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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.

Aug
04

Know The Process

Keep the belt tightened to combat rising property taxes.

"Property values will likely increase over the next few years, so it is as important as ever for property owners to ensure that their property is fairly assessed."

In Alabama, as in much of the country, many property owners tightened their belts during the Great Recession, looking for ways to reduce operating costs for tenants and themselves. For some owners, a little bit of property tax relief provided a silver lining to the loud of plummeting property values that followed the crash Ben Bernanke and other economists assure us that better times lie ahead, however, property owners should remain vigilant in monitoring properties for over-assessment as the recovery plays out.

First and foremost, taxpayers should familiarize themselves with the general property tax laws and procedures in each market in which they own or in tend to own real estate. Though generally created and governed by state law, the property tax appeal process is often speckled with local nuances and specialized interpretations of law.

Learn key dates, including the valuation date, when assessors distribute notices, and the appeal deadline. How do assessors determine market value? Must an owner pay the full tax bill to preserve the right to appeal? Does the property qualify for any tax exemptions or alternative valuation methods? Local counsel can be an efficient and effective way to monitor these and other property tax considerations.

Perhaps in response to a growing number of tax protests, tax assessment officials are increasingly adding procedures and requirements concerning valuation disputes. These local rules range from requiring specific methods of filing protests - whether on a certain form or by mail, fax or email- to establishing early deadlines for submitting a property's financial statements for consideration of the income approach to valuation. Although the legality of some of these additional requirements is unclear, it is important for the property owner to observe these rules to avoid unnecessary appeals and litigation.

Knowing the correct deadlines is essential, and is more challenging than it may seem. For example, Alabama taxpayers have 30 days after the valuation notice date to file a protest. Each of Alabama's 67 counties sends out valuation notices on its own schedule, typically between April and midsummer. Georgia's 159 counties have similarly staggered notice periods and deadlines. To further complicate things, Alabama does not require valuation notices if the property value is unchanged from the previous year. Nonetheless, the taxpayer has only 30 days from the notice date to file a protest.

As in many other states, Alabama assessors send tax notices to the property's owner of record. This means that tenants - which often pay the taxes and have protest rights under their leases - generally do not receive notices from the assessor. In such cases, the tenant needs to remind the owner to forward valuation notices as soon as they are received, and should independently confirm the notice dates and values with the taxing jurisdiction. In an expanding economy, the valuation date can significantly affect the property's assessed value. For example, Alabama assessments in any given year reflect the property's value as of Oct. 1 of the previous year, so 2013 taxes are determined by the value as of Oct. 1; 2012. Accordingly, an increase in market values in the first quarter of 2013 should have no bearing on the value used to determine 2013 taxes. When reviewing an assessment for accuracy, a taxpayer should consider all factors affecting the property's value. Taxpayers are often focused on the big picture in ad valorem tax disputes such as the net operating income, rent roll, occupancy, capitalization rates and the like.

There is more to be mined in less obvious areas, however. Is the property subject to any title restrictions, such as use limitations or conservation easements? Are there any environmental impairments? Is the property specialized for the particular use of one owner, thereby limiting its market value to potential buyers? Is the property's value affected by "super adequacy," which occurs when the cost and quality of improvements exceed market requirements but fail to contribute to the property's value? An example of the latter would be a government building with security features well in excess of those a private business would require - or pay for. Property values will likely increase over the next few years, so it is as important as ever for property owners to ensure that their property is fairly assessed.

adv headshot resize Aaron D. Vansant is a partner in the law firm of DonovanFingar LLC. the Alabama member of American Property Tax Counsel (APTC) the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Aug
03

Is Your Brownfield Being Fairly Assessed?

"While the case law and appraisal science continue to evolve, the framework for valuing properties subject to environmental contamination remains relatively unchanged..."

The legal and appraisal communities have embraced the notion that environmental contamination can impair real estate value. After all, a property's potential uses or limitations on those uses have a direct bearing on the asset's marketability and profit potential.

An investor seeking to rein-in the tax burden on a contaminated property must navigate a legislative and regulatory framework that imposes liability on the property owner for environmental cleanup costs and remediation. In addition to the value lost when a property is directly contaminated, properties in proximity to the contaminated site can also lose value because they are subject to contamination.The devil is in the details, however, and uantifying the direct or proximate impact on value can prove problematic.

The State of New Jersey is a leader in attempting to define the impact of contamination on property value, and its highest court discussed this perplexing problem in the 1980s case of Inmar Associates Inc. vs. Carlstadt.

The New Jersey Supreme Court recognized that the costs associated with cleaning up environmentally contaminated properties would have a depreciating effect upon the properties' true value. The court also noted that deducting those costs dollar-for-dollar from the true value of the property is an unacceptable methodology, and deferred to the appraisal community to arrive at an appropriate valuation method.

Years later, in the case of Metuchen vs. Borough of Metuchen, the court identified a procedure it found acceptable. Without question, uncontaminated land is worth more than contaminated land, the court reasoned. Therefore, as contaminated land is cleaned up, its value increases. The legal question is, how should this capitalization of the cleanup costs affect the market value of the subject property?

In Metuchen, the tax court used the principles established in Inmar to form a foundation or core principles for assessing the value of unused, contaminated property that is subject to mandatory cleanup at the owner's expense, at an estimated but undetermined cost. Those are: cleanup cost, the effect on market value, calculating the impact and treating the cost of cleanup as a depreciable capital improvement.

Taking the lead from the New Jersey Supreme Court's ruling in Inmar, the tax court in Metuchen deferred to the appraisers to determine the costs of cleanup and appropriate capitalization time period. The parties essentially agreed upon the unimpaired value of the property and the court easily reconciled the difference in opinion on cleanup costs.

While the case law and appraisal science continue to evolve, the framework for valuing properties subject to environmental contamination remains relatively unchanged since Metuchen. That formula entails discounting the present value of cleanup costs and subtracting that from the property's clean value.
Most recently, the tax court used the Metuchen formula to find value in an unreported decision.

While courts, property owners and assessors use the Metuchen formula to determine the value of contaminated land, this method fails to deal with other factors associated with contaminated sites. One of those factors is environmental stigma, a term the appraisal community uses in attempting to quantify the adverse effect on property value produced by the market's perception of increased risk. Even after environmental cleanup and remediation, environmental stigma may still lower the otherwise unimpaired property's value.

pgiannuarioPhilip J. Giannuario is a partner in the Montclair, NJ law firm Garippa, Lotz & Giannuario, the New Jersey and Eastern Pennsylvania member of American Property Tax Counsel. He may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jul
16

Some Justice for Taxpayers

How a Compelling, Well-Prepared Property Tax Appeal Can Defeat An Unlawfully Excessive Assessment

" A compelling case that is well presented gives the taxpayer the best chance at success."

It's no secret to taxpayers that appealing property tax assessments can be challenging. Typically, taxpayers bear both the burden of proof and the risk of a decision that not only protects government revenue but also ignores the facts and applicable law. Nevertheless, sometimes a compelling and well-prepared property tax appeal can result in tax justice.

A 2013 Michigan Tax Tribunal decision exemplifies the potential for achieving a fair outcome. In this case, the tribunal determined the market value of an apartment complex with 779 units. The analysis was substantially the same for both tax years involved, so just the first valuation date is discussed here.

The taxpayer claimed that the property was worth less than $13,400 per unit. Based on sales of apartments in the area, on an absolute and relative basis, this is a low value for an apartment property in the subject market. To prevail, the taxpayer had to carefully present its case using three essential components:

  • A convincing explanation of why the subject property's per-unit value was so low;
  • A well-reasoned appraisal based upon both the income approach and sales comparison approach, which demonstrated that the property was worth what the taxpayer contended and refuted the contentions and analysis of the government's assessor and appraiser; and
  • Legal authorities whose testimony supported the taxpayer's position.
  • The taxpayer needed each of these three ingredients to achieve total victory. It would have been insufficient for the taxpayer to have simply presented an appraisal that reached value conclusions supporting their contentions. In recent years, there have been numerous cases where the tribunal found taxpayer-filed appraisals to be flawed and unpersuasive.

Winning the Case

The taxpayer gave a compelling explanation for the property's low value. In this case, the property's one- and two-bedroom units averaged a mere 581 square feet. The onebedroom units, which comprised more than 70 percent of the apartments, were only 550 square feet. Those measurements were far smaller than those of the area's other apartment complexes, which averaged 750 and 850 square feet for one- and two-bedroom units, respectively.

As the owner explained to the tribunal, the original developer had built the units decades before to serve relatively unskilled young adults working in area factories. The small unit sizes made the apartments affordable for these first-time renters.

The Great Recession reduced demand for all types of apartments, which hurt occupancy and rental rates for the entire apartment market. This economic obsolescence adversely impacted the subject property's value. Further, the recession negatively impacted the subject property far more than other apartment properties because the huge downturn eliminated so many factory jobs for relatively young and unskilled workers. As those jobs disappeared, so did single renters who wanted small units, saddling the property with enormous functional obsolescence.

Given these explanations of the property's deficiencies, the judge could readily accept that even when occupancy improved and became stabilized, the complex would have above-market vacancy and would be limited in the rents it could charge, while forcing the owner to bear most of the utility costs.
These facts were an integral part of the direct capitalization income approach in the taxpayer's appraisal. In this income approach, the appraiser first determined the property's net operating income with occupancy that had reached a stabilized level. This required providing and analyzing the income and expenses of comparable properties as well as the subject property's financial results in recent calendar years. The appraiser applied an appropriate capitalization rate to the stabilized net operating income to determine the property's value as stabilized. The appraiser then subtracted the costs of rent concessions and lost rents the property would experience as it increased occupancy to a higher stabilized level.

In the sales comparison approach, the appraiser presented sales of six comparable properties, and where applicable, made adjustments for numerous elements of comparison, including location and age. Significantly, the appraiser's analysis included not only the commonly used per-apartment unit basis but also a per-square-foot analysis.

The appraiser gave some weight to this sales comparison approach but relied primarily on the income approach. Their testimony, supported by testimony of one of the taxpayer's senior managers, not only satisfied the taxpayer's burden of proof but presented a compelling case.

Having heard this powerful evidence, during the cross-examination of the government's witnesses, it was easier for the judge to see the flaws in the assessor's income and sales comparison approaches. Also, the taxpayer's counsel was able to cite a legal precedent to refute the government's cost approach, which ignored functional and economic obsolescence.

Ultimately, the tribunal rejected the government's value contention, which was 50 percent higher than the taxpayer's, and adopted the taxpayer's claimed value.
For taxpayers who are inexperienced in handling property tax appeals, these cases can be fraught with pitfalls that result in excessive taxation and exasperating endings. A compelling case that is well presented, however, gives the taxpayer the best chance at success. And as this case shows, there are times when tax justice is indeed attainable.

MANDELL Stewart

Stewart L. Mandell is a partner in the law firm of Honigman Miller Schwartz and Cohn L.L.P., the Michigan member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jul
12

A Taxing Situation in Cleveland

Owners at risk of unfairly high assessments pending Ohio Supreme Court guidance

"Recent history shows that districts are using sale prices to impose unreasonable tax burdens on taxpayers..."

Like much of the nation, Cleveland is experiencing sluggish but discernible improvements in its real estate market, and buyers are beginning to purchase real estate at prices that exceed the property's tax assessment value. The resulting real estate price volatility puts many Ohio property owners — and recent buyers in particular — at greater risk of receiving an unexpected and potentially unfair increase in their property tax bill. When property values are fragile, unexpected increases in expenses can be disastrous, and that includes an unexpected rise in real estate taxes. Ohio is one of the few states where school districts and other taxing entities have the legal authority to protest the assessed values of properties in their districts and to seek increases in taxable value. In fact it is customary for school districts in Ohio to seek an increased valuation and consequent rise in taxes on properties that have recently sold.

While the practice is customary, it is neither predictable nor uniform. The assessment on a property that recently sold can be significantly higher than the assessments on neighboring properties based on its sale price. Moreover, different taxing districts have different policies as to the extent and manner in which they pursue this remedy. For instance, some taxing districts may not aggressively chase sales. Others may seek not only to raise future assessments, but also to retroactively increase the assessment for the past year.

Taxing Sales

In many cases, a recent sale of real property is the best indication of its value, but there are exceptions. Modern real estate transactions frequently include the simultaneous transfer of non-real estate items, or the amount of consideration paid may reflect factors other than the fair market value of the real property. If these non-real estate items are not specifically identified and distinguished from the real estate value, they can be included in the value assigned to the property for files an increase complaint.

Recent history shows that with increasing frequency districts are using sale prices to impose unreasonable tax burdens on taxpayers. In an effort to correct this trend, on June 11, 2012, the state of Ohio enacted a statute that clearly states that real estate assessments must be based on fee simple estate, as if unencumbered. Moreover, the new statute further provides that where there is a recent arm's length sale, the auditor may consider the sale to be true value.

Read together, in order for the assessor to consider the sale price to be true value, that sale would have to reflect the fee simple estate, as if unencumbered. To understand why and how that is so important, it is useful to look back over developments in Ohio law over the past decade.

The Changing Law

Ohio law always provided that assessments shall be made based on true value and that "the auditor shall consider the sale price of such tract, lot, or parcel ... to be the true value for taxation." In 2005, the Ohio Supreme Court interpreted that statutory language to mean that there is no further evidence necessary to prove true value. Later, the Supreme Court expanded the ruling by stating that leased fee sales were also acceptable. (Leased fee value is based on a landlord's expected rental income from a leased property.) Even worse, later cases expanded the law to include leased fee transactions as comparable sales even when appraising fee simple, owner-occupied properties. And finally, other cases set precedents that precluded the county auditor, the state Board of Tax Appeals, or Common Pleas Courts from taking into consideration circumstances which indicated that the sale was not representative of market value. Despite the state's recent efforts to stop counties and school boards (which can file suits) from preying on investors buying property in Ohio, the trend has continued.

KJenningsGraph2013

Real estate buyers in Cleveland must be even more careful to take appropriate steps to ensure fair treatment. As recently as March 2013, an assessor used the sale price of the ongoing business of a 127-bed nursing home, which was part of a sale that included 72 other nursing home operations in a multi-state transaction, to determine its assessed value. The sale price of the nursing home was $10.6 million, and the assessor valued the property at that price. The taxpayer's appraisal valued only the real estate, which came to $3.5 million (see chart). In short, the county is now taxing the value of the personal property and business operation at the nursing home when it only has authority to tax the real estate.

State lawmakers have attempted to make the law more uniform and equal by establishing a standard of fee simple, as if unencumbered, while providing flexibility to use a sale where it is warranted. What is still needed is guidance from the Supreme Court to enforce that standard.
Until the court has an appropriate case to provide that needed guidance, investors need to structure transactions with taxation in mind. To be recently purchased must be treated like those that have not been sold. Unfortunately, the burden falls on the parties in the transaction to make sure that all documents involved in the sale, particularly those that are recorded publicly, reflect only the real estate value.

Countermeasures Emerge

As an alternative, many investors have taken to purchasing the entity that owns the property rather than the real estate. Purchasing the entity eliminates the need to record a new deed, which is often the triggering event for school districts to file complaints seeking additional property taxes. As a result, the county may unknowingly be forced to treat all taxpayers alike. Moreover, state law prevents the schools from using the purchase of an entity to treat new buyers differently than existing owners. In 2000 and in 1998, the Ohio Supreme Court ruled that the sale price of all the shares of a company's stock does not establish the value of the company's real property. This is true even where the only asset of the company is its real estate. By purchasing an entity rather than the bare real estate, a taxpayer has at least a fighting chance to have equal treatment under the law. Given the complexities of such a transaction, however, buyers should seek local counsel when using this acquisition strategy.


kjennings Kieran Jennings 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. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Jun
22

Scandal Fallout Threatens Los Angeles Property Tax System

The response to alleged improprieties by Los Angeles County Assessor John Noguez has hurt taxpayers in ways that were unforeseeable when Noguez took office more than two years ago, or when the investigation into those improprieties started last year.

Prosecutors filed dozens of new charges on April 23 in relation to a corruption probe that began more than a year ago. Prosecutors have alleged that Noguez accepted bribes to illegally lower assessments on a number of properties represented by tax consultant Ramin Salari, and named Mark McNeil, one of Noguez's aides, in the charges as well. Prosecutors contend that the scheme cost taxpayers at least $9.8 million in lost tax revenue.

As if the scandal alone weren't enough, the response by the Los Angeles County Assessor's Office to those improprieties has impaired taxpayers' ability to communicate with the assessor's office to resolve property tax appeals. This new communication breakdown, in turn, has increased the cost and time required to process appeals.

New policies

After Noguez took a leave of absence in mid-2012, the Los Angeles County Board of Supervisors appointed an interim assessor who launched an internal investigation of the assessor's office. The temporary assessor published a "First 100 Days" report in October 2012, establishing two policy initiatives that have significantly damaged the property assessment system's function and efficiency. One measure assigns new personnel to represent the assessor's office before the county's assessment appeals board; the second institutes higher assessed value approval thresholds for settlement of cases pending before the board.

The latter initiative was instituted after a former appraiser in the assessor's office unilaterally changed assessed values for wealthy property owners without management approval. Requiring approval from upper management has reduced the number of cases settled prior to hearing, and either forces more property tax appeals to go to hearing (a surge which has overwhelmed the appeals board's limited resources) or necessitates postponement (which adds to the backlog of pending cases).

Report by independent auditors

The investigation of Noguez also prompted the county's board of supervisors to retain independent auditors to evaluate the assessor's management practices. In late 2012, those auditors issued a comprehensive report which included specific recommendations for the handling of property tax assessment appeals. For example, the auditors recommended that the assessment appeals board force appeals to hearing by not granting more than one hearing postponement to taxpayers.

The assessor's office and the appeals board agreed with some of the auditors' suggestions: The assessor adopted a suggestion that the assessor's office not share case data informally with taxpayers prior to appeals board hearings, and the appeals board concurred with the suggestion that a fee be charged to file assessment appeals.

The changes suggested by the independent auditors, particularly prohibiting informal pre-hearing information exchanges with taxpayers, reduces the possibility of resolving cases short of hearing. The auditors' recommendation that the appeals board avoid granting taxpayers postponements is unrealistic because, in many cases, the assessor is the party asking for more time.

Registration of property tax agents

Another recommendation by the independent auditors was to require persons who represent taxpayers to register as "tax agents." As of this writing, the board of supervisors is considering a registration program that will require people who appear before the assessment appeals board or have contact with the assessor's office, tax collector's office or auditor-controller's office to register as tax agents and pay an annual fee of $250. The program will cover in-house company tax representatives, attorneys and enrolled agents. Registrants would have to follow an 11-point code of ethics and report all political contributions made to any public official in Los Angeles County. Individuals who fail to comply with the registration program would be fined and their names would be listed on the county's website. The California Legislature has also introduced a bill with provisions similar to the proposed Los Angeles County ordinance.

The policy changes described above have slowed the assessment appeal process in Los Angeles County at a time when the system can least afford it. In 2012, assessment appeal filings in the county increased to more than 40,000, a four-fold increase since 2007. The changes in personnel representing the assessor at the appeals boards, new limits on staff authority to settle cases prior to hearings, the recommendation to limit postponements coupled with a restriction on informal information exchanges with taxpayers before hearings, and the requirement that taxpayers' agents register with the county, all work against the speedy resolution of assessment appeals.

The county's assessment appeal system was intended to promote informal and rapid resolutions of property tax appeals. The changes recently implemented or to be implemented by the county and its assessor will thwart those aims, hampering taxpayers' ability to obtain speedy redress of their claims and undermining the effectiveness of the assessment appeal process.

CONeallCris K. O'Neall specializes in property and local tax matters as a partner in the law firm of Cahill, Davis & O'Neall LLP, the California member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Jun
17

Three Questions Buyers Should Ask, About Utah Property Taxes

In Utah, only real and personal tangible properties are subject to property tax. Intangible property is exempt from Utah property tax. This includes such things as licenses, contracts, trade names custom software, trained workforce, copyrights and goodwill. If a property owner acquired any of these intangible properties along with the real estate, then there is an opportunity to reduce the property tax obligation for the real estate and other personal property. The key is to identify and separate the portion of the total purchase price that is associated with the intangible properties.

What is the standard of value for property tax?

Utah is a fair market value standard state. In simple terms, fair market value is the price a typical, willing buyer would pay a typical, willing seller for a property, with both parties being knowledgeable of all relevant facts. Accordingly, investment value or the price a specific buyer paid to acquire a property for a particular use may not indicate the fair market value. The price may need to be adjusted if the owner is trying to use it as evidence of the taxable property value.

What are the reporting requirements?

Generally, property owners will not have a reporting requirement for locally assessed land and buildings. Utah is a non-disclosure state, which means a buyer isn't required to disclose to the county assessor the price paid for real estate.
However, a buyer will likely receive a questionnaire from the assessor requesting voluntary disclosure of the purchase price, as well as access to the property to conduct an appraisal.

After reviewing the real estate, the assessor will issue an assessment that estimates what the property's fair market value was on Jan. 1. The county assessor is required to send notices indicating the property's fair market value and the associated tax by July 22. Appeals are due by Sept. 15, and taxes are due by Nov.

30. Utah does require reporting' of any business personal property. Each year, owners must submit a self-assessment of personal property tax liability, identifying 'the personal property, its cost and date of acquisition. Then the owner must apply a percent good factor to the property based upon the age and type of property in order to estimate the fair market value for the property. The tax commission is required to update and publish the percent good factors each year.

Apply the tax rate to the estimated fair market value to determine the amount of personal property tax due. Generally, signed personal property statements will be due to the county assessor by May 15. Appeals on personal property taxes are also due by May 15, or within 60 days after the mailing of a tax notice. While this brief discussion is certainly not a thorough review of Utah property taxes, it does cover the three basic things an investor should know when making a decision to acquire property in Utah.

dcrapo David J. Crapo is the managing partner at Crapo Smith PLLC, Utah Member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Jun
08

Potential Tax Increase Threatens Georgia Property Owners

"Regardless of property type, commercial owners should vigilantly review assessment notices upon receipt and determine whether the particular property has indeed increased in valuation, or if assessors using mass appraisal techniques have over generalized..."

By Lisa Stuckey, Esq., as published by Southeast Real Estate Business, June 2013

Under a recently enacted law, taxpayers who purchased property in Georgia in 2011 or 2012 face potentially steep hikes on upcoming tax bills. The new statute, which took effect on Jan. 1,2011, provides that the sale amount paid or real estate in an arms-length transaction shall be the property's maximum allowable fair market value for property tax purposes for the following tax year. That means owners of properties purchased in 2011 received ad valorem assessment notices for 2012 at a value no higher than the purchase price.

For tax year 2013, however, the county assessors' offices were free from this limitation on valuation for those specific properties purchased during 2011. For those properties, assessors were required to review the market, make a determination of fair market value as f Jan. 1, 2013, and issue assessment notices based on the new review for those properties. The same is true for owners of properties purchased in 2012. The assessment notices those owners receive for 2014 will be unfettered by the sale amount limitation that held values in check for those properties in 2013. Clearly, new property owners in Georgia must guard against a false sense of security based on property valuations and tax bills received during the year after the purchase of their property.

Georgia property owners need be mindful that tax authorities issue assessment notices in April, May and June, and taxpayers will only have 45 days from the date of the notice to file an appeal if they disagree with the county's valuation. Taxpayers cannot appeal tax bills. If an owner fails to timely file an appeal, there is no further opportunity to appeal the valuation or have any input into the amount of property taxes.

A review of the last few years of commercial sales tracked in the CoStar Group database for tl1e metropolitan Atlanta area, as well as discussions with the major metro Atlanta county assessors' offices, suggests that the property type with the greatest potential for increases in valuation over the next few years is office, but other property types are potentially subject to valuation changes as well.

Regardless of property type, commercial owners should vigilantly review assessment notices upon receipt and determine whether the particular property has indeed increased in valuation, or if assessors using mass appraisal techniques have over generalized. Be aware of the specific attributes affecting the value of the individual property, and ensure that the county appraisal staff has properly considered those factors in determining value.

Worthwhile points to review with the appraiser include a significantly higher vacancy rate at the property compared with other properties in the area, as well as how long the vacant space in the subject property has gone untenanted. Discuss any real or perceived reasons why the vacant space cannot be leased. What rent has been lost? What rent is in arrears, and for how long?

Also make the appraiser aware of any tenant instability or perceptions of tenant instability based on the type of company, and any necessary rent or expense concessions. How does the length of new lease terms compare with older leases? What will be needed in terms of capital improvements cost? And be sure to point out noteworthy or w1usual common area maintenance expenses, or unsuccessful marketing attempts and unsatisfactory responses to that marketing. There are plenty of other fact-specific arguments that will vary by property. When comparing your real estate to sold properties, various important considerations which may be relevant include geographic desirability and demographic comparability (or lack thereof) between the properties; actual and effective age; quality or class of the asset; and size. Consider, too, each property's condition, which may include any physical depreciation or property-specific peculiarities, and the presence of any intangible assets such as branding that affect value. Are the properties functionally equivalent, or is there disparity between the subject and the sold properties, such as differing qualities or quantities of parking, traffic anomalies, and other distinctions?

There are many promising areas for taxpayers to draw from in arguing with county assessors to reduce property valuations, and thus a decrease in the property tax burden. But in Georgia, it is critical for new owners to be diligent about taking appropriate action upon receipt of the county assessment notice.

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

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Jun
06

Actual Expenses Establish Low-Income Housing Value in Dispute

"The actual expenses, coupled with the rent restrictions, would cause a willing buyer to pay less for this type of a housing project as opposed to a market-rate apartment complex. Thus, the taxpayer carried its burden in proving that its property tax assessment was excessive..."

By Gregory F. Servodidio, Elliott B. Pollack as published by Affordable Housing Finance Online, June 2013

Property owners and assessment authorities continue to clash over the proper valuation for property tax purposes of rent-restricted, low-income housing. One of the most recent disagreements flared up in the small town of Beattyville, the county seat of Lee County in east central Kentucky.

A developer had converted a former Beattyville school into 18 units of low-income housing apartments. In connection with that conversion, authorities placed a restrictive covenant on the land use, to remain in place for 30 years. Under the restrictions, the Beattyville School Apartments could only take in tenants with incomes equal to or less than 50 percent of the local median income.

The Lee County property valuation administrator valued the property for tax purposes at $662,700, or about $37,000 per unit, in 2011. This value appropriately excluded any value attributable to the issued tax credits. Nevertheless, it was still well above the value of $130,000, or about $7,200 per unit, that the taxpayer presented on appeal. What created such a dramatic gap between those opinions?

The Kentucky Constitution mandates that assessors must value all property for tax purposes at fair cash value, meaning the price that the property is likely to bring at a fair voluntary sale. In arriving at fair cash value, the assessor is not obligated to consider every characteristic of a particular property, but the law requires her to consider those factors that most impact the property's value. In the case of rent-restricted, low-income housing, this requires considering those property characteristics that differentiate the asset from market-rate housing.

Interestingly enough, Lee County's assessor and the taxpayer agreed on just about all of the steps in estimating the property's fair cash value. Specifically, they agreed that the income approach to value was the most appropriate valuation methodology for this property type. They further agreed that the property's actual restricted rents should be used in the development of the income approach. They even agreed that the income approach should use a 10 percent capitalization rate, which is surprising, considering that capitalization rate selection is often a subjective determination and a point of contention between opposing valuation professionals.

The consensus broke down on the issue of expenses. The county's assessor had obtained the property's actual audited expenses as reviewed and approved by both the Department of Housing and Urban Development and the Kentucky Housing Corp. The assessor deemed those expenses to be excessive and decided to cap the expenses used in her valuation model at 35 percent of income. The assessor used the same expense ratio to value other businesses in Lee County. Using lower, capped expenses as opposed to actual expenses produced a value that was five times higher than the taxpayer thought it should be.

On appeal, the hearing officer for the Kentucky Board of Tax Appeals sided with the property owner on the expense issue. He concluded that it was inappropriate to cap the expenses used in the income approach since these expenses are to a certain extent a function of applicable state and federal law, which pushes them higher than those at market-rate apartments. To ignore the actual expenses is to overlook an important characteristic of the property that has a significant impact on its value.
If the assessor felt that the actual expenses were excessive for specific reasons, she could have provided evidence to that effect at the appeal hearing. Simply arguing that they were too high, however, was insufficient to convince the hearing officer to reject the use of audited and approved expenses.

The actual expenses, coupled with the rent restrictions, would cause a willing buyer to pay less for this type of a housing project as opposed to a market-rate apartment complex. Thus, the taxpayer carried its burden in proving that its property tax assessment was excessive.

In concluding that the complex should be valued at $150,000, the hearing officer and in turn the Board of Tax Appeals were mildly critical of the taxpayer's valuation presentation. The hearing officer noted that the taxpayer's appeal petition valued the property between $110,000 and $150,000. During the hearing, the taxpayer refined its value position to $130,000, but in a way that was not entirely clear from the record.

Citing an earlier Kentucky court ruling, the Board of Tax Appeals refused to put the taxpayer in a more advantageous position on appeal than the position it had staked out in its filing. This serves as yet another confirmation that a taxpayer should place the lowest supportable value on its appeal form, so as not to place a floor on its value position during the appeal process.

 

GServodidio pollack

Gregory F. Servodidio, CRE, and Elliott B. Pollack represent clients in property tax appeals and eminent domain matters at the Connecticut law firm of Pullman & Comley, LLC, the Connecticut member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Servodidio can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Pollack at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

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May
15

What's the Property Tax Impact of Lifestyle Centers on Enclosed Malls

"The replacement cost approach has enabled property owners to obtain reduced assessments for steel mills, hospitals and other property types. The same theory can apply to an enclosed mall..."

By Brent A. Auberry, Esq., as published by REBusinessOnline.com, May 2013

This is not your mother's shopping experience. In the never-ceasing cycle of trying to stay hip and cool (or perhaps just relevant), mall owners in recent years have shifted away from the traditional, inward-facing enclosed mall to today's outward-facing lifestyle center. This change in design for new shopping centers brings with it a potential change in valuation techniques for older malls.

Assessors often apply a modified reproduction cost to malls, basing value on the cost of recreating the property's identical shape, size, design and layout. A more relevant value is replacement cost, or the cost to replace the asset with a modern shopping center with the same utility. In other words, in certain circumstances assessors should assess large enclosed malls as if they were the less costly, more efficient lifestyle centers that could be developed on the same site. The difference might result in property tax savings for the owner.

Lifestyle centers typically range between 150,000 and 500,000 square feet of leasable retail area and include at least 50,000 square feet devoted to upscale national chain stores, according to the International Council of Shopping Centers. Many rely on multiplex theaters or other entertainment components rather than traditional anchor stores.

Most importantly, lifestyle centers are open, with streets or outdoor pedestrian walkways rather than enclosed corridors, and are easily accessible from the parking area. There is no common entrance, no massive food court, no inline space or mezzanines — and none of the costs that go with those expensive construction items.

According to Sara Coers, managing director at Valbridge Property Advisors in Indianapolis, lifestyle centers reflect a pedestrian-centric, Main Street idea where customers can park near and access their favorite retail properties from the exterior. Shoppers avoid the extra time needed to find and enter a common entrance, traverse a long stretch of the mall's interior to find a particular store, and then reverse the process after making a purchase. For these reasons and others, lifestyle centers are the new, trendy kid on the shopping block.

Costs Are Key Consideration

Large interior spaces make enclosed malls bigger and more expensive to build and operate. That interior space must be heated and cooled, lit, cleaned, secured and insured. Those higher costs can translate into a lower property tax assessment, and here is how. Under the cost approach, the assessor should value the enclosed mall as a modern property of the same utility as the existing property, and the mall's modern equivalent may very well be a smaller and more efficient lifestyle center.

A penalty for the property's excess construction cost is only part of the equation. The assessor should also consider reducing the enclosed mall's assessment based on its excess operating costs, which penalize the existing mall's value. An assessment for property tax purposes should be adjusted downward to reflect that penalty.

However, not every enclosed mall should be replaced with a lifestyle center for assessment purposes. The demographics of the market served must support the case. Lifestyle centers will be sustained by a higher-income customer base. Consider the competition as well. Would customers flock to a lifestyle center, if another regional mall were nearby?

Is the climate compatible? A developer might replace an enclosed mall with a lifestyle center in Florida but not necessarily in Minnesota, where indoor shopping is a significant customer draw during severe winter weather.

The replacement property must have the same utility as the existing, assessed property. How utility is measured is open for discussion, and might be leasable square footage, the number of customers served, or something else. A utility measuring stick of some kind is a necessity, however.

How To Bolster Your Case

Sometimes property owners need to speak the language of the local assessor. That language is often cost, and applying cost means looking at replacement value. Enclosed mall owners must ask themselves, "What would a modern replacement for this property be?" If the answer is "a lifestyle center," then there may be an opportunity to negotiate a property tax reduction.

The replacement cost approach has enabled property owners to obtain reduced assessments for steel mills, hospitals and other property types. The same theory can apply to an enclosed mall. Even if the mall would not be "replaced" with a lifestyle center, a reduction is likely justified if the property is overbuilt or inefficiently configured and a smaller enclosed mall design would support the same utility.

Property owners shouldn't be afraid to ask themselves if a lifestyle choice might reduce their property tax assessment.

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). Brent A. Auberry can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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May
10

New York City Assessors Elevate Forms over Substance

"New York City has launched an all-out effort to deprive taxpayers of hard fought tax exemptions and find new ways to impose high penalties for late and defective filing. The measures are all calculated to bring in additional revenue..."

By Joel R. Marcus, Esq., as published by National Real Estate Investor - online, May 10th, 2013

The New York City Department of Finance has generated millions of dollars in additional revenue for the city coffers by directing new and greater efforts to serve penalties and remove tax exemptions from property owners who fail to make complete and timely filings of routine information statements. In the process, however, the city has deprived many property owners of valuable tax exemptions that they were entitled to, or charged stiff penalties for what amount to minor infractions and late or incomplete returns.

Late last year, property owners received notices to file a certificate of continuing use for commercial tax exemptions like the Industrial and Commercial Incentive Program and the Industrial and Commercial Abatement Program. The notices warned that even though a property owner may qualify for continued benefits on these multi-year, legislative as-of-right incentive programs, failure to timely file the renewal form would result in the exemption's cancellation.

This form only asked a few routine questions, requiring the property owner to list the square footage of commercial or industrial space, the number of permanent employees at the building, and report the number of employees who were New York City residents. In fact, the city had discontinued the form for the past 10 years.

Many owners were either unfamiliar with the form or failed to receive notices that were mailed to the wrong address, in many cases because the city failed to note a change in ownership that occurred during the past decade. To complicate matters, only a form specifically generated by the Department of Finance for each property could be used, requiring those who did not receive it to request a duplicate. So where a property owner had multiple parcels and lacked the correct form for one or more of its properties, the city refused to accept a standard form that did not carry its barcode.

The city allowed no margins for error. If the property owner left even one question blank, as in the number of permanent city residents that worked in a shopping center or office building, this was grounds to declare the form incomplete and invalid.

Not-for-profits received a similar request to renew Educational, Charitable and Religious exemptions by returning a different renewal form on a timely basis. Many houses of worship and schools that failed to receive the notice or were negligent in completely filling out and returning the form on time saw their exemptions removed.

Many not-for-profit organizations had enjoyed an exemption for decades, if not longer, and considered the exemptions to be granted by the State Constitution and state legislation. Some of those organizations were unfamiliar with this new policy and ill-equipped to delineate details of tax exempt uses and purposes. After all, this information previously was only required on the initial exemption application, filed long ago by people long since departed.

In the process, a great many of these venerable institutions lost an exemption for which they were absolutely qualified. In many instances they were forced to engage counsel and file appeals at the tax commission, which found that the removals were unjustified.

The most severe of the form-failure penalties fell on Real Property Income and Expense (RPIE) filers. The RPIE is a mandatory report of income and expenses, but some properties fall into one of several filing exemptions, such as those with new owners. Although exempt from filling out the entire form, new owners had to check a box on the form affirming that they were exempt from filing. Therefore a failure to report back to the city that they weren't required to file the form became a reason to charge a penalty for failing to file a form on time. Here the penalties, rarely if ever experienced before, became commonplace.

Last year the city collected fines of $100,000 or more for minor infractions of the filing deadlines. To make matters worse, the city imposed many penalties a year or more after the alleged infractions, with the unfortunate result of saddling new owners with penalties because the previous owners failed to file two years earlier. Filing errors not being of record, title companies are unable to insure against such losses.

Notwithstanding that for more than 20 years RPIE compliance has been greater than 99 percent and only three examples of fraud are on record, the Department of Finance now is proposing legislation to tighten the screws again. The department refuses to trust taxpayers to file these returns themselves, and has asked the City Council to move the annual due date up from Sept. 1 to June 1, with a new requirement that the form be completed and certified by a certified public accountant (CPA).

Property owners who submitted RPIE statements digitally on the Department of Finance website each September previously will now have to file using a CPA ertificate by June 1 each year. That means owners will incur certification fees for all commercial properties with an assessed valuation of $1 million or more (a CPA fee is usually $10,000 or more depending on the property). This burden never existed before.

Since the Department of Finance online entry system doesn't adhere to generally accepted accounting principles, and because it excludes large categories of income and expense, it may prove impossible for many CPA's to comply. Also, by excluding these categories, the report doesn't mirror the owner's actual operating information, making it impossible for anyone to sign or attest to it.

These policies elevate "form over substance" to an entirely new — and sinister — level.


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

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Apr
13

Taxing Times

"What assessors may try to ignore is how unsteady this recovery truly is in light of stalled economic growth."

How to Avoid Unfair Tax Assessments Due to the Economic Recovery

By Darlene Sullivan Esq., as published by Commercial Property Tax Executive, April 2013

Property taxes are the largest expense for many commercial real estate owners, so in today's stagnant economic climate, it would be wise to take initiative to ensure that tax assessments fairly represent property values.

Property tax systems vary from state to state, but no matter how the local system operates, there are some key things to keep in mind. As the nation's commercial real estate market continues its slow recovery, local assessors will try to capitalize on what appears to be a visible improvement in the availability of capital and an increased number of real estate transactions. What assessors may try to ignore, however, is how unsteady this recovery truly is in light of stalled economic growth.

One way assessors may attempt to reflect the market's recovery is by applying a lower capitalization rate to an inflated net operating income in order to arrive at a higher assessed value. Capitalization rates are a buyer's expected annual rate of return on a property purchase. Assessors observing improvement in the commercial real estate market will expect a stronger cash flow from the property combined with a decreased risk. Whether or not that expectation applies to the property, it will likely affect assessed value. While it is true that absorption levels have improved across property categories over the past year, rents have remained flat or decreased from pre-recession levels, and revenue growth still has not caught up to what it was five years ago. Local assessors need to be reminded that with revenues still struggling to recover, the absorption gains should not automatically translate into higher assessed values.

Strong performances recently by real estate investment trusts provide another way assessors may try to increase values unfairly. In this scenario, an assessor unfairly applies the limited number of REIT property sales within a sector to all of the assets in the area that fall within the same property code. Yet such a comparison may be inapplicable to a particular asset.

Following are some guidelines to ensure fair treatment from an assessor: First, review the 2013 property assessment promptly and do not miss any appeal deadlines. Most local assessing jurisdictions have Web sites and online resources to guide taxpayers through the appeal process. When reviewing your assessment, ask yourself: Did the value increase, decrease or stay flat from the previous assessment? Scrutinize it and consider an appeal of any increases in assessed value from 2012 to 2013. Second, evaluate the property's individual characteristics: Was occupancy up or down? Did revenues and expenses increase or decrease? Are there any significant items of deferred maintenance? Any changes, either positive or negative, may impact assessed value.

Third, in many states the expectation is that assessed values will increase significantly in 2013. For example, in three of the largest counties in the state of Texas, assessed values increased between 2.5 percent and 9 percent across property types from tax year 2011 to tax year 2012. Given the increased number of transactions and the signs of recovery, property owners should expect increases in 2013 at least equal to those in 2012.

In some cases, however, assessors will be even more aggressive to compensate for what they now perceive to be modest increases in 2012. If an assessment increases significantly, make sure to have the proper tools and a property tax professional to fight that assessment.

Finally, recognize that the management of property taxes may impact how quickly a particular asset recovers from the recession. A lower property tax expense means a higher net operating income and more cash flow. The money can then go back into the asset to cover any capital expenditures or can be distributed back to investors. As an added benefit, lower property taxes can impact other aspects of the property, such as occupancy. For example, keeping the property tax expense under control may allow a shopping center owner to quote lower expenses to prospective tenants, providing an edge over the competition when it comes to attracting and retaining quality retailers.

Be vigilant when it comes to property tax expense in 2013, and don't let the signs of an improving commercial real estate market drive assessed value to distorted proportions. Be aware of tactics your local assessor may be using to increase values, and know how to counter them.

DarleneSullivan140 Darlene Sullivan is a partner in the Austin-based law firm of Popp Hutcheson P.L.L.C. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Sullivan can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
09

A Tax Recipe for Failure in District of Columbia

"Washington is unique in its reliance on property taxes, and in particular commercial property taxes, for a disproportionate share of its revenue. This is due in large part to factors outside of the council's control, such as the large amount of federally owned, tax-exempt property in the district, and to Congress' decision to prevent the district from taxing income earned in the district by non-residents..."

By Scott B. Cryder, Esq., as published by National Real Estate Investor - online, April 9th, 2013

Most property owners in the District of Columbia would welcome a plan to increase the accuracy of tax assessments by providing assessors with the most up-to-date information available. But if that plan also reduced the time D.C. assessors have to conduct their assessments to two months, rather than the current six months, many of those same taxpayers might reconsider. And if this plan would also reduce the time for assessors to handle initial administrative appeals, which has been an efficient mechanism to pare down the number of formal appeals, to six weeks instead of the current four-month window, most reasonable people would likely balk at the entire notion.

The truth is, legislation mandating these exact changes is pending before the Council of the District Columbia. And if statements from key councilmembers and District officials are any indication, this legislation has a good chance of becoming law in the next few months. How did we get here?

First, understand that Washington is unique in its reliance on property taxes, and in particular commercial property taxes, for a disproportionate share of its revenue. This is due in large part to factors outside of the council's control, such as the large amount of federally owned, tax-exempt property in the district, and to Congress' decision to prevent the district from taxing income earned in the district by non-residents.

Nonetheless, this heavy reliance on property taxes has created the public perception that Washington's assessment division is a revenue-generating department. Misplaced as this view may be—and it is misplaced—it has resulted in the assessment division being subject to frequent charges of "giving away" taxpayer dollars.

The most recent iteration of this line of criticism came to a head last year when the Washington Post published a series of articles suggesting that the Real Property Assessment Division was improperly settling commercial assessment appeals. To pile on, the Washington D.C. Office of the Inspector General issued a report shortly thereafter roundly criticizing many key practices and policies in the Assessment Division.

Although many of the criticisms levied at the Assessment Division were unmerited, the top staff of the Assessment Division determined that action needed to be taken. Naturally, one would anticipate that a working committee of stakeholders was convened and suggestions of the assessors sought, since they would be implementing any changes.

One would also expect such a committee, or someone in authority, to thoroughly review implications of any proposed changes. Unfortunately, though not unsurprisingly, none of this occurred. Instead of engaging in an "all—of-the-above" type of conversation, district officials quickly rolled out a wholesale overhaul of the assessment process without anything resembling the thorough vetting needed.

Good intentioned as those public servants proposing these changes may be, most professionals involved in the assessment and appeal process (including every assessor the author has queried) agree that the recommended changes will have a negative impact on the quality of assessments, and will ultimately increase both the number of appeals and the average time required to resolve an appeal. While this is surely not the outcome that district officials desire, it will likely be the one they achieve.

Cryder600 Scott B. Cryder is an associate in the law firm of Wilkes Artis Chartered, the District of Columbia member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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Mar
08

Cap Rates And Property Taxes

Changing cap rate spreads may inflate property taxes.

"Accurate capitalization or cap rates (the ratio between the annual net operating income of an asset and the capital cost or market value) enable an appraiser or investor to calculate an asset's value from its net operating income..."

By Michael Shalley, as published by Shopping Center Business, March 2013

A scarcity of comparable sales data is driving many property tax assessors to rely on historical rules of thumb that may threaten inflated tax bills for shopping center owners. Studying the problem requires a clear understanding of the events that have weighed down transaction volume, how mass appraisal software works, and how extrapolations from the few property sales available today can lead appraisers astray.

A Recipe for Confusion

The recent credit crunch may be regarded as one of the worst in American history. The crisis hit hard in March 2008, as investment bank Bear Stearns became the first of dozens of major American financial institutions to fail or be bailed out by the Fed. The causes were many, starting with subprime mortgages and extending to consumer credit, commercial mortgage backed securities and credit default swaps. But one of the greatest impacts for the commercial real estate market came in the form of uncertainty regarding property values and future access to credit.

This vast uncertainty that followed the crisis halted or cratered most transactions in commercial real estate, making it almost impossible to accurately appraise property and peg asset prices. Appraisers and property tax assessors struggled to find comparable sales, and many times looked back to historical rules of thumb to extrapolate data gathered from a few current sales for application in a wide range of assessments. It is the use by property tax assessors of these old standards in mass appraisal valuation models that may overburden some property owners.

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Accurate capitalization or cap rates (the ratio between the annual net operating income of an asset and the capital cost or market value) enable an appraiser or investor to calculate an asset's value from its net operating income. So an assessor who knows the cap rate from a recent property sale can use that data in assessing similar properties.

In normal and functioning commercial real estate markets, the spread in capitalization rates between Class A, B and C properties has generally held a consistent range. Historically, the variance or spread in cap rates between Class A or investment-grade properties and Class B properties typically averaged between 75 basis points and 150 basis points. A similar cap rate spread existed between Class B and C properties. However, these old rules of thumb have become at least temporarily obsolete.

There has been a flight to quality among investors and well-leased Class A shopping centers' cap rates are getting really aggressive," says Rafi Zitvar, a principal at Global Fund Investments LLC, which specializes in retail real estate. On the other hand, "Class B and B-minus centers have to be priced very attractively, say 200 to 300 basis points above Class A centers, for us to even look at them." The PWC Real Estate Investor Survey — compiled quarterly by PricewaterhouseCoopers and formerly known as the Korpacz Real Estate Investor Survey — reveals this widening trend for cap rates among asset classes in the national strip shopping center category. The survey data confirms that the average cap rate spread between institutional grade and non-institutional grade properties has increasingly widened for the past six years (as shown in the chart).

Modeling Mishaps

Many property tax assessors use a mass appraisal income approach model that uses cap rates to assess shopping centers. The model breaks down various components of each shopping center that are usually predicated on the classification of the center. The rental income, expenses and a corresponding cap rate for each shopping center are driven by the class inputted into the valuation model. Cap rates for each classification of shopping center are calculated off a sliding scale, where the base rate is usually a Class A cap rate supported by a sale or sales in the market, and then all other classes are modeled out using a scale based on typical spreads. It is the scaling or setting of cap rates for Class B and C shopping centers using a Class A cap rate that can result in overvaluation.

Clearly, the cap rate spreads between the top-quality shopping center assets and other classes have significantly changed over the past few years. Therefore, when assessors use historical cap rate spreads between different classes of shopping centers, the mass appraisal model overvalues properties from all but the highest class. It takes some experience, diligence and a detailed understanding of the assessor's model to ensure that a shopping center is being accurately appraised using today's standards.

ShalleyMichael Shalley is a principal at the Austin, Texas, law firm of Popp Hutcheson PLLC., which focuses its practice on property tax disputes, and is the Texas 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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Mar
07

Canada: 10 provinces, 10 Tax Regimes

"...as in the United States, local counsel is essential to understanding the tax system and use best means of pursuing a positive outcome..."

By Bradford Nixon, as published by Real Estate Forum, March 2013

The key to understanding ad valorem property assessment and taxation in Canada is to recognize that each province has its own unique system adhering to me basic principles of market value and equity. Each of the J 0 provinces has established a distinct regime of municipal assessment and property taxation. Although each province has different terminology, the general principle of market value derived from a value in exchange is consistently applied.

A second, crucially important principle which applies in nine of the 10 provinces (except Quebec) requires an equitable distribution of assessments and property taxes amongst similar properties. In the United States, this concept is known as uniformity.

Most provinces limit real estate tax levies to the assessed value of real property. Personal property is generally non-taxable in Canada except in Alberta, which taxes personal property in the oil and gas industry.

While the goal of the assessment is to obtain a correct current value as a conclusion, every individual taxpayer is entitled to an assessment that is equitable with comparable properties. As in the individual stales in the US, provincial legislation dictates how to properly determine the correctness and fairness of a property assessment. In a few provinces such as Ontario, the property tax system is complicated by tax caps and clawbacks, or legislative phase-ins of assessment increases or decreases.

Generally, each province provides taxpayers with a level of administrative appeal to a quasi-judicial tribunal, which is in turn subject to appeal on questions of law to the superior court of the province. The tribunals are independently appointed and usually separate from the local municipality. The assessment function may be performed by a provincial corporation in some cases, as it is in Ontario and British Columbia; or alternatively, the assessment roll may be prepared and defended by public or private sector agents of the local municipalities, as in Alberta, Manitoba and Quebec.

Each province has established its own set of exemptions from property taxation, which will include property owned by the federal and provincial governments or by churches, universities, schools and various nonprofit organizations.

Representatives performing assessment and tax services on behalf of taxpayers are coming under increasing scrutiny and regulation. For instance, in Quebec, only licensed appraisers may give opinion of value evidence before the assessment appeal tribunals.

In Ontario, only lawyers or paralegals licensed to provide legal services by the Law Society of Ontario may file and prosecute appeals.

Deadlines for assessment appeals will vary from province to province. For instance, in Ontario, there is an annual right of appeal and an appeal in the initial year of the four-year cycle will be deemed in effect for the subsequent 3 years, whereas in Quebec an appeal of the tri-annual assessment can only be made in the first year of the cycle. Knowing the local laws and practices are critical Thus, as in the United States, local counsel is essential to understanding the tax system and use best means of pursuing a positive outcome.

BradNixon2Brad Nixon is a partner in the Toronto law firm Walker Poole Nixon LLP, the Canadian member of American Property Tax Counsel, the national affiliation of properly tax attorneys. He may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it.. The views expressed here are the author's own.

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Jan
01

The Supreme Court Speaks; Some Taxpayers Shudder

"It was not of constitutional moment, the court decided, that the Indianapolis lump-sum payers were stuck for the full amount of their assessments while the installment payers received forgiveness reductions. Terminating the installment payers' obligations to make their remaining installments, the court observed, permitted the city to avoid "maintaining an administrative system for years ..."

By Elliott B. Pollack, Esq., Commercial Property Executive, January 2013

Property owners frequently raise legitimate questions about hard-to-fathom differences between assessments of similar properties, as well as the failure of municipal and county assessors to equalize values. Property owners may question the constitutionality of such unreasonable governmental actions in court. Attorneys, however, have long counseled clients that attempting to toss out an assessment, or a valuation system, on constitutional grounds is a very steep hill to climb. The U.S. Supreme Court underscored the accuracy of this advice last June in a rather prosaic piece of litigation involving sewer assessments.

The city of Indianapolis' policy to pay for sewer construction and line extensions was to apportion the cost among abutting lots. After assessing the initial project, the city divided the cost among the number of affected lots. The city also made adjustments to reflect differences in lot size and configuration. Upon completion of the project, each lot received a final assessment. So far, so good.

Once in receipt of the proposed assessment, a lot owner could choose to pay the amount due in a lump sum or in installments, a choice typically given to property owners facing capital assessments in most U.S. jurisdictions. One particular sewer extension project affected 180 Indianapolis homeowners; 38 chose to pay their obligations at once, and the remainder opted for installments.

Just one year later, the city abandoned the lot apportionment assessment methodology, instead adopting a complicated payment plan based on project bond financing, which need not be discussed here. The key to the new system was that it reduced the liability of the individual lot owners affected by this project.

This was good news for the 142 homeowners who had opted for the installment payment plan, but it went over like a lead balloon for the 38 homeowners who had paid in full. Why? Because in the course of adopting the new financing plan, the city forgave all remaining installments owed under the old format but did not attempt to make refunds to those homeowners who had paid in full.

Understandably upset that they did not receive the same financial consideration that the installment payers received, the lump sum payers initiated refund litigation. The property owners met with initial success but lost the case in the Indiana Supreme Court, which ruled that the city had a rational basis for forgiving the remaining installment payments. Among the reasons the city offered, and the court approved, was a reduction in the city's administrative costs because the cost of calculating refunds to the lump sum payers and making refunds did not warrant doing so. The city also indicated an interest in providing financial relief to the installment payment homeowners. The homeowners took their case to the U.S. Supreme Court, which agreed to hear their appeals.

The Supreme Court concluded that as long as "there is any reasonably conceivable state of facts which could provide a rational basis for the decision" made by Indianapolis, it was constitutional. This thinking is in keeping with a long line of rulings that make it clear the justices are almost always unwilling to wade into the tax-fairness swamp. Commentators suggest that this reluctance is based on the court's perception that once it starts deciding whether a particular tax or tax refund plan is constitutional, it will be deluged with hundreds of cases from all over the country. As a result, the court has developed a jurisprudence that requires it to defer broadly to the judgment of local taxing authorities, except in extreme circumstances.

It was not of constitutional moment, the court decided, that the Indianapolis lump-sum payers were stuck for the full amount of their assessments while the installment payers received forgiveness reductions. Terminating the installment payers' obligations to make their remaining installments, the court observed, permitted the city to avoid "maintaining an administrative system for years ... to collect debts arising out of (many different construction) projects involving monthly payments as low as $25 per household."

The fact that Indianapolis authorities were concerned about potential financial hardships that might be suffered by certain installment payers if their remaining obligations were not forgiven stuck in the craw of the lump sum payers and probably made them wonder why the city did not think of their potential financial hardship, as well. Nevertheless, the Supreme Court ruled that the "city's administrative concerns are sufficient to show a rational basis" for its action. Once the court discerned a rational basis, it refused to take its fairness and constitutional analysis any further.

The June 4, 2012, ruling was signed by Justices Breyer, Kennedy, Thomas, Ginsburg, Sotomayor and Kagan. Justices Scalia and Alito joined Chief Justice Roberts' vigorous dissenting opinion.

Pollack Headshot150pxElliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley L.L.C. The firm is the Connecticut 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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Jan
01

Buying Property? Beware Of Inflated Assessments

"The first step toward making a tax-informed decision on a real estate purchase is to consult with a property tax professional knowledgeable in the market..."

By Sharon DiPaolo, Esq., as published by rebusinessonline.com, January 2013

Someone buys a commercial property after months of research and negotiation, and soon afterward the property's real estate taxes skyrocket. The pattern — or at least the degree of the tax increase — often catches even sophisticated buyers unaware because rules that govern real estate assessments vary from state to state and town to town.

Investors who blindly assume that real estate taxes will remain flat after a sale risk disastrous consequences. Tax increases of 50 percent or more are not uncommon following a sale. A clear understanding of how the taxes could change can significantly influence what a buyer is willing to pay for real estate.

"It happens every day," says J. Kieran Jennings, managing partner of Cleveland-based law firm Siegel Jennings, which specializes in commercial property tax. "The phone rings and it's the new owner of a property who has just been hit with a huge tax increase, wanting to know what happened. Sometimes we can fight the tax increase after the fact, but it's always better to know what to expect before you buy. We prefer to get the phone call before the purchase, when we can help plan."

Know the market

Real estate taxes are based on a property's assessment, but tax rules vary widely by location. Some states ban the assessor from changing a property's assessment to match the sale price. Other states automatically raise the assessment to the sale price. Some states have a hybrid system in which a taxing district can file an appeal to increase the assessment after a sale. Knowing the rules of the particular jurisdiction is critical to proper tax planning.

Pennsylvania, for example, has a hybrid system. Pennsylvania law prohibits the county assessor from spot assessing, or independently changing the assessment of only one property. Under another Pennsylvania statute, however, taxing districts can file appeals to increase specific assessments, and many districts use sales to cherry-pick which properties to appeal.

Within Pennsylvania, and even within a particular county, school districts diverge in their practices of filing appeals. In Pittsburgh alone, one district might file appeals on all properties with sales greater than a certain percentage of the assessment, while another district might not file any appeals where the sale price is less than $1 million. A few districts have decided not to file any appeals.

Across the state line, in Ohio, the situation is a little different. Ohio has 88 counties and county auditors set assessments. "It boils down to knowing the county," says Jennings. Ohio has a six-year reappraisal cycle when every property gets a new assessment, and a three-year update cycle when the assessment can be modified.

Owners should expect the sale to be taken into account in a reappraisal year. Mid-cycle, the county auditor also can change an assessment to reflect a sale price. Just as in Pennsylvania, districts can file increase appeals, and many do. Generally, Pennsylvania and Ohio see more increase appeals by taxing districts than do other nearby states.

In New Jersey, the law is similar to Pennsylvania's, but the practical effect is different. "It's a trap for the unwary," says Philip J. Giannuario, a property tax lawyer with Garippa Lotz & Giannuario in New Jersey.

Giannuario cautions property owners to investigate the tax climate carefully before buying. Under New Jersey law, assessments are set by towns. A town's assessor cannot use a recent sale as a reason to change a property's assessment.

Just as in Pennsylvania, such spot assessments are banned. The towns can, however, opt to file assessment appeals to increase the assessments of properties that sell. With more than 650 towns in the state, Giannuario says that whether a particular town actually files increase assessment appeals depends on the town. The key is to know each town's practice.

Budget for worst-case scenario

The first step toward making a tax-informed decision on a real estate purchase is to consult with a property tax professional knowledgeable in the market. Based on the nuances of the particular jurisdiction, if an increase in an assessment is a possibility the tax professional can help the buyer to project a budget as if the assessment were raised to the potential sale price. That analysis could reduce the sum that the potential buyer is willing to offer for the property.

Knowing the worst-case scenario also can help the buyer notify tenants about potential outcomes so that they, in turn, can budget or even escrow funds. A little preparation goes a long way and is an easy step to avoid surprises down the road.

sdipaolo150Sharon F. DiPaolo is a partner in the law firm of Siegel Jennings Co., L.P.A., the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Dec
13

Building Value

How to Save Money by Allocating Prices in Real Estate Transactions

"Federal regulators recognize operations account for a significant component of hotel income and value..."

By Morris A. Ellison, Esq., as published by Commercial Property Executive, December 2012

Commercial real estate investors generally acquire properties based on total cash flow, rather than on the perceived value of the property's individual components generating that cash flow. Increasingly, however, lenders are attempting to underwrite real estate loans through component analyses by breaking down a property into income-generating elements under the theory that separately valuing components reduces risk.

Taxing authorities already generate separate tax bills, often at different rates, for real property, personal property and business licensing fees. A similar approach from lenders, which are under increasing regulatory pressure to reduce risk, may impinge on commercial real estate financing and slow the industry's recovery.

A purchaser often analyzes components of cash flow when evaluating how to improve a property's operational performance and the impact of taxes on potential returns. Common considerations include real estate transfer taxes, allocation of basis for income tax purposes, real and personal property tax assessments, and segregation of readily depreciable or amortizable assets from non-depreciable or non-amortizable assets. Allocation generally involves four components: (i) land (non-depreciable); (ii) buildings or improvements (generally depreciable); (iii) tangible personal property (generally depreciable); and (iv) goodwill or ongoing business value represented by intangible personal property or business enterprise value (BEV).

Hotel properties are prime examples of component analysis, as the analysis is often a major negotiating point. Hotels are generally sold as going concerns—that is, operating businesses with a value distinct the underlying real estate. Integrating a well thought- out allocation into a purchase agreement potentially simplifies recordkeeping yields significant savings on income, property and transfer taxes, sometimes worth tens millions of dollars. The federal Internal Revenue Code applies different depreciation rates and tax calculations to different property types. Commercial businesses with substantial goodwill associated with operations (such as hotels, shopping centers, healthcare facilities and marinas) can significantly benefit from a comprehensive allocation analysis.

For example, much of the value of healthcare facilities rests in operating licenses. These and other intangible assets are generally not subject to ad valorem taxation, and accurately reflecting value will prevent overpaying property taxes due to an incorrect allocation of value. In states where the federal income tax basis is used to calculate property taxes for purchased assets, an allocation analysis is critical. For federal income tax purposes, the tax basis of purchased assets is allocated according to the residual method, which generally allocates a purchase price into classes of assets. Except for land, certain tangible assets are depreciable for federal income tax purposes.

Valuing such assets typically involves obtaining a real estate appraisal, extracting improvement values from land value and valuing tangible personal property such as furniture using the most appropriate methodology for that asset type. Because the federal income tax basis of property is determined at the time of acquisition, allocating the purchase price should be part of due diligence and not put off until after closing. Closing is a great opportunity to establish the various business assets' tax basis, and separate conveyance documents should be prepared for each major asset to document allocated value.

Property Tax Implications

After closing, governments generally separately assess taxes against the real property, tangible personal property and intangible personal property (usually in the form of a business licensing fee).

Tangible personal property, which is subject to a faster depreciation schedule, includes furniture, fixtures, equipment and supplies. Business enterprise value might include startup costs, an assembled workforce, a reservation system and residual intangible assets. The Uniform Standards of Professional Appraisal Practice (USPAP), promulgated by the Appraisal Standards Board of the Appraisal Foundation, require separation of a hotel's business value from other components. However, there is no consensus on the method for calculating BEV.

Some taxing authorities contend BEV is an illusion conjured by disreputable appraisers and property owners seeking to reduce ad valorem taxes, but the Appraisal Institute and federal regulators recognize that the operating business of a hotel, for example, accounts for a significant component of its income and overall value.

Since Oct. 1, 2011, the Small Business Administration has required affiliated lenders to obtain a going-concern appraisal for any real estate involving an ongoing business. Affected property types include hospitality, healthcare facilities, restaurants and nightclubs, entertainment venues, manufacturing firms, office buildings, shopping centers and apartment complexes. SBA lenders must obtain an appraisal valuing the separate components from an appraiser who has taken specified courses in valuing going concerns.

The Office of the Comptroller of the Currency, which regulates commercial banks, simply requires lenders to use a competent appraiser and does not specify course requirements for the appraiser. While OCC appraisals need only comply with USPAP, stricter standards may apply if required by what the OCC calls "principles of safe and sound banking."

USPAP does not specifically require appraisers to value component elements when appraising going-concern properties. Although USPAP Rule 1-4(g) states, "(w)hen personal property, trade fixtures or intangible items are included in the appraisal, the appraiser must analyze the effect on value of such non-real property items," the Appraisal Foundation has made it clear that this standard does not mandate an appraisal of the property's individual components of value. However, "the appraiser may be required to value the individual components because of what the analysis produces and/or the manner in which the analysis was applied." Thus, USPAP implicitly require an appraiser to allocate values under certain circumstances.

The OCC appears to be seeking to require more. The Federal Deposit Insurance Corp. Improvement Act of 1991 imposed additional requirements on institutions subject to OCC regulations, which require each institution to adopt and maintain written real estate lending policies "consistent with principles of safety and soundness and that reflect consideration of the real estate lending guidelines." Exactly what this means is unclear.

A recent article published by the Appraisal Institute contends that appraisals of going concern properties must allocate values. Although not attributable to USPAP requirements, the FDIC, as well as the Financial Institutions Reform, Recovery and Enforcement Act of 1989, may require allocation in order to ensure "safety and soundness." Whether these principles require different interest rates for different components of value remains an open question.

Component analysis makes sense in analyzing operations and in calculating taxes. The ongoing debate over how to calculate BEV, however, illustrates the difficulty of transporting component analysis into transactions and real estate lending. For example, large hotel loans are typically made by a lender's corporate loan department, not the real estate department, and with good reason. Furthermore, incorporating the concept of component analysis into real estate lending seems likely to increase interest rates at a time when available credit is already scarce. That debate is just beginning.

ellison mMorris A. Ellison is a member of the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice L.L.P., and is the South Carolina 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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Nov
18

Are You Being Taxed for your Reputation?

"The taxing jurisdictions argued that "accounting goodwill is not intangible property but rather taxable tangible property..."

David J. Crapo Esq., as published by Commercial Property Executive Blog, November 2012

A recent Utah Supreme Court decision may influence taxes throughout the country by clarifying whether goodwill is a component of taxable real estate value. Most states exclude intangible property from taxation, so identifying intangible components of a business can significantly reduce property tax liability.

In T-Mobile vs.Utah State Tax Commission, the Court declared that accounting goodwill is intangible property and not subject to property tax. The Court defined goodwill as "a business' reputation, patronage, and other intangible assets that are considered when appraising the business."

The taxing jurisdictions argued that "accounting goodwill is not intangible property but rather taxable tangible property." They relied on a 2000 Utah Supreme Court decision in Beaver County vs. WilTel to argue that the synergistic value of a company's intangible property, working together with the tangible property, constituted enhanced value and was taxable because the enhancement value was directly attributable to tangible property.
As the taxing jurisdictions saw it, goodwill was enhancement value, and therefore taxable.

The Court disagreed with the counties and held that goodwill constitutes intangible property and is therefore not subject to taxation. The Court stated that goodwill includes such items as "customer base, customer service capabilities, presence in geographic markets or locations, nonunion status, strong labor relations, ongoing training programs, and ongoing recruitment programs." The Court then stated that these items "are associated with the business being conducted on the property; they are not directly attributable to tangible property."

By clarifying the accounting of goodwill, the Utah case provides a reference point and reminder for taxpayers nationwide. To ensure that property is not over-assessed and thus overtaxed, it is important to make sure the taxing jurisdictions have made all the proper adjustments to remove intangible property. And that entails the exclusion of business value attributable to goodwill.

dcrapo David J. Crapo is a partner in the Bountiful, Utah law firm of Crapo Smith, the Utah 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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Nov
02

Guest Column: Tax Relief for Obsolete Retail Space

"A critical question for the taxpayer is when, if ever, to share that documentation. Appraisal evidence properly prepared with an attorney in advance of litigation will often protect that document from individuals with whom the owner does not wish to share it, and should allow the owner's team the opportunity to present the evidence at the time and place that is most advantageous to the owner..."

By J. Kieran Jennings, Esq., as published by Commercial Property Executive, November 2012

Since 2001, major retailers have closed about 5,000 stores per year. Certainly there are more closings in challenging times, and in other years there are more store openings than closings. There is one constant, however: Real estate owners and operators must determine what to do with vacated space. Assessors also should weigh the impact on the property, and taxpayers should decide how to reduce taxes based on inevitable tenant turnover.

For many years, the assessing community refused to fully recognize the devaluation of a shopping center due to vacancies. Assessors argued that vacant space has worth, and that an income approach to valuation ignores the income-producing potential intrinsic to empty space. In certain instances, the assessor's argument is true, and including an estimate of potential income for vacant space is an integral part of a shopping center assessment. But what should be done when the space no longer has value or becomes a detriment to the property?

Assessors are often reluctant to acknowledge the nominal or negative value of space that no longer adds to a property's value. When that occurs, a financial study of highest and best use can prove that the space simply cannot be reused economically. Specifically, the property owner can show that build-out and other costs required to prepare the space for the highest and best use outweigh the potential rent the space would earn.

Take for instance a small cinema complex that must update to digital projectors or go out of business. An article in the Sept. 30 edition of USA Today described the owner of a four-screen theater who lamented that he lacked the profit margin to support the $250,000 conversion. The cinema operator's plight should raise a question for the real estate assessor. Is the current usage designation of the space, in its current condition, financially feasible? If the answer is no, then the highest and best use study takes a look at the financial viability of either upgrading — in this example, to digital projection — or renovating the space for a different use and user.

When looking at potentially renovating and changing the use of the property, the appraiser or assessor must determine whether the conversion is physically possible. There may be demand for rentable space, but can the existing structure be adapted for that use? Other considerations include whether the use is legally permissible. A bar, hotel or casino may be a great idea, but do zoning and other laws permit the use? The proposed use should also be reasonable and probable. A conversion to a use that harms the rest of the shopping center is not appropriate.

In many secondary markets in particular, the cost of renovation may exceed the amount of rent that would be collected at market rates over the life of the potential lease. Repurposing a cinema, for example, incurs costs that competing retail properties don't have to bear, such as the expense of leveling sloped floors, adjusting ceiling heights and removing lobbies. If the costs do not justify the change, then the appraiser as well as the owner will need to determine if the building is a detriment to the center. In some cases, the only avenue available is demolition of the property, after which the land can be held for future development.

The days of just discussing the issues of obsolete spaces with the assessor are long since over. Chinese Gen. Sun Tzu's famous admonition, "Know your enemy and know yourself, in a hundred battles you will never be in peril," is apropos in tax contests. A successful appeal requires knowing how the opponent ticks and what proof is necessary.

Owners are often best served in preparing for a hearing or meeting by obtaining an appraisal from a reputable third party. A critical question for the taxpayer is when, if ever, to share that documentation. Appraisal evidence properly prepared with an attorney in advance of litigation will often protect that document from individuals with whom the owner does not wish to share it, and should allow the owner's team the opportunity to present the evidence at the time and place that is most advantageous to the owner.

The final question is, when should the taxpayer raise these arguments? Experience suggests that the taxpayer should attack the issue of obsolete space as soon as the market begins to question the existing use. Tax contests can be lengthy, and profitability — or even survival — may depend upon minimizing non-productive expenses such as taxes.

kjenningsKieran Jennings is a partner with the law firm of Siegel & Jennings, which focuses its practice on property tax disputes and is 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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Oct
23

A Taxing Issue

Have Your Intangible Assets Been Included in Your Property Tax Assessment?

"It is important to identify and remove potential intangible assets in any property tax valuation."

By Mark S. Hutcheson, Esq., CMI, as published by Commercial Property Executive, October 2012

What's the difference between an income tax and a property tax? The answer seems simple, but it is one lost on many assessors when valuing property for ad valorem taxation. Most people understand that income taxes reflect the income a business generates. Property taxes, by contrast, are based on the value of the tangible assets of a business. Some assessors lose that distinction when applying the income valuation approach, however, and fail to identify and properly remove non-taxable intangible assets.

As a general rule, assessors determine property tax value using one or more of three methods: the sales comparison, income and cost approaches. For commercial properties, assessors and appraisers favor the income approach because it mirrors the method buyers most often use in the open market. When this approach is used to determine the value of taxable property, however, the net operating income (NOI) must exclude any income stream attributable to an intangible asset. 

Intangible property includes assets that have value but are nonphysical, including franchises, trademarks, patents, copyrights, goodwill, equities and contracts, according to The Dictionary of Real Estate Appraisal. Intangible value cannot be imputed to any part of the physical property.

Many commercial businesses have franchise agreements, contract interests and goodwill. These intangible assets are separate and distinct from the physical assets of the business and are generally nontaxable, so the assessor must remove them when determining a property's taxable value. The first step toward that end is to identify the specific intangible assets that contribute to business income.

The operation of a hypothetical hotel provides a simple illustration. A hotel's income stream clearly includes the owner's taxable return from the land and building, but it may also include a host of intangible items that must be removed before the NOI is capitalized into a taxable value. These items may include the hotel's brand; the assembled and trained workforce; maid, concierge and security services; food and beverage outlets; and spa services. Just as the building and underlying land of a McDonald's should not be valued based on the number of hamburgers the restaurant sells, the service and brand components of a hotel's income must be excluded from the value of the taxable assets. While hotels and restaurants are clear examples, it is important to identify and remove potential intangible assets in any property tax valuation.

The proper identification of intangible assets can be more difficult in properties that primarily derive rental income. The tendency is to assume that if a property rents, all of the income is directly attributable to its tangible assets. While this is generally true, there are a few notable exceptions. Above-market leases are properly classified as intangible assets and should be excluded from property tax valuation. An above-market lease creates a contract right that may not be reproducible on the open market.

The Appraisal of Real Estate, published by the Appraisal Institute, provides that "a lease never increases the market value of real property rights to the fee-simple estate. Any potential value increment in excess of a fee-simple estate is attributable to the particular lease contract, and even though the rights may legally 'run with the land,' they constitute contract rather than real estate rights."

This concept can be expanded to other rental-related agreements, like anchor concessions and a shopping center's tenant mix. For example, assume the owner of a shopping center has relationships with several national tenants that rent space in the owner's centers in other locations. If the owner can persuade a few national tenants to rent space in a new center (possibly through concessions or other business agreements), the result is often a synergy that allows for higher overall rents and less vacancy. In this example, the higher rents are attributable to the owner's business relationships, rather than the location or condition of the center, and must be adjusted to remove the intangible enhancements. Intangible assets are generally nontaxable and exist in almost every business. If your property tax assessment is based on the income approach, make sure the income being capitalized is attributable solely to the taxable, tangible assets of the property.

MarkHutcheson150Mark S. Hutcheson is a partner 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 the American Property Tax Counsel, the national afi liation of property tax attorneys. Reach him at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

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Oct
17

Contingent Fee Consultants Target Large Property Owners for Tax Increases

While the taxing jurisdictions' consultants maintain that they are not doing appraisal work or appraisal consulting work, a review of USPAP definitions suggests differently. The Uniform Standards define appraisal consulting as "the act or process of developing an analysis, recommendation, or opinion to solve a problem, where an opinion of value is a component of the analysis leading to the assignment results."

By John E. Garippa, Esq. & Brian A. Fowler, Esq., as published by National Real Estate Investor - Online, October 2012

As U.S. Supreme Court Chief Justice John Marshall observed two centuries ago, "the power to tax involves the power to destroy." That statement applies today in the Delaware Valley, where taxing jurisdictions are delegating the tax assessment function to outside consultants.

Incredibly, these consultants are compensated on a contingent fee basis for the additional tax revenue they can accumulate for the jurisdiction. In a typical contract, the fee has been 25 percent of the additional revenue received over a three-year period.

In practice, these consultants can pick and choose which properties to recommend for reassessment. It's not surprising that the most valuable commercial assets, which offer the largest potential for gain in a reassessment, attract the most attention from these bounty-hunting consultants.
Here's how the process typically works. Once consultants have determined which properties are under-assessed, the school districts file affirmative appeals to raise the assessments on the affected properties. Property owners who choose to defend their existing assessments must hire attorneys and independent appraisers at considerable cost.

This system of taxation grows less uniform with each reappraisal. And while it may seem absurd to hand over the reins of tax policy to an outside consultant, the practice is becoming routine under current Pennsylvania law.

Taxing questions

Experience has shown that at any given time there will always be disparities in tax assessments within a given jurisdiction. However, most taxpayers assume that the assessment function is being performed by tax assessors in an ethical and uniform manner, and that those assessors are not paid based on the increased revenue they find.

The increasingly prevalent use of tax assessment consultants raises serious issues that communities must address.
First, the Pennsylvania legislature has prohibited contingent fee agreements where it has deemed them to be contrary to public interest. Specifically, Pennsylvania law prohibits real estate appraisers from accepting an appraisal assignment where the fee is contingent on the valuation reached.
While consultants to taxing entities might argue that they are not appraisers, the fact that they are concluding to a value or value range arguably makes their work product an appraisal.

Second, Pennsylvania has adopted the Uniform Standards of Professional Appraisal Practice (USPAP), which can help to level the playing field for the property owner in appealing an assessment. Those rules include minimum standards for the retention of records, referred to as the "record-keeping rule." An appraiser or consultant must prepare a work file for each appraisal, appraisal review or appraisal consulting assignment.

A work file must exist prior to the issuance of any conclusion, and a written summary of any oral report must be added to the work file within a reasonable time after the issuance of the oral report. Any appraiser or consultant who willfully or knowingly fails to comply with the obligations of this record keeping rule is in violation of the state's ethics rule.

While the taxing jurisdictions' consultants maintain that they are not doing appraisal work or appraisal consulting work, a review of USPAP definitions suggests differently. The Uniform Standards define appraisal consulting as "the act or process of developing an analysis, recommendation, or opinion to solve a problem, where an opinion of value is a component of the analysis leading to the assignment results."

The Uniform Standards also indicate that an appraisal may be numerically expressed as a "range of numbers or as a relationship (e.g. not more than, nor less than) to a previous value opinion or numerical benchmark (e.g. assessed value, collateral value)." Clearly, concluding that certain properties are under-assessed requires a conclusion of value and a comparison to an existing assessment benchmark. The point is, if it looks like a duck, walks like a duck, and quacks like a duck, it is a duck--or in this case, an appraisal.

Allowing consultants to wander the tax lists on the basis of bounty hunting for under-assessed properties is essentially a free trip for the taxing authorities, which bear no burden of cost. When the targets are identified and appeals are filed to increase the assessments, the consultants are rewarded for their efforts by being paid a fee contingent on whatever additional revenue is raised.

If taxing authorities had to fund these efforts on an ongoing basis, rather than on a contingent fee basis, much of this bounty hunting would end. Moreover, if state licensing authorities would examine this conduct under existing appraisal law and the Uniform Standards, the inevitable conclusion would be that appraisal consulting services are taking place. Again, this would serve to restrain the current, unbridled practice of targeting large taxpayers.

 

Garippa155 John E. Garippa is senior partner and Brian A. Fowler is an associate in the law firm of Garippa, Lotz & Giannuario with offices in Montclair, N.J., the New Jersey member of the American Property Tax Counsel, the national affiliation of property tax attorneys.
FowlerPhoto90  
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Oct
17

Bay Area Real Estate Recovery Creates Property Tax Appeal Opportunities

The uneven recovery of the Bay Area real estate market over the past year has created opportunities for real estate owners to challenge their property tax assessments. Areas that have experienced the strongest growth, as well as markets in which the recovery is lagging, may be ripe for challenges to property tax assessments.

By Cris K. O'Neall, as published by National Real Estate Investor - Online, October 2012

Pregnant propositions

Under California's Proposition 13, property taxes are based on the purchase price paid for a property or on the cost of constructing the property. Thereafter, Proposition 13 caps value increases (and property tax increases) at 2 percent annually.When property values decline, Proposition 8, the bookend to Proposition 13, requires county assessors to reduce taxable property values below Proposition 13 value caps to reflect current market conditions. As real estate values recover following a downturn, assessors restore taxable values back to Proposition 13 levels.

Over the past year or so, core Bay Area markets (primarily San Francisco and the Silicon Valley) have experienced strong growth in market rents and declines in capitalization rates, particularly as compared to other Bay Area real estate markets. Because of the brisk recovery in core markets, county assessors have aggressively moved to restore 2012 values, determined as of Jan. 1, 2012, back to Proposition 13 levels. Such value restorations can bring major increases in assessments and taxes.

ckoneall

Assessors exercise value judgment

In order to restore property values to Proposition 13 levels, California requires county assessors to evaluate market sales and rental information. In so doing, assessors consider ranges of information on sales and rentals, and exercise their judgment as to whether values should fall in the top, middle or bottom of a range.
While assessors generally determine values for residential properties using computerized mass appraisal techniques, commercial properties tend to be more complex and require individual attention by assessor staff.

This year, the assessors in San Francisco and Santa Clara County have restored property values and assessments to levels at or near Proposition 13 amounts, which, in some cases, has dramatically increased tax bills as compared to 2011. In doing so, assessors may have justified assessments using more recent rental rates or cap rates, rather than using average rates during the 12 months prior to Jan. 1, which tends to accelerate value increases.

In 2012, most Bay Area counties announced increases in their property tax rolls.
The 2012 roll increases are due, at least in part, to increasing sales and leasing activity, which tend to be reflected in higher property tax values and assessments. However, these increases also reflect Proposition 13 value restorations described previously, and highlight those counties which merit increased consideration as far as whether to review and appeal property tax assessments.

Property tax appeal opportunities

The current situation presents several types of property tax appeal opportunities. First, for properties in San Francisco, San Mateo and Santa Clara counties, it is possible that assessors have been overly aggressive in restoring values to Proposition 13 levels. Taxpayers should request backup information supporting full or partial restoration of Proposition 13 levels and if the assumptions appear excessive, file an appeal.

This same advice goes for properties in secondary and tertiary markets, particularly where there have been Proposition 13 value restorations. Properties in these markets should also be reviewed, however, to determine whether they have participated in the economic recovery that San Francisco and the Silicon Valley have experienced. Economic recovery among Bay Area counties has been uneven, and hasn't benefited every city within a county consistently. In San Mateo County, for example, property values in Atherton have increased significantly, but values in East Palo Alto have continued to decline. Similarly, in Contra Costa County, values in five cities increased while in the county's remaining 14 cities values generally declined.

Finally, property owners should not assume that a "no change" assessment or that a lower assessment by the local assessor is correct. Values in some areas declined during 2011, which means that market values as of Jan. 1, 2012 may be lower than 2011 values, and should not reflect value increases that have occurred during the first nine months of 2012.

CONeall Cris K. O'Neall specializes in property and local tax matters as a partner in the law firm of Cahill, Davis & O'Neall LLP, the California member of American Property Tax Counsel, the national affiliation of property tax attorneys. He may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Sep
28

Tax Trap in Dallas

"Just because a value may have decreased from a previous year assessment doesn't translate into a correct assessed value. Make sure that the property is being valued correctly with the appropriate approaches to value—income, cost and sales comparison..."

By John Murphy, as published by National Real Estate Investor - Online, September 2012

Since the beginning of the economic decline in 2008, property values have fluctuated in many Texas counties, including Dallas County. Now that the Dallas commercial real estate market is on the mend, commercial property owners must continue to monitor their property values and consider remedies available to appeal errant assessments.

Generally, the Dallas County real estate market has fared well over the past five years, having proven itself largely immune to the effects of the recession. In fact, the Dallas Central Appraisal District (DCAD) in July announced that overall property values increased this year for the first time since 2008, climbing by 1.4 percent. Commercial real estate drove the increase with a 4.6 percent gain that trumped a slight decline in residential values to boost the total tax roll.

Each July, DCAD produces an estimated value report which, after certification by the Dallas County Appraisal Review Board, is published as the Certified Estimated Value Report. This report summarizes tax roll estimates by property type, including commercial, business, personal and residential property. The report also provides a total value for all classes.

It is important to note that the appraisal district bases values on an effective date of Jan. 1 for each year, and that the certified estimated value is 100 percent of market value.

Popp Hutcheson conducted a market research study to determine changes in asking price per square foot for commercial properties in Dallas as of Jan. 1 for each year from 2008 through 2012. Please note, in the chart below, the research data represents an average of the three dominant commercial property types: office, industrial and retail.

dallas-values-600

Asking price per sq. ft. has fluctuated over the five years measured but does not correspond directly to the Dallas County Certified Estimated Values. Although the Dallas market did not suffer nearly as much as most counties in Texas and the U.S., it is clear that the market failed to adjust asking prices appropriately during and after the recession. This is especially true in 2009, when the average asking price increased despite market-wide value declines at the deepest point of the downturn. Arguably, DCAD tracked the recession more appropriately with decreases in Certified Estimated Values for each year.

 

What does this mean for the taxpayer?

The apparent disconnect between market value and asking prices in Dallas underscores the potential for overestimating taxable property values. While this is a macro-level view of certified values and asking prices, the point of all this is quite simple. The property owner must be diligent in tracking assessed value. Carefully review each notice of appraised value from the appraisal district and watch for any increases in assessments.

Just because a value may have decreased from a previous year assessment doesn't translate into a correct assessed value. Make sure that the property is being valued correctly with the appropriate approaches to value—income, cost and sales comparison. For example, an appraiser may value a 15-year-old, income-producing commercial property via the cost approach. That typically isn't the most appropriate method, because an assessor seldom appropriately captures all forms of depreciation (physical, functional and external) using the cost approach.

dallas-values-600

The income approach may be the most appropriate method for appeal purposes, and careful consideration should be taken in applying a true market rent, vacancy rate, collection loss, expense ratio and, of course, capitalization rate to arrive at an appropriate market value. Cost can be used as additional support, however, provided that all forms of depreciation are properly captured. The value indicated via these approaches should be very close, thus arriving at a reasonable concluded value.

Also make sure that the appraisal district has the correct building square footage, age, physical characteristics and land size on its record cards. DCAD, like most jurisdictions, has a difficult job tracking and making sure that each and every property is valued correctly. As with anything, mistakes happen and more often than a property owner may realize.

Additional remedies

Dallas taxpayers, as well as all Texas property owners, have a right to equal and uniform appraisals. Taxpayers need to seek professional help to determine whether their property is valued the same, from an equality and uniformity perspective, as competing properties in Dallas County.

DCAD's shrinking value estimates over the years do not ensure accurate assessments. Inappropriate valuation methods, clerical errors and unequal appraisals can all inflate taxable values, and it is extremely important to keep these risks in mind.

john-murphy-activeJohn Murphy is director of real estate assessments at the Austin, Texas-based law firm Popp Hutcheson which represents taxpayers in property tax disputes and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached This email address is being protected from spambots. You need JavaScript enabled to view it.

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Sep
28

What Revaluation Means for Chicago

"In Chicago specifically, the most telling statistic may be the lack of property sales. From an average of 50,000 to 55,000 Cook County sales per year in the boom years, sales in the last three years have not exceeded 5,500 per year..."

By James P. Regan, Esq., as published by National Real Estate Investor - Online, September 2012

Cook County, Ill. systematically revalues all properties for taxation every three years, and 2012 is the reassessment year for Chicago. The last revaluation took place in 2009, shortly after the collapse of Lehman Brothers and the beginning of the Great Recession. The county has already sent reassessment notices to real estate owners in the northern sections of Chicago and will notify those in the rest of the city of the proposed assessed value of their properties over the next six months. The 2012 assessment will be used to determine each Chicagoan's real estate taxes through 2014.

Homeowners and business owners alike should pay close attention to this year's revaluation. Real estate has undergone a significant value loss since 2008, and that alone makes the 2012 revaluation a defining event for Chicago's property owners.

Assessment officials strive to make the process as transparent as possible, and the notices contain a wealth of information about the property and its assessment history. At neighborhood meetings throughout the city, officials stress that the proposed 2012 assessment contained in the notice is only the first step in a process, and that every taxpayer has the opportunity to provide evidence which shows that the proposed assessment inaccurately reflects the property's value. The assessor calculates values using mass appraisal techniques applied to data amassed on all segments of the city's real estate markets, but recognizes that each property is unique and that market data can be made more precise by information provided by the property owner.

Despite the efforts at transparency, the process of producing a final tax bill is not restricted solely to valuation. The budgets of local agencies funded by real estate taxes affect the bill as well.

The assessment process

Real estate taxes are an ad valorem tax, or dependent upon how much the property is worth. Illinois relates taxes to the fair cash value of the property. Simply said, the assessor must determine how much the property would have sold for as of Jan. 1, 2012. The primary purpose for assessment valuation is to determine the fair share of taxes and to assure that each property is uniformly taxed in accord with its value.

Value loss must be considered in that context. The real estate markets—residential and commercial—were at the heart of the boom of the last decade. In the last three years real estate has, in turn, felt the full force of the burst bubble. According to the Moody's REAL Commercial Property Price Index, as of the first quarter 2011, office, industrial, apartments and retail properties had all fallen back to 2003 value levels.

regan reevaluationChicago

In Chicago specifically, the most telling statistic may be the lack of property sales. From an average of 50,000 to 55,000 Cook County sales per year in the boom years, sales in the last three years have not exceeded 5,500 per year.

Office vacancy rates in the Central Business District have gone from 11.5 percent in 2008 to more than 20 percent as of the first quarter of 2012, according to MB Real Estate Services. Concessions and rent abatements continue for new tenants.

Retail rents declined from $18 per sq. ft. in 2009 to $16 per sq. ft. by 2011, according to Colliers International. And the S&P/Case-Shiller Home Prices Indices show that Chicago condominium prices in 2010 had fallen to 2002 levels, and that home prices closely followed the downturn in condos. Home prices were down 18.7 percent on an annual basis.

One could strongly argue that the decline in value, together with the paucity of sales, demands new methods to arrive at fair cash value. Income data is available to determine values more accurately determine, even for the residential and condo markets, and extraordinary times require extraordinary solutions.

The budget process

The other contributor to the real estate taxpayer's bill is the aggregate budget requirement of local schools, police, fire, county, city governmental, park districts and libraries, which determines the dollars that must be collected from real estate taxes. The assessment determines the proportion of that aggregate amount the individual taxpayer owes, based on property value.

Chicago's usage classifications further obfuscate the process: Residential properties are assessed at 10 percent of value while commercial properties are assessed at 25 percent. That triggers a state equalization factor, which is included in the computation of every taxpayer's bill. Experienced tax counsel can help taxpayers evaluate all these factors and determine whether to protest their assessment.

reganJames Regan is the managing partner of the Chicago law firm of Fisk Kart Katz and Regan, the Illinois 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.

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Sep
23

The Silver Lining of Increased Vacancy

"By demonstrating the scale of the reduction in income to the property and quantifying the precise loss in value through the process of income capitalization, a taxpayer can often reduce its tax burden..."

By Stephen Paul , Esq., as published by Real Estate Forum, September 2012

The clearest way to convey the bright side of declining commercial real estate values is through a residential example. At the height of the real estate boom in 2007, my wife and I received an unsolicited offer for a condominium we owned in Florida. The buyer was persistent and eventually paid us three times what we had paid only four years earlier. But because we still wanted a vacation place in Florida, we purchased a new condo as the market was topping out.

As soon as we moved into our new condo, the market crashed. Similar units in our development were soon selling for half the amount we had paid for ours. When my wife saw our first tax assessment, she was dismayed that our condo's value had dropped so far below our purchase price. But because we intended to hold onto the property for many years, and because our property taxes had decreased, the decline in assessed value actually improved our position.

For commercial real estate, the post-2008 increase in vacancy rates and the collapse of the capital markets have led to a substantial value loss. Value-weighted US commercial property values in June this year were down 30.7% from the peak of January 2010, according to the CoStar Commercial Repeat Sales Index. This cloud has a silver lining for property owners, however. The decline in the market creates an opportunity to reduce taxable value, increase the bottom line and begin to turn the property's value upward. To everything there is a season.

Real estate values, much like the real estate market itself, are largely cyclical. Tax assessors usually calculate commercial property value by capitalizing the property income. As rents decline, property value declines, both for business valuation and tax purposes. A lower assessment also reduces the tax bill.

Logically, any reduction in a major expense will raise net income. Other than debt service, the largest expense for most real estate is property tax. Consequently, as the tax load decreases, the property owner's bottom line increases.

Few local governments assess properties annually. Most properties are reassessed every three or four years, and the tax authority simply adjusts values annually to reflect general market changes. A property may carry an assessment from the market's peak or from a time when the property had less vacancy, thereby overstating the current value.

Assessors will not always reduce a property's assessed value simply because hard economic times have fallen on a region. The problem is further compounded because assessors rarely have access to a property's rent roll. When assessors choose to reduce values generally, the reduction may not be tied to a specific property's actual reduction in tenancy.

In most jurisdictions, however, when a building suffers from an inordinate loss through vacancy, the taxpayer can file a real estate tax appeal requesting an adjustment of the building's assessed value. By demonstrating the scale of the reduction in income to the property and quantifying the precise loss in value through the process of income capitalization, a taxpayer can often successfully and substantially reduce its tax burden. A successful tax appeal and the resulting reduction in tax burden can in turn help offset the loss of income caused by the building's excessive vacancy. Additionally, the lower assessment may remain in effect even as the market improves, resulting in savings for future years.

The tax reduction will boost the property's net operating income. In turn, this will raise the property's market value once the building's increased net operating income is capitalized into anindication of value. This cyclical cause and effect is a built-in economic buffer for owners whose properties suffer from above-normal vacancy rates.

Outside of the tax arena, if a property's expenses decrease and its net income increases, the owner may seek a professional appraisal of the property. An appraisal that accounts for the reduced tax burden may be used to secure more favorable financing, particularly for properties with underwater mortgages. Further, for owners looking to sell their properties, the decrease in the real estate tax load may counterbalance higher-than-average vacancy. A potential buyer will see a better return on investment with a lower tax burden and may be willing to pay more for the property than the occupancy alone would suggest.

By recognizing that there is a silver lining to excessive vacancy and by acting to secure a more favorable assessment, owners can better manage their taxes and keep their property's value elevated in lean times.

paul Stephen Paul is a partner in the law firm of Faegre Baker Daniels, the Indiana member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. This email address is being protected from spambots. You need JavaScript enabled to view it., associate, contributed to this article.

 

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