"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.

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.

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.

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..

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.

First, 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.

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..

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.

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..

"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.

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.

"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.

Brooks 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

"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.

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..

"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.

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.

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..

"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.

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..

"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 Stewart L. Mandell as published by National Real Estate Investor Online, November 2011

In his 1948 book, "How to Stop Worrying and Start Living," Dale Carnegie titled one chapter, If You Have a Lemon, Make A Lemonade. That advice has been passed down through the years to anyone facing a tough situation. How do you take something that's bad and turn it into a positive? The metaphor is apt for commercial real estate owners today, many of whom are stuck with piles of lemons.

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. Imagine an intersection with four 150,000-sq.-ft. office buildings, one on each corner. The four buildings are physically identical, but have economic incongruities that could result in significantly different property taxation. These differences include vacancy rates, current rents, lengths of leases, creditworthiness of tenants and recent financing transactions.

Building A's rents average $25 per sq. ft., which is $5 more than the market average of $20 per sq. ft. But its leases with above-market rents will be ending sooner than the average lease in the other buildings at the intersection. Building A is 90 percent occupied, versus the market average of 80 percent.

If a tax assessor values the property using the actual contract rents, current occupancy and a capitalization rate obtained from a national survey, the property owner might well suffer excessive taxation. Arguing for a few adjustments to that calculation might substantially reduce Building A's taxes. The law of the jurisdiction might authorize a valuation that uses market rent, rather than above-market contract rents. Furthermore, leases that will be ending soon could justify a capitalization rate that is much higher than that reported in a national survey; rates from national surveys often are derived from fully leased, stabilized properties and not ones that soon could have significant vacancy.

If Building A's value is assessed according to its superior attributes and taxed at 2.5 percent of market value, its taxes would be more than $520,000 (see chart). If, however, its valuation is similar to a building with market attributes, its taxes would be around $360,000, almost 30 percent less.

Building B has the market's average vacancy rate of 80 percent and the same, above-market rents as Building A. The property recently sold in a sale-leaseback transaction that priced the building above its assessment.

As with Building A, the applicable law might provide for using market rents in the assessment. Additionally, the sale-leaseback transaction price doesn't preclude a lower assessed value. Some state supreme courts have recognized that sale-leasebacks are simply financing transactions and should not be used to value properties for taxation.

Buildings C and D both have below-market average rents of id="mce_marker"5 per sq. ft. Building C has accepted tenants with greater credit risk to achieve 90 percent occupancy. Building D is in the worst shape, with below-market rents and a below-market 70 percent occupancy rate.

Certainly any tax appeal for Building D would rely on the property's below-market rents and occupancy. Additionally, the taxpayer may be able to show that these problems warrant a higher capitalization rate, which also would reduce the property's indicated value and taxes.

To the extent that Building C, like Building D, has below-market rents, the same holds true. With the above-market occupancy, the owner of Building C will need to determine whether the jurisdiction would accept a valuation that uses market vacancy, and if not, seek an adjustment based on the greater likelihood of defaults.

Dale Carnegie also wrote, "We all have possibilities we don't know about." Well-advised property owners, too, may learn of possibilities for property tax reductions they didn't know about.

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 (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"Lately, cities and counties have been seeking ways to collect transfer tax from these legal entity transfers. For guidance, they have looked to California's property tax regime, which generally reassesses property when legal entity transfers occur..."

By Cris O'Neall, as published by National Real Estate Investor, November 2011

Property owners in and around San Francisco face an increasing tax burden as local governments attempt to bolster their struggling budgets by expanding the scope of transfer tax laws. In recent years, the cities of San Francisco and Oakland as well as Santa Clara County have gone beyond just collecting transfer tax when a deed is recorded, and now collect the tax for real property ownership changes that occur when one company buys or takes over another. The new laws may be working, as transfer tax revenues in all three jurisdictions have recently risen. From the time of its first implementation in the 1960s until recently, local governments only levied documentary or real property transfer taxes when a deed or other legal instrument was recorded based upon a transfer of "realty sold." The amount usually ranged from $0.55 cents to $3 for each increment in the reported price paid for the property.

However, the advent of new types of legal entities which are readily bought and sold has altered the way properties transfer now. As a result, the traditional system for collecting transfer tax via recorded deeds cannot always keep up with today's transactions.

For example, owners frequently transfer single-member limited liability companies and limited partnership interests to other owners. When these legal entities own real property, tracking real estate transfers can be difficult: While a deed is recorded when Company A sells real estate to Company B, no deed recording occurs when Company A buys a controlling interest in Company B, which owns real estate and continues to operate. Because the change in control of a legal entity that owns real property does not require a deed to be recorded, transfer tax is not collected when such legal entity transfers occur. Until now, that is.

New Implementation

Lately, cities and counties have been seeking ways to collect transfer tax from these legal entity transfers. For guidance, they have looked to California's property tax regime, which generally reassesses property when legal entity transfers occur. Amending their transfer tax laws to follow California's property tax system, jurisdictions have adopted ordinances that expand the scope of the transfer tax to include legal entity transfers. Santa Clara County was the first Bay Area jurisdiction to enact a transfer tax on legal entity transfers. The county's law imposes transfer tax whenever a legal entity that holds real property experiences a change in control, either directly or indirectly.

San Francisco adopted an easier approach. It simply redefined the term "realty sold" in the 1960s transfer tax statute to mean a change in ownership control for a legal entity that holds real property. Oakland followed suit, amending its law to include language similar to that in San Francisco's ordinance.

The amendments to these three Bay Area jurisdictions' laws were intended, at least in part, to close a perceived loophole in the transfer tax and thereby increase the amount of tax collected. For instance, when Oakland amended its transfer tax law, it expected to increase transfer tax revenues by $550,000 each year.

Amounts rising

The strategy may be working. In the past one to two years, the amount of transfer tax collected by San Francisco, Oakland and Santa Clara County has been on the rise. By far, the largest rise was in San Francisco where collections have shot up by more than 160 percent over the past two years, while Oakland and Santa Clara County experienced modest gains in transfer tax revenues.

The reason for the increase is less clear. Obviously, a higher number of transactions due to the recovery of the Bay Area real estate market drove some of the surge. And in San Francisco, transfer tax revenues also rose because the city raised tax rates to 2 percent for transactions valued at more than $5 million and to 2.5 percent for transactions million or more, up from 1.5 percent previously.

For comparison, the amounts of transfer tax collected by Berkeley, the City of San Mateo and Contra Costa County—none of which collect transfer tax on legal entity transfers—have been flat in recent years. The experience of these other jurisdictions may be an indication that the expansion of transfer tax laws by San Francisco, Oakland and Santa Clara County to capture legal entity transfers is indeed having the intended effect.

To combat transfer taxes, property buyers should structure transactions to fall under one of the exceptions in California's transfer tax law. If an exception is not available, buyers should timely advise tax authorities of their transaction to avoid costly non-reporting penalties.

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

When an altered traffic route handicaps your retail center, it's time for an assessment appeal.

"Owners should appeal their property tax assessment immediately after a public announcement of a highway or road change that will divert traffic away from their property..."

By Jerome Wallach, Esq., as published by National Real Estate Investor, September 2011

Once motorists lose sight of the property or can no longer access it conveniently, customers stop coming. At the very least, an owner facing such a loss is entitled to a fair property tax bill that reflects the asset's diminished commercial value.

Owners should appeal their property tax assessment immediately after a public announcement of a highway or road change that will divert traffic away from their property. Don't wait for evidence of changing traffic counts. The damage to property value occurs when the public announcement of the traffic diversion is made.

Effect on value

Assessed values are based upon market value, and market value in turn is predicated on a willing buyer and a willing seller. A public announcement that traffic will be rerouted for a period of time is an external event that appraisers refer to as external obsolescence, or something beyond the perimeter of the property that has an impact upon the property's value. Altered traffic routes are something a prudent buyer would consider in determining what to pay for an asset.

The announcement of an impending traffic shift will affect properties in varying time sequences and severity. For instance, the economic lifespan of a highway commercial property such as a convenience store will be limited to the opening date of the new roadway. A prudent buyer will base the purchase price upon the net operating income for that economic life.

There could very well be some residual value after the opening of the new road, but certainly not for convenience-store purposes. The carcasses of functionally obsolete convenience stores can be viewed from any recently moved.

Calculating the loss

Determining the property value after a road realignment plan is announced requires the stabilization of the declining income over the predictable remaining life of the property.

Consider, for example, a strip retail center. After the announcement but before construction, there may be no observable effect on retail sales at the center. From the time that the yellow barrels go up and the construction starts, and through the opening of the new road, however, sales and tenancy will decline.

Assuming the center is functioning at 95% of its gross potential at the time of the announcement, there may be a slight drop-off in the first and second year. But assuming a three-year building period for the roadway, leases that expire are not likely to be renewed. Leases in place also are in danger because patronage is expected to decline subsequent to the road opening.

The tenant will lack the ability to make the rental payments and may walk away. As spaces within the center go Notesdark, the property will lose its synergy of crossover customers. At the end of a 10-year period after the announcement, the center will be either dark or attract only an inferior class of tenant, and will at best be a marginal performer.

The property owner must analyze this declining income stream to determine a stabilized income over the remaining economic life of the property. The capitalization rate is then applied to the stabilized income over the property's remaining life as opposed to using the historic data, which becomes meaningless in the face of the changing traffic pattern.

It is critical to remember that the property owner's loss of value occurs at the time the road relocation project is made public, not at some future date. Thus, delaying a tax assessment appeal will only add to the property owner's losses.

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

"It is now clear that the Minnesota Tax Court doesn't need to merely pick one of the taxable property values presented at trial and can find a taxable value outside the range of values introduced at trial..."

By John Gendler, Esq., as published by NREIonline, September 2011

In several cases over the past few years, the Minnesota Tax Court has found a taxable property value higher than the amounts presented in witness testimony from either side of a tax argument.

Because the Tax Court has the power to increase values as well as decrease them, this trend has raised concerns when considering whether a case should be taken to trial. However, a Minnesota Supreme Court opinion issued this year suggests that the Tax Court's decisions in the future are more likely to reflect facts presented in testimony.

Legal showdown

The pivotal decision stems from Eden Prairie Mall, LLC vs. County of Hennepin in which the Minnesota Supreme Court rejected the Tax Court's value increase for a recently renovated mall from $90 million to id="mce_marker"22 million.

The Supreme Court has said the Minnesota Tax Court cannot simply copy a county attorney's memorandum — including arithmetic mistakes — when deciding to find a value for a property that is higher than that testified to by either appraiser.

Both the taxpayer and government presented appraisals prepared by independent appraisers who had earned the MAI designation from the Appraisal Institute. (The professional accreditation refers to "Member, Appraisal Institute.")

The diverse appraisal testimony included value opinions for Jan. 2, 2005, and for Jan. 2, 2006, as a separate value must be found for each year in Minnesota.

The taxpayer's appraiser relied exclusively on an income approach, citing the lack of comparable sales, and testified to a value of $68.75 million in 2005 and a value of $60.55 million in 2006.

The original assessments being appealed put the mall's market value at $90 million in 2005, increasing to id="mce_marker"00 million in 2006. The government's appraiser gave most weight to the income approach, testifying to a value of id="mce_marker"10 million in 2005 and id="mce_marker"15 million in 2006. Neither appraiser prepared a discounted cash flow analysis.

The judge based her decision on a direct-capitalization income approach, finding that the government's cost and sales approaches were not meaningful given the recent major renovation of the mall. The Tax Court found the value of the mall to be id="mce_marker"22.9 million the first year and a slightly lower id="mce_marker"20.1 million for the later assessment.

In the decision, the Tax Court adopted an argument made by the government's attorney, which resulted in the indicated value being higher than that found by the government's appraiser. Like the government's attorney, the court stated that the government's appraiser had made a mistake in his calculations.

Independent judgment

The Supreme Court said that the Tax Court did have the authority to make a value determination that is higher or lower than the testimony of the experts because the judges bring their "own expertise and judgment in valuation matters."

The Supreme Court noted, however, that "market value determinations involve the exercise of complex and sophisticated judgments of market conditions, anticipated future income, and investor expectations ...." In other words, the Tax Court can set taxable values based on its own analysis supported by the factual record. But did that analysis occur?

The Supreme Court pointed out that the Tax Court rejected both appraisers' opinions of market value and adopted, verbatim, a calculation presented by the government's attorney in a post-trial brief, "including several arithmetic errors."

The Supreme Court said "adopting verbatim the recalculated assumptions and nearly verbatim the value determinations ... presented in a post-trial brief raises doubts over whether the Tax Court exercised its own skill and independent judgment."

Although the Supreme Court affirmed other portions of the case, including the increase in value of a separate anchor store, this part of the case was returned to the Tax Court for additional explanation, including its use of income higher than that used by either appraiser.

Furthermore, the Supreme Court explicitly stated the Tax Court could reopen the record and admit additional evidence. It is not clear whether the Tax Court must admit additional evidence, but presumably the taxpayer will seek to do so when the Tax Court reconsiders its decision. At this writing, the Tax Court has not issued a new decision.

It is now clear that the Minnesota Tax Court doesn't need to merely pick one of the taxable property values presented at trial and can find a taxable value outside the range of values introduced at trial.

Importantly, however, it is also clear that the Minnesota Supreme Court will scrutinize those findings, demanding that the Tax Court explain in detail why it is rejecting the testimony and substituting its own opinions and data.

This precedent-setting case could encourage the Tax Court to stay within the range of testimony from the various appraisers, absent a compelling explanation for doing otherwise.

John Gendler is a partner in the Minneapolis law firm of Smith, Gendler, Shiell, Sheff, Ford & Maher, P.A., the Minnesota 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..

"Pennsylvania has no mandatory requirement for periodic revaluation, meaning that, as a practical matter, no county spends the time and political currency to reassess properties unless a lawsuit is filed forcing it to do so..."

By Sharon DiPaolo, Esq., as published by National Real Estate Investor Online - City Reviews, August 2011

Imagine you are a property owner trying to budget now for 2012 real estate taxes on your high-rise downtown office building, and no one can tell you what assessment your taxes will be based upon.

What number do you budget? What will you bill your tenants?

That property management nightmare is reality in Pittsburgh. The state Supreme Court ordered Pittsburgh and the rest of Allegheny County to reassess properties in 2012, the county's fourth reassessment in 12 years. But with the third quarter drawing to a close, the county hasn't released even tentative assessments, and has no plan to do so before the 2012 real estate bills go into the mail.

Pittsburgh's debacle is but one chapter in an ongoing tragedy, as Pennsylvania's broken property tax system plays out against the day-to-day practicalities of managing real estate. In recent years, the state's system for assessing real property has been under attack — in the courts, in the legislature, in the media and around kitchen tables.

Decentralized property tax system

Pennsylvania is one of only nine states that decentralize the property tax assessment process to the local government level. Its property assessment system operates under six separate statutes which are implemented and funded at the county level.

Pennsylvania has no mandatory requirement for periodic revaluation, meaning that, as a practical matter, no county spends the time and political currency to reassess properties unless a lawsuit is filed forcing it to do so.

As a result, assessments on aging properties grow stagnant while new construction is assigned higher assessments. New assessments occur on a property-by-property basis, either when taxpayers file individual appeals or when taxing districts cherry pick properties to appeal, usually based on recent sales.

For example, two identical office buildings built at the same time by the same builder might originally be assessed at the same id="mce_marker"0 million. But if one of the buildings sells at id="mce_marker"5 million, the taxing district will appeal the assessment of that property, resulting in two identical properties with dramatically different assessments.

Seven Pennsylvania counties have not reassessed in more than 30 years, and Blair County's last reassessment was in 1958. The reason Allegheny County is undergoing yet another reassessment is that multiple lawsuits have forced it to do so.

Currently, Allegheny County is under order from the Pennsylvania Supreme Court to revalue every property within its borders, with new assessed values to take effect for the 2012 tax year. Erie and Lebanon counties are preparing for reassessments to take effect in 2013.

Washington County is in on-again, off-again litigation and currently preparing for a reassessment for 2014. Lancaster County has cancelled its reassessment for 2013 and now will not reassess until 2017.

Call for statewide solution

When the Pennsylvania Supreme Court ordered Allegheny County to reassess, it stopped short of directing the state's other 66 counties to do the same but called on the legislature to study the system. Motivated by imminent reassessment projects with price tags upwards of id="mce_marker"0 million, both Allegheny and Washington counties asked the legislature to issue a moratorium on reassessments until a state-wide solution could be found.

Two years ago, legislation mandating a moratorium died in committee. Then in late June, 2011, the legislature passed a moratorium on just Washington County's revaluation project in a measure tacked onto Pennsylvania's budget.

On July 8, Gov. Corbett vetoed the bill, so Washington County's reassessment was back on but is now delayed until at least 2014. Currently some legislators are putting together yet another task force to study the issue. If history is any predictor, no statewide solution is on the horizon.

Delay in Allegheny County

Allegheny County's revaluation project has been repeatedly delayed. The county is behind on its preparations for the reassessment project and, in particular, behind on its valuation of commercial properties.

At the latest court conference before Judge Stanton Wettick, who is overseeing the reassessment project, the county admitted that it is behind in valuing commercial properties. At the judge's request, the county produced two alternate plans — neither of which will provide taxpayers with tentative 2012 values until next year.

Under the county's preferred plan, in which it would issue all notices at the same time, preliminary notices would be mailed out Jan. 31, 2012 with final values to be certified by early April 2012.

Under the alternate plan, notices would go out first to property owners in Pittsburgh, in December 2012, with certified values following in February 2012. Property owners in the rest of the county would be forced to wait until March for their preliminary notices and May for certified values.

Further, Allegheny County's plans call for an informal review process to analyze preliminary values. But as the reassessment project and preliminary notices have been delayed while the project drags on, the county has shortened the time for informal reviews from five months to five weeks.

Complicating the matter for taxpayers and taxing districts alike, Pennsylvania law requires municipalities to set the 2012 tax rates in January, before the 2012 assessment is final. And in Pittsburgh, the school district will issue its 2012 tax bills before the assessment deadline.

Progress?

Last week, Judge Wettick heard a dozen representatives of school districts and municipalities describe how the delay in the reassessment project is affecting their budget process, hiring decisions and tax rates while it increases administrative costs and overhead. The City of Pittsburgh School District reported that it would have to take out a $66 million tax anticipation loan just to make payroll, costing the school district almost id="mce_marker".5 million.

Judge Wettick is expected to select one or the other timetable at a hearing on Sept. 15. Taxpayers and taxing districts alike are keeping a close watch on the outcome.

Gov. William Penn announced Pennsylvania's first property tax in 1683; within two weeks of the tax's enactment, a property owner filed the first complaint challenging an assessment. More than 300 years later, Pennsylvanians still struggle to find the right solution to meet Pennsylvania's constitutional requirement of uniformity in taxation.

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..

"Readily available data such as this can be used to create a compelling chart documenting the losses sustained by a mall owner. Using somewhat different data, a manufacturer can document the depletion of a skilled work force..."

By Christpher Dicharry, Esq., as published by Commercial Property Executive Blog, August 2011

The value of property is influenced by demographic fluctuations. Thus, when property owners receive their tax assessment each year, it is essential that they and their tax professionals carefully examine demographic changes in the markets where their properties are located.

Estimated demographics are available at any time, but the end of a census provides a unique opportunity to mine for demographic gold.

What's Important about Demographics?

A high-end shopping mall in a metropolitan statistical area (MSA) with a decreasing population is a prime candidate for a valuation reduction. The property owner's ability to sustain sales is declining along with the MSA's population, particularly if those leaving the area are high-income earners.

Shifts in population, household income or other demographics affect other property types besides retail. For example, a manufacturer may not sell to local residents the way a retail center does, but it hires from that community.

As population declines, the value of a manufacturing facility in that market will likely decline. This is particularly true if the manufacturer had targeted a specific MSA to maintain skilled employment levels.

Demographics are Readily Available

Anyone with a computer or iPad can access U.S. Census Bureau data across the United States and convert the relevant information into a compelling graphic.

For example, it has been widely reported in the media that the Century III Mall in West Miflin, Pa. is struggling. A comparison of 2000 and 2010 Census data shows a decrease of 6% in the population within a 30-minute drive of the mall.

Readily available data such as this can be used to create a compelling chart documenting the losses sustained by a mall owner. Using somewhat different data, a manufacturer can document the depletion of a skilled work force.

While many factors affect value, and such raw data may not be admissible for an appeal, it is useful for presenting to the assessor convincing evidence to support an argument for a tax reduction.

Chris Dicharry is a partner in the law firm of Kean Miller LLP, the Louisiana 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..

"Dates and timing involve more than just a knowledge of deadlines. Based on knowledge of the law, the savvy tax payer will know the best time to contest their taxes or to close a deal. Dependent upon the jurisdiction, an investor that enters into a land contract or purchases a property's underlying business entity may be able to put off for years the event that triggers an assessment change..."

By J. Kieran Jennings, as published by Commercial Property Executive Blog, August 2011

There are essentially four elements in developing a strategy to minimize property taxes: The law, dates and timing, risk and reward, and a professional team. As in many aspects of real estate, there are practical considerations and then there are details to be addressed by specialists.

Here are some points to consider in your strategy development:

1. The law that governs property taxation can vary greatly among states, and practical knowledge of tax law is not confined to simply how frequently jurisdictions reassess, but also to how, and what, is being taxed? In certain states, for instance, property is assessed as it is encumbered by its leases. As a result, a property purchased and improved with a building on leased land likely will not be assessed equally to an otherwise identical, neighboring property. Understanding the law regarding what and how property is taxed remains key to knowing how or if, to fight your property assessment.
2. Dates and timing involve more than just a knowledge of deadlines. Based on knowledge of the law, the savvy tax payer will know the best time to contest their taxes or to close a deal. Dependent upon the jurisdiction, an investor that enters into a land contract or purchases a property's underlying business entity may be able to put off for years the event that triggers an assessment change.
3. Risk and reward need to be balanced. In a number of states, an ill-advised tax contest can result in an increased assessment.
4. Taxing authorities are digging in their heels and some are on the offensive. Owners of real estate that is under-assessed, yet they decide to file tax contests simply due to the weak economy may find that the local jurisdiction has hired professionals seeking to increase the assessment to meet fair market value. Quality professional advice reduces risk.
5. Your professional team, including expert witnesses and local counsel, should consist of knowledgeable tax professionals that fully understand local tax law as well as individuals that understand valuation. Local knowledge is essential.

With a carefully thought-out strategy, you can work with the motivations of the parties to drive a settlement or avoid a hot-button issue with the judge or assessor.

Kieran Jennings is a partner with the law firm of Siegel Siegel Johnson and 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..

"This pumping up of assessments allowed politicians the luxury of claiming that they did not raise the tax rate during the entire period. If taxes went up, even dramatically, well then that's just the marketplace talking."

By Stanley Fineman, Esq., as published by National Real Estate Investor Online - City Reviews, August 2011

Real estate taxes, which are based on assessor opinions, are the only subjectively determined taxes on the planet. And unlike other building expenses, which are largely controllable, property taxes are volatile, chaotic and often quixotic. Above all else, in the District of Columbia, they are high.

So, how high are your property taxes? Presumably all owners can answer that question on a cost-per-square-foot basis. But there are other perspectives to consider. How much have those taxes changed in the past five years? What percentage of the property's overall operating expenses do property taxes represent, and has that ratio altered over the years?

Here in D.C., we keep track of such things — and the results are startling. Office building taxes ballooned from $4.97 per sq. ft. in 2004 to $8.81 per sq. ft. in 2009, an increase of 77%. That's more than double the rate of increase in office contract rents, which averaged $45.31 per sq. ft. in 2009, up 35% from $33.46 in 2004.

None of the tax increases in those five years resulted from changes in the millage rate, or tax per id="mce_marker",000 of valuation, which remained essentially constant for the entire period. The increase was the product of assessment legerdemain, and would have been much higher had property owners failed to wage relentless and successful administrative and judicial tax appeals.

This pumping up of assessments allowed politicians the luxury of claiming that they did not raise the tax rate during the entire period. If taxes went up, even dramatically, well then that's just the marketplace talking.

Never mind that the tax rate might have been significantly reduced, softening the blow of the assessment spikes, but it was not. After all, there were pet projects that needed feeding.

Economic toll

We can examine the impact of mushrooming assessed values on the bottom line. Non-tax building expenses including fixed costs, maintenance, utilities, administration and services rose modestly from 2004 through 2009, by perhaps 20%.

With tax bills growing at a faster rate, however, the tax burden as a percentage of total building costs increased dramatically over that same period.

By 2009, property taxes climbed to an astounding 42.25% of all operating expenses, up from 33.24% five years earlier. In the early 1990s, taxes were as low as 24% of all operating expenses.

The overall effect on property cash flow was to significantly blunt the profitability one might have expected from the general rise in property values over the period.

Let's examine that further. Average rental rates increased 35% over a five-year period. If property taxes had increased at the same rate, taxes on the average office building would be $6.71 per sq. ft.

But because property taxes actually climbed 77% over that five years, the average office taxes is $8.81 per sq. ft. That's $2.10 per sq. ft. lost from the bottom line.

In a 250,000 sq. ft. office building, not uncommon in D.C., that equates to a loss of $525,000, annually.

Let's now look at it from the perspective of the taxing authority. There are approximately 1,000 privately owned office buildings in D.C. If the average size were, say, 175,000 sq. ft., D.C. arguably would be gaining excess tax revenues approaching $400 million annually.

That is a staggering sum, a massive shift of the tax burden heaped quietly onto the shoulders of commercial owners.

The D.C. government, always a minority partner in real estate enterprises, has been biting off heftier chunks of the commercial pie through taxation as the years roll by.

This has allowed it to subsidize homeowners (i.e. voters) through reduced tax rates and capped increases. And everybody's happy. Oh, except commercial owners and their tenants, the geese that lay the golden eggs. And we all remember what happened to them.

A proposal

Over the years, commercial owners have raised many salient arguments in an attempt to hold down their taxes. For example, commercial taxes in D.C. are considerably higher than in the adjacent jurisdictions, suburban Maryland and Virginia, resulting in a competitive disadvantage for D.C. property owners.

Arguing this point has brought some success in lowering the D.C. tax rate, but a large disparity remains.

Most recently, recalcitrant D.C. assessors were slow to recognize the downturn in the economy that afflicted property values in all jurisdictions. When the economy improves, aggressive assessors will tend to be overzealous in pursuing and overstating the market.

Simply put, property taxes shouldn't increase at a faster rate than rents. In practice, such a rule would require first establishing a base line of rents and taxes, and then utilizing reliable data to establish increases.

There might be lag time involved in acquiring and utilizing the data, but that challenge is a hill, not a mountain, to climb. And most importantly, it would be reasonable and fair.

Stanley J. Fineman is a shareholder in the law firm of Wilkes Artis Chartered, the District of Columbia member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

"A developer who commits to operate a property as a low-income housing complex can apply for Low Income Housing Tax Credits under Section 42 of the Internal Revenue Code. The developer then sells the credits to investors to generate equity to construct the project..."

By William K. Elias, Esq., as published by National Real Estate Investor - Online Edition, July 2011

The impact of low-income housing tax credits (LIHTC) on the taxable value of real property has been a subject of controversy in Oklahoma for many years. A recent court ruling lays down the law, however, by definitively excluding the credits from calculations of taxable value.

Under the Tax Reform Act of 1986, Congress established the low-income housing tax credit program to encourage private development of affordable housing for people with low incomes.

A developer who commits to operate a property as a low-income housing complex can apply for Low Income Housing Tax Credits under Section 42 of the Internal Revenue Code. The developer then sells the credits to investors to generate equity to construct the project.

The recent case of Stillwater Housing Associates v. Jacquie Rose, Payne County Assessor, et al. (Oklahoma Supreme Court No. 108,682) could result in lower tax assessments for many low-income housing properties in Oklahoma.

In the Stillwater Housing decision, the Oklahoma Court of Civil Appeals issued several conclusions to clarify how low-income housing tax credits issued under Section 42 of the Internal Revenue Code affect taxable value.

Case in point

The Stillwater Housing case arose in Payne County, Okla., where limited partnership Stillwater Housing Associates applied to the Oklahoma Housing Finance Agency for low-income housing tax credits to develop a low-income housing complex. The agency granted credits to be allocated over 10 years in the amount of $455,235 per year.

To generate private equity to complete construction, Stillwater sold its low-income housing tax credits to investors, who became limited partners, and the credits flowed through Stillwater directly to those limited partners. Stillwater received no monetary benefit or cash flow from the tax credits.

Stillwater was obligated under a regulatory agreement to rent the units to low-income residents at restricted rents for 40 years. The tax credits were subject to recapture if Stillwater breached the terms of the regulatory agreement during the first 15 years.

Under Oklahoma law, real property is assessed annually as of Jan. 1 at its fair cash value. That's the estimated price the property would bring in a voluntary sale for the highest and best use for which it is actually used, or classified for use, during the previous calendar year.

Assessors can use the cost, income or sales-comparison method to estimate fair cash value. Neither the Oklahoma statutes nor the Oklahoma Tax Commission rules prescribe a methodology for valuing low-income housing tax credit properties.

In 2007, Stillwater protested the assessor's value of the property and asserted a fair cash value of $3.975 million, based upon actual rents. The assessor denied the protest and the developer appealed to the County Board of Equalization. The board instructed the assessor to add $235,347 of tax credits as income under the income approach. As a result, the value increased to more than $8.6 million.

Stillwater appealed the board's value to district court and both sides filed motions for partial summary judgment on the issue of whether low-income housing tax credits should be treated as property income. The district court ruled in favor of Stillwater and the assessor appealed.

The Oklahoma Court of Appeals affirmed the district court, however, and held that low-income housing tax credits are not income and do not replace income to the real property.

The court also held that the credits are tax benefits belonging to the investor, not a right or privilege belonging to the land, meaning the credits are not within the statutory definition of real property. Finally, the court held that the tax credits are intangibles exempt from taxation under Article X, Section 6A of the Oklahoma Constitution.

The assessor asked the Oklahoma Supreme Court to review the appeals court decision, but that petition was denied on March 28, 2011. When published, the appellate court's Stillwater Housing decision will constitute persuasive authority in all Oklahoma courts.

What does Stillwater Housing mean for owners of low-income housing tax credit properties? First, because the tax credits are not income and do not replace income to the property, the credits must be excluded from income-based assessments.

Second, because the credits are tax benefits belonging to the investor and not a right or privilege belonging to the land, then credits do not fall within Oklahoma's statutory definition of real property.

Essentially, regardless of their value to investors, low-income housing tax credits are intangibles exempt from taxation. The Stillwater Housing decision could result in lower tax assessments for many LIHTC properties in Oklahoma.

William K. Elias is a partner in the Oklahoma City law firm of Elias, Books, Brown and Nelson, P.C., the Oklahoma member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

The unique characteristics of a low-income housing tax credit project make it difficult for assessors to apply standard market value definitions and approaches in making a fair assessment.

By Stewart L. Mandell, Esq., as published by Commercial Property Executive, July 2011

Can you visualize how your tax appeal attorney would address an assessor's sales-comparison based property valuation? What if your attorney were Sherlock Holmes? Holmes sits at his desk as Watson enters. "Holmes, old boy, look at the assessor's valuation report on the Franklin Office Center, a multi-tenant office building. The assessor's fl awed cost approach is no surprise, but who would have expected a comparable-sales analysis with five sales to justify a sky-high value as of Jan. 1, 2010?"

Holmes chuckles as he quickly digests the report. "There is nothing here that should trouble you, my dear friend. Our evidence and my cross examination of the assessor will result in a compelling closing argument and a sizable assessment reduction."

"You already know how you'll address these sales?" asks Watson with astonishment.

"Why, of course," says Holmes, rising. "Here's how I'll summarize this in my closing statement: Your Honor, Sale No. 1 obviously is not a valid comparable, given the October 2007 date of sale. As our appraiser testified, from the market's peak in October of 2007 until January 2010, office building values in the area declined more than 40 percent. "You could make a market condition or time adjustment for that reason, and it would be something in excess of 40 percent. But the sale should be rejected because 2007 market conditions were so extremely different from what existed on Jan. 1, 2010. This sale is no more useful than one where the seller exercises an option to buy that was part of a lease agreement negotiated five years earlier."

Selecting his favorite meerschaum from the mantelpiece, Holmes continues: "Sale No. 2 must be rejected on the same grounds as Sale

1. Initially, the assessor made much of the fact that this sale closed on Sept. 16, 2008, which was after the start of the Great Recession, the Bear Stearns collapse and Lehman Brothers' bankruptcy filing.

"On cross examination, however, the assessor admitted that the parties executed the purchase agreement on March 7, 2008. That was well before both the valuation date and the point when the values of offi ce buildings plunged like Professor Moriarty descending the falls at Reichenbach." Having filled his pipe, Holmes turns toward the window.

"Sale No. 3 is irrelevant," he resumes. "Oh, it closed during the last quarter of 2009, near our valuation date, but there is one detail the assessor overlooked: This property was 100 percent leased to one of the 10 largest companies in the country, with 10 years remaining on the lease term. The assessor valued the landlord's interest, also known as the leased fee, and not the fee simple interest. The rent that produced this sizable sale price is well above Jan. 1, 2010, market rents. And in our state, valuation using a leased fee interest and above-market rents is unlawful." The strike of a match punctuates this last revelation.

"Sale No. 4 not only shares the fatal fl aw of Sale 3, but is even less defensible because it is a sale of a leased, built-to-suit property. Here, one of the country's most successful companies had arranged for construction of a facility to its exact specifications, and ultimately an investor acquired not just the property but also the tenant's 35-year lease.

"Of course, the rent is based on the contractor's cost and is unrelated to current market conditions. Not only was the transaction purely financial but as our appraiser's empirical data showed, built-to-suit properties such as this include significant costs that will not increase the property's sale price when subsequently sold." The atmosphere in the room begins to resemble the fog outside the window.

"Sale No. 5 is a sale-leaseback transaction. Town of Cunningham v. Property Tax Appeal Board, a 1992 Appellate Court of Illinois decision, is one of a number of decisions that confirm why this sale is irrelevant. "In the Cunningham case, the property owner initially listed the property with a sale price of $6 million, as well as a leaseback provision that would pay annual rent ranging from $200,000 to $250,000 for a term of 10 to 15 years. Ultimately, the property sold for $9.3 million plus a 15-year leaseback, with annual rent at $615,000. Obviously, the sale price and lease terms were directly related, with a higher rental stream producing a higher sale price. As the court concluded, this was a financing transaction, and the purchase price was unrelated to the property's market value."

Holmes bends to address his companion, seated beneath the swirling cloud. "In short, Your Honor, the assessor's sales-comparison approach is not worth the paper on which it is written."

Clearly, if owners are to achieve fair property tax valuations, they and their attorneys must dig deeply into comparables used by assessors. And that is elementary.

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

"The real estate tax is based on the tax rate and a property's assessed value. In the face of all the troubles and distress seen in real estate over the last three years, the City of New York has made some outsized increases in its estimates of market values, which it uses to assess properties for taxation..."

By Joel R. Marcus, Esq., as published by National Real Estate Investor, April 2011

The New York City real estate community has been through the wringer since 2007. It has endured a dearth of major property transactions, suffered through the meltdown of the financial services industry and watched available debt financing evaporate. Lenders and special servicers are more in control of the real estate market than ever before.

In the real world of property ownership and development, many taxpayers are experiencing a drop in occupancy for office, hotels and rental apartment buildings. Condo sales have slowed to a trickle and construction of new office, hotels and apartment buildings has come to a virtual standstill.

In this environment of dropping office rents, condominium fire sales and increasing costs of operations, real estate taxes — the largest component of a building's expenses — have skyrocketed. Why is this happening?

New York City satisfies its budget needs through a variety of taxes, and of all of them, the real estate tax is the most important and durable. The city now finds itself facing a cutback in state and federal aid and has big budget deficits. This is happening at a time when corporate and personal income taxes and sales taxes have declined, and other taxes such as transfer and mortgage-recording taxes have all but disappeared.

The city's revenue options are few. People and businesses can move to New Jersey or other areas to escape New York City's income taxes or sales taxes, and this puts a practical limit on what New York City can extract. Real estate, however, is stuck in New York City and can't escape the city's tax grip.

Excessive taxes erode equity.

The real estate tax is based on the tax rate and a property's assessed value. In the face of all the troubles and distress seen in real estate over the last three years, the City of New York has made some outsized increases in its estimates of market values, which it uses to assess properties for taxation.

A snapshot provided by the City of New York Department of Finance highlights some of these amazing hikes in estimated market value. In Queens, for instance, assessors raised the market values for cooperatives 32.37% (on average12.05% citywide) from last year and Queens luxury hotels experienced a 27.97% increase as well. Manhattan luxury hotels underwent a 14.82% raise in values, while values climbed 9.65% for cooperatives and 15.91% for condominiums.

Many in the commercial real estate industry believe that the jump in assessed real estate market values is related to the city's budget woes, rather than to actual changes in the market place. The city vociferously denies this notion, but as Shakespeare's Hamlet said, "The lady doth protest too much, methinks."

How much tax is too much?

An analysis of the city's system for assessing properties shows that in office and other commercial properties the property tax bite consumes almost 34% of a property's pre-tax net income. Let's examine with this hypothetical example the formulas used by assessors.

An office building charges $45 rent per sq. ft. Its operating expenses are $12 per sq. ft., and its amortized leasing and tenant expenses are another $4.50 per sq. ft. Therefore the pre-tax net income is $28.50 per sq. ft.

The city divides that income by 13.64%, which is derived by adding a 9% capitalization rate to 4.64%, or 45% of the 10.312% tax rate. That yields a fair market value of $209 per sq. ft.

Assessed at 45% of fair market value, the result is a tax assessment of $94 per sq. ft. and a tax bill of $9.70 per sq. ft., based on the 10.312% tax rate. Therefore the city is a partner in 34% of the net operating income without any equity investment at all! This is before debt service, depreciation and capital improvements are accounted for — expenses that only the owner has to pay but for which the owner gets no credit from the city. Not bad if you can get away with it.

For apartment buildings, the pattern is even more egregious. If rents are $45 per sq. ft. and expenses are $12 per sq. ft. as in the office example, the assessor takes 45% of the 13.353% Class-2 tax rate (which is 6.009%) and adds a 7.5% cap rate to get a loaded cap rate of 13.509%. Divide the cap rate into the net operating income of $33, and the fair market value is $244.28 per sq. ft.

The assessment, therefore, is $110 per sq. ft., and this applies to the tax rate results in annual taxes of $14.69 per sq. ft. That's 44.5% of the property's pre-tax net income. Boy, what a deal the city has! If major capital repairs are needed for such expenses as the facade or elevator modernization, a roof or an apartment makeover, they are borne solely by the owner. None of these expenses are factored into the city's formula.

Property owners can always appeal their assessments, but many believe that it's the city's policy on taxes instead, that needs a reassessment.

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

"Whichever approach or combination of approaches is used, the value of a property should never be higher than that calculated under the cost method."

By Stephen H. Paul, Esq., as published by Commercial Property Executive Blog - May 2011

Appraisers can choose from three approaches to determine what a buyer would pay for a commercial property. But which approach is the most appropriate method of valuation?

The cost approach assumes that buyers will pay no more for a property than it would cost them to build an equal substitute. The appraiser calculates the cost to build the property and subtracts physical, economic, and functional depreciation.

Appraisers prefer this approach for newer properties that lack an operating history. The cost approach is also preferred for unique or specialty properties because no comparable properties may exist.

The income approach assumes that buyers will pay no more for the commercial real estate being assessed than it would cost to purchase an equally-desirable, substitute investment. The appraiser calculates the net income from the property over a given number of years, and discounts the result to its present value.

Appraisers prefer the income approach for income-producing properties that are typically bought and sold by investors. However, this approach requires accuracy in setting the interest rate and predicting future expenses.

The sales approach assumes that buyers will pay no more for the property than it would cost them to purchase an equal substitute. The appraiser locates sales of comparable properties and adjusts the prices to reflect the subject property. Although this approach may be the most accurate in that it provides a price in a particular market, finding a truly comparable property can sometimes be difficult.

Whichever approach or combination of approaches is used, the value of a property should never be higher than that calculated under the cost method. A buyer would not pay more for a property than it would cost to build, unless something else was included in the value. Anything above the value given by the cost approach must be business value, which is excluded from value calculations for property tax purposes.

Stephen H. Paul is a partner in the Indianapolis office of Baker & Daniels LLP, 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..

By Cris K. O'Neall, Esq., and Michael T. Lebeau, Esq.¹, as published by IPT May 2011 Tax Report, May 2011

On January 6, 2011, the Assessment Appeals Board in Orange County, California issued a significant decision for owners and operators of assisted-living facilities, particularly facilities dedicated to providing "memory care" services. In a nutshell, the Board found that a significant portion of the assessed values enrolled by the Orange County Assessor's Office for memory care facilities acquired in 2007 included the value of non-taxable intangible assets and rights.² The Board's decision not only demonstrated the correct handling of intangibles under California's property tax statutes, case law and State Board of Equalization guidance document, but also found that the cost approach should be used to extract non-taxable intangibles from business enterprise purchase prices in order to arrive at values for taxable real and personal property.

The Nature of Memory Care Facilities

Memory care is one of the fastest growing segments of the assisted-living care industry. Memory care facilities specialize in the housing and treatment of persons suffering from senile dementia, Alzheimer's disease, and similar "memory loss" maladies. Persons with these conditions typically suffer from moderate to severe memory loss. Consequently, the nature of the facilities that house persons with these conditions and the operation of those facilities differ from most other types of assisted-living facilities and operations.

In order to protect patients or residents from leaving the facility unattended or unescorted, memory care facilities incorporate design features which are not typically found in other types of assisted-living or even convalescent care facilities. The facilities must be laid out so that residents can be observed continually, and so that they do not wander away from the facility by themselves. Points of egress must be limited in number and must be designed to allow electronic monitoring at all times. Despite these severe design restrictions, the families of residents housed in memory care facilities usually want such facilities to have the ambience of a residential or home setting.

The operation of memory care facilities also requires significantly more staffing than the typical assisted living care facility. This includes additional nursing staff as well as staff to observe and work with residents.

There must be sufficient staff to monitor residents at all times in order to insure that they do not leave the facility unattended. In addition, because residents are typically ambulatory, a variety of planned on-site and off-site activities are usually provided to them, which requires a larger number of employees. This higher level of service requires a resident-to-staff ratio that is up to twice that for general assisted-living facilities, and a more skilled, better trained, and more highly paid management and employee staff than is typically found in other assisted-living situations.

Treatment of Intangibles under California's Acquisition-Based Property Tax Regime

California's Proposition 13 made acquisition prices the touchstone for taxable value in many instances. However, Proposition 13 did not explain what to do in those situations where an acquisition price includes a business enterprise comprised of real property, personal property and intangible assets and rights. Fortunately, California Revenue and Taxation Code sections 110(d)-(f) and 212(c) explain that intangible assets and rights are not taxable, and the values of identified intangibles must be excluded from the value allocated to a business enterprise in order to arrive at the value of taxable real and personal property. This is confirmed by published appellate court decisions such as GTE Sprint Communications Corp. v. County of Alameda (1994) 26 Cal.AppAth 992 as well as by the California State Board of Equalization's guidance in Assessors' Handbook Section 502, "Advanced Appraisal" (1998), Chapter 6, pages 150-165 ("Treatment of Intangible Assets and Rights"). Similarly, California Property Tax Rule 8(e) (18 Cal. Code Regs., § 8(e» requires that where a property is valued using the income approach, "sufficient income shall be excluded to provide a return on ... nontaxable operating assets."

Purchase Transaction Created Challenges for Purchaser

In early 2007, a number of memory care facilities and operations in several states, including four facilities and related operations in Orange County, California, were acquired by a large assisted-living facility operator.

The acquisition included not only the real and personal property at the four Orange County locations, but also the government-issued facility operating license, existing workforce, and business operating at each site. While the real and personal property were subject to property taxation, the purchaser contended that the facility operating licenses, workforce and other business-related assets (contracts, relationships, etc.) were not taxable under California law.

The transaction documents for the 2007 transaction did not assign a specific value to the various categories of assets (real property, personal property, and intangibles) for each of the Orange County locations. Fortunately, the seller of the properties had commissioned an appraisal for each of the properties.

Those appraisals were provided to the buyer, however, they were of limited utility in the property tax context because they were "going concern" appraisals which determined a business enterprise value for each facility and, therefore, included a value for all property at each of the Orange County facilities that encapsulated real and personal property as well as non-taxable intangibles. Furthermore, the buyer had used the going concern values shown in the appraisals as the basis for reporting the acquisitions to the Orange

County Assessor's Office and the Assessor's Office had simply enrolled the reported values as the taxable value for each property. Thus, there was a clear "chain" of documentation showing that the Assessor's Office had enrolled the value of all property, including intangible assets and rights, as the taxable value of the property at each facility.

The situation was further complicated by the fact that the purchaser had acquired the intangible assets (namely the operating licenses) through a saleleaseback arrangement and not through the purchase and sale agreement by which the real and personal property were transferred. This was done because a considerable amount of time is usually needed to transfer memory care facility licenses to a new owner, and waiting for the licenses to be transferred would have delayed the transaction for a year or more. Use of the sale-leaseback arrangement was typical in the industry, and had facilitated the transaction. The buyer's representative testified at the Assessment Appeals Board hearing that the buyer would not have acquired the four Orange County properties without the facility operating licenses as it would have taken too long to go through the process of obtaining new licenses. However, because the licenses had not transferred with the purchase and sale agreement, it created an impression that the buyer had not acquired the licenses, which were perhaps the most significant intangible asset in the transaction. On a positive note, the purchaser was helped by the fact that the seller's purchase appraisals exhibited the extreme disparities between the assessed values enrolled by the Assessor's Office (based on the income approach values) and the purchaser's values which relied on the cost approach: the Assessor's values were as high as $500 per square foot, several times the buyer's values for real property; the Assessor's values were also more than twice the cost new without depreciation for the improvements; and the Assessor's values were based on net income figures the majority of which were unrelated to the real estate at each location. All of this served to demonstrate that the Assessor's values subsumed the value of non-taxable intangible assets and rights in violation of California property tax law.

Cost Approach the Key to Taxable Values

The purchaser used the cost approach as the basis for proving the value of the taxable real and personal property. The purchaser retained the seller's appraiser, who had prepared the appraisals used to establish and allocate the total purchase price paid for all of the acquired facilities, to testify at the Assessment Appeals Board hearing. The appraiser explained that the appraisals were going concern appraisals, and for that reason the income and sales comparison approach values in those appraisals represented business enterprise values or the values of the going concern operating at each location.

The buyer's appraiser also testified that only the cost approach conclusions in the appraisals would represent the value of the taxable real and personal property. In support of this, the appraiser relied upon the Appraisal Institute's text The Appraisal of Nursing Facilities (J. Tellatin, 2009), particularly the portions of that text stating that "property tax assessments should exclude the value of intangible assets" and identifying intangible assets to include operating licenses and assembled workforce (pages 37, 40, 314, 315). The appraiser also focused the Board's attention on two key passages from the Appraisal Institute's text: The greatest usefulness of the cost approach could be in allocating the total assets of the business to real estate, tangible personal property, and intangible personal property assets under the theory that the value of an asset cannot exceed the cost to replace it in a timely manner, less reasonable amounts of depreciation. (Page 284)

When the depreciated cost of the tangible assets and the land are less than the overall business enterprise value, the cost approach can be a proxy for real estate value. (Page 315) These conclusions were supported by portions of the California State Board of Equalization's Assessors' Handbook Section 502 at page 159, note 126, and page 163: "The cost approach does not typically capture the value of intangible assets and rights because the appraisal unit only includes the subject property." With this background, the purchaser's appraiser demonstrated that the cost approach values in his appraisal report for each of the four facilities represented solely the values of the taxable tangible real and personal property.

The Assessment Appeals Board's Decision

The Orange County Assessment Appeals Board upheld the buyer's values, with adjustments for increased land values and minor increases in construction costs to account for inflation. The Board supported the buyer's position that the intangible assets and rights, particularly the operating licenses, had transferred along with the real and personal property as part of the same transaction: 42. The Board finds that the purchase agreement, the master lease, the sublease and a financing agreement that were all part of the same transaction, within the meaning of California Civil Code section 1642, and the purchase price did reflect and include intangible assets which are not subject to taxation.

Critical to this finding was testimony by the purchaser's representative that the payments under the lease agreements were not based on market rates, but were related to financing the transaction. In fact, evidence presented to the Board showed that the amount of each facility's lease payment exceeded or nearly exceeded the total revenue generated by each facility. Civil Code section 1642 provides that "several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together."

The Board also ruled that the cost approach was the proper method for valuing the properties because it excluded the value of intangible assets and rights: 43. The Board finds that the cost approach is the most accurate measure of accurate [sic] value since the comparable sales approach and the income approach both captured the value of the property as a going concern and that it includes the value attributable to nontaxable assets and rights. Hence, the Board utilized the [cost approach portions of the] appraisals submitted by the Applicants as a starting point for its valuation analysis.

The Orange County Assessment Appeals Board's decision to use the cost approach, and to reject the income approach and sales comparison approach values from the buyer's going concern appraisals, affirmed Assessors' Handbook Section 502's counsel to avoid use of going concern appraisals (page 157) and to rely upon the cost approach when other approaches cannot segregate the value of taxable real and personal property from the value of intangible assets and rights. The Board's decision is a clear statement of the correct approach to be applied in the multi-facility purchase context in order to exclude the value of intangible property and determine the value of taxable real and personal property.

1. The authors acknowledge Max Row of Complex Property Advisors Corporation in Southlake, Texas and David H. Fryday of Tellatin, Short & Hansen, Inc. in Salem, Oregon for their comments and input to this article.

2. The facilities are owned by NorthStar Realty Finance.

"Look for release of damages provisions that waive the right to sue if there are surface impairments. Make sure that the property has not flooded in recent years, especially if it's near a stream, lake or low lying area. Flood plain maps are periodically updated, so current information is crucial."

By Howard Donovan, Esq., as published by Commercial Property Executive Blog - April 2011

In ad valorem tax disputes, commercial property owners and their tax counsel often are so focused on rent rolls, occupancy, capitalization rates and other big-picture considerations that they overlook special conditions affecting value. There is "ore to be mined" in less obvious areas, however.

Here are five factors to consider in making sure a tax protest covers all the bases.

1. Subsurface Conditions. Geology can weigh heavily in determining fair market value. Common examples include old mining activity, limestone formations and sinkholes, earthquake events, flood plains and periodic flooding. The property owner may already have information along these lines, and mining maps, flood plain maps and seismic activity information are generally available. Look for release of damages provisions that waive the right to sue if there are surface impairments. Make sure that the property has not flooded in recent years, especially if it's near a stream, lake or low lying area. Flood plain maps are periodically updated, so current information is crucial.
2. Environmental Impairments. Obviously, the presence of asbestos, petroleum products or other types of pollutants either in the improvements or subsurface will strongly influence value. Ensure that expert reports are brought current and provided to the appraiser. Reports should address costs of remediation, which can be used to argue that value should be reduced by the costs. Finally, keep in mind the need for confidentiality with respect to this information. See if the jurisdiction will agree not to duplicate reports and to return them after review.
3. ADA Compliance. Even after 20 years under the Americans with Disabilities Act, many properties fail to comply with the act's provisions. The costs of compliance can be submitted as reason to reduce assessed value.
4. Easements, Restrictions and Covenants of Record. Every jurisdiction that applies the fair market value standard recognizes that title restrictions, easements and covenants affect value and strongly influence market transactions. This is true not only of the subject property, but also of any property transactions cited by the assessor as comparable sales. Examples include use restrictions, size of the improvements, density, amenities and the accompanied assessments, curb cuts, traffic signals and other factors. Verify that your file includes current copies of such covenants, and that any appraiser is aware of these items.
5. Personal Property Returns. Most large commercial buildings, malls and shopping centers have associated personal property that is critical to property operations. Yet the personal property tax return is often a forgotten part of the overall value of the property.

Personal property values are generally calculated based on the depreciated original cost method, so make certain that the useful life of the personal property is realistic. Also check to see that the tax return excludes property that has been discarded or is no longer on site. If the real estate is the subject of a recent sale, find out what dollar value was allocated to the personal property and if that number is consistent with the values the tax assessor is showing.

Howard Donovan is a partner in the Birmingham, Ala. law firm of Donovan Fingar, LLC, the Alabama 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..

"Property owners must stay vigilant to maintain agricultural-use status on farmland and avoid financial penalties..."

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

Local governments are under the greatest financial stress since the Great Depression, and assessing authorities are aggressively pursuing revenue to combat these financial woes. One target in assessors' crosshairs is the preferential tax treatment of land with agricultural status.

Developers who are considering the purchase of agricultural land or holding acreage for eventual development need to be aware of the potential tax consequences. Depending on the way assessors categorize the land, the owner could face an unexpected rise in tax costs.

All states offer some tax relief for qualified agricultural property, but each jurisdiction has specific and often complex legal requirements for agricultural status. Investors in land held for future development must know the laws governing agricultural status if they hope to maintain this preferred tax position.

Most real estate is assessed at market value, which typically reflects the most probable price a buyer would pay in a competitive market. The most common benefit of an agricultural designation is that the land is assessed at use value instead of market value. Use value reflects how the property is currently used, i.e., for agriculture, rather than its highest and best use, which may be for residential or commercial development.

Eligibility for agricultural status varies by jurisdiction. The following are the major eligibility requirements.

• Use: Typically, states require that land be actively engaged in agricultural use and used exclusively or primarily for commercial agriculture. That can include growing crops, dairying, raising and breeding livestock, or horticulture.
• Acreage: A majority of states impose an acreage requirement to qualify for agricultural use, meaning a minimum number of acres. Qualifying acreage is typically low relative to average farm size. Some states have no minimum acreage requirement, while others allow local authorities to establish size criteria.
• Productivity: Most states impose minimum productivity requirements. These laws vary by jurisdiction, but most require property to generate a minimum amount of annual income from farming or raising livestock. Some states average the measure of income over a period of years. Other states require that a minimum percentage of the owner's or lessee's annual income is earned from agricultural activity on the land.
• Prior Usage: About half the states require property to be used for agricultural purposes for a period of years before it qualifies for preferential tax treatment. These laws are meant to discourage owners from changing a tract's use to take advantage of the tax benefits. Two or three years immediately preceding approval is typical.

Check for penalties

Many states impose a penalty when farmland is converted to non-agricultural use. In some states the penalty takes the form of a recapture or rollback tax, which is the difference between the taxes that would have been paid and the taxes actually paid while the land qualified as agricultural. This recapture period varies between three and 10 years.

In other states, if farmland is converted from agricultural use within a certain period after qualifying for preferential treatment, penalties are calculated based on the property's fair market value when its use changes or it is sold.

Most states require owners to periodically submit extensive information to demonstrate that the land continues to be used agriculturally. This may include IRS Form 1040F, leases, invoices and receipts, among other documents.

Each state's eligibility requirements, application process and potential penalties play a part in determining whether properties qualify for agricultural status. But a property's agricultural status can translate into significant tax savings. Local counsel may be required to navigate the complexity of obtaining or maintaining the agricultural status.

Douglas S. John is with the Tucson, Arziona law firm of Bancroft Susa & Galloway, the Nevada and Arizona 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..

Why Hotels and Nursing Homes Prove Especially Vulnerable to Inaccurate Taxation

"The most valuable asset the team would acquire through that contract would be a continued association with the Derek Jeter name, a brand in which the team has invested a great deal. The Yankees' challenge in reaching a new contract with Jeter, recently accomplished, indeed echoes the difficulty faced by many municipal assessors in valuing properties that are as much business as they are parcels of real estate."

By Elliott B. Pollack, Esq., as published by Commercial Property Executive, April 2011

Tax laws across the United States typically prohibit assessors from including intangible assets such as good will, franchise value or business value in a property tax assessment. Only tangible real and personal property may be placed on assessment rolls. But taxpayers and assessors alike sometimes have difficulty differentiating between tangibles and intangibles.

That's understandable on the part of taxpayers who may need to include intangibles in their calculations when buying or selling a hotel, nursing home or assisted-care property. For purposes other than property taxes, intangibles often are part of a property's overall value. Indeed, rivers of ink in appraisal and valuation literature—not to mention judicial rulings— have been devoted to the issue of intangibles.

Unfortunately, many assessors don't fully understand how to exclude these non-taxable elements from their calculations, either. For the unwary property owner, the resulting overassessment can result in an equally overstated tax bill. One way to gain a clearer perspective on the degree to which intangible assets can affect value is to turn our lenses on another field entirely—a baseball field, in fact. On Nov. 10, 2010, sports columnist Richard Sandomir presented an illuminating look at the talents of the New York Yankees' redoubtable shortstop, Derek Jeter, in an article for the New York Times. "The Yankees would not quite be the Yankees if (Derek Jeter) suited up with another team," Sandomir noted. The writer contended that Jeter adds substantially to the Yankees' overall value, much in the same way, it can be argued, that a respected brand boosts the worth of a hotel. Without Jeter's headline-grabbing performances, the team would be less valuable, just as an unflagged hotel is likely to be less valuable than its branded competitor. Sandomir quoted a business consultant who observed that Jeter's playing, were he less celebrated, might be worth $10 million a year. But as an iconic draw for ticket sales, Jeter's value to the team is closer to $20 million each year. The Yankee captain's "value as a brand builder," the expert noted, not merely as a hitter or infielder, is what drives his intangible worth differential, again, very much like the business value inherent in a well-managed hotel or convalescent facility.

With Jeter's lengthy contract concluded, it would be foolish for the Yankees not to sign him up again as he enters free agency, even though his baseball skills have eroded, the expert opined. The most valuable asset the team would acquire through that contract would be a continued association with the Derek Jeter name, a brand in which the team has invested a great deal. The Yankees' challenge in reaching a new contract with Jeter, recently accomplished, indeed echoes the difficulty faced by many municipal assessors in valuing properties that are as much business as they are parcels of real estate.

After years of resistance from taxpayers and their attorneys, it seems taxing authorities in the United States are getting the message about intangible assets. It now appears that the majority of assessors recognize that the net operating income generated by a hotel, as an example, does not result exclusively from its real estate value. In fact, the management expertise—which drives revenues from non-occupancy hospitality services such as food service, special events and recreation revenues—is an asset independent of and severable from the real estate itself.

Similarly, the intensive services furnished to the patients of long-term-care convalescent facilities are distinct from the property in which those services operate. Indeed, nursing and medical care, meals and rehabilitation produce revenues that have little to do with the real property and should not be capitalized when the health-care facility is valued using an income methodology.

There is case law to provide examples of the correct way to value commercial real estate without inflating taxable value by rolling intangible assets into the equation. Taxpayers interested in doing a little research will find one court's approach toward the separation of intangibles and the valuation of health-care real property in the case of Avon Realty L.L.C. v. Town of Avon, decided in 2006 by the Superior Court of Connecticut, Judicial District of New Britain. In that case, the owner of the Avon Convalescent Home, a 120-bed skilled nursing facility, appealed an assessed value in excess of $5 million on the grounds that the assessor hadn't deducted sufficient value attributable to intangible assets from the business's overall value. Upon review, the court deemed the value to be a little more than $4 million, supporting the taxpayer's appeal.

A thorough understanding of the issues and methodologies involved in properly differentiating and valuing tangibles and intangibles marks the difference between fair and excessive property tax assessments for hotels, nursing homes and assisted-care facilities.

Elliott B. Pollack is chair of the property valuation department of the Connecticut law firm Pullman & Comley L.L.C. He cautions that he is an avid Boston Red Sox fan. The firm is the Connecticut member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..