Taxpayers should look beyond fair market value in deciding whether — and how — to protest assessments.

Taxpayers usually appeal property tax assessments by proving a market value different from the assessor's finding, but they should not overlook constitutional guarantees of uniform and equal taxation.

As an ad valorem tax, real property taxes are charged on the value of the underlying real estate, usually measured as fair market value. In many states, taxpayers can demonstrate their property's market value with a recent, arm's-length sale price or by independent appraisal evidence.

Two potential concerns emerge for taxpayers in an assessment appeal centered on market value: the declining reliability of data in volatile and rapidly changing markets, and the trailing nature of market data used by assessors. Those data issues can skew the mass appraisal techniques tax assessors often use, including comparisons to sales of similar properties, when assessing real property.

Volatility and rapid change

Commercial property data can lose relevancy with surprising speed in a volatile market. For example, office properties continue to bear the consequences of increased remote work and occupants' shrinking footprints since the pandemic. Many office properties with mortgages maturing in 2023 have lost half or more of their previously underwritten asset values. Badge swipes tracked by Kastle Systems show an average office attendance of about 50 percent throughout 2023.

In early 2023, Cushman & Wakefield attributed slowing construction to uncertainty in the office market along with challenges related to higher interest rates, supply chain issues, and labor shortages. Office properties may be in danger of becoming "zombie" buildings with utilization of 50 percent or less, while market watchers warn of doom loops or a domino effect of property failures, especially in dense central business districts. Most market participants are waiting for the other shoe to drop and for the market to reveal its bottom.

Assessors are not immune to the valuation problems this market uncertainty creates. Assessors currently valuing properties are likely considering comparable sales that occurred as far back as 2019 or early 2020. Even more recent sales are likely to be based on leases executed years earlier, or on financing obtained prior to the pandemic.

Further undermining data reliability is the decline in sales activity after March 2020, when pandemic-related uncertainty and economic pressures like rising interest rates began to discourage participants from unnecessary transactions. As pre-pandemic leases expire and loans underwritten on those leases mature, transactional data will likely show drastic valuation declines within a short amount of time. The lag in sales data as these properties are brought to market will affect the accuracy of property tax assessments.

What can a taxpayer do when market activity is too chaotic and volatile to accurately price value? Taxpayers should not forget constitutional safeguards of equal protection and uniform taxation.

The U.S. and most state constitutions protect taxpayers against non-uniform and discriminatory tax policies. For example, the Ohio Constitution requires that "land and improvements thereon" are "taxed by uniform rule according to value." Ohio statutes also require that assessors appraise property according to "uniform rule" in both the "mode of assessment" and as a "percentage of value." The constitutions of Pennsylvania and Texas also contain uniformity clauses. The 14th Amendment of the U.S. Constitution prohibits the government from depriving any person of their property without due process or denying any person equal protection of the law.

These constitutional protections are important enough that federal and state courts have held that when the goals of uniform taxation and correctly assessing market value cannot both be met, the constitutional priorities of equity and uniformity prevail.

Uniform, equal taxation

There are a few ways to help ensure consistent and equitable property taxation, starting with regular reassessment cycles. Some Pennsylvania counties have not reassessed countywide since the 1960s. The lack of regular appraisals to determine market value results in fewer properties being taxed on their true market value, especially if recently sold properties are assessed at their sale price while others have not been reappraised in decades.

A related problem is variation in the taxed percentage of market value between similar properties, which leads to non-uniform assessment ratios. There have been a series of successful contests recently in Lackawanna County, Pennsylvania, by taxpayers demonstrating that other property owners with similar properties were not paying taxes based on similar market values. Therefore, properties with the same market values were not being assessed at the same ratio, leading to non-uniform assessments. "The problem in Lackawanna County was not caused by this assessor's office, but gets perpetuated when new construction is placed on the assessment rolls at 100% of construction costs based solely on permit information, while similar properties have not been property reassessed since the base year of 1967," explains James Tressler of Tressler Law LLC, the attorney who brought a number of these successful challenges.

Another way to ensure assessment uniformity is by valuing the unencumbered, fee-simple interest in the real property, regardless of whether a particular property is leased, owner-occupied, or vacant. Ohio amended its controlling legislation to clarify that assessors must value the market value of the fee simple interest for all properties. Valuing the same market-based fee simple interest for all properties safeguards real estate tax assessments from being influenced by the business value of a successful (or unsuccessful) enterprise conducted on the property.

Governments can check discriminatory treatment by allowing taxpayers to contest the unequal ratios of market value across similar properties, or by allowing taxpayers to challenge assessments based on the median assessments of a reasonable number of comparable properties. Texas law contains this type of protection for taxpayers, and similar legislative remedies are being discussed in Ohio.

These additional checks and balances to secure equal and uniform property tax systems assure taxes are not borne discriminatorily by a few. The Pennsylvania Supreme Court wisely reminds us of these protections in a 2017 decision involving Valley Forge Towers Apartments, stating: "As every tax is a burden, it is important that the public has confidence that property taxes are administered in a just and impartial manner, with each taxpayer contributing his or her fair share of the cost of government."

The often-overlooked band-of-investment argument helps taxpayers demand maximum capitalization rates to combat inflated property tax assessments.

When commercial property owners review assessments of their properties' taxable value for fairness, they typically look to the markets for context. This year, however, superficial market observations do little to clarify questions about property valuation. At the risk of understating the obvious, 2023 has been a confusing time in commercial real estate.

Most investors, brokers, appraisers, and even tax courts seem to agree that the office sector is under severe strain and unlikely to recover soon, even if they debate the extent or duration of damage to the property type. With other sectors, however, the wide range of perspectives today can be confusing and even contradictory.

Mainstream news reports of strong occupancy and tenant demand for retail space only tell part of the story. Many retail property owners continue to struggle with historically high tenant improvement costs and contend with tenants seeking concessions far more frequently than they did before the pandemic.

The multifamily and industrial sectors have remained robust relative to other property types, but inflationary construction costs and borrowing costs driven up by interest rate hikes have thinned margins and clouded projections in many deals.

Against that backdrop, economic forecasts garner a mixed reception. Predictions of an impending recession have felt like sage prophecy, foolish overreaction, or an echo chamber of crying wolf, depending on one's perspective or position in the markets.

Ideal time to review assessments

Clearly, the economics of operating investment properties are far less predictable than they were five years ago. Even within stronger property types, performance and pricing have become more volatile.

That kind of uncertainty means increased risk, which any appraiser will tell you should indicate elevated capitalization rates. Combine that risk with climbing interest rates, and the negative impact on overall commercial property value is undeniable. That makes this an ideal time to review property tax exposure and to contest assessors' overstated valuations.

Data trackers and analysts estimate that value losses among commercial property types range from 30 percent to more than 50 percent. Retail and office properties have suffered the greatest declines from their original appraised values, at 57 percent and 48.7 percent, respectively, according to CRED iQa commercial real estate analytics and valuation platform. In a study of $10 billion in assets across property types, CRED iQ noted an average 41.2 percent valuation decline from original appraised values.

And what's more, KC Conway, the principal of The Original Red Shoe Economist and 2018-2023 chief economist for the CCIM Institute, predicts "lots more (commercial real estate) value loss and bank failures to come."

A residential example helps to put these losses into context. The average 30-year fixed residential mortgage interest rate for the week ending Dec. 30, 2021, was 3.11 percent, compared to 6.42 percent for the week ending Dec. 29, 2022, according to Freddie Mac's Primary Mortgage Market Survey. At 3.11 percent, a homebuyer purchasing a $200,000 house with 20 percent down would have had a monthly mortgage payment of $684.

One year later, a homebuyer putting 20 percent down and using a mortgage with 6.42 percent interest would have to purchase a home for $109,138 to achieve the same monthly payment of $684. This is a roughly 45 percent decrease in purchasing power over the span of one year.

The same principle applies to commercial real estate, where climbing interest rates and a related spike in capitalization rates have rapidly hammered down property values.

Cap rate consequences

It is important for taxpayers to understand that assessors often draw the capitalization rates used in property valuation from cap rate surveys, which may not indicate true cap rates because surveys are backward-looking. And cap rates have risen quickly along with buyers targeted internal rate of return (IRR).

With an increase in interest rates, a potential deal that may have met a target IRR in early 2022 would no longer meet that same threshold at the end of 2022. Correspondingly, the buyer looking at a deal in early 2022 vs. the end of 2022 would likely have to lower their purchase price to meet their target IRR. Assuming net operating income remains constant, the cap rate for the deal in late 2022 would be higher than the cap rate reported for the early 2022 deal. This is a chief reason why cap rates tend to follow interest rates.

Taxpayers may be able to achieve a reduced assessment by arguing for a higher capitalization rate that more accurately reflects a buyer's expected rate of return. To support the highest possible cap rate, taxpayers should take a hard look at the mortgage-equity method, often called the "band-of-investment" technique.

Based on the premise that most real estate buyers use a combination of debt and equity, the mortgage-equity method calculates the weighted average of the borrower's cap rate and the lender's cap rate. Equity cap rates tend to be higher than those on debt, and with lenders offering lower loan-to-value mortgages, equity caps play a greater proportional role in today's acquisition pricing.

Until recently, the method had become disfavored by some tax courts and county boards of equalization. Common criticisms are that the methodology is too susceptible to manipulation, or that the equity component is too subjective and/or too difficult to support. Arguably, many critics just don't understand it. But in the current climate, the band-of-investment is increasingly accepted and perhaps more relevant than ever.

Band-of-investment strategies

Taxpayers can use the methodology in a few ways. For properties purchased or refinanced recently but before the Fed's interest rate hikes really accelerated, taxpayers may argue for straightforward adjustments to recent appraisals to reflect market changes. More complex situations may require a specialist's appraisal to support the value change.

Importantly, even properties which have maintained strong performance are subject to value loss from market changes, which may justify making the additional effort to prepare a mortgage-equity argument.

Before attempting such strategies, taxpayers should evaluate the jurisdictional laws and definitions that control property taxes, including the effective date of the challenged assessment. With 2024 looming and bringing with it a new lien date for measuring assessments in many jurisdictions, now is an ideal time to review portfolios for excessive property tax assessments.

Here are the steps to start an informal discussion with the assessor that may lead to a tax reduction.

Owners of large commercial real estate portfolios typically have internal staff to deal with assessed property values and the resultant taxes on a regular basis. But what about owners of small or medium-value properties?

How can a taxpayer, without knowledgeable staff or outside assistance, determine whether their assessment is fair or if they should seek an adjustment? And if seeking a reduction seems appropriate, going it alone through discussion with the Assessor may be productive.

Any such informal review or discussion should be the result of careful consideration and preparation. The following points are essential in that review and will help the taxpayer build and present a strong case for a reduced valuation.

Getting started

A government representative, usually the county collector, issues a property tax bill based on the value the county assessor has placed on the taxpayer's real estate. The property owner may launch an appeal to contest that assessed value. However, in many states, the tax bill arrives after the due date for appealing the assessor's valuation.

Owners should review their property's assessed value each year. Begin the process as soon as the assessor posts new values to its website, usually in January. If there has been no increase, the assessor won't provide a statement of the assessed value until it is included in the tax bill sent later in the year, at which time the appeal period will have ended in most jurisdictions.

If the assessor's value opinion is less than the taxpayer believes it should be, they can simply pay the taxes due and plan to revisit the assessor's website the next year. If the assessor's opinion is approximately the same or greater than the property owner's value estimate, however, the taxpayer should investigate further and consider whether to seek a meeting with the assessor followed by an appeal.Some jurisdictions (states) have cycles of more than one year so the valuation for tax purposes may extend beyond the first year's valuation date into the following year or years.

Know dates and procedures

Missing the filing deadline is fatal to any potential relief from property tax. Most jurisdictions will notify taxpayers of an assessment increase and provide the timeline for review on appeal. Even when an assessed value is unchanged from previous years, the owner may still deem the assessment to be excessive and worth appealing.

While the owner is entitled to appeal an unchanged valuation, in most states there is no obligation for the assessor to notify the owner of altered assessed value—at least not until the time for appeal has run out.

Learn the lingo

Appraisers, assessors, attorneys, real estate brokers and other professionals dealing regularly with property tax matters frequently use words and phrases unique to the valuation of real estate. These terms and their interpretations fill volumes of legal writing and serve as linchpins in court decisions and business transactions.

Taxpayers who familiarize themselves with valuation lingo will be better prepared to discuss value with assessing officials. (For a list of key terms and definitions, see Property Tax Terms.)

Call the assessor

Most assessors or members of their staff will meet for informal discussions prior to, and sometimes during, a formal appeal. Call to request a meeting and provide the assessor with a heads-up about which property or properties will be discussed. This will save time by ensuring the assessor's team has an opportunity to review their work and supporting data for an informed discussion.

The meeting will be informal. The assessor or representative will be prepared to defend the assessed value. It is important for the taxpayer to realize that value was probably, in whole or in part, generated by a computer.

Bring relevant materials and documents in duplicate so that a set can be left with the assessor's office. They may not want to accept them but give it a try.

The informal meeting is often the property owner's first opportunity to show the property was overvalued in the assessment. The owner will need to support their proposed value using at least one of three standard approaches to valuation, which are cost, income, and sales comparison.

Of these, a non-appraiser is most likely to apply a sales comparison. While adjustments may be necessary in the application of a comparative sales calculation, it is less complex and dependent on expert analysis than either the cost or income approach. For the non-professional, the fewer adjustments required, the better.

For example, developing an informed opinion of a single-family home value based on the sale of two nearly identical homes on the same street does not present a great challenge. The further away the sales occur and the more they differ from the subject property, however, the greater the challenge and the less reliable the sales become as comparatives.(comparables is the term appraisers use)

The cost approach, unless it reflects the actual and recent construction cost plus the land value of the property in question, requires the application of factors best left to professionals in the valuation field. The income approach is even more complex, drawing a value conclusion not from actual rent at the subject property but by applying market rents to the initial rates of return that provide the basis for prices paid for acquisition of similar properties.

Like the cost approach, income-based valuation is best left to the experts. However, an owner who owns and invests in income-producing properties may very well be able to show a lower valuation using their own formulas learned through experience and practice. If such be the case, present that opinion and back-up information to the assessor.

Escalate as needed

Assuming informal discussions fail to achieve a value reduction, the taxpayer must file a timely appeal or accept the assessor's opinion. Filing requires the owner to know and conform to the prescribed filing date. The taxpayer must also decide when or if they will engage an attorney to pursue the appeal.Jurisdictions vary on the point at which an attorney is required to pursue a formal appeal.Filing dates and the required point to seek expert assistance are critical and vary by state. It is up to the taxpayer to learn these dates for their area, and to act while there is sufficient time remaining to file and win an appeal.

Property Tax Terms

A general understanding of real estate valuation terminology is intrinsic to discussions with the assessor.

Assessed Value: The taxable percentage (usually set by statute) of the assessor's opinion of fair market value.

Fair Market Value: What a willing and informed buyer would pay to a willing and informed seller. Fair market value is not value in use, sentimental value, or personal value unique to the owner.

Deferred Maintenance: The property needs a paint job, roof replacement or similar repairs, in which case the cost of correcting the deficiency is deducted from the property's value.

Obsolescence: A curable problem of which the anticipated cost to cure is deducted from the value of the property without the problem.

Incurable Obsolescence: A problem on the property that can't be cured at any cost, such as loss of parking or loss of access due to a road project.

Fighting for laws that produce equal, uniform taxation best serves taxpayers and state governments.

It has been said that the people who complain about taxes can be divided into two classes: men and women. While we all complain, taxes ensure various levels of government have funds to perform essential functions—to keep society civil and in, more or less, working order.

A tax must be fair to be supported, however. In countless instances, a taxpayer's first complaint about an assessor's valuation is that the amount exceeds their neighbors' valuations. In essence, the property owner claims that the property valuation and resulting tax liability is unfair or non-uniform.

Too many jurisdictions lack an efficient mechanism to address non-uniform taxation. Fortunately, several states specifically require tax uniformity, and two offer legal remedies to help taxpayers combat unfair assessments.

A constitutional concept

Most taxing jurisdictions seek to assess real property at market value, which is the amount the property might sell for as of a certain date. Many states even address the legal requirements of taxation in their governing documents.

Ohio's constitution, for example, requires that "Land and improvements thereon shall be taxed by uniform rule according to value." Virginia's constitution states: "All taxes shall be levied and collected under general laws and shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax."

• Washington's constitution necessitates that all taxes shall be uniform upon the same class of property within the limits of the assessor's authority, while Missouri's constitution requires that assessments must be based upon market value and be uniform.

• That all four of these sampled constitutions mention the importance of taxation uniformity underscores the importance of the concept. Taxpayers seeking an effective model for opposing an assessment on the basis of unequal treatment can look to two other states: Texas and Georgia.

Ready remedies

Texas and Georgia have taken great strides in establishing the methods to ensure property assessments meet their constitutional goals of equal and uniform taxation. Both states empower taxpayers by setting out specific steps to show an overvaluation. Taxpayers in these jurisdictions are assured the right to have their property assessed for taxation in a uniform and equal manner when compared to nearby comparable properties.

In Georgia, a property owner can challenge an assessor's valuation of their real property based on uniformity.The state's standard appeal forms have a box to check as to whether the appeal is being filed based on value, taxability or uniformity.

Under a 1991 Georgia case, Gwinnett County Board of Tax Assessors vs. Ackerman/Indian Trail Association Ltd., a property owner who can show that numerous similar properties in the same area and county have lower assessed values can use that information as grounds to advocate for a lower assessed value.

Texas property owners can challenge an assessor's valuation by arguing there has been an unequal appraisal.Texas property owners in this position can file a protest if they believe the property is taxed at a higher value than comparable properties.

To prevail in seeking a lower valuation, the property owner can submit sale or appraisal evidence. Alternatively, the taxpayer can prevail by showing their assessed valuation exceeds the median appraised value of a reasonable number of appropriately adjusted comparable properties.

In a 2001 case, Harris County Appraisal District vs. United Investors Realty Trust, a Texas appeals court found that when there is a conflict between taxation at market value and equal and uniform taxation, equality and uniformity prevail. This means it is more important that taxes be equally and uniformly imposed and collected than it is to arrive at the property's market value when the "corrected" value makes the property a taxation outlier in its competitive set.

A pervasive need

For sure, a tax assessor's job of valuing all land and improvements is daunting, and they must use many data points and much subjectivity to assess values. Given the scope of their job, mistakes in valuation will occur—especially if the valuation incorporates inaccurate data regarding gross building area, square footage, age, condition or other variables.

Because mistakes are inevitable, property tax systems must provide taxpayers with efficient and effective methods of challenging overvaluations. All jurisdictions provide taxpayers the right and some mechanism to contest the assessor's valuation through an administrative and/or judicial process. This procedural right gives taxpayers a means to correct apparent overvaluations and to seek fairness—or at least it provides the opportunity to argue for fairness.

Taxpayers' pursuit of that procedural right most often revolves around valuation and ignores the constitutional requirement of uniformity. Or worse, the available procedure conflates uniformity with valuation by stating that if the assessed value reflects market value, that equates to uniformity. This thinking is only accurate in theory, as achieving market value assessments for all is aspirational but elusive.

If taxpayers in every jurisdiction could argue a solution along the lines of Texas' defense, it would ensure uniform and equal taxation for all.

Many times, an appeal board hearing a valuation complaint will require either evidence of a recent sale of the subject property or an appraisal report before it will adjust an assessor's valuation. However, sales are often unavailable and appraisal reports can be expensive. Given the cost of appraisals, owners of lower value real estate must often weigh cost versus potential tax savings before deciding whether to hire an appraiser and contest an unfair assessment.

Fairness across the assessor's jurisdiction must be the paramount goal. The defenses or means of redress provided by Georgia and Texas are vital to ensure that taxpayers have access to a constitutionally mandated equal and uniform valuation. These statutory provisions provide a cost-effective method for taxpayers to challenge an overvaluation.

Constitutions that provide an equal and uniform defense give taxpayers fair and equitable access to assessors' valuation systems and promote equal and uniform taxation. Expanded taxpayer access and improved assessor responsiveness promotes trust in government.

Every jurisdiction should follow these examples to provide taxpayers an equal and uniform defense.

Ensure tax bills reflect continuing value reductions for office assets caused by COVID's long-term effects.

Since early 2020, the COVID-19 pandemic has upended lives and disrupted the normal course of businesses, including those in the commercial real estate market. As in many other sectors, however, this public health crisis has not affected all commercial properties equally.

Real estate occupied by essential businesses such as grocery stores, sellers of household goods, and warehouse clubs, for example, have weathered the pandemic well. A few have even increased their market share. By contrast, many office buildings, hospitality and non-essential retail properties have suffered severely.

Taxing jurisdictions and assessors have responded to the crisis with varying degrees of success. The Ohio Legislature passed special legislation (spearheaded by Siegel Jennings Managing Partner Kieran Jennings) to allow a onetime, 2020 tax year valuation complaint for a valuation date of Oct. 1, 2020, since the usual tax lien date of Jan. 1 would not have shown the effects of COVID. Other assessors applied limited reduction factors to account for the sudden pandemic-induced decrease in property values.

As values recover, it is important for taxpayers to monitor still-unfolding consequences as they review their property tax assessments.

Initially, hotels and experiential property uses suffered the steepest losses as travel declined or completely halted. While the long-term effects of COVID-19 are still emerging as the pandemic progresses, office properties may be the real estate type changed the most, and perhaps permanently so. Central business districts and suburban campuses or headquarters have been particularly hard hit.

In the last six to 12 months, many people have returned to working in an office at least part of the time, especially since vaccinations have become widely available. However, the emergence of virus variants has stalled the full return to the office that looked imminent earlier this year.

Some firms including Twitter, Zillow, Spotify, and Dropbox decided that they will not require workers to return to the office at all, making remote working a permanent option. Other companies including Google, Nationwide, Microsoft, and Intuit will continue with a hybrid model that requires workers to be in office some of the time.

Many of those employers are using an office hoteling model. Hybrid arrangements require less physical office space per employee, although employers will need to balance having fewer employees onsite against the desire for low-density occupancy.

With more employees working remotely, many office tenants have subleased space they no longer need, adding to available office supply. For example, toward the end of 2020, the Chicago metro region's office market reached a record high in available sublease space, with two-thirds of it in the central business district. For employees who work in CBDs, there is an added concern of commuting via public transit.

In the initial stages of non-essential business closures and governmental stay-at-home orders across the country, many tenants sought rent abatements and concessions. Tenant defaults and increased unemployment exacerbated office vacancy levels.

Some of the workforce in more densely populated markets may have relocated away from central business districts, at least at the beginning of the pandemic, also influencing office space demand. As acceptance of remote work increased, both employers and workers not tied to a physical office location gained employment and talent-search opportunities beyond their local markets. This, too, has influenced the demand for office space.

The Columbus area's overall office vacancy rate was more than 23 percent in the third quarter of 2021, according to Cushman & Wakefield. That vacancy figure includes more than 1 million square feet of sublease space but does not include offices leased but underutilized – or not used at all – because of employees working from home.

As these vacancy rates and over-abundant sublease inventory demonstrate, there is a disconnect between the space that office tenants are currently leasing and their actual real estate needs. As leases expire, it will not be surprising to see tenants renegotiate for smaller footprints and shorter durations as they adjust to their changing requirements.

The shrinking need for office space is not limited to markets with dense populations and public transit commuters. In fact, these trends reverberate in suburban markets. Multiple large suburban office buildings in the Cleveland area, together totaling almost two million square feet, were 75 percent empty in the fall of 2021 because of employees working remotely.

This suggests that property tax assessments may be based on outdated lease information. Accurate valuation of office properties for taxation will require proper consideration of lease renewals and related activity. In reviewing assessments, it will be critical to scrutinize any older sale transactions assessors used for comparison that were based on pre-pandemic leases.

Positive signs are emerging for the commercial real estate market overall. Bloomberg recently reported that domestic U.S. travel for the year-end holidays is expected to be near pre-pandemic levels. Downtown foot traffic, hotel stays, and visitor counts have been climbing back from the lows seen early in the pandemic.

Despite this good news, office properties face persistent challenges. Recently, Marcus & Millichap reported that the office sector was one of the only property types lagging in 2021 commercial real estate transaction volume compared to the same time in 2019. (The other was medical office.) Flexibility on the part of both tenants and owners will be key in riding out the continuing waves of lease maturities and renewals in this changing market.

Since assessors are often using lagging data in their assessments, attention to the continued effects of COVID on office properties will be vital to ensuring that property tax valuations reflect a property's fair market value. Remember, too, that various assessors are treating COVID effects differently, so as always, it is wise for property owners to consult with experts familiar with assessment law and appraisal practice in their local jurisdictions. With careful observation of market changes, strategic planning and review with trusted tax experts, taxpayers can help ensure that their real estate tax burden is fair.

Commercial real estate owners should build arguments now to reduce fair market value on their properties affected by the pandemic.

The uncertainties and changes brought on by COVID-19 have had far-reaching effects on all facets of daily life. As commercial property owners position themselves to weather the storm, it is crucial that taxpayers most affected by the virus do what they can to control their property tax expenses.

The issues they face are complex, from pre-crisis valuation dates and the need to quantify value losses, to cash-strapped taxing entities that will be reluctant to compromise on values. Taxpayers will need creative, innovative approaches to successfully protest their assessments and see their cases through to having their taxable property values reduced.

Ohio mulls relief

Assessors in Ohio and many other states value real property as of Jan. 1 of the tax year under protest, known as the tax lien date. Other than when a property has recently sold, assessors and courts seldom consider factors occurring after the tax lien date in a property tax case.

For example, the current property tax filing period in Ohio relates to tax year 2020, and real property is required to be valued as of Jan. 1, 2020, for that tax year. That means valuations for 2020 in those jurisdictions typically ignore changes to a property's value that occurred during the COVID-19 pandemic.

Ohio is the only state considering legislation that would require taxing authorities to recognize the effects of COVID-19 on real estate values where the impact occurred after the tax lien date. Depending on where a property is located, taxpayers will need to consider all options if their jurisdiction does not allow for consideration of the impact of COVID-19 in a tax challenge this year.

When it comes to deciding whether to challenge a property's assessment, there are many factors to consider. If the property recently sold, analyze the sales price to indicate the actual market value of the real estate deducting any non-real estate values. Then factor in the pandemic-related issues.

The taxpayer may need to order an appraisal, whether to support their own complaint or in fighting a tax increase complaint filed by a school district. These circumstances are more likely in some jurisdictions than others; experienced local counsel can help the taxpayer decide whether, and when, to obtain an appraisal.

At times, taxing authorities or a court may require testimony from a property owner or other individuals associated with a property. Many taxing authorities are allowing testimony via popular video conferencing applications, which may make it easier than in the past to seek the involvement of witnesses for a hearing.

Variations by property type

Market trends affecting specific property types and operations will provide evidence to support many assessment protests. Hotels, for example, have been directly impacted by COVID-19, therefore data for hotel properties must be carefully evaluated in light of current events.

Compile historical information such as 2020 financials as soon as possible, as well as recent occupancy reports. Hotel owners must be prepared to testify along with their expert appraisal witnesses.

First-hand knowledge of the devastating effects of COVID-19 will be an important component of a case. While Ohio courts in the past have generally disfavored the discounted cash flow method of valuing commercial properties, expert witnesses may need to explore, use, and be prepared to explain that option in a post COVID-19 world.

It is important to note that COVID-19 has not affected all property types in the same manner. The pandemic devastated many hotels, restaurants, and certain retail and office properties, for example. On the other hand, other properties such as industrial properties serving ecommerce operations have fared well.

How trends relating to property type translate into a potential reduction in a property's fair market value depends on what a particular jurisdiction requires from taxpayers to prove their case. Property sales data from 2020 to the present will become an important component of any property tax review, given the events of the past several months. Discussions with an appraiser familiar with local data and trends will be critical.

Even if a taxpayer cannot reference COVID-19 effects in a challenge filed this year, they should consider effective strategies now in preparation for future property tax issues related to the pandemic. Most likely this will involve a long-term approach to contain property taxes, while addressing short-term needs as best as possible. A case settlement may address several tax years, giving the taxpayer some certainty and planning capabilities for the future.

Additionally, a plan for how to approach a case often depends on the regional property tax landscape. Because of this, achieving a good outcome in the future may depend on how the taxpayer prepares their case from the outset, affecting decisions such as whether to have an appraisal and which parties should testify.

The best means to address recent change and today's uncertainties are to remain adaptable and to begin forming effective case strategies as soon as property tax expenses become available for evaluation.

The Buckeye State's questionable methods deliver alarmingly high values.

A recent decision from an Ohio appeals court highlights a developing and troubling pattern in the state's property tax valuation appeals. In a number of cases, an appraiser's misuse of the highest and best use concept has led to extreme overvaluations. Given its potential to grossly inflate tax liabilities, property owners and well-known tenants need to be aware of this alarming trend and how to best respond.

In the recently decided case, a property used as a McDonald's restaurant in Northeast Ohio received widely varied appraisals. The county assessor, in the ordinary course of setting values, assessed the value at $1.3 million. Then a Member of the Appraisal Institute (MAI) appraiser hired by the property owner calculated a value of $715,000. Another MAI appraiser, this one hired by the county assessor, set the value at $1.9 million. The average of the two MAI appraisals equals $1.3 million, closely mirroring the county's initial value.

Despite the property owner having met its burden of proof at the first hearing level, the county board of revision rejected the property owner's evidence without analysis or explanation. The owner then appealed to the Ohio Board of Tax Appeals (BTA).

In its decision on the appeal, the BTA focused on each appraiser's high-est and best use analysis. The county's appraiser determined the highest and best use is the existing improvements occupied by a national fast food restaurant as they contribute beyond the value of the site "as if vacant." The property owner's appraiser determined the highest and best use for the property in its current state was as a restaurant.

With the county appraiser's narrowly defined highest and best use, the county's sale and rent examples of comparable properties focused heavily on nationally branded fast food restaurants (i.e. Burger King, Arby's, KFC and Taco Bell). The BTA determined that the county's appraisal evidence was more credible because it considered the county's comparables more closely matched the subject property.

By analyzing primarily national brands, the county's appraiser concluded a $1.9 million value. Finding the use of the national fast food comparable data convincing, the BTA increased the assessment from the county's initial $1.3 million to the county appraiser's $1.9 million conclusion.

On appeal from the BTA, the Ninth District Court of Appeals deferred to the BTA's finding that the county's appraiser was more credible, noting "the determination of [the credibility of evidence and witnesses]…is primarily within the province of the taxing authorities."

Questionable comparables

Standard appraisal practices demand that an appraiser's conclusion to such a narrow highest and best use must be supported with well-researched data and careful analysis. Comparable data using leased-fee or lease-encumbered sales provides no credible evidence of the use for which similar real property is being acquired. Similarly, build-to-suit leases used as comparable rentals provide no evidence of the use for which a property available for lease on a competitive and open market will be used. However, this is exactly the type of data and research the county's appraiser relied upon.

A complete and accurate analysis of highest and best use requires "[a] n understanding of market behavior developed through market analysis," according to the Appraisal Institute's industry standard, The Appraisal of Real Estate, 14th Edition. The Appraisal Institute defines highest and best use as "the reasonably probable use of property that results in the highest value."

By contrast, the Appraisal Institute states the "most profitable use" relates to investment value, which differs from market value. The Appraisal of Real Estate defines investment value as "the value of a certain property to a particular investor given the investor's investment criteria."

In the McDonald's case, however, the county appraiser's highest and best use analysis lacks any analysis of what it would cost a national fast food chain to build a new restaurant, nor does it acknowledge that the costs of remodeling the existing improvements need to be considered.

If real estate is to be valued fairly and uniformly as Ohio law requires, then boards of revision, the BTA and appellate courts must take seriously the open market value concept clarified for Ohio in a pivotal 1964 case, State ex rel. Park Invest. Co. v. Bd. of Tax Appeals. In that case, the court held that "the value or true value in money of any property is the amount for which that property would sell on the open market by a willing seller to a willing buyer. In essence, the value of property is the amount of money for which it may be exchanged, i.e., the sales price."

Taxpayers beware

This McDonald's case is not the only instance where an overly narrow and unsupported highest and best use appraisal analysis resulted in an over-valuation. To defend against these narrow highest and best use appraisals, the property owner must employ an effective defense strategy. That strategy includes the critical step of a thorough cross examination of the opposing appraiser's report and analysis.

In addition, the property owner should anticipate this type of evidence coming from the other side. The property owner's appraiser must make the effort to provide a comprehensive market analysis and a thorough highest and best use analysis to identify the truly most probable user of the real property.

Take advantage of the following opportunities for tax savings in the booming multifamily market.

With healthy multifamily market fundamentals and increasing demand from investors, apartment property values are on the rise. For owners concerned about property tax liability, however, there are still opportunities to mitigate assessments and ensure multifamily assets are taxed fairly.

Here are key considerations for common scenarios.

Property Acquisition

Whether an investor is buying a single property or a portfolio, it is wise to understand how the transaction will affect property taxes going forward. In some taxing districts, the assessors will move the value to 80%-90% of the sale price in the assessment year following an acquisition. If the sale is an arm's length, open market transaction with no unusual investment drivers, there remain few arguments against increasing taxable value to equal the sale price, less personal property.

When running income and expense projections on a potential acquisition, look to how the sale will affect taxable value. To pencil in reasonable budgets, consult with local experts who can zero in on a likely tax rate. Those who know the market can forecast local rate increases with some accuracy.

When there are non-open-market factors in a sale – such as unusual financing, tax shelter exchange considerations or a portfolio value allocation based on forecasts – there is more room to make arguments for a value based on an income approach. In discussing this approach with assessors, the greatest source of disagreement is the capitalization or cap rate used to extrapolate value from the income stream.

For apartments in the Midwest, initial cap rates can range from 4.5% to 6.5%, and assessors will often choose rates from the lower end of the range or use an average. Taxpayers who can demonstrate or work with the assessor to derive the correct cap by using appropriate comparable sales will enjoy a more reasonable value discussion.

Opportunity Zones

An opportunity zone stimulates investment within its perimeter by enabling investors to reap tax benefits on deferred capital gains and spur growth. This vehicle has been of special interest to developers of student and low-income housing. To get the full benefit of the new program, investors must decide to invest in a qualified opportunity fund (QOF) by the end of 2019.

Investors in QOFs which were formed to meet a June deadline must invest these funds into qualified property by year end. Investors that miss the deadline will be subject to IRS penalties. After 10 years of investment, 100% of the gain will be free of capital gains. This can enhance returns considerably.

The race to the year-end finish line could lead investors to initiate apartment deals that fail to meet market development yields. When looking at the values for property tax purposes, the costs of such projects driven by tax advantages can be discounted in a valuation analysis.

Procedural Concerns

Property owners' increased sophistication in challenging assessed values has led many taxing jurisdictions to use procedural arguments to shut down a petitioner's case, citing failure to comply with minute details of technical rules such as income disclosure requirements.

• In some jurisdictions, petitioners must disclose certain information for an appeal to go forward. For example, in Minnesota a petitioner that contests the assessed value of income-producing property must provide a slew of information to the county assessor by Aug. 1 of the taxes-payable year. These include: year-end financial statements for both the year of the assessment date and the prior year;
• a rent roll on or near the assessment date listing tenant names, lease start and end dates, base rent, square footage leased and vacant space;
• identification of all lease agreements not disclosed on the above rent roll, listing the tenant name, lease start and end dates, base rent and square footage leased;
• net rentable square footage of the building or buildings; and
• anticipated income and expenses in the form of a proposed budget for the year subsequent to the year of the assessment date.

The duty to disclose is strictly enforced, even if there is no prejudice to the taxing authority. In the case of an appeal for an apartment project, it would be prudent for a petitioner to clarify with the assessor in advance what data is required. Particularly if there is a commercial component to the project, where license agreements can be considered leases, a prior agreement with the assessor on what is required will remove the risk of a case ending on procedural grounds.

Seniors Housing

Many seniors housing complexes include independent living sections; assisted living areas, usually with smaller unit sizes and limited or no kitchen facilities; and memory care areas with even more limited furnishings, locked access and egress and full-time staffing by case professionals.

No matter what type of living area is involved, the monthly rental payment covers services provided to residents over and above rental of an apartment unit. These services are most intensive and comprehensive for residents in memory care, who require the most direct staff attention and receive all meals and services through the facility.

Even assisted living and independent living residents enjoy significant non-realty services, including wellness classes and other programming, spiritual services, medication dispensing, field trips for shopping or other events, onsite dining facilities and operation, and access to full-time staffing at the facility. These services are part of what residents pay, and it's important when trying to determine the real estate value for tax purposes that the service income component is excluded from the valuation analysis.

Although the market is robust for both multifamily investment sales and construction, taxpayers who apply a data-based approach with knowledge of local market conditions, procedures and opportunities can achieve a reasonable property tax bill.

Millions of property tax dollars can be saved by understanding seven issues before buying real estate.

We asked property tax lawyers around the country for tax advice they wish their clients would request before an acquisition to avoid excessive taxation. Their responses, like tax laws, vary by state:

Ask Early. Transaction timing can help avoid having an assessment increased to equal the sale price, says Gilbert Davila, a Principal with property tax law firm Popp Hutcheson in Austin, Texas. Texas reassesses every Jan. 1, so a transfer in the third or fourth quarter is likely to receive an assessment increase the following January. Closing the transaction in the first or second quarter allows time to gather facts for an appeal.

In Chicago, real estate taxes following a purchase depend on location and where the county is in its three-year revaluation cycle, says Mary Anne "Molly" Phelan, a partner with Siegel Jennings Co. LPA. Local counsel can advise whether to expect an immediate increase or a couple years of stable property taxes.

Structure the Transaction. Purchasing an entity that owns real estate or combining the purchase of assets and real estate may offer advantages. For example, Pennsylvania authorities calculate transfer tax using current assessed value when a buyer acquires 100% of interests in a property's holding company. With an outright purchase of real estate, however, transfer tax applies to the purchase price.

If a property is under-assessed, purchasing the holding company can reduce the tax amount and avoid the need to appeal an assessment based on a purchase price well above the current assessed value. The buyer saves on transfer taxes upfront and will likely save on future real estate taxes with an unchanged assessment.

In cities like Pittsburgh, where transfer tax is 4.5% and soon to be 5%, the savings can be significant. Some savvy buyers have structured their purchases of Pittsburgh properties using the "89/11" provisions of the tax statute. This precluded transfer tax for buyers who acquired 89% or less of the owning entity, then purchased the remaining 11% after a three-year hold. The strategy drew a public outcry following some high-profile transfers, prompting a recent legal change that made this approach more difficult.

Chicago buyers of a business that owns real estate may avoid a property tax increase altogether, Phelan observes. A local attorney is critical in such cases to advise on not only the law, but also on nuances of its application and the local political climate.

Allocate Properly. Property sale prices often include going-concern value, business value and personal property. Phelan cautions buyers to carefully segregate the real from the non-real components exempt from property tax. Then, "document, document, document," she says. "Having documentation in the file to back up the buyer's allocation of the various components can make all the difference if an appeal is filed down the road."

Similarly, Robb Udell, an attorney with Rennert Vogel Mandler & Rodriguez PA in Miami, advises that Florida law imposes a documentary stamp tax on consideration paid for real estate. There is no documentary stamp tax due for personal property or intangible value, however, so ensure the recorded price excludes those values. Hotel transactions include significant tangible and intangible personal property value.

Details Matter. Details may strengthen arguments opposing an assessor's attempt to increase the assessment to equal the sale price. For example, 1031 exchanges, portfolio transactions or purchases by a REIT may not meet a jurisdiction's criteria for an arms-length, market value sale.

What Information Will Be Public? Ask a local attorney what information will become public in a sale. Texas buyers are not required to divulge their acquisition price on the deed, Davila says, so assessors go to great lengths to discover Texas sale prices. They may search for loan documentation or use subscription services documenting recent sales, for example, to estimate the price.

Budget Correctly. Buyers who fail to understand the law when budgeting for real estate taxes can overpay on acquisitions by millions of dollars. This is especially true in states like Pennsylvania and Ohio, where taxing entities can appeal to increase a property's assessment.

School districts often appeal assessments to chase sale prices, then file "fishing expedition" discovery requests of the buyer's financial information to support the district's case. Out-of-state buyers have overpaid for property due to their budgeting on historical real estate taxes not accounting for the potential government-initiated increase appeal. This common practice in Pennsylvania has drawn increasing challenges from property owners outraged at being unfairly singled out for an increase.

In Georgia, it is the assessors who increase assessments on properties using recent sale prices. Lisa Stuckey, partner in the Atlanta law firm of Ragsdale Beals Seigler Patterson & Gray LLP, advises that – due to a recent change in Georgia law – assessors can value recently traded properties as high as the purchase price, but not higher. Since the statutory change, many assessors have adopted a policy of increasing assessments to full sale prices in the year following the sale.

Understand Assessment Caps. In Florida, there are two values related to property taxes: market value and assessed value. County property appraisers determine market value annually and cap increases in the assessed value of non-homestead properties at 10% from one year to the next. School districts tax uncapped market value, however, so that portion of a property owner's tax bill is sensitive to increases in market value.

Udell cautions that capped assessments reset to market value the tax year following a change of property ownership or control, so a purchase price consistent with the prior year's market value can still have a significant tax impact if the previous assessment was capped at a low value. Capped assessments also reset to market value the tax year following an improvement that increases market value by 25% or more, and other factors also can affect the cap's applicability. Thus, proper budgeting for tax consequences requires a clear understanding of Florida law.

Asking the right questions can save enormous tax dollars. 

​The American Property Tax Counsel argues that if a property tax assessment is premised on a uniform per-square-foot value, rental rate or vacancy rate for all office properties in a metro area, the assessor is likely going to overlook distinguishing factors in submarkets that could benefit building owners.

Managing fixed expenses is the best way to ensure the long-term profitability of investment properties, especially in a flat market. The largest continuing expense for most commercial properties is the property tax bill, and in a market with skyline-defining properties and headline-grabbing sales prices, tax assessors have multi-tenant office properties in the crosshairs.

Any reduction in tax burden can drastically improve an investment's profitability, competitiveness and tenant retention. As another assessment season begins across the Midwest, understanding tax assessors' common errors can equip property managers and owners with the tools necessary to review the accuracy and reasonableness of the assessments on their office properties and, when appropriate, challenge those assessments.

Know the relevant market

To an outsider, the office market can appear monolithic. To such people, rent, occupancy and other income characteristics of office properties are consistent throughout the market. But pulling data from the wrong market can lead assessors to an incorrect result.

For example, assessors may assume that Class A downtown office towers are the best-performing assets in the market, and value them accordingly. Contrary to this perception, though, Class A properties may not outperform all Class B or Class C properties, and downtown may not be the strongest office submarket in a certain metro area.

Nowhere is the distinction between office submarkets clearer than in the downtown-suburban divide. In many Midwestern markets, suburban office properties tend to be newer, have better occupancy, and in some cases, command higher rents than their downtown competition.

The factors influencing the relative performance of downtown and suburban office properties vary, but they include employees' desire to work closer to their homes, and comparatively low land prices, which allow office building construction with the larger floorplates many tenants prefer. Suburban office markets also typically are able to offer free parking, while paid parking — which is common in the central business district — increases occupancy costs for tenants and their employees. Downtown towers though may appeal to large law firms, accounting firms and banks seeking a prestigious address.

If an assessment is premised on a uniform per-square-foot value, rental rate or vacancy rate for all office properties in a metro area, the assessor is likely failing to consider distinguishing factors in submarkets. Finding those distinctions can benefit owners on either side of the downtown-suburban divide.

Don't blindly trust sales

Assessors are often too reliant on sales data. Although some properties may be valued by considering sales prices for comparable properties, office properties do not neatly lend themselves to such an analysis. Applying the recent sales price of a downtown office tower to all other office towers in the downtown area may seem reasonable on its face, but fails to recognize how buyers and sellers interact in the office market.

For many real estate types, an assessor can identify comparable sales and adjust those transactions to reflect differences between the comparable and subject properties. Unlike owner-occupied buildings, investment properties that are otherwise similar are not easily adjusted for real estate-related factors. This is because market participants do not settle on sales prices based on attributes of the real property, but on attributes of the income stream.

Buyers of multi-tenant office buildings are motivated by the durability of the income stream, reflecting either potential for growth or existing leases with creditworthy, in-place tenants. Knowing a target's income characteristics, buyers apply their own capitalization rate thresholds and back into the sales price. But that price necessarily reflects the particular income stream being purchased, which may have limited applicability to another property. This approach is opposite to the way many assessors believe sales prices are set.

This is not to say that sales of comparable properties are entirely irrelevant in valuing an office property for tax purposes. For example, because capitalization rates reflect the behavior of investors in the market, sales of properties that are comparable as investments can inform the selection of a capitalization rate in a particular analysis. But if an assessor has used a recent sale as the sole basis to set the assessments of the competitive set, whether their assessments truly reflect the market is questionable.

When income isn't income

As income-generating assets, office properties are most commonly valued using the income approach. But even though office rents are not as attributable to personal or intangible property as is, for example, a hotel's income, the rents paid by office tenants are not entirely attributable to the real estate. Simply capitalizing a building's existing income stream mistakenly assumes it is.

The market for office properties in many areas is extremely competitive, and nearly all leases in some markets reflect tenant incentives like improvement allowances. Even long-standing tenants expect such incentives when their leases are up for renewal, and tenants are accustomed to using those allowances to refresh their space. Landlords, in turn, collect marginally higher rent that amortizes those costs over the lease period. But the impact of above-market allowances must be removed from the lease rate in determining the market level of rent. An assessor cannot say that a lease is $15 per square foot if the landlord paid the tenant $5 per square foot upfront.

Assessors also often misunderstand reimbursement income. Triple-net leases are uncommon in the office market; instead, landlords build an assumed level of expenses into their base rent and if the expense exceeds that base-level in future years, the tenant reimburses the landlord for the excess. Some assessors mistakenly view reimbursement income as additional profit. But, as the word "reimbursement" suggests, landlords only collect reimbursement income when, and to the extent, expenses exceed the base amount. Assessors should be reminded that reimbursement income is not a profit center.

As the office market continues its slow expansion, assessors are eager to capitalize on the most visible parts of the city skyline. But by grounding the assessor in the economic realities of the office market, diligent owners and property managers can reduce fixed expenses, lower tenant occupancy costs and ultimately improve profitability.