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Property Tax Resources

Aug
08

How to Challenge Your Property Tax Assessments

A step-by-step guide from a veteran attorney to navigating the process of disputing real estate valuations by local government.

By Jerome Wallach, Esq.

In most jurisdictions, taxpayers may meet with the assessor or assessor's representative to deliberate and possibly resolve issues concerning taxable real estate valuation.

First, contact the assessor's office to request a meeting. Getting past recorded messages may be a challenge in some instances, but talking to a human being is necessary.

During that initial phone call, be prepared to describe the problem and point of the discussion, then ask for a date and time to meet. Be sure to request the meeting in sufficient advance of filing deadlines for any appeal process.

Before the meeting, identify an objective (typically a lower assessment) and a plan to achieve that outcome. Be optimistic, but recognize that the assessor's office may reject the taxpayer's position. During the discussion, be reasonably flexible; passion and anger are seldom persuasive and will detract from an otherwise sound argument.

Fix the facts

There are a number of valid concerns other than overvaluation which, if properly addressed and corrected, can result in significant savings.

The most obvious reason to discuss the property with the assessor is the need to correct a simple mistake on the part of the assessor's office. Computer-generated assessed values are now widely used and accepted. The resulting values are no better than the data fed into the database, so review assessments with an eye on the broad picture.

Pay particular attention to the address and all measurements, which are common sources of error. Be sure the property hasn't been confused with some other property of greater value. If the property is improved, review the records available on the assessor's website to see if the improvements are accurately described and that the land is properly measured. Call any mistake of fact to the assessor's attention.

Most jurisdictions recognize varying degrees of assessment value depending on property classification. Typical classifications are commercial, residential and agricultural. Each class is assessed at a different percentage of its market value.

Usage is the primary classification determinant. For instance, undeveloped property zoned commercial may be a productive farm, in which case its classification would be agricultural. Point out to the assessor that the property is being farmed and was so used on the tax valuation day. Bring photos and records to establish that farming was the use on value day, and continues to be so.

Make a similar argument in any situation where the assessor classified the property higher than its actual use. Along the lines of classification, some properties are exempt from taxation if used regularly for charitable, religious and educational purposes.

Unless the use is easily recognized and accepted, it is unlikely the assessor's office will alter its opinion in an informal meeting. The meeting is an effort to convince the assessor that the property is overvalued for tax purposes.

Study the concepts

Unless the taxpayer is a valuation expert, it's probable he or she is meeting with someone who knows more about property values than the owner does, or at least believes that to be the case. A fundamental understanding of valuation methods is critical to a meaningful dialogue.

Volumes are written on the subject and the law books are full of cases dealing with value concepts. The following provides a thumbnail sketch of these concepts.

The three approaches accepted by all valuation experts are cost, income, and market or sales comparison. Assessors use these approaches daily, and look at property through these lenses.

Cost. If the property was purchased and improved with a new structure or structures within the last five years, the total cost of acquisition and improvement is a good indicator of what the property is worth and how it should be valued for tax purposes.

In the absence of a recent transaction, a credible opinion of the cost to replace the improvements on the property may be useful. There are manuals recognized by value experts that may assist in obtaining and presenting such an opinion as evidence.

Market. If the house next door, built just like the subject home, sold yesterday, then that sale price is a good indicator of the value of the subject house. On its face, the method of seeing what similar properties sell for seems the simplest and most direct way to determine a property's value.

If only it were so. The more variances there are between the properties, the greater the comparison challenge. Differences can include location, date of sale, condition of the property—the list goes on.

In dealing with the assessor, present listings and recent sales of properties similar to the subject property, if possible.

Income. In short, this is the present value of future benefits, and is the price a knowledgeable person would pay to acquire the future income stream of a given property.

Under this approach, value is typically determined by dividing the net income by the capitalization rate, or the buyer's initial annual rate of return. The capitalization rate, or cap rate, provides a formula for value calculation, and the higher the cap rate, the lower the value conclusion. The assessor will have a firm opinion of the cap rate and is unlikely to be swayed, but it's worth a try.

In many instances, arguing the general market cap rate with the assessor is futile. A better approach may be to show why the assessor's cap rate should be adjusted because of conditions unique to the property. Look for conditions that are beyond the owner's control and constitute risk to future income.

Arguments challenging the assessor's cap rate could include the greater risk of lost income due to external factors, such as a highway change or a major demographic shift.

Assessors and their staff consider themselves professionals meriting respect as public servants. To achieve any result from conversing with them, they should be dealt with accordingly.

At the conclusion of the meeting, be sure to document any agreement reached.



Jerome Wallach is a partner at The Wallach Law Firm in St. Louis, the Missouri State 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..
Sep
01

Don't Let Taxing Authorities Kill Your Deal

Tips from a veteran attorney on handling the assessments that can spell the difference between a successful closing and coming up short.

Almost every week, I get calls from brokers or investors who want to know how property taxes could impact a potential purchase. With property taxes forming the largest variable expense in most real estate acquisitions, investors should question the tax implications of every deal.

In some jurisdictions, the effective property tax can reach 5 percent of market value, so an unexpected increase can cause a deal to go under. With planning and an understanding of the local environment, however, investors can fully appreciate the risks and expenses, and may be able to come in with a winning bid in a tight market.

Most of the inquiries I receive relate to properties in Ohio or Pennsylvania, where school districts can, and do, file appeals to raise taxes on real estate. In those states, the aggressor is often a school board that seeks to value an asset based on its recent sale price. In other states, it may be the county assessor. Some states have deemed it unconstitutional to "chase" sales in setting taxable value.

Know your district

Knowing which states have aggressive taxing authorities can reveal potential problems, but familiarity with those agencies and their personnel is the key to deciding whether to walk away from a deal or to stay and find a creative solution, resulting in a deal that is favorable to everyone.

An examination of any real estate purchase, whether office, retail, hotel, etc., in the context of various taxing districts' behavior illustrates the importance of thoroughly knowing your taxing authority. In all the following examples, assume that the property is uniformly assessed and that the current assessment is consistent with the value of competing properties.

Also assume that the property is assessed for less than the proposed sale price, and that increasing taxable value to the amount of the purchase price would ruin the deal.The first example takes the case of a taxing district with an aggressive, unyielding district attorney. The tax district's counsel is unwilling or unable to see that the tax increase will end up lowering the property's value below the purchase price.

In this scenario, the assessment is raised to the purchase price, which becomes part of the tax budget. Since taxing entities typically establish tax rates based on the overall assessment of the community, the tax district only gets a single year's increase in tax revenue. In subsequent years, the newly increased tax burden weighs down the property's market value, ending in an eventual refund of taxes. The net effect is a loss for the district and a loss for the taxpayer, though the taxpayer eventually recovers some of those losses. It is altogether a lose-lose situation.

Big gambles

The relatively passive school district occasionally files an increase appeal and generally isn't driven to get the last penny from the taxpayer. At first this seems like a good situation. Although a passive district may be less difficult to deal with than a more aggressive counterpart, it still leaves the buyer with a great deal of uncertainty. Risking large sums of money on chance is gambling, not investing.

The advice to the investor in a passive district rests greatly upon the taxpayer's risk tolerance, and upon local counsel's experience with how cases are typically settled. In some instances, the investor could assume that the case would be settled similarly to past cases. This requires counsel that has enough experience with the district to gauge the risk as well as the possible outcome. It also requires that the buyer fully understand the nature of the risk.

Finally, there are districts with counsel that is both reasonable and creative. In that situation, attorneys have been able to resolve tax questions with the district in advance of closing. This allows for the obvious decrease in risk. As in the previous example, it takes a great deal of experience with the opposing attorney.

Of note, approaching a district early can produce a better result. Taxing authorities have become more likely to pursue appeals of assessments, and the chances that a sale will go unnoticed—and that an assessment will go unchanged—are becoming slimmer.

Due diligence means more than determining what might happen; it requires arranging the deal to whatever extent is possible to bring about the desired outcome. Paper the file with an appraisal that satisfies any allocations, and make notations in the purchase agreement that support the tax strategy.

Being able to explain the nature of the purchase later in a tax hearing is important, but having facts and documents that support those assertions is much more valuable. With the right opportunity and preparation, an investor may be able to enter into an acquisition while eliminating risk that has driven away the competition.

J. Kieran Jennings is a Partner at the law firm Siegel Jennings Co, L.P.A., which has offices in Cleveland and Pittsburgh. The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. Kieran can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
May
25

Property Tax Tip: Beware of Misleading Comp Sales

Are you challenging an assessment?  

A veteran tax attorney urges a close look at sales comps used by the assessor, which may not reflect your asset's true market value.

To estimate a property’s value for taxation, assessors customarily draw on in-house databases.  Sales chosen for comparison are selected on the basis of general characteristics, such as location, use and zoning.

However, those characteristics do not tell the entire story. To begin with, databases are neither designed nor maintained to record crucial details. Although buyer motivation is assumed to be implicit within the transaction that information is rarely included, if ever.

In practice, no two property sales are identical. In order for the assessor to draw value conclusions, comparisons must reflect adjustments for the unique characteristics affecting the price. A real property transaction may meet one standard of a market sale: the arm’s-length test, which establishes that the buyer and seller are independent and acting in their own interest.

FINDING THE MOTIVE

Nevertheless, the taxpayer must examine the buyer’s motivation, which may very well turn out to disqualify the transaction as a comparable market sale. If the buyer’s needs are unique to that transaction, reflecting a motive that other investors are unlikely to share or value, that disqualifies the exchange as a valid transaction for comparison.

The assessor’s records should include such basic information as the buyer and seller, the property’s size and location and the closing date. This provides a starting point for further inquiry.

In many instances, the needs of the seller or buyer create an exchange value unique to the parties and do not reflect market value. They may include one or more of the following situations.

Strategic premium. The buyer under this scenario is protecting its own enterprise by eliminating opportunities for competitors to move into its trade area. An owner of convenience stores that sell gasoline, for example, may acquire sites likely to attract other operators, impose deed restrictions that preclude competition, and resell the restricted property. To that convenience-store owner, the value of the deal is to enhance sales volume by eliminating competition. Other categories of retail chains may employ the strategy. One big-box retailer typically imposes deed restrictions on sites it vacates, thus thwarting competitors from moving into its former space.

Part of a larger deal. The assignment of value within a portfolio transaction is always subject to question. When investors buy multiple properties in a single deal, they may be compelled to take on some under-performing assets along with the most desirable ones. For that reason, values assigned to individual assets in the transaction may be arbitrary, or at best driven by other priorities, not the least of which may be depreciation schedules for federal tax purposes.

Unique buyer needs. A business that must expand its footprint to keep growing has two choices: Buy the property next door, or move to a larger location. The value of the neighboring property to that buyer does not necessarily reflect how the market would typically value the property, but indicates only the buyer’s need at that time.

Sale-leasebacks. The transfer of a property with a leaseback agreement is more a financing arrangement than a conventional sale. It generates cash for the seller and returns to the buyer through lease payments that may bear little or no relation to actual market lease rates. The value in exchange lies in the entirety of the arrangement, which is essentially equivalent to a loan secured by a deed of trust that includes outside collateral.

Assemblage. In order to create a parcel large enough to meet its needs, a buyer may acquire several tracts to create a single property. The individual parcels cease to exist separately and become an undefined part of the new, larger assemblage. Sometimes the owner of the key tract—perhaps the final one required to complete the assemblage—is able to extract a higher price than the property would otherwise command. To the buyer, it is a must-have piece without which the project cannot be completed. Since the buyer pays more than the market value, the excessive price is an unreliable barometer.

These examples demonstrate that the values an assessor references as comparable purchase prices may well be misleading. Indeed, the prices paid for those assets regularly stem from strategic priorities, rather than from actual market. By carefully examining the assessor’s database of comparable sales, taxpayers can reduce property assessments that do not reflect the fair market value of a property.

 

Wallach90Jerome Wallach is the senior partner in The Wallach Law Firm based in St. Louis, Missouri. The firm is the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. Jerry Wallach can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Apr
17

Solid Base: Proper Lease Structures Can Reduce Property Taxes

In Washington, D.C., as in so many jurisdictions throughout the country, commercial property assessments and taxes have steadily increased for the last five years.  For large office buildings in the District, real estate taxes now constitute an approximately 45 percent slice of the expense pie.  It is not surprising, then, that these tax hikes are generating mounting concern from landlords and tenants, with each side seeking to minimize the impact on the bottom line.

Triple-net leases enable landlords to pass increased property tax expenses to tenants, yet that situation tends to be the exception.  Most office tenants in Washington and other major markets lease space on a full-service basis, so that occupants are typically responsible for increases in real estate taxes only over a pre-established base.

Given this prevailing lease structure, tenants are become increasingly sensitive to how the base is structured.  During the past two years, we’ve noticed a significant uptick in requests from landlords for help with structuring, interpreting and negotiating base years.  The best advice can be summed up as: “Be prepared, be precise and be flexible.”

Be Prepared

Real estate taxes are generally the single largest expense for almost any owner, no matter the state in which the property exists.

During negotiations, landlords should recognize the significance of this cost to the tenant, and assume that the tenant will do the same.  This means that a landlord needs a clear understanding of the property’s current and projected real estate tax situation.

For stabilized properties, current property taxes are a reliable indicator of future taxes, prior to adjustments for changing market conditions.  For new construction or recently renovated properties, however, property taxes can spike in the years following substantial completion.  Understanding a property’s current and likely future assessment will place the landlord in the best possible position during negotiations.

Too often, however, landlords reach out to property tax counsel at the tail end of lease negotiations, after tenants and landlord have already exchanged lease language.  Rather, landlords should consult counsel at the outset of negotiations so that owner and adviser understand the property’s current and projected real estate taxes.

Be Precise

As with any lease clause, precision matters in property tax provisions.  Base-year disputes most often arise when leases use boilerplate language which is either open for interpretation or simply does not apply to the local jurisdiction.  Often this language relies on standard broker/landlord leases and uses generic terms or those that do not clearly apply to the assessing jurisdiction.

Moreover, imprecise language increases the likelihood that costly disputes will arise.  Concerns about base-year language often stalls dispositions or scuttles them altogether.  To minimize the chances of such mishaps, tax-related language should be tailored to the property and jurisdiction.  Again, consulting local property tax counsel is crucial.

Flexibility is Key

There are many ways to negotiate a real estate tax recovery clause.  In the Washington, D.C., metro, standard practice is to set either the first year of the lease or first full calendar year of the lease.  While this standard practice has some superficial logic, it may result in a base year that comprises multiple fiscal years.  For example, Washington’s fiscal year runs from October to September.  As a result, any base year patterned on the calendar year will necessarily require two assessments and could spark a dispute if those assessments differ significantly.

Mindful of this possibility, some landlords and tenants prefer to set base years on the District’s fiscal calendar so that only one assessment will be implicated.  Sometimes, however, the parties are unable to agree on a time period for the base year.  In such cases, taxpayers should shift from a temporal approach to a numeric approach.

For example, if the parties are at loggerheads over whether the base year should be 2016 or 2017, they can simply set a specific assessment or tax amount.  Taking that step can reduce the influence of chance in establishing the base.

Given the outsized importance of real estate taxes to the bottom line, managing these costs is imperative.  While this calls for engaging local counsel to review and appeal the property’s assessment, it should also include working with counsel at the front end to assist in developing appropriate lease language.

cryder scott jpg

Scott B. Cryder is a partner in the law firm of Wilkes Artis Chartered, the DIstrict of Columbia member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.  He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Nov
01

Tax Trauma - How Higher Assessments Can Cause Lower Net Rents

Resurgent demand for commercial real estate is driving sale prices to record highs, pressuring assessors to increase taxable property values substantially. In the Minneapolis-St. Paul area, tax bills on some suburban and downtown Minneapolis buildings have shot up 30 percent or more within two years following a sale.

These assessment spikes yield staggeringly larger tax bills, with some buildings now taxed at $8 to $10 per square foot, up from $5 to $6.50, for taxes payable in 2014.

For landlords with well-occupied properties, the tax burden itself is less important than the increased occupancy cost it creates, because most tenants compare lease proposals by total occupancy cost rather than by net rent alone. It does not matter to a tenant where the rent dollar goes; for every dollar that taxes increase, tenants will likely try to reduce net rent payments by that same amount in order to keep occupancy costs flat.

Assessors under Pressure

The Minnesota Department of Revenue prepares an annual sales-ratio study that compares assessments to sales prices. This puts pressure on assessors to react strongly to rising sale prices when properties are revalued each year.

If a sale price is 50 percent higher than the assessed value, then a 20 percent assessment increase in the first year after the sale, and 20 percent again the next year, will only raise the value to something approaching the sale price.

For example, a downtown Minneapolis property assessed at $107 million sold for $200 million. The assessments increased only 10 percent the first year and another 10 percent the second year, but jumped another 34 percent in year three. These repeated increases drive building costs well beyond owner and taxpayer expectations.

Assessors increased another property’s value by 30 percent in the year after the sale. Yet another pair of buildings were assessed 10 percent higher the year before they sold, then increased 30 percent and 50 percent in the year following the sale, putting them at approximately 90 percent of the purchase price.

Tenant Repercussions

Tenants notice operating cost increases, especially those recurring over consecutive years. Operating cost increases can discourage a tenant from renewing its lease at a higher rent.

As an example, a local tenant in a build-to-suit property had projected taxes at $4 per square foot, but with taxes of $10 per square foot this year, the tenant faces occupancy costs far in excess of projections. Whether the difference is looked at in an absolute sense as $6 per square foot or as 250 percent higher than expectations, the tenant is in a very different financial position than anticipated. How can the next lease be at the same net rate?

Many national tenants demand lease provisions that cap annual increases in real estate tax charges as protection against these increases, turning a triple-net lease into a quasi-gross lease, at least for taxes. Common in retail properties and found in flex space or office buildings as well, this practice puts a dent into the owner’s return. As in many other states, Minnesota assessors try to equalize assessments, so a few high-priced sales may trigger increased assessments for neighboring buildings. If an assessor is trying to avoid being accused of “chasing sales,” then one or two sales in a market area can lift all assessments. Comparable properties may see an increase in taxes with no changes to their own net rents or occupancy. Such increases can be a burden if the assessor has done a poor job of equalizing.

One of the biggest surprises for new buyers can occur when trying to renew leases. Many landlords discover that higher assessments lead to lower net rents or increased vacancy numbers that are far different from the assumptions made at the time of purchase. Relatively few buyers project double-digit tax increases, so tax hikes approaching 30 percent can inflict a troublesome dampening effect on net rents and occupancy.

Even tax increases limited to 10 percent annually for two or three years will exceed the 3 percent increases that a typical buyer builds into a discounted cash flow analysis when evaluating a purchase. That unexpected cost can decrease cash flow in future years to the point that the purchase price appears too optimistic. When this increase in taxes is combined with lower net rents as tenants fight to keep occupancy costs under control, the entire analysis at the time of sale becomes a meaningless historical curiosity.

Clearly, potential buyers must perform due diligence on assessor practices when a contemplated sale price is significantly higher than current assessments, or risk nasty surprises in the next few years.

 

jgendler

John Gendler is a partner in the Minneapolis law firm of Smith, Gendler, Shiell, Sheff, Ford & Maher, P.A., the Minnesota 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..

Jul
01

Is Your Hotel Paying Too Much Property Tax?

The value of a hotel for purposes of tax assessment is not the same number as its value as a going concern.  Understanding the difference between the two will save the hotel owner from an excessive property tax bill.

For assessors, the challenge is to correctly distinguish taxable assets from the non-taxable, and therein lies both a problem and an opportunity. By fully separating the assets, the property owner may reduce its taxes. But failing to properly prove the allocation results in the owner paying real estate taxes on non-real estate—and likely non-taxable property.

Let’s step back for a moment and note that hotel operation comprises four closely related asset components: land; the building or buildings; furniture, fixtures and equipment; and the business itself.

The main distinction here is that land and buildings are taxable as real estate, whereas the business components and fixtures, furniture and equipment are not. Nevertheless, each asset component is tightly linked to the others in making up the value of the going concern.

Reckoning Value

Because these assets are investments, each must generate income to justify its cost. Calculating the return of and on these investments can serve to separate the asset’s value from the going concern and isolate the real estate value.

Clearly, room revenue in a hotel operation is based on more than nightly room charges; it also includes income attributable to the furnishings and services. Separating the value of furniture, fixtures and equipment is the obvious first step to allocating the assets. Assuming that the taxpayer can make a supportable estimate of the market value of the fixtures, furniture and equipment, the taxpayer can then subtract the value attributable to the use of, and profit from,  those items. In other words, the value calculation should recognize both a return of—and a return on—furniture, fixtures and equipment.

To be sure, furnishings are hardly the only investment in hotel operations. Services such as marketing and reservation systems, food and beverage, recreational amenities, and quality of the flag or brand, among other components, all contribute to the property’s value.

These cost centers are business assets that are part of the going concern, but they are not taxable as real estate. Still, many assessors mistakenly accept only the removal of the depreciated cost of the furniture, fixtures and equipment, and erroneously attribute the full net operating income to the real estate. Crucially, that includes the non-taxable business income associated with the hotel operation.

In order to pay tax only on the real estate, property owners should allocate value to the non-taxable business assets. That step allows the owner to more accurately segregate the value of the real estate from the going concern.

Robust Debate

Within the valuation community, there is robust debate over the extent of items related to business value that should be removed from the going concern. Some appraisers go so far as to assign a value to the initial investment in personnel and training, while others may just remove the food and beverage component and apply a rent to the restaurant or meeting space.

Make no mistake: Appraisers and courts agree that a business value component exists. When that value is clearly demonstrated and the valuation is properly supported, courts and appraisers will also agree that it should be removed from the going concern in order to isolate the real estate. Until persuaded otherwise, however, taxing authorities usually take the position that expenses associated with hotel cost centers offset the income, and the management and franchise fees cover all of the business and intangible values associated with a hotel.

Blending the contributory value of the furnishings and business with the real estate is a disservice to the taxpayer and unjustifiably burdens the property with an excessive fixed cost. A well-developed real estate appraisal for a lodging property will go beyond addressing the value of the going concern, and will also analyze each asset category to correctly identify the taxable real estate component. By drilling down into the operation of the property and segregating the asset components, a capable valuation expert may be able to offer some relief to the taxpayer.

The final key to minimize taxes is local knowledge. This requires an understanding of the jurisdiction and the methodologies that local tax assessors find acceptable, and knowing the personalities of opposing counsel and appraisers. Many ideas surround asset allocation, and knowing which ones to employ may keep hotel owners from overpaying real estate taxes.

KJennings90

Anthony Barna jpeg

J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania 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..

Anthony C. Barna, MAI, SRA, is a principal of Pittsburgh appraisal firm Kelly\Rielly\Nell\Barna Associates.   He specializes in appraisal and consulting for litigatgion support.  He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..                                                         


     

 

 

 

Apr
15

Valuation Education

How to spot - and challenge - unfair tax bills
Even if there is life left in this market cycle, commercial property owners should maximize returns now in preparation for the next buyer’s market, whenever it may begin. Property tax is one of the largest expenses for most owners, so protecting the property, investment and tenants requires a thorough understanding of the tax system. With that understanding, the taxpayer will be better equipped to spot an inflated assessment and contest unfair tax bills.

Keep it (fee) simple
Merely knowing for how much a property would sell is insufficient to ensure proper taxation. Specifically, taxpayers need to know fair taxation starts with a fair measurement of value.

The assessment is the measurement to which taxing entities apply the tax rate. In order to treat all taxpayers uniformly, assessors must measure the fee simple value of the property, or the value without any encumbrance other than police power.

Why is that important? The principle is that a leased property and an identical owner occupied property, valued on the same date and under the same market conditions, would be taxed the same. By contrast, leased fee value or value affected by encumbrances can vary greatly, even between identical properties. The concept is simple; the application, not so simple.

Assessors and courts alike struggle to determine an asset’s fundamental real estate value because their primary source of data is leased-fee sales, or sales priced to reflect cash flow from existing leases. Several courts across the country have understood the necessity to assess properties uniformly and have mandated that assessors adjust sales data to reflect the unencumbered value of the real estate.

In Ohio, the state Supreme Court ruled that an appraiser who was valuing an unencumbered property had to adjust the sale prices of comparable properties to reflect the fact that the subject property was unencumbered (by leases, for example) and would therefore likely sell for less. The decision recognized that an encumbered sale is affected by factors besides the fundamental value of the real estate.

Courts across the country have been wrestling with the fee simple issue. For real estate professionals, the idea that tenancy, lease rates, credit worthiness and other contractual issues affect value is commonplace. In order to tax in a uniform manner, however, assessors must strip non-market and non-property factors from the asset to value the property’s bare bricks, sticks and dirt.

Doing the math
Although part of the purchase price, contractual obligations and other valuable tenant-related attributes are not components of real estate. What is part of the real estate is the value attributable to what the property might command in rent as of a specific date. This may appear to be splitting hairs, but the difference between values based on these calculations can be significant.

In the first instance, the landlord and tenant have a contractual obligation. For example, suppose the rent a tenant pays under a 20-year-old lease were $30 per square foot. If the tenant were to vacate, however, that space might only rent for $10 per square foot today. The additional $20 per square foot premium is in the value of the contract, not the value of the real estate. Moreover, the contract only holds that value if the market believes the tenant is creditworthy and will continue to pay an above-market price.

When the tenant vacates, it’s the real estate itself that determines the current market-rate lease of $10.

Good data, good results
Identifying an inflated assessment brings the taxpayer halfway to a solution. Step two is finding the best way to challenge the inappropriate assessment. Each state has its own tax laws and history of court decisions, but a few key principles will help taxpayers achieve a fee simple value.

First, sales and rents must have been exposed to the open market. A lease based on construction and acquisition costs reflects only the cost of financing the acquisition and construction of a building, not market prices.

Another principle assessors often fail to apply is that the data they use must be proximate to the date of the tax assessment. Therefore, a lease established years before the assessment is not proximate, even if the lease itself is still current.

What does make for good data is a lease that has been exposed to the open market, where the property was already built when the landlord and tenant agreed to terms free of compulsion. Equally reliable is the sale of a vacant and available property, or where the lease in place reflects market terms proximate to the assessment date.

Taxpayers who challenge assessments that are not based on fee simple values help themselves maintain market occupancy costs, which will in turn lead to better leasing opportunities and retention of tenants.

KJennings90J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania 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..

Feb
17

Lighten the Load - How to Ease a Threat to Affordable Housing

Over the past three decades, the federal Low-Income Housing Tax Credit (LIHTC) Program has proven to be a crucial tool for creating housing for low- and moderate-income residents.  Yet the communities created under the program operate on a fine margin that can be jeopardized by unfairly high property taxes.  Unfortunately, taxpayers and taxing authorities have yet to reach consensus on how to value LIHTC assets.

In the face of this dilemma, stakeholders can take action by educating assessors on the mission of the LIHTC program and accurate valuation for property tax purposes.

Codified in the Tax Reform Act of 1986, the LIHTC program offers incentives to create rental housing for low-income residents.  Eligible developers earn annual tax credits for 10 years, in an amount equal to a percentage of development costs.  In order to raise capital for development or renovation, developers typically sell those credits to investors.

The tax credits are the linchpin of the LIHTC program, because the costs of the project far exceed the value it creates.  Given the often onerous demands of the federally funded, state-managed program, projects would otherwise be infeasible.

To begin with, the LIHTC program stipulates flat rents tied to the local median income and the average number of bedrooms per multifamily unit.  At the same time, developers must pay for mandatory reporting and fund community programs.  Failure to meet those requirements during the first 15 years after a project’s completion triggers a federal recapture of the tax credits, with interest.  As a result, net operating income at LIHTC properties is often flat for many years and then declines as expenses consume more and more capital.

Sadly, many authorities mistakenly believe that the guaranteed rents generated LIHTC communities reduce the owner’s risk and make the assets more valuable than market-rate properties.   This misconception leads to overvaluation, thus inflating tax liability and likely rendering a project infeasible.

Wanted: Consensus

When valuing LIHTC properties, taxing authorities should be mindful of the program’s goal: to help communities provide housing for financially challenged people.

The generally accepted approach to valuation is the income method, which applies in-place rents and, for vacant units, LIHTC-approved rents.  Gross rents at LIHTC properties are pegged to the local median income, so rent increases tend to be minimal.

On the debit side, assessors should use actual operating expenses, which for LIHTC properties are substantially higher than those of market-rate properties.  If assessors instead value an LIHTC property based on market rents or operating expenses, they will overstate NOI and therefore the property’s true market value.

Some authorities advocate including the depreciated value of the tax credits in property tax assessments.  Taxpayers have countered that the credits’ only real value is the intangible one of providing good-quality housing for renters with moderate and low incomes.  The tax credits merely bridge the gap between construction costs and the value created through development.

Including these tax credits in the assessment erroneously produces above-market valuations and excessive tax liability for properties that are clearly less valuable than those able to charge market rents and are unburdened by LIHTC programming and reporting costs.

Many legislatures have at least partially codified the proper valuation of LIHTC properties.  In many jurisdictions where the law is silent, courts have rendered decisions addressing, at least in part, the valuation of LIHTC properties.

Given the lack of consensus on valuation, a taxpayer challenging an assessment of an LIHTC property should know the relevant statutes and case law.  In jurisdictions that lack statutory or case law, the taxpayer must make sure that authorities understand the LIHTC program and the need for policies that further its goals.

In jurisdictions where legislation has not overturned unfavorable case law, or where the code is incomplete or silent, taxpayers need to organize and lobby their legislators to act.  Ask them to codify assessment principles that lead to reasonable taxes.  That step will contribute significantly to the LIHTC program’s mission.

Emily Betsill Emily Betsill is a partner in the Washington, D.C. law firm of Wilkes Artis Chartered.  The firm is the District of Columbia, Maryland and Virginia member of American Property Tax Counsel, the national affiliation of property tax attorneys.  You may reach Emily via email at This email address is being protected from spambots. You need JavaScript enabled to view it.

Oct
08

Overstating the Case

To Save on Property Taxes, Beware of Inaccurate Valuations

Every year, the dreaded property tax envelope hits the desk of tax managers and property owners. Despite the anxiety that accompanies this event, surprisingly few taxpayers take reasonable steps to learn whether or not their tax documents may be overstating their liability. Many property owners simply pop an antacid and write a check to cover the bill.

Property taxes are a necessary evil be-cause in most jurisdictions, they are the primary source of revenue for funding schools, social services and other government functions. That said, of course, property taxes are also a major cost item. Approaching an assessment with a healthy dose of skepticism and an eye for common errors is a good way for owners to ensure that they are paying only their fair share of the tax burden.

Assessing property for taxation starts with determining real market value. The leased fee value of the property, or the going-concern value of a business, are inappropriate criteria for assessment and should raise red flags when they appear in a property tax review.

In a review, evaluate the origins of the property assessment to determine whether the assessed amount reflects the property's real market value. For example, if state law provides that a sale or other transfer resets real market value for tax purposes, the reviewer needs to evaluate the entire transaction.

The purchase price of a fully leased commercial building will typically reflect the value of a leased fee. The sale can reflect a higher value than it would if the property were vacant because the purchaser is achieving an immediate return on investment from in-place rents. If an asset's sale price is recorded as its taxable value, without an evaluation of market rents and lease-up costs to determine real market value, the owner will be overpaying taxes.

Similarly, the purchase of real estate within a business transaction may include compensation for goodwill, an in-place work force, management and other intangible assets that are not taxable in most jurisdictions. In order to properly reflect the value of the real property, the assessor must exclude these intangibles from the sale price, as only tangible real property is taxable.

In a complex, multi-property transaction, the buyer's appraiser typically conducts a mass appraisal of the portfolio rather than analyzing each asset in depth. However, this practice may overlook issues that affect the value of individual properties.

An allocation appraisal of that nature may overvalue a property that is encumbered by governmental restrictions which limit its development potential. Likewise, a property that carries significant environmental liability can be overvalued, resulting in a tax assessment that exceeds the asset's real market value. Drilling down to the level of the individual asset prior to reporting the sale value to the assessor may help cut the tax bill significantly.

Another overlooked source of savings hinges on recognizing that construction costs do not necessarily equate with a property's real market value. Assessors like to use the cost approach to set real market value, because it is simple and relies on the property owner's documentation of costs. But what about added costs that don't affect value?

Suppose, for instance, that the design of a manufacturing facility calls for a stairway in a certain place, but because local regulations require the stairway to be farther from manufacturing activity, an inspector directs the builder to move it. The change adds $200,000 to the project's cost without adding to the facility's real market value.

Another kind of overstatement often results when an owner builds an addition. Temporary walls, electrical infrastructure and extra labor may be required in order for the occupant to keep functioning normally. These items increase the owner's out-of-pocket costs without adding to the property's real market value. Keeping track of such costs can result in significant tax savings.

Awareness of these often overlooked pitfalls offers opportunities to trim the annual property tax bill. So between the time the bill comes in and the payment goes out, it is crucial to evaluate the bases for real market value. That will go a long way toward determining whether the assessment–and the dill–are correct.

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..

Jul
08

Custom-Built Carrots: Attracting Growth Firms Calls for Smart Incentives

In the wake of the Great Recession, government initiatives to promote economic growth have varied widely across the nation. Some states targeted manufacturers, while others focused on technology companies and other high-impact, knowledge-based firms. A spirited debate has emerged on the role of economic incentives in these efforts.

Historically, Southern states have targeted manufacturers rather than knowledge-based companies as the engines of economic growth by offering tax incentives aimed at reducing costs. Manufacturers typically make substantial upfront capital investments and create large numbers of jobs. These companies quickly generate property tax revenue for the public coffers.

Knowledge-based technology companies and startups, however, seldom make hefty initial capital investments, nor do they create large numbers of jobs right away. Rather, these employers tend to offer fewer, but higher-paying, jobs that have a greater impact on the economy than an equivalent number of manufacturing positions. As a result, traditional tax breaks linked to job numbers and capital investment don’t appeal to knowledge-based companies, particularly startups that are not yet generating revenue.

The real target should be a category that is best characterized as "growth" companies. Regardless of sector, these companies include startups as well as more established companies that are increasing revenue at a high rate.

Most companies measure success by revenue and profit growth, not by numbers of employees, capital investment outlays or numbers of patents. One study notes that growth firms tend to be eight years old or less and most economists agree that startups will create the vast majority of future U.S. jobs.

Recent statistics suggest a one-size-fits-all approach to economic incentives may not be best. In May, the nation’s unemployment rate fell to a seven-year low of 5.4 percent; however, job growth during the past few years has been remarkably uneven. Fourteen states have rebounded strongly, with employment increasing 10 percent or more from Great Recession lows. Top performers include Texas and Utah, where unemployment has risen more than 15 percent, and California and Colorado, where employment is up more than 13 percent. Knowledge-based jobs are a critical component to employment growth in these states.

In contrast, total employment in 10 primarily industrial states has grown just 5 percent or less from Great Recession lows.

Cutting Costs, Growing Jobs

Nevertheless, manufacturing jobs have been an important component of the recovery. Some states that have enticed manufacturers by offering lower production costs have been among the leaders in the comeback. For example, employment increased about 11 percent in South Carolina, 10.5 percent in Georgia, and 9.9 percent in North Carolina. These states all created an attractive business environment in part by taking steps to cut costs, such as taxes on capital investment.

One of South Carolina’s main incentives has been a fee-in-lieu-of-taxes agreement (FILOT), which targets property taxes. A participating company negotiates the agreement with the county where the company is locating or expanding its facility.

Generally, a FILOT agreement enables companies investing at least $2.5 million in a new facility or an expansion over a five-year period to cut their property taxes by about 40 percent annually. A FILOT typically lasts for a set term of 20 to 30 years.

To calculate property taxes, South Carolina calculates uses according to the following formula: property value x assessment ratio x millage (or tax rate) = tax. A FILOT can reduce the assessment ratio of a manufacturing facility from 10.5 percent to 6 percent, and sometimes to as low as 4 percent.

FILOTs may also set the millage rate for the duration of the agreement or modify millage every five years. Any personal property subject to the FILOT depreciates. The approach to assessment is similarly variable. The FILOT agreement either sets the property’s value at cost for the agreement’s entire term or permits an appraisal every five years. That provision offers an opportunity to revisit the property’s value even during the life of the FILOT.

While clearly attractive to a manufacturer, a FILOT is less appealing to knowledge-based and technology firms, since these companies are unlikely to make substantial initial capital investments.

Structuring incentives for knowledge-based firms poses unique challenges. These employers invest significantly in non-tangible intellectual property and hire highly skilled, highly paid employees. Income tax credits can be attractive if those companies are making a profit, but those credits have little appeal for a startup that is losing money while the market determines whether the company’s product is attractive.

Economic development cannot focus on manufacturing to the exclusion of knowledge based jobs. In his book The New Geography of Jobs, Enrico Moretti notes that each new high-tech job creates five additional jobs out-side the high-tech sector. He argues that the “innovation” sector has a disproportionately larger multiplier effect than manufacturing. That means one of the best ways for a state to generate jobs for less-skilled workers is to attract technology companies that hire highly skilled employees.

Attracting knowledge-based companies requires creation of the critical mass of firms and workers needed to sustain a truly competitive, often self-sustaining, high-tech ecosystem. That ecosystem, in turn, re-quires a landscape that is culturally vibrant, economically robust and entrepreneurial. These qualities are essential to attracting, engaging and retaining the young talent that contributes so heavily to the knowledge-based economy.

Innovative Manufacturing

In the 21st century, innovation isn’t restricted to knowledge-based companies. Manufacturers must also innovate to expand revenues and profits and to respond to changing opportunities. The recovery from the Great Recession has shown that states must look beyond conventional incentives and tailor their strategies to the competitive needs of the companies that are investing capital and creating jobs.

Smart companies, economic development officials and policymakers should focus on growing revenues and profits, not incentives. Despite the differences between the manufacturing and knowledge-based sectors, their workforces are central to both. With that in mind, employers should strive to build the innovative, flexible and adaptable workforce that is a key to growth.

All too often, however, conventional incentives and development strategies fail to address these concerns. Physical infrastructure does not attract and retain employees; opportunity does. Smart economic development is about increasing income for both companies and workers and encouraging innovation. Smart incentives should do the same.

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..

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