a partner in the Atlanta law firm of Ragsdale, Beals, Seigler, Patterson & Gray, LLP, the Georgia member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Deck - Summary for use on blog & category landing pages

  • It's critical for owners to identify both economic and functional obsolescence in order to fight unfair tax assessments.
May
01

Understanding Intangible Assets and Real Estate: A Response to the IAAO Committee's Guide

This paper responds to the guide issued by the IAAO Special Committee on Intangibles relating to the handling of intangible assets and real estate in property tax valuation and assessment. The response supports use of appraisal methods which directly appraise and remove the full value of identified non-taxable intangible assets in the valuation and assessment of taxable real property. The response also addresses some of the methods discussed in the IAAO Committee's guide and identifies concerns with the legal authorities cited in the guide.

In early 2017 the International Association of Assessing Officers (IAAO) Special Committee on Intangibles issued a white paper addressing the scope of the intangible asset exemption: "Understanding Intangible Assets and Real Estate: A Guide for Real Property Valuation Professionals,"[2] hereafter the "IAAO Guide" or "Guide. "The  IAAO describes the purpose of the IAAO Guide as follows: "This guide is intended to assist assessors in understanding and addressing intangible assets in property tax valuation" and "to assist in identifying intangible assets and exclude them from real property assessments." [3]The Guide purports to describe the legal and appraisal requirements for removing the value of intangible assets and rights in the assessment of real estate for property tax purposes. However, the Guide advocates appraisal methods that do not remove the value of intangible assets from assessment, omits essential appraisal authority, mis-cites court decisions, and ignores controlling law. This paper exposes the unbalanced nature of and errors in the Guide, including techniques which purportedly minimize or eliminate the value of intangible assets from assessment and other omissions.

The Qualified Nature of the IAAO Guide

Not all IAAO publications have equal weight. The IAAO Guide expressly provides the following self-limiting disclosure immediately below the title of the paper: " This guide was developed by the IAAO Special Committee on Intangibles for informational purposes only and does not necessarily represent a policy position of IAAO. This guide is not a Technical Standard and was developed for the benefit of assessment professionals."[4]

An IAAO "technical standard" represents an official position of the IAAO: "International Association of Assessing Officers (IAAO) maintains technical standards that reflect the official position of IAAO on various topics related to property tax administration, property tax policy, and valuation of property including mass appraisal and related disciplines. These standards are adopted by the IAAO Executive Board. IAAO assessment standards represent a consensus in the assessing profession."[5] The IAAO Guide is not an IAAO technical standard, so it has not been approved by the IAAO Executive Board and cannot be described as endorsing a "consensus" in the assessing profession.

Excluding the Value of Intangible Assets: Issues Raised in the IAAO Guide

The IAAO Guide correctly acknowledges that in "the majority of jurisdictions, intangible assets are not taxable, at least not as part of the real estate assessment. As a result, assessors must ensure their real estate assessments are free of any intangible value" and that "the value of intangible assets is excluded. " The Guide also says "assessors seek methods that measure the value of the real property but exclude any intangible asset value" and "[assessors] must utilize methods to ensure the value of intangible assets is excluded from real estate assessments."[6]

The question is whether the IAAO Guide actually proposes methods that meet this standard.The bare assertion that all of the intangible assets have been removed from an assessment must be tested:if the appraisal methodology is recognized to encompass non-taxable intangible assets, then it must demonstrate exactly how intangibles are removed and what value was ascribed to each of those removed intangibles.The methods advocated by the Guide can be evaluated by asking whether a particular method of appraisal subsumes intangible assets and, if so, what those intangibles are, their values, and whether those values are actually excluded.

A fundamental question raised by any assessment or appraisal method is whether it is likely to include intangible assets.Capitalizing operating revenue very likely means that business enterprise, and/or business enterprise components such as assembled workforce, working capital, licensing rights or such, are included in the assessment.If the cost indicator includes a line item for operating permits or environmental emission credits, then an intangible asset is being assessed.If the sales price is paid for a rental property, and that price is based on an above market lease in place and/or fails to account for lease-up costs and delay, then intangible assets are implicated. Thus, an initial question is whether the nature of the property at issue and the appraisal method implicates intangible assets.

There are a number of issues addressed in the IAAO Guide which are accepted in the appraisal profession as being consistent with correct methods for handling the identification, segregation and removal of intangibles.For example, several paragraphs in the Guide point out that the Cost Approach, as applied to the tangible real and personal property, "inherently excludes" the value of non-taxable intangible assets and rights.[7]The Guide also states that when the Sales Comparison Approach or the Income Approach are used to value going-concern type properties, it is likely that non-taxable intangibles are subsumed in the going-concern value conclusion, and those intangibles that were captured need to be identified and their values excluded.[8]In addition, the Guide cautions that sales prices for real property sold along with a business may include intangibles' values.[9]Therefore, from an introductory perspective, the Guide satisfactorily identifies those situations in which intangibles may be implicated in an appraisal.

There are other issues addressed in the IAAO Guide which are not accurately or correctly discussed.The first is the "separability" criteria for identifying intangibles.The second is the role of ownership in the intangibles exclusion process. The third is the use of accounting and tax records to allocate value to intangible assets.And the fourth is the efficacy of the Rushmore "Management Fee" method for removing the value of non-taxable intangibles.Each of these issues is addressed below.

1.Separability Is Not Necessary for the Identification of Intangible Assets

The Issue

The IAAO Guide asserts that "separability" is necessary for identification of intangibles because some intangible assets are "intertwined" in that one intangible is dependent upon another and the intangibles "are not easily separated."The Guide also states "the question is whether the business . . . could be separated from the real estate" or, more broadly, "[i]f the real estate [could] be sold without the intangible."[10]

The Response

An intangible asset need not "be capable of being separate and divisible from real estate" as the IAAO Guide contends for the intangible to be recognized, and the "separability test" is unnecessary.No reason is given for separability in the IAAO's list of requirements for identifying intangibles.In fact, so long as there is adequate data available for placing a value on an intangible, even one that is not easily separated from real estate, the ability to divide the intangible from the real estate is irrelevant.

California's State Board of Equalization (SBE) addressed the issue of "separability" when it approved Assessors' Handbook Section 502 in December 1998.[11]In Issue Paper Number 98-031, which was released prior to approving Assessors' Handbook Section 502, the California SBE considered the question of separability.[12]On December 7, 1998, the California SBE's Property Tax Committee determined that separability was not necessary in order to recognize an intangible asset or right for purposes of removing the intangible's value in the property tax assessment of taxable real and personal property.[13]Based on this decision, the California SBE included language in Assessors' Handbook Section 502, Chapter 6 (entitled "Treatment of Intangible Assets and Rights") stating that while some intangible assets and rights may be identifiable but not capable of segregation, the inability to separate an intangible "does not prevent recognition of the value" of the intangible.[14]The California SBE's guidance is consistent with that of Reilly and Schweihs issued ten years later:"[T]here is absolutely no requirement that the intangible asset has to be transferable separately from other assets.In other words, the subject commercial intangible asset may be sold with other tangible assets and/or with other intangible assets."[15]

The IAAO Guide is unclear about what types of intangibles must be found separable.The example provided is the "historical significance" of the Waldorf Astoria Hotel in New York City.[16]The Guide then refers to other types of "real property attributes" that are intangible in nature and cannot be sold without the real property, such as view, proximity (location), prestige and appeal.[17]Later, the Guide refers to "real property intangibles" such as zoning and air rights.[18]All of these intangible attributes of real property are properly tied to the real property because they are integral to the property (just as a property's layout, design, or architectural style is integral to the property).These intangible real property attributes are taxable under California Revenue and Taxation Code section 110(f) and the California Supreme Court's guidance:"[I]ntangible attributes of real property" include location, proximity, zoning, view, architecture and other attributes that "are an integral part of" the real property, but "intangible attributes" do not include rights exercised in connection with the use of real property.[19]But aside from this limited set of intangible real property attributes, the value of all other intangible attributes, even those closely aligned with the real property, must be removed.

2.Ownership Is Not Relevant in the Intangibles Value Exclusion Process

The Issue

The IAAO Guide states that "the sale of a hotel with a franchise and management agreement in place does not include the value of those assets [the agreement]" because the value of the agreement inures to the hotel management company and not the hotel owner.The first sentence of the paragraph in which this statement appears provides the context:"a property sells and the intangible assets are included in the price."Another place in the Guide says that the "intangible assets owned by others, such as the franchisor or third-party management agreement [of a hotel]," need not be excluded even if they were included in the purchase price for the sale of a going-concern that includes real estate, personal property and an ongoing business.In the Income Approach context, the Guide also asserts that management and franchise are owned by the management or franchise company.[20]

The Response

In the circumstance where a purchase price is paid for a going-concern consisting of real property, personal property and intangible assets, that purchase price must be allocated to all of the assets that were included in the purchase.While the IAAO Guide generally concurs with this, the Guide also singles out hotel management and franchise agreements as not being subject to this standard.But when intangible assets are included in the purchase price paid for a hotel property, a portion of that price must be allocated to those assets, i.e., the management/franchise agreement.Likewise, when the management/franchise agreement generates revenues for a going-concern, a portion of that going-concern's value must be allocated to the intangible.That is so regardless of who owns the agreement because the benefits flowing from that intangible agreement accrue to both the hotel manager and the hotel owner.Those benefits accrue to the manager and the owner because they share the legal rights to use (a) the real property and (b) the intangible assets/rights under the management/franchise agreement.This issue is discussed in more detail in the "Management Fee" method section below.

Similar misdirection appears in the IAAO Guide's discussion of assembled workforce:"Typically, the management company of a hotel, not the owner, hires the managers and workers.Therefore any value of the assembled workforce belongs to the management company."[21]Again, the issue is not who "owns" the workforce, but who benefits from the presence of the workforce and who holds the legal right to use and benefit from that workforce.Both the hotel manager and the hotel owner benefit from a hotel's workforce – the manager earns a management fee, and the owner makes revenues.(Moreover, even if the manager hires the workforce, the hotel owner pays the salaries and wages of the managers and workers in that workforce.)

3.Accounting/Tax Records Should Not Be Used to Allocate Value to Intangibles

The Issue

In the context of analyzing property sales, particularly sales of going-concern properties which include intangibles, the IAAO Guide encourages assessors to consider sales price allocations appearing in financial reports and accounting documents as well as filings under Internal Revenue Code section 1060.[22]However, the Guide also counsels assessors not to rely on accounting valuations because "[t]he classification and method for estimating and allocating intangible value for accounting purposes are rarely the same [as those] for property tax purposes," and not to rely on financial reporting information because "the type of value required for financial reporting [accounting purposes] is typically fair value. . . .The definition of fair value is different from that for property tax purposes (typically market value)."[23]

The Response

The instructions on Page 47 of the IAAO Guide are proper.Reliance on valuations performed for accounting or tax reporting purposes are nearly always irrelevant and inappropriate for use in property tax assessment appraisals.This is demonstrated by the Guide's citation to the decision in Hilliard City Schools Board of Education v. Franklin County Board of Revision,[24] where the Ohio Supreme Court declined to use accounting information in favor of an appraisal.[25]Similarly, the use of value allocations made for federal tax purposes was rejected by the California Court of Appeal:

[T]he proposition that a sales price is prima facie evidence of fair market value . . . holds . . . true with respect to an arm's length, open market sale . . . with the proviso that the probative value of such sale may be displaced by a variety of factors, including the influence of tax and other business considerations.. . .[P]laintiffs' contractual allocation of the purchase price . . . minimized the value of the [real] property as compared with the business assets [intangibles].These allocations largely reflected plaintiffs' own construction of the values, and at least one of them was specifically made for federal tax purposes.[26]

The IAAO Guide's discussion of this topic concludes:"Valuation and allocation for accounting purposes may be different from, and possibly not applicable to, the value of real property in a property tax assessment scenario.. . .Although accounting documents may not prove or disprove the presence or value of intangible assets, they do represent another piece to the puzzle that could assist the appraiser or assessor in reaching a supportable estimate of value."[27]The equivocating nature of these statements casts doubt on accounting (or tax) reporting documents, and such information should not be used for purposes of allocating value to intangibles in the property tax assessment of real property.

4.The "Management Fee" Method Does Not Remove the Value of Intangibles

The Issue

The Rushmore "Management Fee" method asserts generally that deducting a management and/or franchise fee or other operating costs accounts for (removes) the value of intangible assets from assessment: "Rushmore's assertion is that, by deducting the costs associated with intangible value . . . from a property's operating expenses, the remaining NOI is for the real property only."[28] Put another way:

The management fee approach is based on the premise that any intangible value arising from a going-concern can be measured by capitalizing the management fee necessary to compensate a third part to run the business.. . .Theoretically, under this method, any value arising from the management of the business has been excluded.Under the theory of substitution, no one would pay more for a business or building than the presumed cost to replace it.[29]

The IAAO Guide contends that "hotels usually sell with the intangibles excluded from the transaction price through [management fee] deductions in the pricing decision that represent business-related intangible assets."[30]Finally, the Guide also asserts that when an income approach is used, the Rushmore "Management Fee" method is the "best method for excluding intangible value in an income approach" and "is the most valid approach for excluding intangible assets in an income approach."[31]

The Response

The Relationship between the Hotel Owner and Hotel Operator under the Management/Franchise Agreement

When an income capitalization approach is used to value a property and the income used in the approach is generated by all forms of property in use, including real property, personal property, and intangible property, the resulting value represents the value of all forms of property that generated the income, including the real property, personal property and intangible property.The general appraisal principle is set forth in a decision by the California Court of Appeal:"When the capitalization-of-income approach is used as a basis for an opinion of or considered in determining the market value of an operating enterprise, the result is a determination of the total value of all of the items of property which are a part of that enterprise."[32]

The Rushmore "Management Fee" method assumes that a hotel owner and a hotel manager have entered into a hotel management or franchise agreement under which the manager will operate a hotel on the hotel owner's behalf.Under this agreement, the hotel owner provides a hotel facility for the hotel manager to operate.In return, the hotel manager provides to the hotel owner the benefits of the hotel manager's management expertise as well as the benefits relating to the hotel manager's name or "brand."

The intangible contractual rights of the hotel owner and the hotel manager, and the interests created by those rights, are aligned under the management/franchise agreement because the owner and manager are both engaged in an ongoing hotel enterprise using the same tangible and intangible property, and their mutual success depends on how well the hotel performs financially.Success under the management/franchise agreement comes in two parts.First, the hotel manager succeeds if it receives a management fee as called for in the contract.Because the management fee is usually a percentage of revenues generated, the fee is tied to the hotel's performance.(The IAAO Guide asserts that any return to the business from a management/franchise agreement arises from this percentage of revenues element.[33]But because the entire percentage management fee is paid to the manager, and not the hotel owner, the percentage fee does not capture any of the value of the management/franchise agreement to the owner.)And second, the hotel owner succeeds if the hotel produces revenues sufficient to pay the hotel manager's fee and the hotel produces incremental additional revenue over and above the fee paid to the hotel manager, which revenue goes to the hotel owner.

"Return of" and Return on" the Management/Franchise Agreement

The Management Fee method deducts the management or franchise fee as a regular operating expense in a standard income capitalization analysis:"the management fee approach can be applied by including a going-concern management fee as an operating expense."[34]The deduction of the management/franchise fee in the Management Fee method amounts to the hotel owner's repayment of the fee to the hotel manager.It is, in the strictest sense, the cost to the hotel owner for having a management company or franchisee operate the owner's hotel.As such, it literally represents the "return of" the management fee to the hotel manager.Referring back to a portion of the IAAO Guide cited above, it represents the "cost to replace" the management agreement under the "theory of substitution."[35]

The Management Fee method's contention that the deduction of the management fee represents the full value of the intangible non-taxable hotel management/franchise agreement is short-sighted and misleading.First, no hotel owner would hire a hotel manager if doing so did not produce additional revenue to the hotel owner.Why would a hotel owner pay a hotel manager a management/franchise fee if, at the end of the year, the revenue brought in by the hotel manager's efforts was only enough to pay the management/franchise fee to the manager?All of the revenue attributable to hiring the hotel manager would be paid to the manager, and the hotel owner would be no better off than if he had not hired the manager in the first place.

Clearly, the hotel owner will only hire a hotel manager if the manager will increase the hotel's revenue by more than the amount of the management/franchise fee paid to the manager.In other words, the hotel owner will not hire a hotel manager if there is only a "return of" the management/franchise agreement through payment of the management/franchise fee.There also has to be a "return on" the management/franchise agreement to the hotel owner, meaning that as a result of hiring the hotel manager and entering into the management/franchise agreement, the hotel owner receives additional revenue over and above the fee paid to the hotel manager.

An example is in order.Assume a hotel owner can make $10 million per year operating a hotel by himself.Alternatively, the owner can engage a hotel manager to operate the hotel under a management agreement which requires payment of a four percent (4%) management fee (or $400,000).For the owner to pay the manager the management fee and make the same $10 million as before, the manager's efforts have to increase the hotel's revenues by the amount of the management fee (4% or about $400,000) to $10.4 million.However, at this level of operating revenue the hotel owner only nets $10 million after paying the management fee to the manager (the "return of" the management fee), and so the owner will be ambivalent about whether or not to retain the manager.The hotel owner will only hire a manager (enter into a management agreement) if the manager's efforts increase the hotel's revenues by more than 4% (more than $400,000) so that the hotel owner receives a "return on" his investment in the hotel management agreement over and above the "return of" the management fee to the manager.

This is where the second fallacy in the Management Fee method arises.The Management Fee method asserts that the hotel management company holds all of the rights to the management/franchise agreement or, stated another way, that all of the benefits and value of that agreement resides with the manager.But such is not the case for two reasons:(a) the hotel owner has obtained access to the rights held by the manager/franchisor by virtue of the management/franchise agreement (as described above, the hotel owner and manager are essentially partners or joint venturers in the hotel enterprise by virtue of the management/franchise agreement); and (b) although the management fee ("return of") may be paid to the manager/franchisor, the additional revenue earned by the hotel as a result of the management/franchise agreement over and above the management fee, the "return on," belongs to the hotel owner based on the allocation of intangible contractual rights under the management/franchise agreement.The manager does not receive the additional revenue generated by the management/franchise agreement over and above the management fee, only the hotel owner does.It is this "return on" which arises from the manager's and owner's shared rights in the management/franchise agreement which the Management Fee method fails to take into consideration.

Note that this analysis is not dependent on who "owns" the rights under the management/franchise agreement (in fact, there is an allocation of rights under that agreement).If the total revenues generated by the hotel are being used in an Income Approach to value the hotel, the resultant business enterprise value includes return to both the hotel owner and the hotel manager.In this circumstance, the full value of the management/franchise agreement must be removed, i.e., return of and return on, and the ownership of the agreement is irrelevant.

Investors demand both a return of their investment (a recapture of the investment) and return on their investment (a yield on the investment).Thus, "return of" and "return on" are always required if an investor is to undertake any form of investment.This is true both for investments in real property as well as investment in a hotel management/franchise agreement.The California SBE has recognized the "return on" requirement in its Assessors' Handbook Section 502:"An investor's expected return must include both an economic reward and a recovery of invested capital.The economic reward is the return on capital, … ."[36]The "return on" concept was explicitly applied to the Management Fee method by the California SBE:

The value of intangible assets and rights cannot be removed by merely deducting the related expenses from the income stream to be capitalized.Allowing a deduction for the associated expense does not allow for a return on the capital expenditure.. . . Similarly, the deduction of a management fee from the income stream of a hotel does not recognize or remove the value attributable to the business enterprise that operates the hotel.[37]

This is consistent with California Property Tax Rule 8(e) relating to the Income Approach which states:"When income from operating a property is used, sufficient income shall be excluded to provide a return on working capital and other nontaxable operating assets [i.e., intangible assets and rights] and to compensate unpaid or underpaid management."[38]Rule 8(e) has the force of law in California.

The IAAO Guide asserts:"whether a deduction of a management fee and related brand expenses adequately removes business or other intangible asset values in a hotel valuation by a real property appraiser should be based on verified market behavior."[39]Quoting Elgonemy:"Appraisers should value hotels the same way that investors analyze deals."[40]If investors demand a return of and a return on their investment in a hotel management/franchise agreement, then the "Management Fee" method, which only provides a return of, is not "consistent with the observed market behavior" of hotel investors in the "transaction market [which] is the primary source of appropriate valuation methodology to replicate in any appraisal."[41]It is noteworthy that the Guide provides no statements from hotel investors as to how they treat intangibles in hotel investment decisions.

California's Court of Appeal Has Disapproved the "Management Fee" Method

The application of the Rushmore "Management Fee" method to a major resort hotel was expressly disapproved by the California Court of Appeal in 2014:

We disagree with the County's claim that "the intangible value was removed by deducting the management and franchise fee."The Assessor . . . did not explain how that deduction captured the "majority" of intangible property. . . . The Assessor's reliance on the deduction of the management and franchise fee – and its refusal to identify and value certain intangible assets – is akin to paying "lip service to the concept of exempting intangible assets from taxation," a practice condemned in GTE Sprint [Communications Corp. v. County of Alameda (1994)] 26 Cal.App.4th at p. 1005.[42]

In the final analysis, the Rushmore "Management Fee" method capitalizes operating revenues into a going concern value.The fact that the management/franchise fee is deducted does not prevent that result.That being the case, there is no difference between the Management Fee method and a standard income capitalization approach that arrives at a business enterprise value.Furthermore, if the operating revenue being capitalized is generated in part from the presence of intangible assets, but nothing is removed from the resulting indication of value by the income approach for those intangibles, the resulting value will necessarily subsume the value of intangible assets.

To sum up, the IAAO Guide states:"Rushmore's assertion is that, by deducting the costs associated with intangible value . . . from a property's operating expenses, the remaining NOI is for the real property only."[43]Thus, a standard income approach, without any other adjustment, does not include the value of intangible assets.But, as the appellate court said in SHC Half Moon Bay, there is no explanation provided as to how the deduction of a management or franchise fee removes the value of the intangible rights embodied in the management/franchise agreement.The Guide afforded the IAAO an opportunity to address this and related questions in a non-litigation context.While IAAO Committee documented their awareness of these issues in the Guide, they did not address them in any meaningful way.

The Rushmore "Management Fee" Method Is Not Widely Embraced by Courts

The IAAO Guide asserts that the Rushmore Management Fee method is "widely embraced by the courts" and lists judicial decisions in support of this view.[44]

Careful review of those decisions reveals the following.The Guide cites thirteen cases in support of the Rushmore Management Fee method (fourteen cases are discussed, but the Maryland decision, RRI Acquisition Company, Inc. v. Supervisor of Assessments of Howard County,[45] is cited twice).Of those thirteen cases, six were issued by the New Jersey Tax Court.The two Michigan decisions were issued by the Michigan Tax Tribunal, which is not a court (although the Guide refers to the Michigan Tax Tribunal as court), and one of those decisions contains some criticism of the Rushmore method.The Guide cites two decisions from the District of Columbia, both relating to the same hotel property.The 2015 decision was issued by a trial court (Superior Court).The 2009 District of Columbia decision is not reported, so the specific tribunal and the content of the decision cannot be confirmed.Finally, the Guide cites to the 2013 California Court of Appeal decision in EHP Glendale, LLC v. County of Los Angeles (EHP II),[46] even though that decision was subsequently decertified and depublished by the California Supreme Court.

Regarding New Jersey, two of the cited decisions contain the following language:

This decision is based upon the consideration of the reasoning and supporting data addressed in the record of this case for the particular adjustments proposed.It should not be understood as a definitive pronouncement on appraisal practices designed to extract real estate value from the assets of a business or as binding precedent with respect to adjustments of the kind proposed here, should they be offered in other cases with different records.[47]

The second case, BRE Prime Properties, LLC v. Borough of Hasbrouck Heights,[48] has not been certified for publication by the New Jersey Tax Court Committee on Opinions.And in a third case, the New Jersey Superior Court Appellate Division found that the taxing jurisdiction's opinion of value under the income approach did not account adequately for the value of the intangible business assets in the valuation of a casino-hotel.[49]

To summarize, the IAAO Guide reports that the Rushmore Management Fee method has been embraced by courts in only six states.Six of the thirteen decisions cited are from New Jersey, but three of those decisions do not unequivocally approve the Rushmore method.Two of the thirteen decisions were not issued by a court but by the Michigan Tax Tribunal and so have limited precedential value.The two decisions from the District of Columbia pertain to the same property, although the citation to one of those decisions cannot be located, and the other decision is by a lower court.And the California decision cited by the Guide has been decertified and depublished by the California Supreme Court.In light of the above, it is difficult to support the Guide's assertion that the Rushmore method "has been widely embraced by the courts."Moreover, there is at least one case disapproving the Management Fee Method:SHC Half Moon Bay LLC v. County of San Mateo.

The IAAO Guide Mis-Cites Pertinent Law and Ignores Key Authorities

The IAAO Guide reads like a legal brief, citing 52 cases or administrative decisions.But this legalistic patina is thin.The main problem is that the Guide does not acknowledge the basic hierarchy of authority:a tax tribunal or trial court decision is not binding authority as a general rule, and is not equivalent to a published appellate court decision.The Guide cites many authorities, but the citation-heavy format should not be construed to add credibility.Careful review reveals undisciplined and indiscriminate references to authorities, most of which are not binding, and the omission of authorities which are in fact precedential.Moreover, many of the authorities cited are difficult to obtain because they are opinions by state or provincial boards of review or equalization which have no binding or precedential effect.In some cases, the decisions are not readily accessed, which makes vetting such references impossible without significant additional effort.

1.Skilled and Assembled Workforce

The IAAO Guide's reliance on questionable citations is illustrated by focusing on its discussion of skilled and assembled workforce.[50]The Guide offers five legal citations in support of its advice that the assembled workforce intangible need not be recognized or deducted in valuing real property:

(1)Boise Cascade Corporation v. Department of Revenue[51]:"The Oregon Tax Court rejected the workforce argument in a case involving the assessment of a veneer mill.In that case, the court said, 'management or work force in place [value] . . . should not be deducted from any estimate of market value'."

(2) EHP Glendale, LLC v. County of Los Angeles (EHP I)[52]:"The court rejected the workforce argument, stating 'Absent superior management of an exceptional workforce, though, the presence of prudent management and a reasonably skilled workforce are required to put a property to its beneficial and productive use, and no additional value needs to be deducted from the income stream'."

(3) SHC Half Moon Bay, LLC v. County of San Mateo[53]:"[T]he court determined that the assessor failed to remove the value of the hotel's assembled workforce, stating, '. . . the deduction of the management fee from the hotel's projected revenue stream did not – as required by California law – identify and exclude intangible assets such as the hotel's assembled workforce'."

(4) Fairmont Hotels & Resorts v. Capital Assessor, Area No. 01[54]:"The court recognized that a trained workforce is intertwined with the real estate, and its frequent turnover negates its value, stating, 'With respect to an assembled workforce, while we accept that there must have been an initial investment in hiring and training a workforce, we do not accept that the initial investment necessarily continues to have discreet market value. . . . We find that such value is inextricably intertwined with the realty'."

(5) CP Hotels Real Estate Corp. v. Municipality of Jasper[55]: "[T]he court recognized an assembled workforce might not be desired by a potential buyer, saying, 'the assembled workforce may actually be a liability, instead of an asset'."

Each of these five citations is problematic for the reasons set forth below.

Boise Cascade Corporation.The Oregon Legislature amended Oregon Revised Statutes section 307.020 in 1993 to expressly include assembled workforce within the statutory definition of intangible assets.The IAAO Guide cites as authority a case that was superseded by subsequent legislation.

EHP Glendale, LLC.The language in the IAAO Guide attributed to EHP I is not found in that case.The quoted language is actually found in a later 2013 decision by the California Court of Appeal in the same case.[56].EHP II was wrongly decided and inconsistent with California law, and the California Supreme Court decertified EHP II and ordered it be depublished on December 18, 2013.Depublished cases are not citable authority under California law.The Guide also includes the following statement relating to EHP II:"The court approved the Rushmore approach, despite the California State Board of Equalization Assessors' Handbook, Section 502, disallowing the use of the management fee approach alone."[57]Plainly, this reference is also invalid.In sum, the Guide cites as authority language from a case that is not citable and not deemed reliable by the California Supreme Court.

SHC Half Moon Bay.The IAAO Guide correctly cites this case, which contradicts the Guide's support for the Rushmore Management Fee method.Contrary to the Guide, there are no "conflicting rulings" relating to workforce in the California Court of Appeal[58] because the EHP II decision is not good law.In fact, the Guide fails to cite three other California Court of Appeal cases in accord with SHC Half Moon Bay, all holding that assembled workforce is an intangible asset that must be removed from assessment.[59]Neither does the Guide disclose the California SBE's recognition of assembled workforce as an intangible asset (workforce is a component "of enterprise value that create[s] value separate and apart from any value inherent in the tangible assets") and requiring that such value be removed from the assessment.[60]So the Guide misleads the reader into thinking that California courts have ruled that assembled workforce is not a recognized non-taxable intangible when the opposite is the case.

Fairmont Hotels & Resorts / CP Hotels Real Estate Corp.These are Canadian assessment review board decisions and are not precedential authority.Moreover, the Guide ignores legal authority that is contrary to the remarks contained in Fairmont Hotels & Resorts to the effect that if the intangible and tangible assets are "intertwined," then the intangible assets need not be removed from the assessment.The California Supreme Court has expressly explained that even if an intangible asset is "intertwined" so that it is necessary for the "beneficial and productive use" of the real property, the value of such intangible components must still be removed from the assessment:

[I]f the intangible assets are necessary to the beneficial and productive use of the taxable property, the court must determine whether the plaintiff has put forth credible evidence that the fair market value of those assets has been improperly subsumed in the valuation.If so, then the valuation violates [Revenue and Taxation Code] section 110(d)(1), which prohibits an assessor from using the value of intangible rights and assets to enhance the value of taxable property, and the fair market value of those assets must be removed.[61]

Courts in other states have similarly found that the "inextricably intertwined" argument does not overcome the principle that real property assessments should not be based on business value.[62]

Thus, the Guide identifies no citable authority with precedential effect in support of its position on assembled workforce, and the sole valid authority it does cite, SHC Half Moon Bay, rejects the premise underlying the Rushmore Management Fee method (deduction of employee salaries and wages as an operating expense removes the value of workforce) and actually requires that the value of an assembled workforce be removed from assessment.This is an example of selective citation intended to advance a particular viewpoint, instead of a balanced consideration of actual authority which is inconsistent with the advocated policy.The important conclusion is the Guide's citation of authority cannot be taken at face value:each assertion must be examined for validity and accuracy before it may be relied upon.

2.Start-up Costs and the Business Enterprise Value Approach

The IAAO Guide contends that business start-up costs are not an intangible that should be recognized in the assessment of properties.The Guide reasons that start-up costs, such as pre-opening marketing and workforce training for a hotel property, only occur at the initial opening of a property.The Guide concludes that because marketing and workforce costs are deducted as operating expenses when existing hotels are appraised, the deduction of start-up expenses as an intangible asset is unnecessary and improper.[63]The start-up costs issue is a subset of the business enterprise value (BEV) approach.The IAAO Guide dismisses the BEV approach because the approach is not broadly accepted in the appraisal community or the market.[64]

The purpose of this response is not to side with those favoring deduction of start-up expenses or those opposed to doing so, or to become involved in the broader dispute between those who support and those who do not support the BEV approach.However, the lack of depth to the legal authorities cited in the IAAO Guide as support for the views opposing deduction of start-up costs and the BEV approach is noteworthy.The IAAO Guide cites eight cases in all relating to start-up costs and the BEV approach.Four of those cases are cited as supporting the Guide's views on both topics.

Five of the cases cited in the IAAO Guide support the "no start-up cost" viewpoint, and one does not.One of those five cases was issued by a trial court.[65]Three other decisions were issued by tax tribunals.[66]These decisions, from the District of Columbia, Maryland, Canada and Maine, are trial court or assessment review board decisions, and some of them have limited precedential impact.The Guide only references one published court decision from New Jersey as opposing the start-up costs position.[67]

The IAAO Guide also cites five decisions that oppose the BEV approach, and one that supports its.The Guide says there are other cases which have "embraced the BEV approach," but does not cite to any of those cases.[68]One such case is a decision by the Appeals Court of Massachusetts which held that the assessor and tax appeal board were required to make deductions for hotel business enterprise value elements.[69]Of the five opposition decisions cited in the Guide, three are from assessment review boards and may have limited precedential effect.[70]One decision was issued by the Iowa Supreme Court twenty years ago; the Guide reports that an Iowa statute required that the court reject the BEV approach in that case because it was not widely accepted by the appraisal community at that time.[71] The only other opposing decision cited by the Guide is once again the New Jersey decision in the Saddle Brook Marriott Hotel case.[72]The IAAO Guide puts considerable reliance on this one decision by the New Jersey Tax Court, also citing the case three other times.[73]

3.Leases-in-Place and Above- and Below-Market Leases

The IAAO Guide states that fee-simple value for leased properties is found by using market rents, and goes on to say that above-market leases are part of real property and are not intangible.[74]The Guide cites no authority for the latter assertion other than USPAP FAQ 193.[75]The Guide does not cite a conflicting Wisconsin Supreme Court decision which found that above-market leases are not real property or part of fee simple estate property rights.[76]The Guide also does not reference Indiana Tax Court and Kansas Court of Appeals decisions that reached the same conclusion.[77]

4.Goodwill

The IAAO Guide says "Because . . . courts have ruled the value of goodwill is reflected in a management fee, it is safe to say that applying the management fee technique in an income approach effectively removes any goodwill value in the estimate of real property."[78]This conclusion is based solely on the IAAO's incorrect reading of the California Court of Appeal's decision in the SHC Half Moon Bay case.

In SHC Half Moon Bay the taxpayer identified goodwill as the residual value in a cost segregation appraisal.Because of that, the Court of Appeal found that the taxpayer had failed to present sufficient evidence showing that the deduction of the management fee did not remove goodwill.But this finding must be understood in the context of the review standards used by California appellate courts.In this case, the appellate court determined that the taxpayer had not presented substantial evidence (i.e., facts) showing that the management fee did not remove the value of the hotel's goodwill.However, the court also said that other evidence might have been presented that would show how the management fee failed to remove the value of goodwill: "[t]here may be situations where the taxpayer can establish the deduction of a management and franchise fee from a hotel's income stream does not capture the intangible asset of goodwill, but SHC, the taxpayer, has failed to do so here."[79]

The SHC Half Moon Bay decision left open the possibility that another taxpayer could demonstrate that goodwill is not removed by the deduction of a management fee.Stated another way, the Court of Appeal did not rule as a matter of law, and therefore did not foreclose the possibility that another taxpayer might show, based on different facts, that deduction of a management fee does not in and of itself remove the value of goodwill.Thus, the IAAO's conclusory statement that the management fee technique removes goodwill value was not established as a matter of law in SHC Half Moon Bay, but only under the facts of that particular case.

The deduction of goodwill as an intangible asset has been approved by courts in other states.[80]Also, the California SBE says that goodwill is an intangible and that its value should be deducted.[81]

5.Go-Dark Valuation

The IAAO Guide contains a brief discussion of the go-dark valuation issue.[82]Go-dark valuation has engendered significant controversy, and the IAAO has recently issued a "Draft Big Box Position Paper" relating to the "dark store" or go-dark valuation topic.[83]Discussion of go-dark valuation is beyond the scope of this response.

Conclusion:Direct Valuation and Removal of Identified Intangibles

The primary purpose of the IAAO Guide is to identify and explain appraisal methods which assessors can use to "effectively exclude" intangibles from property tax assessment without "valuing intangible assets directly."[84]To that end, the Guide asserts that the Rushmore Management Fee method under an income approach is one of the primary ways to remove the value of intangibles when assessing real property.[85] However, as discussed in this response, the Management Fee method is problematic, and the Guide's explanation as to how the method removes intangibles is inadequate.This inadequacy was highlighted by the California Court of Appeal in SHC Half Moon Bay LLC v. County of San Mateo.Furthermore, the weaknesses that plague the Guide's explanation of the Management Fee method, including the inaccurate and unbalanced citation to legal authority, also extend to the Guide's discussion of assembled workforce, start-up costs, leases-in-place and goodwill.

Instead of using methods which claim to "effectively exclude" non-taxable intangibles, such as the Management Fee method, appraisers should value identified intangibles directly and deduct the full value of those intangibles – similar to the "parsing income" technique described in the IAAO Guide.[86]Although the Guide says "[t]he courts have generally rejected the parsing income method for property tax purposes," it only cites Saddle Brook and Fairmont Hotels v. Area 01 to support this assertion.[87]In fact, for over two decades the California Court of Appeal, the California Supreme Court, and the California SBE (in its Assessors' Handbook and Property Tax Rule 8(e)) have accepted the method of directly identifying and valuing the separate stream of income associated with an identified intangible asset as a valid method for removing the full value of intangible assets in property tax assessment.[88]

The IAAO Guide says that "the real estate market determines whether intangibles are included or excluded," and that the Management Fee method mimics the market.[89]However, the Guide provides no specific proof that the Management Fee method comports with how market participants evaluate properties.Regardless, most state laws require that the value of intangible assets be excluded from ad valorem property tax assessments.[90]The Guide does not explain how the Management Fee method, an indirect method for removing intangibles, "effectively excludes" the full value of non-taxable intangibles.Directly identifying, valuing and deducting the full value of intangible assets, the method California's appellate courts and the California SBE have followed since the GTE Sprint Communications Corp. decision was issued in 1994, is a more effective approach.


[1] Cris K. O'Neall, Greenberg Traurig, LLP, (949) 732-6610, This email address is being protected from spambots. You need JavaScript enabled to view it.; C. Stephen Davis, Greenberg Traurig, LLP, (949) 732-6527, This email address is being protected from spambots. You need JavaScript enabled to view it..The authors thank attorney Sharon F. DiPaolo of Siegel Jennings Co., LPA in Pittsburgh, PA and attorney Lisa F. Stuckey of Ragsdale, Beals, Seigler, Patterson & Gray, LLP in Atlanta, GA for their assistance in researching some of the legal authorities cited in this article.The authors also thank attorney Jennifer Kim of Greenberg Traurig, LLP for her assistance in preparing this article for publication.

[2] International Association of Assessing Officers (IAAO), Understanding Intangible Assets and Real Estate: A Guide for Real Property Valuation Professionals (Special Committee on Intangibles, 2017) 14 Journal of Property Tax Assessment & Administration pp. 41-91 <http://www.iaao.org/library/2017_Intangibles_web.pdf> (as of June 18, 2017) (hereafter IAAO Special Committee 2017).

[3] Id. at pp. 41, 68.

[4] Id. at p. 41.

[5] International Association of Assessing Officers, Technical Standards, <http://www.iaao.org/wcm/Resources/Publications_access/Technical_Standards/wcm/Resources_Content/Pubs/Technical_Standards.aspx.> (as of June 18, 2017, italics added).

[6] IAAO Special Committee 2017, supra, pp. 41, 48, 65.

[7] Id. at pp. 49-50.

[8] Id. at pp. 50, 51, 60, 65, 66.

[9] Id. at pp. 45, 48, 65, 66.

[10] Id. at pp. 42-45, 66.

[11]State Board of Equalization (SBE), Assessor's Handbook Section 502: Advanced Appraisal (Dec. 1998)<http://boe.ca.gov/proptaxes/pdf/ah502.pdf> (as of June 18, 2017) (hereafter SBE AH 502).

[12]State Board of Equalization, Issue Paper Number 98-031 (Nov. 5, 1998) <https://www.boe.ca.gov/proptaxes/pdf/1998.pdf> (as of June 18, 2017).

[13] State Board of Equalization, Property Tax Committee Meeting Minutes (Dec. 7, 1998) <http://www.boe.ca.gov/proptaxes/pdf/PTC_Minutes_120798.pdf> (as of June 18, 2017).

[14] SBE AH 502, supra, p.153.

[15] Reilly and Schweihs, Guide to Property Tax Valuation (Willamette Management Associates Partners 2008) p. 326.

[16] IAAO Special Committee 2017, supra, p. 43.

[17] Ibid.

[18] Id. at 59.

[19] Elk Hills Power, LLC v. Bd. of Equalization (2013) 57 Cal.4th 593, 620-21 (hereafter Elk Hills Power).

[20] IAAO Special Committee 2017, supra, pp. 44-45, 50, 53.

[21] IAAO Special Committee 2017, supra, p. 56.

[22] Id. at 50.

[23] Id. at pp. 47, 66.

[24] (Ohio B.T.A. 2007) Nos. 2007-M-277, 2007-M-278, affd. per curiam (2011) 128 Ohio St.3d 565.

[25] Id. at p. 51.

[26] American Sheds, Inc. v. County of Los Angeles (1998) 66 Cal. App. 4th 384, 394, fn.6. italics added; see also In re Ames Shopping Plaza Wellsboro Borough (Pa. Commw. Ct. 1984) 476 A.2d 1001, 1004.

[27] IAAO Special Committee 2017, supra, p. 51, italics added.

[28] Id. at p. 52.

[29] Id. at pp.51-52.

[30] Id. at p. 55.

[31] Id. at pp.51, 54.

[32]Los Angeles SMSA Ltd. Partnership v. State Bd. of Equalization (1992) 11 Cal.App.4th 768, 776, fn.6; Hershey Entertainment and Resorts Co. v. Dauphin County Bd. of Assessment Appeals (Pa. Comm. Ct. 2005) 874 A.2d 702.

[33] IAAO Special Committee 2017, supra, p. 52.

[34] Id. at p. 51.

[35] Ibid.

[36]SBE AH 502, supra, p. 62.

[37] Id. at p. 162, italics added.

[38] Italics added.

[39] IAAO Special Committee 2017, supra, p. 55.

[40] Id. at p. 53.

[41] Id. at p. 55.

[42]SHC Half Moon Bay LLC v. County of San Mateo (2014) 226 Cal.App.4th 417, 492 (hereafter SHC Half Moon Bay).

[43] IAAO Special Committee 2017, supra, p. 52.

[44] IAAO Special Committee 2017, supra, pp. 53-54.

[45] (Md. T.C.M. 2006) No. 03-RP-HO-0055.

[46] (2013), 219 Cal.App.4th 1015 (hereafter EHP II).

[47] Chesapeake Hotel LP v. Saddle Brook Township (N.J. T.C. 2005) 22 N.J.Tax 525, 536-37 (hereafter Saddle Brooke); BRE Prime Properties, LLC v. Borough of Hasbrouck Heights (N.J. T.C. 2013) Nos. 005271-2010, 005644-2011, unpub. (hereafter BRE Prime Properties).

[48] BRE Prime Properties, supra, Nos. 005271-2010, 005644-2011, unpub.

[49] Marina District Development Co., LLC v. City of Atlantic City (N.J. 2013) 27 N.J. Supp. 469.

[50] IAAO Special Committee 2017, supra, pp. 55-57.

[51] Boise Cascade Corporation v. Dept. of Revenue (Or. T.C. 1991) 12 OTR 263.

[52] EHP Glendale, LLC v. County of Los Angeles (2011) 193 Cal.App.4th 262 (hereafter EHP I).

[53]SHC Half Moon Bay LLC, supra, 226 Cal.App.4th 417.

[54] Fairmont Hotels & Resorts v. Capital Assessor, Area No. 01, [2005] CarswellBC 3760 (Can. Tax. A.B.C.).

[55] CP Hotels Real Estate Corp. v. Municipality of Jasper, [2005] CarswellAlta 2573 (Can. Tax. A.B.C.).

[56]EHP II, supra, 219 Cal.App.4th 1015.

[57] IAAO Special Committee 2017, supra, p. 54.

[58] IAAO Special Committee 2017, supra, p. 57.

[59] GTE Sprint Communications Corp. v. County of Alameda (1994) 26 Cal.App.4th 992, 1007 (hereafter GTE Sprint Communications Corp.); County of Orange v. Orange County Assessment Appeals Bd. (1993) 13 Cal.App.4th 524, 533; Shubat v. Sutter County Assessment Appeals Bd. (1993) 13 Cal.App.4th 795, 798.

[60] SBE AH 502, supra, pp.154, 156, 160, fn. 130.

[61] Elk Hills Power,supra, 57 Cal.4th at p. 615.

[62] Walgreen Co. v. City of Madison (Wis. 2008) 752 N.W.2d 687, 705; Gregg County Appraisal District v. Laidlaw Waste Systems, Inc. (Tex.Ct.App.1995) 907 S.W.2d 12, 19-20.

[63] IAAO Special Committee 2017, supra, pp. 57-58.

[64] Id. at pp. 62-63.

[65] CHH Capital Hotel Partners LP v. Dist. of Columbia (2015 D.C. Super. Ct.) No. 2009 CVT 9455.

[66] RRI Acquisition Co., Inc. v. Supervisor of Assessments of Howard County (Md. T.C.M. 2006) No. 03-RP-HO-0055 (hereafter RRI Acquisition); CP Hotels Real Estate Corp. v. Municipality of Jasper, [2005] CarswellAlta 2573 (Can. Tax. A.B.C.); GGP-Maine Mall, LLC v. City of South Portland (Me. B.A.R. 2008) No. 2008-1 (hereafter GGP-Maine Mall).

[67] Saddle Brook, supra, 22 N.J.Tax 525.

[68] IAAO Special Committee 2017, supra, p. 63.

[69] Analogic Corporation v. Bd.of Assessors of Peabody (Mass.Ct.App. 1998) 700 N.E.2d 548, 552-554.

[70]RRI Acquisition, supra, No. 03-RP-HO-0055; Wolfchase Galleria Ltd. Partnership, Shelby County (Tenn. S.B.E. Mar. 16, 2005); GGP-Maine Mall, supra, No. 2008-1.

[71] Merle Hay Mall v. Bd. of Review (Iowa 1997) 564 N.W.2d 419.

[72] Saddle Brook, supra, 22 N.J.Tax 525.

[73] IAAO Special Committee 2017, supra, pp. 53, 58, 65.

[74] IAAO Special Committee 2017, supra, p. 59.

[75] The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice (2016-2017 ed. 2016) p. 299.

[76] Walgreen Co. v. City of Madison, supra, 752 N.W.2d 687, 700-01.

[77] Grant County Assessor v. Kerasotes Showplace Theatres, LLC (Ind. T.C. 2011) 955 N.E.2d 876, 882-83; Shelby County Assessor v. CVS Pharmacy, Inc.(Ind. T.C. 2013) 994 N.E.2d 350, 354; In Re Equalization Appeal of Prieb Properties, LLC (Kan.Ct.App. 2012) 275 P.3d 56, 134-36.

[78] IAAO Special Committee 2017, supra, pp. 60-61.

[79] SHC Half Moon Bay LLC, supra, 226 Cal.App.4th at p. 493, italics added.

[80] T-Mobile USA, Inc. v. Utah State Tax Comm'n (Utah 2011) 254 P.3d 752; GTE Sprint Communications Corp, supra, 26 Cal.App.4th 992; County of Orange v. Orange County Assessment Appeals Bd., supra, 13 Cal.App.4th 524.

[81] SBE AH 502, supra, pp. 154, 157, fn. 118, 157-158, 159, 160, fn. 130.

[82] IAAO Special Committee 2017, supra, pp. 61-62.

[83] International Association of Assessing Officers, Draft Big Bix Position Paper (2017) <http://www.iaao.org/media/Exposure/Big_Box_6-1-17.pdf >.

[84] IAAO Special Committee 2017, supra, pp. 48, 50, 66.

[85] Id. at pp. 51, 54, 66.

[86] IAAO Special Committee 2017, supra, pp. 64-65.

[87] Id. at p. 65.

[88] GTE Sprint Communications Corp., supra, 26 Cal.App.4th 992; Elk Hills Power LLC v. Bd. of Equalization, supra, 57 Cal.4th at pp. 617-19; SBE AH 502, supra, pp. 161-62.

[89] IAAO Special Committee 2017, supra, pp. 54, 55, 63, 67.

[90] Id. at p. 41, 48.

Cris K. O'Neall is a Member in the law firm of GreenbergTraurig, the California member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
Apr
27

How Cook County Takes the Benefit Out of Taxpayer Incentives

The Cook County Board of Commissioners may have dealt manufacturing districts in South and Southwest Cook County, Illinois, their final blow.

The use of property tax incentives has increased over the past several decades and has been a vital economic development tool in this manufacturing belt. The industrial corridor suffered a one-two punch during the Great Recession and is still hanging onto the ropes, trying to recover while the rest of Cook County thrives.

Cook County property tax incentives reduce assessed values used to determine a property's tax bill. Assessors normally set taxable value at 25 percent of a property's market value, while assessing real estate qualifying for the incentive at 10 percent of market value. This yields a taxable value 60 percent lower than the asset would carry under the standard calculation.

The recession gutted Cook County's manufacturing belt. Numerous manufacturing companies either closed their doors for good or relocated to nearby Indiana, recruited with the promise of a feather-weight tax burden. The migration left a glut of vacant facilities in its wake, driving market values and the assessment base into a downward spiral.

As the market and occupancy rates plummeted, local tax rates spiked, exceeding 35 percent in some suburban municipalities. Without reinvestment in their communities, these municipalities could never recover, and the tax rate would not recede. The most valuable economic development tool available to these municipalities was the property tax incentive.

Crossed purposes

Over the past several years, the Cook County Board of Commissioners has suffocated the utility of the incentive program by imposing wage and other labor requirements on owners and operators of incentivized real estate. Most recently in March, the Commissioners imposed a "prevailing wage requirement," which mandates that any property that receives an incentive after September of this year must" pay all laborers ,workers and mechanics engaged in construction work not less than the prevailing wage paid for public works."

The new rule is expected to increase construction costs by 30 percent. Additionally, the new ordinance mandates participation in federally approved apprenticeship programs. Moreover, the change adds burdensome administrative costs to the incentive holder, which must keep detailed records of employee wages, contractor wages and other minutia. They must make quarterly reports to municipal agencies, or else live under the threat of having the incentive taken away.

But why would the Cook County Board of Commissioners impose mandates that effectively eliminate any incentive benefit? The decision is even more remarkable given the strong opposition it drew from the affected communities. Thirty mayors from the south and south western suburban municipalities testified in front of the county commissioners against the most recent ordinance. Local news media, which typically refrains from dive deeps into nuanced economic development issues, came out against the proposed ordinance.

Cook County elections were March 20. Commissioners in thriving districts were not going to risk their re-election prospects on an issue that didn't affect their constituents. So, the ordinance passed.

Act now

For entities looking to take advantage of the incentive program in Cook County, the most important task is to file the incentive application with the municipality and/or Cook County Assessor's Office prior to Sept.1. Any taxpayer who is attempting to sell or lease their property should apply for an incentive now instead of waiting for a prospective tenant or buyer. If the application is filed prior to Sept. 1, the prevailing wage mandate will not apply to any construction.

It is critical to note that the expansion of a facility will also trigger the prevailing-wage mandate for the additional square footage, even if the property already has an incentive. The property owner must apply for an additional incentive for the new space. Thus, any property owner considering such an expansion should make the required filing before Sept.1.

Most property owners in manufacturing districts that rely heavily on incentives for economic development only protest tax assessments when the property is reassessed. They would be wise to appeal their taxes every year, however.

The unpredictability of the incentive program itself is enough to drive up cap rates by two basis points, which will lower market values across the board. That creates the opportunity to achieve a lower assessment on appeal. The ability to quantify these issues is critical in an appeal, and failure to do so further diminishes the value of the real estate.

Most likely, due to the unnecessary restrictions imposed on the current incentive programs, the entire existing incentive program for Cook County may be scrapped. It is unfair that certain municipalities struggling with economic development are now political carnage. Any new incentive program should put the authority in the local municipalities' hands, rather than leave it under the political machinations of the rest of Cook County.

Deck - Summary for use on blog & category landing pages

  • The Cook County Board of Commissioners may have dealt manufacturing districts in South and Southwest Cook County, Illinois, their final blow.
Apr
11

Look Beyond Price to Cut Property Taxes

The Purchase amount isn't necessarily a valid proxy for taxable value.

Multifamily Property owners and Appraisers are often creatures of habit. They generally calculate a property's value for tax purposes the same way they do for an investment. If an apartment complex recently traded for 10 million, the buyer's appraiser may reason that the property would be assessed at $10 million for taxation purposes.

This line of thinking is particularly common in states that use market value as the standard and where the purchase price was based on an appraisal. While this approach might be reasonable for budgeting worst-case tax accruals, such thinking could result in missed opportunities to reduce the actual tax burden on the property.

PERMISSIBLE APPROACHES TO VALUATION VARY

There are several reasons a property's investment value, or even its market value, might differ from its value for tax purposes. Such considerations include whether the acquisition or investment value includes non-real estate items such as personal property, or intangibles such as long-term leases. Taxpayers should closely examine all of those issues to ensure that only taxable property is being assessed (and, then, at the correct value).

There's another,often-overlooked dimension of savings available to many taxpayers, in the form of seemingly hidden tax benefits conferred by statute. Indiana, for example, has a number of assessment statutes that dictate specific approaches to determining taxable value, depending on the type of property at issue. One property type receiving this unusual valuation treatment is apartment or multifamily rental properties.

Even as investors continue to bid up asking prices in the marketplace, Indiana law requires apartments to be assessed at the lowest valuation determined by applying the three standard approaches to valuation: cost, sales comparison, and income. This means owners and appraisers would miss the mark in estimating the taxable value of apartments or multifamily rental proper­ties if they applied only the typical approaches used to evaluate a property's investment value or market value.

The Indiana Board of Tax Review has issued several decisions confirming this mandate. One such case, Merrillville Lakes DE LLC v. Lake County Assessor, involved a taxpayer challenging his 2010-2014 assessments for an apartment complex in Merrillville, Ind. Both the assessor and the taxpayer presented appraisals at the administrative hearing, but only the taxpayer relied on the specific apartment-valuation statute to develop his opinion of taxable value. The board rejected the assessor's appraisal.

Based on the statutory code and the appraisal in the Merrillville Lakes case, the Indiana Board of Tax Review ultimately lowered the assessed value of the apartment complex for each contested year based on the taxpayer's cost analyses. Because the statute dictates that the lowest of three approaches determines the tax value, even if the owner had purchased the property for far more than the cost-approach indication of value, the board couldn't have increased the value to the higher sales price.

DUE DILIGENCE CAN YIELD SAVINGS

While it may seem like common sense to assume that a property's purchase price is a valid proxy for its taxable value, as the Indiana ruling shows, that's not always the case. A little due diligence could result in a lower valuation and, with that, significant savings.

David A. Suess is a partner in the Indianapolis office of the law firm Faegre Baker Daniels, the Indiana member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Deck - Summary for use on blog & category landing pages

  • Owners of such damaged property need to explore a number of issues to ensure that their assessments reflect their losses.
Apr
10

Assessment Shock and Awe in NYC, and your Properties are the Target

The newly released New York City Tax Assessment Roll had a total market value of$1.258 trillion. These results are shockingly bad news for the real estate industry. On average, tax assessments increased by about 9.4 percent.

The breakdown of increases in the assessments are also very surprising, with residential apartments growing by 11.51 percent, while taxable values on commercial properties climbed 7.85 percent. By borough, Brooklyn leads the way in increases, followed by the Bronx, Queens and Manhattan. Staten Island had the lowest percentage of increase at 6.36 percent.

Residential apartment buildings, rentals, cooperatives and condominiums showed strong valuation increases, which appear to be at odds with recent market weakness noted in all these property types. It is well documented that residential rents are slipping or flat, concessions are on the rise, and sales of co-ops and condos have stalled and are showing further signs of decline.

Furthermore , the loss of state and local tax deductions under the new federal tax law increases the burden on taxpayers. All of these factors exert a negative influence on market values.

What we will see in this assessment roll, and in statistics compiled by the New York City Department of Finance, is a strong emphasis on increasing tax burdens across all property types. This effort disregards the current pressures the market's real estate owners are already facing.

It is significant that the mayor has the sole discretionary authority to increase this specific tax. Virtually every other tax collected in the city needs approval from the state legislature, which may be why property taxes are continuing to go up. Just over 45 percent of all revenues for the City of NewYork now come from real estate taxes.

Even hotels, which are experiencing lower revenue per available room and competition that has intensified in recent years with the addition of thousands of new rooms, face an increase of 4 to 5 percent. This rubs more salt in to the wound for this property class.

What the city is doing in this new tax roll is killing the goose that gave us the golden eggs. We see more vacancies and empty store fronts, traffic at a standstill, mass transit in failure and mounting subway line closures. How tough are they making it for the real estate industry to survive?

There is a great need for property tax reform in this city. The percentage of taxes levied on real estate is out stripping taxpayers' ability to pay for it. In effect, the government is almost a 40 percent partner of all the real estate properties without sharing in the risk or having skin in the game. This ever­ growing push to squeeze the last dollar out of our industry will only hasten its fall.

We should call on our government to be more reasonable and limit property taxes to an affordable level. This would be a better strategy, priming the pump of the local economy and permitting future growth. When owners find that their property's largest single expense is its tax burden, which is out of control, they must do something about it-and do it now.


​​​​​​​Joel R. Marcus is a partner in the New York City law firm of Marcus & Pollack LLP, the New York member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Apr
04

Value the Dirt or the Dollars?

Property taxes should reflect the value of the real estate being taxed, not the needs of governmental entities that share in the tax. However, assessors are under increasing pressure to maintain or enhance property tax revenue. The result is a growing and improper tendency by assessors to use the success of the enterprise occurring in the real estate as an indicator of taxable property value.

Value is the amount a willing and knowledgeable buyer would pay a willing and knowledgeable seller to acquire a property as of a certain date. This simple concept has engendered volumes of appraisal books, hours of testimony and endless discussion of how to segregate the real estate component from the whole of an enterprise.

The willing buyer, willing seller standard mandates the property is available for a buyer's use on the date of sale. For value purposes, any enterprise carried on within the property is absent on the date of sale. The buyer is not buying the business or any part of the business, only the place where the business operates.

The success of the business is independent from the property in which it operates; to approach valuation otherwise leads to invalid and inequitable results. An example would be a building designed and used as a single-screen cinema. One week it features a popular and highly promoted movie, and during that week the ticket sales are great. The theater is full and ticket lines extend outside for each showing. The following week the movie house runs a bad film, and ticket sales are low or non-existent.

To include enterprise value as a component of the value of the real property is to say the theater building is worth more the week it shows a popular movie than when it screens a flop. Meanwhile, a retail building is no more than a structure in which goods enter from the loading dock and exit the front in customers' hands, leaving money or credit behind. Effectively, the building is a conduit for an activity which could occur anywhere in that submarket.

There is little doubt that successful operations will garner higher property taxes than weaker businesses, which is unfair. To some extent, the assessor punishes the taxpayer for a successful enterprise, all too frequently raising the concept of sales per square foot as justification. This rationale also applies to big box national retailers as well as your local mom-and-pop barbeque joint.

Some businesses require government licenses, which may be site-specific and limited to certain people or entities. They do business in properties of specific design that are not easily modified to other uses. Bank charters and licenses for liquor sales or casino gambling are limited to specific facilities at a specific location. What value do these properties hold after the business leaves? Pull the license off the walls, now determine the value of a building that once was one of these enterprises. So, when the old home-town bank building no longer houses a bank, what is it worth?

By law, the former bank building is worth no more or no less than when a bank operated there.

To value it in use is to value the banking activity that occurred there. Taxing business activity isn't an element of property tax at all; it is an enterprise tax, impermissible and unauthorized by law.

Brick-and- mortar retailers are under attack from ecommerce, and the public is subjected daily to photos of dying malls and struggling shopping centers. It is widely accepted that the value of a shopping center drops when the anchor tenant vacates. But the taxable value should be unchanged, because the hypothetical buyer is purchasing a property ready for occupancy.

The prosperous business should not be punished for its success by the improper valuation of the place where the success happens. Dealing with the assessor, the owner must argue that taxable valuation is based on the property being vacant. That means the current occupant is presumed gone on the date of sale.

Any other approach values the enterprise occurring there.

Jerome Wallach is a partner at the Wallach Law Firm, the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
Apr
03

Consider Appealing Assessments to Hurricane-Damaged Property

Owners of such damaged property need to explore a number of issues to ensure that their assessments reflect their losses.

Severe flooding and wind dam­age from Hurricane Harvey wrought widespread property damage across Southeast and Central Texas in August 2017. Several large counties, including Harris and Mont­gomery, sustained severe losses. As the deadline for property tax appeals approaches, there are several things to keep in mind, particularly if you own property that was damaged by the storm.

Texas law allows for reassessment of property damaged in a disaster area. A city, county, school district or other taxing jurisdiction may request a reappraisal, and the cost of the reappraisal must be covered by the requesting jurisdiction. The benefit for reappraised properties would be a proration of taxes based on the pre- and post-disaster values.

Only a handful of jurisdictions have approved a reappraisal at this time,but if your property was damaged during Hurricane Harvey, it would be wise to contact the appraisal dis­trict to see if any of the jurisdictions that tax the property have approved a reappraisal. That would take care of any relief that is available for tax year 2017. For 2018, assessed values are based on the condition of the property as of Jan. 1, 2018.

This time of year, appraisal districts across the state are working on their mass appraisal models and conduct­ing field inspections. The 2018 prop­erty tax values may reflect recent flood or wind damage that was not repaired. However, since the dam­age from Hurricane Harvey was vast and widespread, it remains uncertain whether affected counties will be able to adequately capture and reflect the effect of the storm damage in valua­tions. For that reason, it is important for property owners to be on the lookout for the Notice of Appraised Value and appeal that value during the appeal window if the valuation seems exces­sive or unfair.

Deadline Shortened

The property tax appeal deadline has changed from May 31 to May 15. Given the deadline has been moved up two weeks, now is the time to pre­pare for your 2018 property tax ap­peal by gathering the pertinent infor­mation that will be useful in fighting your assessed taxable value. It will be important to assemble documentation that shows the ex­tent of damage sustained due to the natural disaster. Taxpayers will find it beneficial to keep the appraisal dis­trict informed of any changes to the property.

Appraisal district websites have added features to allow property owners to submit information regard­ing damage to their property due to the storm. Keep detailed records of the extent of the damage, along with the cost of repair.

Demonstrating the condition of the property after the storm will go a long way toward ob­taining tax relief, so photographs of the damage are critical. If you hold any inventory or other personal property and typically elect a Sept. 1 inventory appraisal date, you may have suffered significant losses as of that date. If so, it will be especially important to provide records of the goods lost, and docu­ment whether any of the inventory was salvageable as of Sept.1.

If you are a commercial real estate owner and have tenants that were affected by the hurricane, keep track of any concessions in the way of free rent or tenant improvements that you may have given as relief. For owners of hotels or apartments, keep in mind two main consider­ations:

First, if there was damage, the loss in revenue and ability to produce future income may be significant fac­tors that the appraisal districts would be willing to consider and account for.

Second, if your property is undam­aged and in or near an affected area, you may have seen an uptick in rev­enue at the end of the year due to in­ creased demand for temporary hous­ing. The increase in revenue is not realistic stabilized income, however, and shouldnot be used to derive your 2018 taxable property value.

Further even if your property did not sustain physical storm damage, appraisal districts will be consider­ing the effect of flooding and damage to neighborhoods and surrounding properties when making market ad­justments to your property. It is im­portant to consider this when determining whether or not to appeal the value for tax year 2018.

The amount of property tax relief provided in the wake of Hurricane Harvey will largely depend on the amount of damage and where prop­erty owners were in the rebuilding process on Jan. 1. However, to obtain the best result, protest your appraised value on time, keep detailed records of both the damage sustained and the repair cost, and track concessions to tenants and lost income. And remember that, as a general rule, the more detailed and specific your records are, the better they will support a request for a lower prop­erty tax value.

Deck - Summary for use on blog & category landing pages

  • Owners of such damaged property need to explore a number of issues to ensure that their assessments reflect their losses.
Feb
22

Snakes In The Property Tax Woodpile

Real estate acquisitions and improvements harbor traps for the unwary taxpayer.

Estimating the costs of purchasing or improving real proper ties may seem a simple exercise. However, tax traps await owners who are unaware of the dangers to avoid or otherwise veer off the trail. Prudent investors will be alert to the hidden tax snakes inherent in real estate decisions. Missteps taken at the time of purchase can lead to substantially higher property taxes later. To avoid these snakebites, the prudent investor will carefully research a property's existing tax treatment before closing, consider whether to execute an allocation engagement and ensure that the transaction is properly documented.


In some states, statutory caps limit valuation increases that would oth­erwise rise to reflect the market. For example, California's Proposition 13 limits increases in assessed value to 2 percent per year even if the property's market value is increasing at a faster rate, so long as ownership remains unchanged. Property owners should know that acquisitions and improve­ments can dramatically impact tax values that were previously limited by statutory caps.

In most states, acquisitions trigger reassessments at the next applicable valuation date. In researching existing tax values prior to purchase, prospec­tive buyers often research the taxing authority's online tax records. Online research may fail to distinguish be­tween capped or taxable value versus fair market value, however. If the ac­quisition removes the prior cap and the buyer estimates taxes based on the capped value rather than the fair market value, the new property owner could be in for a very rude awakening come tax time.  

Acquisitions can also change dead­lines for filing tax appeals in some ju­risdictions. For example, the normal filing deadline for appeals in South Carolina is January 15, but most coun­ty assessors will mail new assessment notices during the year following an acquisition. In those circumstances, the filing deadline is 90 days after the date of the reassessment notice.

Failure to take simple but essential steps in documenting a purchase can have substantial tax ramifications. For example, South Carolina law poten­tially exempts as much as 25 percent of a commercial property's purchase price from later ad valorem taxation, but only if the purchaser files for the exemption on or before January 30 fol­lowing the closing. Failure to file can cost purchasers tens of thousands of tax dollars or more. Yet many purchas­ers are unaware of this exemption un­til after they receive the new tax bill, when it is generally too late to file for the exemption.

Closing documents can increase future property tax bills. Many asses­sors calculate taxable value based on the consideration recited in a deed. Purchasers typically acquire income­ producing properties based on existing or potential cash flow.It is the com­bination of the real property, tangible personal property and intangible per­sonal property which generates that cash flow.

The deed consideration should re­flect only the value of the real property and improvements, not the total trans­action value. Similarly, title insurance should reflect the real property's value and exclude value attributable to tan­gible or intangible personal property. A well-thought-out allocation agreement potentially simplifies later record keep­ing and yields significant savings on income, property and transfer taxes, sometimes worth millions of dollars.

For example, operating hotels are generally sold as going concerns. That distinct from the underlying real es­tate. The hotel's intangible personal property, such as its brand, reserva­tion system or on-line presence, may substantially increase cash flow but is generally exempt from ad valorem tax­ation.Using the transaction's value, rather than the value of the real estate and improvements, in the deed not only increases documentary stamps but could lead to unwarranted higher ad valorem taxes.

Pre-purchase cost segregation stud­ies are often useful in documenting these separate values, but many pur­chasers and their lenders are reluctant to engage in this component analysis. For example, large hotel loans typical­ly proceed from a lender 's corporate loan department,not the real estate de­partment, and with good reason. Loan officers can be reluctant to explain to their superiors or to regulators why title insurance values might be lower than the face amount of the note, when the loan is really underwritten on the value of the cash flow and not the in­dividual components contributing to that cash flow. That reluctance could manifest itself in reduced loans being made available for borrowers.

Similarly, loans secured by retail real estate occupied by national credit ten­ants previously garnered less scrutiny from lenders and regulators in assessing loan risk. That laissez faire attitude may be changing as e-commerce erodes sales at brick-and-mortar stores, which continue to close in large numbers.

In some jurisdictions, changes in the property's condition such as a vacancy by a major retail tenant do not trigger a reassessment, and may not be factored into tax bills. The key inquiry in those situations is whether the change in condition occurred after the applicable valuation date.

Property improvements also cre­ate taxation pitfalls. In states that cap taxable property values, the caps may come off when improvements are made. In other words, the cost of im­provements could include not only construction expenses but also a substantially greater tax burden.

The effect of improvements on prop­erty taxes varies by jurisdiction. Flor­ida has adopted a bright-line test that examines whether the completed improvement increases value by at least 25 percent. California law protects properties from reassessment so long as any work is normal maintenance or repair, or the improvement does not convert the property to a state "substantially equivalent to new." Whether new construction or improvements fall into this category is "a factual deter­mination that must be made on a case­ by-case basis," the California statute states. South Carolina law contains no such guidance.

Timing also matters. Most jurisdic­tions prohibit taxing improvements until after the improvements are com­pleted, as defined by applicable stat­ute. If the applicable valuation date is Dec. 31, 2018, an owner might consider delaying completion until after Jan. 1,2019, to delay a major tax increase. Re­gardless, careful analysis and plannirig can help property owners address the hidden cost of increased taxes.With careful planning, the prudent property owner can avoid being bit­ten by the lurking snake of increased property taxes and walk the property tax trail with confidence.

­


Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Bond Dickinson LLP. The firm is the South Carolina member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Deck - Summary for use on blog & category landing pages

  • Real estate acquisitions and improvements harbor traps for the unwary taxpayer.
Feb
01

Missing Property Tax Deadlines Costs Money

Put filing deadlines and other key tax dates on the calendar to preserve your rights to appeal and protect incentives.

Timing can be everything when it comes to property tax appeals. Failure to file an appeal on time will almost certainly lead to its dis­missal, and paying taxes too late can lead to the same fate. Those aren't the only important dates to keep in mind when it comes to property taxes, however. Knowing the correct assessment dates, exemp­tion filing periods and other relevant time elements can be critical for a taxpayer looking to minimize its property tax liability.

At a basic level, all taxpayers should know when to file returns, when assessors determine values, when protests and appeals must be filed, when taxing entities issue tax bills and when payment is due. This may seem simple enough, but there is often more than meets the eye. These dates vary from state to state, county to county and even municipality to municipality. Many jurisdictions revalue real property annually, while others do so on a less frequent cycle. In some jurisdictions, such as Florida, a taxpayer may re­ceive a discount for paying property taxes early. The following are some examples of timing issues that a taxpayer should keep in mind.

Assessment, Valuation Dates

Each jurisdiction assesses real and personal property as of a certain date each year. Many states, including Florida, Georgia and Tennessee, use a valuation date of Jan.1. In Alabama, the valuation date is Oct. 1 of the year proceeding the tax year, such as a valuation date of Oct. 1 2017, for the 2018 tax year, with a tax bill due Oct. 1,2018, and tax payments deemed delinquent if not paid by Dec.31,2018. Events occurring at or to the property after the assessment/valuation date are typically excluded from consideration when determining the taxability or value of the property for the relevant tax year.

The assessment or valuation date can have significant implications for the owner's property tax liability. For instance, a casualty event could result in vastly different assessments depending on whether the property damage occurred a few days before or a few days after the applicable valuation date.If a purchaser's new use will result in the property losing an exemption or being assessed at a higher assessment ratio, there might be an opportunity for substantial first-year tax savings if the closing occurs after the relevant assessment or valuation date.

The assessment date will also determine which sales and rent comparable examples the assessor can consider, and which years of income information are relevant. In the case of construction in progress, knowing the valuation date and properly documenting the status of construction as of that date can greatly affect the assessed value.

The assessment date may also dictate who is entitled to receive notices, file property tax protests or claim exemptions, so it is important for a purchaser to consider these issues at closing to ensure that its rights are protected. A prudent purchaser should promptly ensure that the property is assessed in its name and request that the seller immediately forward any tax notices it receives. Tax appeals are often required to be filed in the owner's name as of the assessment date, and in such cases, a purchaser should obtain the right to appeal in the name of the previous owner.

Some jurisdictions reappraise property on an annual basis, with values subject to increase or decrease each year, while others are on longer reappraisal cycles of up to six years. In jurisdictions with multiyear reappraisal cycles,there still may be instances where a value is adjusted before the next appraisal cycle, including new construction, casualty, sale of the property or other conditions.

Assessment, Claim Deadlines

Most states have various exemptions, property tax incentives and favorable assessment classifications that, when applicable, must be claimed with the local assessor. These may include charitable exemptions, current-use valuation for timber or agricultural properties, statutory abatements and the like. In many jurisdictions, properties are broken down into classifications such as commercial or residential, which may be assessed at a higher or lower rate.

In order to receive the benefit of these exemptions or lower assessment rates, it is of utmost importance to comply with all filing deadlines. In certain instances, exemptions and other favorable assessments can be waived if the taxpayer fails to claim them within the prescribed time periods.

Taxpayers must also remember to file personal property returns on time, where applicable. Missing a deadline can result in penalties, incorrect assessments and the waiver of exemptions. The person preparing the return should confirm the correct assessment date to ensure that only those items owned on the applicable assessment date are included on the return.

Protest, Appeal Deadlines

A taxpayer must be diligent in determining when valuation notices are issued (if at all) and the correct deadlines for filing protests to dispute high valuations. The failure to do so may result in missed deadlines, waiver of appeal rights and the payment of excessive taxes. Protest deadlines can vary widely, even within the same state, and are often 30 days or less from the date of the valuation notice. In some instances such as in Alabama when the value has not increased from the previous year, no notice is even required to be sent. Therefore, it is incumbent on the taxpayer to determine when the values were issued and what date protests must be received.

Appeals beyond the initial administrative level typically have specific filing deadlines and other procedural and jurisdictional requirements that must be strictly met in order to maintain an appeal. These requirements may include paying the taxes before they become delinquent, filing of a bond and other procedural requirements that are not always intuitive, so it is important to consult with local professionals who are well acquainted with the requirements in any particular jurisdiction.

Deck - Summary for use on blog & category landing pages

  • Put filing deadlines and other key tax dates on the calendar to preserve your rights to appeal and protect incentives.
Jan
30

Attorney: Owners Need to Investigate Whether Possible Tax Increases from New Tax Law can be Abated

''While Republicans and Democrats remain divided on the overhaul's benefits, there is a single undeniable fact: The sharp reduction of the corporate tax rates from 35 percent to 21 percent will be a boon for most businesses"

President Trump's Tax Cuts and Jobs Act is the first sweeping reform of the tax code in more than 30 years. Signed into law on Dec. 22, 2017, the plan drops top individual rates to 37 percent and doubles the child tax credit; it cuts income taxes, doubles the standard deduction, lessens the alternative minimum tax for individuals, and eliminates many personal exemptions, such as the state and local tax deduction, colloquially known as SALT.

While Republicans and Democrats remain divided on the overhaul's benefits, there is a single undeniable fact: The sharp reduction of the corporate tax rates from 35 percent to 21 percent will be a boon for most businesses. At the same time, employees seem to be benefiting too, with AT&T handing out $1,000 bonuses to some 200,000 workers, Fifth Third Bancorp awarding $1,000 bonuses to 75 percent of its workers, Wells Fargo raising its minimum wage by 11 percent and other companies sharing some of the increased profits with employees. Companies are showing understandable exuberance at the prospect of lower tax liability, but investments many firms are making in response to the changes may trigger increases in their property tax bills.

Some companies already are reinvesting in their own infrastructure by improving and upgrading inefficient machinery or renovating aging structures. Renovations to address functional or economic obsolescence can help to attract new tenants and, most significantly,command higher rental rates for the same space.

The real property tax systems in place for most states are based on an ad valorem (latin for "according to value") taxation method. Thus, the real estate taxes are based upon the market value of the underlying real estate. Since the amounts on tax bills are based on a property's market value, changes or additions to the real estate can affect the taxes collected by the municipality.

Generally speaking, most renovations such as new facades, windows, heating or air conditioning will not change the value or assessment on a property. The general rule is that improvements that do not change the property's footprint or use, such as a shift from industrial to retail, shouldn't affect the property tax assessment. However, an expans1on or construction that alters the layout of a property can -and usually does -result in an increased property assessment. Since realestate taxes are computed by multiplying the subject assessment by the tax rate, these changes or renovations can significantly increase the tax burden.

Tax Exemptions Available for Property Improvements

Recognizing that this dynamic could chill business expansions, many states offer a mechanism to phase-in or exempt any assessment increases. This can ease the sticker shock of a markedly higher property tax bill once construction is complete.

New York offers recourse in the form of the Business Investment Exemption described in Section 485-b of the Real Property Tax Law. If the cost of the business improvements exceeds $10,000 and the construction is complete with a certificate of occupancy issued, the Section 485-b exemption will phase-in any increase in assessment over a 10-year period. The taxpayer will see a 50 percent exemption on the increase in the first year, followed by 5 percent less of the exemption in each year thereafter. Thus, in year two there will be a 45 percent exemption, 40 percent in year three and so on.

Most other states have similar programs to encourage busmess investments and new commercialconstruction or renovations. The State of Texas has established state and local economic development programs that provide incentives for companies to invest and expand in local communities.For example, the Tax Abatement Act, codified in Chapter 312 of the tax code, exempts from realproperty taxation all or part of an increase in value due to recent construction, not to exceed 10 years. The act's stated purpose is to help cities, counties and special­ purpose districts to attract new industries, encourage the development and improvement of existing businesses and promote capital investment by easing the increased property tax burden on certain projects for a fixed period.

Not long ago, the City of Philadelphia enacted a 10-year tax abatement from realestate taxes resulting from new construction or improvements to commercial properties. Similarly,the State of Oregon offers numerous property tax abatement programs, with titles such as the Strategic Investment Program and Enterprise Zones.

Minnesota goes a step further and automatically applies some exemptions to real property via the Plat Law. The Plat Law phases-in assessment increases of bare land when it is platted for development. As long as the land is not transferred and not yet improved with a permanent structure, any increase in assessment will be exempt. Platted vacant land is subject to different phase-in provisions depending on whether it is in a metropolitan or non-metropolitan county.

Clearly, no matter where commercial real estate is located, it is prudent for a property owner to investigate whether any recent improvements, construction or renovations can qualify for property tax relief.



Jason M. Penighetti is an attorney at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLP, the New York State member of AmericanProperty Tax Counsel, the national affiliation of property tax attorneys. Contact him at JPenighetti@taxcert. com.
Jan
05

RETAIL SUFFERS FROM EXCESSIVE TAX ASSESSMENTS Assessors attempt to ignore market realities when valuing retail property.

Retail property owners' pursuit of fair treatment in real estate taxation seems to generate a river of appeals and counter-appeals each year. What makes this ongoing melee especially perplexing and frus­trating for property owners is a sense that taxing entities will often ignore market realities and established valu­ation practices to insist upon inequi­table, inflated assessments. This tendency to forsake indus­try norms is rampant, and calls for a dose of reality. This article uses the term "real value" to describe that of­ten ignored element of true property value or genuine value of the real es­tate only, meaning the market value that buyers and sellers recognize as a product of an asset's attributes and the real-world conditions affecting it. Real value in this usage is not a legal term, but encompasses issues that real estate brokers, property owners, appraisers, lawyers and tax managers regularly discuss in retail valuation. The array of issues that affect real value or market value range from the influence of ecommerce on in-store sales to build-to-suit leases, sales of vacant space, capi­talization rates for malls of varying quality, proper ac­counting for eco­nomic or functional obsolesce and more.

All of these important and timely issues find their way into an age-old discussion of how to properly value the real estate, and only the real estate, in retail properties for property tax purposes. Although these topics may involve complex calcula­tions or judgments, buyers and sell­ers regularly use these concepts to ar­rive at mutually agreeable transaction prices, which is exactly the sort of real value that assessors should recognize for taxation. Some taxpayers may be surprised to learn that the arms-length sale of a property on the open market isn't universally accepted among taxing entities as representing that property's real or taxable value. The path to rem­edying assessors' tendency to avoid finding the real value of the real estate only is to educate tax authorities and their assessors by appealing unjust as­sessments, and by sharing the details of beneficial case law that continues to shape tax practices across the country.

Cases in Point
Tax laws vary from state to state so that the applicable principle that comes from the case decision in one region may not fit neatly in another region. Nevertheless, trends and con­cepts are always important guideposts that need to be recognized. Taxpayers who present case law from other re­gions to their local courts can begin the process of introducing the truth of real value in their market. A number of new retail property tax cases have come from the Midwest. These cases deal with issues that tax­ payers coast to coast have argued and continue to argue in the struggle to establish real value in court for retail property. ln 2016, the Indiana Tax Court heard an appeal from the Marion County tax assessor, who was unhappy with an Indiana Board of Tax Review decision that granted lowered assessments on Lafayette Square Mall for the 2006 and 2007 tax years. The assessor had origi­nally valued the property at $56.3 mil­lion for 2006, but the county's Property Tax Assessment Board of Appeal re­duced that amount by more than half. Simon Property Group, which owned the mall during the years in question, appealed to the Board of Tax Review, which further reduced the property's taxable value to $15.3 million for 2006 and $18.6 million for 2007. During the appeal, taxpayer, Simon Property Group, presented evidence of the mall's $18 million sale in late 2007. It stated it had begun to market the property for sale because it was suffering from vacancy and leasing is­sues and the property no longer fit its investment mission. The taxpayer's appraiser indepen­dently verified the sale and concluded it to be arms-length, having been ad­equately marketed and there being no relationship between buyer and seller and no special concessions for financ­ing.This scenario seems like what most of us in the tax assessment community would consider a textbook example of market-defined value. Yet the county assessor appealed the review board's conclusion to the tax court.

What is noteworthy here is that the court affirmed the tax board's conclu­sions, which were also in line with the taxpayer's evidence from a real-world transaction. The sad part about this event is that it required years of review and expense to prove that a sale in the open market reflected value. In Michigan in 2014, the Court of Appeals heard a case presented at the Michigan Tax Tribunal which con­cluded in favor of the taxpayer, Lowe's Home Centers. The case is significant because the court accepted a market­ based value as true taxable value. The taxpayer's expert testified re­garding its appraisals and indicated that they were appraising fee simple interest or the value of the property to an owner, and at the highest and best use as a retail store, valued as vacant. They distinguished between existing facilities and build-to-suit facilities, ex­plaining that the subject property is an existing facility and that the build-to­ suit market rent or sale price is based upon cost of construction, whereas the existing market sale price or rent is a function of supply and demand in the marketplace. Basing his analysis on the above fun­damental premise, the taxpayer's ap­praiser valued the property in detail. Again, what makes this case signifi­cant is that the tribunal accepted the taxpayer's argument, and the court af­firmed that decision.

Incremental Acceptance
While these principles seem univer­sal, they have been rejected in many regions of our country. Tax-assessing communities wage battles to impose excessive values based on a rejection of the actual market. As most tax systems are based in the market value concept, the only resource for these taxing juris­dictions is to distort the concept. These issues are as old as dirt, but resolution remains elusive. The lesson here for the retail prop­erty owner appealing an assessment is to advance arguments that reflect real-world conditions supported by evi­dence. The decisions in these cases and others tell us that someone is listening to those arguments, and taking heed.

​Philip Giannuario is a partner at the Montclair New Jersey, law firm Garippa, Lotz & Giannuario. the New Jersey and Eastern Pennsylvania member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Philip Giannuario can be reached at  This email address is being protected from spambots. You need JavaScript enabled to view it.

Jan
05

Struggling with Vacancy? You May Get a Break on Property Taxes

To determine whether your property may qualify for relief, identify the market occupancy rate for that property type and submarket.

In many states, abnormally high vacancy at commercial properties should mean a lower tax bill. Market transaction evidence essentially dictates this result: States that assess taxable value on commercial properties based on market value, as though leased at market rents, should allow a deduction from that value when the property incurs above-market vacancy and collection losses.

Would buyers pay as much for a vacant income-producing property as they would for an identical property that is fully leased at market rates? Of course not. For the same reason, in states that value the property as though leased at market rents, below-market occupancy should result in a lower property tax assessment.

To determine whether your property may qualify for relief, identify the market occupancy rate for that property type and submarket. Loan underwriting is a good source of this information because lenders underwrite property loans based on the normal, stabilized occupancy rate.

For example, in many areas lenders assume 95 percent stabilized occupancy for shopping centers. In those areas, a shopping center that is only 80 percent occupied has below-market occupancy and, therefore, is worth less than otherwise similar properties with the higher market occupancy rates.

Similarly, the prospect of the imminent departure of a major tenant reduces the price a buyer would pay, even if the property currently enjoys market occupancy. And a vacant anchor space diminishes value even when the owner continues to receive rent on the dark space. All these circumstances signal an opportunity for property tax relief.

Start the process

If any of these circumstances apply, the best first step is usually to contact the tax assessor's office and inform the appraiser responsible for valuing the subject property. Providing data about the vacancy problem may be all it takes to reduce taxable value in the next assessment.

If this fails to achieve a reduced value, consider a property tax appeal. Engaging counsel experienced with property tax matters will help the owner evaluate the merits of appeal opportunities. Counsel may also be able to give the conversation with the assessor's office a fresh try.

An appraisal may be necessary to support a property tax appeal. The property owner's counsel should help select a good appraiser who can testify, if necessary. Counsel will also instruct the appraiser on what will be needed for property tax purposes.

Deduct a vacancy shortfall

In states where below-market occupancy affects property tax valuation, the appraiser should engage in a two-step analysis. First, determine the property's stabilized value. Then estimate the amount of vacancy shortfall to deduct from the stabilized value to account for the costs, risk, effort and skill that a buyer of the property would require to bring it to stabilized occupancy.

The three components of a vacancy shortfall deduction are direct costs, indirect or opportunity costs and entrepreneurial incentive. Direct costs include tenant improvements and leasing commissions that would be required to lease up the vacant space. Indirect costs include lost rent until the space is leased, lost expense recoveries and any free rent or other concessions the new tenants would require, based on market lease terms.

Finally, the entrepreneurial incentive profit margin represents the additional deduction from the stabilized value that value-add investors require for the extra risk, skill and effort required to bring the property to stabilized occupancy. The entrepreneurial incentive profit margin can range from as little as 20 percent to over 100 percent of the vacancy shortfall costs.

Another approach to account for entrepreneurial incentive is to increase the capitalization rate used in the income approach to calculating stabilized value during the first step. That does not show the effect of the abnormal vacancy as clearly. Ideally, step one includes several valuation approaches rather than relying on the income approach alone and concludes a reconciled value as if stabilized. Then the full effect of the abnormal vacancy can be isolated in the second step of the appraisal (i.e., in the vacancy shortfall analysis).

To value property with below-market occupancy, the appraiser must understand how buyers and sellers treat such properties in actual transactions. The appraiser will need to verify comparable sales prices directly with buyers and sellers or their brokers to determine how they determined the selling price for properties that sold subject to below-market occupancy. Though each party to the transaction may differ in its analysis, both will likely have performed this two-part examination to determine the as-is selling price of the struggling property. This market evidence will bolster the subject property's tax appraisal.

Just as a buyer typically would negotiate a lower price for deferred maintenance such as a leaky roof, buyers pay less for properties struggling with vacancy issues. Typically value-add investors expect a significantly higher return to compensate them for the elevated risks of trying to create additional value. Many states appropriately recognize this in lower property tax assessments.

Michelle DeLappe and Norman J. Bruns are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local taxes. Bruns is the Idaho and Washington representative of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.  DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..​
Dec
30

Time for your Annual Property Tax Check

Question: What do the following have in common? A developer of a new mixed-use power center. The owner-operator of nursing homes or assisted living facilities. A national retailer with a large distribution center. A 100+ unit multifamily owner or manager. The owner of hotel chain. A high-tech manufacturer with a research and development facility. Answer: They all pay property taxes.

Whether you are a real estate investor or need real estate to house and facilitate your business operation, your real estate taxes will be one of your highest expenses, and one that you must pay even if your property is vacant or underperforming. Now is the time for your yearly check-up on your Ohio properties to determine whether the values that form the basis of your property taxes are fair.

Review your assessment

Start by reviewing the assessment on your tax bills. In Ohio, your tax valuation should reflect a reasonable sale price under typical market circumstances for the land and improvements as of the tax lien date of January 1, 2017. Verify that the information in the county records is accurate. For many Ohio counties, including Cuyahoga, much of this information will be online. Double-check building size, land size, year built, number of stories, etc.

Grounds for a change in value

The following are the most common types of evidence considered by boards of revision, which is the initial reviewing body:

Sale

One way to demonstrate value is with a recent, arm's length sale price. Generally, if a sale occurred within two years of tax lien date, did not include any non-real estate items, and was typically motivated, the price will be good evidence of the real estate value for tax purposes.

Appraisal

An appraisal can also be used to justify a change in value. Appraisal done for tax appeals must value the property as of the tax lien date. The appraiser should also be ready to testify at the hearing. Appraisals for tax appeals may have requirements that are not necessarily present for appraisals for other purposes, such as financing, so it is helpful to talk to someone familiar with the process.

Property Conditions

If there are unusual conditions, severe deferred maintenance, sudden changes in occupancy, or ongoing vacancy issues that affect the value of your real estate, that information should be brought to the attention of the board. Recent sales of properties similar to yours that support a lower value for your property may also help demonstrate that your valuation is incorrect.

Filing Deadline

The deadline to contest your assessment for properties in all Ohio counties is March 31. Because it falls on a Saturday in 2018, the deadline will be extended to April 2. The complaint form can be obtained from the county in which the property is located. The form is only one page; however, there are restrictions on who can file a complaint (i.e. what relationship they have to the property) as well as some technical requirements that may be missed by those unfamiliar with them. Generally, only one complaint can be filed per triennial period, although there are some exceptions.Once the deadline has passed for a particular tax year, the chance to contest that assessment is lost.

Procedure

After your complaint is filed, the local school district where the property is located has the opportunity to file a counter-complaint. After the period to file both complaints and counter-complaints has expired, the county board of revision will schedule a hearing. Each county board has its own rules regarding the submittal of evidence, requests for continuances, etc. At the board of revision hearing you will have the opportunity to explain why the assessment of your property is inaccurate. Boards of revision are not generally bound by the Ohio Rules of Evidence; boards are also empowered to conduct their own research. The board of revision may adopt the value you are seeking; it may make no change, or grant you are partial decrease. It may even increase the value, so it is important to consider carefully before filing a complaint.

Appealing the BOR decision

If you do not agree with the decision of the board of revision (BOR), you can appeal it to the county court of common pleas, or the Board of Tax Appeals (BTA) in Columbus. The BTA is an administrative tribunal that only hears tax related cases. Proceedings at this level are more formal than at the board of revision. Prior to September 29 of this year, a decision of the BTA could be directly appealed to the Ohio Supreme Court. Now any appeals from the Board of Tax Appeals and courts of appeals to the Ohio Supreme Court are discretionary and not as of right. The Supreme Court can decide not to hear your case. It is unclear yet the consequences of this recent legislative change, but there may be an increase in disparate treatment across the state as a result.

School district increase complaints

All Ohio taxpayers should be aware that Ohio is one of the few states (Pennsylvania is another) where school districts are enabled to file an action to get your tax valuation increased. Usually, this occurs when a recent purchase price is higher than the most recent tax assessment. Be aware of how the taxes will be prorated when you are working on a sale transaction. Depending on the timing of the sale, you may end up owing additional taxes for a period during which you did not actually own the property.

No one enjoys paying taxes, but with some research and preparation, you can make sure that your share of the real estate tax burden is fair.

Nov
14

Oregon Law Offers Potential For Property Tax Reductions

Properties under construction and projects subject to governmental restriction can take advantage of legislative provisions the state provides.

The Portland metropolitan area is undergoing an unprecedented boom in commercial construction that extends from downtown to the suburbs and into just about every product type.Many taxpayers are preparing to pay larger tax bills, either because they are developing one of those new projects, or because they own properties that are becoming more valuable in response to growing demand for redevelopment sites. This is particularly common in developed areas where infill construction is hot.

Taxpayers in either of those positions may be missing out on significant tax savings if they are unaware of two provisions of Oregon law that could offer some respite. The Oregon legislative has carved out property tax provisions for a property under construction and for a property subject to a governmental restriction. The savvy property owner needs to know about these opportunities and comply with the statutory requirements to achieve the tax benefit.

The provisions are especially relevant to Portland's latest round of development, much of which is concentrated around infill in neighborhoods and on properties that were once used for industrial activities.

It is important to remember that Oregon law bases property taxes on the real market value of the property or the maximum assessed value under the Oregon Limits on Property Tax Rates Amendment of 1997. Also known as Measure 50, this amendment imposed restrictions on future increases in assessed values and on tax rates. Taxing entities multiply the assessed value by the tax rate to calculate the taxes owed.

The state defines "real market value" as the price an informed buyer would pay to an informed seller in an arms-length transaction. The statute goes on to state that if the property is subject to a governmental restriction as to use, "the property's real market value must reflect the effect of those restrictions."

That brings us to the tax-saving opportunities associated with usage restrictions and construction. Taxpayers typically think of government restrictions only as zoning law or a conditional land-use limitation. Often overlooked are environmental restrictions on a property's use, such as when the federal Environmental Protection Agency or the Department of Environmental Quality has identified the land as a contaminated site.

When a property is governed by a qualified environmental remediation plan, it is subject to a governmental restriction on the property's use. Obviously, the contamination and the future costs of remediation or containment significantly reduce the property's real market value.

One way to measure the reduction in market value caused by the government's environmental restrictions is to calculate the present value of the future clean-up costs. The assessing authority will consider the responsibility and costs of remediation or containment, and will usually reduce the real market value of the property significantly.

Another common governmental usage restriction occurs when a governmental agency provides low-interest loans or tax incentives as a means of encouraging development of certain types of public interest projects, such as low-income housing. The government loan will typically require that the property reserve a number of units for lease at a below-market rent.

In Oregon, the statute allows the property owner to choose whether it wants to enter into the special assessment program for low-income housing. A caution to the property owner that enters into the special assessment program for low-income housing is that the property could become subject to back taxes if it later fails to meet the requirements of the county, or of the loan.

Importantly, the statute does not require the property owner to enter the special assessment program to achieve the tax benefit of certain low-income housing units, as long as the loan meets certain statutory requirements and is properly recorded.

Not to be missed is the construction-in-progress exemption, which is available for income-producing properties. Most states encourage the development of commercial and industrial facilities by sheltering construction projects from the payment of taxation until the property is in use or occupied, and therefore generating rental income or enabling an owner-occupier to pursue business activities there.

The construction exemption requires strict compliance with the statute, and inadvertently failing to meet one of the criteria could cost the property owner a year of tax savings. The exemption isn't limited to manufacturing facilities; the Oregon Tax Court has held that this tax exemption is also available to a condominium under construction, provided that the units were held for sale until its completion.

While taxpayers in Portland's hot construction market enjoy many opportunities to take advantage of tax reductions, owners all across the state should be on the alert for these potential reductions.

Cynthia M. Fraser is a partner at the law firm Garvey Schubert Barer where she specializes in property tax and condemnation litigation. Ms. Fraser is the Oregon representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Ms. Fraser can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
Nov
14

Property Taxes Should Reflect Retail’s Apocalyptic Times

Instead, assessors continue to ignore the clear fact that brick-and-mortar retail is in massive decline.

The retail sector is experiencing its darkest period ever, and taxing entities must come to grips with declining shopping center values.

News reports confirm that national retailers are closing stores at a record pace. In 2017 alone, retail mainstays such as JC Penney, Sears and Macy's have shuttered hundreds of stores. Leading market analysts including Credit Suisse and Cushman & Wakefield have predicted the closing of some 10,000 brick-and-mortar stores.

Even worse, many national retailers are filing for bankruptcy protection, with several others on analysts' watch lists. The more than 300 retailers reported to have filed for bankruptcy protection in 2017 include several major brands, from Payless ShoeSource to Gymboree and Wet Seal. These dire conditions have spurred some economists to describe the ongoing blood-bath as a retail apocalypse.

Double Trouble

There are two main reasons for the retail sector's decline:

First, consumer preferences are migrating from shopping at brick-and-mortar stores to more online shopping. Online sales increased by about $40 billion in 2016 and accounted for nearly 42 percent of all retail sales growth that year. Amazon alone accounted for 53 percent of that growth, reportedly quintupling its North American sales to $80 billion in 2016 from $16 billion in 2010.

Second, today's consumers would rather spend their money on experiences than on material goods. They prefer dining out, going to movies and travel over buying more shoes, jeans, and electronics. And when they buy goods, they are increasingly likely to buy them online.

These ongoing changes in consumer behavior have resulted in a disturbingly high inventory of vacant retail space, made worse by years of over-building in the sector. The United States reportedly has 40 percent more retail space per person than Canada, five times more than the United Kingdom and 10 times more than Europe.

Shopping malls have been particularly affected. Once popular destinations, many regional malls now scramble to find quality tenants and to attract shoppers. To survive, some malls have taken desperate measures to steer customers to their stores, such as hosting amusement parks and concerts. Sadly, analysts predict 20 to 25 percent of U.S. shopping malls will close within the next five years. The market is simply oversaturated.

Value Questions

Consequently, retail property value has plummeted. What once was seen as a safe investment is now fraught with risk. Suffering national retailers have made retail real estate riskier as the chances of store closures and tenant bankruptcies have increased. Investors only value retail properties highly when those assets are generating a reliable stream of rental payments from high-quality tenants. But with department stores, electronics retailers and apparel shops boarding up, there is insufficient demand to sustain the rental rates and occupancy levels necessary for many properties to support historical values.

Unfortunately, tax assessors are turning a blind eye to this new reality, continuing to assume that there is a viable market with robust buyer demand for this property type.

In many jurisdictions, tax assessors have even raised taxable values on retail properties. This has obviously created confusion among property owners, as the values assessed by taxing jurisdictions conflict with selling prices that owners can garner on the open market.

When vacant properties go up for sale, they may linger on the market for years. And when they do sell, they are often sold to unconventional users, such as hospitals, trampoline parks, call centers, churches and schools. These buyers know that they can leverage the market oversupply to achieve low acquisition prices.

When owners point to sales of comparable — and often vacant — retail properties as evidence of market value, tax assessors accuse them of applying the "Dark Store Theory," which many assessors have mischaracterized as a tax loophole. Assessors have even convinced news media organizations of this misconception, evidenced by headlines such as "Sinister-Sounding Dark Store Theory Is Corporate Welfare and "How Big-Box Retailers Weaponize Old Stores."

This has fueled an ongoing debate concerning how to properly value the fee-simple interest in income-producing property, which in most jurisdictions is the taxable value.

In essence, tax assessors claim that retail property owners are trying to escape taxation by calculating taxable value based on the asking rents and sales of vacant retail locations, rather than on actual rents and sales of occupied properties. Tax assessors contend that property owners are comparing apples to oranges.

Property owners counter that assessors are overstating real estate value by capturing the additional value of non-taxable assets, such as long-term leases with brand-name retailers.

Despite this debate, there is no hiding the fact that retail is going dark. Shopping malls and oversized big box stores have become largely obsolete, bankruptcies and store closures plague the industry, and the glut of retail space grows. Preferences for on-line shopping and consumer purchasing patterns are here to stay.

We are reaching a point where the "dark store is the norm. The market has turned previous assumptions about variables such as market exposure, vacancy, capitalization rates and market rents on their heads, resulting in a retail meltdown.

Daniel R. Smith is a principal with and general counsel for Austin, Texas law firm Popp Hutcheson PLLC, the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. James Johnson is a graduate student at Texas A&M University's Real Estate Center and tax analyst for Popp Hutcheson. They may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
Sep
28

Where Has All The Value Gone In Retail?

Telltale signs can signal opportunities for tax reductions in declining retail properties.

For a number of years the mantra in the retail industry has been that retail property values and shopping center values, in particular, will continue to decline because consumers make purchases online rather than in brick-and-mortar stores. While this may be true, simply reciting the words to property tax authorities rarely succeeds in arguing for a reduced assessment.

The best strategy to obtain significant tax reductions for declining retail properties is an analysis of indicators that measure the mall's or shopping center's health. These factors come in four categories: anchor tenants, in-line tenants, tenant occupancy costs and prevailing lease agreements. While these dynamics may not be readily apparent, their analysis is the key to obtaining property tax relief.

Anchor Tenants

Mall anchor tenants have a significant say in how the property is configured, and in the mix of inline tenants. Consequently, when a national chain department store or other anchor tenant starts to experience a decline in sales per square foot, it can send tremors through the entire shopping center. Declining anchor tenant sales grow more serious when the anchor tenant's sales per square foot fall below the national chain-wide average. If the anchor consistently underper­forms the chain-wide average, the store is often deemed a candidate for closure.

Inline Tenants

Inline tenants are the bread and butter of most shopping centers. No other group receives more scrutiny than tenants occupying 10,000 square feet or less. The first thing mall evaluators look for is the types of inline tenants, as well as the trends in those tenant types. Landlords and investors prefer permanent inline tenants over temporary tenants. It is also better to have retail inline tenants than non-retail users, such as offices, government agencies and the like. Of course, the level of inline vacancy is also important because higher vacancy levels may trigger co-tenancy clauses in leases, thereby permitting tenants to vacate before their leases expire.

Tenant Occupancy Costs

The trend in tenants' cost of occu­pancy (COO) may be the best predictor of inline tenants' future performance. By extrapolating COO trends, it is also possible to project a mall's performance several years into the future.

The COO measures the ratio between gross sales and real estate ex­penses, including rent, maintenance charges and other costs that a tenant bears. The COO ratio for Class B and higher malls is usually in the 13 per­cent to 17 percent range, depending on the strength of the tenants, and between 10 percent and 12 percent for lower-end Class C malls.

COO ratios that are higher than these ranges indicate tenants are spending more of their gross revenues to pay property occupancy costs. This reduces the available revenues to pay other operating expenses and, obviously, limits the tenant's profits. Year-over­year increases in COO ratios means tenants are experiencing increasing financial pressure. Eventually, COO ratios become so high tenants will either ask for rent relief or other lease conces­sions, or just walk away.

Prevailing Lease Agreements

Most inline tenants enter into triple­net lease arrangements with the prop­erty owner when a shopping center first opens. Triple-net leases require tenants to pay for maintenance, insur­ance, real estate taxes and other property operating expenses, including the cost for operating common areas within the mall. As a mall declines, inline tenant sales per square foot dwindle, rental rates for new tenants decline and COO ratios increase. At some point, tenants will be unable to pay their rent and still make a profit. At this point, they are likely to ask the mall owner for some type of rent relief.

Rent relief for inline tenants takes different forms, but usually consists of converting triple-net leases to leases paying a percentage of sales, or some­times to gross leases, both of which make the mall owner bear more operating costs. An increase in the number of percentage and gross leases shows that inline tenants are unable to generate enough sales to pay rent and other occupancy expenses.

As more and more leases become percentage or gross leases, the expense burden on the mall owner increases, and the likelihood grows that the mall will close. During this time, the mall owner may replace departing inline tenants with new tenants that demand gross lease arrangements, which further contribute to the mall's decline.

Seek Early Property Tax Relief

The four factors discussed above are interrelated. The progression of falling dominoes starts when the anchor tenant's sales begin to decline. This then leads to a fall in the number of permanent inline retailers, a rise in COO ratios, and the replacement of preferred triple-net leases with percentage or gross leases. All these factors put downward pressure on a retail property's value, which typically reduces the property's tax assessment.

Most of this sequence cannot be observed because it happens below the surface, but it may be the precursor to a mall's failure. Thus, the local property tax authority may not realize a mall is in decline until it falls off the cliff, as when an anchor tenant closes its doors or high-end retailers fail to renew their leases and move to other malls.

Astute retail property owners and operators will identify the underlying problems in a mall or shopping center early on, and bring those difficulties to the attention of the local tax assessor. Doing so may reduce taxes - and mall operating expenses - well before a property is in free-fall mode. If the tax relief is significant and obtained early in the process, it may even extend the life of the mall.

Cris K. O'Neall is a shareholder at the law firm Greenberg Traurig, LLP and focuses his practice on ad valorem property tax assessment counseling and litigation. The firm is the California member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
Sep
25

Louisiana: Tax Exemption For Partially Completed Construction?

Passage of a new ballot initiative will confirm exemption of partially completed property from taxation."

Any taxpayer planning to develop a new property must consider how local taxing entities will treat the project during construction, but the question is especially important in evaluating and comparing overall costs of potential development locations during an industrial site search.

States generally recognize Construction Work in Progress (CWIP) as property that is in the process of changing from one state to another, such as the conversion of machinery, construction materials and other personal property from inventory into an asset or fixture by installation, assembly or construction. There is no clear consensus among taxing jurisdictions as to whether (or how) a tax assessor should value such par­tially completed construction on the applicable assessment date.

Many states including Alabama, Missouri and North Carolina value CWIP based on the value or percentage of completion on the assessment date. Kansas values incomplete construction based on the cost incurred as of the assessment date. Florida, Maryland, Virginia and West Virginia assess CWIP when the work has progressed to a degree that it is useful for its eventual purpose. And in South Carolina, improvements are only assessed upon completion.

With the exception of a few errant assessments in the early 1930s, Louisiana has never assessed partially completed construction for property tax purposes. Rather, taxing jurisdictions assess and add the completed property to tax rolls as of January 1 of the year immediately following completion of construction. This complements Louisiana's industrial tax exemption program, which exempts certain manufacturing property from ad valorem taxation for a specified number of years.

Unfortunately, properties on which ad valorem taxes have been paid are ineligible for participation in the exemption program. Thus, if a taxpayer has paid taxes on a project as partially completed construction, the property is no longer eligible for the industrial tax exemption and remains on the taxable rolls, subject to assessment each year. Obviously, assessing projects with partially finished construction in this manner would significantly diminish the value of the exemption pro­gram to taxpayers and undermine its usefulness to economic develop­ment agencies as an incentive tool.

In 2016, a local assessor broke with established practice and initiated an audit that included construction work in progress on a major industrial taxpayer. This audit raised statewide and local uniformity concerns over the assessment of a single taxpayer's partially completed construction in a single parish, and jeopardized the taxpayer's existing industrial tax exemption.

The taxpayer immediately filed an injunction action in district court, and the Louisiana Legislature took up the situation during its regular 2017 legislative session. Recognizing the need to formalize the exemption, the Legislature referred to voters a constitutional amendment that would codify the exemption of construction work in progress from assessment. Louisiana is one of 16 states that require a two-thirds supermajority in each chamber of the Legislature to refer a constitutional amendment to the ballot, so their vote underscores the strong support among lawmakers to codify the exemption.

Act 428 would add a subsection to Article VII, Section 21 of the Louisiana Constitution, which lists property that is exempt from ad valorem tax assessment. The new provision would exempt from ad valorem tax all property delivered to a construction project site for the purpose of incorporating the property into any tract of land, building or other construction as a component part. This exemption would apply until the construction project is completed (i.e. occupied and used for its in­tended purpose).

The exemption would not apply to (1) any portion of a construction project that is complete, available for its intended use, or operational on the date that property is assessed; (2) for projects constructed in two or more distinct phases, any phase of the construction project that is complete, available for its intended use or operational on the date the property is assessed; (3) certain public service property.

If voters approve the ballot item, CWIP will be exempt from property taxes until construction is "completed." The proposed amendment defines a completed construction as occurring when the property "can be used or occupied for its intended purpose." The exemption would thus remain effective until the construction project or given construc­tion phases of the project are ready to be used or occupied.

A constitutional amendment does not require action by the Governor. This constitutional amendment will be placed on the ballot at the state­wide election to be held on Oct. 14, 2017.

Angela Adolph is a partner in the law firm of Kean Miller LLP, the Louisiana member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

American Property Tax Counsel

Recent Published Property Tax Articles

Reject Tax Assessors’ Finance-Industry Valuations

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...

Read more

3 Keys to Appealing an Unfair Assessment

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...

Read more

Drew Raines: How to Reduce Student Housing Property Tax Assessments Post-Pandemic

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...

Read more

Member Spotlight

Members

Forgot your password? / Forgot your username?