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Property Tax Resources

Oct
23

How to Avoid Excessive Property Taxes

Knowing what to look for in monitoring your assessments can help avoid over taxation.  

By Gilbert D. Davila

As robust occupancies and escalating investor demand in many markets drive up property tax bills for multifamily housing, apartment owners must continue to monitor their assessments to avoid overtaxation. Knowing what to look for can ease this task, and the place to start is with a firm grasp of the assessor's methodology.

Many taxpayers are unaware that assessors typically use a mass appraisal technique to derive assessments without referencing or even collecting details about a property's unique characteristics or performance. Property owners who understand the mass appraisal procedure have a distinct advantage in identifying assessment errors, and this knowledge can inform the apartment owner's arguments when they choose to fight excessive valuations.

Rooted in Generalities
The burden on appraisers to generate thousands of property values, often annually, is colossal. For this reason, assessors determine most market values for assessment purposes through mass appraisal, which is the process of valuing a group of properties as of a given date using common data, standardized methods, and statistical testing. Assessors using mass appraisal rely upon valuation equations, tables, and schedules developed through mathematical analysis of market data.

Mass appraisal analysis begins with assigning properties to classes or strata based on highest and best use. Valuation models are created for defined property groups, such as industrial or office, and are then calibrated to reflect the market factors for that specific market or submarket.

The International Association of Assessing Officers (IAAO) sets mass appraisal standards for assessors, by which an assessor can appraise the fee simple interest in property at market value. These standards set the preferred methods for mass application of the three traditional approaches to value (cost, sales comparison, and income). Armed with this information, apartment owners can attack mass appraisal procedures that result in values that don't reflect a property's true market value.

Property Data Errors
IAAO standards dictate that valuation models should be consistently applied to property data that are correct, complete, and up-to-date. However, assessor records commonly contain errors relating to a property's age, total square footage, net leasable area, number of apartments, unit mix, and facility amenities. An error in one of these fundamental property characteristics can significantly increase a property's overall assessment.

When arguing errors in specific property data, apartment owners should be prepared to share a current rent roll with their assessor in order to document the property's square footage, net leasable area, number of units, and unit mix. It may also be helpful to provide the assessor with copies of the property's most recent marketing materials, which show the project's various floor plans and amenities. Finally, pointing out land-size discrepancies or external nuisances such as traffic or airport noise can be helpful in arguing for lower values.

Income Approach
Assessors typically use the income approach in valuing apartments. Mass appraisal application of the income approach begins with collecting and processing income and expense data gathered from the marketplace. Appraisers then compute normal or typical gross incomes, vacancy rates, and expense ratios to arrive at a net income that is capitalized using a market-driven cap rate. This approach is often problematic because it fails to take into account a property's unique economic performance in a dynamic market.

Perhaps the best defense against excessive appraisals is to attack an assessor's mass appraisal income pro forma. Apartment owners should distinguish their property's rental rates and expense ratios from market data by providing current and prior-year operating statements if the numbers support a value reduction. Assessors often overestimate rent and underestimate expenses.

Owners should also provide occupancy reports to portray the property's occupancy trends, compare the property's occupancy level with market comparables, and outline any concessions and allowances the owner provides renters to maintain occupancy. The standardized vacancy and collection loss factor used in a mass appraisal income approach rarely captures the true physical and economic occupancy of a project.

Finally, owners should refute cap rates derived from sales of properties that aren't comparable to the subject.

Mass appraisal is a necessary evil that apartment owners should guard against. Knowing how assessors apply the procedure will help taxpayers in their continued fight to reduce property taxes.


Gilbert Davila is a partner in the law firm of Popp Hutcheson PLLC , the Texas 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
12

Oversupply, Taxes Choke Self-Storage Growth

 According to Gilbert Davila, principal at Popp Hutcheson PLLC, an Austin-based law firm specializing in property taxes, the hikes are primarily attributable to basic increases in construction and investment in self-storage properties across Texas. Based on how pricing for commercial real estate in Texas has generally skyrocketed in recent years, appraisal districts are now able to derive very low cap rates for many of the properties they assess. In addition, Davila says appraisal districts are only just beginning to have access to comprehensive data to use in valuing properties in this sector. "Prior to the last couple years, appraisal districts weren't very aggressive on self-storage owners, and now they're playing a  game of catch-up" he says. "However, we should be past the worst of the exponential increases and should see more stagnant property tax valuations for the year 2018."

Davila also points out that many self-storage owners are now protesting their assessments in court. Because Texas law requires all properties within a certain jurisdiction to be assessed equally and uniformly with facilities of similar sizes, this litigation should help lower the median level of valuation for self-storage assets.

Aug
22

How to Fight Aggressive Property Tax Assessments

The student housing market is robust, generating strong market data that tax assessors are using to support increasingly aggressive property tax assessments. Thus, student housing owners must monitor their property values and arm themselves with the tools to fight excessive valuations.

Forecasters expect the student housing market to grow for the next several years, primarily because of its stability. Healthy investor interest led to a 71 percent year-over-year increase in student housing sales volume at the end of the third quarter of 2015, according to Real Capital Analytics. In addition, the market’s average overall cap rate was down 37 basis points from the first quarter of 2015 to the first quarter of 2016.

Combined with increased demand for beds that accompanies accelerating enrollment at the largest universities, these healthy fundamentals will encourage assessors to boost property tax assessments. In many cases, assessors will produce inflated valuations that cannot be supported by market data or realistic operating scenarios.

Student housing owners should consider the following issues to combat aggressive assessments:

Evaluate the approach

Assessors commonly derive a market value using one or more of the three classic approaches to value: cost, income or sales comparison.

The cost approach is arguably the least reliable method if the property is more than a few years old, especially given the difficulties of estimating depreciation and obsolescence factors for older properties. An assessor will most likely rely on an income and/or sales comparison approach when valuing student housing. Taxpayers can achieve lower assessments by disputing how the assessor has applied a valuation methodology to a specific property.

Challenge sales data

Assessors are using the sales comparison approach more frequently, given the huge sale volumes previously mentioned. Student housing owners should remind assessors that a sale price does not necessarily equate to market value.

While discussing comparable-sales data with the assessor, the taxpayer can sometimes discredit a sale’s relevance by outlining the physical and economic differences between the property sold and the assessed property. Point out to the assessor the factors influencing a buyer’s decision to purchase a property, which may make the sale incomparable to the taxpayer’s property.

Did the assessor reference any portfolio purchases in the sales comparison? Point out that properties in a portfolio are typically priced as a group, and may not reflect market value.

Finally, emphasize buyer motivations such as time constraints or income tax consequences that affected the price of the comparable property. Owners should consider a tax appeal even if the recent purchase price of their complex is higher than the current property tax assessment. Buyers pay for properties based on factors beyond real estate, so a purchase price should provide no more than a touchstone for an assessor.

Taxpayers should outline the factors they considered in purchasing the property, such as special financing considerations. Show how the property’s performance differs from projections made at the time of purchase.

Sharing the purchase price may lead to a higher assessment, but student housing owners can mitigate the amount of the increase with a meaningful purchase price discussion with the assessor.

Beware incompatible income comparisons

Properties built and/or operated specifically as student housing projects are often referred to as purpose-built properties. An alternative student housing solution in college areas is conventional, market-rate apartments, also known as student competitive apartments.

On the surface, purpose-built and student competitive projects are similar in use and function. When an assessor is using an income approach to value, however, the properties’ differences become significant.

Competitive properties usually include more studio and one- or two-bedroom apartments, while purpose-built properties have more three- and four-bedroom units. Competitive complexes rent by the apartment, while purpose-built properties rent by the bed. Rental rates and amenities also can differ dramatically between the two property types.

In an income approach, assessors typically use market-driven rent, vacancy, and expense factors to arrive at a net operating income figure that is then capitalized using a market-driven capitalization rate. The most common mistake assessors make using this approach is applying competitive market data in their analysis rather than purpose-built market factors.

Student housing owners should be quick to point out the differences between these two property types: For example, competitive apartments are valued per square foot, while purpose-built housing is valued by unit or bed.

Owners should emphasize occupancy fluctuation differences between competitive apartments and a purpose-built property, which may have low occupancy during the summer. Also point out the influence of the on-campus housing supply on the performance of an off-campus, purpose-built project.

Finally, be mindful of how a property’s distance from campus affects rental rates. There is typically a direct correlation between proximity to campus and higher rent levels, leasing velocity and occupancy for purpose-built properties. The correlation isn’t as strong at student competitive properties.

Even if an assessor is using appropriate data from comparable purpose-built properties, owners should challenge the market factors in the assessor’s analysis with data taken directly from the property’s current and previous year’s operating statements, if such data is in the property owner’s favor. An operating statement can help distinguish the owner’s property from projects that lead to higher assessments. Pointing out specific income and expense items can show trends in rental rates, occupancy and expenses that differ from the market trends alleged by the assessor.

Even in a strong market, student housing owners should constantly monitor their property tax assessments, and have the courage to combat assessments derived from sales or income data.

Davila Photo 3Gilbert Davila is a partner in the Austin law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Davila can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Oct
30

Six Ways to Reduce Student Housing Property Taxes

Advice on one of the biggest hurdles in acquiring -- and owning -- off-campus student housing properties.

Property taxes can have a huge impact on a student housing project's bottom line, and that expense is growing as assessors across the country aggressively increase valuations. Student housing owners should ask themselves the following questions as a part of any effort to combat excessive valuations.

1. Is My Property Data Correct?

Assessors' records commonly contain errors regarding a property's age, square footage, leasable area, number of units, number of beds, unit mix and amenities. An error can significantly increase a property's assessment.

Providing a current rent roll to the assessor can correct many of the above-referenced mistakes. Consider providing a property site plan and marketing materials that show the project's floor plans and amenities. Correcting basic errors in the assessor's records remains the simplest path to a lower tax assessment.

2. When Will My Property Be Re-Appraised?

Assessment schedules vary from state to state and sometimes county to county. Many jurisdictions appraise commercial property annually, while some opt for every three to five years. A handful of jurisdictions reevaluate a property's assessment only when the asset sells. Student housing owners should learn their jurisdictions' appraisal rules, since this can factor into a property tax appeal.

3. How Did The Assessor Arrive At My Valuation?

Assessors commonly derive market value using one or more of the three classic approaches: cost, income, or sales comparison. Cost is arguably the least reliable approach if the property is more than a few
years old, especially given the difficulties of estimating depreciation and obsolescence for older properties. In valuing student housing, an assessor will most likely rely on an income and/or sales comparison approach. Taxpayers have reduced assessments by disputing how the assessor applied a valuation methodology to a specific property.

4. How Did The Assessor Apply The Income Approach To Valuation?

In an income approach, assessors typically use market rent, vacancy and expense factors to arrive at an annual net operating income figure and then apply a market capitalization rate to calculate value. Often, the market factors used in the assessor's income approach reflect data taken from properties that are incomparable to the property being assessed.

The most common mistake assessors make when using the income approach for student housing is applying conventional apartment data in their analysis. Student housing owners should explain the differences between these two property types, especially when discussing values per square foot used in conventional apartments versus values per unit or bed in student housing. Also, owners should emphasize seasonal occupancy fluctuation differences between a student housing property, which often experiences low summer occupancy, and a conventional apartment project, in addition to the influence of on-campus housing supply on the performance of an oft-campus student housing project.

Even if an assessor is using student housing market factors in a valuation analysis, the owner should challenge the market factors with data taken directly from the property's current and previous year's operating statements, if such data is in the property owner's favor. Specific income and expense items can show trends in rental rates, occupancy and expenses that differ from the market
trends alleged by the assessor.

5. How Did The Assessor Apply The Sales Comparison Approach To Valuation?

Aggressive assessment increases often stem from an assessor's reliance on the recent sales prices of other student housing properties. A property owner can usually discredit so-called "comparable" sales by outlining the physical and economic differences between the properties sold and the assessed property.

Specifically, the owner can point out to the assessor that the factors influencing a buyer's decision to purchase a property cannot be known unless the assessor was a party to the transaction. For example, a purchaser may have obtained below-market-rate financing, or might have been motivated by time constraints or income tax consequences. Make sure that the assessor understands the meaning of comparability.

Many student housing owners worry that a recent purchase price will increase their property's assessment. Owners should consider a tax appeal even if the recent purchase price of their complex was higher than the taxable value of the property, however. Buyers analyze factors extending beyond real estate in determining what they can pay for properties. As a result, a purchase price should provide no more than a touchstone for an assessor.

Taxpayers arguing against the assessor's use of a purchase price as a value basis should outline for the assessor the considerations that affected the price, such as special financing. Also explain how the actual performance of the property differs from projections made at the time of purchase. A purchase price may lead to a higher assessment, but student housing owners can mitigate the increase through a discussion with the assessor.

6. Did The Assessor Consider Equality And Uniformity?

Most taxing jurisdictions require equal and uniform assessments among comparable properties. An equal and uniform argument is separate from a discussion about a property's market value. Assessors often value student housing projects without considering the assessment of like properties, which presents an additional opportunity to argue for a reduced assessment.

The assessment of a student housing property should fall within a uniform range of values for comparable properties. Student housing owners should compare their property's assessments to comparable properties on a per-unit or per-bed basis. Assessors often compare by square footage, which is inappropriate for student housing.

Another unit of comparison for student housing owners is to analyze the gross rent multiplier ratio between comparable properties. If an owner's property is assessed disproportionately higher than the comparable properties on an appropriate unit of comparison, the taxpayer can argue for a value reduction based on equality and uniformity, regardless of the assessor's market value claims.

Owners of student housing should consistently monitor their property tax assessments.

Asking the appropriate questions can lead to effective strategies to reduce taxable values.

DavilaPhoto
Gilbert Davila is a partner in the Austin law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Davila can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Mar
25

Don't Be Afraid to Protest Property Tax Assessments

"Analyze the costs and potential tax savings associated with an appeal to ensure that the protest makes economic sense... ."

By Gilbert D. Davila, Esq. - as published by Affordable Housing Finance - News Headlines Online, April 2010

Low-income housing tax credit (LIHTC) property owners must monitor their tax valuations without fail, especially given the current economic climate. When they receive their property tax assessments, owners should ask themselves the following questions:

Should I appeal?

LIHTC owners should familiarize themselves with valuation laws and the definition of market value in their taxing jurisdiction before deciding whether to appeal an assessment. Taxable value can hinge on how the assessor treats tax credits.

Analyze the costs and potential tax savings associated with an appeal to ensure that the protest makes economic sense. Most successful valuation appeals consist of attacking errors made by the assessor, so consider the time, resources, and documents that will be required to make an effective case.

Is my data correct?

Assessors' records frequently misstate a property's age, square footage, net leasable area, number of rental units, unit mix, and amenities. Such errors can significantly increase an assessment.

Providing a current rent roll and perhaps a site plan to the assessor can help to correct these common inaccuracies. Improving the accuracy of the assessor's records is the simplest path to a lower tax assessment.

How did the assessor arrive at my valuation?

Owners must question the assessor's approach to determining value and help the assessor appreciate the unique challenges facing LIHTC owners. The most common mistake an assessor will make when deriving an LIHTC property's market value is to treat the asset like a traditional multifamily complex.

The following are talking points to help property owners and their assessors to distinguish LIHTC properties from a typical apartment complex:

Restrictions: The Land Use Restriction Agreement (LURA) and LIHTC regulations limit the property's income potential, and penalties for violations are severe. Rental restrictions cap rent per unit at much lower rates than comparable conventional properties are able to charge. Resident restrictions increase vacancy risk and complicate marketing efforts.

Expenses: Overhead is higher for LIHTC owners because they must meet certain reporting, record-keeping, and documentation edicts beyond conventional practice. The median income growth rate dictates rental rates, so when expenses growing at the rate of inflation rise faster than median incomes, a property's net operating income can decrease.

Illiquidity: Tax credits come with many restrictions. An owner cannot sell, transfer, or exchange the property unless they obtain government approval and meet certain conditions. In addition, the LURA dictates who the property can be sold to, and the property's restrictions survive a sale. The income tax benefits associated with the tax credits expire after 10 years, but the transferability restrictions may continue for another 20 years. These factors make for an extremely illiquid asset especially in today's economic environment.

Intangible value: Tax credits are not a benefit attributable to the real estate and are thus intangible value that should not be a component of the market value assessment. Owners should be prepared to provide the assessor with a copy of the LURA for the property and argue that the unique characteristics of the LIHTC project warrant a deviation from conventional appraisal methods.

Did the assessor consider equality and uniformity? Most jurisdictions require that assessments among comparable properties be equal and uniform. The fact that assessors often value LIHTC properties without considering the assessment of like projects presents an additional opportunity for owners to argue for a reduced value.

A tax credit property should fall within a uniform range of values when compared with other LIHTC properties and not with conventional apartment projects. Owners should compare their property's assessment to other LIHTC properties on a square-footage basis. If an owner's property is assessed disproportionately higher, then the owner can argue for a value reduction based on equality and uniformity, regardless of the assessor's "market value" claims.

The decision to appeal a tax assessment can yield significant tax savings when owners ask themselves the appropriate questions, identify inaccuracies, and show assessors the error of their ways.

DavilaPhoto90Gilbert Davila is a partner with the Austin, Texas, law firm Popp, Gray & Hutcheson. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Davila can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Feb
08

Simple Steps To Slicing Your Property Tax Bill

Correcting basic errors in the assessor's records remains the simplest path to lower a tax assessment

"A multifamily owner should definitely appeal an assessment if the assessor's value exceeds the owner's estimate of the property's market value."

By Gilbert D. Davila, Esq., as published by Apartment Finance Today, February 2008

Simple Errors Can Cost Big Money

An assessor's records indicate that a particular project has a net leasable area of 175,000 square feet and has been valued at $45 per square feet, which equates to an assessment of $7.875 million. In reality, however, the project only contains 160,000 square feet and should be valued at $7.2 million. This one error alone results in a significant $675,000 over-assessment. Were the owner to find a second mistake in the records, such as the valuation of a $150,000 swimming pool that did not exist at the property, the excessive valuation based on errors in basic data would be even more egregious.

The two recording errors in the scenario would amount to $825,000 in excessive valuation, or more than 10 percent of the initial valuation. A review of the assessor's records in this example would have netted the owner almost $25,000 in tax savings in a jurisdiction with a $3 mill rate for every $100 of value.

Property tax expenses can have a huge impact on a project's bottom line. Multifamily developers and owners must constantly monitor their property tax valuations to make a decision about whether to appeal the assessment. Once the valuation is appealed, the owner must decide how to combat the excessive valuation. An overview of the common mistakes made by assessors can help owners develop arguments for lower tax assessments. In most jurisdictions, assessors have a statutory responsibility to value a property at its market value as of a particular valuation date. A multifamily owner should definitely appeal an assessment if the assessor's value exceeds the owner's estimate of the property's market value.

Three factors should be considered before making a decision to appeal. First, procedural and valuation laws vary from state to state. Owners should discuss the procedures for appeal and the possibility of success with a tax specialist in the state where the property is located.

Second, the costs associated with an appeal and the potential tax savings from such an appeal should be evaluated to ensure that the protest makes economic sense. Third, the practical aspects of the appeal must be considered, such as the time and resources required for the appeal and the documents needed to make an effective case.

After working through these issues, most multifamily owners find it worth while to proceed with an assessment appeal. Once the appeal decision has been made, the next step is organizing the valuation arguments and gathering the documents that support the property owner's opinion of value.

Most often, a successful assessment appeal is based on outlining and attacking errors made by the assessor in the valuation process. Answering the following five questions will help you mount your argument.

1. Is my property data correct?

Assessor's records commonly contain errors in a property's age, total square footage, net leasable area, number of units, unit mix, and facility amenities. An error in the property's basic data can significantly increase a property's overall assessment. Providing a current rent roll to the assessor can help correct mistakes in a property's basic data. An owner may also wish to produce a site plan for the property along with the most recent marketing materials that show the project's different floor plans and amenities. Correcting basic errors in the assessor's records remains the simplest path to lower a tax assessment.

2. How did the assessor arrive at my valuation?

Assessors will commonly derive a market value using one or more of the three classic approaches to value: cost, income, or sales comparison. The cost approach is arguably the least reliable approach to value if the property is more than several years old, especially given the difficulties of estimating depreciation and obsolescence factors for older properties. An assessor will most likely rely on an income and/or sales comparison approach when determining an apartment's valuation. Value reductions can be gained by disputing how the assessor has applied a valuation methodology to a specific property.

3. How did the assessor apply the income approach?

In an income approach, assessors typically use market-driven rent, vacancy, and expense factors to arrive at a net operating income (NOI) figure that is then capitalized using a market capitalization rate. Conversely, multifamily owners typically estimate market value based on the actual cash flow generated by the property. The differences between actual cash flows and market factors can often support a value reduction. Owners should challenge the market factors used by the assessor and support the challenge with data taken directly from the property's current and previous year's operating statements, if such data is in the owner's favor.

Often, the market factors used in the assessor's income approach rely on data taken from properties that are not truly comparable to the property being assessed. A property's operating statement can help distinguish the owner's property from "comparable" properties that lead to higher assessments. Pointing out specific income and expense items can show trends in rental rates, occupancy, and expenses that differ from the market trends alleged by the assessor.

Many times in an income approach the assessor will understate the allowance for vacancy and for concessions provided to tenants. Owners can present assessing authorities with rent rolls and monthly occupancy reports to portray the property's occupancy trends, compare the property's occupancy levels with market comparables, and outline concessions and allowances given to maintain occupancy.

Finally, assessors often apply artificially low capitalization rates to NOI to support a higher valuation. The capitalization rates are usually derived from sales of comparable properties that are either not truly comparable or have unique characteristics that do not qualify the sales as true market transactions. Owners should push the assessor to provide data that supports the capitalization rates being used and, thus, distinguishes the comparable sales as not truly comparable.

4. How did the assessor apply the sales comparison approach?

Aggressive assessments often result from the assessor's reliance on the recent sales prices of comparable properties. A property owner can usually discredit comparable sales by outlining the physical and economic differences between the properties sold and the assessed property. More specifically, the owner can point out to the assessor that the factors influencing a buyer's decision to purchase a property cannot be known unless the assessor was a party to the transaction.

For example, a purchaser may have obtained below-market financing or might have been motivated by time constraints or income tax consequences when acquiring the comparable property. The assessor cannot categorize a sale as comparable unless all the purchasing factors are known. Apartment owners must make sure that assessors under stand the meaning of comparability.

A common mistake made by assessors is assuming that a purchase price equals market value. An apartment owner should not avoid a tax appeal simply because the recent purchase price of their complex was higher than the taxable value of the property. Owners pay for properties based on their analysis of factors beyond real estate. As a result, a purchase price should provide no more than a touch stone for an assessor. Taxpayers arguing against a purchase price as the basis for value should outline for the assessor the factors that were considered in purchasing the property, such as special financing considerations and how the actual performance of the property differs from projections made at the time of purchase.

5. Did the assessor consider equality and uniformity?

Most taxing jurisdictions require that assessments among comparable properties be equal and uniform. The fact that assessors often value apartment projects without considering the assessment of like properties presents an additional opportunity for owners to argue for a reduced assessment.

A taxpayer's assessment should fall within a uniform range of values when compared to other comparable properties. Apartment owners should compare their property's assessment to other comparable properties on a square footage and per-unit basis, with the owner's market survey usually being a good place to begin. If an owner's property is assessed disproportionately higher than the comparable properties, an argument can be made for a value reduction based on equality and uniformity, regardless of the assessor's market value claims.

DavilaPhoto90Glibert D. Davila is a partner with the Austin, Texas law firm of Popp, Gray & Hutcheson. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the 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..

Feb
15

How Owners Can Keep Property Tax Bills in Check

"Creating an ongoing dialogue with the assessor becomes the key to avoiding excessive property tax valuations. This dialogue should educate the assessor about the distinctive nature of LIHTC properties and send the message that the LIHTC owner will be cooperative, yet aggressive in protesting excessive property valuations."

By Gilbert D. Davila, Esq., as published in Affordable Housing Finance, February 2007

The unique characteristics of low-income housing tax credit (LIHTC) projects make it difficult for assessors to appraise these properties for property tax purposes, and can ultimately lead to excessive valuations. However, LIHTC owners need not despair, as they can use several methodologies to determine whether property taxes are excessive and challenge those assessments.

How to recognize excessive taxation: Errors in basic data

The initial step calls for a review of the basic data contained in the taxing authority's property records. This examination offers the LIHTC owner the first and easiest place to determine the appropriateness of levied tax assessments. Assessors' records commonly contain errors in one or more of the following areas: a property's age, square footage, unit mix, and/or facility amenities. An error in even one of these fundamental property characteristics can significantly increase a property's overall assessment.

A more significant error commonly made by assessors results from their assessing a LIHTC project as if it were a traditional multifamily complex. Property codes are commonly assigned to property types, which dictate what criteria will be used in arriving at the property tax assessment. A simple coding error can result in an excessive valuation in the millions of dollars. LIHTC owners should verify that their projects have been coded as low income housing properties.

Most jurisdictions provide taxpayers with specific protest avenues to correct these common mistakes. LIHTC owners should be prepared to share a current rent roll with their assessor in order to document the property's square footage and unit mix. Owners should also provide the assessor with a copy of the property's Land Use Restriction Agreement (LURA) to confirm its LIHTC status.

Lack of equality and uniformity

LIHTC owners should ensure that their property has been valued fairly and equally in comparison to other LIHTC projects in the taxing jurisdiction. Many states require that assessments among comparable properties be equal and uniform. A LIHTC owner's assessment should fall within a uniform range of values when compared to other LIHTC properties.

For example, if an owner's project is valued at $60 per square foot and there are 10 other comparable LIHTC projects in the taxing jurisdiction valued between $40 and $45 per square foot, the owner's property should also fall within the $40 to $45 range.

This example clearly demonstrates the importance of assessors properly categorizing and coding a LIHTC project in its records. A low-income housing project should not be valued at the same level as a traditional market project.

Owners need to compare their property's assessment to other LIHTC properties on a square footage and per-unit basis. If an owner's property is assessed disproportionately higher than comparable properties on these two factors, an argument can be made for a value reduction based on equality and uniformity, regardless of the assessor's "market value" claims.

Educating the assessor about LIHTCs

In most jurisdictions, the assessor's statutory responsibility is to value a property as its "market value" as of a particular valuation date. Assessors commonly derive a market value using one or more of the three classic approaches to value: the cost, income, or sales comparison. They will encounter difficulty in applying these valuation methodologies to an LIHTC property because of the unusual restrictions imposed by the LURA.

The cost approach presents inherent obstacles for the assessor due to the need to quantify functional and, in particular, economic obsolescence brought about by the LURA restrictions. Under the income approach, the assessor experiences problems with the quantification of income (actual versus market), the extraordinary expenses incurred by LIHTC projects and the calculation of a reasonable capitalization rate. Finally, the sales comparison approach will be difficult to apply when there are no sales of comparable properties and because of the restrictive covenants that run with the land.

LIHTC owners find it beneficial to educate themselves about the difficulties assessors face when valuing projects. This helps the LIHTC owner educate the assessor about the unique characteristics of the project and helps to inspire confidence in the appraisal methodologies proposed as a solution to the valuation difficulties.

Points to discuss with the assessor

Creating an ongoing dialogue with the assessor becomes the key to avoiding excessive property tax valuations. This dialogue should educate the assessor about the distinctive nature of LIHTC properties and send the message that the LIHTC owner will be cooperative, yet aggressive in protesting excessive property valuations. The following points provide owners with arguments to prove to the assessor that they should deviate from their normal appraisal methods.

Intangible value

A debate continues among assessors concerning whether tax credits should be considered when valuing a LIHTC project. A LIHTC property's total value derives from two primary components: the real estate and the tax shelter benefits. Appraisal scholars argue that, for tax assessment purposes, these benefits should be segregated into tangible value (that is, the benefits attributable to the real estate) and intangible value (that is, the benefit attributable to the LIHTC). this classification is crucial because, in most jurisdictions, assessors cannot include intangible values in their property tax assessments.

If a LIHTC owner's property is located in a jurisdiction that does not give the assessor guidance on the tangibility issue, owners should always argue that the credits are not a benefit attributable to the real estate but rather, comprise intangible value that should not be a component of the market value assessment. This argument will always lead to reduced property values. To help bolster this argument, an owner should show the assessor sample legislation from other jurisdictions that dictates that tax credits are intangible. Even better, LIHTC owners should join forces and lobby their state legislators to enact statutes that direct assessors to exclude tax credits from the valuation equation.

Illiquidity

A LIHTC owner cannot sell, transfer, or exchange the property without meeting certain conditions and obtaining government approvals. In addition, the LURA dictates whom the property can be sold to, and whether the property's restrictions survive a sale. These factors make for an extremely illiquid asset. Most "market value" definitions assume a willing buyer and willing seller in the open market. Such a definition cannot be easily applied to a LIHTC project. Owners should argue that the illiquidity of a LIHTC project be accounted for in the property tax assessment. One suggestion is to recommend a 15percent to 25 percent discount off the indicated value via the income approach to account for the illiquidity of the investment.

Restrictions and expenses

A LIHTC property operates under limited potential due to the restrictions associated with the LURA. The restrictions are long term, with severe penalties for violations. Resident restrictions result in additional risk and effort.

In addition, LIHTC owners experience higher expenses because they must meet certain reporting, record-keeping, and documentation edicts beyond conventional practice. Rental rates are limited, but expenses are not.

Owners should insist that the assessor take into account the effects of these restrictions and expenses on a property's tax assessment. An owner could argue that the restrictions, risk, and expenses that distinguish a LIHTC project from a typical market complex support the use of a higher capitalization rate in an income analysis. This will, in turn, produce a reduced taxable value. Armed with methods of recognizing excessive tax assessments and arguments to thwart these excesses, LIHTC owners will be in a good position to gain fair taxation of their properties.

DavilaPhoto90Gilbert Davila is a partner with the Austin-based law firm of Popp, Gray & Hutcheson, LLP. Popp, Gray & Hutcheson devotes its practice exclusively to the representation of taxpayers in property tax appeals and lawsuits and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. Mr. Davila can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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