Reported transaction prices tend to show up again as overstated taxable property values, advises attorney Jerome Wallach.

The old maxim that no good deed goes unpunished might well be applied to official disclosure of the acquisition price on real estate.

Many jurisdictions require the disclosure of a property's sale price after the sale closes. All too often, buyers respond by reporting a number which includes non-real-estate components. Although they are acting in good faith, these investors seldom realize that the local tax assessor may use the acquisition price they report in determining the property's market value for ad valorem tax purposes. That can result in an overstated assessment when the price reflects the value of the going concern constructed on the property rather than the real estate alone.

Disclosure exposure

There are several reasons a buyer will broadcast the exchange price for acquired real estate to the public domain. The new owner may want the number known because it will enhance the public image of the buyer's business. It may be a legal requirement to report the purchase price. Many jurisdictions require the filing of a certificate of value, for example. Whatever the reasons, the buyer and soon-to-be owner closing on a real estate acquisition should be careful how the deal is characterized when reported.

Tax assessors, appraisers and other real estate professionals are skilled at tracking down sale prices. There are also services that regularly publish sale prices gleaned from a variety of sources. Taxpayers should assume that the assessing authorities will learn the price of their property acquisition.

While purchasers of real property typically factor in the effect of property taxes on the net cash flow, they may not consider the impact the exchange price can have on property taxes in the coming years. Frequently, the higher the published transaction value, the more that news will bolster the buyer's business reputation. Not so for property tax consequences, however, because assessments and ongoing property tax liability will often increase in proportion to the published transaction amount.

An assessor seeing a certificate of value or reading a published sale price can and frequently will rely on that number as the property's market value, against which ad valorem taxes are levied. Unfortunately, that number may not fairly represent the taxable value of the real estate if it includes value from non-real-estate components, which are not subject to ad valorem taxes.

Differentiate real estate value

Hotels provide an example of how the reported sale price differs from the real estate value. Appraisers cite comparable hotel sales in terms of value per room, which may include the television, beds and other items in each room as well as the hotel's brand and other components of business value that are exempt from property taxation. Some analysts adjust for the non-realty components of per-room sales data, but most do not.

However, the problem isn't unique to the hospitality sector and may apply equally to other property types.

In the larger view, the same miscalculation could apply to other properties where non-realty components were part of the transaction. Non-real-estate sources of transaction value can include leases in place, brand recognition, in-place management and trained workforce, personal property such as vehicles and furniture, and ongoing business operations within the property. The assessor may have included all these elements, inappropriately, in the value of the real estate. This is a situation the taxpayer could have avoided by correctly reporting that the price exchanged for the property included non-real-estate items.

Disclose with care

Exercising some foresight in describing the elements of the sale at the time of closing could mitigate the unwanted effect of triggering an inflated tax assessment on the subject property. In reporting, the buyer should pay attention to how they characterize the acquisition price, with a view toward how the information may influence an assessor's calculation of taxable value.

It is predictable that the assessor will be aware of the purchase price. In fact, the number is required public disclosure and will, in all probability, become the assessor's opinion of market value. At any hearing or proceeding resulting from the taxpayer challenging the assessor's opinion of market value, the assessor will likely put forth the public disclosure document as prima facie evidence of market value.

The new owning entity can protect itself by laying the groundwork for assessment appeals when it discloses the transaction amount. When appropriate, the closing statement should clearly represent that the acquisition is for going-concern value, which encompasses both real estate and the business operating in that real estate. An asterisk after the number, with an accompanying footnote, would suffice as long as there is a clear indication that the number relates to enterprise value.

Assessors frequently rely on the acquisition price of a going concern as equaling the value of the real estate alone. When that occurs, a buyer's footnote on a price disclosure can pay dividends in any proceeding challenging the assessor's opinion of value.

District of Columbia taxpayers can appeal assessed property valuations through three levels of review.

In the District of Columbia, a prudent taxpayer must observe important steps and deadlines to appeal a real property tax assessment. Strict code provisions, government policies and procedures govern the appeal process, so understanding the typical lifecycle of an appeal provides a head start in making sure a property is fairly assessed.
Here is a look at what to expect as a case advances:

Assessment and notification
Assessors reassess all real property in the District each year using a Jan. 1 valuation date that precedes the start of that tax year. For example, Tax Year 2023 runs from Oct. 1, 2022 through Sept. 30, 2023. Thus, corresponding assessed values are as of Jan. 1, 2022.

The District typically will mail assessment values and update the MyTaxDC.gov website on or around March 1 each year, sending its estimate of market value to the owners of more than 205,500 parcels. This will be the taxpayer's first glimpse of the valuation and potential tax liability for the following tax year.

These assessed values are released without supporting documentation, however.

To determine how an assessor derived the value, the taxpayer or a duly authorized agent must contact the Office of Tax and Revenue to request a copy of the assessor's workpapers. These documents will be critical in formulating the basis for any possible appeal.

1.) Office of Tax and Revenue
The first-level tax appeal deadline is April 1. While the property owner may not have all the relevant documents they need to properly analyze their assessment by this time, the taxpayer must meet the filing deadline or waive their right to any further appeal for the tax year.

Fortunately, the first-level petition is a one-page form completed online and requires only basic property information to satisfy the requirement. Continuing with a first-level appeal, however, demands further analysis.

The assessor may use one of the three common approaches to derive a proposed value — the income, cost and/or sales comparison approach — or any other approach that can be supported. For large commercial properties, the most common practice is to use the income approach in conjunction with the District's mass-appraisal model.

Mass appraisal uses market assumptions based on property type, submarket and classification. These assumptions derive from taxpayer-submitted income and expense reports (I&E) for the previous tax year. The assessor derives the property's net operating income using market assumptions and divides the result by a market capitalization rate loaded with the applicable tax rate. Or, in the case of retail properties, the assessor uses a net lease rate and an unloaded capitalization rate to arrive at taxable value.

Consequently, the yearly filing of income and expense reports is an integral part of the assessment process and is mandatory for most owners of income-producing properties. At the beginning of each calendar year, the District issues its notice of income and expense report filing requirements, along with unique access and submission codes for taxpayers to report their sensitive financial information using an online portal.

This portal opens in January, giving taxpayers adequate time to comply with the I&E submission deadline, which is on or about April 15 each year. (Due to a holiday, Tax Year 2023 I&Es are due Monday, April 18, 2022.) Timely compliance with this requirement is imperative, as failure may result in a 10 percent penalty on the subsequent tax year's liability. A local tax advisor can be a great help with this complicated process.

Once complete, and when applicable, the I&E will be a vital component to the analysis and validity of a tax appeal. If the taxpayer believes an appeal is warranted, they can move to a first-level hearing. This administrative appeal to the assessor of record generally occurs in May or June. The assessor reviews information the taxpayer provides and can adjust the value by first-level decision.

2.) Appeals Commission
If the initial appeal does not provide a satisfactory result, property owners may continue to the next administrative level. The taxpayer must initiate an appeal to the Real Property Tax Appeals Commission (RPTAC) within 45 days of the first-level decision or forfeit additional appeal rights.

Filing a petition with RPTAC requires the taxpayer to produce specific information such as property and financial data as well as supporting evidence to prove the current assessment is incorrect.

In other words, the assessment is presumed correct unless and until the taxpayer proves otherwise. RPTAC hearings generally occur between early October and the end of January. Hearings before a panel of two or three commissioners allow both parties to argue their positions and to answer commissioners' questions. The Commission should issue its decisions by Feb. 1 of the relevant tax.

3.) D.C. Superior Court
The District issues real property tax bills in March and September of the relevant tax year. This means, barring extraordinary disruptions that can include global pandemics, administrative appeals should be completed prior to the issuance of these bills.

If an administrative appeal does not achieve a result the taxpayer believes is fair, a further appeal to D.C. Superior Court is available.

To appeal to the Superior Court, the taxpayer must first pay all taxes in full and file a petition by Sept. 30 of the related tax year.
The proceeding will ostensibly become a "refund" lawsuit and may take several years to reach a resolution. However, if successful, taxing entities will be required to provide an additional 6 percent interest with any refund amount.

Importantly, any tax representative must be an active member of the D.C. Bar Association to handle this stage of appeal, which is a court proceeding. Therefore, to maximize the effectiveness of a tax appeal, a local tax attorney is best situated to guide a taxpayer through the life cycle of a property tax appeal.

New York City has published three tax-year assessments since COVID-19 swept into our world. The New York City Tax Commission and New York City Law Department have had ample opportunity to reflect and refine their thinking on those assessments.

The disease broke out in Wuhan, China, in late 2019 and soon spread around the world. Most of New York City noticed its impact in February and March of 2020 as businesses shut down at an accelerating rate, warranting government mandates and additional closures.

So, what did New York City do for the 2020-2021 tax year? It significantly raised tax assessments. The Tax Commission and other review bodies refused to base their valuations upon the devastating catastrophic effects of COVID-19 that had ravished the city.

Why do this? The answer is technical. New York City values real estate on a taxable status date, which is Jan. 5 each year. On Jan. 5, 2020, COVID-19 did not exist in assessors' evaluation process. Nor did it exist in the review of assessments later in the year.

Employment restrictions, mask mandates and lockdown requirements made it impossible to operate theaters, hotels, restaurants and many other businesses. These restrictions took effect long before the first installment of property tax payments for the 2020-2021 year had to be paid. Yet hotels found that their tax bills exceeded their total revenue. Other businesses had similar experiences.

The city's next assessment, for the 2021-2022 tax year, reduced assessments by 10 to 15 percent in some sectors, and by as much as 20 percent for hotels. It was too little, too late, and many businesses were failing. The assessment review process was slow and unsympathetic to the plight of businesses devastated by COVID-19.

The Jan. 5, 2022 assessment roll attempted to recoup a modest amount of the value trimmed from taxpayers' properties the previous year in spite of the destructive effects of the Omicron variant that were at their height on the Jan. 5 valuation date. That is the truth: New York City's newly released fiscal 2022-2023 property tax assessment roll presents a market value of almost $1.4 trillion, an 8 percent increase in taxes and estimated taxable assessments of $277.4 billion. That sounds like too much!

Real estate tax increases have come at a time when most property owners and businesses have not even begun to recover from the pandemic's economic impact. Foreign and business travel have disappeared; street traffic is down and empty storefronts abound.

Commercial rents in Herald Square, for example, are down 27 percent from pre-pandemic levels. However, high bills due to ever-increasing inflation remain to be paid. Mortgages, payrolls and maintenance costs add to the burdens of businesses in New York City. Most properties are still struggling, and many are falling behind.

The hospitality sector has been hit especially hard. Hotel revenues and prices have dropped to unsustainable levels. COVID-related rules and fears have evaporated any sustainable growth in tourism. One example of the pandemic hotel market value decline is the recent sale price of the DoubleTree Metropolitan at 569 Lexington Ave., which was 50 percent less than the price it sold for in 2011.

While a few market values have increased, tax increases should have been delayed. For Class 1 real estate, which includes residential properties of up to three units, total citywide market value rose 6.7 percent to $706.8 billion from the previous year's tax roll.

For Class 2 properties­ — cooperatives, condominiums and rental apartment buildings —the total market value registered $346.9 billion, an increase of $27.8 billion, or 8.7 percent, from the 2022 fiscal year. For Class 3 properties, which include properties with equipment owned by gas, telephone or electric companies, market value is tentatively set by the New York State Office of Real Property Tax Services at $43.6 billion.

Last but definitely not least, total market value for commercial properties (Class 4) increased by 11.7 percent citywide to $300.8 billion. Manhattan had the smallest percent increase in market value at 10.3 percent. Class 4 market value is down $25.2 billion, or 7.7 percent, below its level for the 2021 fiscal year. Hotels registered a market value increase of only 5.3 percent.

These slight increases in market value do not warrant this year's increase in taxes. Businesses are still being affected by the economic impact of the pandemic and need time to recuperate. The city's Department of Finance admits that although values increased for the 2023 fiscal year, they remain below the 2021 fiscal year values for many properties due to the impact of the pandemic.

The Department of Finance also acknowledged in its announcement of the tentative tax roll that commercial property values remain largely below pre-pandemic levels. This underscores why the increase in taxes should have been delayed, at least until properties and businesses attain pre-pandemic values.

Strategies for Relief

In appealing assessments, property owners can improve their chances for obtaining relief by quantifying property value losses. For hotel owners and operators, this means gathering documentation showing closure dates, occupancy rates and any special COVID-19 costs incurred. Most industry forecasts anticipate at least a four-year recovery period for hotels to reach pre-pandemic revenues.

Retail and office property owners should be prepared to show any declines in gross income and rents received or paid on their financial reports filed with the city. Residential landlords should list tenants that vacated and those that are not paying rent.

In conclusion, tax assessments must reflect the entirety of what this pandemic has done to the real estate industry over the past 24 months. New York City authorities must provide tax relief for property owners, and taxpayers and their advisors will need to take an active part in obtaining reduced assessments.

Attorney Molly Phelan on how to reduce property tax liability.

Office property owners may feel they are getting squeezed from all sides in 2022, but the right strategy can help them turn lemons into lemonade by reducing property tax liability.

The Bad News: Inflation was up 7.1 percent year over year in December, its highest rate since 1982.

The Culprits: Supply chain issues (raw material shortages, seaport congestion and logistic limitations), labor shortages (general wages up 5 percent, retail wages up 15 percent), and a housing shortage (national apartment vacancy at 2 percent and average rent growth above 15 percent year over year).

The Response: The Federal Reserve signals a shift to tightening monetary policy, indicating future interest rate increases.

The office market is facing headwinds of its own. Numerous corporations have announced permanent shifts to hybrid in-person/work-from-home operations for office staff, significantly decreasing demand for office space. Rental rates have dropped anywhere from 5 percent to 33 percent during the pandemic, depending on market and class. Although Manhattan rents for Class A space have increased 2 percent in the past year, the net operating income for these properties is down 7 percent due to increased costs and lease concessions.

In the Midwest, office landlords previously expected to provide one month of free rent per year to woo tenants. Now brokers are reporting a free rent ratio of 1.6 months per year, with leases over 10 years pushing two months per year. Tenant improvement costs have increased approximately 44 percent since the beginning of the pandemic, and turnaround time for occupancy has increased from 30 days to 60 days.

Farther down the balance sheet, things aren't much better. Energy prices tracked in the S&P Goldman Sachs Commodity Index ended 2021 59 percent higher than in the beginning of the year. Labor costs, from janitorial staff to property managers, have increased as well.

The Good News: Although the market has handed office landlords a bucket of lemons that are putting downward pressure on average net incomes, landlords can make lemonade from this data to significantly reduce their real property tax liabilities, even if their NOI has not yet taken a hit.

The Strategy: Pivoting from a direct capitalization value analysis to a discounted cash flow approach can capture the effects of investor outlook data on a property's market value. Appraisers and assessors who value office properties typically figure direct capitalization in their income analysis to estimate fee simple market values. This is standard practice in stabilized markets but is a poor fit to current conditions.

With the dramatic changes and uncertainty in the office market, appraisers should be conducting discounted cash flow analyses, which identify the market conditions investors are anticipating as of the valuation date. The DCF analysis examines the market like an investor would, considering trends such as rental rate reductions and increases in operation costs and vacancy. These factors are then built into pricing models.

Savvy investors are aware of a sleeping giant that few assessors or taxpayers are identifying, and that is shadow vacancy. While landlords are still collecting income on current leases, there is no reflection of the market's precarious situation in their income. A DCF, however, identifies upcoming vacancy and reductions in market rents, which may have a significant effect on NOI.

Methods Compared

Let's compare the two approaches, beginning with a look at direct capitalization applied to a 500,000-square-foot office complex. As of Jan. 1, 2022, its tenants are paying $25 per square foot in net rent, or a maximum $12.5 million in annual attainable rent. Stabilized vacancy is 8 percent and operating expenses are 20 percent, or $2.3 million annually. A capitalization rate of 6.5 percent indicates a market value of $141,538,462. In Illinois, outside of Cook County, an assessment level of 33.33 percent and a tax rate of 5 percent equates to a tax liability of $2,358,738.

Paired with the estimated increases in interest rates as indicated by the Federal Reserve, the cap rate could easily increase to 7.5 percent for the specific property. The DCF analysis using these factors indicates the market value is $102,120,000 and the taxes are reduced to $1,701,830. The difference in tax liability is $656,909, or a reduction to the tenants of $1.31 per square foot in tax pass throughs.

Commercial real estate investors across the board rely on the discounted cash flow model, but few taxpayers or their advisors use the strategy in contesting property assessments. Given the additional information and analysis required to perform the analysis, not all appraisers can properly construct a credible discounted cash flow model.

For success, it is critical that both the taxpayer's advisor and appraiser be able to knowledgeably discuss the differences between the two models, and in an assessment appeal, be able to explain why the discounted cash flow model is a more reliable methodology in this market.

To remain competitive, landlords must reduce occupancy costs for tenants and their own holding costs as they take back more vacant space. Even if an assessment has been lowered or remained stable over the past few years, having a credible team provide an alternative view can offer a competitive advantage moving forward.

Ensure tax bills reflect continuing value reductions for office assets caused by COVID's long-term effects.

Since early 2020, the COVID-19 pandemic has upended lives and disrupted the normal course of businesses, including those in the commercial real estate market. As in many other sectors, however, this public health crisis has not affected all commercial properties equally.

Real estate occupied by essential businesses such as grocery stores, sellers of household goods, and warehouse clubs, for example, have weathered the pandemic well. A few have even increased their market share. By contrast, many office buildings, hospitality and non-essential retail properties have suffered severely.

Taxing jurisdictions and assessors have responded to the crisis with varying degrees of success. The Ohio Legislature passed special legislation (spearheaded by Siegel Jennings Managing Partner Kieran Jennings) to allow a onetime, 2020 tax year valuation complaint for a valuation date of Oct. 1, 2020, since the usual tax lien date of Jan. 1 would not have shown the effects of COVID. Other assessors applied limited reduction factors to account for the sudden pandemic-induced decrease in property values.

As values recover, it is important for taxpayers to monitor still-unfolding consequences as they review their property tax assessments.

Initially, hotels and experiential property uses suffered the steepest losses as travel declined or completely halted. While the long-term effects of COVID-19 are still emerging as the pandemic progresses, office properties may be the real estate type changed the most, and perhaps permanently so. Central business districts and suburban campuses or headquarters have been particularly hard hit.

In the last six to 12 months, many people have returned to working in an office at least part of the time, especially since vaccinations have become widely available. However, the emergence of virus variants has stalled the full return to the office that looked imminent earlier this year.

Some firms including Twitter, Zillow, Spotify, and Dropbox decided that they will not require workers to return to the office at all, making remote working a permanent option. Other companies including Google, Nationwide, Microsoft, and Intuit will continue with a hybrid model that requires workers to be in office some of the time.

Many of those employers are using an office hoteling model. Hybrid arrangements require less physical office space per employee, although employers will need to balance having fewer employees onsite against the desire for low-density occupancy.

With more employees working remotely, many office tenants have subleased space they no longer need, adding to available office supply. For example, toward the end of 2020, the Chicago metro region's office market reached a record high in available sublease space, with two-thirds of it in the central business district. For employees who work in CBDs, there is an added concern of commuting via public transit.

In the initial stages of non-essential business closures and governmental stay-at-home orders across the country, many tenants sought rent abatements and concessions. Tenant defaults and increased unemployment exacerbated office vacancy levels.

Some of the workforce in more densely populated markets may have relocated away from central business districts, at least at the beginning of the pandemic, also influencing office space demand. As acceptance of remote work increased, both employers and workers not tied to a physical office location gained employment and talent-search opportunities beyond their local markets. This, too, has influenced the demand for office space.

The Columbus area's overall office vacancy rate was more than 23 percent in the third quarter of 2021, according to Cushman & Wakefield. That vacancy figure includes more than 1 million square feet of sublease space but does not include offices leased but underutilized – or not used at all – because of employees working from home.

As these vacancy rates and over-abundant sublease inventory demonstrate, there is a disconnect between the space that office tenants are currently leasing and their actual real estate needs. As leases expire, it will not be surprising to see tenants renegotiate for smaller footprints and shorter durations as they adjust to their changing requirements.

The shrinking need for office space is not limited to markets with dense populations and public transit commuters. In fact, these trends reverberate in suburban markets. Multiple large suburban office buildings in the Cleveland area, together totaling almost two million square feet, were 75 percent empty in the fall of 2021 because of employees working remotely.

This suggests that property tax assessments may be based on outdated lease information. Accurate valuation of office properties for taxation will require proper consideration of lease renewals and related activity. In reviewing assessments, it will be critical to scrutinize any older sale transactions assessors used for comparison that were based on pre-pandemic leases.

Positive signs are emerging for the commercial real estate market overall. Bloomberg recently reported that domestic U.S. travel for the year-end holidays is expected to be near pre-pandemic levels. Downtown foot traffic, hotel stays, and visitor counts have been climbing back from the lows seen early in the pandemic.

Despite this good news, office properties face persistent challenges. Recently, Marcus & Millichap reported that the office sector was one of the only property types lagging in 2021 commercial real estate transaction volume compared to the same time in 2019. (The other was medical office.) Flexibility on the part of both tenants and owners will be key in riding out the continuing waves of lease maturities and renewals in this changing market.

Since assessors are often using lagging data in their assessments, attention to the continued effects of COVID on office properties will be vital to ensuring that property tax valuations reflect a property's fair market value. Remember, too, that various assessors are treating COVID effects differently, so as always, it is wise for property owners to consult with experts familiar with assessment law and appraisal practice in their local jurisdictions. With careful observation of market changes, strategic planning and review with trusted tax experts, taxpayers can help ensure that their real estate tax burden is fair.

A recent order from the Ohio Board of Tax Appeals highlights a troubling aspect of real property tax valuation in the Buckeye State, where school districts wield extraordinary authority to influence assessments. In this instance, courts allowed a district to demand a taxpayer's confidential business data, which it can now use to support its own case for an assessment increase.

Ohio is one of the few states that permit school districts to participate in the tax valuation process, allowing a district to file its own complaint to increase the value of a parcel of real estate, and permitting a school district to argue against a property owner that seeks to lower the taxable valuation of a parcel of real estate.

Steve Nowak, Siegel Jennings Co.

Generally, school districts looking to increase tax revenue will review recent property sales for opportunities to seek assessment increases. Likely candidates for an increase complaint include real estate that changed hands at a purchase price or transfer value that exceeds the county assessor's valuation. That is not always the case, however.

In the case that gave rise to this article, there was no recent sale of the subject property, which is a multi-story apartment building. The apartment building owner had done nothing to draw any assessor's attention to their property in recent years — it had not been listed for sale, for example, nor had the owner recently refinanced the property.

Blind assertions

In the apartment building case, the school district filed a complaint to increase the county's valuation from $3.85 million to $4.63 million. At the local county board of revision hearing on the school district's complaint, the school district failed to present any competent and probative evidence that the apartment complex was undervalued as currently assessed.

The school district could not present evidence of a recent sale because there had been no sale. The school district also failed to present an independent appraisal witness to testify that the apartment complex was undervalued. Not surprisingly, the county board denied the school district's request to increase the valuation of the subject property.

This is where things got tough for the property owner, and where other Ohio taxpayers may face similar dilemmas. Having received the county board's denial of its complaint, the school district filed an appeal to the Ohio Board of Tax Appeals (BTA) to relitigate its argument that the apartment complex was undervalued.

Once a case is appealed to the BTA, the parties to the case obtain the right to conduct discovery. This is a process intended to help parties in a legal disagreement to "discover" or learn the case and evidence the opposing side may present against them.

Here, as part of its discovery requests, the school district asked that the property owner provide directly to the school district copies of rent rolls, income and expense information and other business records.

Not wanting to turn over such sensitive information, the property owner filed a motion for protective order and requested the BTA deny the school district's prying requests into the day-to-day operations of the apartment building's financial performance. Because discovery is granted as a matter of right on appeal and the threshold for discovery requests is fairly low, the BTA denied the property owner's request for a protective order.

Facing what it believed to be an unconstitutional infringement of its right to privacy, the property owner appealed the BTA's decision denying the request for a protective order to the next appellate level. The taxpayer laid out its arguments of why the school board's baseless complaint seeking to increase the property owner's valuation was unconstitutional.

The appellate court was unmoved, however, and issued a short order upholding the BTA's decision denying the property owner's motion for protective order.

Private data shared

Faced with the appellate court's order, the apartment building property owner was left with no choice but to turn over to the school district years of rent rolls and years of income and expense records for the property. The school district then provided the property owner's own confidential and sensitive business information to the district's appraiser.

Thus, after failing to produce sufficient supporting evidence of its original valuation assertions, the very evidence the school district will now rely upon to increase the property owner's real estate valuation (and tax bill) will have been provided by the property owner itself.

Cases like the one outlined above illustrate the unfettered discretion that school boards have in deciding on what properties to seek increased valuations. This puts Ohio real estate owners' rights at risk, and needs to be responsibly and reasonably curtailed.

Here are a number of approaches to defending against excessive tax assessments.

Countless companies have seen their top and bottom lines decimated by COVID-related shutdowns, travel restrictions and changing consumer preferences since the start of the pandemic. Yet for many taxpayers, property tax values have changed little or even increased.

Many of these taxpayers have been surprised to receive property tax bills that do not reflect the real and lingering economic challenges that the retail, hospitality, office and other industries have, are, and will continue to face. These taxpayers – and even those in industries better suited to weather the storm – should give special attention to ensuring they receive fair and reasonable assessments.

Observe Valuation Dates, Notices and Appeal Deadlines

With a large percentage of employees working remotely, together with an inconsistent postal service, it is more important than ever to have dedicated employees and knowledgeable property tax professionals reviewing property value assessments annually and filing timely protests when warranted. Failure to receive a tax valuation notice rarely excuses a missed protest deadline, so it is vital to know and comply with applicable deadlines.

Many property tax bills issued in 2020 were based on statutory valuation dates that preceded the emergence of COVID-19. For instance, assessors working under a valuation date of Oct. 1, 2019, or January 1, 2020, were quick to tell taxpayers to "wait until next year" before assessments could reflect any impact from COVID-19.

Not surprisingly, some assessors are now arguing that the pandemic was temporary and that its worst effects have passed. In some jurisdictions, assessors simply carried forward the prior year's cost-based value with no adjustments to account for additional depreciation or functional and economic obsolescence. In other cases, assessors have relied on pre-pandemic sales during the relevant tax cycle to justify increases over the preceding tax year.

Many locales had few sales in the early stages of the pandemic, and in these cases, the assessor may downplay or entirely ignore the actual impact of COVID-19 on market values. In contesting assessments in each of these cases, it is helpful to not only demonstrate the immediate difficulties that began in March 2020, but also the pandemic's lingering effects on the taxpayer's current and future operations.

Although the pandemic has affected all industries, certain sectors face unique challenges that will persist well beyond the initial virus surges and vaccine rollouts. These include, but are not limited to, brick and mortar retailers competing with ever-expanding e-commerce, office buildings competing with flexible work options including remote work, and hotels competing for elusive business travel in a cost-cutting environment. Some of these challenges are trends that began long before the pandemic, such as the slow death of enclosed malls as consumers increasingly favor lifestyle centers and online shopping.

COVID-19 Influences by Property Sector

Retail. Since the early 2000's, e-commerce's share of total retail sales has increased each year. The pandemic accelerated that trend, arguably by years, when people who had long resisted shopping online no longer had the same in-store options, and experienced online shoppers became more comfortable buying things like groceries and large-ticket items online.

These evolving shopping habits certainly affect the desirability and value of retail real estate, especially of those buildings constructed before the scope of today's e-commerce world could be contemplated. Landlords must now think outside the box when re-tenanting shopping centers, often filling vacancies with restaurants, service and entertainment concepts. These uses can create parking, zoning and other challenges for centers built for traditional retail.

In the case of big box stores, companies such as Walmart are looking at converting portions of existing stores to warehouse or fulfillment space for e-commerce. All these changes to keep up with the rapidly evolving marketplace shine a light on the functional and economic obsolescence present in many retail properties.

Office. Office landlords are also facing rapid market evolution, including an accelerating trend toward more remote and flexible work options. The pandemic made Zoom meetings ubiquitous and gave employees a taste, and perhaps a future expectation, of more work-from-home opportunities.

In light of the Delta variant's spread, many large companies have delayed their anticipated returns to the office, with Google now postponing its return until at least January 2022. Although some of the pandemic's effects on office occupancy have already occurred, the full impact will continue to play out as leases expire and companies reevaluate the volume and design of office space they require.

Hospitality. The hotel and travel industry suffered some of COVID-19's most immediate and devastating financial casualties. Leisure and business travel ground to a near halt, with hotel stays and flight counts falling to once-unimaginable lows. Corporate travel has yet to make a meaningful recovery and remains at a fraction of pre-pandemic levels. Throughout the country, corporations are cutting back on travel budgets as they weigh its costs and health risks against alternatives such as video conferencing.

Business travel and events are unlikely to return to pre-pandemic levels until 2024, according to a recent American Hotel & Lodging Association survey. Although the leisure travel industry benefitted from pent-up demand during the summer of 2021, the Delta variant has undermined that temporary resurgence. And even with the recent increase in leisure travel, airplane traffic is still well below 2019 levels.

These are just a few of the industries that will continue to see COVID-19 weigh down their businesses and property values. Property and business owners should closely review their property tax values to make sure assessments adequately reflect the specific challenges affecting their properties, to include the pandemic's immediate, ongoing and future financial impact.

Strategies for getting value adjustments on assets impacted by the pandemic, from attorney Cynthia Fraser.

Last January I penned an article for this publication titled: "Will 2021 Bring Property-Tax Relief?" I never imagined we would enter a second phase of outbreaks and continued economic fallout related to COVID-19.

Because most states assess property for taxes as of Jan. 1 each year, last year's assessments did not reflect the pandemic's catastrophic impact on real estate in 2020. This year, as jurisdictions certify tax rolls to reflect real market values as of Jan. 1, 2021, property tax relief may depend on the taxing jurisdiction's recognition of external obsolescence due to COVID-19.

Businesses and commercial properties in my hometown of Portland, Ore., are still suffering from not only work-from-home policies and social distancing mandates related to COVID-19, but also the long-term effects of civil unrest downtown following the death of George Floyd. While downtown experienced a glimmer of revival this summer, many once-vibrant small businesses and restaurants remain boarded up or vacant. Whether from COVID-19 or riots, these external influences affected property market value during 2020.

Across the nation, many companies have extended remote-work policies through the end of the year, leaving office buildings a ghostly reflection of their bustling heydays and slowing recovery of commerce dependent on office worker customers.

A visible occupancy decline for commercial real estate that housed offices, restaurants, small retail stores and hotels should be hard to ignore. Unfortunately, tax assessors have been reluctant to recognize these realities when assessing taxable property value, even when the marketplace reflects downward trends.

Obtaining relief will require the taxpayer to effectively document the market impact of COVID-19 during 2020 and into 2021. Their focus should be on the market, property class, rents, vacancies and property sales, as well as the property characteristics that tenants and investors were seeking on the date of value, Jan. 1, 2021. The following paragraphs cover key points to consider.

Will Workers Return to the Office Full Time?

The office market may undergo the most significant long-term adjustments to the pandemic. In fact, office changes that started in 2020 will continue into this next tax year. The shrinking of office footprints appears to be lasting as remote work becomes acceptable and, in fact, necessary to attract and keep talent.

Younger office workers in particular are voicing a strong desire to work from home permanently or part-time. The reality is that most office workers have gotten off the merry-go-round of spending 12 hours of each day commuting and working. Walking to the kitchen table or a bedroom office with coffee in hand has its appeal to many.

Work from home may be a necessity for many with younger children at home. During 2020, most schools and daycare facilities closed completely, leaving parents no choice but to pivot to full-time daycare on top of work.

Likewise, in 2020 businesses began projecting space needs going into 2021. In Portland, mass transit operator TriMet polled its workers and found an overwhelming aversion to a return to the office. Accordingly, the public agency reduced its office footprint, redesigned workspaces to accommodate "hoteling" or shared workstations, and allowed many employees to permanently work from home. The private industry is quietly following suit, as 2021 shows no real slowdown in COVID-19.

The Hotel Industry Languishes

Perhaps no other industry has been harder hit than the hotels and conventions industry that collapsed in 2020. Not only did pleasure travel come to a standstill, but Zoom meetings and virtual conventions replaced business travel to become the new normal in 2021. The result was high vacancy in 2020 and lingering uncertainty over how long these properties will continue to be underutilized, sending a ripple effect through other commercial spaces.

The Market Wild Card: Housing

The wild card for 2020 was housing. Single-family homes across the nation saw exponentially rising prices that should make a tax assessor's heart soar. However, rent moratoriums for most of 2020 devastated some landlords. Documenting the costs associated with nonpaying renters, including higher management fees for evictions, may be used for challenging this past year's taxes. Rent moratoriums are an external market force outside a landlord's control, making them an incurable, negative external factor.

Demonstrating External Obsolescence

When requesting a lower assessed value for 2020, taxpayers should be ready to show how pandemic effects contributed to external obsolescence for their properties, requiring a depreciation adjustment to real market value. It will be important to address not only how changing occupier demand is affecting values in that property type but also the real estate's location and the degree to which its value depends on the surrounding submarket.

Identify all external factors, including those addressed in this article that impacted the property in 2020. These are economic influences outside the taxpayer's control and create an external obsolescence to the property that is incurable.

Appraisers recognize external obsolescence as an acceptable valuation adjustment to a property's market value. The Appraisal of Real Estate, published by the Appraisal Institute, recognizes the term and its application as a form of depreciation.

External obsolescence can be temporary or permanent and has a marketwide effect that typically influences an entire class of properties. This depreciation or obsolescence adjustment can be applied on a year-by-year basis to reflect the impacts of COVID-19 on the real estate for 2020.

Any assessor's argument that there may not be long-term impacts on the real estate is irrelevant to the 2020 assessment year when using an external obsolescence adjustment. For tax year 2020, at least, there can be no doubt that the majority of commercial real estate was hit hard by the pandemic and merits an external or economic adjustment. When approaching the assessor to request a value reduction for 2020, come prepared with economic market data to support an external obsolescence adjustment.

How to use these factors to reduce a senior living property's tax assessment.

The longstanding debate over intangible value in commercial real estate taxation rages unabated, and nowhere is the squabbling fiercer than in valuing seniors living facilities. Because these properties generally transact based on income from a going concern rather than from real estate, taxpayers planning to acquire a seniors facility should consider how to separate intangible value prior to acquisition. Simply waiting for the annual tax bill is a recipe for incurring inflated cost and an inferior investment return.

Skilled nursing facilities, assisted living and other seniors housing subtypes often require state-issued licenses personal to the operator. Critically, seniors housing sales typically involve the transfer of a going concern including a valid operating license, assembled workforce and other business assets required for the operation. In other words, sales involve more than just the real estate, and the intangible personal property component involves more than just goodwill.

Acquisition pitfalls

A seniors housing owner's overall return may hinge on tax consequences. Common considerations include real estate transfer taxes, allocation of basis for income tax purposes, real and personal property tax assessments, and segregation of readily depreciable or amortizable assets from non-depreciable or non-amortizable assets.

A common mistake is to use the transaction price as the consideration in the deed. That consideration is the basis for transfer taxes and should exclude tangible and intangible personal property value. Many assessors will revalue the property based on deed consideration, which is easily identifiable and theoretically reflects both parties' valuation of the land and improvements. Thus, citing overall transaction value on the deed can lead to inappropriate excessive taxation.

Instead, define consideration in an allocation agreement at or before closing, which is when the property's federal income tax basis is determined. This generally identifies four components: land (non-depreciable); buildings or improvements (generally depreciable); tangible personal property (generally depreciable); and goodwill or ongoing business value, represented by intangible personal property or business enterprise value. A cost segregation study is helpful but not required.

Loans secured by senior living facilities often pose valuation challenges. Lenders underwriting on a going concern basis need to address whether the state-issued licenses can be secured. The Small Business Administration requires SBA lenders to obtain a going-concern appraisal for real estate involving an ongoing business. Those appraisals must value the separate components and be completed by an appraiser trained in valuing going concerns.

The federal Office of the Comptroller of the Currency, which regulates commercial banks, requires lenders to use a competent appraiser but does not specify appraiser course requirements.

Property tax issues

State law generally requires tax assessors to value only real estate, based on a hypothetical transaction involving the real estate only. Therein lies the rub, because the property's income reflects a combination of real property and tangible and intangible personal property. There is now general agreement that hotels and most seniors living facilities involve intangible value.

The problem is isolating the intangible value. For example, in a 2020 decision involving Disney's Yacht & Beach Club Resort, the Florida Court of Appeals noted that though the nearly 1,200-room hotel's business and real estate values are linked, the assessor is required to value only the real estate, not the going concern.

Some older literature suggests that real estate value contributes only 73 percent to the value of independent living properties, 53 percent to assisted living values, and only 36 percent to the value of a skilled nursing facility. The remaining, non-taxable value, is from the going concern.

The Appraisal of Real Estate provides that going-concern value "includes the incremental value associated with the business concern, which is distinct from the value of the tangible real property and personal property." The Dictionary of Real Estate Appraisal, 6th Edition, defines intangible property as "nonphysical assets, including but not limited to franchises, trademarks, patents, copyrights, goodwill, equities, securities, and contracts as distinguished from physical assets such as facilities and equipment."

State-issued seniors housing licenses fall squarely in the definition of intangible personal property but can be difficult to value, demanding business valuation skills in addition to real estate appraisal skills.

Appropriate approaches

Appraisers typically try to value real estate using the cost, sales comparison, and income approaches, none of which fit seniors housing well. Moreover, charged with valuing many properties, assessors often employ mass appraisal techniques ill-suited for valuing complex going concerns.

Sales comparison drawbacks include the skewing effects of portfolio sales. Common in seniors housing, portfolio prices can obscure the consideration for individual properties or may include significant price premiums over individual sale prices, for reasons completely separate from real estate value.

Some appraisers will use the nearest multifamily sale as a comparable transaction. Yet most types of seniors housing offer abbreviated individual kitchens, if any, and smaller individual living spaces designed to encourage seniors to use the common facilities. If an appraiser is going to use a traditional multifamily property as a comparable, it must be adjusted to retrofit the property as conventional apartments.

To use an income approach, the appraiser must recognize that a huge portion of the seniors housing rent is not attributable to shelter but to services. As noted, seniors apartments are typically designed to get people out of individual units and into common areas. Common spaces usually generate higher expenses and are built to encourage the use of services such as shared dining rooms.

Similarly, compared with standard apartments, expenses for seniors living facilities involve higher maintenance, utility, management and administrative fees generally associated with the property's intangible value. Further, continuing care retirement communities exercise significant synergies between service levels as residents age. Proper analysis of these income and expense figures requires expertise generally removed from an assessor relying on mass appraisals.

Recognizing that many seniors living facilities include substantial intangible value, a 2017 white paper by the International Association of Assessing Officers (IAAO) suggests the cost approach is the proper method for extracting intangible value. Replacement cost certainly offers an easily understandable way for extracting that value.

While correct in valuing new construction, however, the cost approach has questionable utility for older facilities. Replacement cost will often not reflect value, since one can question whether a seniors facility would be rebuilt in the absence of a license. That raises a problem best analyzed as whether the facility represents the property's highest and best use.

The real valuation answer is anything but simple.

At its heart, the debate over how to value seniors care facilities rests on assessors engaged in a hypothetical exercise which is not reflective of the market. Without agreement on how to value the real property when a transaction involves a going concern, the debate will continue.

Cris K. O'Neall of Greenberg Traurig on new avenues for challenging property tax assessments.

Changes brought by the recent pandemic continue to impact the property tax regimes of many states. Clearly, COVID-19 greatly reduced property values and property tax revenues, particularly where real estate markets determine the fair market value used in setting assessments.

But the pandemic has had other far-reaching effects, some of which may continue for years to come. Here are three trends reshaping property tax dynamics, and ways taxpayers can use those factors to reduce their tax liability.

1. Downturn Horizons Extend (Will Things Ever Return to Normal?)

Many property types have experienced value declines over the past 18 months. The question is how much longer the declines will continue. For example, will hospitality property revenues and values rebound in 2023? Or 2024? Will consumers continue to make online purchases, as they were forced to do during the pandemic, forever abandoning the traditional brick-and-mortar retailing outlets usually found in power centers and shopping centers?

The difficulties in estimating time horizons for the recovery of real estate markets creates uncertainty. At the same time, it presents opportunities for short-term and longer-term property tax relief for many property owners and managers. This is particularly the case where pandemic-driven change has permanently changed markets and created "new normals" for some real estate subsectors.

2. Local Tax Authorities Offer More Leniency

When the pandemic commenced in spring 2020, property owners sought to extend the time within which property taxes had to be paid. Rather than penalize property owners for not paying by deeming them in default, many jurisdictions allowed property owners more time to pay, extending deadlines that were once thought unchangeable. Some jurisdictions extended deadlines for more than just payment: They gave taxpayers additional time to file property renditions, property tax appeals and exemption requests.

While many tax advisors expected this leniency to cease following the worst of the pandemic, the opposite has happened. Some property tax jurisdictions continue to give taxpayers more time to pay and have extended deadlines to comply with filing requirements. An example of this is seen in the California State Board of Equalization's July announcement that it plans to author legislation giving the tax agency more power to extend deadlines under certain circumstances.

3. Restricted Access Drives Property Value Declines

COVID-19 has tested and perhaps expanded the valid reasons taxpayers can cite to prove property value declines and seek property tax reductions in many states. Prior to the pandemic, taxing jurisdictions were quite willing to grant property owners value reductions and property tax refunds for properties damaged by fire, earthquake, flood or other calamities. But such value reductions were always based on the physical condition of the property: If the calamity caused physical damage to the property, making it less useable, then a value reduction and tax refund would be granted.

The pandemic changed this. COVID-19 had the unique effect of making properties unusable and, therefore, less valuable solely due to restricted access. Public health concerns in general and government orders prohibiting citizens from frequenting public places depressed property values without inflicting any physical damage at all. Thus, government stay-at-home orders and public health fears made ghost towns of shopping centers, hotels and resorts, entertainment venues and other places where large crowds previously congregated. Almost overnight, the values of those properties greatly declined, sometimes to a fraction of pre-pandemic values.

Existing laws relating to property tax relief were not written to address restricted-access value declines. Nevertheless, many local assessors recognized the effect of pandemic-driven property value declines, including those caused by restricted access. Some taxing jurisdictions have even been proactive in reducing assessments due to downturns caused by COVID-19 in selected real estate markets, not waiting for taxpayers to file administrative appeals or lawsuits challenging property tax assessments. For example, California county assessors have asked commercial property owners to voluntarily submit valuation data early in the assessment cycle in order to reduce assessed values before the deadline for filing property tax appeals.

Despite recent real estate market value declines and efforts by local assessors to recognize such losses, the values of property tax rolls have continued to grow. In Los Angeles, the largest property tax jurisdiction in the U.S., the assessment roll increased by 6 percent during 2020, which was consistent with the preceding three years. Tax assessment rolls in San Francisco and San Diego hit record highs during 2020. Miami, Seattle and even Oklahoma City experienced similar increases. This stable growth of property tax rolls during the pandemic has allowed assessors to grant assessment relief to properties most affected by restricted access.

So the question arises, how long will local assessors continue to give COVID-19 property tax relief? Further, have the pandemic's restricted-access property value declines created new opportunities for future property tax value reductions? Time will tell.

Property Tax Reduction Opportunities Abound

The pandemic has created many opportunities to reduce property taxes, particularly in states where assessments reflect fair market values, and especially in sectors hard hit by restricted access issues. Uncertainty as to when market values will rebound, if ever, means property value reductions may remain in effect for more than a few years or assessment cycles.

Furthering this opportunity is the willingness of local taxing jurisdictions to extend deadlines and consider pandemic-induced property devaluations, including those caused by restricted access. This year and next, and perhaps beyond that, property owners and managers would do well to work with local taxing authorities to reduce their property tax assessments and, if need be, file property tax appeals.

Self-storage has become a hot investment and values are up, but many owners find themselves with excessive property-tax bills that eat into their cash flow. Here's an overview of how tax assessments are made and some ways to potentially lower your bill.

Self-storage facilities continue to command great cash flow, but many owners find themselves funneling more of their income toward exorbitant property-tax bills. Those who take the time to review their assessments and liabilities with a local expert often discover they're being taxed unfairly. This is why you should identify and question your assessor's methods, assumptions, data and calculations. By exercising your right to contest your assessment and presenting a convincing argument, you might be rewarded with a lower tax bill.

Self-storage is especially vulnerable to errant valuations by assessors who fail to differentiate taxable from non-taxable value. Key questions include whether the sale of a self-storage facility is completely subject to transfer tax and if the price directly equates to taxable value for real property tax. It can be argued that much of the value associated with self-storage is business value and personal property, which is typically exempt from transfer or property taxes.

Let's examine how self-storage tax assessments are made and arguments you can use to contest one assigned to your own property. A successful appeal can save significant money, so it's worth pursuing.

The Trouble With Assessment

Arguing that the value of your self-storage facility is largely derived from non-real-estate sources can be problematic. Much of the difficulty comes into play when the assessor obtains a copy of the finance appraisal, or when a purchase and sale agreement includes an allocation separating the real estate from non-realty items.

Assessors want to believe that all the value in a sale or from financing is derived from real estate. In the Ohio case St. Bernard Self-Storage LLC vs. Hamilton County Board of Revision, the state supreme court stated that although the purchase and sales agreement carved out goodwill in the acquisition price, it was unconvinced that the sale of a self-storage facility had any goodwill. Conversely, lenders are often unable to lend on value that isn't attributable to real estate.

For property owners, the first step toward minimizing taxes and maximizing their financing is watching definitions; the definition of the interest being appraised is paramount. Appraisers can properly find for two different values on the same property, depending on whether they're valuing for the purpose of financing or tax assessment, so it's important to establish the interest being appraised.

When it comes to financing, lenders can and do lend on the stabilized value of a property performing as a going concern. In other words, they're appraising the property's leased fee value. So, for financing, appraisers can rightfully take into consideration the income from the operation at stabilization, but that isn't necessarily true for tax assessors.

Many states require assessors to value the fee simple interest in the real property only. The fee-simple appraisal is based on the real estate value alone and excludes value from the return of and on personal property. When it comes to self-storage, the assessor's calculation of taxable value must ignore value associated with units, computer systems, national marketing and so on, based on circumstances. Individual units are capable of being assembled and disassembled, which means they are at best a business fixture and not real estate.

Many assessors and appraisers recognize the removal of the depreciated value of personal property, which means they must also remove the personal property—and any income attributable to it—from the going-concern value. The comingling of values from multiple sources is especially evident when there's a sale.

Arguments in Your Favor

When the assessor cites a tax assessment based on the sale of your self-storage property, you can make several arguments. First, look at the building's construction and acquisition costs without factoring in things like security, computer systems, marketing and individual units.

If your facility was recently converted from a different type of building, that too can give you an advantage. Properties like those transformed from big-box retail space often trade at much lower price before lease-up and stabilization, and the conversion costs are typically associated with the personal property and eventual occupancy. So, as the owner, you can present sales of comparable pre-conversion properties to support an argument for a reduced assessment. It's better than using the sales of operating self-storage facilities as comps because there's no need to remove the personal property from the equation.

In cases when there are few comparable sales of big-box properties to reference or your self-storage facility truly isn't comparable to others that have been sold, it's appropriate to assess the property based on the replacement costs associated with building new. However, the appraiser should stop short of including costs specific to individual units, otherwise they'd need to apply depreciation from all sources, including age and any economic or functional depreciation.

The last line of counterargument is based on the income approach to valuation. Income-based assessment is the most complex when it comes to removing non-realty income. The easiest and cleanest way to respond is to look at examples of same-generation retail or light-industrial rents.

That said, when trying to defeat a sales price, it may be necessary to look at the actual income and then determine the appropriate amount for the non-realty value. Appropriate income will be based on the initial investment to install personal property as well as the return from that personal property. The income derived from that non-realty component is then removed from the actual net income. This is an activity easier said than done, but appraisers can establish the return. After removing the non-realty income, they should apply an appropriate capitalization (cap) rate to arrive at the property value.

Preferably, the cap rate used by the appraiser or assessor should be created from a mortgage constant and equity returns rather than from sales of comparable self-storage facilities because cap rates from this industry have comingled interests.

As you can see, it's appropriate for self-storage owners to use different values for their property, including one for financing and another for taxable or assessed value. These will differ because the appraisals that produce them are truly measuring different property interests.

Simultaneously protesting an assessment and a government taking can put taxpayers in a quandary.

There are multitudes of ways for property owners to reduce their tax burdens, as well as missteps that can derail a tax strategy. With that in mind, taxpayers should beware of trying to prove a low value for a tax appeal while simultaneously claiming a higher value in another proceeding. And here is how it can happen.

Protesting a high assessment

Most real estate taxes in the Northeast -- including those in New York, Pennsylvania, Connecticut and Massachusetts -- have an "ad valorem" or "value-based" assessment method. Thus, the greater a property is worth, the higher its real estate tax burden. A property tax bill is calculated by multiplying the property assessment by the tax rate. The assessment or taxable value is determined by the local assessor or board of assessors and is typically a percentage of market value.

This percentage varies among states and even municipalities. In New York, it is based on a comprehensive analysis of sales. The percentage is released annually by the state's Office of Real Property Tax Services and is different for each municipality. Connecticut sets its percentage by statute. In Pennsylvania, it is set by the state's Tax Equalization Board. But regardless of the state or method, local statutes fortunately allow property owners to reduce their real property tax burden by protesting the assessment they receive.

To successfully appeal a tax assessment, property owners must file a tax appeal and conclusively prove a lower market value. There are a few accepted ways to do this, namely the sales comparison, income capitalization, and cost approaches to determining value. No matter which method is used, the calculation must value the property according to its actual use and condition as it existed on a specific date in the past. New York designates this as a taxable status date and most states use the same or a similar term.

Asserting a higher value

The "actual use and condition" guideline in setting taxable value stands in stark contrast with condemnation and eminent domain guidelines, which value property when it is taken for a public purpose. In that scenario, the property must be valued according to its highest and best use, regardless of how the property is actually being used.

When the government takes private property for a public purpose, it must compensate the owner for the damages to the property's most valuable use. This valuation standard is known as "highest and best use," and has a specific meaning in the appraisal and eminent domain world.

According to the Appraisal Institute's reference text, "The Appraisal of Real Estate," and a multitude of state and federal court cases, the highest and best use of a property must be (1) physically possible, (2) legally permissible, (3) financially feasible, and (4) maximally productive. A taxpayer building a case for maximum value will typically need a lawyer, along with an appraiser and/or engineer, to evaluate these four categories for the specific property, look at the range of uses that qualify under each of those categories, and then conclude which use will result in the highest market value.

For example, a vacant, five-acre, commercial-zoned parcel of land on Madison Avenue in New York City would not be valued as vacant land, but as whatever its maximum use could have been, such as an office building.

At crossed purposes

There can be a serious conflict between the two guidelines when there is a partial taking, such as when a government takes a strip of a larger tract for a road widening, during the pendency of a tax assessment appeal on the larger property. The conflict can arise when the property's highest and best use happens to be its present use and condition.

In that scenario, a property owner is in the difficult position of claiming a low market value for the tax assessment proceedings and claiming a higher market value during the condemnation proceeding. When that happens, the taxpayer's team must perform an analysis to determine which proceeding will potentially result in the greatest benefit to the owner.

A good rule of thumb would be to withdraw the tax appeal and concentrate on the eminent domain claim. This is because for condemnation, the damage has occurred on a single date (the date of the taking). Tax appeals, on the other hand, are filed annually, and market values can change from year to year. A wise petitioner would proceed with a tax appeal only after the eminent domain claim is concluded.

Property tax assessments show market-wide value declines for the first time in 25 years but fall short of reflecting taxpayers' true losses.

Judith Viorst, author of the children's book Alexander and the Terrible, Horrible, No Good, Very Bad Day, had nothing on 2020. By virtually every metric, 2020 was a terrible, horrible, no good, very bad year.

Most states have some sort of catastrophe exemption for a property tax abatement or reduction tied to a defined disaster event. These statutes are state-specific, however, and few states had authority to address whether a property had to have sustained physical damage to qualify for catastrophe relief on property taxes.

Most states, including Texas, eventually concluded that some form of physical damage was necessary for property values to be reduced following a disaster. Its neighbor, Louisiana, went the other direction, concluding that its disaster statute did not require physical damage, only that the property be inoperable due to a declaration of emergency by the governor. Accordingly, property values for the 2020 tax year could be reduced in Louisiana due to COVID-19-related economic losses.

Pandemic paper trails

Fortunately, 2021 gives all taxpayers a fresh start. Most states use Jan. 1 as the "lien date," or valuation date for determining fair market value of property subject to ad valorem tax. For income-producing properties, taxpayers now have a full year's documentation of COVID-19 impacts, which more accurately demonstrate the fair market value of their properties in the current, COVID-19 economic climate. At a high level, such documentation may include financial statements with year-over-year and month-over-month comparison of revenues to expenses and profits to losses.

Drilling down, taxpayers should be able to demonstrate the source of these changing numbers, such as reduced employee hours, decreased production outputs and sales, unoccupied rooms, canceled conferences and the like. Comparable sales information should also now be available.

This information generally relates to economic obsolescence, which is a loss in value due to causes outside the property and which are not included in physical depreciation. Taxpayers also must consider whether their property exhibits functional obsolescence, or a loss in value due to the property's lack of utility or desirability.

Functionality is tied to a property's amenities, layout and current technology. A property's functional obsolescence is measured through reduced or impaired use. Taxpayers can quantify the lack of use in 2020 and compare it to pre-2020 capacity and usage in arguing for a reduction in taxable value.

Value and evolving utility

Historical information is key to the taxpayer's case — as is evidence of adaptation to current market trends. For instance, a year ago, who would have imagined that neighborhood and big-box stores of all stripes would start delivering their products directly to customers' homes? Suddenly, abundant check-out lanes, wide aisles, sampling stations and sprawling parking lots are unnecessary. Retailers would rather have drive-thru lanes and dedicated carryout parking.

Hotels have been similarly affected. Traditional amenities such as atriums, event space and intimate lounges that preclude safe social distancing are passé. Motels with open-air access are enjoying a renaissance. Resourceful restauranteurs have figured out how to make street-side dining desirable. Patios are now essential. While many of these changes in use are likely temporary, some are expected to be longer-lasting.

Consider commercial office space. Prior to the pandemic, many office-using employers permitted only limited remote work but working from home has now become the new normal. Facility planners expect the traditional office environment to shift to a hybrid model, with expanded remote working, office-sharing, and fewer in-person communications. Large conference rooms are out and state-of-the-art multimedia systems have taken their place.

These trends impact real estate values because they affect how property is used, or more importantly, not used. Commercial real estate developers will not be laying out offices the same way they used to, and hoteliers will not be building out the same large conference centers post-COVID. And the reality is that much existing buildout, furniture and equipment is going unused. So for now, a replacement cost analysis is the most appropriate valuation method for those property types, because it reflects the functionality of the property and the fact that the property would not be rebuilt as is.

Of course, as more and more businesses adapt to post-pandemic market trends, the lack of utilization may be deemed industrywide rather than property specific. At that point, appraisers should treat the lost value as economic obsolescence, which is value losses stemming from factors occurring outside the property. In either case, taxpayers should be prepared to demonstrate the inutility of their property, and the cost of such inutility, to reduce taxable value.

Better than terrible

Whether or not 2021 is radically better than last year, at least taxpayers are now in a better position to show the adverse impact the pandemic has had on fair market values. And if that translates to lower ad valorem tax liabilities, then this decade is off to a very good start.

Insights into managing real property tax liabilities in the nation's capital.

After the tumult and disruptions of 2020, the last thing taxpayers need is another surprise. Our society craves predictability more than ever before, and commercial real estate owners want predictability in their property taxes. 

In the District of Columbia, commercial real estate owners keen to make their future expenses more predictable can start by familiarizing themselves with the full gamut of real property liabilities. In addition to the standard annual property tax, the District imposes a variety of charges on real estate that vary by the property's location, use and payment history. 

Managing these real estate charges can help a taxpayer budget for upcoming expenses and minimize the risk of incurring unplanned costs. What follows is a primer to help taxpayers manage real property tax liabilities in the District: 

Start with the basics 

The DC Office of Tax and Revenue (OTR) recently launched MyTax. DC.gov, a new taxpayer website intended to streamline the tax assessment and billing processes. This single portal offers insight into taxes on individual income, businesses and real property, as well as fees administered by OTR. 

The site features self-service tools that enable taxpayers to review and pay property tax bills online, view assessment histories, apply for tax relief benefits, request mailing address changes and submit mixed-use declarations, among other features. While this centralized system should help to organize the billing and payment processes, it offers little information about the District's fees and may leave owners still wondering: What are these charges? 

The BID tax 

Many commercial property owners in the District incur a business improvement district (BID) tax. The District defines a business improvement district as "a self-taxing district established by property owners to enhance the economic vitality of a specific commercial area." Each of the District's 11 BIDs assess a surcharge to the real property tax liability, which the District collects and then returns to the BID. Each BID dictates how it spends its funds, typically supporting the community with programs promoting cleanliness, maintenance, safety and economic development. 

The DC Code establishes BIDs and their geographic boundaries. These provisions empower each BID to establish its tax rates. How those taxes are calculated varies by BID. For example, an individual district may base its tax on the number of rooms in a hotel, a building's square footage and a percentage of the tax assessment value. Thankfully, these organizations often have robust, informative websites that can be useful resources for property owners. 

As with real property taxes, a property owner that fails to pay its BID tax on time and in full can incur penalties and interest charges on its tax account. Therefore, mismanaging a property's BID tax can lead to pricey consequences. 

Public space or vault rent 

To optimize the operation of an asset, many property owners rent-adjacent, District-owned space known as "public space." The District categorizes these offerings as either "vault space," which is below ground level; or above-ground "café space." Examples include outdoor café space, above or below-grade parking and areas for storage of utilities. 

The formula for calculating vault rent is Land Rate x Vault Area x Vault Rate. Therefore, changes in a property's taxable land assessment value will result in a change in the rental charge for associated public space. Unlike BID taxes, public-space rent is charged to the renter as a separate bill. This requires extra attention to avoid those pesky penalty and interest charges. 

Special assessments 

A variety of supplementary special assessments may arise to fund city-wide projects. Examples of these charges include a ballpark fee, Southeast Water and Sewer Improvement fee and the New York Avenue fee. The levy of these assessments is governed by specific criteria set forth in the related DC Code provision. 

Given the often-complex nature of the code, taxpayers may choose to consult a tax or legal professional to help navigate these less-common levies. 

Credits 

A credit on a property owner's tax account will likely come as a welcomed surprise, but the taxpayer should give these circumstances the same scrutiny they would give to unexpected charges. Understand that a credit is not free money, nor is it always an accurate designation. 

If a credit appears on the account, it will likely stem from a prior overpayment. This may reflect a reduction in tax liability that occurred after a bill was issued. Other possible causes include a DC Superior Court Refund Order, a dual payment from a third-party vendor or a prepayment of the full year tax liability on a first-half tax bill. 

Before enjoying the benefit of the lowered tax liability, it is important to verify this credit is justified. If the credit was wrongfully applied, a taxpayer will still be liable for the remaining balance. The District may issue a corrected bill for the outstanding amount, or the balance may appear on a future tax bill. A failure to remedy this balance can once again lead to penalty and interest charges. 

Penalties and interest 

The most unwanted surprise charges are penalties and interest. These charges can arise under several circumstances such as when the taxpayer has failed to file a yearly income and expense form with the District, or after missed, late or incomplete payments. 

Penalties and interest can cause a headache for taxpayers. The District will apply any future payment to penalties and interest before the account's principal balance. Therefore, it is easy for a small charge to cause a cascading liability if it is not timely addressed. In addition, while a taxpayer may petition for these charges to be waived, this process is often lengthy and the issuance of such a waiver is at the sole discretion of the OTR. 

The prospect of navigating these charges may seem overwhelming but it is a vital part of owning and managing real estate in the District. Therefore, it is best to learn the tax rules or consult with a local tax attorney who has experience dealing with these issues, as well as with the corresponding governmental entities. A knowledgeable expert can sort through this complicated web of liabilities, penalties and errors.

Georgia taxpayers should start preparing arguments to lower their property tax assessments.

Few commercial properties emerged with unscathed values from the harsh economic climate of 2020. Yet Georgia and many jurisdictions like it valued commercial real estate for property taxation that year with a valuation date of Jan. 1, 2020 – nearly three months before COVID-19 thrust the U.S. economy into turmoil.

This means governments taxed commercial properties for all of 2020 on values that ignored the severe economic consequences those properties endured for more than 75% of the calendar year. When property owners begin to receive notices of 2021 assessments, which Georgia assessors typically mail out in April through June each year, property owners can at last seek to lighten their tax burden by arguing for reduced assessments.

The pandemic hurt some real estate types more than others, however, and with both short-term effects and some that may continue to depress asset values for years. For taxpayers contesting their assessments, the challenge will be to show the combination of COVID-19 consequences affecting their property, and the extent of resulting value losses.

The experiences of 2020 can serve as a roadmap for valuations in the current year and, in certain settings, in future years.

A three-pronged attack

COVID-19 can inflict a three-pronged assault on a commercial property's value, and taxpayers should explore each of these areas for evidence of loss as they build a case for a lower assessment.

Widespread losses. The first prong of the trident may be a drop in value stemming from an overall decline in the market. Like the Great Recession of 2008, the pandemic has reduced many property values by impeding economic performance in general.

Reduced income and cash flow, for example, can indicate reduced property value. Valuing the property with a market and income analysis approach can reveal this type of loss.

Reduced functionality. Is the property's layout or format less functional than models that occupiers came to prefer during the pandemic? In Georgia, functional impairments may have curable and incurable components beyond normal obsolescence. In other words, when changing occupier demand has rendered a property obsolete, there may be some features the owner can address to restore utility and increase value.

Adverse economic trends. Economic factors occurring outside the property can suppress property value. Georgia tax law recognizes that economic trends can reshape market demand and render some property models obsolete. This economic obsolescence can be short term while the economy is down or a permanent change.

Subsector considerations

Retail. Big-box stores, malls and inline shopping centers had already experienced a functional decline and an economic downturn, both of which accelerated as shopping habits changed during the pandemic. Big box properties were already becoming functionally obsolete as retailers reduced instore inventory requirements and shrank showrooms, which left little demand for the large-format buildings.

Moreover, outside economic factors such as declining instore sales, competition with ecommerce retailers, and high carrying costs have also undercut the value of these properties. The pandemic accelerated this decline, and it is unlikely there will be much, if any, recovery.

Hospitality. The pandemic has severely diminished travel and vacations, and hotel vacancies have skyrocketed. The income yield per room is declining. Operating costs have increased per visitor as amenities have been shut, curtailed or reconfigured. Many hotels have eliminated in-house dining and offer only room service.

The cost to maintain kitchen services is disproportionate to the number served. This decline is solely a product of COVID-19 and, over time, will revert to near normal. Some increased costs may remain elevated, such as extra cleaning supplies and labor to disinfect the property.

Office. COVID-19's effect on office buildings, especially high-rises, may be long-lasting. Fully leased buildings have seen less of a direct affect, but properties with significant unleased space are already hurting. Demand will diminish as more employees work remotely and companies consolidate with shared workspaces, motivated to reduce occupancy cost. This trend will produce both functional and economic effects on the value of office buildings.

Industrial. To a lesser extent, some manufacturing plants can suffer industry-specific economic consequences of COVID-19. Reduced travel has compelled airlines to reduce flights and sideline aircraft, reducing the demand for new and replacement aircraft. Less aircraft being built reduces the value of aircraft manufacturing plants, including the buildings that house them. Likewise, oil production, storage and consumption is down, due to reductions in leisure and business travel and commuting as more people work remotely. Excess capacity for drilling, storage and processing petroleum makes those facilities temporarily obsolete.

Multifamily residential. COVID-19 may have had little negative effect on multifamily complexes. During the pandemic, the supply of available housing on the market has contracted, driving up rents. As a result, apartments remain in high demand from renters and investors, although some areas may be overbuilt.

Despite high occupancy rates, properties may have non-paying or late-paying tenants. It would seem that yields per square foot may be higher, which would suggest increased property values for apartment complexes now. This is not always the case, however, and multifamily values must be considered individually.

Expect resistance

COVID-19 has also affected the mindset of taxing authorities, whose operating costs have remained the same or increased during the crisis. Taxing authorities will be reluctant to decrease tax revenue and will push back against property owners' arguments for reducing taxable values.

Just as individuals have taken personal health precautions against COVID-19, property owners must take precautions to protect the financial health of their properties from the virus' detrimental effects. All commercial property owners in Georgia should carefully examine assessment notices. Wise owners should strongly consider consulting with property tax experts to determine whether to file an appeal.

Commercial real estate owners should build arguments now to reduce fair market value on their properties affected by the pandemic.

The uncertainties and changes brought on by COVID-19 have had far-reaching effects on all facets of daily life. As commercial property owners position themselves to weather the storm, it is crucial that taxpayers most affected by the virus do what they can to control their property tax expenses.

The issues they face are complex, from pre-crisis valuation dates and the need to quantify value losses, to cash-strapped taxing entities that will be reluctant to compromise on values. Taxpayers will need creative, innovative approaches to successfully protest their assessments and see their cases through to having their taxable property values reduced.

Ohio mulls relief

Assessors in Ohio and many other states value real property as of Jan. 1 of the tax year under protest, known as the tax lien date. Other than when a property has recently sold, assessors and courts seldom consider factors occurring after the tax lien date in a property tax case.

For example, the current property tax filing period in Ohio relates to tax year 2020, and real property is required to be valued as of Jan. 1, 2020, for that tax year. That means valuations for 2020 in those jurisdictions typically ignore changes to a property's value that occurred during the COVID-19 pandemic.

Ohio is the only state considering legislation that would require taxing authorities to recognize the effects of COVID-19 on real estate values where the impact occurred after the tax lien date. Depending on where a property is located, taxpayers will need to consider all options if their jurisdiction does not allow for consideration of the impact of COVID-19 in a tax challenge this year.

When it comes to deciding whether to challenge a property's assessment, there are many factors to consider. If the property recently sold, analyze the sales price to indicate the actual market value of the real estate deducting any non-real estate values. Then factor in the pandemic-related issues.

The taxpayer may need to order an appraisal, whether to support their own complaint or in fighting a tax increase complaint filed by a school district. These circumstances are more likely in some jurisdictions than others; experienced local counsel can help the taxpayer decide whether, and when, to obtain an appraisal.

At times, taxing authorities or a court may require testimony from a property owner or other individuals associated with a property. Many taxing authorities are allowing testimony via popular video conferencing applications, which may make it easier than in the past to seek the involvement of witnesses for a hearing.

Variations by property type

Market trends affecting specific property types and operations will provide evidence to support many assessment protests. Hotels, for example, have been directly impacted by COVID-19, therefore data for hotel properties must be carefully evaluated in light of current events.

Compile historical information such as 2020 financials as soon as possible, as well as recent occupancy reports. Hotel owners must be prepared to testify along with their expert appraisal witnesses.

First-hand knowledge of the devastating effects of COVID-19 will be an important component of a case. While Ohio courts in the past have generally disfavored the discounted cash flow method of valuing commercial properties, expert witnesses may need to explore, use, and be prepared to explain that option in a post COVID-19 world.

It is important to note that COVID-19 has not affected all property types in the same manner. The pandemic devastated many hotels, restaurants, and certain retail and office properties, for example. On the other hand, other properties such as industrial properties serving ecommerce operations have fared well.

How trends relating to property type translate into a potential reduction in a property's fair market value depends on what a particular jurisdiction requires from taxpayers to prove their case. Property sales data from 2020 to the present will become an important component of any property tax review, given the events of the past several months. Discussions with an appraiser familiar with local data and trends will be critical.

Even if a taxpayer cannot reference COVID-19 effects in a challenge filed this year, they should consider effective strategies now in preparation for future property tax issues related to the pandemic. Most likely this will involve a long-term approach to contain property taxes, while addressing short-term needs as best as possible. A case settlement may address several tax years, giving the taxpayer some certainty and planning capabilities for the future.

Additionally, a plan for how to approach a case often depends on the regional property tax landscape. Because of this, achieving a good outcome in the future may depend on how the taxpayer prepares their case from the outset, affecting decisions such as whether to have an appraisal and which parties should testify.

The best means to address recent change and today's uncertainties are to remain adaptable and to begin forming effective case strategies as soon as property tax expenses become available for evaluation.

Closely examine your 2021 tax assessment to ensure your property's valuation isn't excessive.

   E-commerce was here to stay even before the pandemic devastated small businesses and placed an even greater premium on technology. In the changed landscape, lowering occupancy costs by reducing property taxes is one of the most important steps businesses can take to remain competitive.

  Stay-at-home orders still prevent many shoppers from visiting their favorite brick-and-mortar stores, while fear of contagion exacerbates consumers' reluctance to shop in person. Regardless of customer traffic, however, retailers still incur fixed costs including insurance, enterprise software, property taxes and, arguably, rent.

  Online-only retailers' occupancy costs are much lower, making it difficult for small brick-and-mortar businesses to compete. Put differently, sales taxes decline with reduced sales but property taxes do not. Landlords and tenants in triple net leases often fail to examine property taxes, but the survival of both may depend on reducing this cost.

  Other costs such as insurance and the enterprise software needed to run the business generally lie beyond a small business' control and do not diminish with reduced business volume. The active 2020 hurricane season certainly has not reduced insurance costs. During the pandemic, some landlords have deferred or forgiven rent, but this forbearance provides no long-term solution to the challenges e-commerce poses.

Mounting pressures

  The threat that high ad valorem taxes pose to pandemic battered small businesses is compounded by, and interrelated with, the e-commerce threat. Small businesses face enormous challenges in competing online with major brands such as Amazon and Wal-Mart, which command a far greater web presence than small mom-and-pop retailers.

  E-commerce's challenge to traditional retail will not end with the pandemic. The bulk of retail sales still occur in stores, with online purchases peaking in the second quarter of 2019 at just 16% of total U.S. retail sales, according to the Commerce Department. That percentage slowed to 14% in the third quarter.

  COVID-19 has accelerated the trend to "Buy Online, Pick Up In Store" (BOPIS). Pre-pandemic, BOPIS offerings were already growing as shoppers used it to avoid instore browsing time and shipping charges. A 2018 study reported 90% of surveyed online shoppers stated high shipping fees and home delivery longer than two days would likely deter them from completing an online purchase. Even before the pandemic, Amazon's rapid delivery model was pressuring conventional retailers to compete by accelerating shipping times.

  BOPIS allows retailers to blend online and in-store customer engagement while offering a more convenient way to shop. COVID-19 accelerated this trend as shoppers sought to minimize interpersonal contact during store visits. Retailers, however, need to be certain that applicable restrictive covenants permit BOPIS, since shopping centers often limit tenants' right to use common space. Further, traditional methods of valuing properties for tax purposes struggle to recognize and separate the intangible and untaxable value of web presence from the value of a physical location that serves as a pick-up point.

  Black Friday and Cyber Monday 2020 illustrate the evolving relationship between brick-and-mortar stores and e-commerce. RetailNext reported foot traffic to physical stores on Thanksgiving through the following Sunday decreased by 48% from 2019, while spending per customer increased more than 36%.

  Mall traffic tracker, Sensormatic Solutions, concluded that online ordering and social-distancing restrictions made shoppers more "purposeful" on their Black Friday trips. Adobe Analytics reported that Black Friday saw $9 billion in U.S. online sales, a nearly 22% increase year over year that made it the second-largest online spending day. Cyber Monday 2020 brought the largest shopping day in American history with $10.8 billion in volume, a 15.2% increase over 2019, Adobe reported. Adobe also noted that Black Friday curbside pickup increased 52% year over year.

Shared interests

  Landlords and tenants must recognize the mutual harm of high occupancy costs and guard against unwarranted property taxes as local governments seek to shore up their finances. Every nickel counts when retailers are under economic pressure just to keep their doors open. Years of remaining lease term is of cold comfort to a landlord whose tenant is forced to close by reduced revenue and high occupancy costs.

  Some short-sighted landlords ignore the property tax burden placed on their triple net tenants until a renewal is imminent since the landlord's costs are not directly impacted.  Where possible, a good lease on multitenant properties will address tax challenges and discourage taxes from being viewed as a mere pass-through expense. Further, prudent landlords should help reduce tax costs and avoid being forced to negotiate reduced rent to keep small businesses operating. Most leases do not include a provision permitting tenants to challenge ad valorem property taxes. Similarly, many state statutes only permit property owners, not tenants, to challenge taxes.

  Most assessors have not yet recognized COVID-19's impact on retail stores, primarily because the valuation date for most properties preceded the pandemic's full impact on retail. That will change in 2021 in many jurisdictions. Similarly, the trend toward BOPIS will increase the intangible value of online presence, generally not subject to ad valorem taxation, and decrease the importance of physical locations.

  COVID-19 is pressuring local governments to increase the property tax burden on small businesses. A recent survey found that municipal revenues are down 21% while expenses have increased 17% amid the pandemic. The survey reported 45% of mayors expect to see dramatic budget cuts for education, while at least one-third expect to see drastic cuts in parks and recreation, mass transit and roads. Only 36% of mayors expect to see a replacement of the businesses shuttered due to COVID-19.

  High property taxes will only exacerbate the municipal revenue problem. A short-term remedy to municipal finances, higher property taxes, risks the permanent closure of many small businesses and increase the burden on remaining brick-and-mortar retailers. Failing to address the problem will only accelerate the decline of physical stores and eliminate their local jobs and taxes.

COVID-19, wildfires and civil unrest all threatened property values and tax revenues in 2020, notes Foster Garvey attorney Cynthia Fraser.

Across America, 2020 transformed the urban core. Hotels sit vacant, deprived of business by travel that has been all but suspended. Restaurants under occupancy restrictions struggle to break even or have closed for good where winter weather precludes outdoor dining. In some locations, plywood sheets encase office and commercial buildings for protection against vandalism. In my own city of Portland, Ore., walking through parts of downtown is like walking through a ghost town of shuttered businesses that once teemed with commerce.

Suburban and rural properties have sustained similar impacts, while fires have ravaged many communities. With skyrocketing unemployment in many states, governments have set eviction moratoriums, and the number of tenants not paying rent continues to grow. Landlords may begin to file for bankruptcy protection in increasing numbers as their own bills—including property taxes—come due.

How long it takes for cities to bounce back from the events of 2020, and for property values to recover, will depend upon each community's economic vibrancy. Because property tax is a state tax, any relief from this tax burden depends upon each state's statutory date of value and whether its tax law contains a force majeure clause, which frees a party from a contract's obligations when an unforeseen event prevents their performing its terms.

MATTERS OF TIME

Most states value property as of Jan. 1 for taxes due later in the same year. Thus, in most jurisdictions a property's taxable value for the recent tax year reflects what was known or could have been known about the property and market conditions as of Jan. 1, 2020.

Lockdown for COVID-19 did not begin in most states until March 2020. The fires that devastated forests, agricultural land and communities across that nation took place over the summer and fall. No crystal ball predicted these events, nor the catastrophic fallout and snowballing impacts on property values.

Many contracts contain force majeure clauses. In most states, a force majeure law provides an adjustment to the market value for property taxes when there was a catastrophic event that destroyed or damaged property during the tax year. These statutes typically provide for an adjustment based on the event's timing, and in most states recognizing force majeure, it is critical to appropriately report the property damages to receive this retrospective reduction in taxable property value.

Some states, including Oregon, have passed legislation extending the deadline to report property damage from fire that will allow for a reduced real market value for a portion of the tax year.

Force majeure laws do not typically recognize a decline in property value due to a pandemic or the economic effects of boarded-up city blocks. Any records tracking the decline of property values will help taxpayers address novel valuation issues for this coming tax cycle. The long-term effects of these economic forces will weigh on property values for years and to varying degrees.

PREPARE TO PROTEST

Assessors will vigorously fight the taxpayer's request for a reduction in taxable value when their coffers are already low due to the loss of other tax revenues. For apartment landlords, it will be important to track nonpaying tenants, particularly in the states and cities that have enacted laws preventing evictions for nonpayment of rents. Retail landlords should track local market conditions and news of business closures that result in stores and restaurants going vacant, as that information will be important in supporting tax appeals this coming year.

Perhaps the largest unknown in the market is what will happen to the office sector. Office workers the world over have adapted to remote working. Zoom, Microsoft Teams or Webex have replaced conferences and board meetings, client visits and even many court hearings. The need to live close to a downtown office, or even in the same city, has diminished. Businesses are rethinking the need to staff their offices full time, and workers may be reluctant to commute to an office when they can effectively do their job at home.

Multiple factors will shape the real market value of properties this coming year. In 2020, taxpayers may have struggled to pay or protested tax liabilities that were based on values and valuation dates which preceded the crises that were to come that year.

By contrast, the uncertainties of the pandemic and its economic fallout will be tied to what is known as of Jan. 1, 2021. Property values across the nation will surely be affected, and this time around, taxpayers will be able to appeal assessments that fail to reflect the detrimental effects that many of the past year's events have inflicted upon their property's market value. Be sure to have the facts, figures and experts to deliver this information lined up in order to achieve a successful property tax appeal.

Owners in North Carolina must satisfy legal tests in arguments for reduced taxable valuations.

   Notice of a commercial property's revaluation to an increased taxable value can deliver a shock to the taxpayer. Although actual tax liability will depend on the completed valuation, new budgets and a tax rate that is still to be set, the taxpayer fears that an inflated value will result in an unfairly high property tax bill.
The typical taxpayer response is to assert the new value is too high, particularly for the larger assessment increases. The assertion alone, however, is not enough to change the valuation. While many jurisdictions have different burden of proof statutes, under North Carolina law, the onus is on taxpayers to prove specific criteria meriting a reduced assessment.
   Unfortunately, the state's valuation practices set the stage for assessor mistakes and inaccurate valuations. Unlike many jurisdictions, North Carolina only requires that real property subject to taxation be revalued every eight years, although recently most counties have opted to revalue every four years. In light of dramatic property value swings over the past decade or two, however, these lengthy gaps between valuations often result in significant increases, with assessments spiking by as much
as 40 percent.
   Undertaking a county-wide real property revaluation is a behemoth project for any taxing authority. Countless hours of factual investigation, analysis, and number crunching go into the process. Those involved are performing a necessary public function and do their best to get it right.
   Given the scope of a revaluation, lawmakers have set limitations to discourage taxpayers that simply disagree with the new assessment from demanding a full appeal and hearing based solely on the merits of the value. Aside from the time deadlines in the appeal process, a significant governor on the appeal process in North Carolina is the burden of proof.

Proof vs. persuasion
    In North Carolina, tax assessments are presumed correct. The State Supreme Court spelled out this premise in a 1975 case involving AMP Inc.'s appeal of the taxable valuation assessed on inventory stored at a Greensboro facility.
    In finding that AMP failed to prove its case, the Court encapsulated the burden of proof when a taxpayer attempts
to rebut the presumed correctness of an assessment. This is a presumption of fact that may be rebutted by producing evidence that tends to show that both an arbitrary or illegal method of valuation was used and that the assessment substantially exceeded the true value of the property.
    A taxpayer appealing an assessment must come forward with evidence tending to show both of these conditions: that the method used to establish the assessed value was wrong, and that the value derived from that method was substantially greater than the true value (the assessed value was unreasonably high).
   The burden is not one of persuasion but one of production. In layman's terms, the burden is not to persuade the decision maker that the taxpayer's opinion of value is correct and the assessor's is wrong. Rather, the taxpayer must show simply that there is evidence both that the assessor used an incorrect method in its appraisal, and that the resulting value is substantially greater than it should be.
   Once the taxpayer has produced evidence to rebut the presumption of correctness, the burden of coming forward with evidence shifts to the county. The assessing entity must establish that its method did, in fact, produce true value; that the assessed value is not substantially higher than called for by the statutory formula; and that it is reasonable. The latter is a burden of persuasion, meaning the assessor must convince the decision maker that it applied a correct method and arrived at true value.
   The terms "arbitrary" and "illegal," which the Court used in AMP in referring to the taxpayer's burden of showing the assessor used an improper method, sound a bit harsher than they need be. The courts simply hold that a property valuation methodology is arbitrary or illegal if it fails to produce "true value" as defined by tax law in General Statute 105, Section 283. That section defines true value as meaning market value. Market value is the price estimated in terms of money at which the property would change hands between a willing and financially able buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of all the uses to which the property is adapted and for which it is capable of being used."
    A variety of methods have been found to be illegal or arbitrary, such as failing to consider the effect of obsolescence in the face of testimony of obsolescence and relying only on the cost approach to value income-producing property. A tax professional will be knowledgeable of many other examples.
   Given the burdens inherent in challenging assessments, a taxpayer planning to appeal its assessed value needs to be prepared to assemble and present information supporting its value opinion. In addition, the taxpayer should obtain and understand the taxing authority's method of arriving at the assessed value, in order to challenge that method as may be appropriate.
   At the local level, taxpayers have traditionally focused arguments on value alone, but, as an appeal reaches higher levels, the burden can become a critical evidentiary obstacle to overcome. Failure to get over this initial hurdle can result in dismissal of the appeal without the actual assessed value being considered on its merits.

Here's what investors should know before buying or developing in the Steel City.

Over the past decade, Pittsburgh has been named the most livable city in the continental U.S., a hipster haven, a tech hub and other trendy titles. Publications laud the city's affordable housing stock in a stable real estate market, access to the arts in an established cultural community, and world-class healthcare and higher education that place the Steel City at the forefront of medicine and robotics.

This attention has drawn real estate investors to submarkets well beyond downtown Pittsburgh's Golden Triangle. Even in the midst of the pandemic and the economic uncertainty that has come with it, a surprising amount of new development has continued in the region.As investors from outside the region consider investing in this real estate market, they should be aware of idiosyncrasies and pitfalls lurking in Pennsylvania tax law.

Welcome, Stranger

As in most states, assessors in Pennsylvania cannot independently change a property's assessment upon its transfer. However, Pennsylvania lets local taxing districts appeal assessments and request value increases, which they often do following a sale. Locals call this the "welcome stranger" tax.

"One of the most common reactions I hear from our out-of-state clients who are new to this market is disbelief that school districts can appeal assessments," says Sharon F. DiPaolo, Esq., the managing partner of Siegel Jennings' Pennsylvania property tax practice. "Of course, in most states that's called a spot assessment, but in Pennsylvania it's just another appeal."

In fact, local school districts (which take the largest piece of the property tax pie) filed more assessment appeals than property owners in 2017-2019, according to The Allegheny Institute for Public Policy data. "The most difficult part for buyers is accurately estimating what is obviously a large part of a property's value equation," DiPaolo explains. "Buyers can budget for the legal costs of defending against an appeal by the government, but it's much harder to underwrite the real estate taxes when they can't know where the assessment will eventually be set. We have seen many investors choose not to enter this market because of the uncertainty."

Allegheny County in particular is unusual in that it has a March 31 assessment appeal deadline, and Pennsylvania uses the filing date as the effective date of value for assessment appeals.This means that properties already under appeal for 2020 should be valued as affected by the early fallout from COVID-19, and 2021 appeals will have to consider the pandemic's continuing impacts on property values.

Understanding the local legal landscape can help investors budget for potential risks, and thoughtfully structuring a deal can sometimes help reduce that risk. For instance, when appropriate, transferring a property's holding company rather than the property itself can avoid triggering an increase appeal.

Further, properly allocating a purchase price—either among multiple properties in a portfolio or among the different components of a going concern—can avoid misinterpretation of deeds and transfer tax statements by local taxing authorities. This also ensures Pittsburgh's 5% transfer tax is applied to the real estate only.

Net lease investors should also be aware that, while many states can be described as "fee simple" or "leased fee" jurisdictions, Pennsylvania is unique in that, in practice, its courts will usually tax a leased property according to whichever of those values yields greater taxes. Through a series of cases over 15 years, Pennsylvania's appellate courts have struggled to base a property's taxation on its "economic reality."

Currently, a property achieving above-market rent is assessed according to its leased fee value (which will be greater than the fee simple value), while a property with below-market rent will be taxed at its fee simple value (which will be greater than its leased fee value). Under this system, two physically identical properties within the same taxing district can be assessed at wildly different values.

Neighborhood Discrepancies

Anthony Barna, senior managing director of Integra Realty Resources Pittsburgh, cautions investors to vet property specifics. "People keep saying,'Pittsburgh's hot,' but it's not the whole region," he says. "It's not even the whole city."

While office vacancy in the CBD had reached a 10-year high even before the onset of the pandemic, some nearby neighborhoods including Oakland and the Strip District can barely satisfy demand. Similarly, new apartments in popular neighborhoods like Lawrenceville are stabilizing quickly at record rental rates, yet rents and occupancies in other neighborhoods remain flat.

"The lack of a significant population increase in the city, coupled with the large number of new residential units coming online, threatens the economic balance and risks an oversupply," Barna observes.

Even more fundamentally, Barna says "a lot of our neighborhoods don't yet have the infrastructure to actually support what someone might want to build." In fact, Amazon cited infrastructure concerns as a major factor in its decision to drop Pittsburgh as a final contender in its HQ2 search.

Similarly, developers should investigate available tax breaks, which vary by location. Frequently these come in the form of Tax Increment Financing (TIF) or Local Economic Revitalization Tax Assistance (LERTA). In 2019, Pittsburgh opened all neighborhoods to potential tax benefits for new developments that meet certain employment or affordability requirements.

Tammy Ribar, Esq., Director at Houston Harbaugh who concentrates her law practice in commercial real estate transactions, advises that additional opportunities are available through various government bodies and can entail program-specific deadlines. "I think the best advice I can give to buyers is to research and understand in advance what programs are available and be informed about applicable deadlines, so that a relatively easy opportunity for savings is not missed," says Ribar.

Based on the recent pace of construction throughout the city, many investors have clearly decided that Pittsburgh's anticipated rewards outweigh its risks. And as many have learned, working with knowledgeable locals during planning can help to avoid headaches – and create significant savings later.

Local and state governments are expected to see annual revenues decline by between 4.7 percent and 5.7 percent over the next three years, excluding fees to hospitals and higher education, according to Brookings. But most vital government functions continue, and soon, counties will assess property values to prepare property tax bills for 2021. They expect timely payment. They also should expect a flood of appeals to lower property values, says Linda Terrill, president of the American Property Tax Counsel and a partner with the Property Tax Law Group, who spoke with SCT contributing editor Joe Gose.

How do you anticipate 2021 property tax assessments unfolding?

The good assessors know that a decline is coming and will try to make some serious examinations to see whether they need to come in at a different number from the prior year. My cynical view is that when there is an increase in value, they're very quick to notice it but if it's a decrease, there's a lag before they notice it.

It sounds like you expect a lot of appeals. What can property owners do to prepare for one?

Planning is the key to everything. You need to find out the state requirements for when you can file and who can file to make it legal — some states require corporations to be represented by legal counsel, some don't – and you need to know the state's definition of market value. You also need to get ahead of the curve and begin interviewing professionals who can help you, especially appraisers, before all the good ones are representing others. It's best to find an appraiser that does property tax or condemnation work.

What is the most important element in an appeal?

The highest and best use analysis. A lot of appraisers would confess that they go into an analysis thinking that the current use is indeed the highest and best use, but I don't think they can assume that anymore. Property owners need to tell their appraisers to really do the work and math because as of Jan. 1, 2021, the highest and best use of a shopping mall charging $20 per square foot in rent might now be a fulfillment center charging $5 per square foot. Or maybe it's an adaptive reuse that includes converting part of the mall to office or adding apartments.

How might declining rental rates influence an appeal?

Shopping center owners can make a terrific argument that if they had to lease space on Jan. 1, 2021, the current contract rent would have no reflection at all on market rent. There are an awful lot of leases being renegotiated and amended that will have to be considered, even though they might not get done before Jan. 1. Property owners need to put a trail of paperwork together to tell a good story. That means keeping correspondence with tenants to show the back-and-forth of what's happening and whether or not they are staying.

Is there anything property owners can do to reset to a more appropriate value prior to an appeal?

The best bet is to see if you can work something out early, particularly if you're a shopping center that is historically a top provider of tax receipts in your jurisdiction. You might want to start talking to the county assessor now and see if you can get a better result when the values come out in 2021. I don't know of any assessor that wouldn't welcome the opportunity to have a legitimate discussion about what's happening and come to a number. Many states also have a local-level appeal that you go through before going to court or an administrative body. In either case, you may have to settle for something less than what you would like, but if it helps keep you afloat, then it's a good outcome.

How long does a typical appeals process take?

If you're in [my state of] Kansas and want a hearing in 2021, you're not going to get one anytime soon because we haven't had any in 2020 yet. Thousands of cases are backed up, and I think there are many states in a similar situation. Counties are going to want to hire more people to handle these cases, but at the same time, they're going to be laying off people because of budgets. For all those reasons, it's going be impossible to come to a resolution quickly.

​Cris K. O'Neall Esq. of Greenberg Traurig LLP discusses why multifamily property taxes are excessive and what taxpayers should do about it.

While COVID-19 has diminished value and property tax liability for all types of real property, it has been especially hard on multifamily housing owners.

State and local shelter-in-place orders that limited business operations have contributed to reduced rental income and vacancies for most commercial property types. In extreme cases, residents have gone out of business or into bankruptcy, eliminating revenues. Many owners have shuttered vacant commercial properties during the pandemic, which at least allowed them to curb spending on utilities and other operating costs.

Few multifamily owners have had that luxury. People still need a place to live, so they continue to occupy their apartments even though they may not be paying rent. As a result, many multifamily operations have lost revenue without reducing occupancy, exacerbating anemic rent collections by compelling landlords to pay operating expenses on fully occupied complexes.

THE PROBLEM: RESIDENTIAL EVICTION MORATORIUMS

In March, COVID-19 prompted the federal government and many states to declare emergencies; counties and cities immediately placed moratoriums on evictions of apartment dwellers for nonpayment of rent. California's experience was typical, with over 150 cities and nearly all metropolitan counties in the Bay Area and Southern California passing eviction moratoriums. Similar restrictions adopted throughout the nation prevented residential landlords from evicting residents for not paying rent.

The specter of millions of apartment dwellers forced from their homes remains very real. With over 45 million renter households in the U.S., the magnitude of potential evictions and the possibility of creating a huge homeless population overnight is staggering.

In August, Stout Risius Ross LLC estimated that 42.5 percent of renter households nationwide were unable to pay their rent and at risk of eviction due to the economic impact of COVID-19. Mississippi showed the highest percentage of renters in distress at 58.2 percent, while Vermont had the lowest at 20.0 percent. Percentages in the major states ranged from the low 30s to 50s.

MORATORIUMS EXTENDED

Many eviction moratorium ordinances either expired by June or were set to expire in early September. The Centers for Disease Control and Prevention responded by issuing an order on Sept. 2 (85 FR 55292) that, prior to Jan. 1, 2021, courts must not evict renters for failure to pay rent. Two days prior to the CDC order, the California Legislature passed an emergency statute (AB 3088) prohibiting nonpayment evictions through March 31, 2021.

California's governor asserted the state's statute takes precedence over the CDC's order. The statute preempts similar county and city ordinances, and the CDC's order states that eviction moratoriums in states that provide greater health-care protections than the CDC calls for are to be applied in lieu of the CDC's order.

The CDC's order and California's new law set renter income thresholds, but only to require greater documentation of need due to COVID-19's effect on a household. In California, the threshold is $100,000 for individuals or 130 percent of the median income in the county.

Renters below these thresholds need only submit a short hardship declaration to their landlord. The CDC's order and California's statute do not absolve residents, who must pay back-rent by Jan. 31, 2021 (CDC), or March 31, 2021 (California). In addition, California requires residents by Jan. 31, 2021, to pay 25 percent of rent owed for September 2020 through January 2021.

EVICTION MORATORIUMS AND PROPERTY TAXES

The National Apartment Association in 2019 estimated 14 cents of every dollar of rent goes to property taxes. Property owners receive 9 cents, while 27 cents pays property operating expenses and 39 cents goes to the property's mortgage.

Obviously, if there is no rent being paid but properties are still being occupied, owners must continue to pay property taxes, operating expenses, and their mortgages (mortgage relief is generally only available, under the CARES Act, to small property owners or owners with government-backed mortgages).

How will these moratoriums affect multifamily property taxes? Whether residents will resume paying rents early next year is far from certain, and back rent may never be paid. These unknowns will affect what multifamily properties' taxable values should be in 2020 and what they will be in 2021.

County assessors generally value multifamily properties using an income approach, starting with gross income netted against operating expenses. Capitalizing that income indicates a value that is the basis for determining the amount of property tax owed. The capitalization rate is based in part on the anticipated risk associated with the property's ownership, or the likelihood the property will continue to generate income.

The difficulty with using the income approach right now is that gross income declined precipitously and remains depressed many months later while operating expenses continue unabated, and there is no assurance back rents will be paid in 2021. The result in many cases is negative net income, which implies negative values and lower property taxes. In addition, capitalization rates are difficult to forecast because no one knows when COVID-19 health restrictions and related eviction moratoriums will be lifted. This uncertainty increases capitalization rates which, in turn, lower property values.

APPEAL ASSESSMENTS NOW

Given the economic challenges confronting renters, any multifamily property is highly likely to have declined in value in the short term, and potentially for the next year or longer. While assessors have promised "to take a hard look" at values in 2021 to see if they should reduce values and lower taxes, whether they will do so remains to be seen.

In view of this, multifamily property owners and managers would do well to appeal their property tax bills this year or during the next available appeal season. This will help ensure tax assessments for this year and future years account for the damage COVID-19 eviction moratoriums have inflicted on multifamily property values.

Numbers of lawsuits remind taxpayers and assessors to exclude intangible assets from taxable real estate value.

A recent case involving a Disney Yacht and Beach Club Resort in Orange County, Florida demonstrates how significantly tax liability can differ when an assessor fails to exclude intangible assets. For Disney's property, the tax assessor's and Disney's valuation of the property differed by a whopping $127.8 billion.

Real estate taxes are ad valorem, or based on the value of the real property. And only on real property.

The precise definition of real property varies by jurisdiction but generally is "the physical land and appurtenances affixed to the land," which is to say the land and any site and building improvements, according The Appraisal of Real Estate, 14^th Edition.

Your real property tax assessment, then, should exclude the value of any non-real-estate assets. That includes tangible personal property like equipment, or intangible personal property like goodwill.

When real estate is closely linked to a business operation, such as a hotel, it can be difficult to separate business value from real estate value. If the business activity is subject to sales, payroll, franchise, or other commercial activity taxes, then the assessor's inclusion of business value in the property assessment results in impermissible double taxation.

In Singh vs. Walt Disney Parks and Resorts US Inc., the county assessor appraised the Disney resort using the Rushmore method, which accounts for intangible business value by excluding franchise and management expenses from the calculation of the net income before capitalizing to indicate a property value.

Disney argued the Rushmore method did not adequately separate income from food, beverage, merchandise and services sold on the real estate, not generated by leasing the real estate itself. Disney also argued that the assessor included the value of other intangible assets like goodwill, an assembled workforce, and the Disney brand in the valuation.

The trial court did not rule on the propriety of the Rushmore method but found its application in this case violated Florida law. Referencing an earlier case involving a horse racing track (Metropolitan Dade County vs. Tropical Park Inc.), the court agreed with Disney that "[w]hile a property appraiser can assess value using rental income or income that an owner generates from allowing others to use the real property, the property appraiser cannot assess value using income from the taxpayer's operation of business on the real property."

The trial court decision was appealed to the district court (appeals court). The appeals court found the Rushmore method, not just its application, violated Florida law by failing to remove all intangible business value from the tax assessment. When the case returned to the trial court on another issue, the appeals court instructed that the Rushmore method should not be used to assess the property.

In deciding Disney, both courts found SHC Halfmoon Bay vs. County of San Mateo instructive. That case involved the Ritz Carlton Half Moon Bay Hotel in California. The California court had rejected the Rushmore method because it "failed to identify and exclude intangible assets" including an assembled workforce, leasehold interest in a parking lot, and contract rights with a golf course operator from the property tax assessment.

The Disney trial court also looked to the Tropical Park horse track case, where the tax assessment improperly included income generated from the business betting operation not the land use.

Similarly, in an Ohio case involving a horse racing facility, the state Supreme Court rejected a tax valuation that included the value of intangible personal property in the form of a video-lottery terminal license (VLT) valued at $50 million by the taxpayer's expert (Harrah's Ohio Acquisition Co. LLC vs. Cuyahoga County Board of Revision). The property had a casino and 128-acre horse racing facility including a racing track, barns, and grandstand.

The Ohio Court recognized that the VLT had significant value that should be excluded from the real property tax assessment. It rejected the argument that the license was not an intangible asset because it could not be separately transferred or retained. Looking at its prior decisions, the Court had recognized a non-transferable license could still be valuable to the current holder of that license, and that value should be exempt from real property taxation.

Experts continue to disagree about the best method to appraise assets with a significant intangible business value component.Nonetheless, these court cases underline again how important it is for your tax assessment to exclude intangible assets. With most commercial property owners facing onerous tax burdens based on pre-COVID-19 valuation dates, it is even more critical that intangible assets are removed from valuations for property tax purposes. Work closely with assessors, knowledgeable appraisers, and tax professionals to ensure you only pay real estate taxes on the value of your real estate.

Commercial property owners are a tempting target for cash-strapped governments dealing with fallout from COVID-19, writes Morris A. Ellison, a veteran commercial real estate attorney.

Macro impacts of the microscopic COVID-19 virus will subject the property tax system to unprecedented strains, raising the threat that local governments will turn to property tax increases as a panacea for their fiscal woes.

Local governments face formidable financial challenges. One article by Smart Cities Dive suggests that the crisis will blow "massive holes" in municipal budgets, with 96 percent of cities seeing shortfalls due to unanticipated revenue declines. The Washington Post reported that more than 2,100 U.S. cities expect budget shortfalls in 2020, with associated program cuts and staff reductions. The National League of Cities recently estimated that the public sector has lost over 1.5 million jobs since March. Governmental temptation to increase the tax burden on commercial properties will be difficult to resist.

Commercial property owners face similarly unprecedented challenges. Many owners of properties that traditionally served long-term uses for hospitality, retail, office and restaurant activities are now questioning whether those uses will continue. Many properties will need to be repurposed, but to what? Some owners are reportedly considering converting hotels to apartments, for example.

Property taxes are a major component of the costs landlords must examine in determining when and how to reopen. High property taxes, which are generally passed along to commercial tenants, will exacerbate those business' economic problems. While owners can influence some occupancy costs, others, such as taxes and insurance, are largely beyond their control.

RATES, DATES AND VALUES

Real estate taxes reflect both taxation rates and assessed values, but property tax appeals must focus on a property's value. Values hinge on key concepts such as valuation dates, capitalization rates, and highest and best use. The property tax system assumes that values change only gradually, often assessing a property's value by creating a fictitious sale between a willing buyer and seller on a statutorily defined valuation date.

With valuation dates set in the past, assessors tend to value through the rearview mirror. Looking to make a deal, investors, by contrast, look prospectively in deciding whether to buy or sell a property. These viewpoints can clash, particularly when events affecting value occur after the valuation date.

That is why the commercial property owners clamoring for immediate property tax reductions will likely be disappointed, at least until a tax year when their statutorily mandated valuation date postdates COVID-19's onset.

For example, if a taxpayer's bill is based on a fictional sale occurring on Dec. 31, 2019, before the black swan of COVID-19, the assessor is statutorily bound to value the property at its pre-pandemic value.

Some jurisdictions maintain a valuation date for years. That value may change substantially once the valuation date postdates early March 2020, but few state statutes will authorize revaluations based on COVID-19 as a "changed circumstance." A pre-COVID-19 valuation could therefore burden a property for years.

Like the systemic market downturn of 2008, the COVID-19 pandemic will create great uncertainty in capitalization rates, which reflect risk associated with a property's income. This will provide good fodder for argument in tax appeals. The difference this time may be the added uncertainty surrounding the highest and best uses of various commercial properties.

In negotiating a transaction involving income-producing properties, prudent parties analyze future trends. Looking forward, they would interpret weakening tenancy with heightened risk associated with occupancy, rent collections and overall tenant credit-worthiness. They would know that tenants' missed rent payments can lead owners to miss mortgage payments, which can lead to foreclosure.

Contrary to this real-world tendency to look ahead in a transaction, assessors have often assumed a property's highest and best use is its traditional or current use. Trends of working remotely, social distancing, and the rapid, dramatic shift to online retailing turn this assumption on its head.

OBSOLESCENCE ISSUES

Some businesses that closed during the pandemic, including many retailers, may never reopen. Anecdotal evidence of the market shift is manifold. Even before the COVID-19 pandemic, analysts were describing the shift to online retail as "apocalyptic" for many brick-and-mortar stores. Seasoned retailers including Neiman Marcus, Pier 1 Imports and J. C. Penney have declared bankruptcy. Many hotels have only been able to meet debt service obligations by tapping heretofore sacrosanct capital reserves, and airline travel has fallen off a cliff. In April, CNBC estimated that 7.5 million small businesses may not reopen. UBS projects that 20 percent of American restaurants might close permanently.

Social distancing rules that reduce restaurants' serving capacity may remain in place indefinitely. Combined with the loss of clientele, such as office workers that no longer work nearby, these conditions could mean closures for low-margin restaurants. Increasing occupancy costs and revenue declines accompanied by increased taxes could tip the balance.

Office values have historically been less volatile than retail property values, but this may change with the move to remote work. Change will be less apparent where many tenants remain subject to long lease terms, but some form of remote working is likely here to stay, and this suggests office tenants may well need less or different space.

Will an office tenant renew its lease? If so, at what rate? And will the tenant downsize? A key indicator of a weakening market is when tenants with long terms remaining on leases sublet space. In a declining market, tax assessors seldom look behind historic income statements to consider these weaknesses, which should be a risk reflected in the capitalization rate.

DON'T DELAY TAX PLANNING

Retail, office, and hospitality property values almost certainly will decline, at least in the short run. For transactional and property-tax purposes, commercial property owners should examine carefully whether the property's "highest and best use" has changed. Local governments that ignore these market changes in an effort to generate short-term tax revenues may exacerbate their long-term revenue problems.

Smart property owners may be able to mitigate the fallout by focusing tax appeals on the concepts of valuation date and highest and best use. They should also note the uncertainty inherent in capitalization rates.

Tax appeals in 2020 may prove especially challenging for cash-strapped commercial taxpayers because statutorily mandated valuation dates likely predate COVID-19. However, the longer-term risk rests with local governments. If they ignore changes in highest and best uses, and if taxing authorities fail to account for the increased risk in capitalization rates, governments may unwittingly increase the pandemic's economic damage.