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Property Tax Resources

Jul
29

A (Tax) Tale of Two Campuses

With apologies to Charles Dickens, a tale of two corporate office campuses underscores the fickle nature of real estate fads and the difficulty property owners face in convincing tax tribunals that standard valuation matrices may not apply in properly assessing these large, suburban properties.

Aetna’s challenge

Aetna Life Insurance Co. developed more than 1.6 million sq. ft. of corporate and computer center space together with parking garages in the early 1980s in a rural area of Middletown, Conn., spending almost $170 million in the process. In 1995, the property owner challenged the city’s $250 million market valuation.

Aetna held that the property’s highest and best use was as a multi-tenant office project, rather than as a corporate headquarters designed for its exclusive use. This argument seemed reasonable because, among other matters, the developer had built the property with large atria and excessive common areas, together with a number of special amenities such as cafeterias and recreational space which a typical office building would not contain. These amenities obviously drove up the assessor’s value, but mattered little in the market place.

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The city contended that since the property was used as a corporate headquarters, its highest and best use was its continued use for that purpose, and that regardless of its inefficient features and super adequacies, it was typical of headquarters structures. In that sense, the highest and best user, not use, determined
market value.

Key to the owner’s argument in the tax appeal was that the reproduction cost was legally suspect because it was highly unlikely that anyone would reproduce such a quirky, outmoded structure as the 20th century ended. The owner argued that the situation called for a replacement cost approach that would eliminate the inefficiencies and super adequacies of the property.

Although a Connecticut appellate court upheld the trial court’s reliance on the reproduction cost approach, when Aetna’s occupancy concluded in 2010 and the property owner was unable to find another headquarters corporate occupant, it demolished the building—albeit too late to affect the valuation case.

Union Carbide’s conundrum

Union Carbide Corp. moved to Danbury, Conn. from New York City in 1985. It selected a beautifully wooded location close to the New York border to construct an idiosyncratic, multi-level property that floated above the site in so dramatic a fashion that many of its occupants referred to the building as “Battlestar Galactica.” Faced with excessive operating costs and a declining need for such a large area under one roof, Union Carbide reduced its occupancy, but was unable to find many subtenants.

The development’s unusual qualities and its practical insufficiencies prompted a property tax appeal. The company argued, as had Aetna, that whatever the construction cost might have been, the assessor should base its campus’ market value on replacement cost and/or income analysis. The resulting value, the company maintained, was far less than the one the City of Danbury’s assessor had produced.

Here again, the court was unsympathetic, given the huge amount of money spent on development, a juicy sale-leaseback deal which had little relationship to market realities, and what was likely the prevailing view 20 years ago that cost equals value.

Value the use, not the user

A valuation that relies on a single corporate occupant or user assumes a sale to a similar occupant. That essentially converts the market-value-in-exchange analysis, which is legally required in most states, to a market-value-in-use construct.

In the second decade of the 21st century we know that these buildings are seldom re-used by single occupants. Demolishing a bad decision, as with Aetna’s Middletown campus, or subdividing the structure for multiple users as in the case of Union Carbide, is far more likely.

Reliance by local assessors on the single occupant, value-in-use theory ignores the much greater likelihood of multiple occupancy, with attendant significant renovation, subdivision and tenant improvement costs, as well as a considerable period of vacancy while the building is marketed for lease.

The Egyptian pharaohs coerced thousands of slaves to build their pyramids three millennia ago, creating the classic single-user structure in the process. While these potentates succeeded in creating their brand and in making a profound statement about their majesty and importance, both in life and in death, most corporate campus headquarters lack these qualities and must stand the test of economic utility.

That so many campuses failed is one of the dramatic real estate stories of the last 40 years or so. Owners faced with appealing the assessments of overvalued headquarters assets today should emphasize that whether or not value in use to the user was ever a valid yardstick, is utterly irrelevant today.

pollackElliott B. Pollack is a member and Valuation Department chairman in the law firm of Pullman & Compley LLC, the Connecticut 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.  Melton Spivak, retired, was vice president of corporate property taxes for JPMorgan Chase & Co.

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Oct
31

The Price of Air - New York Ponders Fair Value for Right to Develop Taller Buildings

In order to fund proposed transit improvements in the vicinity of Grand Central Terminal, New York City is considering an air-rights zoning change to allow construction of perhaps a dozen buildings, primarily office towers, that would stand taller than is currently permitted. Developers would be asked to pay the city about $250 per square foot to acquire these new air rights, and the city would use the monies to carry out its proposed public improvements.

The pricing of new air rights under the proposal stands to pit the city against some New York property owners, who could see the value of their own air rights slashed as a result. A question with implications for commercial property owners is, how did the city determine the square-foot charge of $250? An article by Laura Kusisto in the Aug. 13 edition of the Wall Street Journal explores the brewing controversy.

The Landauer Valuation & Advisory organization calculated an estimate of value for the city. Landauer is a division of Newmark Grubb Knight Frank, a well-known real estate advisory firm.

Landauer first determined the value of office land in the Grand Central area, then applied a 35 percent discount. According to Robert Von Ancken, its chairman, residential or hotel uses were not considered in valuing the proposed air rights. Landauer relied on current market data and a methodology used in the past by market participants.

Argent Ventures, which already has a dog in this argument because it owns the air rights above Grand Central, has termed $400 a more accurate unit value. Argent's president has asserted that air rights should not be discounted off underlying land values and might even be worth more than land with the same development potential.

Argent bases this on work performed for it by Jerome Haims Realty Inc. and backed by another appraisal firm. However, as Kusisto notes in her Wall Street Journal article, "Argent has an interest in putting a higher price tag on the air rights because it will have to compete with the city to sell air rights to developers if the rezoning passes."

This controversy obviously sets an existing stakeholder against a municipality that needs to encourage growth in a particular submarket. The value of Argent's Grand Central air rights will be sharply influenced by the city's offerings. The city probably cares as much about creating tax flows from the buildings that would float on the newly created air rights as it does about the selling price, although the Wall Street Journal article does not mention this point.

From a valuation perspective, it would be interesting to review the Landauer and Haims studies, if only to learn in detail how these firms valued the right to create what apparently will be millions of square feet of new office product. Issues such as absorption, the impact of the transportation improvements proposed by the city on market values and the data relied upon to upport the appraisers' conclusions could offer a textbook tudy of a very complicated topic.

Ultimately, the New York City Council must vote on the creation and price of the new air rights.

Pollack_Headshot150pxElliott B. Pollack is a member of Pullman & Comley in Hartford, Connecticut and chair of the firm's Valuation Department. The firm is the Connecticut member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

 

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Jun
06

Actual Expenses Establish Low-Income Housing Value in Dispute

"The actual expenses, coupled with the rent restrictions, would cause a willing buyer to pay less for this type of a housing project as opposed to a market-rate apartment complex. Thus, the taxpayer carried its burden in proving that its property tax assessment was excessive..."

By Gregory F. Servodidio, Elliott B. Pollack as published by Affordable Housing Finance Online, June 2013

Property owners and assessment authorities continue to clash over the proper valuation for property tax purposes of rent-restricted, low-income housing. One of the most recent disagreements flared up in the small town of Beattyville, the county seat of Lee County in east central Kentucky.

A developer had converted a former Beattyville school into 18 units of low-income housing apartments. In connection with that conversion, authorities placed a restrictive covenant on the land use, to remain in place for 30 years. Under the restrictions, the Beattyville School Apartments could only take in tenants with incomes equal to or less than 50 percent of the local median income.

The Lee County property valuation administrator valued the property for tax purposes at $662,700, or about $37,000 per unit, in 2011. This value appropriately excluded any value attributable to the issued tax credits. Nevertheless, it was still well above the value of $130,000, or about $7,200 per unit, that the taxpayer presented on appeal. What created such a dramatic gap between those opinions?

The Kentucky Constitution mandates that assessors must value all property for tax purposes at fair cash value, meaning the price that the property is likely to bring at a fair voluntary sale. In arriving at fair cash value, the assessor is not obligated to consider every characteristic of a particular property, but the law requires her to consider those factors that most impact the property's value. In the case of rent-restricted, low-income housing, this requires considering those property characteristics that differentiate the asset from market-rate housing.

Interestingly enough, Lee County's assessor and the taxpayer agreed on just about all of the steps in estimating the property's fair cash value. Specifically, they agreed that the income approach to value was the most appropriate valuation methodology for this property type. They further agreed that the property's actual restricted rents should be used in the development of the income approach. They even agreed that the income approach should use a 10 percent capitalization rate, which is surprising, considering that capitalization rate selection is often a subjective determination and a point of contention between opposing valuation professionals.

The consensus broke down on the issue of expenses. The county's assessor had obtained the property's actual audited expenses as reviewed and approved by both the Department of Housing and Urban Development and the Kentucky Housing Corp. The assessor deemed those expenses to be excessive and decided to cap the expenses used in her valuation model at 35 percent of income. The assessor used the same expense ratio to value other businesses in Lee County. Using lower, capped expenses as opposed to actual expenses produced a value that was five times higher than the taxpayer thought it should be.

On appeal, the hearing officer for the Kentucky Board of Tax Appeals sided with the property owner on the expense issue. He concluded that it was inappropriate to cap the expenses used in the income approach since these expenses are to a certain extent a function of applicable state and federal law, which pushes them higher than those at market-rate apartments. To ignore the actual expenses is to overlook an important characteristic of the property that has a significant impact on its value.
If the assessor felt that the actual expenses were excessive for specific reasons, she could have provided evidence to that effect at the appeal hearing. Simply arguing that they were too high, however, was insufficient to convince the hearing officer to reject the use of audited and approved expenses.

The actual expenses, coupled with the rent restrictions, would cause a willing buyer to pay less for this type of a housing project as opposed to a market-rate apartment complex. Thus, the taxpayer carried its burden in proving that its property tax assessment was excessive.

In concluding that the complex should be valued at $150,000, the hearing officer and in turn the Board of Tax Appeals were mildly critical of the taxpayer's valuation presentation. The hearing officer noted that the taxpayer's appeal petition valued the property between $110,000 and $150,000. During the hearing, the taxpayer refined its value position to $130,000, but in a way that was not entirely clear from the record.

Citing an earlier Kentucky court ruling, the Board of Tax Appeals refused to put the taxpayer in a more advantageous position on appeal than the position it had staked out in its filing. This serves as yet another confirmation that a taxpayer should place the lowest supportable value on its appeal form, so as not to place a floor on its value position during the appeal process.

 

GServodidio pollack

Gregory F. Servodidio, CRE, and Elliott B. Pollack represent clients in property tax appeals and eminent domain matters at the Connecticut law firm of Pullman & Comley, LLC, the Connecticut member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Servodidio can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Pollack at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

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Jan
01

The Supreme Court Speaks; Some Taxpayers Shudder

"It was not of constitutional moment, the court decided, that the Indianapolis lump-sum payers were stuck for the full amount of their assessments while the installment payers received forgiveness reductions. Terminating the installment payers' obligations to make their remaining installments, the court observed, permitted the city to avoid "maintaining an administrative system for years ..."

By Elliott B. Pollack, Esq., Commercial Property Executive, January 2013

Property owners frequently raise legitimate questions about hard-to-fathom differences between assessments of similar properties, as well as the failure of municipal and county assessors to equalize values. Property owners may question the constitutionality of such unreasonable governmental actions in court. Attorneys, however, have long counseled clients that attempting to toss out an assessment, or a valuation system, on constitutional grounds is a very steep hill to climb. The U.S. Supreme Court underscored the accuracy of this advice last June in a rather prosaic piece of litigation involving sewer assessments.

The city of Indianapolis' policy to pay for sewer construction and line extensions was to apportion the cost among abutting lots. After assessing the initial project, the city divided the cost among the number of affected lots. The city also made adjustments to reflect differences in lot size and configuration. Upon completion of the project, each lot received a final assessment. So far, so good.

Once in receipt of the proposed assessment, a lot owner could choose to pay the amount due in a lump sum or in installments, a choice typically given to property owners facing capital assessments in most U.S. jurisdictions. One particular sewer extension project affected 180 Indianapolis homeowners; 38 chose to pay their obligations at once, and the remainder opted for installments.

Just one year later, the city abandoned the lot apportionment assessment methodology, instead adopting a complicated payment plan based on project bond financing, which need not be discussed here. The key to the new system was that it reduced the liability of the individual lot owners affected by this project.

This was good news for the 142 homeowners who had opted for the installment payment plan, but it went over like a lead balloon for the 38 homeowners who had paid in full. Why? Because in the course of adopting the new financing plan, the city forgave all remaining installments owed under the old format but did not attempt to make refunds to those homeowners who had paid in full.

Understandably upset that they did not receive the same financial consideration that the installment payers received, the lump sum payers initiated refund litigation. The property owners met with initial success but lost the case in the Indiana Supreme Court, which ruled that the city had a rational basis for forgiving the remaining installment payments. Among the reasons the city offered, and the court approved, was a reduction in the city's administrative costs because the cost of calculating refunds to the lump sum payers and making refunds did not warrant doing so. The city also indicated an interest in providing financial relief to the installment payment homeowners. The homeowners took their case to the U.S. Supreme Court, which agreed to hear their appeals.

The Supreme Court concluded that as long as "there is any reasonably conceivable state of facts which could provide a rational basis for the decision" made by Indianapolis, it was constitutional. This thinking is in keeping with a long line of rulings that make it clear the justices are almost always unwilling to wade into the tax-fairness swamp. Commentators suggest that this reluctance is based on the court's perception that once it starts deciding whether a particular tax or tax refund plan is constitutional, it will be deluged with hundreds of cases from all over the country. As a result, the court has developed a jurisprudence that requires it to defer broadly to the judgment of local taxing authorities, except in extreme circumstances.

It was not of constitutional moment, the court decided, that the Indianapolis lump-sum payers were stuck for the full amount of their assessments while the installment payers received forgiveness reductions. Terminating the installment payers' obligations to make their remaining installments, the court observed, permitted the city to avoid "maintaining an administrative system for years ... to collect debts arising out of (many different construction) projects involving monthly payments as low as $25 per household."

The fact that Indianapolis authorities were concerned about potential financial hardships that might be suffered by certain installment payers if their remaining obligations were not forgiven stuck in the craw of the lump sum payers and probably made them wonder why the city did not think of their potential financial hardship, as well. Nevertheless, the Supreme Court ruled that the "city's administrative concerns are sufficient to show a rational basis" for its action. Once the court discerned a rational basis, it refused to take its fairness and constitutional analysis any further.

The June 4, 2012, ruling was signed by Justices Breyer, Kennedy, Thomas, Ginsburg, Sotomayor and Kagan. Justices Scalia and Alito joined Chief Justice Roberts' vigorous dissenting opinion.

Pollack Headshot150pxElliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley L.L.C. The firm is the Connecticut 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..

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Apr
18

Real Estate and the Yankees

Why Hotels and Nursing Homes Prove Especially Vulnerable to Inaccurate Taxation

"The most valuable asset the team would acquire through that contract would be a continued association with the Derek Jeter name, a brand in which the team has invested a great deal. The Yankees' challenge in reaching a new contract with Jeter, recently accomplished, indeed echoes the difficulty faced by many municipal assessors in valuing properties that are as much business as they are parcels of real estate."

By Elliott B. Pollack, Esq., as published by Commercial Property Executive, April 2011

Tax laws across the United States typically prohibit assessors from including intangible assets such as good will, franchise value or business value in a property tax assessment. Only tangible real and personal property may be placed on assessment rolls. But taxpayers and assessors alike sometimes have difficulty differentiating between tangibles and intangibles.

That's understandable on the part of taxpayers who may need to include intangibles in their calculations when buying or selling a hotel, nursing home or assisted-care property. For purposes other than property taxes, intangibles often are part of a property's overall value. Indeed, rivers of ink in appraisal and valuation literature—not to mention judicial rulings— have been devoted to the issue of intangibles.

Unfortunately, many assessors don't fully understand how to exclude these non-taxable elements from their calculations, either. For the unwary property owner, the resulting overassessment can result in an equally overstated tax bill. One way to gain a clearer perspective on the degree to which intangible assets can affect value is to turn our lenses on another field entirely—a baseball field, in fact. On Nov. 10, 2010, sports columnist Richard Sandomir presented an illuminating look at the talents of the New York Yankees' redoubtable shortstop, Derek Jeter, in an article for the New York Times. "The Yankees would not quite be the Yankees if (Derek Jeter) suited up with another team," Sandomir noted. The writer contended that Jeter adds substantially to the Yankees' overall value, much in the same way, it can be argued, that a respected brand boosts the worth of a hotel. Without Jeter's headline-grabbing performances, the team would be less valuable, just as an unflagged hotel is likely to be less valuable than its branded competitor. Sandomir quoted a business consultant who observed that Jeter's playing, were he less celebrated, might be worth $10 million a year. But as an iconic draw for ticket sales, Jeter's value to the team is closer to $20 million each year. The Yankee captain's "value as a brand builder," the expert noted, not merely as a hitter or infielder, is what drives his intangible worth differential, again, very much like the business value inherent in a well-managed hotel or convalescent facility.

With Jeter's lengthy contract concluded, it would be foolish for the Yankees not to sign him up again as he enters free agency, even though his baseball skills have eroded, the expert opined. The most valuable asset the team would acquire through that contract would be a continued association with the Derek Jeter name, a brand in which the team has invested a great deal. The Yankees' challenge in reaching a new contract with Jeter, recently accomplished, indeed echoes the difficulty faced by many municipal assessors in valuing properties that are as much business as they are parcels of real estate.

After years of resistance from taxpayers and their attorneys, it seems taxing authorities in the United States are getting the message about intangible assets. It now appears that the majority of assessors recognize that the net operating income generated by a hotel, as an example, does not result exclusively from its real estate value. In fact, the management expertise—which drives revenues from non-occupancy hospitality services such as food service, special events and recreation revenues—is an asset independent of and severable from the real estate itself.

Similarly, the intensive services furnished to the patients of long-term-care convalescent facilities are distinct from the property in which those services operate. Indeed, nursing and medical care, meals and rehabilitation produce revenues that have little to do with the real property and should not be capitalized when the health-care facility is valued using an income methodology.

There is case law to provide examples of the correct way to value commercial real estate without inflating taxable value by rolling intangible assets into the equation. Taxpayers interested in doing a little research will find one court's approach toward the separation of intangibles and the valuation of health-care real property in the case of Avon Realty L.L.C. v. Town of Avon, decided in 2006 by the Superior Court of Connecticut, Judicial District of New Britain. In that case, the owner of the Avon Convalescent Home, a 120-bed skilled nursing facility, appealed an assessed value in excess of $5 million on the grounds that the assessor hadn't deducted sufficient value attributable to intangible assets from the business's overall value. Upon review, the court deemed the value to be a little more than $4 million, supporting the taxpayer's appeal.

A thorough understanding of the issues and methodologies involved in properly differentiating and valuing tangibles and intangibles marks the difference between fair and excessive property tax assessments for hotels, nursing homes and assisted-care facilities.

 

Pollack_Headshot150pxElliott B. Pollack is chair of the property valuation department of the Connecticut law firm Pullman & Comley L.L.C. He cautions that he is an avid Boston Red Sox fan. The firm is the Connecticut member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Oct
23

Lack of Data Complicates Property Valuation

"Consider market developments after the valuation date. Even though an appraiser or the assessor generally ignores after-occurring transactions, an equalization board or court may find the information useful..."

By Elliott B. Pollack, as published by Commercial Property Executive Blog - October 2010

As municipalities reassess real estate within their jurisdictions, those counties and cities which are required to rely upon market value, as opposed to formulaic or historic cost based approaches, have a major problem. The lack of transactions in the late 2007-late 2009 time frame means that appraisers' jobs will be far more complicated.

How to estimate market rent when there are a few tenants signing leases? Is there a way to determine market-based capitalization rates when there are few sales from which rates can be derived? How to calculate band of investment capitalization rates when mortgage financing is so difficult to come by?

When assessors ask themselves these sorts of questions, their reply usually sounds something like this: "I have a job to do. Even in the absence of data, I must determine market value as of my jurisdiction's assessment date. I will do the best job I can in the circumstances."

This means that the ad valorem tax valuation of your commercial property today is difficult to calculate and is likely to be too high.

Take the time to review the accuracy of your assessment with competent appraisal and property tax counsel. If you are fortunate enough to own a trophy asset or a property in a major market, go to internet data sources for a preliminary analysis.

Consider market developments after the valuation date. Even though an appraiser or the assessor generally ignores after-occurring transactions, an equalization board or court may find the information useful.

Look at the values of comparable properties with an eye to determining the equity of your assessment. Even if a valuation appeal isn't possible, an equalization attack may be an option. Most importantly, talk with brokers and lenders. They may hold valuable information about failed financing applications, busted transactions and lease negotiations which will be of great assistance in weighing the approximate accuracy of the assessor's value.

Pollack_Headshot150pxElliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley, LLC. The firm is the Connecticut 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..

 

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Jul
24

Is the Current Use the Highest & Best Use?

"Appraisers seem conditioned to accept the property's current status, and it is almost politically incorrect to challenge it..."

By Elliott B. Pollack, Esq., as published by Hotel News Resource - July 2010

The first step a real estate appraiser must take before valuing a property is to identify its highest and best use (HBU). Indeed, it is a truism that everything in an appraisal flows from this determination.

HBU is "the reasonable, probable and legal use of vacant land or improved property, which is physically possible, appropriately supported, financially feasible and that results in the highest value." That being said, appraisers rarely conclude that the HBU of a property is different from the current use. Why? Appraisers seem conditioned to accept the property's current status, and it is almost politically incorrect to challenge it. Moreover, the fee structure under which many appraisers function discourages them from taking on this often expansive mission.

Nevertheless, the horrible economic conditions of the last two-plus years have severely undermined the viability of many hospitality properties. As more operations become marginal, appraisers should question whether the profitable years of a particular hotel may be in its past. This is true even if it wouldn't make sense to immediately demolish and construct some other use, or to simply turn the property into a parking lot.

Take the case of a tired, decades-old, un-flagged property that suffers from deferred maintenance. Is it reasonable to conclude that a buyer, or even the current owner, would make the necessary investment to prolong its life much longer? If not, then the appraiser should consider whether the amount of physical, functional and economic obsolescence inherent in the property has numbered its days. Even though operations may continue for another few years, given the lack of alternative uses presently, the effect on appraised value is the same.

With properties struggling to remain viable, the appraiser should research whether or not current hospitality HBU will likely come to an end in the foreseeable future. If that outcome is likely, the appraiser should consider developing a discounted cash flow that incorporates demolition costs and future revenues as a surface parking lot or some other improved use. If similar properties in the area have been demolished or converted to alternate uses, such as housing for senior citizens, then support for a new HBU becomes even stronger.

The appraiser who fails to grapple with the sort of fact pattern set forth above will be doing his client a disservice, and may generate an excessive valuation and an unduly heavy ad valorem tax burden for her client.

Pollack_Headshot150pxElliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley, LLC. The firm is the Connecticut 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..

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Oct
01

Health Care Property Tax Exemption Issues Loom Large

Charitable Giving vs. Tax Breaks

"A notable 1971 decision involving a staff apartment house owned by Hartford Hospital upheld the exemption even though the property had nothing to do with the direct provision of health care..."

By Elliott B. Pollack , Esq., as published by The Commercial Record, October 2009

It is no secret that Connecticut leans more heavily on local property taxes to support the activities of municipal government than almost any other state in the union. The recent economic downturn and lack of leadership in Hartford to achieve meaningful property tax reform has only exacerbated the situation.

Over the years, assessors in several Connecticut communities have tested entitlement to the local ad valorem exemption and have enjoyed a certain degree of success. Most of the cases have dealt with private schools, colleges, low income housing and fund raising organizations. A notable 1971 decision involving a staff apartment house owned by Hartford Hospital upheld the exemption even though the property had nothing to do with the direct provision of health care. A use "necessary" for an exempt use was sufficient to bring the property under the exemption tent. Judicial efforts to develop coherent rules have created confusion about just what the law requires.

Does It Make Sense?

As health care has consumed more and more of our gross domestic product, large health care organizations have become billion dollar businesses with executives who command eye-popping salaries. Assessing authorities across the country have noted that many of these behemoths are run like profit-making businesses, and, while they are exempt under federal income tax law, the rationale for their property tax exemption may no longer exist.

Most states have focused on the intrinsically charitable origin of nonprofit health care when they have awarded health care institutions the exemption. After noticing that some of these entities furnish very little charitable care, a number of assessors went on the attack. Other assessors became aware that institutional health care providers had developed a panoply of new profitable services, some of which seemed to go beyond the mission statement in their organizational documents.

Two cases, one decided by Connecticut's highest appellate tribunal in March 2009 and one now before the Illinois Supreme Court, exemplify this trend.

In the Connecticut case, Saint Joseph's Living Center in Windham lost its local tax exemption. The Windham assessor asserted that because virtually all of the Center's patients' care was being paid from public or private sources, insufficient free or charitable care was being delivered. Charitable contributions were not significant. He also claimed that the short-term rehabilitation services which the Center had instituted were totally compensated, no free care was rendered, rehab was not one of the Center's stated charitable purposes and even wealthy patients would be served. The last arguments were accepted by the Connecticut Supreme Court in what may prove to be one of our more significant property tax exemption decisions in decades.

In a case which has made national headlines, Provena Covenant Medical Center in Urbana, Illinois is seeking to overturn a lower court decision denying its property tax exemption. Citing evidence that only 0.7 percent of its revenue was devoted to free or discounted care, the Illinois Attorney General urged the state's Supreme Court to uphold the revocation. Serving only 302 of 100,000 patients on a charitable basis is far short of the commitment to charitable care which is necessary to support the exemption, claimed the Illinois Attorney General. He also noted that bills sent to indigent patients failed to mention the availability of free or discounted care.

Provena's response was that the amount of charitable care actually provided is unimportant. The only relevant factor is whether the institution makes such care available to all.

The fiscal stakes could not be higher. One has only to look around Connecticut and to guesstimate about the billions of dollars in exempt real estate and personal property owned by currently exempt hospitals (we have only one for-profit hospital) and nursing homes. Millions of annual potential property tax payments may be on the line.

The federalization of health care which occurred in the mid 1960s with the passage of Medicare and Medicaid, together with the relentless growth of employer-based insurance, directed billions of dollars of new revenue to American hospitals. Those located in central cities generally support substantial charitable care to poor and lower-income citizens. Those hospitals in suburban areas may receive payment for virtually every service rendered. Does this fact justify judicial intervention to overturn local property tax exemptions in the most egregious cases? Or is this issue so basic to the fabric of our society that it should only be addressed, if at all, by legislation?

The Connecticut Supreme Court's decision in Saint Joseph's supported the denial of the health care facility's tax exemption on narrower grounds than those asserted against Provena. That is not to say, however, that other cases will not bubble up through the court system in which a Connecticut nonprofit hospital or nursing home may have to answer the challenges presented in Illinois.

Pollack_Headshot150pxElliott 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 This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jun
04

Controlling LIHTC Property Taxes

Tips to help affordable housing owners control their tax burden

"Being a unique property type established largely as a creature of government funding/subsidy programs, affordable housing assessment challenges should not take a cookie-cutter approach."

By Elliott B. Pollack, Esq. as published by Affordable Housing Finance, in a Web Exclusive AHF Newsletter, June 2009

When it comes to property tax considerations for affordable housing, one expert summed it up well. He wrote: "Opinions on the proper assessment of affordable housing real property are varied, and decisions on the best method to use in developing these assessments vary from jurisdiction to jurisdiction."

Thus, controlling the tax burden of affordable housing properties is a difficult matter about which to generalize. However, based on available guidance and experience, a number of questions should be researched by owners in all jurisdictions:

  • Is there a state statute of general application that addresses the valuation of affordable housing for ad valorem purposes? If so, is the statute applicable to the type of financing/subsidy arrangement in place at the property? For example, what income or asset tests must be met by residents for the project to qualify?
  • Has the local assessment authority issued any regulations dealing with this issue?
  • Has a state agency with oversight authority over the local assessment practices carried out its duties?
  • What restrictions are imposed on the owner? How long are these restrictions in place?
  • If the nature of the financial benefit derives from mortgage financing, when do these restrictions expire?
  • How have the courts of the applicable jurisdiction ruled on valuing these properties? What are the reported decisions from the highest appellate court or various trial courts?

Finding highest and best use

With those questions in mind, let's look at the approaches to real estate valuation: costs, sales, and income. With each methodology, determination of value requires understanding, first, and concluding what the highest and best use may be.

In this analysis, the highest and best use finding must be able to include the fact that the property is in some fashion or other rent-restricted and/or return on investment (ROI) limited and dependent on the government subsidy, guaranty, or concession for its creation and ongoing existence.

The cost approach is usually not helpful to value an affordable housing property. For older developments, depreciation and obsolescence generally become difficult to measure. For newer properties, construction cost is irrelevant unless the same government subsidy or program can be determined to be in place to support a new property. In these economically stressed days, that assumption may not hold.

The sales approach contains many of the same deficiencies since most market transactions will not be government-subsidized properties, but rather market-rate projects. Affordable housing projects tend not to trade frequently. By the same token, lack of comparable rent structures and locations will usually render the sales approach of little help.

In most circumstances, the income approach is the best methodology. As Richard E. Polton, MAI, points out, a property in the early years of its rent/net operating income (NOI) restriction covenants is probably best valued using a direct capitalization methodology. However, he continues, a project nearing the end of these restrictions, with a reasonable opportunity to revert to a market rental structure, might be better valued using a discounted cash flow approach.

In order to keep property assessment (and therefore taxes) as low as possible, a very careful analysis of the regulatory regime in place must be undertaken by the expert appraiser. Extraction of relevant provisions from the project documents, which support the restricted rent/NOI theme, usually constitutes a wise approach. Inclusion of applicable federal/state statutes and regulations to support the highest and best use conclusion will make the appraiser's report more credible and readable.

What's the cap rate?

Since the NOI of an affordable housing project should be fairly easy to establish, the key analytical challenge becomes developing and supporting a cap rate in order to express the correct market value.

The most convincing data are cap rates extracted from the sales of other affordable housing projects. If sales cannot be located in the immediate or surrounding jurisdictions, regional or national data should be obtained and examined since many larger affordable housing developments trade in the national market. This national activity typically takes place after the original developer extracts development fees and any applicable tax credits for itself and its investors.

Many experts do not think cap rates derived from market sales of non-restricted properties are terribly relevant in developing rates for income/NOI-restricted units. While restricted projects tend to be perceived as carrying lower risk due to assured income streams, appreciation is nonexistent, and major value upgrading potential such as condo conversion is usually impossible. Therefore, non-restricted properties as a group tend to sell at lower cap rates, meaning higher unit values because of the far greater upsides. Affordable housing owners should determine whether the assessing jurisdiction has attempted to place a separate value on the federal housing assistance contract, low interest rate mortgage, or rent subsidy. While these efforts may inflate value, they usually fail to meet state assessment law requirements, which reject adding the value of intangible financial assets to real estate assessments. In most jurisdictions, an attack on the effort by the authorities to assess intangibles will produce a winning assessment appeal.

The devil's in the details

Everyone would agree that a "fair" assessment should be accepted by an affordable housing project. The "devil" of achieving this goal is in the nitty-gritty associated with relating assessments to the ability of a property to carry a particular tax load.

An owner's inability to pass tax increases through in the form of rent subsidy increases or other financial offsets frequently can convince the assessor to reduce his or her expectations. In one circumstance, a tax professional found it very helpful in the prosecution of an affordable housing tax appeal to ask the owner to send leaflets to the property's 300-plus elderly residents about the tax increase concerns. The dozens of letters to the local assessor expressing concern about potential rent increases presumably had some impact in enabling the case to be settled.

Owners should also review for compatibility and consistency the assessments of affordable housing in their jurisdiction or neighboring communities. Occasionally, a tax appeal asserting lack of equalization will be victorious.

Being a unique property type established largely as a creature of government funding/subsidy programs, affordable housing assessment challenges should not take a cookie-cutter approach. An intimate knowledge of the property, applicable financing and restrictions, and market conditions become critical to keeping an assessment under control and thereby bringing taxes down. In the absence of legally binding guidelines or assessment practices and protocols applicable to affordable housing projects, an owner seeking assessment justice has much homework to do.

Pollack_Headshot150pxElliott 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 This email address is being protected from spambots. You need JavaScript enabled to view it..

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Oct
05

Understand Highest and Best Use Before Filing a Tax Appeal

"HBU is not a conclusion reached mechanically; it requires at least a bit of thought. Ignoring the chance that your current use is inferior to the HBU of your property is not a wise gamble."

By Elliott B. Pollack , Esq. and Richard R. Wright, as published by Corporate Real Estate Leader, September/October 2008

Before deciding to challenge the value of your property in U.S real estate tax appeal proceedings, spend a few moments considering its highest and best use as of the relevant date of value. Highest and best use is not an arid expression of appraisal jargon; it is a critical point of analysis for the property owner, in concert with his expert advisors and counsel, before putting his property in play.

Most states require real estate values to be determined, at least after informal proceedings have concluded, on the basis of expert testimony from appraisers. In order to furnish an opinion as to market value, it is necessary to have an understanding of a property's highest and best use. Market value, as we know, is the amount which in cash or cash equivalents would be paid to a knowledgeable seller by an equally knowledgeable buyer, both free of constraints not typical in the applicable market place.

Highest and best use (HBU) is the most valuable use, in terms of dollars (or these days, perhaps euros!) to which a property may be devoted. Many owners fall into the trap of making the unwarranted assumption that the current use of their property is its highest and best use.

In a dynamic real estate market, reflexively deciding that current use equals HBU can be dangerous. It's equivalent to believing absolutely that the future will be the same as the past.

HBU Isn't Always Visible in a Rear View Mirror

The current use of a property is the use to which it has been put based on past understandings of the market and historic economic judgments. Depending on how long ago that decision was made, its accuracy as a current HBU may be subject to challenge. Just because someone decided to construct a strip mall on a 20 acre tract of verdant farmland 20 years ago does not mean that the existing strip mall is the HBU today. Just because a service station was constructed on the corner of a busy intersection in one of New York City's five boroughs shouldn't blind the owner to a future user's objectives. And although a surface parking lot has been generating substantial monthly and transient revenues for its owner does not necessarily mean that a buyer would reach the same economic conclusion as to future use.

Of course, the less significant the buildings and improvements are on a parcel, the more likely a fresh look at HBU is required. But the fact that a major office building or hotel occupies a certain land parcel may have nothing to do with the future use to which the market tells us that the parcel should be put. And, of course after all, we must listen to the market if we are to correctly gauge market value!

The foregoing remarks suggest that if the current use is not economically advantageous, prosecuting a tax appeal may or may not make sense. For example, the obsolete hotel which faces demolition may or may not be replaced by a more economically valuable use. Viewed from the perspective of at least several years down the road, the property may currently be worth less for ad valorem tax purposes than the assessor believes. If, however, following demolition, the site is to be rapidly repositioned for an intensive mixed use development, the current hotel improvement may tell us less about market value than we think it does.

Gas Stations Typify Current HBU Issues

Should the owner of the abovementioned hypothetical gasoline station challenge her ad valorem assessment? Perhaps the station generates less revenue than she thinks it should, not as a result of fundamentals but due to a poor operation, grungy building, unattractive flag or changes in neighborhood traffic patterns. Poor economic results may also indicate that a use once thought to be one of the most commercially intensive and profitable uses available to a smaller parcel has been eclipsed by other uses.

Recent market data indicate that certain gasoline station sites were being sold at multiples of five and ten times what they would be worth as ongoing filling stations. Why? Research showed that developers have been able to reposition gas station properties for retail and, occasionally, residential uses, depending, of course, on the location and environmental compliance, due to changing neighborhood and macro-market conditions. Neighborhoods once thought to be somewhat unattractive are now in great demand to yuppies and empty nesters. The lack of urban development sites, measured against the rather modest improvements found at gas stations, has raised the value of some corner service stations beyond what they could ever fetch based on the current, use. The owner of that property might challenge her ad valorem assessment at his peril.

Conversely, the gasoline station owner may properly conclude that, if sold, her property would yield less than she thought. For example, new highway construction diverting traffic away from a formerly easily accessible and visible site might be one of many reasons for lowering HBU and therefore market value.

How Owners Can Use HBU

HBU represents the foundation of a real estate appraisal and, in almost every case, an assessor's or board of tax appeal's market value judgment. The Uniform Standards of Professional Appraisal Practice (USPAP), the "bible" to which appraisers must conform their work, tells us that appraisers must develop a market value opinion based on HBU. The factors to be reviewed by an appraiser include:

  • The physical capabilities and potential of the site;
  • The impact of applicable land use regulations;
  • Economic supply and demand; and
  • Neighborhood, local and regional economic factors

Many property owners, either acting themselves or through others, initiate ad valorem assessment review proceedings, if even on an informal basis, before an HBU judgment is reached. Sometimes, contests are initiated simply because taxes increased over a prior year or because some predetermined ratio of taxes to gross operating income has been violated. Hopefully, the foregoing discussion shows how unwise this approach can be in certain cases.

The pitfalls of bringing a tax appeal without thoughtful consideration of HBU are amply displayed by an actual event not involving the authors or their employers. A large commercial property developer engaged a consultant officed in a distant state to appear before the local Connecticut board to challenge the assessment of a vacant land parcel. He came charging up to the appeal on a snowy evening in early March. As part of his informal presentation, he showed the board a valuation analysis his client had prepared both on an "as vacant" and "as improved" basis. Since the property was in the midst of a hot development market, the board fastened on the "as improved" conclusion and tripled the assessment which the hapless fellow had come before it to appeal!

The same observation is applicable to ill considered assessment challenges which fail to recognize the likelihood of an assessor reaching a higher HBU opinion than the current use. Calling the property to the assessor's or the board's attention can trigger a reconsideration which will increase an assessment. Spending the time to consider the potential of this risk before rushing off to an assessment contest is highly recommended.

HBU is not a conclusion reached mechanically; it requires at least a bit of thought. Ignoring the chance that your current use is inferior to the HBU of your property is not a wise gamble.

Pollack_Headshot150pxElliott B. Pollack is a member of Pullman & Comley in Hartford, Connecticut and chair of the firm's Valuation Department. The firm is the Connecticut member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Richard R. Wright is Senior Property Tax Manager of J.C. Penney Company, Inc. in Dallas, Texas.

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