Property Tax Resources


How Poor Performance Can Aid Property Tax Appeals

Accounting for weak operations can buoy arguments to reduce taxable value, writes Baker Jarrell of Popp Hutcheson PLLC.

Property taxes are an ongoing headache for many commercial real estate owners, especially when their properties generate inadequate income. Assessors compound these frustrations when they value underperforming real estate as if it were operating on par with the market. By understanding the source of the poor performance, however, owners can build a compelling appeal to reduce their property's taxable value.

One of the main reasons taxing entities overvalue underperforming properties is their use of mass appraisal. The appraisal districts that value real estate for taxation typically deal with thousands of parcels contributing to hundreds of billions of dollars in market value. Mass appraisal allows these districts to systematically value large numbers of properties where performing individual appraisals would be unfeasible.

Understandably, this methodology can create confusion and frustration among property owners, who often feel their assessment does not accurately represent the specific real estate. Mass appraisal is a useful method but lacks the nuance necessary to determine the actual value of real estate and, thus, the appropriate tax levy.

Adjust to occupancy

With a standard property that operates at market-level occupancy, income and expenses create market value based on an expected rate of return. Assessors and appraisers know this as the income approach to valuation.

Additional losses should be factored into the value when the property performs below standard occupancy, however. This means that, when a property has vacancy well above the market rate, the final value must account for this gap.

The first remedy for excessive taxation on a poorly performing property is to adjust for rent loss in the income approach. For instance, if there are two otherwise comparable buildings but one maintains the market occupancy of 85 percent and the other is only at 50 percent occupancy, it does not make sense to appraise and value them equally.

Any buyer of a poorly performing property will incur significant costs to lease up the building to the market level. The costs typically include rent loss, tenant improvements and leasing commissions. In valuation, an appraiser would total the present value of these costs over the absorption period to arrive at the total discount for rent loss. The appraiser can then deduct the discount from the previously calculated value via the income approach to represent what a buyer would pay in an arm's length transaction.

Other factors

If the property's poor performance is attributable to factors other than vacancy, there are still options available in an appeal. Often, trends outside the property owner's control limit the income a particular property can generate and, consequently, the overall value. Shifts in legislation, supply and demand, or any industry-specific economics are all possible factors contributing to a reduction in earning potential. Incorporating economic obsolescence in the cost approach quantifies poor performance from these external factors.

For example, if a property has a depreciated improvement plus land value of $10 million and a market rate of return of 9 percent, it would be expected to generate $900,000 annually. If the stabilized net income before taxes is only $650,000, however, there is a deficit of $250,000. Dividing the difference by the rate of return (9 percent) determines the economic obsolescence adjustment of $2.8 million. In this scenario, the property taxes would be initially assessed at $10 million, but $7.2 million is the more accurate figure.

Lastly, what can owners do when the property is generating sufficient income today, but potential struggles loom on the horizon? The typical signal for approaching difficulty comes from a rent roll analysis, which will identify leases set to expire in the next few years. Without guaranteed rent for an extended period, property income can become volatile in tandem with economic conditions.

Potential volatility indicates an elevated risk, for which any buyer would demand an increased rate of return. As a result, the capitalization rate needs to be adjusted upward to account for the higher risk when compared to a similar property with greater cash-flow certainty. Because of their inverse relationship, a higher cap rate will result in a lower property value. Initially, the appraisal district will be unaware of the income volatility and will assess taxes at the incorrect value.

To illustrate, if a property in a specific market typically requires an 8 percent capitalization but is found to carry excess risk, the cap rate may need to be 9 percent or higher for that property. If the hypothetical building generates $600,000 in net operating income, the cap rate adjustment decreases taxable value by 11 percent. This shows how understanding the property's expected future performance helps estimate at a more accurate market value.

When it comes to determining the taxable value of real property, the owner is always going to have access to the most helpful information for showing how the property performs. It is unrealistic to assume an appraisal district can reach the same conclusion of value while using less specific information. As such, it is the responsibility of the owner's tax team to use this information in establishing a more accurate and fair opinion of value.

Baker Jarrell is a property tax consultant at the law firm Popp Hutcheson PLLC, the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. The firm focuses its practice on defending owners in property tax disputes.
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3 Keys to Appealing an Unfair Assessment

Spencer Fane's Michael Miller on the critical steps for finding tax relief.

This is a challenging time in the property tax world. Pandemic-era federal assistance programs have dried up, increasing communities' appetite for tax dollars to deal with crime, homelessness, transportation and other issues. Recognizing that inflation has put taxpayers under pressure, governments may offer tax relief to homeowners, their voters, but not to the commercial property owner.

In Colorado, a November ballot issue would reduce the valuation of a residential property by $40,000 and of a commercial property by $50,000. This will be little help to an owner of a $2 million commercial property.

Relief for the commercial property owner must instead come from a deep dive into the assessor's valuation, best performed by the property owner and an experienced property tax professional working as a team. What follows are key stages for preparing an appeal.

1. Understand and observe all filing deadlines.

Every state has a deadline for starting the appeal process. If a taxpayer misses that deadline, they lose the right to appeal. In some states, after paying their tax, a taxpayer might be allowed to file for an abatement sometime later.

It is important to provide the property tax professional with relevant information in sufficient time to analyze it before filing the appeal. This is a challenge in many cases, such as when the taxpayer receiving tax notices is out of state and their advisor is local. Contacting the advisor before tax notices go out can provide a head start, often enabling the advisor to find the property's taxable value before the notice arrives.

2. Critically analyze the assessment basis.

By itself, a substantial value increase does not qualify as a reason to appeal. Often, the assessor will justify the increase based on the general market strength shown in substantially rising prices. The taxpayer must ask, is this for the entire county, or for this specific type of property in this specific location?

A recent example illustrates how assessors' generalizations can overstate an individual property's value change. As our firm appealed a client's assessment in an expensive resort area, the local newspaper quoted the assessor stating that prices had increased 50% or even more. Available sales of comparable properties all occurred at least a year prior to the valuation period, while one was near the valuation period.

The assessor trended the earlier sales to the valuation period by making a 50% adjustment to each sales price. However, our team compared the most recent year-ago sale with the current sale of a comparable property in the same location, showing that the price per square foot only went up 14%. It was clear the 50% increase was a mass appraisal number covering the entire county, while prices in the subject property's submarket increased at a much slower pace. This deep dive yielded results in the appeal.

3. Analyze the assessor's comparable sales.

Most jurisdictions require assessors to value the fee simple estate, the real estate alone. Assessors have attempted to debate what this means, but what it clearly does not mean is a sale price based upon the income generated by a lease. Nor can the taxable value be based on the success of the business operated from the property.

Simply stated, fee simple value must be limited to the real estate, not the business. When applying this to an owner-occupied property, this means a fee-simple buyer would be purchasing a vacant property. Value is based on the price at which a willing buyer would buy, and a willing seller would sell, the property. And in the sale of an owner-occupied property, there is no lease.

Often in this situation, the assessor will nevertheless use the sale of a leased property as a comparable. It is not comparable, because the buyer is buying the income stream from the lease, not just the bricks and mortar. Moreover, the rent seldom reflects current market rent. Possibly the lease was signed when rents were higher than today, the lease escalated rents automatically, or the landlord agreed to build the property according to the tenant's specifications and increased the rent by the amortized cost. Every lease is unique. The sale of a leased property is simply not the same as the sale of a property without a lease.

While examining income properties within the assessor's comparable sales, be sure to analyze the income's source. Taxable values of income-producing properties are based on income derived from the real estate and not income derived from other sources.

A hotel buyer, for example, is buying not only the bricks and mortar, but also the flag or brand, and the hotel's reputation. These are intangibles included in the acquisition price. However, intangible value is not subject to a property tax.

Another example of this concept is seniors housing. Seniors housing has numerous profit centers beyond rent for the room. It may have a beauty shop, a physical therapy center, a recreation facility such as a bowling alley, special medical services and many other offerings. The resident pays rent, but also pays extra for the many services. For property tax purposes, the income used to determine value must be separated between business cashflow and income generated from the real estate.

Property tax in the current environment can indeed present a challenge, but it need not be overwhelming. The taxpayer must analyze the assessor's value in depth to find factors that would result in a successful appeal. It may start with sticker shock over the assessor's notice, but an experienced tax professional's analysis can level the playing field between the assessor aggressively pursuing increased funding and the property tax owner looking for tax relief.

Michael Miller is Of Counsel in the Denver office of Spencer Fane, the Colorado member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Don’t Ignore Business Personal Property Taxes

Blas Ortiz and Andrew Albright of Popp Hutcheson PLLC offer tips for decreasing liabilities.

For property tax purposes, commercial property owners concern themselves primarily with the administrative appeals and real estate taxes, while often ignoring corresponding business personal property. By doing so, those owners forfeit many tax-saving opportunities when complying with state filing requirements for and appealing taxes on business personal property. Since the majority of states tax business personal property in some form or fashion, commercial owners should follow several tax saving tips when preparing annual compliance filings.

Conduct the personal property test

Commercial property owners must realize that personal property tax savings begin during the compliance phase when formally rendering personal property value to the local assessor. This typically starts with what is reflected on the fixed asset list. In many states, taxable personal property represents anything that's not real estate, is income-producing, and not considered intangible. Generally speaking, the primary test to determine whether an asset is personal property rests on the answer to the following question: If the asset were removed from the real estate, would the real estate be irreparably damaged? A yes answer means the asset would likely be real estate. Removing real estate line items becomes crucial. Otherwise it amounts to double taxation if an asset more appropriately characterized as real estate also gets taxed as personal property. Properly delineating each asset line item as personal property or real estate is a vital first step to lowering personal property taxes.

Classify assets properly

Taxpayers will find that proper asset classification holds another key to decreasing tax liability. Certain assets may be depreciated on shorter age-life schedules if described and classified properly when reported to the business personal property assessor. The North American Industry Classification System, along with various cost estimator and valuation services provide general classification and age-life guidance when finding acceptable depreciation schedules for a company's fixed assets. A local property assessor or state department of revenue may also provide personal property classification and depreciation schedules, though it may not always be clear how that information was derived. If applicable, include potential obsolescence factors that may affect the final opinion of value. Many states periodically audit tangible personal property returns, so be prepared to explain any deviation from the assessor's depreciation schedules and the inclusion of obsolescence or inutility factors.

Understand depreciation

Commercial owners must also keep in mind that the net book value of assets on a fixed asset list, although pertinent for accounting purposes, is not considered when calculating ad valorem property tax liability. Accounting guidelines allow for depreciating assets differently than property tax depreciation. For accounting purposes, an asset is usually depreciated at a set amount each year over the asset's total typical life until it depreciates to $0. Those items often remain on the books even if the assets have been disposed of because they no longer have accounting value and, therefore, do not impact the overall book value.

However, for property tax purposes, assets are never fully depreciated to $0 value. Instead, they are depreciated to a residual value anywhere between 5 percent to 20 percent of the original cost. That being the case, when reporting assets, the preparer may look to the local assessors' asset depreciation schedules to determine each asset's depreciated value based on the asset's current age. As a corollary to that, the preparer should also confirm whether any disposed or "ghost assets" remain on the books, and if so, remove them from the fixed asset list before rendering.

Consider intangibles

The removal of intangible property continues to be a fundamental step often overlooked when reviewing fixed asset ledgers for the purpose of filing self-reported personal property renditions and returns. In certain states, items such as software and warranties are nontaxable. While being mindful of each state's specific guidelines for intangible property, consider embedded intangibles which might be identified within an asset's total capitalized cost. Removing intangible personal property line items, in accordance with state and jurisdictional laws and guidelines, can preserve potential front-end tax savings for many years.

File properly and on-time

Knowing when to report is just as important as knowing how to report. To avoid late filing penalties, be aware of the filing requirements and methods for each specific jurisdiction, such as postmark and submission deadline rules. Be aware that many assessors and appraisal districts are shifting to electronic filing vs. traditional hard copy filing. Additionally, be certain to properly identify the property by identification number, owner name and address.

Business personal property should not be ignored when determining a company's property tax liability. Following consistent and informed methodologies when filing tangible personal property compliance can create viable tax savings opportunities year after year.

Andrew Albright
Blas Ortiz
Blas Ortiz is a director and Andrew Albright a manager at Popp Hutcheson PLLC, the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. The firm focuses its practice on property tax disputes.
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Will a Recession Lower Your Property Taxes?

Amid talk of a downturn, Rachel Duck and Nick Machan of Popp Hutcheson PLLC offer some guidance.

As interest rates rise to combat inflation, recessionary pressure is the highest it's been since 2009. Moving into 2023, shifting market conditions have pummeled real estate values, many of which had experienced dramatic upswings during the prior 18 months. With market uncertainty and recessionary conditions bearing down upon them, property owners across the country may hope to see some relief in property tax assessments.

But does a recession equal falling property tax liability? To answer this question, it is essential to understand how a recession could influence assessed values of the various property types.

How Recessions Impact Market Values

During a recession, interest rates typically continue to climb. In commercial real estate, rising debt costs can translate to reduced transaction volume and price contraction as capitalization rates reflect buyers' increased risk. Worsening job markets and weak consumer spending may impact the demand for various property types.

Multifamily tends to be less sensitive than other property types to recessionary market conditions. During downturns, risk-averse individuals tend to prefer rental housing over homeownership. Additionally, inflationary costs can delay multifamily construction and limit supply, which helps avert supply surges that can lead to steep drops in rent and occupancy. To illustrate, while office, industrial, and retail rent fell between 14 percent and 17 percent during the last recession, multifamily rent only declined 8 percent overall.

Retail property responses to a recession vary by type, but market growth rates will likely slow across all types. Brick-and-mortar stores were already facing a potential "retail apocalypse" prior to COVID-19 as consumers increasingly shopped online. Traditional shopping malls could be the most severely impacted retail properties in a recession. Many Class B and C malls already face closure, driving many owners to repurpose them into industrial, multifamily, distribution, and even healthcare space.

Hospitality is among the most vulnerable property types in a recession, and hotel performance has been one of the most volatile over the last few years. Revenues for many properties cratered during the pandemic and some have been slower to recover than others. However, many hotels had recovered to near pre-pandemic levels in 2022, with some year-end 2022 revenues surpassing 2019 levels. Moving into a recession, pent-up leisure demand could help balance out the decline of business travel as businesses cut costs. Perhaps the biggest question marks in predicting the impact of a recession on hotel performance involve business travel volume and hotels' ability to sustain high average daily rates they adopted to increase revenue per available room and combat falling occupancy.

How Do Market Fundamentals Affect Assessed Values?

Assessors in most jurisdictions base assessments on some variation of market value, which is fundamentally the value at which the property would transact on the open market. Assessors weigh cost, income, and sales data to determine their initial valuations. They must, however, also value thousands of properties quickly, and therefore rely on mass appraisal techniques that may omit factors affecting individual properties.

Recessionary market conditions affect all three of the valuation approaches but will vary by property type, geographic area, and individual property metrics. For these reasons, a property owner's first step after receiving their assessments should be to determine whether the valuation is reasonable based on the individual market factors impacting their property as of the valuation date.

Assessors in most jurisdictions must also consider the equity of property values. Many states have laws protecting the equitable value of comparable properties, and assessors are generally intent upon making fair assessments.

Tricky Tax Rates

In addition to assessed value, the second piece of a property owner's tax liability is the tax rate. Should 2023's overall appraisal roll or tax base decline, property owners should not necessarily expect an equivalent decline in their tax liability.

Most taxing entities set their rates separately from, and usually after, assessors' determination of property values. Typically, there is an inverse relationship between a jurisdiction's tax rates and the tax base. If total valuations fall significantly, it is possible—and maybe even likely—that tax rates will rise.

As an example, imagine you own a small apartment building outside of Dallas, Texas. Due to market factors, your property's value fell to $9 million as of the Jan. 1, 2023, valuation date, down 10 percent from $10 million a year earlier. Excited, you prepare to pay a correspondingly 10 percent smaller amount on your 2023 property taxes.

The overall appraisal roll declined as well, however, and your applicable 2023 tax rate increased from 2.4 percent to 2.472 percent as a result. Instead of a 10 percent decrease, your liability shrinks 7.3 percent to $222,480, down from $240,000 the year before.

No one can predict tax rates with certainty, but owners would be wise to budget conservatively for anticipated tax liabilities. A 40 percent decline in revenue may not translate to a 40 percent decline in the assessed property valuation or ultimate tax liability for the tax year ahead. Partnering with an experienced, local property tax advisor can give owners peace of mind as they navigate the shifting market in this tumultuous year.

Rachel Duck is a principal and senior property tax consultant and Nick Machan is a manager and property tax consultant at the Austin, Texas law firm Popp Hutcheson PLLC, the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. The firm specializes exclusively in property tax.
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The Sanctity of Fair and Square Property Taxation

Assessors often need reminding that property owners are entitled to equal, uniform treatment, notes Stephen Grant of Popp Hutcheson PLLC.

Across the country, state constitutions require that property taxes be equally and uniformly assessed. And thank goodness for that.

Without such constitutional guarantees, local taxing authorities would have the unfettered ability to single out individuals, property types, or categories of property owners for taxation by a different standard, possibly taxing them out of existence.

Fairness Trumps Market Value

Generally, taxpayers can challenge their property tax assessments by arguing that the appraised value of their property exceeds its fair market value. However, if a conflict exists between taxation at market value and equal and uniform taxation, equal and uniform taxation must prevail. Various court cases have upheld this principle and underscore its importance. In short, the guarantee of equal and uniform taxation is designed to protect taxpayers and ensure equal treatment of all commercial and residential property owners.

Despite constitutional protections, unequal appraisal by local taxing authorities persists. There are several reasons for this, including data errors and tax officials' willingness to single out recently sold properties to assign value, commonly referred to as "sales chasing."

Tax assessors continue to appraise recently sold property at or near its actual sales price but leave the taxable values of other, similar properties unchanged. A business cannot compete in its respective market if it is being taxed more heavily than its competitors. Compounding the issue, many commercial leases pass through property tax expenses to tenants who ultimately bear the brunt of higher property tax bills.

Further, a property appraised according to the high end of market values may nonetheless be unequally assessed if other comparable properties are valued at the lower end of the market. Over time, the variation created by that practice would result in affected property owners being saddled with higher assessments and potentially higher tax liabilities than similarly situated properties. At the minimum, this practice raises a question of whether properties within a taxing district are being taxed to an equal and uniform standard.

Taxpayer Recourse

When one parcel is unequally appraised compared to similar properties, what recourse do taxpayers have to ensure equitable taxation?

While most state constitutions require that taxation be equal and uniform, only a few states have adopted a statutory remedy to accomplish that goal. Where available, the statutory unequal appraisal provision permits taxpayers to appeal or protest when an assessor has appraised their property using a different standard than those used for other properties. Accordingly, a property owner can seek relief if their property was treated differently from other properties in the same tax base, even when their appraised value does not exceed fair market value.

Texas has what may be the most robust statutory unequal appraisal remedy in the country. The provision states that a property shall be valued for property taxes based upon the median level of appraisal of a reasonable number of comparable properties, appropriately adjusted.

When selecting comparable properties, it is important to consider several factors, including but not limited to the properties' use, competitive set, neighborhood, and size. While the Texas statute does not define what a "reasonable number" of comparable properties is, consideration should be given to the quality and number of comparable properties used.

After selecting a reasonable number of comparable properties, adjustments are then made to the appraised values of the comparable properties to put them on equal footing. The adjustments account for differences between the selected comparable properties and the subject property, such as location, age, and size. When determining what adjustments to make, the focus should be on elements that directly affect the properties' value.

The final step is to compare the median adjusted value per square foot of the comparable properties and see how they correlate to the subject property. If the subject property has a higher value per square foot than the calculated median, then there is an equity issue.

Fair Fights

The equal and uniform remedy serves as a helpful tool for taxpayers when challenging their property's assessed value. For instance, disputing a property's market value may not be viable in some situations, and a taxpayer's only recourse may be to argue that their property has been unequally appraised.

For example, a hypothetical taxpayer purchased a 300,000-square-foot, Class-A office building for $55 million during the prior tax year. The appraisal district subsequently assessed the building for property tax purposes based upon the purchase price, despite assessing other Class-A office buildings of similar size and location at a lower price per square foot.

By engaging in sales chasing, the appraisal district has unfairly appraised the subject property in relation to its competitors. However, if the state had adopted an equal and uniform remedy, then the taxpayer could challenge the property's value on the grounds that it was unequally appraised even if the assessor deemed the sales price to be fair market value for property tax purposes.

Challenging tax values on an equal and uniform basis is an effective remedy. It addresses the practice of sales chasing, counters assessors' tendency to use high sales prices to raise property taxes across an entire market and offers a coherent alternative to simply arguing that an assessment is excessive.

The unequal appraisal remedy is a readily accessible argument, particularly for homeowners, because it provides taxpayers with a more straightforward option than a market value appeal. It enables taxpayers to forego the high cost of procuring expert appraisers by allowing them to instead build an argument by identifying a representative sample of similar properties from the appraisal district's own website.

In sum, if your state has an equal and uniform remedy—use it. If your state does not have an equal and uniform remedy, consider urging lawmakers to adopt one in your state.

Stephen Grant is an associate at the Austin, Texas, law firm Popp Hutcheson PLLC. Popp Hutcheson focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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For Office Owners, It's Time to Make Lemonade

Attorney Molly Phelan on how to reduce property tax liability.

Office property owners may feel they are getting squeezed from all sides in 2022, but the right strategy can help them turn lemons into lemonade by reducing property tax liability.

The Bad News: Inflation was up 7.1 percent year over year in December, its highest rate since 1982.

The Culprits: Supply chain issues (raw material shortages, seaport congestion and logistic limitations), labor shortages (general wages up 5 percent, retail wages up 15 percent), and a housing shortage (national apartment vacancy at 2 percent and average rent growth above 15 percent year over year).

The Response: The Federal Reserve signals a shift to tightening monetary policy, indicating future interest rate increases.

The office market is facing headwinds of its own. Numerous corporations have announced permanent shifts to hybrid in-person/work-from-home operations for office staff, significantly decreasing demand for office space. Rental rates have dropped anywhere from 5 percent to 33 percent during the pandemic, depending on market and class. Although Manhattan rents for Class A space have increased 2 percent in the past year, the net operating income for these properties is down 7 percent due to increased costs and lease concessions.

In the Midwest, office landlords previously expected to provide one month of free rent per year to woo tenants. Now brokers are reporting a free rent ratio of 1.6 months per year, with leases over 10 years pushing two months per year. Tenant improvement costs have increased approximately 44 percent since the beginning of the pandemic, and turnaround time for occupancy has increased from 30 days to 60 days.

Farther down the balance sheet, things aren't much better. Energy prices tracked in the S&P Goldman Sachs Commodity Index ended 2021 59 percent higher than in the beginning of the year. Labor costs, from janitorial staff to property managers, have increased as well.

The Good News: Although the market has handed office landlords a bucket of lemons that are putting downward pressure on average net incomes, landlords can make lemonade from this data to significantly reduce their real property tax liabilities, even if their NOI has not yet taken a hit.

The Strategy: Pivoting from a direct capitalization value analysis to a discounted cash flow approach can capture the effects of investor outlook data on a property's market value. Appraisers and assessors who value office properties typically figure direct capitalization in their income analysis to estimate fee simple market values. This is standard practice in stabilized markets but is a poor fit to current conditions.

With the dramatic changes and uncertainty in the office market, appraisers should be conducting discounted cash flow analyses, which identify the market conditions investors are anticipating as of the valuation date. The DCF analysis examines the market like an investor would, considering trends such as rental rate reductions and increases in operation costs and vacancy. These factors are then built into pricing models.

Savvy investors are aware of a sleeping giant that few assessors or taxpayers are identifying, and that is shadow vacancy. While landlords are still collecting income on current leases, there is no reflection of the market's precarious situation in their income. A DCF, however, identifies upcoming vacancy and reductions in market rents, which may have a significant effect on NOI.

Methods Compared

Let's compare the two approaches, beginning with a look at direct capitalization applied to a 500,000-square-foot office complex. As of Jan. 1, 2022, its tenants are paying $25 per square foot in net rent, or a maximum $12.5 million in annual attainable rent. Stabilized vacancy is 8 percent and operating expenses are 20 percent, or $2.3 million annually. A capitalization rate of 6.5 percent indicates a market value of $141,538,462. In Illinois, outside of Cook County, an assessment level of 33.33 percent and a tax rate of 5 percent equates to a tax liability of $2,358,738.

 By contrast, a DCF model would also reflect that market rent has dropped to $23 per square foot, reducing the asset's revenue capacity to $11.5 million per year. It would show that market-wide vacancy is expected to rise to 12 percent, that expenses have increased to 27 percent, and that the subject property has 100,000 square feet offered for sublet at $20 per square foot. Additionally, 20 percent of its leases mature in the next two years and a total of 50 percent of its leases will end within five years.

Paired with the estimated increases in interest rates as indicated by the Federal Reserve, the cap rate could easily increase to 7.5 percent for the specific property. The DCF analysis using these factors indicates the market value is $102,120,000 and the taxes are reduced to $1,701,830. The difference in tax liability is $656,909, or a reduction to the tenants of $1.31 per square foot in tax pass throughs.

Commercial real estate investors across the board rely on the discounted cash flow model, but few taxpayers or their advisors use the strategy in contesting property assessments. Given the additional information and analysis required to perform the analysis, not all appraisers can properly construct a credible discounted cash flow model.

For success, it is critical that both the taxpayer's advisor and appraiser be able to knowledgeably discuss the differences between the two models, and in an assessment appeal, be able to explain why the discounted cash flow model is a more reliable methodology in this market.

To remain competitive, landlords must reduce occupancy costs for tenants and their own holding costs as they take back more vacant space. Even if an assessment has been lowered or remained stable over the past few years, having a credible team provide an alternative view can offer a competitive advantage moving forward.

Molly Phelan is a partner in the Chicago office of law firm Siegel Jennings Co. LPA, the Illinois, Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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