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Property Tax Resources

May
01

IPT's 2017 Property Tax Article of the Year

The Institute for Professionals in Taxation has awarded Brent A. Auberry, Esq., Stewart L. Mandell, Esq., and Daniel L. Stanley, Esq. with the 2017 Property Tax Article of the Year Award for their article entitled, “Invalid “Dark Box” Property Tax Claims Misinform Indiana and Michigan Legislatures,” which was published in the July 2016 issue of IPT’s monthly publication, IPT Insider.

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May
01

Invalid "Dark Box" Property Tax Claims Misinform Indiana and Michigan Legislatures

Some have recently called this the dark box theory. However, what some are now calling the dark box theory is simply traditional accepted valuation methodology. Indeed, among appraisal professionals, it is the use of comparable sales of occupied stores that generates controversy and is often inappropriate to value an owner-occupied store.

If the criticisms of valid appraisal methodology are not legitimate, why has this issue received so much attention? One cause is the financial pressure on localities due to lower property values from the Great Recession. Not only did property values fall after 2008, but many businesses closed altogether. Communities have faced not only a loss in jobs but also decreasing property values. In both Michigan and Indiana, that pressure was compounded by the application of property tax caps. Public coffers to support local services have been squeezed, and state governments have not provided additional funding.

Another root cause was self-inflicted: the unjustified, over-assessment of new big box stores. Assessors used construction costs and land cost as the “market value” of the property, despite the fact that, like a new car or a newly tailored suit, the market value of these properties is always less than the cost of construction.

The purported problem is also one of public perception. If a retail store is operating, with inventory on the shelves and customers in the aisles, it may be difficult for the general public and local officials to understand why it is appropriate to value the property by using a transaction of a similar store that was vacant at the time of sale.

Trained assessors, however, should know better. They are legally required to only value the property itself, i.e., its “sticks and bricks” as well as the land. The occupants and content of the property have no relevance to the market value of an owner-occupied real property. Most states separately tax the business activity conducted on a property through income and sales taxes. Assigning value to property based on a taxpayer’s business operations will unlawfully tax properties based on both intangible assets and intangible factors, and result in nonuniform taxation of similar properties.

Indiana Board of Tax Review Decisions
In December of 2014, the Indiana Board of Tax Review (IBTR) issued two opinions, which in most respects were no different than hundreds of rulings that preceded them.In both cases, taxpayers prevailed after the IBTR concluded their USPAP-compliant appraisals represented the best evidence of value. In the first case, involving a freestanding 237,000 square foot big box store in Indianapolis, the taxpayer’s appraiser developed and relied upon the sales comparison and income approaches to value (assigning more weight to the sales approach) to reach value conclusions for multiple tax years. In the second case, involving an 88,000 square foot big box store attached to a shopping center, the taxpayer’s appraiser developed all three approaches to value but relied on and assigned equal weight to the sales comparison and income approaches to value.

In both cases, the taxpayers’ appraisers used sales of vacant stores. Each appraiser adjusted those sales to reflect the differences between the appraised store and the comparable stores. Neither appraiser relied exclusively on the sales comparison approach to value. Consequently, the IBTR’s rulings in both appeals were not based solely on the supposed “dark box” sales, and the sales that were relied upon were adjusted to reflect differences between the subject and the comparable properties, with respect to physical condition, location and other factors.

That nuance was lost on the assessing community as a whole and the subsequent statewide media reporting. The public was told that the IBTR incorrectly compared an active store with a defunct one. Yet, a sale of a vacant store represents the transfer of the real property alone, without the value of the business operations, which is exactly what should be valued under the law. The flawed and overly simple criticisms of the IBTR’s decisions were repeated often, and loudly. Unfortunately, the Indiana General Assembly listened.

The Indiana Legislative Reaction and its Subsequent Fallout 2015 Legislation
After much heated discussion, the Indiana legislature, in the waning hours of its 2015 session, passed two provisions addressing “dark box” assessments in Senate Bill 436. The first provision (Section 43) was directed at big box stores. Assessors were directed to assess newer stores (those with an effective age of ten years or less) using a modified cost approach, accounting for physical depreciation and obsolescence.

The second provision (Section 44) impacted all “commercial non-income producing real property, including a saleleaseback property.” In determining the true tax value of qualifying properties with improvements with an effective age of ten years or less, a “comparable real property sale” could not be used if the comparable, among other restrictions, had been vacant for more than one year as of the assessment date.

Sections 43 and 44 were not well received. The IBTR issued a memo noting the new law contained “provisions that run counter to generally accepted appraisal practices.”

2016 Legislation
Indiana’s 2016 legislation session saw a complete repeal of Sections 43 and 44, effective January 1, 2016. House Bill 1290, Section 13, added Ind. Code § 6-1.1- 31-6(d) to provide: “With respect to the assessment of an improved property, a valuation does not reflect the true tax value of the improved property if the purportedly comparable sale properties supporting the valuation have a different market or submarket than the current use of the improved property, based on a market segmentation analysis.” Any such analysis “must be conducted in conformity with generally accepted appraisal principles.” And the analysis “is not limited to the categories of markets and submarkets enumerated in the rules or guidance materials adopted” by Indiana’s property tax rulemaking agency, the Department of Local Government Finance (DLGF), which is the agency that was directed to develop rules classifying improvements in part based on market segmentation.

What does this mean? That remains to be seen. Subsection 6(d) will undoubtedly be litigated before the IBTR and Indiana Tax Court, and the DLGF is in the process of developing its market segmentation rules. We do know two things: (i) the party challenging use of comparable sales must provide the market segmentation analysis; and (ii) the analysis must be based on generally accepted appraisal principles. No presumption exists under the statute that a sale is excluded. Exclusion must be proven with expert analysis.

Subsection 6(d) will lead to more costly appeals, with additional expert testimony and reports on market segmentation being required. As appeal expenses increase, litigants are likely to adopt tougher settlement positions, which will cause fewer cases to settle. As litigation takes longer to resolve, local officials’ uncertainty regarding the tax base will also increase. Section 13 also added Ind. Code § 6-1.1- 31-6(e), which cemented a long-standing principle of Indiana assessment law, i.e., that true tax value “does not mean the value of the property to the user.” To illustrate, the assessed value of a big box store owned and operated by Wal-Mart cannot be based on the specific value that the store has to Wal-Mart due to, for example, how Wal-Mart uses its unique marketing and employee training standards to sell its distinctive product mix.

Proposed Michigan Legislation – HB 5578
As in Indiana, Michigan government representatives have been waging a public relations campaign that has misled the public, including policy makers. The legislation drafts originally circulated were influenced by Indiana’s legislation. Ultimately, on June 8, 2016, the Michigan House passed House Bill 5578 (“HB 5578”). Among its many significant flaws, HB 5578 prevents use of the sales comparison approach in cases where its use would be appropriate, and forces reliance on the cost approach, without accounting for all forms of obsolescence. It is not yet known what will happen to the bill in the Michigan Senate.

HB 5578’s Required Findings of Fact
HB 5578 requires many specific findings of fact by the Michigan Tax Tribunal in a tax assessment appeal. Among others, HB 5578 requires specific findings of fact regarding: the market in which the subject property competes, the highest and best use of the property under appeal, the reproduction or replacement cost, and comparable properties in the market that have the same highest and best use.

While the listed factors are appropriate to consider in a valuation appeal, requiring specific findings of fact will be extremely burdensome and, in some cases, is ambiguous or unworkable. For example, an automotive assembly plant in Michigan might compete with automotive plants in the Midwest, Canada and Mexico and the automobiles produced at the plant could be shipped worldwide. HB 5578 provides no ascertainable standards on how one determines “the market in which the property subject to assessment competes.”

HB 5578 requires calculation of a “replacement or reproduction cost for property that has the same . . . age as the property subject to assessment.” It is nonsensical to calculate the construction cost to reproduce or replace property that has the same “age” as the property under consideration because, as an example, one cannot construct a 40-year old building. Presumably, what was intended was that cost new would be calculated, with a deduction for the depreciation of the subject property due to age. However, that is not what the plain language of HB 5578 requires.

HB 5578’s Exclusion of Comparable Properties
HB 5578 requires that a comparable property be excluded if its “use” is different than the highest and best use of the property subject to assessment. It is unclear what the term “use” means as applied in this subsection and whether it means “actual use when sold,” “subsequent use after sale,” or “highest and best use when sold.”

The proposed legislation also allows a comparable property to be considered “if the sale or rental of the property occurred under economic conditions that were not substantially different from the highest and best use of the property subject to assessment unless there is substantial evidence that the economic conditions are common at the location of the property subject to assessment.” This provision is absurd. It is impossible to compare “economic conditions” with “highest and best use” and, even if it were possible, it would not make any sense to do so.

For the sale of a comparable property that was vacant at the time of sale, HB 5578 requires consideration of whether “the cause of the vacancy is typical for marketing properties of the same class.” How is a “cause of vacancy” ever “typical for marketing”? HB 5578 further requires consideration of whether “the vacancy does not reflect a use different from the highest and best use of the property. . . .” Conspicuously missing from HB 5578 are any instructions as to the determination of how a vacancy reflects a use.

HB 5578 requires exclusion of a comparable sale property if the comparable property was subject to a deed restriction or covenant, “if that restriction or covenant does not assist in the economic development of the property, does not provide a continuing benefit of the property, or materially increases the likelihood of vacancy. . . .” What is missing from this analysis is any consideration as to whether such a deed or covenant would impact the price at which the property sold. For example, a reciprocal easement on the comparable property that did not “assist in the economic development of the property” but did not impact its sale price likely would be enough to exclude the comparable sale. Such reciprocal easements are commonplace and generally do not affect the price at which property sells.

Conclusion
Few would challenge the fundamental principles that property tax assessments should be uniform and should reflect the value of the fee simple interests of the properties – not the values of the business operations conducted thereon. Yet, the “dark box” bogeyman threatens these cornerstone valuation principles. In both Indiana and Michigan, new legislation gives taxpayers good reason to fear that in future years they may be faced with inflated property tax bills based on non-uniform and inequitable assessments.

 

Brent AuberryBrent A. Auberry is a partner in the Indianapolis office of the law firm Faegre Baker Daniels LLP, the Indiana member of American Property Tax Counsel (APTC), the natonal affiliation of property tax attorneys. Mr. Auberry can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

 

Mandell StewartStewart Mandell is a Partner of the Tax Appeals Practice Group Leader, 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 This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Daniel L. StanleyDaniel Stanley 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 This email address is being protected from spambots. You need JavaScript enabled to view it..

Apr
14

Five Ways Property Owners May Qualify For Property Tax Exemptions In Indiana

But in every instance, obtaining an exemption requires timely and accurate applications.

It is a common misconception in Indiana that property owners must also be non-profit corporations to qualify for a property tax exemption. While tax-exempt status is critical for the application of some exemptions, Indiana law provides for-profit property owners with opportunities to reduce their tax liabilities by claiming exemption.

To obtain the exemption, the property owner must show that it uses the property in a manner that qualifies for tax exemption, and the application must clear mandated procedural hurdles.

There are several property uses that may qualify for exemption from property tax liability. Here are five common scenarios:

  1. The property is owned, occupied and predominantly used for charitable, educational, religious, literary or scientific purposes — To qualify, the owner must file an exemption application and show that it owns the property to further one of these tax exempt purposes.

    Ownership, occupancy and use need not be unified in one entity, and the statute does not require the owner to be a non-profit.

    For example, the tax court in 2014 approved a 100 percent property tax exemption for an office building that a for-profit, limited liability company owned to further the charitable tissue bank operations of its tenant, a related public benefit corporation. The assessor failed to show that the for-profit owner, in fact, had a profit motive for the property.

    Similarly, in a final determination issued that same year, the Indiana Board of Tax Review — the state agency that adjudicates property tax exemption appeals — stated that "involvement of for-profit entities does not preclude a property tax exemption.

    In this latter case, a for-profit entity leased a building to another for-profit entity to provide early childhood education.

    A year earlier, the tax review board approved the 100 percent exemption of a building owned by an individual and leased to a for-profit, faith-based daycare.

    Starting in 2015, the Indiana Legislature explicitly authorized the exemption of property owned by a for-profit provider of certain early childhood education services.
  2. The property is leased to a state agency — Property owned by a for-profit entity and leased to an Indiana state agency qualifies for exemption, but the lease must require the state agency to reimburse the property owner for property taxes.
    The exemption applies only to the assessed value attributable to the part of the real estate that the agency leases.
  3. The property is leased to a political subdivision — Structures leased to political subdivisions, including municipal corporations, are exempt from property tax.
  4. The property is leased to a public university — The Indiana Board of Tax Review considered this provision in 2013, applying a 13 percent property tax exemption for the portion of a for-profit commercial property owner's building that was leased to Purdue University for use as classrooms.
  5. The property is used as a public airport — To qualify for this measure, the owner of an Indiana airport must hold a valid and current public airport certificate issued by the State Department of Transportation. The law states that the applicant may claim an exemption "for only so much of the land as is reasonably necessary to and used for public airport purposes."

Eligible property includes not only the ground used for taking off and landing of aircraft, but also real estate "owned by the airport owner and used directly for airport operation and maintenance purposes" or "used in providing for the shelter, storage, or care of aircraft, including hangars."

The exemption does not apply to areas used solely for purposes unrelated to aviation.

How to apply

What is the process for claiming a tax exemption? Beginning in 2016, applications are due April 1, six weeks earlier than in past years. Indiana's Department of Local Government Finance provides a standard exemption form, Form 136, available on the agency's website at http://www.in.gov/dlgf/8516.htm.

The form can be used to claim both real and personal property tax exemptions. It includes three pages of questions and identifies the information and documents needed to process the request.

The property owner is responsible for explaining why the property is exempt to the assessor and to the county property tax assessment board of appeals, which has the authority to review and approve or reject each application.

Owners may need to provide in-formation beyond what the form requires. For example, assessors often want to review the relevant leases, such as a lease to a state agency or political subdivision. Indiana has 92 counties, and each county has its own procedures for processing applications.

There is no universally reliable test for weighing applications for tax exemption, so each claim stands on its own facts. Whether an owner's property qualifies for the exemption will depend on the statute under which the exemption is claimed and the particular evidence provided to support the claim.

Miss the filing deadline?

Exemptions are not automatically applied each year, but property that has been previously granted an exemption under certain provisions may not require new applications annually, depending on the facts of the case.

If the exemption does not carry forward and the owner fails to properly claim an exemption, it may be waived.

Even if the exemption is waived, however, hope remains. The owner may be able to obtain a legislative solution that permits a retroactive filing for an otherwise untimely application.

 

Brent AuberryBrent A. Auberry is a partner in the Indianapolis office of the law firm Faegre Baker Daniels LLP, the Indiana member of American Property Tax Counsel (APTC), the natonal affiliation of property tax attorneys. Mr. Auberry can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

May
29

What's The Basis For Your Assessment?

Assessors must value only the 'sticks and bricks,' not the business enterprise.

What can Indiana assessors value for property tax purposes? The answer is simple – the fee simple interest and nothing more. Yet assessors stray from that straightforward rule with alarming frequency.

In valuing land and improvements, assessors are not permitted to assign value to personal property; that is assessed separately. They also must refrain from assessing intangible assets – which are non-taxable – or the business operations conducted on or within a property. Profits may be subject to corporate income tax, but not property tax.

The fee simple interest is the absolute, unencumbered ownership of the real property, the sticks and bricks, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.

A fee simple interest means the owner retains the right to sell, lease or occupy the property. If the assessor values more than the fee simple interest, he or she has gone too far. Such assessments are not only erroneous as a matter of law, but also bad public policy because they result in double or otherwise illegal taxation.

Establishing Precedent

The Indiana Board of Tax Review, which oversees property tax appeals at the state level, has recognized that the market value and market value-in-use standards do not permit “assessors to assess things other than real property rights for ad valorem taxation.” In fact, the Indiana Tax Court has dismissed assessors’ efforts to value more than a property’s fee simple interest.

In 2013, the court rejected an assessor’s reliance on above-market contract rents to establish a commercial property’s value. The taxpayer based its rents on sale-leaseback transactions, which included an investment component, and thus sold more than ownership rights in property.

In an earlier ruling, the court agreed that “one should approach the rental data from [sale-leaseback] transactions with caution, taking care to ascertain whether the sales prices/contract rents reflect real property value alone, or whether they include the value of certain other economic interests.”

Indiana law requires assessors to determine a property’s true tax value, which for property other than agricultural land means the “market value-in-use of a property for its current use, as reflected by the utility received by the owner or by a similar user, from the property.”

Too often assessors misunderstand and misapply this standard by seeking to value the taxpayer’s specific, on-site business operations.

Profitability is Irrelevant

Even if the taxpayer’s business is successful, the building in which its business is regularly conducted must be valued no differently than a similar, vacant building. Consider this ex-ample:

In an industrial park, two 10-year-old buildings sit side-by-side, identical in size, shape, condition, construction materials and workmanship. The same external or economic factors impact both properties’ values.

On the assessment date, an extremely profitable business uses Building A at full capacity and around the clock. In contrast, Building B is vacant, though it had previously served the same general purpose as Building A. Despite the owner’s best efforts, no business is conducted on the property.

Objective, reliable market evidence undisputedly indicates that the true tax value of the fee simple interest of Building B is $1 million as of the date of value.

What is the indicated value of the fee simple interest of Building A? It’s (fee) simple: $1 million.

How can that be, especially when business is going gangbusters inside Building A? The answer is that we are not valuing that business activity. In an arm’s length transaction, assuming a fair sale occurs, a reasonable and prudent third party looking to acquire either building would pay no more than the value of the sticks and bricks – $1 million – regardless of the profitability or lack thereof of business operations conducted there.

Let’s further assume that the owner of Building A was instead the third-party buyer, faced with the same choice of two identical buildings, one vacant and the other occupied for profitable uses.

Even knowing with near certainty that its business operations would be remarkably lucrative, the buyer would not pay $1 more for either property than the market would bear. According to the market, both properties are valued at $1 million.

The buyer is not acquiring a trade name or workforce, or the seller’s trademarks, trade secrets, machinery and equipment, customer lists, licenses or contracts. It is acquiring land, a building, and yard improvements, and the value of those for both buildings is the same.

Nobody said determining the fair value of property is always easy. But in Indiana it should always be fee simple.

Brent Auberry

Brent A. Auberry is a Partner in the Indianapolis law firm of Faegre Baker Daniels LLP, the Indiana member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..  

Jul
15

Protecting Taxpayers: Indiana Shifts Burden of Proof to Assessors

A recent legal change in Indiana has created a model for property tax reform across the country. Starting in 2011, the Hoosier State has compelled assessing officials to defend excessive assessment increases with objective evidence and meaningful arguments in appeals.

The statute applies whenever the appealed property's value has increased by more than 5 percent over its prior year's value. Moreover, where the prior year's value was reduced on appeal and the reduction was not based on the income approach, the assessor now has the burden of proof to support any increase. Failure to defend the assessment automatically reduces the property's assessment to the prior year's level, and the taxpayer can press to further reduce the value.

Assessors on the defensive

This simple change gives Indiana taxpayers greater protections in appeals than taxpayers have in most other jurisdictions. Why? With no burden of proof on appeal, an assessor may contend that her value is presumed correct. Instead of explaining how she derived a property's value, the assessor may attempt only to discredit the taxpayer's case.

With the burden of proof, however, the assessor must produce probative evidence and logical arguments to support her value. She must explain why her assessment meets the jurisdiction's valuation standard. She must walk the local or state tribunal through her analysis. In short, she must explain how she did her job and produce evidence justifying her increased valuation.

An assessor that fails in those steps will likely lose. To avoid the time, expense and potential embarrassment of a loss, the assessor who carries the burden of proof is more likely to settle a case.

Limits on burden-shifting

For the burden-shifting statute to apply, the property under appeal must be the same property for both the current and prior years. It does not apply where the disputed assessment is based on structural improvements, zoning or uses that were not considered in the assessment for the prior tax year.

If significant new construction or demolitions occur at the property between the prior and current assessment dates, the taxpayer maintains the burden of proof. If the increase in value is due to the assessment of omitted property, such as when the assessor added square footage previously overlooked, then the taxpayer maintains the burden of proof.

The burden-shifting statute applies only to an increase of assessed value, not to an increase in tax burden. Taxpayers carry the burden of proof to show the value should be lower than the prior year's value.

The burden of proof can shift several times during an appeal. For example, assume that an Indiana commercial property is assessed at $800,000 in Year 1. In Year 2, the assessment increases by more than 5 percent to $1 million.

The property's physical status and use are the same in both years, and the taxpayer has an appraisal supporting a value of $500,000 in Year 2. The assessor carries the initial burden of proof to show her $1 million value is proper. If she fails to make a convincing case, the property's assessment will at minimum revert to its Year 1 value of $800,000. The taxpayer then has the burden of proof to show that its appraised value of $500,000 is correct.

If persuasive, the appraised value likely will carry the day; the Indiana Tax Court has said that an appraisal compliant with the Uniform Standards of Professional Appraisal Practice is often the best evidence of value. Even if the appraisal is unpersuasive, the property's assessment will still be lowered to its Year 1 value.

What are the drawbacks?

Who has the burden is sometimes unclear, so deciding the burden of proof may add an argument to the appeal. Parties may file motions in advance of a hearing to decide the burden of proof issue. If multiple years are under appeal, different parties may (depending on the values from year to year) have the burden of proof for different years, which could complicate the presentation of arguments and evidence at the administrative hearing.

The burden-shifting statute is one reason that more assessors are hiring counsel and paying for appraisals in appeals, which might prolong the appeals process in some cases. Taken as a whole, however, Indiana's burden-shifting experience has been a positive one for taxpayers. Taxpayers have always had to present evidence and arguments to prevail and now, in many cases, so do the assessors.

Indiana has compelled assessing officials to explain how they did their jobs correctly—or lose on appeal. Assessors who can't or won't defend their assessments are more likely to settle, saving taxpayers considerable time and resources. Taxpayers in other states should consider pressing lawmakers in their jurisdictions to replicate this Heartland property tax experiment.

Brent AuberryBrent A. Auberry is a partner in the Indianapolis office of the law firm Faegre Baker Daniels LLP, the Indiana member of American Property Tax Counsel (APTC), the natonal affiliation of property tax attorneys. Mr. Auberry can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

May
15

What's the Property Tax Impact of Lifestyle Centers on Enclosed Malls

"The replacement cost approach has enabled property owners to obtain reduced assessments for steel mills, hospitals and other property types. The same theory can apply to an enclosed mall..."

By Brent A. Auberry, Esq., as published by REBusinessOnline.com, May 2013

This is not your mother's shopping experience. In the never-ceasing cycle of trying to stay hip and cool (or perhaps just relevant), mall owners in recent years have shifted away from the traditional, inward-facing enclosed mall to today's outward-facing lifestyle center. This change in design for new shopping centers brings with it a potential change in valuation techniques for older malls.

Assessors often apply a modified reproduction cost to malls, basing value on the cost of recreating the property's identical shape, size, design and layout. A more relevant value is replacement cost, or the cost to replace the asset with a modern shopping center with the same utility. In other words, in certain circumstances assessors should assess large enclosed malls as if they were the less costly, more efficient lifestyle centers that could be developed on the same site. The difference might result in property tax savings for the owner.

Lifestyle centers typically range between 150,000 and 500,000 square feet of leasable retail area and include at least 50,000 square feet devoted to upscale national chain stores, according to the International Council of Shopping Centers. Many rely on multiplex theaters or other entertainment components rather than traditional anchor stores.

Most importantly, lifestyle centers are open, with streets or outdoor pedestrian walkways rather than enclosed corridors, and are easily accessible from the parking area. There is no common entrance, no massive food court, no inline space or mezzanines — and none of the costs that go with those expensive construction items.

According to Sara Coers, managing director at Valbridge Property Advisors in Indianapolis, lifestyle centers reflect a pedestrian-centric, Main Street idea where customers can park near and access their favorite retail properties from the exterior. Shoppers avoid the extra time needed to find and enter a common entrance, traverse a long stretch of the mall's interior to find a particular store, and then reverse the process after making a purchase. For these reasons and others, lifestyle centers are the new, trendy kid on the shopping block.

Costs Are Key Consideration

Large interior spaces make enclosed malls bigger and more expensive to build and operate. That interior space must be heated and cooled, lit, cleaned, secured and insured. Those higher costs can translate into a lower property tax assessment, and here is how. Under the cost approach, the assessor should value the enclosed mall as a modern property of the same utility as the existing property, and the mall's modern equivalent may very well be a smaller and more efficient lifestyle center.

A penalty for the property's excess construction cost is only part of the equation. The assessor should also consider reducing the enclosed mall's assessment based on its excess operating costs, which penalize the existing mall's value. An assessment for property tax purposes should be adjusted downward to reflect that penalty.

However, not every enclosed mall should be replaced with a lifestyle center for assessment purposes. The demographics of the market served must support the case. Lifestyle centers will be sustained by a higher-income customer base. Consider the competition as well. Would customers flock to a lifestyle center, if another regional mall were nearby?

Is the climate compatible? A developer might replace an enclosed mall with a lifestyle center in Florida but not necessarily in Minnesota, where indoor shopping is a significant customer draw during severe winter weather.

The replacement property must have the same utility as the existing, assessed property. How utility is measured is open for discussion, and might be leasable square footage, the number of customers served, or something else. A utility measuring stick of some kind is a necessity, however.

How To Bolster Your Case

Sometimes property owners need to speak the language of the local assessor. That language is often cost, and applying cost means looking at replacement value. Enclosed mall owners must ask themselves, "What would a modern replacement for this property be?" If the answer is "a lifestyle center," then there may be an opportunity to negotiate a property tax reduction.

The replacement cost approach has enabled property owners to obtain reduced assessments for steel mills, hospitals and other property types. The same theory can apply to an enclosed mall. Even if the mall would not be "replaced" with a lifestyle center, a reduction is likely justified if the property is overbuilt or inefficiently configured and a smaller enclosed mall design would support the same utility.

Property owners shouldn't be afraid to ask themselves if a lifestyle choice might reduce their property tax assessment.

auberryBrent A. Auberry is a partner in the Indianapolis office of the law firm Faegre Baker Daniels LLP, the Indiana member of American Property Tax Counsel (APTC). Brent A. Auberry can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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