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.


Protecting Taxpayers: Indiana Shifts Burden of Proof to Assessors

A recent legal change in Indiana has created a model for property tax reform across the country. Starting in 2011, the Hoosier State has compelled assessing officials to defend excessive assessment increases with objective evidence and meaningful arguments in appeals.

The statute applies whenever the appealed property's value has increased by more than 5 percent over its prior year's value. Moreover, where the prior year's value was reduced on appeal and the reduction was not based on the income approach, the assessor now has the burden of proof to support any increase. Failure to defend the assessment automatically reduces the property's assessment to the prior year's level, and the taxpayer can press to further reduce the value.

Assessors on the defensive

This simple change gives Indiana taxpayers greater protections in appeals than taxpayers have in most other jurisdictions. Why? With no burden of proof on appeal, an assessor may contend that her value is presumed correct. Instead of explaining how she derived a property's value, the assessor may attempt only to discredit the taxpayer's case.

With the burden of proof, however, the assessor must produce probative evidence and logical arguments to support her value. She must explain why her assessment meets the jurisdiction's valuation standard. She must walk the local or state tribunal through her analysis. In short, she must explain how she did her job and produce evidence justifying her increased valuation.

An assessor that fails in those steps will likely lose. To avoid the time, expense and potential embarrassment of a loss, the assessor who carries the burden of proof is more likely to settle a case.

Limits on burden-shifting

For the burden-shifting statute to apply, the property under appeal must be the same property for both the current and prior years. It does not apply where the disputed assessment is based on structural improvements, zoning or uses that were not considered in the assessment for the prior tax year.

If significant new construction or demolitions occur at the property between the prior and current assessment dates, the taxpayer maintains the burden of proof. If the increase in value is due to the assessment of omitted property, such as when the assessor added square footage previously overlooked, then the taxpayer maintains the burden of proof.

The burden-shifting statute applies only to an increase of assessed value, not to an increase in tax burden. Taxpayers carry the burden of proof to show the value should be lower than the prior year's value.

The burden of proof can shift several times during an appeal. For example, assume that an Indiana commercial property is assessed at $800,000 in Year 1. In Year 2, the assessment increases by more than 5 percent to $1 million.

The property's physical status and use are the same in both years, and the taxpayer has an appraisal supporting a value of $500,000 in Year 2. The assessor carries the initial burden of proof to show her $1 million value is proper. If she fails to make a convincing case, the property's assessment will at minimum revert to its Year 1 value of $800,000. The taxpayer then has the burden of proof to show that its appraised value of $500,000 is correct.

If persuasive, the appraised value likely will carry the day; the Indiana Tax Court has said that an appraisal compliant with the Uniform Standards of Professional Appraisal Practice is often the best evidence of value. Even if the appraisal is unpersuasive, the property's assessment will still be lowered to its Year 1 value.

What are the drawbacks?

Who has the burden is sometimes unclear, so deciding the burden of proof may add an argument to the appeal. Parties may file motions in advance of a hearing to decide the burden of proof issue. If multiple years are under appeal, different parties may (depending on the values from year to year) have the burden of proof for different years, which could complicate the presentation of arguments and evidence at the administrative hearing.

The burden-shifting statute is one reason that more assessors are hiring counsel and paying for appraisals in appeals, which might prolong the appeals process in some cases. Taken as a whole, however, Indiana's burden-shifting experience has been a positive one for taxpayers. Taxpayers have always had to present evidence and arguments to prevail and now, in many cases, so do the assessors.

Indiana has compelled assessing officials to explain how they did their jobs correctly—or lose on appeal. Assessors who can't or won't defend their assessments are more likely to settle, saving taxpayers considerable time and resources. Taxpayers in other states should consider pressing lawmakers in their jurisdictions to replicate this Heartland property tax experiment.

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


Turning the Tide

Court Decision Promises to Reduce California Hospitality Property Taxes

A May 22, 2014, decision by the California Court of Appeal may be a game changer for hotel and hospitality property owners and operators. After many years of litigation before local boards of equalization and the courts, in SHC Half Moon Bay v. County of San Mateo, there now appears to be a definitive ruling on whether the "Rushmore approach" may be used to value hotel properties.

First championed by its creator, appraiser Stephen Rushmore, the Rushmore approach is a technique that appraisers use in valuing hotel properties that is intended to remove the value of intangible assets and rights used in hotel operations.

Intangibles, which are generally exempt from property taxation, include assets such as an assembled workforce, service contracts, and hotel management and franchise agreements. Removal of such intangibles is necessary in certain contexts, such as appraisals for property tax purposes. Intangible assets and rights used in the operation of hotels are often closely intertwined with the real property, land and buildings, which are also used in the hotel's operation.

Appraisers have used the Rushmore approach to value hospitality properties for years, and the method enjoys broad acceptance in some contexts, such as with lenders that require appraisals for financing purposes. Yet the Rushmore approach has been a constant source of controversy in the valuation of properties for ad valorem property tax purposes, primarily because the approach fails to remove the entire value (or in some cases any value) of intangibles.

Insufficient Deduction

Stated most simply, the Rushmore approach is supposed to remove the value of intangibles through the deduction of management and franchise fees as an expense when an appraiser or assessor values hospitality properties by capitalizing the revenues generated by such properties.

In its recent decision, the appellate court specifically 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 workforce and other intangibles. The court also said that the taxing authority had not explained how the deduction of the management and franchise fee captured the value of the intangible property.

Unfortunately, the court's decision upheld the use of the Rushmore approach to remove the value of goodwill for the hotel in the SHC Half Moon Bay case. The court made the decision because the local board of equalization received insufficient evidence on the issue. Because the hotel's goodwill basically represented the value of its franchise, or flag, the court's decision left in place the assessment of that nontaxable intangible.

Fortunately, the appellate court provided a road map for other taxpayers to remove the value of their hotel's franchise value in the future. To achieve that result, taxpayers will have to provide more specific evidence for the value of their hotel franchise or flag, or for other significant hotel intangibles.

Savvy hospitality property owners will find several silver linings in the SHC Half Moon Bay decision. For one, although the ruling came down from a California court, its reasoning has application nationwide.

In addition, the case supports California's general standard for addressing intangibles, which is to identify, value and deduct. For hospitality properties, this means pointing out to the taxing authorities the specific intangibles used in conjunction with the real property and then obtaining an independent appraisal of each identified intangible. The appraised values for all the identified intangibles should then be added together and deducted from the overall value for the hotel, the overall value being calculated from total hotel revenues.

Franchise Value

Also, the taxpayer in the case sought to remove the intangible value of the hotel's franchise using an accounting analysis that was intended for use in financial reporting and which assigned all residual value to goodwill. Careful reading of the Court of Appeal's decision shows that had the hotel separately valued the franchise, as it did for the workforce and other identified intangibles, the outcome might have been very different.

The SHC Half Moon Bay decision has one other benefit in that it confirms that failure by a taxing authority to remove an identified intangible is a legal issue entitled to de novo review by the courts. De novo enables the court to review the case afresh, without reference to previous reviews or assumptions by lower courts or boards. In California, such review is rarely available in judicial appeals of decisions by local boards of equalization, which are difficult to reverse in the courts.

Hospitality property owners should show the SHC Half Moon Bay case to their local assessors and follow the decision by presenting valuations for all of the intangible assets and rights used in their property's operations. If the assessor declines to remove the intangibles in accordance with the appellate court's decision, the owner should pursue their rights before the county board of equalization and in the courts.

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


Accounting For E-commerce In Retail Property Values

"Computing value can get complicated if stores are required to mix online sales with physical sales."

Shopping via smartphones and tablets is here to stay, but the new-found convenience has introduced new uncertainties and complexities to shopping center owners, developers and investors.

The uncertainty stems from the ways e-commerce complicates shopping center valuations and development. Appraisers, assessors and property investors are forced to reconsider previously accepted answers to fundamental questions: What is the relative value of in-line stores and anchors? How should stores on contiguous parcels comprising a regional mall be valued? How fundamental is location? In an e-commerce world, the answers to these questions are increasingly uncertain and complex.

For example, the existing ad valorem tax system taxes a property's real estate value rather than its profitability. The current system assumes rents, which form the basis of commercial property values, relate directly to profitability. Rents in a regional mall are based upon profitability. For example, a jewelry store in a mall's center court may pay $75 per square foot while a family apparel store pays $20 per square foot. What really matters is occupancy cost. When occupancy costs (the total costs paid to the landlord including rent and reimbursable items such as CAM) exceed 12 percent of sales, the tenant may be headed for trouble. Higher sales permit higher occupancy costs. Indeed, appraisers often incorrectly equate real property value to the profitability of the property's business operation when the real property should be valued in fee simple in a tax appeal.

Conventional wisdom suggests strong anchors improve a center's real estate value, stabilize a property's financial statement, reduce an owner's risk and increase the price a buyer would pay for the center. For example, a Nordstrom will often bring inline tenants that would otherwise not go to the mall. A recent variant on this theme is the proliferation of mixed-use centers, which often include office, apartments and other life style uses designed to draw potential shoppers for the retail tenants. Put simply, retail sales historically relate to the center's location, trade area population, trade area household income and foot traffic, not to factors such as web presence. Additional uses also theoretically provide more stability to the project's value.

E-commerce is challenging conventional wisdom about the effect of anchors on overall value as online sales increase pressure on bricks and mortar retailers and diminish their role in overall retail sales. In February 2014, the U.S. Census Bureau reported that 2013 fourth quarter retail e-commerce sales, adjusted for seasonal variation but not for price changes, increased 16 percent from the fourth quarter of 2012, as compared to a 3.9 percent increase in total retail sales for the same period in 2013. E-commerce accounted for 5.8 percent of total sales in 2013 compared to 5.2 percent for the same period in 2012.

On a non-adjusted basis — that is, excluding sales in categories not commonly purchased online — Internet Retailer magazine estimated e-commerce accounted for 7.6 percent of total retail sales during 2013, a 6.8 percent increase from the same period in 2012. Forrester Research projects that by 2017, direct online purchases will account for approximately 10 percent of all U.S. retail sales, representing a nearly 10 percent compound annual growth rate from 2012. Looking beyond purely online purchases, Internet Retailer estimates that by 2017, 60 percent of U.S. retail sales will involve the web.

In some ways, these figures understate e-commerce's impact on bricks and mortar retailers. For example, the figures do not account for lost profitability and price pressure created by consumers who price shop online and visit a center to make a purchase. Further, how many consumers now shop on-line for groceries and either have those groceries delivered to their homes via a provider such as, or collect them from a drive-through checkout line?

Forrester Research predicts U.S. e-commerce spending will increase because larger retail chains will invest in omnichannel" efforts — tying together stores with the web and mobile — along with more consumers using smartphones and tablets, and what the report calls "increased comfort with web shopping."

Onmichannel marketing will likely decrease inherent real estate values and lower ad valorem taxes since e-commerce decreases the importance of bricks and mortar stores and foot traffic. If 60 percent of retail sales will involve the web by 2017, how important is location? How important are anchors?

The answers may be, "Not very much." E-commerce's impact is already evident in store closings by retailers once considered national credit or anchor tenants. In 2013, a major South Carolina grocery chain that anchored many small shopping centers closed most of its stores. Nationally, in early March 2014, RadioShack announced the closure of approximately 1,100 stores while Staples announced plans to close 225 stores. Is it coincidental that Staples is now the number 2 e-tailer behind Amazon?

Historically, the risk in leasing to a large anchor was much lower than leasing to smaller tenants. Different uses generally involve different capitalization rates, or expected rates of return relative to the purchase price. The risk involved with office leases differs from the risk of renting to national retailers. Historically, inline stores arguably should have had a higher capitalization rate than the anchor stores did, since there was more risk. This was never the case as all the department stores have credit ratings below investment grade and are larger stores and therefore have a greater risk than smaller inline stores with better credit. Most malls trade on cap rates in the 6 to 8 percent range, whereas the few department stores that were leased when sold traded in the 10 to 12 percent range. Taxing authorities traditionally only paid lip service to these risk differences in calculating one overall capitalization rate, and tended to gravitate to a lower rate thought to be inherent in the anchor. But in an increasingly online world, is the riskier tenant the inline store, or is it the anchor?

The evolving significance of anchors also raises questions about the inter-relationship between separate parcels. Unsophisticated assessors tend to ignore state laws requiring parcels be individually valued. Instead, taxing authorities value the project by grouping multiple parcels together and applying one blended capitalization rate, regardless of the multiplicity of uses and tenants. Unquestionably, inline stores and anchors have a symbiotic relationship, but how does one measure that relationship value particularly when the anchor is on a different parcel from the mall itself?

The physical location of a closed anchor in a mixed-use center can exacerbate the problem. For example, what happens when a failed anchor, located in the middle of the mall, creates parking or access issues for patients visiting medical offices? How is this impact measured?

While the solutions are still unclear, a few basic issues confronting the industry are coming into focus through the cyber static:

  • Appraisers and tax authorities need to recognize most power centers and malls are complex businesses, where anchors and inline stores depend on each other (and internet presence) for profitability.
  • The historic relationship of the capitalization rates applied to inline stores versus anchors needs to be scrutinized more closely.
  • Some jurisdictions specifically require parcels be valued individually for tax purposes. If so, how does one measure the interdependency of the tenants that comprise the center?
  • How does an owner address increased vacancies within mixed-use centers for both profitability and tax purposes?
  • How does one calculate a property's real estate value when it is part of the retailer's onmichannel sales effort?

The challenges posed to owners by e-commerce spans the gamut from development to taxes. Valuing regional malls, power centers and even local shopping centers for property tax purposes is increasingly difficult in the e-commerce era. An owner who appropriately quantifies the different and increasingly complex risks associated with these businesses is far more likely to adapt successfully to the e-commerce world, and simultaneously reduce property tax bills. Recognizing the questions and challenges posed by e-commerce is the first step in obtaining the answers.

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




Multifamily Boom May Skew Property Tax Assessment Systems

Since the onset of the Great Recession in 2007 the home ownership rate in the United States has fallen by a considerable 4 percent, according to the Census Bureau. While the U.S. may not have become a nation of renters, that long-cherished and widely promoted American dream of home ownership appears to be less attainable and less desirable than it was a decade ago.

This shift in housing demand has sparked a construction boom in the multifamily sector. Across the nation, developers are building a vast amount of multifamily units. According to Cassidy Turley's most recent U.S. Macro Forecast, developers are set to deliver 160,000 new units this year, the most robust construction period in 15 years.

There has been a lot of ink spilled regarding the significance of this sea-change in housing. Often overlooked, though, is the effect this construction boom will have on property taxes in the multifamily sector in general. To understand the implications for property taxes, however, taxpayers must first understand how tax assessors typically value multifamily buildings.

Many tax jurisdictions, including the District of Columbia, employ a computer-assisted mass appraisal (CAMA) system to value multifamily buildings. CAMA systems are designed to simplify the assessment process across a product type, with the goal of producing more uniform assessments, as opposed to property-specific valuations.

To accomplish this, the taxing entity first stratifies properties into different categories and sub-categories. For instance, the D.C. assessor's office first categorizes multifamily buildings as either high-rise (five floors or more) or low-rise (four floors or less). It then further segments properties by submarket; in D.C. there are three general areas.

With properties categorized by the taxing jurisdiction's specifications, the assessor's office enters actual rental, expense and vacancy data for products within each specific category into the CAMA system. The computer model then produces statistical market-based indices for the various categories.

Assessors use these market-based indices to assess individual properties within categories, rather than using rental and expense information that is unique to that property. While adjustments can be made on an individual basis for property-specific issues, the goal of the CAMA system is to produce uniform assessments within the stratification.

Notwithstanding general grievances with CAMA valuations (and this writer has many), CAMA systems are based on general market data, which makes them prone to break down during periods of rapid market change, or when the stratifications are not updated in a timely manner.

One such scenario involves an oversupply at one end of the sector, as is now occurring in many cities due to the construction of class-A multifamily product. Too much construction of class-A apartments can result in lower occupancy levels and downward pressure on rents for these properties. In another, less understood scenario is a process that has been described as "filtering," in which new class-A product, with its higher levels of finish and greater amenities, displaces existing class-A product at the high end of the market. The older, formerly class-A buildings effectively join the class-B category, achieving lower rental rates than the newer product.

In the latter scenario, the stratifications within the CAMA system must be updated in a timely manner to reflect the new market realities. If they are not, the CAMA system will break down as it aggregates data from dissimilar properties, thus resulting in inflated values for the former class-A buildings.

Washington D.C. is beginning to experience the onset of this market dynamic. Research by Delta Associates indicates that while class-A rents rose slightly across the district, they actually decreased in established submarkets with relatively little new product, such as in the Upper Northwest. The district hasn't adjusted its market stratification's to reflect this new phenomenon, however. Instead, the system lumps together markets that have seen decreased rental rates with markets that are experiencing rent growth due to the influx of new class-A product.

Moreover, in the district all high-rise buildings are included in the same pool of comparable properties, regardless of when they were built, or what levels of finish or amenities they offer. Consequently, unless D.C. updates its CAMA system to reflect these new market norms, it is likely that in the next few years we will begin to see the CAMA system overstate assessments for older class-A product.

While taxing jurisdictions should be cognizant of these market changes and make timely adjustments to their CAMA systems, it will often fall to the property owners to be vigilant in monitoring and, when necessary, appealing property assessments. Watching a building's rent levels decrease due to competition from newer product is bad enough—having the city also tax that building as if it were the newer product just adds insult to injury.


Cryder600 Scott B. Cryder is an associate in the law firm of Wilkes Artis Chartered, the District of Columbia member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.


Don't Stack The Tax Deck Against Yourself

Tax expert warns of property taxation issues buyers may be unaware of when acquiring an asset.

In the mysterious realm of property tax valuation, it is hard enough to get a proper and decent property tax value on commercial property on a good day. It's even harder when the deck is stacked against you, and harder still when you are the one stacking the deck.

In many states, property transfers are significant revenue-raising events for taxing entities. In Georgia, the transferor (the grantor or seller in a transaction) takes the lead in filing form PT-61, which is filed along with the deed, and typically the transferor pays the tax. Generally speaking, the transfer tax burden amounts to $1 per $1,000 of asset value, which is less than in other states. The transferee, or the buyer in a transaction, may pay little attention to what happens with form PT-61, especially since the tax is paid by the transferor.

But county tax assessors pay particular attention to the PT-61, with serious implications for the transferee's future property tax liability.

How serious? Consider that even valuation professionals can find it challenging to distinguish between real estate value and the value of a business operated from the real estate. For example, Bill Gates inventing Microsoft and operating it from his garage does not create a billion-dollar garage.

Sometimes distinctions are less clear. Assume someone purchases a daycare center for $2 million. The buyer is acquiring a business that brings the building to life, providing care to hundreds of little ones crawling around and demanding attention, generating revenue to the owner in the process. That business has value and is worth, say, $1 million. Indeed, the business is why the buyer acquired the property.

A closing attorney involved in the deal's real estate aspect sees a $2 million check at closing for a building operating as a daycare center. Suddenly that $2 million appears on the PT-61. Rest assured, when the tax assessor sees $2 million on the PT-61 (and assuming the assessor has no thoughts that the value may be understated), the job is done. The value is affixed to the property. The property owner must show that the affixed value is grossly overstated, a burden complicated by the very closing where the owner acquired the property reflecting the $2 million value. Try explaining that to three lay members of a board of equalization. In these situations, the owner frequently pays twice the real estate taxes which should be owed, often perpetually.

Other types of properties are even more treacherous for buyers. Hotels are one example, especially higher-end properties that collect substantial revenue from needy guests willing to pay for pampering (perhaps hundreds of the not-so-little ones meandering around and demanding attention). At least the appraisal sector has developed some valuation standards for hotels.

A more challenging area is retirement homes or skilled nursing centers. Many of these structures are 50 to 60 years old with linoleum floors or aging carpet, window air conditioning units and in a condition which might charitably be described as basic. Were they standing vacant, the buildings may well be demolished. In such a case, business value derives from the units' designation as worthy of a "certificate of need," a government-issued document that verifies a need for the services provided at the property and grants approval and licenses for that activity.

The real estate and business may be worth $10 million but the real estate by itself may be worth only a minor fraction of that amount. Putting a value of $10 million on the PT-61 form may result in a huge tax liability, both for that property and for those similarly situated.

Calling a certificate of need "real property" is a major stretch. It is a license to operate a particular business from that property, an intangible personal property right subject to revocation. The revenue generation is already subject to income taxes; trying to collect real estate taxes because of that revenue is hard to justify, even if an assessor thinks of this type of business as a "cash cow," as one confided recently.

Even appraisals, most often done to help procure financing, are seldom helpful. Appraisers will talk in terms of the value and number of beds (some of which may be 50 years old) to justify a business' value or cash flow to support the loan. But this ignores the huge expenditures on patient care, nurses, support staff, training, safety, health and related matters for which Medicare, Medicaid and insurance pay for reimbursement. Few appraisals of nursing facilities focus on separating underlying real estate value, and many appraisals are worth little in negotiating with tax assessors.

For properties like these, rent doesn't determine value, either. A renter in these situations is renting a business more than renting real estate.

Despite the complexities of separating business value from real estate value, a buyer can at least avoid common mistakes. Pity the transferee who unknowingly allows a closing attorney to put the entire $15 million purchase price on a PT-61, when the property can't be worth that without including the retirement or nursing home business. Some type of discounted cash construction cost analysis is one way of approaching real estate value.

It is imperative to demonstrate a fair, reasonable and understandable allocation of real and personal property tax values on the PT-61. An assessor will merrily accept the seller's assertion that the full purchase price is applicable to real estate. The purchaser's pride in enriching county coffers will pale when the purchaser can no longer clear enough revenue after taxes to repay loans or even stay in business. The process to avoid that outcome starts when the property is acquired.

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


Property Assessments Present Opportunities to Reduce Taxes

The tax assessor's notice arrives in the mail with the seemingly inevitable increase in your property's assessment. Is this just another expense line item creeping upwards? Should you start budgeting now for an increase in next year's real estate taxes?

Not so fast. Taking the time to review the notice with an experienced property tax professional could reveal opportunities for significant savings.

What Can I Gain?
Successful appeals can generate thousands or even hundreds of thousands of dollars in tax savings per year. Property taxes are one of the few expense line items that a property owner can manage with an eye toward not just keeping the expense flat, but in many cases actually reducing taxes compared with the current and prior years. Yet property taxes are often overlooked as a controllable expense. As Robert L. Gordon, a partner who specializes in property tax with the law firm of Michael Best & Friedrich LLP in Wisconsin, says, "One of the things I continue to see is that clients who are sensitive to the smallest increments in their income taxes, and engage in highly sophisticated planning to manage their income taxes, will at the same time accept property tax assessment increases as an inflexible cost that cannot be managed or addressed."

For many companies, a reduced assessment is the equivalent of "found money" and is a great boost to the bottom line.

Why Assessments Change
Typical conditions triggering an assessment change include new construction, renovation or demolition. More unusual cases can occur in places like California, where a change in ownership will generate a change in the assessment. Another reason for assessment change is error correction, as when an assessor finds that they had missed the existence of a building in previous assessments.

But the No. 1 reason for assessment changes is periodic district-wide reassessments. Most states have mandatory reassessment cycles while a few do not (see table).


In Pennsylvania, which doesn't require periodic reassessment, assessments can get far afield from actual market value, contends attorney M. Janet Burkardt, managing partner of Weiss Burkardt Kramer LLC, which advises Pennsylvania counties on reassessment. "Not reassessing regularly means taxing inefficiently, because counties are not capturing changes in value," Burkardt says. "The more often a county reassesses, the more equitable and uniform the values."

Pennsylvania, Oklahoma and California are examples of states that lack mandated reassessments. States that do reassess vary widely in frequency: Florida, Minnesota, Arizona, Kansas and Washington, D.C., are some states that reassess every property, every year. Some others – Wisconsin, for example – require annual reassessments, but in practice those don't always happen.

Don't Miss an Opportunity to Appeal
Even if an assessment goes unchanged in a given year, there may still be opportunities to reduce real estate taxes. In many states, like Pennsylvania, there is a ratio calculation that does change annually. For example, a property in Butler County, Penn., generated the same $100,000 assessment in 2012 and in 2014. By application of this ratio calculation for each year, the property is on the tax rolls at a fair market value of $523,000 and $740,000 for these years, respectively. If the property is worth $600,000, that would mean an appeal opportunity in 2014, but not in 2012.

Practices vary widely by state and even within states, so reviewing all assessments annually can turn up opportunities that might otherwise be missed.

What Will it Cost?
Filing fees for property appeals are modest, and in many jurisdictions the initial appeal is free. Fees in other places average about $100. The cost of the appraisal will vary based on the property's type, uniqueness, and the relative ease or difficulty of the valuation calculation. Commercial appraisals can range from $2,500 to $25,000 or more. Legal fees vary, but it is common for property tax attorneys to work on a contingency-fee basis, where there is no fee unless an appeal achieves tax savings.

Experience Matters
Asking an experienced property tax professional to evaluate assessment notices pays off. Working with a professional who knows the nuances of the jurisdiction, the law, how the system works in practice, which appraiser is right for the job, and who has a working relationship with the government employees that administer that system can be the difference between winning and losing appeals. Finding the right person to evaluate your assessments on a regular basis is the first step toward realizing tax savings.

dipaolo web Sharon F. DiPaolo is a partner in the law firm of Siegel Siegel Johnson & Jennings, 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..


Identifying Intangibles

The Appraisal Institute Resolvers Some Debates About Nonphysical Assets

After decades of debate in the marketplace and legal battles over the role of intangibles in commercial property valuation, the Appraisal Institute has published a detailed treatise intended to clarify many of the issues in question. For the first time, the organization has devoted an entire chapter to these nonphysical assets in the latest edition of its industry guide, The Appraisal of Real Estate.

There were plenty of reasons for the Appraisal Institute to weigh in on the subject. Intangibles are a familiar concept for anyone involved in property taxation, eminent domain or financial reporting, but have been a long-standing source of disagreement among appraisers, taxpayers and tax assessors. Arguments frequently arise over the allocation of intangibles—or how to determine the portion of value that intangibles contribute to the total assets of a business. In earlier years, some appraisers and market participants even questioned the very existence of intangibles within real estate.

In many states today, intangible assets are exempt from taxation under specific exclusions for property tax valuation. Therefore, intangible assets—and more important, the appropriate methods for allocation have become critical to the appraisal assignment and to the final tax liability.

Over the years, The Appraisal Institute has offered specific seminars, courses and some collections of articles on intangibles, but nothing as specifically on point as Chapter 35 in The Appraisal of Real Estate, 14th Edition, published in late 2013. This chapter, titled "Valuation of Real Property with Related Personal Property or Intangible Property," defines intangible property as nonphysical assets including but not limited to contracts, franchises, trademarks and copyrights, as well as goodwill items such as a valuable trade name and a trained

For some property types, the real property usually trades as part of an ongoing operation that includes all of the assets of that business. Examples include healthcare facilities, assisted living and skilled nursing centers, hotels, convenience stores and car washes. In sales of those assets, the total sale price represents the overall value to all the assets of the business, which makes parsing the value among the tangible and intangible components a challenge for appraisers and assessors. The new chapter attempts to clarify when appraisers should be on the lookout for intangibles, stating, "As the proportion of income attributable to non-real estate sources increases, the potential for the property to include intangible assets also rises."

Additionally, the publication cites some existing requirements under Standards Rule 1-4(g) of the Uniform Standards of Professional Appraisal Practice, which states: "When personal property, trade fixtures or intangible items are included in the appraisal, the appraiser must analyze the effect on value of such non-real property items." The chapter goes on to define the three general classes of property as real property, personal property and intangible property, further breaking down each general classification into individual components for each.

It appears the Appraisal Institute is finally comfortable with confirming the existence of intangibles within certain property types, and with describing how to define them and when to look for them. Unfortunately, that is about where the clarity ends.

The chapter continues with an explanation of two different premises for valuation used by business appraisers. Under the going concern premise, the ongoing business is assumed to continue operations indefinitely, and the liquidation premise assumes the business is closed and the assets are sold. The premise that produces the highest-value conclusion is used to develop a final-value opinion. Assuming the going concern premise is used, however, that is just the starting point to develop a total value for all assets. The chapter fails to provide guidance for properly breaking out the value components of each asset.

One logically would expect the next section of the chapter to contain a how-to discussion for developing a supportable allocation value for the intangible components of the total assets. The chapter does offer some suggestions under the three general valuation approaches: income, cost and sales. Regrettably, each approach is delivered with cautious statements and vague examples, with a point-versus-counterpoint followup for each method.

It is understandable that the Appraisal institute is reluctant to state an absolute preference for one method over another when dealing with intangibles. But with this intensely debated issue, a more in-depth discussion with practical recommendations to make credible conclusions would be more useful.

The new chapter is a welcome addition that helps to clarify the issues involved, that provides definitions and ideas, and that suggests what to consider when the appraisal assignment requires an allocation among asset classes. As the chapter's authors acknowledge, the debate is over for the existence of intangibles in real estate. However, it continues when it comes to determining the proper valuation techniques for intangibles.


Michael Shalley is a principal in the Austin law firm of Popp Hutcheson PLLC, which focuses its practice on representation of taxpayers in property tax disputes and is the Texas Member of the American Property Tax Counsel. Mike can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..


Kansas Legislature To Reform Property Tax Appeals Process?

In the nearly 200 years since the U.S. Supreme Court's ruling in McCulloch v. Maryland, pundits, attorneys, courts and others have deliberated Chief Justice John Marshall's assertion that "the power to tax is the power to destroy."

Today the issue is front and center in Kansas, where the state Legislature seems poised to enact sweeping reform legislation governing tax appeals. The contemplated measures would provide substantive due process in an attempt to level the playing field for taxpayers that seek to challenge state and local property, excise and income taxes.

The current tax appeal system in Kansas combines informal hearing processes at the county level in property tax issues and at the state level on appeals involving excise and/or income taxes. These are followed by an appeal to the Kansas Court of Tax Appeals (COTA), an administrative agency in the executive branch of state government. If a party is displeased with a COTA decision, the prescribed recourse is a direct appeal to the state Court of Appeals.

Mounting Concerns Over COTA
Tax consultants and commercial taxpayers alarmed by recent COTA decisions originated the call for reform. The grassroots effort spotlighted COTA's efforts to deny taxpayers the right to contract with tax consultants that use fee-based contracts.

COTA had ruled that the contracts violated public policy, and voided them. It then refused to hear pending cases where a tax consultant was involved. COTA also sought to deny taxpayers the ability to retain attorneys that took referrals from tax consultants.

Next, COTA dismissed appeals where the tax consultant had signed the appeal form, refusing to recognize the state-issued power of attorney forms the consultants had taxpayers execute.

Taxpayer grievances also extend to the time taken to resolve property tax appeals. A law requires COTA to issue a decision no later than 120 days after a tax hearing, but the law fails to penalize the agency in the event that it exceeds the deadline. Consequently, many cases linger beyond the 120-day mark.

Taxpayer Relief May Be Imminent
House Bill 2614 was introduced to address these issues. As currently written, the bill will make the following changes:

  • Provide for a de novo appeal to the District Court. This change will ensure that a court of competent jurisdiction hears the taxpayer's evidence and makes findings and conclusions, rather than non-lawyer employees appointed by the governor deciding the case.
  • Require a presumption of correctness for any appraisal submitted by a state-licensed appraiser.
  • Permit taxpayers to employ the tax professional of their choosing without interference from COTA.
  • Require tax appeal decisions to be issued within 120 days and, if not, all filing fees paid by the taxpayer will be refunded.
  • Waive the filing fee in the event that a protective appeal for the following year must be filed because the prior year's appeal is still pending.
  • Require COTA to provide for a simultaneous exchange of evidence. This would replace the current method, which requires the taxpayer to provide evidence months before the hearing while protecting the county from disclosure until 20 days prior to the hearing.
  • Change the agency name from the Court of Tax Appeals back to the Board of Tax Appeals, to avoid the suggestion that COTA is a court within the judicial branch. This point also includes a staff salary reduction.
  • Provide a method whereby a party could file to have a board member removed for cause, defined to be failing to issue orders timely or failing to maintain continuing educational requirements.
  • Make cases valued at $3 million or less eligible for filing with the small claims division. This would be an increase from the current cutoff of $2 million.
  • Require the agency to promptly approve stipulations between the taxpayers and the taxing body.

The initial group of taxpayers, tax consultants and attorneys contacted Kansas legislators directly and urged their support for tax appeal system reform. The Kansas Chamber of Commerce later picked up the grassroots effort.

In its "Legislative Agenda 2014 For A Healthy Economy," the chamber endorsed COTA reform to "provide an affordable, accessible and impartial system that can resolve state and local tax disputes expeditiously and efficiently."

Other groups including the lobby for the Kansas Association of Realtors joined the call for reform. Now the legislation has widespread support throughout the business and real estate communities.

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..


Rocky Top Tax Relief

"Reappraisal process allows Shelby County taxpayers to appeal assessed values every year."

Tennessee's fiscally strapped cities and counties are pressuring assessors more than ever before to aggressively value commercial property. Taxpayers must be aware of their rights under state law, lest an assessor attempt to prematurely capture any value increases prior to the next scheduled reappraisal.

With a proper understanding of the reappraisal process, commercial property owners in Memphis and Shelby County could get some property tax relief over the next three years, whether the fair market value of their properties increase or decrease.

Work the Reappraisal Cycle

Many states require assessors to reappraise property values annually. In Tennessee, counties have the option to reappraise property every four, five or six years. Shelby County reappraises every four years; its last reappraisal was in 2013 and the next one will be in 2017.

The purpose of reappraisals is for the assessor to adjust values for tax assessment purposes to actual fair market value. In a market that is moving up or down, the effect of a four-year reappraisal cycle is that appraised values fall out of sync with the market in between reappraisals.

Shelby County's reappraisal process is designed to favor taxpayers by enabling them to appeal assessed values every year, while the assessor can only adjust values in a reappraisal year (with some exceptions). This means that taxpayers can account for decreases in value annually, but the assessor can only capture increases in value every four years — when values increase.

The commercial real estate market in Memphis has been improving, and values have been steadily increasing, for certain types of property for the past year or two. For example, recent sales of medical office buildings indicate a much stronger market than in prior years. Demand for Class A multifamily properties have likewise increased, driving up sales prices. In the sought-after Poplar Avenue/240 corridor, vacancy in Class A+ office buildings had fallen to 7.7 percent in the third quarter of 2013, down from a peak of 20 percent in 2010, according to Cushman & Wakefield.

Owners have a right to an official notice from the assessor if the value on a property changes. The owner may then file an appeal with the Board of Equalization to contest the value change.

Owners should scrutinize the basis of a change in value by the assessor. Although there are certain times the assessor can change a value in a non-reappraisal year, there are other times when a change is not appropriate.

For example, an assessor should not "chase sales" to value a recently sold property at its sale price. Such a revaluation would constitute an illegal spot reappraisal. Also, the assessor should not revalue a property to reflect ongoing maintenance or repairs due to a turnover in tenants. Such actions by owners are ongoing and the revaluation of these properties would essentially amount to a reappraisal.

In what circumstances can the assessor revalue a property prior to the next reappraisal date? One example is when an addition or renovation is made to a property. In that case, the assessor may legally revalue the property because its physical condition has changed. Another example is when the Board of Equalization has reduced the value of a property due to its circumstances, such as being completely vacant. If the property is leased up, the assessor may revalue the property in subsequent years, even if not a reappraisal year.

Some property types in Memphis are still languishing under depressed values. The industrial vacancy rate stood at 14.1 percent in the third quarter of 2013, Cushman & Wakefield found. Industrial rents remained soft, as many users have relocated south of Memphis, across the state line in DeSoto County, Miss. Class C and D multifamily properties are still suffering from elevated vacancy and collection issues. Expenses, such as insurance, are rising at faster rates than rents. Many former tenants of Class C and D apartments have taken advantage of the institutional purchase and rental of single-family homes.

Fortunately, Tennessee law allows owners of these properties to file appeals every year. The assessor is not required to send an official notice to the taxpayer when the value stays the same, however. This means that taxpayer must remain vigilant to prevent the assessor from leaving the value for tax assessment purposes unchanged when the true fair market value of the property is decreasing. Taxpayers in this situation should exercise their annual right to appeal in order to avoid paying the same amount of property taxes on a property that is not worth as much as it was a year ago.


araines Andy Raines is a partner in the Memphis, Tennessee law firm of Evans Petree PC, the Tennessee 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..


Utah Assessors Argue Against Fair Market Value

Utah taxpayers could soon be required to conduct an item-by-item appraisal of personal property in order to contest its taxable value if Utah assessors have their way. Utah imposes property tax on a business' tangible personal property based upon the personal property's fair market value. Fair market value means the value a knowledgeable, willing buyer would pay a knowledgeable, willing seller for the property operating at its highest and best use.

The taxable value of a business' personal property is self-reported and self-assessed using state guidelines. Every year, a business must submit a signed personal property statement to each county in which it owns property. These statements must include the year of acquisition and purchase price for each item of personal property. The taxpayer then multiplies the prices by a provided percent-good factor to determine its estimated fair market value.

Unfortunately, simply applying the percent-good factor does not always equal the property's fair market value. For example, there may be additional functional or economic obsolescence for which the percent-good factors do not account. Consequently, a taxpayer is allowed to dispute the resulting value.

Some taxing jurisdictions, however, have recently argued that taxpayers may only dispute the resulting value if they prepare an item-by-item appraisal, rather than valuing all the personal property subject to tax as a group or operating unit.

Utah State Tax Commission to Decide
In a case pending before the Utah State Tax Commission, the taxpayer disputed the assessed value of its personal property, arguing that such property suffered from functional and economic obsolescence above that accounted for in the percent-good factors. Consequently, the taxpayer argued that its property was valued above fair market value.

In challenging the value, the tax-payer had an appraisal performed. The appraiser determined that the personal property would most likely be sold as a group of assets operating together, and thus valued the personal property as an operating unit. While the appraisal looked at every piece of personal property, the valuation reflected its aggregate value rather than values placed on each specific piece of personal property. Likewise, in applying obsolescence adjustments, the appraiser applied them to the whole, rather than to specific items of personal property.

The county which imposed the tax argued that such an appraisal was improper and deficient because it failed to appoint a value to each item of personal property separately, and as a result, the taxpayer did not meet its burden of proving that the personal property was over-assessed.

The county's argument appears to lack any precedent. The Utah Constitution and the Utah Code only require that property be valued at its fair market value operating at its highest and best use. The highest and best use value for the separate items of tangible personal property in this case was achieved when the properties were viewed as operating together as a unit. Furthermore, the Utah Constitution and Utah Code do not mandate itemized valuations.

In a 2011 case (T-Mobile USA Inc. vs. Utah State Tax Commission), the Utah Supreme Court stated that "the code simply provides that property shall be assessed by the Commission at 100 percent of fair market value. Requiring the Tax Court to use a specific valuation method ignores the reality that certain methodologies are not always accurate in every circumstance."

In the case pending before the Commission today, a ruling in favor of the taxing entity would drastically change the manner in which a taxpayer is to dispute the value of its personal property. Whereas now, there is no specific method that must be followed in order to determine the fair market value. If the Commission rules in favor of the taxing entity, taxpayers would be required to separately value each item of personal property listed on its personal property signed statement. Then tax-payers would have to add those values together to derive the value estimate for all of the personal property regardless of whether that summation is the fair market value at which the personal property would likely sell.

A ruling in favor of the taxpayer, however, maintains the status quo and further emphasizes that the standard for valuation in Utah is fair market value. So long as that is achieved, it does not matter which valuation method is used.

A decision from the Utah State Tax Commission is expected later this year.

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


Pittsburgh Taxpayers Face Double Jeopardy on Assessments

Pittsburgh-area commercial property owners who received dramatic increases in their 2013 real estate assessments may see those taxable values go even higher. This wave reflects the growing nationwide issue of changes in property values and how they are assessed.

In the case of the Steel City, Allegheny County's first revaluation in 10 years dramatically increased assessments, which had remained static even during market highs in the mid-2000s and the crash in 2008 and 2009. While the overall increase in county assessments was 35 percent, commercial owners bore the brunt of the increase, seeing their assessments rise 54 percent overall.

More recently, however, local legislators enacted an unusual deadline extension that has effectively put property owners — especially commercial owners — at risk for even higher assessments.

Note that, rather than rely upon a central tax authority, each of Pennsylvania's 67 counties sets its own assessment. Because the state lacks a mandate for periodic revaluation, counties normally only undertake revaluation when a taxpayer files suit but will occasionally do so on the county's own initiative. Historically, reassessments are so infrequent in Pennsylvania (sometimes a decade or more passes between reassessments) that property values spike when a county eventually does reassess, which leads to public outcry and confusion.

Following publication of the new 2013 assessments for Pittsburgh-area properties, property owners filed 100,000 appeals before the original deadline on April 1, 2012. Then, in early 2013, Allegheny County's chief executive asked the county council to reopen the filing of 2013 appeals until April 1, 2013, ostensibly to help property owners.

At the time, the chief executive told local reporters that the deadline extension would give taxpayers another opportunity to appeal. What he didn't say, however, is that extending the deadline also opened the door for school districts to file appeals.

Increases in Store for Property Owners
Reopening the appeals process hurt more property owners than it helped. Most taxpayers who needed to appeal had already filed, but Pennsylvania law gives school districts a right of appeal as well. When the county council voted to reopen the deadline and allow new appeals, thousands of school appeals followed. School districts filed most of the 7,000 new appeals in 2013.

What's more, Pittsburgh's office market was hot in the latter part of 2012. The districts tracked sale prices in the last three quarters of 2012 and subsequently appealed to increase the property owners' new assessments based on these sale amounts. Most of these appeals to increase valuations target commercial owners.

Of the new appeals filed by property owners, the vast majority are attempts to re-hear appeals that were previously filed. Those are likely to be thrown out by the courts. That will leave mostly school-initiated appeals.

As of this writing, administrative hearings are complete for the original 100,000 appeals, and administrative decisions that caused the taxpayer or school district to be unhappy with the outcome are already pending in court. Hearings on the 7,000 new appeals are underway.

What to Do
When a taxing district files an appeal, state law requires it to send notice of the appeal to the address listed in county records as the property's Change Notice Mailing Address, which is published on the county's website ( Some of the county records are outdated as to owners' addresses and, in those instances, some new owners are unaware of appeals on their properties.

New owners should check the address the county has on record for their properties and watch for notices sent to this address in the coming months. If a school district does appeal, the property owner would be wise to seek counsel, appear at hearings and defend his property's taxable value, otherwise risk having his assessment increased even more.

dipaolo web Sharon F. DiPaolo is a partner in the law firm of Siegel Siegel Johnson & Jennings Co., LPA, 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..


Highest And Best Property Use: Why Does It Matter?

"Any investor wants to maximize his property's value and income-producing potential, but many fail to take this concept seriously — until they realize what they could be missing out on"

Who cares about the highest and best use of a property? Well, appraisers certainly care, and when a property ends up in litigation, the judge cares. Understanding how these authorities determine value will make it clear that commercial property owners should care about highest and best use, too.

I learned the importance of highest and best use during my first year at the Department of Justice, in a small condemnation or government taking case. The property owner had a single-family home on a prime piece of commercial real estate, and a highway expansion was bringing traffic lanes to within 12 feet of the house. The property had been rezoned commercial and was surrounded by other commercial uses.

As a residential asset, the entire property before partial condemnation had appraised at $140,000, whereas the land as a commercial site was worth double that amount. Because the highest and best use of the property was redevelopment as a commercial site, the value for the land taken as right of way was worth more than the residential value of the entire, previously undivided property.

Not all analyses of highest and best use are so simple and obvious. This is particularly true in the context of appraising an industrial property for a property tax appeal. The standard test for determining highest and best use has four prongs, and each can be critical to the valuation of the property.

That question is: What use is legally permissible, physically possible, financially feasible and maximally profitable?

The first prong, what is legally permissible, refers to zoning or other governmental restrictions, as well as the deed restrictions, and the uses that those parameters allow for the property. In a recent case, a 57-acre property was zoned industrial, which allowed for offices as an accessory use to the industrial use. Improvements included several older flex manufacturing buildings totaling close to 600,000 square feet. The condition and use of the flex buildings varied but the need to use the structures primarily for manufacturing no longer existed.

The Oregon Department of Revenue's appraisal valued the majority of the 600,000 square feet as office use. This did not meet the test for what is legally permissible, because the zoning only allowed office as an accessory to an industrial use.

What is financially feasible? In this same case, the appraiser for the Department of Revenue also failed to address if it was cost effective to reconfigure several 80,000-square-foot, two-story flex manufacturing facilities for multitenant use. The government's appraisal lacked any discussion of the basic demising costs to create smaller rentable spaces, including common areas for hallways, lobbies, and relocation of elevators and restrooms.

What is physically possible? Many of the industrial buildings in this example were interconnected. They had shared utilities, were situated on a single tax lot and offered only limited access without dedicated parking for a given building. Separation of the buildings into viable stand-alone parcels may have been prohibited by the physical location of the utilities, the placement of the buildings on the lot, or by parking, ingress and egress to the site.

The fourth prong is often the simplest to address. Of the possible uses meeting the first three facets of the highest-and-best-use test, which offers the maximum profit for the owner?

An appraiser's failure to do a highest-and-best-use analysis and appropriately support its conclusions can be fatal in a trial setting. In a 1990 decision, Freedom Federal Savings & Loan vs. Department of Revenue, the Oregon Supreme Court held that highest and best use of the property subject to evaluation is the first question that must be addressed in a credible appraisal. This set the critical framework for valuation, and determines what other comparable properties can be used to value the subject property.

These highest-and-best-use tests must be appropriately supported. In the context of an investment property, for example, would an investor deem the current use to be most productive from a financial or physical basis for the property, or would an alternative use be preferable?

If a careful highest-and-best-use analysis is done at the beginning, the appraiser can select credible comparable sales or leases for use in valuation. The property owner, in turn, will be treated fairly, whether in a tax assessment appeal or an eminent domain acquisition.

CfraserCynthia M. Fraser is an attorney at Garvey Schubert Barer where she specializes in property tax and condemnation litigation. The firm is the Oregon and Washington member of the 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..


Bay Area Real Estate Recovery Bolsters Proposition 13

The recovery of the Bay Area's real estate markets has muted the public outcry to change Proposition 13's restrictions on assessed value increases. Passed in 1978, Proposition 13 has come under fire for fostering unequal tax burdens.

The reasons that tax-reform fervor is weakening are twofold. First, as the recovery spurs real estate sales, properties will be reassessed at higher market values under Proposition 13's acquisition value system. Second, recent sales are also likely to increase real estate values generally, which will permit assessors to raise the assessments of other property owners. These trends have increased the values of property tax rolls and tax revenues.

Acquisition value system increases tax revenues

One under-appreciated aspect of Proposition 13 is its requirement that assessed values for property tax purposes be equated to acquisition values or sales prices. Critics of Proposition 13 contend that the law keeps values too low and reduces the amount of taxes going to government agencies. But in an active real estate market where properties are held for as little as five years, the opposite is true. In such markets, sales prices are usually climbing, assessed values increase, property tax collections rise, and local governments receive more revenues.

The recent up-tick in Bay Area real estate sales is proving the benefits of Proposition 13 because the values of tax assessment rolls have increased for all counties. For example, the 2013-2014 tax year assessment rolls increased over the previous year by 8.3 percent in Santa Clara County, by 6.0 percent in San Mateo County, by 5.0 percent in Alameda County, and by 4.5 percent in San Francisco. Statewide, assessed values increased by $191.5 billion or 4.3 percent over the prior year.

Recent sales affect assessments

The increase in real estate sales activity doesn't just impact the assessed values and taxes on properties that have sold. It can also affect the values and property taxes for real estate held by investors. Here's why.

Under Proposition 8, the bookend to Proposition 13, assessors can and have reduced real estate assessments in recent years to reflect across-the-board declines in market values. In some cases, the reductions have been considerable, well in excess of the 2 percent annual adjustments that are permitted under Proposition 13.

As real estate markets recover, the Proposition 8 reductions that assessors made in prior years to reflect market downturns usually are reversed. The Proposition 8 values of prior years can shoot up much faster than 2 percent per year for properties that are assessed below their trended Proposition 13 values, depending on where current sales show market values to be. As Proposition 8 values are reversed and values return to Proposition 13 levels, the property taxes on those assets also rise, thereby increasing tax revenues to local governments.

Split roll unnecessary

One of the changes currently advocated by opponents of Proposition 13 is to create a split tax roll which would tax commercial properties differently from residential ones, either by requiring commercial properties to be reassessed annually instead of upon acquisition, or by increasing the tax rates for commercial properties.

However, as described above, such changes are unneeded so long as there is an active market for commercial properties, and so long as sales prices generated by that market tend to increase over time, which is usually the case. When these conditions are present, assessed values will increase and property tax revenues will rise.

As markets continue to recover and assessed values rise, property owners should take stock of their assessed values. Local assessors will begin to set assessed values for the 2014-2015 tax year in January 2014. In some cases, values reduced under Proposition 8 in prior years will be restored to Proposition 13 levels. Taxpayers should ask whether those restored values represent market values, and if a value appears excessive, the property owner should file an appeal.

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


Owner, Beware

"When Assessors Seek Business Income Information"

Is it appropriate for a tax assessor to use income information in determining taxable value?

That question comes up frequently in property tax cases when assessors seek income information from taxpayers. The answer is that whether a request is appropriate depends on the type of property at issue and the type of income information being sought. In several recent cases involving manufacturing operations, industrial enterprises and other types of businesses, assessors have sought information on income from the business or businesses operating on the property, rather than on income from the property itself.

Often, assessors have a legitimate reason to seek certain types of income information from taxpayers. For instance, if the property type at issue is typically rented in the marketplace, as is the case with an apartment complex or an office building, it will likely be entirely reasonable for the assessor to request, and for taxpayers to use, the property's rents when evaluating its market value. Indeed, investors regularly rely on rental information to determine the price for such property.

However, some types of income data should be excluded from a property assessment. In a number of recent instances, for example, assessors attempting to value manufacturing or industrial properties have sought income and production information relating to the manufacturing process, which is unrelated to the property's income-producing capacity. Where the business is something different from the rental of property and the business income derives principally from assets other than the real estate, reliance on income information will produce misleading conclusions about the value of the real property (whether for taxation or any other purpose).

To better understand the problem, consider a hypothetical downtown office building that houses law firms, accounting firms, travel agencies, dental offices and any number of other tenants. No reasonable assessor would consider the revenues of the tenants in determining the value of the office building.

Why not? Because that business revenue would indicate only the value of the business taking place in the building. Tenant revenues do not determine the building's rent, and no reaonable investor would value the building on the basis of such income information. In short, it is irrelevant.

The same generally goes for production and income information when it comes to manufacturing proeprties. A typical manufacturing process requires personnel, machinery and equpment, managerial expertise and real property. Add to that goodwill and other intangibles that allow the manufacturer to capture market share and sell its products, and it is clear the income from product sales incorpoates value from a number of assets unrelated to the value contribution of the real property.

Special Purposes, Special Properties

Why, then, might assessors seek business income information, and how should taxpayers respond to such requests?

In many markets, manufacturing properties are more lilely to be in owner-occupied rather than leased space, so determining the equivalent of market rents for such properties is difficult. Assessors seeking production or business income information occassionally argue that they cannot use sales data because the property is a special-purpose asset. But even if the property is special purpose, the assessor should not seek and use income information unrelated to the property and its market value.

Attorneys also hear assessors argue that the property represents a special component of, or provides a particular "synergy" to, the taxpayer's business. These assessors contend they need business income information to accurantely reflect the property's true value. But such efforts to capture special value apart from the real estate itself are efforts to tax an intangible, not the property.

In some cases, it may be appropriate to consider income information to determine whether a property suffers obsolescence and is, therefore, over-assessed. For example, if the total income from all operations is insufficient even to support the real property at its current assessed value, an argumnent exists that the real property suffers obsolescence (relative to its assessed value). However, the fact that income shortfalls might indicate obsolescence does not make business income generally indicative of real estate value.

When assessors request business income unrelated to the property or its rent, taxpayers should consider objecting on several grounds: First, if the information is truly unrelated to the property or its rent, the taxpayer should explain that to the assessor \and try to provide only the property's rental information, if available.

Second, taxpayers should guard against the disclosure of proprietary business information. Many states have laws that protect confidential taxpayer data such as information relating to earnings, income, profits, losses and expenses; taxpayers are wll advised to mark that information as confidential and take other steps to avoid public disclosure of any income information they provide to the assessor.

Suess David photo

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


Case Study: If The Build-To-Suit Fits.....

"Once vacated by the original user, build-to-suit properties require a different valuation process."

Build-to-suit properties, like custom suits, are wonderful for the original purchaser. A made-to-order suit matches the specific user's size and build and looks just right on him. But try giving that suit to a friend, and the suit that looked great on you may not look as good or fit as well on him.

Similarly, build-to-suit properties may offer limited or no functionality to the next user. The following case study of a freestanding restaurant illustrates the challenges of determining the taxable value of a build-to-suit property.

The property was built in Austin in 2006 for a dine-in hamburger chain with restaurants in the U.S. and Canada. Located at a high-traffic intersection in front of a large shopping center, the restaurant measured 6,780 square feet, according to Travis Central Appraisal District records.

When the restaurant closed its doors in 2011, the restaurant appeared to the casual viewer to be in excellent condition, but the property owner demolished the building. From there, one might have assumed that a different property type would replace it.

As such, it was surprising to see another restaurant replace the demolished property in 2012. When completed, the new structure measured 6,350 square feet, tax records showed — nearly the same size as the previous building's 6,780 square feet. And the new building, like the old, was home to a national chain, in this case a steakhouse.

In this example, the value to the original user was an investment value and most likely equated to the original cost less physical depreciation. The investment value to the new owner was land value less the cost of demolition.

So how did a relatively new building suffer 100 percent depreciation after only a few years of physical depreciation? In this case, the custom suit was given to a friend, and it just didn't fit. The exterior of the first building matched the branded design of a specific chain restaurant, and on the inside, the builder had tailored the kitchen and dining areas to this particular chain. But the new user also wanted a specific exterior design, kitchen and dining area layout to match a different restaurant chain.

So, how then can an appraiser or assessor value a build-to-suit property without putting a nominal or "zero" value on the improvements?

In Texas, the property tax code requires assessors to value properties at market value, not the investment value to any one specific user. "The Appraisal of Real Estate, 14th Edition" states that, "it is generally agreed that market value results from the collective value judgments of market participants...In contrast to market value, investment value is value to an individual, not necessarily value in the marketplace."

In the case of a build-to-suit restaurant, it can be assumed that the pool of potential second-generation users who find functional utility in the property is limited to local restaurateurs or small local chains that do not require a specific look or layout for brand recognition. The market value to these users is likely somewhere in between the physically depreciated cost and the
land-less-demolition cost.

This implies that functional obsolescence is inherently built into a build-to-suit property. While measuring the amount of obsolescence is beyond the scope of this article, one strategy is to inventory the number of comparably sized restaurants in the subject's market area and determine the percent of those restaurants that are regional or national chains.

A larger percentage of such chains in the market area indicates a greater degree of functional obsolescence. Using the income approach to value, a larger percentage of regional or national chains implies fewer potential users of the property and, therefore, a greater risk, which can be reflected in the cap rate.

An assessor must consider these factors when determining the market value of a build-to-suit property for property tax purposes. Significant value swings can occur when looking at the investment value for one specific user rather than the market value for a collective of market participants.

Once the market participants who find utility with the property have been determined and weighed against the market participants for which the" suit just doesn't fit," the assessor can determine a proper market value.

Kevin Sullivan is an Appraiser and Tax Consultant with the Austin, Texas, law firm Popp, Gray & Hutcheson. 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. Sullivan can be reached atThis email address is being protected from spambots. You need JavaScript enabled to view it.


South Carolina Taxpayers Play 'Dating Game'

Inconsistencies and confusion reign in determining effective date for valuing commercial properties.

"The practical implementation of the mandated five-year county-wide reassessment program further compounds the dating confusion. Many counties delay county-wide reassessment for one year, as authorized by statute, and in some cases, two years..."

Commercial property owners in South Carolina already faced an unsettled and confusing issue in trying to determine he valuation date for ad valorem taxes. Now, the South Carolina Court of Appeals has further complicated the issue.

Determining the valuation date should be simple: South Carolina law states the pertinent date of value for a given tax year is Dec. 31 of the preceding year. For example, logic suggests the valuation date for 2013 property taxes hould be Dec. 31, 2012. But that logic is often mistaken. South Carolina statutes require local assessors to engage in a countywide reassessment every five years. The process is referred to as an "equalization and reassessment program," and is intended to equalize the tax burden on property owners. Logic suggests the equalization program will equalize values, but that logic is also mistaken.

Act No. 388 and its Wake

Approximately seven years ago, the South Carolina General Assembly passed Act No. 388 which, among other things, capped value increases resulting from a county-wide equalization and reassessment to 15 percent of the property's prior assessed value, so long as the property had not changed hands in the past five years. However well-intentioned, the effort to lower property tax burdens wrought havoc with the concept of equalization.

The legislature also created the concept of an assessable transfer of interest, which eliminated the cap in some situations, such as in certain transfers of interest within the ownership entity, or following construction of improvements. In a sense, the legislation penalizes a landowner from a tax standpoint for improving a property's economic performance with new construction.

By their nature, caps erode the principal of uniformity since taxes for some properties go uncapped. Competing properties may have identical uses and financial performance, but taxes may be capped on one property, but not on the other. Under Act No. 388, two economically identical properties could be taxed using different valuation dates.
In fact, Act No. 388 promulgates a potential for four alternative valuation dates.

In an effort to address some of the outcry over the inequality engendered by Act No. 388, the legislature in 2012 provided an exemption of up to 25 percent of the purchase price of commercial properties. Unfortunately, this provision adds yet another little-known filing deadline, since the application for the exemption is due on or before Jan. 31 of the applicable tax year. In other words, a property purchaser must file for this exemption prior to the first Jan. 31 after acquisition. Failure to do so likely invalidates the exemption.

The practical implementation of the mandated five-year county-wide reassessment program further compounds the dating confusion. Many counties delay county-wide reassessment for one year, as authorized by statute, and in some cases, two years. For example, after delaying a scheduled 2004 reassessment to 2005, Charleston County delayed its next scheduled county-wide reassessment from 2010 to 2011 and decided to use a Dec. 31, 2008 valuation date rather than Dec. 31, 2010. The question is what date to use for valuation in the county-wide reassessment. Should it be the date on which reassessment was scheduled to occur or Dec. 31 of the year prior to implementation?
The correct answer is unclear.

Interim Appeals Defy Logic

So, what happens if a property owner wants to appeal the value of a property in the middle of the fiveyear period because of a change in economic performance? For example, is it fair to tax a property based on its economic status as of the valuation date used in the last county-wide reassessment, when it may have lost its anchor tenants since then? Logic and the clear language of state statutes suggest the valuation date should be the lien date, or Dec. 31 of the year prior to the year in which taxes are due, in order to treat properties equally based on economic performance.

According to the South Carolina Attorney General, however, that logic again would be wrong. In 2010, the attorney general opined that county assessors should ignore the unambiguous statutory language regarding valuation date and use the effective date of the last county-wide reassessment. County assessors are implementing this opinion regardless of logic.

In the 2013 case of Charleston County Assessor vs. LMP Properties, the South Carolina Court of Appeals further complicated the dating problem. In this case, the parties agreed to a Dec. 31, 2003, value date because 2004 was the date of the county's last county-wide reassessment. However, the Court determined Dec. 31, 2007, was the proper date for determining the property's highest and best use. In other words, the Court held an appraiser should use one date to determine the property's value and a different date to determine the property's highest and best use. How licensed appraisers meet these requirements and satisfy professional standards under the Uniform Systems of Professional Appraisal Practice defies logic. Logic suggests that assessors should use a uniform date, the lien date, for valuing real property. Logic also suggests the property's economic performance as of the lien date should control for interim appeals. But, then again, whoever said that dating — in love or taxes — had to
be logical?

ellison mMorris A. 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 A. Ellison can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..


Is History Repeating Itself in Multifamily Rental Space?

One of the bright spots that have emerged in the real estate market over the past five years of the economic recovery has been the multifamily rental segment. Of the 49 major metropolitan markets tracked by Cassidy Turley, only 17 have a multifamily vacancy rate above 5% and only two have a vacancy rate above 7%, according to the Firm's US Multifamily Forecast Report for Summer 2013.

Rental rates have increased in virtually all markets, with the strongest growth in top-tier cities. In Chicago, for example, rents at class A buildings have increased 21% since 2009. And at the national level, multifamily transaction volume quadrupled between 2009 and 2012. Despite these robust indicators, however, some observers worry that the industry may be overestimating the extent of the US multifamily recovery, and that developers are setting the stage for the next bubble.

Since 2012, construction has come to the fore. Almost 60,000 new multifamily units are expected to reach completion by the end of 2013 in the top 10 markets. The bulk of the new construction is class A buildings, which feature amenities such as a doorman, concierge services, work-out facilities, pools and in-unit washers and dryers.

Millenials, born between the mid-1980s and mid-1990s, appear to be driving the rental market. They are renting instead of buying for several reasons. Some have limited opportunities to finance the purchase of a home. Others want to remain mobile while pursuaing their careers. New construction is highest in cities like Austin, Washington, Chicago and New York, which are some of the prime designations for millenials.

While optimism is warranted, there are signs that the sector may have ignored the lessons of the 2008 recession. The availability of capital alone cannot be the determining factor driving development in a segment of the market that has become dominated by the addition of new supply. The real estate market must operate within the parameters of the greater economy, and that overall economy merits far less enthusiasm than the multifamily boom would suggest.

The liklihood of an over-supply in the apartment market raises interesting property tax concerns. The prospect of lower fundaments raises risk and lowers revenue expectations. Ultimately, it must be anticipated that pricing will change and values will decline.

Real estate taxes are based on market value, but the development of new values for real estate taxes lag well behind the market. In many places, the decline in value over the past five years still has not been fully recognized in the values established by assessors. Developers must have strategies in place which accelerate assessors' recognition of value changes taking place in the market. The key strategy to help owners keep real estate taxes in line with value changes is assiduous appeal of property tax assessments.

In 1989, the response to the savings and loan crises, the Uniform Standards of Professional Appraisal Practice were promulgated by the Appraisal Standards Board. These standards govern both the mass appraisal practices of assessors and the appraisal of individual properties by private appraisers, and will take into account the changes in the market as they arise. Thus apartment owners need to diligenty scrutinize their tax assessments in the next several years to ensure that these assessments reflect the changes in market values, and where they don't file an appeal.3

reganJames Regan is the managing partner of the Chicago law firm of Fisk Kart Katz and Regan, the Illinois member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. His Fish Kart colleague Antonio Senagore also contributed to this article and he can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..


Answer to a Question Posed to Members of the Real Estate Forum Editorial Advisory Board

"How will market conditions in 2014 be different from what we saw in 2013?"

Stephen H. Paul, Esq., President of APTC, answered as follows:

"As Congress has been prone to "kick the can" down the road on tough budget issues, I believe many financial institutions holding large amounts of real estate mortgage paper have been kicking the can down the road over the past few years on many of their loans that have been underwater for some time, extending balloon payback dates into the future in hopes of having their troubled properties recover from their lagging performance. At some point, these financial institutions will have to fish or cut bait as to those properties that haven't recovered during their period of leniency. To the extent these institutions swallow hard and take their hits, we could see a large number of properties come onto the market at attractive prices for investors during 2014 — a reprise of 2010-2012.

"As to those properties that have recovered during this forgiveness period, to the extent they come back to the market, if the they're higher quality retail and office assets, we could see some slight appreciation in prices during 2014, certainly in primary, and most probably in good secondary markets as well."

Real Estate Forum, December 2013


Stephen H. Paul 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..


Eagle Ford Shale Ignites Boom

"Natural gas reserves a boom for not just energy industry, but for all of South Texas."

South Texas is humming with activity, much of it attributable to the Eagle Ford Shale and the rapid growth it has brought to the region. The opportunities available and the boom resulting from the Eagle Ford resources have generated significant wealth and economic activity in these modest communities. As the population expands with workers and South Texas hastens to keep up with the surging demand for housing, roads and other infrastructure, property values are on the rise.

The boom has fueled significant tax assessment increases over the past few years. South Texas counties are reaping the benefits of the new prosperity by increasing property values and adding more property to their tax base. The trend serves as a poignant example of how externalities affect value.

What is the Shale?
The Eagle Ford Shale is a geological formation from the Cretaceous period spanning the Mexican border in South Texas into East Texas. It is roughly 50 miles wide, 400 miles long, and pans 30 Texas counties between the Buda Lime and Austin Chalk formations. The shale produces dry gas, wet gas, natural gas liquids and oil.

Some experts believe the Eagle Ford discovery could become the sixth largest oil discovery in the history of the United States. Combine this with the fact that it is as large as or larger than the Barnett Shale play in terms of natural gas reserves, and you have a recipe for a legendary oil and natural gas boom.

Since 2008, the exponential growth in the Eagle Ford Shale has been staggering. In 2008, there were roughly 350 barrels of oil produced in the region per day; today, almost 10 times more barrels of oil are produced per day. And, as of the end of September, an estimated 5,200 drilling permits have been issued.

Benefits to South Texas
In South Texas, housing supply has increased as numbers of transient workers migrate to work in the oil fields, on pipeline projects and in new gas processing plants. From 2000 to 2010, the population in just a six-county region (Dimmit, Frio, La Salle, Maverick, Webb and Zavala) grew by roughly 66,000 people, and housing grew by about 22,000 units.

The results from the new prosperity are evident in the increase in property tax assessment values. For La Salle County's Cotulla Independent School District (15D), total taxable value was over $2.3 billion in 2012, compared to $408 million in 2008. Nearby, the Dilley ISD total taxable value more than doubled to $235 million in 2012, from $103 million in 2008. While the majority of the increase in tax base is due to the value of oil, gas and minerals and the industrial personal property needed for these projects, the ripple effects can also be observed in commercial and residential properties.

For example, lodging room revenues in the oil and gas areas grew by almost 16 percent in 2012, which is more than the state average, according to a report prepared by Source Strategies Inc. for the Office of the Governor, Economic Development & Tourism. Also, room revenues in the city of Alice (Jim Wells County) were $12 million in 2012 compared to $5 million in 2008.
As room revenues increase, appraisal districts have captured the new income streams and raised hotel values.

This is just one example of how the activity from the Eagle Ford boom has filtered down to property values. But while room revenues have been consistently increasing over the last
couple of years, Source Strategies suggests that the growth seems likely to moderate, as revenues during the second quarter 2013 declined slightly in Victoria and Laredo.

Similarly, as the market begins to even out and supply catches up with demand, there may be more stabilization of property values. In any event, property owners should be watchful of market trends in reviewing their property values.

Continued Growth Ahead
Anticipated future production in the Eagle Ford Shale indicates continued expansion in South Texas. By 2021, the Eagle Ford Shale could produce as much as $62.2 billion in output and $34 billion in gross regional products, according to projections by the University of Texas at San Antonio's Institute for Economic Development. More permits continue to be

approved for drilling.

As communities in South Texas catch up with the increased activity, property owners should be on guard against unfair and inflated property tax assessments.

MelissaRamirez150Melissa Ramirez is a principal with the Austin law firm of Popp Hutcheson P.L.L.C., which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Ms. Ramierz can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.


Will Flood Insurance Changes Put Property Values Under Water?

"Both residential and commercial policy holders currently benefitting from subsidized rates will see a 25 percent yearly rate increase until each rate reflects "true flood risk" according to the new flood insurance maps to be generated by FEMA. New risk tables will not be available until June 2013, making the magnitude of the adjustments uncertain..."

In Texas, flooding is a part of life. Between the Galveston hurricane of 1900 and Hurricane Ike in 2008, seven major hurricanes and destructive tropical storms have ravished the Texas Gulf Coast. The people of Texas have lived through, and re-built, in the wake of these and many other flooding events.

Congress enacted the National Flood Insurance Act of 1968 to create the National Flood Insurance Program (NFIP), intended to provide an insurance alternative to help property owners meet the escalating costs of repairing damage to buildings and other property losses. The program insures roughly 5.5 million homes, the majority of which are in Texas and Florida. The NFIP also provides building-and-contents flood insurance for businesses.

Communities participating in the program must adopt and enforce a floodplain management ordinance to reduce flood risks in zones recognized as Special Flood Hazard Areas. In exchange, the federal government will underwrite flood insurance for these high-risk communities. The Flood Disaster Protection Act of 1973 made the purchase of flood insurance mandatory for the protection of property within designated special flood hazard areas. Later, the Flood Insurance Reform Act of 2004 further modified the national flood insurance program to reduce losses to property owners with repetitive claims.

Rates for policies under the national program are in most cases substantially lower than privately available insurance, and are the only coverage available for some high-risk locations. Policy premium rates are depicted on flood insurance rate maps (FIRMs) and the mapping process is managed by the Federal Emergency Management Agency (FEMA), which oversees the flood insurance program.

Since 1978, the national flood insurance program has paid more than $38 billion in claims, and in 2012, it insured roughly $1.2 trillion worth of property. In January 2009, mostly as a result of the devastating 2005 hurricane season, the national flood insurance program owed the U.S. Treasury approximately $19.2 billion, with yearly interest payments of more than $730 million. The program's worrisome financial health brought it under scrutiny during the 2009 re-authorization process, and the Government Accountability Office issued multiple reports on the program.

Congress passed the Biggert Waters Flood Insurance Reform Act of 2012 to modify the way FEMA manages the national flood insurance program. The act will require the program's rates to reflect true flood risks, a premium hike that should make the program more financially stable. The 2012 act also calls for FEMA to change the way it implements flood insurance rate maps: Under the act's provisions, actions such as buying a property, allowing a policy to lapse or purchasing a new policy can trigger rate changes, effectively ending subsidies and grandfathered policies.

Both residential and commercial policy holders currently benefitting from subsidized rates will see a 25 percent yearly rate increase until each rate reflects "true flood risk" according to the new flood insurance maps to be generated by FEMA. New risk tables will not be available until June 2013, making the magnitude of the adjustments uncertain.

The uncertainty about rates presents a hazard to property values in high risk areas. The greatest uncertainty and risk to property values, however, may be updates to flood insurance maps, which FEMA is currently preparing.

Some policy changes, such as ceasing to recognize private levies and revisions to historical flood lines, may change the risk rating of many properties. For properties where the risk severity and availability of subsidies are changing, the overall economic viability of the property may be at risk.

Changes to the national flood insurance program have created economic obsolescence affecting the values both of properties currently in the program and of properties not in the program, which may have their risk rating changed by the flood maps' pending revision.

While the magnitude of the change in property values may be unknown for several more months, enough information is available to argue that the additional risk these regulatory changes introduce will reduce taxable values of potentially affected properties. Once all the variables are known, affected property owners should undertake an in-depth analysis of the effect of the regulations on property value to determine whether a tax appeal is necessary to obtain a fair property tax assessment.

RodriganoSebastian Rodrigano is a principal at the Texas law firm of Popp HutchesonPLLC. 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. Rodrigano can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..



The Price of Air - New York Ponders Fair Value for Right to Develop Taller Buildings

In order to fund proposed transit improvements in the vicinity of Grand Central Terminal, New York City is considering an air-rights zoning change to allow construction of perhaps a dozen buildings, primarily office towers, that would stand taller than is currently permitted. Developers would be asked to pay the city about $250 per square foot to acquire these new air rights, and the city would use the monies to carry out its proposed public improvements.

The pricing of new air rights under the proposal stands to pit the city against some New York property owners, who could see the value of their own air rights slashed as a result. A question with implications for commercial property owners is, how did the city determine the square-foot charge of $250? An article by Laura Kusisto in the Aug. 13 edition of the Wall Street Journal explores the brewing controversy.

The Landauer Valuation & Advisory organization calculated an estimate of value for the city. Landauer is a division of Newmark Grubb Knight Frank, a well-known real estate advisory firm.

Landauer first determined the value of office land in the Grand Central area, then applied a 35 percent discount. According to Robert Von Ancken, its chairman, residential or hotel uses were not considered in valuing the proposed air rights. Landauer relied on current market data and a methodology used in the past by market participants.

Argent Ventures, which already has a dog in this argument because it owns the air rights above Grand Central, has termed $400 a more accurate unit value. Argent's president has asserted that air rights should not be discounted off underlying land values and might even be worth more than land with the same development potential.

Argent bases this on work performed for it by Jerome Haims Realty Inc. and backed by another appraisal firm. However, as Kusisto notes in her Wall Street Journal article, "Argent has an interest in putting a higher price tag on the air rights because it will have to compete with the city to sell air rights to developers if the rezoning passes."

This controversy obviously sets an existing stakeholder against a municipality that needs to encourage growth in a particular submarket. The value of Argent's Grand Central air rights will be sharply influenced by the city's offerings. The city probably cares as much about creating tax flows from the buildings that would float on the newly created air rights as it does about the selling price, although the Wall Street Journal article does not mention this point.

From a valuation perspective, it would be interesting to review the Landauer and Haims studies, if only to learn in detail how these firms valued the right to create what apparently will be millions of square feet of new office product. Issues such as absorption, the impact of the transportation improvements proposed by the city on market values and the data relied upon to upport the appraisers' conclusions could offer a textbook tudy of a very complicated topic.

Ultimately, the New York City Council must vote on the creation and price of the new air rights.

Pollack_Headshot150pxElliott B. Pollack is a member of Pullman & Comley in Hartford, Connecticut and chair of the firm's Valuation Department. The firm is the Connecticut 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..




A Reason to Challenge Tax Assessments

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

There is a common perception among assessors that an increase in real estate sales activity is a sign of an improving economy. For a commercial property owner on the receiving end of a tax assessment increase, however, it is a good idea to analyze how the assessor came to his/her conclusions and then decide if the increase is justified, or if a protest is in order.

Sales of office, retail, hotel, multi-family and industrial properties in Atlanta increased in number from early 2010 to late 2012, according to CoStar Group, a national researcher. But does that increase automatically result in higher valuations? What trends do the sale prices over this period indicate on a per-square-foot, per-room, or per-unit basis? More importantly, what conclusions, if any, should the taxpayer or assessor draw regarding valuation of individual properties?

Retail properties accounted for the largest number of commercial, arms-length sales transactions in Atlanta from the beginning of 2010 through 2012. Narrowing the focus of sale price data reveals that the average price per square foot paid for retail properties in that period actually decreased by 20 percent. Full-year data for 2013 is not yet available, but sales through July suggest that the downward trend in average price per square foot for Atlanta's retail properties is continuing.

Atlanta's highest percentage increase in number of sales from 2010 through 2012 occurred in the hotel market; despite the uptick in volume, the average price paid on a per-room basis for hotel properties decreased by about 17 percent. Available year-to-date data for 2013 indicates that the average room rate for hotel properties may be increasing, with an associated effect on hotel valuations, but each property will require a closer analysis of the class of property sold, its location, and other relevant facts.
Atlanta's multifamily sector posted a compelling percentage increase in the number of sales completed from early 2010 through 2012. In this group, the average sale price per unit increased over that same period. But again, valuing a specific property would require an examination of all factors, such as quality and location.

The market's office sales increased significantly in number from the beginning of 2010 to year-end 2012. During that time, the average sale price per square foot increased, but like other categories, specific factors must be examined to arrive at a fair value.

Finally, while industrial properties experienced a dramatic increase in the number of sales from the beginning of 2010 to the end of 2012, the average price per square foot for these properties in Atlanta decreased steadily in 2011 and 2012. Whether this trend will continue in 2013 is unknown. Sales would need to be examined for specific industry types or sub-categories of properties in order to draw worthwhile conclusions about the value of a particular parcel.

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

Research regarding many personalized, property-specific factors and criteria are involved in making a determination of value, including an analysis using the income approach. Atlanta commercial property owners should question any assessor's suggestion that sales volume recovery in the Atlanta marketplace equates to an increase in the value of their properties.

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..


Madness in the Method Inflates Property Assessments

Though a few large companies may be expanding in the Portland region, it won't necessarily be a boon to property owners.

"The madness is in the method of assessment, because it is impossible for the assessor to physically inspect and appraise each property on its rolls. Instead, the assessor will typically add up a taxpayer's historical investments in a property as reported each year..."

The real estate headlines in Oregon newspapers this month kindled cautious optimism that the economy is in full recovery. One article touted a boom in the residential and commercial markets of Canby, a Portland suburb, while another trumpeted a bash to kick off a $25 million, mixed-use development in downtown Portland.

These positive headlines added to the stimulating effects of last year's expansion announcements by Nike and Intel. News of those companies' plans for growth in Hillsboro bolstered the industrial, office, and residential markets in the Sunset Corridor.

Industrial property owners, be vigilant. This uptick in the economic outlook does not mean there should be a corresponding increase in a property's real market value and a corresponding over-assessment of the property.

It should be simple to spot an inflated assessment. By statute, a property is assessed at its real market value, defined as what a willing buyer and willing seller would agree upon in an open market transaction. Assessments are also subject to Measure 50's maximum assessed value limitations. The assessed value is the lower of the maximum assessed value or the real market value.

Yet over-assessments are common, and the reasons numerous. Despite the economic uptick, there are still significant economic impacts to industry in Oregon resulting in over-valuation of property by the Counties and the Department of Revenue.

The madness is in the method of assessment, because it is impossible for the assessor to physically inspect and appraise each property on its rolls. Instead, the assessor will typically add up a taxpayer's historical investments in a property as reported each year, and equate the cumulative sum of those investments to the real market value of the property — without any regard to market conditions.

Market conditions that impact a company and the real market value of the property can be significant, particularly for an industrial property. Take a high tech campus that was built in the 1970's and designed for a single user. Back then, tech firms favored flex buildings designed for manufacturing, research and development, assembly, and distribution with a typical floor plate of 40,000 square feet. No thought went into an exit strategy when planning the design or layout of the access, parking, integrated utility systems, and location of the buildings on the property.

Fast forward to 2013, when globalization generally calls for overseas assembly plants and distribution centers located strategically to the company's global market. The need for a single-user campus with six or more dated, 100,000-square-foot flex buildings that share interconnected utilities on a single tax lot is gone. Globalization is an economic force that is external to a company and one that drives down the market price of these facilities. It is a form of obsolescence that is rarely accounted for in a property valuation.

Another factor that assessors typically overlook at industrial sites is functional obsolescence. Consider a facility built 30 or 40 years ago. Technology for the manufacturing processes may have advanced over the years, but the building design, including the ceiling height or floor load, may limit the use of the new technology. The overall utility of the property suffers from functional obsolescence that impairs the market value.

The assessor often lacks the people power to drill down into the details of every property. Because property value reflects not only local market conditions, but also the inherent functional and economic obsolescence unique to the property, a property being taxed solely on a trending basis may be over-assessed.

CfraserCynthia M. Fraser is an attorney at Garvey Schubert Barer where she specializes in property tax and condemnation litigation. The firm is the Oregon and Washington member of the 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..


Use Quality Data to Fight Unfair Tax Assessments

Owners appealing unfair tax assessments must aggressively and specifically examine the general economic climate.

"While area bankers express high hopes for the coming year, that optimism is not reflected in actual lending practices for the past year. According to the St. Louis Federal Reserve Bank, commercial and industrial loan volume in the United States totaled $16.4 billion in 2012, up slightly from $14 billion in 2011."

By accident or design, assessors tend to punish commercial property owners by increasing the assessed value of properties that outperform the market, thereby generating more taxes for the local government. The problem arises from real property valuations based upon a cash flow analysis, which fails to take into account intangible qualities that boost cash flow but are unconnected to intrinsic real estate value.

Intangible qualities that can increase a commercial property's cash flow include the skills of the management and general business reputation of the owners. Assessors have a tendency to value the business rather than the real property. Consequently, assessors punish owners for efficient and successful management. In order to guard against such an outcome, owners appealing unfair tax assessments must aggressively and specifically examine the general economic climate. In analyzing commercial property, appraisers dedicate pages within each appraisal report to the local economy. Time after time, appellate reviewers in their rush to focus on the cash flow of the specific property simply skip over the plethora of general economic data that fills appraisal reports.


Two measures of local market performance are particularly important in appealing an assessment, however. One metric is retail sales, which provide a clear barometer of general economic conditions. Sales reflect the health of the consumer base and, most notably, employment. With diminished employment, sales fall in the marketplace. The other dataset to examine is the availability of credit for commercial property acquisition and/or development. While valuation authorities rarely acknowledge the relationship, retail sales and credit are inextricably linked.

Follow Sales Tax Receipts

A look at retail sales and availability of credit in the St. Louis marketplace provides a far better foundation for value analysis than do the population counts and various economic facts tacked onto assessors' reports.

In the city of St. Louis, total sales tax receipts increased every year from 2008 through 2012, with just a slight decline in 2010 (see chart). In 2013, however, the trend's trajectory has changed. The city of St. Louis has collected $30.7 million in sales tax receipts year-to-date through May, down 4.9 percent from $32.3 million during the same period a year ago.

Annual sales tax receipts for 2013 in St. Louis based were previously projected to reach just over $120 million based on the actual receipts for the first five months of 2013 and previous years' receipts during the last seven months of the year. However, the closing of a Macy's store in downtown St. Louis in May will dim this picture even further. Banks are feeling regulatory pressure to lower the concentration of commercial real estate loans in their portfolios. Lending to acquire or develop commercial buildings or residential subdivisions tanked during the Great Recession. Today, lenders give more scrutiny to a potential borrower's creditworthiness than before the downturn. The credit quality of borrowers or developers has in many respects become an important factor in the intrinsic value of the project or the real estate itself.

While area bankers express high hopes for the coming year, that optimism is not reflected in actual lending practices for the past year. According to the St. Louis Federal Reserve Bank, commercial and industrial loan volume in the United States totaled $16.4 billion in 2012, up slightly from $14 billion in 2011. Compared to the market's peak loan volume of $26 billion originated in 2008, credit availability in the sector is clearly constrained.

Focus On Fair Market Value

Property owners should keep in mind that the determination of fair market value is based upon not only a willing seller, but also a willing buyer. A willing buyer must obtain financing, and the St. Louis market has tightened up considerably in that regard. A tax appeal based on the scrutiny of credit availability and retail sales will go a long way toward ensuring that careful, prudent entrepreneurship and management will go unpunished by an excessive tax burden.

Wallach90 Jerome Wallach is a partner at The Wallach Law Firm, the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.


Supreme Court Rulings Help, Hurt Property Taxpayers

Two recent rulings by the California Supreme Court may have significant effects on the state's property taxpayers. These effects may be both good and bad, depending on your situation.

"The rule in question had watered down Proposition 13's cap on assessment increases by directly offsetting such increases against depreciation on machinery and equipment..."

The California Supreme Court issued two decisions in early August relating to property taxes that will significantly impact owners of commercial and industrial properties in Southern California.

Decision #1: Ruling Clarifies Tax Exemption for Intangibles

The first decision, Elk Hills Power vs. State Board of Equalization, broadly affirmed the exemption of intangible assets and rights from property taxation. County assessors had previously been assessing intangibles that businesses use in conjunction with real property as part of the real property's value. In other words, property owners were paying property tax on the value of the intangibles associated with operating businesses at a property, as well as on the value of the real estate.

The Elk Hills Power decision changes that by prohibiting assessors from including intangibles in the taxable value of the real property. Moreover, if a taxpayer identifies an intangible to the county assessor and shows the value of the intangible, the assessor must review it. So what are the intangibles that are exempted from taxation? The Supreme Court's decision lists several, including franchises, contracts, assembled workforce, customer base and goodwill.

That list is not comprehensive, however, and nearly all intangibles used in the operation of a business are arguably included. So how should property owners respond to the Supreme Court's taxpayer-friendly decision? First, identify the intangibles used in operating any business at the property and, if possible, attempt to value those intangibles.

Next, report the identified intangibles with associated values to the county assessor. This is especially important if the real property was recently acquired, which allows local assessors to establish new Proposition 13 base year values. If discussions with the assessor fail to result in exclusion and exemption of intangible values from the property tax assessment, the property owner should file and pursue an appeal before the county assessment appeals board.

Decision #2: Court Weakens Proposition 13's Cap on Tax Increases

The Supreme Court's second decision, Western States Petroleum Association vs. State Board of Equalization, involved the legality of a new rule issued by the State Board of Equalization for the taxation of petroleum refineries. The question before the court concerned a rule affecting Proposition 13, a law that essentially limits increases on the assessed value of land to no more than 2 percent annually.

The rule in question had watered down Proposition 13's cap on assessment increases by directly offsetting such increases against depreciation on machinery and equipment. For fixtureintensive properties like refineries, food processing facilities and power plants, the impact can be significant The Court struck down the rule, finding the Board had issued an inadequate economic impact report, and thereby failed to adhere to the requirements of the Administrative Procedures Act. In the same decision, however, the Court also ruled that the Board's reasons for adopting the rule were sound.

In fact, in a concurring opinion, one of the Court's justices essentially invited the Board to reissue the rule as long as it followed the procedures for doing so. It appears that the Board may be preparing to do just that. But this time the rule may be much broader in scope, sweeping in all types of properties that are operated with large amounts of machinery and equipment, which assessors refer to as "fixtures."

If the Board issues a more broad-ranging rule, commercial and industrial properties that use large amounts of fixtures will experience noticeable increases in property taxes. In essence, the Supreme Court's decision in Western States mounts to another attack on Proposition 13, much like the "split-roll" attacks that have sought to apply a tax rate to commercial properties that is different from the rate applied to residential properties. While it is possible that the Board will decline to revisit the matter, the current political and economic situation in California suggests it will enact another rule.

CONeallCris K. O'Neall, partner, Cahill, Davis & O'Neall LLP in Los Angeles. The law firm is 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..


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