​Assessors too often value newly constructed apartments as fully occupied, producing excessive assessments.

Developers frequently ask how to estimate property taxes on newly constructed multifamily properties, and tax assessors often provide an easy answer by adding up the value of building permits or by projecting the project's value when fully rented. However, this seemingly simple question grows complex when the assessor's valuation date precedes full occupancy and the ramifications of a wrong answer can linger for years.

Consider these points to value a new multifamily project more accurately.

Valuation Methods

Charged with valuing hundreds or thousands of parcels, assessors often seek a quick way to value a new multifamily project.

The cost approach offers the quickest and easiest route for the assessor, who estimates the current expense to construct an identical structure. One way to do this on a new project is to add the value of the building permits to the land value.

While building costs are clearly a factor in the decision to build, the cost approach ignores the market preference to value income-producing projects based primarily on income.

The assessor's second-easiest option is to rely on an appraisal's stabilization value and ignore the time and cost required to achieve stabilization. In valuing a not-yet-built multifamily project using an income approach, appraisers preparing a financing appraisal should, but don't always, calculate two different values: the "at completion" value and the "stabilized" value.

"At completion" is the project's value when construction is complete but prior to being fully leased. The prospective market value, or "as stabilized," reflects the property's projected market worth when, and if, it achieves stabilized occupancy.

The Dictionary of Real Estate defines stabilized value in terms of the expected occupancy of a property in its particular market, considering current and forecast supply and demand, and assuming it is priced at market rent. To determine a property's fair market value prior to stabilization, one must account for the monetary loss the owner will incur prior to stabilization.

Development Issues

Improvements generally trigger reassessment. The assessor's statutorily mandated valuation date generally ignores the development calendar's key milestones, most importantly the construction commencement, completion and revenue stabilization dates.

The developer makes assumptions during the development process, calculating the cost of building and operating the improvements as well as the rents that can be achieved. This calculation serves as the basis for a pro forma of an income and expense analysis of the project when fully leased.

Construction loans reflect building costs and subsequent time and money needed to achieve full lease-out or stabilization. Banking regulations require the lender to obtain an appraisal. The completed, but not yet stabilized, project incurs costs in the form of income not received during initial leasing, until it reaches stabilization.

Permanent financing depends on the stabilized value, which, in turn, depends on the project's income. Appraisals for permanent loan commitments obtained prior to the project's completion use a prospective valuation date and must contain various assumptions as to the property's financial condition on that prospective date.

The FDIC's Interagency Appraisal and Evaluation Guidelines authorize using a prospective market value in valuing a property interest for a credit decision. The Uniform System of Professional Appraisal Practices requires disclosure of assumptions in an appraisal with a prospective market value, as of an effective date subsequent to the appraisal report's date.

Assumptions regarding the anticipated rent at stabilization and the time required to lease the property are key to calculating stabilized value. Also critical are incentives the owner may offer prospective tenants during lease-up, and the project's projected income once fully leased. The appraisal should clearly disclose these assumptions, but they can still prove incorrect.

Clear disclosure of assumptions is critical. Unfortunately, many appraisers fail to adequately disclose their assumptions, and shortcut to the project's stabilized value.

Valuation Dates

Most state statutes prohibit taxation of improvements while under construction. The project usually comes on line for tax purposes after completion but prior to stabilization.

Being mandated by statute, the valuation date often does not account for where the multifamily project is on the spectrum between completion and stabilization. Unsophisticated assessors charged with valuing these projects often employ mass-appraisal techniques and may value the asset similarly to the market's stabilized properties.

Statutory Caps

Some states cap potential increases in tax value, which may magnify impact of the initial tax valuation. Caps limit increases that would otherwise bring values up to the market. For example, South Carolina properties undergo countywide reassessment every five years, but property values ordinarily cannot increase by more than 15 percent from the previously determined value.

Assessors know that a project's value at completion will nearly always be lower than its stabilized value because stabilization takes time and costs money. Competition may lower the project's achievable income, too. This knowledge can spur assessors to reach for stabilized values regardless of whether the project is yet stabilized. This taxes the unrealized, additional value between completion and stabilized levels.

A Matter of Time

All of the above considerations involve a timing disconnect between the property's actual condition on the statutorily mandated valuation date and its estimated future value based on fallible projections by the lender, developer or assessor. Axiomatically, assumptions don't always hold true. Lease-up may take longer than expected and may require concessions that increase cost. In over-built markets, the stabilized income may be lower than originally anticipated.

Charged with calculating true or fair market value as of a statutorily mandated valuation date, the assessor should examine how the market would value the property as of that date. If the asset has not achieved stabilization, the assessor should discount appropriately for time and financial costs required to achieve stabilization.  That is what the market would do, and is what the assessor is statutorily obligated to do.

And that should be the answer to the seemingly simple question of how to value newly constructed multifamily projects for tax purposes.

​Here's what taxpayers should do if the tax controversy now brewing causes large property tax increases

Recent headlines questioning the taxable values of Atlanta-area commercial properties may threaten taxpayers throughout Fulton County with a heightened risk of increased assessments.

Changes in the Midtown Improvement District, which extends northward from North Avenue and along both sides of West Peachtree and eastward, are rapidly reshaping the Atlanta skyline. Multiple new buildings under construction rise 19 to 32 stories, ushering in more than 2,000 new apartment units as well as hotel and office uses.

Amid this intense construction, Fulton County tax assessors have come under fire in newspaper and broadcast news reports that showed assessed taxable values were well below the acquisition prices paid for many commercial properties. Both Atlanta and Fulton County have ordered audits to determine whether assessors consistently undervalued properties, resulting in lost revenue.

While it may be unsurprising that assessors failed to keep up with rapidly changing market pricing in a development hotspot like Midtown, the news coverage and government scrutiny may pressure assessors to increase commercial assessments across the board. Owners of both newly constructed and older properties should diligently review the county's tax assessment notices, sent out each spring, to determine whether they should appeal their assessed values.

Know the assessment process

Understanding the permissible approaches to valuation is key for the taxpayer to determine whether to appeal an assessment. The two most commonly used methods are the income approach and the market or sales comparison approach, both of which can be problematic if incorrectly applied by the county assessor.

Assessors typically value apartments and office buildings using the income approach. Initially, however, assessors use mass appraisal methods that may not reflect the specific financial realities of the individual property. Taxpayers should examine each of the various components of the county's income model and question whether each element of the formula is appropriately applied to their property.

By utilizing data from the market, has the assessor overestimated the rental rates for the property? Property owners should analyze and discern whether it is beneficial to provide the previous year's rent roll to the assessor in order to argue that the county's model rental rate is inaccurate for their property. An older complex or building may have new competition from a recently built property offering up-to-date amenities. Not only will the older property be at a disadvantage to charge premium rents, but the newer construction is also driving its taxes higher.

Has the assessor used a market occupancy rate that does not correctly indicate the property's occupancy level? In order for the income approach to accurately achieve both physical and economic occupancy, the vacancy and collection loss should take into account both the occupancy rate and concessions that the owner provides to renters to maximize occupancy. Again, in a fluctuating market with new construction competing against old, occupancy rates can be affected.

In using market data, has the assessor underestimated the expenses for the property? Perhaps the expense ratio used is inappropriate for the property. If so, property owners can demonstrate this by providing the previous year's income and expense statement to the assessor, differentiating their property from the mass appraisal model.

A common area of disagreement is the capitalization rate. A capitalization rate is the ratio of net operating income to property asset value. Has the assessor used a cap rate that is derived incorrectly from sales of properties that are not comparable to the taxpayer's property?

Has the assessor properly added in the effective tax rate to the reported base cap rate from the comparable sales because the real estate taxes were not included in his allowable expenses? If the effective tax rate is not added to the base cap rate, and real estate taxes are not included in the expenses, the result is a lower cap rate, and thus, an artificially and incorrectly higher value. An analysis of the accurate application of the sales comparison or market approach is helpful in making the determination of the appropriate cap rate.

Many factors go in to determining if sales are sufficiently similar and can be relied upon. The comparable sales used should be of a similar age as the subject property. Older properties usually command a lower price per unit or lower price per square foot than newly constructed properties.

The comparable sales used should be similar in square footage to the subject property, with similar square footages in the various units within the property, because larger average unit size usually generates higher rents and also results in a quicker lease-up.

Consider the type of purchaser involved in the comparable sale transactions. Private investors typically pay less for properties than institutional purchasers such as real estate investment trusts because REITs are able to obtain lower-cost loans.

Similarly, if below-market-rate financing was already in place and the buyer was able to assume the loan, then the sale price may have been artificially inflated. Another circumstance to examine is, if the seller provided a significant amount of financing in the sale, there may have been unusually favorable financing terms; if so, the sales price must be adjusted.

Another aspect to investigate is the existence or lack of substantial deferred maintenance at the time of sale in comparison to the subject property. The necessity for additional capital expenditures after a purchase can affect the purchase price.

It is helpful to inquire into the effective real estate tax rates of the sold properties in order to determine if they are sufficiently similar to the subject property. Jurisdictions or taxing districts with lower tax rates can cause properties to sell for higher prices. Taxing neighborhoods with higher tax rates tend to generate sales with lower values, and thus, higher cap rates.

All commercial real property owners in Fulton County should carefully examine their tax assessment notices, because higher valuations by county assessors may be on the horizon. Property owners do not want to pay sky-high taxes based on what may be reflexive assessments stemming from the latest headlines.

Tax courts don't always recognize market value in setting property tax assessments.

Most real estate is taxed ad valorem, or according to the value. The theory is that each person is taxed on the value of the real property they own.

The New Jersey Constitution (Article VIII, Section 1, paragraph 1) stipulates that property is to be assessed for taxation by general laws and uniform rules, and that all non-agricultural real property must be assessed according to the same value standard.

Our statutes define the standard of value as the true property value. We call this market value, or the most probable price a property will bring in a competitive and open market under conditions requisite to a fair sale. That assumes the buyer and seller are each acting prudently and knowledgeably, and that the price is unaffected by undue stimulus.

In 2005, the state Tax Court, in a General Motors case, openly admitted it was making a determination that the highest and best use of the property was as an auto assembly facility. By this determination, the court set public policy indicating that this highest and best use fairly and equitably distributed the property tax burden.

In this case the court felt it was necessary to conclude the highest and best use of the property at issue was an auto assembly plant because to do otherwise may allow features of the property to go untaxed and therefore lower the value of the plant. The court also stated that this determination was consistent with and effectuates the public policy of fairly and equitably distributing the property tax burden. All of this was concluded while the market data suggested a different result, given that no auto manufacturing facility had ever before been sold to another automobile manufacturer. Further, by law, the tax court's role is to determine value, not to redistribute the tax burden.

The history of the Tax Court has, in practice if not in theory, interpreted the constitution and statutes of real property taxation to find value in a uniform and stabilized manner. In other words, although the market may vary over a period of years under review, the court would attempt to stabilize the effect of the differences when rendering opinions.

The Tax Court would also set precedent by using methods of valuation not normally used in the marketplace because it deemed the data before it at trial to be lacking. It has, for example, applied a cost approach to determine value when a buyer would purchase a property based on an income approach. This is common in court decisions, but often runs afoul of true market motivations and distorts the conclusion of value. The more the courts reach these types of decisions, the further away they move from concluding market value.

The court's attempt to carry these principles forward has appeared in various ways over the years. As early as 1996, in a case involving a super-regional mall with anchors not separately assessed, the Tax Court deemed the income approach inappropriate to value the stores and instead valued the stores on a cost approach. Today, the legacy of that decision requires plaintiffs to present a cost approach, which is not evidence of market value. This may well distort a property's valuation.

Issues such as capitalization rates are also problematic for certain assets in Tax Courts findings. Over the years, court precedent has set rates that often do not reflect the market. This is especially evident today when valuing regional malls classified as B or C grade. The market capitalization rates are well over those the courts have historically found. Although transactions verify this market data as accurate, the courts fail to recognize it, making it difficult for plaintiffs to prevail with values based on actual, transactional data.

In January 2018, after a number of decisions that rejected plaintiffs' approach, our Tax Court appears to have taken some pause. It recognized that by rejecting proofs from the market and data forwarded by taxpayers, it was ultimately failing to conclude to warranted assessment adjustments.

It stated:

"there has been some criticism of late, that the Tax Court perhaps has raised the bar for meeting the standard of proof too high in property tax appeals, given arguendo, what could be viewed as a growing trend seen in a number of recent decisions, where the court rejected expert opinions and declined to come to value. While such a suggestion may give the Tax Court pause for self-examination and reflection, it must not serve to invite expert appraisers to abrogate their responsibility of providing the court with 'an explanation of the methodology and assumptions used…'"

The quote seems to recognize that the proof bar was getting so high that a plaintiff could never prove its case. A more realistic view of the proofs provided by a taxpayer comes with it the recognition that market data and actions from market participants are the touchstones of value that should establish our assessments.

​What You Need to Know to Successfully Appeal Your Inordinate Property Taxes

For some time, owners and operators of seniors housing properties have been aware of the staggering demographic statistics, such as the Census Bureau's projection that the baby boomer population will exceed 61 million when the youngest boomers reach 65 in 2029. This is truly the Silver Tsunami. Yet, even seniors housing professionals may be surprised by excessive property tax assessments that break otherwise carefully constructed budgets.

Before discussing what seniors housing owners can do to combat an excessive property tax assessment, it will help to review why some taxpayers will receive such unwelcome notifications. Factors include the large and increasing number and variety of seniors housing projects, coupled with the mass-appraisal methods that assessors typically employ.

With tens of thousands of units constructed each year, the country now has over 3 million seniors housing units ranging from independent living to assisted living, memory care and/or nursing care. Appropriate assessment methods depend on whether a property is an all-encompassing, continuing care retirement community; freestanding with only one component (such as independent living only); or comprising several (but not all) of these subtypes.

Unfortunately, assessors with limited resources usually use a cost-based methodology that is cost-effective for valuing a large number of properties. That may work for residential assessments in areas with similar homes, but given the significant differences between seniors housing properties, this approach can create an enormous tax problem for taxpayers who own seniors housing.

An outrageous assessment

In one recent case, the owner of a newly constructed property was shocked to receive an assessment valuing the property about 30 percent above its actual cost.The resulting taxes would have exceeded the owner's budget by over $250,000, not only ruining cash flow, but also destroying more than $2 million of market value.

Fortunately, there are measures taxpayers can take to counter excessive assessments. A critical initial step is to confirm any appeal deadline. Not only do rules differ across the country, but in many states the appeal deadline depends on when the notice is sent.

Further complicating this point is that more than one formal appeal may need to be filed, and taxpayers often have a narrow window within which to file. Generally, if a taxpayer receives a notice and misses a required appeal deadline, there are no second chances for that tax year.

Other important steps are to determine the applicable value standard and the assessment's basis. Usually (but not always) the standard will be market value, or the probable cash-equivalent price the property would fetch if buyer and seller are knowledgeable and acting freely. To determine that value, the assessor usually will have used an incomplete and improper cost approach that only adjusted for physical depreciation.

For these typical cases where the assessor has estimated market value using a flawed cost approach, drilling down deep into the assessor's cost methodology may produce a gusher of tax savings. In the aforementioned case, the assessor had used the costs for constructing a very expensive skilled nursing facility. Correctly using the assessor's cost estimator service for the subject property, which was mostly comprised of independent living units, reduced the cost by about $10 million.

Additionally, an assessor's cost-based valuation often will only account for depreciation from the property's physical condition. A proper cost approach must also account for any functional or external obsolescence.

Functional obsolescence can be substantial, especially for older properties, because consumer preferences change over time. What consumers may have desired years ago may now constitute a poor offering.

External obsolescence, which is often due to adverse economic conditions, can impact a property regardless of its age. For example, there will be external obsolescence if new properties overwhelm market demand in an area, or if the inevitable next economic downturn lowers market values.

Other scenarios

While atypical, sometimes assessors will use an income approach or sales comparison approach to value seniors housing properties. As with the cost approach, those approaches introduce many ways for assessors to reach erroneous and excessive value conclusions. One potentially large error is valuing the entire business and failing to remove the value attributable to services, intangibles or personal property.

In the previously mentioned case, the taxpayer's appraiser used the income approach and concluded that the seniors housing property had a total business value of approximately $22 million. The appraiser then determined that about $1 million of that value was attributable to services and intangibles and about $800,000 was attributable to tangible personal property as shown in the table below.

In a similar vein, the Ohio Supreme Court recently reversed the Ohio Board of Tax Appeals in the case of a nursing home property where a taxpayer's appraiser had determined that only about sixty-two percent of the total paid for all assets was for the real property. The Board of Tax Appeals had summarily rejected the appraiser's analysis as a matter of principle. The Ohio Supreme Court reversed and ordered the Board to reconsider the appraiser's analysis, and determine what amount, if any, should be allocated to items other than real estate.

These cases underscore that an assessor who uses the income or sales comparison approach and mistakenly values the entire business, rather than the real property alone, can improperly inflate a real property assessment by a material amount.

Another step taxpayers can take to achieve tax justice is to involve experienced tax professionals and appraisers. As the above analysis shows, property tax valuation appeals have many procedural nuances as well as legal and factual issues that must be addressed. In addition, in some jurisdictions there may be a basis to obtain relief based on the assessments of comparable properties.

As the inevitable Silver Tsunami inundates markets, there will be more seniors housing properties and more instances of excessive tax assessments. To the extent that the surge in the elderly population depletes local government finances, whether due to government pension plan shortfalls or otherwise, there should be no surprise if property tax bills increase.

​

Careful preparation is the key to contesting these unfair property taxes.

It may be paradoxical that big-box retail has lost property value in real estate markets where commercial property values in general are climbing, but that is the message many owners must convey to achieve a lower property tax bill.

For decades, big-box properties generated significant tax revenue for schools and local governments, but that story is changing. Annual valuation gains of 2 percent to 10 percent annual increases may have become a simple rule of thumb at one time for assessed values, but are no longer expected or acceptable to most big-box owners. Instead, there is now a major struggle between the big-box owners and the local property tax assessor.

Many companies have changed their real estate and marketing strategy to adapt to declining big-box property values. Toys R Us, Kmart, Sears and other stores have either closed stores or no longer exist. Others, including Walmart and Target, have adapted to suit customers who are no longer happy shopping in a mega store, or having to walk to a distant corner of a mega store to pick up a toothbrush, a bottle of milk or a pair of shoes.

Many retailers have achieved positive results by reducing store sizes. Target moved away from the superstore format to stores of 25,000-45,000 square feet, emphasizing the "grab and go" concept rather than the full grocery store.

Some experiments have not worked so well. Walmart opened a number of smaller, "neighborhood" Walmarts, only to close many a few years later. Mega stores still exist, but while commercial real estate values in general may be soaring, the value of these mega stores generally is not.

Yet, the local assessors do not see it that way, applying either a simple, across-the-board increase based on the general market, or using the standard cost, income capitalization and market/sales approaches to perpetuate valuation increases that ignore changing retail dynamics.

Points of contention

The cost approach often results in an inflated and unrealistic value that no one would pay in an open-market transaction. The cost approach should only be used on a relatively new building with little depreciation or obsolescence to take into account. The original cost may also include single-purpose features which have little or no value to a second-generation user.

Finally, if the building is to be repurposed, there is enormous added cost to convert a mega store to multi-tenant occupancy or to a different use with a shallower usable depth; it may not be economically feasible.

The income approach is often unavailable since these stores are most often owner-occupied, and this approach should only be applied for a rental property. An owner-occupied property should never be required to produce income and expenses in the context of a valuation of the property for property tax purposes. Such information values the business that is being operated from the property, and not the bricks, mortar and land.

This leaves the third option, the market or sales approach, as the primary appraisal method. Here starts the war.

First, many assessors see a Walmart, Kohl's, Target or a Lowe's store differently than they do a local mom-and-pop store operated from a similar property. Yet this is wrong, because it violates basic principles of property tax valuations.

A taxing entity cannot collect property taxes on the value to the name as an ongoing business, but only on the bricks, mortar and land. Buildings with comparable size, location, age, quality and other real estate characteristics should have the same value, regardless of whether there is a national name on the building.

Second, most big boxes are owner-occupied. If sold, there would be no lease to transfer to the buyer; the building would be vacant and available to the buyer for its own use or subsequent leasing to a user-tenant. The way to apply this sales approach in such cases is to compare the big box to comparable sales of non-leased property that are, or soon will be, vacant and available.

Such sales in the relevant period are often hard to find. Many of these properties linger on the market for years before they are sold or repurposed. As a result of such few sales for comparison, the assessor will gravitate to using sales of leased properties.

A leased property is a totally different animal from an owner-occupied, big box store. The sale is based on the lease itself – the remaining term on the lease, the net income generated, the tenant's credit and the like. Often, the lease predates the sale by years and does not reflect current market rent. Sometimes the property was a build-to-suit project with rent based on the cost resulting from the user's specific requirements, which resulted in an initial inflated cost to build.

Case in point

This played out in one of my recent cases. The assessor valued a big box at $105 per square foot, based on recent sales of leased properties, with the rent in most of them being established 10-20 years earlier. Some were build-to-suit leases.

There was, however, a recent sale at $75 per square foot of a vacant big box store in a neighboring county. The Colorado Board rejected the assessor's valuation, finding that a vacant store represented the true market value, and reduced the taxable value to $10 million from the assessor's $15 million. This $5 million reduction resulted from digging into the assessor's analysis, pointing out the flaw in the cost and income approaches, and eliminating sales of leased properties.

The battle will soon start anew, and it is never too early to start accumulating the necessary data that will determine the victor.

Lack of data makes for more important conversations between advisors and property owners.

Corporate headquarters present unique challenges and opportunities in property valuation discussions with tax assessors. Managing taxes on any real estate property requires an understanding of all three traditional approaches to value, but headquarters are unusual in that good data are hard to find.

This article highlights common sticking points in value discussions for this unique property set. A collaborative discussion between an advisor and property owner on these few areas can lead to a successful tax reduction.

Cost considerations

A headquarters defines an enterprise, but many of its defining improvements lack value to potential buyers.

Especially with newly constructed or renovated projects, or when lacking comparable data, the assessor will often rely heavily on the cost approach to estimate market value. This can result in a high valuation with room for fruitful discussion about ways to support a value decrease.

Under the cost approach, an assessor using reproduction cost will frequently understate depreciation and obsolescence. It is important to also review treatment of the economic age-life method, which is often misapplied. The effective age, rather than the actual age, must be measured against the life expectancy of improvements.

Deferred maintenance also requires deductions. Good appraisal practice mandates that short-lived items should first be costed out by category — items such as windows, HVAC systems, carpet, roofs and restrooms — before determining their remaining useful life and cost of replacement based on capital plans.

If the appraiser resorted to a cost approach due to a lack of data for other approaches, in the case of an older headquarters with functional issues not designed to current standards, a replacement cost approach is preferred.

The replacement method projects the cost to reconstruct the buildings using modern materials, design and layout standards. This eliminates the need to estimate depreciation for superadequacies and poor design. It provides a better indication of the existing improvements' contribution to market value.

With preparation, the taxpayer can tell a powerful story of how to build the functional equivalent of the headquarters.

Income and sales

The income approach to value is seldom helpful, in part because of the difficulty in finding market rents for a single-user property of considerable size. The assessing authority may want to use multi-tenant rent comparables, but an explanation of the costs of the conversion from single- to multi-tenant use will reveal a significantly lower value conclusion.

The sales comparison will be the most relevant approach to value in most cases. Appraisers often use gross building area as a measurement unit of comparison for single users, but comparing by net rentable area (NRA) will go far to account for the reduction in value a building experiences when needs and usage change.

The appraiser must also use NRA for comparable sales. Factors such as remote working, benching and collaborative space needs will make more traditional and formal spaces within the building less valuable. Changes in how the corporate workforce uses office space can render many areas obsolete and deductible from NRA, such as auditoriums or an oversupply of formal conference rooms.

Another argument that helps to manage value in the sales comparison approach is to point out that parcels surrounding improvements should not be valued as fully functional and available building sites. Separating land from a corporate campus can diminish the campus' value.

Determining the economic impact to the comparables' sale prices when excess land might be at issue requires a more thorough analysis than simply looking at a land-to-building ratio and using the ratio as an adjustment criterion. The land-to-building-ratio adjustment alone does not measure the economic productivity of any excess land on the comparables in relation to the economic productivity of the headquarters land. There may be difficulty in developing the site due to terrain, or a corporate user might lose the right to add square footage elsewhere on campus if land is partitioned and sold.

There are good arguments to be made surrounding value adjustments for any renovations in a corporate campus. Often a corporate headquarters is physically complicated and evolving. If renovations add space, there is often an imperfect fit to the existing space. The taxpayer may argue that the new space suffers a discount because of the imperfect efficiency inherent in the blending of new and old.

Discussing conditions of sales comparables with the assessor is useful for appropriate adjustments. Often, the assessor lacks access to detailed offering memoranda or insights into the motivations of the buyer or seller, such as instances where a developer would pay more to acquire an assemblage, or if there is a need for cash, or unusual tax considerations.

Set the stage for a productive discussion with the assessor by first initiating an informative dialogue with the building engineers and manager. Ask them about the changing nature of the campus and their predictions about future changes.

On meeting with the assessor, share capital replacement plans and how the building must be changed due to internal industry needs and external trends. A meeting of the minds with the taxing authority on the cost and market approaches discussed above can lead to a successful value reduction.

A step-by-step guide from a veteran attorney to navigating the process of disputing real estate valuations by local government.

In most jurisdictions, taxpayers may meet with the assessor or assessor's representative to deliberate and possibly resolve issues concerning taxable real estate valuation.

First, contact the assessor's office to request a meeting. Getting past recorded messages may be a challenge in some instances, but talking to a human being is necessary.

During that initial phone call, be prepared to describe the problem and point of the discussion, then ask for a date and time to meet. Be sure to request the meeting in sufficient advance of filing deadlines for any appeal process.

Before the meeting, identify an objective (typically a lower assessment) and a plan to achieve that outcome. Be optimistic, but recognize that the assessor's office may reject the taxpayer's position. During the discussion, be reasonably flexible; passion and anger are seldom persuasive and will detract from an otherwise sound argument.

Fix the facts

There are a number of valid concerns other than overvaluation which, if properly addressed and corrected, can result in significant savings.

The most obvious reason to discuss the property with the assessor is the need to correct a simple mistake on the part of the assessor's office. Computer-generated assessed values are now widely used and accepted. The resulting values are no better than the data fed into the database, so review assessments with an eye on the broad picture.

Pay particular attention to the address and all measurements, which are common sources of error. Be sure the property hasn't been confused with some other property of greater value. If the property is improved, review the records available on the assessor's website to see if the improvements are accurately described and that the land is properly measured. Call any mistake of fact to the assessor's attention.

Most jurisdictions recognize varying degrees of assessment value depending on property classification. Typical classifications are commercial, residential and agricultural. Each class is assessed at a different percentage of its market value.

Usage is the primary classification determinant. For instance, undeveloped property zoned commercial may be a productive farm, in which case its classification would be agricultural. Point out to the assessor that the property is being farmed and was so used on the tax valuation day. Bring photos and records to establish that farming was the use on value day, and continues to be so.

Make a similar argument in any situation where the assessor classified the property higher than its actual use. Along the lines of classification, some properties are exempt from taxation if used regularly for charitable, religious and educational purposes.

Unless the use is easily recognized and accepted, it is unlikely the assessor's office will alter its opinion in an informal meeting. The meeting is an effort to convince the assessor that the property is overvalued for tax purposes.

Study the concepts

Unless the taxpayer is a valuation expert, it's probable he or she is meeting with someone who knows more about property values than the owner does, or at least believes that to be the case. A fundamental understanding of valuation methods is critical to a meaningful dialogue.

Volumes are written on the subject and the law books are full of cases dealing with value concepts. The following provides a thumbnail sketch of these concepts.

The three approaches accepted by all valuation experts are cost, income, and market or sales comparison. Assessors use these approaches daily, and look at property through these lenses.

Cost. If the property was purchased and improved with a new structure or structures within the last five years, the total cost of acquisition and improvement is a good indicator of what the property is worth and how it should be valued for tax purposes.

In the absence of a recent transaction, a credible opinion of the cost to replace the improvements on the property may be useful. There are manuals recognized by value experts that may assist in obtaining and presenting such an opinion as evidence.

Market. If the house next door, built just like the subject home, sold yesterday, then that sale price is a good indicator of the value of the subject house. On its face, the method of seeing what similar properties sell for seems the simplest and most direct way to determine a property's value.

If only it were so. The more variances there are between the properties, the greater the comparison challenge. Differences can include location, date of sale, condition of the property—the list goes on.

In dealing with the assessor, present listings and recent sales of properties similar to the subject property, if possible.

Income. In short, this is the present value of future benefits, and is the price a knowledgeable person would pay to acquire the future income stream of a given property.

Under this approach, value is typically determined by dividing the net income by the capitalization rate, or the buyer's initial annual rate of return. The capitalization rate, or cap rate, provides a formula for value calculation, and the higher the cap rate, the lower the value conclusion. The assessor will have a firm opinion of the cap rate and is unlikely to be swayed, but it's worth a try.

In many instances, arguing the general market cap rate with the assessor is futile. A better approach may be to show why the assessor's cap rate should be adjusted because of conditions unique to the property. Look for conditions that are beyond the owner's control and constitute risk to future income.

Arguments challenging the assessor's cap rate could include the greater risk of lost income due to external factors, such as a highway change or a major demographic shift.

Assessors and their staff consider themselves professionals meriting respect as public servants. To achieve any result from conversing with them, they should be dealt with accordingly.

At the conclusion of the meeting, be sure to document any agreement reached.

A proposed law to close the "LLC Loophole" from real estate transfer taxes is a solution in search of a problem.

Ohio legislators are drafting a measure to apply the state's real estate transfer tax to the transfer of any ownership interest in a pass-through entity that owns real property. This proposal will cause more problems than it solves.

Ohio assesses its transfer tax, called a conveyance fee, on each real estate transaction based on the purchase amount reported on a conveyance fee statement and filed with the deed. If a pass-through entity owns the property, a sale of interest in that entity is exempt from transfer tax. The proposed changes would apply the conveyance fee to those transfers, however.

Also, if the property purchase price exceeds currently assessed value, recording the conveyance fee statement and deed with the county will usually trigger a lawsuit by the school district to increase the assessment and tax bill.

Transfers exempt from transfer tax include gifts between spouses or to children; sales to or from the U.S. government, the State of Ohio or any of its political subdivisions; transfers to provide or release security for a debt or obligation; and sales to or from a non-profit agency that is exempt from federal income tax, when the transfer is without consideration and furthers the agency's charitable or public purpose. Generally, the policy is to impose the transfer tax only after a market transaction with market consideration.

What's the problem?

Lawmakers consider the proposal on transfer tax and pass-through entities a tool to fix the problem of real estate value escaping taxation, both at the time of transfer and, more importantly, as part of the assessment. The two supposed loopholes that the proposal aims to close are:

1. The transfer tax loophole argument assumes that some buyers may structure their purchase as an entity transfer, in part, to avoid the transfer tax, which can be significant for a highly valuable property.

1. The property tax loophole describes the more likely "problem" the proposed law purports to address. This argument suggests that some buyers attempt to avoid real estate tax increases when the purchase price is higher than the current tax assessment by structuring the deal as an entity transfer

Ohio assumes that a recent, arm's length sale price is the best evidence of property value for real estate taxation. Filing the deed and conveyance fee statement prompts the school district to file a lawsuit to increase the taxes. The conveyance fee statement indicates the purchase price, carries evidentiary weight and is presumed to be completed under oath, even though as a practical matter it is more like a clerical function and seldom completed by any party to the sale.

When interest in the ownership entity transfers without direct conveyance of the real estate, the transfer tax is inapplicable under current law and no purchase price is recorded. Some sales may be structured this way, trying to avoid exposure to an increase in property taxes by filing a conveyance fee statement.

Everyone should bear their share of the tax burden based on fair property valuation, but this proposed bill does not solve the problem of people skirting their responsibility. It also can lead to unintended consequences including the loss of privacy, increased transaction costs, implementation and enforcement costs, and less real estate investment.

A multilayered dilemma

There is no indication that using a pass-through entity is even an effective way for investors to avoid triggering an increased assessment. Ohio school districts file increase complaints not only when deeds and conveyance fee statements are recorded, but also in response to mortgages, LLC transfers, SEC filings, and sometimes the opinion of outside consultants. There is little evidence that significant numbers of sales are missed because they are the transfer of ownership interests. Thus, there is no loophole that needs to be closed.

The proposal disrupts uniformity, because using a recent purchase to set the assessment midway through Ohio's three-year valuation cycle treats taxpayers who've recently bought their properties differently than others. This is non-uniform treatment, which the Ohio Constitution prohibits.

The conveyance fee statement is often completed and filed by someone not a party to the sale. Common errors occur, usually in allocating the total asset purchase price. Historically, these incorrectly reported purchase prices were being applied to set real estate tax values with increasing rigidity, leading to assessments that did not accurately reflect the value of the real estate.

Assessments should only value real estate, but assessments based on these total asset prices would include the value of non-real estate items as well. To the extent that the value of these other items -- for example, an ongoing, successful business operation -- were also being taxed through sales taxes or a commercial activity tax, these taxpayers were subjected to double taxation.

The solution exists

A recent amendment to the tax law mandates that a real estate assessment reflect the unencumbered fee simple interest. The Ohio Supreme Court recently confirmed in its Terraza 8 LLC vs. Franklin City Board of Revision decision that the amendment requires assessors and tribunals to evaluate all circumstances of a sale, and not blindly apply the number reported on the conveyance fee statement.

The appraisal of the unencumbered fee simple interest provides uniform assessment for all taxpayers, while acknowledging the circumstances of real world transactions. It limits double taxation by making sure real estate tax is based on real estate value only, and yields consistent results whether a sale price is higher or lower than the current assessment.

It ensures uniform measurement and taxation for everyone; just as you would not impose taxes based on gross profits for one taxpayer and net profits for another. It also ensures that the tax is applied consistently, whether the owner just bought the property, has owned it for decades, leases it, occupies it, owns it individually or owns it through interests in a pass-through entity. Valuing the unencumbered interest also results in predictability, aids budgeting, and alleviates deal-killing uncertainty.

There are legitimate reasons to convey property through the transfer of ownership interests in an LLC or other pass-through entity, including privacy or other tax planning. The proposed bill undercuts those legitimate concerns without addressing the perceived problem of real estate value escaping taxation. Consistently valuing the unencumbered fee simple interest of real property through uniform assessment and uniform application ensures that no real estate value escapes taxation, and that no taxpayer bears more than their fair share of the burden.

​Savvy commercial real estate professionals keep property-tax planning on their checklists for acquisitions and capital projects.​

Why? Because they know that considering property taxes early can save money and reduce hassle later, whether the project is acquiring a business that owns real estate, developing real estate, remodeling a property or adding to existing improvements. And given that businesses overall spend more on property tax than any other state and local tax, considering property tax while planning these projects is a valuable opportunity to improve the bottom line.

The first step is to identify how the acquisition or other proposed actions might affect the property's taxable value. This depends on the local jurisdiction's assessing practices and on how an assessor will relate the sale price or project cost to taxable market value.

States treat sales information in varying ways. Ohio, for example, presumes a property's sale price to be its market value for calculating property taxes. Other states include the sale price in the overall algorithm for all properties but do not use it to determine the value of the specific property that sold. Still others ignore the price altogether.

There are several ways that price may differ from value. For one, the transaction may include non-taxable elements, such as a business, in addition to real property. Or the sale price of an office building may reflect added value for a lease at an above-market rental rate.

In a common scenario, the price paid for a portfolio of senior-living facilities will include the value of each facility's real property, the value of each facility's tangible personal property, and the value of each facility's resident lists, service arrangements, goodwill and other intangible (and therefore untaxable) personal property. The allocation of the purchase price among the various components may not reflect the market value of each component, even when the overall transaction price reflects market value. And sometimes a buyer pays more for a property than it is worth generally on the market. This is often due to the buyer's own investment strategies and thus requires an assessor to distinguish between investment value and market value.

A buyer should ideally evaluate how the price relates to the property's market value in the lead-up to the transaction. This is key to projecting property taxes going forward, in light of the transaction and the way the particular jurisdiction reacts to (or ignores) different types of transactions. It is also important to ensuring that the assessor receives accurate information in states where assessors learn of and react to sales prices.

This early planning can influence the portion of the price allocated to taxable value and help limit it to market value. Part of this is specifically identifying nontaxable, intangible components in the transaction documents in a way that conforms to the jurisdiction's property tax laws.

Another key step is to make sure any documents filed for real estate transfer taxes reflect the value of the taxable component instead of an overall value, thereby managing both the real estate transfer tax and future property taxes. Opportunities may exist to avoid or minimize the transfer tax, depending on the specific laws in each jurisdiction.

Many a buyer has reported the full sale price (or allowed the seller to do so, in jurisdictions where the seller reports the transaction), realizing too late that the reported sum included components that should have been reported differently. The buyer should also consider property taxes when reviewing any press release about the transaction. The new owner may find itself bound to what was reported, whether to government or the media, in later property tax appeals.

Also, preserving certain transaction details, such as the valuation analysis and rationale, may help later as support material or to dispute errors in discussions with the assessor.

Lastly, if information about the transaction goes public in a way that may lead to a misunderstanding by the assessor, reacting promptly can be crucial. This often involves discussing the information with the assessor to provide additional context, such as explaining when a buyer paid a premium above the property's market value.

Similar considerations apply to other types of project strategies, such as plans to develop real estate, renovate or remodel a property, or add to existing improvements. In each instance, early consideration of property taxes often proves useful. Doing so not only aids in projecting future property taxes, but can also guide the owner in reducing those taxes through choices made while carrying out the project.

Norman J. Bruns and Michelle DeLappe are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local tax. Norman Bruns is the Idaho and Washington representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Norman Bruns can be reached at nbruns@gsblaw.com. Michelle DeLappe can be reached at mdelappe@gsblaw.com.

The federal government has long encouraged owning a home over renting. Housing subsidies in the tax code effectively lower the after-tax cost of homeownership, which has helped taxpayers move out of residential rentals and into their own homes. The Jeffersons might not have credited tax policy for it in their 1970's sitcom, but it has assisted taxpayers in "moving up" to bigger and better homes. The Tax Cuts and Jobs Act of 2017 (TCJA) makes sweeping changes to the tax code for individual taxpayers that directly impact their ability to transition from renting to owning their home.

About 34 million households, or 44 percent of U.S. homes, carry a mortgage with annual interest charges that exceeded the prior standard deduction. With the new standard deduction, that group shrinks to around 14 million, or 15 percent of U.S. households, according to the National Association of Realtors (NAR).

And while the TCJA nearly doubles the standard deduction, it caps the deduction for state and local taxes -- including income, sales, and property taxes -- at $10,000 for both single and married taxpayers. This one-two punch could significantly impair some taxpayers' appetite for homeownership.

Two household examples

NAR prepared an analysis that illustrates this potential impact. In the first of two examples, a single taxpayer earns $58,000 per year, rents an apartment, and claims the standard deduction. Her tax liability for 2018 under the prior law would have been $7,491 but, under the TCJA, she pays just $6,060 and enjoys a tax cut in the amount of $1,431.

Now assume she purchases a home for $205,000, putting down 3.5 percent with a 30-year mortgage fixed at 4 percent interest. Further assume her first-year mortgage interest would total $7,856 and she would pay property taxes of $2,050.

As a first-time homeowner, her tax liability under the prior law would be $5,393. The tax benefits under the prior law save $2,098, which effectively lowers her monthly mortgage payment by $175 per month. Under the TCJA, her tax would be $5,423 (a $30 increase!) and the differential between renting and owning a home, which was $2,098 under the prior law, has shrunk to just $637 or $53 per month.

In the second NAR example, a married couple with three children and an annual household income of $120,000 leases a home and takes the standard deduction. Their tax liability for 2018 under the prior law would have been $11,370 but, under the TCJA, they pay $8,999 and enjoy a tax cut in the amount of $2,371.

Now assume they purchase a home for $425,000, putting down 10 percent with a 30-year, fixed rate mortgage at 4 percent interest. Further assume their first-year mortgage interest would total $15,189 and they would pay property taxes of $4,250.

Under the prior law, the couple would lower their tax liability for 2018 by $3,219 by purchasing a home instead of renting. This amount effectively lowers their monthly mortgage payment by over $268 per month. Under the TCJA, their tax would be $8,051 (a $100 decrease) and the differential between renting and owning a home, which was $3,219 under the prior law, has shrunk to just $948 or $79 per month. (For NAR's analysis and further discussion of Apartment Lists' examples, visit https://www.nar.realtor/tax-reform/the-tax-cuts-and-jobs-act-what-it-means-for-homeowners-and-real-estate-professionals.)

As these examples illustrate, the TCJA offers an incentive to homeownership, but it is considerably less valuable than the previous incentive. Thiseffectively levels the playing field between renting and owning a residence. In fact, after accounting for additional costs associated with homeownership such as maintenance, neighborhood association dues and local district fees, the scales may now tip in favor of renting.

Thus, taxpayers may forego the traditional path, and choose not to move up from renting to purchasing a home. Instead, they may choose to climb within the rental market. That is, they may move to bigger and better residences and may spend more on their residences , but they are likely to rent rather than buy.

At the same time, the TCJA is fueling investors' interest in the rental market so that more options will likely be available for taxpayers who forego owning a home in favor of renting. To that end, the TCJA offers more favorable treatment of pass-through income. And, income property owners are still able to deduct interest payments on mortgages, with no cap.

These factors make it more profitable for investors to own income-generating property such as multifamily apartments or single family rentals. So, while the TCJA may increase taxpayer demand for renting homes, it also encourages investors to invest in residential properties and make bigger and better rental units available to renters. Whether by accident or design, the TCJA is likely to result in significant benefits to the rental market.

Energy-efficient buildings may not yet command premium rents and prices in smaller markets, but green features could mean property tax savings.

A growing number of commercial properties incorporate energy-efficient attributes that exceed basic code requirements. While conserving resources, these sustainable building strategies can also enhance the owner's bottom line by reducing operating costs. As investors consider developing or buying green properties in certain markets, though, they should consider a less-obvious source of savings – their property tax bills.

No single set of attributes defines a green building; rather, sustainable structures lie on a spectrum. At one end are otherwise-conventional buildings with modest upgrades, ranging to a high end of properties employing comprehensive design and operational strategies that approach zero net consumption of energy or water.

The features most commonly associated with green building tend to be efficient heating and cooling equipment, better insulation, rainwater catchment and on-site power generation methods such as solar, wind, or geothermal. While roof-top solar panels garner attention, other design attributes including passive solar collection, drought-tolerant landscaping, and building-control systems can be equally effective at achieving sustainability objectives. Ultimately, each attribute adds costs to the construction or operation of a property, while not necessarily generating the same incremental gain in value.

How green is the market?

Green design and operations have become standard for Class A properties in many primary markets. With above-average adoption rates, the investment premium for energy-efficient attributes may disappear and properties lacking those attributes may decline in value. Similarly, buildings without green features may be at a competitive disadvantage in attracting potential tenants and buyers.

In many secondary and tertiary markets including across the Midwest, Southeast, Great Plains and elsewhere, however, buyers and tenants have not shifted their preferences toward green construction. This greatly reduces the direct economic benefits of green features. When the pool of tenants willing to pay premium rent for energy-efficient features approaches zero, the pool of buyers demanding those features likewise declines.

Accordingly, whether green attributes have an overall positive or negative impact on a property's market value is highly dependent on the local market, even when the nation overall shifts demand toward such features. Energy-efficient construction may be a market prerequisite in one location, while constituting over-engineering and over-building in another. The question for owners of sustainable buildings evaluating their tax assessments, then, is how buyers and sellers in that market react to specific green features.

Necessary, adequate or superadequate?

Assessors often value properties, at least initially, based on the costs of construction, using either replacement cost tables or information from construction permits. But most green buildings have higher upfront costs, with a goal of achieving long-term efficiency objectives. A green building assessed purely on a cost basis, without considering whether its features are above-market, may be over-assessed and, as a result, overtaxed.

Any cost-based property valuation must account for all depreciation, from ordinary wear-and-tear to obsolescence brought about by market factors. One type of functional obsolescence is superadequacy, which applies to an attribute that exceeds current market requirements. Essentially, a superadequacy is a cost without a corresponding value increase.

Importantly, obsolescence is measured against the market, so even a newly constructed property with no physical deterioration could suffer from substantial obsolescence. A particular green feature might represent a positive value element, a market requirement, or functional or external obsolescence, depending on the property type and location.

Of course, as market demands evolve, some features that were superadequate when originally constructed may become standard. Tax assessments must reflect property and market conditions on a certain date, however, and until the market changes, must account for superadequacies.

And while superadequacy is an element of the cost approach to value, it should be a consideration in income- or sales-based analyses as well. The value of green features, like everything else in an appraisal, must be supported with market research and data. If no demand is found for the property's features, that must be reflected in the value conclusion.

Getting the value right

Assessors may ask: "If a green building has an out-of-pocket cost of $1 million, how can it appraise for only $750,000? Why would an investor spend the extra money?"

Certain items may motivate a particular owner, but property tax assessments are usually based on the real estate's market value alone, regardless of business value or intangible value. If the market does not recognize a feature as valuable, then the value a particular user assigns to that feature is irrelevant for property tax purposes.

In questioning how a green feature affects a property's market value (as opposed to its value to the user), consider whether the feature creates a direct monetary benefit to the property owner or user, either in the form of higher income or lower expenses. Sustainability features may boost the owner's business, perhaps resulting in goodwill or broader market recognition, but that increase will not necessarily accrue to the real property itself. And indirect benefits – those nonmonetary benefits to the community or environment – are unlikely to change real estate value.

Valuing a green building involves most of the techniques used for conventional properties, but the nuances and complexities require greater knowledge and training. Local tax assessors, particularly in smaller jurisdictions where sustainable features have not reached market acceptance, often lack that requisite knowledge. It is no wonder that assessments often fail to consider all of the relevant market factors, creating opportunities for taxpayers to appeal excessive assessments.

As demand for sustainable buildings expands, assessors want to capture that growth in the local tax base. But by focusing on whether the local market demands or ignores energy-efficient features, diligent owners can reduce their property's tax assessments and achieve significant savings.

​Due diligence is required to determine whether possible tax increases can be abated.​

President Trump's Tax Cuts and Jobs Act is the first sweeping reform of the tax code in more than 30 years. Signed into law on Dec. 22, the plan drops top individual rates to 37 percent and doubles the child tax credit; it cuts income taxes, doubles the standard deduction, lessens the alternative minimum tax for individuals, and eliminates many personal exemptions, such as the state and local tax deduction, colloquially known as SALT.

While Republicans and Democrats remain divided on the overhaul's benefits, there is a single undeniable fact: The sharp reduction of the corporate tax rates from 35 percent to 21 percent will be a boon for most businesses. At the same time, employees seem to be benefiting too, with AT&T handing out $1,000 bonuses to some 200,000 workers, Fifth Third Bancorp awarding $1,000 bonuses to 75% of its workers, Wells Fargo raising its minimum wage by 11% and other companies sharing some of the increased profits with employees.Companies are showing understandable exuberance at the prospect of lower tax liability, but investments many firms are making in response to the changes may trigger increases in their property tax bills.

Some companies already are reinvesting in their own infrastructure by improving and upgrading inefficient machinery or renovating aging structures. Renovations to address functional or economic obsolescence can help to attract new tenants and, most significantly, command higher rentals for the same space.

The real property tax systems in place for most states are based on an ad valorem (Latin for "according to value") taxation method. Thus, the real estate taxes are based upon the market value of the underlying real estate. Since the amounts on tax bills are based on a property's market value, changes or additions to the real estate can affect the taxes collected by the municipality.

Generally speaking, most renovations such as new facades, windows, heating or air conditioning will not change the value or assessment on a property. The general rule is that improvements which do not change the property's footprint or use, such as a shift from industrial to retail, shouldn't affect the property tax assessment. However, an expansion or construction which alters the layout of a property can – and usually does – result in an increased property assessment. Since real estate taxes are computed by multiplying the subject assessment by the tax rate, these changes or renovations can significantly increase the tax burden.

Recognizing that this dynamic could chill business expansions, many states offer a mechanism to phase-in or exempt any assessment increases. This can ease the sticker shock of a markedly higher property tax bill once construction is complete.

New York offers recourse in the form of the Business Investment Exemption described in Section 485-b of the Real Property Tax Law. If the cost of the business improvements exceeds $10,000 and the construction is complete with a certificate of occupancy issued, the Section 485-b exemption will phase-in any increase in assessment over a 10-year period. The taxpayer will see a 50 percent exemption on the increase in the first year, followed by 5 percent less of the exemption in each year thereafter. Thus, in Year 2 there will be a 45 percent exemption, 40 percent in Year 3 and so on.

Most other states have similar programs to encourage business investments and new commercial construction or renovations. The State of Texas has established state and local economic development programs that provide incentives for companies to invest and expand in local communities. For example, the Tax Abatement Act, codified in Chapter 312 of the tax code, exempts from real property taxation all or part of an increase in value due to recent construction, not to exceed 10 years. The act's stated purpose is to help cities, counties and special-purpose districts to attract new industries, encourage the development and improvement of existing businesses and promote capital investment by easing the increased property tax burden on certain projects for a fixed period.

Not long ago, the City of Philadelphia, Pennsylvania, enacted a 10-year tax abatement from real estate taxes resulting from new construction or improvements to commercial properties. Similarly, the State of Oregon offers numerous property tax abatement programs, with titles such as the Strategic Investment Program, Enterprise Zones and others.

Minnesota goes a step further and automatically applies some exemptions to real property via the Plat Law. The Plat Law phases-in assessment increases of bare land when it is platted for development. As long as the land is not transferred and not yet improved with a permanent structure, any increase in assessment will be exempt. Platted vacant land is subject to different phase‑in provisions depending on whether it is in a metropolitan or non‑metropolitan county.

Clearly, no matter where commercial real estate is located, it is prudent for a property owner to investigate whether any recent improvements, construction or renovations can qualify for property tax relief.

​It's critical for owners to identify both economic and functional obsolescence in order to fight unfair tax assessments.​

New technologies, shifting markets and aging buildings can drive economic obsolescence across entire industries. Equally important for the taxpayer, these factors also affect individual property values from a functionality perspective. Understanding both economic and functional obsolescence is essential to properly evaluate tax assessments for accuracy.

Determining functional obsolescence requires an analysis of the property's layout and technologies in use. This exercise attempts to quantify any adjustment in value that amplifies or outpaces downward trends occurring in the market, or accelerates depreciation beyond a straight-line basis. This may include external trends having a unique negative effect on the property's functionality.

Likewise, economic obsolescence can affect a property's value.Such an analysis involves external factors not necessarily specific to the property that may compromise its value on the open market.Declining trends in markets within an industry can signify reasons for impaired values both nationally and regionally.Moreover, international competition may underscore weaknesses within an industry that explain a reduction in a particular property's value.

In ascertaining the decline in a property's value due to economic obsolescence, the analysis must attempt to quantify that decline and offer reasons explaining it.These reasons need to be identified and reasonable, a rationale correlating values assigned to those reasons. For example, a facility may have a decline in excess of industry averages, such as changes in transportation costs and infrastructure in comparison to other supplying markets.It could become much less expensive to ship product from South America than to ship by rail in parts of the United States.

In an uncertain economic climate or a declining or stagnant real estate market, the need to evaluate obsolescence in property assessments is obvious. But even in times of growth and rising real estate prices, taxpayers should consider functionality in reviewing an assessment.

In Georgia, for example, regulations governing property assessments require local taxing authorities to take obsolescence into account. The statute lacks any description of the precise mechanics involved in measuring obsolescence, however, and assessors often forego such an evaluation.

A given jurisdiction's tax return may apply depreciation schedules, but those may not incorporate the concept of functionality. If unaddressed in depreciation schedules, then functional obsolescence needs to be captured as an adjunct to depreciation. Poor economic times or deterioration in a property's utility will exacerbate normal depreciation.

The degree of functional obsolescence is reflected in the utilization of the property. A comparison between full versus actual property usage can indicate the degree of functional obsolescence. Look for evidence of the gap between full and actual historical changes in operating income and production.

Functional vs. Economic Obsolescence

Given that the discrepancy between full and actual property utilization is unique to the facility and not industry-wide, it is functional. This could be explained by technological differences between competing facilities and the subject property. At the same time, external economic factors may contribute to the property's comparative decline.

For example, a printer may use antiquated equipment and technology that require it to keep large facilities for both production and warehousing. Comparisons will identify a gap in functionality between the property and those of more modern competitors using smaller facilities and newer technology. Faster production at newer printing operations may also require less warehousing, because projects are completed more quickly for shipping. The impact of this obsolescence on value is unique to the subject property, reflecting reduced functionality.

On the other hand, great changes are transforming the printing industry. These external factors may be detected in exactly the same way as functional change, but on an industry-wide basis.

Declining demand for an industry overall can impair a particular property's value. Such a sea change can exist within a robust economy, too: In our example, a digital culture has rejected the traditional model for printing to a significant degree, as the widespread use of electronic records and communication has reduced demand for paper printing.

A mine provides another example. Over time, miners extract the most accessible minerals using the least costly means. The layout and operation would have been originally set up to facilitate this process.

As mining continues, the remaining minerals may become more expensive to extract per unit of raw material. This added cost reduces operating income. The mine may require new infrastructure to continue operations. These periodic expansions may be inefficient, again increasing processing costs.

It may be true that, were the mine to be redesigned from scratch, no one would duplicate the existing operation because of the production costs. This reflects deteriorating functionality. On the other hand, industrial demand for the mined product may evaporate due to innovations that make the material unnecessary in processes that once required it.

Changing market forces can impact value. Until recently, the United States was a net importer of natural gas, supporting demand for facilities that enabled the import of liquid natural gas. Now that the United States is a net exporter of natural gas, those same facilities that handled the import of natural gas are more obsolete and less valuable.

Obsolescence is an important consideration in valuing property, regardless of economic conditions. This is especially true for functional obsolescence, but can also be true for economic obsolescence. In valuing property, it is important to remember there is significant overlap between the two, and many factors and influences may explain overall obsolescence.

This paper responds to the guide issued by the IAAO Special Committee on Intangibles relating to the handling of intangible assets and real estate in property tax valuation and assessment. The response supports use of appraisal methods which directly appraise and remove the full value of identified non-taxable intangible assets in the valuation and assessment of taxable real property. The response also addresses some of the methods discussed in the IAAO Committee's guide and identifies concerns with the legal authorities cited in the guide.

In early 2017 the International Association of Assessing Officers (IAAO) Special Committee on Intangibles issued a white paper addressing the scope of the intangible asset exemption: "Understanding Intangible Assets and Real Estate: A Guide for Real Property Valuation Professionals,"[2] hereafter the "IAAO Guide" or "Guide. "The  IAAO describes the purpose of the IAAO Guide as follows: "This guide is intended to assist assessors in understanding and addressing intangible assets in property tax valuation" and "to assist in identifying intangible assets and exclude them from real property assessments." [3]The Guide purports to describe the legal and appraisal requirements for removing the value of intangible assets and rights in the assessment of real estate for property tax purposes. However, the Guide advocates appraisal methods that do not remove the value of intangible assets from assessment, omits essential appraisal authority, mis-cites court decisions, and ignores controlling law. This paper exposes the unbalanced nature of and errors in the Guide, including techniques which purportedly minimize or eliminate the value of intangible assets from assessment and other omissions.

The Qualified Nature of the IAAO Guide

Not all IAAO publications have equal weight. The IAAO Guide expressly provides the following self-limiting disclosure immediately below the title of the paper: " This guide was developed by the IAAO Special Committee on Intangibles for informational purposes only and does not necessarily represent a policy position of IAAO. This guide is not a Technical Standard and was developed for the benefit of assessment professionals."[4]

An IAAO "technical standard" represents an official position of the IAAO: "International Association of Assessing Officers (IAAO) maintains technical standards that reflect the official position of IAAO on various topics related to property tax administration, property tax policy, and valuation of property including mass appraisal and related disciplines. These standards are adopted by the IAAO Executive Board. IAAO assessment standards represent a consensus in the assessing profession."[5] The IAAO Guide is not an IAAO technical standard, so it has not been approved by the IAAO Executive Board and cannot be described as endorsing a "consensus" in the assessing profession.

Excluding the Value of Intangible Assets: Issues Raised in the IAAO Guide

The IAAO Guide correctly acknowledges that in "the majority of jurisdictions, intangible assets are not taxable, at least not as part of the real estate assessment. As a result, assessors must ensure their real estate assessments are free of any intangible value" and that "the value of intangible assets is excluded. " The Guide also says "assessors seek methods that measure the value of the real property but exclude any intangible asset value" and "[assessors] must utilize methods to ensure the value of intangible assets is excluded from real estate assessments."[6]

The question is whether the IAAO Guide actually proposes methods that meet this standard.The bare assertion that all of the intangible assets have been removed from an assessment must be tested:if the appraisal methodology is recognized to encompass non-taxable intangible assets, then it must demonstrate exactly how intangibles are removed and what value was ascribed to each of those removed intangibles.The methods advocated by the Guide can be evaluated by asking whether a particular method of appraisal subsumes intangible assets and, if so, what those intangibles are, their values, and whether those values are actually excluded.

A fundamental question raised by any assessment or appraisal method is whether it is likely to include intangible assets.Capitalizing operating revenue very likely means that business enterprise, and/or business enterprise components such as assembled workforce, working capital, licensing rights or such, are included in the assessment.If the cost indicator includes a line item for operating permits or environmental emission credits, then an intangible asset is being assessed.If the sales price is paid for a rental property, and that price is based on an above market lease in place and/or fails to account for lease-up costs and delay, then intangible assets are implicated. Thus, an initial question is whether the nature of the property at issue and the appraisal method implicates intangible assets.

There are a number of issues addressed in the IAAO Guide which are accepted in the appraisal profession as being consistent with correct methods for handling the identification, segregation and removal of intangibles.For example, several paragraphs in the Guide point out that the Cost Approach, as applied to the tangible real and personal property, "inherently excludes" the value of non-taxable intangible assets and rights.[7]The Guide also states that when the Sales Comparison Approach or the Income Approach are used to value going-concern type properties, it is likely that non-taxable intangibles are subsumed in the going-concern value conclusion, and those intangibles that were captured need to be identified and their values excluded.[8]In addition, the Guide cautions that sales prices for real property sold along with a business may include intangibles' values.[9]Therefore, from an introductory perspective, the Guide satisfactorily identifies those situations in which intangibles may be implicated in an appraisal.

There are other issues addressed in the IAAO Guide which are not accurately or correctly discussed.The first is the "separability" criteria for identifying intangibles.The second is the role of ownership in the intangibles exclusion process. The third is the use of accounting and tax records to allocate value to intangible assets.And the fourth is the efficacy of the Rushmore "Management Fee" method for removing the value of non-taxable intangibles.Each of these issues is addressed below.

1.Separability Is Not Necessary for the Identification of Intangible Assets

The Issue

The IAAO Guide asserts that "separability" is necessary for identification of intangibles because some intangible assets are "intertwined" in that one intangible is dependent upon another and the intangibles "are not easily separated."The Guide also states "the question is whether the business . . . could be separated from the real estate" or, more broadly, "[i]f the real estate [could] be sold without the intangible."[10]

The Response

An intangible asset need not "be capable of being separate and divisible from real estate" as the IAAO Guide contends for the intangible to be recognized, and the "separability test" is unnecessary.No reason is given for separability in the IAAO's list of requirements for identifying intangibles.In fact, so long as there is adequate data available for placing a value on an intangible, even one that is not easily separated from real estate, the ability to divide the intangible from the real estate is irrelevant.

California's State Board of Equalization (SBE) addressed the issue of "separability" when it approved Assessors' Handbook Section 502 in December 1998.[11]In Issue Paper Number 98-031, which was released prior to approving Assessors' Handbook Section 502, the California SBE considered the question of separability.[12]On December 7, 1998, the California SBE's Property Tax Committee determined that separability was not necessary in order to recognize an intangible asset or right for purposes of removing the intangible's value in the property tax assessment of taxable real and personal property.[13]Based on this decision, the California SBE included language in Assessors' Handbook Section 502, Chapter 6 (entitled "Treatment of Intangible Assets and Rights") stating that while some intangible assets and rights may be identifiable but not capable of segregation, the inability to separate an intangible "does not prevent recognition of the value" of the intangible.[14]The California SBE's guidance is consistent with that of Reilly and Schweihs issued ten years later:"[T]here is absolutely no requirement that the intangible asset has to be transferable separately from other assets.In other words, the subject commercial intangible asset may be sold with other tangible assets and/or with other intangible assets."[15]

The IAAO Guide is unclear about what types of intangibles must be found separable.The example provided is the "historical significance" of the Waldorf Astoria Hotel in New York City.[16]The Guide then refers to other types of "real property attributes" that are intangible in nature and cannot be sold without the real property, such as view, proximity (location), prestige and appeal.[17]Later, the Guide refers to "real property intangibles" such as zoning and air rights.[18]All of these intangible attributes of real property are properly tied to the real property because they are integral to the property (just as a property's layout, design, or architectural style is integral to the property).These intangible real property attributes are taxable under California Revenue and Taxation Code section 110(f) and the California Supreme Court's guidance:"[I]ntangible attributes of real property" include location, proximity, zoning, view, architecture and other attributes that "are an integral part of" the real property, but "intangible attributes" do not include rights exercised in connection with the use of real property.[19]But aside from this limited set of intangible real property attributes, the value of all other intangible attributes, even those closely aligned with the real property, must be removed.

2.Ownership Is Not Relevant in the Intangibles Value Exclusion Process

The Issue

The IAAO Guide states that "the sale of a hotel with a franchise and management agreement in place does not include the value of those assets [the agreement]" because the value of the agreement inures to the hotel management company and not the hotel owner.The first sentence of the paragraph in which this statement appears provides the context:"a property sells and the intangible assets are included in the price."Another place in the Guide says that the "intangible assets owned by others, such as the franchisor or third-party management agreement [of a hotel]," need not be excluded even if they were included in the purchase price for the sale of a going-concern that includes real estate, personal property and an ongoing business.In the Income Approach context, the Guide also asserts that management and franchise are owned by the management or franchise company.[20]

The Response

In the circumstance where a purchase price is paid for a going-concern consisting of real property, personal property and intangible assets, that purchase price must be allocated to all of the assets that were included in the purchase.While the IAAO Guide generally concurs with this, the Guide also singles out hotel management and franchise agreements as not being subject to this standard.But when intangible assets are included in the purchase price paid for a hotel property, a portion of that price must be allocated to those assets, i.e., the management/franchise agreement.Likewise, when the management/franchise agreement generates revenues for a going-concern, a portion of that going-concern's value must be allocated to the intangible.That is so regardless of who owns the agreement because the benefits flowing from that intangible agreement accrue to both the hotel manager and the hotel owner.Those benefits accrue to the manager and the owner because they share the legal rights to use (a) the real property and (b) the intangible assets/rights under the management/franchise agreement.This issue is discussed in more detail in the "Management Fee" method section below.

Similar misdirection appears in the IAAO Guide's discussion of assembled workforce:"Typically, the management company of a hotel, not the owner, hires the managers and workers.Therefore any value of the assembled workforce belongs to the management company."[21]Again, the issue is not who "owns" the workforce, but who benefits from the presence of the workforce and who holds the legal right to use and benefit from that workforce.Both the hotel manager and the hotel owner benefit from a hotel's workforce – the manager earns a management fee, and the owner makes revenues.(Moreover, even if the manager hires the workforce, the hotel owner pays the salaries and wages of the managers and workers in that workforce.)

3.Accounting/Tax Records Should Not Be Used to Allocate Value to Intangibles

The Issue

In the context of analyzing property sales, particularly sales of going-concern properties which include intangibles, the IAAO Guide encourages assessors to consider sales price allocations appearing in financial reports and accounting documents as well as filings under Internal Revenue Code section 1060.[22]However, the Guide also counsels assessors not to rely on accounting valuations because "[t]he classification and method for estimating and allocating intangible value for accounting purposes are rarely the same [as those] for property tax purposes," and not to rely on financial reporting information because "the type of value required for financial reporting [accounting purposes] is typically fair value. . . .The definition of fair value is different from that for property tax purposes (typically market value)."[23]

The Response

The instructions on Page 47 of the IAAO Guide are proper.Reliance on valuations performed for accounting or tax reporting purposes are nearly always irrelevant and inappropriate for use in property tax assessment appraisals.This is demonstrated by the Guide's citation to the decision in Hilliard City Schools Board of Education v. Franklin County Board of Revision,[24] where the Ohio Supreme Court declined to use accounting information in favor of an appraisal.[25]Similarly, the use of value allocations made for federal tax purposes was rejected by the California Court of Appeal:

[T]he proposition that a sales price is prima facie evidence of fair market value . . . holds . . . true with respect to an arm's length, open market sale . . . with the proviso that the probative value of such sale may be displaced by a variety of factors, including the influence of tax and other business considerations.. . .[P]laintiffs' contractual allocation of the purchase price . . . minimized the value of the [real] property as compared with the business assets [intangibles].These allocations largely reflected plaintiffs' own construction of the values, and at least one of them was specifically made for federal tax purposes.[26]

The IAAO Guide's discussion of this topic concludes:"Valuation and allocation for accounting purposes may be different from, and possibly not applicable to, the value of real property in a property tax assessment scenario.. . .Although accounting documents may not prove or disprove the presence or value of intangible assets, they do represent another piece to the puzzle that could assist the appraiser or assessor in reaching a supportable estimate of value."[27]The equivocating nature of these statements casts doubt on accounting (or tax) reporting documents, and such information should not be used for purposes of allocating value to intangibles in the property tax assessment of real property.

4.The "Management Fee" Method Does Not Remove the Value of Intangibles

The Issue

The Rushmore "Management Fee" method asserts generally that deducting a management and/or franchise fee or other operating costs accounts for (removes) the value of intangible assets from assessment: "Rushmore's assertion is that, by deducting the costs associated with intangible value . . . from a property's operating expenses, the remaining NOI is for the real property only."[28] Put another way:

The management fee approach is based on the premise that any intangible value arising from a going-concern can be measured by capitalizing the management fee necessary to compensate a third part to run the business.. . .Theoretically, under this method, any value arising from the management of the business has been excluded.Under the theory of substitution, no one would pay more for a business or building than the presumed cost to replace it.[29]

The IAAO Guide contends that "hotels usually sell with the intangibles excluded from the transaction price through [management fee] deductions in the pricing decision that represent business-related intangible assets."[30]Finally, the Guide also asserts that when an income approach is used, the Rushmore "Management Fee" method is the "best method for excluding intangible value in an income approach" and "is the most valid approach for excluding intangible assets in an income approach."[31]

The Response

The Relationship between the Hotel Owner and Hotel Operator under the Management/Franchise Agreement

When an income capitalization approach is used to value a property and the income used in the approach is generated by all forms of property in use, including real property, personal property, and intangible property, the resulting value represents the value of all forms of property that generated the income, including the real property, personal property and intangible property.The general appraisal principle is set forth in a decision by the California Court of Appeal:"When the capitalization-of-income approach is used as a basis for an opinion of or considered in determining the market value of an operating enterprise, the result is a determination of the total value of all of the items of property which are a part of that enterprise."[32]

The Rushmore "Management Fee" method assumes that a hotel owner and a hotel manager have entered into a hotel management or franchise agreement under which the manager will operate a hotel on the hotel owner's behalf.Under this agreement, the hotel owner provides a hotel facility for the hotel manager to operate.In return, the hotel manager provides to the hotel owner the benefits of the hotel manager's management expertise as well as the benefits relating to the hotel manager's name or "brand."

The intangible contractual rights of the hotel owner and the hotel manager, and the interests created by those rights, are aligned under the management/franchise agreement because the owner and manager are both engaged in an ongoing hotel enterprise using the same tangible and intangible property, and their mutual success depends on how well the hotel performs financially.Success under the management/franchise agreement comes in two parts.First, the hotel manager succeeds if it receives a management fee as called for in the contract.Because the management fee is usually a percentage of revenues generated, the fee is tied to the hotel's performance.(The IAAO Guide asserts that any return to the business from a management/franchise agreement arises from this percentage of revenues element.[33]But because the entire percentage management fee is paid to the manager, and not the hotel owner, the percentage fee does not capture any of the value of the management/franchise agreement to the owner.)And second, the hotel owner succeeds if the hotel produces revenues sufficient to pay the hotel manager's fee and the hotel produces incremental additional revenue over and above the fee paid to the hotel manager, which revenue goes to the hotel owner.

"Return of" and Return on" the Management/Franchise Agreement

The Management Fee method deducts the management or franchise fee as a regular operating expense in a standard income capitalization analysis:"the management fee approach can be applied by including a going-concern management fee as an operating expense."[34]The deduction of the management/franchise fee in the Management Fee method amounts to the hotel owner's repayment of the fee to the hotel manager.It is, in the strictest sense, the cost to the hotel owner for having a management company or franchisee operate the owner's hotel.As such, it literally represents the "return of" the management fee to the hotel manager.Referring back to a portion of the IAAO Guide cited above, it represents the "cost to replace" the management agreement under the "theory of substitution."[35]

The Management Fee method's contention that the deduction of the management fee represents the full value of the intangible non-taxable hotel management/franchise agreement is short-sighted and misleading.First, no hotel owner would hire a hotel manager if doing so did not produce additional revenue to the hotel owner.Why would a hotel owner pay a hotel manager a management/franchise fee if, at the end of the year, the revenue brought in by the hotel manager's efforts was only enough to pay the management/franchise fee to the manager?All of the revenue attributable to hiring the hotel manager would be paid to the manager, and the hotel owner would be no better off than if he had not hired the manager in the first place.

Clearly, the hotel owner will only hire a hotel manager if the manager will increase the hotel's revenue by more than the amount of the management/franchise fee paid to the manager.In other words, the hotel owner will not hire a hotel manager if there is only a "return of" the management/franchise agreement through payment of the management/franchise fee.There also has to be a "return on" the management/franchise agreement to the hotel owner, meaning that as a result of hiring the hotel manager and entering into the management/franchise agreement, the hotel owner receives additional revenue over and above the fee paid to the hotel manager.

An example is in order.Assume a hotel owner can make $10 million per year operating a hotel by himself.Alternatively, the owner can engage a hotel manager to operate the hotel under a management agreement which requires payment of a four percent (4%) management fee (or $400,000).For the owner to pay the manager the management fee and make the same $10 million as before, the manager's efforts have to increase the hotel's revenues by the amount of the management fee (4% or about $400,000) to $10.4 million.However, at this level of operating revenue the hotel owner only nets $10 million after paying the management fee to the manager (the "return of" the management fee), and so the owner will be ambivalent about whether or not to retain the manager.The hotel owner will only hire a manager (enter into a management agreement) if the manager's efforts increase the hotel's revenues by more than 4% (more than $400,000) so that the hotel owner receives a "return on" his investment in the hotel management agreement over and above the "return of" the management fee to the manager.

This is where the second fallacy in the Management Fee method arises.The Management Fee method asserts that the hotel management company holds all of the rights to the management/franchise agreement or, stated another way, that all of the benefits and value of that agreement resides with the manager.But such is not the case for two reasons:(a) the hotel owner has obtained access to the rights held by the manager/franchisor by virtue of the management/franchise agreement (as described above, the hotel owner and manager are essentially partners or joint venturers in the hotel enterprise by virtue of the management/franchise agreement); and (b) although the management fee ("return of") may be paid to the manager/franchisor, the additional revenue earned by the hotel as a result of the management/franchise agreement over and above the management fee, the "return on," belongs to the hotel owner based on the allocation of intangible contractual rights under the management/franchise agreement.The manager does not receive the additional revenue generated by the management/franchise agreement over and above the management fee, only the hotel owner does.It is this "return on" which arises from the manager's and owner's shared rights in the management/franchise agreement which the Management Fee method fails to take into consideration.

Note that this analysis is not dependent on who "owns" the rights under the management/franchise agreement (in fact, there is an allocation of rights under that agreement).If the total revenues generated by the hotel are being used in an Income Approach to value the hotel, the resultant business enterprise value includes return to both the hotel owner and the hotel manager.In this circumstance, the full value of the management/franchise agreement must be removed, i.e., return of and return on, and the ownership of the agreement is irrelevant.

Investors demand both a return of their investment (a recapture of the investment) and return on their investment (a yield on the investment).Thus, "return of" and "return on" are always required if an investor is to undertake any form of investment.This is true both for investments in real property as well as investment in a hotel management/franchise agreement.The California SBE has recognized the "return on" requirement in its Assessors' Handbook Section 502:"An investor's expected return must include both an economic reward and a recovery of invested capital.The economic reward is the return on capital, … ."[36]The "return on" concept was explicitly applied to the Management Fee method by the California SBE:

The value of intangible assets and rights cannot be removed by merely deducting the related expenses from the income stream to be capitalized.Allowing a deduction for the associated expense does not allow for a return on the capital expenditure.. . . Similarly, the deduction of a management fee from the income stream of a hotel does not recognize or remove the value attributable to the business enterprise that operates the hotel.[37]

This is consistent with California Property Tax Rule 8(e) relating to the Income Approach which states:"When income from operating a property is used, sufficient income shall be excluded to provide a return on working capital and other nontaxable operating assets [i.e., intangible assets and rights] and to compensate unpaid or underpaid management."[38]Rule 8(e) has the force of law in California.

The IAAO Guide asserts:"whether a deduction of a management fee and related brand expenses adequately removes business or other intangible asset values in a hotel valuation by a real property appraiser should be based on verified market behavior."[39]Quoting Elgonemy:"Appraisers should value hotels the same way that investors analyze deals."[40]If investors demand a return of and a return on their investment in a hotel management/franchise agreement, then the "Management Fee" method, which only provides a return of, is not "consistent with the observed market behavior" of hotel investors in the "transaction market [which] is the primary source of appropriate valuation methodology to replicate in any appraisal."[41]It is noteworthy that the Guide provides no statements from hotel investors as to how they treat intangibles in hotel investment decisions.

California's Court of Appeal Has Disapproved the "Management Fee" Method

The application of the Rushmore "Management Fee" method to a major resort hotel was expressly disapproved by the California Court of Appeal in 2014:

We disagree with the County's claim that "the intangible value was removed by deducting the management and franchise fee."The Assessor . . . did not explain how that deduction captured the "majority" of intangible property. . . . The Assessor's reliance on the deduction of the management and franchise fee – and its refusal to identify and value certain intangible assets – is akin to paying "lip service to the concept of exempting intangible assets from taxation," a practice condemned in GTE Sprint [Communications Corp. v. County of Alameda (1994)] 26 Cal.App.4th at p. 1005.[42]

In the final analysis, the Rushmore "Management Fee" method capitalizes operating revenues into a going concern value.The fact that the management/franchise fee is deducted does not prevent that result.That being the case, there is no difference between the Management Fee method and a standard income capitalization approach that arrives at a business enterprise value.Furthermore, if the operating revenue being capitalized is generated in part from the presence of intangible assets, but nothing is removed from the resulting indication of value by the income approach for those intangibles, the resulting value will necessarily subsume the value of intangible assets.

To sum up, the IAAO Guide states:"Rushmore's assertion is that, by deducting the costs associated with intangible value . . . from a property's operating expenses, the remaining NOI is for the real property only."[43]Thus, a standard income approach, without any other adjustment, does not include the value of intangible assets.But, as the appellate court said in SHC Half Moon Bay, there is no explanation provided as to how the deduction of a management or franchise fee removes the value of the intangible rights embodied in the management/franchise agreement.The Guide afforded the IAAO an opportunity to address this and related questions in a non-litigation context.While IAAO Committee documented their awareness of these issues in the Guide, they did not address them in any meaningful way.

The Rushmore "Management Fee" Method Is Not Widely Embraced by Courts

The IAAO Guide asserts that the Rushmore Management Fee method is "widely embraced by the courts" and lists judicial decisions in support of this view.[44]

Careful review of those decisions reveals the following.The Guide cites thirteen cases in support of the Rushmore Management Fee method (fourteen cases are discussed, but the Maryland decision, RRI Acquisition Company, Inc. v. Supervisor of Assessments of Howard County,[45] is cited twice).Of those thirteen cases, six were issued by the New Jersey Tax Court.The two Michigan decisions were issued by the Michigan Tax Tribunal, which is not a court (although the Guide refers to the Michigan Tax Tribunal as court), and one of those decisions contains some criticism of the Rushmore method.The Guide cites two decisions from the District of Columbia, both relating to the same hotel property.The 2015 decision was issued by a trial court (Superior Court).The 2009 District of Columbia decision is not reported, so the specific tribunal and the content of the decision cannot be confirmed.Finally, the Guide cites to the 2013 California Court of Appeal decision in EHP Glendale, LLC v. County of Los Angeles (EHP II),[46] even though that decision was subsequently decertified and depublished by the California Supreme Court.

Regarding New Jersey, two of the cited decisions contain the following language:

This decision is based upon the consideration of the reasoning and supporting data addressed in the record of this case for the particular adjustments proposed.It should not be understood as a definitive pronouncement on appraisal practices designed to extract real estate value from the assets of a business or as binding precedent with respect to adjustments of the kind proposed here, should they be offered in other cases with different records.[47]

The second case, BRE Prime Properties, LLC v. Borough of Hasbrouck Heights,[48] has not been certified for publication by the New Jersey Tax Court Committee on Opinions.And in a third case, the New Jersey Superior Court Appellate Division found that the taxing jurisdiction's opinion of value under the income approach did not account adequately for the value of the intangible business assets in the valuation of a casino-hotel.[49]

To summarize, the IAAO Guide reports that the Rushmore Management Fee method has been embraced by courts in only six states.Six of the thirteen decisions cited are from New Jersey, but three of those decisions do not unequivocally approve the Rushmore method.Two of the thirteen decisions were not issued by a court but by the Michigan Tax Tribunal and so have limited precedential value.The two decisions from the District of Columbia pertain to the same property, although the citation to one of those decisions cannot be located, and the other decision is by a lower court.And the California decision cited by the Guide has been decertified and depublished by the California Supreme Court.In light of the above, it is difficult to support the Guide's assertion that the Rushmore method "has been widely embraced by the courts."Moreover, there is at least one case disapproving the Management Fee Method:SHC Half Moon Bay LLC v. County of San Mateo.

The IAAO Guide Mis-Cites Pertinent Law and Ignores Key Authorities

The IAAO Guide reads like a legal brief, citing 52 cases or administrative decisions.But this legalistic patina is thin.The main problem is that the Guide does not acknowledge the basic hierarchy of authority:a tax tribunal or trial court decision is not binding authority as a general rule, and is not equivalent to a published appellate court decision.The Guide cites many authorities, but the citation-heavy format should not be construed to add credibility.Careful review reveals undisciplined and indiscriminate references to authorities, most of which are not binding, and the omission of authorities which are in fact precedential.Moreover, many of the authorities cited are difficult to obtain because they are opinions by state or provincial boards of review or equalization which have no binding or precedential effect.In some cases, the decisions are not readily accessed, which makes vetting such references impossible without significant additional effort.

1.Skilled and Assembled Workforce

The IAAO Guide's reliance on questionable citations is illustrated by focusing on its discussion of skilled and assembled workforce.[50]The Guide offers five legal citations in support of its advice that the assembled workforce intangible need not be recognized or deducted in valuing real property:

(1)Boise Cascade Corporation v. Department of Revenue[51]:"The Oregon Tax Court rejected the workforce argument in a case involving the assessment of a veneer mill.In that case, the court said, 'management or work force in place [value] . . . should not be deducted from any estimate of market value'."

(2) EHP Glendale, LLC v. County of Los Angeles (EHP I)[52]:"The court rejected the workforce argument, stating 'Absent superior management of an exceptional workforce, though, the presence of prudent management and a reasonably skilled workforce are required to put a property to its beneficial and productive use, and no additional value needs to be deducted from the income stream'."

(3) SHC Half Moon Bay, LLC v. County of San Mateo[53]:"[T]he court determined that the assessor failed to remove the value of the hotel's assembled workforce, stating, '. . . the deduction of the management fee from the hotel's projected revenue stream did not – as required by California law – identify and exclude intangible assets such as the hotel's assembled workforce'."

(4) Fairmont Hotels & Resorts v. Capital Assessor, Area No. 01[54]:"The court recognized that a trained workforce is intertwined with the real estate, and its frequent turnover negates its value, stating, 'With respect to an assembled workforce, while we accept that there must have been an initial investment in hiring and training a workforce, we do not accept that the initial investment necessarily continues to have discreet market value. . . . We find that such value is inextricably intertwined with the realty'."

(5) CP Hotels Real Estate Corp. v. Municipality of Jasper[55]: "[T]he court recognized an assembled workforce might not be desired by a potential buyer, saying, 'the assembled workforce may actually be a liability, instead of an asset'."

Each of these five citations is problematic for the reasons set forth below.

Boise Cascade Corporation.The Oregon Legislature amended Oregon Revised Statutes section 307.020 in 1993 to expressly include assembled workforce within the statutory definition of intangible assets.The IAAO Guide cites as authority a case that was superseded by subsequent legislation.

EHP Glendale, LLC.The language in the IAAO Guide attributed to EHP I is not found in that case.The quoted language is actually found in a later 2013 decision by the California Court of Appeal in the same case.[56].EHP II was wrongly decided and inconsistent with California law, and the California Supreme Court decertified EHP II and ordered it be depublished on December 18, 2013.Depublished cases are not citable authority under California law.The Guide also includes the following statement relating to EHP II:"The court approved the Rushmore approach, despite the California State Board of Equalization Assessors' Handbook, Section 502, disallowing the use of the management fee approach alone."[57]Plainly, this reference is also invalid.In sum, the Guide cites as authority language from a case that is not citable and not deemed reliable by the California Supreme Court.

SHC Half Moon Bay.The IAAO Guide correctly cites this case, which contradicts the Guide's support for the Rushmore Management Fee method.Contrary to the Guide, there are no "conflicting rulings" relating to workforce in the California Court of Appeal[58] because the EHP II decision is not good law.In fact, the Guide fails to cite three other California Court of Appeal cases in accord with SHC Half Moon Bay, all holding that assembled workforce is an intangible asset that must be removed from assessment.[59]Neither does the Guide disclose the California SBE's recognition of assembled workforce as an intangible asset (workforce is a component "of enterprise value that create[s] value separate and apart from any value inherent in the tangible assets") and requiring that such value be removed from the assessment.[60]So the Guide misleads the reader into thinking that California courts have ruled that assembled workforce is not a recognized non-taxable intangible when the opposite is the case.

Fairmont Hotels & Resorts / CP Hotels Real Estate Corp.These are Canadian assessment review board decisions and are not precedential authority.Moreover, the Guide ignores legal authority that is contrary to the remarks contained in Fairmont Hotels & Resorts to the effect that if the intangible and tangible assets are "intertwined," then the intangible assets need not be removed from the assessment.The California Supreme Court has expressly explained that even if an intangible asset is "intertwined" so that it is necessary for the "beneficial and productive use" of the real property, the value of such intangible components must still be removed from the assessment:

[I]f the intangible assets are necessary to the beneficial and productive use of the taxable property, the court must determine whether the plaintiff has put forth credible evidence that the fair market value of those assets has been improperly subsumed in the valuation.If so, then the valuation violates [Revenue and Taxation Code] section 110(d)(1), which prohibits an assessor from using the value of intangible rights and assets to enhance the value of taxable property, and the fair market value of those assets must be removed.[61]

Courts in other states have similarly found that the "inextricably intertwined" argument does not overcome the principle that real property assessments should not be based on business value.[62]

Thus, the Guide identifies no citable authority with precedential effect in support of its position on assembled workforce, and the sole valid authority it does cite, SHC Half Moon Bay, rejects the premise underlying the Rushmore Management Fee method (deduction of employee salaries and wages as an operating expense removes the value of workforce) and actually requires that the value of an assembled workforce be removed from assessment.This is an example of selective citation intended to advance a particular viewpoint, instead of a balanced consideration of actual authority which is inconsistent with the advocated policy.The important conclusion is the Guide's citation of authority cannot be taken at face value:each assertion must be examined for validity and accuracy before it may be relied upon.

2.Start-up Costs and the Business Enterprise Value Approach

The IAAO Guide contends that business start-up costs are not an intangible that should be recognized in the assessment of properties.The Guide reasons that start-up costs, such as pre-opening marketing and workforce training for a hotel property, only occur at the initial opening of a property.The Guide concludes that because marketing and workforce costs are deducted as operating expenses when existing hotels are appraised, the deduction of start-up expenses as an intangible asset is unnecessary and improper.[63]The start-up costs issue is a subset of the business enterprise value (BEV) approach.The IAAO Guide dismisses the BEV approach because the approach is not broadly accepted in the appraisal community or the market.[64]

The purpose of this response is not to side with those favoring deduction of start-up expenses or those opposed to doing so, or to become involved in the broader dispute between those who support and those who do not support the BEV approach.However, the lack of depth to the legal authorities cited in the IAAO Guide as support for the views opposing deduction of start-up costs and the BEV approach is noteworthy.The IAAO Guide cites eight cases in all relating to start-up costs and the BEV approach.Four of those cases are cited as supporting the Guide's views on both topics.

Five of the cases cited in the IAAO Guide support the "no start-up cost" viewpoint, and one does not.One of those five cases was issued by a trial court.[65]Three other decisions were issued by tax tribunals.[66]These decisions, from the District of Columbia, Maryland, Canada and Maine, are trial court or assessment review board decisions, and some of them have limited precedential impact.The Guide only references one published court decision from New Jersey as opposing the start-up costs position.[67]

The IAAO Guide also cites five decisions that oppose the BEV approach, and one that supports its.The Guide says there are other cases which have "embraced the BEV approach," but does not cite to any of those cases.[68]One such case is a decision by the Appeals Court of Massachusetts which held that the assessor and tax appeal board were required to make deductions for hotel business enterprise value elements.[69]Of the five opposition decisions cited in the Guide, three are from assessment review boards and may have limited precedential effect.[70]One decision was issued by the Iowa Supreme Court twenty years ago; the Guide reports that an Iowa statute required that the court reject the BEV approach in that case because it was not widely accepted by the appraisal community at that time.[71] The only other opposing decision cited by the Guide is once again the New Jersey decision in the Saddle Brook Marriott Hotel case.[72]The IAAO Guide puts considerable reliance on this one decision by the New Jersey Tax Court, also citing the case three other times.[73]

3.Leases-in-Place and Above- and Below-Market Leases

The IAAO Guide states that fee-simple value for leased properties is found by using market rents, and goes on to say that above-market leases are part of real property and are not intangible.[74]The Guide cites no authority for the latter assertion other than USPAP FAQ 193.[75]The Guide does not cite a conflicting Wisconsin Supreme Court decision which found that above-market leases are not real property or part of fee simple estate property rights.[76]The Guide also does not reference Indiana Tax Court and Kansas Court of Appeals decisions that reached the same conclusion.[77]

4.Goodwill

The IAAO Guide says "Because . . . courts have ruled the value of goodwill is reflected in a management fee, it is safe to say that applying the management fee technique in an income approach effectively removes any goodwill value in the estimate of real property."[78]This conclusion is based solely on the IAAO's incorrect reading of the California Court of Appeal's decision in the SHC Half Moon Bay case.

In SHC Half Moon Bay the taxpayer identified goodwill as the residual value in a cost segregation appraisal.Because of that, the Court of Appeal found that the taxpayer had failed to present sufficient evidence showing that the deduction of the management fee did not remove goodwill.But this finding must be understood in the context of the review standards used by California appellate courts.In this case, the appellate court determined that the taxpayer had not presented substantial evidence (i.e., facts) showing that the management fee did not remove the value of the hotel's goodwill.However, the court also said that other evidence might have been presented that would show how the management fee failed to remove the value of goodwill: "[t]here may be situations where the taxpayer can establish the deduction of a management and franchise fee from a hotel's income stream does not capture the intangible asset of goodwill, but SHC, the taxpayer, has failed to do so here."[79]

The SHC Half Moon Bay decision left open the possibility that another taxpayer could demonstrate that goodwill is not removed by the deduction of a management fee.Stated another way, the Court of Appeal did not rule as a matter of law, and therefore did not foreclose the possibility that another taxpayer might show, based on different facts, that deduction of a management fee does not in and of itself remove the value of goodwill.Thus, the IAAO's conclusory statement that the management fee technique removes goodwill value was not established as a matter of law in SHC Half Moon Bay, but only under the facts of that particular case.

The deduction of goodwill as an intangible asset has been approved by courts in other states.[80]Also, the California SBE says that goodwill is an intangible and that its value should be deducted.[81]

5.Go-Dark Valuation

The IAAO Guide contains a brief discussion of the go-dark valuation issue.[82]Go-dark valuation has engendered significant controversy, and the IAAO has recently issued a "Draft Big Box Position Paper" relating to the "dark store" or go-dark valuation topic.[83]Discussion of go-dark valuation is beyond the scope of this response.

Conclusion:Direct Valuation and Removal of Identified Intangibles

The primary purpose of the IAAO Guide is to identify and explain appraisal methods which assessors can use to "effectively exclude" intangibles from property tax assessment without "valuing intangible assets directly."[84]To that end, the Guide asserts that the Rushmore Management Fee method under an income approach is one of the primary ways to remove the value of intangibles when assessing real property.[85] However, as discussed in this response, the Management Fee method is problematic, and the Guide's explanation as to how the method removes intangibles is inadequate.This inadequacy was highlighted by the California Court of Appeal in SHC Half Moon Bay LLC v. County of San Mateo.Furthermore, the weaknesses that plague the Guide's explanation of the Management Fee method, including the inaccurate and unbalanced citation to legal authority, also extend to the Guide's discussion of assembled workforce, start-up costs, leases-in-place and goodwill.

Instead of using methods which claim to "effectively exclude" non-taxable intangibles, such as the Management Fee method, appraisers should value identified intangibles directly and deduct the full value of those intangibles – similar to the "parsing income" technique described in the IAAO Guide.[86]Although the Guide says "[t]he courts have generally rejected the parsing income method for property tax purposes," it only cites Saddle Brook and Fairmont Hotels v. Area 01 to support this assertion.[87]In fact, for over two decades the California Court of Appeal, the California Supreme Court, and the California SBE (in its Assessors' Handbook and Property Tax Rule 8(e)) have accepted the method of directly identifying and valuing the separate stream of income associated with an identified intangible asset as a valid method for removing the full value of intangible assets in property tax assessment.[88]

The IAAO Guide says that "the real estate market determines whether intangibles are included or excluded," and that the Management Fee method mimics the market.[89]However, the Guide provides no specific proof that the Management Fee method comports with how market participants evaluate properties.Regardless, most state laws require that the value of intangible assets be excluded from ad valorem property tax assessments.[90]The Guide does not explain how the Management Fee method, an indirect method for removing intangibles, "effectively excludes" the full value of non-taxable intangibles.Directly identifying, valuing and deducting the full value of intangible assets, the method California's appellate courts and the California SBE have followed since the GTE Sprint Communications Corp. decision was issued in 1994, is a more effective approach.

[1] Cris K. O'Neall, Greenberg Traurig, LLP, (949) 732-6610, oneallc@gtlaw.com; C. Stephen Davis, Greenberg Traurig, LLP, (949) 732-6527, daviscs@gtlaw.com.The authors thank attorney Sharon F. DiPaolo of Siegel Jennings Co., LPA in Pittsburgh, PA and attorney Lisa F. Stuckey of Ragsdale, Beals, Seigler, Patterson & Gray, LLP in Atlanta, GA for their assistance in researching some of the legal authorities cited in this article.The authors also thank attorney Jennifer Kim of Greenberg Traurig, LLP for her assistance in preparing this article for publication.

[2] International Association of Assessing Officers (IAAO), Understanding Intangible Assets and Real Estate: A Guide for Real Property Valuation Professionals (Special Committee on Intangibles, 2017) 14 Journal of Property Tax Assessment & Administration pp. 41-91 <http://www.iaao.org/library/2017_Intangibles_web.pdf> (as of June 18, 2017) (hereafter IAAO Special Committee 2017).

[3] Id. at pp. 41, 68.

[4] Id. at p. 41.

[5] International Association of Assessing Officers, Technical Standards, <http://www.iaao.org/wcm/Resources/Publications_access/Technical_Standards/wcm/Resources_Content/Pubs/Technical_Standards.aspx.> (as of June 18, 2017, italics added).

[6] IAAO Special Committee 2017, supra, pp. 41, 48, 65.

[7] Id. at pp. 49-50.

[8] Id. at pp. 50, 51, 60, 65, 66.

[9] Id. at pp. 45, 48, 65, 66.

[10] Id. at pp. 42-45, 66.

[11]State Board of Equalization (SBE), Assessor's Handbook Section 502: Advanced Appraisal (Dec. 1998)<http://boe.ca.gov/proptaxes/pdf/ah502.pdf> (as of June 18, 2017) (hereafter SBE AH 502).

[12]State Board of Equalization, Issue Paper Number 98-031 (Nov. 5, 1998) <https://www.boe.ca.gov/proptaxes/pdf/1998.pdf> (as of June 18, 2017).

[13] State Board of Equalization, Property Tax Committee Meeting Minutes (Dec. 7, 1998) <http://www.boe.ca.gov/proptaxes/pdf/PTC_Minutes_120798.pdf> (as of June 18, 2017).

[14] SBE AH 502, supra, p.153.

[15] Reilly and Schweihs, Guide to Property Tax Valuation (Willamette Management Associates Partners 2008) p. 326.

[16] IAAO Special Committee 2017, supra, p. 43.

[17] Ibid.

[18] Id. at 59.

[19] Elk Hills Power, LLC v. Bd. of Equalization (2013) 57 Cal.4th 593, 620-21 (hereafter Elk Hills Power).

[20] IAAO Special Committee 2017, supra, pp. 44-45, 50, 53.

[21] IAAO Special Committee 2017, supra, p. 56.

[22] Id. at 50.

[23] Id. at pp. 47, 66.

[24] (Ohio B.T.A. 2007) Nos. 2007-M-277, 2007-M-278, affd. per curiam (2011) 128 Ohio St.3d 565.

[25] Id. at p. 51.

[26] American Sheds, Inc. v. County of Los Angeles (1998) 66 Cal. App. 4th 384, 394, fn.6. italics added; see also In re Ames Shopping Plaza Wellsboro Borough (Pa. Commw. Ct. 1984) 476 A.2d 1001, 1004.

[27] IAAO Special Committee 2017, supra, p. 51, italics added.

[28] Id. at p. 52.

[29] Id. at pp.51-52.

[30] Id. at p. 55.

[31] Id. at pp.51, 54.

[32]Los Angeles SMSA Ltd. Partnership v. State Bd. of Equalization (1992) 11 Cal.App.4th 768, 776, fn.6; Hershey Entertainment and Resorts Co. v. Dauphin County Bd. of Assessment Appeals (Pa. Comm. Ct. 2005) 874 A.2d 702.

[33] IAAO Special Committee 2017, supra, p. 52.

[34] Id. at p. 51.

[35] Ibid.

[36]SBE AH 502, supra, p. 62.

[37] Id. at p. 162, italics added.

[38] Italics added.

[39] IAAO Special Committee 2017, supra, p. 55.

[40] Id. at p. 53.

[41] Id. at p. 55.

[42]SHC Half Moon Bay LLC v. County of San Mateo (2014) 226 Cal.App.4th 417, 492 (hereafter SHC Half Moon Bay).

[43] IAAO Special Committee 2017, supra, p. 52.

[44] IAAO Special Committee 2017, supra, pp. 53-54.

[45] (Md. T.C.M. 2006) No. 03-RP-HO-0055.

[46] (2013), 219 Cal.App.4th 1015 (hereafter EHP II).

[47] Chesapeake Hotel LP v. Saddle Brook Township (N.J. T.C. 2005) 22 N.J.Tax 525, 536-37 (hereafter Saddle Brooke); BRE Prime Properties, LLC v. Borough of Hasbrouck Heights (N.J. T.C. 2013) Nos. 005271-2010, 005644-2011, unpub. (hereafter BRE Prime Properties).

[48] BRE Prime Properties, supra, Nos. 005271-2010, 005644-2011, unpub.

[49] Marina District Development Co., LLC v. City of Atlantic City (N.J. 2013) 27 N.J. Supp. 469.

[50] IAAO Special Committee 2017, supra, pp. 55-57.

[51] Boise Cascade Corporation v. Dept. of Revenue (Or. T.C. 1991) 12 OTR 263.

[52] EHP Glendale, LLC v. County of Los Angeles (2011) 193 Cal.App.4th 262 (hereafter EHP I).

[53]SHC Half Moon Bay LLC, supra, 226 Cal.App.4th 417.

[54] Fairmont Hotels & Resorts v. Capital Assessor, Area No. 01, [2005] CarswellBC 3760 (Can. Tax. A.B.C.).

[55] CP Hotels Real Estate Corp. v. Municipality of Jasper, [2005] CarswellAlta 2573 (Can. Tax. A.B.C.).

[56]EHP II, supra, 219 Cal.App.4th 1015.

[57] IAAO Special Committee 2017, supra, p. 54.

[58] IAAO Special Committee 2017, supra, p. 57.

[59] GTE Sprint Communications Corp. v. County of Alameda (1994) 26 Cal.App.4th 992, 1007 (hereafter GTE Sprint Communications Corp.); County of Orange v. Orange County Assessment Appeals Bd. (1993) 13 Cal.App.4th 524, 533; Shubat v. Sutter County Assessment Appeals Bd. (1993) 13 Cal.App.4th 795, 798.

[60] SBE AH 502, supra, pp.154, 156, 160, fn. 130.

[61] Elk Hills Power,supra, 57 Cal.4th at p. 615.

[62] Walgreen Co. v. City of Madison (Wis. 2008) 752 N.W.2d 687, 705; Gregg County Appraisal District v. Laidlaw Waste Systems, Inc. (Tex.Ct.App.1995) 907 S.W.2d 12, 19-20.

[63] IAAO Special Committee 2017, supra, pp. 57-58.

[64] Id. at pp. 62-63.

[65] CHH Capital Hotel Partners LP v. Dist. of Columbia (2015 D.C. Super. Ct.) No. 2009 CVT 9455.

[66] RRI Acquisition Co., Inc. v. Supervisor of Assessments of Howard County (Md. T.C.M. 2006) No. 03-RP-HO-0055 (hereafter RRI Acquisition); CP Hotels Real Estate Corp. v. Municipality of Jasper, [2005] CarswellAlta 2573 (Can. Tax. A.B.C.); GGP-Maine Mall, LLC v. City of South Portland (Me. B.A.R. 2008) No. 2008-1 (hereafter GGP-Maine Mall).

[67] Saddle Brook, supra, 22 N.J.Tax 525.

[68] IAAO Special Committee 2017, supra, p. 63.

[69] Analogic Corporation v. Bd.of Assessors of Peabody (Mass.Ct.App. 1998) 700 N.E.2d 548, 552-554.

[70]RRI Acquisition, supra, No. 03-RP-HO-0055; Wolfchase Galleria Ltd. Partnership, Shelby County (Tenn. S.B.E. Mar. 16, 2005); GGP-Maine Mall, supra, No. 2008-1.

[71] Merle Hay Mall v. Bd. of Review (Iowa 1997) 564 N.W.2d 419.

[72] Saddle Brook, supra, 22 N.J.Tax 525.

[73] IAAO Special Committee 2017, supra, pp. 53, 58, 65.

[74] IAAO Special Committee 2017, supra, p. 59.

[75] The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice (2016-2017 ed. 2016) p. 299.

[76] Walgreen Co. v. City of Madison, supra, 752 N.W.2d 687, 700-01.

[77] Grant County Assessor v. Kerasotes Showplace Theatres, LLC (Ind. T.C. 2011) 955 N.E.2d 876, 882-83; Shelby County Assessor v. CVS Pharmacy, Inc.(Ind. T.C. 2013) 994 N.E.2d 350, 354; In Re Equalization Appeal of Prieb Properties, LLC (Kan.Ct.App. 2012) 275 P.3d 56, 134-36.

[78] IAAO Special Committee 2017, supra, pp. 60-61.

[79] SHC Half Moon Bay LLC, supra, 226 Cal.App.4th at p. 493, italics added.

[80] T-Mobile USA, Inc. v. Utah State Tax Comm'n (Utah 2011) 254 P.3d 752; GTE Sprint Communications Corp, supra, 26 Cal.App.4th 992; County of Orange v. Orange County Assessment Appeals Bd., supra, 13 Cal.App.4th 524.

[81] SBE AH 502, supra, pp. 154, 157, fn. 118, 157-158, 159, 160, fn. 130.

[82] IAAO Special Committee 2017, supra, pp. 61-62.

[83] International Association of Assessing Officers, Draft Big Bix Position Paper (2017) <http://www.iaao.org/media/Exposure/Big_Box_6-1-17.pdf >.

[84] IAAO Special Committee 2017, supra, pp. 48, 50, 66.

[85] Id. at pp. 51, 54, 66.

[86] IAAO Special Committee 2017, supra, pp. 64-65.

[87] Id. at p. 65.

[88] GTE Sprint Communications Corp., supra, 26 Cal.App.4th 992; Elk Hills Power LLC v. Bd. of Equalization, supra, 57 Cal.4th at pp. 617-19; SBE AH 502, supra, pp. 161-62.

[89] IAAO Special Committee 2017, supra, pp. 54, 55, 63, 67.

[90] Id. at p. 41, 48.

The Cook County Board of Commissioners may have dealt manufacturing districts in South and Southwest Cook County, Illinois, their final blow.

The use of property tax incentives has increased over the past several decades and has been a vital economic development tool in this manufacturing belt. The industrial corridor suffered a one-two punch during the Great Recession and is still hanging onto the ropes, trying to recover while the rest of Cook County thrives.

Cook County property tax incentives reduce assessed values used to determine a property's tax bill. Assessors normally set taxable value at 25 percent of a property's market value, while assessing real estate qualifying for the incentive at 10 percent of market value. This yields a taxable value 60 percent lower than the asset would carry under the standard calculation.

The recession gutted Cook County's manufacturing belt. Numerous manufacturing companies either closed their doors for good or relocated to nearby Indiana, recruited with the promise of a feather-weight tax burden. The migration left a glut of vacant facilities in its wake, driving market values and the assessment base into a downward spiral.

As the market and occupancy rates plummeted, local tax rates spiked, exceeding 35 percent in some suburban municipalities. Without reinvestment in their communities, these municipalities could never recover, and the tax rate would not recede. The most valuable economic development tool available to these municipalities was the property tax incentive.

Crossed purposes

Over the past several years, the Cook County Board of Commissioners has suffocated the utility of the incentive program by imposing wage and other labor requirements on owners and operators of incentivized real estate. Most recently in March, the Commissioners imposed a "prevailing wage requirement," which mandates that any property that receives an incentive after September of this year must" pay all laborers ,workers and mechanics engaged in construction work not less than the prevailing wage paid for public works."

The new rule is expected to increase construction costs by 30 percent. Additionally, the new ordinance mandates participation in federally approved apprenticeship programs. Moreover, the change adds burdensome administrative costs to the incentive holder, which must keep detailed records of employee wages, contractor wages and other minutia. They must make quarterly reports to municipal agencies, or else live under the threat of having the incentive taken away.

But why would the Cook County Board of Commissioners impose mandates that effectively eliminate any incentive benefit? The decision is even more remarkable given the strong opposition it drew from the affected communities. Thirty mayors from the south and south western suburban municipalities testified in front of the county commissioners against the most recent ordinance. Local news media, which typically refrains from dive deeps into nuanced economic development issues, came out against the proposed ordinance.

Cook County elections were March 20. Commissioners in thriving districts were not going to risk their re-election prospects on an issue that didn't affect their constituents. So, the ordinance passed.

Act now

For entities looking to take advantage of the incentive program in Cook County, the most important task is to file the incentive application with the municipality and/or Cook County Assessor's Office prior to Sept.1. Any taxpayer who is attempting to sell or lease their property should apply for an incentive now instead of waiting for a prospective tenant or buyer. If the application is filed prior to Sept. 1, the prevailing wage mandate will not apply to any construction.

It is critical to note that the expansion of a facility will also trigger the prevailing-wage mandate for the additional square footage, even if the property already has an incentive. The property owner must apply for an additional incentive for the new space. Thus, any property owner considering such an expansion should make the required filing before Sept.1.

Most property owners in manufacturing districts that rely heavily on incentives for economic development only protest tax assessments when the property is reassessed. They would be wise to appeal their taxes every year, however.

The unpredictability of the incentive program itself is enough to drive up cap rates by two basis points, which will lower market values across the board. That creates the opportunity to achieve a lower assessment on appeal. The ability to quantify these issues is critical in an appeal, and failure to do so further diminishes the value of the real estate.

Most likely, due to the unnecessary restrictions imposed on the current incentive programs, the entire existing incentive program for Cook County may be scrapped. It is unfair that certain municipalities struggling with economic development are now political carnage. Any new incentive program should put the authority in the local municipalities' hands, rather than leave it under the political machinations of the rest of Cook County.

The Purchase amount isn't necessarily a valid proxy for taxable value.

Multifamily Property owners and Appraisers are often creatures of habit. They generally calculate a property's value for tax purposes the same way they do for an investment. If an apartment complex recently traded for 10 million, the buyer's appraiser may reason that the property would be assessed at $10 million for taxation purposes.

This line of thinking is particularly common in states that use market value as the standard and where the purchase price was based on an appraisal. While this approach might be reasonable for budgeting worst-case tax accruals, such thinking could result in missed opportunities to reduce the actual tax burden on the property.

PERMISSIBLE APPROACHES TO VALUATION VARY

There are several reasons a property's investment value, or even its market value, might differ from its value for tax purposes. Such considerations include whether the acquisition or investment value includes non-real estate items such as personal property, or intangibles such as long-term leases. Taxpayers should closely examine all of those issues to ensure that only taxable property is being assessed (and, then, at the correct value).

There's another,often-overlooked dimension of savings available to many taxpayers, in the form of seemingly hidden tax benefits conferred by statute. Indiana, for example, has a number of assessment statutes that dictate specific approaches to determining taxable value, depending on the type of property at issue. One property type receiving this unusual valuation treatment is apartment or multifamily rental properties.

Even as investors continue to bid up asking prices in the marketplace, Indiana law requires apartments to be assessed at the lowest valuation determined by applying the three standard approaches to valuation: cost, sales comparison, and income. This means owners and appraisers would miss the mark in estimating the taxable value of apartments or multifamily rental proper­ties if they applied only the typical approaches used to evaluate a property's investment value or market value.

The Indiana Board of Tax Review has issued several decisions confirming this mandate. One such case, Merrillville Lakes DE LLC v. Lake County Assessor, involved a taxpayer challenging his 2010-2014 assessments for an apartment complex in Merrillville, Ind. Both the assessor and the taxpayer presented appraisals at the administrative hearing, but only the taxpayer relied on the specific apartment-valuation statute to develop his opinion of taxable value. The board rejected the assessor's appraisal.

Based on the statutory code and the appraisal in the Merrillville Lakes case, the Indiana Board of Tax Review ultimately lowered the assessed value of the apartment complex for each contested year based on the taxpayer's cost analyses. Because the statute dictates that the lowest of three approaches determines the tax value, even if the owner had purchased the property for far more than the cost-approach indication of value, the board couldn't have increased the value to the higher sales price.

DUE DILIGENCE CAN YIELD SAVINGS

While it may seem like common sense to assume that a property's purchase price is a valid proxy for its taxable value, as the Indiana ruling shows, that's not always the case. A little due diligence could result in a lower valuation and, with that, significant savings.

The newly released New York City Tax Assessment Roll had a total market value of$1.258 trillion. These results are shockingly bad news for the real estate industry. On average, tax assessments increased by about 9.4 percent.

The breakdown of increases in the assessments are also very surprising, with residential apartments growing by 11.51 percent, while taxable values on commercial properties climbed 7.85 percent. By borough, Brooklyn leads the way in increases, followed by the Bronx, Queens and Manhattan. Staten Island had the lowest percentage of increase at 6.36 percent.

Residential apartment buildings, rentals, cooperatives and condominiums showed strong valuation increases, which appear to be at odds with recent market weakness noted in all these property types. It is well documented that residential rents are slipping or flat, concessions are on the rise, and sales of co-ops and condos have stalled and are showing further signs of decline.

Furthermore , the loss of state and local tax deductions under the new federal tax law increases the burden on taxpayers. All of these factors exert a negative influence on market values.

What we will see in this assessment roll, and in statistics compiled by the New York City Department of Finance, is a strong emphasis on increasing tax burdens across all property types. This effort disregards the current pressures the market's real estate owners are already facing.

It is significant that the mayor has the sole discretionary authority to increase this specific tax. Virtually every other tax collected in the city needs approval from the state legislature, which may be why property taxes are continuing to go up. Just over 45 percent of all revenues for the City of NewYork now come from real estate taxes.

Even hotels, which are experiencing lower revenue per available room and competition that has intensified in recent years with the addition of thousands of new rooms, face an increase of 4 to 5 percent. This rubs more salt in to the wound for this property class.

What the city is doing in this new tax roll is killing the goose that gave us the golden eggs. We see more vacancies and empty store fronts, traffic at a standstill, mass transit in failure and mounting subway line closures. How tough are they making it for the real estate industry to survive?

There is a great need for property tax reform in this city. The percentage of taxes levied on real estate is out stripping taxpayers' ability to pay for it. In effect, the government is almost a 40 percent partner of all the real estate properties without sharing in the risk or having skin in the game. This ever­ growing push to squeeze the last dollar out of our industry will only hasten its fall.

We should call on our government to be more reasonable and limit property taxes to an affordable level. This would be a better strategy, priming the pump of the local economy and permitting future growth. When owners find that their property's largest single expense is its tax burden, which is out of control, they must do something about it-and do it now.

​​​​​​​Joel R. Marcus is a partner in the New York City law firm of Marcus & Pollack LLP, the New York member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at jmarcus@marcuspollack.com

Property taxes should reflect the value of the real estate being taxed, not the needs of governmental entities that share in the tax. However, assessors are under increasing pressure to maintain or enhance property tax revenue. The result is a growing and improper tendency by assessors to use the success of the enterprise occurring in the real estate as an indicator of taxable property value.

Value is the amount a willing and knowledgeable buyer would pay a willing and knowledgeable seller to acquire a property as of a certain date. This simple concept has engendered volumes of appraisal books, hours of testimony and endless discussion of how to segregate the real estate component from the whole of an enterprise.

The willing buyer, willing seller standard mandates the property is available for a buyer's use on the date of sale. For value purposes, any enterprise carried on within the property is absent on the date of sale. The buyer is not buying the business or any part of the business, only the place where the business operates.

The success of the business is independent from the property in which it operates; to approach valuation otherwise leads to invalid and inequitable results. An example would be a building designed and used as a single-screen cinema. One week it features a popular and highly promoted movie, and during that week the ticket sales are great. The theater is full and ticket lines extend outside for each showing. The following week the movie house runs a bad film, and ticket sales are low or non-existent.

To include enterprise value as a component of the value of the real property is to say the theater building is worth more the week it shows a popular movie than when it screens a flop. Meanwhile, a retail building is no more than a structure in which goods enter from the loading dock and exit the front in customers' hands, leaving money or credit behind. Effectively, the building is a conduit for an activity which could occur anywhere in that submarket.

There is little doubt that successful operations will garner higher property taxes than weaker businesses, which is unfair. To some extent, the assessor punishes the taxpayer for a successful enterprise, all too frequently raising the concept of sales per square foot as justification. This rationale also applies to big box national retailers as well as your local mom-and-pop barbeque joint.

Some businesses require government licenses, which may be site-specific and limited to certain people or entities. They do business in properties of specific design that are not easily modified to other uses. Bank charters and licenses for liquor sales or casino gambling are limited to specific facilities at a specific location. What value do these properties hold after the business leaves? Pull the license off the walls, now determine the value of a building that once was one of these enterprises. So, when the old home-town bank building no longer houses a bank, what is it worth?

By law, the former bank building is worth no more or no less than when a bank operated there.

To value it in use is to value the banking activity that occurred there. Taxing business activity isn't an element of property tax at all; it is an enterprise tax, impermissible and unauthorized by law.

Brick-and- mortar retailers are under attack from ecommerce, and the public is subjected daily to photos of dying malls and struggling shopping centers. It is widely accepted that the value of a shopping center drops when the anchor tenant vacates. But the taxable value should be unchanged, because the hypothetical buyer is purchasing a property ready for occupancy.

The prosperous business should not be punished for its success by the improper valuation of the place where the success happens. Dealing with the assessor, the owner must argue that taxable valuation is based on the property being vacant. That means the current occupant is presumed gone on the date of sale.

Any other approach values the enterprise occurring there.

Real estate acquisitions and improvements harbor traps for the unwary taxpayer.

In some states, statutory caps limit valuation increases that would oth­erwise rise to reflect the market. For example, California's Proposition 13 limits increases in assessed value to 2 percent per year even if the property's market value is increasing at a faster rate, so long as ownership remains unchanged. Property owners should know that acquisitions and improve­ments can dramatically impact tax values that were previously limited by statutory caps.

In most states, acquisitions trigger reassessments at the next applicable valuation date. In researching existing tax values prior to purchase, prospec­tive buyers often research the taxing authority's online tax records. Online research may fail to distinguish be­tween capped or taxable value versus fair market value, however. If the ac­quisition removes the prior cap and the buyer estimates taxes based on the capped value rather than the fair market value, the new property owner could be in for a very rude awakening come tax time.  

Acquisitions can also change dead­lines for filing tax appeals in some ju­risdictions. For example, the normal filing deadline for appeals in South Carolina is January 15, but most coun­ty assessors will mail new assessment notices during the year following an acquisition. In those circumstances, the filing deadline is 90 days after the date of the reassessment notice.

Failure to take simple but essential steps in documenting a purchase can have substantial tax ramifications. For example, South Carolina law poten­tially exempts as much as 25 percent of a commercial property's purchase price from later ad valorem taxation, but only if the purchaser files for the exemption on or before January 30 fol­lowing the closing. Failure to file can cost purchasers tens of thousands of tax dollars or more. Yet many purchas­ers are unaware of this exemption un­til after they receive the new tax bill, when it is generally too late to file for the exemption.

Closing documents can increase future property tax bills. Many asses­sors calculate taxable value based on the consideration recited in a deed. Purchasers typically acquire income­ producing properties based on existing or potential cash flow.It is the com­bination of the real property, tangible personal property and intangible per­sonal property which generates that cash flow.

The deed consideration should re­flect only the value of the real property and improvements, not the total trans­action value. Similarly, title insurance should reflect the real property's value and exclude value attributable to tan­gible or intangible personal property. A well-thought-out allocation agreement potentially simplifies later record keep­ing and yields significant savings on income, property and transfer taxes, sometimes worth millions of dollars.

For example, operating hotels are generally sold as going concerns. That distinct from the underlying real es­tate. The hotel's intangible personal property, such as its brand, reserva­tion system or on-line presence, may substantially increase cash flow but is generally exempt from ad valorem tax­ation.Using the transaction's value, rather than the value of the real estate and improvements, in the deed not only increases documentary stamps but could lead to unwarranted higher ad valorem taxes.

Pre-purchase cost segregation stud­ies are often useful in documenting these separate values, but many pur­chasers and their lenders are reluctant to engage in this component analysis. For example, large hotel loans typical­ly proceed from a lender 's corporate loan department,not the real estate de­partment, and with good reason. Loan officers can be reluctant to explain to their superiors or to regulators why title insurance values might be lower than the face amount of the note, when the loan is really underwritten on the value of the cash flow and not the in­dividual components contributing to that cash flow. That reluctance could manifest itself in reduced loans being made available for borrowers.

Similarly, loans secured by retail real estate occupied by national credit ten­ants previously garnered less scrutiny from lenders and regulators in assessing loan risk. That laissez faire attitude may be changing as e-commerce erodes sales at brick-and-mortar stores, which continue to close in large numbers.

In some jurisdictions, changes in the property's condition such as a vacancy by a major retail tenant do not trigger a reassessment, and may not be factored into tax bills. The key inquiry in those situations is whether the change in condition occurred after the applicable valuation date.

Property improvements also cre­ate taxation pitfalls. In states that cap taxable property values, the caps may come off when improvements are made. In other words, the cost of im­provements could include not only construction expenses but also a substantially greater tax burden.

The effect of improvements on prop­erty taxes varies by jurisdiction. Flor­ida has adopted a bright-line test that examines whether the completed improvement increases value by at least 25 percent. California law protects properties from reassessment so long as any work is normal maintenance or repair, or the improvement does not convert the property to a state "substantially equivalent to new." Whether new construction or improvements fall into this category is "a factual deter­mination that must be made on a case­ by-case basis," the California statute states. South Carolina law contains no such guidance.

Timing also matters. Most jurisdic­tions prohibit taxing improvements until after the improvements are com­pleted, as defined by applicable stat­ute. If the applicable valuation date is Dec. 31, 2018, an owner might consider delaying completion until after Jan. 1,2019, to delay a major tax increase. Re­gardless, careful analysis and plannirig can help property owners address the hidden cost of increased taxes.With careful planning, the prudent property owner can avoid being bit­ten by the lurking snake of increased property taxes and walk the property tax trail with confidence.

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Put filing deadlines and other key tax dates on the calendar to preserve your rights to appeal and protect incentives.

Timing can be everything when it comes to property tax appeals. Failure to file an appeal on time will almost certainly lead to its dis­missal, and paying taxes too late can lead to the same fate. Those aren't the only important dates to keep in mind when it comes to property taxes, however. Knowing the correct assessment dates, exemp­tion filing periods and other relevant time elements can be critical for a taxpayer looking to minimize its property tax liability.

At a basic level, all taxpayers should know when to file returns, when assessors determine values, when protests and appeals must be filed, when taxing entities issue tax bills and when payment is due. This may seem simple enough, but there is often more than meets the eye. These dates vary from state to state, county to county and even municipality to municipality. Many jurisdictions revalue real property annually, while others do so on a less frequent cycle. In some jurisdictions, such as Florida, a taxpayer may re­ceive a discount for paying property taxes early. The following are some examples of timing issues that a taxpayer should keep in mind.

Assessment, Valuation Dates

Each jurisdiction assesses real and personal property as of a certain date each year. Many states, including Florida, Georgia and Tennessee, use a valuation date of Jan.1. In Alabama, the valuation date is Oct. 1 of the year proceeding the tax year, such as a valuation date of Oct. 1 2017, for the 2018 tax year, with a tax bill due Oct. 1,2018, and tax payments deemed delinquent if not paid by Dec.31,2018. Events occurring at or to the property after the assessment/valuation date are typically excluded from consideration when determining the taxability or value of the property for the relevant tax year.

The assessment or valuation date can have significant implications for the owner's property tax liability. For instance, a casualty event could result in vastly different assessments depending on whether the property damage occurred a few days before or a few days after the applicable valuation date.If a purchaser's new use will result in the property losing an exemption or being assessed at a higher assessment ratio, there might be an opportunity for substantial first-year tax savings if the closing occurs after the relevant assessment or valuation date.

The assessment date will also determine which sales and rent comparable examples the assessor can consider, and which years of income information are relevant. In the case of construction in progress, knowing the valuation date and properly documenting the status of construction as of that date can greatly affect the assessed value.

The assessment date may also dictate who is entitled to receive notices, file property tax protests or claim exemptions, so it is important for a purchaser to consider these issues at closing to ensure that its rights are protected. A prudent purchaser should promptly ensure that the property is assessed in its name and request that the seller immediately forward any tax notices it receives. Tax appeals are often required to be filed in the owner's name as of the assessment date, and in such cases, a purchaser should obtain the right to appeal in the name of the previous owner.

Some jurisdictions reappraise property on an annual basis, with values subject to increase or decrease each year, while others are on longer reappraisal cycles of up to six years. In jurisdictions with multiyear reappraisal cycles,there still may be instances where a value is adjusted before the next appraisal cycle, including new construction, casualty, sale of the property or other conditions.

Assessment, Claim Deadlines

Most states have various exemptions, property tax incentives and favorable assessment classifications that, when applicable, must be claimed with the local assessor. These may include charitable exemptions, current-use valuation for timber or agricultural properties, statutory abatements and the like. In many jurisdictions, properties are broken down into classifications such as commercial or residential, which may be assessed at a higher or lower rate.

In order to receive the benefit of these exemptions or lower assessment rates, it is of utmost importance to comply with all filing deadlines. In certain instances, exemptions and other favorable assessments can be waived if the taxpayer fails to claim them within the prescribed time periods.

Taxpayers must also remember to file personal property returns on time, where applicable. Missing a deadline can result in penalties, incorrect assessments and the waiver of exemptions. The person preparing the return should confirm the correct assessment date to ensure that only those items owned on the applicable assessment date are included on the return.

Protest, Appeal Deadlines

A taxpayer must be diligent in determining when valuation notices are issued (if at all) and the correct deadlines for filing protests to dispute high valuations. The failure to do so may result in missed deadlines, waiver of appeal rights and the payment of excessive taxes. Protest deadlines can vary widely, even within the same state, and are often 30 days or less from the date of the valuation notice. In some instances such as in Alabama when the value has not increased from the previous year, no notice is even required to be sent. Therefore, it is incumbent on the taxpayer to determine when the values were issued and what date protests must be received.

Appeals beyond the initial administrative level typically have specific filing deadlines and other procedural and jurisdictional requirements that must be strictly met in order to maintain an appeal. These requirements may include paying the taxes before they become delinquent, filing of a bond and other procedural requirements that are not always intuitive, so it is important to consult with local professionals who are well acquainted with the requirements in any particular jurisdiction.

Aaron D. Vansant is a partner in the law firm of Donovanfingar, LLC., the Alabama member of American Property Tax Counsel the national affiliation of property tax attorneys.He can be reached at adv@donovanfingar.com.

''While Republicans and Democrats remain divided on the overhaul's benefits, there is a single undeniable fact: The sharp reduction of the corporate tax rates from 35 percent to 21 percent will be a boon for most businesses"

President Trump's Tax Cuts and Jobs Act is the first sweeping reform of the tax code in more than 30 years. Signed into law on Dec. 22, 2017, the plan drops top individual rates to 37 percent and doubles the child tax credit; it cuts income taxes, doubles the standard deduction, lessens the alternative minimum tax for individuals, and eliminates many personal exemptions, such as the state and local tax deduction, colloquially known as SALT.

While Republicans and Democrats remain divided on the overhaul's benefits, there is a single undeniable fact: The sharp reduction of the corporate tax rates from 35 percent to 21 percent will be a boon for most businesses. At the same time, employees seem to be benefiting too, with AT&T handing out $1,000 bonuses to some 200,000 workers, Fifth Third Bancorp awarding $1,000 bonuses to 75 percent of its workers, Wells Fargo raising its minimum wage by 11 percent and other companies sharing some of the increased profits with employees. Companies are showing understandable exuberance at the prospect of lower tax liability, but investments many firms are making in response to the changes may trigger increases in their property tax bills.

Some companies already are reinvesting in their own infrastructure by improving and upgrading inefficient machinery or renovating aging structures. Renovations to address functional or economic obsolescence can help to attract new tenants and, most significantly,command higher rental rates for the same space.

The real property tax systems in place for most states are based on an ad valorem (latin for "according to value") taxation method. Thus, the real estate taxes are based upon the market value of the underlying real estate. Since the amounts on tax bills are based on a property's market value, changes or additions to the real estate can affect the taxes collected by the municipality.

Generally speaking, most renovations such as new facades, windows, heating or air conditioning will not change the value or assessment on a property. The general rule is that improvements that do not change the property's footprint or use, such as a shift from industrial to retail, shouldn't affect the property tax assessment. However, an expans1on or construction that alters the layout of a property can -and usually does -result in an increased property assessment. Since realestate taxes are computed by multiplying the subject assessment by the tax rate, these changes or renovations can significantly increase the tax burden.

Tax Exemptions Available for Property Improvements

Recognizing that this dynamic could chill business expansions, many states offer a mechanism to phase-in or exempt any assessment increases. This can ease the sticker shock of a markedly higher property tax bill once construction is complete.

New York offers recourse in the form of the Business Investment Exemption described in Section 485-b of the Real Property Tax Law. If the cost of the business improvements exceeds $10,000 and the construction is complete with a certificate of occupancy issued, the Section 485-b exemption will phase-in any increase in assessment over a 10-year period. The taxpayer will see a 50 percent exemption on the increase in the first year, followed by 5 percent less of the exemption in each year thereafter. Thus, in year two there will be a 45 percent exemption, 40 percent in year three and so on.

Most other states have similar programs to encourage busmess investments and new commercialconstruction or renovations. The State of Texas has established state and local economic development programs that provide incentives for companies to invest and expand in local communities.For example, the Tax Abatement Act, codified in Chapter 312 of the tax code, exempts from realproperty taxation all or part of an increase in value due to recent construction, not to exceed 10 years. The act's stated purpose is to help cities, counties and special­ purpose districts to attract new industries, encourage the development and improvement of existing businesses and promote capital investment by easing the increased property tax burden on certain projects for a fixed period.

Not long ago, the City of Philadelphia enacted a 10-year tax abatement from realestate taxes resulting from new construction or improvements to commercial properties. Similarly,the State of Oregon offers numerous property tax abatement programs, with titles such as the Strategic Investment Program and Enterprise Zones.

Minnesota goes a step further and automatically applies some exemptions to real property via the Plat Law. The Plat Law phases-in assessment increases of bare land when it is platted for development. As long as the land is not transferred and not yet improved with a permanent structure, any increase in assessment will be exempt. Platted vacant land is subject to different phase-in provisions depending on whether it is in a metropolitan or non-metropolitan county.

Clearly, no matter where commercial real estate is located, it is prudent for a property owner to investigate whether any recent improvements, construction or renovations can qualify for property tax relief.

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​Philip Giannuario is a partner at the Montclair New Jersey, law firm Garippa, Lotz & Giannuario. the New Jersey and Eastern Pennsylvania member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Philip Giannuario can be reached at  phil@taxappeal.com

To determine whether your property may qualify for relief, identify the market occupancy rate for that property type and submarket.

In many states, abnormally high vacancy at commercial properties should mean a lower tax bill. Market transaction evidence essentially dictates this result: States that assess taxable value on commercial properties based on market value, as though leased at market rents, should allow a deduction from that value when the property incurs above-market vacancy and collection losses.

Would buyers pay as much for a vacant income-producing property as they would for an identical property that is fully leased at market rates? Of course not. For the same reason, in states that value the property as though leased at market rents, below-market occupancy should result in a lower property tax assessment.

To determine whether your property may qualify for relief, identify the market occupancy rate for that property type and submarket. Loan underwriting is a good source of this information because lenders underwrite property loans based on the normal, stabilized occupancy rate.

For example, in many areas lenders assume 95 percent stabilized occupancy for shopping centers. In those areas, a shopping center that is only 80 percent occupied has below-market occupancy and, therefore, is worth less than otherwise similar properties with the higher market occupancy rates.

Similarly, the prospect of the imminent departure of a major tenant reduces the price a buyer would pay, even if the property currently enjoys market occupancy. And a vacant anchor space diminishes value even when the owner continues to receive rent on the dark space. All these circumstances signal an opportunity for property tax relief.

Start the process

If any of these circumstances apply, the best first step is usually to contact the tax assessor's office and inform the appraiser responsible for valuing the subject property. Providing data about the vacancy problem may be all it takes to reduce taxable value in the next assessment.

If this fails to achieve a reduced value, consider a property tax appeal. Engaging counsel experienced with property tax matters will help the owner evaluate the merits of appeal opportunities. Counsel may also be able to give the conversation with the assessor's office a fresh try.

An appraisal may be necessary to support a property tax appeal. The property owner's counsel should help select a good appraiser who can testify, if necessary. Counsel will also instruct the appraiser on what will be needed for property tax purposes.

Deduct a vacancy shortfall

In states where below-market occupancy affects property tax valuation, the appraiser should engage in a two-step analysis. First, determine the property's stabilized value. Then estimate the amount of vacancy shortfall to deduct from the stabilized value to account for the costs, risk, effort and skill that a buyer of the property would require to bring it to stabilized occupancy.

The three components of a vacancy shortfall deduction are direct costs, indirect or opportunity costs and entrepreneurial incentive. Direct costs include tenant improvements and leasing commissions that would be required to lease up the vacant space. Indirect costs include lost rent until the space is leased, lost expense recoveries and any free rent or other concessions the new tenants would require, based on market lease terms.

Finally, the entrepreneurial incentive profit margin represents the additional deduction from the stabilized value that value-add investors require for the extra risk, skill and effort required to bring the property to stabilized occupancy. The entrepreneurial incentive profit margin can range from as little as 20 percent to over 100 percent of the vacancy shortfall costs.

Another approach to account for entrepreneurial incentive is to increase the capitalization rate used in the income approach to calculating stabilized value during the first step. That does not show the effect of the abnormal vacancy as clearly. Ideally, step one includes several valuation approaches rather than relying on the income approach alone and concludes a reconciled value as if stabilized. Then the full effect of the abnormal vacancy can be isolated in the second step of the appraisal (i.e., in the vacancy shortfall analysis).

To value property with below-market occupancy, the appraiser must understand how buyers and sellers treat such properties in actual transactions. The appraiser will need to verify comparable sales prices directly with buyers and sellers or their brokers to determine how they determined the selling price for properties that sold subject to below-market occupancy. Though each party to the transaction may differ in its analysis, both will likely have performed this two-part examination to determine the as-is selling price of the struggling property. This market evidence will bolster the subject property's tax appraisal.

Just as a buyer typically would negotiate a lower price for deferred maintenance such as a leaky roof, buyers pay less for properties struggling with vacancy issues. Typically value-add investors expect a significantly higher return to compensate them for the elevated risks of trying to create additional value. Many states appropriately recognize this in lower property tax assessments.

Question: What do the following have in common? A developer of a new mixed-use power center. The owner-operator of nursing homes or assisted living facilities. A national retailer with a large distribution center. A 100+ unit multifamily owner or manager. The owner of hotel chain. A high-tech manufacturer with a research and development facility. Answer: They all pay property taxes.

Whether you are a real estate investor or need real estate to house and facilitate your business operation, your real estate taxes will be one of your highest expenses, and one that you must pay even if your property is vacant or underperforming. Now is the time for your yearly check-up on your Ohio properties to determine whether the values that form the basis of your property taxes are fair.

Review your assessment

Start by reviewing the assessment on your tax bills. In Ohio, your tax valuation should reflect a reasonable sale price under typical market circumstances for the land and improvements as of the tax lien date of January 1, 2017. Verify that the information in the county records is accurate. For many Ohio counties, including Cuyahoga, much of this information will be online. Double-check building size, land size, year built, number of stories, etc.

Grounds for a change in value

The following are the most common types of evidence considered by boards of revision, which is the initial reviewing body:

Sale

One way to demonstrate value is with a recent, arm's length sale price. Generally, if a sale occurred within two years of tax lien date, did not include any non-real estate items, and was typically motivated, the price will be good evidence of the real estate value for tax purposes.

Appraisal

An appraisal can also be used to justify a change in value. Appraisal done for tax appeals must value the property as of the tax lien date. The appraiser should also be ready to testify at the hearing. Appraisals for tax appeals may have requirements that are not necessarily present for appraisals for other purposes, such as financing, so it is helpful to talk to someone familiar with the process.

Property Conditions

If there are unusual conditions, severe deferred maintenance, sudden changes in occupancy, or ongoing vacancy issues that affect the value of your real estate, that information should be brought to the attention of the board. Recent sales of properties similar to yours that support a lower value for your property may also help demonstrate that your valuation is incorrect.

Filing Deadline

The deadline to contest your assessment for properties in all Ohio counties is March 31. Because it falls on a Saturday in 2018, the deadline will be extended to April 2. The complaint form can be obtained from the county in which the property is located. The form is only one page; however, there are restrictions on who can file a complaint (i.e. what relationship they have to the property) as well as some technical requirements that may be missed by those unfamiliar with them. Generally, only one complaint can be filed per triennial period, although there are some exceptions.Once the deadline has passed for a particular tax year, the chance to contest that assessment is lost.

Procedure

After your complaint is filed, the local school district where the property is located has the opportunity to file a counter-complaint. After the period to file both complaints and counter-complaints has expired, the county board of revision will schedule a hearing. Each county board has its own rules regarding the submittal of evidence, requests for continuances, etc. At the board of revision hearing you will have the opportunity to explain why the assessment of your property is inaccurate. Boards of revision are not generally bound by the Ohio Rules of Evidence; boards are also empowered to conduct their own research. The board of revision may adopt the value you are seeking; it may make no change, or grant you are partial decrease. It may even increase the value, so it is important to consider carefully before filing a complaint.

Appealing the BOR decision

If you do not agree with the decision of the board of revision (BOR), you can appeal it to the county court of common pleas, or the Board of Tax Appeals (BTA) in Columbus. The BTA is an administrative tribunal that only hears tax related cases. Proceedings at this level are more formal than at the board of revision. Prior to September 29 of this year, a decision of the BTA could be directly appealed to the Ohio Supreme Court. Now any appeals from the Board of Tax Appeals and courts of appeals to the Ohio Supreme Court are discretionary and not as of right. The Supreme Court can decide not to hear your case. It is unclear yet the consequences of this recent legislative change, but there may be an increase in disparate treatment across the state as a result.

School district increase complaints

All Ohio taxpayers should be aware that Ohio is one of the few states (Pennsylvania is another) where school districts are enabled to file an action to get your tax valuation increased. Usually, this occurs when a recent purchase price is higher than the most recent tax assessment. Be aware of how the taxes will be prorated when you are working on a sale transaction. Depending on the timing of the sale, you may end up owing additional taxes for a period during which you did not actually own the property.

No one enjoys paying taxes, but with some research and preparation, you can make sure that your share of the real estate tax burden is fair.

Properties under construction and projects subject to governmental restriction can take advantage of legislative provisions the state provides.

The Portland metropolitan area is undergoing an unprecedented boom in commercial construction that extends from downtown to the suburbs and into just about every product type.Many taxpayers are preparing to pay larger tax bills, either because they are developing one of those new projects, or because they own properties that are becoming more valuable in response to growing demand for redevelopment sites. This is particularly common in developed areas where infill construction is hot.

Taxpayers in either of those positions may be missing out on significant tax savings if they are unaware of two provisions of Oregon law that could offer some respite. The Oregon legislative has carved out property tax provisions for a property under construction and for a property subject to a governmental restriction. The savvy property owner needs to know about these opportunities and comply with the statutory requirements to achieve the tax benefit.

The provisions are especially relevant to Portland's latest round of development, much of which is concentrated around infill in neighborhoods and on properties that were once used for industrial activities.

It is important to remember that Oregon law bases property taxes on the real market value of the property or the maximum assessed value under the Oregon Limits on Property Tax Rates Amendment of 1997. Also known as Measure 50, this amendment imposed restrictions on future increases in assessed values and on tax rates. Taxing entities multiply the assessed value by the tax rate to calculate the taxes owed.

The state defines "real market value" as the price an informed buyer would pay to an informed seller in an arms-length transaction. The statute goes on to state that if the property is subject to a governmental restriction as to use, "the property's real market value must reflect the effect of those restrictions."

That brings us to the tax-saving opportunities associated with usage restrictions and construction. Taxpayers typically think of government restrictions only as zoning law or a conditional land-use limitation. Often overlooked are environmental restrictions on a property's use, such as when the federal Environmental Protection Agency or the Department of Environmental Quality has identified the land as a contaminated site.

When a property is governed by a qualified environmental remediation plan, it is subject to a governmental restriction on the property's use. Obviously, the contamination and the future costs of remediation or containment significantly reduce the property's real market value.

One way to measure the reduction in market value caused by the government's environmental restrictions is to calculate the present value of the future clean-up costs. The assessing authority will consider the responsibility and costs of remediation or containment, and will usually reduce the real market value of the property significantly.

Another common governmental usage restriction occurs when a governmental agency provides low-interest loans or tax incentives as a means of encouraging development of certain types of public interest projects, such as low-income housing. The government loan will typically require that the property reserve a number of units for lease at a below-market rent.

In Oregon, the statute allows the property owner to choose whether it wants to enter into the special assessment program for low-income housing. A caution to the property owner that enters into the special assessment program for low-income housing is that the property could become subject to back taxes if it later fails to meet the requirements of the county, or of the loan.

Importantly, the statute does not require the property owner to enter the special assessment program to achieve the tax benefit of certain low-income housing units, as long as the loan meets certain statutory requirements and is properly recorded.

Not to be missed is the construction-in-progress exemption, which is available for income-producing properties. Most states encourage the development of commercial and industrial facilities by sheltering construction projects from the payment of taxation until the property is in use or occupied, and therefore generating rental income or enabling an owner-occupier to pursue business activities there.

The construction exemption requires strict compliance with the statute, and inadvertently failing to meet one of the criteria could cost the property owner a year of tax savings. The exemption isn't limited to manufacturing facilities; the Oregon Tax Court has held that this tax exemption is also available to a condominium under construction, provided that the units were held for sale until its completion.

While taxpayers in Portland's hot construction market enjoy many opportunities to take advantage of tax reductions, owners all across the state should be on the alert for these potential reductions.