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Property Tax Resources

Mar
11

Rocky Top Tax Relief

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

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

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

Work the Reappraisal Cycle

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

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

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

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

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

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

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

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

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

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

 

araines Andy Raines is a partner in the Memphis, Tennessee law firm of Evans Petree PC, the Tennessee member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Sep
07

Why Assessors Need to Take a Mulligan

"Assessors prefer the cost approach because the availability of cost data from national valuation services makes the determination of a value rather straightforward.Taxpayers argue that an income approach is better suited to derive the value of a golf course..."

By Andy Raines , Esq., as published by National Real Estate Investor, August 2008

As the old joke goes, the fastest way to become a millionaire as a golf course owner is to start out with $5 million. Unfortunately some property tax assessors don't get the joke. They continue to assess golf courses as if their value is increasing or holding steady.

During the 1990s, the supply of golf courses expanded by 24% while the number of golfers rose by just 7%, according to the National Golf Foundation. What's more, in the first quarter of 2008 there has been a 3.5% drop in rounds played.

Golf course owners now face numerous challenges. Although more courses have closed than opened over the past two years, the oversupply will likely take several years to absorb. Additionally, the soft economy and rising oil prices negatively affect travel to golf courses and course operating costs.

Property assessors have failed to take these factors into account in making their assessments. But golf course owners have begun to fight city hall by filing property tax appeals. If successful, the appeals can result in significant tax savings.

The accompanying chart demonstrates the magnitude of assessment reductions obtained by four different golf courses as a result of their tax appeals. On average, these appeals achieved a 40% reduction.

Why do assessors' valuations of golf courses differ so dramatically from the values contended by taxpayers and, in many instances, adopted by boards of equalization and judges? The assessor and taxpayer each use different valuation approaches that yield different values.

Methodology matters

The generally accepted valuation approaches include the cost, income capitalization, and sales comparison approaches. The appropriate valuation approach depends on various factors:

  • the amount and reliability of the data collected in each approach;the inherent strengths and weaknesses of each approach as it relates to a particular property type;
  • the relevance of each approach to the particular property at issue.

Raines_graph2Assessors typically value golf courses using a cost approach. That approach starts with land value, adds the cost of property improvements, and subtracts physical depreciation. Assessors prefer the cost approach because the availability of cost data from national valuation services makes the determination of a value rather straightforward.

Taxpayers argue that an income approach is better suited to derive the value of a golf course. That approach starts with a determination of revenue and deducts operating expenses to arrive at net operating income. Net operating income is then divided by a capitalization rate, thus yielding the value.

The issue centers on which method of golf course valuation is preferable: the assessor's cost approach, or the taxpayer's income approach?

 

Courts side with owners

The judges in these cases rejected the assessor's cost approach for several reasons. The cost approach rests on the principle of substitution, but replacement sites are difficult to find in the golf course industry. One judge cited an appraisal industry publication, which concluded that the cost approach is generally inapplicable to golf courses.

The cost approach used by the assessor deducted only the physical depreciation, based on age, but did not factor in external obsolescence. External obsolescence results from outside forces such as the oversupply of courses.

Again, a judge cited the appraisal industry publication that noted the difficulty in estimating external obsolescence in a market where prices have fallen 50% or more since the late 1990s. The judges found that investors rarely use a cost approach to determine the purchase price to pay for a golf course.

The judges held that the income approach offers the best valuation method for a golf course because buyers typically buy courses to produce income. The approach measures this capacity and converts it into a projected sales price.

The assessor's cost approach has been found not to be par for the course, so owners should consult their property tax professional to determine if an income approach can reduce their property tax liability.

RainesPhoto90Andy Raines is a partner in the Memphis law firm of Evans & Petree PC, the Tennessee member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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