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Property Tax Resources

May
01

Understanding Intangible Assets and Real Estate: A Response to the IAAO Committee's Guide

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

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

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Jan
10

Built-In Costs / Investors need to pay attention to transfer taxes when buying properties

There was a time when closing a real estate sale cost the seller a few hundred dollars for transfer tax stamps on the transfer deed, but those days are long gone.  Nowadays, transfer tax can be a major consideration in structuring and funding a property transaction.  And the requirements for complying with, or being excluded from, transfer taxes have multiplied.

In some markets, transfer tax can exceed the property tax burden in the first few years after an acquisition.  For example, in San Francisco the transfer tax on property transactions valued at more than $10 million is 2.5 percent of the sales price.

Historically, transfer taxes were only collected when the county recorder’s office recorded a deed.  If a transfer occurred through the acquisition of a legal entity that owned the property, and that entity continued to exist without requiring a transfer deed, then no transfer tax was owed.

Today, however, many real estate transactions occur through the buying or selling of ownership interests in legal entities which hold title to real property, and which continue to exist and hold property after the transaction has concluded.  Technically, there is an indirect change in ownership because the legal entity is now owned by a different entity or owner, even though the title for the real estate remains unchanged.

The proliferation of these indirect property transfers has spurred tax authorities to enact laws that assess transfer taxes on indirect sales.  The deed-recording process cannot capture indirect sales, so counties and cities now require buyers and/or sellers to report such transfers through other means.

The most common way of tracking indirect transfers is to align transfer tax reporting with the property tax system.  In California, for example, taxpayers must report legal entity transfers to the state Board of Equalization, which in turn reports the transfers to county assessors.  Counties and cities which collect transfer taxes on indirect sales can now access assessor databases to learn about indirect transfers in their jurisdictions.

Most transfer tax laws contain numerous exclusions.  For example, if there is a mortgage against a property, the amount financed is excluded from the purchase price when calculating the transfer tax.  Similarly, transfers of property between entities which have the same ownership percentages are excluded from transfer taxes.  A third example is the exclusion from transfer tax for marital dissolutions.

In recent years, however, tax authorities have repealed some exclusions from transfer tax. Some jurisdictions have deleted the mortgage deduction.  Likewise, gifts and transfers upon death, and transfers to non-profit entities, which were once generally excluded, are now subject to transfer tax.

The declining number of exclusions restricts a market participant’s ability to structure transactions to be exempt from transfer tax.  That task has grown only more difficult as variations in tax rules have increased between jurisdictions at the local level.

The transfer tax has traditionally been and continues to be a local tax.  Consequently, individual counties and cities determine what elements to include or not include in their transfer tax ordinances.  Transfer taxes are an attractive way for local governments to raise revenue, particularly when other sources of tax income are limited.

In California, most counties and cities operate under the traditional transfer tax laws that the state Legislature established almost 50 years ago.  But more than a dozen counties and cities have modified the transfer tax law enacted by the Legislature.  The courts have approved such changes under the home rule doctrine, which allows communities to govern themselves with laws that don’t conflict with state or federal law.

These modifications have two primary goals: The first is to impose transfer tax on indirect transfers of real property caused by changes in the ownership of legal entities.  The second goal is to repeal the exclusions that existed in the original transfer tax laws.  In addition, the modifications have often added penalties for failure to pay transfer taxes.

California, like most states, has dozens of counties and hundreds of cities, which means that buyers and sellers of real property must familiarize themselves with the specific provisions in local transfer tax ordinances.

Transfer tax compliance used to be as simple as checking a box.  But high transfer tax rates, the prevalence of indirect property sales and rising property values have increased the significance and complexity of transfer taxes in property transactions.  Awareness of tax rates, available exclusions from the transfer tax and compliance and reporting requirements is essential to maximize property value and avoiding reporting pitfalls.

 

Cris ONeall

Cris K. O'Neall is a shareholder at the law firm Greenberg Traurig, LLP and focuses his practice on ad valorem property tax assessment counseling and litigation.  The firm is the California member of the American Property Tax Counsel, 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..

Dec
31

Beware The Costs Of Hidden Capital

Owners Must Examine The Tax Consequences Of Making Capital Improvements Before Breaking Ground

For nearly 40 years, states have attempted to protect property owners from rapidly escalating property tax bills by limiting increases in the taxable value of real estate.  Often referred to as “caps,” these limitations are myriad and complicated, but share a tendency to distort the market for developers of new space and for property owners seeking to improve existing commercial properties.

How so?  Laws are state-specific, but taxpayers purchasing or improving real estate may lose the benefit of the cap on their property’s value, and incur a substantial tax increase on top of the acquisition or improvement cost.  In other words, caps discourage property owners from improving their properties, while owners who know how caps apply can access tremendous savings.

Caps in Action

Caps apply by limiting increases in taxable value for properties subject to reassessment that would otherwise rise to reflect the market.  For example:  California’s Proposition 13 generally limits annual valuation increases to 2 percent, even if the property’s market value is rising at a faster rate.  Common triggers for reassessment are an ownership change, countywide reassessment and improvements to the property.

Some states exempt a fixed percentage of any increased assessed value following an ownership change.  Ownership changes can include not only title transfers but also internal transfers of interests in the entity that owns the property.  To access this exemption, the taxpayer may need to take some timely action, such as filing a claim or meeting other state requirements.  Miss the deadline, and the exemption disappears.

Consequences of an oversight can be dramatic.  For example, an apartment complex previously assessed, capped or otherwise, at $20 million sells for $30 million.  Rather than incur taxes reflecting the full $10 million increase in value included in the sale price, the buyer qualifies for a 25 percent tax exemption, or $7.5 million.  Yet, failure to file a timely exemption application could result in taxation of that otherwise exempt $7.5 million of the total value.

Many jurisdictions cap value increases during periodic reassessment.  Florida generally limits annual increases to 10 percent of assessed value for the prior year.  South Carolina, which theoretically reassesses every five years, limits increases to 15 percent of the property’s prior assessed value unless there has been a property improvement or a change in ownership.

Some limits disappear if there has been an ownership change.  Florida generally defines an ownership change as any sale or transfer of title or control of more than 50 percent of the entity that previously owned the property.  South Carolina has adopted a much more complicated system of assessable transfers of interest (ATI’s).  The definition of an ATI runs for four full pages in the South Carolina Code.

Impaired by Improvements

With tax caps, taxpayers who improve their properties face even greater potential tax consequences, because states generally remove artificial caps on new construction and major renovations.  In other words, the total cost of improvements can include not only construction expenses but also a substantially heavier tax burden.  The result places an improved income-producing property at a serious disadvantage in competing with unimproved properties.

What constitutes an improved property? Florida has adopted a bright line test by examining whether the improvements increase value by at least 25 percent.  California law protects properties from reassessment so long as any work is normal maintenance or repair, or the improvement does not make the property “substantially equivalent to new.”

South Carolina is much more complicated and unclear.  The state requires assessors to include the value of new construction in valuing properties, but its statutes fail to define “improvements,” leaving interpretation to local taxing authorities.

The result is a patchwork quilt of inconsistency.  In order to circumvent South Carolina’s 15 percent cap on periodic reassessment, some counties have adopted a stepped approach to increases in value, although such a procedure is clearly unauthorized by statute.  Other counties simply add the value stated in building permits to existing assessed value in order to derive a new value, though the market would never see a sale on that basis.  Still other counties assume stabilization in valuing a new or improved income-producing property such as a hotel rather than accurately valuing the property before stabilization.  Clearly, a property owner improving a property faces a potential hidden cost in the form of increased taxes by loss of the statutory cap.

Reimplementation of tax caps on an improved income-producing property further complicates an owner’s prediction of costs.  Whatever the method of valuing the improvements, how does South Carolina’s 15 percent general cap apply to future valuations when the property value may be much greater?

If the taxing authority simply adds the cost of the increased value set forth in building permits, has the taxing authority fully captured an increase in value which, in turn, may be subject to re-imposed caps?  To state the obvious, an owner will not improve a property merely to re-cover the cost of improvements, but rather sees the potential of income gains exceeding improvement costs.

Most income-producing properties will generally require some period of time for lease up or stabilization.  Should the taxing authority be allowed to make assumptions of future income that the market would not make if the property sold prior to stabilization?  These questions have no easy answers.

Regardless of the system used for valuing new improvements, caps give a competitive advantage to owners of unimproved property in the form of lower costs.  Property owners must examine the obvious – and hidden – tax consequences of improvements to determine whether potential income from improvements justifies the costs.

Morris Ellison Photo Current july 2015Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. Morris Ellison can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Dec
10

Transfer Taxes Are Now a Costly Consideration in Real Estate Transactions

There was a time when closing a real estate sale cost the seller a few hundred dollars for transfer tax stamps on the transfer deed, but those days are long gone.  Nowadays, transfer tax can be a major consideration in structuring and funding a property transaction.  And the requirements for complying with, or being excluded from, transfer taxes have multiplied.

In some markets, transfer tax can exceed the property tax burden in the first few years after an acquisition.  For example, in San Francisco the transfer tax on property transactions valued at more than $10 million is 2.5 percent of the sales price.

Transfer tax scope widens

Historically, transfer taxes were only collected when the county recorder’s office recorded a deed.  If a transfer occurred through the acquisition of a legal entity that owned the property, and that entity continued to exist without requiring a transfer deed, then no transfer tax was owed.

Today, however, many real estate transactions occur through the buying or selling of ownership interests in legal entities which hold title to real property, and which continue to exist and hold property after the transaction has concluded.  Technically, there is an indirect change in ownership because the legal entity is now owned by a different entity or owner, even though the title for the real estate remains unchanged.

The proliferation of these indirect property transfers has spurred tax authorities to enact laws that assess transfer taxes on indirect sales.  The deed-recording process cannot capture indirect sales, so counties and cities now require buyers and/or sellers to report such transfers through other means.

The most common way of tracking indirect transfers is to align transfer tax reporting with the property tax system.  In California, for example, taxpayers must report legal entity transfers to the state Board of Equalization, which in turn reports the transfers to county assessors.  Counties and cities which collect transfer taxes on indirect sales can now access assessor databases to learn about indirect transfers in their jurisdictions.

Fewer exclusions, a patchwork of requirements

Most transfer tax laws contain numerous exclusions.  For example, if there is a mortgage against a property, the amount financed is excluded from the purchase price when calculating the transfer tax.  Similarly, transfers of property between entities which have the same ownership percentages are excluded from transfer taxes.  A third example is the exclusion from transfer tax for marital dissolutions.

In recent years, however, tax authorities have repealed some exclusions from transfer tax. Some jurisdictions have deleted the mortgage deduction.  Likewise, gifts and transfers upon death, and transfers to non-profit entities, which were once generally excluded, are now subject to transfer tax.

The declining number of exclusions restricts a market participant’s ability to structure transactions to be exempt from transfer tax.  That task has grown only more difficult as variations in tax rules have increased between jurisdictions at the local level.

The transfer tax has traditionally been and continues to be a local tax.  Consequently, individual counties and cities determine what elements to include or not include in their transfer tax ordinances.  Transfer taxes are an attractive way for local governments to raise revenue, particularly when other sources of tax income are limited.

In California, most counties and cities operate under the traditional transfer tax laws that the state Legislature established almost 50 years ago.  But more than a dozen counties and cities have modified the transfer tax law enacted by the Legislature.  The courts have approved such changes under the home rule doctrine, which allows communities to govern themselves with laws that don’t conflict with state or federal law.

These modifications have two primary goals: The first is to impose transfer tax on indirect transfers of real property caused by changes in the ownership of legal entities.  The second goal is to repeal the exclusions that existed in the original transfer tax laws.  In addition, the modifications have often added penalties for failure to pay transfer taxes.

California, like most states, has dozens of counties and hundreds of cities, which means that buyers and sellers of real property must familiarize themselves with the specific provisions in local transfer tax ordinances.

Transfer tax compliance used to be as simple as checking a box.  But high transfer tax rates, the prevalence of indirect property sales and rising property values have increased the significance and complexity of transfer taxes in property transactions.  Awareness of tax rates, available exclusions from the transfer tax and compliance and reporting requirements is essential to maximize property value and avoiding reporting pitfalls.

 

Cris ONeall

Cris K. O'Neall is a shareholder at the law firm Greenberg Traurig, LLP and focuses his practice on ad valorem property tax assessment counseling and litigation.  The firm is the California member of the American Property Tax Counsel, 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..

Apr
01

LA's Seismic-Retrofitting Plan May Affect Property Taxes

Mayor Garcetti’s “Resilience by Design” plan may expose building owners to property tax assessments for new construction.

Los Angeles Mayor Eric Garcetti recently unveiled his plan to require owners of older buildings to seismically retrofit their properties.  The Mayoral Seismic Safety Task Force published retrofitting requirements on Dec. 8 as part of a report called “Resilience by Design.”

The question for taxpayers with regards to this report is whether building improvements mandated by the plan may trigger property reassessments that are required on new construction.  Before speculating on how the mayor’s plan will impact their properties, owners should take a close look at the relevant new and existing rules.  The question for taxpayers with regards to this report is whether building improvements mandated by the plan may trigger property reassessments that are required on new construction.  Before speculating on how the mayor’s plan will impact their properties, owners should take a close look at the relevant new and existing rules.

The Seismic-Retrofitting Plan

Mayor Garcetti’s plan targets two types of properties for earthquake upgrades: soft, first-story buildings and reinforced concrete buildings.  The first category consists of wood-frame buildings where the first floor has large openings.  These may include tuck-under parking, garage doors and retail display windows.

The second category includes concrete buildings built before the implementation of the 1976 building code.  Those structures are at higher risk of collapse because parts of the building, such as the columns and frame connectors, are too brittle and may break in strong shaking.  The weight of the concrete in these buildings makes them particularly deadly when they fail.

The Seismic Safety Task Force recommended the passage of ordinances that would require soft, first-story building owners to report if seismic retrofitting is required within one year of the ordinance’s approval, and to complete such retrofits within five years.  The proposed ordinance would also require owners of concrete buildings to report whether seismic retrofitting is required within five years, and to complete such retrofits within 25 years.  Concrete buildings would have to meet the Basic Safety Objective of the American Society of Civil Engineers (ASCE) Standard 41 or an equivalent standard.

Is Retrofitting Assessable as New Construction?

As a general rule, new construction is assessable for property tax purposes in California.  Consequently, the seismic retrofitting required under the plan would constitute assessable “new construction,” thereby raising property tax assessments on the retrofitted properties.  However, under a law approved by California voters in 2010, seismic-retrofitting is excluded from property tax assessment.

The 2010 law exempts from property tax assessment “seismic retrofitting improvements and improvements utilizing earthquake hazard mitigation technologies.”  In layman’s terms, this refers to reconstructing an existing building to remove falling hazards, such as parapets, cornices and building cladding that pose serious dangers.  It also means strengthening an existing building to resist an earthquake and reduce hazards to the life and safety of building occupants exiting the building during an earthquake.

The new law also exempts from taxation new construction performed on an existing building that the local government has identified to be hazardous to life in the event of an earth-quake.  Notably, the law excludes entirely new buildings or alterations to existing buildings that are made at the same time as the seismic-retrofitting, such as new plumbing or electrical systems.

Retrofitting Under LA’s Plan Will Likely Be Exempt

The Mayoral Seismic Safety Task Force did not take into consideration the possibility that seismic-retrofitting work performed under the task force’s proposed ordinances would be assessable as new construction, and therefore subject property owners to increased property tax assessments.  The Task Force could have done so by incorporating the seismic retrofitting construction standards specified in the law approved by voters in 2010.

Nevertheless, some fairly broad language in the property tax exemption statute will likely permit the property tax exemption for seismic retrofitting to be extended to construction work that building owners perform in compliance with Mayor Garcetti’s proposed plan.  It is also possible the city will amend the ordinances proposed by the Seismic Safety Task Force to incorporate the seismic safety standards referenced in the 2010 property tax exemption law.

Claiming the Seismic-Retrofitting Exemption

Although seismic-retrofitting work is generally exempted from property taxation, such exemption is not automatic.  The 2010 law requires owners of properties who have carried out seismic retrofitting to submit a claim form to their county assessor to receive the property tax exemption.

The owner must submit the form prior to or within 30 days of completion of the seismic-retrofitting work.  They must submit documents supporting the claim no later than six months after completing the seismic-retrofitting project.  The property owner, his contractor, architect, or civil or structural engineer may complete the claim form and provide the supporting documentation.

Once the taxpayer has submitted the claim form and supporting documents, the city’s building department must identify the portions of the project that were seismic-retrofitting components.  That will determine whether the property is exempt from a new assessment, or has undergone new construction unrelated to the seismic retrofit that will trigger a new assessment. 

Cris ONeall

Cris K. O'Neall is a partner with Cahill, Davis & O'Neall LLP, the California member of American Property Tax Counsel, 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..

Jan
16

Reducing Hotel Property Taxes By Properly Valuing Intangible Assets

Most, but not all, taxing authorities acknowledge that hotels include intangible and tangible assets. Reducing property tax costs by removing intangible value has long been controversial due to the challenging task of valuing intangible assets. Intangibles include items such as the assembled workforce, service contracts, reservations systems, web presence and hotel management and franchise agreements.

Most, but not all, taxing authorities acknowledge that hotels include intangible and tangible assets. Reducing property tax costs by removing intangible value has long been controversial due to the challenging task of valuing intangible assets. Intangibles include items such as the assembled workforce, service contracts, reservations systems, web presence and hotel management and franchise agreements.

Fortunately for hotel owners, a recent decision by the California Court of Appeals makes clear that measuring a hotel’s intangible value solely by deducting franchise fees and management fees understates a hotel’s intangible value. Assessors must exclude all intangible value to tax the hotel’s real property properly. Proper exclusion of intangible value will necessarily result in lower taxes.

The debate
It is axiomatic that investors buy operating hotels based on the income generated by the hotel’s business. The income is generated by the combination of the property’s real estate, tangible personal property, and intangible personal property. All of these components are essential and the absence of any of these elements severely compromises a hotel’s ability to generate revenue.

Ad valorem taxing authorities are not investors or lenders. They are charged with valuing only the real estate component of a hotel for tax purposes. Isolating a hotel’s taxable value requires that the assessor remove from the hotel’s overall value both the value of tangible personal property and the value of the intangible personal property used in conjunction with the operating business.

Valuing the hotel’s tangible personal property, such as beds, furniture and the like, is relatively easy. Valuing intangible assets poses a far greater challenge. How should the assessor separate the value of intangible assets from the hotel’s overall value? The answer to that question has been the subject of heated debate.

Evolving methodology
The Appraisal Institute’s current curriculum recognizes the presence of intangible value in hotels but avoids the issue of how to calculate this value. This omission implicitly acknowledges that the value of an operating hotel lies at the intersection of real property appraisal and business valuation, and both skill sets are required to value a hotel property appropriately.

Stephen Rushmore developed the initial approach to the problem over 30 years ago. To account for a hotel property’s intangible value, the Rushmore Approach simply subtracts management fees and franchise fees from the hotel’s revenue and capitalizes the remaining revenue to determine real estate value.

The debate about valuing intangible property in a hotel has been long, loud and heated. While revolutionary at the time, the Rushmore Approach has been criticized for years. Rushmore’s defenders have responded to the criticism on several fronts.

Critics argue the Rushmore Approach offers the attraction of simplicity at the expense of understating the contribution made by intangible personal property to the hotel’s revenue. Critics further argue that the Rushmore Approach’s assumption that the deduction of management and franchise fees effectively accounts for a hotel’s entire intangible value is contrary to the experience of market participants in owning and operating a hotel. Rushmore’s detractors often advocate an alternative method known as the business enterprise approach, which casts a wider net to account for intangibles.

Rushmore’s supporters note the absence of hard data to quantify sales of a hotel’s individual components. The absence of this data, however, is unsurprising, considering investors buy and sell hotels based on income generated rather than on the value of individual components.

Rushmore’s advocates also suggest that alternative approaches overstate intangible value, thereby reducing the mortgage-asset-secured value lenders rely upon for hotel financing.

Courts weigh in
The Rushmore Approach certainly accounts for some intangible value, but, does it reveal the full intangible value associated with a hotel such as licenses to use software and websites?

Until recently, Glen Pointe Associates vs. Township of Teaneck, a 1989 New Jersey opinion, was the seminal hotel property tax decision that adopted the Rushmore Approach to extract the real estate value of an operating hotel. A May 2014 California Court of Appeals opinion, however, suggests the tide may be turning against the Rushmore Approach and in favor of the business enterprise approach.

In SHC Half Moon Bay vs. County of San Mateo, the California Court of Appeals held that “the deduction of the management and franchise fee from the hotel’s projected revenue stream pursuant to the income approach did not - as required by California Law - identify and exclude intangible assets” such as an assembled workforce and other intangibles.

In overturning the taxing authority’s methodology as a matter of law, the appellate court held that the taxing authority had failed to explain how the deduction of the management and franchise fee, i.e. the Rushmore Approach, captures the value of all of the hotel’s intangible property. Considering that consumers increasingly make hotel reservations online instead of using a flag’s reservation system, it is increasingly difficult to argue that the Rushmore Approach sufficiently captures the value of the hotel’s website or its relationship to on-line providers outside of the flags.

The arrival of Airbnb in the market also provides food for thought. Airbnb is a controversial web platform where an apartment owner advertises an apartment online for overnight paying guests. The platform boasts over 800,000 listings in 33,000 cities in 192 countries. Many local governments argue Airbnb allows apartment owners to avoid hospitality taxes or other hotel regulations.

Airbnb’s success demonstrates the difficulty of isolating a hotel’s real estate value by only excluding management and franchise fees. Airbnb doesn’t charge management or franchise fees, yet the service allows owners to increase the income potential of their apartments far beyond market rent.

The debate between advocates and critics of the Rushmore Approach rages on. The challenge for valuing hotel real estate remains. The beauty of the Rushmore Approach is its simplicity, but in the days of the Internet and Airbnb, simplicity may not equate to accuracy. In the wake of the decision from California, the tide may be running out on the Rushmore Approach.

ellison mMorris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. Morris Ellison can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Jan
01

California Property Tax Updates

UPDATED september 2018

Vote on Split Roll Initiative Postponed to 2020 Election

Proponents of a voter initiative measure to take Proposition 13 protections away from commercial property owners have decided to put the measure off until the November 2020 election. The proposed measure would require all commercial properties to be re-assessed at current market value at least one time every three years, thereby creating a “split roll” with commercial properties being assessed differently from residential properties. Under current law, Proposition 13 sets the value of commercial properties at their purchase price (or cost of construction), and the values are trended upward by a maximum of 2% in each subsequent year. The proposed initiative measure would not change the way in which residential properties are assessed – those properties would remain under Proposition 13. The planned initiative is opposed by many California county assessors as it would significantly increase the workload of assessor’s offices due to the annual reassessment requirement for commercial properties. Taxpayer organizations are expected to organize in opposition to the initiative measure next year.


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Greenberg Traurig, LLP
American Property Tax Counsel (APTC)

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Dec
16

Recent Cases Affirm Tax-Exempt Status of Intangible Value

Whether a business is a seniors housing facility, a racetrack or other service-oriented operation - or even a manufacturing plant - part of the business’ value may be intangible and exempt from property tax. Recent court cases underscore this critical premise and provide valuable reference points for taxpayers struggling against unfair tax practices.

Local governments in all states have authority to impose property tax on the value of real estate. Local governments in all but seven states also impose property tax on the value of at least some tangible personal property, or property that can be moved, such as equipment.

But in most states, local authorities are prohibited from taxing any additional value of a business as a going concern, meaning value attributable to a brand, reputation for product quality, intensive management, licenses, contractual rights, proprietary technology, and other intangible assets.

For example, if a manufacturing plant receives additional revenue because it packages items with a well-known brand’s label instead of a generic one, that brand is an intangible asset. In numerous cases it has been seen that the value of intangible assets equal or exceed the value of the taxable property. Whatever the business, removing intangible assets from the property tax bill is key.

California tests intangibles

Some states provide clearer guidance than others on identifying and quantifying intangible assets. California, in particular, has been a hotbed of controversy over the treatment of intangibles in valuation for tax purposes lately.

Stephen Davis, a partner in the Los Angeles law firm of Cahill, Davis & O’Neall, summed up the latest developments during a presentation at the Seattle Chapter of the Appraisal Institute Fall Real Estate Conference in October by saying that major cases in the last two years capped two decades of controversy. He should know, since his firm was counsel of record in the SHC Half Moon Bay vs. County of San Mateo case, decided in May 2014. Davis commented that the result of this new case law has been “a few new controversies instead of a clean resolution,” but much was resolved favourably for taxpayers and provided helpful lessons that should apply anywhere in the nation.

The main takeaway from California’s recent cases is the importance of an appraisal of each intangible asset in order to deduct that value from the overall business value.

In SHC Half Moon Bay vs. County of San Mateo, the four-star Ritz Carlton Half Moon Bay Hotel proved that the assessor inappropriately included in the hotel’s taxable value approximately $2.8 million of exempt value attributable to its workforce and to contractual rights involving a parking lot and golf course. Granting a significant victory to taxpayers, the appeals court made clear that merely subtracting franchise fees from the value indicated by the income approach to value did not account for the value of the hotel’s franchise rights and other goodwill.

What does that mean for taxpayers? Under this case, an appraisal that provides evidence of the value of each intangible asset should result in removing those intangible values from property tax assessments. The reasoning espoused in this decision from California should apply in any state where intangible property is exempt from property tax.

For example, just last year the Montana Supreme Court declared invalid a Montana Department of Revenue regulation that attempted to narrow that state’s broad exemption for intangibles, such as by requiring valuation of goodwill only by the accounting method.

A growing volume of cases argues for valuing the intangible assets of a wide range of businesses by using generally accepted appraisal practices, bolstering the position of taxpayers defending themselves against unfair taxation of those assets.

Source URL: http://nreionline.com/tax-strategies/recent-cases-affirm-tax-exempt-status-intangible-valueRecent

MDeLappe Bruns Norman J. Bruns and Michelle DeLappe are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local tax. Bruns is the Idaho and Washington representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
Sep
30

Why Assisted Living Is The New Property Tax Frontier

"Like hotels, these facilities feature non-taxable intangibles."

Assisted living is moving to the forefront of the ongoing debate over the role of intangible assets in property taxation. Over the past 10 or more years, property tax professionals and the courts have focused discussions of intangible assets on hotel and resort properties, which tend to rely on brands, assembled workforces and other intangible assets in their operations.

Intangibles are exempt from property taxation in most states, so hospitality property owners have fought to exclude the value of those intangibles from their property assessments.

The courts have resolved the question of whether the value of intangibles can be included in the value of hospitality properties, establishing case law through key decisions such as those by California's Supreme Court and Court of Appeal in Elk Hills Power vs. Board of Equalization and SHC Half Moon Bay v. County of San Mateo.

In those cases, the courts have explained that assessors must remove the value of non-taxable intangible assets and rights from a property's value so that only real property is assessed for property tax purposes.

Owners should take page from hotel playbook

Now tax industry professionals are asking whether the principles used to exclude intangibles from hospitality property assessments can also apply to assisted living properties. The answer to that question might have been "no" just 15 years ago, prior to the explosion in the number and sophistication of assisted living communities. At that time, it would have been impossible to argue that there were significant intangible assets and rights involved in the operation of most assisted living facilities.

But assisted living operations have become more sophisticated in recent years, incorporating more valuable and more numerous intangibles. That trend has created opportunities to reduce property taxes in the same way that hospitality operators limit tax exposure for their properties.

Today's assisted living facility is much more than a building with a license to provide convalescent care. Top-rated facilities employ staffs with a variety of expertise in caring for the aged, including highly specialized skills to care for residents suffering from memory loss due to dementia or Alzheimer's disease.

Staff-to-resident ratios can be as high as 2-to-1. And the personal care for residents occurs 24 hours a day, seven days a week, so the number of employees needed to operate an assisted living facility has greatly increased.

In addition, high-end assisted living facilities offer more services to their residents today than properties typically provided in the 1990s, making them increasingly similar to hospitality businesses. Nowadays, residents have full food and beverage services, often with a choice of several meal plans.

Assisted living facilities also offer hairdressing and barber services, laundry, housekeeping, transportation and, in some cases, staff-coordinated activities. The operator provides all of the services mentioned above in addition to any medical supervision, physical therapy or other healthcare offerings.

Nearly all of the recent improvements in assisted living reflect the increased number of intangible assets and rights that assisted living facilities must use in order to deliver the services that their residents require — and the residents' families demand.

Much like a high-end hotel or resort, the many services that upscale assisted living facilities provide to residents bear little relation to the building and location where the service delivery occurs. Rather, the trained workforce provides those services.

Generally speaking, only the building and land are subject to property taxation. Consequently, value created by the workforce and the services it provides is a non-taxable intangible asset, which must be excluded for property tax purposes.

To identify assisted living intangibles, first consider that the facility is an income-producing property. The income produced there derives from more than the rental of space. In fact, rent for residents' living space accounts for as little as one-quarter or one-third of the revenue an assisted living facility generates.

The balance of the income that assisted living facilities receive is payment for services that the workforce provides. In addition, some assisted living properties likely benefit from brand recognition or have accumulated business goodwill.

Three ways to remove intangibles from equation

Property tax practitioners have three primary ways of removing identifiable, non-taxable intangible assets and rights from the value of an assisted living enterprise.

1. Determine the cost of the land and buildings that the facility uses. This method directly values the "sticks and bricks" at the facility, and works well if the facility is fairly new so that there has been little physical deterioration. Some taxing authorities recommend this method, as does a textbook on the appraisal of assisted living facilities, published by the Appraisal Institute.

2. Identify facilities where an operator leases the land and buildings, so the rental payment only represents rent for use of the land and building. Similarly, professionals who appraise or value assisted living facilities for property tax purposes should seek sales of assisted living center land and buildings only for a proper comparison. Unfortunately, leases and sales of only land and buildings for assisted living tend to be elusive.

3. Value the specific intangible assets and rights in use and deduct the value of those intangibles from the full business enterprise value of the facility. This method applies to most assisted living facilities. Assessors already use this method for hospitality properties, so it is readily applied to assisted living.

Property taxes are a significant expense for assisted living operators. Fortunately, the hospitality industry has already blazed the path to tax relief. With some ingenuity, the taxpayer can borrow the same methods that help control hospitality property taxes and use them to reduce taxes on assisted living facilities as well.

 

CONeallCris K. O'Neall is a partner with Cahill, Davis & O'Neall LLP, the California member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Sep
23

Does a Property's Sale Price Really Equal the Taxable Market Value

The question arises all too often: Is the recent sale price of a property the best evidence of the property's taxable value?

Basic appraisal principles dictate that market value is the price upon which a willing buyer and willing seller would agree. Coming out of the recent recession, however, assessors continue to question whether the purchase prices paid for commercial or industrial properties reflect the properties' market value.

The confusion derives from the distressed sales that dominated commercial real estate transaction activity during the recession. As tenants defaulted on leases and property incomes plummeted, many owners were either compelled to sell their real estate in order to avoid foreclosure, or gave their underwater properties back to lenders. A number of lenders simply sold those assets after foreclosure at liquidation prices, adding to the volume of sales at distressed pricing levels.

Where the majority of sales of similar types of property are distressed, those sales may become the market, establishing pricing even for non-distressed sellers. To assert a higher taxable value on a property in this scenario, the assessor would have to demonstrate that these sales defy current economic conditions.

Now, as the country's economy begins to improve and property owners remain cautiously optimistic that the recession is ending, which recent sales truly represent market value? It is a challenging question for property owners and assessors seeking to use recent transactions for sales comparisons in order to determine current market value and taxable value of a property.

In many parts of the country, there was a complete dearth of sales and little construction activity during the downturn. In those areas, the sale of a property may have been the only transaction that occurred in that market in several years, with no other sales available for comparison.

With the uptick in the economy, assessors are latching onto recent transactions as fully indicative of a new market, and are inflating assessed taxable values in the process. Distinguishing the value indicated by a property's sale price remains vital to having it correctly assessed.

One reason that evaluating a sale for tax purposes requires more than just looking at the closing price is that the sale price may reflect financial incentives and tax-exempt components included to motivate the buyer or seller. For example, sale prices paid for restaurants, hotels, nursing homes and some industrial plants may reflect the value of the business enterprise, as opposed to just the real estate.

In Oregon, California and Washington, many intangible assets may be exempt from taxation for most properties. Thus, for purposes of determining the property's taxable market value, the appraiser or assessor must determine and exclude the value of the intangible rights relating to the business.

In Oregon, properties other than those used in power generation or other utility services may have tax-exempt intangible assets including goodwill, customer contract rights, patents, trademarks, copyrights, an assembled labor force, or trade secrets. Properly separating real estate value from the business enterprise value can substantially reduce the assessed value.

Additionally, an often overlooked influence on the sale price may be the existence of a sale- leaseback provision. In Oregon and many other states, real market value for tax purposes involves a willing seller and willing buyer in an open-market transaction, without consideration of the actual leases in place.

Thus, in the sale of a building fully leased to an ongoing enterprise that sets the buyer's anticipated rate of return, the assessor must extract the existing lease value and instead apply market lease and occupancy rates to arrive at the real market value for taxation purposes. In other words, whether the leases in place at a sold property are at, above, or below market rates affects the relationship of its sale price to taxable value.

Assessment requires more than simply assuming that the sale price is the sole indicator of value. For a vacant property, the sale price may be the best indicator of value. But any transaction used to establish market value for tax purposes needs to be thoroughly vetted. Taxpayers should keep these principles in mind when reviewing the assessor's process to set the taxable value of their real estate.

CfraserCynthia M. Fraser is a partner at the law firm Garvey Schubert Barer where she specializes in property tax and condemnation litigation. Ms. Fraser is the Oregon representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Ms. Fraser can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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