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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.

Dec
16

Replacement Reserves Can Significantly Reduce Property Tax Bills

Funds set aside to maintain, repair and upgrade capital assets are the lifeblood of many commercial properties today. Known as “reserves for replacement,” the treatment of these major operating expenses in the calculation of a property’s value can significantly influence its tax burden. Mishandling that calculation can cost a taxpayer dearly.

Replacement funds are essential resources that enable hotels and resorts to renovate every few years, a critical task if they are to remain competitive. Likewise, department stores and most in-line retailers in shopping centers must rejuvenate their properties in order to keep customers coming. Even fast food outlets must update their spaces, as well as their menus, on a regular basis to maintain sales.

The sums that hospitality, retail and food outlets spend to renovate or refresh their properties on a regular basis are sizable, sometimes as much as 5 percent of total revenues. Reserves are a significant expense these properties must bear, and have a major impact on a property’s bottom line.

Property tax assessments for commercial properties usually reflect income that the properties produce. The greater a property’s net revenue, the higher the property’s assessed value and tax burden will be. Clearly, it is in the taxpayer’s interest to make sure tax assessors do not inflate that net revenue by improperly accounting for expenses in their value calculations.

Above the Line or Below?

In many industries, replacement reserves are an above-the-line expense deduction, which means they are deducted along with other operating expenses to determine net operating income. If the reserve is large, its deduction can greatly reduce a property’s net income.

Why do accountants and appraisers handle reserves this way? Because the above-the-line deduction of reserves permits properties to be compared on an apples-to-apples basis.

For example, the replacement reserves deduction for one hotel may vary from the deduction for another hotel for a variety of reasons, including intensity of use, age of the facility and so forth, based on the owner /operator’s knowledge of what is needed to keep that hotel competitive.

Removing reserves from the picture enables an appraiser or assessor to compare the net income performance of comparable competing properties on a uniform basis. Such comparisons are also important to investors.

Reserves and Property Taxes

As described above, the deduction of replacement reserves as an expense affects a property’s net income. If the assessor fails to deduct the reserves, or deducts them after net income in a below-the-line calculation, the net income will be higher. Conversely, if the appraiser deducts reserves as an operating expense, net income will be lower.

Net income often underpins property tax values and tax assessments. If the assessor deducts reserves and net income is lower, then the property’s taxes will be lower. If not, the taxes will be higher.

In some states, including California, tax authorities mimic market participants in their treatment of reserves. That means that for some properties, assessors deduct reserves so that properties can be directly compared for appraisal and valuation purposes. The consistent handling of reserves also permits taxing authorities to develop capitalization rates from comparable sales transactions.

Reporting Inconsistencies can Increase Taxes

While participants in a particular real estate sector — say, hospitality or retail — generally handle reserves in the same way, it is difficult to learn about the amount of replacement reserves deducted for a specific property due to the confidentiality of financial statements. If financial statements are available, the property’s operator may ignore industry standards and report reserves below the line, or may not report reserves at all.

The amount of reserves reported, usually as a percentage, may also vary from property to property even within the same property class. Finally, a property operator may simply use an arbitrary figure for reserves, which does not represent the actual cost of the replacement reserve deduction incurred.

Disparities in reporting reserves can significantly skew the net income, which is the basis for a property’s assessed value and property tax bill. Taxing authorities exacerbate the problem when they handle replacement reserves inconsistently, either because of inconsistent reporting or because the assessor attempts to correct financial statements that omit replacement reserves or appear to inaccurately report replacement reserves. If the assessor uses incorrect data, or incorrectly adjusts the data, the property values will be incorrect and the taxes based on those values will be erroneous.

Getting Reserves and Taxes Right

Taxpayers can insure their local assessor properly handles reserves in assessing and taxing their properties by taking these simple steps.

1.  If the taxpayer provides financial statements to the tax authorities, make sure to report replacement reserves consistently with industry practice. If most industry participants report on an above-the-line basis, follow that practice.

2.  If the taxpayer is spending replacement reserves, report the full amount of those reserves. Failure to report or under-reporting will likely increase the property’s taxes.

3.  Ask to see the financial statements from other properties that the taxing authority is using to value the property. If the assessor won’t disclose those statements, at least ask to see the portion showing the amount of reserves and the how they are being handled.

4. If investigation shows that reserves are being improperly handled and a property is over-valued, meet with the tax authority’s appraiser to discuss the situation and, if necessary, use the appeals process to correct the assessment. 

Cris ONeall

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..

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Dec
15

Market-Value Tax Assessments Under Attack

Governments increasingly seek tax increases through value-in-use property taxation.f the compelling evidence is on your side, the record shows you have a fighting chance.

An unprecedented national debate is raging as vocal proponents of additional government revenue seek significant property tax changes that will be costly to taxpayers.

A recent Michigan Court of Appeals decision in Menard Inc. v. Escanaba (the “Menard decision”), which involved a Menards hardware store in the Michigan Upper Peninsula City of Escanaba, confirms that proponents of greater taxation are masking their true goals with claims that they merely seek equitable taxation. Consequently, it is important for property owners to understand the issues involved.

Typically, property taxes reflect market value rather than a property’s value-in-use, which is the value to the owner. The market value standard bases taxes on the amount the property probably would fetch, after reasonable market exposure, in a sale between two knowledgeable, unrelated parties.

With the exception of the right to appeal under due process, no property tax component is more essential to taxpayers than basing taxation on market value, and not on value-in-use. The market value standard provides a framework for equitable and uniform property taxation.

Market value bases taxes on what is achievable in a market sale, determined through objective information such as comparable sales, rental income, operating expenses, capitalization rates and other market information.

Important distinctions

With market value taxation, a property’s value is unaffected by who owns the property, or whether the owner is able to use the property to operate a successful business. For example, a retailer, manufacturer, or cloud data storage provider may use intangible and tangible property, including real estate, in a way that achieves extraordinary income from business operations. This does not change the market value of the real property used.

In contrast, value-in-use taxation is inequitable and non-uniform. Consider two identical, neighboring residential properties that have the same market value. Their value-in-use would most likely differ, and the differences could be dramatic. The disparity could be because one house has more occupants, or because one property is used only part of the year.

Alternatively, one house could have greater value-in-use because a resident generates significant income from work done while in the home, such as in a home office or studio. Also, when one of these identical properties sells, the property’s value-in-use could substantially increase or decrease.

Those who seek value-in-use taxation might argue that such taxation is equitable because owners who obtain more value from using their properties should pay higher property taxes. But consider some of this position’s enormous failings:

  • Most people would readily agree that the most equitable system is one in which all properties are uniformly valued based on their usual selling price, rather than their differing values in use.
  • Value-in-use taxation is highly subjective and inherently inequitable. Imagine the problems and disputes if properties were valued based on the value each owner experienced.
  • Value-in-use assessment would result in duplicative taxation. If a property is used in conjunction with a business, whether the property is a residence or otherwise, value-in-use property taxation will reflect the business’s income and success. Yet, there will be duplicative taxation where other taxes are imposed on the business, such as income taxes, gross receipts taxes and value-added taxes.

Given the enormous problems with value-in-use taxation, taxpayers could understandably think there is little risk that such taxation would be adopted.

Unfortunately, those seeking value-in-use taxation have shrewdly focused on the taxation of large big-box retail properties, which they claim have been unfairly valued based on sales of vacant properties that allegedly had value-depressing deed restrictions.

The proponents of greater taxation have even tried to divide taxpayers by suggesting that some taxpayers will pay higher taxes because big-box taxpayers are not paying their fair share.

Keys to the truth

Developers build big-box retail properties to the owner’s specific needs, typically with a layout matching the owner’s other stores. Buyers of such properties invariably pay far less than the cost to construct such properties. They do so because they will spend large sums for renovations the new owner desires, in particular to fit a business image.

Also, there is reduced demand for these properties. It’s what appraisers call external obsolescence – especially with growing industry disruption from Internet sales. There are numerous sales of big-box properties without deed restrictions that confirm the selling prices for these properties are low compared with their construction costs.

Notwithstanding these irrefutable truths, the Menard decision held that an assessor could value the property under a cost approach, as if the property had no functional obsolescence. According to the Michigan Court of Appeals decision, a buyer would consider a property suitable for its own needs, merely because the property satisfied the needs of its original owner.

Such reasoning obviously values the property based on its value to the original owner – i.e., value-in-use, not its market value. These principles are the same whether dealing with a non-residential property or a home that has been custom built to an owner’s unusual tastes.

Significantly, the Menard decision specified that value-in-use taxation also could apply to a large industrial property. And a prior Michigan Court of Appeals decision endorsed value-in-use for the headquarters of a financial institution. Once the value–in-use genie is out of the bottle, it can cause above-market valuations and increased taxes for virtually any type of property.

Notably, the pro-government briefs that oppose Menards appeal to the Michigan Supreme Court deny that the decision endorses value-in-use taxation. These denials, like those in the press made by advocates of greater taxation, disregard that the Menard decision itself uses the very words “value-in-use" in endorsing such taxation. It remains to be seen if the Michigan Supreme Court will review the Menard decision, and it could be a year or more before the case’s ultimate outcome is known.

High stakes game

Some in the business community are responding to today’s property tax debate as they would to any intense effort to broadly raise property taxes. Such groups understand what is at stake and are defending market value-based property taxation for all properties.

Yet those who seek higher taxes appear to be strongly united. Whether they succeed in imposing value-in-use taxation may well depend on whether the business community itself will unite to oppose what eventually could become an enormous tax increase.

To paraphrase Abraham Lincoln, a business community divided against itself will inevitably succumb to the united forces that seek greater taxation.

Mandell Stewart jpg

Stewart Mandell is a Partner of the Tax Appeals Practice Group Leader, in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Dec
07

Superstorm Sandy's Impact On Property Taxes

Mistaking rehabilitation for new construction, assessors inflate post-superstorm tax assessments.

Four years have passed since Superstorm Sandy slammed the East Coast and crippled the Northeast. The overwhelming majority of media coverage centered on the devastation suffered by residential properties, paying little attention to the tens of thousands of commercial property owners who suffered equally historic destruction.

The rebuilding process has been a feast for local tax assessors, who have increased property assessments throughout these Sandy-stricken areas based on the misguided opinion that rehabilitated commercial properties should be valued as newly constructed buildings, ignoring the financial realities and stigma attached to "Sandy properties."

The post-Sandy rebuilding process has taken years, requiring commercial property owners to overcome insurance claim nightmares, bureaucratic red tape, and the massive exodus of tenants who either lost their businesses or relocated as a result of the storm. Too often, local tax assessors ignored the hardships suffered by these property owners, taking advantage of the reconstruction by increasing assessments well above pre-Sandy values to increase their tax base.

Fortunately, the laws of each state allow landlords or property owners to reduce unfairly increased property tax assessments by filing a commercial tax appeal. These appeals offer the owner or the owner's representative the opportunity to prove that the property is worth less than its current taxable value. Whether that tax-reduction opportunity occurs at an administrative hearing, through negotiations or in the courtroom, taxpayers are best served by seeking the expertise of an attorney experienced in navigating the appeals process and the valuation of commercial properties.

Proper Valuation vs. Unfair Increases

Traditional methods to valuing commercial real estate for property taxation include the sales-comparison, cost, and income capitalization approaches.  Sales comparison typically relies upon arms length sales data. Unfortunately, there is very little arms-length transaction data in Sandy-ravaged areas because the market has been flooded with sales of distressed properties.

The cost approach should only be applied when valuing new construction or specialty properties.

When tax assessors value commercial buildings as in-come-producing properties, they capitalize the subject's net income stream, or if owner-occupied, the income it would generate if leased. Appraisal professionals and the courts agree that this income-capitalization approach is the preferred method of valuation at a commercial tax appeal.

Nevertheless, local tax assessors have been leaning on the cost approach when valuing post-Sandy re-habilitated retail properties. These assessors mistakenly perceive a property owner's rehabilitation or reconstruction work as equivalent to a capital improvement or new construction, at the same time ignoring the economic realities that these property owners faced as a result of the storm. More specifically, the cost approach ignores increased expenses, extended periods of vacancy and the difficulty that landlords continue to face in luring tenants back to properties destroyed by the storm. This unfortunate valuation practice has inflated tax assessments and created unfair tax burdens.

Hidden Costs Linger

Sandy's impact runs deeper than brick and mortar reconstruction. Cleanup, rehabilitation and lingering stigma have forced landlords to contend with increased expenses and lengthy vacancies. The stigma that follows a "Sandy property" is similar to that attached to cars sold in New Orleans after Hurricane Katrina, engendering the burdensome label of "Katrina cars."

Like suspicious car buyers in Katrina's wake, prospective tenants either ran for the hills or demanded low rents with short-term leases after learning that a property was ravaged by Sandy. The fear of the unknown resulted in tenants searching for what they perceived as less risky locations further inland.

In addition to disproportionately high vacancies, Sandy-stricken property owners have had to contend with significantly increased expenses. Insurance is one example. Not only have premiums skyrocketed due to the perceived risk of owning property near Sandy's point of impact, but the Federal Emergency Management Agency has issued new flood zone maps that expand many flood zones inland. Flood zone boundaries have compelled landlords to purchase flood insurance in areas that are relatively far from the shore, regardless of whether their property incurred damage from the storm.

Property owners typically bore the costs to rehabilitate flooded and destroyed properties, because many insurance companies exclude wind or hurricane damage from coverage. Other properties sustained damages in excess of policy limits. Unfortunately, many owners lacked the necessary funds to rehabilitate, leaving entire shopping centers abandoned.

Property owners who were lucky enough to have full coverage still had to deal with empty buildings and high carrying costs for many months during ongoing construction.

Taxpayers Fight Back

The key to a successful property tax appeal is to arrive armed with data supporting the argument that the subject property is worth less than its assessed, taxable value. For commercial property, the owner or their representative should analyze the subject's income and expense history, together with market data of similar properties in the area. For a Sandy property, this analysis should concentrate on the actual economic harm suffered as a result of Sandy and its aftermath.

In order to do this, prior to filing a property tax challenge, the taxpayer's representative should review copies of the leases, rent rolls and income and expense data of the subject from the last five years. Assuming the asset suffered major vacancies, the property owner's representative must be prepared to discuss and produce documentation or an affidavit attesting to the hardships faced in trying to rent the property and overcome the stigma associated with marketing Sandy-stricken space. In addition, the owner must be prepared to produce and discuss all insurance claims, including awards and denials, and provide an accounting of all out-of-pocket costs associated with the property's rehabilitation.

A carefully prepared and documented presentation of the facts offers the owner a real possibility to avoid unfairly high property tax assessments on these Sandy-impaired properties.

Hild and PenighettiRyan C. Hild and Jason M. Penighetti are attorneys at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLP, the New York State member of Amercian Property Tax Counsel, the national affiliation of property tax attorneys.  Contact Ryan at This email address is being protected from spambots. You need JavaScript enabled to view it. or Jason at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Dec
05

In Tax Law, There Are No Insignificant Cases

Throughout the United States, taxpayers can expect to bear the burden of proof in property tax appeals. Standards vary by jurisdiction, but owners who seek to change a municipality’s assessment must convince a board or court that the property owner is correct in challenging the assessor’s conclusion. If they fail in that argument, the assessment remains unchanged.

Commercial taxpayers and their tax professionals often review decisions by local courts to glean direction and weigh prospects of a favorable outcome in their own cases. These stakeholders tend to only view complex commercial property cases for insight, ignoring residential and small commercial cases. But seemingly insignificant residential and small commercial cases are rich in detail that may aid taxpayers with a more sophisticated case when preparing to meet the standard of proof.

Some of these smaller cases shine a light on changing expectations of the court. For example, courts may begin to deem evidence that once would have been acceptable to meet the court’s threshold is no longer adequate. Thus, while the court does not change the law or create new standards, its interpretation of “sufficient competent evidence” may well move the goal post. The education obtained from these cases is not a guiding light to win a case, but rather a reminder of how not to lose one.

In New Jersey, law presumes that any property assessment is correct. Based on this presumption, any taxpayer appealing that valuation has the burden of proving the assessment is erroneous. The presumption is more than an allocation of which party carries the burden of proof. Rather, it expresses that in tax matters, the law presumes that the assessor correctly exercised their governmental authority. In a 1998 decision, MSGW Real Estate Fund vs. the Borough of Mountain Lak, the court stated that the presumption of correctness stands until sufficient competent evidence to the contrary is presented.

Courts must decide whether the evidence presented is sufficient to counter the assessor’s conclusion. To meet that standard, the evidence presented must be sufficient to determine the value of the property under appeal, thereby establishing the existence of a debatable question as to the correctness of the assessment.

This language is common in most jurisdictions. In New Jersey, it is also increasingly more common to see a change in the trial court’s interpretation of what meets the level of proof to question the assessor’s assumptions. The danger to taxpayers occurs when a court of special expertise establishes case law that, in effect, raises the standard of proof by simply increasing the evidence barrier to attain a reduction.

For example, in January of this year a New Jersey tax court decided Arteaga vs. Township of Wyckoff, where the taxpayer challenged the assessment of a single-family home assessed at approximately $900,000. The property owner offered an expert and an appraisal report for the years under appeal, while the municipality did not complete an appraisal, instead relying on the presumption of correctness.

The taxpayer’s expert cited three sales in a sales comparison and concluded a value of approximately $775,000. In a 10-page opinion, the court rejected the expert’s conclusions, finding fault with his adjustments to the comparable sales.

The court stated that an expert’s testimony must have a proper foundation to be of any value in an appeal. Citing earlier cases, the court stated that an expert must offer specific underlying reasons for their opinions, not mere conclusions. An expert witness is required to “give the why and wherefore of his expert opinion, not just a mere conclusion.” In this case, the court found that the plaintiff’s expert provided no substantive factual evidence to support the adjustments made.

The trend toward requiring a higher level of evidence has been growing over a number of years. As the court noted in a 1996 case, Hull function Holding Corp. vs. Princeton Borough, expert opinion unsupported by adequate facts has consistently been rejected by the tax court. Other rulings have stated that while the court has an obligation to apply its own judgment to valuation data submitted by experts in order to arrive at a true value and find an assessment for the years in question, the court must receive credible and competent evidence to make an independent finding of true value.

In the recent case, the court stated it was not provided with credible and competent evidence. As a result, the court had insufficient information from which to determine valuation. The court concluded that in general the expert provided no market analysis for any of the adjustments he made to his comparable sales.

The lesson to be learned: be aware of the potential of a new, heightened level of proof to establish a reduction. The case law has not been changed or altered. However, while most jurisdictions have case law suggesting that a court be mindful of the expense and reasonableness of data it should expect from a taxpayer to prove its case, trends have started to appear that swing the decisions toward a more difficult and expensive standard.

A number of recently decided residential tax appeals have followed this path to a find of no-change to the assessment. While the courts may be correct in the conclusions that evidence was lacking, they set a disturbing tone as to the level of expectation required for data to prove a value reduction.

The answer for taxpayers seeking a solution to this issue cannot be detailed so as to follow a definitive path to victory. For taxpayers seeking reductions in assessments, they must be aware and wary of not only the law, but the court’s most recent expectations.

Phil Giannuario photoPhilip Giannuario is a partner at the Montclair, N.J. law firm Garippa, Lotz & Giannuario, the New Jersey and Eastern Pennsylvania member of American Property Taxc Counsel (APTC), the national affiliation of property tax attorneys.  Contact Philip at Ryan at This email address is being protected from spambots. You need JavaScript enabled to view it. or Jason at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Nov
09

Why Timeshares Shouldn't Be Taxed Like Condominiums

The perceived similarity between condominiums and timeshare projects often leads tax assessors to treat those properties as identical.  “If it looks like a duck, quacks like a duck and walks like a duck, then it probably is a duck,” right?

But when it comes to property assessments for taxation, looks can be deceiving.  Fundamental differences between timeshares and condominiums can lead to significantly divergent value calculations.  All too often, it falls to the taxpayer to see that the assessor acknowledges and accounts for those factors in order to accurately assess timeshare properties.

In 2015, an assessor increased the assessment for a timeshare project at a Utah ski resort by 10 percent from the previous year.  The property owner appealed the assessment and provided evidence of the project’s fair market value.  The assessor challenged that evidence, however, based in part on an increase in sale prices for condominiums during previous years.

Under Utah law, the value of a wholly-owned condominium does not provide a meaningful comparison to the value of a timeshare project for several reasons.  First, such a comparison assumes that units within a timeshare project could be resold as wholly-owned condominiums.  This is impossible, given the legal structure of timeshare properties.  Once a timeshare project is put into place, it cannot be altered.  Unlike condominiums, individual units can never be sold.

Although the Utah assessor identified a 30 percent increase in per-unit condominium sale prices near the project, there was not a similar 30 percent increase in timeshare sales.  The only consistent figure shared by timeshares and condominiums each year is the number of units subject to foreclosure.

Second, treating timeshares like condominiums fails to take into account the costs associated with operating a timeshare project.  Utah law recognizes that timeshares are significantly different from condominiums and requires assessors to exclude costs that are unique to timeshare properties.

Specifically, those factors include any intangible property and rights associated with the acquisition, operation, ownership and use of the timeshare interest or timeshare estate.  The assessor must also exclude fees and costs associated with the sale of timeshare interests and timeshare estates that exceed those fees and costs normally incurred in the sale of other similar properties.  Other excluded costs include the operation, ownership and use of timeshare interests and timeshare estates, vacation exchange rights, vacation conveniences and services, club memberships and any other intangible rights and benefits available to a timeshare unit owner.

Sales commissions for timeshares are typically about 18 percent, whereas sales commissions for condominiums are closer to 6 percent.  Because the law requires an adjustment for costs and fees which “exceed those fees and costs normally incurred in the sale of other similar properties,” the property owner is entitled to remove the excess 12 percent portion of commissions.

There are other fees and costs for operating a timeshare that, by law, may be deducted from the value.  Those fees and costs may be difficult to identify or to allocate to individual units, but would include fees and costs for customer service, management costs necessitated by the existence of numerous owners, accounting and similar expenses.

A third distinction is that the assessor may need to make a personal property adjustment for timeshare property.  In Utah, the personal property of timeshares is separately assessed and, to avoid double taxation, must be excluded from the real property assessment.  In the pending Utah appeal, the assessing county challenged the property owner’s proposed personal property adjustment because it exceeded the reported value for the project’s personal property tax assessment.

In Utah, personal property assessments reflect depreciation schedules, which are rough estimates of the depreciated value of certain classes of personal property.  When those schedule-based values diverge from fair market value, an adjustment removing the fair market value of that property (for purposes of the real property assessment) will not perfectly correspond to the personal property tax assessment.  Nevertheless, a fair market value assessment of the timeshare property should include an appropriate adjustment for personal property which is otherwise taxable.

Timeshare units are simply incomparable to wholly-owned condominiums.  Under Utah law, the most appropriate way to value timeshare units is to look at sales of similar timeshare units, making adjustments consistent with the tax code.  Laws in other states may require similar adjustments.

When reviewing local assessments of timeshare properties for comparison, be aware of the distinctions between condominiums and timeshares, and ensure that proper adjustments were made in each.  If those timeshare assessments are comparable to assessed values of condominiums, then the assessor likely neglected to account for the unique characteristics and expenses associated with timeshares.

Pamela B. Hunsaker serves as counsel in the Salt Lake City office of law firm Holland & Hart and is a Montana, New Mexico, Utah and Wyoming 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..

 

Hunsaker Pamela

Pamela B. Hunsaker serves as counsel in the Salt Lake City law office of Holland & Hart and is a Montana, New Mexico, Utah and Wyoming member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reched at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Nov
01

Tax Trauma - How Higher Assessments Can Cause Lower Net Rents

Resurgent demand for commercial real estate is driving sale prices to record highs, pressuring assessors to increase taxable property values substantially. In the Minneapolis-St. Paul area, tax bills on some suburban and downtown Minneapolis buildings have shot up 30 percent or more within two years following a sale.

These assessment spikes yield staggeringly larger tax bills, with some buildings now taxed at $8 to $10 per square foot, up from $5 to $6.50, for taxes payable in 2014.

For landlords with well-occupied properties, the tax burden itself is less important than the increased occupancy cost it creates, because most tenants compare lease proposals by total occupancy cost rather than by net rent alone. It does not matter to a tenant where the rent dollar goes; for every dollar that taxes increase, tenants will likely try to reduce net rent payments by that same amount in order to keep occupancy costs flat.

Assessors under Pressure

The Minnesota Department of Revenue prepares an annual sales-ratio study that compares assessments to sales prices. This puts pressure on assessors to react strongly to rising sale prices when properties are revalued each year.

If a sale price is 50 percent higher than the assessed value, then a 20 percent assessment increase in the first year after the sale, and 20 percent again the next year, will only raise the value to something approaching the sale price.

For example, a downtown Minneapolis property assessed at $107 million sold for $200 million. The assessments increased only 10 percent the first year and another 10 percent the second year, but jumped another 34 percent in year three. These repeated increases drive building costs well beyond owner and taxpayer expectations.

Assessors increased another property’s value by 30 percent in the year after the sale. Yet another pair of buildings were assessed 10 percent higher the year before they sold, then increased 30 percent and 50 percent in the year following the sale, putting them at approximately 90 percent of the purchase price.

Tenant Repercussions

Tenants notice operating cost increases, especially those recurring over consecutive years. Operating cost increases can discourage a tenant from renewing its lease at a higher rent.

As an example, a local tenant in a build-to-suit property had projected taxes at $4 per square foot, but with taxes of $10 per square foot this year, the tenant faces occupancy costs far in excess of projections. Whether the difference is looked at in an absolute sense as $6 per square foot or as 250 percent higher than expectations, the tenant is in a very different financial position than anticipated. How can the next lease be at the same net rate?

Many national tenants demand lease provisions that cap annual increases in real estate tax charges as protection against these increases, turning a triple-net lease into a quasi-gross lease, at least for taxes. Common in retail properties and found in flex space or office buildings as well, this practice puts a dent into the owner’s return. As in many other states, Minnesota assessors try to equalize assessments, so a few high-priced sales may trigger increased assessments for neighboring buildings. If an assessor is trying to avoid being accused of “chasing sales,” then one or two sales in a market area can lift all assessments. Comparable properties may see an increase in taxes with no changes to their own net rents or occupancy. Such increases can be a burden if the assessor has done a poor job of equalizing.

One of the biggest surprises for new buyers can occur when trying to renew leases. Many landlords discover that higher assessments lead to lower net rents or increased vacancy numbers that are far different from the assumptions made at the time of purchase. Relatively few buyers project double-digit tax increases, so tax hikes approaching 30 percent can inflict a troublesome dampening effect on net rents and occupancy.

Even tax increases limited to 10 percent annually for two or three years will exceed the 3 percent increases that a typical buyer builds into a discounted cash flow analysis when evaluating a purchase. That unexpected cost can decrease cash flow in future years to the point that the purchase price appears too optimistic. When this increase in taxes is combined with lower net rents as tenants fight to keep occupancy costs under control, the entire analysis at the time of sale becomes a meaningless historical curiosity.

Clearly, potential buyers must perform due diligence on assessor practices when a contemplated sale price is significantly higher than current assessments, or risk nasty surprises in the next few years.

 

jgendler

John Gendler is a partner in the Minneapolis law firm of Smith, Gendler, Shiell, Sheff, Ford & Maher, P.A., the Minnesota 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..

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Oct
20

Purchase Price Isn't Property Tax Value

Know the many factors that often make property tax value different than the purchase price.

Don’t worry about challenging a property tax value that is less than the taxpayer’s purchase price, right? Wrong! There are numerous factors that distinguish a purchase price from a taxable assessed value, and the failure to closely review an assessment can cost a property owner dearly.

The legal standard for determining property tax values can differ from state to state, but it is generally equivalent to fair market value.  That is the probable price that the property would bring in a voluntary, arms-length transaction between a willing and knowledgeable buyer and seller, in an open and competitive market, with neither party being under undue duress, as of the valuation date.

While it is possible for a purchase price to be the same or similar to market value, there are many instances where the two deviate.  Here are some common examples:

A sale is not an arms-length market transaction if it occurs between related parties and isn’t exposed to the open market.  A sale between a company and its subsidiary, for example, may not reflect fair market value.

Fee Simple vs. Leased Fee

For property tax purposes, fair market value is most often based on the fee simple estate, unencumbered by Leases or other third-party interests in the property.  If the property is subject to an above-market lease, perhaps in a sale / leaseback transaction, the leased fee purchase price might greatly exceed the property’s fee simple valuation used for assessment purposes.

Portfolio Sales and M&A

A transfer of real estate in connection with a merger or acquisition is not a market transaction with respect to that particular property.  Likewise, an assessor shouldn’t use the sales price for a portfolio of properties, which might be bundled together and marketed as a whole, to determine the market value of one small component of the transaction.

Although buyers regularly make purchase price allocations for these types of transactions, such allocations are not synonymous with fair market value standards used for assessment purposes.

Unique Sales Terms

Sellers and buyers often think outside the box to close a deal.  Seller concessions come in all shapes and sizes and can drastically affect the final purchase price.  For instance, a seller may agree to provide certain services or take on additional obligations after closing that would not be part of a typical market transaction.

1031 Exchanges

Buyers motivated to defer substantial income tax liability by executing a 1031 exchange before a deadline may pay above-market prices.

Special Financing Terms

The purchase price may be artificially inflated because of unusual or favorable financing terms.  Institutional investors, with greater access to the capital markets, are able to obtain more favorable financing terms than the average market participant.  This lower cost of capital allows the institutional investor to pay above-market prices on lower cap rates in order to beat out competing bidders, while still achieving the same return as the typical investor.

Construction Costs

Developers and expanding businesses often find their projects detailed in the newspaper, with anticipated costs or total project investment.  Often these amounts include expenses not associated with the real estate, such as equipment, employee training and the like.  And just because something costs a certain amount to build does not mean it can be sold for a similar price.

Declining Market

Markets heat up and markets cool down.  Overpaying at the height of the market may mean a poor return, but this should not justify an overassessment.

A prudent assessor looks beyond the price to determine if a sale is a true, market-value transaction.  Despite the best intentions, even the most diligent assessor cannot account for all of the factors that can skew a sale price away from market value.  Referencing non-market deals for comparison will erroneously influence the sales data and can lead to artificially higher assessments.  The assessor’s reliance on an assumed purchase price for the subject property can have an even more dramatic and costly effect on that taxpayer’s assessment.

Many states charge a transfer or privilege tax to record a deed, which may require the buyer or seller to disclose a purchase price.  Assessors will look at these stated purchase prices and will quickly flag any that are higher than the assessed value.  A taxpayer should consult with local counsel to avoid overstating the purchase price.  For instance, a purchase price may include personal property, intangibles or perhaps additional real estate that should not be included in the consideration amount required to be disclosed.

Real estate brokers should not be surprised when contacted by assessors or subscription services to confirm details of a sale.  Before quickly confirming a sale as a market transaction, the broker should be mindful of the issues discussed in this article.  The failure to do so might significantly increase the purchaser’s future tax assessment.

All real estate investors should have a property tax review plan in place, with professionals knowledgeable of local valuation standards, rules and procedures.  When purchasing or developing real estate, remember to provide your tax professional with the particulars of the transactions, including any reasons why the purchase price or investment may not indicate market value.

Always keep in mind that purchase price and market value are not synonymous, so there is no need to concede a high assessment without first looking beyond the price on the deed.

  adv headshot resize Aaron D. Vansant is a partner in the law firm of DonovanFingar LLC, the Alabama member of 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.

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Oct
18

Why Taxing Authorities are Suing Taxpayers

Municipalities and school districts increasingly file lawsuits to increase property tax assessments.

As property owners increasingly participate in transactions across multiple states and countries, they could be shocked to find themselves defending against a lawsuit filed to increase their real estate taxes.

A minority of states allow the local real estate tax assessing body or school district to appeal a tax assessment, arguing that the property's value and resulting taxes should be higher.  States where these types of appeals are allowed include Ohio, Pennsylvania and New Jersey.  Property owners in those states should  be aware that someone may be filing a lawsuit to increase their property taxes.

Method to the madness

Taxpayers cannot prevent a school district or assessing body from appealing a property tax assessment in states that allow them to do so.  Property owners should be especially watchful in the following situations where it is more likely to occur:

Sales – In Ohio, if a recorded sales price is higher than the current assessment, it is almost guaranteed that the local school district will file a complaint to increase an assessment, particularly in large markets around urban areas.

School district attorneys routinely review recorded sales for comparison to the current assessment.  Although recent legislative changes have increased assessors' ability to consider all relevant facts of a sale, a recorded sales price is still a formidable challenge to overcome.

In Pennsylvania, and particularly in Western Pennsylvania, sales are the most common trigger for an appeal to increase a tax assessment.  In states where chasing sales price may run afoul of constitutional protections, the local taxing authority may wait until a few years after the sale closes before filing the appeal.

Mortgages – In response to lower sales prices and increased sales volume resulting from foreclosure or bankruptcy during the Great Recession, taxing bodies also file appeals to increase taxes based on recorded mortgages.

Similar to the tracking of recorded sales, attorneys for the taxing authority will review the amounts of recorded mortgages and compare them to the current assessment.

When the mortgages are secured by collateral that includes other assets in addition to the real estate, this practice can lead to inaccurate and inflated real estate tax assessments.

Other available filings – A recent case in Ohio shows the spread of this practice from recorded mortgages and deeds to Securities and Exchange Commission (SEC) filings.

The local school district filed an appeal to increase the assessment of an apartment in Athens from approximately $12.6 million to $48.98 million, based on an SEC filing by a mortgage lender.

The property owner's attorney has stated that the SEC filing includes the total value of the business purchased, which includes other assets in addition to the real estate.

The local county board of revision granted the revision at the first level of review and the case is currently on appeal.

Outside consultants – In Pennsylvania, taxing authorities filing complaints to increase assessments are on the rise, particularly in counties that have riot undergone a reassessment in some time, based on the recommendations of outside consultants.

These consultants contract with a particular taxing body, typically the school district, to review assessments and recommend appeals on properties they identify as under assessed.

Although this consultant activity seems most prevalent in the eastern part of the state, the regular practice of school districts filing appeals is spreading across Pennsylvania.

Meanwhile, in Ohio certain school districts have even begun to file complaints to increase values in cases that have previously been tried in court.

Practical pointers

Because sales trigger so many of these cases, it is important to get pre-closing advice on the property tax consequences affecting your specific property.  There may be measures the taxpayer can take in structuring the transaction to avoid or minimize an increase in taxes.

Be aware of the tax consequences of recorded and publicly available documents, including SEC filings, particularly with portfolio asset purchases across multiple states.

Filially, attorneys for the taxing body may use procedural tactics to fish for non-public documents that could help them argue that a property is under assessed.  For example, school districts in Ohio have used the discovery process to subpoena financing appraisals from lenders.

Local expertise is key

Because real estate taxing schemes vary greatly, owners should consult local tax professionals to determine the best strategy to defend against an appeal that seeks to increase the property owner's taxes, or to minimize the potential that such an appeal will be filed in the first place.

Procedural, jurisdictional and evidentiary traps abound for those not well-versed in the local law.

For example, in Ohio, property taxes are levied and paid one year behind, meaning that taxes for the 2016 tax year are paid in calendar year 2017.  Similarly, appeals to reduce or increase the tax assessment are filed one year behind.

If a taxpayer purchases a property and the sale closes on Dec. 31, 2016, for a recorded price that is higher than the current tax assessment, the school district will be aware of that sales price and can contest the 2016 assessment any time from Jan. 1 through March 2017.

If the school district appeals the assessment based on the sales price and is successful, the assessment will be increased to the sales price, effective at the beginning of the 2016 tax year.

That means the buyer could be on the hook for increased taxes for a period of time when he did not own the property.

Local taxing bodies have been filing appeals now more frequently to increase property tax assessments, attempting to generate revenue after property values and sales prices dropped during the economic downturn.

Even though the market has improved, these taxing authorities are unlikely to now abandon the practice.

Consult with professionals who have local experience to defend against these suits in order to maintain fair real estate assessments and taxes.

Cecilia Hyun 2015

Cecilia Hyun is an attorney at the law firm Siegel Jennings Co, L.P.A., which has offices in Cleveland and Pittsburgh.  The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Oct
10

Recovery Complicates Retail Property Tax

The retail real estate sector has been slow to recover from the Great Recession, and vacancy levels remain elevated for neighborhood shopping centers. As retail property owners search for ways to reduce carrying costs, many are scrutinizing one of the largest expenses their properties incur: real estate taxes.

Fortunately, the laws of each state provide a vehicle for landlords to reduce unfairly high property tax burdens by filing a commercial property tax appeal. At these appeal hearings, the property owner must prove that the property is worth less than its current taxable market value, and seek a fair value either through negotiation or a valuation trial in the local court.

Building a strong case to reduce an assessed taxable value requires technical expertise at any time, and it’s an even more complicated proposition for retail properties in a period of economic recovery.

The three traditional approaches used to value a shopping center are the cost approach, sales comparison approach and the income capitalization approach. Unless the shopping center was recently constructed, the cost approach is seldom used. The sales comparison approach is only used when comparable sales data is available, which is rare. Therefore, appraisal professionals and the courts agree that the income capitalization approach is generally the most reliable analysis.

The income approach requires the capitalization of a net income stream into a present value. Prior to filing a property tax challenge, the shopping center owner or their tax professional should gather copies of leases, rent rolls, and income and expense data for the prior and current year. Each is required in order to estimate the property’s market value.

Post-recession issues

Prior to the economic crash of 2008, a review of the property’s leases, vacancy rates and expenses helped paint a picture of the center’s ability to produce income. After applying a proper capitalization rate — the rate of return reflecting the risk of investment — to the center’s net income, an owner’s tax professional would be able to estimate the center’s market value for property tax purposes.

Following the crash of 2008, however, an increasing number of shopping center landlords have been forced to make rental concessions in order to keep tenants. As a result, the mere analysis of the center’s occupancy, lease rates and expenses is no longer enough.

A better strategy is to conduct a comprehensive inquiry with the owner’s leasing representative or property manager to identify any concessions such as reductions in rent, recalculations of base tax years for property tax reimbursement, or a reduced reimbursement of common area maintenance charges.

Much of the data in the typical yearend income and expense report for a shopping center may be misleading or inconclusive, requiring detailed discussion with the landlord or the landlord’s accountant. For example, some owners report tenants’ payments to the landlord for reimbursement of property tax or for common area maintenance as rental income. Yet if this data were capitalized along with rental income in a valuation, it would inflate the center’s taxable value and reduce the owner’s chance of securing a property tax reduction at a valuation hearing or trial.

After determining rental income, the taxpayer or tax professional will review the shopping center’s vacancy history in order to determine the property’s effective gross income, or gross income less vacancy and collection losses.

The economic health of any shopping center depends upon the percentage of the total space rented. Therefore, the taxpayer must consider an appropriate vacancy and collection loss factor when refining gross income into economic gross income. Shopping centers are rarely fully occupied today, and this factor must be considered in the analysis. Vacancy rate estimations should reflect a review of the subject’s vacancy rate together with local and regional market statistics.

Next, analyze expense data to estimate the subject’s net income, subtracting expenses typically incurred by the landlord from the property’s effective gross income. To ascertain typical expenses, study a number of shopping centers and compare those findings with the subject’s actual expense data. Generally, shopping center expenses include management, insurance, leasing fees and commissions, un-reimbursed common area maintenance charges, and utilities not paid by tenants.

Depending on the region, these expenses can total 15 percent to 30 percent of gross income.

The income capitalization approach to market value requires the application of a capitalization rate to the shopping center’s net income in order to estimate fair market value. The capitalization rate is a percentage that expresses risk, return, equity and property tax rates.

Considerations in estimating these rates include the degree of risk, market expectations, prospective rates of return for alternative investments, rates of return for comparable properties in the past and the availability of debt financing. It’s always helpful to determine caps rates utilized in the jurisdiction.

Many things to consider

Clearly, there are many factors to consider when evaluating a shopping center’s taxable value today. In addition to the factors mentioned above, the property owner must consider the subject’s size, location, access, competition, parking, tenants and other traits to form a value opinion.

Prior to presenting a case to the assessor or judge for a property tax reduction, the taxpayer must thoroughly analyze the individual economics of the shopping center and employ a valuation approach that produces a logical and well supported estimate of taxable market value.

Given that most shopping centers have experienced economic hardship since 2008, owners of these properties should seek professional advice to evaluate their property tax bill. A skilled property tax attorney will know how to conduct the necessary analyses and effectively argue on the taxpayer’s behalf for a property tax reduction.

Hild and PenighettiRyan C. Hild and Jason M. Penighetti are attorneys at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLP, the New York State member of Amercian Property Tax Counsel, the national affiliation of property tax attorneys.  Contact Ryan at This email address is being protected from spambots. You need JavaScript enabled to view it. or Jason at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Oct
10

Beware of RevPAR in Property Tax Valuations

When comparing hotels for valuation purposes, a common method of making adjustments for the difference between properties is to examine revenue per available room (RevPAR), a measurement of hotel performance.  If executed poorly, these calculations can distort property value and lead to unfairly heavy tax burdens on hospitality owners.

There are two different ways to calculate RevPAR.  The first is to multiply the average rental income per room by the number of rooms occupied, then divide by the number of days in the period.  The other method is to divide total guestroom revenue by the number of available rooms and divide that figure by the number of days in the period.

In an article titled “Using RevPAR as a Basis for Adjusting Comparable Sales,” published in February 2002 by HospitalityNet.org, appraiser Erich Baum voiced a common argument shared by appraisers who advocate for RevPAR adjustments.  Baum contends that the adjustments are appropriate because the revenue a hotel generates is tied to its location and the quality of its product.

The question in valuation for property taxation is whether or not RevPAR incorporates additional, non-real estate values such as quality of brand, management, goodwill, etc., and whether or not the RevPAR adjustment reflects those non-real estate items.

If the appraiser’s purpose is to compare values of hotels as a going concern, including all tangible and intangible items, this adjustment may make sense.  If, however, the purpose is only to value the tangible real estate and exclude intangible business value, as in an ad valorem tax valuation, a RevPAR adjustment may be inappropriate.

Appraisers generally accept that there is intangible value associated with the going concern value of a hotel.  The Appraisal Institute discusses this concept further in the 14th edition of The Appraisal of Real Estate (2013) Chapter 35, “Valuation of Real Property with Related Personal Property or Intangible Property.”  This is important in the world of ad valorem tax valuations because intangibles are not taxable.

Determining Values

To understand whether RevPAR adjustments are appropriate in a property tax setting, consider a nationally branded hotel that loses its brand.  Compare the hotel to its closest competitors using a RevPAR adjustment both with and without its flag.  Conversely, look at a non-branded hotel that becomes a nationally branded hotel and adjust its competitors’ RevPAR -using the same metrics.

Source Strategies produced a study to determine brand values by tracking the subsequent difference in revenue realized by hotels in Texas that gained or lost a nationally branded flag.  A detailed examination of the study appeared in the summer 2012 edition of The Appraisal Journal.

Researchers compared hotels on the basis of their RevPAR index, which measures a hotel’s performance relative to its competitive set.  An index of 100 indicates that a subject hotel is get-ting its fair share of revenue in comparison to its competitors.  An index higher than 100 indicates the subject is realizing more than its fair share of revenue and an index below 100 indicates the subject is realizing less.

Gaining or Losing a Brand

The study tracked five different brands of hotels in Texas between 1990 and 2010 and found that properties which gained or lost a national brand saw a respective drop or increase in their RevPAR index by as much as 40 percent.  Two hotels from the brand study provide an opportunity to test the utility and appropriateness of RevPAR adjustments.

One of the hotels studied was a Hampton Inn in San Antonio.  In 2004, its second-to-last year as a Hampton, the hotel was outperforming its competitive set.  This is indicated by a RevPAR index of 109.  The hotel’s average daily rate (ADR) was $55.60, or 9.4 percent higher than its competitors’ average of $50.82.

The year after the hotel lost its Hampton Inn brand, it operated as a non-branded hotel.  That year the same competitive set outperformed the now non-branded hotel.  The subject saw its RevPAR Index drop to 64, and its average daily rate fall to $39.89, or 35.7 percent lower than the $62.12 average in its competitive set.

Using a RevPAR adjustment would require a positive adjustment of 9.4 percent in one year and a 35.7 negative adjustment just two years later for the same real estate.

Now consider the effects of a RevPAR adjustment to a hotel that starts out as an independent hotel and then becomes nationally branded.  The study showed that one such hotel in Houston went from unbranded to being a Holiday Inn Express.  In 2004, its last year as an independent, this hotel generated less revenue than its competitors, as evidenced by the subject’s RevPAR index of 51.  The competitors’ average daily rate was $29.52, or twice that of the subject’s $14.72 ADR.

The year after the subject became a Holiday Inn Express it outperformed the same competitive set, as evidenced by the increase in its RevPAR index to 129.  As a nationally branded hotel, the subject’s ADR was $40.76, or 29.7 percent higher than the competing set’s $31.43 ADR.

In both cases the RevPAR index changed significantly for the subject properties, while the real estate remained unchanged.  The comps and methods of comparison remained the same.  The only change was the removal or addition of the brand and its resultant change in revenue.

These results indicate that the revenue shift reflects the change in brand and possibly management or goodwill, none of which are a part of the real estate.  Rather, they are separate and intangible components of the going concern.  Because these items are tied to RevPAR, a RevPAR adjustment will entail adjustments to the differences in both the tangible real estate and intangible items such as brand, management and goodwill.  RevPAR adjustments are therefore inappropriate when calculating only the tangible real estate value of a hotel. 

greg hart active

kevin sullivan active

Greg Hart is an attorney and tax consultant at the Austin, Texas law firm of Popp Hutcheson, PLLC, and Kevin Sullivan is an appraiser and tax consultant with the firm.  Popp Hutcheson PLLC represents taxpayers in property tax disputes and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Hart can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Sullivan at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

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Oct
05

Sounding the Alarm on Code Compliance Costs

Most multifamily owners are familiar with reserve requirements for items such as fire alarms and alarm replacement. Yet those owners may be surprised to learn that complying with the latest fire code changes can jeopardize statutory caps on property tax increases. In fact, recent changes to the International Fire Code (IFC) could substantially increase fire safety requirements, trigger loan defaults and escalate repair and property tax costs for apartment owners.

By their nature, apartment buildings are not, and cannot be, constructed to meet future unanticipated building code requirements. In many jurisdictions, property owners know that if their building suffers more than a 50% loss, they will be required to satisfy new code requirements during reconstruction. However, few owners expect to be saddled with retroactive application of new code requirements even if there is not a casualty.

The IFC provides a comprehensive regulatory framework of code templates setting minimum standards aimed at both safeguarding buildings from fires and protecting building occupants when fires occur. Among other things, the IFC addresses the installation and maintenance of automatic fire alarm and sprinkler systems and fire safety requirements for new and existing buildings.

States and local jurisdictions are often slow to adopt and apply the latest building codes to existing properties. So while the 2015 version of the IFC has been published, many state and local governments are still coming to grips with the 2009 version, which incorporated retroactive requirements regarding the installation of fire alarms into existing buildings. For property owners, significant concerns arise when governmental officials adopt an IFC version that retroactively imposes new requirements.

For example, the 2009 IFC included several potentially expensive retrofit requirements for existing buildings. Chapter 46 of the IFC recommended the installation of smoke detectors in each bedroom for existing structures. For buildings that are more than three stories high or contain more than 16 multifamily units, the IFC imposes retroactive requirements, including installing manual or automatic fire alarm notification systems; installing audible fire alarms in each unit; and wiring all units to ensure visual fire alarms may be installed for the hearing impaired.

Retroactive application of new requirements creates issues for owners of existing properties. Modifications to meet new regulations for existing buildings can cost thousands of dollars per unit, and failure to make required upgrades can have serious consequences, including fines, possible insurance and liability problems not to mention that violation of local building codes generally constitutes an event of default under standard loan documents such as the Freddie Mac form loan agreement.

Moreover, the capital reserves that most permanent lenders require borrowers to maintain for building maintenance are seldom adequate to fund fire-safety retrofits, since borrowers and lenders could not reasonably anticipate the nature and cost of these improvements when establishing reserves. Most apartment complexes are owned by single purpose entities. Their loan documents strictly limit obtaining new loans. If cash flow is tight, these owners face financial challenges in funding retroactive code-mandated improvements.

Increases in property taxes represent an additional hidden risk to property owners in jurisdictions where statutory caps limit property tax increases, such as Florida and South Carolina. Caps limit increases in taxable value for properties subject to reassessment that would otherwise rise to reflect the market. Florida, for example, generally limits annual increases in taxable value to 10% of the prior year's assessment. South Carolina limits increases to 15% of the property's prior assessed value unless there has been a property improvement, ownership change, or assessable transfer of interest.

Caps can be removed if an existing project undergoes renovations, adding a substantially heavier tax burden atop the renovation expense. For that reason, property owners who are required to make IFC-mandated improvements must determine whether the renovated properties will run afoul of the statutory cap limitations, and prepare accordingly.

There is no problem in California where the law protects properties from reassessment unless renovations make the property "substantially equivalent to new."

IFC compliance measures are more likely to jeopardize assessment caps in states such as South Carolina where state law requires taxing authorities to include the value of new construction when valuing properties. South Carolina excludes minor construction or repairs from taxation, but does not define these terms and interpretation is often left to local taxing authorities.

No one advocates ignoring fire safety, but multifamily owners must investigate all potential costs – both obvious and hidden – of bringing their properties into compliance.

Morris Ellison Photo Current july 2015Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. Morris Ellison can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Sep
26

Washington's Carbon Experiment

California has a carbon cap-and-trade program.  British Columbia, Canada, has a carbon tax.  Washington is ready to join those West Coast efforts to reduce carbon emissions, but no one knows what mechanism the state will choose.  Washington is now considering a clean air rule that would cap greenhouse gas (GHG) emissions.  In November, Washington voters may establish a carbon tax.  However, the Association of Washington Business (AWB) argues that Washington businesses already lead the nation in protecting the environment and that a carbon cap or tax would negatively affect the state’s small businesses and consumers.

Possibility #1: A Regulatory Cap on GHG Emissions

In 2009 former Gov. Christine Gregoire tried to persuade the Legislature to pass a cap-and-trade program.[1]  In 2015 Gov. Jay Inslee (D) tried again, to no avail.[2] Inslee’s plan labeled the state’s oil refineries and other major industrial plants “major polluters” and would have required them to buy emission allowances in an auction for the region, in conjunction with British Columbia, Oregon, and California.[3] He expected the auction to raise nearly $1 billion in revenue annually.

Because those efforts failed, Inslee has moved at a breakneck pace on an alternative plan to cap and reduce GHG emissions.  In mid-2015 Inslee tasked the state’s Department of Ecology (DOE) with proposing a clean air rule by January 2016 and adopting a final one by summer 2016 after input from stakeholders.  After meeting its deadline for issuing a proposed rule, stakeholders representing both industry and environmental concerns made it clear that the rule needed significant work.  The DOE withdrew the rule in February and issued a revised proposal May 31.  The public comment period on the new draft rule closed July 22.

The clean air rule, unlike the cap-and-trade proposal, would not have any centralized marketplace for trading emission allowances and therefore would not raise revenue for the state.[4] The updated rule “would require businesses and organizations that are responsible for large amounts of greenhouse gases like natural gas distributors, petroleum product producers and importers, power plants, metal manufacturers, waste facilities, and others to show once every three years that they’re reducing their emissions an average of 1.7 percent annually.”[5] Sarah Rees, special assistant on climate policy for the DOE, described the rule’s strategic priority as slowing climate change by capping and reducing statewide GHG emissions under the state’s existing Clean Air Act.  The goal is to have reduced emissions to 1990 levels by 2010, to 25 percent below 1990 levels by 2035, and to 50 percent below 1990 levels by 2050.  Businesses that do not sufficiently reduce emissions could comply by buying emission reduction units that businesses with extra reductions could sell.[6] The rule would use a special formula to try to address the needs of energy-intensive, trade-exposed industries in order to both target emission reductions based on comparisons with national emissions for the particular industry and encourage the business to remain, and even expand, in Washington.[7]

Scott DuBoff, who practices law in environmental and energy matters at Garvey Schubert Barer, questioned how effective the rule would be: “Despite the commendable objectives of the Washington Department of Ecology’s proposed Clean Air Rule, the state’s proposal is in tension with, among other things, the fundamental reality that the problem to which it is addressed – global climate change – requires broad national and multinational solutions.” Last week, DOE adopted the rule and declared that it will take effect October 17.

Possibility #2: A Carbon Tax

A similar goal drives Initiative 732, a citizen initiative backed by Carbon Washington, which describes itself as “a non-partisan grassroots group of individuals who are keen on bringing a BC-style carbon tax to Washington State.”[8] I-732 would establish a carbon tax starting in 2017 at $15 per ton, with gradual increases to $100 per ton by 2059 (plus adjustments for inflation).  I-732 would also reduce the state sales tax from 6.5 percent to 5.5 percent and reduce the business and occupation (B&O) tax on manufacturing from 0.44 percent of gross receipts to 0.001 percent.  To help further offset the regressive effect of the carbon tax on low-income households,[9] I-732 would fund a working family tax rebate, which would provide a 25 percent match to the federal earned income tax credit.

The goal is a revenue-neutral measure.  Greg Rock, an executive committee member at Carbon Washington, explained that its predictable pricing schedule over the next 40 years and offsets on other taxes reflect a “centrist policy” with the hope of attracting bipartisan support.  By increasing the price of carbon emissions, Carbon Washington hopes to change behaviors at all levels of the economy – industries, investors, and consumers.

Whether I-732 would achieve revenue neutrality has sparked much debate.  The Department of Revenue concluded in April that the measure would result in $800 million of lost revenue during its first five years in effect (revised from the $900 million loss the DOR projected in January).[10] The Sightline Institute, an environmental think tank, analyzed the DOR fiscal note and concluded, ‘‘I-732 is revenue neutral, to the best of anyone’s ability to forecast it.”[11] Sightline pointed to numerous difficulties in predicting the revenue effects of the various aspects of I-732 as well as several errors in the DOR’s analysis.[12] Rock enthusiastically reported that Carbon Washington has experienced a “whirlwind of activity” since Sightline issued its analysis.  He said he anticipates that the DOR fiscal note would be I-732’s major hurdle at the polls.  Most environmental groups oppose the measure largely because of its projected revenue loss.  For example, the Sierra Club said it worries that losing revenue would put “already underfunded budgets for education, social services, and the environment at greater risk” and sees even Sightline’s analysis as indicating a significant revenue loss.[13]

But another aspect of I-732 worries Drew Shirk, the DOR’s senior assistant director of tax policy: how to implement the working family tax rebate.  Washington does not have an individual income tax.  Implementing the working family tax rebate would mean creating a computer database that the DOR does not have.  The DOR fiscal note assumes that the state would need 60 or more full-time employees to administer I-732, a number Rock sees as exaggerated.  Sight-line did not examine that aspect of the DOR projection; the cost is small ($20 million) compared with other costs projected in the fiscal note.

Even if the measure achieves system wide revenue neutrality, it would not be revenue neutral regarding many individual taxpayers.  “Boeing will probably come out ahead,” Rock said, whereas Ash Grove Cement Co., which burns coal to produce cement in downtown Seattle, has told Carbon Washington that it would come out behind.  Rock admitted that Carbon Washington struggled to determine how to offset the carbon tax most effectively for manufacturers because it developed I-732 without access to companies’ financial information.  Also, some businesses previously eliminated their manufacturing B&O tax through legislative incentives for specific industries, such as food processing.[14] For those taxpayers, I-732 mostly represents an added cost.  Still, Rock said that for the manufacturing sector as a whole, the tax reductions would fully offset the cost of the carbon tax.

Some manufacturers that perform in-state extracting activities, such as logging, may experience little or no relief from I-732’s virtual elimination of the B&O tax on manufacturing.  That is because of the multiple activities tax credit, which is designed to minimize repetitive B&O tax on the same taxpayer for the same finished product.[15] Currently, a manufacturer can take a credit against the B&O tax on manufacturing for any B&O tax paid on extracting the products in the state.  If the manufacturing B&O tax is practically eliminated, the business would still have to pay full B&O tax on its extracting activities, resulting in little to no change to offset that manufacturer’s carbon tax burden.

Overall, Carbon Washington said it thinks that the off-setting reductions would encourage industries to remain in the state.  And given Washington’s abundance of hydroelectricity, which would remain untouched by any carbon pricing policy, Rock said that “businesses may flock to Washington because of its low-carbon energy” as carbon pricing efforts spread to other states.  AWB’s campaign against I-732 says the opposite, based on California’s modest rate of growth in manufacturing since it established its carbon pricing policy through the cap-and-trade program: “If the carbon tax passes, companies looking to expand or move into a new market will simply decide to go elsewhere.”[16]

Possibility #3: Both the Cap and the Tax

Though both Inslee and Carbon Washington want to reduce emissions, they strongly disagree about what mechanism would more effectively achieve that goal.  Inslee said that a cap is the most powerful mechanism for reducing emissions.  “If you go just the taxation route, the numbers you have to get to really change behavior and investment are not politically tenable,” Inslee said.[17] But Rock argued that an early indication of the effects of a carbon tax show otherwise, because British Columbia’s petroleum consumption per capita dropped 16 percent since the tax while the rest of Canada’s petroleum consumption per capita increased 3 percent.

Neither the cap nor the tax would fund mitigation, adaptation, or preventive efforts regarding reducing pollution.  I-732’s carbon tax revenue would go to the state’s general fund.  According to Rock, that is based on the belief of most economists that carbon pricing is more effective than incentives for reducing emissions.  Citing a lesson learned during his studies in sustainable energy engineering, he said, “It is always more effective to tax what you don’t want than to subsidize what you do want.”  Carbon Washington does not oppose subsidies and targeted investments, but it sees carbon pricing as the more important step.

Inslee’s emphasis on a cap suggests that, should he win a second term in November, he would implement the cap regardless of I-732’s fate.  But Rees, in discussing the clean air rule in May, said that would not be the case.  She said that businesses would not have to contend with both the clean air rule and the carbon tax if I-732 passes.  On the other hand, Rock said he sees no reason why a cap and a tax could not coexist.  He explained that the tax is simply a mechanism to put a price on carbon emissions, similar to a trading mechanism through a marketplace like California’s, and that a cap and a tax, even if operating separately, could be effective.  Some have even contemplated the possibility of a cap-and-trade system combined with a carbon tax or with other tax elements, such as tax credits.[18] Still others have argued that a cap-and-trade program is the equivalent of a tax.[19] At this point, all options seem possible in Washington.

Possibility #4: Other Options

Through all this, AWB, while supporting the overarching goal of reducing carbon emissions, has argued that Washington businesses have already worked hard to make Washington one of the greenest states in the country.  AWB is sponsoring a “No on 732”campaign based on the premise that “we should lead the world by continuing to reduce emissions through collaboration and innovation.”[20] AWB has highlighted business efforts on that front for years, such as in its annual Green Manufacturing Award, which recognizes businesses that have “maximized energy efficiency levels, gone above and beyond regulatory requirements, minimized waste from the production process and reduced its carbon footprint.”[21] Similarly, the Washington Business for Climate Action, a group of businesses, many of which are well-known leaders in the state, joined together in recent years around a declaration that supports businesses’ voluntary efforts, such as investments in renewable energy, clean technologies, and energy efficiency.[22] That group has apparently taken no official position with regard to either the clean air rule or I-732.

A major concern with any environmental regulation is that the added costs could burden local businesses to the point that they cannot compete against businesses in locations where environmental laws are more lax, or that local businesses themselves move to those locations.  Having a clean domestic plant that provides the local community with jobs and tax revenue is far preferable overall to importing products from a dirty or dangerous plant.  Any measure to reduce emissions must ensure that it will not impair the competitiveness of the states’ businesses.  Both the proposed clean air rule and I-732 say they would avoid harm to Washington businesses.  Regardless, though, some businesses would inevitably suffer under either regime.

Property taxes could also change as an unintended consequence of either regime.  Companies that face increased burdens under the clean air rule or I-732 may, as a result, experience a change in the market value of their property.  According to Chris Davis, Inslee’s adviser on carbon markets, discussions of climate policy disregard that as a factor.  But for companies whose products are inextricably tied to emitting carbon dioxide, the ultimate goal of those policies is an effect similar to that of Prohibition on a brewery or a distillery.  Property specific to brewing beer or distilling alcohol would have naturally suffered extraordinary obsolescence when those products became illegal.  That type of external force can produce a drastic decline in a property’s market value and its assessed value for property taxes.  Though often overlooked, that is one of the likely impacts under either the cap or tax scenario.  Their effect on both carbon-intensive businesses and the communities that depend on the businesses’ value for property tax revenue should be considered.

Conclusion

The carbon controversy in Washington is part of a much older debate: Should we use taxes to influence behavior or should we strive for tax neutrality in which only direct regulation and government subsidies regulate behaviors?[23] Tax systems routinely feature attempts to regulate behaviors: Sin taxes seek to reduce tobacco and alcohol use and Pigouvian taxes seek to charge those who engage in undesirable activities for the social costs they cause.  Some argue that tax laws should serve as a mechanism for addressing “the externalities of the harmful effects of carbon, which the market does not take into account”;[24] others contend that taxes should serve strictly “for raising revenue, not engineering whatever it is we’re trying to engineer this week.”[25] The bottom line, however, is that taxes and regulations can be effective in changing behaviors but can also impose costs on businesses and consumers.

Whether consciously or not, Washington voters will weigh in on this perennial debate in November.  The state may tax carbon emissions or cap emissions by means of a new clean air rule – with the possibility of both at some point.  Neither of those two mechanisms is intended to raise revenue for the state.  But either way, some will face significant costs with the changes.


[1] Warren Cornwall, “Lawmakers Thwart Gregoire’s Cap-and-Trade Plan on Climate,” The Seattle Times, Mar. 16, 2009.

[2] HB 1315/SB 5283 (Carbon Pollution Accountability Act).

[3] 3Office of the Governor, “2015 Carbon Pollution Reduction Legislative Proposals,” available at http://bit.ly/2bTrwt6.

[4] Office of the Governor, “Inslee Directing Ecology to Develop Regulatory Cap on Carbon Emissions”(July 28, 2015), available at http://bit.ly/2cpjzyn.

[5] Department of Ecology news release (June 1, 2016), available at http://bit.ly/2cpjKJT.

[6] Department of Ecology, “Frequently Asked Questions About the Washington Clean Air Rule,” available at http://bit.ly/1RzQSxS.

[7] Department of Ecology, “Energy-Intensive, Trade-Exposed Industries and the Clean Air Rule,” available at http://bit.ly/2c5ksM7.

[8] Carbon Washington website, “Our Team,” http://yeson732.org/ our-team/.

[9] Natalie Chalifour, ‘‘A Feminist Perspective on Carbon Taxes,”22 Can. J. Women & L. 169, 194 (2010) (“While a carbon tax policy can be designed to mitigate regressivity, the whole raison d’être of carbon taxes is to raise the costs of goods and services based on their carbon content. The price increases that inevitably result from the tax will be harder on people with lower incomes than on those with higher incomes”).

[10] Paul Jones, “Carbon Tax Initiative Revenue Neutral, Think Tank Says,” State Tax Notes, Aug. 15, 2016, p. 528.

[11] Sightline Institute, “Does I-732 Really Have a ‘Budget Hole’?”(Aug. 2, 2016), available at http://bit.ly/2aJTNFt.

[12] Id.

[13] Sierra Club Seattle, Aug. 23, 2016, available at http://bit.ly/2ckkXoi.

[14] Laws of 2015, ch. 6, 3d Spec. Sess. (among other things, extending a B&O tax exemption for food processors).

[15] RCW 82.04.440.

[16] AWB, “Campaign Launches to Defeat Proposed Carbon Tax”(July 21, 2016), available at http://www.noon732.com/news/.

[17] David Roberts, “The Greenest Governor in the Country Tells Grist About His Big Climate Plan,” Grist (Jan. 13, 2015), available at http://bit.ly/1syriig.

[18] See, e.g., David Gamage and Darien Shanske, “Using Taxes to Improve Cap and Trade, Part II: Efficient Pricing,” State Tax Notes, Sept. 5, 2016, p. 807; Chalifour, supra 9, at 179; and David Suzuki Foundation, “Carbon Tax or Cap-and-Trade?” available at http:// bit.ly/1Ny3cOu.

[19] See, e.g., Jennifer Carr, “California Businesses Call Cap-and-Trade Auction an Illegal Tax,” State Tax Notes, Apr. 22, 2013, p. 246.

[20] No on 732 website, “Why No on 732,”available at http:// www.noon732.com/what-we-do.

[21] AWB website, ‘‘Awards,” available at https://www.awb.org/ awards/.

[22] Washington Business for Climate Action website, available at http://bit.ly/2cdLy5f; and Ceres, “Washington Business Climate Declaration FAQs,” available at http://bit.ly/2ckTwtU.

[23] See, e.g., Carlo Garbarino and Giulio Allevato, “The Global Architecture of Financial Regulatory Taxes,”36 Mich. J. Int’l L. 603, 610 (2014-2015).

[24] Patrick Dowdall, “Should a State Adopt a Carbon Tax?” State Tax Notes, May 30, 2015, p. 695.

[25] David Brunori, “Judge Not, That Ye Be Not Judged,” State Tax Notes, Aug. 22, 2016, p. 639.

 

MDeLappe Michelle DeLappe is an owner in the Seattle office of Garvey Schubert Barer, where she specializes in state and local tax. Garvey Schubert Barer are the Idaho and Washington representatives of American Property Tax Counsel, the national affiliation of property tax attorneys. Michelle can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
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Aug
25

When Law Firms Collaborate, Property Owners Reap The Benefits On Their Bottom Line

Traditionally, a commercial real estate owner would retain several law firms, each with its own area of expertise. One firm may handle development, construction, acquisition, and leasing issues, while another firm handles contract disputes and litigation.

Although it may have become conventional, this service model is losing its appeal. Law firms with mutual clients often fail to communicate with each other, sending mixed signals to the client and leading to inconsistent advice.

As owners become more astute and the market for legal services grows increasingly competitive, owners can now demand that law firms seeking their business distinguish themselves from the competition.

One of those distinguishing attributes is the ability of the firm or its real estate practice group to address an owner’s overall real estate needs, not just a specific function. This better enables the firm or practice group to demonstrate its understanding of the owner’s business and commitment to achieving owner goals.

Some service-oriented law firms recognize this and have learned to provide value in practice areas beyond those for which they were hired. They are now looking to bring in additional professionals to ensure that their client-service teams have the expertise to handle the universe of challenges a client faces, with the experience to deliver results.

Rather than attempting to hire specialists in practice areas they don’t have, savvy law firms accomplish the broadening of expertise through collaboration.

An example of specialties that a firm may handle through collaboration is property tax representation.

Although real estate law firms have clients with large property portfolios and corresponding property tax expenses, property tax is a practice area that few real estate law firms or practice groups cover.

They typically lack the valuation experience and relationships with appraisal districts necessary to best handle their clients’ property tax issues. There are other, specialized attorneys that do have property tax expertise, however.

Several boutique law firms and practice groups in larger firms devote all of their efforts to protecting clients from appraisal districts’ excessive and erroneous property valuations and exemption determinations.

Through this focused scope of service, they have developed appraisal expertise and the ability to effectively navigate the traps and pitfalls of the property tax practice area. As a result, they can deliver significant tax savings to property owners.

When these boutique practices collaborate with a client’s primary law firm, they become critical components of the client service team. Importantly, collaborating with the primary firm’s attorneys enables property tax lawyers to maximize efficiencies in pursuing tax protests and obtaining successful outcomes – adding value that clients are coming to expect.

The most notable efficiencies come with sharing information. The client’s primary law firm will likely have institutional knowledge about the client’s business and properties that could be greatly beneficial in a tax protest.

This could include details about the client’s purchase of the property, such as purchase agreements, appraisal reports, settlement statements and financing documents.

Additional details could include the client’s reasons for acquiring the property and improving it to include specific features, construction contracts and expense reports, and financial records concerning income that the property generates along with corresponding expenses.

Lawyers at the client’s primary firm, moreover, may offer explanations as to why certain properties have decreased in desirability, resulting in obsolescence and falling demand, and thus reduced value. This is all helpful information that a property tax specialist would want to use in advocating for the client.

Without this collaboration, the client’s tax protest may be compromised because important information, which could affect the outcome of the protest, may be overlooked or forgotten.

Conversely, specialists can potentially bring different approaches to solving client problems, offering perspectives from their property tax experience.

Property tax attorneys pay close attention to capitalization rates, financing trends and sales of comparable properties, which the client’s primary attorneys may use in negotiating real estate transactions.

Because of their valuation expertise, property tax attorneys can advise other counsel on assessing damages in real estate partnership disputes or construction defect claims, and can provide recommendations for quality appraisers to serve as expert witnesses.

Property tax counsel can further provide regular updates on the evolving area of property tax law and advise on how best to position the client to minimize tax liability through tax exemptions or abatements, or other means. This collaboration would mutually serve all counsel involved for the ultimate benefit of the client.

Clients want to see that their business interests are being looked after, and are beginning to ask that lawyers collaborate to ensure the right professionals are on their team. This collaboration provides added value to property owners.

daniel smith active at popp hutcheson

Daniel R. Smith is general counsel  in the Austin law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He represents commercial property owners in property tax appeals across the state, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Aug
22

How to Fight Aggressive Property Tax Assessments

The student housing market is robust, generating strong market data that tax assessors are using to support increasingly aggressive property tax assessments. Thus, student housing owners must monitor their property values and arm themselves with the tools to fight excessive valuations.

Forecasters expect the student housing market to grow for the next several years, primarily because of its stability. Healthy investor interest led to a 71 percent year-over-year increase in student housing sales volume at the end of the third quarter of 2015, according to Real Capital Analytics. In addition, the market’s average overall cap rate was down 37 basis points from the first quarter of 2015 to the first quarter of 2016.

Combined with increased demand for beds that accompanies accelerating enrollment at the largest universities, these healthy fundamentals will encourage assessors to boost property tax assessments. In many cases, assessors will produce inflated valuations that cannot be supported by market data or realistic operating scenarios.

Student housing owners should consider the following issues to combat aggressive assessments:

Evaluate the approach

Assessors commonly derive a market value using one or more of the three classic approaches to value: cost, income or sales comparison.

The cost approach is arguably the least reliable method if the property is more than a few years old, especially given the difficulties of estimating depreciation and obsolescence factors for older properties. An assessor will most likely rely on an income and/or sales comparison approach when valuing student housing. Taxpayers can achieve lower assessments by disputing how the assessor has applied a valuation methodology to a specific property.

Challenge sales data

Assessors are using the sales comparison approach more frequently, given the huge sale volumes previously mentioned. Student housing owners should remind assessors that a sale price does not necessarily equate to market value.

While discussing comparable-sales data with the assessor, the taxpayer can sometimes discredit a sale’s relevance by outlining the physical and economic differences between the property sold and the assessed property. Point out to the assessor the factors influencing a buyer’s decision to purchase a property, which may make the sale incomparable to the taxpayer’s property.

Did the assessor reference any portfolio purchases in the sales comparison? Point out that properties in a portfolio are typically priced as a group, and may not reflect market value.

Finally, emphasize buyer motivations such as time constraints or income tax consequences that affected the price of the comparable property. Owners should consider a tax appeal even if the recent purchase price of their complex is higher than the current property tax assessment. Buyers pay for properties based on factors beyond real estate, so a purchase price should provide no more than a touchstone for an assessor.

Taxpayers should outline the factors they considered in purchasing the property, such as special financing considerations. Show how the property’s performance differs from projections made at the time of purchase.

Sharing the purchase price may lead to a higher assessment, but student housing owners can mitigate the amount of the increase with a meaningful purchase price discussion with the assessor.

Beware incompatible income comparisons

Properties built and/or operated specifically as student housing projects are often referred to as purpose-built properties. An alternative student housing solution in college areas is conventional, market-rate apartments, also known as student competitive apartments.

On the surface, purpose-built and student competitive projects are similar in use and function. When an assessor is using an income approach to value, however, the properties’ differences become significant.

Competitive properties usually include more studio and one- or two-bedroom apartments, while purpose-built properties have more three- and four-bedroom units. Competitive complexes rent by the apartment, while purpose-built properties rent by the bed. Rental rates and amenities also can differ dramatically between the two property types.

In an income approach, assessors typically use market-driven rent, vacancy, and expense factors to arrive at a net operating income figure that is then capitalized using a market-driven capitalization rate. The most common mistake assessors make using this approach is applying competitive market data in their analysis rather than purpose-built market factors.

Student housing owners should be quick to point out the differences between these two property types: For example, competitive apartments are valued per square foot, while purpose-built housing is valued by unit or bed.

Owners should emphasize occupancy fluctuation differences between competitive apartments and a purpose-built property, which may have low occupancy during the summer. Also point out the influence of the on-campus housing supply on the performance of an off-campus, purpose-built project.

Finally, be mindful of how a property’s distance from campus affects rental rates. There is typically a direct correlation between proximity to campus and higher rent levels, leasing velocity and occupancy for purpose-built properties. The correlation isn’t as strong at student competitive properties.

Even if an assessor is using appropriate data from comparable purpose-built properties, owners should challenge the market factors in the assessor’s analysis with data taken directly from the property’s current and previous year’s operating statements, if such data is in the property owner’s favor. An operating statement can help distinguish the owner’s property from projects that lead to higher assessments. Pointing out specific income and expense items can show trends in rental rates, occupancy and expenses that differ from the market trends alleged by the assessor.

Even in a strong market, student housing owners should constantly monitor their property tax assessments, and have the courage to combat assessments derived from sales or income data.

Davila Photo 3Gilbert Davila is a partner in the Austin law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Davila can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jul
01

Is Your Hotel Paying Too Much Property Tax?

The value of a hotel for purposes of tax assessment is not the same number as its value as a going concern.  Understanding the difference between the two will save the hotel owner from an excessive property tax bill.

For assessors, the challenge is to correctly distinguish taxable assets from the non-taxable, and therein lies both a problem and an opportunity. By fully separating the assets, the property owner may reduce its taxes. But failing to properly prove the allocation results in the owner paying real estate taxes on non-real estate—and likely non-taxable property.

Let’s step back for a moment and note that hotel operation comprises four closely related asset components: land; the building or buildings; furniture, fixtures and equipment; and the business itself.

The main distinction here is that land and buildings are taxable as real estate, whereas the business components and fixtures, furniture and equipment are not. Nevertheless, each asset component is tightly linked to the others in making up the value of the going concern.

Reckoning Value

Because these assets are investments, each must generate income to justify its cost. Calculating the return of and on these investments can serve to separate the asset’s value from the going concern and isolate the real estate value.

Clearly, room revenue in a hotel operation is based on more than nightly room charges; it also includes income attributable to the furnishings and services. Separating the value of furniture, fixtures and equipment is the obvious first step to allocating the assets. Assuming that the taxpayer can make a supportable estimate of the market value of the fixtures, furniture and equipment, the taxpayer can then subtract the value attributable to the use of, and profit from,  those items. In other words, the value calculation should recognize both a return of—and a return on—furniture, fixtures and equipment.

To be sure, furnishings are hardly the only investment in hotel operations. Services such as marketing and reservation systems, food and beverage, recreational amenities, and quality of the flag or brand, among other components, all contribute to the property’s value.

These cost centers are business assets that are part of the going concern, but they are not taxable as real estate. Still, many assessors mistakenly accept only the removal of the depreciated cost of the furniture, fixtures and equipment, and erroneously attribute the full net operating income to the real estate. Crucially, that includes the non-taxable business income associated with the hotel operation.

In order to pay tax only on the real estate, property owners should allocate value to the non-taxable business assets. That step allows the owner to more accurately segregate the value of the real estate from the going concern.

Robust Debate

Within the valuation community, there is robust debate over the extent of items related to business value that should be removed from the going concern. Some appraisers go so far as to assign a value to the initial investment in personnel and training, while others may just remove the food and beverage component and apply a rent to the restaurant or meeting space.

Make no mistake: Appraisers and courts agree that a business value component exists. When that value is clearly demonstrated and the valuation is properly supported, courts and appraisers will also agree that it should be removed from the going concern in order to isolate the real estate. Until persuaded otherwise, however, taxing authorities usually take the position that expenses associated with hotel cost centers offset the income, and the management and franchise fees cover all of the business and intangible values associated with a hotel.

Blending the contributory value of the furnishings and business with the real estate is a disservice to the taxpayer and unjustifiably burdens the property with an excessive fixed cost. A well-developed real estate appraisal for a lodging property will go beyond addressing the value of the going concern, and will also analyze each asset category to correctly identify the taxable real estate component. By drilling down into the operation of the property and segregating the asset components, a capable valuation expert may be able to offer some relief to the taxpayer.

The final key to minimize taxes is local knowledge. This requires an understanding of the jurisdiction and the methodologies that local tax assessors find acceptable, and knowing the personalities of opposing counsel and appraisers. Many ideas surround asset allocation, and knowing which ones to employ may keep hotel owners from overpaying real estate taxes.

KJennings90

Anthony Barna jpeg

J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania 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..

Anthony C. Barna, MAI, SRA, is a principal of Pittsburgh appraisal firm Kelly\Rielly\Nell\Barna Associates.   He specializes in appraisal and consulting for litigatgion support.  He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..                                                         


     

 

 

 

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May
31

Tax Resolution Conundrum

Pittsburgh resolves to reduce taxpayers' inflated property assessments.

Politics makes strange bed fellows. Pittsburgh's city council recently ordered its finance director to draft policies that protect taxpayers from assessment appeals by the city, and even to file appeals on taxpayers' behalf.

Unlike many states, Pennsylvania allows the three entities that levy real estate taxes (counties, schools and municipalities) to appeal annual real estate assessments, just as taxpayers do.

Taxpayers file appeals when they believe their property is over-assessed, in order to reduce their assessment and their real estate taxes.

When taxing authorities file annual appeals, they seek to increase assessments and taxes. The city of Pittsburgh has historically filed appeals following the sale of a property assessed at a lower value than the sale price. This practice, where taxing authorities essentially sue individual taxpayers (and voters) to increase real estate tax payments, is common in Western Pennsylvania.

In a strange twist, first-term city councilman Dan Gilman recently introduced legislation to limit the city's ability to file increase appeals and, in some cases, to even direct the city to file appeals to decrease property assessments. The resolution passed and the mayor signed the measure on Feb. 23.

The resolution starts off with two self-limiting provisions. First, it bars the city from appealing the assessment of a property for two years after the property sells. Second, the resolution prohibits the city from using a property's sale price as the basis for an appeal seeking an assessment increase.

These provisions restrict the city from doing what it is permitted to do by Pennsylvania statute, which states that "[Any county, city, . . school district . . which may feel aggrieved by any assessment of any property . . shall have the right to appeal" an assessment the same as the property's owner.

The resolution further limits the city to appealing a property's assessment once every three years. Pennsylvania's statute allows taxing authorities to appeal annually.

David "J.R." Sachs, president of A-1 Van Service recently battled Pittsburgh taxing authorities over his property's assessment, and believes the new resolution is a good idea.

After Sachs purchased three dilapidated buildings and contaminated land along the banks of the Allegheny River in 2013, the school district appealed his assessment, seeking an increase to the purchase price. Sachs saw his assessment mushroom from $489,800 to $540,000 following the appeal, while the assessments of neighboring properties without recent sale prices remained unchanged.

The new resolution "gives people a chance to invest in their properties and improve them before getting hit with a tax increase," Sachs says.

Perhaps most unusual is the resolution's requirement directing the city to generate a list of properties with assessments 50 percent or more greater than their market value, and to "appeal values downward on behalf of those owners." This provision turns current practice on its head.

In a taxpayer-initiated appeal seeking an assessment reduction, the city's legal department has historically defended the assessment and fought against reductions. Now, the city will be required to file appeals seeking reductions on behalf of taxpayers.

This last provision is not entirely unprecedented in Pittsburgh. In 2005, Allegheny County, where Pittsburgh is located, conducted a countywide reassessment following a court mandate, releasing the new assessment figures but refusing to certify the assessment. Instead, the county resisted implementing the assessments in litigation that wound up in Pennsylvania's Supreme Court.

During this litigation, in April 2006, Allegheny County filed 11,000 appeals on behalf of taxpayers who saw their assessments rise since the prior reassessment in 2002 as a result of previous appeals by school districts or municipalities. Allegheny County brought these appeals to hearing and requested reductions. City and school district representatives appeared and defended the assessments.

The city's recent initiative may have unintended consequences, according to Pittsburgh lawyer, Michael I. Werner of ZunderWerner, LLP. Werner has extensive experience representing property owners in appeals of their property assessments. "When the county did the same thing in 2006, property owners were confused. In some instances, the owners did not want the county to file appeals on their properties," he says. "This put us in an odd position: Because the owner was not the appellant, we were unable to withdraw the appeals. The county was trying to help, but they inadvertently created new obstacles for many property owners."

"It is a noble thing they are trying to do, but it raises the question of whether a city employee, who does not know the specific property and who does not have an attorney-client relationship with the property owner, is in a position to properly represent that owner's interests," Werner says. "City-initiated appeals to reduce an assessment should only be filed at the request of the property owner."

The city's resolution also calls for its finance director to collaborate with the Pittsburgh school district and Allegheny County to implement and expand its new policies. Given the history, it seems unlikely that the school district will join the city, either in self-limiting its appeal rights or in filing appeals seeking lower assessments.

Pennsylvania school systems are strapped for cash due to the state legislature's budget impasse: lawmakers are more than eight months past deadline to pass the 2015-2016 budget, and many school districts have been forced to take out loans to meet operating expenses. Increasingly, school districts have become more aggressive in filing increase appeals as they seek new sources of revenue.

What happens next is open for debate. Even though Pittsburgh's mayor ratified the resolution on Feb. 23, one councilwoman introduced a measure on Feb. 22 to repeal it. The new proposal remains in committee. All assessment appeals for properties in Pittsburgh were due March 31, and hearings will begin in May and June.

sdipaolo150Sharon DiPaolo is a partner in the law firm of Siegel Jennings Co., L.P.A., the Ohio and Western Pennsylvania 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..

 

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May
17

Property Taxes And The Growing Millennial Impact On The Retail Sector

As researchers continue to debate how market conditions affect the value of commercial real estate, one thing is certain: Appraisal districts across Texas are recalculating taxable property values. To ensure fair tax assessments, it is crucial for retail property owners to monitor demographic and technological changes that can disrupt retailers’ sales and a shopping center’s overall income potential.

Here are a few points for taxpayers to broach when helping assessors determine correct taxable property value.

Consumers spent more on dining out than at the grocery store last year, a historical first, according to Marcus and Millichap’s 2016 U.S. Retail Investment Forecast. With millennials dining out more than other age groups, this trend will likely continue. Some landlords are shifting the balance of stores, restaurants and bars at their properties to lure millennia) shoppers.

Conversely, changing consumer demand is weighing on outdated shopping centers that require significant renovation to remain relevant. Even with the right updates, a center could suffer from external obsolescence, or conditions outside the property that reduce its value.

Millennial Impact

The growing influence of millennials has also increased demand for convenience commerce.

Businesses such as Instacart now enable consumers in some markets to order groceries and goods directly from major grocery chains using smartphones, to be delivered to their home in as little as one hour.

E-commerce companies are adapting services that were once accessible only in a retail space and delivering those conveniences to the consumer. Entrepreneurs have already begun to experiment with mobile services ranging from dog grooming, manicures, hair styling and even massage therapy.

As the availability of services grows in step with millennials’ disposable income, owners of shopping centers offering similar services may see a decrease in foot traffic within their developments.

Shopping centers with tenants that cannot adapt to this service delivery model may be exposed to significant vacancy risk.

Adapting to the Market

Many national retailers adapting to e-commerce growth have announced store closures in 2016. Many of these retailers are investing significant capital into their omni-channel platform, suggesting that additional store closures are still to come.

With the continued growth of e-commerce, some industry observers believe that retailers will reduce the size of their showrooms or sales floors to allow more square footage for warehouse fulfillment space.

More warehouse space would allow retailers to process merchandise for pickup or delivery without interfering with the shopping space for customer foot traffic.

In this scenario, market rental rates that represent part showroom and part warehouse space would be appropriate for assessors to use when applying the income approach to value.

Adapting to Change

Taxpayers must always ensure that assessors use correct rates and values as comparables, otherwise the assessor could reach an improper value.

Additionally, as retailers across the nation continue to experiment with smaller store footprints, assessors must consider the potential for that trend to reduce the market value of large boxes and inline spaces, with a corresponding impact on property values.

Shifting demographics, the evolution of convenience commerce and retailers’ adaptation to e-commerce can profoundly increase or decrease a retail property’s value.

These trends demand that assessors carefully analyze a property’s individual characteristics as well as the market area in which the subject is located.

Apparel tenants may be the most at risk of losing sales, but landlords must also consider the viability of other tenants that could occupy the retail space at market rents.

The assessor should consider this uncertainty when selecting capitalization rates. Also discuss with the assessor year-over-year changes in income and expenses, and in tenant health, within the subject property.

By protesting property taxes, landlords can pass any tax savings onto their tenants, who typically reimburse the landlord for taxes, depending on the terms of the lease. In addition, a successful tax protest may enable the landlord to quote lower operating expenses, which can help attract and retain retailers. Correct analysis can identify any obsolescence that may exist, enabling the assessor to adjust taxable value accordingly.

And with a more accurate picture of the property’s marketability, the assessor will be in a better position to judge proper market rents, vacancy and collection loss, and capitalization rates. Only with all these essential pieces can the assessor correctly determine a retail property’s taxable value. 

kirk garza activeKirk Garza is part of the Member Appraisal Institute and a licensed Texas Property Tax Consultant with the Texas law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Reach him at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

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May
17

Smartphones, Showrooming Impact Cost

Smartphones lead the way in making mobile a key player in consumer purchases in-store and online.

The battle between physical stores and online retail rages on, but the recent explosion in smartphone usage is blurring the battle lines. Using smartphones, consumers in a store now can simultaneously shop and compare pricing and product availability at competing stores or online. The practice is sometimes referred to as “showrooming.” Increasingly, retailers must simultaneously invest in the problem. a combination of brick-and-mortar stores, websites, digital marketing and merchandise delivery to sell goods.

Only the real estate component of that infrastructure is subject to property tax. If property owners identify the portion of store sales attributable at least partially to online shopping, they can argue for taxable property values more accurately based on the remaining sales volume attributable to a store’s physical location and condition.

Retailers that think mobile is a channel use the wrong metrics to measure the smartphone’s impact on retail. Smart retailers focus on the impact on overall business rather than trying to measure only app downloads or channel sales.

Extrapolating a retail property’s value from base rent is relatively easy, but what happens when rent is based on sales? How do sales that take place in the store via smartphone, or online transactions that stem from a store visit, affect percentage rent?

Assessors and appraisers don’t yet have satisfactory answers to these questions and developing appropriate metrics is challenging. Taxpayers can help shape the debate, and their own tax liability, by understanding the problem.

Digital Influence Spreads

The lion’s share of U.S. retail sales continues to revolve around physical stores. Forrester Research reports that in 2015, e-commerce sales totaled approximately $334 billion, while off-line sales totaled $2.9 trillion, more than eight times more. However, many offline sales were digitally influenced, meaning shoppers connected with digital touch points, particularly mobile phones.

Forrester estimates that $1.2 trillion of U.S. retail sales in 2015 were web-influenced, and that by 2020, $1.6 trillion of all off-line retail sales will be web-influenced. The penetration of online buyers using smartphones increased to 86 percent in 2015, up from 54 percent in 2011, Forrester found.

Shoppers want to receive products quicker and cheaper than ever before, but still prefer to shop in physical stores in order to touch merchandise and obtain products immediately. Successful physical retailers combine physical stores and digital tools, enabling customers to touch and receive goods in a more cost-effective way than ever before.

Physical retailers must realize the key role smartphones play in unlocking sales. American adults use smartphones to locate stores and to check store hours, requiring retailers to keep websites current. Forrester estimates that in the first quarter of 2016, more than one-quarter of U.S. online mobile phone users ages 18 to 34 used their phones to compare prices online for products they were considering buying.

Shoppers also research product information on smartphones, often while in a store. Retailers, therefore, must monitor price variances and adjust prices in real time, against both physical and virtual competition.

Physical retailers also need to address perceived problems with off-line shopping, such as long lines and out-of-stock merchandise. Some sophisticated retailers have addressed these issues by developing store-specific data. Forrester reports that companies such as Target and The Home Depot now direct shoppers, via smartphones, to look for items in specific locations within stores, thereby reducing wait time and frustration. Nike store employees can look up inventory and make sales immediately with their smartphones. Shipping continues to pose a problem for both physical and virtual retailers. When the product is in stock, the physical retailer does not have a problem. However, maintaining inventory in stores potentially imposes the added costs of the inventory itself, additional rent and associated property taxes.

In January 2016, The Wall Street Journal reported that Gap, Inc., which includes retailers Banana Republic and Old Navy, was narrowing its free shipping window to 5 to 7 business days, down from 7 to 9 business days. Is this enough to satisfy the demands of consumers who expect immediate delivery of products, particularly from physical retailers?

Challenge to Retailers

Physical retailers face three very expensive budget items: associates, real estate occupancy costs (including taxes) and inventory. They must create a more pleasurable, yet competitive, shopping experience in order to beat digital competitors. Stores must become increasingly immersive and engaging experiences that enable customers to do everything from trying on wearable goods to playing with and testing products, or attending cooking classes and food demonstrations. The importance of enhancing the shopping experience in physical stores often means creating easy availability to other amenities such as restaurants and coffee bars.

While it may seem counterintuitive, the quality of a retailer’s online presence will influence sales, and hence the underlying value of the retailer as a tenant in a shopping center. Developers need to attract retailers who simultaneously focus on brick-and-mortar store sales, websites, digital marketing and merchandise delivery to sell goods. Percentage rent clauses in leases must appropriately capture sales.

All of this takes money and increases the complexity of measuring costs. Costs, such as property taxes, play a key role as retailers compete for sales and profits. Online retailers generally pay property taxes for distribution centers but can often reduce this cost by obtaining tax incentives, such as fee in lieu of tax agreements. Physical retailers, which often have a greater impact on the local economy, have less leverage to control property taxes. They face the challenge of showing assessors how mobile technology and e-commerce, not location alone, impact sales.

In January 2016, Forrester reported that “too often, companies measure what they can, rather than what they should, because they lack the analytics to generate the insights they need. Retailers track mobile sales rather than influenced sales because they can, and, more often than not, do treat mobile as a [separate] sales channel.”

This is precisely the problem tax assessors and physical retailers face in measuring mobile technology’s impact on a retail property. The assessor’s job is to value the real estate, not the business, which is increasingly affected by mobile innovation. Theoretically, one can use only in-store sales volume in the valuation but to what degree is a store-front simply an advertising medium — like a billboard. Stores can encourage customers to order while browsing at the store but have it shipped to their house and/or pickup at a nearby location that has lower property tax, possibly a warehouse on a side street.

Increasingly, retailers must balance between the physical and the virtual, with the smartphone serving as the key touchpoint. Retail success is still about location — location of the actual shopper inside or outside the store, at home, at work, at a competitor’s store or on a website or smartphone  — it’s just not about physical storefronts anymore.

Morris Ellison Photo Current july 2015Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. Morris Ellison can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
16

Don't Lose Out on Construction Tax Exemptions

Tax Exemptions Can Apply To Income-Producing Real Estate From Apartments To Manufacturing Facilities

The construction cranes that punctuate our city skylines confirm that economic recovery is again driving commercial real estate development. Property tax considerations should not be the tail that wags the dog when it comes to timing construction or leasing. However, the savvy investor and tax manager may want to make sure they are not leaving money on the table by overlooking potential tax savings. Most should also be aware that, in many states, property under construction is exempt from property taxes.

Most states encourage the development of commercial and industrial facilities by sheltering construction projects from the payment of property taxes until the property is in use or occupied, and therefore producing income to pay the taxes. As with most property tax exemptions, however, taxpayers must follow statutory procedures and meet specific conditions to qualify. Frankly, many taxpayers inadvertently fail to meet the criteria for receiving the full benefit of the tax  exemption.

A tax exemption typically will apply to a commercial or industrial building under construction, including ramps, loading docks, and paved areas used for parking or storage built in conjunction with the project. In most states, the key to receive the exemption is that the property must be constructed to produce an income.

Exemptions most often apply to hotels, apartments, office buildings, retail stores and manufacturing plants. Even a condominium project may be entitled to the exemption because it is built to produce an income. A qualifying income may be from a one-time sale of the property, as with a condominium project, or an ongoing income stream from a lease or use of the property in business.

The tax exemption may also apply to construction of an addition in an existing building or structure, such as a new wing for a building already on a site. In most cases, the modification must change the nature of the building, perhaps increasing manufacturing space or adding a new wing onto a shopping mall, thus increasing the property's income-producing potential.

In many states, the construction exemption also applies to machinery added to the space. This is usually limited to machinery and equipment installed or affixed to the new building, structure or addition. Unfortunately, most states disallow equipment installed subsequent to construction to qualify for this construction-in-progress exemption.

The exemption seldom applies to preparing the land for construction. That means that site development such as excavation or grading the property to prepare for construction will not qualify as property under construction for a tax exemption.

An exemption will be denied if the applicant fails to meet one of the conditions. For example, in Oregon the property must be under construction on Jan. 1 of the assessment year. As discussed earlier, site preparation is not considered part of the construction, nor is demolition of an existing building; construction commences when work begins on the foundation.

Timing can be critical to securing the tax exemption. In Oregon, if the user occupies any part of the property before Jan. 1 of the year following the year for which the exemption is claimed, the property is disqualified for a construction-based tax exemption.

Partial occupancy is one of the fatal stumbles that many taxpayers make, losing their tax exemption. For example, user occupancy of the first floor retail space in a multi-story commercial or apartment building would disqualify the entire building from exemption, even if floors 10-15 are still under construction on Jan. 1. Thus, the occupancy of the retail space, in advance of the apartment complex completion, may result in hundreds of thousands of dollars in lost property tax exemption.

Additionally, many jurisdictions require a full year of construction, from Jan. 1 to Jan. 1, to qualify for a property tax exemption. If the building is first occupied on day 363 of the tax year, then the property owner could lose the entire year of property tax exemption.

Finally, most states require that the taxpayer apply for an exemption before starting construction. Oregon's statute requires the applicant to file the application on or before April 1 of the assessment year for which the exemption is claimed.

Most states limit how long a taxpayer may benefit from the tax exempt status for property under construction. Usually, this exemption is no more than two consecutive years.

The taxpayer must carefully review their statutes to determine the criteria and conditions for a construction-in-progress tax exemption. The under construction provision is one of many exemptions that can yield significant tax savings for property owners who take the initiative to learn effective tax strategies for their markets. This is particularly true of the commercial projects taking shape under those construction cranes gracing our skylines today.

 

CfraserCynthia 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..

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Apr
15

Valuation Education

How to spot - and challenge - unfair tax bills
Even if there is life left in this market cycle, commercial property owners should maximize returns now in preparation for the next buyer’s market, whenever it may begin. Property tax is one of the largest expenses for most owners, so protecting the property, investment and tenants requires a thorough understanding of the tax system. With that understanding, the taxpayer will be better equipped to spot an inflated assessment and contest unfair tax bills.

Keep it (fee) simple
Merely knowing for how much a property would sell is insufficient to ensure proper taxation. Specifically, taxpayers need to know fair taxation starts with a fair measurement of value.

The assessment is the measurement to which taxing entities apply the tax rate. In order to treat all taxpayers uniformly, assessors must measure the fee simple value of the property, or the value without any encumbrance other than police power.

Why is that important? The principle is that a leased property and an identical owner occupied property, valued on the same date and under the same market conditions, would be taxed the same. By contrast, leased fee value or value affected by encumbrances can vary greatly, even between identical properties. The concept is simple; the application, not so simple.

Assessors and courts alike struggle to determine an asset’s fundamental real estate value because their primary source of data is leased-fee sales, or sales priced to reflect cash flow from existing leases. Several courts across the country have understood the necessity to assess properties uniformly and have mandated that assessors adjust sales data to reflect the unencumbered value of the real estate.

In Ohio, the state Supreme Court ruled that an appraiser who was valuing an unencumbered property had to adjust the sale prices of comparable properties to reflect the fact that the subject property was unencumbered (by leases, for example) and would therefore likely sell for less. The decision recognized that an encumbered sale is affected by factors besides the fundamental value of the real estate.

Courts across the country have been wrestling with the fee simple issue. For real estate professionals, the idea that tenancy, lease rates, credit worthiness and other contractual issues affect value is commonplace. In order to tax in a uniform manner, however, assessors must strip non-market and non-property factors from the asset to value the property’s bare bricks, sticks and dirt.

Doing the math
Although part of the purchase price, contractual obligations and other valuable tenant-related attributes are not components of real estate. What is part of the real estate is the value attributable to what the property might command in rent as of a specific date. This may appear to be splitting hairs, but the difference between values based on these calculations can be significant.

In the first instance, the landlord and tenant have a contractual obligation. For example, suppose the rent a tenant pays under a 20-year-old lease were $30 per square foot. If the tenant were to vacate, however, that space might only rent for $10 per square foot today. The additional $20 per square foot premium is in the value of the contract, not the value of the real estate. Moreover, the contract only holds that value if the market believes the tenant is creditworthy and will continue to pay an above-market price.

When the tenant vacates, it’s the real estate itself that determines the current market-rate lease of $10.

Good data, good results
Identifying an inflated assessment brings the taxpayer halfway to a solution. Step two is finding the best way to challenge the inappropriate assessment. Each state has its own tax laws and history of court decisions, but a few key principles will help taxpayers achieve a fee simple value.

First, sales and rents must have been exposed to the open market. A lease based on construction and acquisition costs reflects only the cost of financing the acquisition and construction of a building, not market prices.

Another principle assessors often fail to apply is that the data they use must be proximate to the date of the tax assessment. Therefore, a lease established years before the assessment is not proximate, even if the lease itself is still current.

What does make for good data is a lease that has been exposed to the open market, where the property was already built when the landlord and tenant agreed to terms free of compulsion. Equally reliable is the sale of a vacant and available property, or where the lease in place reflects market terms proximate to the assessment date.

Taxpayers who challenge assessments that are not based on fee simple values help themselves maintain market occupancy costs, which will in turn lead to better leasing opportunities and retention of tenants.

KJennings90J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania 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..

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Apr
14

Five Ways Property Owners May Qualify For Property Tax Exemptions In Indiana

But in every instance, obtaining an exemption requires timely and accurate applications.

It is a common misconception in Indiana that property owners must also be non-profit corporations to qualify for a property tax exemption. While tax-exempt status is critical for the application of some exemptions, Indiana law provides for-profit property owners with opportunities to reduce their tax liabilities by claiming exemption.

To obtain the exemption, the property owner must show that it uses the property in a manner that qualifies for tax exemption, and the application must clear mandated procedural hurdles.

There are several property uses that may qualify for exemption from property tax liability. Here are five common scenarios:

  1. The property is owned, occupied and predominantly used for charitable, educational, religious, literary or scientific purposes — To qualify, the owner must file an exemption application and show that it owns the property to further one of these tax exempt purposes.

    Ownership, occupancy and use need not be unified in one entity, and the statute does not require the owner to be a non-profit.

    For example, the tax court in 2014 approved a 100 percent property tax exemption for an office building that a for-profit, limited liability company owned to further the charitable tissue bank operations of its tenant, a related public benefit corporation. The assessor failed to show that the for-profit owner, in fact, had a profit motive for the property.

    Similarly, in a final determination issued that same year, the Indiana Board of Tax Review — the state agency that adjudicates property tax exemption appeals — stated that "involvement of for-profit entities does not preclude a property tax exemption.

    In this latter case, a for-profit entity leased a building to another for-profit entity to provide early childhood education.

    A year earlier, the tax review board approved the 100 percent exemption of a building owned by an individual and leased to a for-profit, faith-based daycare.

    Starting in 2015, the Indiana Legislature explicitly authorized the exemption of property owned by a for-profit provider of certain early childhood education services.
  2. The property is leased to a state agency — Property owned by a for-profit entity and leased to an Indiana state agency qualifies for exemption, but the lease must require the state agency to reimburse the property owner for property taxes.
    The exemption applies only to the assessed value attributable to the part of the real estate that the agency leases.
  3. The property is leased to a political subdivision — Structures leased to political subdivisions, including municipal corporations, are exempt from property tax.
  4. The property is leased to a public university — The Indiana Board of Tax Review considered this provision in 2013, applying a 13 percent property tax exemption for the portion of a for-profit commercial property owner's building that was leased to Purdue University for use as classrooms.
  5. The property is used as a public airport — To qualify for this measure, the owner of an Indiana airport must hold a valid and current public airport certificate issued by the State Department of Transportation. The law states that the applicant may claim an exemption "for only so much of the land as is reasonably necessary to and used for public airport purposes."

Eligible property includes not only the ground used for taking off and landing of aircraft, but also real estate "owned by the airport owner and used directly for airport operation and maintenance purposes" or "used in providing for the shelter, storage, or care of aircraft, including hangars."

The exemption does not apply to areas used solely for purposes unrelated to aviation.

How to apply

What is the process for claiming a tax exemption? Beginning in 2016, applications are due April 1, six weeks earlier than in past years. Indiana's Department of Local Government Finance provides a standard exemption form, Form 136, available on the agency's website at http://www.in.gov/dlgf/8516.htm.

The form can be used to claim both real and personal property tax exemptions. It includes three pages of questions and identifies the information and documents needed to process the request.

The property owner is responsible for explaining why the property is exempt to the assessor and to the county property tax assessment board of appeals, which has the authority to review and approve or reject each application.

Owners may need to provide in-formation beyond what the form requires. For example, assessors often want to review the relevant leases, such as a lease to a state agency or political subdivision. Indiana has 92 counties, and each county has its own procedures for processing applications.

There is no universally reliable test for weighing applications for tax exemption, so each claim stands on its own facts. Whether an owner's property qualifies for the exemption will depend on the statute under which the exemption is claimed and the particular evidence provided to support the claim.

Miss the filing deadline?

Exemptions are not automatically applied each year, but property that has been previously granted an exemption under certain provisions may not require new applications annually, depending on the facts of the case.

If the exemption does not carry forward and the owner fails to properly claim an exemption, it may be waived.

Even if the exemption is waived, however, hope remains. The owner may be able to obtain a legislative solution that permits a retroactive filing for an otherwise untimely application.

 

Brent AuberryBrent A. Auberry is a partner in the Indianapolis office of the law firm Faegre Baker Daniels LLP, the Indiana member of American Property Tax Counsel (APTC), the natonal affiliation of property tax attorneys. Mr. Auberry can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Mar
28

Partially Built Properties Raise Property Tax Issues

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

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

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

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

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

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

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

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

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

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

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

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

paul Ben Blair jpg

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

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Mar
28

Property Owners Beware

"The varying directions of price trends demonstrate that now, more than ever, Atlanta property owners should closely review property tax assessments and make specific determinations regarding the correctness of the valuation. General sales trends and perceptions provide insufficient basis for deciding whether or not to appeal the county assessment notice..."

The year following a real estate acquisition is a critical tax year or the property's owner. An assessor will typically latch onto the recent sale price to support a reassessment of the property's taxable value to equal that transaction amount, effective in the following tax year.

When the new assessment arrives, some taxpayers will recognize the familiar sales price amount reflected in the property's assessed taxable value, breathe a sigh of resignation and plan to be taxed accordingly. Yet there is good reason to question the new assessment's accuracy, even if it equals the acquisition price.

Georgia law provides that the transaction amount a buyer pays for real estate in an arms-length, bona fide acquisition shall be the property's maximum allowable fair market value for property tax purposes for the following tax year. Accordingly, purchasers of property in one tax year should expect to receive ad valorem tax assessment notices for the subsequent tax year at a value no higher than the purchase price. In other words, the taxable value may be lower than the acquisition amount.

Differentiate Price, Value

There are several analyses that a wise taxpayer should consider when reviewing the tax assessment received in the year following the property's purchase.

Some county taxing authorities use the purchase price as the taxable value for the next tax year by default. That price may not be an appropriate valuation, however.

Often the assessor is unaware that the purchase price may reflect an analysis of factors other than the value of the real estate alone, and that the price, therefore, may exceed the true fair market value. In that event, the taxpayer should identify and explain those factors to the assessor.

Examples might be special financing arrangements, the financial stability of certain tenants, the duration of existing rental terms, or the transference of non-real estate items such as personal property and/or intangibles. Intangibles may include an in-place work force, favorable contracts for property management or other non-taxable items.

Another potential consideration is that the property's financial performance may have varied from the expectations the purchaser entertained at the time of the acquisition. Perhaps physical changes to the property since the time of purchase have decreased its value; for example, the owner may have razed or demolished part of the improvements in preparation for remodeling or repair that did not occur before Jan. 1.

In short, the purchaser should not blindly accept a transaction value from the previous year as the real estate's de facto taxable value.

Is It Fair?

Be on the lookout for sale-chasing assessors. Sale chasing occurs when a tax assessor changes assessments only on properties sold in a given year and leaves assessments unchanged on similar properties that did not change hands.

Property owners should be diligent, comparing the assessment of newly purchased property relative to assessments of similar properties in the same market that have not sold, to determine if their own assessment is accurate. Compare assessments of similar properties on a per-square-foot basis, a per-key basis, or on a per-unit basis, depending on the property type, to determine if a question about fairness in valuation may exist, and whether further analysis is warranted.

In addition to comparing the assessment of the purchased property to the assessments of comparable properties that have not sold, the wise property owner should also compare the assessment to the assessments of com-parable properties in the same market that were sold in the preceding year.

The taxpayer may need to calculate and compare a gross rent multiplier ratio. To determine this ratio, divide the assessment of the real estate by its annual rental income before expenses such as taxes, insurance, utilities, etc. (It may require a market survey or direct inquiry to acquire that data.)

While this method ignores differences in vacancy rates, if the gross rent multiplier for the taxpayer's real estate is much higher than the multiplier for similar properties that sold in the same market and calendar year as the subject property, then the taxpayer may have a legitimate cause for complaint.

In a hypothetical example, a property sold for $25.3 million in 2014, has the potential to generate $2.5 million in rent annually, and received a 2015 county tax assessment of $25.25 million. The ratio of the county assessment divided by the rent potential results in a gross rent multiplier of 10.1.

Another property sold in 2014 at a price of $27.4 million, has annual rent potential of $3.4 million, and the 2015 county tax assessment on this property was $23.2 million. This second property's gross rent multiplier is 6.82. A third property that did not sell was assessed at $30.68 million for 2015 and its annual rent potential was $4.5 million, resulting in a gross rent multiplier of 6.82.

After making these comparisons, the taxpayer in this example can make a good argument for a lower assessment. It is worth mentioning that taxpayers must adhere strictly to applicable appeal deadlines.

Clearly, sale price does not necessarily equal fair market value. Shrewd taxpayers in Georgia should carefully review, research and analyze their assessment notices to determine whether the county taxing authority has merely made a cursory assessment of the fair market value of their property based solely on the purchase price. If so, an appeal may be in order.

Stuckey

Lisa Stuckey 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. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Feb
29

Beware of Excessive Property Taxes After Government Condemnations

Easements negatively affect a property's utility and desirability, reducing its fair market value.

Property valuation for tax purposes shares a common basis with condemnation law when it comes to the impact on property owner rights.

In practical terms, imposing an easement or taking a portion of a property devalues that real estate.

Property owners have a clear legal remedy for compensation when the government takes any of the bundle of rights inherent to property ownership. There is no prescribed procedure, however, that automatically adjusts taxable property value when the government burdens the property through some form of taking.

The property owner must step up and declare that the property is being subjected to a double hit: (1) the loss of some property rights for which compensation presumably was paid; (2) the continued excessive tax burden resulting from the assessor's failure to recognize the value loss commensurate with the taking of some right or rights that contributed to the property's prior value.

The Other Shoe Drops

How do properties burdened by government easements and partial takings suffer a double value loss?

First, the use of the property for some public purpose limits its usefulness to the owner, and therefore reduces its marketability. Second, the property owner incurs an ongoing cost in unfair taxation when the assessor fails to adjust to the diminished value and reduce the value for assessment purposes.

A typical example is a taking for a utility easement across a property. The owner and government will either negotiate a price paid for the easement, or a condemnation proceeding will determine just compensation.

The government acquires the easement legally, typically paying money to do so. Yet the acquisition imposes a value loss on the remainder of the property, a loss that goes unnoted and unacknowledged by the taxing authority.

There are small differences between the loss in value resulting from the imposition of an ·easement or the taking of the fee interest in the affected property, but all takings for a public purpose result in value loss to the remainder of the real estate.

Encumbrances All Around

Some examples of loss resulting from the imposition of an easement, be it a power line, sewer line, green space or pipeline, are the interference with or elimination of future development or use of the property. There is a loss of peaceful enjoyment and use of the property during the construction and development stage, as well as the continued inhibition of full use of the property in perpetuity.

The holder of the easement rights will also have the power forever to re-enter the property to maintain, repair, alter and expand its use within the easement. That right of access usually includes a right of ingress or egress over the whole property as required to get equipment and personnel to the easement.

For instance, agricultural properties subservient to easements, such as for power lines, are subjected to maintenance and repair crews corning to repair the lines and crossing through cultivated fields. Since the lines are most often damaged during storms, the fields will be at their most vulnerable to damage and resultant crop loss.

The crop-loss scenario is equally adaptable to urban commercial property. A sewer line running under the parking lot of a big-box store, a power line across a convenience store entrance, a water line in front of a fast food restaurant, are all subject to failure or modification that could interfere with the enterprise operating on the property.

The point is that the encumbered property, if offered for sale, will not obtain the same price as a competing property that is unencumbered by such a burden.

Calculate the loss

The basic measure of compensation to acquire an easement is the fair market value of the property before the taking versus the fair market value after the taking. The difference between those values represents the compensable loss to the owner.

Assessors ignore this statutory standard, failing to recognize that a property burdened by public easements does not command the same value as unburdened or less burdened properties of similar use.

Properties that have lost size as a result of a taking for public use suffer an even greater value loss to the remainder of the asset. Assessors will typically use some database to justify their value assessment, confronting the taxpayer with statistics. The assessor will rely on market data such as asserting that hotels sell for $X per room, Class A office space for $Y per square foot, convenience stores on one-acre lots for $Z and so on.

But a commercial property diminished in size is invariably diminished in desirability, if not in outright utility.

A very small strip of land taken in front of a fast food restaurant may result in an inferior access. A taking from an office building parking lot may result in a lack of adequate parking that is usually required. The taking may render the entire property nonconforming because setback requirements and building-to-land ratios no longer meet local ordinances.

Assessors rarely, if ever, re-value properties after a taking through eminent domain or a threat of it, and lower the assessed value to reflect the property's lost competitiveness in the marketplace.

The fast food store owner knows that hamburger sales suffer after a street widening or change of access. A shopping center manager knows how diminished parking affects business. Hotel management knows the negative result of lost visibility due to a highway project. The list could go on.

The point is that easements and other takings inflict observable damage on a commercial property's utility and desirability. They all result in lost fair market value, with no acknowledgement by assessors.

Property owners appealing their tax assessments should quantify this value loss and present this data to property tax decision makers. Anything less than a fair adjustment would be an unfair, further burden to the property owner already encumbered by the public use.

Wallach90Jerome Wallach is the senior partner in The Wallach Law Firm based in St. Louis, Missouri. The firm is the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. Jerry Wallach can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Feb
17

Lighten the Load - How to Ease a Threat to Affordable Housing

Over the past three decades, the federal Low-Income Housing Tax Credit (LIHTC) Program has proven to be a crucial tool for creating housing for low- and moderate-income residents.  Yet the communities created under the program operate on a fine margin that can be jeopardized by unfairly high property taxes.  Unfortunately, taxpayers and taxing authorities have yet to reach consensus on how to value LIHTC assets.

In the face of this dilemma, stakeholders can take action by educating assessors on the mission of the LIHTC program and accurate valuation for property tax purposes.

Codified in the Tax Reform Act of 1986, the LIHTC program offers incentives to create rental housing for low-income residents.  Eligible developers earn annual tax credits for 10 years, in an amount equal to a percentage of development costs.  In order to raise capital for development or renovation, developers typically sell those credits to investors.

The tax credits are the linchpin of the LIHTC program, because the costs of the project far exceed the value it creates.  Given the often onerous demands of the federally funded, state-managed program, projects would otherwise be infeasible.

To begin with, the LIHTC program stipulates flat rents tied to the local median income and the average number of bedrooms per multifamily unit.  At the same time, developers must pay for mandatory reporting and fund community programs.  Failure to meet those requirements during the first 15 years after a project’s completion triggers a federal recapture of the tax credits, with interest.  As a result, net operating income at LIHTC properties is often flat for many years and then declines as expenses consume more and more capital.

Sadly, many authorities mistakenly believe that the guaranteed rents generated LIHTC communities reduce the owner’s risk and make the assets more valuable than market-rate properties.   This misconception leads to overvaluation, thus inflating tax liability and likely rendering a project infeasible.

Wanted: Consensus

When valuing LIHTC properties, taxing authorities should be mindful of the program’s goal: to help communities provide housing for financially challenged people.

The generally accepted approach to valuation is the income method, which applies in-place rents and, for vacant units, LIHTC-approved rents.  Gross rents at LIHTC properties are pegged to the local median income, so rent increases tend to be minimal.

On the debit side, assessors should use actual operating expenses, which for LIHTC properties are substantially higher than those of market-rate properties.  If assessors instead value an LIHTC property based on market rents or operating expenses, they will overstate NOI and therefore the property’s true market value.

Some authorities advocate including the depreciated value of the tax credits in property tax assessments.  Taxpayers have countered that the credits’ only real value is the intangible one of providing good-quality housing for renters with moderate and low incomes.  The tax credits merely bridge the gap between construction costs and the value created through development.

Including these tax credits in the assessment erroneously produces above-market valuations and excessive tax liability for properties that are clearly less valuable than those able to charge market rents and are unburdened by LIHTC programming and reporting costs.

Many legislatures have at least partially codified the proper valuation of LIHTC properties.  In many jurisdictions where the law is silent, courts have rendered decisions addressing, at least in part, the valuation of LIHTC properties.

Given the lack of consensus on valuation, a taxpayer challenging an assessment of an LIHTC property should know the relevant statutes and case law.  In jurisdictions that lack statutory or case law, the taxpayer must make sure that authorities understand the LIHTC program and the need for policies that further its goals.

In jurisdictions where legislation has not overturned unfavorable case law, or where the code is incomplete or silent, taxpayers need to organize and lobby their legislators to act.  Ask them to codify assessment principles that lead to reasonable taxes.  That step will contribute significantly to the LIHTC program’s mission.

Emily Betsill Emily Betsill is a partner in the Washington, D.C. law firm of Wilkes Artis Chartered.  The firm is the District of Columbia, Maryland and Virginia member of American Property Tax Counsel, the national affiliation of property tax attorneys.  You may reach Emily via email at This email address is being protected from spambots. You need JavaScript enabled to view it.

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