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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.

Jul
13

The Logical and Proper Determination of The True Cash Value of Big Box Stores

I. The Valuation Problem
 
In Michigan, the property tax valuation standard is true cash value (“TCV”), statutorily defined as “usual selling price” (MCL 211.27). There are no exceptions. The valuation standard applies to all taxable property including, for example, apartment complexes, office buildings, shopping centers, single family homes and the subject of this article: “big box retail stores.” As used in this article, big box retail store means the real property comprising an existing free standing retail store with a building area of approximately 80,000 square feet or more.

It is imperative that value to the owner not be substituted for TCV (i.e. usual selling price or market value). In Rose Bldg Co. v. Independence Twp. 436 Mich. 620; 462 N.W.2d 25 (1990), the Michigan Supreme Court held:

The Constitution requires assessments to be made on property at its cash value. This means not only what may be put to valuable uses, but what has a recognizable pecuniary value inherent in itself, and not enhanced or diminished according to the person who owns or uses it. [Emphasis in original.]

Before a big box store’s usual selling price can be concluded, the identity of the interest in the property being appraised must be identified. Different interests in any given property can have significantly different values. Paraphrasing well-known author and real property appraiser David Lennhoff, “you can’t get the right value unless you value the right rights.”

This article focuses specifically on owner-occupied big box stores. Because the properties are owner-occupied, there is no lease in place and no leased fee interest. TCV for owner-occupied property is based on the fee simple interest in the property. Fee simple interest is defined as follows:

Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat. The Dictionary of Real Estate Appraisal (5th ed., 2010).

Thus, this article discusses the usual selling price of the fee simple interest in an owner-occupied large free standing store real property, unaffected by the person who owns or uses the property.

II.    Big Box Stores Are All Built To Suit And Not Built To Thereafter Be Sold Or Leased.

The above section of this article addressed the legal principles governing the TCV of big box stores and other types of property. This section addresses ways in which big box stores are factually unlike most property types. Big boxes are all built to suit or custom built for a specific retailer’s business. They are either constructed by (1) a retailer or (2) for a retailer pursuant to a pre-construction contract whereby the retailer agrees to lease the property after construction under terms that allow the contractor to recover its costs and profit. Unlike many property types (apartment complexes, shopping centers, warehouses, office buildings, houses, etc.), big box stores are never built for the purpose of selling or leasing after construction is completed.

Although this gets us ahead of the story, the question should be asked why, unlike many other property types, are big box stores not built to thereafter be sold or leased. The answer is quite simple. Big box retail stores are custom built to accommodate a particular user’s image and marketing strategies. For reasons discussed below, no one could reasonably expect to profit from custom construction of a big box store and thereafter selling or leasing it in the market.

Although an existing big box store is most often clearly suitable for retail use by another retailer, the market tells us a buyer of the fee simple interest in an existing big box store, at a minimum, is going to make substantial modifications to the property. One not familiar with sales of fee simple interests in big box stores will ask why after sale of the fee simple interest in a big box store are big box store buildings either demolished or substantially modified when the building was suitable, as is, for retail use. The answer is that each big box store retailer has its own business image and desired store layout and design - façade, flooring, lighting, location of restrooms, etc. Each big box retailer wants all its stores to look alike and not like another retailer’s stores.

In short, the market tells us that when the fee simple interest in an existing big box store is sold or leased, one of two things almost always happens - (1) the building is demolished or (2) the building is substantially modified.

III. Valuation Of The Fee Simple Interest

Borrowing a quotation from the late William Kinnard, a professor, author, and well-known real property appraiser, “An appraisal is the logical application of available data to reach a value conclusion.” It is useful to keep this truism in mind when valuing property, including the fee simple interest in a big box store property.

A.    Sales Comparison Approach.

In valuing the fee simple interest of a big box store by the sales comparison approach, ideal comparable sales are fee simple sales of similar properties, i.e. sales of the same interest in property as the interest in the big box store being valued.

The Michigan Tax Tribunal has consistently used comparable fee simple sales of properties that were vacant and available when valuing a subject big box store. See Home Depot USA, Inc. v. Twp. of Breitung, MTT Docket No 366428 (2012), affirmed by the Michigan Court of Appeals in an unpublished opinion, Home Depot USA, Inc., v. Twp. of Breitung, Michigan Court of Appeals Docket No. 314301, (April 22, 2014) (“Petitioner’s selected comparables were vacant and available at the time of sale. The Tribunal finds that these sales best represent the fee simple interest in the subject property. Vacant and available at the time of sale is not an alien term: an appraiser’s analysis of exchange value must account for this eventuality. Not all properties transition instantaneously from seller to buyer like a light switch. Moreover, vacant and available for sale does not automatically present a negative connotation.”) (Emphasis added.)

As the Michigan Court of Appeals further explained:

The tribunal properly valued the properties by valuing the fee simple interest of the properties as if they were vacant and available. By comparing the subject properties to similar big box retail properties that were vacant and available, with various adjustments made to compensate for differences between the properties, Allen [taxpayer’s appraiser] was able to determine what the fair market value would be of the subject properties, if they were to be sold in a private sale, as required by MCL 211.27(1). Therefore, Allen’s sales-comparison approach properly valued the TCV of the fee simple interest of the subject properties.

Home Depot USA, Inc., v. Twp. of Breitung, unpublished opinion per curiam of the Court of Appeals, issued April 22, 2014 (Docket No. 314301).

Below are some common issues and errors in concluding to the TCV of the fee simple interest in big box stores using the sales comparison approach:

1.     Leased Fee Sales. A leased fee comparable may not be a valid indicator of a fee simple interest. Income producing real estate is often subject to an existing lease or leases encumbering the title. By definition, the owner of real property that is subject to a lease no longer controls the complete bundle of rights, i.e., the fee simple estate. The price paid for a leased fee sale is a function of the contract rent, the credit worthiness of the tenant, and the remaining years on the lease. If the sale of a leased property is to be used as a comparable sale in the valuation of the fee simple interest in another property, the comparable sale can only be used if reasonable and supportable market adjustments for the differences in rights can be made. The Appraisal of Real Estate, p. 323 (13th ed.); p. 406 (14th ed).

2.     Sale - Leasebacks. Sale/Leasebacks are typically financing transactions and always transactions between related parties, i.e. in addition to seller and buyer, the parties are tenant and landlord to each other. Thus, a price paid for a sale/leaseback comparable sale is typically based upon a financial transaction not reflective of the fee simple interest value and is always a transaction between related parties.

3.     Expenditures after sale. Misapplication of reimaging costs as “expenditures made immediately after purchase” results from failure to make a logical application of available data.

a.     It is appropriate to adjust a comparable sale price for expenditures that “have to be made” when such expenditures do not have to be made for the subject property

b.     It is not appropriate to adjust for expenditures made after the sale to “reimage” or customize the big box store for the buyer’s specific business purposes. An adjustment for a buyer’s expenditures after sale are erroneously included when the subject has the same or similar physical features and condition because both the comparable sale and the subject would typically be modified to satisfy the buyer’s business plan and image.

4.     Zoning and Deed Restrictions. Real property in Michigan is restricted in use by zoning. Other means of restricting a property’s use also exist. One is deed restrictions. A deed restriction, like a zoning restriction, may have a negative effect on a property’s value. However, like a zoning restriction, a deed restriction may not affect a property’s value. Where a deed restriction exists on a comparable sale property, it is appropriate to determine if the restriction caused a diminution in price when considering using the sale as a comparable sale to value a subject big box store property. However, typically when big box stores sell with a deed restriction, the restriction is negotiated as part of the sale so as to not affect the buyer’s intended use of the property and does not affect the sale price for the property.

5.     Highest and Best Use Issues. The highest and best use (“HBU”) of an existing owner-occupied big box store is likely going to be for retail use. In valuing big box store real property by the sales comparison approach, ideally each improved comparable sale would have the same or a similar HBU as the improved subject property. The Appraisal of Real Estate, p. 43 (14th ed. 2013). A big box store comparable sale not purchased for the subject’s same or similar HBU (retail) should be investigated to determine what evidence it provides about the value of the subject big box store property.

For example, if the improved comparable sale is physically comparable and suitable for retail use but the property sells for a use other than retail, the sold property’s HBU (as reflected by the sale) may not be even similar to subject’s HBU - retail. When that sale is used as a comparable sale without adjustment for this fact (but appropriate other adjustments), its use may result in overvaluation (but not an undervaluation) of the subject. If the comparable sale property suitable for retail use was offered for sale in the market and not bought for retail use, then the comparable property’s selling price for retail use (the subject property’s HBU) would have been equal to or less than its selling price for some other use - this is simply a logical application of available data.

B.    The Income Approach.

The most contested issue involving the valuation of the fee simple interest in big box stores by the income approach is typically the determination of market rent. To the extent the Tribunal has relied on the income approach to value these properties, it has considered only arms length transactions between unrelated parties resulting in agreed upon rent for an existing building not rent for a non-existent store to be built to a tenant’s specifications. The subject of this article is existing big box stores and not stores to be built. Rental terms from build-to-suit leases and sale/leaseback transactions would not reflect market rent (except by accident). Similarly, landlord provided tenant improvements or tenant improvement allowances so the tenant can reimage or reconstruct space for its business purposes must be adjusted from stated rent for a rent comparable so that the concluded market rent is for the subject property as is (without additional rent that may be realizable by the landlord for providing for more than the subject property, e.g. a landlord provided tenant improvement allowance).

C.    The Cost Approach.

1.             The Cost Approach to value big box store properties is generally agreed to by appraisers to be inapplicable due to the fact that it is not used by buyers and sellers and because of issues relating to the quantification of total depreciation. If used, then replacement cost is the basis from which all depreciation must be deducted. Quantifying this depreciation including, proper functional obsolescence and external (economic) obsolescence determinations, typically must be done through information obtained through comparable sales and/or income approach:

2.             Comparable Sales can be used to derive market extracted depreciation.

3.             Income deficiency or capitalization of rent loss (the difference between rent at market and the rent required to justify investment based on cost new) can also be used.

Big box store real property TCVs are adversely impacted by substantial obsolescence. The question has been asked why do the fee simple interests in big box store properties sell for so little as a % of cost new? There are multiple explanations for this market fact which are generally applicable regardless of the property’s age:

a.         All freestanding big box stores are custom built for the original owner’s business purposes and business model and the modified cost for a buyer’s business model/image is expensive.

b.         Upon sale, at a minimum, there is modification for reimaging (when the building is not demolished). (Sometimes the modification is for a use other than retail.)

c.         Fast growing e-commerce sales - In general, even big box retailers are not building new stores and when they are building, they are generally constructing smaller stores.

Significantly, the loss in value attributable to these obsolescence factors further explains why build-to-suit lease rental rates will typically be at rental rates above the market rental rate for an existing big box store property.

IV. Summary

In conclusion, the logical application of available data is required to answer the question: As of the valuation date, what is the usual selling price that would be paid for the fee simple interest in the subject existing big box store property?

The usual selling price is most appropriately determined from fee simple interest sales of similar existing properties and through market rent based on rents agreed to for other similar existing properties. The cost approach is generally not used. But when it is used, it would not likely provide a reliable result unless sales and/or income approaches to value are used to account for total depreciation.

districts in Ohio and Pennsylvania can come in and file their own tax appeal to raise the value of a given property." Landlords must diligently review property taxes yearly, looking at assessments based on current marketplace ' conditions, Shapiro says. "My clients are fighting assessments," he said, "because assessors were ignoring the function obsolescence of their properties, which in some cases meant a 50 percent reduction in value."

 

 

 

 

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Michael Shapiro is of counsel at the Michigan law firm Honigman Miller Schwartz and Cohn LLP. The firm is the Michigan member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Jul
08

Custom-Built Carrots: Attracting Growth Firms Calls for Smart Incentives

In the wake of the Great Recession, government initiatives to promote economic growth have varied widely across the nation. Some states targeted manufacturers, while others focused on technology companies and other high-impact, knowledge-based firms. A spirited debate has emerged on the role of economic incentives in these efforts.

Historically, Southern states have targeted manufacturers rather than knowledge-based companies as the engines of economic growth by offering tax incentives aimed at reducing costs. Manufacturers typically make substantial upfront capital investments and create large numbers of jobs. These companies quickly generate property tax revenue for the public coffers.

Knowledge-based technology companies and startups, however, seldom make hefty initial capital investments, nor do they create large numbers of jobs right away. Rather, these employers tend to offer fewer, but higher-paying, jobs that have a greater impact on the economy than an equivalent number of manufacturing positions. As a result, traditional tax breaks linked to job numbers and capital investment don’t appeal to knowledge-based companies, particularly startups that are not yet generating revenue.

The real target should be a category that is best characterized as "growth" companies. Regardless of sector, these companies include startups as well as more established companies that are increasing revenue at a high rate.

Most companies measure success by revenue and profit growth, not by numbers of employees, capital investment outlays or numbers of patents. One study notes that growth firms tend to be eight years old or less and most economists agree that startups will create the vast majority of future U.S. jobs.

Recent statistics suggest a one-size-fits-all approach to economic incentives may not be best. In May, the nation’s unemployment rate fell to a seven-year low of 5.4 percent; however, job growth during the past few years has been remarkably uneven. Fourteen states have rebounded strongly, with employment increasing 10 percent or more from Great Recession lows. Top performers include Texas and Utah, where unemployment has risen more than 15 percent, and California and Colorado, where employment is up more than 13 percent. Knowledge-based jobs are a critical component to employment growth in these states.

In contrast, total employment in 10 primarily industrial states has grown just 5 percent or less from Great Recession lows.

Cutting Costs, Growing Jobs

Nevertheless, manufacturing jobs have been an important component of the recovery. Some states that have enticed manufacturers by offering lower production costs have been among the leaders in the comeback. For example, employment increased about 11 percent in South Carolina, 10.5 percent in Georgia, and 9.9 percent in North Carolina. These states all created an attractive business environment in part by taking steps to cut costs, such as taxes on capital investment.

One of South Carolina’s main incentives has been a fee-in-lieu-of-taxes agreement (FILOT), which targets property taxes. A participating company negotiates the agreement with the county where the company is locating or expanding its facility.

Generally, a FILOT agreement enables companies investing at least $2.5 million in a new facility or an expansion over a five-year period to cut their property taxes by about 40 percent annually. A FILOT typically lasts for a set term of 20 to 30 years.

To calculate property taxes, South Carolina calculates uses according to the following formula: property value x assessment ratio x millage (or tax rate) = tax. A FILOT can reduce the assessment ratio of a manufacturing facility from 10.5 percent to 6 percent, and sometimes to as low as 4 percent.

FILOTs may also set the millage rate for the duration of the agreement or modify millage every five years. Any personal property subject to the FILOT depreciates. The approach to assessment is similarly variable. The FILOT agreement either sets the property’s value at cost for the agreement’s entire term or permits an appraisal every five years. That provision offers an opportunity to revisit the property’s value even during the life of the FILOT.

While clearly attractive to a manufacturer, a FILOT is less appealing to knowledge-based and technology firms, since these companies are unlikely to make substantial initial capital investments.

Structuring incentives for knowledge-based firms poses unique challenges. These employers invest significantly in non-tangible intellectual property and hire highly skilled, highly paid employees. Income tax credits can be attractive if those companies are making a profit, but those credits have little appeal for a startup that is losing money while the market determines whether the company’s product is attractive.

Economic development cannot focus on manufacturing to the exclusion of knowledge based jobs. In his book The New Geography of Jobs, Enrico Moretti notes that each new high-tech job creates five additional jobs out-side the high-tech sector. He argues that the “innovation” sector has a disproportionately larger multiplier effect than manufacturing. That means one of the best ways for a state to generate jobs for less-skilled workers is to attract technology companies that hire highly skilled employees.

Attracting knowledge-based companies requires creation of the critical mass of firms and workers needed to sustain a truly competitive, often self-sustaining, high-tech ecosystem. That ecosystem, in turn, re-quires a landscape that is culturally vibrant, economically robust and entrepreneurial. These qualities are essential to attracting, engaging and retaining the young talent that contributes so heavily to the knowledge-based economy.

Innovative Manufacturing

In the 21st century, innovation isn’t restricted to knowledge-based companies. Manufacturers must also innovate to expand revenues and profits and to respond to changing opportunities. The recovery from the Great Recession has shown that states must look beyond conventional incentives and tailor their strategies to the competitive needs of the companies that are investing capital and creating jobs.

Smart companies, economic development officials and policymakers should focus on growing revenues and profits, not incentives. Despite the differences between the manufacturing and knowledge-based sectors, their workforces are central to both. With that in mind, employers should strive to build the innovative, flexible and adaptable workforce that is a key to growth.

All too often, however, conventional incentives and development strategies fail to address these concerns. Physical infrastructure does not attract and retain employees; opportunity does. Smart economic development is about increasing income for both companies and workers and encouraging innovation. Smart incentives should do the same.

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

Jun
30

Retail Property Tax Valuation Debate Heats Up in Hoosier State

Indiana has become the latest battleground in the debate over how assessors should value retail real estate and other commercial properties for property tax purposes. The debate’s conclusion will likely affect owners of retail, office and even industrial properties in Indiana, and may affect taxpayers grappling with similar issues in other states.

At the heart of the debate is the question of what assessors should value under Indiana’s market value-in-use standard. Though that term can seem somewhat puzzling, the Indiana Supreme Court has stated that any valuation standard must be based on objective data while also protecting Indiana taxpayers who choose to use their properties at something less than full market potential.

How is market value in-use different from market value? In many if not most situations, they are identical. Where a property is being used for its highest and best use, the property’s market value-in-use will be the same as its market value.

Because a property can be used for something less than its highest and best use, however, its market value-in-use may be lower than its market value. This is the case in the example of agricultural land surrounded by commercial development.

A property cannot be used for something greater than its highest and best use, however; by definition, nothing is higher or better than the highest and best use. Accordingly, a property’s market value-in-use cannot exceed its market value.

Importantly, market value-in-use does not mean the value to the individual user. This distinction may seem like mere semantics, but how the state defines market value-in-use affects many commercial taxpayers. A series of Indiana cases show why.

Since at least 2010, when the Indiana Tax Court issued a pair of decisions addressing the meaning of market value-in-use, Indiana has recognized that market value-in-use as determined by objectively verifiable market data, is the value of a property for its use, not the value of its use to the particular user.

Indiana courts also recognize that in markets where both buyers and sellers frequently exchange and use properties for the same general purpose, a sale often indicates value. The Indiana Board of Tax Review has affirmed and applied these rulings in subsequent cases, including a pair of decisions issued in December 2014 involving big-box retail stores.

These decisions followed longstanding precedent from the Indiana’s Tax Court and kept Indiana in line with the overwhelming majority of other states that have considered the question. Had the board instead agreed with the assessors’ interpretation of market value-in-use as being the value of the use, it would potentially have created a number of anomalous outcomes, including similar properties being assessed differently based on the property owners’ characteristics and not on the properties’ characteristics.

Following the board’s decisions, local governments petitioned the Indiana legislature to change the valuation standard for commercial properties. After a heated debate, legislators left the market value-in-use standard unchanged but amended the property tax statute to modify the evidence available to prove a property’s value, based on the facts of the case.

It is too early to know the full ramifications of the new statute. Assessors’ repeated attacks on the market value-in-use standard, however, will produce one certain result, Taxpayers that own property in Indiana or are considering doing business there will face increasing uncertainty. For that reason, taxpayers must monitor their assessments to ensure fairness as the debate continues.

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

Jun
30

Weigh Anchor Inducements To Sink Property Tax Bills

Anchors weigh heavily in tax decisions

As the post-recession recovery for retail properties continues, local assessors are eager to increase shopping center tax assessments to their pre-recession highs or beyond. But regional and super-regional shopping centers are among the most complex types of real estate that assessors regularly value, and that complexity yields errors.

By failing to remove the value of an often-overlooked intangible asset, assessors are improperly attributing excess income to the real property, resulting in excessive tax assessments. This error stems from assessors incorrectly answering one of the most fundamental questions in property assessment: What property is being valued?

Too many assessors look at the income generated by a shopping center and conclude that the income is entirely attributable to the real estate. But the value of a shopping center's going concern is not equal to the market value of its real property. Unless the assessor makes an effort to extract the non-real-estate components, the value indications under the income and sales comparison approaches to value will capture not just the value of the real property, but also non-taxable personal and intangible property.

AGREEMENTS ARE INTANGIBLE

One major non-realty component of a shopping center's value is its operating agreements with anchor tenants.

Shopping centers depend on their anchor tenants for more than rent, Anchors typically make major advertising expenditures to draw customers to the property. As a result, customers ordinarily visit the mall with the initial purpose of shopping at the anchor retailer, and only then venturing out into the rest of the mall, which is typically the domain of more specialized retailers.

Shopping centers with better-quality anchors are able to draw more customers and charge higher rents to inline tenants. The presence of high-quality anchors also conveys stability, which attracts potential inline tenants. Conversely, when a mall loses one or more of its anchor tenants, inline tenants almost always follow the anchor, and the landlord must offer larger concessions to attract replacement tenants.

Beyond helping to attract and retain inline tenants, high-quality anchor tenants contribute indirectly to higher income generation for the shopping center. Because shopping centers often collect percentage rent, or rental income based in part on an inline tenant's retail sales, the long-term presence of an anchor that draws customers is vital to a mall's long-term financial success.

Shopping center developers typically ·offer significant inducements to attract and retain anchor tenants, and to convince those tenants to sign favorable long-term operating agreements. These inducements may take the form of cash, a preferred site, site improvements, or reduced expense recoveries, and may occur both upon the initial development of the shopping center and during redevelopment ·

Whatever the form and timing, shopping centers have to subsidize the anchor's costs. The shopping center gets a return on this investment over the lifetime of the tenancy in the form of higher in-line rents.

Because the higher rental income from in-line tenants is, in part, a byproduct of the anchor operating agreements rather than a reflection of the real estate value alone, it is inappropriate to attribute the entire income stream to the real property. But when assessors use the total income of the shopping center's business in their calculations, they implicitly value the total assets of the business, rather than the real property alone.

PROPER ASSESSMENT TECHNIQUE

To properly value just the shopping center’s real property, the income attributable to the favorable anchor operating agreements must be subtracted from the ' shopping center's total income prior to capitalization.

The calculation of the income attributable to anchor inducements is a two-step process. First, the appraiser must determine the value of the anchor inducements, accounting for both a return of the initial investment and a return on that investment that would be expected by developers in the market. There is no one-size-fits-all method of determining the amount needed to induce a particular anchor tenant. Every shopping center owner has its own method of determining how much it should pay in inducements to potential anchors given the location, size, age, design, and tenant distribution of the shopping center.

Whatever method is used to determine the value of the favorable contracts, it is important that appraisers select values that reflect inducements actually provided by market participants. For that reason, it is important that taxpayers contesting assessments select appraisers who have experience with shopping centers and who understand the dynamics of that industry.

ANCHOR INDUCEMENTS

Once the assessor calculates the total return of and on the inducements, the second step in this process is to determine the income attributable to those inducements. To do this, the appraiser must amortize the total return over the term of a typical anchor agreement – generally 10 to 15 years – at a yield rate high enough to account for the fact that intangibles are the highest-risk components of a business enterprise.

The appraiser will then subtract the resulting figure from the going concern's net operating income, along with return of and on personal property and other non-real-estate expenses, such as start-up costs. The result will be the net income from the real property alone, which is the correct base for the income approach for property tax purposes.

For most retail properties, the largest expense after debt service is the property tax bill. Any reduction in the tax burden can drastically impact a property's profitability, and a reduction in property taxes passed through to tenants can itself be a method of attracting and retaining better-quality tenants. So as the retail market continues its slow recovery, proper treatment of anchor agreements may be a way to keep from drowning in excessive property taxes.

paul Ben Blair jpg

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

Jun
26

Big-Box Retail Offers Property Tax Lessons for Industrial Owners

Taxing jurisdictions have struggled to properly value big-box retail buildings for many years, and the potential for improperly assessing the real estate value of these buildings remains high. Yet the ongoing dance between big-box owners and assessors provide useful insights for property owners in other commercial property types, particularly industrial.

A big box of confusion

Assessing the taxable value of a big-box retail property touches on many of the hot-button issues in property tax law. Some of the circumstances that often lead to incorrect tax assessments include development of big-box retail under build-to-suit arrangements, in which the tenant’s rent is a contractual repayment of the developer’s costs, rather than a market-rate rent. Big-box tenants are often creditworthy national companies under absolute net leases, valuable to a potential investor as a guaranteed income stream, but irrelevant to taxable value of the real estate.

The sale/leaseback transactions that big-box retailers often enter to free up capital for business operations, and the strong investor demand to buy buildings leased on a net basis to a single user that handles all property expenses, can all lead to incorrect tax assessments. Many assessors value the wrong interest, confused over whether to reflect investment value, leased-fee interest, fee simple interest, or value in use versus value in exchange.

The potential for improperly capturing non-taxable items in the property tax assessment is high. Often assessors and appraisers lack sufficient education about the nuances of valuing these types of properties. Depending on whether a tax assessor adopts the correct methodology, the difference in both value and tax liability can be significant. And for cash-strapped governmental entities, there is a strong inclination to try to capture as much taxable value as possible.

Implications beyond retail

Owners of non-retail property types shouldn’t dismiss these valuation issues as pertaining only to big-box retailers. Consider the potential for similar valuation errors with other single-tenant properties developed and exchanged in a similar way. A corporate headquarters building with “superadequacies” - or features only valuable to that particular tenant - is particularly vulnerable to overvaluation, for example.

In Ohio, the state tax appeal board recently dealt with that scenario, related to a large industrial building. The property was constructed to a national bank tenant’s unique specifications for its use as a data center, with gated entrances, impact-resistant windows, raised floors with subfloor cooling, battery backup rooms, and fire-suppression systems. The tenant had specific security needs based on its use, and had the building constructed to protect servers from weather events.

The two expert appraisers involved in the case concluded to drastically different overall values. One appraiser viewed the building as used for general office or warehouse space, and did not perform a cost -approach analysis because of the large degree of economic obsolescence related to a single-tenant industrial building used as an operations center.

The other appraiser posited that the building was unique, rather than tailored to the use of that particular tenant. That conclusion led the appraiser to use out-of-state sales for comparison in his analysis and to develop a cost approach. The resulting difference in the conclusions of value was $8.38 million, and the appeals board adopted the higher value.

According to the current appeal pending at the Ohio Supreme Court, more than half of the property was basic office and warehouse space; and the tenant only used a small portion of the remaining space for its specific purpose: a data center.

A recent Pennsylvania case involved a large, industrial, single-occupant, mixed-use property that consisted of an office building, a conference center, and a third building used for offices, research and development, and manufacturing, all constructed at different times. Again, the value conclusions and appraisal methodologies of the experts differed significantly.

Similar to the Ohio case, one appraiser viewed the property as a special-purpose facility with a limited market. Both appraisers developed cost and sales comparable approaches to value, but the appraiser who viewed the property as special-purpose put more weight into a cost-based conclusion, while the other put more weight on his sales-comparison approach.

Unlike the Ohio case, however, neither appraiser included the replacement costs of specific features that an entity replacing the facility would consider unnecessary, such as acoustic rooms, vibration floor slabs, special piping and chilling equipment.

As in assessments of big-box properties, this divergence in appraisal methodology and the definitions of the interest to be valued led to significant gulfs in the final tax assessments. Assessors are more likely to value properties deemed to be special-purpose with primary reliance on the cost approach, with its inherent difficulties in accurately measuring all forms of depreciation and obsolescence, both functional and economic.

Traditionally, appraisers applied this special-purpose classification to properties that did not readily transfer in the open market-houses of worship, sports arenas, schools. Additionally, primary reliance on the cost approach lacks the built-in market “check” that is present when using data from actual sales and rent transactions that have occurred in the marketplace. Even if not considered as special use, improvements only valuable to the current user can be improperly included in the assessment. Rather, the assessor should measure the value-in-exchange, and avoid cherry picking data for comparables.

Avoid complacency in industrial

The U.S. industrial real estate market is booming, with Los Angeles and the Inland Empire standing out as particularly hot markets, according to Diana Golob, managing director at Hanna Commercial Real Estate in Cleveland, Ohio, who represents both U.S. and European multinational firms. Speculative development has even started to reappear in multiple markets.

Do not let the good news of a thriving market create a blind spot when it comes to reviewing property tax assessments.

In the retail context, jurisdictions are still identifying the correct interest to be valued for real estate tax purposes, and the best appraisal methods to do so. Courts, legislatures, tax assessors and independent appraisers are all grappling with these nuanced issues.

It appears that owners of single-tenant, net-leased or owner-occupied industrial properties will be dealing with similar assessment issues. The applicable assessment law is in flux and sometimes is the polar opposite from one jurisdiction to the next.

It is vital to consult with professionals, familiar with both the legal and appraisal complexities of the jurisdiction, to determine whether a property tax assessment is fair. With a few changes, an expression from psychologist Abraham Maslow is appropriate here: Do not view every assessment challenge as a nail because you only have a hammer in your belt; make sure you have the right tool - for the right assessment approach - for the job.

Cecilia Hyun 2015

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

May
30

A Valuable Lesson

Look beyond value to ensure correct property tax assessment.

Many taxpayers pay close attention to property tax values, and rightfully so. Property owners can realize significant tax savings by successfully challenging excessive assessed values.

Yet taxpayers often overlook equally important assessment issues that can be costly if ignored. A prudent real estate investor always confirms that its real property is assessed correctly, meeting the local assessment authority's requirements and deadlines. That prudent investor also makes a point to understand the tax assessment consequences of any purchase, sale or improvement of real property.

Know Your Responsibilities

What can go wrong with an assessment, aside from the valuation? In one common scenario, a new property owner may miss the deadline to protest a property tax assessment because tax notices went to the previous owner. Having the property correctly assessed in the owner's name is usually necessary to receive copies of tax bills and valuation notices, so a buyer should confirm whether the first property tax bill and valuation notices after closing will be sent to the buyer or to the previous owner. A missed protest or payment deadline will not be excused because the new owner did not receive such notices, especially if the taxpayer failed to properly have the property assessed in its name.

In some jurisdictions, the buyer may need the seller's written authorization to file a value protest if the applicable valuation or lien date preceded closing of the sale. If that is the case, the buyer should obtain the necessary authorization, at closing if possible. The document should authorize the new owner to file the protest in the name of the seller if required.

As part of due diligence, the purchaser should understand how the property has been assessed in the past and what effect the purchase will have on its future assessment. Don't assume the assessment will be unaffected by the sale.

Here are several other property tax issues to consider when purchasing or developing real property:

  • Is the sales price likely to affect the tax value?
  • When does the tax authority send valuation notices, and when is the deadline to file a protest?
  • Will the purchaser's use of the property constitute a usage change that will trigger a higher assessment?
  • Is the property subject to exemptions or abatements? Will the new owner qualify for exemptions, and what are the required steps to secure them?
  • Is the property tax proration calculated correctly? If based on an estimate, will the taxes be re-prorated to reflect the final tax bill?
  • If part of a larger parcel, when will a new tax parcel be created? Who will pay the taxes until separate parcels are created?
  • Are all of the existing improvements properly assessed, and if not, what is the risk of an escape assessment, or a retroactive correction in assessed value that may require the payment of back taxes?
  • Does the state assess and tax construction work in progress?

A well-drafted contract can address some of these issues. For example, the contract may determine the party responsible for paying any rollback taxes based on the change in use, such as a change from agricultural use to retail.

If new construction occurs, the taxpayer should know of any legal requirements to have the improvements assessed. For instance, Alabama law requires the owner to assess any new improvements constructed during the preceding tax year. Failing to do so can add a 10 percent penalty to the tax value of the improvements. Further, the county assessor can go back up to five years and issue an escape assessment for the unassessed improvements, plus additional penalties and interest.

Personal Property

Real estate investors must also investigate the personal property assessment procedures in each state where they do business. Taxpayers should review personal property returns for accurate information, such as the acquisition date and cost. Regularly review the taxpayer's list of personal property to remove items sold or discarded before the valuation date. Timely file all exemptions, and review tax bills annually to confirm the benefit of any such exemption.

A prudent real estate investor must pay close attention to assessment requirements and procedures or risk unexpected taxes, penalties and interest, or missed opportunities to protest excessive property tax values. By consulting knowledgeable local professionals, an investor can ensure that its real and personal property are being correctly assessed and that the assessor has applied all exemptions or value adjustments.

  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..

May
29

What's The Basis For Your Assessment?

Assessors must value only the 'sticks and bricks,' not the business enterprise.

What can Indiana assessors value for property tax purposes? The answer is simple – the fee simple interest and nothing more. Yet assessors stray from that straightforward rule with alarming frequency.

In valuing land and improvements, assessors are not permitted to assign value to personal property; that is assessed separately. They also must refrain from assessing intangible assets – which are non-taxable – or the business operations conducted on or within a property. Profits may be subject to corporate income tax, but not property tax.

The fee simple interest is the absolute, unencumbered ownership of the real property, the sticks and bricks, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.

A fee simple interest means the owner retains the right to sell, lease or occupy the property. If the assessor values more than the fee simple interest, he or she has gone too far. Such assessments are not only erroneous as a matter of law, but also bad public policy because they result in double or otherwise illegal taxation.

Establishing Precedent

The Indiana Board of Tax Review, which oversees property tax appeals at the state level, has recognized that the market value and market value-in-use standards do not permit “assessors to assess things other than real property rights for ad valorem taxation.” In fact, the Indiana Tax Court has dismissed assessors’ efforts to value more than a property’s fee simple interest.

In 2013, the court rejected an assessor’s reliance on above-market contract rents to establish a commercial property’s value. The taxpayer based its rents on sale-leaseback transactions, which included an investment component, and thus sold more than ownership rights in property.

In an earlier ruling, the court agreed that “one should approach the rental data from [sale-leaseback] transactions with caution, taking care to ascertain whether the sales prices/contract rents reflect real property value alone, or whether they include the value of certain other economic interests.”

Indiana law requires assessors to determine a property’s true tax value, which for property other than agricultural land means the “market value-in-use of a property for its current use, as reflected by the utility received by the owner or by a similar user, from the property.”

Too often assessors misunderstand and misapply this standard by seeking to value the taxpayer’s specific, on-site business operations.

Profitability is Irrelevant

Even if the taxpayer’s business is successful, the building in which its business is regularly conducted must be valued no differently than a similar, vacant building. Consider this ex-ample:

In an industrial park, two 10-year-old buildings sit side-by-side, identical in size, shape, condition, construction materials and workmanship. The same external or economic factors impact both properties’ values.

On the assessment date, an extremely profitable business uses Building A at full capacity and around the clock. In contrast, Building B is vacant, though it had previously served the same general purpose as Building A. Despite the owner’s best efforts, no business is conducted on the property.

Objective, reliable market evidence undisputedly indicates that the true tax value of the fee simple interest of Building B is $1 million as of the date of value.

What is the indicated value of the fee simple interest of Building A? It’s (fee) simple: $1 million.

How can that be, especially when business is going gangbusters inside Building A? The answer is that we are not valuing that business activity. In an arm’s length transaction, assuming a fair sale occurs, a reasonable and prudent third party looking to acquire either building would pay no more than the value of the sticks and bricks – $1 million – regardless of the profitability or lack thereof of business operations conducted there.

Let’s further assume that the owner of Building A was instead the third-party buyer, faced with the same choice of two identical buildings, one vacant and the other occupied for profitable uses.

Even knowing with near certainty that its business operations would be remarkably lucrative, the buyer would not pay $1 more for either property than the market would bear. According to the market, both properties are valued at $1 million.

The buyer is not acquiring a trade name or workforce, or the seller’s trademarks, trade secrets, machinery and equipment, customer lists, licenses or contracts. It is acquiring land, a building, and yard improvements, and the value of those for both buildings is the same.

Nobody said determining the fair value of property is always easy. But in Indiana it should always be fee simple.

Brent Auberry

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

May
21

Texas Extends Lucrative Tax Incentive

Program is designed to help entice companies and developers to the state.

Economists anticipate unprecedented capital investment in Texas over the next few decades, and tax jurisdictions in Texas are no doubt eager to take advantage of this influx of capital. Increasing property tax rates and limited manufacturing and construction resources have hampered Texas' economic development efforts on the ever-competitive national stage, however.

So, in the spirit of the Texas Economic Development Corp.'s "Texas Wide Open for Business" marketing program, lawmakers have extended two of the state's most popular and lucrative tax incentives programs in order to entice companies and developers here. Those incentives are property tax abatements and a program to temporarily limit increases on the appraised value of capital investments at properties taxed by school districts. Many companies have already discovered that the best way to reduce the property tax burden during early project investment years is through local property tax incentives. But what do these programs offer, and who should  use them?

The recently renewed Chapter 312 of the Texas Property Tax Code, also known as the Property Redevelopment and Tax Abatement Act, allows the taxpayer and local taxing unit to create agreements exempting all or part of an appraised property value increase from taxation for up to 10 years.

This incentive promotes economic development in the state through major capital investment, job creation, job retention and the utilization of existing local vendors. Property owners often seek abatement incentives for projects ranging from retail shopping centers and distribution warehouses to natural gas processing plants and wind farms. Local taxing units that wish to provide property tax abatements must state their intent to provide the incentive, and then adopt abatement guidelines and criteria. Typically, abatement guidelines and criteria reflect the specific needs of the taxing unit. Therefore, abatement guidelines and criteria, such as minimum investment amounts and/or the number of jobs to be created, often vary from county to county. A company considering investment in Texas should research proposed sites in advance to confirm that the potential project meets local abatement guidelines and criteria.

The Texas Legislature reauthorized the use of property tax abatements until Sept. 1, 2019. In 2001, the 77th Texas Legislature  enacted House Bill 1200 Creating Texas Tax Code Chapter 313, the Texas Economic Development Act. Under Chapter 313, a qualified applicant may apply to a school district for a limitation on the appraised value of their new capital investment project for 10 years. The limitation on the appraised value applies specifically to the school district's maintenance-and-operations tax rate, while its interest and sinking tax rate; or bond rate, applies to the full taxable value of the property. This program allows Texas school districts to increase their ad valorem tax bases by attracting large-scale capital investments, and creates desirable, well-paying jobs in the process. Recently, the 83rd Legislature extended the Chapter 313 Act through 2022 and added various rule changes, including the extension of the value limitation from eight to 10 years, and the inclusion of contractor jobs as counting toward job creation requirements for a project.

The Texas Comptroller's Economic Development & Analysis Division, however, is now required to verify that an eligible project will generate sufficient tax revenues over a 25-year period to offset the school district's maintenance-and-operations tax revenues lost as a result of entering into the value limitation agreement. Additionally, the Comptroller must also find that the value limitation incentive is a determining factor in the applicant's decision to invest capital and construct the project in Texas. Reviewing any potential incentive project with an experienced tax professional; offers the best opportunity to create an effective property tax strategy.

Blas Ortiz jpgBlas Ortiz is a tax consultant with Texas law firm of Popp Hutcheson PLLC. 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. Mr. Ortiz can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

May
05

Property Tax Assessments Spiral Out Of Control In New York

Massive assessment hikes in New York City confirm that Mayor Bill de Blasio intends to extract as much revenue as possible from real estate, one of the city’s most important industries. This will kill the golden goose underlying the city’s economic recovery.

The city released its tentative assessment roll for the 2015-2016 tax year on Jan. 15, 2015, revealing painful and substantial increases in market value for both residential and commercial properties. The city pumped up the value of residential properties by almost 11 percent, while driving up commercial assessments by 12 percent over the prior tax year.

These increases are nearly double the rate of increase effected by last year’s final assessment roll, where residential market values increased by 6.6 percent and commercial market values increased by 7 percent over the 2013­-2014 roll.

The compound effect of year-after-year increases is a crushing burden to owners and tenants, but the higher end of the commercial property spectrum was particularly hard hit in the latest assessment roll. Owners of trophy office buildings saw their market values spike by more than 31 percent over the prior year’s values.

Even worse, owners saw the market value of luxury hotels soar almost 65 percent over the previous year’s values for assessment purposes. The city is rough-handling these properties with mounting harshness on both sides of the income and expense equation.

As a result of the new citywide assessments, real estate taxes in the city continue to substantially erode owners’ and developers’ bottom lines. Based on an analysis of the most re­cent assessment roll, the percentage of income now dedicated to paying real estate taxes is so high that the city has essentially become a silent partner in these properties — without the inher­ent risks of ownership, of course.

Consider the example of a non-exempt Manhattan residential property, with annual net operating income of $1 million before real estate taxes. Factoring in the current municipal residential tax rate and the prevailing capitalization rates used by the City Department of Finance, our hypothetical property yields a taxable assessed value of approximately $3.6 million and a property tax bill of about $463,000.

That burden means the property owner in this example is paying 46 percent of his or her net income in real estate taxes alone. Even analyzing the numbers based on a gross income of $1.4 million (based on the Department of Finance’s most recent expense guidelines), city property taxes account for more than one-third of the property’s overall expenses.

The situation is similarly oppressive for commercial properties, although they currently enjoy a lower property tax rate and higher capitalization rates than their residential counterparts — at least according to the most recent New York City Department of Finance Assessment Guidelines. Utilizing a similar analysis to the residential example above, the owner of a midtown Manhattan office building with a net operating income of $1 million would be paying just under 40 percent of its net operating income and almost 30 percent of its gross income in real estate taxes.

Based on the de Blasio administration’s ever-increasing crusade for revenue, owners and developers can expect this trend to continue. However, there are a number of avenues for them to pursue in order to ameliorate the effects of this rapid and seemingly endless rise.

While the release of the 2015-2016 assessment roll may have upset many taxpayers, it also marks an opportunity. That’s because the roll’s release begins the process under which owners and developers can initiate challenges to their property tax assessments. Based on the situation described above, it is likely that most of them will be doing exactly that.

Owners must challenge their assessments by filing applications and supporting documentation to the New York City Tax Commission. The owner’s representative must prepare a detailed analysis of conditions at the property, an analysis of leasing and vacancy, and a carefully prepared set of comparable properties to support the relief sought.

The Tax Commission is the administrative agency charged with annually hearing owners’ real estate tax challenges. The agency has the power to offer a reduction in the challenged assessment. Owners who are dissatisfied with the results of this Tax Commission review are entitled to challenge their assessments in New York State Supreme Court.

JoelMarcusJoel R. Marcus is a partner in the New York City law firm of Marcus & Pollack LLP, the New York City 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..

Apr
30

Fallacious Cap Rates Unfairly Increase Tax Burden

Commercial property owners must challenge burdensome and unfair property taxes, and more often than not that task requires challenging the assessor’s assumption of a market cap rate.

The process may begin as informal meetings with assessing authorities, followed by administrative appeals and ultimately, if needed, court proceedings. The parties to these dialogues all recognize that the preferred method to determine the value of commercial properties is the income approach, and will usually agree on the factual elements related to the value calculation.

The most critical element in the income approach is the cap rate, however, and that point is also the most likely source of disagreement.

Cap rates by nature are subject to opinion and manipulation, because cap rates reflect judgments of multiple factors. In defending their value opinion, assessors frequently cite a “market-derived cap rate.” While there is some validity to determining a cap rate from sales of similar properties in the same market, the method as widely used by assessors yields errant results.

Sometimes the assessor’s market-derived cap rate is supported by sales, but the assessor rarely provides an analysis of those sales, showing some performance history of the sold properties. The assessor simply matches market income against the sale price, magically determining a cap rate. The assessor then applies the rate thus determined to case after case, in a one-size-fits-all analysis. It’s all pretty impressive and takes on an air of finality, as if carried down from the mountain on stone tablets.

The fallacy is that a cap rate derived as described bears no relevance to the value of the commercial real estate under appeal.

The assessor, by law, is limited to valuing real property. But the sales used as the basis for the assessor’s market-derived cap rate are the sales of entire enterprises, and consequently indicate value for the entire enterprise. It fails to achieve the goal of finding a value indicator of the real property that houses the enterprise.

The cap rate derived from sales of going concerns is different from one derived from sales of the properties that the enterprises occupy.

Taxpayers must challenge the assessor’s market-derived cap rate to achieve equitable taxation. The flawed methodology is as inappropriate as using the sales comparison approach of going concerns to determine real property value.

The enterprise value cap rate is based on the return on the investment, in the form of property value appreciation and rental income, plus the return of the investment in the form of business revenue. In addition to tangible components, enterprise value entails tax-exempt intangibles such as advertising, a trained work force, market niches or dominance, furniture, fixtures, affiliation such as franchise rights, all of which must be separated from the real property component in a property tax assessment.

Real property value is just one component of enterprise value, so an assessor’s market-derived cap rate that fails to segregate non-real-estate components is useless in valuing the property.

Plan of attack

Prepare to challenge an assessment by analyzing the assessor’s data base used in the valuation. What sold, and at what sale price? Investors buy and sell commercial properties as going concerns, which may generate returns that are more or less than the return from the property alone.

Consider the design and function of the properties used in the assessor’s data base as compared to the subject property. For instance, an assessor in the Midwest recently valued a large corporate headquarters building using a market-derived cap rate. Its data base consisted of regional office building sales, including gross income at the time of sale, sales price, size and location. It used market rents to determine property income.

The assessors study used sales of fully occupied, multitenant buildings, then applied that information to a single-tenant structure which had been designed as a national corporate headquarters and was roughly 33 percent occupied. Typical of such studies, the data was inapplicable to the single-tenant, largely vacant subject building.

To say that the going concern cap rate for hotels is X, or that the rate for golf courses is Y, fails to shed light on the cap rate for the real property component of a property.

Market-derived cap rate studies invariably end up being used as indicators—at best—of the value of going concerns, of which one component may be real property. They may look impressive, even somewhat persuasive, but they must be carefully reviewed to determine just what they represent, otherwise the taxpayer may be saddled with a grossly excessive property tax assessment.

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

Apr
30

FIGHTING BACK - Big-Box Owners Contest User-Based Tax Assessments

The big-box concept changed the face of retail in the 1960s. It also skewed the way that assessors value retail property for tax purposes. To this day, taxpayers across the United States have been fighting back—and in Wisconsin, Kansas and Michigan, they are winning.

The problems arose out of financing arrangements such as prearranged sale-leasebacks or build-to-suit transactions to construct or develop a big box. Companies used these methods to keep cash available for core business purposes, and repaid the sale proceeds as rent.

These arrangements created financing rents that assessors mistakenly adopted as market rents. Further, once the above-market lease was in place, owners typically sold the lease and property to an investor at a sales price reflecting the value of the longterm, above-market lease in place to a high-credit tenant. The sales never reflected the fair market value of bricks and sticks alone, because the transaction transferred more than real estate.

Assessors then relied upon these sales without adjustment to calculate fee-simple value. Finally, assessors used the above-market rents and leased-fee sales to value owner-occupied retail stores, spreading the problem to all retail.

Guiding Principles

The concept of valuing property at its fair market value of the fee simple vanished in many locations as governmental assessors adopted this leased-fee concept, occasioning substantial valuation increases for property tax purposes. The user of the property and their contract rent trumped longstanding appraisal concepts of use and market rent. The trend eroded the requirement for a uniform and equal rate of assessment and taxation at fair market value. The same land and building could now have vastly different real property values, depending on the tenant.

For instance, a building leased to Walmart would have a higher value than if the same were leased to a local department store. How was it possible that the value of a building depended on the name of the tenant? Assessors could not distinguish between sales of properties with an income stream related to the property and sales of properties with an income stream related to the business value of the tenant.

Taxpayers successfully fought back in Wisconsin, Kansas and Michigan.

In 2008, the Wisconsin Supreme Court agreed with Walgreens that the assessor had not valued its properties in fee simple. The court focused on the issue of an above-market lease and the impact on valuation, and concluded that a “lease never increases the market value of the real property rights to the fee simple estate.”

The ruling directed assessors to use market rents, not the contract or financing rents. The court was not persuaded to move away from fee-simple valuation to a business valuation, as argued by the assessor. The assessor’s methodology could cause “extreme disparities and variations in assessments,” something the court was not willing to tolerate.

The Kansas Court of Appeals case followed in 2012, prosecuted by Best Buy, the single tenant in the building. The decision made three things clear for commercial property owners. First, Kansas is a fee-simple state. The court rejected the county appraiser’s argument for a leased-fee value. Second, build-to-suit rates are not market rents and cannot be used unless after review of the lease it can be adjusted to market rental information. Finally, market rents are those rents that a property could expect to pay in an open and competitive market. Market rent is not whatever financing arrangements a tenant can procure based on their costs and credit ratings.

Most recently, the Michigan Supreme Court addressed how these financing arrangements are impacting valuations of owner-occupied big-box retail. In 2014, the court ruled on cases brought by Lowe’s Home Improvement and Home Depot, both owner-occupants.

The court dismissed the township’s argument to consider the user of the property, rather than the use of the property. The county method would mistakenly arrive at a value in use, rather than a market value, the court found.

The court concurred with the taxpayers that the sales comparison approach to value was the most appropriate method to value owner-occupied properties, noting the approach must be developed using market sales of fee-simple interests. Leased fee sales may only be used if adjusted to reflect fee simple. The court was unimpressed by the township appraiser’s conclusion that no adjustments were necessary, with the court finding his report to be shockingly deceptive on this point.

Whether it was failing to understand basic appraisal theory or the desire to inflate values, assessors plugged bad information into market-based valuation models, and it has taken years to begin unwinding the damage and restoring basic appraisal concepts of fee simple, uniformity and equality. Taxpayers are taking the lead from Wisconsin, Kansas and Michigan, and have cases pending in many, if not all, jurisdictions.

TerrillPhoto90Linda Terrill is a partner in the Leawood, Kansas. law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Apr
01

LA's Seismic-Retrofitting Plan May Affect Property Taxes

Mayor Garcetti’s “Resilience by Design” plan may expose building owners to property tax assessments for new construction.

Los Angeles Mayor Eric Garcetti recently unveiled his plan to require owners of older buildings to seismically retrofit their properties.  The Mayoral Seismic Safety Task Force published retrofitting requirements on Dec. 8 as part of a report called “Resilience by Design.”

The question for taxpayers with regards to this report is whether building improvements mandated by the plan may trigger property reassessments that are required on new construction.  Before speculating on how the mayor’s plan will impact their properties, owners should take a close look at the relevant new and existing rules.  The question for taxpayers with regards to this report is whether building improvements mandated by the plan may trigger property reassessments that are required on new construction.  Before speculating on how the mayor’s plan will impact their properties, owners should take a close look at the relevant new and existing rules.

The Seismic-Retrofitting Plan

Mayor Garcetti’s plan targets two types of properties for earthquake upgrades: soft, first-story buildings and reinforced concrete buildings.  The first category consists of wood-frame buildings where the first floor has large openings.  These may include tuck-under parking, garage doors and retail display windows.

The second category includes concrete buildings built before the implementation of the 1976 building code.  Those structures are at higher risk of collapse because parts of the building, such as the columns and frame connectors, are too brittle and may break in strong shaking.  The weight of the concrete in these buildings makes them particularly deadly when they fail.

The Seismic Safety Task Force recommended the passage of ordinances that would require soft, first-story building owners to report if seismic retrofitting is required within one year of the ordinance’s approval, and to complete such retrofits within five years.  The proposed ordinance would also require owners of concrete buildings to report whether seismic retrofitting is required within five years, and to complete such retrofits within 25 years.  Concrete buildings would have to meet the Basic Safety Objective of the American Society of Civil Engineers (ASCE) Standard 41 or an equivalent standard.

Is Retrofitting Assessable as New Construction?

As a general rule, new construction is assessable for property tax purposes in California.  Consequently, the seismic retrofitting required under the plan would constitute assessable “new construction,” thereby raising property tax assessments on the retrofitted properties.  However, under a law approved by California voters in 2010, seismic-retrofitting is excluded from property tax assessment.

The 2010 law exempts from property tax assessment “seismic retrofitting improvements and improvements utilizing earthquake hazard mitigation technologies.”  In layman’s terms, this refers to reconstructing an existing building to remove falling hazards, such as parapets, cornices and building cladding that pose serious dangers.  It also means strengthening an existing building to resist an earthquake and reduce hazards to the life and safety of building occupants exiting the building during an earthquake.

The new law also exempts from taxation new construction performed on an existing building that the local government has identified to be hazardous to life in the event of an earth-quake.  Notably, the law excludes entirely new buildings or alterations to existing buildings that are made at the same time as the seismic-retrofitting, such as new plumbing or electrical systems.

Retrofitting Under LA’s Plan Will Likely Be Exempt

The Mayoral Seismic Safety Task Force did not take into consideration the possibility that seismic-retrofitting work performed under the task force’s proposed ordinances would be assessable as new construction, and therefore subject property owners to increased property tax assessments.  The Task Force could have done so by incorporating the seismic retrofitting construction standards specified in the law approved by voters in 2010.

Nevertheless, some fairly broad language in the property tax exemption statute will likely permit the property tax exemption for seismic retrofitting to be extended to construction work that building owners perform in compliance with Mayor Garcetti’s proposed plan.  It is also possible the city will amend the ordinances proposed by the Seismic Safety Task Force to incorporate the seismic safety standards referenced in the 2010 property tax exemption law.

Claiming the Seismic-Retrofitting Exemption

Although seismic-retrofitting work is generally exempted from property taxation, such exemption is not automatic.  The 2010 law requires owners of properties who have carried out seismic retrofitting to submit a claim form to their county assessor to receive the property tax exemption.

The owner must submit the form prior to or within 30 days of completion of the seismic-retrofitting work.  They must submit documents supporting the claim no later than six months after completing the seismic-retrofitting project.  The property owner, his contractor, architect, or civil or structural engineer may complete the claim form and provide the supporting documentation.

Once the taxpayer has submitted the claim form and supporting documents, the city’s building department must identify the portions of the project that were seismic-retrofitting components.  That will determine whether the property is exempt from a new assessment, or has undergone new construction unrelated to the seismic retrofit that will trigger a new assessment. 

Cris ONeall

Cris K. O'Neall is a partner with 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..

Mar
24

Georgia Taxpayers Risk Losing Arbitration Rights in Tax Appeals

IT'S DECISION TIME

"Georgia taxpayers risk losing arbitration rights in tax appeals."

Although the Georgia General Assembly enacted statutory provisions governing property tax arbitration procedures in 2009, counties file motions to dismiss tax-payer arbitration requests.  An appellate court has yet to weigh in on the issue, but a court decision would help to avoid the repetitious filings of dis-missal motions by counties, and put an end to taxpayers having to continually fight for the right to have their appeals heard in arbitration by a licensed professional appraiser.

- - - - -   It is time for an appellate court decision that could well put this matter to rest.   - - -

The arbitration statute provides that taxpayers may elect to have their real estate property tax appeal heard by a real property arbitrator — an appraiser as classified by the Georgia Real Estate Commission and the Georgia Real Estate Appraisers Board.  After hearing evidence, in the style of baseball arbitration, the arbitrator is required to select either the board of tax assessors’ value or the taxpayer’s value as set forth in the certified appraisal.  The law makes the arbitrator’s decision binding and precludes further appeal.

County tax assessors have filed motions to dismiss and briefs in support in more than one county across Georgia contending that the arbitration provisions violate the Georgia Constitution.  The assessors seek to have the tax appeal arbitration statutory provisions declared unconstitutional and the arbitration appeals dismissed.

Here are the assessors’ main contentions, and the taxpayers’ arguments against those same points.

Judicial authority: Assessors con-tend the arbitration statute violates provisions of the Georgia Constitution that require that the judicial power of the state shall be vested exclusively in the courts.  The assessors’ position is that the arbitration statute creates a separate judicial forum that is required to declare what the law is and apply the law to the case.  They contend that in order to determine the fair market value of a property the arbitrator is required to declare and apply Georgia law.

Taxpayers respond that the Georgia Constitution is not violated because the arbitrator is not a court or a judge.  The arbitrator’s actions are authorized because the General Assembly can create administrative agencies which are permitted to perform quasi-judicial functions.

Separation of powers: Assessors argue that the statute violates provisions of the Georgia Constitution that provide for separation of powers.  The assessors contend that by enacting the arbitration statute, the legislative branch has encroached upon the powers of the judicial branch.

Taxpayers respond that the specified provisions do not apply to local governments, and that there is no prohibition against administrative officers exercising quasi-judicial powers.

Uniform valuation: The assessors further contend that the arbitration statute violates the constitutional requirement that property must be valued uniformly with other property of the same class, because the statute requires that the arbitrator must select either the value set forth by the county tax assessors or the value set forth by the taxpayer.  Similarly, the assessors contend that the arbitration statute violates the equal protection clause of the Georgia Constitution because owners of like properties are not provided equal protection of the law.

Taxpayers respond that just because an arbitrator may possibly not agree with the value set by the county board of tax assessors does not mean that the uniformity provisions of the Georgia Constitution are violated.

The Taxpayer Position

The taxpayers contend that the Georgia Superior Courts have no jurisdiction over the matter because the arbitration provisions only require that the Chief Judge be involved for the purpose of selecting an arbitrator if the parties cannot agree, and issuing an order requiring the arbitration to proceed.  The taxpayers also contend that the tax assessors have no power to sue and cannot obtain a declaration by the court that the statute is unconstitutional.  The taxpayers point out that the assessors have no constitutional rights that have been violated.

At the time of this writing it is unknown which party will prevail, but interesting questions have been raised.  Tax arbitration provisions in various forms have existed on and off in Georgia for more than a century, and if the arbitration provisions are declared unconstitutional, taxpayers will be deprived of a statutory format designed to afford relief from unjust valuations through the mechanism of a decision made by a knowledgeable professional, based on information supplied by the county tax assessors and a certified appraisal obtained by the taxpayer.

It is time for an appellate court decision that could well put the matter to rest, and save taxpayers the need to expend time and effort fighting for their statutorily established right to property tax arbitration.

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..

Mar
06

Tax Equation: Know When Your Property Tax Assessment Is Excessive

Restaurant owners and operators manage a long list of expenses, but one cost item that may offer significant savings– real estate taxes – often goes overlooked.  Even if the restaurant leases its space, it may have the right under the lease to protest tax assessments.

Restaurateurs often look at property tax as a fixed expense, one that warrants little attention unless there is a drastic change from one year to the next.  But failure to examine a property tax assessment may mean the taxpayer is leaving money on the table.

For example, the owner of a free-standing restaurant assessed at $1 million files a protest and convinces tax authorities to lower the assessment to $800,000.  Using a local tax rate of 2.5%, the lower assessed value would equal $5,000 per year in savings.  In some areas the tax rate may be significantly higher, meaning greater savings.  Depending on the jurisdiction, that savings could continue for years.

HOW TO REVIEW ASSESSMENTS
What is an assessor attempting to measure in an assessment, and what constitutes a bad assessment?  Procedures vary from state to state, but in most places property taxes are based on the fair market value of the property as determined by the local assessor.  The market value is typically considered to be the price that the property would sell for in an open-market, arm's length sale as of the assessment date.

There are a number of reasons why some assessments miss the mark in attempting to establish a fair taxable value.  Many initial assessments are done by mass appraisal firms on a city- or county-wide scale, without much consideration for the individual situation of a particular property.  Assessors also may have inaccurate data on a given restaurant building, such as incorrect square footage or age, or amenities that do not actually exist.

An assessment may be unfairly high because it is based on a sale that occurred in a better market, or because it reflects costs to construct the building but lacks appropriate deductions for depreciation.  An assessment may also reflect a lease with an above-market rental rate negotiated in different market conditions, or negotiated many years prior to the assessment date.

Given so many opportunities for error, it's a good idea to review each assessment.  The first thing to check is the factual data the assessor used in the determination of value, including building area, acreage, year built, type of building and finish and amenities.  Experienced legal counsel can help with these points and proceed with a more technical review of the assessment to determine whether or not to protest the assessed value.

HOW TO PROTEST
Appeal deadlines vary from state to state.  Some states have an annual filing deadline, such as Ohio, where the deadline is March 31.  Other states allow a certain amount of time – for example, 30 days –from the mailing of the assessment notice or tax bill.

Some jurisdictions have informal procedures prior to filing the formal appeal, where it is possible to meet with the assessor and share information.  In some cases, providing the assessor or reviewing body with income and expense information or comparable sales data will be enough to get the assessment corrected.  Other cases will require a formal appraisal prepared by an independent appraiser.  Appraisals done for tax purposes are unique and in most instances will require testimony from the appraiser.

In many jurisdictions, there is no filing fee for the initial appeal, while others may charge a modest filing fee in the neighborhood of $100.  If the state requires a formal appraisal, that can cost $2,500 or more, de-pending on the property type and complexities of the case.  Legal fees also vary, but property tax attorneys often work on a contingency basis where there is no charge for the initial review of the assessment.

Because valuation methods and appeal procedures differ greatly, not just from state to state but even within states, it is helpful to have an experienced tax professional assist in reviewing the assessment and in taking any necessary steps to correct it.  Knowledge of the local law, appeal procedures, personalities, and appraisers are invaluable in successfully lowering tax liability.

Real estate taxes needn't be a fixed expense that is entirely out of the taxpayer's control.  Review property tax assessments carefully for possible tax savings that could even increase the bottom line.

Cecilia Hyun 2015

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

Jan
16

Reducing Hotel Property Taxes By Properly Valuing Intangible Assets

Most, but not all, taxing authorities acknowledge that hotels include intangible and tangible assets. Reducing property tax costs by removing intangible value has long been controversial due to the challenging task of valuing intangible assets. Intangibles include items such as the assembled workforce, service contracts, reservations systems, web presence and hotel management and franchise agreements.

Most, but not all, taxing authorities acknowledge that hotels include intangible and tangible assets. Reducing property tax costs by removing intangible value has long been controversial due to the challenging task of valuing intangible assets. Intangibles include items such as the assembled workforce, service contracts, reservations systems, web presence and hotel management and franchise agreements.

Fortunately for hotel owners, a recent decision by the California Court of Appeals makes clear that measuring a hotel’s intangible value solely by deducting franchise fees and management fees understates a hotel’s intangible value. Assessors must exclude all intangible value to tax the hotel’s real property properly. Proper exclusion of intangible value will necessarily result in lower taxes.

The debate
It is axiomatic that investors buy operating hotels based on the income generated by the hotel’s business. The income is generated by the combination of the property’s real estate, tangible personal property, and intangible personal property. All of these components are essential and the absence of any of these elements severely compromises a hotel’s ability to generate revenue.

Ad valorem taxing authorities are not investors or lenders. They are charged with valuing only the real estate component of a hotel for tax purposes. Isolating a hotel’s taxable value requires that the assessor remove from the hotel’s overall value both the value of tangible personal property and the value of the intangible personal property used in conjunction with the operating business.

Valuing the hotel’s tangible personal property, such as beds, furniture and the like, is relatively easy. Valuing intangible assets poses a far greater challenge. How should the assessor separate the value of intangible assets from the hotel’s overall value? The answer to that question has been the subject of heated debate.

Evolving methodology
The Appraisal Institute’s current curriculum recognizes the presence of intangible value in hotels but avoids the issue of how to calculate this value. This omission implicitly acknowledges that the value of an operating hotel lies at the intersection of real property appraisal and business valuation, and both skill sets are required to value a hotel property appropriately.

Stephen Rushmore developed the initial approach to the problem over 30 years ago. To account for a hotel property’s intangible value, the Rushmore Approach simply subtracts management fees and franchise fees from the hotel’s revenue and capitalizes the remaining revenue to determine real estate value.

The debate about valuing intangible property in a hotel has been long, loud and heated. While revolutionary at the time, the Rushmore Approach has been criticized for years. Rushmore’s defenders have responded to the criticism on several fronts.

Critics argue the Rushmore Approach offers the attraction of simplicity at the expense of understating the contribution made by intangible personal property to the hotel’s revenue. Critics further argue that the Rushmore Approach’s assumption that the deduction of management and franchise fees effectively accounts for a hotel’s entire intangible value is contrary to the experience of market participants in owning and operating a hotel. Rushmore’s detractors often advocate an alternative method known as the business enterprise approach, which casts a wider net to account for intangibles.

Rushmore’s supporters note the absence of hard data to quantify sales of a hotel’s individual components. The absence of this data, however, is unsurprising, considering investors buy and sell hotels based on income generated rather than on the value of individual components.

Rushmore’s advocates also suggest that alternative approaches overstate intangible value, thereby reducing the mortgage-asset-secured value lenders rely upon for hotel financing.

Courts weigh in
The Rushmore Approach certainly accounts for some intangible value, but, does it reveal the full intangible value associated with a hotel such as licenses to use software and websites?

Until recently, Glen Pointe Associates vs. Township of Teaneck, a 1989 New Jersey opinion, was the seminal hotel property tax decision that adopted the Rushmore Approach to extract the real estate value of an operating hotel. A May 2014 California Court of Appeals opinion, however, suggests the tide may be turning against the Rushmore Approach and in favor of the business enterprise approach.

In SHC Half Moon Bay vs. County of San Mateo, the California Court of Appeals held that “the deduction of the management and franchise fee from the hotel’s projected revenue stream pursuant to the income approach did not - as required by California Law - identify and exclude intangible assets” such as an assembled workforce and other intangibles.

In overturning the taxing authority’s methodology as a matter of law, the appellate court held that the taxing authority had failed to explain how the deduction of the management and franchise fee, i.e. the Rushmore Approach, captures the value of all of the hotel’s intangible property. Considering that consumers increasingly make hotel reservations online instead of using a flag’s reservation system, it is increasingly difficult to argue that the Rushmore Approach sufficiently captures the value of the hotel’s website or its relationship to on-line providers outside of the flags.

The arrival of Airbnb in the market also provides food for thought. Airbnb is a controversial web platform where an apartment owner advertises an apartment online for overnight paying guests. The platform boasts over 800,000 listings in 33,000 cities in 192 countries. Many local governments argue Airbnb allows apartment owners to avoid hospitality taxes or other hotel regulations.

Airbnb’s success demonstrates the difficulty of isolating a hotel’s real estate value by only excluding management and franchise fees. Airbnb doesn’t charge management or franchise fees, yet the service allows owners to increase the income potential of their apartments far beyond market rent.

The debate between advocates and critics of the Rushmore Approach rages on. The challenge for valuing hotel real estate remains. The beauty of the Rushmore Approach is its simplicity, but in the days of the Internet and Airbnb, simplicity may not equate to accuracy. In the wake of the decision from California, the tide may be running out on the Rushmore Approach.

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

Jan
12

Michigan Provides Property Tax Lessons for Big Box Retail

"Probably the most important concept affirmed in these Michigan decisions is that assessors must value big box properties based on their value-in-exchange and not their value-in-use."

Owners of big box retail buildings can take lessons from Michigan on the proper way to value these large, free-standing stores for property tax purposes. The state’s well-developed tax law offers a clear model that is applicable in any state that bases its property tax valuation assessments on the fee simple, value-in-exchange standard.

Many states, including Michigan, base real estate taxation on the market value of a property’s fee simple interest using value-in-exchange principles. In other words, a property’s taxable value is its market value, and market value is commonly considered the property’s probable selling price in a cash-equivalent, arms-length transaction involving willing, knowledgeable parties, neither of whom is under duress.

In recent years, the Michigan Tax Tribunal has decided with remarkable consistency a dozen cases involving big box stores. In 2014, the Michigan Court of Appeals affirmed two of these Tax Tribunal decisions, recognizing that the Tribunal’s key rulings in this area rested on established law.

Probably the most important concept affirmed in these Michigan decisions is that assessors must value big box properties based on their value-in-exchange and not their value-in-use. Assessors and appraisers hired by local Michigan governments repeatedly — and improperly — reached value conclusions based on value-in-use rather than value-in-exchange principles.

The violation of this fundamental point was not obvious from a cursory review of the valuation evidence. For example, the assessor’s evidence included both big box property sales with nigh per-square-foot prices and big box properties with high rental rates. Consequently, for the Michigan Tribunal to decide these cases correctly, taxpayers needed to present evidence, including from expert witnesses, which convincingly established the following:

  1. Each big box retailer either builds or remodels its stores to be consistent with the retailer’s marketing, branding and merchandising operations (built-to-suit);
  2. When a big box property sells, the buyer will spend substantial dollars reimaging the property so that it conforms to the new owner’s appearance, layout and other specifications;
  3. Given that big box properties can be costly to build because of their built-to-suit nature, and that the subsequent purchasers will make substantial modifications at significant cost, these properties sell for far less than their construction cost; and
  4. Actual sales confirmed that these properties sell for far less than construction cost.

With evidence establishing each of these points, the Michigan Tribunal has repeatedly recognized that taxable value for a big box property must reflect its value-in-exchange.

For example, the Tribunal could grasp that a sale would not reflect market value if the property had a rental rate designed to compensate the developer for construction to the retailer’s specifications, rather than a rent negotiated between a landlord and tenant for an existing building.

Similarly, with such evidence the Michigan Tribunal could discern that a sale would not reflect market value if the original owner/user of the property sold and leased back the space. A sale-leaseback is typically a financing transaction between two parties with multiple relationships (landlord/buyer and seller/tenant) that are different from an arms-length transaction. That means the rent in a sale-leaseback does not reflect the property’s market rent, which would be used in an income approach to determine value. Similarly, the sale price in such a transaction is not evidence of market value.

Likewise, the Michigan Tribunal recognized that if the assessor used leases with above-market rents to value these properties, it would impermissibly be valuing something other than the property’s fee-simple interest. This is important because it applies anytime a property with above-market rent is used as either a comparable sale or a rent comparable.

Finally, the Michigan Tribunal rejected the claim that each property’s highest and best use as improved was the continued use by the specific retailer that occupied the property. Generally, highest and best use is that which is legally permissible, financially feasible, maximally productive, and physically possible.

To define that use as the continued use by the retailer occupying the property would improperly make the value depend on the identity of the property’s owner. Additionally, it would lead to a value conclusion that reflected the value of the property to that owner, or its value in-use. Thus, the Michigan Tribunal concluded that the highest and best use was simply retail use.

Michigan’s many recent big box property tax decisions spotlight issues applicable to many types of properties, wherever the law requires assessors to value properties based on the market value of a property’s fee simple interest. Perhaps the most important takeaway is that in such cases, taxpayers need to provide evidence from appraisers and other experts to carefully document a property’s market value, and where that value is significantly less than construction cost, explain why this is true.

MandellPhoto90

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

Jan
09

Finding Relief - Property Tax Appeals for Industrial Assets Yield Rewards

While it is common knowledge that tax relief is available for newly constructed industrial facilities that bring jobs and infrastructure to a region, business owners often overlook the opportunity to reduce property taxes on their existing facilities. That’s a pity, because successful property tax contests are a source of found money that goes straight to the company’s bottom line.

Those savings can be significant. In Pennsylvania, a 2.5 million-square-foot manufacturing plant that had not challenged its assessments in more than a decade was overvalued by $30 million. An appeal ultimately yielded $500,000 in annual tax relief.

Public perception vs. reality. Tax appeals for industrial properties present unique challenges. In rural areas, the property owner is often the region’s largest employer and the largest taxpayer in the jurisdiction, so that reducing the assessment also reduces funds available to local schools. Development costs are both widely publicized and somewhat misleading, because investment in equipment, site preparation, training arid other items frequently exceeds the real estate’s fair market value. News stories about that $100 million plant can come back to haunt the owner who tries to argue for a more realistic assessment.

Moreover, for properties developed with the help of government incentives or tax abatements, an owner seeking a tax reduction may run into community resentment when local media report on the contest.

Expect a fight. Taxing jurisdictions will fight hard against a tax contest. Authorities typically delay the litigation, often from a sense of outrage rather than anything else. When an appeal seeking hundreds of thousands of dollars of tax relief stretches into multiple years, winning a favorable ruling becomes progressively more difficult for the property owner. At trial, the case is typically decided by a local judge, who is mindful that a reduction would have a negative effect on local districts. The property owner must strike a delicate balance, continuously pushing the litigation forward while staying sensitive to its larger impact.

“Face-to-face meetings, both internal and external, are essential when managing property taxes for a large industrial property owner”, said Christine Rohde, manager of property tax and incentives at Alcoa Inc., where she oversees tax protests. When possible, I make every effort to inspect our sites and meet with plant management to explain the process and answer questions. Meeting personally with out-of-state assessors helps build relationships and allows both parties to work through the valuation issues to arrive at assessments that are fair to all concerned.

The property owner’s tax counsel must also push the litigation. Courts seldom specify a timetable for bringing the case to trial and jurisdictions will try to delay the process by asking for continuances. Tax counsel must produce an appraisal promptly, call the jurisdiction’s counsel regularly, invite representatives of the jurisdictions to inspect the facility and ask the judge to schedule conferences or pre-trial meetings. As Rohde noted, tax counsel should meet face to face with the jurisdiction’s representatives whenever possible and be prepared to travel to the property repeatedly.

Valuation challenges. Differences among industrial properties - heavy manufacturing, light manufacturing, office/flex, warehouse and distribution centers - greatly affect valuation, so hire professionals with demonstrated expertise in appraising the specific category of the industrial property in question.

Owner-occupied properties, which have no rental income to capitalize, present another challenging situation. Or the property may have a mix of uses, as with a corporate headquarters campus that has offices, research and development space and training facilities.

Finding comparable properties for the appraisal can be an issue as well. A special-purpose property, such as an ethanol plant, cannot be easily used by another user. Even generic manufacturing space is subject to external obsolescence or incurable factors that affect valuation and are beyond the physical boundaries of the property. External obsolescence might reflect a scarcity of a natural resource used in the manufacturing process, or extended travel time to the closet interstate highways, either of which can severely impair value.

If the property is the only one of its kind in the state, the appraiser may seek comparable sales out of state. The assets being used as the basis of comparison are often attracted by economic incentives to places where they would not otherwise go perhaps far from suppliers or interstate highways. These locational issues detract from fair market value and the associated comps can reduce the assessment and property taxes for the contested property.

The checklist. Evaluate industrial property for potential tax appeals annually, and know the jurisdiction’s idiosyncrasies. Can the property owner meet informally with the assessor? Does the taxing authority have a reputation for being litigious?

Keep the property owner’s public relations department involved, and be mindful of how an appeal is presented and perceived. Get an appraisal from the most experienced professional in the property type and one who presents well on the stand. And finally, push the appeal through to conclusion.

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

 

Dec
16

Recent Cases Affirm Tax-Exempt Status of Intangible Value

Whether a business is a seniors housing facility, a racetrack or other service-oriented operation - or even a manufacturing plant - part of the business’ value may be intangible and exempt from property tax. Recent court cases underscore this critical premise and provide valuable reference points for taxpayers struggling against unfair tax practices.

Local governments in all states have authority to impose property tax on the value of real estate. Local governments in all but seven states also impose property tax on the value of at least some tangible personal property, or property that can be moved, such as equipment.

But in most states, local authorities are prohibited from taxing any additional value of a business as a going concern, meaning value attributable to a brand, reputation for product quality, intensive management, licenses, contractual rights, proprietary technology, and other intangible assets.

For example, if a manufacturing plant receives additional revenue because it packages items with a well-known brand’s label instead of a generic one, that brand is an intangible asset. In numerous cases it has been seen that the value of intangible assets equal or exceed the value of the taxable property. Whatever the business, removing intangible assets from the property tax bill is key.

California tests intangibles

Some states provide clearer guidance than others on identifying and quantifying intangible assets. California, in particular, has been a hotbed of controversy over the treatment of intangibles in valuation for tax purposes lately.

Stephen Davis, a partner in the Los Angeles law firm of Cahill, Davis & O’Neall, summed up the latest developments during a presentation at the Seattle Chapter of the Appraisal Institute Fall Real Estate Conference in October by saying that major cases in the last two years capped two decades of controversy. He should know, since his firm was counsel of record in the SHC Half Moon Bay vs. County of San Mateo case, decided in May 2014. Davis commented that the result of this new case law has been “a few new controversies instead of a clean resolution,” but much was resolved favourably for taxpayers and provided helpful lessons that should apply anywhere in the nation.

The main takeaway from California’s recent cases is the importance of an appraisal of each intangible asset in order to deduct that value from the overall business value.

In SHC Half Moon Bay vs. County of San Mateo, the four-star Ritz Carlton Half Moon Bay Hotel proved that the assessor inappropriately included in the hotel’s taxable value approximately $2.8 million of exempt value attributable to its workforce and to contractual rights involving a parking lot and golf course. Granting a significant victory to taxpayers, the appeals court made clear that merely subtracting franchise fees from the value indicated by the income approach to value did not account for the value of the hotel’s franchise rights and other goodwill.

What does that mean for taxpayers? Under this case, an appraisal that provides evidence of the value of each intangible asset should result in removing those intangible values from property tax assessments. The reasoning espoused in this decision from California should apply in any state where intangible property is exempt from property tax.

For example, just last year the Montana Supreme Court declared invalid a Montana Department of Revenue regulation that attempted to narrow that state’s broad exemption for intangibles, such as by requiring valuation of goodwill only by the accounting method.

A growing volume of cases argues for valuing the intangible assets of a wide range of businesses by using generally accepted appraisal practices, bolstering the position of taxpayers defending themselves against unfair taxation of those assets.

Source URL: http://nreionline.com/tax-strategies/recent-cases-affirm-tax-exempt-status-intangible-valueRecent

MDeLappe Bruns Norman J. Bruns and Michelle DeLappe are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local tax. Bruns is the Idaho and Washington representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
Dec
02

Beware the Income Approach to Property Tax Assessments

A hotel business relies on much more than the combination of daily room rentals to generate income. Understanding this fact is critical to achieving a fair and accurate property tax assessment, because only the tangible portion of the hotel operation is taxable.

A fundamental issue in virtually every hotel property tax case is the question of how to allocate value among the taxable tangible assets and non-taxable intangible assets. Tangible assets include the land, building, furniture, fixtures and equipment. The intangible assets generally include the hotel brand or franchise, the management team, the assembled work force, contracts with vendors and customers, and any goodwill stemming from the hotel’s operations. The appraisal community has debated how to allocate among these assets for the last 30 years, yet significant divisions remain.

When valuing a hotel for property tax purposes, most assessors will attempt to utilize the income approach: They simply deduct the expenses from the hotel’s revenue and divide the resulting net operating income by a capitalization rate, just as they would if appraising an office building or an apartment complex. The resulting value is meant to mirror what the property would sell for under prevailing market conditions.

The problem with this analysis, of course, is that it fails to recognize the significant portion of hotel income that flows from non-taxable intangible assets. These non­taxable assets are present in nearly every hotel transaction, but should not be incorporated into a property tax assessment.

To understand this misapplication of the income approach, it is helpful to view the relationship between a business’ income and the real estate the business happens to occupy. On one end of the spectrum are office buildings and apartment complexes. These commercial enterprises derive almost 100 percent of revenue from the direct rental of real estate.

On the other end of the range are service oriented businesses like law firms. A law firm’s revenue derives purely from services rendered, and bears almost no relationship to the rent paid to occupy office space. As a result, an appraiser would never determine the value of a law firm’s office space by capitalizing the firm’s net operating income. Yet this is exactly how many assessors value hotels.

This is not to suggest that hotels are pure service businesses like a law firm. Hotels are hybrid businesses that fall somewhere in the middle of the range between these two extremes. While a hotel’s revenue is not limited to rent, there are certainly portions of the income which are directly attributable to the hotel’s real estate and taxable personal property. The key is to differentiate, if possible, how the income is derived from the different classes of assets.

Parsing out the income streams attributable to the taxable and non-taxable assets is an absolute requirement when an assessor applies the income approach to a hotel’s property tax assessment. Tax assessors routinely ignore this task, however. If they recognize the concept of intangibles at all, many simply deduct a standard percentage – say 20 percent – to reflect the hotel’s non-taxable assets.

The taxpayer must demand more. If the assessor is using the same methodology to value your hotel as he or she uses to value an office building, there is a problem. Engage an expert who understands the allocation of intangible assets, and ensure that your hotel’s property tax value is limited to the value of your taxable assets.

Mark_Hutcheson90Mark Hutcheson is a partner with the Austin, Texas law firm of Popp Hutcheson PLLC. 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. Mr. Hutcheson can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Nov
19

Property Taxes Are Not A Fixed Expense

If you have taken an accounting class, your professor likely explained that property taxes are one of the fixed expenses on real estate financial statements. While your professor was technically correct that property taxes are considered a fixed expense in accounting, many property owners, asset managers and investors are finding out that "fixed" certainly doesn't mean always consistent or predictable.

In a recent third quarter earnings call of a large, publicly traded hotel REIT, the discussion contained all the typical metrics on financial performance and forward-looking guidance. The call was overall very positive; however, one particular comment from the chief financial officer raised a critical issue. The REIT had significantly missed its pro forma expenses on property taxes, which had negatively impacted actual earnings. The REIT's miscue on projecting property taxes and the sizable impact on its financial results indicated that planning for this expense item can be particularly difficult, especially during an upswing in the current real estate cycle.

Hotel performance has bounced back from a cyclical low in late 2008, and many U.S. markets are approaching the peak performance levels last reached in 2006. Additionally, investment capital in-flows into the hotel sector are at record highs for public and private REITs, private equity funds and other investors. All these factors have led to record investment volume and investors chasing after a limited number of deals (especially in top-tier markets) and subsequently are driving up hotel asset pricing.

While all this is good news for existing hotel owners and investors, it often creates a budgeting challenge for changes in property taxes. With strong market fundamentals, improving performance metrics and sales volume on the rise, assessors have been quick to increase tax valuations on hotels. Many assessors are recouping much of the value lost during the downturn and have typically been more aggressive than in past cycles.

For example, in late 2013, a mid-sized hotel investor had just acquired its first Texas hotel. The investor had done its own due diligence and projected property taxes to increase by 3 percent ever year of ownership — sound familiar? In early 2014, after closing on the acquisition, the investor reached out for help when the hotel's tax valuation notice had increased 100 percent, almost whiping out projected cash flow. Had the investor called for help prior to closing he could have been warned about the possibility of an increase and properly budgeted for the future tax years.

So, what can owners and investors do to help identify pitfalls in underwriting for property taxes? Here are a few budgeting points that will help to avoid surprises:

Understand the assessment laws and practices in the jurisdiction. All states and many assessors within the same state operate differently, so get the facts straight on local practices. For example, some assessors reappraise at the time of transaction and others only revalue on a set cycle that could vary dramatically from every year to multiple years between a revaluation.

Is there a disclosure requirement? And to what degree will it be used to establish future tax valuations? In Texas, sales disclosure is not required by law. Therefore, a deal with non-disclosure agreements between the parties can be an important aid to budgeting.

Get to know the local political landscape and legislative undercurrents. Any proposed law changes or political pressures on a specific property classes can be a major influence on a prudent budget. Recently, there has been a push in a few areas around the country to increase taxes on commercial properties to try to reduce the escalating tax burden on residential properties.

Find out what is taxable. Hotels are a truly unique asset class and present a major appraisal challenge that could significantly impact property tax projection. Hotels contain real estate, business personal property and intangible value. Some states don't tax personal property (furniture, fixtures and equipment) and others don't tax business intangibles, value associated with a business operation and related to the brand affiliation, contracts, trained workforce, loyalty programs, etc.

Make reasonable assumptions. Using a standard 3 percent growth rate or some other unsupported assumption "just to push the deal through" almost always comes back to haunt budgets later.

Enlist help from a local and knowledgeable expert. If you are budgeting for an acquisition then make sure to consult the experts prior to going under contract on a deal. Make sure the expert understands hotel taxation and valuation. Ask about the specific valuation models and techniques employed by local assessors. If your expert doesn't know those answers, then find an expert who does. Taxpayers managing an existing hotel should seek expert tax advice every budget season.

While no list is exhaustive for every situation, these points will make sure you are on the right path to proper and more accurate budgeting for property taxes.

michael-shalley-activeMichael Shalley is a principal in the Austin, Texas law firm of Popp Hutcheson PLLC, which focuses representation of taxpayers in property tax disputes and is the Texas Member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Shalley can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Nov
18

How Government Machinations Can Slash Property Tax Liability

Taxpayers and tax professionals researching market conditions to determine fair market value should consider any impending government actions. Even a rumor of a government project that would require acquisition of a property through eminent domain, or would impose restrictions on future use, can reduce the property's market value and taxable value.

Property values begin to suffer even before community leaders approve the final plans or begin work on such a project. That's because the belief that the project will occur places a cloud on the property owner's ability to sell and on the price attainable in a sale.

A potential buyer would be reluctant to acquire a property that will be involved in future condemnation litigation, with its inherent costs and delays, nor would a buyer welcome the uncertainty that those plans place on the property's future use.

The government taking may not involve acquisition of the property as a whole. Rather, it may remove some rights of use through restricting zoning, creation of conservation corridors or the diversion or rerouting of traffic, for example.

The property value declines because the wheels are turning to take away some of the rights of ownership, perhaps as much as 100 percent of those rights. The property owner carries the burden of convincing the taxing authority of diminished value resulting from rumored or pending acts of government.

Fair market value determinations must match reality. A title search would not reveal the threat of a government taking, but the valuation process cannot assume clear title in the face of the cloud imposed by the contemplated taking of some of the owner's bundle of rights.

An array of public improvements has the potential to affect property values, with an equally wide range of implications for taxable value. "They sky is falling because a highway is coming through here someday" is at the extreme, but other property owners may learn of the future imposition of a conservation easement on coastal properties, or a restriction on land use, allowable sign dimensions, or other rights. Any of these limitations would have a direct and immediate effect on value.

Calculate the damage

When the reality of a government action hits, it may take up to 100 percent of the property's fair market value. The taxpayer should weigh the seriousness of the threat and the probability and timing of it actually occurring. Then the taxpayer should measure the weighted estimate against the value of the property without the threat.

If the property is in "the path of progress," questions to consider in determining its value are: Who will buy it? What is its anticipated economic life? And what purpose will it serve?

First, determine the seriousness of the threat. What is the likelihood of it occurring? Next, calculate the remaining life of the present use of the property in the face of the impending government action. If it is going to happen, when will that be?

In the case of projected highway takings, the probability is high. Once announced, the highway's completion is almost assured. The present use has a limited and uncertain life.

Market observations show that buyers avoid properties in the path of progress. The development of a highway project is a time-consuming process that can hang over a property for years, suppressing value.

Another diminishing value aspect of an impending road taking is that the property/s neighbors may defer, or altogether cease, to maintain their properties, a condition sometimes called "condemnation blight." Broken windows won't be replaced, leaking roofs won't get patched and buyers won't buy. Buyers will purchase, however, a competing property unthreatened by condemnation.

Regulatory threats

Anticipated or threatened taking for regulatory reasons likewise diminishes market value. Suppressed industrial expansion is one example, such as when a local authority announces it doesn't want noise or the use of industrial-use pollutants in proximity to a new residential development.

The force of regulation frequently drives industrial uses away from new residential development or expanding metropolitan uses. Community leaders may deem junkyards or outdoor storage undesirable and force those uses away. Forcing such uses away from the metropolitan area threatens future use of local properties, and therefore limits property value.

Taxpayers need to help taxing authorities understand that the portion of the government that weakens property values by taking away property rights should suffer the resulting loss of property taxes.

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

Oct
29

New York Tax Uncertainty

The future of New York City's 421-a tax exemption is highly uncertain, particularly in light of the election of Mayor Bill de Blasio, whose initiatives appear to call for sweeping changes to the program.

The 421-a program, which is scheduled to expire on June 14, 2015, provides substantial real estate tax exemption benefits for the developers of new multifamily buildings. Currently, the city determines the level of exemption provided to an eligible building under 421-a; that determination is based on a geographical and functional basis.

That could change under de Blasio's proposed "Five-Borough, 10-Year Plan." The proposal, relating to the creation or preservation of 200,000 units of affordable housing, frequently references the 421-a program, alluding to its future presence in the real estate market.

The city created the 421-a program in 1971 to encourage multifamily construction by granting a partial tax exemption for the property owner. In 2008, changes to the program had a prospective effect on 421-a projects. These modifications included a dramatic expansion of the Geographical Exclusion Areas (GEA), in which properties must meet additional requirements to qualify for an exemption. The amended laws eliminated as-of-right, or automatic, benefits for new multifamily construction throughout Manhattan. In addition, significant sections of the outer boroughs became part of the GEA, effective for buildings that commenced construction after June 30, 2008.

The law created exceptions for projects within the GEA to obtain a tax exemption. To qualify, at least 20 percent of the units must be affordable to families whose income at initial occupancy does not exceed 6o percent of the area median income adjusted for family size. In addition, projects located in a GEA could qualify for benefits via the purchase of negotiable certificates. Under the negotiable certificates program, affordable housing developers can sell negotiable certificates to market-rate developers, who use the certificates to access tax abatements.

Hints of Change

Based on Mayor de Blasio's proposal, the percentage of affordable housing required per project may increase to provide for more affordable units.

The proposal highlights the establishment of a new, mandatory Inclusionary Housing Program, which will serve a broader range of New Yorkers with varying income levels. The Inclusionary Housing Program offers an optional floor area bonus to developers of new residential buildings, in exchange for the creation or preservation of affordable housing.

The new residential housing can be onsite or offsite, so long as it is within the same community board jurisdiction or within a half-mile radius of the site receiving the floor area compensation. The program seeks to promote economic integration in areas of the city undergoing significant new residential development. In order to qualify under the current Inclusionary Housing Program, the affordable units must be affordable to households at or below 80 percent of the area median income.

In contrast to the current Inclusionary Housing Program, some observers speculate that the mayor's proposed program would require all developers to put aside at least 20 percent of their units for low-income families. These units would then remain permanently affordable.

Currently, developers are able to layer 421-a benefits on top of inclusionary housing benefits, therefore allowing developers to take advantage of both programs. By allowing this double-dipping of benefits, the city creates a greater incentive for developers to provide onsite affordable housing.

However, de Blasio's plan may change the way developers use multiple subsidy programs together. The proposal states that in situations where a developer pursues multiple subsidies, the city will increase the percentage of affordable units required for eligibility and/or require that the developer provide deeper affordability.

No automatic exemptions?

Some observers have speculated that the mayor's plan may expand the GEAs of the city and reduce, if not completely eliminate, any as-of-right areas for 421-a construction. As Manhattan is already a GEA, this proposal would affect those areas in the outer boroughs that were not classified as GEAs in 2008. Moreover, developers in the expanded GEAs would be required to provide a higher percentage of affordable units (some proposals call for as much as 50 percent affordability) and offer apartments to families at 40 percent to 50 percent of area median income.

Proposed changes to the program also include eliminating some of the strict requirements that developers must meet in order to receive a 421-a Certificate of Eligibility. For example, under the current program, a qualifying property must meet one of the following three conditions:

  • All affordable units must have a comparable number of bedrooms to the market rate units, and a unit mix proportional to the market rate units. Or
  • At least go percent of the affordable units must have two or more bedrooms, and no more than go percent of the remaining units can be smaller than one bedroom. Or
  • The floor area of affordable units is no less than 20 percent of the total floor area of all dwelling units.

Mayor de Blasio's proposal seeks to modify or eliminate what the administration terms inefficient regulations," since existing requirements may force developers to build larger units than the market dictates.

Overall, the filing process to receive a Certificate of Eligibility is time consuming, due to regulations such as the unit distribution requirement. Mayor de Blasio's proposal states that it seeks to "streamline the 421-a program, improving its usefulness to developers and its ability to promote affordability, by eliminating outdated and unnecessary programmatic, eligibility, and oversight requirements."

JoelMarcusJoel R. Marcus is a partner in the New York City law firm of Marcus & Pollack LLP, the New York City 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..

Sep
30

Why Assisted Living Is The New Property Tax Frontier

"Like hotels, these facilities feature non-taxable intangibles."

Assisted living is moving to the forefront of the ongoing debate over the role of intangible assets in property taxation. Over the past 10 or more years, property tax professionals and the courts have focused discussions of intangible assets on hotel and resort properties, which tend to rely on brands, assembled workforces and other intangible assets in their operations.

Intangibles are exempt from property taxation in most states, so hospitality property owners have fought to exclude the value of those intangibles from their property assessments.

The courts have resolved the question of whether the value of intangibles can be included in the value of hospitality properties, establishing case law through key decisions such as those by California's Supreme Court and Court of Appeal in Elk Hills Power vs. Board of Equalization and SHC Half Moon Bay v. County of San Mateo.

In those cases, the courts have explained that assessors must remove the value of non-taxable intangible assets and rights from a property's value so that only real property is assessed for property tax purposes.

Owners should take page from hotel playbook

Now tax industry professionals are asking whether the principles used to exclude intangibles from hospitality property assessments can also apply to assisted living properties. The answer to that question might have been "no" just 15 years ago, prior to the explosion in the number and sophistication of assisted living communities. At that time, it would have been impossible to argue that there were significant intangible assets and rights involved in the operation of most assisted living facilities.

But assisted living operations have become more sophisticated in recent years, incorporating more valuable and more numerous intangibles. That trend has created opportunities to reduce property taxes in the same way that hospitality operators limit tax exposure for their properties.

Today's assisted living facility is much more than a building with a license to provide convalescent care. Top-rated facilities employ staffs with a variety of expertise in caring for the aged, including highly specialized skills to care for residents suffering from memory loss due to dementia or Alzheimer's disease.

Staff-to-resident ratios can be as high as 2-to-1. And the personal care for residents occurs 24 hours a day, seven days a week, so the number of employees needed to operate an assisted living facility has greatly increased.

In addition, high-end assisted living facilities offer more services to their residents today than properties typically provided in the 1990s, making them increasingly similar to hospitality businesses. Nowadays, residents have full food and beverage services, often with a choice of several meal plans.

Assisted living facilities also offer hairdressing and barber services, laundry, housekeeping, transportation and, in some cases, staff-coordinated activities. The operator provides all of the services mentioned above in addition to any medical supervision, physical therapy or other healthcare offerings.

Nearly all of the recent improvements in assisted living reflect the increased number of intangible assets and rights that assisted living facilities must use in order to deliver the services that their residents require — and the residents' families demand.

Much like a high-end hotel or resort, the many services that upscale assisted living facilities provide to residents bear little relation to the building and location where the service delivery occurs. Rather, the trained workforce provides those services.

Generally speaking, only the building and land are subject to property taxation. Consequently, value created by the workforce and the services it provides is a non-taxable intangible asset, which must be excluded for property tax purposes.

To identify assisted living intangibles, first consider that the facility is an income-producing property. The income produced there derives from more than the rental of space. In fact, rent for residents' living space accounts for as little as one-quarter or one-third of the revenue an assisted living facility generates.

The balance of the income that assisted living facilities receive is payment for services that the workforce provides. In addition, some assisted living properties likely benefit from brand recognition or have accumulated business goodwill.

Three ways to remove intangibles from equation

Property tax practitioners have three primary ways of removing identifiable, non-taxable intangible assets and rights from the value of an assisted living enterprise.

1. Determine the cost of the land and buildings that the facility uses. This method directly values the "sticks and bricks" at the facility, and works well if the facility is fairly new so that there has been little physical deterioration. Some taxing authorities recommend this method, as does a textbook on the appraisal of assisted living facilities, published by the Appraisal Institute.

2. Identify facilities where an operator leases the land and buildings, so the rental payment only represents rent for use of the land and building. Similarly, professionals who appraise or value assisted living facilities for property tax purposes should seek sales of assisted living center land and buildings only for a proper comparison. Unfortunately, leases and sales of only land and buildings for assisted living tend to be elusive.

3. Value the specific intangible assets and rights in use and deduct the value of those intangibles from the full business enterprise value of the facility. This method applies to most assisted living facilities. Assessors already use this method for hospitality properties, so it is readily applied to assisted living.

Property taxes are a significant expense for assisted living operators. Fortunately, the hospitality industry has already blazed the path to tax relief. With some ingenuity, the taxpayer can borrow the same methods that help control hospitality property taxes and use them to reduce taxes on assisted living facilities as well.

 

CONeallCris K. O'Neall is a partner with Cahill, Davis & O'Neall LLP, the California 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..

Sep
30

How To Discover Whether Your Tax Assessment Is Fair

Many taxpayers pay more than their fair share of property taxes. Yet in a tax arena fraught with nuance, it can be difficult for a taxpayer to recognize an inflated assessment. The key to spotting a bad assessment lies in knowing precisely what the assessor is measuring and the requirements of the state's property tax law.

What, then, is being assessed? The simplistic answer is that real estate is being assessed, but that response doesn't fully address commercial real estate, where values often hinge on contracts, encumbrances and regional legal definitions.

That said, all states attempt to tax at similar levels properties that are similar to one another.

The challenge to meeting that goal is that commercial real estate is subject to a variety of contracts and encumbrances, creating situations where nearly identical properties are taxed at significantly different assessments. Causing more trouble is assessors' tendency to rely on recent sales to determine values, resulting in tremendous differences in assessments among similar properties.

In a Pennsylvania case, an owner filed to reduce his property's taxable value based on a long-term lease in place at below-market rent. The Pennsylvania Supreme Court held that assessors must weigh all the interests associated with a parcel, specifically the impact of leased-fee interests and leasehold interests on value. However, the typical commercial property sale only reflects the leased-fee portion of the sale, because the buyer is essentially buying a rental income stream.

Kentucky has yet to fully address the uniformity problem. The Kentucky constitution states that "all property, not exempted from taxation by this Constitution, shall he assessed for taxation at its fair cash value, estimated at the price it would bring at a fair voluntary sale." As a result, nearly identical buildings could be taxed at significantly different amounts.

Ohio legislators recently passed a statute to achieve uniform taxation. Ohio simply stated that the assessor must assess all real property at the fee-simple value as if it were unencumbered. In this way the state is requiring the assessor to use market terms regardless of above-market or below-market rents in place at the property.

The remedy to unfair taxation based on recent sales is to tax all property using market terms and market rates applied to the conditions specific to the property. Without knowing what the assessor is measuring, however, a taxpayer may consider a sales price to be a fair assessment value. As demonstrated by these examples, understanding how the states assess properties goes a long way to knowing whether a taxpayer is paying a fair share in that particular state.

KJennings90J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Sep
23

Does a Property's Sale Price Really Equal the Taxable Market Value

The question arises all too often: Is the recent sale price of a property the best evidence of the property's taxable value?

Basic appraisal principles dictate that market value is the price upon which a willing buyer and willing seller would agree. Coming out of the recent recession, however, assessors continue to question whether the purchase prices paid for commercial or industrial properties reflect the properties' market value.

The confusion derives from the distressed sales that dominated commercial real estate transaction activity during the recession. As tenants defaulted on leases and property incomes plummeted, many owners were either compelled to sell their real estate in order to avoid foreclosure, or gave their underwater properties back to lenders. A number of lenders simply sold those assets after foreclosure at liquidation prices, adding to the volume of sales at distressed pricing levels.

Where the majority of sales of similar types of property are distressed, those sales may become the market, establishing pricing even for non-distressed sellers. To assert a higher taxable value on a property in this scenario, the assessor would have to demonstrate that these sales defy current economic conditions.

Now, as the country's economy begins to improve and property owners remain cautiously optimistic that the recession is ending, which recent sales truly represent market value? It is a challenging question for property owners and assessors seeking to use recent transactions for sales comparisons in order to determine current market value and taxable value of a property.

In many parts of the country, there was a complete dearth of sales and little construction activity during the downturn. In those areas, the sale of a property may have been the only transaction that occurred in that market in several years, with no other sales available for comparison.

With the uptick in the economy, assessors are latching onto recent transactions as fully indicative of a new market, and are inflating assessed taxable values in the process. Distinguishing the value indicated by a property's sale price remains vital to having it correctly assessed.

One reason that evaluating a sale for tax purposes requires more than just looking at the closing price is that the sale price may reflect financial incentives and tax-exempt components included to motivate the buyer or seller. For example, sale prices paid for restaurants, hotels, nursing homes and some industrial plants may reflect the value of the business enterprise, as opposed to just the real estate.

In Oregon, California and Washington, many intangible assets may be exempt from taxation for most properties. Thus, for purposes of determining the property's taxable market value, the appraiser or assessor must determine and exclude the value of the intangible rights relating to the business.

In Oregon, properties other than those used in power generation or other utility services may have tax-exempt intangible assets including goodwill, customer contract rights, patents, trademarks, copyrights, an assembled labor force, or trade secrets. Properly separating real estate value from the business enterprise value can substantially reduce the assessed value.

Additionally, an often overlooked influence on the sale price may be the existence of a sale- leaseback provision. In Oregon and many other states, real market value for tax purposes involves a willing seller and willing buyer in an open-market transaction, without consideration of the actual leases in place.

Thus, in the sale of a building fully leased to an ongoing enterprise that sets the buyer's anticipated rate of return, the assessor must extract the existing lease value and instead apply market lease and occupancy rates to arrive at the real market value for taxation purposes. In other words, whether the leases in place at a sold property are at, above, or below market rates affects the relationship of its sale price to taxable value.

Assessment requires more than simply assuming that the sale price is the sole indicator of value. For a vacant property, the sale price may be the best indicator of value. But any transaction used to establish market value for tax purposes needs to be thoroughly vetted. Taxpayers should keep these principles in mind when reviewing the assessor's process to set the taxable value of their real estate.

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

American Property Tax Counsel

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