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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.

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..

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..

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..

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.

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.

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..

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..

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.

Jan
29

Seize Tax Opportunities When The Price Is Right

Reporting the sales price on a transaction for a real estate excise tax affidavit or refund petition can be tricky in the State of Washington, depending which side of the coin you’re on.

Seattle's hot real estate market presents two special tax-saving opportunities – or, for the unwary, two tax traps – involving Washington State's real estate excise tax.

The first arises when above-market rents in place at a property contribute to its selling price. The second occurs when the sale of a property experiences high vacancy. In both scenarios, some buyers and sellers report prices that are higher than they should be for the real estate excise tax. At nearly 1.8 percent of the property's sale price, real estate excise tax is a sizable trans-action cost that deserves attention.

Skewed By High Rents
With above-market rents, a portion of the sale price may reflect the value of contracts and business efforts. The tax only applies to the consideration paid for real estate, so the consideration paid for above-market contracts should be separated out as nontax-able.

Although we believe Washington law is clear on this, the Department of Revenue has been struggling to determine its position. The department recently agreed taxable value excludes the portion of the purchase price attributable to above-market rents, but then it changed its position.

Since these vacillations occur in the context of individual taxpayer cases, other taxpayers do not necessarily know what the department's position is at any given time. The department has not published any rules or guidance specific to this scenario.

Impaired By Vacancy
In the scenario involving the sale of a property with high vacancy, the buyer and seller frequently agree on a price as though occupancy were full and then deduct an amount for the vacancy shortfall. The deduction reflects the costs to lease the remaining space, and also the entrepreneurial profit the buyer requires for undertaking the risk and work required to achieve full occupancy.

Some parties to a transaction mistakenly report the stabilized value instead of the amount actually paid for the property. The only price they should report for tax purposes is the sum after deducting for vacancy, as that represents the actual amount paid.

Both parties have an incentive to ascertain and report the correct price on the real estate excise tax affidavit. Though the parties can negotiate who pays the tax, the seller is responsible for its payment by law. And yet, the Department of Revenue can enforce payment by placing a lien against the property, making the buyer indirectly liable.

Both buyer and seller sign the affidavit reporting the sales price, under penalty of perjury. Buyers may feel the ongoing effect of the reported price in the form of property taxes, since county assessors pay attention to the affidavits in determining property tax values. With this in mind, both parties should care about correctly reporting the transaction.

Buyers and sellers in either scenario can put themselves in a favorable tax position by presenting the information about the transaction carefully, whether in the affidavit or in a refund petition to the Department of Revenue. Note that a refund petition, if applicable, must be filed within four years of the transaction date.

Information about the transaction should be presented to the taxing authorities in a clear manner to establish the correct facts and legal analysis. In the first scenario, a detailed explanation of the facts ideally includes an appraisal that excludes the price paid for the value of the above- market leases in place, as opposed to the real property.

In reviewing the transaction, the Department of Revenue should presume the price paid is taxable, but the taxpayer can rebut that position. When the transaction price reflects more than the price for real estate alone, the department often next turns to the property's assessed value instead.

The taxpayer can argue that, by law, an appraisal as of the sale date trumps the assessed value as evidence of the taxable amount. For this reason, an appraisal is important for the above-market rent scenario.

In the high-vacancy scenario, however, the presumption applies that the price paid is taxable, and no appraisal should be needed. Therefore, the parties should report the actual price paid after accounting for the vacancy shortfall.

Recent experience indicates the Department of Revenue may choose to challenge an affidavit or deny a refund claim if it takes the position that the portion of the price attributable to above-market rent is untaxable. That does not mean the department is right, however, and its vacillations suggest its directors feel uncertain about their position. Taxpayers with strong facts should pursue the issue and work diligently to make a strong case that will help the department get to the right result.

Whether a sale involves the added value of contracts or a deduction for high vacancy, seeking professional advice about how to best report the transaction on the real estate excise tax affidavit, or in a refund petition, can turn the sale into a significant tax opportunity.

MDeLappeBrunsNorman J. Bruns and Michelle DeLappe are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local tax. Bruns is the Idaho and Washington representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
Jan
22

Multifamily Investors, Don't Forget About Property Taxes

The music continued to play in 2015 for the white-hot multifamily market, as many investors saw rents and occupancies climb higher and cap rates fall. Sales of apartment projects still under construction remain commonplace. Record-high sales prices seem to be the norm.

Accompanying the high prices, however, are rapidly increasing property tax valuations. Multifamily investors should be prepared for such increases, and be ready to combat overassessments. All multifamily investors should also be aware of the myriad property tax issues associated with the development, purchase or sale of their particular project.

The amount of attention property owners pay to property taxes often depends on the investor's specific situation. For instance, property taxes may indeed be the most pressing concern for a long-term owner of an apartment complex who receives a tax notice 50 percent higher than the previous year's bill, based on a lofty sales price paid for a new project down the road. Not only does this investor have to compete for tenants against a new development with better amenities; he or she now has to pay more in taxes because of that same development, effectively slashing the property's net operating income.

On the other hand, a developer might be preoccupied with his own, more immediate concerns, such as site selection, construction schedules and financing. Even so, the developer should be mindful of important property tax considerations: Are there property tax incentives available, such as affordable-housing exemptions, brownfield abatements and many others? What is the valuation date for assessment purposes? How do assessors assess the value of construction in progress? Will a change in use trigger any roll-back taxes, or increase the tax rate?

Careful property tax planning is of vital importance to purchasers of multifamily properties. A purchaser of a newly constructed apartment complex must determine how an assessor will value the property after closing. Will the assessor base the value on construction costs, sales of comparable properties, income information or a combination thereof?

Unfortunately, some investors wrongly assume that property tax values will remain unchanged following a transaction. Although a sale will not necessarily result in a new tax value, tax assessors are increasingly trying to catch up to sales prices that exceed current assessed market values.

Underestimating property taxes at the time of the purchase can significantly reduce the investor's actual return. For that reason, a purchaser should carefully scrutinize any tax estimate based on an assessed value that is lower than the purchase price.

Purchasers of low-income housing tax credit (LIHTC) properties should consult local counsel to confirm whether the jurisdiction allows assessors to consider rent restrictions and tax credits in determining fair market value. In some jurisdictions, local tax laws may compel the assessor to value an LIHTC property much higher than the actual sales price.

In states that require the deed to show the purchase price, assessors frequently rely upon these deed amounts in determining fair market values. The declared transaction value on the deed too often includes consideration not attributable to the real property, such as value for personal property or intangibles, although assessors rarely take this into account. Similarly, assessors may not look behind a sale to consider factors that distinguish the acquisition from a market transa<.1:ion, such as an allocated purchase price as part of a portfolio sale.

As the multifamily market continues to sizzle, lower rates of return diminish the margin for error when estimating property taxes. Investors must recognize the importance of appropriate property tax planning, or risk an unpleasant surprise at tax time that could jeopardize their property's cash flow.

By consulting knowledgeable local professionals, investors can equip themselves to make better-informed decisions when estimating taxes. A seasoned tax expert can review tax notices for accuracy and fairness, and navigate any local rules and deadlines to challenge unfairly high assessments.

  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.

Jan
10

Built-In Costs / Investors need to pay attention to transfer taxes when buying properties

There was a time when closing a real estate sale cost the seller a few hundred dollars for transfer tax stamps on the transfer deed, but those days are long gone.  Nowadays, transfer tax can be a major consideration in structuring and funding a property transaction.  And the requirements for complying with, or being excluded from, transfer taxes have multiplied.

In some markets, transfer tax can exceed the property tax burden in the first few years after an acquisition.  For example, in San Francisco the transfer tax on property transactions valued at more than $10 million is 2.5 percent of the sales price.

Historically, transfer taxes were only collected when the county recorder’s office recorded a deed.  If a transfer occurred through the acquisition of a legal entity that owned the property, and that entity continued to exist without requiring a transfer deed, then no transfer tax was owed.

Today, however, many real estate transactions occur through the buying or selling of ownership interests in legal entities which hold title to real property, and which continue to exist and hold property after the transaction has concluded.  Technically, there is an indirect change in ownership because the legal entity is now owned by a different entity or owner, even though the title for the real estate remains unchanged.

The proliferation of these indirect property transfers has spurred tax authorities to enact laws that assess transfer taxes on indirect sales.  The deed-recording process cannot capture indirect sales, so counties and cities now require buyers and/or sellers to report such transfers through other means.

The most common way of tracking indirect transfers is to align transfer tax reporting with the property tax system.  In California, for example, taxpayers must report legal entity transfers to the state Board of Equalization, which in turn reports the transfers to county assessors.  Counties and cities which collect transfer taxes on indirect sales can now access assessor databases to learn about indirect transfers in their jurisdictions.

Most transfer tax laws contain numerous exclusions.  For example, if there is a mortgage against a property, the amount financed is excluded from the purchase price when calculating the transfer tax.  Similarly, transfers of property between entities which have the same ownership percentages are excluded from transfer taxes.  A third example is the exclusion from transfer tax for marital dissolutions.

In recent years, however, tax authorities have repealed some exclusions from transfer tax. Some jurisdictions have deleted the mortgage deduction.  Likewise, gifts and transfers upon death, and transfers to non-profit entities, which were once generally excluded, are now subject to transfer tax.

The declining number of exclusions restricts a market participant’s ability to structure transactions to be exempt from transfer tax.  That task has grown only more difficult as variations in tax rules have increased between jurisdictions at the local level.

The transfer tax has traditionally been and continues to be a local tax.  Consequently, individual counties and cities determine what elements to include or not include in their transfer tax ordinances.  Transfer taxes are an attractive way for local governments to raise revenue, particularly when other sources of tax income are limited.

In California, most counties and cities operate under the traditional transfer tax laws that the state Legislature established almost 50 years ago.  But more than a dozen counties and cities have modified the transfer tax law enacted by the Legislature.  The courts have approved such changes under the home rule doctrine, which allows communities to govern themselves with laws that don’t conflict with state or federal law.

These modifications have two primary goals: The first is to impose transfer tax on indirect transfers of real property caused by changes in the ownership of legal entities.  The second goal is to repeal the exclusions that existed in the original transfer tax laws.  In addition, the modifications have often added penalties for failure to pay transfer taxes.

California, like most states, has dozens of counties and hundreds of cities, which means that buyers and sellers of real property must familiarize themselves with the specific provisions in local transfer tax ordinances.

Transfer tax compliance used to be as simple as checking a box.  But high transfer tax rates, the prevalence of indirect property sales and rising property values have increased the significance and complexity of transfer taxes in property transactions.  Awareness of tax rates, available exclusions from the transfer tax and compliance and reporting requirements is essential to maximize property value and avoiding reporting pitfalls.

 

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..

Dec
31

How Do I Win My Property Tax Appeal?

If the compelling evidence is on your side, the record shows you have a fighting chance.

The best time to consider how an appellate court might view a property tax appeal is not after a trial court delivers an unwelcome decision.  Rather, as the taxpayer carefully plans the evidence to be submitted at trial, it is worthwhile to consider how the evidence will look to appellate judges.

The handling of tax cases in appellate courts receives comparatively little attention.  Yet an appellate court may well make the final decision in a property tax appeal.  That appellate court may even be a state’s highest court, typically (though not always) the state’s supreme court.

Based on the attention given to appellate court strategies in tax literature, the handling of appeals is a neglected orphan in the property tax process.  Innumerable property tax articles address how assessors mass appraisal methods can overstate a property’s market value.

Writers cover pitfalls of the typical cost and sales comparisons and income approaches to value, or detail valuation peculiarities by property type.  Little is written about the key issue that can help tax-payers prevail in the appellate courts.

The Record Rules

Everyone has heard that the three points of consequence for real property are location, location, location.  For a property tax appeal in an appellate court, those three points of consequence are the record, the record and the record.

Whether the taxpayer is the appellant or is responding to an appeal, the best chance of prevailing derives from a record filled with compelling evidence that covers the big-picture points, as well as all of the finer ones.

Some recent decisions confirm these points and show some of the opportunities and challenges that property tax appeals in appellate courts can entail.  In each case the appellate court found that the record showed the tribunal had adopted a wrong principle or made a decision not supported by competent and substantial evidence.

In one Midwestern case, the question at issue was whether the taxpayer had mistakenly reported personal property as taxable in a particular jurisdiction, even though the personal property was not only in other cities, but also in a different state.

At trial, counsel had the taxpayer testify in painstaking detail about the property and its location, including unusual costs the taxpayer incurred to maintain the property.  Notwithstanding this evidence, the tribunal held that the taxpayer had failed to satisfy its burden of proof.

At oral argument in the court of appeals, however, the taxpayer’s counsel was able to read compelling portions of the transcript to show that the trial judge had erred badly.

Sometimes judges cannot be swayed, no matter what is said at oral argument, but in this case the passages quoted grabbed the attention of all three appellate court judges, who seemed to fully understand the injustice that had occurred.  The resulting decision gave the taxpayer a complete victory.

Great Valuation Records

A second case involved a retail property in the Midwest that was almost 80 percent vacant on each of two valuation dates.  The initial tax tribunal decision adopted the appropriate methodology by using the income approach to first value the property at a stabilized occupancy of 85 percent, which the judge determined was the stabilized rate.  The judge then deducted the lost rent and costs involved over the time needed for the property to reach stabilized occupancy level.

Unfortunately, the tribunal’s decision included three technical flaws:

It deducted only a portion of the stabilization costs; it understated the area needed to be leased in order to achieve stabilization; and it included market rent that was inappropriately increased in the second tax year calculation because a gross lease was misconstrued as a net lease.

The record, including both the testimony of the taxpayer’s witnesses as well as a carefully documented appraisal, enabled the appellate court to see that the initial decision erred on all three points.  The taxpayer was fortunate that the three-judge panel deciding the appeal was willing to carefully analyze such technical valuation issues, rather than defer to a tax tribunal judge.  Yet this successful outcome hinged on compelling recorded evidence.

In a third and similar Midwestern case, the appraiser had initially valued a retail property as stabilized and then deducted stabilization costs.  Most of those costs were to cure the property’s extreme deferred maintenance, with a small amount relating to the leasing of vacant space to achieve stabilized occupancy.

The tribunal decision erroneously adopted the interim value before applying the stabilization deductions, With a record very much like the first case, the appeals court recognized that the cost of curing the deferred maintenance had to be accounted for, yet inexplicably failed to order the deduction of the modest costs related to the property achieving stabilized occupancy.

The taxpayer’s counsel made excellent lemonade from this decision by pointing out to the government’s counsel that, undeniably, the decision was logically inconsistent, because if the costs to cure deferred maintenance had to be deducted, then the same was true of the costs to cure the excessive vacancy.

Additionally, the taxpayer’s counsel argued that given the costs of further appeals and the likelihood that the taxpayer would ultimately prevail, a sensible solution would be for the government to agree to the value with the deferred maintenance costs de-ducted.  In fact, the government ultimately did agree and settled with the taxpayer on that basis.

While this case provided the taxpayer with an excellent result, it shows that a compelling record is a necessary – but not always sufficient – condition to prevail.

MandellPhoto90

Stewart Mandell is a Partner and 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..

Dec
31

Beware The Costs Of Hidden Capital

Owners Must Examine The Tax Consequences Of Making Capital Improvements Before Breaking Ground

For nearly 40 years, states have attempted to protect property owners from rapidly escalating property tax bills by limiting increases in the taxable value of real estate.  Often referred to as “caps,” these limitations are myriad and complicated, but share a tendency to distort the market for developers of new space and for property owners seeking to improve existing commercial properties.

How so?  Laws are state-specific, but taxpayers purchasing or improving real estate may lose the benefit of the cap on their property’s value, and incur a substantial tax increase on top of the acquisition or improvement cost.  In other words, caps discourage property owners from improving their properties, while owners who know how caps apply can access tremendous savings.

Caps in Action

Caps apply by limiting increases in taxable value for properties subject to reassessment that would otherwise rise to reflect the market.  For example:  California’s Proposition 13 generally limits annual valuation increases to 2 percent, even if the property’s market value is rising at a faster rate.  Common triggers for reassessment are an ownership change, countywide reassessment and improvements to the property.

Some states exempt a fixed percentage of any increased assessed value following an ownership change.  Ownership changes can include not only title transfers but also internal transfers of interests in the entity that owns the property.  To access this exemption, the taxpayer may need to take some timely action, such as filing a claim or meeting other state requirements.  Miss the deadline, and the exemption disappears.

Consequences of an oversight can be dramatic.  For example, an apartment complex previously assessed, capped or otherwise, at $20 million sells for $30 million.  Rather than incur taxes reflecting the full $10 million increase in value included in the sale price, the buyer qualifies for a 25 percent tax exemption, or $7.5 million.  Yet, failure to file a timely exemption application could result in taxation of that otherwise exempt $7.5 million of the total value.

Many jurisdictions cap value increases during periodic reassessment.  Florida generally limits annual increases to 10 percent of assessed value for the prior year.  South Carolina, which theoretically reassesses every five years, limits increases to 15 percent of the property’s prior assessed value unless there has been a property improvement or a change in ownership.

Some limits disappear if there has been an ownership change.  Florida generally defines an ownership change as any sale or transfer of title or control of more than 50 percent of the entity that previously owned the property.  South Carolina has adopted a much more complicated system of assessable transfers of interest (ATI’s).  The definition of an ATI runs for four full pages in the South Carolina Code.

Impaired by Improvements

With tax caps, taxpayers who improve their properties face even greater potential tax consequences, because states generally remove artificial caps on new construction and major renovations.  In other words, the total cost of improvements can include not only construction expenses but also a substantially heavier tax burden.  The result places an improved income-producing property at a serious disadvantage in competing with unimproved properties.

What constitutes an improved property? Florida has adopted a bright line test by examining whether the improvements increase value by at least 25 percent.  California law protects properties from reassessment so long as any work is normal maintenance or repair, or the improvement does not make the property “substantially equivalent to new.”

South Carolina is much more complicated and unclear.  The state requires assessors to include the value of new construction in valuing properties, but its statutes fail to define “improvements,” leaving interpretation to local taxing authorities.

The result is a patchwork quilt of inconsistency.  In order to circumvent South Carolina’s 15 percent cap on periodic reassessment, some counties have adopted a stepped approach to increases in value, although such a procedure is clearly unauthorized by statute.  Other counties simply add the value stated in building permits to existing assessed value in order to derive a new value, though the market would never see a sale on that basis.  Still other counties assume stabilization in valuing a new or improved income-producing property such as a hotel rather than accurately valuing the property before stabilization.  Clearly, a property owner improving a property faces a potential hidden cost in the form of increased taxes by loss of the statutory cap.

Reimplementation of tax caps on an improved income-producing property further complicates an owner’s prediction of costs.  Whatever the method of valuing the improvements, how does South Carolina’s 15 percent general cap apply to future valuations when the property value may be much greater?

If the taxing authority simply adds the cost of the increased value set forth in building permits, has the taxing authority fully captured an increase in value which, in turn, may be subject to re-imposed caps?  To state the obvious, an owner will not improve a property merely to re-cover the cost of improvements, but rather sees the potential of income gains exceeding improvement costs.

Most income-producing properties will generally require some period of time for lease up or stabilization.  Should the taxing authority be allowed to make assumptions of future income that the market would not make if the property sold prior to stabilization?  These questions have no easy answers.

Regardless of the system used for valuing new improvements, caps give a competitive advantage to owners of unimproved property in the form of lower costs.  Property owners must examine the obvious – and hidden – tax consequences of improvements to determine whether potential income from improvements justifies the costs.

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..

Dec
10

Transfer Taxes Are Now a Costly Consideration in Real Estate Transactions

There was a time when closing a real estate sale cost the seller a few hundred dollars for transfer tax stamps on the transfer deed, but those days are long gone.  Nowadays, transfer tax can be a major consideration in structuring and funding a property transaction.  And the requirements for complying with, or being excluded from, transfer taxes have multiplied.

In some markets, transfer tax can exceed the property tax burden in the first few years after an acquisition.  For example, in San Francisco the transfer tax on property transactions valued at more than $10 million is 2.5 percent of the sales price.

Transfer tax scope widens

Historically, transfer taxes were only collected when the county recorder’s office recorded a deed.  If a transfer occurred through the acquisition of a legal entity that owned the property, and that entity continued to exist without requiring a transfer deed, then no transfer tax was owed.

Today, however, many real estate transactions occur through the buying or selling of ownership interests in legal entities which hold title to real property, and which continue to exist and hold property after the transaction has concluded.  Technically, there is an indirect change in ownership because the legal entity is now owned by a different entity or owner, even though the title for the real estate remains unchanged.

The proliferation of these indirect property transfers has spurred tax authorities to enact laws that assess transfer taxes on indirect sales.  The deed-recording process cannot capture indirect sales, so counties and cities now require buyers and/or sellers to report such transfers through other means.

The most common way of tracking indirect transfers is to align transfer tax reporting with the property tax system.  In California, for example, taxpayers must report legal entity transfers to the state Board of Equalization, which in turn reports the transfers to county assessors.  Counties and cities which collect transfer taxes on indirect sales can now access assessor databases to learn about indirect transfers in their jurisdictions.

Fewer exclusions, a patchwork of requirements

Most transfer tax laws contain numerous exclusions.  For example, if there is a mortgage against a property, the amount financed is excluded from the purchase price when calculating the transfer tax.  Similarly, transfers of property between entities which have the same ownership percentages are excluded from transfer taxes.  A third example is the exclusion from transfer tax for marital dissolutions.

In recent years, however, tax authorities have repealed some exclusions from transfer tax. Some jurisdictions have deleted the mortgage deduction.  Likewise, gifts and transfers upon death, and transfers to non-profit entities, which were once generally excluded, are now subject to transfer tax.

The declining number of exclusions restricts a market participant’s ability to structure transactions to be exempt from transfer tax.  That task has grown only more difficult as variations in tax rules have increased between jurisdictions at the local level.

The transfer tax has traditionally been and continues to be a local tax.  Consequently, individual counties and cities determine what elements to include or not include in their transfer tax ordinances.  Transfer taxes are an attractive way for local governments to raise revenue, particularly when other sources of tax income are limited.

In California, most counties and cities operate under the traditional transfer tax laws that the state Legislature established almost 50 years ago.  But more than a dozen counties and cities have modified the transfer tax law enacted by the Legislature.  The courts have approved such changes under the home rule doctrine, which allows communities to govern themselves with laws that don’t conflict with state or federal law.

These modifications have two primary goals: The first is to impose transfer tax on indirect transfers of real property caused by changes in the ownership of legal entities.  The second goal is to repeal the exclusions that existed in the original transfer tax laws.  In addition, the modifications have often added penalties for failure to pay transfer taxes.

California, like most states, has dozens of counties and hundreds of cities, which means that buyers and sellers of real property must familiarize themselves with the specific provisions in local transfer tax ordinances.

Transfer tax compliance used to be as simple as checking a box.  But high transfer tax rates, the prevalence of indirect property sales and rising property values have increased the significance and complexity of transfer taxes in property transactions.  Awareness of tax rates, available exclusions from the transfer tax and compliance and reporting requirements is essential to maximize property value and avoiding reporting pitfalls.

 

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..

Dec
10

A Fair Share of Taxes

Frequent reassessments benefit Pittsburgh-area property owners.

Pittsburgh-area properties are being reassessed more frequently than in the past – and that is good news for property owners.  Periodic reassessment helps to keep property assessments current with actual values and ensure that everyone pays their fair share.

Unfortunately, frequent reassessments are not the norm throughout Pennsylvania.  Pittsburgh and surrounding counties are the exception, with Allegheny County (in which Pittsburgh is located) having four reassessments in the last 15 years.  Nearby Indiana County is undergoing a reassessment now for tax year 2016, its first since 1968, and neighboring Washington County is undergoing a reassessment for tax year 2017.

Pennsylvania lacks a mandatory revaluation cycle.  A revaluation or reassessment is a thorough analysis of every property in the entire county, with the objective of bringing each property’s assessment into line with its current market value.  Revaluations are often conducted by outside firms, usually with the assistance of the local assessment office.  Occasionally, in-house assessment offices conduct reassessments.

Without a mandate to reassess, some counties go decades without a reassessment.  Rural Franklin County, for example, last reassessed in 1961.   Assessors there attempt to keep properties equalized by placing newly constructed assets on the tax rolls for what they believe the properties would have been worth in 1961.

The more time that passes, however, the more tenuous this methodology becomes.  Further, assessors are prohibited from “spot assessing,” or changing assessments on existing properties without a countywide reassessment.  Thus, as different parts of the county appreciate at different rates, the equality of assessment becomes more and more skewed.

Blair County, west of Pittsburgh, decided to undertake a reassessment for tax year 2017 after commissioning a study from the attorneys at Weiss Burkardt Kramer.  Comparing actual sales in the county to assessments, the study concluded that Blair County’s more than 50-year-old assessments do not meet the constitutional uniformity requirement.

Says attorney M.  Janet Burkardt, a partner at Weiss Burkardt Kramer: “If assessment systems are not periodically adjusted, they become regressive so that properties appreciating at a higher rate are taxed at less than their fair share, and properties appreciating at a lesser rate or those who have depreciated in value, pay more than their fair share in taxes.”

Because properties that benefit from unfairly low assessments rarely appeal those values, inequities become locked in over time.  For instance, in one county where revaluation had not occurred in decades, major office buildings were, on the whole, dramatically under-assessed.

Some under-assessed buildings paid such low taxes that they enjoyed a competitive advantage in attracting tenants.  A neighboring office building, despite paying dramatically higher taxes than its competition, had no recourse to appeal because it was also under-assessed and could not meet the test that its market value was too high.  The solution? A county-wide reassessment.

The longer a county goes between reassessments, the harder the next reassessment becomes.  First, big increases in assessments spark taxpayer outrage, tempting county leaders to push the problem off to another day.

Infrequent reassessments are also more time-consuming and expensive; reassessments in Pennsylvania usually stem from litigation, which is expensive and inefficient.  Less frequently, county leaders prompt the reassessment, as Indiana County did when it had reached the statutory cap on its tax rate.

In marked contrast, Erie County, to Pittsburgh’s north, was the first county to impose a reassessment cycle on itself.  “Our goal in reassessing is to gain uniformity and accuracy,” said Scott Maas, Erie County’s chief assessor.  “We meet with property owners informally and we welcome the opportunity to update our data and make corrections.  We want to get it right.” Maas initiated the county’s periodic reassessment cycle and oversaw the 2003 and 2013 reassessments.

Pittsburgh’s record four reassessments in 15 years followed years-long litigation in two different cases that went all the way to the Pennsylvania Supreme Court.  Ultimately, the Supreme Court ordered the reassessment.  Pittsburgh’s reassessment in 2013 sparked 100,000 appeals; for 2015, only a few thousand taxpayers appealed, demonstrating that most properties’ assessments have been resolved to the property owners’ satisfaction.  If Pittsburgh were to continue to reassess in the next three to five years, building on this fresh data and satisfactory values, the likelihood is that there would be minimal appeals year-to-year.

Frequent reassessments benefit property owners.  When the appeals process corrects errors, the data under under-lying the assessments improves and yields more accurate values in the next reassessment.  Pennsylvania law requires that reassessments be revenue-neutral, meaning that rather than local governments enjoying a windfall when assessed values increase, governments must reduce tax rates, so many property owners see a reduction in taxes when reassessments occur.

Most importantly, reassessment yields more uniform assessments.  Uniformity of assessment is required by Pennsylvania’s constitution.  When assessments are uniform, everyone pays their fair share.  Pennsylvania’s Supreme Court spoke to this in 1909: “While every tax is a burden, it is more cheerfully borne when the citizen feels that he is only required to bear his proportionate share...”

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..

 

Nov
30

Shrinking Retail Footprint Complicates Taxes

With other major retailers making similar announcements in 2015, this market shift will likely affect property owners and their property values for years to come.

As brick-and-mortar store operators respond to competition from online retailers, shopping center owners face a mounting risk of unfair taxation when assessors fail to account for retailers’ changing preferences for space.

In markets across the nation, select big box and junior big box retail tenants are changing their existing store concepts and shrinking the building footprints of retail shopping center and standalone locations.

Businesses that were once considered strong anchor or junior anchor tenants are even restructuring their business models, renegotiating leases for smaller spaces and closing stores that no longer meet viable internal metrics.

JC Penney, Barnes & Noble and Sears have all announced nationwide store closings in 2015, and the merger of Office Depot and Office Max has fueled additional store closings this year.

With other major retailers making similar announcements in 2015, this market shift will likely affect property owners and their property values for years to come.

Changes Threaten Values

Retailers’ new criteria for inline and freestanding stores will almost certainly present a property tax challenge for big box and junior big box space, as store closures and footprint reductions affect demand, market vacancy and lease rates in the sector.

Often, assessors will focus too much on the tenant and what the lease states, instead of remembering that the ultimate goal is to properly value the building and land as of the date of value.

When working with assessors, it is important to consider that calculations involving existing tenants constitute a leased fee analysis, which is inappropriate for calculating value for property taxes.

On a fee simple basis, which looks at the property and its market position, this type of space may have an entirely different market value.

With that in mind, it is important to know what the space would lease for if available for lease in an open market as of the date of value.

Another important factor to consider is what the property would sell for in an open market transaction on a fee simple basis. In reviewing the assessor’s calculations, consider whether any referenced sales of other properties reflect leased fee or fee simple pricing.

Blending leased fee and fee simple sales without a proper analysis can yield conflicting data points, compromising the integrity of subsequent conclusions.

These oversights often result in in-correct market value assumptions and metrics, and lead to artificially inflated property tax values.

Interest Shrinks for Big Boxes

Some tenants have reduced their store footprints by more than 20 percent over the past few years.  In part, this adjustment maximizes inventory turnover and sales per square foot.

When looking for new space, certain retailers have also set strict size limits with leasing brokers, and some stores that were once considered anchors are moving into inline retail space.

This type of size restriction can significantly impair a retail property’s overall market rent potential if an owner already has a vacant big box or junior box space. These factors are important metrics to consider when surveying rent to arrive at an appropriate market rental rate conclusion.

One way property owners are dealing with unmarketable big boxes is by subdividing the space into smaller suites that better accommodate the growing demand for small retail footprints.

This conversion can be costly, and if relevant, it is important to discuss the conversion costs with the assessor as of the date of value for the property.

It is also important to consider a proper lease up analysis if the property has substantial vacancy. With store closings triggering an increase in the available retail supply and online shopping continuing to gain market share, a lease up analysis that captures these factors is essential.

An additional issue to consider with the conversion into smaller suites is the depth of the original box and the potential for what some brokers term “bowling alley” space.

Often when the subdivision of big box or junior big box space is complete, new tenants will refuse to lease the excess depth the suite may provide.

In this instance owners are sometimes left with non-leasable space in the rear portion of the original building.

When this happens, it is important to consider excluding this space from the net rentable area of the analysis since the configuration often makes this space impossible to lease.

If subdivision is not an option, be realistic about the future lease up prospects for this type of space and use an appropriate, stabilized vacancy rate in addition to a proper lease up analysis.

Even after observing the points mentioned here, be sure to consider the particular characteristics of the local market before reaching any value conclusions.

As business models for big box and junior box retailers evolve, so must the assessor’s approach to valuation. Only after considering all of these factors can the assessor determine a proper market value to the fee simple estate.

 

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..

 

Oct
30

Big-Box Valuation Fight Jeopardizes Retail Property Profitability

Assessors' incorrect use of the data inflates property taxes.

Tax assessors across the country are drawing battle lines to pit new valuation theories against accepted appraisal methodologies.

This fierce ideological assault threatens the sustainability of retail businesses weighed down by ever-increasing property taxes.

Retail landlords who desire to have their real estate valued on a fee simple basis routinely face assessors who claim that these owners want their property valued as a “dark store.” This prickly issue originally focused on how to value big-box stores for property tax purposes, but its scope has widened to affect a range of retail property types.

Dispute’s Roots Run Deep

Woolworth’s opened the first big-box store in 1962, the same year that McDonald’s introduced the golden arches and ushered in the concept of branding stores with identical interiors and exteriors.

Over the following decades, Walmart, Kmart, Target and other retailers married the big-box format with McDonald’s-style branding. Replicating the same store in many locations increased consumers’ brand recognition and reduced the owner’s cost to develop, stock open and operate new locations.

Much of today’s controversy over assessments stems from alternative financing methods that caught on with these major retailers. The two most common strategies are build-to-suit and sale-leaseback arrangements, both of which generate rent payments that exceed market rates.

A build-to-suit is a financial arrangement where the tenant’s rent is a repayment of the developer’s cost to acquire the land and build a tenant specific building. These transactions can include a variety of other non-real estate costs, such as financed inventory, personal property and/or cashback incentives.

A retailer uses sale-leaseback transactions to free up capital by selling its building and then renting it back under a long-term lease. The rent is purely a function of the amount of capital to be financed and the number of years to pay it back.

In either scenario, a landlord with one of these above-market leases in place to a high-credit tenant will often sell the lease and property to an investor. The resulting sales price is a function of the length of the lease in place and the strength of the tenant, and has nothing to do with the real estate’s fair market value. In other words, the value is no longer what the real estate is worth, but what the investor would pay to receive the income from that user.

Bad Data Proliferates

Property valuations for tax purposes are not done as single-property appraisals. In single-property appraisals, the appraiser uses data specific to a property to develop an opinion of its value. Tax assessors, on the other hand, use mass appraisals. The latter method values a universe of properties using common data.

The problem arises when non-market data taints the assessor’s common data. For instance, if the above-market rents from build-to-suits are included in the common data, the assessor will overstate the market rental rate and subsequently overstate property value under the income approach.

Concurrently, when common data includes investor acquisitions of properties with leases in place under these alternative financing methods, the sales comparison approach to value suffers from the same flawed methodology as the income approach.

The problem doesn’t stop there, as the defective data spills over into depreciation calculations used in the cost approach to valuation, and in developing capitalization rate percentages. Using bad common data will taint every commonly used valuation method and lead to an overvaluation.

Implications Outside the Box

This issue is worth watching for shopping center owners, investors and developers for two reasons. First, big-box tenants traditionally are high-credit national retailers committed to a financing-based lease on an absolute net basis. That makes them a valuable addition to a shopping center as a draw for customers, and to the investor as a guaranteed income stream.

The second reason to closely follow the assessment issue is often overlooked, but has more serious implications. What began as an anomaly in the method assessors used to value and tax big-box stores is now spreading to all retail. Assessors increasingly use incorrect, inflated, non-market data to value anchor stores, discount and department stores and strip centers, overstating valuations for tax purposes.

Most states require assessors to value commercial real estate uniformly and equally. That means that two identical buildings should have the same value.

The taxable value should not be higher if one is leased to a high-credit tenant and the other to an independent local retailer. The value of the business may be greater for one over the other, but the value of the real estate must be the same.

Uniformity and equality dissolve when real estate values fluctuate based on nothing more than the identity of the tenant. And uniformity and equality can exist only when assessors value bricks and mortar alone. That is not valuing a dark store; that is valuing the fee simple.

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Linda Terrill is a partner in the Leawood, Kansas law firm of Property Tax Law Group, the Kansas and Nebraska 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..

Oct
30

Six Ways to Reduce Student Housing Property Taxes

Advice on one of the biggest hurdles in acquiring -- and owning -- off-campus student housing properties.

Property taxes can have a huge impact on a student housing project's bottom line, and that expense is growing as assessors across the country aggressively increase valuations. Student housing owners should ask themselves the following questions as a part of any effort to combat excessive valuations.

1. Is My Property Data Correct?

Assessors' records commonly contain errors regarding a property's age, square footage, leasable area, number of units, number of beds, unit mix and amenities. An error can significantly increase a property's assessment.

Providing a current rent roll to the assessor can correct many of the above-referenced mistakes. Consider providing a property site plan and marketing materials that show the project's floor plans and amenities. Correcting basic errors in the assessor's records remains the simplest path to a lower tax assessment.

2. When Will My Property Be Re-Appraised?

Assessment schedules vary from state to state and sometimes county to county. Many jurisdictions appraise commercial property annually, while some opt for every three to five years. A handful of jurisdictions reevaluate a property's assessment only when the asset sells. Student housing owners should learn their jurisdictions' appraisal rules, since this can factor into a property tax appeal.

3. How Did The Assessor Arrive At My Valuation?

Assessors commonly derive market value using one or more of the three classic approaches: cost, income, or sales comparison. Cost is arguably the least reliable approach if the property is more than a few
years old, especially given the difficulties of estimating depreciation and obsolescence for older properties. In valuing student housing, an assessor will most likely rely on an income and/or sales comparison approach. Taxpayers have reduced assessments by disputing how the assessor applied a valuation methodology to a specific property.

4. How Did The Assessor Apply The Income Approach To Valuation?

In an income approach, assessors typically use market rent, vacancy and expense factors to arrive at an annual net operating income figure and then apply a market capitalization rate to calculate value. Often, the market factors used in the assessor's income approach reflect data taken from properties that are incomparable to the property being assessed.

The most common mistake assessors make when using the income approach for student housing is applying conventional apartment data in their analysis. Student housing owners should explain the differences between these two property types, especially when discussing values per square foot used in conventional apartments versus values per unit or bed in student housing. Also, owners should emphasize seasonal occupancy fluctuation differences between a student housing property, which often experiences low summer occupancy, and a conventional apartment project, in addition to the influence of on-campus housing supply on the performance of an oft-campus student housing project.

Even if an assessor is using student housing market factors in a valuation analysis, the owner should challenge the market factors 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. Specific income and expense items can show trends in rental rates, occupancy and expenses that differ from the market
trends alleged by the assessor.

5. How Did The Assessor Apply The Sales Comparison Approach To Valuation?

Aggressive assessment increases often stem from an assessor's reliance on the recent sales prices of other student housing properties. A property owner can usually discredit so-called "comparable" sales by outlining the physical and economic differences between the properties sold and the assessed property.

Specifically, the owner can point out to the assessor that the factors influencing a buyer's decision to purchase a property cannot be known unless the assessor was a party to the transaction. For example, a purchaser may have obtained below-market-rate financing, or might have been motivated by time constraints or income tax consequences. Make sure that the assessor understands the meaning of comparability.

Many student housing owners worry that a recent purchase price will increase their property's assessment. Owners should consider a tax appeal even if the recent purchase price of their complex was higher than the taxable value of the property, however. Buyers analyze factors extending beyond real estate in determining what they can pay for properties. As a result, a purchase price should provide no more than a touchstone for an assessor.

Taxpayers arguing against the assessor's use of a purchase price as a value basis should outline for the assessor the considerations that affected the price, such as special financing. Also explain how the actual performance of the property differs from projections made at the time of purchase. A purchase price may lead to a higher assessment, but student housing owners can mitigate the increase through a discussion with the assessor.

6. Did The Assessor Consider Equality And Uniformity?

Most taxing jurisdictions require equal and uniform assessments among comparable properties. An equal and uniform argument is separate from a discussion about a property's market value. Assessors often value student housing projects without considering the assessment of like properties, which presents an additional opportunity to argue for a reduced assessment.

The assessment of a student housing property should fall within a uniform range of values for comparable properties. Student housing owners should compare their property's assessments to comparable properties on a per-unit or per-bed basis. Assessors often compare by square footage, which is inappropriate for student housing.

Another unit of comparison for student housing owners is to analyze the gross rent multiplier ratio between comparable properties. If an owner's property is assessed disproportionately higher than the comparable properties on an appropriate unit of comparison, the taxpayer can argue for a value reduction based on equality and uniformity, regardless of the assessor's market value claims.

Owners of student housing should consistently monitor their property tax assessments.

Asking the appropriate questions can lead to effective strategies to reduce taxable values.

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Gilbert 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.

Oct
30

Undermining A Public Purpose

"Economic development tools are under assult in Louisiana by tax assessors"

Louisiana tax assessors have begun assessing taxes on properties that have been exempt from property tax under economic development incentive programs, undermining one of the state's essential tools for promoting job growth and commerce.

Louisiana offers a handful of enticements to attract new business and spur economic development, including the industrial property tax exemption, inventory tax credits, payments in lieu of taxes (PILOTs) and cooperative endeavor agreements (CEAs) with private companies. Each of these incentives involves reducing a private entity's property tax liability.

Article 7, Section 14 of the Louisiana Constitution authorizes the state and its political subdivisions to enter into cooperative endeavor agreements that serve a public purpose, and Section 21 of the same article provides that public lands and other public property used for public purposes are exempt from property tax. The Louisiana Supreme Court has also recognized that economic development is a public purpose.

Under a typical cooperative endeavor agreement, a political subdivision leases industrial property to a private entity for development and operation. Since a political subdivision owns the property, it is exempt from property taxes. Unfortunately, some assessing authorities have decided otherwise, and have attempted to collect property tax in connection with these assets.

In Pine Prairie Energy Center LLC vs. Soileau, in 2014, a local industrial development board issued bonds and loaned the proceeds to privately held Pine Prairie to build an underground natural gas storage facility and associated facilities and pipelines. Prior to entering into the transactions, the industrial development board, Pine Prairie, and even the local tax assessor all agreed that, as long as Pine Prairie paid the agreed-upon lease payments and payments in lieu of taxes, the property would be exempt from property taxes during the lease period.

Pine Prairie built the facility, sold it to the industrial development board and then leased the property back for operations. The assessor subsequently listed the property on the tax rolls as Pine Prairie's property. Pine Prairie paid the taxes under protest and sued for a refw1d and declaratory judgment that it did not owe property taxes on an asset owned by the industrial development board.

The assessor contended that the property was not being used for a public purpose. The Third Circuit Court of Appeal noted that actual public use was not the criteria by which public purpose was determined. Rather, public use is synonymous with public benefit, public utility or public advantage, and involves using the natural resources and advantages of a locality to extract their full development in view of the general welfare.

Considering that Pine Prairie's investment resulted in approximately $700 million in local economic value, the court held that the project was beneficial to the public and thus the property was indeed being used for a public purpose.

In Board of Commissioner of Port of New Orleans vs. City of New Orleans, the Port of New Orleans leased property to two private entities that provide warehousing, freight forwarding and intermodal transportation services at the port. As i n Pine Prairie, the assessor assessed property taxes on the private companies that leased the properties, not on the public entity that owned them. When the companies failed to pay the taxes, the assessor attempted to sell the leased properties at a public tax sale.

The assessor argued that, because the activities of the private companies did not qualify as a public purpose as they did not constitute a governmental function, a benefit to the general public or a dedication for use by the general public, the property was not being used for a public purpose. The port authority demonstrated that the companies' activities were necessary for the operation of a port facility and that they furthered its broad public mission to maintain, develop and promote commerce and traffic at the port. The Fourth Circuit Court of Appeal punted on the question in 2014, and ordered a hearing on whether the specific activities conducted by the companies served a public purpose. That case is ongoing.

Cases like these obviously erode business confidence in the reliability of tax incentives. Although Pine Prairie won its case, it had to pay some $122,000 in taxes under protest and then sue to recover its funds. And the Port of New Orleans had its property seized and offered at tax sale, and now has to prove up that traditional port activities like warehousing, freight forwarding and intermodal transportation services, which have always been necessary to the operation of a port facility, serve a public purpose. This kind of uncertainty is devastating to economic development efforts.

Adolph Angela

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

Oct
08

Overstating the Case

To Save on Property Taxes, Beware of Inaccurate Valuations

Every year, the dreaded property tax envelope hits the desk of tax managers and property owners. Despite the anxiety that accompanies this event, surprisingly few taxpayers take reasonable steps to learn whether or not their tax documents may be overstating their liability. Many property owners simply pop an antacid and write a check to cover the bill.

Property taxes are a necessary evil be-cause in most jurisdictions, they are the primary source of revenue for funding schools, social services and other government functions. That said, of course, property taxes are also a major cost item. Approaching an assessment with a healthy dose of skepticism and an eye for common errors is a good way for owners to ensure that they are paying only their fair share of the tax burden.

Assessing property for taxation starts with determining real market value. The leased fee value of the property, or the going-concern value of a business, are inappropriate criteria for assessment and should raise red flags when they appear in a property tax review.

In a review, evaluate the origins of the property assessment to determine whether the assessed amount reflects the property's real market value. For example, if state law provides that a sale or other transfer resets real market value for tax purposes, the reviewer needs to evaluate the entire transaction.

The purchase price of a fully leased commercial building will typically reflect the value of a leased fee. The sale can reflect a higher value than it would if the property were vacant because the purchaser is achieving an immediate return on investment from in-place rents. If an asset's sale price is recorded as its taxable value, without an evaluation of market rents and lease-up costs to determine real market value, the owner will be overpaying taxes.

Similarly, the purchase of real estate within a business transaction may include compensation for goodwill, an in-place work force, management and other intangible assets that are not taxable in most jurisdictions. In order to properly reflect the value of the real property, the assessor must exclude these intangibles from the sale price, as only tangible real property is taxable.

In a complex, multi-property transaction, the buyer's appraiser typically conducts a mass appraisal of the portfolio rather than analyzing each asset in depth. However, this practice may overlook issues that affect the value of individual properties.

An allocation appraisal of that nature may overvalue a property that is encumbered by governmental restrictions which limit its development potential. Likewise, a property that carries significant environmental liability can be overvalued, resulting in a tax assessment that exceeds the asset's real market value. Drilling down to the level of the individual asset prior to reporting the sale value to the assessor may help cut the tax bill significantly.

Another overlooked source of savings hinges on recognizing that construction costs do not necessarily equate with a property's real market value. Assessors like to use the cost approach to set real market value, because it is simple and relies on the property owner's documentation of costs. But what about added costs that don't affect value?

Suppose, for instance, that the design of a manufacturing facility calls for a stairway in a certain place, but because local regulations require the stairway to be farther from manufacturing activity, an inspector directs the builder to move it. The change adds $200,000 to the project's cost without adding to the facility's real market value.

Another kind of overstatement often results when an owner builds an addition. Temporary walls, electrical infrastructure and extra labor may be required in order for the occupant to keep functioning normally. These items increase the owner's out-of-pocket costs without adding to the property's real market value. Keeping track of such costs can result in significant tax savings.

Awareness of these often overlooked pitfalls offers opportunities to trim the annual property tax bill. So between the time the bill comes in and the payment goes out, it is crucial to evaluate the bases for real market value. That will go a long way toward determining whether the assessment–and the dill–are correct.

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..

Sep
01

Texas Legislature Retains Equal and Uniform Property Tax Remedy

Tax relief was a hot topic from the very beginning of the session, with lawmakers submitting bills in both the House and the Senate proposing property tax, sales tax and franchise tax relief.

The 84th Texas legislative session followed a pre-session spectacle that seemed to promise heated debates over property tax issues, but ended with no casualties or otherwise drastic changes to the state’s property tax remedies and system.

Legislators submitted some 332 property tax bills. Among those were several bills addressing grumblings raised in the news media as to the equal-and-uniform remedy, unique to Texas and instrumental in granting its taxpayers property tax relief. The remedy holds that a property’s appraised value must be equal to or less than the median appraised value of a reasonable number of comparable properties appropriately adjusted.

In the end, the legislature passed about 65 bills, granting tax relief to property owners, making tweaks to the property tax system and leaving the equal-and-uniform remedy intact.

Tax relief was a hot topic from the very beginning of the session, with lawmakers submitting bills in both the House and the Senate proposing property tax, sales tax and franchise tax relief. Eventually, the legislature increased the homestead exemption for school district property taxes from $15,000 to $25,000, effective for the 2015 tax year. In addition, the legislature reduced franchise taxes by 25 percent.

In another effort to grant property tax relief, the law will now require a taxing entity to achieve a 60 percent majority vote, rather than a simple majority, to adopt a property tax rate that exceeds the effective tax rate. The effective rate is the tax rate that would achieve the same amount of revenue as the previous year’s taxes. Additionally, the interest rate taxing entities must pay on refunds resulting from the final determination of a taxpayer’s property value increased to 9.5 percent until the refund is made.

As expected, the equal-and-uniform tax relief provision garnered considerable discussion. In recent years, countless articles and interviews criticizing commercial property owner’s “abuse” of the equal-and-uniform remedy circulated in the industry. Although the Constitution guarantees equal and uniform taxation, opponents alleged the remedy had shifted the property tax burden from commercial property owners to homeowners.

On the reverse side, commercial property owners advocated fair and equitable treatment in a district’s valuation of their property, and wanted a right to pursue their equal and uniform remedy through litigation, just like homeowners do.

The equal-and-uniform remedy for commercial property owners was at risk going into the session, and a few lawmakers introduced a handful of bills that would have substantially limited or completely eliminated the remedy for commercial property owners. Those bills failed to gain momentum, however, and none passed out of committee.

Instead, to address both appraisal district and taxpayer concerns over the perceived misuse and the general preservation of the equal and uniform remedy, lawmakers eventually passed a compromise bill. House Bill 2083 amending the tax code provides that any equal-and-uniform analysis must be based on the application of generally accepted appraisal methods and techniques.

At the same time, it recognizes a property owner’s right to give an opinion as to the value of his own property. While increasing the standard under which an equity analysis must be prepared and reviewed, the new law leaves the equal-and-uniform remedy in place for all taxpayers.

Several other measures adopted during the legislative session seek to secure taxpayer access to relief. The legislature expanded the availability of arbitration as an alternate means to appeal property values, for example.

Now, commercial property owners with a property appraised at $3 million or less may appeal directly through binding arbitration instead of having to file an appeal in district court. This replaces the previous $1 million threshold, making the remedy available to more commercial property owners.

Another new law aims to facilitate the process for lawsuit settlement by requiring parties to attend settlement conferences before incurring unnecessary expenses. And lawmakers passed other laws directed at addressing taxpayer concerns over exemptions, applications and other procedures.

A legislative session is sometimes more notable for the measures that failed to pass. At least one failed bill proposed to allow appraisal districts to recover their attorneys’ fees should they prevail in district court, as taxpayers are currently allowed. Another would have provided for a 5 percent appraisal cap on all property, disregarding studies suggesting that caps are ineffective tax relief measures that run contrary to equal-and-uniform taxation. Neither these nor some of the more curious bills received much attention.

Ultimately, despite warnings of the looming collapse of the equal-and-uniform remedy, the bills that passed were uncontroversial. The equal-and-uniform remedy for commercial property owners remains secure, and other passed amendments will generally benefit property owners.

MelissaRamirez150Melissa Ramirez is a principal with the Austin law firm of Popp Hutcheson P.L.L.C., 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. Ms. Ramierz can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Sep
01

How Assessors Incorrectly Classify Property to Overstate Values

Where the value of commercial properties has failed to keep pace with local governments’ revenue needs, real estate assessors have pursued unconventional arguments and valuation methods to protect and grow the property tax base. Among those arguments and methods, assessors increasingly contend that manufacturing and other commercial properties are “special-purpose properties,” and therefore the property tax assessments on these assets should exceed the value that would result from the use of traditional market data.

While special-purpose properties certainly exist, these assessors’ arguments typically fail in three ways. First, they erroneously confuse limited-market property with special-purpose property. Second, they refuse to consider available market evidence that, even if imperfect, provides information about the value of the property. Third, even when a property is a special-purpose property, assessors often value the wrong interest, valuing more than the fee simple real estate, for example.

Wrong definition, incorrect assessments

The Dictionary of Real Estate Appraisal defines special-purpose property as "[a] limited-market property with a unique physical design, special construction materials, or a layout that restricts its utility to the use for which it was built; also called special-design property.” Thus, special-purpose property is both a limited-market property and a property having a unique physical design, special construction materials or a layout that restricts it to the use for which it was built. By definition, special-purpose properties are a subset of limited-market properties; they are not synonymous.

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A subset, not the same set

In general, special-purpose properties are a subset of limited-market properties, which are a small subset of commercial properties.

Appraisers often identify certain categories of property as special purpose, such as churches, schools, railroad stations and sports arenas. But such properties, in addition to being limited-market properties, also reflect specific evidence of unique physical design, highly restricted use and/or special construction materials.

The facts of a New Jersey case illuminate the difference between properties with special features and special-purpose properties. In Ford Motor Co. vs. Township of Edison, the New Jersey Supreme Court in 1992 concluded that an automotive manufacturing plant was a general-purpose property, even though it was constructed with heavy steel framing, paint booths, baking ovens, massive boilers, terrazzo amenities, and electrical, steam and plumbing infrastructure that exceeded normal industrial requirements. Although the property was a limited-market property, the court noted that “[a] property does not qualify as special-purpose where it possesses certain features which, while rendering the property suitable to the owner’s use, are not truly unique.”

Importantly, whether a property is special-purpose is a fact-specific inquiry, and courts rightly reject attempts to classify properties as special-purpose in the absence of evidence that the property is special-purpose. Other cases reinforcing this concept include a 2015 decision in Certain Teed Corp. vs. County of Scott, in which a Minnesota tax court rejected the contention that a shingle factory was a special-purpose property; and TD Bank vs. City of Hackensack, a 2015 case in which a New Jersey tax court rejected an argument that a bank branch is a special-purpose property.

Refusal to consider market data may lead to higher assessments

Assessors typically argue that special-purpose properties may only be valued using the cost approach; that market comparable sales may not be used to value special-purpose property, and/or that the value of the special-purpose property is so intimately tied to the property’s owner or user that the assessor must use income from business operations (as opposed to rents) to value the property.

These arguments share a flawed premise that, due to the property’s unique nature, there is simply no market data available to value the property. These arguments often fail because they conflict with real world evidence.

For example, while it may be true in a given case that there are few or no comparable market transactions for a special-purpose property, this is not an appraisal rule or point of law. That is why the Minnesota Supreme Court in 2007 reversed the decision of a tax court that had refused to consider available sales data based on the classification of the property as special-purpose. In that case, Southern Minnesota Beet Sugar Coop vs. County of Renville, the Court acknowledged that if market transactions exist and shed light on the value of a special-purpose property, it should be considered even if adjustments must be made to account for differences between the comps and the subject property.

Just as it is wrong to refuse categorically to consider market transactions when valuing special-purpose property, it is inappropriate to consider taxpayer-specific income data reflecting more than the value of the real property. For example, special-purpose manufacturing properties are seldom rented in the market. Attempting to value the real estate based on non-rental income from the manufacturing operations would produce a highly misleading estimate of value, since such income is derived from non-real estate elements such as intangibles and personal property. Examples of intangibles include an in-place work force, intellectual property and goodwill; personal property includes items such as manufacturing machinery and equipment.

Given the tenuous link between manufacturing income or business income and the value of a special-purpose property in which the manufacturing occurs, taxpayers can—and should—object to the assessor’s use of such income information to value the real property, even if it is a special purpose property.

When assessors increase assessments or defend excessive assessments by claiming that the property is special-purpose, taxpayers should request the evidence on which the classification and the valuation are based. In many cases, taxpayers will find that such assessments lack support, conflict with generally accepted appraisal practices, and should be appealed.

Suess David photo

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

Jul
29

A (Tax) Tale of Two Campuses

With apologies to Charles Dickens, a tale of two corporate office campuses underscores the fickle nature of real estate fads and the difficulty property owners face in convincing tax tribunals that standard valuation matrices may not apply in properly assessing these large, suburban properties.

Aetna’s challenge

Aetna Life Insurance Co. developed more than 1.6 million sq. ft. of corporate and computer center space together with parking garages in the early 1980s in a rural area of Middletown, Conn., spending almost $170 million in the process. In 1995, the property owner challenged the city’s $250 million market valuation.

Aetna held that the property’s highest and best use was as a multi-tenant office project, rather than as a corporate headquarters designed for its exclusive use. This argument seemed reasonable because, among other matters, the developer had built the property with large atria and excessive common areas, together with a number of special amenities such as cafeterias and recreational space which a typical office building would not contain. These amenities obviously drove up the assessor’s value, but mattered little in the market place.

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The city contended that since the property was used as a corporate headquarters, its highest and best use was its continued use for that purpose, and that regardless of its inefficient features and super adequacies, it was typical of headquarters structures. In that sense, the highest and best user, not use, determined
market value.

Key to the owner’s argument in the tax appeal was that the reproduction cost was legally suspect because it was highly unlikely that anyone would reproduce such a quirky, outmoded structure as the 20th century ended. The owner argued that the situation called for a replacement cost approach that would eliminate the inefficiencies and super adequacies of the property.

Although a Connecticut appellate court upheld the trial court’s reliance on the reproduction cost approach, when Aetna’s occupancy concluded in 2010 and the property owner was unable to find another headquarters corporate occupant, it demolished the building—albeit too late to affect the valuation case.

Union Carbide’s conundrum

Union Carbide Corp. moved to Danbury, Conn. from New York City in 1985. It selected a beautifully wooded location close to the New York border to construct an idiosyncratic, multi-level property that floated above the site in so dramatic a fashion that many of its occupants referred to the building as “Battlestar Galactica.” Faced with excessive operating costs and a declining need for such a large area under one roof, Union Carbide reduced its occupancy, but was unable to find many subtenants.

The development’s unusual qualities and its practical insufficiencies prompted a property tax appeal. The company argued, as had Aetna, that whatever the construction cost might have been, the assessor should base its campus’ market value on replacement cost and/or income analysis. The resulting value, the company maintained, was far less than the one the City of Danbury’s assessor had produced.

Here again, the court was unsympathetic, given the huge amount of money spent on development, a juicy sale-leaseback deal which had little relationship to market realities, and what was likely the prevailing view 20 years ago that cost equals value.

Value the use, not the user

A valuation that relies on a single corporate occupant or user assumes a sale to a similar occupant. That essentially converts the market-value-in-exchange analysis, which is legally required in most states, to a market-value-in-use construct.

In the second decade of the 21st century we know that these buildings are seldom re-used by single occupants. Demolishing a bad decision, as with Aetna’s Middletown campus, or subdividing the structure for multiple users as in the case of Union Carbide, is far more likely.

Reliance by local assessors on the single occupant, value-in-use theory ignores the much greater likelihood of multiple occupancy, with attendant significant renovation, subdivision and tenant improvement costs, as well as a considerable period of vacancy while the building is marketed for lease.

The Egyptian pharaohs coerced thousands of slaves to build their pyramids three millennia ago, creating the classic single-user structure in the process. While these potentates succeeded in creating their brand and in making a profound statement about their majesty and importance, both in life and in death, most corporate campus headquarters lack these qualities and must stand the test of economic utility.

That so many campuses failed is one of the dramatic real estate stories of the last 40 years or so. Owners faced with appealing the assessments of overvalued headquarters assets today should emphasize that whether or not value in use to the user was ever a valid yardstick, is utterly irrelevant today.

pollackElliott B. Pollack is a member and Valuation Department chairman in the law firm of Pullman & Compley LLC, the Connecticut 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.  Melton Spivak, retired, was vice president of corporate property taxes for JPMorgan Chase & Co.

Jul
23

Commercial Use Can Trigger Tax on Tax-Exempt Property

Utah property owners should be aware of tax laws that may even apply to tax-exempt properties.

When a business owner leases property that is exempt from property tax and then uses that property in connection with a for profit business, local taxing entities may have authority to tax the property's user. Whether and to what extent that tax applies will vary by state, but in some states, including Utah, the property user's tax burden can be significant.

Under Utah law, the assessing authority may impose a privilege tax in "the same amount that the ad valorem property tax would be if the possessor or user were the owner of the property," according to the state's tax code. But because Utah's privilege tax is an all-or-nothing tax, local authorities cannot impose the tax unless the user has exclusive possession of the exempt property.

In 2012, the Utah Supreme Court had its first opportunity to determine what constitutes exclusive possession. In Alliant Techsystems Inc. vs. Salt Lake County Board of Equalization, the court identified a three-part test for determining exclusive possession and then remanded the case back to the district court to apply the test.

In April of this year, the Utah Court of Appeals upheld the district court's decision that the user of the exempt property did not have exclusive possession and could not be assessed a privilege tax for its for-profit use of that property. Details of the case, then, may provide important insight for companies in similar circumstances.

Control Issues

Alliant Techsystems Inc., the taxpayer in these appeals, is a for-profit aerospace and defense products corporation that operates on its own property, as well as on the Naval Industrial Reserve Ordnance Plant, a property owned by the U.S. Navy. Alliant and the Navy entered into a facilities-use agreement that governs the company's use of the ordnance plant. In 2000 and for all subsequent years, Salt Lake County imposed a privilege tax on Alliant for its use of the ordnance plant. The county based the amount of the tax on the full value of the exempt property.

Alliant challenged the county's assessment of the privilege tax on the basis that it did not have exclusive possession of the property due to the control retained by the Navy. The Salt Lake County Board of Equalization, the Utah State Tax Commission and then the district court concluded that Alliant had exclusive possession of the ordnance plant because no other party had an agreement with the Navy to use the property. ·

Alliant appealed to the Utah Supreme Court, which interpreted exclusive possession to mean exclusive as against all parties, including the property owner.

Utah's Test

The Utah Supreme Court's three-part test for exclusive possession requires that the user or possessor have (1) the general power to admit or exclude others, including the property owner, from any present occupation of the property; (2) the authority to make broad use of the property, with only narrow exceptions; and (3) possession and control of a definite space for a definite time.

Alliant relied on several points to demonstrate that it lacked exclusive possession of the Navy's ordnance plant, due to the control retained by the Navy:  For one, the Navy had erected a fence surrounding the property, and posted signs stating that the property belonged to the United States government. Additionally, the parties' operating agreement stated that unauthorized use of the property could result in fines, imprisonment or both.

Alliant also pointed out that the facilities-use agreement permitted the Navy to terminate Alliant's right to use the property at any time and for any reason, and at any time to change or terminate the list of facilities that the company may use. The Navy maintained onsite representatives to manage some of the ordnance plant's operations.

Finally, Alliant lacked authority to exclude the Navy or anyone authorized by the Navy from the property; neither could the company use the property for non-Navy purposes without permission from the Navy.

The county didn't dispute these points, and the district court held that Alliant lacked exclusive possession of the ordnance plant property and was exempt from the privilege tax. The county appealed the decision and the Utah Court of Appeals upheld the district court's decision.

Whether a state can tax the business use of exempt property by a lessor will depend on how each state's tax laws are written. If the tax is based on the full value of the property, and the lessor can demonstrate that the property owner maintains control of the property, the user may challenge the tax as violating the Supremacy Clause of the U.S. Constitution, which establishes the supremacy of federal law (and federally established tax exemptions) over state and local laws. Alliant raised that challenge in its appeals, put the court declined to address the constitutional challenge because its interpretation of the statute fully resolved the matter.

Stephen Young Sept 2014Stephen P. Young is a partner in the law firm of Holland & Hart, the Montana, New Mexico, Utah and Wyoming 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..

Jul
22

Use Vigilance To Lower Tax Assessments

A firm understanding of how assessors apply market data locally comes in handy for savvy owners.

The real estate market is flourishing, as articles in Heartland Real Estate Business seem to confirm. Recent headlines such as “General Contractors are off to a Running Start,” and “Speculative Industrial Construction is Making a Come Back in St. Louis Market,” certainly are encouraging to readers.

But investors must remain diligent in keeping their assessed property values in check, or risk paying for their complacency later.

By monitoring assessments and challenging them when necessary, taxpayers can maximize profit and stay competitive when the cycle inevitably reaches its peak and the market begins to slide.

To minimize taxes, every taxpayer should understand the property tax system. That requires a grasp of local market dynamics and how assessors apply market data in establishing assessments.

Real estate taxes are merely a function of the tax rate multiplied by the assessment. The assessment is the measure that, if applied equally, and based solely upon bare real estate, that measure will yield uniform taxation for you.

Assessments tend to follow Newton’s law of inertia. Sales often set assessments in motion, but that doesn’t mean that sale prices always lead to assessments.

Price Versus Value

Too often, assessors confuse price with taxable value. Assessed or taxable value should be based on real estate alone. Sale prices, on the other hand, often reflect other factors that greatly affect the sale.

For instance, the business acumen of tenants and property managers often influence commercial property prices.

The lodging industry has an abundance of business and personal property value that is often difficult to distinguish from real estate value.

Hotel buyers are often purchasing in-place contracts, a workforce, personal property, reservation systems, the reputation of food and beverage providers, and other intangible items. As a result, the business value of a hotel tends to fluctuate more rapidly than the actual value of the “bricks and sticks.”

Because these intangible elements are factored into the sale, an assessment that is later based on the sale price will reflect more than the real estate value, unless the taxpayer takes the right steps to prevent that from happening.

What to look for

It is possible to strip away non-taxable components and turn a sale into a useful indicator of market value. An assessor can rely on a properly adjusted sale in the assessment of the subject property, and when valuing comparable properties. But what is the proper method of adjustment?

Excluding intangibles from taxable value can be an elusive goal. Investors often place tremendous value on the credit-worthiness of tenants, length of lease terms and other non-real-estate items. Those components depend on the occupant’s business rather than upon the location or condition of property improvements.

For assessment purposes, sales must be adjusted to reflect what the price would be if the tenant were a typical market tenant, paying market rent under current market lease terms.

State nuances

Taxpayers should consider not only the sale itself when evaluating for assessment, but also the particular state’s laws concerning assessments. For instance, Ohio recently amended its statutes to preserve it in assessments. Prior to the amendment, an assessor “must” have considered a recent sale price to be the new assessment of the property, regardless of any non-real-estate factors that might have affected the sale price.

Under the amended statute, assessors “may” use the sale, assuming that the sale reflects the “fee simple as if unencumbered value.” Thus, Ohio now takes a more nuanced approach, assessing properties based on market rents rather than in-place contract rents, along with the intention that assessors use market occupancy and market creditworthiness in assessments.

Taxpayers in other states have challenged assessment statutes to achieve more equal and taxation. Courts in Michigan addressed the concept of build-to-suit leases and contract rents, which the initial tenant pays in part to repay the developer’s costs, making contract rents incomparable with market rents.

Michigan now requires assessors to utilize market rents and other market indices to determine market value. Likewise, courts in Kansas and Wisconsin have established case law recently that requires more equal and assessment practices.

While there may be similarities between some states regarding their assessment laws, and a general trend of states moving toward more assessment, all states apply their laws differently.

Taxpayers must give due care to their state’s distinct approach.

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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