Where the value of commercial properties has failed to keep pace with local governments’ revenue needs, real estate assessors have pursued unconventional arguments and valuation methods to protect and grow the property tax base. Among those arguments and methods, assessors increasingly contend that manufacturing and other commercial properties are “special-purpose properties,” and therefore the property tax assessments on these assets should exceed the value that would result from the use of traditional market data.

While special-purpose properties certainly exist, these assessors’ arguments typically fail in three ways. First, they erroneously confuse limited-market property with special-purpose property. Second, they refuse to consider available market evidence that, even if imperfect, provides information about the value of the property. Third, even when a property is a special-purpose property, assessors often value the wrong interest, valuing more than the fee simple real estate, for example.

Wrong definition, incorrect assessments

The Dictionary of Real Estate Appraisal defines special-purpose property as "[a] limited-market property with a unique physical design, special construction materials, or a layout that restricts its utility to the use for which it was built; also called special-design property.” Thus, special-purpose property is both a limited-market property and a property having a unique physical design, special construction materials or a layout that restricts it to the use for which it was built. By definition, special-purpose properties are a subset of limited-market properties; they are not synonymous.

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A subset, not the same set

In general, special-purpose properties are a subset of limited-market properties, which are a small subset of commercial properties.

Appraisers often identify certain categories of property as special purpose, such as churches, schools, railroad stations and sports arenas. But such properties, in addition to being limited-market properties, also reflect specific evidence of unique physical design, highly restricted use and/or special construction materials.

The facts of a New Jersey case illuminate the difference between properties with special features and special-purpose properties. In Ford Motor Co. vs. Township of Edison, the New Jersey Supreme Court in 1992 concluded that an automotive manufacturing plant was a general-purpose property, even though it was constructed with heavy steel framing, paint booths, baking ovens, massive boilers, terrazzo amenities, and electrical, steam and plumbing infrastructure that exceeded normal industrial requirements. Although the property was a limited-market property, the court noted that “[a] property does not qualify as special-purpose where it possesses certain features which, while rendering the property suitable to the owner’s use, are not truly unique.”

Importantly, whether a property is special-purpose is a fact-specific inquiry, and courts rightly reject attempts to classify properties as special-purpose in the absence of evidence that the property is special-purpose. Other cases reinforcing this concept include a 2015 decision in Certain Teed Corp. vs. County of Scott, in which a Minnesota tax court rejected the contention that a shingle factory was a special-purpose property; and TD Bank vs. City of Hackensack, a 2015 case in which a New Jersey tax court rejected an argument that a bank branch is a special-purpose property.

Refusal to consider market data may lead to higher assessments

Assessors typically argue that special-purpose properties may only be valued using the cost approach; that market comparable sales may not be used to value special-purpose property, and/or that the value of the special-purpose property is so intimately tied to the property’s owner or user that the assessor must use income from business operations (as opposed to rents) to value the property.

These arguments share a flawed premise that, due to the property’s unique nature, there is simply no market data available to value the property. These arguments often fail because they conflict with real world evidence.

For example, while it may be true in a given case that there are few or no comparable market transactions for a special-purpose property, this is not an appraisal rule or point of law. That is why the Minnesota Supreme Court in 2007 reversed the decision of a tax court that had refused to consider available sales data based on the classification of the property as special-purpose. In that case, Southern Minnesota Beet Sugar Coop vs. County of Renville, the Court acknowledged that if market transactions exist and shed light on the value of a special-purpose property, it should be considered even if adjustments must be made to account for differences between the comps and the subject property.

Just as it is wrong to refuse categorically to consider market transactions when valuing special-purpose property, it is inappropriate to consider taxpayer-specific income data reflecting more than the value of the real property. For example, special-purpose manufacturing properties are seldom rented in the market. Attempting to value the real estate based on non-rental income from the manufacturing operations would produce a highly misleading estimate of value, since such income is derived from non-real estate elements such as intangibles and personal property. Examples of intangibles include an in-place work force, intellectual property and goodwill; personal property includes items such as manufacturing machinery and equipment.

Given the tenuous link between manufacturing income or business income and the value of a special-purpose property in which the manufacturing occurs, taxpayers can—and should—object to the assessor’s use of such income information to value the real property, even if it is a special purpose property.

When assessors increase assessments or defend excessive assessments by claiming that the property is special-purpose, taxpayers should request the evidence on which the classification and the valuation are based. In many cases, taxpayers will find that such assessments lack support, conflict with generally accepted appraisal practices, and should be appealed.

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

"When Assessors Seek Business Income Information"

Is it appropriate for a tax assessor to use income information in determining taxable value?

That question comes up frequently in property tax cases when assessors seek income information from taxpayers. The answer is that whether a request is appropriate depends on the type of property at issue and the type of income information being sought. In several recent cases involving manufacturing operations, industrial enterprises and other types of businesses, assessors have sought information on income from the business or businesses operating on the property, rather than on income from the property itself.

Often, assessors have a legitimate reason to seek certain types of income information from taxpayers. For instance, if the property type at issue is typically rented in the marketplace, as is the case with an apartment complex or an office building, it will likely be entirely reasonable for the assessor to request, and for taxpayers to use, the property's rents when evaluating its market value. Indeed, investors regularly rely on rental information to determine the price for such property.

However, some types of income data should be excluded from a property assessment. In a number of recent instances, for example, assessors attempting to value manufacturing or industrial properties have sought income and production information relating to the manufacturing process, which is unrelated to the property's income-producing capacity. Where the business is something different from the rental of property and the business income derives principally from assets other than the real estate, reliance on income information will produce misleading conclusions about the value of the real property (whether for taxation or any other purpose).

To better understand the problem, consider a hypothetical downtown office building that houses law firms, accounting firms, travel agencies, dental offices and any number of other tenants. No reasonable assessor would consider the revenues of the tenants in determining the value of the office building.

Why not? Because that business revenue would indicate only the value of the business taking place in the building. Tenant revenues do not determine the building's rent, and no reaonable investor would value the building on the basis of such income information. In short, it is irrelevant.

The same generally goes for production and income information when it comes to manufacturing proeprties. A typical manufacturing process requires personnel, machinery and equpment, managerial expertise and real property. Add to that goodwill and other intangibles that allow the manufacturer to capture market share and sell its products, and it is clear the income from product sales incorpoates value from a number of assets unrelated to the value contribution of the real property.

Special Purposes, Special Properties

Why, then, might assessors seek business income information, and how should taxpayers respond to such requests?

In many markets, manufacturing properties are more lilely to be in owner-occupied rather than leased space, so determining the equivalent of market rents for such properties is difficult. Assessors seeking production or business income information occassionally argue that they cannot use sales data because the property is a special-purpose asset. But even if the property is special purpose, the assessor should not seek and use income information unrelated to the property and its market value.

Attorneys also hear assessors argue that the property represents a special component of, or provides a particular "synergy" to, the taxpayer's business. These assessors contend they need business income information to accurantely reflect the property's true value. But such efforts to capture special value apart from the real estate itself are efforts to tax an intangible, not the property.

In some cases, it may be appropriate to consider income information to determine whether a property suffers obsolescence and is, therefore, over-assessed. For example, if the total income from all operations is insufficient even to support the real property at its current assessed value, an argumnent exists that the real property suffers obsolescence (relative to its assessed value). However, the fact that income shortfalls might indicate obsolescence does not make business income generally indicative of real estate value.

When assessors request business income unrelated to the property or its rent, taxpayers should consider objecting on several grounds: First, if the information is truly unrelated to the property or its rent, the taxpayer should explain that to the assessor \and try to provide only the property's rental information, if available.

Second, taxpayers should guard against the disclosure of proprietary business information. Many states have laws that protect confidential taxpayer data such as information relating to earnings, income, profits, losses and expenses; taxpayers are wll advised to mark that information as confidential and take other steps to avoid public disclosure of any income information they provide to the assessor.

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