"...if the property is considered owner occupied, a taxpayer no longer has to respond in order to have valid appeal rights."

By John E. Garippa, Esq., as published by Globest.com Commercial Real Estate News and Property Resource, July 31, 2008

A recent decision of the Appellate Division in the State of New Jersey established a defense for some taxpayers who have failed to respond to assessor requests for income and expense information. Before this decision, if a taxpayer failed to respond to a tax assessor's request for income and expense information made during any given tax year, any tax appeal filed for that subsequent tax year was subject to dismissal, regardless of the merits of the appeal. In addition, even if a property were owner occupied, if the owner failed to respond to the assessor's request by informing him that the property was "owner occupied," that appeal could be dismissed as well.

As a result of the Appellate Division's recent decision, if the property is considered owner occupied, a taxpayer no longer has to respond in order to have valid appeal rights. However, the court warned taxpayers that if there were even small elements of rental income earned on the property, and the owner fails to report that income when requested by the assessor, the potential would still exist for dismissal of an appeal.

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at john@taxappeal.com.

"In most jurisdictions, the taxing authorities include in industrial property tax assessments the value of the real estate and the value of the intangibles, despite the fact that in many states intangibles are not taxable assets..."

By Cris O'Neall, Esq., as published by National Real Estate Investor, June 2008

For over a decade, tax authorities in many jurisdictions have recognized that intangible assets and rights must be removed when assessing certain types of properties for tax purposes. This recognition of non-taxable intangibles has typically been limited to hospitality and retail properties, where intangible assets are easier to pinpoint.

Assessors often believe industrial properties consist of solely taxable real estate and personal property, and don't remove the intangible assets for valuation purposes. That could change, however, in the next few years, due to changes in financial reporting standards made earlier this decade, including the advent of FASB 141 and 142, which address the reporting treatment of intangibles acquired by publicly traded companies.

INDUSTRIAL INTANGIBLES PROVE DIVERSE
New reporting requirements enable industrial property owners to call attention to intangible assets so they can be deducted from property valuations.

Gaining traction

As auditors have learned to apply FASB 141 and 142, the number and types of intangibles reported to regulatory authorities has increased. The above chart provides a few examples of the kinds of data industrial companies have begun to report to the Securities and Exchange Commission following large industrial plant acquisitions.

In each example, a portion of the purchase price paid was allocated to specific intangible assets and rights. For instance, Harvest Energy Trust allocated over $118 million of the price it paid for a refinery in Newfoundland, Canada in 2006 to engineering drawings, marketing contracts and customer lists. In the past, intangibles were usually reported along with property, plant and equipment and not delineated. Thus, assessors could not see the intangible assets much less understand their value. FASB 141 and 142 have changed that. The identification of specific intangible assets by industrial companies in financial reporting of acquisitions represents a big step forward. It gives legitimacy to specific intangibles, both for the company reporting them and for other companies in the same industry. Intangibles are exempted from taxation in a number of states. For example, in California, statutes, regulations and appellate court decisions exempt most industrial plant intangibles.

Property taxpayers who can identify and place a value on intangible assets and rights are entitled to exclude the value of those intangibles in determining their property's assessed value. Similar tax exemptions can be found in other states, such as Texas and Washington.

Doing the math

Once intangibles are identified, the amount of intangible value to be deducted from the property's total value must be determined. This is established by a review of comparable sales or a cash flow analysis. An appraiser should be retained to develop the valuation using the appropriate ad valorem tax standard.

For example, every industrial property has employees and a market expense to recruit and train can be estimated. This figure is an "avoided cost" to a buyer and represents the fair market value of that workforce for ad valorem tax purposes.The same technique can be used to value drawings, manuals and software.

Normally, property owners do not determine the value of intangibles by using the local property tax value standard. By valuing intangibles that way, the taxpayer derives a quantitative value for the tangible real and personal property that should be subject to property tax.

In most jurisdictions, the taxing authorities include in industrial property tax assessments the value of the real estate and the value of the intangibles, despite the fact that in many states intangibles are not taxable assets. Therefore, owners and operators of industrial properties need to follow these key steps:

• Determine how the taxing authorities appraise your properties for ad valorem tax value. If they include real estate and intangibles in their assessment, take stock of the intangible assets and rights used in connection with your properties.

• Order appraisals for all the properties' intangibles, basing those appraisals on local ad valorem value standards.
• Present the facts to the taxing authorities and request that the value of the intangibles be excluded from the taxable value of your properties.

If you and the authorities cannot agree, file a tax 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.

"Current market conditions such as eroding rental values and escalating vacancy rates impact the current market value and will not typically be taken into consideration by the assessor."

By John E. Garippa, Esq., as published by Globest.com Commercial Real Estate News and Property Resource, May 28th, 2008

New Jersey property owners need to begin reviewing their property tax assessments that were not appealed, now that the April 1st deadline for filing a tax appeal on 2008 taxes has passed. This is an important exercise because of the rapidly changing market conditions faced by New Jersey property owners.

A proper review calls for a current market analysis on the value of the taxpayer's property. The value discovered from the market analysis should be compared to the current assessed fair market value used by the assessor. Don't forget to include the latest Chapter 123 ratio because the assessor's valuation includes this ratio.

Assessments in New Jersey do not change year-to-year. Typically, once a revaluation cycle has been completed, those assessments remain in place for a number of years. Current market conditions such as eroding rental values and escalating vacancy rates impact the current market value and will not typically be taken into consideration by the assessor. This causes a significant disparity between the current assessment and what that assessment should be if it properly reflected the current market conditions.

By performing this exercise on every property in a portfolio, the taxpayer will be in a position to meet with the assessor months before a new appeal cycle starts.

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

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at john@taxappeal.com.

"While sophisticated owners and mangers understand these facts, they often ignore the effect when they see a fully leased building. This remains the classic mistake made by owners when dealing with property taxes."

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

The office market in New Jersey has softened considerably according to statistics cited in a recent Wall Street Journal article. While sales of large commercial buildings have declined nationally, the drop in Northern and Central New Jersey has been significant. The area's office vacancy factor remains at 17.8% for the 4 th Q4 of 2007. Then, too, according to Real Capital Analytics, Inc., a New York real estate research firm, the area is tied with Kansas City, Missouri and Sacramento California for the largest percentage decline in sales volume in the 50 major U.S. markets.

These facts bring into focus a key question: What will this slump do to property tax assessments? The answer depends on the level of due diligence performed by the tax mangers and owners responsible for these properties.

Historical precedent tells us that even with a long term upward trending real estate market, there will always be periods of repose, and in some instances contractions. We are currently in such a contracting period. This means owners will put considerable effort into reducing operating expenses as portfolios are devalued. And, the single biggest expense, after debt repayment, for all types of properties is property taxes.

Many owners and managers fail to realize that property taxes must be examined annually to ensure equitable treatment across time for their properties. A property may be fairly valued and assessed for years and then, suddenly, become over-assessed.

This is precisely what the current confluence of events has precipitated this year in New Jersey. First, office market vacancy rates continue to remain at high levels with no indication of reduction. Second, the meltdown in the subprime mortgage market has seriously eroded the capital markets. Banks and financial institutions are requiring significantly more capital infusion from prospective buyers. This, coupled with lender fears, has forced capitalization rates to rise. Third, the employment climate in the state continues to weaken as fears of an economic recession rise.

While sophisticated owners and mangers understand these facts, they often ignore the effect when they see a fully leased building. This remains the classic mistake made by owners when dealing with property taxes.

For property tax assessment purposes, property must be valued each year as if a snapshot of the market is taken on October 1 st of the prior year. For 2008 property tax assessments, owners must ask themselves: What would the current economic market rent, vacancy, and capitalization rate be for each property as of October 1, 2007? Because of the events previously described, any reasonable level of analysis would conclude that most commercial property must be valued below the prior year. Therefore, even if the assessment remains static year to year, the property becomes over assessed because of macroeconomic forces.

Assume the following example: A 100,000 square foot office building leases for an average rental of $25 per square foot based on leases that are several years old. The average vacancy in the building is 5%. If current economic rates indicate that as of October 1, 2007 the appropriate market rent for that building, were it exposed to the market, would be $20 per sf with a 15% vacancy rate, using this example, the building's gross income would drop by more than 29%. This alone results in a significant change in value for this property.

However, the building's market value falls even more when a change in the capitalization rate is appropriate. Based on the macro economic changes described above, an increase in the capitalization rate would be appropriate. In this example, if the capitalization rate changed from 9% to 10%, the value of the property would decrease more than 35% from its original valuation. While a buyer examining the rent roll and net income, as indicated in the example, sees no change based on contract rent, enormous changes have taken place based on economic rent and current market conditions.

Holding a commercial property for long term capital appreciation represents a sound investment policy. Operating under such a policy puts enormous pressure on owners not to ignore cyclical downturns. Even in the short term, those down drafts can dramatically affect a property's valuation for property tax purposes, costing owners untold thousands of dollars in tax expense.

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. Mr. Garippa is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at john@taxappeal.com.

"...whenever the assessor seeks income information, the property owner should ensure that only income attributable to the real estate is provided."

By Robert L. Gordon, Esq., as published by Midwest Real Estate News, April 2008

Throughout the United States, assessors constantly search for new ways to squeeze value from commercial property. Assessing the business value of the property rather than just its real estate value has become one of the most common stratagems assessors employ. They do this by purporting to value the property on a traditional income approach, but then use the income generated from a business conducted on the property to derive the property's value. This violates the fundamental rule of ad valorem taxation, which states that only value generated by the real estate itself can be taxed.

This generally causes no problem for leased property. To take a simple example, a commercial office building clearly can be assessed based on the rental income it generates to the owner. Unquestionably, such income represents pure real estate income, generated by the real estate itself. No assessor would seriously seek to assess an office building by including income generated by the law firms, accounting firms and other commercial tenants who rent the office space.

The problem arises for owner-occupied property, where no rental income stream exists that the owner can identify as income generated by the real estate itself. In such cases, it becomes easier for the assessor to take the income generated by the business the owner operates at that location and try to portray that business income as income generated by the property.

In some cases, it should be obvious that the assessor cannot do so. For example, a successful retailer may generate several hundred dollars of retail income per square foot by selling high-end consumer electronics at its owner-occupied location. It would be difficult in that case for the assessor to claim that the income was attributable to the real estate and not the retailer's business skills. On the other hand, as we will see, where a business operated by the owner is less clearly separable from the real estate, the assessor will have an easier time trying to ascribe the income to the real estate.

Court weighs in on business value

Three Wisconsin appellate court decisions on this issue prove instructive and provide a fairly universal guide to steps property owners in any jurisdiction can take to ensure that assessors capture only the value of their real estate, and not the value of a business conducted on that real estate.

Wisconsin courts require that the real estate itself must have the "inherent capacity" to produce income before that income can be considered in assessing the property. In the first Wisconsin case on this issue, the Court of Appeals rejected a regional mall owner's argument that the mall should be assessed at less than its purchase price on the theory that the purchase price included a business value independent of the real estate. The court held that since regional malls exist for the purpose of leasing space to tenants, all the income generated by leasing this space is "inextricably intertwined" with the real estate and, thus, assessable.

In a second case, the Wisconsin Supreme Court found that income generated by a state-licensed, owner-operated landfill could be included in the property's assessment. The court stated that since the license was "specific to the site" and could not be transferred to any other property, the land itself had " an inherent capacity to accept waste that would not be present" in sites without licenses. The court noted, however, that neither side had been able to find evidence of leases in the local market, that is, instances where landfill operators paid the property owner market rent to lease a landfill site. The court indicated that had such market information been available, it likely would not have permitted the landfill income to be used in formulating the assessment.

Actions Owners Should Take

Property owners in any jurisdiction can glean several lessons from these decisions. First and foremost, whenever the assessor seeks income information, the property owner should ensure that only income attributable to the real estate is provided. For example, this will be relatively easy in the case of a retail sales location, since retail sales income is not properly attributable to real estate.

In more difficult cases, some income may be attributable to the real estate and some may not. In such instances, owners need to carefully structure their operating statements so that income sources not directly pertaining to the real estate are reported and categorized separately, and not intermingled with the real estate income. The more the owner blurs the real estate and other income together in a single operating statement, the easier it will be for the assessor to cite that statement as proof that the income in question is "inextricably intertwined" with the real estate income.

Finally, as the Wisconsin landfill decision makes clear, the best defense against an assessor seeking to include business income in a property assessment is actual evidence of local market rental rates for similar properties. Property owners need to exhaust all possibilities for finding like businesses that lease their space, since such market evidence makes it next to impossible for the assessor to claim that business income which exceeds those market rental rates is attributable to the real estate.

In sum, property owners who carefully review and understand the basis for their property tax assessments, and who regularly focus their attention on how their business income is reported to the assessor, stand the best chance of avoiding unlawful property taxation of their business income.

Robert L. Gordon is a partner with Michael Best & Friedrich LLP in Milwaukee, where he specializes in federal, state and local tax litigation. Michael Best & Friedrich is the Wisconsin member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at rlgordon@michaelbest.com.

"The key question for owners is: are these new assessments as accurate as they were before the new GIM technique was employed?

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

The Tentative Assessment Roll for 2008/2009 demonstrates a significant shift in assessments for class 2 properties (rented apartment buildings, cooperatives and condominiums). This is due to the New York City Department of Finance abandoning the time-honored approach of net income capitalization in favor of the gross income multiplier (GIM) approach, which for the very first time ignores age, condition, location and expense factors. The key question for owners is: are these new assessments as accurate as they were before the new GIM technique was employed?

Different Methods, Different Results

First, what are the differences in the past and present methodologies and where are the pitfalls in adopting one formula over another? Net income capitalization has been used by assessors and endorsed by New York State courts for more than a century. In 1962, the New York Appellate Division ruled that value arrived at by capitalization provides the surest ground for sound appraisal. In an earlier case, the New York Court of Appeals determined that: "the net income of a property is more persuasive evidence of what a property is worth than using a sales price derived from a similar property. What an investor will pay for a property is measured in large part by the amount and certainty of the income that can be obtained."

The Finance Department provided two reasons for renouncing the capitalization approach: 1) expenses for some buildings were higher than others leading to lower assessments, while in some cases the expenses may have been overstated by the owner. 2) using the GIM eliminated the need to study expenses or expense ratios and offered a simpler, more predictable one-step method.

While GIM offers more predictability, it fails to provide more accuracy. GIM is not seriously employed by any major developer, investor, lender or appraiser today, nor has any New York court embraced it.

In the most recent edition of its handbook, the Appraisal Institute warned appraisers to be careful when using this GIM method. The handbook cautions that all properties used as a basis for this approach must be comparable to the subject property and to one another in terms of physical, location and investment characteristics. If properties have different operating expense ratios this method may not be comparable for GIM valuation purposes.

The GIM approach presents one overriding problem. It is applied to all residential property regardless of location, age physical conditions or the level of services. Also, using GIM throws retail rents, antenna, signage or health club income into the mix, thus, offering the distinct possibility of grossly inaccurate and unfair assessments for many types of properties.

In addition, many substantial valuation disparities occur due to factors such as rent controls, rent stabilization and complexes composed of a large group of buildings. There may be substantially different expense ratios for an aging multi-building housing complex and a 100-unit, mid-block, non doorman apartment house in the West Village. These differences generate unfair tax assessments.

Legal Flaws in GIM

Initially, the Finance Department used different GIMs depending on income level and whether the property is rental, co-op or condominium. This directly violates state law, which mandates that these properties must be assessed uniformly. Therefore, the New York City Law Department ordered Finance Department to make changes; co-ops and condominiums had their assessments lowered and rentals saw their assessments increase.

The fact remains that for all rent-producing properties, the city possesses detailed real property income and expense information from legally mandated filings, and requires detailed statements by CPAs in all but the smallest assessment challenges. This surely provides a database for accurate net income capitalization and takes into account location, condition and other significant factors which ordinarily would render GIM suspect.

As the Finance Department begins to use the GIM to derive property tax assessments, owners need to be on guard against property tax increases. When these increases appear, an owner's only defense is filing a property tax appeal. Income capitalization may be down, but it is not out.

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

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

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

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

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

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

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at john@taxappeal.com.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. Mr. Garippa is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at john@taxappeal.com.

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

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

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

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

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

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

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

How the process works

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

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

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

The taxpayer's reward

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

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

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

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

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

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

Stewart L. Mandell is a partner in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at slmandell@honigman.com.

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

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

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

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

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

1. Abatement vs. Exemption

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

2. Reduction of Retail Eligibility

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

3. Reduction of Eligible Construction Period

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

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

Joel R. Marcus is a partner at the law firm of Marcus & Pollack LLP: a member of American Property Tax Counsel, an affiliation of property tax attorneys. He can be reached at jmarcus@marcuspollack.com.

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

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

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

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

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

ping centers, typically valued using the income approach.

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

Two methods, two results

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

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

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

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

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

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

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

What's a comparable sale?

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

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

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

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

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

Michael Shapiro is a partner in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at mshapiro@honigman.com.

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

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

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

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

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

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

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

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

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

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

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

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

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

John E. Garippa is a senior partner of the law firm of Garippa, Lotz & Giannuario of Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at john@taxappeal.com.

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

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

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

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

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

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

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

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

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

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

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

Joel R. Marcus is a partner at the law firm of Marcus & Pollack LLP: a member of American Property Tax Counsel, an affiliation of property tax attorneys. He can be reached at jmarcus@marcuspollack.com.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Michele M. Whittington is Counsel in the Frankfort office of Stites & Harbison, PLLC, the Kentucky member of American Property Tax Counsel, the national affiliation of property tax attorneys. Michele Whittington can be reached at mwhittington@stites.com.

Bruce F. Clark is a Member in the Frankfort office of Stites & Harbison, PLLC, the Kentucky member of American Property Tax Counsel, the national affiliation of property tax attorneys.He can be reached at bclark@stites.com.

"When you receive your tax statement, determine if the property belongs to you and if you are responsible for the payment of taxes."

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

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

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

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

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

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

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

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

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

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

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

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

David Canary has specialized in state and local tax litigation for the past 18 years. He has worked for the past 13 years as an owner in the Portland office of Garvey Schubert Barer and prior to that was an assistant attorney general representing the Oregon Department of Revenue. He has the distinction of trying several of the largest tax cases in Oregon's history. He is the Oregon member of American Property Tax Counsel and an active member of the Association of Oregon Industries' Fiscal Policy Council. He can be reached at dcanary@gsblaw.com.

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

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

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

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

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

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

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

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

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

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

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

John E. Garippa is a senior partner of the law firm of Garippa, Lotz & Giannuario of Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at john@taxappeal.com.

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

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

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

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

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

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

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

Fighting back

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

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

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

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

Case study makes the point

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

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

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

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

Proving market value

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

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

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

J. Kieran Jennings, partner at Siegel Siegel Johnson & Jennings, a law firm with offices in Cleveland and Pittsburgh. The firm is the Ohio and Western Pennsylvania member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at kjennings@siegeltax.com.

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

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

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

The basic issues

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

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

Where does the taxpayer begin?

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

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

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

What can taxpayers do when over-assessed?

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

How does the taxpayer prove the case in an appeal?

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

Must an attorney file a property tax appeal?

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

What risks and benefits come with contesting taxes?

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

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

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

J. Kieran Jennings, partner at Siegel Siegel Johnson & Jennings Co., LPA, with offices in Cleveland and Pittsburgh. The firm is the Ohio and Western Pennsylvania member of the American property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at kjennings@siegeltax.com.

Income approach to value helps reduce assessments on aging manufacturing plants

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

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

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

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

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

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

A preferred valuation method

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

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

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

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

Why exclude intangibles?

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

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

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

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

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

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

David Canary has specialized in state and local tax litigation for the past 18 years. He has worked for the past 13 years as an owner in the Portland office of Garvey Schubert Barer and prior to that was an assistant attorney general representing the Oregon Department of Revenue. He has the distinction of trying several of the largest tax cases in Oregon's history. He is the Oregon member of American Property Tax Counsel and an active member of the Association of Oregon Industries' Fiscal Policy Council. He can be reached at dcanary@gsblaw.com.

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

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

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

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

Get Help

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

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

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

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

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

New Requirements

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

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

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

Bruce F. Clark is a partner in the Frankfort office of Stites and Haribson, the Kentucky member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at bclark@stites.com.

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

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

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

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

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

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

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

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

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

Highway 40 reconstruction will reduce property values

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

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

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

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

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

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

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

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

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

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

Jerome Wallach is the senior partner in The Wallach Law Firm based in St. Louis, Missouri. The firm is the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. Jerry Wallach can be reached at jwallach@wallachlawfirm.com.

Challenging the sales approach can save you big bucks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Elliott B. Pollack is a partner at Pullman & Comley in Hartford, Conn. He is the Chairman of the firm's Property Valuation Department. Pullman & Comley is the Connecticut member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at ebpollack@pullcom.com.

Retail Owners Can Fight Assessors' High Valuations

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

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

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

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

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

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

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

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

The market approach

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

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

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

The income approach

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

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

Scholarly advice

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

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

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

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