" Few U.S. markets are stable these days, however. In today's economic tumult, a property's leased fee position—its value based on contract lease rates—may not reflect current, dire market conditions that can bring down its taxable value..."

By Mark Maher, Esq., as published by Commercial Property Executive, September 2010

Many states assess commercial property on a fee-simple basis, using market rents and vacancy rates to calculate a property's potential income and value. That may work in a stable market, where multi-tenant properties have rent rolls that continually turn over and are consistent with market rents.

Few U.S. markets are stable these days, however. In today's economic tumult, a property's leased fee position—its value based on contract lease rates—may not reflect current, dire market conditions that can bring down its taxable value. It's more important than ever to educate the assessor to the realities of leasing in 2010.

In many cases, the data in the rent roll don't convey the full story of a property's performance. Tenants may be missing payments or be late in meeting their obligations. Some spaces might be rented but physically vacant as companies close sites and consolidate operations. This "shadow space" that is leased but unoccupied reduces the appeal of the rest of the property to potential new users. Worse yet, shadow space is often available for sublease and directly competes with the landlord for tenants, usually at attractively low rates.

Another common source of overvaluation by assessors is published asking rental rates, which many jurisdictions equate to market rates. Such information is easily available and busy assessors often revert to it as a starting point for valuing properties.

The property owner's leasing team is the best source of information to establish the new, lower market rents that will produce an assessment in line with true value. The taxpayer can build a case by providing examples of tenants signing leases for low rent, but that task may prove challenging because few tenants are currently taking new space.

As an alternative, property owners can marshal anecdotes of failed leasing efforts in order to counter asking-rent data. Lost and dead leasing deals need to be detailed so that assessors can place themselves in the property owner's shoes.

Remember that few assessors have experienced a precipitous downturn before. It's in the taxpayer's best interest to educate assessors on the realities of leasing in a down market.

Mark Maher is a partner in the Minneapolis-based law firm of Smith Gendler Shiell Sheff Ford & Maher, the Minnesota member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at mmaher@smithgendler.com.

"In many cases, taxing jurisdictions cannot support or defend the values that are placed on those properties under appeal..."

By Philip J. Giannuario, as published by Commercial Property Executive Blog, August 2010

With real estate values down in all sectors across the nation, tax appeals are climbing to record numbers. In many cases, taxing jurisdictions cannot support or defend the values that are placed on those properties under appeal.

As municipal revenues run thin and state governments cut programs to balance their budgets, those governments understandably want to avoid returning significant amounts of money as tax refunds.

As a result, many taxing authorities are exploiting technicalities in state laws to seek dismissals of valid appeals. That makes it critically important that property owners stay abreast of all state requirements that may bear on tax appeals, and rigorously follow required procedures.

New Jersey's Chapter 91 statute provides a clear example of the kinds of technicalities state's employ. The statute requires the assessor to send a request to the owner of income-producing properties and ask for financial data related to the asset. The owner then has 45 days to respond to the demand. If the owner fails to respond in that time, he or she forfeits the right to challenge that year's assessment.

In a recent New Jersey case, a municipality moved to dismiss an appeal for a failure to respond to the income and expense request. The property owner had designated an agent to receive property tax notices and correspondence. Although the agent received the request, the agent failed to file the form with the municipality.

The owner argued that the strict words of the statute required the assessor to serve the owner directly. The court held that the only address on file was that of the agent, however, and reasoned that the owner was bound by the statute. On those grounds, the court dismissed the case.

The simple lesson to learn from this example is that a number of procedural hurdles exist in each state's tax law. Taxpayers must become knowledgeable about all applicable procedural rules and create failsafe, redundant systems to guard against the needless loss of their tax appeal rights.

Philip J. Giannuario is a partner in the Montclair, New Jersey law firm Garippa Lotz & Giannuario, the New Jersey and eastern Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. Phil Giannuario can be reached at phil@taxappeal.com.

"Paying attention to what rent includes can result in lower tax bills..."

By Cris K. O'Neall , as published by Commercial Property Executive Blog - June 2010

Rental income has always been the touchstone for calculating real property values and is a key element in determining taxable value for ad valorem property taxes. Because it plays such a crucial role in the property tax valuation, paying attention to what rent includes can result in lower tax bills.

Rental income for properties such as multi-family residential is closely associated with real estate usage and is easily capitalized into an indication of taxable value. That is not the case, however, for properties used by service-oriented businesses, such as full-service hotels or stores in high-end retail malls. In those situations, the stream of income generated by the facility may represent both a return to the real property as well as to franchises, branding, or a trained and assembled workforce.

In most states, these non-realty rights and assets are not subject to property tax. If local tax assessors calculate assessments using income that includes a return on non-realty elements, the property owner will overpay property taxes.

Similarly, in those situations where landlords participate in their tenants' revenues through percentage rent, taxpayers should determine whether those rents represent a return solely to real property or if they also allow the landlord to share in profits that the tenant generates from customer services and branding. This situation frequently arises when private companies operate in government-owned facilities, such as public airports with privately run concessions.

So, what should investment property owners do? First, determine whether service-oriented businesses are operating in the property or whether percentage-rent arrangements are in effect. If either is the case, contact the local tax assessor and learn the basis for the property's tax valuation. If the assessed value is based on property income, the property tax may be based in part on non-taxable income. In that case, the property should receive a reduction in taxes.

Cris K. O'Neall specializes in ad valorem property tax matters as a partner in the Los Angeles law firm of Cahill, Davis & O'Neall, LLP. His firm is the California member of American Property Tax Counsel, the national affiliation of property tax attorneys. Mr. O'Neall can be contacted at cko@cahilldavis.com.

Seeking Reassessment? Act Now, Tax Attorneys Warn

By Suzann D. Silverman as published by Commercial Property Executive, June 2010

With the Federal Reserve repeatedly calling attention to commercial real estate assets' decline in market value and reduced access to financing, taxing jurisdictions have shown greater openness of late to appeals for reduced property taxes. That trend has offered many owners some badly needed breathing room. But as municipalities themselves become more strapped for cash, winning tax appeals looks likely to become much more challenging.

The commercial property sector is a natural place for municipalities to look for revenue, noted Elliott B. Pollack, chairman of the property valuation department of Pullman & Comley L.L.C. and a director of the American Property Tax Counsel. After all, commercial properties already make up a large proportion of communities' tax bases, and most legislators would much rather hike taxes on a local office building than on their constituents.

Some states have enacted tax caps, according to Stephen Paul, a partner at Baker & Daniels L.L.P. and vice president of the Tax Counsel.

But those limits can be deceiving. In Indiana, where he practices, residents' taxes are limited to 1 percent of value, while apartments are capped at 2 percent and commercial property at 3 percent. The risk, Paul said, is that the greatest pressure to raise assessments will be on commercial properties, which have the highest ceiling by percentage.

And when property values do inevitably begin to climb, the raw tax liability will naturally rise with them.

Paul expects a surge in tax litigation to result, with local appeals becoming harder to win and a greater number reaching the state level.

Eventually, these cases will get a fair hearing, he believes, but that outcome may require a time-consuming, expensive effort by owners.

The steady erosion of municipal finances across the country presents an additional reason for concern, according to John E. Garippa, senior partner of Garippa Lotz & Giannuario and president of the Tax Counsel.

While bonding capacity should yield enough cash for municipalities to cover refunds, at least in theory, Garippa foresees potential for reductions in many municipalities' ability to bond. Legislation may also cause delays by extending the deadlines for municipalities to distribute tax refunds.

The predicted rise in interest rates is also likely to have an impact, he noted, driving cap rates up and asset values down. "That's why it's important for clients to be on top of this," he cautioned.

When it comes to property tax disputes, being on top of it means preparing in advance to appeal to ensure that deadlines are met, and then gathering the details necessary to persuade the court. While many property owners file appeals every year (most settle rather than try their luck in the backlogged courts), there are still a good number that do not, Garippa said. But with assessments based on the previous year's data, current assessments may not fully reflect the market downturn. That offers an opportunity to argue for an assessment decrease.

In New York City, for instance, the Real Property Income & Expense filings that the finance department required in 2009 were based on 2008 data, which did not reflect the full extent of the commercial real estate market crash that occurred at year-end 2008, explained Joseph Giminaro, special counselor & co-manager of the tax certiorari department for Stroock & Stroock & Lavan L.L.P. It is too soon to evaluate how the tax commission will view updated data, but Glenn Newman, president of the commission, has indicated that he wants to see all data that shows the difficulties property owners are enduring. "I think it's very favorable that the tax commission is openly saying it wants to hear these stories," Giminaro observed.

That positive attitude seems common nationally. Tax certiorari attorneys, who specialize in tax appeals, are achieving some significant reductions.

In the hospitality arena, for example, "it is not unusual to see total assessments drop by more than a third," said Garippa, who represents some of the nation's largest hotel operators. Big-box stores saw a similar drop in the past year, he noted. Pollack, too, has seen significant decreases; he reports that appeals for hotel properties are typically garnering tax reductions of 20 to 40 percent. And while hotel and retail properties have been subject to the largest overassessments, owners of other property types can also mount successful appeals. Older industrial properties are another big area.

Taxing jurisdictions typically have based value largely on income capitalization and replacement value, not comparable sales, but one area that offers growing potential to strengthen appeals is brand value, since so-called intangible benefits are not taxable. Retail and hospitality properties are the categories whose brand value is most readily recognized by tax courts, according to Paul. Part of hotels' income is derived from the flag, and shopping centers typically count on big-name stores to attract customers.

Mall owners have brought branding to a new level in recent years with efforts for company name recognition among consumers. Office property owners are newer to this strategy and have had less success. However, that will come with time, Paul predicted.

In the meantime, with data now available on the softer market and municipal difficulties looming, "now's the time to take a tax appeal," Paul said.

Stephen H. Paul is a partner in the Indianapolis law firm of Baker & Daniels LLP, the Indiana member of the American Property Tax Counsel. He can be reached at stephen.paul@bakerd. com

Elliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley, LLC. The firm is the Connecticut member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at ebpollack@pullcom.com

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. Mr. Garippa is also president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at john@taxappeal.com

"These steps enhance your chances for a successful appeal"

By Howard Donovan, as published by Commercial Property Executive Blog, May 2010

When it's tax appeal time, taking the right steps can be critical for winning an assessment dispute. Follow these four steps to make the best case.

1. 1. Provide current and accurate property information. Review the assessor's property card at least annually and correct any errors. This is also an opportunity to determine if there is reason to dispute the valuation. Consider public records, appraiser credentials, and national cost or capitalization guides. Look for inaccurate information regarding land size or improvements, as well as inaccurate depreciation of improvements.
2. 2. Make sure the proper party files the administrative protest. In most jurisdictions, only the owner or owner's agent can file a protest or appeal a decision of the administrative board. An agent's authorization by the current owner must be legal or dismissal may result. If there has been an ownership change during the year, determine whether the party filing the appeal is the owner as of the lien date, or as of the payment date. In some states, parties other than the owner can protest, such as tenants or mortgage holders.
3. Make sure that submitted lease information supports the taxpayer's position as to fair market value. Almost every state requires the assessment of property at fair market value. Not every lease represents the market, however, or results in a proper value calculation.
4. Make sure that all encumbrances, deed covenants and restrictions, environmental contamination or other impairments are considered in the fair market value determination. Any factor may be considered in determining fair market value, so consider the impact of the state of the property's title, such as easements, conditions and restrictions. Did the assessor compare the asset to similar properties, or to real estate with more profitable uses than those allowed on the taxpayer's property?

These steps enhance your chances for a successful appeal.

Howard Donovan is a partner in the Birmingham, AL, law firm of Donovan Fingar, the Alabama member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at whd@donovanfingar.com.