"Many assessors routinely send Chapter 91 requests to taxpayers seeking information about income producing property."

By John E. Garippa, Esq., as published by Globest.com Commercial Real Estate News and Property Resource, February 22nd, 2008.

New Jersey taxpayers need to know about two critical issues as they consider possibilities for property tax relief.

The first issue is the filing deadline. All property tax appeals in New Jersey must be filed no later than April 1, 2008. This date requires that the appeal be received by the Tax Court on that date. Merely mailing the appeal with a postmark of April 1st will result in a dismissal. As a precaution, taxpayers would be well advised to file their appeal anytime after January 1, 2008. When the appeal is filed, all property taxes due and owing must be paid in order for the appeal to be considered by the court.

The second issue revolves around the need to timely respond to Chapter 91 requests that have been made by the assessor. Many assessors routinely send Chapter 91 requests to taxpayers seeking information about income producing property. These requests, which must be answered within 45 days of receipt, are sometimes ignored by taxpayers. That is a fatal error. If the assessor sends out such a request, it must be answered in order for the taxpayer to have the right to file a tax appeal the following year. Many valid tax appeals have been dismissed for this failure.

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"Over the past 18 months, the residential market has faced significant erosion and downward pricing pressure with the subprime mortgage meltdown reducing the value of most residential property. The increasing inventory of unsold housing units causes additional downward pressure."

By John E. Garippa , Esq. as published by Real Estate New Jersey, February 2008

At the start of a new year, it is vitally important for New Jersey taxpayers to understand the challenges they should expect regarding property tax assessments. For 2008, many taxing jurisdictions have completed municipal-wide revaluations. Under New Jersey law, in a revaluation all tax parcels are valued at 100% of fair market value. The revaluation set for the 2008 tax year values all property as of October 1, 2007.

The difficulty in properly completing this assignment arises because it generally takes 18 months to properly complete an accurate revaluation. Most often, in the process of their work, revaluation firms consider comparable sales data and comparable income data derived during a 12-month period prior to the October 1 st date. They place greater reliance on that data which is closest to the October 1 st date.

Problems occur with revaluations when the data relied upon does not accurately measure the true value of property at October 1, 2007. In some markets, where a significant value change takes place, accuracy is almost impossible. This year that market will almost certainly be residential revaluations.

Over the past 18 months, the residential market has faced significant erosion and downward pricing pressure with the subprime mortgage meltdown reducing the value of most residential property. The increasing inventory of unsold housing units causes additional downward pressure. Revaluations commencing in 2008 are relying upon sales dating back to 2006, still a period of strength for the residential market. Taxpayers should carefully review their tax notices to determine if these revaluation notices accurately reflect the value of their property as of October 1, 2007.

In Commercial, a continuing challenge will be the fact that now most assessors routinely send Chapter 91 requests to taxpayers every year. These requests are designed to assist the assessor in determining current information about all income-producing property within a taxing jurisdiction. A taxpayer has 45 days to respond to this inquiry.

A failure to respond results in the automatic dismissal of any tax appeal filed thereafter for that tax year. Every year, hundreds of tax appeals are dismissed by the Tax Court because taxpayers failed to properly respond to these requests. While all taxpayers should be diligent in answering Chapter 91 requests, owners with larger portfolios need to stay particularly vigilant regarding these requests.

Taxpayers owning income-producing property also face challenges. High vacancies continue to be seen in many office markets, and the prospect of a slowdown in the economy puts pressure on many commercial values as well. Likewise, with the subprime mortgage market affecting other sectors, retail properties will face price pressure.

All of this makes valuing these properties difficult during 2008. Many of these properties will be worth less in the months after October 1, 2007, than they were prior to October 1. While that fact may not assist in reducing an assessment for 2008, it can be useful in negotiating assessments for 2009.

Key Points You Need to Know: Remember, it is not unusual during the tax appeal process for a tax assessor to request a dismissal for a prior year in order to reduce the following year's tax assessment. This allows the assessor to reduce an assessment for a subsequent year prior to collecting any taxes. The ploy puts the taxing jurisdiction in a position where they will not have to pay any property tax refunds.

The law in New Jersey presumes that assessments are correct. The burden falls on the taxpayer to demonstrate through probative evidence that the value placed by the assessor isn't correct. This makes it especially difficult for taxpayers when market value changes month to month and value must be proven as of October 1, 2007.

Once the tax rolls are closed and certified, a procedure that takes place by the end of the prior tax year, only by filing a valid tax appeal can an assessment be lawfully changed. The tax appeal process can be difficult and expensive, requiring significant proofs. Each taxpayer needs to be aware of the significant difficulties involved, and the fact that these problems are even more pressing when significant economic issues come into play.

Valuing real property in normal static times is difficult enough, valuing them during times of significant change can be almost impossible. Taxpayers face significant obstacles throughout all of 2008 as they try to obtain equitable tax assessments. Bringing together the combined knowledge and expertise of your entire tax team will benefit taxpayers in this tough environment.

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. Mr. Garippa is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Using comparable market sales for taxation can correct errors assessor errors.

"The tax professionals' initial work identified three relatively recent sales of comparable properties that suffered from functional and external obsolescence, much like the taxpayer's property."

By Stewart L. Mandell, Esq., as published by National Real Estate Investor, February 2008

Assessors typically value industrial and commercial properties using a cost approach that starts with land value, adds the cost of property improvements and subtracts some physical depreciation, often based on the property's age. Deducting only the physical depreciation from a property tax valuation often results in egregiously excessive taxation. However, by applying data regarding comparable market sales, taxpayers can remedy this problem, sometimes with extraordinary results.

Seldom are such factors as functional or external obsolescence, which can dramatically diminish property values, used in assessors' property tax valuations. Functional obsolescence arises from the flaws that exist in a property. Examples include an abnormal size, shape, or height, concrete floors that are exceptionally deep or too shallow and so forth.

External obsolescence results from outside forces such as industrial properties becoming vacant because production moves offshore, or a change in tax laws that reduces commercial property values. Fortunately, data from comparable property sale can be used to identify specific amounts of functional and external obsolescence; amounts that must be deducted from assessors' valuations to eliminate unlawfully excessive taxation.

Consider an industrial facility with above market operating expenses that houses manufacturing barely surviving global competition. In an actual case similar to this example, the assessor made a mere 4% reduction for functional and external obsolescence even after the taxpayer had fully described the obsolescence. Ultimately the taxpayer retained property tax professionals who knew how to use sales of comparable properties to demonstrate the diminished values the obsolescence caused.

How the process works

Assessor's records commonly contain errors in a property's age, total square footage, net leasable area, number of units, unit mix, and facility amenities. An error in the property's basic data can significantly increase a property's overall assessment. Providing a current rent roll to the assessor can help correct mistakes in a property's basic data. An owner may also wish to produce a site plan for the property along with the most recent marketing materials that show the project's different floor plans and amenities. Correcting basic errors in the assessor's records remains the simplest path to lower a tax assessment.

The tax professionals' initial work identified three relatively recent sales of comparable properties that suffered from functional and external obsolescence, much like the taxpayer's property. The professionals used these sales to quantify depreciation in a way that enabled them to reasonably estimate the obsolescence in the taxpayer's property. Using the steps followed by the professionals, taxpayers can garner stunning property tax reductions. Here's how:

• Determine the value of improvements by subtracting the value of the land from its sale price for each of the comparable properties.
• Determine the construction cost of improvements when new by researching construction costs in national estimating services such as Marshall Valuation.
• Calculate the property's total depreciation by subtracting the value of the improvements today from the cost to construct the improvements.
• Ascertain physical depreciation by dividing the property's effective age by its life expectancy.
• Estimate functional and economic obsolescence by subtracting the physical depreciation from its total depreciation.

The taxpayer's reward

Completing this analysis for the three comparable sales produced an indication of functional and external obsolescence that was far greater than the assessor recognized in his assessment. Having established a 40% to 48% range for obsolescence, the professionals then determined whether any further adjustments were warranted such as those due to differences between the sold properties and the taxpayer's property.

For example, unlike the sold properties, the taxpayer's property was both excessively large and had an unusual shape. These features would cause the taxpayer's property to suffer from even greater obsolescence than the sold properties.

As a result of the analysis, the assessor agreed that a proper cost approach required both the physical depreciation originally calculated plus an additional 40% reduction for obsolescence, an $8 million assessment reduction.

This example demonstrates that the property owner was able to deduct functional and external obsolescence without relying on an income analysis. In this case, property was located in a market where virtually all of the industrial properties were either owner occupied or vacant, making it impossible to obtain income information.

In the cost approach, where physical depreciation represents the only deduction, taxpayers should expect that properties with functional and external obsolescence will be overvalued.

When that happens it is crucial that taxpayers take action. To paraphrase the renowned philosopher, Mick Jagger, when it comes to property taxation, taxpayers may not be able to get what they want, but armed with the right information and professional assistance, they may be able to get what they need.

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..

Under the proposed ICAP legislation, retail facilities benefits would be dramatically reduced

"Most knowledgeable developers disagree with restricting the program's benefits and eligibility and want the program extended unchanged."

By Joel R. Marcus, Esq., as published by Real Estate New York, February 2008

The Industrial and Commercial Incentive Program is New York City's largest commercial real estate incentive program, with approximately 15,000 applications filed since its 1984 inception. KIP provides partial real estate tax exemptions for new and renovated industrial and commercial buildings in most areas of the city. While the program's renewal seems certain, it's likely to undergo significant legislative revisions.

Critics contend that lClP operates at a substantial fiscal loss for the city, with approximately $371 million in real estate tax revenues foregone in 2006 alone. The city demands reforms to the current ICIP. Specifically, they want to restrict benefits to commercial and manufacturing buildings in geographic areas that truly require special real estate tax incentives to encourage construction, stimulate employment and foster significant new economic activity. Most knowledgeable developers disagree with restricting the program's benefits and eligibility and want the program extended unchanged. In the proposed legislation, three elements are particularly noteworthy:

1. Abatement vs. Exemption

The current IClP offers tax exemption for new and renovated buildings based upon building assessment increases directly attributable to construction, i.e. "physical increases" described in the application. Industrial and commercial buildings located in special exemption areas also qualify for exemption from assessment increases arising from inflation or market value appreciation, i.e. "equalization increases." It appears ICIP amendments will provide a tax abatement rather than an exemption. For that reason, the revised legislation is generally referred to as the Industrial and Commercial Abatement Program. While exemptions reduce the amount of assessment subject to real estate taxation, abatement's are tax credits that directly reduce tax liabilities imposed upon the property. A project's abatement base will reflect the difference between the assessed value of the completed building and 11 5% of its pre-construction assessed value.

2. Reduction of Retail Eligibility

Under the proposed new lCAP legislation, benefits for retail facilities would be dramatically reduced and would depend upon the type of project and its location. Critics of KIP contend that new retail facilities frequently displace sales from existing locations in the city rather than create new economic activity. Retail space within newly constructed or renovated commercial buildings in Manhattan south of City Hall would remain eligible for [CAP benefits. Commercial buildings in Manhattan between City Hall and 59th Street would not be eligible for abatement benefits on any retail space greater than 5% of the total floor area. In regular commercial benefit areas, retail space in excess of 10% of the building's floor area would not qualify for abatement benefits.

3. Reduction of Eligible Construction Period

The old ICIP program called for commercial or industrial construction work to be performed between the date the first building permit is issued and the sixth taxable status date (Jan. 5) there after. Failure to meet these construction benchmarks would not mean denial of benefits but merely serves as a cap on the exemption base.

Under ICAP, owners generally would have to complete new buildings within five years of the permit date and renovation projects within two years of the permit date. Failure to complete construction within these periods would mean revocation of all abatement benefits granted from inception. The abatement base would be limited to physical assessment increases within three years after the permit date for new buildings and one year after the permit date for renovations. ICAP would reduce the lClP construction period from almost six years to one to three years, depending upon whether the project is a new or renovated structure. Clearly, ICAP offers far less generous benefits than those available under KIP. To capture lClP benefits, owners must 1) file a preliminary application with the New York City Department of Finance prior to June 30,2008 and 2) obtain a building permit no later than July 31,2008. These dates are critical if owners want to qualify their projects under IClP rather than ICAP.

Joel R. Marcus is a partner at the law firm of Marcus & Pollack LLP: a member of American Property Tax Counsel, an 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..

Assessors' misuse of highest and best use principle proves costly.

"To support inflated values, taxing units attempt to narrowly define the highest and best use of the property."

By Michael Shapiro, Esq., as published by National Real Estate Investor, December 2007

In many states, the war over property tax assessments based on "value to the owner" as opposed to "market value" has ended with a clear victory for market value. Nonetheless, some jurisdictions continue to try changing this outcome by misusing "highest and best use."

Assessors' attempts to misuse highest and best use can be seen most often in buildings used by big-box retailers and manufacturers, as opposed to properties such as hotels, office buildings and shop-

ping centers, typically valued using the income approach.

To support inflated values, taxing units attempt to narrowly define the highest and best use of the property. They claim that a taxpayer's comparable sales aren't evidence of market value because the sale properties have a different highest and best use than the property being assessed.

Two methods, two results

An assessor may contend, for example, that only stores purchased by Jones Corporation can be used to value a store used by Jones Corporation. This effectively eliminates comparable sales as a basis for valuation. One tax court addressed this issue when it held that a property's highest and best use cannot be defined "so narrowly that it precludes analysis and value based on market data."

The accompanying chart demonstrates the difference between the assessor's valuation of two big-box stores based on his narrow definition of highest and best use and the actual selling price of those same stores in the open market.

The assessor defined highest and best use as that use being exercised by that specific retailer. That definition led the assessor to value big-box store No. 1 at $62 per sq. ft. and big box store No. 2 at $58 per sq. ft. Actually, store No. 1 sold to another retailer for $49 per sq. ft. and store No. 2 was bought by a different retailer for $38 per sq. ft.By narrowly defining highest and best use, the assessor ignored market data and over assessed the property.

The relevance of a comparable sale's highest and best use was addressed in the case of Newport Center v. City of Jersey City. The New Jersey Tax Court held that a comparable sale should be admissible evidence of value, regardless of its highest and best use, if the claimed comparable sale provides logical, coherent support for an opinion of value.

Many jurisdictions want to effectively reinstate value to the owner, in legal terms called "value-in-use," as the lawful standard for property tax valuations, thereby inflating assessments by eliminating from consideration the sales-comparison approach to value. In the sales comparison approach, sales often provide the best indication of a big box or manufacturing property's market value.

Sales prices reflect loss in value from replacement cost due to obsolescence. That obsolescence generally includes a significant amount of external obsolescence, which represents loss in value caused by some negative influence outside the property.

For example, external obsolescence could result from limited market demand for a big-box store or manufacturing plant built to meet the needs of a specific user. Value may also be adversely influenced by functional obsolescence, a loss in value due to design deficiencies in the structure, such as inadequate ceiling heights, bay spacing or lighting.

What's a comparable sale?

Appraisers are taught to only use sales comparables with the same or similar highest and best use to that of the property being appraised. However, even this limitation is too restrictive.

For example, years ago a former automobile assembly plant was offered for sale and eventually sold for demolition and construction of a shopping center. No automobile manufacturer, or for that matter any other manufacturer, was willing to pay more for this property than the developer who bought it to build a shopping center.

Thus, the market spoke and defined the market value of the former automobile plant. In short, if a property is physically similar to the property being valued, but sells for an unusual use, that sale should not necessarily be disregarded as a comparable sale.

The sale of the former automobile assembly plant for use as a shopping center may not be the ideal comparable sale to value industrial property. However, that sale certainly puts a cap, or limit, on the value of a similar industrial facility, subject of course to adjustments for relevant differences such as location or size.

By understanding the issues involved in using comparable sales to achieve market value assessments, taxpayers can successfully appeal property tax assessments when they are based on the misuse of highest and best use.

Michael Shapiro 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..

"When the taxpayer rejects the protection of the Freeze Act, they must file a tax appeal and prosecute it in the normal course of events. More often than not, a taxpayer thinks twice, or maybe more, about rejecting the Freeze Act's protection, since filing tax appeals requires significant expenditures of time and capital."

By John E. Garippa, Esq., as published by Real Estate New Jersey, December, 2007

New Jersey taxpayers have long struggled against high tax assessments and property taxes imposed by the tax authorities. Historically, even when taxpayers successfully reduced high assessments, there were taxing jurisdictions that filed appeals year after year to increase those reduced assessments. Despite the fact that a taxpayer successfully reduced his assessment in a court proceeding, there was nothing to prevent an increase in assessment for the following tax year.

As a result of this abuse of the system, the Legislature passed New Jersey Statute 54:51A-8, a law commonly referred to as the Freeze Act. The single greatest defensive tool any taxpayer in New Jersey can employ, it was passed to protect taxpayers from the need to file and prosecute annual tax appeals. Now more than ever, it has become crucial that taxpayers have a clear understanding of how the Freeze Act works and under what conditions it may not work.

For the Freeze Act to apply, a final judgment by the Tax Court must have been rendered regarding a real property tax assessment, and that judgment must be binding and conclusive on all parties, including the taxing district and municipal assessor. Generally, the Act makes that final judgment of the Tax Court binding for the next two successive assessment years.

However, exceptions exist to this general rule. If the taxpayer's property increased in value more than the general rate of increase in value of all other property in that taxing jurisdiction, the jurisdiction must file an appeal to void the Freeze. For the most part, the Tax Court has strictly interpreted this change in value standard in a manner that protects taxpayers.

The appeal process requires the tax authority to take two steps. In the first, they have to prove an increase in value more than other properties in the area. Second, they still bear the burden of proof in substantiating the correctness of their valuation of the property.

Some unusual external changes have precipitated the voiding of the Freeze Act protection. For instance, the increase in value of property in close proximity to the proposed casino district in Atlantic City gave rise to an increase in property value that voided the Freeze Act protection.

Another example of how the Freeze act was voided involved the development of a super regional mall near a commercial property that was protected under the Freeze Act. The court concluded that the construction of the super-regional mall and the development of the casino district in Atlantic City, in each instance, caused a substantial change in property values to commercial property in those vicinities.

The following four other conditions cause the Freeze Act to be voided: A complete reassessment or revaluation of all property in the taxing jurisdiction, the subdivision of a property, a zoning change to the property and any construction change to the property that results in an added assessment. In each of these conditions, the taxing jurisdiction merely asserts that one of these is met at the subject property. No need then exists for the court to determine if a change in value has occurred.

In certain circumstances, the taxpayer may determine that it is in their best interests to waive the protection of the Freeze and seek an even lower assessment. This situation may take place where real estate values continue to deflate. When the taxpayer rejects the protection of the Freeze Act, they must file a tax appeal and prosecute it in the normal course of events. More often than not, a taxpayer thinks twice, or maybe more, about rejecting the Freeze Act's protection, since filing tax appeals requires significant expenditures of time and capital.

The use of the Freeze Act and the decision to waive its protection requires an exercise of professional due diligence, which calls for the taxpayer to appraise the property to determine whether continued erosion in the value of the property or a change in the ratio of assessment to value in that taxing jurisdiction has been experienced. If a review of either of these determinants indicates that the property continues to be over assessed, it might be prudent to forsake the protection of the Freeze Act and proceed in filing an appeal.

However, this is not a step to be taken lightly because, in dealing with New Jersey property taxes, prudence is often the better part of valor.

John E. Garippa is a senior partner of the law firm of Garippa, Lotz & Giannuario of Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

By Joel R. Marcus, Esq. as published in Real Estate New York, December 2007

The new law also curtails exemption benefits for as-of-right areas

"The new law, however, greatly expanded the exclusion zones throughout the city to include all of Manhattan and most of Brooklyn's Carroll Gardens, Cobble Hill, Boerum Hill, Park Slope, Sunset Park and Downtown Brooklyn; along with parts of Long Island City, Astoria, Woodside, Jackson Heights and Willets Point in Queens."

On Aug. 24, Gov. Eliot Spitzer signed into law three bills that dramatically revamped New York City's 421a exemption program. The program was created in 1971 to encourage the construction of new multifamily dwellings by granting a partial exemption from increases in real estate taxes resulting from the new residential construction.

The new law compared to the old law. The previous law covered only projects commend prior to July 1,2008 and made 421a benefits available in any area of the city, except for those areas identified as geographical exclusion areas. The areas not classified as exclusion areas are commonly called "as-of-right' areas. The exclusion areas generally included portions of Manhattan between 14th and 96 th streets and the Williamsburg-Greenpoint areas of Brooklyn. Projects qualified for benefits in the exclusion zones if at least 20% of the units were created as affordable housing or if the developer purchased negotiable certificates for creation of affordable housing units off-site.

The new law, however, greatly expanded the exclusion zones throughout the city to include all of Manhattan and most of Brooklyn's Carroll Gardens, Cobble Hill, Boerum Hill, Park Slope, Sunset Park and Downtown Brooklyn; along with parts of Long Island City, Astoria, Woodside, Jackson Heights and Willets Point in Queens. Projects started between July 1,2008 and Dec. 27,2010 in these areas qualify for benefits only if at least 20% of the building's units are affordable to families whose income at initial occupancy doesn't exceed 60% of the area median income.

The new law reduces 421a benefits outside the exclusion zones. The controversy surrounding the new citywide exclusion zones may obscure the fact that the new law dramatically curtails 421a exemption benefits for as-of-right areas.

Under the old law, all assessment increases in excess of the pre-construction assessment, commonly known as the mini-tax, were exempt. Under the new law, benefits for as-of right projects are restricted to the first $65,000 in assessed valuation per dwelling unit. The cap increases by 3% each year, beginning in 2009/10. For the current tax year, the cap is equal to $7,750 in actual taxes per unit ($65,000 x 11.928%).

The new law also dramatically reduces tax benefits for nonresidential space in new multifamily dwellings. Under the old law, up to 12% of the building area could be used for commercial purposes, without loss of exemption. Developers often incorporated valuable retail space in their buildings to lease at market rates while enjoying full 421a exemption benefits. Under the new law, all commercial space in a building is considered one unit and is subject to the $65,000 exemption cap, greatly reducing the tax break for commercial space.

To demonstrate the effect of the exemption cap, consider a new 100,000-sf condominium building with 100 dwelling units and one retail unit constructed in an as-of-right area. The building includes 12,000 sf of retail space and carries a $100,000 mini-tax. The completed building is assessed for $1 5 million. Under both the old and new laws, the project would qualify for a 15-year exemption benefit.

Under the old law, taxes during the construction period and for the first 11 years after completion equaled the mini-tax multiplied by the tax rate. Assuming that the 2007/08 tax rate of 11.928% remains in effect, annual taxes for the entire building would equal $1 1,9280 approximately $118 per residential and retail unit. The exemption would not be affected by the retail space as it does not exceed 12% of the building's floor area. Under the new law, taxes for the entire building, including the retail space, would still be the same mini-tax ($100,000) each year during construction. However, for the first 11 years after construction is completed, the 101 - unit building would be subject to the exemption cap, as adjusted. For the first year, only $6,565,000 (101 units x $65,000) of the building's $15-million assessment qualifies for exemption. Taxes for the fiat year of the benefit period would exceed $1 million for the building or approximately $9,960 per residential and retail unit, a 1,000% increase. The new law will likely affect the feasibility and pricing of all new projects.

Joel R. Marcus is a partner at the law firm of Marcus & Pollack LLP: a member of American Property Tax Counsel, an 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..

Frustrated by your assessment? You've got until Dec. 31 to fight it.

"To successfully appeal, you need to prove that the actual price for which you could sell your property, its "real" real Market value, is below the assessed value. How do you determine the real market value?"

By David Canary, Esq., as published by Daily Journal of Commerce, November 14th, 2007

Your property tax bills have arrived in the mail and, understandably, you're upset with the amount you're paying on your real and personal property. But there is some good news: You have a right to appeal.

So, what are you appealing? Unfortunately, not the tax itself. The amount of property tax you pay cannot be the basis for an appeal. A property tax is the product of multiplying two numbers, the tax rate and the assessed value of the property. Measure 5 limits the tax rate to 1.5 percent of real market value plus any local option property tax. Only in very limited circumstances may property owners challenge the rate.

What you are appealing is the property's assessed value. The assessed value is the lower of two figures: the maximum assessed value (MAV) or the real market value (RMV) of the property.

Under 1997's Measure 50, except for six exceptions, assessed value cannot increase more than 3 percent per year — which becomes the property's maximum assessed value. Real market value, on the other hand, is the amount the property would sell for between a willing buyer and a willing seller in the open market in an arm's length transaction.

Both the real market value and the assessed value appear on the property tax bill. Typically, the assessed value will be below real market value, in which case you are being assessed on the property's maximum assessed value.

To successfully appeal, you need to prove that the actual price for which you could sell your property, its "real" real Market value, is below the assessed value. How do you determine the real market value? First, if you recently bought the property for less than the assessed value, the sale price is a good indication. However, don't base your appeal upon the assessed value of other properties. The Oregon Tax Court has ruled that the assessed value of other properties isn't a sufficient legal basis for seeking a property tax reduction.

An examination of the income generated by your income-producing property may give you an indication that the assessed value is too high. Income may be generated by lease or rental rates of commercial real estate or, in the case of owner-occupied industrial property, by the cash flow generated by the operating facility. If the income generated from the property is far below the expected rate of return of the debt and equity capital invested in the property, this may indicate that the property is over-assessed because it suffers from functional or economic obsolescence.

The best evidence of the property's real market value is an appraisal by a qualified expert for property tax purposes. It may be that your property has been appraised already for other purposes — insurance, partnership buyout, or estate planning purposes. These appraisals may give you an indication whether the assessment of your property is inappropriately high. But appraisals for property tax purposes require that the appraiser render an opinion of the real market value of the fee simple interest of the property as of January 1 st of the tax year. An insurance appraisal that estimates insurable or replacement value is not sufficient. Likewise, an appraisal for estate planning or investment purposes may not fit the requirements necessary for an appeal.

A competent appraiser will determine the real market value of the property by use of one or more of the three approaches to value: the cost approach, the sales comparison approach, and the income approach. The cost approach adds the land value to the depreciated cost of the property's improvements. The sales comparison approach compares the sale price of comparable properties with the property being appraised and makes adjustments for any differences between the two. Finally, the income approach capitalizes either the market rental rate or the cash flow of the property by an appropriate rate of return that reflects the return on, and return of, the investment.

Taxpayers who own residential or commercial properties must first appeal their assessments to the County Board of Property Tax Appeals. Owners of the industrial property can either appeal to county bard, or appeal directly to the Magistrate Division of the Oregon Tax Court. However you chose to proceed, please remember that your appeal must be filed no later than December 31, 2007.

David Canary has specialized in state and local tax litigation for the past 18 years. He has worked for the past 13 years as an owner in the Portland office of Garvey Schubert Barer and prior to that was an assistant attorney general representing the Oregon Department of Revenue. He has the distinction of trying several of the largest tax cases in Oregon's history. He is the Oregon member of American Property Tax Counsel and an active member of the Association of Oregon Industries' Fiscal Policy Council. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. or 503-228-3939.

"The Kentucky General Assembly authorized cities and urban county governments to establish programs that grant property tax moratoriums for existing residential or commercial properties "for the purpose of encouraging the repair, rehab, restoration or stabilization of existing improvements."

By Michele M. Whittington, Esq., Bruce F. Clark, Esq., as published in Midwest Real Estate News, November, 2007

The Louisville-Jefferson County Metro Government offers a property tax incentive designed to encourage redevelopment of economically-blighted properties. While not a widely advertised offer, property owners and developers should be aware of this opportunity to reduce their property taxes.

The Kentucky General Assembly authorized cities and urban county governments to establish programs that grant property tax moratoriums for existing residential or commercial properties "for the purpose of encouraging the repair, rehab, restoration or stabilization of existing improvements." This program was established as the result of an amendment to the Kentucky Constitution passed in 1982 by Kentucky voters.

In 1983, Jefferson County was one of the very few local governments to implement the newly passed legislation, and in 2003, the then-merged Louisville-Jefferson County government continued the program. In essence, it encourages redevelopment of existing properties by "freezing" for five years a property's tax assessment at pre-rehab levels. Unfortunately, the moratorium applies only to the "county" portion of the tax assessment, which currently amounts to $0.125 per $100 of assessed value. Efforts to extend the moratorium to other portions of the total property tax assessment have thus far been unsuccessful. Nevertheless, the moratorium presents an additional incentive for a property owner to rehabilitate an eligible property.

The moratorium program is jointly administered by the Jefferson County Property Valuation Administrator ("PVA") and the Louisville-Jefferson County Metro Government's Inspections and Licensing Department ("IPL"). The eligibility requirements for the moratorium are relatively straightforward. First, the existing residential or commercial structure(s) must be at least twenty-five years old. Second, either (a) the cost of the repair or rehab must be at least twenty-five percent of the pre-rehab value (as determined by the PVA's assessment); or (b) the property must be located within a "target area," an economically-depressed area based on residents' income. In the latter case, the cost of the repair or rehab must be at least ten percent of the pre-rehab value.

A property owner wishing to apply for the moratorium needs to submit an application to the IPL. In addition to other requirements, the application must include proof of the building's age, a description of the proposed use of the property, a general description of the work that will be performed to repair or rehabilitate the property and a schedule for completion of the proposed work. The owner should also obtain the necessary building permits and submit them to IPL. Once the application has been submitted, the owner has two years to complete the project. Upon completion of the project, the owner notifies the IPL, which inspects the property for compliance with the rehab plan set out in the application. If the project has been successfully completed, the IPL notifies the PVA, and they issue a moratorium certificate.

The moratorium's benefits can be calculated by determining the difference between the property's pre-rehab and post-rehab value. The PVA certifies the pre-rehab assessment of the property as part of the application process. Once the project is completed, the PVA reassesses the property at the higher post-rehab value; however, with the moratorium in place, the assessment for the county portion of the taxes will be "frozen" at the pre-rehab value. For example, assume that a developer purchases a qualifying property for $1,000,000. After rehab, the PVA reassesses the property for $10 million. With the moratorium in place, the assessment remains at $1,000,000 for purposes of the county portion of the tax, while the assessment for all other property taxes (state, school and others) increases to $10 million. The resulting tax savings for the property add up to approximately $11,250 per year for five years, or a total tax savings of over $55,000.

Property owners considering rehab of an eligible property should pay particular attention to the pre-rehab assessment. If the owner believes the property may be over-assessed, she should meet with the PVA and present evidence of the true value of the property prior to applying for the moratorium. Given the fact that the moratorium freezes the assessment at the pre-rehab value, a decrease in the assessment results in a corresponding increase in the tax savings, once the moratorium certificate is issued.

Conversely, a developer planning to purchase a property for redevelopment should be aware that the PVA's pre-rehab assessment will most likely be governed by the price the developer pays for the property, rather than by the pre-purchase assessment. Using the previous example, assume that a developer purchases a property for $2 million. Prior to the purchase, the PVA had the property assessed at $1 million. The PVA will inevitably pick up the purchase price from the deed and will reassess the property at $2 million, thus decreasing the tax benefit gained from the moratorium.

In any case, owners and developers should be aware of the moratorium process in order to take advantage of the potential tax savings on eligible properties.

Michele M. Whittington is Counsel in the Frankfort office of Stites & Harbison, PLLC, the Kentucky member of American Property Tax Counsel, the national affiliation of property tax attorneys. Michele Whittington can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Bruce F. Clark is a Member in the Frankfort office of Stites & Harbison, PLLC, the Kentucky 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 you receive your tax statement, determine if the property belongs to you and if you are responsible for the payment of taxes."

By David Canary, Esq., as published by Daily Journal of Commerce, October 9th, 2007

By statute, county assessors must deliver property tax statements to taxpayers by Oct. 25 of each year- just before Halloween. This requirement applies to all property, real or personal, whether owned by homeowners or utilities. To avoid any unpleasant surprises, it is important that taxpayers understand and carefully review their tax statements.

If you don't receive a tax statement for property you own and you're responsible for the payment of taxes, contact the county assessors office to determine if the assessor is unaware of a recent change of address or ownership.

When you receive your tax statement, determine if the property belongs to you and if you are responsible for the payment of taxes. If there has been a recent sale of the property, the assessor may not have noted the change of ownership, Taxpayers have a duty to now the assessor of changes in title and changes in address. Do not assume the new owner, or lessee of the property (in the case of a triple net lease), will pay the property taxes.

Review the real market value and assessed value appearing in the upper left corner of the tax statement. The assessor calculates a real market value for both land and improvements for the current and previous tax years. Below the total real market value is the assessed value for the total account for the current and previous years.

The assessed value may be less than the total real market value, but it may not be more. This is because Measure 50 requires the assessor to calculate two values — the real market value and the maximum assessed value. The lesser of the two values is the assessed value — the value upon which you pay taxes. If the assessed value is less than the real market value, generally, the real market value has no effect upon the property taxes you pay. Next, it is important to compare the assessed value for the current tax year to the assessed maximum assessed value cannot increase more than 3 percent above the property's assessed value from the prior year. There are exceptions, and the taxpayer must investigate to determine if they apply.

A property's maximum assessed value may exceed the 3 percent cap if the new property or improvements were added. Minor construction or general ongoing maintenance and repair does not constitute new property or an improvement.

Further, the improvements must have been made since the last assessment. Improvements made to the property three or four years ago cannot be added to the tax roll under Measure 50 although assessor may add them as omitted property.

Finally, it is the real market value of the new property or new improvements not the cost that is added to the tax rolls under this exception. This is particularly important if the improvement was a major but necessary repair that did not necessarily add value to the property.

Partitioned or subdivided property may be reassessed by the assessor and with some limitations, the reassessment may increase the assessed value by more than 3 percent. Likewise property that has been rezoned may be reassessed and the assessed value increased, but only if the property is used consistently with the rezoning. However, the total assessed value of properties subject to a lot line adjustment should not be affected by the adjustment by more than 3 percent.

The value of property that is added to the tax roll for the first time as omitted property, or property that becomes disqualified from exemption of special assessment, may increase the previous years assessed value by more than 3 percent under Measure 50. Finally, taxpayer that own or lease business personal property should carefully review their tax statements to determine if any penalties have been assessed. Taxable personal property must be listed, and reported to the assessor by March 1 of each year. If the personal property return is not filed timely, the taxpayer may face penalties up to 50 percent of the taxes due.

Under new legislation, upon application to either the assessor or the Board of Property Tax Appeals, under certain circumstances a taxpayer may obtain a waiver of the penalties. Taxpayers who believe their property has been improperly assessed should contact the assessor immediately. The assessor has the discretion to change the tax roll after it's finished, provided the change reduces the value of the property. But only payers who are vigilant and know their rights scan avoid those nasty Halloween surprises.

David Canary has specialized in state and local tax litigation for the past 18 years. He has worked for the past 13 years as an owner in the Portland office of Garvey Schubert Barer and prior to that was an assistant attorney general representing the Oregon Department of Revenue. He has the distinction of trying several of the largest tax cases in Oregon's history. He is the Oregon member of American Property Tax Counsel and an active member of the Association of Oregon Industries' Fiscal Policy Council. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"Despite the law, there appears to be one abiding maxim that all tax assessors observe: Every high sale price represents a market value sale, and every low sale price is seen as a distress sale."

By John E. Garippa, Esq., as published by Real Estate New Jersey, September 2007

New Jersey, as in most other jurisdictions in the US., all real property must be valued and assessed based on market value. It's the law. Market value is defined as the price paid by a willing buyer to a willing seller, each acting knowledgeably, without duress.

Despite the law, there appears to be one abiding maxim that all tax assessors observe: Every high sale price represents a market value sale, and every low sale price is seen as a distress sale. Further, every high sale can be relied upon to set an assessment and every low sale must be disregarded because it took place under distress. However, the real issue revolves around: Is every sale a market event that represents fair market value for assessment purposes? The Tax Court of New Jersey has focused on this issue and determined that a category of events exists that rule out a sale as a reliable indicator of fair market value for assessment purposes.

A transaction set up as a 1031 tax-free exchange represents one such category identified by the Tax Court. Under 1031, sellers of investment-grade real estate may defer paying capital gains by using the proceeds from one sale as an investment in another similar property or properties. The seller has 180 days from the original closing date to complete the exchange. Also, within 45 days of closing, the taxpayer must provide the IRS a list of three or more potential replacement properties.

In a recent case, the Tax Court agreed with the taxpayers arguments that his 1031 sale price was significantly higher than market value. The court concluded that the sale price was motivated by tax and business issues rather than typical real estate motivations. The court also concluded that the tax free exchange laws placed enormous pressure on a seller to conclude a transaction within 180 days. Fundamentally, the sale took place primarily to defer gains from another sale.

Another category of sales rejected by the Tax Court compromise those that have not been properly marketed. For example, a Fortune 500 company sold a corporate headquarters for $16 million. The sale was conducted via sealed bids over a short period of time. The bid package included language that prohibited the bidders from changing any of the sale terms. The court determined that the bid package was not sent to all potential buyers. As a result of these perceived defects in marketing the property, the court rejected the sale price and concluded to a market value of $49 million.

In contrast to the prior set of facts, the Tax Court has also concluded that the sale of a complex property can be market value. In another case, an oil refinery was sold after it was marketed for more than 18 months. The owner hired an investment banker to market the property. The investment banker identified all of the potential buyers. Comprehensive information packages identifying the property were transmitted all over the world. At the end of this marketing period, the seller received two bids, eventually resulting in a sale. The court concluded that such a significant amounted to a valid sale that could be used to value the property for tax assessment purposes.

Some of the same arguments made with regard to 1031 property can also be advanced for high purchase prices paid by REITs. REITs offer significant tax advantages to shareholders; however, they must meet strict tax requirements in order to qualify for that status. A RElT must distribute 90% of its income to shareholders. Thus, in order for a RElT to grow, it must continually purchase properties, as it cannot grow via the normal accumulation of cash.

Growth is critical because it leads to higher stock prices and allows for more diversification in the portfolio. Additionally, REITs use capital markets to which most other buyers do not have access. These large capital markets fund REIT purchases at low interest rates that further the aims of the REIT. All of these issues would normally cloud the price paid by a "willing buyer, acting without duress."

In an era characterized by unusually high sales prices, tax payers need to remember an important caveat: Even the New Jersey Tax Court recognizes that not every sale represents fair market value for tax assessment purposes. Owners involved in transactions with high sales prices need to carefully examine their property tax assessments to determine whether a valid market price was used in levying their assessment.

John E. Garippa is a senior partner of the law firm of Garippa, Lotz & Giannuario of Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"A sale involving a first-generation lease is more a financing operation than a transaction in real estate. In the past, many single-tenant real estate users — often retailers not wanting to tie up capital — financed their real estate through sale-leaseback transactions where they recouped the capital costs by inflating both rent and the corresponding sale price."

By Kieran Jennings, Esq., as published by National Real Estate Investor, Summer Special Edition, July 2007

In a build-to-suit transaction, the value of the property to the user who had it built is greater than the value that property holds for the next user.

For instance, a store built as a McDonald's would not have the same value to a Taco Bell. Although both users are fast-food chains, the layout, design and exterior appearance all work to identify, market or assist the first occupant's business.

The decrease in value from the original user to the subsequent user represents built-in obsolescence. Failure to recognize this obsolescence often subjects first generation owners to excessive property tax assessments.

A triple-net-lease property that was a build-to-suit may be sold to a new owner, even if the original user remains the tenant. In this case, the sale price reflects the value of the tenant's lease. The assets involved in the purchase include both the lease and the real estate.

Because the revenue created by the lease primarily drives the price of the deal, an assessment based on sale price can result in an illegal assessment when it is based on the value of the property to the user.

Fighting back

The first step in reducing improper taxes requires that owners prove to the assessor or the courts that the rent and/or sale represent value to the user, not the market value of the property. The next task is to prove actual market value for the real estate.

A sale involving a first-generation lease is more a financing operation than a transaction in real estate. In the past, many single-tenant real estate users — often retailers not wanting to tie up capital — financed their real estate through sale-leaseback transactions where they recouped the capital costs by inflating both rent and the corresponding sale price. This practice is still prevalent today. The user currently has a relationship with a local developer who will acquire the site and build the property on behalf of the user to suit the user's needs. As with a sale-leaseback transaction, the user will enter into a long-term lease based on the costs of building the property to meet the user's specific needs.

The developer then either retains the property or sells it with the lease in place. Thus, the tenant has outsourced to the developer the financing, site selection, construction and other exterior and interior finishes. The third-party purchaser sees the transaction as essentially buying a bond secured by real estate.

Until the first-generation user vacates the property and the real estate is exposed to the open market, the real estate value has not been tested. Furthermore, because the lease drives the sales price of a net-lease property, only a second generation lease reveals true market value and produces a correct assessment.

Case study makes the point

Data from a recent drug store case illustrates the difference in first- and second generation leases for comparable properties built as national retail drug stores. The average drop of $19 per sq. ft. in rent from the first-generation user to the second generation illustrates the difference between value in use and market value.

The difference is due to obsolescence, a fact first-generation tenants must demonstrate to assessors. Data like that shown in the accompanying chart prove the existence and value of the obsolescence.

Not only are the rents affected by the first-generation tenant, the capitalization rate is significantly lower than market rates. The net-lease market into which these properties are sold is among the most active and developed in the real estate market, allowing for substantial liquidity, efficient pricing, and tax deferral through 1031 exchanges.

As a result, the capitalization rates have been reduced to exceedingly narrow margins. Therefore, cap rates derived from sales of first-generation property should not be used in determining assessments.

Proving market value

Assessment laws generally provide that property must be valued using market terms and conditions. Therefore, market rents, those paid by tenants in comparable properties, not contract rents, those paid by the net-lease tenant, determine the income attributable to the real estate.

The difference between market rents and contract rents demonstrate the amount of the obsolescence. Furthermore, the differences in sales prices of property from first-generation users to the next generation can also be used to prove obsolescence.

The road to a fair and honest assessment is not easy, but as illustrated in the accompanying chart, the difference between use value and market value can be substantial.

J. Kieran Jennings, partner at Siegel Siegel Johnson & Jennings, a law firm with offices in Cleveland and Pittsburgh. The firm is the Ohio and Western Pennsylvania 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 first thing any taxpayer needs to know to determine if they want to appeal their taxes is whether a reduction in assessed value yields tax savings. In states that place no limits on the amount of tax increase possible, owners can be certain that reduction in assessed value will generate a tax savings. However, several states' laws require the taxes rise by only a limited percentage in a given year."

By J. Kieran Jennings, Esq., as published by Affordable Housing Finance, Summer Special Edition 2007

Affordable housing owners looking for ways to save money and eliminate non-productive overhead should start by examining their property taxes. That doesn't require taxpayers to become experts in real estate tax law; they need only a working knowledge of the issues to identify when or if should hire an expert .

The basic issues

The first step in this process is to learn how assessors determine property taxes. One of the main indicators of fair market value that assessors use is the income that could be produced from the property using current rents, vacancies, and market expenses. In most states, real estate assessments are based on some percentage of a property's fair market value. Most often, the actual taxes are calculated using a millage rate (for example, $.001) multiplied by the assessment.

Right now owners of affordable housing face unprecedented increases in fuel and utility costs. And, because net income is a key indicator of market value, an increase in operating expenses likely causes a decrease in value. That means an owner's property might not be worth what the taxman says it is, and an appeal may be necessary.

Where does the taxpayer begin?

The first thing any taxpayer needs to know to determine if they want to appeal their taxes is whether a reduction in assessed value yields tax savings. In states that place no limits on the amount of tax increase possible, owners can be certain that reduction in assessed value will generate a tax savings. However, several states' laws require the taxes rise by only a limited percentage in a given year. In such states, a complex analysis is required to determine whether a reduction in assessed value actually results in a tax savings. This type of analysis calls for the skills of a property tax professional.

Some states' assessments may be based on ratios sometimes known as sale ratios or common-level ratios. In states such as New Jersey and Pennsylvania, an assessment may have originally been based on 100 percent of the appraised market value of the property, but over time that 100 percent assessment no longer reflects market value. So, at regular intervals, each county in these states conducts a study comparing the sale prices of all properties sold in a given period with the last assessed value of these same properties. For example, if the assessed values of properties sold for an average of 50 percent of the sales prices of those same properties, then the sales ratio for that period of time will be 50 percent for all properties in the municipality. This ratio then is used to convert the assessed value back to market value. Owners will want to track down the current-year ratio percentage and then review their assessment to ensure that the correct ratio has been applied in developing their assessment.

Finally, many states establish predetermined ratios. Ohio, for instance, places its predetermined ratio of assessment at 35 percent of the appraised market value every year in all counties. Assessed market value is determined by dividing the assessed value by the ratio percentage. As an example, a $35,000 assessment divided by 35 percent yields an assessed market value of $ 100,000, which then can be compared to the actual fair market value of the property. If the assessed market value appears to be higher then the actual fair market value (what a willing buyer would pay a willing seller in an arm's length transaction), then the taxpayer should consider contesting the assessment.

What can taxpayers do when over-assessed?

If you determine that your property has been over—assessed, file an appeal to reduce your real estate taxes. In some states, that will mean filing a formal complaint by a particular date. In other jurisdictions, the filing deadline depends on the mailing date of the assessment notices. Some jurisdictions mandate that parties must appeal their assessment within 15 days of receiving notice. If the deadline passes, in most jurisdictions, the taxpayer is prohibited from contesting their taxes until the following year. It is, therefore, imperative to know the local rules.

How does the taxpayer prove the case in an appeal?

As with every aspect of assessment law, proving the case varies from jurisdiction to jurisdiction. Most typically, an appeal that has merit can be proven with a qualified appraisal. However, the rules regarding how that appraisal is prepared can vary from state to state. For instance, some states mandate that actual income and expenses be used to determine the market value of the property. In other states, an appraiser or property owner must prove the value based on unencumbered market conditions. An unencumbered market condition exists when a property built under Sec. 42, with a majority of its rents restricted, is appraised as if the property were conventional apartment. However, a property that enjoyed greater occupancy or rents because of Sec. 8 rent subsidy may be able to use a lower income figure based on prevailing market conditions. The income approach to value represents the common thread across exists the country for establishing market value.

Must an attorney file a property tax appeal?

Rules governing appeals vary greatly from state to state. In most states, an attorney is not required to file an appeal at the local level, but an appeal in court almost always requires an attorney. However, in a number of states, the courts have determined that the filing of property tax appeal is the practice of law, requiring an attorney

What risks and benefits come with contesting taxes?

Risks come into play when the appeals process is poorly handled, as that can impair a taxpayer's ability to reduce a property's value to its proper level in the future. Evidence poorly presented often remains in the record and is not retractable. Furthermore, in several states and with increasing frequency, school districts participate in the appeals process. In those states, the hearings may put the taxpayer at risk for an increase in assessment, if such is warranted.

The benefits of controlling real estate taxes far outweigh any risks involved, and by spending a little time learning the process, taxpayers can all but eliminate those risks. A newly established assessment often forms the basis for future assessment. Thus, a reduced tax this year positions an owner for future years because tax increases compound over the years. Even if assessments steadily climb in future years, having started at lower base can save money indefinitely.

Keeping real estate taxes and all non-productive expenses down becomes crucial to the economic health of an affordable housing property.

J. Kieran Jennings, partner at Siegel Siegel Johnson & Jennings Co., LPA, with offices in Cleveland and Pittsburgh. The firm is the Ohio and Western Pennsylvania 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..

Income approach to value helps reduce assessments on aging manufacturing plants

"Industrial property exists for only one reason —— to manufacture goods and provide an income for the owner. When income declines due to external factors, the market value of the plant drops. Because the trended cost investment method only looks at past investment, it can't account for the current economic reality."

By David Canary, Esq., as published by National Real Estate Investor, June 2007

Have you ever wondered why your local tax assessor has such a high opinion of the value of industrial plants in your area? This is particularly perplexing when global competition drives down the price of finished goods, energy prices skyrocket, the plant gets older and justifying further capital investment becomes difficult because of razor-thin margins.

The assessor thinks industrial properties are worth hundreds of millions of dollars because he uses the trended investment cost method to value the plant. The assessor adds up to value the plant. The assessor adds up the historical costs invested in the plant over the last 30 years, trends that cost to current dollars and depreciates the result based upon the plant's remaining physical life.

This method is a backward-looking valuation approach that does not measure the eternal economic factors that makes industrial property less competitive or even obsolete. The trended investment cost method bears no relationship to the price at which an owner could sell a plant on the open market. Yet, market value is the basis for all property tax assessments.

Industrial property exists for only one reason —— to manufacture goods and provide an income for the owner. When income declines due to external factors, the market value of the plant drops. Because the trended cost investment method only looks at past investment, it can't account for the current economic reality.

A preferred valuation method

The only way for industrial plant owners to obtain fair tax assessments is to argue for the use of the income approach o value their plants —— the same valuation approach investors use to determine the price they will pay for any investment.

Utilizing either a discounted cash flow or a direct capitalization method, the income approach projects the future income stream of the plant, capitalizes or discounts the income by the market rate of return on invested capital, taking into account current and future expected market conditions, as well as the risks and liquidity of the investment.

The business value reflects all the factors of production —— land, buildings, machinery and equipment, skilled labor, managerial expertise and goodwill. It is incumbent upon owners to show assessors how to separate the value of the real and personal property from the value of the business for assessment purposes.

Bear in mind that all factors of production fall into one of three categories: working capital, intangible assets and fixed assets. Working capital and intangible assets are non-assessable in most states. The market value of working capital —— which includes cash, receivables, inventories, less current liabilities —— can be easily and accurately determined. Now, only market value of the intangible assets needs to be eliminated to arrive at the value of the fixed assets.

Why exclude intangibles?

Intangible assets include software, good-will, customer lists, contracts, patents and trademarks, assembled workforce and trade secrets. The owner of an industrial property invests in intangible assets one way or another. For example the owner pays wages to skilled workforce and invests in R &D, from which benefits and trade secrets result, in the hope the return will exceed its cost.

Because of economic obsolescence, a struggling industrial plant with low margins enjoys little return on intangible assets. And because the cost of creating and maintaining intangible assets is already reflected in the income stream as costs of doing business, their market value has already been accounted for in the business value. Even if intangible assets do have a value above their cost, the assessor will not complain the resulting valuation is too high.

The devil is in the details. The two components of the income approach —— the income stream and the discount, or capitalization rate —— must be accurately calculated to derive market value. A plant's budget or strategic plan already projects the future income of the plant.

For property tax purposes, it is the expected future debt-free, after-tax cash flow from the industrial plant that is discounted by the weighted average cost of capital. However, this approach must account for the current and expected market risks and liquidity of owning a single, stand-alone plant, not the cost of capital of a Fortune 500 company.

If the future income stream is realistic and the discount or capitalization rate reflects the inherent risks in investing in a single industrial plant, the resulting value will equal the price an investor will pay to own that industrial property.

There remains only the task of convincing assessing authorities that the income approach results in a far better and fairer, estimate of the plant's market value than the antiquated trended investment cost method.

David Canary has specialized in state and local tax litigation for the past 18 years. He has worked for the past 13 years as an owner in the Portland office of Garvey Schubert Barer and prior to that was an assistant attorney general representing the Oregon Department of Revenue. He has the distinction of trying several of the largest tax cases in Oregon's history. He is the Oregon member of American Property Tax Counsel and an active member of the Association of Oregon Industries' Fiscal Policy Council. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"Taxpayers with multiple properties, and tax professionals, will generally find the site is worth the fee. Properties can be accessed by the PVA's parcel identification number and also by the owner's name or the property address."

By Bruce F. Clark, Esq., as published by Midwest Real Estate News, June 2007

With the January, 2003 merger of the Louisville and Jefferson County governments, Louisville/Jefferson County became the largest metro area in Kentucky. As a result, property owners in Louisville and unincorporated areas of the county now pay real property taxes to the metro government. In addition, the owners in the 83 suburban cities in the metro area may continue to pay city property taxes, similar to those that were assessed prior to the merger.

Regardless of a property's location, tax assessments are made by the Jefferson County Property Valuation Administrator (PVA). Tony Lindauer assumed the office after the November, 2006 election. The Jefferson County PVA's office has consistently been one of the most professionally-administered offices in the state, and it appears this distinction will continue under Mr. Lindauer's administration. Taxpayers in the Louisville Metro Area need to be aware of the services offered by the Administrator's office and use them to alleviate their property tax burdens.

Get Help

The PVA's website, found at www.pvalouky.org, provides an invaluable tool for taxpayers and tax professionals. In October 2006, the website won the Web Marketing Association's 2006 Government Standard of Excellence Web Award in a competition with over 2,300 other entries.

While certain information can be obtained from the website at no charge (such as parcel identification numbers and current assessments), the majority of the information is only available by subscription — $25 per month or $300 per year. Taxpayers with multiple properties, and tax professionals, will generally find the site is worth the fee. Properties can be accessed by the PVA's parcel identification number and also by the owner's name or the property address. The site provides information on the current assessment, including: a breakdown by land and improvement values; property characteristics, including acreage, building square footage and construction; sketches and photographs of the improvements; assessment history; sales history; and links to the current year's tax bills.

This information helps taxpayers challenge their tax assessments. Verifying the data on which the Administrator's office based their assessment represents one important use of the information. For example, the PVA often calculates the square footage of a building based on an exterior measurement that may not reflect the actual or usable square footage. Then, too, the possibility exists that the PVA holds incorrect information regarding some characteristics of the property, such as the percentage of an industrial property with HVAC. If the Administrator's office possesses incorrect information, the taxpayer can provide the correct information and likely obtain a tax reduction.

The PVA has underway the reassessment of nearly all the land in Jefferson County, so taxpayers may be seeing significant increases in their assessment. In some areas, 2006 land assessments increased by over 25 percent from the previous year. The PVA's values are backed by a "land study" of recent sales, but this does not mean a taxpayer lacks recourse. In some circumstances, land values can be challenged. A taxpayer may have paid a premium for a particular tract of land due to considerations such as location or market coverage (often the case with banks, service stations, etc.). Thus, the sales price might not be equivalent to the "fair cash value" (the standard for assessments in Kentucky). In such cases, a taxpayer can use the PVA's website to gather sales data on nearby tracts of land in order to demonstrate that the taxpayer paid more than "fair cash value" for the property, and that the assessment should be reduced accordingly.

For possible tax savings, owners also need to analyze the assessed value of their improvements by using depreciation or other obsolescence factors. For example, the Administrator's office placed a value on a building based on the value stated in the building permit at the time of construction. Depending on the type of building (usually industrial or warehouse properties), the taxpayer may be able to argue that the value should be decreased to account for normal or abnormal wear and tear (physical depreciation). Arguments for lower valuation also exist when changes in the market occur for that type of building (economic obsolescence) or when outdated or unusual features of the building make it less marketable (functional obsolescence).

New Requirements

The Jefferson County PVA now requires taxpayers who challenge their assessments to sign an affidavit stating an opinion of value for their property. While it has been customary for a taxpayer challenging the assessment to make a declaration of value, the fact that the PVA now demands that the taxpayer swear to that value is somewhat troubling, since filing a false affidavit could result in criminal penalties. If asked to complete the new form, taxpayers need to insure that their opinion of value rests on a reasonable basis.

The affidavit also calls for the property owner to attest that all of the taxpayer's property has been listed with the Administrator's office. This appears to put a taxpayer in the position of guaranteeing that the PVA has picked up any additions or expansions to the property. While Kentucky law always required a taxpayer to "list" all property with the PVA, this affidavit seems to put an even greater burden on the taxpayer.

The Jefferson County PVA's office remains one of the most user-friendly offices in the state. A taxpayer dissatisfied with his or her assessment should not hesitate to contact the office about protesting an assessment. By providing the Administrator's office with the right information, a taxpayer may be able to obtain a reduction in an assessment, and in any case, can get a full and satisfactory explanation as to how the Administrator assessed the property. The PVA's office offers taxpayers their first chance to obtain a property tax reduction, but remember, good documentation is critical.

Bruce F. Clark is a partner in the Frankfort office of Stites and Haribson, the Kentucky member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"In point of fact, industrial property owners will save themselves time and trouble if they retain a knowledgeable property tax expert to help sort out the most defensible method for categorizing the various machinery, apparatus and equipment in their plants. At the same time, the New Jersey legislature would serve constituents well by clarifying once and for all the language defining what is and is not industrial machinery and equipment for property taxes purposes."

By Philip J. Giannuario, Esq., as published by Real Estate New Jersey, May 2007

Amazingly, every possibility exists that the major equipment in a New Jersey industrial plant is taxed as real property if the owner's case lands before one judge, but if a different judge hears the case, the equipment is not taxed as real property. How did New Jersey put industrial owners in this kind of dilemma and what can be done about it?

In 1990, the Tax Court heard the case of Texas Eastern v. Director, Div. Of Taxation, a case dealing with Texas Easter's gas pipeline distribution facility in New Jersey. The Court determined that the vast majority of the contested property was real property subject to local taxation. Based on the finding, Tax Eastern appealed.

In 1991, relying in part on Texas Eastern, the New Jersey Tax Court decided in the General Motors case that most of the major equipment in the case was real property subject to local taxation. Both this and the Texas Eastern decisions seemed at odds with legislative history-as far back as 1966, New Jersey sought to exclude business personal property (machinery, apparatus and equipment) from taxation as real property. No real property tax assessment can be levied on business personal property, thus, the more such property is defined as business personal property, to lower the real property tax assessment. As a result of these decision and others, in 1992, the legislature passed the Business Retention Act (BRA) to clarify what industrial equipment should be taxed as business personal property and which as real property. Despite BRA and the Appeals Court remanding the original General Motors case for retrial, the second General Motors trial, decided in 2002, resulted in a new judge ruling the same way the first judge had ruled in the original case.

As the original General Motors case, the Appeals Court remanded the Texas Eastern case to different judge for retrial. BRA, passed after both cases had been appealed, attempted to remind taxing authorities that business machinery, apparatus and equipment should not be taxed as real property but rather as personal business property. The Appeals Court appeared to understand the legislature's intent in BRA and remanded both cases to the original court for reconsideration. The new judge in Texas Eastern reconsidered the original court ruling in 2006 and concluded that none of the property was subject to taxation as real property. Much of the machinery and equipment in he Texas Eastern facility was comparable in size and quality to that in the General Motors plant. Despite the similarity, the Texas Eastern Court rendered a decision diametrically opposed to both decisions of the court in the General Motors case.

In Texas Eastern, the court stated that BRA sought more broadly to exclude from local property taxation personal property used or held for use in business. The Act came as a response to the prior decisions in General Motors and Texas Eastern and to cases like this where business equipment is taxed as real property rather than as personal property. The conflicting opinions in the General Motors case in 2002and Texas Eastern in 2006 create an anomalous situation for industrial taxpayers. Two directly opposite Tax Court decisions regarding BRA put taxpayers in a quandary. Do they account for equipment and machinery as business personal property or as real property? One judge ruled one way and another a different way. Since categorizing these assets as business personal property will reduce real property taxes, many taxpayers will, without too much thought, attempt to argue non-taxability as route to lower taxes. While simple on its face, this alterative could put some taxpayers at risk.

In point of fact, industrial property owners will save themselves time and trouble if they retain a knowledgeable property tax expert to help sort out the most defensible method for categorizing the various machinery, apparatus and equipment in their plants. At the same time, the New Jersey legislature would serve constituents well by clarifying once and for all the language defining what is and is not industrial machinery and equipment for property taxes purposes. The state needs stability in this critical area. Conflicting options on the tax law disadvantage any taxpayer that needs to make cogent decisions about investment and taxes in this state.

Philip J. Giannuario is a partner in the Montclair, NJ law firm Garippa Lotz and Giannuario, the New Jersey and Eastern 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..

Highway 40 reconstruction will reduce property values

"Local authorities appear to believe the interference with the traffic pattern will cause a short-term loss and a very positive long-term potential gain. However, the Federal Highway Administration concluded in a recent study that such projects result in "noise, loss of access, loss of parking, diversion of traffic, odors and emissions, loss of business profits and good will, interim construction loss, loss of use and loss of visibility."

By Jerome Wallach, Esq., as published by Midwest Real Estate News, May 2007

Owners of real property in the east-west corridor leading into the core city of St. Louis and the core city itself face a double "whammy" in 2007. First, on January 1, the two-year assessment tax cycle begins in Missouri. Then, in the spring of this year massive $535 millions rebuilding starts on the primary artery into the core city from the west. This reconstruction project on Highway 40 (also known as Interstate 64) is scheduled to close 10-and-a-half miles of this major artery into the city for at least three years. Past experience with highway projects has shown that forecasted completion dates are most often way too optimistic.

With assessors already in the process of reevaluating property for tax purposes and a major reconstruction project beginning in spring, assessors face the task projecting the impact this reconstruction project will have on property values along the Highway 40 corridor and in the core city. Office buildings, service businesses, light manufacturing and residences will suffer from dramatically decreased access, traffic jams, indirect routes extending commuting time and loss of traffic for retail and service outlets.

And all this happens just as the core area of St. Louis is beginning to feel the impact of the dramatic revitalization that has been ongoing over the last several years. One need only look at the new baseball stadium, the approved Ballpark Village with its shops and residences, the dynamic loft developments of shell buildings in the near downtown area and the expansion of Barnes Hospital in the West portion of the city. The revitalization has resulted in rising property values, representing good news for owners and investors. The good news turns bad for property values as the area contemplates the long reconstruction process.

Local authorities appear to believe the interference with the traffic pattern will cause a short-term loss and a very positive long-term potential gain. However, the Federal Highway Administration concluded in a recent study that such projects result in "noise, loss of access, loss of parking, diversion of traffic, odors and emissions, loss of business profits and good will, interim construction loss, loss of use and loss of visibility."

The negative aspects brought about by the reconstruction may well force owners of residential and commercial properties to offer rent abatements in order to hold onto tenants along the Highway 40 corridor and in the core city. Many commercial and residential tenants may just move out because of traffic snarls, noise and the mess of construction. Then, too, commercial tenants may just not be able to tolerate the diminished traffic and attendant loss of revenue and profit. All of this disruption means lower market values, which must result in lower property taxes if taxpayers are to be fairly taxed during the reconstruction period.

Owners should be alert and prepared to react to the new 2007 assessments with an appropriate tax appeal challenging the assessed valuation of a property that may be affected by the reconstruction project. The Missouri Highways and Transportation Commission itself has recognized the decline in business and in occupancy that will result from the project. Comments by public officials demonstrate that various other government agencies know the project will prove bad for business on a short-term basis. Just how bad is an open question. Therefore, taxpayers with property in the Highway 40 area and in the core city must carefully review their assessments to ensure that the assessors have taken into account in their 2007-2008 valuations the negative impact of the reconstruction.

The due date for filling appeals from the assessments is the third Monday in June for St. Louis County and the second Monday in May for St. Louis. Two separate jurisdictions assess properties in the 40 corridor and the core city —- St. Louis County and the city of St. Louis. Taxpayers may find both take the position that the long term effect of a new highway will be beneficial to property values, thus, no interim dip in assessed values are appropriate. The contrary argument, and the one that makes the most sense, holds that in the next two years the market value of most properties in the reconstruction area and the core city will decline. To state it another way, the income stream of commercial properties will not grow until the highway projects is completed.

Since reassessment comes in the odd numbered year of the two-year cycle, the assessors have another shot at determining value as of January 1, 2009. The market at that time will tell the world whether property values have held constant, grown or declined during the reconstruction, which will still be in progress at the end of 2008. Until that time, taxpayers should be on guard and proactive in seeking proper reduction of their tax burden.

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

Challenging the sales approach can save you big bucks

By Elliott B. Pollack, Esq., as published by Apartment Finance Today, April 2007

In many parts of the country, multifamily properties are very hot and command extremely high sale prices. These transactions often make very little sense in terms of the underlying cash flow they can generate. Indeed, there seems to be a speculative fever abroad in the land, probably resulting from investors chasing this property category due, at least in part, to asset diversification needs and other financial asset motivations.

For example, an apartment property owner is not even thinking about selling her property. Then, she receives a telephone call from the assessor advising that her property assessment will increase because of recent sales of comparable properties at relatively stratospheric levels. Can this problem be managed? A recently published case illustrates that the answer to this question is yes. In that case, the approach employed by New York property valuation attorney William D. Siegel was to attack the assessor's sales comparison approach head on. In a tax appeal filed for a 276-unit garden apartment complex in Middletown, N.Y., the property owner challenged the $15 million value estimate offered by the assessor's appraiser, using the appraisal and trial testimony of this expert. The owner's appraiser placed the property's market value at $10 million.

The assessor's expert might have thought he was sitting in the catbird seat with a number of sales at high unit values. However, the property owner's appraiser, William R. Beckmann, located a number of different sales, which resulted in a far lower range of values per apartment unit. Beckmann went even further, though, rejecting the sales approach and resting his value estimate on the income capitalization methodology.

He maintained to the court that a detailed understanding of the income and expenses of the comparable sales used in the assessor's appraisal was absolutely necessary. Otherwise, there was no factual basis for concluding that the sales in the comparable~presented were, in fact, comparable to the owner's property. This litigation suggests that when assessors use the sales approach, owners may be able to challenge increased values by arguing lack of reliability in this approach.

When owners face high valuations based on the sales approach, they should rigorously explore the following questions:

Are the comparable sales relied upon by the assessor relatively recently constructed or older properties? If the sales relied upon by the assessor were relatively newly constructed, they will likely generate higher prices per unit than would a 30-plus-year-old property due to lower repair and replacement expectations.

Just because your local assessor relied on comparable sales to give your property a higher valuation and a bigger tax bill doesn't mean you should pony up without a fight. Take a look at the comps and see how comparable they really are: You may be able to successfully argue that properties built recently, featuring larger unit sizes, or selling with Effective local tax assumable financing were able to fetch much higher sales prices than your property rates are a critical could reasonably command.

What was the average square footage of the various units in these comparables? Average unit square footage is critical because, to a certain degree, larger apartments command higher rents and are easier to lease.

Were the buyers in these sales real estate investment trusts (REITS) or private investors? If many of the buyers in the assessor's sales were REITs, this is important to note because it is well known that investment trusts generally pay significantly more for property than do private investors. They can do this because of their lower cost of funds and financial market pressure to invest.

Was below-market-rate financing in place and assumable? Assumable below-market-rate financing would undoubtedly tend to increase the sales price because, in effect, the buyer's cost of funds is being subsidized by the assumable financing. (The same issue would arise in the event of significant seller financing in the sale.)

Are the capitalization rates apparently revealed by the assessor's sales fairly comparable to the rate which could be commanded by the property? The capitalization rates paid for more attractive, larger, more newly constructed properties tend to eclipse the rates associated with older property sales for many of the reasons discussed in this article. This is true even though cash-on- cash returns will not differ significantly.

Was there significant deferred maintenance? The existence of marked deferred maintenance will almost always affect the purchase price due to the investor's expectations that significant funds will have to be devoted to the property after purchase to bring it up to snuff.

What were the effective real estate tax rates in the communities in which the sale properties were located? Effective local tax rates are a critical element in determining sales prices because properties in low-tax towns tend to sell at higher unit values and at lower cap rates than do properties in more heavily taxed communities. Put differently, investors are frequently willing to pay more to be taxed less. While a number of these issues are beyond the knowledge base of the average property owner, expert appraisal, legal, and other market-oriented consultants' efforts may be helpful in distinguishing an owner's property from those sky-high sale properties relied upon by the assessor.

Of course, if an apartment complex stacks up favorably on most counts to the sales used by the assessor, there will be less running room within which to dialogue with the assessor.

Elliott B. Pollack is a partner at Pullman & Comley in Hartford, Conn. He is the Chairman of the firm's Property Valuation Department. Pullman & Comley is the Connecticut member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Retail Owners Can Fight Assessors' High Valuations

"All too often assessors get away with over assessing big-box properties owned or occupied by national chains. Assessors see cost of construction, sale-leaseback rents or the capitalized value of the lease and just use the information without looking at the relevancy of those figures to market value."

By Linda Terrill, Esq., as published by National Real Estate Investor, March 2007

All too often assessors get away with over assessing big-box properties owned or occupied by national chains. Assessors see cost of construction, sale-leaseback rents or the capitalized value of the lease and just use the information without looking at the relevancy of those figures to market value.

To bring fairness to the property taxation of big boxes, taxpayers need to understand a number of key issues. The following tax appeal case serves as an example of how taxpayers should approach their property tax assessment, even if they think it appears fair.

Store Victory: Home improvement retailer Lowe's recently won a property tax appeal case, resulting in a valuation reduction of $2.2 million

In 1997, a developer constructed a large retail warehouse building for a Lowe's. The 133,000 sq. ft. building was built to this user's specifications at a cost in excess of $8 million. A 20-year lease was entered into with a triple-net rental rate of $7.25 per sq. ft. One year prior to the tax appeal, the property was sold for about $9.2 million. The assessor valued the property at $8.5 million, even though it was marketed for $15 million.

At first blush, the facts in this case appear not to warrant a property tax appeal. The assessor valued the property at about what it cost to build, and less than the price at which it sold. This scenario represents the trap that ensnares all too many big-box owners.

However, in this particular case, the taxpayer correctly analyzed the facts, decided an appeal was warranted and successfully litigated a reduction in value to $6.3 million. In litigating the case the assessor and the taxpayer both relied heavily on the market and income approaches to value, but each with a different take.

The market approach

The assessor argued that the capitalized value of the lease was equal to the value of the real estate. Since the value of the lease could be established by the sale, it was crucial for the taxpayer to identify and remove from the sales price any value attributable to the lease in place.

Here the taxpayer had an advantage because the company owned a number of similar properties in different locations. As the market for larger boxes increased, the taxpayer closed the smaller ones and marketed them for sale. There were enough sales to prove two important points. First, the sales were never to another national retailer. Second, these properties always sold for substantially less than their cost to construct.

So, the court had evidence showing the amount the buyer paid for the leased property and what similar buildings sold for without any leases in place. The court ruled that the difference between the selling price of a property with a lease and one without a lease represents the intangible value attributable to the lease in place. The value of the lease isn't the value of the real estate, and only real estate market value is subject to property tax.

The income approach

The battle here was a familiar one. Does the contract rent, the actual rent paid by the lessee, represent market rent? The assessor relied on other build-to-suit and sale-leaseback rental rates. Conversely, the taxpayer argued that these types of rental rates are irrelevant as they are based on financing costs and are not market-driven rates.

The cost to finance construction of a property forms the basis for establishing the lease rental rate, whereas market rates are a function of buyers and sellers agreeing on a rental rate. The taxpayer relied exclusively on marketplace leases as evidence of what one could expect to receive in rent. Again, the taxpayer's argument prevailed.

Scholarly advice

As taxpayers receive their new assessment notices, they need to remember these general principles:

• For property tax purposes, leased fee and fee simple are different. Don't assume a leased fee sale will also represent the value of the fee simple. If they are the same amount, it's coincidental.
• Some rents are functions of financing, others are a function of market. Financing rents are prevalent in build-to-suit and sale-leaseback arrangements. If financing rents are equal to market rents, it's coincidental.
• Remember, the value of the property to the taxpayer is irrelevant. The only relevant issue is what buyers are willing to pay for the property. If the amount a buyer would pay to buy a property equals the taxpayer's investment in it, it's coincidental.

An experienced property tax professional can help with the factual and legal arguments raised here. As a taxpayer, don't let coincidence or other irrelevant issues become the basis for a property's real estate value.

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

Many now believe that filing a tax appeal in the Tax Court remains their only salvation from the ever increasing property tax burden.

"The courts have given significant protection to the assessments. To offer meaningful defense against these protections, a team effort is generally required right from the inception of the appeal. This team should include the taxpayer, property tax counsel and expert witnesses."

By John E. Garippa, Esq., as published by Real Estate New Jersey, March 2007

Legislation in New Jersey inflicts an ever-increasing property tax burden on commercial and industrial property owners. Many now believe that filing a tax appeal in the Tax Court remains their only salvation. With the deadline for filing appeals approaching quickly, owners need to understand the issues and the process involved.

All tax appeals in New Jersey must be filed by April 1st of each new year. At the time of the filing, all taxes due must be paid. having filed an appeal, a chronology of events takes place that ultimately leads to the court determining the value of the property.

Within four months of filing the appeal, the taxpayer will answer interrogatories relating to substantive issues regarding the property. These interrogatories normally focus on specific aspects of the property including the income and expenses.

Since most tax appeals relate to value, the taxpayer at some point needs to retain a real estate appraiser to value the property. This step should be taken in conjunction with a tax attorney. The taxpayer should choose an appraiser who understands the court's expectations as well as the rules of evidence.

These forensic appraisals are considerably different than the garden variety appraisals used in other settings such as financing, insuring and determining value for property sale purposes. In a forensic appraisal, the property must be valued on a standard of value based on competent market evidence. This evidence should include recent comparable sales data and recent competent lease transactions.

Throughout the tax appeal, the property owner must focus on the fact that the burden of proof always remains on the taxpayer - the assessment levied by the assessor is considered presumptively correct. Only cogent and probative evidence can overcome this presumption of correctness.

Taxing jurisdictions do not rely on testimony of the assessor in tax appeals. Rather, they retain independent appraisers to complete a forensic appraisal, which they use in defense against the appeal. Often, the spread between the assessor and the tax jurisdiction's appraisal can be enormous.

For many types of ordinary income-producing property, the appeal trial can be completed in one day. As the complexity of the property increases, the time required to complete the trial also increases. It's unusual for trials involving some of the more complex commercial and industrial property to take several days or more. These more complex properties include corporate headquarters, super-regional malls and major industrial complexes.

Much of the trial's time is devoted to cross-examination of expert witnesses, where every component of the appraisal is subject to intense scrutiny. Often, prior appraisals and testimony by the appraiser comes before the court to demonstrate inconsistencies in the theories espoused by the appraiser. Anyone involved in this process on a regular basis understands that real estate appraising is an art, not a science.

At the end, the court renders a final judgment. If the taxpayer is successful, the jurisdiction will have 45 days to refund the overpayment. Also, the taxpayer receives interest at the rate of 5% a day from the date the original tax payment was made. More importantly, once the court renders final judgment, under New Jersey law, that judgment will not only cover the years appealed, but also two succeeding years. This is called the Freeze Act, and it significantly helps taxpayers in bringing stability to a property tax assessment.

Only rarely can a jurisdiction void application of the Freeze Act. One exception is when a jurisdiction completes a municipal-wide revaluation on all property. The other is if a significant change occurs in the value of the property at a rate higher than other properties in that jurisdiction.

Prevailing in a New Jersey tax appeal has become a Herculean task. The courts have given significant protection to the assessments. To offer meaningful defense against these protections, a team effort is generally required right from the inception of the appeal. This team should include the taxpayer, property tax counsel and expert witnesses. In the end, the team effort should produce a significant return, well justifying the expenditure of time and money.

The views expressed here are those of the author and not of Real Estate Media or its publications.

John E. Garippa is a senior partner of the law firm of Garippa, Lotz & Giannuario of Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

"April 1 is the last day to file for these cancellations, exemptions and special assessments, and assessing authorities do not have discretion to accept a late filing."

By David Canary, Esq., as published by The Daily Journal of Commerce, March 13th 2007

April 15th is "tax day" for federal and state income taxpayers, but April 1 is equally important to property taxpayers that wish to avoid paying property taxes for the upcoming year. There are a host of exemptions for selected types of properties for which applications or statements must be filed with the local county assessor or the Oregon Department of Revenue on or before April 1. Those exemptions include:

Cancellation of assessment for commercial facilities under construction

New buildings or additions to existing buildings are exempt from property tax assessment for up to two years while under construction. The structure must have been under construction on Jan. 1, 2007, not used or occupied before that time and constructed in the furtherance of the production of income (e.g. an industrial or commercial building or condo). In the case of a nonmanufacturing facility, the structure must first be used or occupied not less than one year from the time construction commenced.

For a manufacturing facility, any machinery and equipment located at the construction site that is or will be installed in or affixed to the structure under construction may also be exempt.

Cancellation of assessment of pollution control facilities

A pollution control facility constructed in accordance with specific Oregon statutes and that has been certified by the state Environmental Quality Commission may be exempt to the extent of the highest percentage figure certified by the commission as the portion of the actual cost properly allocable to the prevention, control or reduction of pollution.

Exemption of nonprofit student housing

Housing that is rented exclusively to students of any educational institution which offers at least a two-year program acceptable for full credit toward a bachelor's degree may be exempt from certain ad valorem assessment. The exemption applies to student housing of an educational institution that is either public or private.

Exemption of low-income housing

Property owned or being purchased by a nonprofit corporation that is occupied by low income residents or held for future development as low-income housing, or a portion thereof, may qualify for tax exemption.

Exemption of ethanol production facilities

The real and personal property of an ethanol production facility may qualify for exemption of 50 percent of the assessed value of its property for up to five assessment years.

Exemption of rural healthcare facilities

The real and personal property of a health care facility with an average travel time of more than 30 minutes from a population center of 30,000 or more may be exempt from property taxation if the property constitutes new construction, new additions, new modifications or new installations of property as of Jan. 1.

Additionally, the exemption must be authorized by the county governing body in which the facility is located. The exemption can be for up to three years.

Exemption of long-term care facilities

The real and personal property of a nursing facility, assisted living facility, residential care facility or adult foster home may qualify for exemption if the facility has been certified for the tax year as an essential community long-term care facility.

The state Legislature specifically declared that a property tax exemption would enable essential long-term care facilities to increase the quality of care provided to the residents because the full value of the exemption is applied to increasing the direct caregiver wages and physical plant improvements that directly benefit the facility residents and staff.

Special assessment of nonexclusive farm-use zoned farmland

Any land that is not within an exclusive farm use zone but that is being used, and has been used for the preceding two years, exclusively for farm use may qualify for farm use special assessment if the gross income derived from the farming operation meets a certain amount that depends upon the size of the farmland.

Special assessment of designated forestland in Western and Eastern Oregon

Forestland being held or used for the predominant purpose of growing and harvesting trees of a marketable species and that has been designated as forestland or land in either Western or Eastern Oregon, the highest and best use of which is the growing and harvesting of trees may qualify for special assessment if certain other requirements are met and a timely application filed.

Taxpayers that believe they qualify for cancellations of assessments, exemptions or special assessments should contact the office of the county assessor in which the property is located or contact the Oregon Department of Revenue to request application forms and instructions.

The fact that a cancellation, exemption or special assessment is granted for one year does not mean the property automatically qualifies for exemption in subsequent tax years. A number of these cancellations, exemptions and special assessments require that applications be filed with the county assessor or the state Department of Revenue each year. That is, an exemption or special assessment may be lost if an application is not filed in each successive year.

April 1 is the last day to file for these cancellations, exemptions and special assessments, and assessing authorities do not have discretion to accept a late filing.

David Canary has specialized in state and local tax litigation for the past 18 years. He has worked for the past 13 years as an owner in the Portland office of Garvey Schubert Barer and prior to that was an assistant attorney general representing the Oregon Department of Revenue. He has the distinction of trying several of the largest tax cases in Oregon's history. He is the Oregon member of American Property Tax Counsel and an active member of the Association of Oregon Industries' Fiscal Policy Council. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"For over 75 years, hotel assessments took into consideration the fact that a hotel comprised both a piece of real estate and an operating business. Numerous court cases pointed out that using business income and expenses for assessing hotel buildings was incorrect. The courts reminded assessors that business income could not be used to assess real estate."

By Joel R. Marcus, Esq., as published by Real Estate New York, February 2007

The Department of Finance does an abrupt about face by dramatically ratcheting up the new 2007/08 property tax assessments after issuing generally lower ones last year. This represents one of the largest leaps ever in hotel assessments.

The Finance Department raised the tentative hotel assessments citywide by an average of 35%. However, the increases were even more pronounced for some of the City's premier hotels. For example, the Marriott marquis saw an increase from $162.5 million to $227.2 million (an 80% change), the Grand Hyatt went from $75.1 million to $135.4 million, and there were over 40% jumps at The Pierre, Sheraton Manhattan, Le Parker Meridian, Waldorf, and Roosevelt Hotels. The outer boroughs were not spared either, as Brooklyn hotels' assessments increased by 74%. Queens hotels' assessments jumped by 34%, while Staten Island saw a 19% increase and the Bronx only experienced a 6% jump.

Some city newspapers speculated that industry leaders and consultants met with the City last year and convinced them to change the method of arriving at the assessed value for hotels. This new method may have contributed to the modest assessments for the 2006/07 tax year because the Finance Department was using only out-of-date 2004 filings, which covered a period when hotels were not doing as well as they are now. This year, by using current 2006 figures, the new methodology dramatically increased assessments.

For over 75 years, hotel assessments took into consideration the fact that a hotel comprised both a piece of real estate and an operating business. Numerous court cases pointed out that using business income and expenses for assessing hotel buildings was incorrect. The courts reminded assessors that business income could not be used to assess real estate. Instead, some method of allocation or extraction had to be employed to remove the income related to furniture, fixtures and equipment and franchise and business value.

In New York City, assessors accepted this premise but chose different approaches over the years to accomplish the job. In some years, they deducted a factor for business value when using sales to value hotels. In recent years, since sales no longer form the basis for assessing most commercial properties, income capitalization has become the primary valuation method. Hotels were sometimes assessed by applying higher capitalization rates, sometimes by deducting business income and sometimes by applying an expense ratio of 75% to room revenues before capitalization. All these approaches have now been abandoned.

Under the new method, assessments are based on a unique gross income multiplier formula where room revenues are converted into market value. The record indicates that this formula is not used anywhere else in the country.

The first step in the new formula calls for estimating room revenue by taking the latest income statement and adjusting it upward to account for normal occupancy, alterations and so on. A percentage of food, beverage, conference and exhibit revenue is then added to this room revenue number. The total gross income thus derived is divided by 365 and then multiplied by 960 for luxury hotels. According to the Finance Department, this calculation provides a fair market value for the hotel's real estate. Should the hotel also contain apartments, retail, office, garage, signage/billboard, telephone or other income, the net income from these categories is then capitalized and added to the prior calculation. To determine the assessment value, the assessor multiplies by 45% the final number derived from these steps.

To illustrate how the new formula works, consider a hotel with a room income range of $295 to $371. The new formula puts the hotel's income at $475, with an estimated market value of 4456,000 per room, an assessment of $205,200 per room, and property taxes of $22,572 per room. These calculations give no effect whatsoever to the age and condition of the property, its franchise, its advertising budgets or whether it is a union or nonunion operation.

The unfairness and inaccuracies of this new method of valuing hotels are overwhelming, so much so that the assessors have already spoken our decrying this methodology and claiming it was a contrived deal made by a consultant and the industry leaders. The Chief reported in a May 2006 article that David Moog, the assessor's union leader, claimed the method violated good assessing practices and was an improper way to determine fair market value.

The views expressed in this article are those of the author and not those of Real Estate Media or its publications.

Joel R. Marcus is a partner in the New York City law firm of Marcus & Pollack LLP, the New York City member of American Property Tax Counsel, 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..

"Penalties for failure to file a personal property return on time can range from 5 percent to 50 percent of the taxes attributable to the personal property. This penalty can be waived only upon a proper showing of good and sufficient cause - which does not include inadvertence, mistake, reliance upon advice from a tax professional or lack of knowledge of the filing requirement - or if the year for which the return was filed was both the first year that a return was required to be filed and the first year for which the taxpayer filed a return."

By David Canary, Esq., as published by The Daily Journal of Commerce, January 9th, 2007

Jan. 2 is the date when all property subject to taxation is identified and required to be listed in real and personal property tax returns. All taxable real and personal property is valued for assessment purposes as of Jan. 1. And ownership and responsibility for payment of taxes are determined as of Jan. 1.

Now that the bowl games are over and the Christmas lights have been taken down, property owners are well advised to take stock of the status and use of their real and personal property as of Jan. 1 in preparation for filing their real and personal property tax returns by the March 1 deadline.

Non-exempt personal property subject to assessment, taxation

Every year, the Oregon Tax Court hands down numerous opinions enforcing penalties on up to 50 percent of the taxes upon businesses and individuals that failed to file personal property tax returns. In some cases, the taxes and penalties assessed go back five years, and the tax court has no jurisdiction to waive penalties because of a taxpayer's lack of knowledge of the filing requirement.

So let's be clear. All personal property not exempt from property taxation shall be valued and assessed at its real market value as of jan. 1. Personal property held for personal use is exempt. Licensed motor vehicles are exempt. Inventory held for sale in the ordinary course of business is exempt. And certain farm machinery and equipment is exempt. Assessment of personal property worth less than $12,500 may be canceled upon filing a verified statement with the county assessor.

Every person and every managing agent or officer of any firm, corporation or association owning, or having in its possession, non-exempt personal property on Jan. 1 must file a personal property tax return with the county assessor by March 1 of each year, but the assessor, upon written request filed before the deadline, shall allow an extension to April 15.

As between a mortgagor and mortgagee, or a lessor and lessee, the actual owner and the person in possession may agree between themselves as to who files the return and pays the tax. However, both parties will be jointly and severally liable for the failure of either party to timely file a personal property return, including penalties.

The personal property return is required to contain: a full listing of the personal property owned or in the taxpayer's possession as of Jan. 1; a statement of its real market value; a separate listing of those items claimed to be exempt as imports or exports; a listing of the additions and retirements made since the prior Jan. 1, indicating the book cost and the date of acquisition or retirement; and the name, assumed business name and address of each general partner (or, if it is a corporation, the name and address of the registered agent). The return shall be annexed an affidavit or affirmation of the person making the return that the statements contained in the return are true. Return forms may be obtained from the office of the county assessor.

Penalties for failure to file a personal property return on time can range from 5 percent to 50 percent of the taxes attributable to the personal property. This penalty can be waived only upon a proper showing of good and sufficient cause - which does not include inadvertence, mistake, reliance upon advice from a tax professional or lack of knowledge of the filing requirement - or if the year for which the return was filed was both the first year that a return was required to be filed and the first year for which the taxpayer filed a return. The imposition of the penalty for late or non-filing of a personal property tax return may be appealed to the county board of property tax appeals.

IPR presents tricky problems

Owners of principal and secondary industrial property must file an industrial property return (IPR). An IPR is a combined return of both real and personal property. The IPR and instructions specifying the information to be included in the return are available on the Oregon Department of Revenue's Web site (search for "industrial property return form").

Essentially, the IPR requires the same sort of information as the personal property return: listing of assets, statement of value, book cost and date of acquisition or retirements. However, unlike a personal property return, an IPR requires a great deal more detail. For example, in addition to reporting the cost of acquiring a piece of machinery, the industrial taxpayer must report the cost of transportation, engineering, installation and special foundation, piping and wiring. Then there is the tricky problem of correctly reporting the cost and value of rebuilds, remodels, upgrades and capital maintenance to industrial plants. And, of course, as with personal property, failure to file the IPR by the March 1 deadline subjects an industrial taxpayer to late a filing fee and penalty.

Owners, lessors and lessees of personal or industrial property are well advised to begin preparing now for the march 1 filing deadline that is fast approaching.

David Canary has specialized in state and local tax litigation for the past 18 years. He has worked for the past 13 years as an owner in the Portland office of Garvey Schubert Barer and prior to that was an assistant attorney general representing the Oregon Department of Revenue. He has the distinction of trying several of the largest tax cases in Oregon's history. He is the Oregon member of American Property Tax Counsel and an active member of the Association of Oregon Industries' Fiscal Policy Council. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"The decrease in a business' property taxes can be substantial. For example, the property taxes saved or paid in each of the above three examples easily exceed several million dollars. Do I have your interest now?"

By David Canary, Esq., as published by The Daily Journal of Commerce, December 12, 2006

A host of property-tax issues impacted the Oregon business community last year, and more issues will soon arise

For those of you who have faithfully followed this column, you know I have devoted it primarily to property tax issues. How relevant are those issues to the business community? How relevant are property taxes to the decisions that companies make on a day-in, day-out basis?

Because this is the time of year for retrospection, let's get some answers by looking back on some of the issues discussed in this column and compare them to what happened in our business community in 2006.

The unintended consequences of using Measure 37

In a March column, I discussed the potential unintended consequences of filing a Measure 37 claim. For properties that receive special assessments, such as farm- or forestlands, county assessors keep track of the amount of property taxes that are deferred for the years that those properties are assessed at below-market values. When such a land is taken out of special assessment and used for a higher and better use - say, a residential subdivision - those deferred taxes become due.

Last month, the Seattle-based Plum Creek Timber Co. filed the largest Measure 37 claims on record. The company filed Measure 37 claims seeking permission to develop 32,000 acres of forestland in two coastal Oregon counties into home sites - or to be paid for the difference in value of the land as forestland. Let's hope the company took into account the hundreds of thousands of dollars in deferred property taxes it may be subject to as a result of filing its Measure 37 claims.

Contamination adversely affects values

In an April column, I discussed the fact that, under Oregon's system of assessment at the lower of a property's real-market or maximum-assessed value, environmentally contaminated property is assessed at its market value less the present value of the future cost to cure, or clean up, the contamination. Those costs can be substantial.

Late in November a substantial decrease in property taxes on land located along Portland's South Waterfront was questioned. Upon investigation, the decrease was found to be justified because it took into account the substantial costs to clean up the contamination on the site.

Two-Year Exemption for Construction of Commercial Property

In my June column, I discussed a ruling in which the Oregon Tax Court held that a property-tax exemption for commercial facilities under construction applied to condominiums that were built for resale.

This fall, in a controversial - yet correct - decision, Multnomah County exempted from assessment some South Waterfront a Pearl District residential condominiums that were under construction as of January 1 of the assessment year but were to be sold later that year. At the same time, other homeowners paid the full amount of their taxes.

Should you care about property taxes? For a company that has made substantial investments in plant, property and equipment over the years, property taxes can be a substantial expense of doing business.

Our Legislature has provided for a number of exemptions and special assessments to either encourage development and capital investment or to preserve certain types of property. Over-valuation of property by the assessor can occur for a myriad number of reasons. the savvy property owner not only knows and takes advantage of the allowable exemptions but is ever vigilant about overassessment.

The decrease in a business' property taxes can be substantial. For example, the property taxes saved or paid in each of the above three examples easily exceed several million dollars. Do I have your interest now?

Looking ahead to 2007

First, please note that to pursue an appeal in 2007 you must file an appeal of your 2006 taxes with your county's board of property tax appeals by Jan. 2, 2007. Otherwise, you will have to wait another year to contest your assessment.

Second, in 2007 you can expect the Legislature to consider proposals to completely overhaul Oregon's public finance system. Proposals will range from reductions to the capital gains, estate and property taxes to the creation of a substantial rainy-day fund and a restructuring and reduction of state income taxes. These measures will precede a proposal to embed a sales tax into Oregon's constitution that cannot be increased except by a vote of Oregon citizens. Of course, because of Oregon's initiative process, you can expect any new taxes the Legislature proposes to be challenged. 2007 will be interesting.

Consequently, this column next year will discuss not only relevant property-tax issues that affect a company's bottom line but also changes proposed to Oregon's state and local tax systems. Until then, have a great holiday season.

David Canary has specialized in state and local tax litigation for the past 18 years. He has worked for the past 13 years as an owner in the Portland office of Garvey Schubert Barer and prior to that was an assistant attorney general representing the Oregon Department of Revenue. He has the distinction of trying several of the largest tax cases in Oregon's history. He is the Oregon member of American Property Tax Counsel and an active member of the Association of Oregon Industries' Fiscal Policy Council. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"Managed properly, property taxes are an area where owners produce significant savings without significant expense."

John E. Garippa, Esq., as published by Real Estate New Jersey, February 2006

As we begin 2006, it's appropriate to think about planning for the coming year relating to property taxes. Too often, planning in this area resembles a fire drill, performed at the very last minute. Many times, property owners assume that property taxes are a fixed expense not requiring annual management. However, if managed properly, property taxes can be an area where owners produce significant savings every year without a significant outlay of expense.

Every commercial property owner needs to put tools in place that will allow annual examination of their property's income and expense. On January 1st of each year, enter on an Excel spreadsheet all income and expense information for each property owned last year and in previous years. This enables owners to easily compare this year's income and expenses against those of prior years.

Also, market cap rates and vacancy rates should be utilized to see what changes have taken place in the valuation of a property. For example, if studies indicate greater vacancy rates in the comparable area than in the owner's property, the owner should argue for the utilization of the market vacancy in developing the property's assessment. This, of course, results in a lower property value. On the other hand, if the property demonstrates greater vacancy than the market, this calls for the owner to argue that the property suffers from obsolescence issues.

Retain competent appraisers and consultants to give advice as to what current cap rates and vacancy rates ought to be. At the same time, property owners will want to examine local markets to find comparables indicating what that property would rent for if exposed in the market. This last exercise is critical because taxing authorities base assessments on current market figures, not necessarily the actual income currently derived from a property.

Competently performing the tasks outlined puts property owners in a good position to evaluate property tax assessments aftera ll valuation notices are received on or about February 1 of each New Year. All property owners receive valuation notices reflecting the latest assessment on their properties. What will not be disclosed on the notice is the overall percentage level of assessment in the taxing jurisdiction.

Few taxing authorities assess properties at 100% of present market value except when a municipality-wide revaluation takes place. That means, in all other years, the percentage level of assessment falls below 100% of market value. While actual assessments may not change from year to year, the overall level of assessment within a jurisdiction always does.

Diligent examination of these changes allows the owner to reach accurate conclusions on the merits of a property tax appeal. Any owner can call their local board of taxation or contact the New Jersey Division of Taxation to find out the applicable percentage level of assessment for their property.

New Jersey sets the absolute deadline for filing an appeal as April 1st. Missing this deadline means the owner must await next year's assessment to file an appeal. If owners utilize the tools discussed here, a competent property tax professional will quickly determine if an appeal is appropriate. An ill-advised appeal often results in an increase in assessment if the property is determined to be undervalued. Thus, competency and significant due diligence become critical.

Using the tools describ ed above also allows the property owner to quickly answer Chapter 91 requests filed by the local tax assessor. Under New Jersey law, a tax assessor can annually demand income and expense information for property within their jurisdiction. Failure to respond to these notices within 45 days causes disallowance of any tax appeal for that year. Many legitimate tax appeals are dismissed just for this failure to respond in a timely manner.

These tools also aid in the successful prosecution of an appeal as it goes forward. By demonstrating changes in the property from year to year, legitimate areas of obsolescence and market weakness can be shown to the assessor, producing lower valuations.

Whether an owner has a large, multi-state portfolio or only a single property, employing these tools holds down excessive property taxation. The larger the property portfolio, the greater the opportunity for mismanagement. Ongoing management and record-keeping insures a timely ability to manage property tax expense. The first step is proper planning as the New Year begins.

The views expressed here are those of the author and not of Real Estate Media or its publications.

John E. Garippa is the senior partner in the law firm of Garippa Lotz & Giannuario with offices in Montclair, NJ and Philadelphia, PA, and was also the president 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.