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

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

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

New policies

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

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

Report by independent auditors

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

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

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

Registration of property tax agents

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

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

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

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

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

What is the standard of value for property tax?

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

What are the reporting requirements?

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Costs Are Key Consideration

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

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

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

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

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

How To Bolster Your Case

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Elliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley L.L.C. The firm is the Connecticut member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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

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

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

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

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

Know the market

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

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

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

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

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

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

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

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

Budget for worst-case scenario

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

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

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

How to Save Money by Allocating Prices in Real Estate Transactions

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

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

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

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

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

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

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

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

Property Tax Implications

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

David J. Crapo is a partner in the Bountiful, Utah law firm of Crapo Smith, the Utah member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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

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

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

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

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

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

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

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

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

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

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

Kieran Jennings is a partner with the law firm of Siegel & Jennings, which focuses its practice on property tax disputes and is the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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

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

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

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

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

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

Taxing questions

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

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

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

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

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

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

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

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

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

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

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

Pregnant propositions

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

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

Assessors exercise value judgment

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

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

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

Property tax appeal opportunities

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

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

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

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

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

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

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

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

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

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

The assessment process

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

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

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

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

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

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

The budget process

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

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

James 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

With assessors often in denial about the decline in valuations, a well-constructed tax appeal can pay off.

By Stewart L. Mandell, Esq., as published by Heartland Real Estate Business, August 2012

We've all heard the old saw: "Denial ain't just a river in Egypt." Yet with property taxation, it is no laughing matter when assessors are in denial about the substantial decline in property values both during and even following the Great Recession. Fortunately, tax attorneys who presented appropriate evidence have succeeded in many recent cases.

A 2011 Michigan Tax Tribunal decision involving a grocery-anchored retail building is particularly telling. The tribunal reduced each assessment about 85 percent because the vacant building was worthless on each of the Dec. 31 valuation dates in 2007, 2008 and 2009. The evidence the owner's tax appeal counsel submitted was compelling. Among the highlights:

• A contractor testified about the property's significant structural problems, calculating that a partial demolition and reconstruction to restore the asset's value would cost almost $1.7 million.
• An architect, who was qualified as an expert, corroborated the contractor's cost estimate as reasonable.
• The broker who had tried to lease or sell the property testified about the lack of interest in the building. The only purchase offer received was well below the government's position, and was withdrawn after the prospective buyer's property inspection and due diligence.
• An appraiser testified that it would be more economical to demolish the building and use the parcel as a new site rather than renovate. Based on the foregoing, the appraiser valued the land using the sales comparison valuation method and deducted the cost of demolishing the existing structure.
• Pictures of the building supported the testimony of the property owner's witnesses.

The tribunal found the taxpayer's evidence convincing, even though the government's parade of witnesses included its assessor, a professional planner, a building inspector, the city manager and an appraiser who supported the assessor's assessments. None of the government's witnesses, however, could disprove the property owner's most important evidence that the cost of renovating the building would have exceeded the value added.

In three other recent cases the tribunal also ruled for the taxpayer based on the sales-comparison-based valuations submitted by each taxpayer's appraiser.

One case involved a big-box retail store of more than 135,000 square feet and the property's valuations for the tax years 2009 through 2011. The appraisers for both parties considered all three approaches to value, but the tribunal found the analysis of the property owner's appraiser convincing.

This included the conclusion that the sale prices of leased big-box stores reflect the value of the leased fee interest, which in a property tax appeal is irrelevant to the valuation of an owner-occupied property's fee simple interest. In summarizing the errors of the government's appraiser, the tribunal concluded that "there is nothing so frightening as ignorance in action."

Two other recent decisions show the importance of selecting truly comparable properties for sales comparisons of properties under appeal. In one case, the tribunal used the sales comparison approach to substantially reduce the value of the taxpayer's industrial building of more than 200,000 square feet located in a small city well outside of the Detroit metropolitan area.

Comparing Apples to Apples

The key to the taxpayer's victory was having documentation of sales of industrial properties whose size and location made them comparable. Properties in the Detroit metropolitan area, which were a key part of the appraisal the government submitted, were not comparable.

Similarly, in a case involving the Dec. 31, 2009 value of 36 acres of vacant land near Detroit Metropolitan Airport, the tribunal rejected all of the purported comparable sales cited by the government's appraiser.

The most important flaw of all of those sales was that they occurred before the Great Recession had ruined property values.

Ultimately, the tribunal found most persuasive a recent listing of property that was relatively close to the subject property and of similar size.

To be sure, many taxpayers have not prevailed in their tax appeals in Michigan and across the country. Taxpayers typically bear the burden of proof and can easily lose without appropriate valuation evidence and an experienced tax appeal counsel. However, as the Michigan cases show, taxpayers are able to obtain tax justice with the right evidence and representation.

Stewart L. Mandell is a partner in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan 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..

"Investigating potential exemptions before structuring a real estate transaction can create a large tax savings. Some jurisdictions tax not only real estate transfers but also the transfer of an interest in an entity that owns real estate. A controlling interest transfer may be sufficient to trigger a real estate transfer tax..."

By Norman J. Bruns, Esq., and Michelle DeLappe, Esq., as published by Affordable Housing Finance News, July/August 2012

Whether it is called a documentary stamp tax or a transfer tax, most states and some local jurisdictions tax conveyances of real property. In connection with transfers of interests in low-income housing, transfer taxes often create opportunities for tax savings or, for the unwary, looming traps.

Here are the two most common issues, along with taxpayer strategies to approach the tax as an opportunity rather than a pitfall.

The first scenario relates to special exemptions that may be available but that may require special care in planning the transaction. The second relates to how the parties report the transfer price to tax authorities and the potential to adjust the nominal price to account for the value of below-market financing that is part of some low-income housing programs. State tax laws vary considerably, but the following strategies will work in many jurisdictions.

Take advantage of exemptions

Investigating potential exemptions before structuring a real estate transaction can create a large tax savings. Some jurisdictions tax not only real estate transfers but also the transfer of an interest in an entity that owns real estate. A controlling interest transfer may be sufficient to trigger a real estate transfer tax.

Parties to a potentially taxable transaction should explore exemptions from transfer taxes from the outset because the availability of an exemption may influence negotiations and terms. An exemption may depend on how the transaction is structured, and altering the structure after the parties execute the agreement is often impossible.

Washington state, for instance, exempts from tax a transfer that under federal income tax rules does not involve the recognition of gain or loss for purposes of entity formation, liquidation, dissolution, or reorganization.

Consider an investor who plans to divest its controlling interest in a partnership, the sole asset of which is a Sec. 42 tax credit project. In this hypothetical example, the remaining partners want to avoid bringing in a new partner.

Correctly structuring the transaction as the liquidation of one partner's interest for federal income tax purposes would avoid some or all of Washington's real estate transfer tax. But if the departing partner simply sells its interest to the remaining partners, the real estate transfer tax applies. All the federal tax reporting must be consistent with the position for state tax purposes to qualify for this exemption. Though many states do not have this particular exemption, careful investigation of exemptions may reveal significant potential tax savings in any state.

Adjust the reported price

The second common opportunity or trap revolves around proper reporting of the value of the real estate transferred, which can reduce transfer tax incurred. Of more lasting importance to the buyer of a low-income housing project, proper price reporting can also help prevent over-assessments later, as assessors often rely on recorded transfer prices to set values for property taxes.

Many states base the transfer tax on the property's market value, which is not always the same as the sales price. One way market value can differ from the sales price is when the buyer pays a higher nominal price by using below-market financing. Embedded in the concept of market value as defined by the American Institute of Real Estate Appraisers is the concept of cash equivalence, that is, the most probable price in cash or in terms equivalent to cash.

Several state courts have agreed with that definition. New Jersey's Tax Court in 1984 held in Presidential Towers vs. City of Passaic that market value requires adjustments to account for favorable financing. The following year, Michigan's highest court reached the same conclusion in Washtenaw County vs. State Tax Commission, requiring "a method of valuation that separates the cost of ... artificially low financing from the sales price to achieve the 'true cash value of such property.—

Wisconsin's highest court, in its 1990 decision in Flood vs. Lomira Board of Review, similarly concluded that "cash equivalency adjustment is applicable whether the analysis is of the market value of comparable property or the market value of the taxpayer's property." For states that base transfer taxes on market value, adjustments for cash equivalency should apply.

Cash equivalent adjustments should apply to low-income housing programs that receive mortgage subsidies. One such program is the U.S. Department of Agriculture's Rural Development program, which provides long-term loans at an effective 1 percent interest rate to what are called Sec. 515 projects. Under certain circumstances, owners of Sec. 515 properties can transfer the project to a new owner who assumes the subsidized loan and preserves the low-income housing restrictions.

Transactions involving below-market financing, such as Sec. 515 preservation transfers, reflect not only the value of the real estate but also the very valuable subsidized financing. Before a Sec. 515 transfer, the federal program usually requires an appraisal to ensure that the property's value will provide adequate security for the assumed loan. Rural Development appraisals separate asset value from the value of the financing to reach the cash-equivalent value of the property.

Reliance on such an appraisal should help in reporting the market value of the transferred property, but reporting an adjusted value can be complicated. Tax authorities may be unfamiliar with cash equivalency adjustments or simply resist accepting anything but the nominal purchase price. Competent state tax counsel should be able to present the information appropriately to the tax authorities.

Exemptions and proper price reporting can minimize the tax impact for both sellers and buyers. Engaging legal counsel familiar with locally applicable tax laws and practices early in the planning of a transaction may significantly reduce the parties' immediate costs and the buyer's future property taxes.

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

Jurisdictions Vary in Approach to Taxing Sustainable Measures

"Governments are trying to strike a balance between encouraging (sustainability) and finding taxable value."

By Philip J. Giannuario, Esq. & Brian A. Fowler, Esq., Commercial Property Executive, July 2012

As energy prices soar, the search for economical alternative energy has become a pressing issue for all consumers, including businesses. Solar power represents a burgeoning alternative to fossil fuels. "Green" is all the rage in society today. But it can take a toll in the tax department.

With plentiful open rooftops on big-box retail and warehouse buildings across the country, installation of solar arrays makes sense, on its face, for both the building owner and the solar provider. The building owner can obtain low-cost electricity for its business, while the solar provider benefits from federal tax credits. Solar panels make use of available real estate with zero negative impact on the environment.

But there are assessment issues surrounding structures erected to deliver the new energy.Property tax treatment of this evolving building attribute varies by jurisdiction. Governments are trying to strike a balance between encouraging greater use of sustainable energy systems and finding taxable value in the equipment that generates and transmits the new energy. It stands to be a new source of revenue for taxing authorities if the state is silent as to its taxability.

California has exempted systems built between 1999 and 2016. For the property owner in New Jersey, a renewable energy system that provides all or a portion of the building's energy needs can be deemed to have no effect on the building's assessed value. (While unstated, it is anticipated that a third party would be obligated to pay taxes on the equipment's value.) In Texas, onsite systems are exempt. In states like New Hampshire and Virginia, the effect on property taxation is left to local rule. Some states, such as Utah, have not specifically passed legislation on the matter.

Most jurisdictions have dealt with property tax issues by writing legislation that embraces many forms of sustainable energy. Pennsylvania, by contrast, has focused more on wind turbines, designating the turbine, tower—and even the foundation—as tax exempt.

In states that have remained silent on the issue, the question of taxability is often reduced to an argument over the definition of business personal property versus real property. This frequently centers on the issue of whether the property can be removed.

For the owner-user, solar panels are easily moved from one location to another and could be considered business personal property, but the structure that connects them to the building and its electrical system—or to the electrical grid—is not. The municipality could choose to assess those components of the system as it does electrical systems. Most states have legislation in place to provide the assessor with guidance on addressing business personal property if it is to be taxed as real property.

New Jersey, which exempts business personal property as real property, is also representative of a more disconcerting circumstance: the extension of an exemption only to the owner-user of the power. While the owner-user is entitled to special protection from ad valorem taxation, it is withheld from for-profit entities such as an investor or utility company.

Furthermore, often the owner-occupier that opts to lease its rooftop for the installation of a solar array where the power supplies the building and the excess power is sold to the market could receive an added assessment notice. There are many situations in which a solar firm owns the panels and obtains federal tax credits that can be sold to utilities, all while selling the energy to the building occupants or to the local utility company.

Is the income approach available to the assessor based on the lease rates on the rooftops? Or should the cost approach be implemented to reflect the cost to install the system? Will assessors attribute more value to the roofs of buildings without solar arrays because there is unrecognized potential there? It will be interesting to see how the assessing community reacts to these evolving trends in energy production. Will they go green or go for the green?

Philip J. Giannuario is a partner and Brian A. Fowler an associate at the Montclair, N.J., law firm Garippa, Lotz & Giannuario, the New Jersey member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Giannuario can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Fowler at This email address is being protected from spambots. You need JavaScript enabled to view it..

"It is not unusual to find situations where appraisers are brought in to assist tax assessors in setting assessments. This is certainly understandable when complicated properties are being appraised..."

By John E. Garippa, Esq., as published by National Real Estate Investor - Online, July 2012

Property owners throughout New Jersey have observed that more tax appeals are headed to trial. More than ever, cases that would have been settled had they occurred a few years ago are now routinely in the litigation track.

What's behind this trend? The most significant reason is that government is under increasing pressure to preserve the municipal treasury. And as the drive for tax revenue brings more taxpayers to court, many of those property owners find an uneven playing field during litigation. The assessment is presumed to be correct until it is overcome by the preponderance of the evidence. The level of proof the taxpayer must provide to reach this standard has become increasingly more difficult to attain.

One useful aid in arguing a property owner's appeal is often overlooked because it comes right out of the appraiser's tool box. The Uniform Standards of Professional Appraisal Practice (USPAP) can help to level the playing field for the property owner. Taxpayers need to understand this set of regulations because it affords opportunities to attack the credibility of the taxing jurisdiction's presentation.

Any licensed appraiser in the state of New Jersey is subject to USPAP, which mandates that an "appraiser shall ensure that all appraisals shall, at a minimum, conform to the Uniform Standards of Professional Appraisal Practice." An appraiser's failure to comply with the provisions of USPAP may be construed to be professional misconduct in violation of New Jersey tax law.

For example, USPAP sets minimal standards for the retention of records, referred to as the "recordkeeping rule." An appraiser must prepare a work file for each appraisal, appraisal review or appraisal consulting assignment. A work file must exist prior to the issuance of any report, and a written summary of any oral report must be added to the work file within a reasonable time after the issuance of the oral report. Such a work file must include the report as well as the information used in creating the report.

The standards set time requirements as well. The work file must be retained for at least five years after preparation or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last. Any appraiser who willfully or knowingly fails to comply with the obligations of this recordkeeping rule is in violation of the state's ethics rule.

In further clarifying the recordkeeping rule, USPAP states that it applies to "appraisals and mass appraisal, performed for ad valorem taxation assignments."

USPAP is adopted by statute, so a violation of its standards may leave a violating appraiser susceptible to sanctions imposed by the governing professional association. In addition, New Jersey's tax statute provides explicitly that for engaging in an act of professional misconduct, the professional licensing board may penalize the offender by suspending or revoking any certificate, registration or license.

It is not unusual to find situations where appraisers are brought in to assist tax assessors in setting assessments. This is certainly understandable when complicated properties are being appraised. Now, however, as the appraiser advises the assessor as to value in setting an assessment, that advice and conclusion is now discoverable by the taxpayer. This presents a significant opportunity for taxpayers to discern the machinations behind the setting of an assessment.

Under USPAP, the appraiser must have a work file demonstrating all of the evidence relied upon to determine that value. It does not matter whether the advice given the assessor is written or oral; the work file must contain written evidence supporting the advice and conclusions given to the assessor. This now becomes a potential gold mine of information that can be used to damage the presumption of correctness of the assessment.

In another common scenario, taxing jurisdictions that rely on outside appraisers to assist the assessor in setting the assessment will typically retain those same appraisers to defend the assessments before the tax court. Because of the backlog of cases in the tax court, this means that an appraiser that originally assisted in setting an assessment could be testifying about value several years after the assessment was set.

This presents an opportunity for the taxpayer to probe the appraisal report prepared for trial and compare it to the work file prepared when the assessment was made. Was the value predetermined because of the early work in setting the assessment? Does the early work erode the conclusions of the later work?

These are all important considerations, and will significantly help to level the playing field against recalcitrant taxing jurisdictions. Appraisers who lend their licenses and credibility to taxing jurisdictions in setting assessments need to be aware that there could be a day of reckoning.

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair, N.J. The firm is the New Jersey and Eastern Pennsylvania 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..

How Wisconsin Supreme Court decision on assessments of specialized manufacturing plants affects owners

"The critical aspect of the case for property owners is the Supreme Court's conclusion that there was a market for continued use of the property, when neither party could identify an example of such a sale..."

By Robert L. Gordon, Esq., as published by Heartland Real Estate Business, July 2012

Wisconsin tax law requires assessors to assess real estate at its fair market value. Whenever possible, that value must reflect recent sales of reasonably comparable property. Longstanding Wisconsin Supreme Court decisions have held that real estate cannot be assessed based on an imaginary or hypothetical market, or at its intrinsic value to the current owner, if that value differs from fair market value. Under those decisions, real estate can only be assessed at what market evidence indicates a third party would pay for the property in the open market.

In the recent case of a specialized plant, the Wisconsin Supreme Court rejected the property owner's argument that the plant was assessed at its intrinsic value to the owner's manufacturing business and not at its fair market value as real estate.

The Background

The plant was built to manufacture a highly specialized food product, using a process regulated by the U.S. Food and Drug Administration. The manufacturer incorporated unique real estate features — at tremendous cost — to meet FDA standards. These included a spray dryer more than 100 feet tall housed in an 8-story tower, as well as concrete surfaces specially treated to eliminate any air pockets where moisture with microbial growth could reside.

At trial before the Wisconsin Tax Appeals Commission, neither the assessor with the Wisconsin Department of Revenue nor the manufacturer's appraiser could identify a single instance anywhere in the United States where a similar plant had sold for continued use to manufacture the same product. The manufacturer's appraiser concluded that there was no market to sell the property for continued use, and that the highest and best use of the plant was as an ordinary food processing plant.

The assessor, however, speculated that one of the manufacturer's few competitors could be a likely purchaser of the plant, and that there was a market for the plant for continued use. The assessor thus valued the property based on its cost to the manufacturer, including the expensive features added solely to support production of its one specialized product, but disregarding the lack of value of those improvements to a purchaser buying the plant for any other use.

The Decision

The Tax Appeals Commission upheld the Department of Revenue's conclusion that there was a market for continued use of the property to manufacture the same specialized product, thereby upholding the assessment based on the plant's cost to the manufacturer.

The Wisconsin Supreme Court affirmed the Tax Appeals Commission and rejected the manufacturer's arguments that the plant was being assessed at its intrinsic value to the owner's manufacturing business and that this was inconsistent with prior Supreme Court decisions.

The critical aspect of the case for property owners is the Supreme Court's conclusion that there was a market for continued use of the property, when neither party could identify an example of such a sale. The court held that a "market can exist for a subject property, especially a special-use property, without actual sales data of similar properties being available." The court further stated that "markets are necessarily forward-looking" and that "empirical evidence of past sales activity is certainly informative, but it is not conclusive."

The Net Effect

Traditionally, owners of properties with expensive features included solely to support the business conducted on the property have pointed to a lack of comparable property sales as evidence that the features do not translate into real estate value.

Because of the Wisconsin Supreme Court's conclusions that markets are forward-looking, that lack of evidence of sales is not conclusive, and that a market can exist without actual sales data, it may now become more challenging for taxpayers to contest assessments. This may be especially true for assessments that are primarily based on the cost of features that are valuable only to the current owner.

In the Wisconsin Supreme Court case, the manufacturer argued that affirming the Tax Appeals Commission decision would place an impossible burden on property owners to prove a negative, which is the absence of a market. The court disagreed, stating that taxpayers are only required to present "sufficient contrary evidence" to demonstrate that an assessor's highest and best use conclusion is incorrect based on the existence of a particular market.

As a result, the Wisconsin Supreme Court has left the door open for property owners to claim that there is no market to sell their plant for continued use. In light of the decision, and the statutory presumption that an assessor's conclusions are correct, property owners should be prepared to make a strong case if they intend to establish the absence of a market.

That case might include an analysis of the industry in which the manufacturer operates. Such analysis could attempt to show that there is no one who would purchase the plant to manufacture the same product. Thus, no one would pay what the plant is worth to the current owner to buy the plant as real estate.

Robert L. Gordon is a partner at the Milwaukee law firm of Michael Best & Friedrich LLP, the Wisconsin member of the American Property Tax Counsel. You can contact him via email at This email address is being protected from spambots. You need JavaScript enabled to view it..

By Stephen H. Paul, Esq. and Benjamin A. Blair, Esq. as published by IPT - Tax Report, July 2012

On June 4, 2012, the Supreme Court of the United States issued a significant decision in Armour v. City of Indianapolis, No. 11-161, finding that a city's forgiveness of sewer assessments for some property owners without offering refunds to others did not violate the Equal Protection Clause. Applying a rational basis standard of review, the Court held that administrative concerns can be sufficient to justify tax-related distinctions without running afoul of the Constitution.

Introduction
On June 4, 2012, the Supreme Court of the United States decided Armour v. City of Indianapolis, No. 11-161, which affirmed the Indiana Supreme Court's ruling that when a city switches from one method of infrastructure financing to another, the city's decision to forgive certain financial obligations arising under the prior financing method may be justified by administrative concerns even when the forgiveness creates disparate consequences. Although ostensibly a sewer-financing case, the Supreme Court's decision directly affects the scope of state and municipal taxing authority and the impact of the Equal Protection Clause on tax-related distinctions.

Facts
For more than a century, cities in Indiana have been permitted to apportion the costs of infrastructure projects among all affected property owners by a statute called Barrett Law. When a city built a Barrett Law project, the city would divide the total cost of the project equally amongst the affected lots. The city would issue a lot-by-lot assessment and would collect payment of the assessment in the same manner as other taxes. Barrett Law allowed lot owners to pay the assessment either in a single lump sum or as installment payments over a period of 10, 20, or 30 years with accruing interest. Until fully paid, an assessment constituted a lien against the property, and the city could foreclose on the property in the event of a default.

For several decades, the City of Indianapolis (the "City") used the Barrett Law system to fund sewer projects. One of the Barrett Law projects was the Brisbane/Manning Project, which began in 2001. It connected about 180 homes to the City's sewer infrastructure, and in July 2004, the homeowners were sent formal notice of their payment obligations. Each property was assessed $9,278 for the project, with options for 10-, 20-, and 30-year payment plans at 3.5% interest. Thirty-eight homeowners paid the assessment in full.

In 2005, the City adopted a new system of sewer-financing, the Septic Tank Elimination Program ("STEP"), in which each homeowner was charged a flat fee and the remainder of the cost was financed by bonds paid by all taxpayers. STEP had the advantage of lowering sewer-connection costs for individual lot owners. However, more than 40 Barrett Law sewer projects had been constructed before STEP was adopted, and more than half of those projects still had installment paying lot owners, including the Brisbane/Manning Project, which had been in place for only a year. In enacting STEP, the City decided to forgive all outstanding assessments under the Barrett Law system because the system presented financial hardships on lower income homeowners who most needed sanitary sewer service. However, no refunds would be issued for assessments already paid. Thus, while 38 of the homeowners in the Brisbane/Manning project had paid $9,278, others paid as little as $309.27 for the same sewer connection.

The homeowners who had paid in a lump sum brought a lawsuit seeking a refund from the City, claiming that the City's refusal to provide refunds at the same time that the City forgave outstanding assessments of other homeowners violated the Federal Constitution's Equal Protection Clause, which provides that "no state shall ... deny to any person within its jurisdiction the equal protection of the laws." The trial court granted summary judgment in favor of the homeowners, and the Indiana Court of Appeals affirmed that judgment. The Indiana Supreme Court reversed the lower court, finding that the City's distinction was "rationally related to its legitimate interest in reducing its administrative costs, providing relief for property owners experiencing financial hardship, establishing a clear transition from Barrett Law to STEP, and preserving its limited resources." Slip op. at 5. The homeowners appealed to the U.S. Supreme Court to consider the equal protection question.

Holding
In a 6-3 decision, the Supreme Court held that the City's tax-related distinction was supported by a rational basis and thus did not violate the Equal Protection Clause.

Analysis
The Court began by finding that the proper question was whether the City's distinction between homeowners had a rational basis. Although the Equal Protection Clause strongly protects individual rights in certain circumstances, a classification that does not involve fundamental rights and which does not proceed along suspect lines "cannot run afoul of the Equal Protection Clause if there is a rational relationship between the disparity of treatment and some legitimate purpose." Slip op. at 6. Rational basis review requires deference to reasonable underlying legislative judgments, and legislatures have "especially broad latitude" in creating classifications and distinctions in tax statutes. Id.

The City's classification involved neither a fundamental right nor a suspect classification. "Its subject matter is local, economic, social, and commercial." Id. The City did not discriminate against out-of-state commerce or new residents, actions which would have increased the degree of scrutiny the Court would give to the City's action. The distinction between fully-paid homeowners and those who had their debt forgiven was simply "a tax classification." Id. Hence, the Court found that the case fell directly within the scope of its precedents holding such a law constitutionally valid

if there is a plausible policy reason for the classification, the legislative facts on which the classification is apparently based rationally may have been considered true by the governmental decision maker, and the relationship of the classification to its goal is not so attenuated as to render the distinction arbitrary or irrational.

Slip op. at 7 (quoting Nordlinger v. Hahn, 505 U.S. 1, 11 (1992)).

The Court found that the City's decision to stop collecting outstanding Barrett Law debts was based on rational administrative concerns. Administrative considerations can justify a tax-related distinction. The City's administrative burdens would have included the need to maintain parallel and expensive administrative systems to monitor both the new and the old financing systems, with the possible need to track down defaulting debtors and bring legal action. The fixed administrative costs would have continued to increase on a per-debtor basis as debts were paid off. Further, the City would have to calculate and administer refunds, which would require appropriating funds from other city programs. In other words, the entire purpose of transitioning from Barrett Law to STEP would have been defeated. While the homeowners put forth systems they deemed superior to the one implemented by the City, the Court noted that "the Constitution does not require the City to draw the perfect line nor even to draw a line superior to some other line it might have drawn... only that the line actually drawn be a rational line." Slip op. at 11.

Although the Indiana court held that relieving financial hardship was also a rational governmental concern, the Court noted that it did not need to consider that argument, explicitly holding that "the administrative considerations we have mentioned are sufficient to show a rational basis for the City's distinction." Slip op. at 10. The homeowners correctly stated that administrative considerations could not justify a system where a city arbitrarily allocated taxes among a few citizens while forgiving others simply because it is easier to collect taxes from a few people than from many. "But that is not because administrative considerations can never justify tax differences." Slip op. at 11. "The question is whether reducing those expenses, in the particular circumstances, provides a rational basis justifying the tax difference in question." Slip op. at 12. The Court held that the homeowners had not met their burden of showing that there was no rational basis justifying the distinction.

In a spirited dissent, Chief Justice Roberts noted that the Court had never before held that administrative burdens alone justify grossly disparate tax treatment of those who should be treated alike. "The reason we have rejected this argument is obvious: The Equal Protection Clause does not provide that no State shall 'deny to any person within its jurisdiction the equal protection of the laws, unless it's too much of a bother.'" Dissent at 4. Similarly, the City's argument that the unequal burden was justified because it would have been "fiscally challenging" to issue refunds "gives euphemism a bad name." Dissent at 5. The dissent disagreed that the City could evade returning money to its rightful owner by the "simple expedient of spending it." Dissent at 6.

The City had been presented with three choices: 1) continue to collect installment payments from all homeowners; 2) forgive the debts of installment-plan homeowners and give equivalent refunds to lump-sum homeowners; or 3) forgive future payments and offer no refunds of past payments. "The first two choices had the benefit of complying with state law, treating all of Indianapolis' citizens equally, and comporting with the Constitution." Dissent at 2. The City chose the third option, and the dissent saw the equal protection violation as plain.

The Ongoing Vitality of Allegheny
The Court's decision in Armour will have a significant impact beyond the limits of Indianapolis' sewer system, particularly in the realm of equal protection challenges to state tax regimes.

The most substantial disagreement between the majority and the dissent, and the area where some commentators have expressed concern, is the continuing vitality of Allegheny Pittsburgh Coal Co. v. Commission of Webster County, 488 U.S. 336 (1989). That case involved a county assessor who valued real property on the basis of its recent purchase price, except where the property had not been recently transferred, in which case the assessment for each property remained essentially flat. The system resulted in gross disparities in the assessed value of generally comparable properties. The Constitution allows a State to divide property into different classes, but the division must not be arbitrary and the distinctions in practice must follow state law. The Supreme Court held that the assessments violated the Equal Protection Clause because the Clause requires that similarly situated property owners achieve rough equality in tax treatment.

The majority in Armour distinguished the earlier decision by emphasizing that Allegheny was "the rare case where the facts precluded any alternative reading of state law and thus any alternative rational basis." Slip op. at 13. There, the assessor "clearly and dramatically violated" a clear state law requirement of equal valuation. In contrast, the City in Armour followed state law by apportioning the cost of its Barrett Law projects equally. State law said nothing about how to design a forgiveness program or how to draw rational distinctions in doing so. Thus, to adopt the view of the homeowners "would risk transforming ordinary violations of ordinary state tax law into violations of the Federal Constitution." Slip op. at 13-14.

The dissent found the equal protection violations to be identical between Armour and Allegheny. Whereas the majority spent little time on the Allegheny decision, the dissent saw the cases as direct analogs, even down to the levels of disparity. Whereas the majority found that the City complied with state law, the dissent viewed the state law as requiring the assessment to be equally apportioned amongst the homeowners. The result of the City's decision was that some homeowners were charged 30 times what the City charged their neighbors for the same service.

The fundamentally different treatments given by the majority and the dissent treatments to Allegheny show that Allegheny is still an important case in equal protection claims relating to taxation. The sides disagreed about how central Allegheny is to the argument for rational basis and the manner in which compliance with state law demonstrates a rational basis.

The majority seems to have taken steps to avoid dealing with Allegheny, despite the obvious parallels between the cases. The Court only discussed Allegheny after finding that the City had a rational basis for the distinction. Whereas Allegheny stands for the notion that failure to comply with state law demonstrates a lack of rational basis, the majority found a rational basis and then read the state law in a way that supported its finding.

The dissent viewed compliance with state law as central to the argument for rational basis. If a City's tax regime fails to comply with state law, it fails rational basis review. Thus while the majority took a broad view of compliance, saying that the assessment itself complied with state law, the dissent took a narrow view of compliance, saying that the end result of the tax regime must comply with state law.

Allegheny, though a "rare case", has long provided taxpayers with some guidance on how to proceed in an equal protection challenge to an unequal tax regime. The decision in Armour shows how rare Allegheny truly is, and how difficult the path for future taxpayers will be. The most significant lesson for taxpayers seeking to overturn a tax regime on equal protection grounds is that the bar is set extremely high. Taxpayers who attack legislative line-drawing have the burden of showing that it was not rational for the City to draw the line to avoid an administrative burden. Slip op. at 12. Taxpayers must show that the administrative burden on the municipality is "too insubstantial to justify the classification." Id. The homeowners in Armour were unable to do so. The discriminatory effect in future cases will need to be egregious in order for taxpayers to successfully show an equal protection violation in light of Armour.

The Impact of Armour on Amnesty Programs
The Court's decision in Armour is also significant because it may be broadly interpreted to give state and municipal governments a wide berth in crafting amnesty programs and other tax policies.

The Court drew a parallel between Indianapolis' assessment forgiveness and other common amnesty programs involving mortgage payments, taxes, and parking tickets. Slip op. at 9-10. The City's distinction between past payments and future obligations is a line consistently drawn by courts between actions previously taken and those yet to come. The Court implied that to overturn the City's sewer-financing distinction would require overturning tax amnesty programs that are regularly used by governments.

The dissent, however, emphasized that the Court's analogy to typical amnesty programs was misplaced. "Amnesty programs are designed to entice those who are unlikely ever to pay their debts to come forward and pay at least a portion of what they owe." Dissent at 5. Because administrative convenience alone does not justify those programs, their constitutionality would not be in question.

The Court's decision continues the line of cases allowing under the Equal Protection Clause distinctions between taxpayers in forgiveness situations. As more states offer tax amnesty programs to increase tax revenues and encourage future compliance, they can feel secure that their programs should receive broad support from the courts, so long as they serve a rational purpose.

Conclusion
The question in Armour was summarized by Justice Breyer, the eventual author of the decision, near the close of oral argument as whether the City's choices were rational. To the majority of the Court – including, notably, Justice Thomas who broke with the conservative wing of the Court – found that administrative considerations alone can justify a tax-related distinction between taxpayers and a city's decision to stop collecting on certain assessments. Despite an invitation by the dissent, the Court refused to say "enough is enough" to continuing pressures on the Equal Protection Clause. The Supreme Court rarely grants certiorari to state tax cases, and the decision in Armour shows that taxpayers will continue to have an high burden when they do reach the courthouse steps.

Benjamin A. Blair, Esq. is a partner in the Indianapolis office of Faegre Baker Daniels, the Indiana 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.

Stephen H. Paul is a partner in the Indianapolis office of Faegre Baker Daniels, the Indiana 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..

One useful aid in arguing a property owner's appeal is often overlooked because it comes right out of the appraiser's tool box. The Uniform Standards of Professional Appraisal Practice (USPAP) can help to level the playing field for the property owner.

By John E. Garippa, as published in National Real Estate Investor Online, June 2012.

Property owners throughout New Jersey have observed that more tax appeals are headed to trial. More than ever, cases that would have been settled had they occurred a few years ago are now routinely in the litigation track.

What's behind this trend? The most significant reason is that government is under increasing pressure to preserve the municipal treasury. And as the drive for tax revenue brings more taxpayers to court, many of those property owners find an uneven playing field during litigation. The assessment is presumed to be correct until it is overcome by the preponderance of the evidence. The level of proof the taxpayer must provide to reach this standard has become increasingly more difficult to attain.

One useful aid in arguing a property owner's appeal is often overlooked because it comes right out of the appraiser's tool box. The Uniform Standards of Professional Appraisal Practice (USPAP) can help to level the playing field for the property owner. Taxpayers need to understand this set of regulations because it affords opportunities to attack the credibility of the taxing jurisdiction's presentation.

Any licensed appraiser in the state of New Jersey is subject to USPAP, which mandates that an "appraiser shall ensure that all appraisals shall, at a minimum, conform to the Uniform Standards of Professional Appraisal Practice." An appraiser's failure to comply with the provisions of USPAP may be construed to be professional misconduct in violation of New Jersey tax law.

For example, USPAP sets minimal standards for the retention of records, referred to as the "recordkeeping rule." An appraiser must prepare a work file for each appraisal, appraisal review or appraisal consulting assignment. A work file must exist prior to the issuance of any report, and a written summary of any oral report must be added to the work file within a reasonable time after the issuance of the oral report. Such a work file must include the report as well as the information used in creating the report.

The standards set time requirements as well. The work file must be retained for at least five years after preparation or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last. Any appraiser who willfully or knowingly fails to comply with the obligations of this recordkeeping rule is in violation of the state's ethics rule.

In further clarifying the recordkeeping rule, USPAP states that it applies to "appraisals and mass appraisal, performed for ad valorem taxation assignments."

USPAP is adopted by statute, so a violation of its standards may leave a violating appraiser susceptible to sanctions imposed by the governing professional association. In addition, New Jersey's tax statute provides explicitly that for engaging in an act of professional misconduct, the professional licensing board may penalize the offender by suspending or revoking any certificate, registration or license.

It is not unusual to find situations where appraisers are brought in to assist tax assessors in setting assessments. This is certainly understandable when complicated properties are being appraised. Now, however, as the appraiser advises the assessor as to value in setting an assessment, that advice and conclusion is now discoverable by the taxpayer. This presents a significant opportunity for taxpayers to discern the machinations behind the setting of an assessment.

Under USPAP, the appraiser must have a work file demonstrating all of the evidence relied upon to determine that value. It does not matter whether the advice given the assessor is written or oral; the work file must contain written evidence supporting the advice and conclusions given to the assessor. This now becomes a potential gold mine of information that can be used to damage the presumption of correctness of the assessment.

In another common scenario, taxing jurisdictions that rely on outside appraisers to assist the assessor in setting the assessment will typically retain those same appraisers to defend the assessments before the tax court. Because of the backlog of cases in the tax court, this means that an appraiser that originally assisted in setting an assessment could be testifying about value several years after the assessment was set.

This presents an opportunity for the taxpayer to probe the appraisal report prepared for trial and compare it to the work file prepared when the assessment was made. Was the value predetermined because of the early work in setting the assessment? Does the early work erode the conclusions of the later work?

These are all important considerations, and will significantly help to level the playing field against recalcitrant taxing jurisdictions. Appraisers who lend their licenses and credibility to taxing jurisdictions in setting assessments need to be aware that there could be a day of reckoning.

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair, N.J. The firm is the New Jersey and Eastern Pennsylvania 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.

As high-tech companies downsized in the US, their campuses were left with significant excess space.

"Therein lies the problem for property owners and tax assessors: What is the market value of these older high-tech campuses that were built without an exit strategy as single-user, special purpose properties?..."

By David Canary, Esq., and Cynthia M. Fraser, Esq., as published by Real Estate Forum, May 2012

In the 1970s and 1980s, the explosive growth of technology in the US touched off a construction frenzy of special-purpose, high-tech buildings in campuses designed for single users.

Dubbed flex manufacturing space, these buildings provided large floor plates to accommodate research and design, manufacturing and assembly, storage and distribution. Flex campuses came with fully integrated and interconnected utility systems, with office space typically arranged in what came to be known as cube farms.

These campus headquarters were built at a time when it was desirable and economically feasible for all of these functions to be under one roof, or one location, to facilitate internal communication, maintain control and security of specialized processes and promote internal efficiency.

By the early 2000s, however, demand for these sprawling hightech campuses declined. It became more cost effective to move manufacturing and assembly functions overseas and to reduce transportation costs by locating near emerging global markets. As high-tech companies downsized their operations in the US, their campuses were left with significant excess space.

Therein lies the problem for property owners and tax assessors: What is the market value of these older high-tech campuses that were built without an exit strategy as single-user, special purpose properties? An investigation into the market value of one of these campuses must begin with an analysis of the property's highest and best use.

There are only three scenarios for highest and best use of any improved property, and they are (a) continuation of the existing use; (b) conversion to an alternative use; or (c) demolition of the improvements and redevelopment of the site. A single property may also incorporate some combination of these alternatives. What follows are key points to consider with each approach.

Continuation of existing use. This valuation scenario assumes the owner would be selling or leasing excess space. There may be legal prohibitions and physical limitations to this alternative, however. Although communities embraced these campuses for the jobs they brought to the local economy, zoning ordinances enacted to establish these projects often contain provisions insuring that the properties maintain their campus-like setting, including limitations on ingress and egress, the percentage of accessory uses not directly connected to the high-tech use, signage and parking ratios that are inconsistent with a multi-use property. Frequently, utilities, security systems and the physical configuration of the campus are interconnected, making it impossible to convert the property to a multi-use or multi-tenant facility. In some cases, it is not financially feasible for the owner of a hightech campus to sell or lease excess space because the revenue generated from a sale or leasing would not justify the expense required to convert to a multi-use facility. These costs include tenant improvements, separate metering of utilities and leasing costs. Thus, the excess space becomes functionally obsolete and it is more cost effective to let it go dark.

Converting to an alternative use. An owner/user could consider vacating the entire campus and selling it on the open market. However, potential users for these types of properties are limited due to the property's excessive size (typically 700,000 to two million square feet), age and condition, large floor plates, outmoded technology and lack of demand due to globalization. A campus property may sell if the price is low enough to justify a significant expenditure in converting the campus to an alternative, multi-tenant use. In 2007, for example, real estate developer Benaroya purchased Microchip Technology Inc.'s wafer manufacturing facility, a 700,000-square-foot, 10-building campus in Puyallup, WA, for $30 million, far less than Microchip's asking price of $93 million. Thereafter, Benaroya reportedly invested $45 million to convert the facility into a multi-tenant, state-of-the-art business and technology center. Today, a significant portion of Benaroya's renovated facility remains vacant. Thus, the financial feasibility of converting a high-tech campus property to an alternative use is problematic.

Demolish the improvements and redevelop the site. Because the previous two alternatives may not be legally permissible, physically possible or financially feasible, a number of large high-tech campus properties have been shuttered or demolished. Reported examples are Motorola's manufacturing plant in Mesa, AZ, and IBM's research park in Poughkeepsie, NY. For these reasons, high-tech campuses have been described as white elephants. Their current use is no longer in demand, and they are not suitable for conversion to an alternative, or second generation, use. The valuation and the assessment of these campuses must account for their inherent functional and economic obsolescence, which directly affect their market value.

David Canary is Of Counsel to Garvey Schubert Barer, the Washington, Oregon and Idaho 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.. Cynthia M. Fraser is an owner at Garvey Schubert Barer. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. They are based in Portland, OR