"Computing value can get complicated if stores are required to mix online sales with physical sales."

Shopping via smartphones and tablets is here to stay, but the new-found convenience has introduced new uncertainties and complexities to shopping center owners, developers and investors.

The uncertainty stems from the ways e-commerce complicates shopping center valuations and development. Appraisers, assessors and property investors are forced to reconsider previously accepted answers to fundamental questions: What is the relative value of in-line stores and anchors? How should stores on contiguous parcels comprising a regional mall be valued? How fundamental is location? In an e-commerce world, the answers to these questions are increasingly uncertain and complex.

For example, the existing ad valorem tax system taxes a property's real estate value rather than its profitability. The current system assumes rents, which form the basis of commercial property values, relate directly to profitability. Rents in a regional mall are based upon profitability. For example, a jewelry store in a mall's center court may pay $75 per square foot while a family apparel store pays $20 per square foot. What really matters is occupancy cost. When occupancy costs (the total costs paid to the landlord including rent and reimbursable items such as CAM) exceed 12 percent of sales, the tenant may be headed for trouble. Higher sales permit higher occupancy costs. Indeed, appraisers often incorrectly equate real property value to the profitability of the property's business operation when the real property should be valued in fee simple in a tax appeal.

Conventional wisdom suggests strong anchors improve a center's real estate value, stabilize a property's financial statement, reduce an owner's risk and increase the price a buyer would pay for the center. For example, a Nordstrom will often bring inline tenants that would otherwise not go to the mall. A recent variant on this theme is the proliferation of mixed-use centers, which often include office, apartments and other life style uses designed to draw potential shoppers for the retail tenants. Put simply, retail sales historically relate to the center's location, trade area population, trade area household income and foot traffic, not to factors such as web presence. Additional uses also theoretically provide more stability to the project's value.

E-commerce is challenging conventional wisdom about the effect of anchors on overall value as online sales increase pressure on bricks and mortar retailers and diminish their role in overall retail sales. In February 2014, the U.S. Census Bureau reported that 2013 fourth quarter retail e-commerce sales, adjusted for seasonal variation but not for price changes, increased 16 percent from the fourth quarter of 2012, as compared to a 3.9 percent increase in total retail sales for the same period in 2013. E-commerce accounted for 5.8 percent of total sales in 2013 compared to 5.2 percent for the same period in 2012.

On a non-adjusted basis — that is, excluding sales in categories not commonly purchased online — Internet Retailer magazine estimated e-commerce accounted for 7.6 percent of total retail sales during 2013, a 6.8 percent increase from the same period in 2012. Forrester Research projects that by 2017, direct online purchases will account for approximately 10 percent of all U.S. retail sales, representing a nearly 10 percent compound annual growth rate from 2012. Looking beyond purely online purchases, Internet Retailer estimates that by 2017, 60 percent of U.S. retail sales will involve the web.

In some ways, these figures understate e-commerce's impact on bricks and mortar retailers. For example, the figures do not account for lost profitability and price pressure created by consumers who price shop online and visit a center to make a purchase. Further, how many consumers now shop on-line for groceries and either have those groceries delivered to their homes via a provider such as Amazon.com, or collect them from a drive-through checkout line?

Forrester Research predicts U.S. e-commerce spending will increase because larger retail chains will invest in omnichannel" efforts — tying together stores with the web and mobile — along with more consumers using smartphones and tablets, and what the report calls "increased comfort with web shopping."

Onmichannel marketing will likely decrease inherent real estate values and lower ad valorem taxes since e-commerce decreases the importance of bricks and mortar stores and foot traffic. If 60 percent of retail sales will involve the web by 2017, how important is location? How important are anchors?

The answers may be, "Not very much." E-commerce's impact is already evident in store closings by retailers once considered national credit or anchor tenants. In 2013, a major South Carolina grocery chain that anchored many small shopping centers closed most of its stores. Nationally, in early March 2014, RadioShack announced the closure of approximately 1,100 stores while Staples announced plans to close 225 stores. Is it coincidental that Staples is now the number 2 e-tailer behind Amazon?

Historically, the risk in leasing to a large anchor was much lower than leasing to smaller tenants. Different uses generally involve different capitalization rates, or expected rates of return relative to the purchase price. The risk involved with office leases differs from the risk of renting to national retailers. Historically, inline stores arguably should have had a higher capitalization rate than the anchor stores did, since there was more risk. This was never the case as all the department stores have credit ratings below investment grade and are larger stores and therefore have a greater risk than smaller inline stores with better credit. Most malls trade on cap rates in the 6 to 8 percent range, whereas the few department stores that were leased when sold traded in the 10 to 12 percent range. Taxing authorities traditionally only paid lip service to these risk differences in calculating one overall capitalization rate, and tended to gravitate to a lower rate thought to be inherent in the anchor. But in an increasingly online world, is the riskier tenant the inline store, or is it the anchor?

The evolving significance of anchors also raises questions about the inter-relationship between separate parcels. Unsophisticated assessors tend to ignore state laws requiring parcels be individually valued. Instead, taxing authorities value the project by grouping multiple parcels together and applying one blended capitalization rate, regardless of the multiplicity of uses and tenants. Unquestionably, inline stores and anchors have a symbiotic relationship, but how does one measure that relationship value particularly when the anchor is on a different parcel from the mall itself?

The physical location of a closed anchor in a mixed-use center can exacerbate the problem. For example, what happens when a failed anchor, located in the middle of the mall, creates parking or access issues for patients visiting medical offices? How is this impact measured?

While the solutions are still unclear, a few basic issues confronting the industry are coming into focus through the cyber static:

• Appraisers and tax authorities need to recognize most power centers and malls are complex businesses, where anchors and inline stores depend on each other (and internet presence) for profitability.
• The historic relationship of the capitalization rates applied to inline stores versus anchors needs to be scrutinized more closely.
• Some jurisdictions specifically require parcels be valued individually for tax purposes. If so, how does one measure the interdependency of the tenants that comprise the center?
• How does an owner address increased vacancies within mixed-use centers for both profitability and tax purposes?
• How does one calculate a property's real estate value when it is part of the retailer's onmichannel sales effort?

The challenges posed to owners by e-commerce spans the gamut from development to taxes. Valuing regional malls, power centers and even local shopping centers for property tax purposes is increasingly difficult in the e-commerce era. An owner who appropriately quantifies the different and increasingly complex risks associated with these businesses is far more likely to adapt successfully to the e-commerce world, and simultaneously reduce property tax bills. Recognizing the questions and challenges posed by e-commerce is the first step in obtaining the answers.

Morris A. Ellison is a partner in the Charleston, S.C. office of the law firm Womble Carlyle Sandridge & Rice L.L.P., and is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at mellison@wcsr.com.

Since the onset of the Great Recession in 2007 the home ownership rate in the United States has fallen by a considerable 4 percent, according to the Census Bureau. While the U.S. may not have become a nation of renters, that long-cherished and widely promoted American dream of home ownership appears to be less attainable and less desirable than it was a decade ago.

This shift in housing demand has sparked a construction boom in the multifamily sector. Across the nation, developers are building a vast amount of multifamily units. According to Cassidy Turley's most recent U.S. Macro Forecast, developers are set to deliver 160,000 new units this year, the most robust construction period in 15 years.

There has been a lot of ink spilled regarding the significance of this sea-change in housing. Often overlooked, though, is the effect this construction boom will have on property taxes in the multifamily sector in general. To understand the implications for property taxes, however, taxpayers must first understand how tax assessors typically value multifamily buildings.

Many tax jurisdictions, including the District of Columbia, employ a computer-assisted mass appraisal (CAMA) system to value multifamily buildings. CAMA systems are designed to simplify the assessment process across a product type, with the goal of producing more uniform assessments, as opposed to property-specific valuations.

To accomplish this, the taxing entity first stratifies properties into different categories and sub-categories. For instance, the D.C. assessor's office first categorizes multifamily buildings as either high-rise (five floors or more) or low-rise (four floors or less). It then further segments properties by submarket; in D.C. there are three general areas.

With properties categorized by the taxing jurisdiction's specifications, the assessor's office enters actual rental, expense and vacancy data for products within each specific category into the CAMA system. The computer model then produces statistical market-based indices for the various categories.

Assessors use these market-based indices to assess individual properties within categories, rather than using rental and expense information that is unique to that property. While adjustments can be made on an individual basis for property-specific issues, the goal of the CAMA system is to produce uniform assessments within the stratification.

Notwithstanding general grievances with CAMA valuations (and this writer has many), CAMA systems are based on general market data, which makes them prone to break down during periods of rapid market change, or when the stratifications are not updated in a timely manner.

One such scenario involves an oversupply at one end of the sector, as is now occurring in many cities due to the construction of class-A multifamily product. Too much construction of class-A apartments can result in lower occupancy levels and downward pressure on rents for these properties. In another, less understood scenario is a process that has been described as "filtering," in which new class-A product, with its higher levels of finish and greater amenities, displaces existing class-A product at the high end of the market. The older, formerly class-A buildings effectively join the class-B category, achieving lower rental rates than the newer product.

In the latter scenario, the stratifications within the CAMA system must be updated in a timely manner to reflect the new market realities. If they are not, the CAMA system will break down as it aggregates data from dissimilar properties, thus resulting in inflated values for the former class-A buildings.

Washington D.C. is beginning to experience the onset of this market dynamic. Research by Delta Associates indicates that while class-A rents rose slightly across the district, they actually decreased in established submarkets with relatively little new product, such as in the Upper Northwest. The district hasn't adjusted its market stratification's to reflect this new phenomenon, however. Instead, the system lumps together markets that have seen decreased rental rates with markets that are experiencing rent growth due to the influx of new class-A product.

Moreover, in the district all high-rise buildings are included in the same pool of comparable properties, regardless of when they were built, or what levels of finish or amenities they offer. Consequently, unless D.C. updates its CAMA system to reflect these new market norms, it is likely that in the next few years we will begin to see the CAMA system overstate assessments for older class-A product.

While taxing jurisdictions should be cognizant of these market changes and make timely adjustments to their CAMA systems, it will often fall to the property owners to be vigilant in monitoring and, when necessary, appealing property assessments. Watching a building's rent levels decrease due to competition from newer product is bad enough—having the city also tax that building as if it were the newer product just adds insult to injury.

Scott B. Cryder is an associate in the law firm of Wilkes Artis Chartered, the District of Columbia member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at scryder@wilkesartis.com

Tax expert warns of property taxation issues buyers may be unaware of when acquiring an asset.

In the mysterious realm of property tax valuation, it is hard enough to get a proper and decent property tax value on commercial property on a good day. It's even harder when the deck is stacked against you, and harder still when you are the one stacking the deck.

In many states, property transfers are significant revenue-raising events for taxing entities. In Georgia, the transferor (the grantor or seller in a transaction) takes the lead in filing form PT-61, which is filed along with the deed, and typically the transferor pays the tax. Generally speaking, the transfer tax burden amounts to $1 per $1,000 of asset value, which is less than in other states. The transferee, or the buyer in a transaction, may pay little attention to what happens with form PT-61, especially since the tax is paid by the transferor.

But county tax assessors pay particular attention to the PT-61, with serious implications for the transferee's future property tax liability.

How serious? Consider that even valuation professionals can find it challenging to distinguish between real estate value and the value of a business operated from the real estate. For example, Bill Gates inventing Microsoft and operating it from his garage does not create a billion-dollar garage.

Sometimes distinctions are less clear. Assume someone purchases a daycare center for $2 million. The buyer is acquiring a business that brings the building to life, providing care to hundreds of little ones crawling around and demanding attention, generating revenue to the owner in the process. That business has value and is worth, say, $1 million. Indeed, the business is why the buyer acquired the property.

A closing attorney involved in the deal's real estate aspect sees a $2 million check at closing for a building operating as a daycare center. Suddenly that $2 million appears on the PT-61. Rest assured, when the tax assessor sees $2 million on the PT-61 (and assuming the assessor has no thoughts that the value may be understated), the job is done. The value is affixed to the property. The property owner must show that the affixed value is grossly overstated, a burden complicated by the very closing where the owner acquired the property reflecting the $2 million value. Try explaining that to three lay members of a board of equalization. In these situations, the owner frequently pays twice the real estate taxes which should be owed, often perpetually.

Other types of properties are even more treacherous for buyers. Hotels are one example, especially higher-end properties that collect substantial revenue from needy guests willing to pay for pampering (perhaps hundreds of the not-so-little ones meandering around and demanding attention). At least the appraisal sector has developed some valuation standards for hotels.

A more challenging area is retirement homes or skilled nursing centers. Many of these structures are 50 to 60 years old with linoleum floors or aging carpet, window air conditioning units and in a condition which might charitably be described as basic. Were they standing vacant, the buildings may well be demolished. In such a case, business value derives from the units' designation as worthy of a "certificate of need," a government-issued document that verifies a need for the services provided at the property and grants approval and licenses for that activity.

The real estate and business may be worth $10 million but the real estate by itself may be worth only a minor fraction of that amount. Putting a value of $10 million on the PT-61 form may result in a huge tax liability, both for that property and for those similarly situated.

Calling a certificate of need "real property" is a major stretch. It is a license to operate a particular business from that property, an intangible personal property right subject to revocation. The revenue generation is already subject to income taxes; trying to collect real estate taxes because of that revenue is hard to justify, even if an assessor thinks of this type of business as a "cash cow," as one confided recently.

Even appraisals, most often done to help procure financing, are seldom helpful. Appraisers will talk in terms of the value and number of beds (some of which may be 50 years old) to justify a business' value or cash flow to support the loan. But this ignores the huge expenditures on patient care, nurses, support staff, training, safety, health and related matters for which Medicare, Medicaid and insurance pay for reimbursement. Few appraisals of nursing facilities focus on separating underlying real estate value, and many appraisals are worth little in negotiating with tax assessors.

For properties like these, rent doesn't determine value, either. A renter in these situations is renting a business more than renting real estate.

Despite the complexities of separating business value from real estate value, a buyer can at least avoid common mistakes. Pity the transferee who unknowingly allows a closing attorney to put the entire $15 million purchase price on a PT-61, when the property can't be worth that without including the retirement or nursing home business. Some type of discounted cash construction cost analysis is one way of approaching real estate value.

It is imperative to demonstrate a fair, reasonable and understandable allocation of real and personal property tax values on the PT-61. An assessor will merrily accept the seller's assertion that the full purchase price is applicable to real estate. The purchaser's pride in enriching county coffers will pale when the purchaser can no longer clear enough revenue after taxes to repay loans or even stay in business. The process to avoid that outcome starts when the property is acquired.

William J. Seigler, III is a partner in the Atlanta law firm of Ragsdale, Beals, Seigler, Patterson & Gray, LLP, the Georgia member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be can be reached at bseigler@rbspg.com.

The tax assessor's notice arrives in the mail with the seemingly inevitable increase in your property's assessment. Is this just another expense line item creeping upwards? Should you start budgeting now for an increase in next year's real estate taxes?

Not so fast. Taking the time to review the notice with an experienced property tax professional could reveal opportunities for significant savings.

What Can I Gain?
Successful appeals can generate thousands or even hundreds of thousands of dollars in tax savings per year. Property taxes are one of the few expense line items that a property owner can manage with an eye toward not just keeping the expense flat, but in many cases actually reducing taxes compared with the current and prior years. Yet property taxes are often overlooked as a controllable expense. As Robert L. Gordon, a partner who specializes in property tax with the law firm of Michael Best & Friedrich LLP in Wisconsin, says, "One of the things I continue to see is that clients who are sensitive to the smallest increments in their income taxes, and engage in highly sophisticated planning to manage their income taxes, will at the same time accept property tax assessment increases as an inflexible cost that cannot be managed or addressed."

For many companies, a reduced assessment is the equivalent of "found money" and is a great boost to the bottom line.

Why Assessments Change
Typical conditions triggering an assessment change include new construction, renovation or demolition. More unusual cases can occur in places like California, where a change in ownership will generate a change in the assessment. Another reason for assessment change is error correction, as when an assessor finds that they had missed the existence of a building in previous assessments.

But the No. 1 reason for assessment changes is periodic district-wide reassessments. Most states have mandatory reassessment cycles while a few do not (see table).

In Pennsylvania, which doesn't require periodic reassessment, assessments can get far afield from actual market value, contends attorney M. Janet Burkardt, managing partner of Weiss Burkardt Kramer LLC, which advises Pennsylvania counties on reassessment. "Not reassessing regularly means taxing inefficiently, because counties are not capturing changes in value," Burkardt says. "The more often a county reassesses, the more equitable and uniform the values."

Pennsylvania, Oklahoma and California are examples of states that lack mandated reassessments. States that do reassess vary widely in frequency: Florida, Minnesota, Arizona, Kansas and Washington, D.C., are some states that reassess every property, every year. Some others – Wisconsin, for example – require annual reassessments, but in practice those don't always happen.

Don't Miss an Opportunity to Appeal
Even if an assessment goes unchanged in a given year, there may still be opportunities to reduce real estate taxes. In many states, like Pennsylvania, there is a ratio calculation that does change annually. For example, a property in Butler County, Penn., generated the same $100,000 assessment in 2012 and in 2014. By application of this ratio calculation for each year, the property is on the tax rolls at a fair market value of $523,000 and $740,000 for these years, respectively. If the property is worth $600,000, that would mean an appeal opportunity in 2014, but not in 2012.

Practices vary widely by state and even within states, so reviewing all assessments annually can turn up opportunities that might otherwise be missed.

What Will it Cost?
Filing fees for property appeals are modest, and in many jurisdictions the initial appeal is free. Fees in other places average about $100. The cost of the appraisal will vary based on the property's type, uniqueness, and the relative ease or difficulty of the valuation calculation. Commercial appraisals can range from $2,500 to $25,000 or more. Legal fees vary, but it is common for property tax attorneys to work on a contingency-fee basis, where there is no fee unless an appeal achieves tax savings.

Experience Matters
Asking an experienced property tax professional to evaluate assessment notices pays off. Working with a professional who knows the nuances of the jurisdiction, the law, how the system works in practice, which appraiser is right for the job, and who has a working relationship with the government employees that administer that system can be the difference between winning and losing appeals. Finding the right person to evaluate your assessments on a regular basis is the first step toward realizing tax savings.

Sharon F. DiPaolo is a partner in the law firm of Siegel Siegel Johnson & Jennings, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at sdipaolo@siegeltax.com.

In the nearly 200 years since the U.S. Supreme Court's ruling in McCulloch v. Maryland, pundits, attorneys, courts and others have deliberated Chief Justice John Marshall's assertion that "the power to tax is the power to destroy."

Today the issue is front and center in Kansas, where the state Legislature seems poised to enact sweeping reform legislation governing tax appeals. The contemplated measures would provide substantive due process in an attempt to level the playing field for taxpayers that seek to challenge state and local property, excise and income taxes.

The current tax appeal system in Kansas combines informal hearing processes at the county level in property tax issues and at the state level on appeals involving excise and/or income taxes. These are followed by an appeal to the Kansas Court of Tax Appeals (COTA), an administrative agency in the executive branch of state government. If a party is displeased with a COTA decision, the prescribed recourse is a direct appeal to the state Court of Appeals.

Mounting Concerns Over COTA
Tax consultants and commercial taxpayers alarmed by recent COTA decisions originated the call for reform. The grassroots effort spotlighted COTA's efforts to deny taxpayers the right to contract with tax consultants that use fee-based contracts.

COTA had ruled that the contracts violated public policy, and voided them. It then refused to hear pending cases where a tax consultant was involved. COTA also sought to deny taxpayers the ability to retain attorneys that took referrals from tax consultants.

Next, COTA dismissed appeals where the tax consultant had signed the appeal form, refusing to recognize the state-issued power of attorney forms the consultants had taxpayers execute.

Taxpayer grievances also extend to the time taken to resolve property tax appeals. A law requires COTA to issue a decision no later than 120 days after a tax hearing, but the law fails to penalize the agency in the event that it exceeds the deadline. Consequently, many cases linger beyond the 120-day mark.

Taxpayer Relief May Be Imminent
House Bill 2614 was introduced to address these issues. As currently written, the bill will make the following changes:

• Provide for a de novo appeal to the District Court. This change will ensure that a court of competent jurisdiction hears the taxpayer's evidence and makes findings and conclusions, rather than non-lawyer employees appointed by the governor deciding the case.
• Require a presumption of correctness for any appraisal submitted by a state-licensed appraiser.
• Permit taxpayers to employ the tax professional of their choosing without interference from COTA.
• Require tax appeal decisions to be issued within 120 days and, if not, all filing fees paid by the taxpayer will be refunded.
• Waive the filing fee in the event that a protective appeal for the following year must be filed because the prior year's appeal is still pending.
• Require COTA to provide for a simultaneous exchange of evidence. This would replace the current method, which requires the taxpayer to provide evidence months before the hearing while protecting the county from disclosure until 20 days prior to the hearing.
• Change the agency name from the Court of Tax Appeals back to the Board of Tax Appeals, to avoid the suggestion that COTA is a court within the judicial branch. This point also includes a staff salary reduction.
• Provide a method whereby a party could file to have a board member removed for cause, defined to be failing to issue orders timely or failing to maintain continuing educational requirements.
• Make cases valued at $3 million or less eligible for filing with the small claims division. This would be an increase from the current cutoff of $2 million.
• Require the agency to promptly approve stipulations between the taxpayers and the taxing body.

The initial group of taxpayers, tax consultants and attorneys contacted Kansas legislators directly and urged their support for tax appeal system reform. The Kansas Chamber of Commerce later picked up the grassroots effort.

In its "Legislative Agenda 2014 For A Healthy Economy," the chamber endorsed COTA reform to "provide an affordable, accessible and impartial system that can resolve state and local tax disputes expeditiously and efficiently."

Other groups including the lobby for the Kansas Association of Realtors joined the call for reform. Now the legislation has widespread support throughout the business and real estate communities.

Linda Terrill is a partner in the Leawood, Kansas. law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at lterrill@taxappealfirm.com.

"Reappraisal process allows Shelby County taxpayers to appeal assessed values every year."

Tennessee's fiscally strapped cities and counties are pressuring assessors more than ever before to aggressively value commercial property. Taxpayers must be aware of their rights under state law, lest an assessor attempt to prematurely capture any value increases prior to the next scheduled reappraisal.

With a proper understanding of the reappraisal process, commercial property owners in Memphis and Shelby County could get some property tax relief over the next three years, whether the fair market value of their properties increase or decrease.

Work the Reappraisal Cycle

Many states require assessors to reappraise property values annually. In Tennessee, counties have the option to reappraise property every four, five or six years. Shelby County reappraises every four years; its last reappraisal was in 2013 and the next one will be in 2017.

The purpose of reappraisals is for the assessor to adjust values for tax assessment purposes to actual fair market value. In a market that is moving up or down, the effect of a four-year reappraisal cycle is that appraised values fall out of sync with the market in between reappraisals.

Shelby County's reappraisal process is designed to favor taxpayers by enabling them to appeal assessed values every year, while the assessor can only adjust values in a reappraisal year (with some exceptions). This means that taxpayers can account for decreases in value annually, but the assessor can only capture increases in value every four years — when values increase.

The commercial real estate market in Memphis has been improving, and values have been steadily increasing, for certain types of property for the past year or two. For example, recent sales of medical office buildings indicate a much stronger market than in prior years. Demand for Class A multifamily properties have likewise increased, driving up sales prices. In the sought-after Poplar Avenue/240 corridor, vacancy in Class A+ office buildings had fallen to 7.7 percent in the third quarter of 2013, down from a peak of 20 percent in 2010, according to Cushman & Wakefield.

Owners have a right to an official notice from the assessor if the value on a property changes. The owner may then file an appeal with the Board of Equalization to contest the value change.

Owners should scrutinize the basis of a change in value by the assessor. Although there are certain times the assessor can change a value in a non-reappraisal year, there are other times when a change is not appropriate.

For example, an assessor should not "chase sales" to value a recently sold property at its sale price. Such a revaluation would constitute an illegal spot reappraisal. Also, the assessor should not revalue a property to reflect ongoing maintenance or repairs due to a turnover in tenants. Such actions by owners are ongoing and the revaluation of these properties would essentially amount to a reappraisal.

In what circumstances can the assessor revalue a property prior to the next reappraisal date? One example is when an addition or renovation is made to a property. In that case, the assessor may legally revalue the property because its physical condition has changed. Another example is when the Board of Equalization has reduced the value of a property due to its circumstances, such as being completely vacant. If the property is leased up, the assessor may revalue the property in subsequent years, even if not a reappraisal year.

Some property types in Memphis are still languishing under depressed values. The industrial vacancy rate stood at 14.1 percent in the third quarter of 2013, Cushman & Wakefield found. Industrial rents remained soft, as many users have relocated south of Memphis, across the state line in DeSoto County, Miss. Class C and D multifamily properties are still suffering from elevated vacancy and collection issues. Expenses, such as insurance, are rising at faster rates than rents. Many former tenants of Class C and D apartments have taken advantage of the institutional purchase and rental of single-family homes.

Fortunately, Tennessee law allows owners of these properties to file appeals every year. The assessor is not required to send an official notice to the taxpayer when the value stays the same, however. This means that taxpayer must remain vigilant to prevent the assessor from leaving the value for tax assessment purposes unchanged when the true fair market value of the property is decreasing. Taxpayers in this situation should exercise their annual right to appeal in order to avoid paying the same amount of property taxes on a property that is not worth as much as it was a year ago.

Andy Raines is a partner in the Memphis, Tennessee law firm of Evans Petree PC, the Tennessee member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at araines@evanspetree.com.

Utah taxpayers could soon be required to conduct an item-by-item appraisal of personal property in order to contest its taxable value if Utah assessors have their way. Utah imposes property tax on a business' tangible personal property based upon the personal property's fair market value. Fair market value means the value a knowledgeable, willing buyer would pay a knowledgeable, willing seller for the property operating at its highest and best use.

The taxable value of a business' personal property is self-reported and self-assessed using state guidelines. Every year, a business must submit a signed personal property statement to each county in which it owns property. These statements must include the year of acquisition and purchase price for each item of personal property. The taxpayer then multiplies the prices by a provided percent-good factor to determine its estimated fair market value.

Unfortunately, simply applying the percent-good factor does not always equal the property's fair market value. For example, there may be additional functional or economic obsolescence for which the percent-good factors do not account. Consequently, a taxpayer is allowed to dispute the resulting value.

Some taxing jurisdictions, however, have recently argued that taxpayers may only dispute the resulting value if they prepare an item-by-item appraisal, rather than valuing all the personal property subject to tax as a group or operating unit.

Utah State Tax Commission to Decide
In a case pending before the Utah State Tax Commission, the taxpayer disputed the assessed value of its personal property, arguing that such property suffered from functional and economic obsolescence above that accounted for in the percent-good factors. Consequently, the taxpayer argued that its property was valued above fair market value.

In challenging the value, the tax-payer had an appraisal performed. The appraiser determined that the personal property would most likely be sold as a group of assets operating together, and thus valued the personal property as an operating unit. While the appraisal looked at every piece of personal property, the valuation reflected its aggregate value rather than values placed on each specific piece of personal property. Likewise, in applying obsolescence adjustments, the appraiser applied them to the whole, rather than to specific items of personal property.

The county which imposed the tax argued that such an appraisal was improper and deficient because it failed to appoint a value to each item of personal property separately, and as a result, the taxpayer did not meet its burden of proving that the personal property was over-assessed.

The county's argument appears to lack any precedent. The Utah Constitution and the Utah Code only require that property be valued at its fair market value operating at its highest and best use. The highest and best use value for the separate items of tangible personal property in this case was achieved when the properties were viewed as operating together as a unit. Furthermore, the Utah Constitution and Utah Code do not mandate itemized valuations.

In a 2011 case (T-Mobile USA Inc. vs. Utah State Tax Commission), the Utah Supreme Court stated that "the code simply provides that property shall be assessed by the Commission at 100 percent of fair market value. Requiring the Tax Court to use a specific valuation method ignores the reality that certain methodologies are not always accurate in every circumstance."

In the case pending before the Commission today, a ruling in favor of the taxing entity would drastically change the manner in which a taxpayer is to dispute the value of its personal property. Whereas now, there is no specific method that must be followed in order to determine the fair market value. If the Commission rules in favor of the taxing entity, taxpayers would be required to separately value each item of personal property listed on its personal property signed statement. Then tax-payers would have to add those values together to derive the value estimate for all of the personal property regardless of whether that summation is the fair market value at which the personal property would likely sell.

A ruling in favor of the taxpayer, however, maintains the status quo and further emphasizes that the standard for valuation in Utah is fair market value. So long as that is achieved, it does not matter which valuation method is used.

A decision from the Utah State Tax Commission is expected later this year.

David J. Crapo is the managing partner at Crapo Smith PLLC, Utah Member of American Property Tax Counsel. He can be reached at djcrapo@craposmith.com

Pittsburgh-area commercial property owners who received dramatic increases in their 2013 real estate assessments may see those taxable values go even higher. This wave reflects the growing nationwide issue of changes in property values and how they are assessed.

In the case of the Steel City, Allegheny County's first revaluation in 10 years dramatically increased assessments, which had remained static even during market highs in the mid-2000s and the crash in 2008 and 2009. While the overall increase in county assessments was 35 percent, commercial owners bore the brunt of the increase, seeing their assessments rise 54 percent overall.

More recently, however, local legislators enacted an unusual deadline extension that has effectively put property owners — especially commercial owners — at risk for even higher assessments.

Note that, rather than rely upon a central tax authority, each of Pennsylvania's 67 counties sets its own assessment. Because the state lacks a mandate for periodic revaluation, counties normally only undertake revaluation when a taxpayer files suit but will occasionally do so on the county's own initiative. Historically, reassessments are so infrequent in Pennsylvania (sometimes a decade or more passes between reassessments) that property values spike when a county eventually does reassess, which leads to public outcry and confusion.

Following publication of the new 2013 assessments for Pittsburgh-area properties, property owners filed 100,000 appeals before the original deadline on April 1, 2012. Then, in early 2013, Allegheny County's chief executive asked the county council to reopen the filing of 2013 appeals until April 1, 2013, ostensibly to help property owners.

At the time, the chief executive told local reporters that the deadline extension would give taxpayers another opportunity to appeal. What he didn't say, however, is that extending the deadline also opened the door for school districts to file appeals.

Increases in Store for Property Owners
Reopening the appeals process hurt more property owners than it helped. Most taxpayers who needed to appeal had already filed, but Pennsylvania law gives school districts a right of appeal as well. When the county council voted to reopen the deadline and allow new appeals, thousands of school appeals followed. School districts filed most of the 7,000 new appeals in 2013.

What's more, Pittsburgh's office market was hot in the latter part of 2012. The districts tracked sale prices in the last three quarters of 2012 and subsequently appealed to increase the property owners' new assessments based on these sale amounts. Most of these appeals to increase valuations target commercial owners.

Of the new appeals filed by property owners, the vast majority are attempts to re-hear appeals that were previously filed. Those are likely to be thrown out by the courts. That will leave mostly school-initiated appeals.

As of this writing, administrative hearings are complete for the original 100,000 appeals, and administrative decisions that caused the taxpayer or school district to be unhappy with the outcome are already pending in court. Hearings on the 7,000 new appeals are underway.

What to Do
When a taxing district files an appeal, state law requires it to send notice of the appeal to the address listed in county records as the property's Change Notice Mailing Address, which is published on the county's website (alleghenycounty.us). Some of the county records are outdated as to owners' addresses and, in those instances, some new owners are unaware of appeals on their properties.

New owners should check the address the county has on record for their properties and watch for notices sent to this address in the coming months. If a school district does appeal, the property owner would be wise to seek counsel, appear at hearings and defend his property's taxable value, otherwise risk having his assessment increased even more.

Sharon F. DiPaolo is a partner in the law firm of Siegel Siegel Johnson & Jennings Co., LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at sdipaolo@siegeltax.com.

"Any investor wants to maximize his property's value and income-producing potential, but many fail to take this concept seriously — until they realize what they could be missing out on"

Who cares about the highest and best use of a property? Well, appraisers certainly care, and when a property ends up in litigation, the judge cares. Understanding how these authorities determine value will make it clear that commercial property owners should care about highest and best use, too.

I learned the importance of highest and best use during my first year at the Department of Justice, in a small condemnation or government taking case. The property owner had a single-family home on a prime piece of commercial real estate, and a highway expansion was bringing traffic lanes to within 12 feet of the house. The property had been rezoned commercial and was surrounded by other commercial uses.

As a residential asset, the entire property before partial condemnation had appraised at $140,000, whereas the land as a commercial site was worth double that amount. Because the highest and best use of the property was redevelopment as a commercial site, the value for the land taken as right of way was worth more than the residential value of the entire, previously undivided property.

Not all analyses of highest and best use are so simple and obvious. This is particularly true in the context of appraising an industrial property for a property tax appeal. The standard test for determining highest and best use has four prongs, and each can be critical to the valuation of the property.

That question is: What use is legally permissible, physically possible, financially feasible and maximally profitable?

The first prong, what is legally permissible, refers to zoning or other governmental restrictions, as well as the deed restrictions, and the uses that those parameters allow for the property. In a recent case, a 57-acre property was zoned industrial, which allowed for offices as an accessory use to the industrial use. Improvements included several older flex manufacturing buildings totaling close to 600,000 square feet. The condition and use of the flex buildings varied but the need to use the structures primarily for manufacturing no longer existed.

The Oregon Department of Revenue's appraisal valued the majority of the 600,000 square feet as office use. This did not meet the test for what is legally permissible, because the zoning only allowed office as an accessory to an industrial use.

What is financially feasible? In this same case, the appraiser for the Department of Revenue also failed to address if it was cost effective to reconfigure several 80,000-square-foot, two-story flex manufacturing facilities for multitenant use. The government's appraisal lacked any discussion of the basic demising costs to create smaller rentable spaces, including common areas for hallways, lobbies, and relocation of elevators and restrooms.

What is physically possible? Many of the industrial buildings in this example were interconnected. They had shared utilities, were situated on a single tax lot and offered only limited access without dedicated parking for a given building. Separation of the buildings into viable stand-alone parcels may have been prohibited by the physical location of the utilities, the placement of the buildings on the lot, or by parking, ingress and egress to the site.

The fourth prong is often the simplest to address. Of the possible uses meeting the first three facets of the highest-and-best-use test, which offers the maximum profit for the owner?

An appraiser's failure to do a highest-and-best-use analysis and appropriately support its conclusions can be fatal in a trial setting. In a 1990 decision, Freedom Federal Savings & Loan vs. Department of Revenue, the Oregon Supreme Court held that highest and best use of the property subject to evaluation is the first question that must be addressed in a credible appraisal. This set the critical framework for valuation, and determines what other comparable properties can be used to value the subject property.

These highest-and-best-use tests must be appropriately supported. In the context of an investment property, for example, would an investor deem the current use to be most productive from a financial or physical basis for the property, or would an alternative use be preferable?

If a careful highest-and-best-use analysis is done at the beginning, the appraiser can select credible comparable sales or leases for use in valuation. The property owner, in turn, will be treated fairly, whether in a tax assessment appeal or an eminent domain acquisition.

Cynthia M. Fraser is an attorney at Garvey Schubert Barer where she specializes in property tax and condemnation litigation. The firm is the Oregon and Washington member of the American Property Tax Counsel the national affiliation of property tax attorneys. Ms. Fraser can be reached at cfraser@gsblaw.com.

The recovery of the Bay Area's real estate markets has muted the public outcry to change Proposition 13's restrictions on assessed value increases. Passed in 1978, Proposition 13 has come under fire for fostering unequal tax burdens.

The reasons that tax-reform fervor is weakening are twofold. First, as the recovery spurs real estate sales, properties will be reassessed at higher market values under Proposition 13's acquisition value system. Second, recent sales are also likely to increase real estate values generally, which will permit assessors to raise the assessments of other property owners. These trends have increased the values of property tax rolls and tax revenues.

Acquisition value system increases tax revenues

One under-appreciated aspect of Proposition 13 is its requirement that assessed values for property tax purposes be equated to acquisition values or sales prices. Critics of Proposition 13 contend that the law keeps values too low and reduces the amount of taxes going to government agencies. But in an active real estate market where properties are held for as little as five years, the opposite is true. In such markets, sales prices are usually climbing, assessed values increase, property tax collections rise, and local governments receive more revenues.

The recent up-tick in Bay Area real estate sales is proving the benefits of Proposition 13 because the values of tax assessment rolls have increased for all counties. For example, the 2013-2014 tax year assessment rolls increased over the previous year by 8.3 percent in Santa Clara County, by 6.0 percent in San Mateo County, by 5.0 percent in Alameda County, and by 4.5 percent in San Francisco. Statewide, assessed values increased by $191.5 billion or 4.3 percent over the prior year.

Recent sales affect assessments

The increase in real estate sales activity doesn't just impact the assessed values and taxes on properties that have sold. It can also affect the values and property taxes for real estate held by investors. Here's why.

Under Proposition 8, the bookend to Proposition 13, assessors can and have reduced real estate assessments in recent years to reflect across-the-board declines in market values. In some cases, the reductions have been considerable, well in excess of the 2 percent annual adjustments that are permitted under Proposition 13.

As real estate markets recover, the Proposition 8 reductions that assessors made in prior years to reflect market downturns usually are reversed. The Proposition 8 values of prior years can shoot up much faster than 2 percent per year for properties that are assessed below their trended Proposition 13 values, depending on where current sales show market values to be. As Proposition 8 values are reversed and values return to Proposition 13 levels, the property taxes on those assets also rise, thereby increasing tax revenues to local governments.

Split roll unnecessary

One of the changes currently advocated by opponents of Proposition 13 is to create a split tax roll which would tax commercial properties differently from residential ones, either by requiring commercial properties to be reassessed annually instead of upon acquisition, or by increasing the tax rates for commercial properties.

However, as described above, such changes are unneeded so long as there is an active market for commercial properties, and so long as sales prices generated by that market tend to increase over time, which is usually the case. When these conditions are present, assessed values will increase and property tax revenues will rise.

As markets continue to recover and assessed values rise, property owners should take stock of their assessed values. Local assessors will begin to set assessed values for the 2014-2015 tax year in January 2014. In some cases, values reduced under Proposition 8 in prior years will be restored to Proposition 13 levels. Taxpayers should ask whether those restored values represent market values, and if a value appears excessive, the property owner should file an appeal.

Cris K. O'Neall is a partner in the Los Angeles law firm of Cahill, Davis & O'Neall LLP, the California member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. O'Neall can be reached at cko@cahilldavis.com.

"When Assessors Seek Business Income Information"

Is it appropriate for a tax assessor to use income information in determining taxable value?

That question comes up frequently in property tax cases when assessors seek income information from taxpayers. The answer is that whether a request is appropriate depends on the type of property at issue and the type of income information being sought. In several recent cases involving manufacturing operations, industrial enterprises and other types of businesses, assessors have sought information on income from the business or businesses operating on the property, rather than on income from the property itself.

Often, assessors have a legitimate reason to seek certain types of income information from taxpayers. For instance, if the property type at issue is typically rented in the marketplace, as is the case with an apartment complex or an office building, it will likely be entirely reasonable for the assessor to request, and for taxpayers to use, the property's rents when evaluating its market value. Indeed, investors regularly rely on rental information to determine the price for such property.

However, some types of income data should be excluded from a property assessment. In a number of recent instances, for example, assessors attempting to value manufacturing or industrial properties have sought income and production information relating to the manufacturing process, which is unrelated to the property's income-producing capacity. Where the business is something different from the rental of property and the business income derives principally from assets other than the real estate, reliance on income information will produce misleading conclusions about the value of the real property (whether for taxation or any other purpose).

To better understand the problem, consider a hypothetical downtown office building that houses law firms, accounting firms, travel agencies, dental offices and any number of other tenants. No reasonable assessor would consider the revenues of the tenants in determining the value of the office building.

Why not? Because that business revenue would indicate only the value of the business taking place in the building. Tenant revenues do not determine the building's rent, and no reaonable investor would value the building on the basis of such income information. In short, it is irrelevant.

The same generally goes for production and income information when it comes to manufacturing proeprties. A typical manufacturing process requires personnel, machinery and equpment, managerial expertise and real property. Add to that goodwill and other intangibles that allow the manufacturer to capture market share and sell its products, and it is clear the income from product sales incorpoates value from a number of assets unrelated to the value contribution of the real property.

Special Purposes, Special Properties

Why, then, might assessors seek business income information, and how should taxpayers respond to such requests?

In many markets, manufacturing properties are more lilely to be in owner-occupied rather than leased space, so determining the equivalent of market rents for such properties is difficult. Assessors seeking production or business income information occassionally argue that they cannot use sales data because the property is a special-purpose asset. But even if the property is special purpose, the assessor should not seek and use income information unrelated to the property and its market value.

Attorneys also hear assessors argue that the property represents a special component of, or provides a particular "synergy" to, the taxpayer's business. These assessors contend they need business income information to accurantely reflect the property's true value. But such efforts to capture special value apart from the real estate itself are efforts to tax an intangible, not the property.

In some cases, it may be appropriate to consider income information to determine whether a property suffers obsolescence and is, therefore, over-assessed. For example, if the total income from all operations is insufficient even to support the real property at its current assessed value, an argumnent exists that the real property suffers obsolescence (relative to its assessed value). However, the fact that income shortfalls might indicate obsolescence does not make business income generally indicative of real estate value.

When assessors request business income unrelated to the property or its rent, taxpayers should consider objecting on several grounds: First, if the information is truly unrelated to the property or its rent, the taxpayer should explain that to the assessor \and try to provide only the property's rental information, if available.

Second, taxpayers should guard against the disclosure of proprietary business information. Many states have laws that protect confidential taxpayer data such as information relating to earnings, income, profits, losses and expenses; taxpayers are wll advised to mark that information as confidential and take other steps to avoid public disclosure of any income information they provide to the assessor.

David Suess is a Partner in the Indianapolis law firm of Faegre Baker Daniels LLP, the Indiana member of the American Property Tax Counsel. He can be reached at david.suess@faegrebd.com. Suess's partner, Brent A. Auberry, contributed insights and edits to the column.

Inconsistencies and confusion reign in determining effective date for valuing commercial properties.

"The practical implementation of the mandated five-year county-wide reassessment program further compounds the dating confusion. Many counties delay county-wide reassessment for one year, as authorized by statute, and in some cases, two years..."

Commercial property owners in South Carolina already faced an unsettled and confusing issue in trying to determine he valuation date for ad valorem taxes. Now, the South Carolina Court of Appeals has further complicated the issue.

Determining the valuation date should be simple: South Carolina law states the pertinent date of value for a given tax year is Dec. 31 of the preceding year. For example, logic suggests the valuation date for 2013 property taxes hould be Dec. 31, 2012. But that logic is often mistaken. South Carolina statutes require local assessors to engage in a countywide reassessment every five years. The process is referred to as an "equalization and reassessment program," and is intended to equalize the tax burden on property owners. Logic suggests the equalization program will equalize values, but that logic is also mistaken.

Act No. 388 and its Wake

Approximately seven years ago, the South Carolina General Assembly passed Act No. 388 which, among other things, capped value increases resulting from a county-wide equalization and reassessment to 15 percent of the property's prior assessed value, so long as the property had not changed hands in the past five years. However well-intentioned, the effort to lower property tax burdens wrought havoc with the concept of equalization.

The legislature also created the concept of an assessable transfer of interest, which eliminated the cap in some situations, such as in certain transfers of interest within the ownership entity, or following construction of improvements. In a sense, the legislation penalizes a landowner from a tax standpoint for improving a property's economic performance with new construction.

By their nature, caps erode the principal of uniformity since taxes for some properties go uncapped. Competing properties may have identical uses and financial performance, but taxes may be capped on one property, but not on the other. Under Act No. 388, two economically identical properties could be taxed using different valuation dates.
In fact, Act No. 388 promulgates a potential for four alternative valuation dates.

In an effort to address some of the outcry over the inequality engendered by Act No. 388, the legislature in 2012 provided an exemption of up to 25 percent of the purchase price of commercial properties. Unfortunately, this provision adds yet another little-known filing deadline, since the application for the exemption is due on or before Jan. 31 of the applicable tax year. In other words, a property purchaser must file for this exemption prior to the first Jan. 31 after acquisition. Failure to do so likely invalidates the exemption.

The practical implementation of the mandated five-year county-wide reassessment program further compounds the dating confusion. Many counties delay county-wide reassessment for one year, as authorized by statute, and in some cases, two years. For example, after delaying a scheduled 2004 reassessment to 2005, Charleston County delayed its next scheduled county-wide reassessment from 2010 to 2011 and decided to use a Dec. 31, 2008 valuation date rather than Dec. 31, 2010. The question is what date to use for valuation in the county-wide reassessment. Should it be the date on which reassessment was scheduled to occur or Dec. 31 of the year prior to implementation?
The correct answer is unclear.

Interim Appeals Defy Logic

So, what happens if a property owner wants to appeal the value of a property in the middle of the fiveyear period because of a change in economic performance? For example, is it fair to tax a property based on its economic status as of the valuation date used in the last county-wide reassessment, when it may have lost its anchor tenants since then? Logic and the clear language of state statutes suggest the valuation date should be the lien date, or Dec. 31 of the year prior to the year in which taxes are due, in order to treat properties equally based on economic performance.

According to the South Carolina Attorney General, however, that logic again would be wrong. In 2010, the attorney general opined that county assessors should ignore the unambiguous statutory language regarding valuation date and use the effective date of the last county-wide reassessment. County assessors are implementing this opinion regardless of logic.

In the 2013 case of Charleston County Assessor vs. LMP Properties, the South Carolina Court of Appeals further complicated the dating problem. In this case, the parties agreed to a Dec. 31, 2003, value date because 2004 was the date of the county's last county-wide reassessment. However, the Court determined Dec. 31, 2007, was the proper date for determining the property's highest and best use. In other words, the Court held an appraiser should use one date to determine the property's value and a different date to determine the property's highest and best use. How licensed appraisers meet these requirements and satisfy professional standards under the Uniform Systems of Professional Appraisal Practice defies logic. Logic suggests that assessors should use a uniform date, the lien date, for valuing real property. Logic also suggests the property's economic performance as of the lien date should control for interim appeals. But, then again, whoever said that dating — in love or taxes — had to
be logical?

Morris A. Ellison is a partner in the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. Morris A. Ellison can be reached at mellison@wcsr.com.

One of the bright spots that have emerged in the real estate market over the past five years of the economic recovery has been the multifamily rental segment. Of the 49 major metropolitan markets tracked by Cassidy Turley, only 17 have a multifamily vacancy rate above 5% and only two have a vacancy rate above 7%, according to the Firm's US Multifamily Forecast Report for Summer 2013.

Rental rates have increased in virtually all markets, with the strongest growth in top-tier cities. In Chicago, for example, rents at class A buildings have increased 21% since 2009. And at the national level, multifamily transaction volume quadrupled between 2009 and 2012. Despite these robust indicators, however, some observers worry that the industry may be overestimating the extent of the US multifamily recovery, and that developers are setting the stage for the next bubble.

Since 2012, construction has come to the fore. Almost 60,000 new multifamily units are expected to reach completion by the end of 2013 in the top 10 markets. The bulk of the new construction is class A buildings, which feature amenities such as a doorman, concierge services, work-out facilities, pools and in-unit washers and dryers.

Millenials, born between the mid-1980s and mid-1990s, appear to be driving the rental market. They are renting instead of buying for several reasons. Some have limited opportunities to finance the purchase of a home. Others want to remain mobile while pursuaing their careers. New construction is highest in cities like Austin, Washington, Chicago and New York, which are some of the prime designations for millenials.

While optimism is warranted, there are signs that the sector may have ignored the lessons of the 2008 recession. The availability of capital alone cannot be the determining factor driving development in a segment of the market that has become dominated by the addition of new supply. The real estate market must operate within the parameters of the greater economy, and that overall economy merits far less enthusiasm than the multifamily boom would suggest.

The liklihood of an over-supply in the apartment market raises interesting property tax concerns. The prospect of lower fundaments raises risk and lowers revenue expectations. Ultimately, it must be anticipated that pricing will change and values will decline.

Real estate taxes are based on market value, but the development of new values for real estate taxes lag well behind the market. In many places, the decline in value over the past five years still has not been fully recognized in the values established by assessors. Developers must have strategies in place which accelerate assessors' recognition of value changes taking place in the market. The key strategy to help owners keep real estate taxes in line with value changes is assiduous appeal of property tax assessments.

In 1989, the response to the savings and loan crises, the Uniform Standards of Professional Appraisal Practice were promulgated by the Appraisal Standards Board. These standards govern both the mass appraisal practices of assessors and the appraisal of individual properties by private appraisers, and will take into account the changes in the market as they arise. Thus apartment owners need to diligenty scrutinize their tax assessments in the next several years to ensure that these assessments reflect the changes in market values, and where they don't file an appeal.3

James Regan is the managing partner of the Chicago law firm of Fisk Kart Katz and Regan, the Illinois member of the American Property Tax Counsel. He can be reached at jregan@proptax.com. His Fish Kart colleague Antonio Senagore also contributed to this article and he can be reached at asenagore@proptax.com.

"How will market conditions in 2014 be different from what we saw in 2013?"

Stephen H. Paul, Esq., President of APTC, answered as follows:

"As Congress has been prone to "kick the can" down the road on tough budget issues, I believe many financial institutions holding large amounts of real estate mortgage paper have been kicking the can down the road over the past few years on many of their loans that have been underwater for some time, extending balloon payback dates into the future in hopes of having their troubled properties recover from their lagging performance. At some point, these financial institutions will have to fish or cut bait as to those properties that haven't recovered during their period of leniency. To the extent these institutions swallow hard and take their hits, we could see a large number of properties come onto the market at attractive prices for investors during 2014 — a reprise of 2010-2012.

"As to those properties that have recovered during this forgiveness period, to the extent they come back to the market, if the they're higher quality retail and office assets, we could see some slight appreciation in prices during 2014, certainly in primary, and most probably in good secondary markets as well."

Real Estate Forum, December 2013

Stephen H. Paul is a Partner in the Indianapolis law firm of Faegre Baker Daniels LLP, the Indiana member of the American Property Tax Counsel. He can be reached at stephen.paul@faegrebakerdaniels.com.

In order to fund proposed transit improvements in the vicinity of Grand Central Terminal, New York City is considering an air-rights zoning change to allow construction of perhaps a dozen buildings, primarily office towers, that would stand taller than is currently permitted. Developers would be asked to pay the city about $250 per square foot to acquire these new air rights, and the city would use the monies to carry out its proposed public improvements.

The pricing of new air rights under the proposal stands to pit the city against some New York property owners, who could see the value of their own air rights slashed as a result. A question with implications for commercial property owners is, how did the city determine the square-foot charge of $250? An article by Laura Kusisto in the Aug. 13 edition of the Wall Street Journal explores the brewing controversy.

The Landauer Valuation & Advisory organization calculated an estimate of value for the city. Landauer is a division of Newmark Grubb Knight Frank, a well-known real estate advisory firm.

Landauer first determined the value of office land in the Grand Central area, then applied a 35 percent discount. According to Robert Von Ancken, its chairman, residential or hotel uses were not considered in valuing the proposed air rights. Landauer relied on current market data and a methodology used in the past by market participants.

Argent Ventures, which already has a dog in this argument because it owns the air rights above Grand Central, has termed $400 a more accurate unit value. Argent's president has asserted that air rights should not be discounted off underlying land values and might even be worth more than land with the same development potential.

Argent bases this on work performed for it by Jerome Haims Realty Inc. and backed by another appraisal firm. However, as Kusisto notes in her Wall Street Journal article, "Argent has an interest in putting a higher price tag on the air rights because it will have to compete with the city to sell air rights to developers if the rezoning passes."

This controversy obviously sets an existing stakeholder against a municipality that needs to encourage growth in a particular submarket. The value of Argent's Grand Central air rights will be sharply influenced by the city's offerings. The city probably cares as much about creating tax flows from the buildings that would float on the newly created air rights as it does about the selling price, although the Wall Street Journal article does not mention this point.

From a valuation perspective, it would be interesting to review the Landauer and Haims studies, if only to learn in detail how these firms valued the right to create what apparently will be millions of square feet of new office product. Issues such as absorption, the impact of the transportation improvements proposed by the city on market values and the data relied upon to upport the appraisers' conclusions could offer a textbook tudy of a very complicated topic.

Ultimately, the New York City Council must vote on the creation and price of the new air rights.

Elliott B. Pollack is a member of Pullman & Comley in Hartford, Connecticut and chair of the firm's Valuation Department. The firm is the Connecticut member of American Property Tax Counsel. He can be reached at ebpollack@pullcom.com.

"The varying directions of price trends demonstrate that now, more than ever, Atlanta property owners should closely review property tax assessments and make specific determinations regarding the correctness of the valuation. General sales trends and perceptions provide insufficient basis for deciding whether or not to appeal the county assessment notice..."

There is a common perception among assessors that an increase in real estate sales activity is a sign of an improving economy. For a commercial property owner on the receiving end of a tax assessment increase, however, it is a good idea to analyze how the assessor came to his/her conclusions and then decide if the increase is justified, or if a protest is in order.

Sales of office, retail, hotel, multi-family and industrial properties in Atlanta increased in number from early 2010 to late 2012, according to CoStar Group, a national researcher. But does that increase automatically result in higher valuations? What trends do the sale prices over this period indicate on a per-square-foot, per-room, or per-unit basis? More importantly, what conclusions, if any, should the taxpayer or assessor draw regarding valuation of individual properties?

Retail properties accounted for the largest number of commercial, arms-length sales transactions in Atlanta from the beginning of 2010 through 2012. Narrowing the focus of sale price data reveals that the average price per square foot paid for retail properties in that period actually decreased by 20 percent. Full-year data for 2013 is not yet available, but sales through July suggest that the downward trend in average price per square foot for Atlanta's retail properties is continuing.

Atlanta's highest percentage increase in number of sales from 2010 through 2012 occurred in the hotel market; despite the uptick in volume, the average price paid on a per-room basis for hotel properties decreased by about 17 percent. Available year-to-date data for 2013 indicates that the average room rate for hotel properties may be increasing, with an associated effect on hotel valuations, but each property will require a closer analysis of the class of property sold, its location, and other relevant facts.
Atlanta's multifamily sector posted a compelling percentage increase in the number of sales completed from early 2010 through 2012. In this group, the average sale price per unit increased over that same period. But again, valuing a specific property would require an examination of all factors, such as quality and location.

The market's office sales increased significantly in number from the beginning of 2010 to year-end 2012. During that time, the average sale price per square foot increased, but like other categories, specific factors must be examined to arrive at a fair value.

Finally, while industrial properties experienced a dramatic increase in the number of sales from the beginning of 2010 to the end of 2012, the average price per square foot for these properties in Atlanta decreased steadily in 2011 and 2012. Whether this trend will continue in 2013 is unknown. Sales would need to be examined for specific industry types or sub-categories of properties in order to draw worthwhile conclusions about the value of a particular parcel.

The varying directions of price trends demonstrate that now, more than ever, Atlanta property owners should closely review property tax assessments and make specific determinations regarding the correctness of the valuation. General sales trends and perceptions provide insufficient basis for deciding whether or not to appeal the county assessment notice.

Research regarding many personalized, property-specific factors and criteria are involved in making a determination of value, including an analysis using the income approach. Atlanta commercial property owners should question any assessor's suggestion that sales volume recovery in the Atlanta marketplace equates to an increase in the value of their properties.

Lisa Stuckey is a partner in the Atlanta law firm of Ragsdale, Beals, Seigler, Patterson & Gray, LLP, the Georgia member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at lstuckey@rbspg.com.

Though a few large companies may be expanding in the Portland region, it won't necessarily be a boon to property owners.

"The madness is in the method of assessment, because it is impossible for the assessor to physically inspect and appraise each property on its rolls. Instead, the assessor will typically add up a taxpayer's historical investments in a property as reported each year..."

The real estate headlines in Oregon newspapers this month kindled cautious optimism that the economy is in full recovery. One article touted a boom in the residential and commercial markets of Canby, a Portland suburb, while another trumpeted a bash to kick off a $25 million, mixed-use development in downtown Portland.

These positive headlines added to the stimulating effects of last year's expansion announcements by Nike and Intel. News of those companies' plans for growth in Hillsboro bolstered the industrial, office, and residential markets in the Sunset Corridor.

Industrial property owners, be vigilant. This uptick in the economic outlook does not mean there should be a corresponding increase in a property's real market value and a corresponding over-assessment of the property.

It should be simple to spot an inflated assessment. By statute, a property is assessed at its real market value, defined as what a willing buyer and willing seller would agree upon in an open market transaction. Assessments are also subject to Measure 50's maximum assessed value limitations. The assessed value is the lower of the maximum assessed value or the real market value.

Yet over-assessments are common, and the reasons numerous. Despite the economic uptick, there are still significant economic impacts to industry in Oregon resulting in over-valuation of property by the Counties and the Department of Revenue.

The madness is in the method of assessment, because it is impossible for the assessor to physically inspect and appraise each property on its rolls. Instead, the assessor will typically add up a taxpayer's historical investments in a property as reported each year, and equate the cumulative sum of those investments to the real market value of the property — without any regard to market conditions.

Market conditions that impact a company and the real market value of the property can be significant, particularly for an industrial property. Take a high tech campus that was built in the 1970's and designed for a single user. Back then, tech firms favored flex buildings designed for manufacturing, research and development, assembly, and distribution with a typical floor plate of 40,000 square feet. No thought went into an exit strategy when planning the design or layout of the access, parking, integrated utility systems, and location of the buildings on the property.

Fast forward to 2013, when globalization generally calls for overseas assembly plants and distribution centers located strategically to the company's global market. The need for a single-user campus with six or more dated, 100,000-square-foot flex buildings that share interconnected utilities on a single tax lot is gone. Globalization is an economic force that is external to a company and one that drives down the market price of these facilities. It is a form of obsolescence that is rarely accounted for in a property valuation.

Another factor that assessors typically overlook at industrial sites is functional obsolescence. Consider a facility built 30 or 40 years ago. Technology for the manufacturing processes may have advanced over the years, but the building design, including the ceiling height or floor load, may limit the use of the new technology. The overall utility of the property suffers from functional obsolescence that impairs the market value.

The assessor often lacks the people power to drill down into the details of every property. Because property value reflects not only local market conditions, but also the inherent functional and economic obsolescence unique to the property, a property being taxed solely on a trending basis may be over-assessed.

Cynthia M. Fraser is an attorney at Garvey Schubert Barer where she specializes in property tax and condemnation litigation. The firm is the Oregon and Washington member of the American Property Tax Counsel the national affiliation of property tax attorneys. Ms. Fraser can be reached at cfraser@gsblaw.com.

Owners appealing unfair tax assessments must aggressively and specifically examine the general economic climate.

"While area bankers express high hopes for the coming year, that optimism is not reflected in actual lending practices for the past year. According to the St. Louis Federal Reserve Bank, commercial and industrial loan volume in the United States totaled $16.4 billion in 2012, up slightly from $14 billion in 2011."

By accident or design, assessors tend to punish commercial property owners by increasing the assessed value of properties that outperform the market, thereby generating more taxes for the local government. The problem arises from real property valuations based upon a cash flow analysis, which fails to take into account intangible qualities that boost cash flow but are unconnected to intrinsic real estate value.

Intangible qualities that can increase a commercial property's cash flow include the skills of the management and general business reputation of the owners. Assessors have a tendency to value the business rather than the real property. Consequently, assessors punish owners for efficient and successful management. In order to guard against such an outcome, owners appealing unfair tax assessments must aggressively and specifically examine the general economic climate. In analyzing commercial property, appraisers dedicate pages within each appraisal report to the local economy. Time after time, appellate reviewers in their rush to focus on the cash flow of the specific property simply skip over the plethora of general economic data that fills appraisal reports.

Two measures of local market performance are particularly important in appealing an assessment, however. One metric is retail sales, which provide a clear barometer of general economic conditions. Sales reflect the health of the consumer base and, most notably, employment. With diminished employment, sales fall in the marketplace. The other dataset to examine is the availability of credit for commercial property acquisition and/or development. While valuation authorities rarely acknowledge the relationship, retail sales and credit are inextricably linked.

Follow Sales Tax Receipts

A look at retail sales and availability of credit in the St. Louis marketplace provides a far better foundation for value analysis than do the population counts and various economic facts tacked onto assessors' reports.

In the city of St. Louis, total sales tax receipts increased every year from 2008 through 2012, with just a slight decline in 2010 (see chart). In 2013, however, the trend's trajectory has changed. The city of St. Louis has collected $30.7 million in sales tax receipts year-to-date through May, down 4.9 percent from $32.3 million during the same period a year ago.

Annual sales tax receipts for 2013 in St. Louis based were previously projected to reach just over $120 million based on the actual receipts for the first five months of 2013 and previous years' receipts during the last seven months of the year. However, the closing of a Macy's store in downtown St. Louis in May will dim this picture even further. Banks are feeling regulatory pressure to lower the concentration of commercial real estate loans in their portfolios. Lending to acquire or develop commercial buildings or residential subdivisions tanked during the Great Recession. Today, lenders give more scrutiny to a potential borrower's creditworthiness than before the downturn. The credit quality of borrowers or developers has in many respects become an important factor in the intrinsic value of the project or the real estate itself.

While area bankers express high hopes for the coming year, that optimism is not reflected in actual lending practices for the past year. According to the St. Louis Federal Reserve Bank, commercial and industrial loan volume in the United States totaled $16.4 billion in 2012, up slightly from $14 billion in 2011. Compared to the market's peak loan volume of $26 billion originated in 2008, credit availability in the sector is clearly constrained.

Focus On Fair Market Value

Property owners should keep in mind that the determination of fair market value is based upon not only a willing seller, but also a willing buyer. A willing buyer must obtain financing, and the St. Louis market has tightened up considerably in that regard. A tax appeal based on the scrutiny of credit availability and retail sales will go a long way toward ensuring that careful, prudent entrepreneurship and management will go unpunished by an excessive tax burden.

Jerome Wallach is a partner at The Wallach Law Firm, the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at jwallach@wallachlawfirm.com

Two recent rulings by the California Supreme Court may have significant effects on the state's property taxpayers. These effects may be both good and bad, depending on your situation.

"The rule in question had watered down Proposition 13's cap on assessment increases by directly offsetting such increases against depreciation on machinery and equipment..."

The California Supreme Court issued two decisions in early August relating to property taxes that will significantly impact owners of commercial and industrial properties in Southern California.

Decision #1: Ruling Clarifies Tax Exemption for Intangibles

The first decision, Elk Hills Power vs. State Board of Equalization, broadly affirmed the exemption of intangible assets and rights from property taxation. County assessors had previously been assessing intangibles that businesses use in conjunction with real property as part of the real property's value. In other words, property owners were paying property tax on the value of the intangibles associated with operating businesses at a property, as well as on the value of the real estate.

The Elk Hills Power decision changes that by prohibiting assessors from including intangibles in the taxable value of the real property. Moreover, if a taxpayer identifies an intangible to the county assessor and shows the value of the intangible, the assessor must review it. So what are the intangibles that are exempted from taxation? The Supreme Court's decision lists several, including franchises, contracts, assembled workforce, customer base and goodwill.

That list is not comprehensive, however, and nearly all intangibles used in the operation of a business are arguably included. So how should property owners respond to the Supreme Court's taxpayer-friendly decision? First, identify the intangibles used in operating any business at the property and, if possible, attempt to value those intangibles.

Next, report the identified intangibles with associated values to the county assessor. This is especially important if the real property was recently acquired, which allows local assessors to establish new Proposition 13 base year values. If discussions with the assessor fail to result in exclusion and exemption of intangible values from the property tax assessment, the property owner should file and pursue an appeal before the county assessment appeals board.

Decision #2: Court Weakens Proposition 13's Cap on Tax Increases

The Supreme Court's second decision, Western States Petroleum Association vs. State Board of Equalization, involved the legality of a new rule issued by the State Board of Equalization for the taxation of petroleum refineries. The question before the court concerned a rule affecting Proposition 13, a law that essentially limits increases on the assessed value of land to no more than 2 percent annually.

The rule in question had watered down Proposition 13's cap on assessment increases by directly offsetting such increases against depreciation on machinery and equipment. For fixtureintensive properties like refineries, food processing facilities and power plants, the impact can be significant The Court struck down the rule, finding the Board had issued an inadequate economic impact report, and thereby failed to adhere to the requirements of the Administrative Procedures Act. In the same decision, however, the Court also ruled that the Board's reasons for adopting the rule were sound.

In fact, in a concurring opinion, one of the Court's justices essentially invited the Board to reissue the rule as long as it followed the procedures for doing so. It appears that the Board may be preparing to do just that. But this time the rule may be much broader in scope, sweeping in all types of properties that are operated with large amounts of machinery and equipment, which assessors refer to as "fixtures."

If the Board issues a more broad-ranging rule, commercial and industrial properties that use large amounts of fixtures will experience noticeable increases in property taxes. In essence, the Supreme Court's decision in Western States mounts to another attack on Proposition 13, much like the "split-roll" attacks that have sought to apply a tax rate to commercial properties that is different from the rate applied to residential properties. While it is possible that the Board will decline to revisit the matter, the current political and economic situation in California suggests it will enact another rule.

Cris K. O'Neall, partner, Cahill, Davis & O'Neall LLP in Los Angeles. The law firm is the California member of American Property Tax Counsel. He can be reached at cko@cahilldavis.com.

Inequities in assessments spark tax controversy in North Carolina's banking hub.

Charlotte, the largest city in North Carolina, is the second largest banking center in the United States. Like the larger New York financial cluster, Charlotte suffered grievous job losses and deflation of property values during the Great Recession. As the seat of Mecklenburg County, Charlotte is also at the center of a tax reform effort marked by record numbers of taxpayer protests, the resignation of the tax assessor and an ongoing attempt by state lawmakers to correct local valuation inequities.

Essentially, the lengthy intervals up to eight years — that North Carolina law allows between revaluations, combined with the effects of deteriorating property values since the onset of the recession, set the stage for a valuation imbroglio for property owners in Charlotte and Mecklenburg County.

Prior to its 2011 revaluation, Mecklenburg had last revalued in 2003. The county planned at that time to revalue in 2007. During the course of the last cycle, however, county commissioners decided to postpone the revaluation until 2009. After the banking crisis and resulting real estate market crash of 2008, when real estate sales largely ceased, commissioners postponed the revaluation to 2010, and then postponed it again until 2011, the eighth year in the cycle, when by law the revaluation had to occur. Presumably, political leaders intended the postponements to allow the real estate market an opportunity to stabilize, and perhaps recover.

Those good intentions and the resulting series of postponements proved to be major contributors to what must be regarded as a blown revaluation, despite the best efforts of what has egnerally been regarded as a highly competent assessor and staff.

The assessments produced significant overvaluations of many properties and sparked mass protests from homeowners in sections of the county and a heated debate punctuated by the county assessor's resignation. Taxpayers had filed 1,542 appeals to the North Carolina Property Tax Commission from the Mecklenburg County Board of Equalization and Review as of mid-April this year, the largest number by far from any revaluation in North Carolina's history.

Pearson's Appraisal Service, an outside consultant the county hired to study the revaluation, reviewed a random sample of the revaluation results and discovered major issues. Although much of the revaluation met acceptable assessment standards, the consultant identified inconsistencies involving both uniformity of assessment and valuation in residential neighborhoods which were heterogeneous with in-fill and tear-down activity and in neighborhoods where the current use might not be the highest and best use.

Problems also emerged in connection with commercial properties, including certain office, retail and hotel categories. Substantial problems turned up involving land valuations in addition to many other issues that the consultant characterized
as minor.

Although the county commissioners voted to expand the consultant's study, they were constrained by a state law that prohibits retroactive valuation adjustments and taxpayer refunds for years when assessments had not previously been appealed. Amid continuing and widespread voter dissatisfaction, legislators, with the support of the county commission, introduced unprecedented legislation on March 4, 2013, to correct the 2011 revaluation.

North Carolina's constitution prohibits classifications of property for taxation except on a statewide basis, and provides that "every classification shall be made by general law uniformly applicable in every county, city and town, and other unit of local government." Another section of the constitution prohibits local legislation extending the time for the levy or collection of taxes.

Attempting to draft constitutional legislation that would address Mecklenburg County's unique revaluation needs, lawmakers worded Senate Bill 159 and its House counterpart, HB 200, to be ostensibly applicable statewide, but with preconditions to application of the statute that only Mecklenburg County is likely to meet.

The North Carolina Senate passed SB 159 unanimously on March 28, and after amendment in the House, the bill was returned to the Senate, which concurred in the House amendments on July 18. SB 159 provides that the county must conduct a general reappraisal within 18 months if the following is found to exist:

• The county has evidence that the majority of commercial neighborhoods possess significant issues of inequity
• Instances of inequity or erroneous data had a significant impact on the valuation of residential neighborhoods,
• The county's last general reappraisal was performed in 20082012 when the economic downturn most severely affected home prices,
• The county's evidence resulted from a review by an appraisal service retained by the county and resulted from a sample size of not less than 375 properties that were examined on site.
• The reappraisal is to be applicable to all tax years from and including the year of last revaluation,
• Alternatively, a county meeting the criteria must have a qualified appraisal service conduct a total review of all the values in the county and make recommendations as to true values of the
• properties as of Jan. 1 of the last general revaluation.

Once in possession of this information, the county would be required under SB 159 to correct incorrect assessments to reflect true value as of Jan. 1, 2011, and apply those corrected values for later years in the revaluation cycle. Refunds would be automatically made, with interest, and under-assessments based on the new values would be subject to discovery assessments under existing tax statutes, but without being subject to normal discovery penalties.

Based on the legislative action, it appears that the Mecklenburg revaluation will drag on for some time. Since the county will be reviewing values, the legislation appears to open the door for taxpayers to identify assessments they think unfair and draw them to the attention of the county for review. And as the legislative note accompanying the bill provides, "a taxpayer or county may have standing to challenge" the legislation and "it is unknown whether a court would find the bill to be local in nature or non-uniform."

In other words, lawmakers recognize the potential for a court to rule the legislation as unconstitutional.

Chuck Neely, Jr. is a partner in the law firm of Williams & Mullen, the North Carolina member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Neely can be reached at cneely@williamsmullen.com.

"According to the Cook County Clerk's office, the budgets for all Chicago agencies increased by nearly $75.5 million over the previous year. Practically all of the increase was concentrated in the levies of the Chicago Public Schools. The increase in the tax rate was due to the decline in property values and the increase in levies..."

Two seemingly unrelated events dominated Chicago news at midyear 2013 and underscored the deteriorated condition of local government and the economy. The first bombshell fell In early spring, when the Chicago Board of Education announced that it was closing 50 underutilized schools and furloughing 1,742 teachers and 1,387 other staff members.

The second shoe to drop — real estate tax bills — arrived in the mail at the end of June. Always a source of trauma, this year's notices delivered an unexpectedly heavy blow in the form of a 17 percent tax rate increase.

If Chicagoans fail to demand action from state lawmakers and municipal leaders to address the budget shortfalls driving these dire measures, economic recovery threatens to elude the city for years to come. But the first step toward change is to understand the funding crises behind the news.

Shrinking values, expanding budgets

Two factors that determine real estate taxes are the total value of all property within the boundaries of the taxing district, and the tax rate. In Chicago, declining property values mean taxing entities would need to increase the tax rate from previous years in order to generate the same amount of revenue collected in those years. Unfortunately, local government budgets have grown, requiring even more revenue and driving up the tax rate even further.

By law, all properties within the city of Chicago must be revalued once every three years. The most recent tax bills were based on the revaluation completed in April 2013. That revaluation determined that the aggregate value of real estate in downtown Chicago had declined 7.5 percent since the previous valuation, and values in the residential neighborhoods had dropped between 14 percent and 20 percent.

According to the Cook County Clerk's office, the budgets for all Chicago agencies increased by nearly $75.5 million over the previous year. Practically all of the increase was concentrated in the levies of the Chicago Public Schools. The increase in the tax rate was due to the decline in property values and the increase in levies.
An office building just west of the Loop's financial district illustrates a typical tax impact on a commercial property. The 10-year-old, 400,000-square-foot building was originally revalued at 20 percent more than the prior year's valuation. After appealing, the value was finally set at a 1 percent increase, but because of the increase in rate, the tax bill increased to approximately $3,196,900, up by $343,200 over the prior year's bill of approximately $2,852,700.

A study in schools

Why the increase in school district taxes? After a stormy negotiation period, the Board of Education and the Chicago Teachers Union agreed on a new three-year contract that was ratified by all parties in December 2012. A few months later, the board announced 50 school closures and faculty layoffs.

The schools scheduled for closing were almost exclusively located in the poorer sections of the city where gang activity and indiscriminate shootings have proliferated. Parents are concerned about the safety of their children, and they have mounted strong opposition to the closings. Some have filed a lawsuit attacking the legality of the closings.

The board is blaming a $1 billion budget deficit for the budget cuts and the personnel layoffs. Pension costs alone have increased by $400 million to a total of $612 million for this year, and along with the new teachers' contract have contributed mightily to the deficit.

In 2011, Moody's Investors Service calculated the unfunded liabilities for Illinois' three largest state-run pension plans to be $133 billion. There can be no doubt that that number has increased significantly over the last year and a half. Like the U.S. Congress, the Illinois Legislature has been unable to make the tough decisions necessary to fund the pension deficits. In desperation, the governor has ordered that the salaries of the Legislature be withheld until they can agree on a pension plan. The response of the Legislature was not to address pensions but to file a suit against the governor on the grounds that his order was unconstitutional.

In addition to the board of education's pension problems, according to a local newspaper, the City of Chicago must make a $600 million contribution to stabilize police and fire pension funds that now have assets to cover just 30.5 percent and 25 percent of their respective liabilities. Without an agreement with the state, the deficit could rise to $1.15 billion in 2016.

Chicago has suffered greatly from the recession. Over the last 25 years, the aggregate value of real estate in the Central Business District has never before declined in a revaluation. Since 2009, however, the vacancy rate for office buildings in the Loop has stubbornly hovered around 15 percent, squeezing property cash flows and asset values. These conditions will continue until the city's unemployment rate of 9.8 percent declines significantly.

The increased tax rates and the school closings have coalesced into tangible issues to which Chicagoans could respond, but they are only symptomatic of much deeper problems that must be addressed. If left unaddressed, tax rate increases and layoffs will become an annual occurrence.

James P. Regan is President of Chicago law firm Fisk Kart Katz and Regan Ltd., the Illinois member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at JRegan@proptax.com..

"Multifamily housing in King County may be particularly susceptible to inflated assessments in the upcoming years."

Each week seems to bring news of yet another record-selling price for a commercial property in Seattle, including assets ranging from office and retail to apartments and even development sites. Increasing occupancy rates for industrial and retail properties also suggest that property values are headed up.

The King County assessor has undoubtedly tracked these price trends, too. In 2012, the assessor's office reported overall increases in taxable values for major office buildings, major retail properties, hotels and apartments. As a result, many commercial property owners in the Puget Sound region saw increases on their 2012 assessed value notices. In March, King County's chief economist projected that total assessed values in the county would reach nearly $327 billion in 2013 (for taxes payable in 2014), up nearly 4 percent from $315 billion in 2012.

For many taxpayers, notices in 2013 will reflect assessment increases even greater than 4 percent. The general recovery in the Seattle market should not trigger increased assessments for all properties. For example, some suburban areas have missed out on the trend toward increasing property values. And there are always individual properties that do not experience the same increases as their neighbors. Accordingly, owners should be attentive to potentially overstated assessed values.

Multifamily housing in King County may be particularly susceptible to inflated assessments in the upcoming years. One reason is the high prices paid in recent transactions. Another is the ongoing development of many new apartment projects. Even as that construction fervor gives assessors the idea that apartments are hot commodities, these new projects increase the risk of value-sapping oversupply in some submarkets.

Assessed values for Single-family residences make up roughly two thirds of the tax base in Seattle. With that said, home prices have risen 10.6 percent in the past 12 months, according to the Standard & Poor's/Case-Shiller Home-Price Index that was released in late May. As many homeowners receive higher assessments in 2013, that should provide at least some measure of relief for commercial taxpayers.

Prepare For Tax Increases

Budgeting for an upcoming year's property tax bill is always a challenge, in part because tax rates can vary significantly by year and location. Seattle's tax rates decreased each year from 2004 through 2008, then rose a whopping 13 percent in 2009. They have continued to climb each year since. A further, small increase in 2014 tax rates is likely. Within King County, tax rates can vary widely even within a single year. While Bellevue has a tax rate of less than 1 percent for 2013, suburbs in South King County employ tax rates that are half-again higher: Kent, Des Moines and Federal Way rates range from 1.45 percent to 1.6 percent. In order to guard against an in- Dated tax bill professionals must ensure that assessed value notices get routed to a responsible person. If an assessment seems too high, then the appeal petition must be filed within 60 days of the notice's mailing date to preserve the owner's appeal rights.

Most commercial property owners should budget for increased tax liability for 2014 taxes, given the prospect of generally rising assessed values in 2013 and the likelihood of higher tax rates in 2014. Property owners should receive notification of new assessed values by this fall. Then in late January, when counties publish final tax rates, property owners can calculate their tax burden and revise budgets accordingly.

Michelle DeLappe and Norman J. Bruns are attorneys at Garvey Schubert Barer, Washington and Idaho member of American Property Tax Counsel, the national affiliation of property tax attorneys. Michelle DeLappe can be reached at mdelappe@gsblaw.com and Norman Bruns can be reached at nbruns@gsblaw.com.

Keep the belt tightened to combat rising property taxes.

"Property values will likely increase over the next few years, so it is as important as ever for property owners to ensure that their property is fairly assessed."

In Alabama, as in much of the country, many property owners tightened their belts during the Great Recession, looking for ways to reduce operating costs for tenants and themselves. For some owners, a little bit of property tax relief provided a silver lining to the loud of plummeting property values that followed the crash Ben Bernanke and other economists assure us that better times lie ahead, however, property owners should remain vigilant in monitoring properties for over-assessment as the recovery plays out.

First and foremost, taxpayers should familiarize themselves with the general property tax laws and procedures in each market in which they own or in tend to own real estate. Though generally created and governed by state law, the property tax appeal process is often speckled with local nuances and specialized interpretations of law.

Learn key dates, including the valuation date, when assessors distribute notices, and the appeal deadline. How do assessors determine market value? Must an owner pay the full tax bill to preserve the right to appeal? Does the property qualify for any tax exemptions or alternative valuation methods? Local counsel can be an efficient and effective way to monitor these and other property tax considerations.

Perhaps in response to a growing number of tax protests, tax assessment officials are increasingly adding procedures and requirements concerning valuation disputes. These local rules range from requiring specific methods of filing protests - whether on a certain form or by mail, fax or email- to establishing early deadlines for submitting a property's financial statements for consideration of the income approach to valuation. Although the legality of some of these additional requirements is unclear, it is important for the property owner to observe these rules to avoid unnecessary appeals and litigation.

Knowing the correct deadlines is essential, and is more challenging than it may seem. For example, Alabama taxpayers have 30 days after the valuation notice date to file a protest. Each of Alabama's 67 counties sends out valuation notices on its own schedule, typically between April and midsummer. Georgia's 159 counties have similarly staggered notice periods and deadlines. To further complicate things, Alabama does not require valuation notices if the property value is unchanged from the previous year. Nonetheless, the taxpayer has only 30 days from the notice date to file a protest.

As in many other states, Alabama assessors send tax notices to the property's owner of record. This means that tenants - which often pay the taxes and have protest rights under their leases - generally do not receive notices from the assessor. In such cases, the tenant needs to remind the owner to forward valuation notices as soon as they are received, and should independently confirm the notice dates and values with the taxing jurisdiction. In an expanding economy, the valuation date can significantly affect the property's assessed value. For example, Alabama assessments in any given year reflect the property's value as of Oct. 1 of the previous year, so 2013 taxes are determined by the value as of Oct. 1; 2012. Accordingly, an increase in market values in the first quarter of 2013 should have no bearing on the value used to determine 2013 taxes. When reviewing an assessment for accuracy, a taxpayer should consider all factors affecting the property's value. Taxpayers are often focused on the big picture in ad valorem tax disputes such as the net operating income, rent roll, occupancy, capitalization rates and the like.

There is more to be mined in less obvious areas, however. Is the property subject to any title restrictions, such as use limitations or conservation easements? Are there any environmental impairments? Is the property specialized for the particular use of one owner, thereby limiting its market value to potential buyers? Is the property's value affected by "super adequacy," which occurs when the cost and quality of improvements exceed market requirements but fail to contribute to the property's value? An example of the latter would be a government building with security features well in excess of those a private business would require - or pay for. Property values will likely increase over the next few years, so it is as important as ever for property owners to ensure that their property is fairly assessed.

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

"While the case law and appraisal science continue to evolve, the framework for valuing properties subject to environmental contamination remains relatively unchanged..."

The legal and appraisal communities have embraced the notion that environmental contamination can impair real estate value. After all, a property's potential uses or limitations on those uses have a direct bearing on the asset's marketability and profit potential.

An investor seeking to rein-in the tax burden on a contaminated property must navigate a legislative and regulatory framework that imposes liability on the property owner for environmental cleanup costs and remediation. In addition to the value lost when a property is directly contaminated, properties in proximity to the contaminated site can also lose value because they are subject to contamination.The devil is in the details, however, and uantifying the direct or proximate impact on value can prove problematic.

The State of New Jersey is a leader in attempting to define the impact of contamination on property value, and its highest court discussed this perplexing problem in the 1980s case of Inmar Associates Inc. vs. Carlstadt.

The New Jersey Supreme Court recognized that the costs associated with cleaning up environmentally contaminated properties would have a depreciating effect upon the properties' true value. The court also noted that deducting those costs dollar-for-dollar from the true value of the property is an unacceptable methodology, and deferred to the appraisal community to arrive at an appropriate valuation method.

Years later, in the case of Metuchen vs. Borough of Metuchen, the court identified a procedure it found acceptable. Without question, uncontaminated land is worth more than contaminated land, the court reasoned. Therefore, as contaminated land is cleaned up, its value increases. The legal question is, how should this capitalization of the cleanup costs affect the market value of the subject property?

In Metuchen, the tax court used the principles established in Inmar to form a foundation or core principles for assessing the value of unused, contaminated property that is subject to mandatory cleanup at the owner's expense, at an estimated but undetermined cost. Those are: cleanup cost, the effect on market value, calculating the impact and treating the cost of cleanup as a depreciable capital improvement.

Taking the lead from the New Jersey Supreme Court's ruling in Inmar, the tax court in Metuchen deferred to the appraisers to determine the costs of cleanup and appropriate capitalization time period. The parties essentially agreed upon the unimpaired value of the property and the court easily reconciled the difference in opinion on cleanup costs.

While the case law and appraisal science continue to evolve, the framework for valuing properties subject to environmental contamination remains relatively unchanged since Metuchen. That formula entails discounting the present value of cleanup costs and subtracting that from the property's clean value.
Most recently, the tax court used the Metuchen formula to find value in an unreported decision.

While courts, property owners and assessors use the Metuchen formula to determine the value of contaminated land, this method fails to deal with other factors associated with contaminated sites. One of those factors is environmental stigma, a term the appraisal community uses in attempting to quantify the adverse effect on property value produced by the market's perception of increased risk. Even after environmental cleanup and remediation, environmental stigma may still lower the otherwise unimpaired property's value.

Philip J. Giannuario is a partner in the Montclair, NJ law firm Garippa, Lotz & Giannuario, the New Jersey and Eastern Pennsylvania member of American Property Tax Counsel. He may be contacted at phil@taxappeal.com.

How a Compelling, Well-Prepared Property Tax Appeal Can Defeat An Unlawfully Excessive Assessment

" A compelling case that is well presented gives the taxpayer the best chance at success."

It's no secret to taxpayers that appealing property tax assessments can be challenging. Typically, taxpayers bear both the burden of proof and the risk of a decision that not only protects government revenue but also ignores the facts and applicable law. Nevertheless, sometimes a compelling and well-prepared property tax appeal can result in tax justice.

A 2013 Michigan Tax Tribunal decision exemplifies the potential for achieving a fair outcome. In this case, the tribunal determined the market value of an apartment complex with 779 units. The analysis was substantially the same for both tax years involved, so just the first valuation date is discussed here.

The taxpayer claimed that the property was worth less than $13,400 per unit. Based on sales of apartments in the area, on an absolute and relative basis, this is a low value for an apartment property in the subject market. To prevail, the taxpayer had to carefully present its case using three essential components:

• A convincing explanation of why the subject property's per-unit value was so low;
• A well-reasoned appraisal based upon both the income approach and sales comparison approach, which demonstrated that the property was worth what the taxpayer contended and refuted the contentions and analysis of the government's assessor and appraiser; and
• Legal authorities whose testimony supported the taxpayer's position.
• The taxpayer needed each of these three ingredients to achieve total victory. It would have been insufficient for the taxpayer to have simply presented an appraisal that reached value conclusions supporting their contentions. In recent years, there have been numerous cases where the tribunal found taxpayer-filed appraisals to be flawed and unpersuasive.

Winning the Case

The taxpayer gave a compelling explanation for the property's low value. In this case, the property's one- and two-bedroom units averaged a mere 581 square feet. The onebedroom units, which comprised more than 70 percent of the apartments, were only 550 square feet. Those measurements were far smaller than those of the area's other apartment complexes, which averaged 750 and 850 square feet for one- and two-bedroom units, respectively.

As the owner explained to the tribunal, the original developer had built the units decades before to serve relatively unskilled young adults working in area factories. The small unit sizes made the apartments affordable for these first-time renters.

The Great Recession reduced demand for all types of apartments, which hurt occupancy and rental rates for the entire apartment market. This economic obsolescence adversely impacted the subject property's value. Further, the recession negatively impacted the subject property far more than other apartment properties because the huge downturn eliminated so many factory jobs for relatively young and unskilled workers. As those jobs disappeared, so did single renters who wanted small units, saddling the property with enormous functional obsolescence.

Given these explanations of the property's deficiencies, the judge could readily accept that even when occupancy improved and became stabilized, the complex would have above-market vacancy and would be limited in the rents it could charge, while forcing the owner to bear most of the utility costs.
These facts were an integral part of the direct capitalization income approach in the taxpayer's appraisal. In this income approach, the appraiser first determined the property's net operating income with occupancy that had reached a stabilized level. This required providing and analyzing the income and expenses of comparable properties as well as the subject property's financial results in recent calendar years. The appraiser applied an appropriate capitalization rate to the stabilized net operating income to determine the property's value as stabilized. The appraiser then subtracted the costs of rent concessions and lost rents the property would experience as it increased occupancy to a higher stabilized level.

In the sales comparison approach, the appraiser presented sales of six comparable properties, and where applicable, made adjustments for numerous elements of comparison, including location and age. Significantly, the appraiser's analysis included not only the commonly used per-apartment unit basis but also a per-square-foot analysis.

The appraiser gave some weight to this sales comparison approach but relied primarily on the income approach. Their testimony, supported by testimony of one of the taxpayer's senior managers, not only satisfied the taxpayer's burden of proof but presented a compelling case.

Having heard this powerful evidence, during the cross-examination of the government's witnesses, it was easier for the judge to see the flaws in the assessor's income and sales comparison approaches. Also, the taxpayer's counsel was able to cite a legal precedent to refute the government's cost approach, which ignored functional and economic obsolescence.

Ultimately, the tribunal rejected the government's value contention, which was 50 percent higher than the taxpayer's, and adopted the taxpayer's claimed value.
For taxpayers who are inexperienced in handling property tax appeals, these cases can be fraught with pitfalls that result in excessive taxation and exasperating endings. A compelling case that is well presented, however, gives the taxpayer the best chance at success. And as this case shows, there are times when tax justice is indeed attainable.

Stewart L. Mandell is a partner in the law firm of Honigman Miller Schwartz and Cohn L.L.P., the Michigan member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at slmandell@honigman.com.