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Property Tax Resources

Our members actively educate themselves and others in the areas of property taxation and valuation. Many of APTC attorneys get published in the most prestigious publications nationwide, get interviewed as matter experts and participate in panel discussions with other real estate experts. The Article section is a compilation of all their work.

Aug
27

Warning: Your Assessor Doesn't Understand Tax Credit Properties

Strategies for differentiating between LIHTC and conventional apartments

"In most jurisdictions, the assessor's statutory responsibility is to value a property at its market value as of a particular date. Assessors often have difficulty incorporating the restrictions spelled out in a tax credit property's Land Use Restriction Agreement (LURA)..."

By Gilbert D. Davila, Esq., as published by Affordable Housing Finance, July/August 2012

Owners of low-income housing tax credit (LIHTC) properties face an unending struggle to keep their property tax assessments at a reasonable level. The fight continues because local assessing authorities receive little guidance from state legislatures and courts on how to account for the unique characteristics of a LIHTC project. Thus, assessors derive a tax credit project's assessment from traditional methods of valuing conventional apartments. Unfortunately, this approach can lead to inflated assessments.

No uniform approach

There is often little consensus across state taxing jurisdictions regarding how to account for tax credits in the valuation equation. Some jurisdictions include the value of the LIHTC allocation as part of a property's net operating income under the contention that the tax credits enhance a project's value in a way that a prospective buyer would take into account when estimating the property's value. The resulting higher property taxes make low-income housing less economically feasible, which undermines the credit program's goal of encouraging the development of affordable housing.

Other jurisdictions exclude tax credits from a project's income, arguing that inclusion of the tax credits leads to excessive assessments. LIHTC property owners should educate themselves on how their local assessor accounts for tax credits in the valuation process. Only then can they begin a meaningful conversation about LIHTC valuations versus conventional complex assessments.

In most jurisdictions, the assessor's statutory responsibility is to value a property at its market value as of a particular date. Assessors often have difficulty incorporating the restrictions spelled out in a tax credit property's Land Use Restriction Agreement (LURA) into their valuation analysis, so they fall back on three classic approaches to value: cost, sales comparison, and income.

It often falls on the LIHTC property owner to show the assessor why tax credit properties defy conventional market value definitions and approaches to value. In that discussion with the assessor, the property owner should incorporate the following points:

Cost and sales-comparison approaches inapplicable

The cost and sales approaches to value are almost never reliable methodologies for tax credit projects, and owners should aggressively protest valuations derived from these approaches.

A cost-based assessment is rarely a reliable value indicator for any multifamily project, much less a tax credit property. And development costs for a LIHTC project usually exceed those of similarly sized conventional projects, given the additional amenities required under the LURA. In addition, a replacement or reproduction cost estimate excludes value associated with the future tax credits and ignores income lost due to restrictions in the LURA.

It is easy to apply the salescomparison approach to a conventional complex because these properties trade frequently in the open marketplace. Sales of LIHTC projects are rare, and the terms and conditions may render the sales data unreliable.

For example, a transfer may occur under a "right of first refusal," in which case the sale price is negotiated well before the transfer date and may not relate to current market value. If the transfer is under a "qualified offer," then the price is based on a statutory formula unrelated to market conditions.

The modified income approach for LIHTC properties

The income approach is the most reliable valuation methodology to derive a tax credit project's property tax assessment, but it requires some special treatment. Typically, assessors using this approach will apply market rents, expense ratios, and capitalization rates into a direct-income pro forma to value the real estate. Owners of tax credit properties should argue for a modified income approach to account for key differences between conventional and LIHTC apartment projects. Here are the major differences:

1. Rents. A tax credit property operates under limited income potential due to the restrictions associated with the LURA and LIHTC regulations. Specifically, rental rate restrictions cause rents per unit to be much lower for a LIHTC project than for conventional properties.

A market rent factor derived from rental data associated with conventional apartment projects will lead to an inflated indication of effective gross income for a LIHTC project and, ultimately, an excessive assessment. Tax credit owners should argue for the use of their actual restricted rent amounts in the income analysis to arrive at a realistic representation of the property's income potential.

2. Expenses. Tax credit properties require management expertise and administrative duties that run up operating costs above those of conventional projects. Tax credit properties also see higher turnover rates than conventional apartments, so make-ready costs are greater.

Finally, rental rates are limited but expenses are not, so the actual expense ratios for tax credit projects are often well above the ratios assessors are willing to use for conventional apartments. LIHTC owners should provide the assessor with a copy of the LURA and point out the requirements that cause expenses to exceed conventional levels.

3. Marketability and capitalization rate. In their income analyses, assessors rely on a capitalization rate, or a buyer's initial annual rate of return based on price and the property's net income.

Assessors typically derive capitalization rates from sales of conventional apartments sold under the willing buyer, willing seller concept associated with most market value definitions.

As previously discussed, tax credit properties rarely sell. If a LIHTC complex does sell, the LURA dictates who the property can be sold to. What's more, tax credits expire after 10 years, but the restrictions may last for another 20 years, and the property's restrictions survive a sale. A purchaser would, in effect, be buying only the restrictions without getting the benefit of the credits. These factors make for an extremely illiquid and unmarketable asset.

A tax credit owner should argue that the assessment take into account the subject property's illiquidity, and the most logical place to do that is in the capitalization rate. The capitalization rate for a tax credit property should be higher than the rates used for conventional projects.

Using these talking points will help LIHTC owners demonstrate to the assessor the differences between tax credit and conventional apartments, which will ultimately lead to reduced assessments and property taxes.

 

GilbertDavila150 Gilbert Davila is a partner with Austin, Texas, law firm Popp Hutcheson, PLLC. The firm devotes its practice to the representation of taxpayers in property tax matters and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. Davila can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Aug
21

Don't Drown In Excessive Property Taxes

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.

MANDELL Stewart 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..

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Aug
03

Minimize Real Estate Transfer Taxes in Low-Income Housing Transactions

"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.

MDeLappe Bruns 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.
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Jul
28

Government Green

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?

 

gianuarioFowlerPhilip 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..

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Jul
23

Taxpayers Increasingly Use Appraisal Standards in Tax Appeals

"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.

Garippa155 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..

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Jul
17

Fair Market Value Versus Intrinsic Value

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.

Gordon Robert-150 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..

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Jun
23

Disparate Treatment under City's Assessment Forgiveness Plan is Ruled Constitutional: Armour v. City of Indianapolis

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.

Blair Ben small

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.

 Paul Steve

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..

 

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Jun
14

Taxpayers Increasingly Use Appraisal Standards in Tax Appeals

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.

Garippa155 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.

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May
31

Devise an Exit Strategy For Older Tech Campuses

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.

dcanary Cfraser

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

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Apr
20

Value Erosion

Lease Terms Can Impact Property Valuation' "But Tax Assessors May Not Realize It

"The loss of tenant reimbursements ... can have a significant impact on the property's net operating income."

By Douglas S. John, Esq., as published by Commercial Property Executive, April 2012

In the past 24 months, published lease rates have continued to decline or remained flat in most markets and for almost all property types.

But published lease rates tell only part of the story. In an effort to keep and attract tenants, landlords have been forced to offer lease terms that can erode a property's value.

In states where tax assessors rely on leased fee valuations (valuing property based on its actual performance), the rates listed in rent rolls may omit these changes to leases. Similarly, where state law requires tax assessors to use fee-simple assumptions of market rent, published lease data typically reflects either asking rates or reported rates that also ignore the effect of these changing terms. Unfortunately for taxpayers, assessors rely on these sources, which are often unreliable indicators of true market lease rates and can result in inflated tax bills.

Taxpayers and their attorneys must dig deep into the terms of lease transactions and explain to assessors how changing terms impact their property's valuation. Following are some key changes in the leasing market and how they are affecting property values.

Transition from Triple Net to Modified Gross Leases: Tenants with sufficient leverage are no longer inclined to fully reimburse landlords for real estate taxes, insurance or common-area maintenance charges. As a result, when leases are renegotiated, the structure may transition from a triple-net lease to some form of a modified gross or even a full-service lease. A cursory review of the rent roll by the tax assessor may suggest that the rate is unchanged upon renewal. But the loss of tenant reimbursements for expenses can have a significant impact on the property's net operating income, resulting in a significant loss of value.

Free Rent: Free rent is a common inducement landlords use to keep or attract tenants. This can take many forms, with landlords offering from a few months to a year or more. In some distressed retail centers, landlords have been known to give anchor tenants free rent for extended periods as a means of retaining other tenants.

To obtain longer lease terms' "and in some instances in lieu of providing tenant improvement allowances they cannot afford' "landlords are also offering free rent on the back end of a lease rather than the front end, with tenants taking it at month 24, 36 or 48. A rent roll reflecting a 72-month lease may only provide 60 months of rent payments, with the final year rent free. In addition, landlords are offering furniture, equipment, free parking and moving allowances.

These rent concessions typically are omitted from rent rolls or published lease data, masking the extent of a property's economic vacancy, reducing its net operating income and contributing to a loss of value.

Tenant Improvements: Some space users want allowances for tenant improvements. But how a landlord accounts for their cost can significantly affect a property's value. For instance, say a tenant renews its lease at the same base rate as before but the landlord also provides $20 per square foot to rehab the property. If the landlord amortizes the improvements into the renewal lease rate, the rate reflected in the rent roll will overstate the effective lease rate. It is critical to explain to assessing authorities that using lease rates that amortize tenant improvements will result in overvaluation of the property.

Co-Tenancy Clauses: Tenants are also using their leverage to include co-tenancy clauses in leases or renewals that allow them to either reduce their lease rate or terminate the lease if the property's occupancy rate falls below a specific level or if a key anchor tenant moves out of the property. When an anchor tenant goes dark, the impact on the property's value is compounded by the potential loss in rent and expense reimbursements from smaller tenants that may decide to exercise their rights under the co-tenancy clause. The existence of a cotenancy clause may have a ruinous impact on the value of a property and should always be brought to the assessor's attention.

These and many other changes to leases that may be seen in the coming years—such as marginal or nonexistent escalator clauses and FASB rule changes—will continue to weigh down property values. It is critical that taxpayers and their attorneys develop presentations that clearly demonstrate to tax assessors, administrative tribunals and courts how a wide variety of lease changes can affect a property's valuation.

dough johnsmallDouglas S. John is an attorney in the Tucson, Arizona, law firm of Bancroft & John P.C., the Arizona and Nevada member of American Property Tax Counsel (APTC), the national affi liation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
10

Texas' Pro-Business Environment Doesn't Extend To Property Taxes

"While Texas remains one of the best places in the nation to do business, the property tax burden here is substantial. Careful planning of new investment in the state can considerably mitigate property taxes for a significant period of time..."

By Sebastian Rodrigano, as published by Texas Real Estate Business, April 2012

The idea that Texas offers a favorable business climate is deeply rooted in the business community, but a business must monitor its property tax burden or risk paying unnecessarily high tax bills.

It's understandable that many Texas businesses downplay the impact of property taxes on their bottom line. Late last summer, a survey by Development Counselors International rated Texas as having the best business climate in the nation for the 12th consecutive year. Survey respondents cited the tax climate, pro-business environment and economic development incentives as the top reasons for favoring the state.

As a 20-year Texas resident, I considered Texas' business climate supremacy to be indisputable. When a client requested a quick check of property tax projections to evaluate locations for a new facility, however, I had trouble reconciling the data with my beliefs about the competitiveness of Texas in attracting new business.

TaxChart2 BIG TAXES IN TEXAS: Across a 20-year period, property taxes on four hypothetical commercial buildings, all valued at $200,000 in the first year, would be nearly four times higher in Texas than in many other states.

The client was trying to decide where to build a $200 million facility, assuming that every available property tax exemption would be granted in each of the states considered. Over a 20-year period, the estimated property taxes in Texas were close to four times those of the nearest competitor.

This result seemed incongruous, to say the least, with Texas' top national ranking in the "tax climate" category. A number of business representatives have assured me that in spite of a disproportionate property tax load carried by businesses, the overall tax picture is more beneficial in Texas than in most other states. Yet the magnitude of a business' property tax burden in this state demands significant attention and prudent management.

For existing infrastructure, much can be done to minimize taxes by ensuring that properties are properly and equitably valued. When dealing with new construction, a number of incentives and exemptions are available to help alleviate the property tax burden. Here are a few options for properties old and new.

Tax Abatement Agreements. Chapter 312 of the Texas Property Tax Code allows taxing entities to enter into agreements with taxpayers to exempt all or some of the value of real and/or tangible personal property from taxation for a period not to exceed 10 years. School districts may not enter into tax abatements. Generally, the agreement must be approved before construction begins.

Value Limitation and Tax Credit Agreements. A school district may agree to limit the taxable value of new property for up to 8 years under Chapter 313 of the Texas Property Tax Code. The limitation applies only to school district maintenance and operations taxes applicable to the property. These exemptions are commonly referred to as House Bill 1200 limitations and can be used in conjunction with a tax abatement agreement.

Economic Development Refund. Chapter 111 of the Property Tax Code provides for state tax refunds to qualified property owners that entered into chapter 312 tax abatement agreements after Jan. 1, 1996, without the benefit of a Chapter 313 value limitation.

Freeport Exemption. The Freeport exemption includes a total tax exemption for personal property (excluding petroleum products) that is detained in the state for less than 175 days for assembling, storing, manufacturing, processing or fabrication purposes. Each taxing jurisdiction must elect to participate. In some instances taxing jurisdictions that previously had not granted an exemption for a Freeport zone have opted into the exemption to incentivize business development. This exemption is described in Section 11.251 of the Property Tax Code.

While Texas remains one of the best places in the nation to do business, the property tax burden here is substantial. Careful planning of new investment in the state can considerably mitigate property taxes for a significant period of time, and a watchful eye over assessments will allow for a less costly experience while doing business in Texas.

Rodrigano Sebastian Rodrigano is a principal at the Texas law firm of Popp, Gray and Hutcheson, PLLC. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Rodrigano can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar
26

New York City's Relentless Reassessments Raise Revenue—and Eyebrows

"The New York City Charter grants property owners the right to protest their tentative assessments from Jan. 15 (or the first day following weekends and/or holidays) until March 1..."

By Joel R. Marcus, Esq., as published by National Real Estate Investor - Online, March 2012

In its 2012-2013 tax roll assessment, New York City has once again reported major increases in property values. Bucking the national trend toward flat or downward value changes, the city in January found that overall market value had grown to more than $876 billion, up by more than $31 billion from last year's record $845.4 billion.

Remarkably, the taxable assessment (approximately 45 percent of market value) is only the latest step in a relentless series of increases in the taxpayers' burden, dished out each and every year since 1995. Bar graphs of total assessed values for each year by property class reveal the linear, uninterrupted nature of the changes, with nary a hint of the variations that would be expected during the two most recent economic recessions. (See chart.)

jmarcusgraph

Last year's assessment increase provoked an angry backlash from both residential and commercial property owners. As a result of these widespread protests, the New York City Department of Finance agreed to voluntarily roll back assessments of cooperatives and condominiums (owned by voting taxpayers) that experienced assessment increases of 50 percent or more, choosing to instead limit increases on those properties to no more than 10 percent over the prior year. Properties that had received an assessment increase of 49 percent or less, however, went unchanged onto the 2011-2012 roll.

The Department of Finance had to correct 30,457 property assessments, and the Tax Commission handled 50,022 appeals covering 183,811 separately assessed tax lots. The Tax Commission's remedial actions yielded $560 million in tax relief to aggrieved taxpayers.

Repeat performance?

With the tentative assessment for the tax period running from July 1, 2012, through June 30, 2013, and showing dramatic value increases yet again for certain residential properties, there is a flurry of legislative activity promoting a new class of property for cooperatives and condominiums. As proposed, this class would have its tax increases capped at no more than 6 percent each year, the same treatment now accorded to one-, two- and three-family homes.

This legislation, if passed, still won't eliminate the precipitous disparity in taxes between apartments and homes. The cap on homes has been in effect since 1982, and now most homes are assessed at a very small fraction of their current market value.

Citywide, the taxable assessed values of one-, two- and three-family homes (Class 1) increased 3.11percent from last year's assessment. Rental apartments, co-ops and condos (Class 2) are up 5.15 percent, and office, hotel, retail and other commercial properties (Class 4) are experiencing an increase of 7.26 percent.

nyc-condo-400A red flag

A red flag

Before publication, the Department of Finance detected massive errors in the assessment roll and delayed its release. Officially, the Department of Finance cited the need "to correct an error in one of the computer systems it uses to calculate values." But insiders report that quality control issues were also a factor in the delay. On Jan. 19, 2012—two days late—the Department of Finance published the city's tentative assessment roll, covering more than 1 million separately assessed parcels of real estate.

The New York City Charter grants property owners the right to protest their tentative assessments from Jan. 15 (or the first day following weekends and/or holidays) until March 1. The law authorizes owners of one- to three-family houses the right to contest their tentative assessments until March 15. The protests must be filed during these time periods with the New York City Tax Commission, an independent city agency authorized to review and correct the Department of Finance's property tax assessments.

In announcing the delayed assessment release, Finance Commissioner David M. Frankel stated that "we will keep the roll open for an additional two days this year." The Tax Commission's legal authority to review protests filed after March 1 and March 15 is questionable, however. In the absence of remedial legislation expressly authorizing the Tax Commission to review protest applications filed after March 1 and March 15, applicants are better off assuming that the current statutory filing dates will continue to govern.

Commercial consternation

During the period after the publication of the tentative assessment and prior to the publication of the final assessment roll on May 25, the Department of Finance is permitted to increase assessed values of nonresidential properties. This authority may only be exercised until May 10, however, and only where the department has mailed written notice to the owner at least 10 days prior to May 10. The mailing of such notices after Feb. 1 extends the protest period for affected owners, who have 20 days after the notice was mailed to apply for a correction of their assessment.

In Frankel's announcement, he also mentioned that the Department of Finance is reviewing whether thousands of properties which have historically enjoyed not-for-profit exemptions remain eligible for such benefits. Previous exemptions for many properties which did not file timely renewal applications prior to Nov. 1, 2011, were removed on the tentative assessment roll, but Frankel advised that these properties can still regain their exemptions for the 2012-2013 tax year if they provide the required documentation by Feb. 13.

Joel MarcusThis email address is being protected from spambots. You need JavaScript enabled to view it. is a partner in the law firm of Marcus & Pollack LLP, the New York City member of American Property Tax Counsel.

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Mar
08

Why "Build-to-Suits" Are Over Assessed

Rather than simply redevelop existing buildings to suit their needs, the build-to-suit model calls for the development and construction of new buildings that match the trade dress of other stores in a national chain. Think CVS pharmacy, Walgreens and the like...

By Michael P. Guerriero, Esq., as published by Rebusinessonline.com, March 2012

The build-to-suit transaction is a modern phenomenon, birthed by national retailers unconcerned with the resale value of their properties. Rather than simply redevelop existing buildings to suit their needs, the build-to-suit model calls for the development and construction of new buildings that match the trade dress of other stores in a national chain. Think CVS pharmacy, Walgreens and the like. National retailers are willing to pay a premium above market value to establish stores at the precise locations they target.

In a typical build-to-suit, a developer assembles land to acquire the desired site, demolishes existing structures and constructs a building that conforms to the national prototype store design of the ultimate lessee, such as a CVS. In exchange, the lessee signs a long-term lease with a rental rate structured to reimburse the developer for his land and construction costs, plus a profit.

In these cases, the long-term lease is like a mortgage. The developer is like a lender whose risk is based upon the retailer's ability to meet its lease obligations. Such cookie-cutter transactions are the preferred financing arrangement in the national retail market.

So, how exactly does an assessor value a national build-to-suit property for tax purposes? Is a specialized lease transaction based upon a niche of national retailers' comparable evidence of value? Should such national data be ignored in favor of comparable evidence drawn from local retail properties in closer proximity?

How should a sale be treated? The long-term leases in place heavily influence build-to-suit sales. Investors essentially purchase the lease for the anticipated future cash flow, buying at a premium in exchange for guaranteed rent. Are these sales indicators of property value, or should the assessor ignore the leased fee for tax purposes, instead focusing on the fee simple?

The simple answer is that the goal of all parties involved should always be to determine fair market value.

Establishing Market Value

Assessors' eyes light up when they see a sale price of a build-to-suit property. What better evidence of value than a sale, right?

Wrong. The premium paid in many circumstances can be anywhere from 25 percent to 50 percent more than the open market would usually bear.

Real estate is to be taxed at its market value — no more, no less. That refers to the price a willing buyer and seller under no compulsion to sell would agree to on the open market. It is a simple definition, but for purposes of taxation, market value is a fluid concept and difficult to pin down.

The most reliable method of determining value is comparing the property to recent arm's length sales, or to a sale of the property itself. It is necessary to pop the hood on each deal, however, to see what exactly is driving the price and what can be explained away if a sale is abnormal.

Alternatively, the income approach can be used to capitalize an estimated income stream. That income stream is constructed upon rents and data from comparable properties that exist in the open market.

For property tax purposes, only the real estate, the fee simple interest, is to be valued and all other intangible personal property ignored. A leasehold interest in the real estate is considered "chattel real," or personal property, and is not subject to taxation. Existing mortgage financing or partnership agreements are also ignored because the reasons behind the terms and amount of the loan may be uncertain or unrelated to the property's value.

Build-to-suit transactions are essentially construction financing transactions. As such, the private arrangement among the parties involved should not be seized upon as a penalty against the property's tax exposure.

Don't Trust Transaction Data

In a recent build-to-suit assessment appeal, the data on sales of national chain stores was rejected for the purposes of a sales comparison approach. The leases in place at the time of sale at the various properties were the driving factors in determining the price paid.

The leases were all well above market rates, with rent that was pre-determined based upon a formula that amortizes construction costs, including land acquisition, demolition and developer profit.

For similar reasons, the income data of most build-to-suit properties is skewed by the leased fee interest, which is intertwined with the fee interest. Costs of purchases, assemblage, demolition, construction and profit to the developer are packed into, and financed by, the long-term lease to the national retailer.

By consequence, rents are inflated to reflect recovery of these costs. Rents are not derived from open market conditions, but typically are calculated on a percentage basis of project costs.

In other words, investors are willing to accept a lesser return at a higher buy-in price in exchange for the security of a long-term lease with a quality national tenant like CVS.

This is illustrated by the markedly reduced sales and rents for second-generation owners and tenants of national chains' retail buildings. Generally, national retail stores are subleased at a fraction of their original contract rent, reflecting pricing that falls in line with open market standards.

A property that is net leased to a national retailer on a long-term basis is a valuable security for which investors are willing to pay a premium. However, for taxation purposes the assessment must differentiate between the real property and the non-taxable leasehold interest that influences the national market.

The appropriate way to value these properties is by turning to the sales and leases of similar retail properties in the local market. Using that approach will enable the assessor to determine fair market value.

GuerrieroPhoto resized Michael Guerriero is an associate at law firm Koeppel Martone & Leistman LLP in Mineola, N.Y., the New York state member of the American Property Tax Counsel. Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar
05

Inaccurate Records Could Inflate Tax Assessments

Taxpayers should review their individual property tax records maintained by the county tax assessor to determine whether the specific facts of their property are accurate. Is the amount of acreage or square footage accurate and up to date, including any additions or demolitions that have occurred?

By Lisa Stuckey, Esq., as published by National Real Estate Investor - Online, March 2012

In this era of computer-generated recordkeeping, Georgia taxpayers should be aware of several areas in which accurate records are critical in the proper valuation of their properties for ad valorem tax purposes. While software and online filing save time, these tools also increase the opportunity for inaccuracy and unfairly high tax bills.

The importance of accurate written records begins with the initial purchase of the property. Georgia law requires property owners to report real estate sales on a PT-61 form, which is filed online with the clerk of the county superior court. This form is transmitted to the county tax assessor, who is required to consider sales in determining the fair market value of property.

Taxpayers should ask themselves if there has been a proper allocation between real and personal property. Examples of personal property include furniture, fixtures and equipment for the operation of hotels. Has there been a proper allocation of tangible vs. intangible property?

A new statute in the Georgia property tax code requires that tax assessors exclude the value of intangible assets such as patents, trademarks, trade names and customer and merchandising agreements. If the reported sale price of a real property contains these intangibles, then inflated tax valuations are likely to occur.

Sometimes there is no allocation in county records of the underlying business being acquired as part of a property transaction. For example, portfolio purchases of convenience stores or daycare centers may reflect only the aggregate purchase price and not a proper allocation of the individual components being acquired. Has there been a proper allocation of specific assets in a multi-property sale transaction? Inaccurate sale price allocation among properties purchased as a portfolio often results in improper tax valuations.

A purchaser with ownership and control of a property must make certain that internal recordkeeping is accurate, for both real and personal property. Inaccuracies can expand over time throughout the length of ownership and life of the property. For instance, owners of personal property may carry pieces of property on their books and ledgers that have been sold, disposed of, moved from the county to another facility owned by the taxpayer, or which are obsolete or no longer in use.

County tax assessors rely upon taxpayers to accurately report property held by the taxpayer in the county on Jan. 1 of each tax year by filing the business personal property tax return. If owners carry over historical purchase prices of personal property without analyzing the facts surrounding current ownership, location, and use of the individual pieces of property, the inaccuracies will result in improper tax valuations of personal property by the county tax assessor. Each passing tax year can compound problems if additional pieces of property are disposed of or moved but continue to be reported to the tax assessor as being held in the county by the taxpayer on Jan. 1.

Real property owners should periodically review and make sure their internal records are accurate. For instance, for office, apartment, retail and warehouse properties, does the software used by the taxpayer to maintain rental records accurately reflect both actual contract rents and the current market rent of the property? Dated and inaccurate market rental rates can be misleading to county tax assessors, who review taxpayer rent rolls to obtain market information used to value commercial properties.

Similarly, for hotel properties, is the actual and market room rate data accurate in all fields of the software, or have record-keepers merely carried over historical market rates that could mislead the tax assessor and cause improperly inflated valuations?

Another area of proper record-keeping involves the actual county tax records. The new Georgia statute requiring county tax assessors to issue annual tax assessment notices to every real property owner places an even greater burden on the tax assessor than in years past, which may result in more factual errors in the county property tax records.

Taxpayers should review their individual property tax records maintained by the county tax assessor to determine whether the specific facts of their property are accurate. Is the amount of acreage or square footage accurate and up to date, including any additions or demolitions that have occurred? Does the county have the correct age for the property, including all of the portions of the improvements, which may have been built at different times?

Along that line, does the county have the appropriate percentage breakdown for the various areas of use at the property, such as office vs. warehouse or rentable area vs. common area? Are the wall heights correct for all portions of the property? These are just a few examples of the type of data maintained by the county tax assessor which must be correct to assist in the accurate valuation of a taxpayer's property.

Electronic records offer many advantages. But savvy property owners invest some of the time they are saving through modern technology, and make sure that inaccurate records related to their property aren't contributing to an overstatement of their tax burden.

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

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Feb
12

Can the Property Tax Code Improve D.C.'s Public Schools?

It is well understood in economics that, outside of the margins, the more you tax something the less of it you get, and the less you tax something the more of it you get.

By Scott B. Cryder, Esq., as published by National Real Estate Investor - Online, February 2012

A city is unlikely to maximize its potential without attracting and retaining families with children. Yet attracting and retaining such families is perhaps the greatest obstacle the District of Columbia will face over the next several decades as it seeks to navigate the region's ongoing population boom. And while it may not seem obvious, the real estate tax code may be an effective tool to meet the challenge.

A good problem to have

According to the 2010 Census, the D.C. metropolitan area grew by 16 percent over the last decade. Among the 10 largest metropolitan areas, this was the largest percentage increase of any non-Sunbelt metropolitan area. Growth extended beyond the suburbs, as the District itself stemmed a 60-year population decline by adding nearly 30,000 new residents.

Buoyed by government spending, related contracting, a robust legal and professional field and growing technology and biomedical industries, the D.C. area is well positioned to maintain this growth over the coming decades. In fact, a recent study by the Center for Regional Analysis at George Mason University predicts that over the next two decades the population of the greater D.C. area will increase by 1.67 million people, a 30 percent increase over the current population of 5.58 million. Compared with the problems facing shrinking metropolitan areas such as Detroit and Chicago, the District is fortunate. Nonetheless, this projected growth presents significant challenges to state and local governments.

A city of hipsters and empty-nesters?

Though the District may be spared from some of the more implacable transportation issues facing its suburban neighbors, it faces its own unique set of challenges. The most glaring, long-term impediment to growth in the District is its dismal public education system. The dearth of quality public schools renders the District inhospitable to large numbers of families with school-age children. These families, who would otherwise prefer to live in the District, are forced either to decamp for the suburbs once their children are of school age or enroll them in private schools, an option that is beyond the reach of a large swath of the populace.

This lack of quality public education effectively restricts the District's appeal to a narrow demographic group of new residents—a fact that has not been lost on the multifamily developers who increasingly dominate D.C. residential development. Reacting to market conditions, these developers are focusing on delivering smaller, more affordable units in amenity-laden buildings. These units are, however, largely impractical for families with school-age children.

DC-family-600

Attracting these families presents a Catch-22 conundrum, however: The quality of public schools will improve if more diverse families move into the District, yet these families are hesitant to move into the District because of the lack of quality public schools. Solving this challenge requires innovative thinking by the District government. Policies must be enacted that simultaneously incentivize individual families to move to the District and incentivize residential developers to provide the necessary housing stock, especially in the multifamily segment. This is where a simple tinkering with the real estate tax code could pay big dividends.

It is well understood in economics that, outside of the margins, the more you tax something the less of it you get, and the less you tax something the more of it you get. This same basic principal should be applied to attracting and retaining families with school-age children. Specifically, the District should implement a child property tax credit of $1,000 for each child enrolled in D.C. public or charter schools. This credit could be claimed by either owner-occupants or landlords where the child lives.

By making this credit available to both owners and landlords, the District would not only directly motivate families to move to the District and enroll their children in D.C. schools, but it would also incentivize developers to provide the new housing necessary to support these families. This simple, easily administered tax credit would address two difficult issues simultaneously, in an efficient manner with little regulatory overhang. If the District wishes to reach its potential, it will need to enact precisely these types of policies.

Scott B. Cryder is an associate in the law firm Wilkes Artis Chartered, the District of Columbia's member of American Property Tax Counsel.

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Jan
30

Obsolescence Creates Tax-Saving Opportunities For Shopping Center Owners

"External obsolescence may be market-wide or industry-specific, international, national, or local in origin. It can be temporary or permanent, but in most cases, the property owner is unable to fix the problem..."

By Benjamin A. Blair, Esq., as published by rebusinessonline.com, December 2012

Shopping center owners often find that factors beyond their control detract from the marketability and profitability of their investments, particularly in the current depressed market. Economic change and evolving technology, for example, have altered the way retailers and property owners transact business. While lenders keep a tight grip on potential financing, brick-and-mortar retailers must compete against an increasingly global, virtual marketplace.

Despite — and indeed because of — this bleak picture, property owners have reason for optimism. Several states and localities, including Chicago and Indiana, are in the midst of systematic property reassessments. Because this cycle of reassessments falls during a time when retailers are still struggling under the effects of the recession, property owners have an opportunity to reap tax savings from this market turbulence and increase the property's bottom line.

The goal of a property tax assessment is to apply the tax rate to an accurate property value. This value is generally set at either market value or at the property's value-in-use. A property's value, however it is set, can be affected by any number of factors, the most important of which for retail properties is the property's ability to earn rental income.

Real-life scenario

Imagine a neighborhood shopping center with leaking roofs and peeling paint. Perhaps the tenant spaces are awkwardly shaped or poorly constructed. An investor would value this property less than an otherwise comparable property in better condition. This depreciation, called physical and functional obsolescence, is due to the physical condition or flaws in the construction of the property.

But just as a property can suffer from physical and functional obsolescence, a property can suffer depreciation from sources external to the property itself. This depreciation, termed economic or external obsolescence, is a usually incurable loss in value caused by negative influences outside the property. External obsolescence may be market-wide or industry-specific, international, national, or local in origin. It can be temporary or permanent, but in most cases, the property owner is unable to fix the problem.

In order to use external obsolescence to reduce a property's tax assessment, the owner must first identify whether external obsolescence is present. Then the owner must quantify the effect of the obsolescence on the property. Unsupported claims of obsolescence are unlikely to impress an assessor and encourage a reduction in the property's assessment.

To quantify the obsolescence, the owner must know its source. Shopping centers in today's market are subject to external obsolescence from a variety of sources. General economic conditions have reduced the demand for leases and have resulted in fewer tenants. Existing tenants, feeling pressure from lower-overhead competitors, are seeking lower rents to reduce strain on their business. Many retail lease rents are based on a percentage of sales, and as sales fall, so does rental income.

As a result of the real estate boom in the middle of the last decade, many markets are oversupplied with competitive properties, and some uncertainty exists as to the future of brick-and-mortar retail. Further, buyers and sellers are still cautious while engaging in sales, and lenders continue to restrict available capital. Changes in interest rates, inflation, capitalization rates, and elected officials can all have an effect on property value.

Proving cause and effect

After identifying the source of the property's obsolescence, the owner must be able to show the impact of the obsolescence on the property. For example, if the owner has lowered rents in order to keep or attract tenants, the valuation of the property should reflect that lowered income earning potential. Decreased demand from investors, whether because of financing restrictions or lower income potential, should reduce the assessment to reflect the smaller market for investment properties.

And when determining value by comparing the sale of similar properties, owners should emphasize the differences in market conditions, which reduce the value of the property.

For most properties, the largest expense after debt service is the property tax bill, so any reduction in that tax burden can drastically improve the property's profitability. Thus, while the economic climate may be turbulent for some time, prepared and informed property owners can use the nuances of external obsolescence to help weather the storm.

Blair Ben small Benjamin A. Blair is a tax associate in the national law firm 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.

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Jan
16

Facts Before Tax

Assessors Often Overvalue Centers, Ignoring Vacancies and Other Issues

"Landlords must diligently review property taxes yearly, looking at assessments based on current marketplace conditions."

Most shopping center owners are being overtaxed and do not even know it. Or they do not realize it until they get their tax bill. The problem is in the way taxes are figured by local assessors- a methodology that was only adequate, at best, during good times, but which has become a severe handicap to landlords during this lengthy economic downturn.

In most states assessors take a mass appraisal approach, trying to determine as quickly and ubiquitously as possible the fair market value of all the shopping centers within a tax district using existing data. The assessor is looking at the market value of the property based upon fee-simple value, which is the value of the real estate without encumbrances - that is, what it would sell for if it were vacant and available for sale or lease at market rates.

"The reality is, there are few cases of commercial property selling where you have a vacant building for sale without encumbrances," said Kieran Jennings, a Cleveland-based partner at Siegel, Siegel, Johnson & Jennings. "Typically, it is partially occupied, fully occupied, et cetera. Often there are deed restrictions in place." Jennings is a member of the Washington-based American Property Tax Counsel, which assists property owners in the U.S. and Canada with tax issues.

"Assessors will look at a market, they will review published sources on cap rates, et cetera, to come up with a model that will be used on shopping centers across the board," said Darlene Sullivan, a partner at Austin, Texas-based Popp, Gray & Hutcheson, and also a member of the APTC. "They have to get their numbers out quickly and apply the model without looking specifically into any condition."

Assessments are levied in similar fashion in Michigan. "In Michigan, as in most states, value is based on market as opposed to contract rent," said Michael Shapiro, a Detroit-based partner at Honigman Miller Schwartz and Cohn, and an APTC member. "In general, the assessor uses a cost approach that has not adequately accounted for obsolescence in the market, reduced demand for property, greater vacancies and increased cap rates. All these factors have a negative impact on value. "There are two general ways overtaxing occurs. The first is the time-lag effect of a slumping market, and the second involves the lease adjustments often made to keep tenants in place, but which assessors do not take into account.

Indiana landlords were being victimized by the calendar until laws there were changed, says Stephen Paul, an Indianapolis-based partner at Baker & Daniels and an APTC member. "Our assessment date is a year behind our value date," Paul said. "For example, the assessment date was March 1, 2009, but the valuation date was January 1, 2008, and the market changed dramatically. On March 1, 2009, market conditions were worse than at the value date. People were taxed currently, but based on values when the market was much better."

The more common failure in tax assessments is the inflexibility of assessors or their inability to consider the lease inducements necessary to keep tenants. "I have a number of clients that are regional and local shopping center owners," said Jennings. "Since the fall of the real estate market, there has been tremendous pressure on them to keep tenants in place. So they have gone from net leases to gross leases, put in buildouts and removed square footage."

All these things mean that actual rents are less than what they appear to be to the assessor. Jennings gives one example where tenants will stay in place, but take up less space. To keep tenants, landlords will allow them to halve their space, which means they have effectively cut income in half. "Now when the assessors come along, they see all of your storefronts are occupied, but many of the tenants have reduced space," said Jennings. ''The landlord has pockets of dead space that will probably never be used again. The assessor is assessing you at rents that are $15 to $20 a square foot, but only half that space is being used, so the effective rent is really $7.50 to $10 a square foot. And it is not showing up in any published data, and assessors can only work from what is published."

That problem rarely gets rectified because, for competitive reasons, shopping center owners are reluctant to share information, which means, of course, that the assessors are working from incomplete data. "Shopping center owners are not amenable to giving out information to assessors," said Paul. "The landlord doesn't want to give out the details of a lease, so the assessor will say: 'If I'm not entitled to look at the lease, I have to make my own assumptions, which will be done on incorrect information. Afterward the taxpayer has to file an appeal against the assessment and layout the reasons why it was excessive."

Overtaxing is a problem not just for the shopping center owners, but for the tenants as well. Most leases are triple-net, which means that taxes are passed through to tenants, so a lower tax will benefit the tenant in the end, Sullivan says. "Tenants need someone to be aggressive for them to keep those triple nets down," she said.

This can also be problem with competitive shopping centers. Consider two similar shopping centers across the street from each other, each with the same type of vacancy. One center is valued at $100 per square foot, and the other at $130 per square foot. Because of triple net, tenants will be enticed to the center taxed at the lower rate, because all things considered, the expense of leasing will be lower.

An assessor equipped with nothing more than the cost approach will find it difficult to quantify value losses without going through a detailed income approach, something that assessor is going to lack the time to do. Most appeals processes will recognize this and adjust accordingly.

In Michigan when an appeal is filed, the parties generally get together and discuss the specifics, and usually the matter is resolved without a hearing or trial, says Shapiro. "We have handled many shopping center appeals, and in recent years we have not gone to trial on a shopping center. Some get resolved while preparing for trial, and some get resolved when a formal, independent appraisal is submitted.

"Not every place is so easy. In Ohio and Pennsylvania third parties such as school systems have joined the fray: fighting to keep assessments high because so much funding comes from levies. Lower assessments mean less revenue for the school districts. "In the event, you are able to convince the assessor to reduce taxes based on, say, half the leased space used," said Jennings. "The school districts in Ohio and Pennsylvania can come in and file their own tax appeal to raise the value of a given property." Landlords must diligently review property taxes yearly, looking at assessments based on current marketplace ' conditions, Shapiro says. "My clients are fighting assessments," he said, "because assessors were ignoring the function obsolescence of their properties, which in some cases meant a 50 percent reduction in value."

DarleneSullivan140 Darlene Sullivan is a partner with the Austin law firm of Popp, Gray & Hutcheson LLP, the Texas member of the American Property Tax Counsel (APTC). She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Paul Steve

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..

kjennings

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..

 

 

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

 

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Jan
16

Industrial Park Wants Full Reassessment Review

Tim Schooley, Pittsburgh Business Times Reporter covers the case lead by APTC Pennsylvania Member - Sharon DiPaolo, Esq., as published by Pittsburgh Business Times January, 2012

The owners of the Robert J. Casey Industrial Park on the North Side are petitioning the Allegheny Court of Common Pleas Judge R. Stanton Wettick to ensure commercial property owners have to same opportunity to appeal their reassessments as residential property owners in Allegheny Count, according to a court filing.

The petition to intervene in the ongoing legal challenge of the reassessment values for Allegheny County is the latest plea to argue for uniform standards to tax the value of real estate in Allegheny County in a legal battle in which the issue of uniformity has been upheld by Wettick.

The family ownership of the eight-parcel industrial park saw its reassessed value jump by 340 percent, according to court documents, rising from a little more than $2.6 million in its 2011 assessed value to a reassessed value for 2013 of $11,864)00.

Sharon F. DiPaolo, a lawyer who represent the owners of the Robert J. Casey Industrial Park, argued in her petition that Allegheny County currently provides no information online regarding comparable sales to determine new assessments or other pertinent information used.

"The interests of commercial property owners are not adequately represented by the current parties and intervenors in the instant action", she wrote.

Of major concern for DiPaolo and her client is the ability to pursue an informal hearing before the Board of Property Assessment Appeals and Review, where a broader a discussion of a property's relative worth can be discussed, rather than a formal appeal before the county's board of viewers.

So far, the reassessment appeals process has been negotiated over between Allegheny County, the plaintiffs, who represent residential property owners, and Pittsburgh Public Schools, which convinced Wettick to delay implementation of the new assessed values

until 2013 so that reassessment appeals can be established to determine how to reset tax rates.

According to court documents, the reassessed values of commercial properties in Pittsburgh rose by 71.08 percent while the city's residential property increased by 46.89 percent.

"If this process were to be adopted, a commercial property owner which files an appeal before the Board of Property Assessment Appeals and Review could be entirely deprived .... by its adjudication by a taxing body's unilateral request to move the appeal to the board of viewers," wrote DiPaolo. "If this procedure were to be adopted, it would violate commercial property owners' right to due process."

At a hearing on Thursday morning, Judge Wettick agreed to consider the petition for next Thursday's scheduled hearing, said DiPaolo.

She added that the owners of the industrial park as well as other commercial property owners expressed the concern that the scale of the increased assessments on their real estate could force them out of business.

She emphasized the importance of the informal review process for commercial property owners, noting a commercial appraisal costs $5,000 to $10,000. A successful voluntary review can result in immediate tax relief, she added, further explaining that a burden of proof shifts to the taxing body after a successful informal review as well.

"If the commercial owners have to pay on their new assessments before it gets adjudicated it's really going to hurt," she said.

Tim Schooley covers retail, real estate, small business, hospitality and media. Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it. or (412) 208-3826.

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

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Jan
15

Inflated Taxes Threaten Phoenix Property Owners

The "new normal" for Phoenix is likely a prolonged era of deleveraging as the market absorbs these distressed assets. For Arizona property owners, the decline in real estate values has not always translated into a commensurate drop in taxes, however. This has occurred for three reasons..."

By Douglas S. John, Esq., as published by National Real Estate Investor Online, January 2012

As 2012 begins, the real estate collapse ravaging Phoenix continues. Phoenix real estate prices have fallen from their height in early 2008 by 28 percent for retail, 52 percent for industrial and 71 percent for office, according to Navigant Capital Advisors, a Chicago-based investment bank. Phoenix ranks No. 7 on Real Capital Markets' list of the most distressed U.S. markets for commercial real estate.

The city's delinquency rate for commercial mortgage-backed securities (CMBS) loans is the third-highest in the nation, accounting for 3.6 percent of total U.S. CMBS delinquencies. And Phoenix's delinquency count is expected to increase next year.

The "new normal" for Phoenix is likely a prolonged era of deleveraging as the market absorbs these distressed assets. For Arizona property owners, the decline in real estate values has not always translated into a commensurate drop in taxes, however. This has occurred for three reasons.

First, the general decline in assessed property values has not kept pace with the actual decline in asset prices. Second, even though taxable property values have dropped, Maricopa County, where Phoenix is located, has increased its property tax rates: for fiscal 2011, tax rates increased by 18 percent from the previous year.

The third and final reason stems from Arizona's unique system of calculating property tax liability from two statutory values — a full cash value and a limited property value. A property's full cash value can decline while its limited property value, determined statutorily, increases, causing an escalation in tax liability.

Taxpayers must be diligent to ensure they are paying no more than their fair share of taxes. Consider the following points before deciding whether an appeal may be beneficial.

Start early

Arizona's property tax system is complex, difficult to navigate, and requires perseverance. Tax year 2013 property tax notices will be mailed in February 2012. The system entails multiple forms and filing deadlines which, if missed, will result in a taxpayer losing appeal rights.

The process will conclude in October 2012 with State Board of Equalization hearings. Owners should start planning now to challenge their 2013 tax assessments. To do so, they should pay close attention to how their properties are assessed.

Mass appraisal?

To determine if a property has been overvalued, it is important to understand that assessors use computer-based statistical models to derive value. These models have several limitations that can result in a property being over-valued.

phoenix graph2First, the assessor's valuation of an individual property is only as accurate as the data and assumptions used in the statistical model to generate a value for a given submarket. The value created by a mass appraisal system may not account for the specific characteristics of a property, which may make it less valuable than predicted by the mass appraisal model.

Second, the mass appraisal system is dependent on correct, complete, and current property data. Oftentimes, the data that assessors use is not only incorrect but outdated by as much as six to eight months, which can inflate assessments. Part of the reason for outdated data is the existence of statutory cut-off dates for collecting data.

Valuation approach

While appraisers use three generally accepted approaches to value - the cost approach, the sales comparison approach, and the income capitalization approach - the appropriate valuation method depends on the property type. In Maricopa County, assessors value 70 percent of commercial properties using the cost approach, which measures the current replacement cost of the improvements minus depreciation, plus the value of the site. But the application of the cost approach in real estate transactions is limited and is rarely used by investors to determine market value.

 

In a depressed real estate market, the use of the cost approach typically results in an assessment that exceeds market value unless all forms of depreciation, especially obsolescence, are deducted.

Market value vs. property tax value

Even if an owner believes the assessor's valuation is reasonable based on his/her understanding of market value in the business world, the property may still be overvalued. Market value as commonly understood differs from property tax value in two key respects. First, Arizona law requires assessors to determine full cash value based on a property's current use, rather than its highest and best use. In many instances these two value concepts produce radically different values.

Second, market value for property tax purposes is limited to the value of the real estate. Arizona law prohibits the inclusion of personal and intangible property in the assessor's valuation.

Limiting assessments to real property is crucial to lowering the taxes of businesses such as hotels, assisted living facilities, and shopping centers and malls, which derive significant income from personal property and intangibles.

Because of the many deadlines, procedures, and valuation methods used, owners should begin reviewing their property tax values now to maximize their chances for success.

dough johnsmall Douglas S. John is an attorney in the Tucson, Ariz. law firm of Bancroft & John, P.C., the Arizona and Nevada member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jan
10

Still Under Appeal

How to Achieve Resolution Despite Many States' Years-Long Tax Court Backlogs

"A tax appeal backlog is a symptom of a system that disfavors taxpayers..."

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

Outside of a handful of primary markets and property types, real estate continues to suffer

Yet in many jurisdictions, assessors have failed to decrease taxable values to keep pace with real estate market declines. As a result, savvy owners and managers have been appealing their assessment with ever-increasing regularity, weighing down local and state tax board and court dockets with a ponderous backlog. In some communities, assessment appeals are now years behind. In litigious markets, the appeals themselves often last several years. Thus, tax cases are taking years longer to resolve at a time when taxpayers needed relief yesterday.

In Ohio, Pennsylvania and New Jersey, to name a few states, tax cases commonly wait on the docket for two or more years, but today some cases are unlikely to be re solved for four or more years. On the other hand, in states like Florida and Texas, taxpayers are still getting relief at the informal and board levels. These states have annual assessments and are accustomed to a large number of appeals. Moreover, since assessors in those states have tended to keep pace with the changing market in annual revaluations, assessments have already been reduced in many instances.

The length of time it takes to resolve a case in a particular state often reflects at which stage of the appeal process most cases reach a resolution. States with a faster turnaround time are genrally those that grant greater leniency for assessors to resolve issues. Where greater flexibility exists, taxpayers with limited evidence can discuss the macroeconomic changes that took place while offering specific evidence, allowing for a true give-and-take negotiation and resulting in fast, meaningful changes to tax assessments.

Where assessors and boards are deprived of sufficient latitude, assessment appeals tend to take on a court-like atmosphere where each fact is argued, often resulting in an appeal of the local board 's decision. This litigation delay is compounded when other taxing authorities, such as school districts, intervene in the process.

A tax appeal backlog is a symptom of a system that disfavors taxpayers. There will always be a group of cases that are complex, may require further appeal, or that involve taxpayers who are not fully satisfied. But delay is almost always against taxpayers' interests, while if a great number of taxpayers routinely appeal to a higher board or court, it is clear they did not get a proper result at the lower level.

Backlog is unfortunately viewed as the problem, and as a result administrators address the backlog and not the underlying issue. For instance, some states are shortening the trial time of a case. For commercial cases, the taxes contested are often in the tens or hundreds of thousands of dollars, having the effect of reducing taxpayers' investment value by millions of dollars.

In Kansas, there has been talk of potentially limiting trials to a half day. That may be insufficient time for cases involving complex commercial properties. In Ohio, the tax commissioner has proposed a small-claims section to alleviate pressure on court time. Several Pennsylvania counties are turning to arbitration, with great success. Other states look at funding or ease of filing as the problem, and are imposing higher filing fees to either raise funds or dissuade taxpayers from filing appeals.

Navigating the logjam

The key to successful litigation in a state with significant backlog is to consider that backlog at the outset and to determine if the benefits of a quick result outweigh a more satisfactory result months or years later. Local counsel is a key to understanding the ebb and flow of court dockets, as well as understanding opposing counsel's needs and wants, to be able to structure the best deal possible for a taxpayer. in some instances, tax payers can take advantage of the backlog when there is a large pending refund. It may be possible to negotiate a reduction in the refund by taking it as a tax credit over time instead of having the possibility of that refund being reduced dramatically or taken away completely in a trial.

Finally, in an environment where government fiscal needs may be in direct opposition to taxpayers' need for fairness and uniformity of taxation, it is helpful to get involved with regional and state chambers of commerce and trade groups. These organizations are working toward solutions to real taxation problems and not just the issue of backlog.

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

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Jan
01

Six Questions for Tax Counsel's Stephen Paul

"For the last few years, the country has been mired in a deep recession, which has severely impacted tax values. In determining assessed values, assessors don't have an understanding of —or ignore the realities of— the impact of the recession on property owners. One example revolves around the capitalization rate that should be used under the income approach to value..."

Interview with American Property Tax Counsel's president, Stephen H. Paul, as published by GlobeSt., January 2012

CHICAGO-Fighting for every scrap of legal tender has become an important part of commercial real estate, as loans today require much more cash and fights ensue about property value loss.

The locally based American Property Tax Counsel is an advocate in this fight for real estate owners. The group is comprised of 32 member firms and more than 100 attorneys from across the country selected for membership based on their reputations for practice excellence in their respective jurisdictions.

Recently, the group held their annual election and selected Stephen Paul with Indianapolis-based Faegre Baker Daniels as this year's president. He talked recently with Globest.com about his insights into the current post-recession era, and what owners can do to retain as much value as possible.

Globest.com: What are your thoughts upon being elected president of APTC?

Paul: The legal issues that have arisen since APTC was founded 20 years ago have changed substantially. My goal is to continue the tradition of making our member firms familiar with the most current issues and solutions, from both the legal and the valuation perspectives. Doing so will allow us to continue to best serve our member firms' clients.

Globest.com: What do you see as the most significant issue in property tax litigation today?

Paul: For the last few years, the country has been mired in a deep recession, which has severely impacted tax values. In determining assessed values, assessors don't have an understanding of —or ignore the realities of— the impact of the recession on property owners. One example revolves around the capitalization rate that should be used under the income approach to value. Assessors utilize pre-recession information that is not applicable to the realities of today. Taxpayers need to closely scrutinize the data used by assessors in developing the cap rate employed in their valuation of the owner's property.

Globest.com: Any other issues that you see this year that will affect property tax litigation?

Paul: Most states define taxable value as market value in exchange, that is, what a willing buyer would pay and a willing seller would accept. Many assessors, however, attempt to utilize market value in use instead, which can translate into an unlawful value. For example, imagine a manufacturing facility built forty or fifty years ago, but which continues to serve the purposes of its owner. The property may be more valuable to the owner in its current use than it would be if the owner chose to sell the vacant building to a buyer. Did the assessor value the taxpayer's property employing a value in use concept?

Globest.com: Has the recession caused any issues involving how sales are compared to one another?

Paul: Specifically when valuing a property under the sales comparison approach, issues arise as to which sales should be considered and which should be ignored. As the economy —including the real estate market— remains in a deep recession, a large number of comparable sales involve foreclosed properties. We see assessors trying to disregard the values of those foreclosures, when in fact foreclosed properties may be the only market. The savvy taxpayer will determine whether the assessor has failed to include foreclosures in its comparables.

Globest.com: What are some of the ways assessors inappropriately inflate property value?

Paul: Assessors sometimes attempt to use an allocated portion of the recorded sale price in a bulk transaction sale. However, that price usually reflects other factors, such as the value of intangibles, or the benefits to that particular owner from the economies of scale of owning multiple operational buildings. In other cases, assessors will try to rely on reported Section 1031 exchange values. That is also inappropriate, though, because those values include considerations that are wholly aside from the value of the realty. Make certain that only the value of the real property is being used to determine the valuation of your property for property tax purposes.

Globest.com: What are some issues you see arising as the real estate markets start to recover?

Paul: From a macro point of view, the increasing level of federal government debt will mean that programs and expenditures heretofore made at the federal level will be pushed onto state and local governments due to the burgeoning federal deficit. Local communities will be under even more pressure to raise revenue. The greatest source of revenue for local governments is property tax. So, as was the case during the Reagan presidency, assessors will become more aggressive in attempting to raise revenue to satisfy their local budgets, and that will fall on the shoulders of property owners. In order to assure fair property taxation, owners must carefully review their tax assessments to ensure that no inappropriate factors are used by assessors in valuing their property.

Paul_SteveStephen 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.

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Dec
08

Six Steps to Managing Property Taxes for Multiple Assets

"There are several ways of managing tax reviews across a portfolio, ranging from keeping everything in-house to delegating the entire job to an outside firm. In AMC's experience, the best approach has been a combination of those two strategies - with a team effort that relies on contributions from in-house personnel and outsourced tax and appraisal professionals. AMC's six-step tax strategy can serve as a model for other businesses with multiple properties..."

By Brooks Rainer, Thomas Slack, MAI, and Linda Terrill, esq., as published by Leader Magazine, November/December 2011

For companies like AMC Theatres, which has hundreds of locations, the challenge to review assessments for every property and decide whether or not to launch a tax appeal can be daunting. It becomes even more so if the company is a tenant and not the owner of the property.

There are several ways of managing tax reviews across a portfolio, ranging from keeping everything in-house to delegating the entire job to an outside firm. In AMC's experience, the best approach has been a combination of those two strategies - with a team effort that relies on contributions from in-house personnel and outsourced tax and appraisal professionals. AMC's six-step tax strategy can serve as a model for other businesses with multiple properties. Here are the key points:

1. Have the property separately assessed. Whether the company is the anchor tenant or occupies a smaller, in-line space, it's rarely good to be valued with other properties on a single parcel. First, a combined assessment abdicates the right to file an appeal. Second, it may be impossible to discern how the assessor valued the tenant's space versus the other tenants. This leaves each tenant at the mercy of the landlord to appropriately allocate taxes.

2. Involve the company's real estate department. Before a tenant can appeal a valuation from a tax assessor, most jurisdictions require that the lease specifically reserves the tenant's right to contest assessments. The lease may even include language that gives the tenant the exclusive right to decide to appeal and specifically prohibits the owner or landlord from filing on the property. Additionally, the lease should guarantee the cooperation of the property owner throughout the appeal process. Normally, the appeal process will require the owner/landlord to supply financial information, so collaboration and support are necessary.

3. Direct all correspondence where it is needed. Deadlines to appeal property taxes are often very short and can run out during the time it takes to get notices forwarded from the property owner to the tenant. Local taxing authorities will typically cooperate to ensure that all notices, tax bills, etc., are mailed where the tenant designates.

4. Get organized and get help. Once all valuation notices and tax bills are in hand, get assistance from a valuation expert such as an appraiser or valuation consultant. A company with multi-state locations should look to the national market to determine market value, and this kind of information is generally unavailable to local assessors. A third party appraisal can be invaluable when talking to local assessors. Effective tax rates differ enormously from county to county and from state to state. To make better sense of it all, analyze properties on the basis of valuation per square foot in addition to taxes per square foot. Even if the property type is marketed and sold on the basis of value per theater screen or value per apartment unit, most assessors are used to dealing on a square foot basis, and the tenant must be able to speak the language. A valuation consultant also will have access to demographic information that can all be vital in distinguishing one property from another.

5. Analyze properties from an "ad valorem" not "accounting" perspective. Most jurisdictions tax real estate based on the fair market value of the real estate. In other words, in a hypothetical sale, that's the highest price a buyer would be willing to pay for the real estate and the lowest price a seller would be willing to accept, with neither party acting under duress. Working with the appraiser, a tax attorney can analyze the information the assessor produces to determine if the valuations incorrectly include intangible business valuation or personal property or whether the asset was valued using an improper appraisal methodology.

6. Include local tax professionals on the team. The rules for who can file an appeal, when it must be filed, what needs to be included in the appeal and a number of other key requirements vary from state to state, county to county and even from year to year. For multi-property companies, it is virtually impossible to stay on top of these changing rules across the portfolio. By supporting the tax team with local experts, a company can keep abreast of change and ensure that its tax bills are fair and manageable.

The steps outlined will help owners and tenants become more efficient and effective in reining in excessive property tax assessments on their locations across the country.

TerrillSlackBrooksBrooks Rainer is a Vice President at AMC Theatres. Thomas Slack, MAI, is an Appraiser and Principal at Property Tax Services in Overland Park, Kan. Linda Terrill is a Partner in the Leawood, Kan., law firm Neill, Terrill & Embree, which is the Kansas and Nebraska member of the American Property Tax Counsel

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Nov
20

Is a Consensus Emerging on LIHTC Property Valuations?

"Rental rates and asset values have fallen to staggering lows, while snowballing vacancy has sapped income from commercial projects across property types and markets. And with local governments determined to maximize revenue from shrinking tax bases, it is more important than ever that property owners know the best recipes to minimize tax bills..."

By Douglas S. John, Esq., as published by Affordable Housing Finance, November 2011

For two decades, owners and managers of low-income housing tax credit (LIHTC) projects have labored to control property taxes that for many are their single largest expense. It has been a hard fight, as local assessing authorities, state legislatures, and courts have struggled to develop clear policies on the many complicated valuation issues that LIHTC properties create.

The last 10 years have brought significant clarification in many jurisdictions. At least 32 states have established some statewide guidance to taxpayers on LIHTC valuation, with 17 states passing legislation and nine state courts issuing decisions clarifying some aspect of the law related to the methodology used to value these assets.

There is still a significant number of jurisdictions without a clear policy, but a consensus may be emerging. Here is a rundown on progress­ and remaining challenges ­in those states that have addressed the valuation of LIHTC properties.

Differing valuation methods

Few jurisdictions prescribe a valuation methodology for LIHTC projects, but the vast majority of assessing authorities use the income capitalization approach rather than sales comparison or cost method.

Almost all jurisdictions and appraisal literature agree that the sales comparison method is inapplicable to LIHTC properties because these assets rarely, if ever, are sold. When LIHTC transactions occur, finding similarly situated properties is difficult because land-use restrictions can vary greatly from project to project.

Similarly, the cost approach is a poor indicator of LIHTC property values for several reasons. First, the actual development costs for these assets typically exceed those for an otherwise comparable, market-rent property. Most LIHTC projects include additional amenities to serve the elderly and disabled, and comply with federal regulations for subsidized housing.

Second, tax credit projects preclude the principle of substitution that is an underlying assumption of the cost approach. Substitution holds that a knowledgeable buyer would pay no more for a property than the cost to acquire a similar site and to construct similar improvements. But without federal tax credits, most low-income housing would be financially unfeasible, and thus never constructed.

Finally, taxpayers and assessing authorities continue to argue over the question of how to estimate depreciation or economic obsolescence due to the restrictive covenants and federal regulations imposed on LIHTC operations.

By default, then, the income capitalization approach is the most common method used to assess LIHTC properties. Even with the income capitalization method, however, significant disagreement persists among jurisdictions regarding its application, primarily because of the rental restrictions and tax credits associated with LIHTC properties.

An assessor valuing a LIHTC complex using the income capitalization method must choose between market rent and the property's restricted rent to derive gross potential income. A clear consensus among jurisdictions has emerged that the property's restricted rents should be used.

Currently, 30 jurisdictions mandate the use of restricted rent amounts in valuing LIHTC properties. Remaining jurisdictions provide no clear guidelines.

Credit for tax credits

There is less clarity, however, on the valuation of the federal tax credits given to owners of LIHTC properties.

Nine jurisdictions include the value of the LIHTC allocation as part of a property's net operating income. Those authorities contend that the tax credit enhances a project's value and becomes something a prospective buyer would take into account when estimating the project's value.

By contrast, 21 jurisdictions exclude tax credits from property income. The proponents of excluding tax credits point out that excessive tax assessments make low-income housing less economically feasible, and thereby undermine the credit program's goal of encouraging the development of such projects.

The courts also have emphasized that a buyer would receive only the remainder of the tax credits, if any, and a seller might be subject to a recapture of the tax credits. Thus, if the project is sold near or at the end of the 10-year period when the tax credits expire, the tax credits would not add to the value of the project.

In many jurisdictions, the decision to include or exclude tax credits from income hinges on the tax credits being categorized as intangible property under state law. The courts in Arizona, Missouri, Ohio, Oklahoma, and Washington have ruled that the tax credits are intangible and should not be considered part of income for purposes of valuation. By contrast, the courts in Georgia, Idaho, Indiana, Illinois, Pennsylvania, South Dakota, and Tennessee have reached the opposite conclusion.

Of these jurisdictions, the legislatures of Georgia, Idaho, Indiana, Pennsylvania, and South Dakota have since acted to overturn those court decisions. And in a few places including Connecticut and Michigan, tax credits were found to be intangible, but the courts nevertheless found that the value of the intangible tax credits must be taken into account for purposes of assessing an LIHTC project.

Consensus and dissent

There is certainly a greater consistency and clarity today than there was 10 years ago on the complex legal and valuation issues affecting LIHTC projects. Yet significant disagreements remain in the ways jurisdictions handle these assets.

Each state has a complex property tax system. For LIHTC project owners and managers, working with local counsel is the most effective way to understand how a jurisdiction's policy toward LIHTC valuation will affect their property tax assessment.

dough_johnsmall Douglas S. John is an attorney in the Tucson, Ariz. law firm of Bancroft, Susa & Galloway, the Nevada and Arizona member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Nov
20

Why Las Vegas Property Owners Should Challenge Their Tax Assessments

"Business leaders' confidence in the Las Vegas economy has turned pessimistic and continued its downward slide throughout 2011. The Southern Nevada Business Confidence Index, which measures companies' outlook, fell to 99.91 for the fourth quarter, down from 99.96 in the third quarter..."

By Douglas S. John, Esq., as published by National Real Estate Investor Online, November 2011

While the tourism, gaming and hospitality industries are stabilizing, the near-term outlook for the Las Vegas economy remains bleak. Economic factors that affect real estate value, such as demographics, employment, income and housing, portend minimal growth in the next 12 to 24 months.

Business leaders' confidence in the Las Vegas economy has turned pessimistic and continued its downward slide throughout 2011. The Southern Nevada Business Confidence Index, which measures companies' outlook, fell to 99.91 for the fourth quarter, down from 99.96 in the third quarter. Adding to commercial property owners' woes, real estate values for all asset classes are at historic lows. Property owners want to know if the steep decline in market values since the peak in 2008 will be reflected in the 2012-13 property tax assessments.

Taxpayers will soon find out: Clark County's issuance of property tax assessments takes place in early December. When assessments arrive, property owners will need to evaluate the benefit of filing a property tax appeal.

Tragically, few owners will file an appeal, even though, on average, property taxes account for 33 percent of real estate operating expenses. They will simply pay their tax bills based on the belief that their assessment is reasonable and that challenging an assessment is too expensive, complicated and time-consuming.

However, rather than taking an immediate pass on contesting an assessment, Las Vegas property owners should consider the following points and then decide whether an appeal may be beneficial.

Long-term Benefits

For savvy taxpayers, the next few years represent a unique opportunity to reduce long-term tax liability. Because of Nevada's partial abatement law or tax cap, a successful appeal this year will yield tax savings now and in the future. When property values begin to appreciate, the tax cap will limit the annual increase in tax liability to no more than 8 percent over the prior year.

Recapture Tax

Taxpayers must be careful to sidestep Nevada's recapture tax. Even if a property's taxable value declined last year, Nevada's recapture provision applies if a property's taxable value decreased by more than 15 percent between tax years 2010-11 and 2011-12, but increases by 15 percent or more in the upcoming 2012-13 tax year. If the recapture applies, the amount of tax that would have been collected without the tax cap will be levied on the property.

The Law on Value

It is important to understand how assessors value property in Nevada to evaluate if a property is overvalued. Owners may believe the taxable value appears reasonable based on their understanding of market value in the business world. But market value in the business world is different from market value for property tax purposes. Nevada law requires assessors to determine taxable value based on value in use rather than highest and best use. In many key instances, these two value concepts produce radically different values.

DJohn_NREINov2011

The Cost Approach

Nevada law requires assessors to determine the initial value of all property using the cost approach, which measures the current replacement cost of the improvements minus depreciation, plus the value of the site. The cost approach is limited in its application and is rarely used by investors to determine market value. In a depressed real estate market, the cost approach generally yields a result that exceeds market value unless all forms of accrued depreciation are deducted.

Value the Sticks and Bricks

Market value for property tax purposes is restricted to the valuation of the real estate alone, or the "sticks and bricks." Nevada law prohibits the inclusion of personal property or intangible property in the assessor's valuation. This applies particularly to businesses such as hotels and motels, assisted living and nursing facilities, and shopping centers and malls, which derive significant income from personal property and intangibles such as trade names, expertise and business skills.

Deadlines and Procedures

Owners should start planning an appeal before tax notices are mailed. The property tax appeal timeline is highly compressed in Nevada. Tax notices are mailed in early December, and this year taxpayers have until Jan. 17 to file an appeal. This leaves taxpayers with only about 30 days after receiving the tax notice to determine whether an appeal is warranted.

Where to Begin

Owners unfamiliar with the deadlines, procedures, and valuation methods used to arrive at their assessment can easily miss an opportunity to reduce their tax bill. To maximize the chances for success, an owner should consult with a tax professional or property tax lawyer with a sound knowledge of Nevada property tax law, valuation theory and tax assessment practices to identify potential avenues for reducing tax liability.

dough_johnsmall Douglas S. John is an attorney in the Tucson, Ariz. law firm of Bancroft, Susa & Galloway, the Nevada and Arizona member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Nov
16

Prepare now for Allegheny County Real Estate Assessments

"If the county has no direction as to what address the taxpayer prefers, it uses the property address as a default. Commercial property owners will often want their change notices to go to corporate headquarters and not to the property address..."

by Sharon DiPaolo, Esq., as published by Pittsburgh Post-Gazette, November 2011

There are a few simple things Allegheny County property owners can do now to prepare for their 2012 property assessments.

For city properties, new assessments will be mailed in December 2011. Informal hearings will be held in December 2011 and January 2012. The deadline to file formal appeals is Feb. 3, 2012.

No specific timetable is available for properties outside of the city, but based upon Allegheny County's progress in the reassessment project, notices will likely be mailed in late spring 2012 with a similar timetable for informal and formal appeals.

Even before receiving their new assessments, property owners can get ready now:

Check Your Addresses. The county maintains two addresses for every tax parcel -- the Change Notice Mailing address and the Tax Bill Mailing Address. If the county has no direction as to what address the taxpayer prefers, it uses the property address as a default. Commercial property owners will often want their change notices to go to corporate headquarters and not to the property address. Residential property owners will likely prefer to receive notice of changes in their assessments at the property address, rather than, say, their mortgage company.

To check your addresses go to http://www2.county.allegheny.pa.us/RealEstate/Default.aspx, type in your property address or parcel -- the two addresses for your property are listed on the bottom of the General Information tab.

To change your addresses, go to http://www.county.allegheny.pa.us/re/addrchg.aspx, and complete the Request for Address Change Form, and follow the directions for submission.

Important: The website instructions state that to change the Tax Bill Mailing address, one must notify both the Department of Real Estate and the County Treasurer's office -- the form itself omits the instruction that one must also make the submission to the County Treasurer's office.

Gather Your Information. Getting your information organized now will allow you to hit the ground running when you receive your preliminary notice.

For commercial properties, this means assembling the last three years of income statements, last three years of rent rolls, the lease (for a single-tenant property), and details concerning the structure (building size, acreage, year built and site plans) for owner-occupied properties.

Residential property owners should assemble information regarding sales of homes in their immediate neighborhood, any repair estimates for their home and photos of any problems with their home.

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

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American Property Tax Counsel

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