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Property Tax Resources

Nov
01

How Property Valuation Differs for Corporate Headquarters

Lack of data makes for more important conversations between advisors and property owners.

By Margaret A. Ford, Esq.

Corporate headquarters present unique challenges and opportunities in property valuation discussions with tax assessors. Managing taxes on any real estate property requires an understanding of all three traditional approaches to value, but headquarters are unusual in that good data are hard to find.

This article highlights common sticking points in value discussions for this unique property set. A collaborative discussion between an advisor and property owner on these few areas can lead to a successful tax reduction.

Cost considerations

A headquarters defines an enterprise, but many of its defining improvements lack value to potential buyers.

Especially with newly constructed or renovated projects, or when lacking comparable data, the assessor will often rely heavily on the cost approach to estimate market value. This can result in a high valuation with room for fruitful discussion about ways to support a value decrease.

Under the cost approach, an assessor using reproduction cost will frequently understate depreciation and obsolescence. It is important to also review treatment of the economic age-life method, which is often misapplied. The effective age, rather than the actual age, must be measured against the life expectancy of improvements.

Deferred maintenance also requires deductions. Good appraisal practice mandates that short-lived items should first be costed out by category — items such as windows, HVAC systems, carpet, roofs and restrooms — before determining their remaining useful life and cost of replacement based on capital plans.

If the appraiser resorted to a cost approach due to a lack of data for other approaches, in the case of an older headquarters with functional issues not designed to current standards, a replacement cost approach is preferred.

The replacement method projects the cost to reconstruct the buildings using modern materials, design and layout standards. This eliminates the need to estimate depreciation for superadequacies and poor design. It provides a better indication of the existing improvements' contribution to market value.

With preparation, the taxpayer can tell a powerful story of how to build the functional equivalent of the headquarters.

Income and sales

The income approach to value is seldom helpful, in part because of the difficulty in finding market rents for a single-user property of considerable size. The assessing authority may want to use multi-tenant rent comparables, but an explanation of the costs of the conversion from single- to multi-tenant use will reveal a significantly lower value conclusion.

The sales comparison will be the most relevant approach to value in most cases. Appraisers often use gross building area as a measurement unit of comparison for single users, but comparing by net rentable area (NRA) will go far to account for the reduction in value a building experiences when needs and usage change.

The appraiser must also use NRA for comparable sales. Factors such as remote working, benching and collaborative space needs will make more traditional and formal spaces within the building less valuable. Changes in how the corporate workforce uses office space can render many areas obsolete and deductible from NRA, such as auditoriums or an oversupply of formal conference rooms.

Another argument that helps to manage value in the sales comparison approach is to point out that parcels surrounding improvements should not be valued as fully functional and available building sites. Separating land from a corporate campus can diminish the campus' value.

Determining the economic impact to the comparables' sale prices when excess land might be at issue requires a more thorough analysis than simply looking at a land-to-building ratio and using the ratio as an adjustment criterion. The land-to-building-ratio adjustment alone does not measure the economic productivity of any excess land on the comparables in relation to the economic productivity of the headquarters land. There may be difficulty in developing the site due to terrain, or a corporate user might lose the right to add square footage elsewhere on campus if land is partitioned and sold.

There are good arguments to be made surrounding value adjustments for any renovations in a corporate campus. Often a corporate headquarters is physically complicated and evolving. If renovations add space, there is often an imperfect fit to the existing space. The taxpayer may argue that the new space suffers a discount because of the imperfect efficiency inherent in the blending of new and old.

Discussing conditions of sales comparables with the assessor is useful for appropriate adjustments. Often, the assessor lacks access to detailed offering memoranda or insights into the motivations of the buyer or seller, such as instances where a developer would pay more to acquire an assemblage, or if there is a need for cash, or unusual tax considerations.

Set the stage for a productive discussion with the assessor by first initiating an informative dialogue with the building engineers and manager. Ask them about the changing nature of the campus and their predictions about future changes.

On meeting with the assessor, share capital replacement plans and how the building must be changed due to internal industry needs and external trends. A meeting of the minds with the taxing authority on the cost and market approaches discussed above can lead to a successful value reduction.


Margaret A. Ford, is a member of the law firm Smith Gendler Shiell Sheff Ford & Maher, the Minnesota member of American Property Tax Counsel, the national affiliation of property tax attorneys. Ford can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
Jul
23

Head: Ohio’s Misguided Tax Fix

A proposed law to close the "LLC Loophole" from real estate transfer taxes is a solution in search of a problem

By Cecilia Hyun, Esq.

Ohio legislators are drafting a measure to apply the state's real estate transfer tax to the transfer of any ownership interest in a pass-through entity that owns real property. This proposal will cause more problems than it solves.

Ohio assesses its transfer tax, called a conveyance fee, on each real estate transaction based on the purchase amount reported on a conveyance fee statement and filed with the deed. If a pass-through entity owns the property, a sale of interest in that entity is exempt from transfer tax. The proposed changes would apply the conveyance fee to those transfers, however.

Also, if the property purchase price exceeds currently assessed value, recording the conveyance fee statement and deed with the county will usually trigger a lawsuit by the school district to increase the assessment and tax bill.

Transfers exempt from transfer tax include gifts between spouses or to children; sales to or from the U.S. government, the State of Ohio or any of its political subdivisions; transfers to provide or release security for a debt or obligation; and sales to or from a non-profit agency that is exempt from federal income tax, when the transfer is without consideration and furthers the agency's charitable or public purpose. Generally, the policy is to impose the transfer tax only after a market transaction with market consideration.

What's the problem?

Lawmakers consider the proposal on transfer tax and pass-through entities a tool to fix the problem of real estate value escaping taxation, both at the time of transfer and, more importantly, as part of the assessment. The two supposed loopholes that the proposal aims to close are:

  1. The transfer tax loophole argument assumes that some buyers may structure their purchase as an entity transfer, in part, to avoid the transfer tax, which can be significant for a highly valuable property.
  1. The property tax loophole describes the more likely "problem" the proposed law purports to address. This argument suggests that some buyers attempt to avoid real estate tax increases when the purchase price is higher than the current tax assessment by structuring the deal as an entity transfer

Ohio assumes that a recent, arm's length sale price is the best evidence of property value for real estate taxation. Filing the deed and conveyance fee statement prompts the school district to file a lawsuit to increase the taxes. The conveyance fee statement indicates the purchase price, carries evidentiary weight and is presumed to be completed under oath, even though as a practical matter it is more like a clerical function and seldom completed by any party to the sale.

When interest in the ownership entity transfers without direct conveyance of the real estate, the transfer tax is inapplicable under current law and no purchase price is recorded. Some sales may be structured this way, trying to avoid exposure to an increase in property taxes by filing a conveyance fee statement.

Everyone should bear their share of the tax burden based on fair property valuation, but this proposed bill does not solve the problem of people skirting their responsibility. It also can lead to unintended consequences including the loss of privacy, increased transaction costs, implementation and enforcement costs, and less real estate investment.

A multilayered dilemma

There is no indication that using a pass-through entity is even an effective way for investors to avoid triggering an increased assessment. Ohio school districts file increase complaints not only when deeds and conveyance fee statements are recorded, but also in response to mortgages, LLC transfers, SEC filings, and sometimes the opinion of outside consultants. There is little evidence that significant numbers of sales are missed because they are the transfer of ownership interests. Thus, there is no loophole that needs to be closed.

The proposal disrupts uniformity, because using a recent purchase to set the assessment midway through Ohio's three-year valuation cycle treats taxpayers who've recently bought their properties differently than others. This is non-uniform treatment, which the Ohio Constitution prohibits.

The conveyance fee statement is often completed and filed by someone not a party to the sale. Common errors occur, usually in allocating the total asset purchase price. Historically, these incorrectly reported purchase prices were being applied to set real estate tax values with increasing rigidity, leading to assessments that did not accurately reflect the value of the real estate.

Assessments should only value real estate, but assessments based on these total asset prices would include the value of non-real estate items as well. To the extent that the value of these other items -- for example, an ongoing, successful business operation -- were also being taxed through sales taxes or a commercial activity tax, these taxpayers were subjected to double taxation.

The solution exists

A recent amendment to the tax law mandates that a real estate assessment reflect the unencumbered fee simple interest. The Ohio Supreme Court recently confirmed in its Terraza 8 LLC vs. Franklin City Board of Revision decision that the amendment requires assessors and tribunals to evaluate all circumstances of a sale, and not blindly apply the number reported on the conveyance fee statement.

The appraisal of the unencumbered fee simple interest provides uniform assessment for all taxpayers, while acknowledging the circumstances of real world transactions. It limits double taxation by making sure real estate tax is based on real estate value only, and yields consistent results whether a sale price is higher or lower than the current assessment.

It ensures uniform measurement and taxation for everyone; just as you would not impose taxes based on gross profits for one taxpayer and net profits for another. It also ensures that the tax is applied consistently, whether the owner just bought the property, has owned it for decades, leases it, occupies it, owns it individually or owns it through interests in a pass-through entity. Valuing the unencumbered interest also results in predictability, aids budgeting, and alleviates deal-killing uncertainty.

There are legitimate reasons to convey property through the transfer of ownership interests in an LLC or other pass-through entity, including privacy or other tax planning. The proposed bill undercuts those legitimate concerns without addressing the perceived problem of real estate value escaping taxation. Consistently valuing the unencumbered fee simple interest of real property through uniform assessment and uniform application ensures that no real estate value escapes taxation, and that no taxpayer bears more than their fair share of the burden.

Cecilia Hyun is a partner at the law firm Siegel Jennings Co. L.P.A., which has offices in Cleveland, Pittsburgh, and Chicago. The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
May
29

Cash in on Tax Savings for Green-Buildings

Energy-efficient buildings may not yet command premium rents and prices in smaller markets, but green features could mean property tax savings.

By Benjamin Blair, Esq.

A growing number of commercial properties incorporate energy-efficient attributes that exceed basic code requirements. While conserving resources, these sustainable building strategies can also enhance the owner's bottom line by reducing operating costs. As investors consider developing or buying green properties in certain markets, though, they should consider a less-obvious source of savings – their property tax bills.

No single set of attributes defines a green building; rather, sustainable structures lie on a spectrum. At one end are otherwise-conventional buildings with modest upgrades, ranging to a high end of properties employing comprehensive design and operational strategies that approach zero net consumption of energy or water.

The features most commonly associated with green building tend to be efficient heating and cooling equipment, better insulation, rainwater catchment and on-site power generation methods such as solar, wind, or geothermal. While roof-top solar panels garner attention, other design attributes including passive solar collection, drought-tolerant landscaping, and building-control systems can be equally effective at achieving sustainability objectives. Ultimately, each attribute adds costs to the construction or operation of a property, while not necessarily generating the same incremental gain in value.

How green is the market?

Green design and operations have become standard for Class A properties in many primary markets. With above-average adoption rates, the investment premium for energy-efficient attributes may disappear and properties lacking those attributes may decline in value. Similarly, buildings without green features may be at a competitive disadvantage in attracting potential tenants and buyers.

In many secondary and tertiary markets including across the Midwest, Southeast, Great Plains and elsewhere, however, buyers and tenants have not shifted their preferences toward green construction. This greatly reduces the direct economic benefits of green features. When the pool of tenants willing to pay premium rent for energy-efficient features approaches zero, the pool of buyers demanding those features likewise declines.

Accordingly, whether green attributes have an overall positive or negative impact on a property's market value is highly dependent on the local market, even when the nation overall shifts demand toward such features. Energy-efficient construction may be a market prerequisite in one location, while constituting over-engineering and over-building in another. The question for owners of sustainable buildings evaluating their tax assessments, then, is how buyers and sellers in that market react to specific green features.

Necessary, adequate or superadequate?

Assessors often value properties, at least initially, based on the costs of construction, using either replacement cost tables or information from construction permits. But most green buildings have higher upfront costs, with a goal of achieving long-term efficiency objectives. A green building assessed purely on a cost basis, without considering whether its features are above-market, may be over-assessed and, as a result, overtaxed.

Any cost-based property valuation must account for all depreciation, from ordinary wear-and-tear to obsolescence brought about by market factors. One type of functional obsolescence is superadequacy, which applies to an attribute that exceeds current market requirements. Essentially, a superadequacy is a cost without a corresponding value increase.

Importantly, obsolescence is measured against the market, so even a newly constructed property with no physical deterioration could suffer from substantial obsolescence. A particular green feature might represent a positive value element, a market requirement, or functional or external obsolescence, depending on the property type and location.

Of course, as market demands evolve, some features that were superadequate when originally constructed may become standard. Tax assessments must reflect property and market conditions on a certain date, however, and until the market changes, must account for superadequacies.

And while superadequacy is an element of the cost approach to value, it should be a consideration in income- or sales-based analyses as well. The value of green features, like everything else in an appraisal, must be supported with market research and data. If no demand is found for the property's features, that must be reflected in the value conclusion.

Getting the value right

Assessors may ask: "If a green building has an out-of-pocket cost of $1 million, how can it appraise for only $750,000? Why would an investor spend the extra money?"

Certain items may motivate a particular owner, but property tax assessments are usually based on the real estate's market value alone, regardless of business value or intangible value. If the market does not recognize a feature as valuable, then the value a particular user assigns to that feature is irrelevant for property tax purposes.

In questioning how a green feature affects a property's market value (as opposed to its value to the user), consider whether the feature creates a direct monetary benefit to the property owner or user, either in the form of higher income or lower expenses. Sustainability features may boost the owner's business, perhaps resulting in goodwill or broader market recognition, but that increase will not necessarily accrue to the real property itself. And indirect benefits – those nonmonetary benefits to the community or environment – are unlikely to change real estate value.

Valuing a green building involves most of the techniques used for conventional properties, but the nuances and complexities require greater knowledge and training. Local tax assessors, particularly in smaller jurisdictions where sustainable features have not reached market acceptance, often lack that requisite knowledge. It is no wonder that assessments often fail to consider all of the relevant market factors, creating opportunities for taxpayers to appeal excessive assessments.

As demand for sustainable buildings expands, assessors want to capture that growth in the local tax base. But by focusing on whether the local market demands or ignores energy-efficient features, diligent owners can reduce their property's tax assessments and achieve significant savings.


Benjamin Blair is an attorney in the Indianapolis office of the international law firm of Faegre Baker Daniels LLP, the Indiana and Iowa 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
11

Misnaming, Misusing The Dark Store Theory

What's in a name? Discussing valuation principles with concise language avoids misunderstanding.

Dark store theory is being used incorrectly to name what is standard, accepted, and proper appraisal practice. It is most often employed by news media to mistakenly suggest that big-box storeowners are taking advantage of a property tax loophole and arguing that a property should be valued as if it were vacant even when the store is open and operating.

While the words "dark store" evoke images of villainous or nefarious activity, assessors and taxpayers should see through this provocative language.

The phrase often confuses the fee simple (absolute ownership of the real estate subject only to governmental powers) market value of the real es­tate with other types of quantifiable value, such as investment or insurable value.

Investment value reflects value to a specific investor based on his own in­vestment requirements, while insur­able value reflects improvements or the portion of the property that may be destroyed.

Typically, property taxes should only be assessed on the real estate value. That's why it's important to differentiate property value for real estate tax assessment from other types of value.

What local law deems real estate value often is different from the property's value to a lender or investor. For example, an owner may include large manufacturing equipment as part of collateral for a mortgage.

This equipment may be valued along with the real estate in determin­ing a loan amount, and may even be included in a financing appraisal; yet the value of that equipment should not be taxed as real estate.

Although this careless and unsys­tematic misapplication of dark store theory concerns commercial real es­tate, we will use examples of single­family homes to illustrate its con­cepts.

Comparable sales valuation

In many jurisdictions, assessors value the land, building and improve­ments for real estate tax purposes. If using sales of comparable proper­ties to determine value, the assessor should examine exactly how much was paid, by whom, for what.

If the sale price of the compara­ble property includes value for an above-market lease, for unusually favorable financing terms, or for an above-average credit rated tenant, the assessor must adjust the sale price to reflect market conditions. The flip side is also true: a sales price based on below-market rent should also be adjusted.

Users of the "dark store theory" label often argue that a busy store deserves a higher real estate tax as­sessment because a large and sophis­ticated company is running a suc­cessful business there. But excluding business value from the real estate as­sessment doesn't mean that the prop­erty owner made ill-advised business decisions.

The adjustments recognize that the sale included additional sources of value or achieved valuable business objectives in addition to the exchange of real estate. The value of these items is separate, and must be excluded from the real estate value for tax pur­poses.

Consider this residential example: a buyer pays 20 percent more than the high end of the market range to buy the house next door to the buyer's brother. The two families have chil­dren of similar ages and expect to save money by carpooling and shar­ing child care and other expenses.

The buyer is acting in his own self­interest and values the proximity to the brother's household, and the ob­jectives the buyer will meet by living next door. That does not mean that the additional money the buyer paid for those considerations increases the value of the house itself to the typical buyer.

lf an appraiser uses this purchase price as a comparable sale to value a similar house across the street, the purchase price should be adjusted to reflect a more typical market partici­pant.

Similarly, any sales of comparable properties used to value big-box retail stores must be adjusted to exclude any value paid for items that are not real estate, whether they are an above­market-quality tenant, atypically long lease duration or other intangible property.

Income approach valuation

Two distinct and important issues get muddied by dark store adherents in valuations based on potential in­come generation.

The first is whether the properties are valued as if vacant, or as if occu­pied at market terms. Valuation as if occupied at market terms by a typi­cal market tenant does not include a landlord's lease-up time and costs, which are factors in the value of a va­cant property.

Secondly, there will generally be a correlation between better retail properties in better locations and the financial strength of the tenants in those properties and areas. Howev­er, the business success or failure of a specific tenant cannot be the basis of a real estate tax assessment if that tenant is not representative of the market.

Returning to the single-family world, houses in desirable areas with good schools, municipal servic­es and low crime rates are generally occupied by people with higher in­comes than homes in less-desirable areas.

However, that does not mean that the income of a specific resident deter­mines the value of the house that he or she occupies. If a brain surgeon and a retail cashier are next-door neighbors in similar houses, the values of the homes do not change.

If two similar retail stores are located in a similar area, but one is gener­ating extremely high store sales while the other is vacant because of a business decision to exit the local market, the value of the properties for real es­tate tax purposes should be the same.

Valuing property is always fact intensive, and the array of specifics dif­fers from situation to situation. There are no shortcuts to an accurate and fair tax assessment value. If the data used is bad and valuation process sloppy, the value conclusion will also be wrong. Consistent and rigorous analysis is vital.

Don't be fooled by labels

Proper appraisal methodology does not become nefarious just because it is erroneously called a "dark store loop­hole." A rose by another name would smell as sweet. Taxpayers need to pay attention when the term "dark store" is bandied about - it is often used to confuse important appraisal concepts and practices.

To be fair and uniform, property taxes must be assessed only against the real estate, and be based on accurate data reflecting typical market participants. Value related to the success of the retailer's business is captured by other taxes levied on income, sales or commercial activity.

To include those items as part of the property tax assessment is not closing a tax loophole; it amounts to double taxation.

Ignore incendiary language and apply appraisal methodology consistently and diligently to arrive at a fair value for real estate taxes.

Cecilia Hyun is an attorney at the law firm Siegel Jennings Co, L.P.A., which has offices in Cleveland and Pittsburgh. The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
Jul
10

Tax Rules Clarified For Section 42 Housing

"Wisconsin Supreme Court reaffirms subsidized housing valuation methods."

In a major victory for subsidized housing developers and investors, the Wisconsin Supreme Court has reaffirmed longstanding principles governing the assessment of these properties.

The Dec. 22, 2016 decision in Regency West Apartments LLC v. City of Racine confirms that the assessment of a subsidized housing project is a property-specific exercise that must take into account the type of federal program involved, specific restrictions on the property and actual property income and expenses.

The decision also affirms that the value of a subsidized property cannot be determined by comparison to conventional apartment properties that have no restrictions and can charge full market rents.

Historical context

The Wisconsin Supreme Court first upheld these principles in a 1993 case involving a Milwaukee apartment project subject to rental and other restrictions imposed by the U. S. Department of Housing and Urban Development (HUD).

The assessor had valued the property based on market rents at conventional apartments, ignoring the property owner’s inability to legally charge market rents. The Supreme Court nullified the assessment, stating that the assessor had illegally assessed the property by “pretend[ing]” that the HUD restrictions did not apply.

The new decision

In the December 2016 decision, the Supreme Court reaffirmed the 1993 decision and announced additional rules governing what assessors cannot do in assessing subsidized housing.

That case involved 72 rental units regulated under Section 42 of the Internal Revenue Code, which provides federal income tax credits for investors in affordable housing. Regulations governing the property restricted both rent and tenant income levels, and required the owner to enter into a 30-year land use restriction agreement.

For the first of the two tax years in issue, the assessor valued the project under an income approach but failed to consider the owner’s actual income and expense projections. Instead, the assessor estimated vacancy and expenses using a mass-appraisal model comprised of market vacancy rates and market expenses for unrestricted properties.

The assessor also used a low 6 percent base capitalization rate, likewise derived from a mass appraisal model consisting of market-rate properties.

For the second year in issue, the assessor used a comparable sales approach based on sales of three properties that the assessor claimed were comparable to the subject property. However, none of those properties was a Section 42 project: Two were rent-subsidized HUD Section 8 properties, and the other was a mixed-use property consisting primarily of market-rate apartments with a few Section 42 units.

The Supreme Court nullified the assessments for both years, concluding that neither approach the assessor used complied with the rule that an assessor cannot value subsidized housing by “pretend[ing]” that the restrictions on the property do not exist.

For the income-based assessment, the Supreme Court found two fatal flaws in the assessor’s methodology.

First, the court found that the assessor violated Wisconsin law by using estimated market-based vacancy and expenses instead of the property’s projected actual vacancy and expenses. The court reaffirmed that its 1993 decision “unambiguously” requires assessors to use actual income and expenses when valuing subsidized housing under an income approach.

The court further held that by using mass appraisal estimation techniques instead of income and expense information specific to the subject property, the assessor violated the statutory requirement that assessors must use the “best available” information.

Second, the court found that the assessor violated Wisconsin law by deriving a capitalization rate from market-rate properties instead of from the specific market for Section 42 properties. The court explicitly held that Wisconsin assessors valuing federally regulated properties “may not” derive a capitalization rate from market-rate properties.

For the comparable sales-based assessment, the court likewise concluded that the three sales the assessor relied on were not “reasonably comparable” to the subject property, as Wisconsin law requires. The court definitively rejected the assessor’s claim that Section 42 properties and Section 8 properties have similar restrictions and similar rates of rent and are there-fore comparable.

In rejecting the assessor’s claim that those two programs have similar restrictions, the court engaged in a lengthy analysis of the fundamental differences between them.

The court emphasized that the two “are vastly different” programs with “different risks for the owners,” since Section 42 is an income tax credit pro-gram while Section 8 is a rent subsidy program; thus, Section 42 properties are “riskier investment[s]” because the government does not insure against nonpayment of rents.

The court likewise rejected the assessor’s claim that the two programs have similar rents, holding that the comparison was invalid because the assessor failed to recognize that Section 8 rents are subsidized by the government while Section 42 rents are not. The Court thus concluded that as a matter of law, Section 8 and Section 42 properties are not reasonably comparable because they do not have the same restrictions.

Key takeaways

The decision is a major victory for subsidized housing developers and investors for several reasons. First, it reaffirmed the 1993 decision that subsidized housing cannot be valued under an income approach based on the income and expenses of conventional apartments. It also provided additional guidance as to what assessors cannot do, including developing a capitalization rate from sales of non-subsidized properties.

Second, the decision addressed for the first time what assessors cannot do in assessing subsidized housing under a comparable sales approach, since the 1993 case only addressed assessment under an income approach.

Finally, and perhaps most significant for investors in these properties, the decision specifically held that different types of subsidized housing programs – Section 42 and HUD Section 8 in particular – are vastly different, and that assessors cannot consider a property under one program to be reasonably comparable to a property in a different program just because they both involve a form of subsidized housing.

Gordon Robert 150Robert Gordon is a partner in the Milwaukee office of Michael Best & Friedrich LLP.  He is also the designated Wisconsin member of Amercican Property Tax Counsel.  Robert can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Jul
07

Lifting the Veil on Chicago and Cook County Real Estate Taxes

It seems like politics watchers and the news media like to establish a veil of mystery around Cook County tax assessments. And although it sells papers and conjures an atmosphere of the unknown, the most important thing to know about tax relief in Cook County is the role of market value in assessments and how taxes are  calculated.

On June 13, taxing entities announced that tax rates in the City of Chicago would be going up approximately 10 percent. The second installment 2016 tax bills were scheduled to be published around July 1 with a very short payment deadline of Aug. 1, 2017. Those bills will reflect all changes to assessments, as well as the new tax  rates.

Tax increases make good headlines, but the increases were not a real surprise. The large anticipated property tax increases arise from a local ordinance designed to recapture a portion of the City of Chicago's and Chicago Public Schools' large budget deficits and pension plan deficits. This local real estate tax increase resulted from the absence any current resolution of the continuing budgetary stalemate between the general assembly and the governor's office in Springfield, Illinois.

The table below illustrates the potential real estate tax increase that could result from the projected 9.3 percent 2016 tax increase from the previous year's tax bills. It addresses a commercial property in Chicago which had a $10 million assessor's fair market value in 2015, considering the projected 2016 property tax increase of about 10  percent.

Projected Tax Bill
$10 million commercial property

 

2015

2016

Market value

10 million

10 million

x 25 percent assessment ratio

  

Assessed value

2.5 million

2.5 million

Equalization factor

2.6685

2.8032

Equalized assessment

$6,671,250

$7,008,000

Tax rate

6.867 percent

7.145 percent

Tax bill (increase 9.3 percent)

$458,114.74

$500,721.60

News outlets made a splash over the approximate 10 percent increase in the tax rate. However, to satisfy the needs associated with funding police, fire and schools, it is likely that there will be future tax increases over and above that initial 10 percent.

What to do? First, understand that a tax challenge is not surrounded by intrigue. Individuals can very easily appeal their assessments to the assessor. Taxpayers that present good facts and arguments following sound appraisal theory will often find some tax relief. Property owners can take a further appeal to the board of review and beyond. However, at the board level, corporate taxpayers require an attorney.

There are a number of practical arguments to consider. One is to pursue an argument based solely on the assessment as compared to the actual market value of the property, considering the contract rents in  place.

Another is taking what appears to be the opposite approach. When arguing about uniformity, taxpayers look toward the general market. In short, assessments should reflect current market rents and not necessarily the actual contract rent at the subject property.

Taxpayers should also consider market occupancy with an eye toward the limitations of the subject property. These arguments  work best when submitted to the board along with reliable appraisal evidence as supporting material.

From a practical standpoint, a uniformity argument hits close to the response that most taxpayers want, which is to be taxed in a similar manner as their neighbors or competitors in similarly situated  properties.

Most assessments are sub-arguments to the income, sales and cost approaches to determining value. The assessors and boards heavily favor the income approach for commercial properties.

Thus by understanding the limitations of the subject property, the taxpayer can argue his own case or be better able to assist tax professionals in establishing the most accurate assessment for the property. There are no smoke and mirrors required, just sound judgment.

 

jbrown kieran jennings

J. Kieran Jennings is a Partner at the law firm Siegel Jennings Co, L.P.A., which has offices in Cleveland and Pittsburgh.  The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. Kieran can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..   Jeffrey Brown is an attorney at the law firm of Fisk Kart Katz and Regan LTD.  The firm is the Illinois member of American Property Tax Counsel.  Jeffrey can be reached at jbrown@proptax.

Dec
15

Market-Value Tax Assessments Under Attack

Governments increasingly seek tax increases through value-in-use property taxation.f the compelling evidence is on your side, the record shows you have a fighting chance.

An unprecedented national debate is raging as vocal proponents of additional government revenue seek significant property tax changes that will be costly to taxpayers.

A recent Michigan Court of Appeals decision in Menard Inc. v. Escanaba (the “Menard decision”), which involved a Menards hardware store in the Michigan Upper Peninsula City of Escanaba, confirms that proponents of greater taxation are masking their true goals with claims that they merely seek equitable taxation. Consequently, it is important for property owners to understand the issues involved.

Typically, property taxes reflect market value rather than a property’s value-in-use, which is the value to the owner. The market value standard bases taxes on the amount the property probably would fetch, after reasonable market exposure, in a sale between two knowledgeable, unrelated parties.

With the exception of the right to appeal under due process, no property tax component is more essential to taxpayers than basing taxation on market value, and not on value-in-use. The market value standard provides a framework for equitable and uniform property taxation.

Market value bases taxes on what is achievable in a market sale, determined through objective information such as comparable sales, rental income, operating expenses, capitalization rates and other market information.

Important distinctions

With market value taxation, a property’s value is unaffected by who owns the property, or whether the owner is able to use the property to operate a successful business. For example, a retailer, manufacturer, or cloud data storage provider may use intangible and tangible property, including real estate, in a way that achieves extraordinary income from business operations. This does not change the market value of the real property used.

In contrast, value-in-use taxation is inequitable and non-uniform. Consider two identical, neighboring residential properties that have the same market value. Their value-in-use would most likely differ, and the differences could be dramatic. The disparity could be because one house has more occupants, or because one property is used only part of the year.

Alternatively, one house could have greater value-in-use because a resident generates significant income from work done while in the home, such as in a home office or studio. Also, when one of these identical properties sells, the property’s value-in-use could substantially increase or decrease.

Those who seek value-in-use taxation might argue that such taxation is equitable because owners who obtain more value from using their properties should pay higher property taxes. But consider some of this position’s enormous failings:

  • Most people would readily agree that the most equitable system is one in which all properties are uniformly valued based on their usual selling price, rather than their differing values in use.
  • Value-in-use taxation is highly subjective and inherently inequitable. Imagine the problems and disputes if properties were valued based on the value each owner experienced.
  • Value-in-use assessment would result in duplicative taxation. If a property is used in conjunction with a business, whether the property is a residence or otherwise, value-in-use property taxation will reflect the business’s income and success. Yet, there will be duplicative taxation where other taxes are imposed on the business, such as income taxes, gross receipts taxes and value-added taxes.

Given the enormous problems with value-in-use taxation, taxpayers could understandably think there is little risk that such taxation would be adopted.

Unfortunately, those seeking value-in-use taxation have shrewdly focused on the taxation of large big-box retail properties, which they claim have been unfairly valued based on sales of vacant properties that allegedly had value-depressing deed restrictions.

The proponents of greater taxation have even tried to divide taxpayers by suggesting that some taxpayers will pay higher taxes because big-box taxpayers are not paying their fair share.

Keys to the truth

Developers build big-box retail properties to the owner’s specific needs, typically with a layout matching the owner’s other stores. Buyers of such properties invariably pay far less than the cost to construct such properties. They do so because they will spend large sums for renovations the new owner desires, in particular to fit a business image.

Also, there is reduced demand for these properties. It’s what appraisers call external obsolescence – especially with growing industry disruption from Internet sales. There are numerous sales of big-box properties without deed restrictions that confirm the selling prices for these properties are low compared with their construction costs.

Notwithstanding these irrefutable truths, the Menard decision held that an assessor could value the property under a cost approach, as if the property had no functional obsolescence. According to the Michigan Court of Appeals decision, a buyer would consider a property suitable for its own needs, merely because the property satisfied the needs of its original owner.

Such reasoning obviously values the property based on its value to the original owner – i.e., value-in-use, not its market value. These principles are the same whether dealing with a non-residential property or a home that has been custom built to an owner’s unusual tastes.

Significantly, the Menard decision specified that value-in-use taxation also could apply to a large industrial property. And a prior Michigan Court of Appeals decision endorsed value-in-use for the headquarters of a financial institution. Once the value–in-use genie is out of the bottle, it can cause above-market valuations and increased taxes for virtually any type of property.

Notably, the pro-government briefs that oppose Menards appeal to the Michigan Supreme Court deny that the decision endorses value-in-use taxation. These denials, like those in the press made by advocates of greater taxation, disregard that the Menard decision itself uses the very words “value-in-use" in endorsing such taxation. It remains to be seen if the Michigan Supreme Court will review the Menard decision, and it could be a year or more before the case’s ultimate outcome is known.

High stakes game

Some in the business community are responding to today’s property tax debate as they would to any intense effort to broadly raise property taxes. Such groups understand what is at stake and are defending market value-based property taxation for all properties.

Yet those who seek higher taxes appear to be strongly united. Whether they succeed in imposing value-in-use taxation may well depend on whether the business community itself will unite to oppose what eventually could become an enormous tax increase.

To paraphrase Abraham Lincoln, a business community divided against itself will inevitably succumb to the united forces that seek greater taxation.

Mandell Stewart jpg

Stewart Mandell is a Partner of the Tax Appeals Practice Group Leader, in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Oct
18

Why Taxing Authorities are Suing Taxpayers

Municipalities and school districts increasingly file lawsuits to increase property tax assessments.

As property owners increasingly participate in transactions across multiple states and countries, they could be shocked to find themselves defending against a lawsuit filed to increase their real estate taxes.

A minority of states allow the local real estate tax assessing body or school district to appeal a tax assessment, arguing that the property's value and resulting taxes should be higher.  States where these types of appeals are allowed include Ohio, Pennsylvania and New Jersey.  Property owners in those states should  be aware that someone may be filing a lawsuit to increase their property taxes.

Method to the madness

Taxpayers cannot prevent a school district or assessing body from appealing a property tax assessment in states that allow them to do so.  Property owners should be especially watchful in the following situations where it is more likely to occur:

Sales – In Ohio, if a recorded sales price is higher than the current assessment, it is almost guaranteed that the local school district will file a complaint to increase an assessment, particularly in large markets around urban areas.

School district attorneys routinely review recorded sales for comparison to the current assessment.  Although recent legislative changes have increased assessors' ability to consider all relevant facts of a sale, a recorded sales price is still a formidable challenge to overcome.

In Pennsylvania, and particularly in Western Pennsylvania, sales are the most common trigger for an appeal to increase a tax assessment.  In states where chasing sales price may run afoul of constitutional protections, the local taxing authority may wait until a few years after the sale closes before filing the appeal.

Mortgages – In response to lower sales prices and increased sales volume resulting from foreclosure or bankruptcy during the Great Recession, taxing bodies also file appeals to increase taxes based on recorded mortgages.

Similar to the tracking of recorded sales, attorneys for the taxing authority will review the amounts of recorded mortgages and compare them to the current assessment.

When the mortgages are secured by collateral that includes other assets in addition to the real estate, this practice can lead to inaccurate and inflated real estate tax assessments.

Other available filings – A recent case in Ohio shows the spread of this practice from recorded mortgages and deeds to Securities and Exchange Commission (SEC) filings.

The local school district filed an appeal to increase the assessment of an apartment in Athens from approximately $12.6 million to $48.98 million, based on an SEC filing by a mortgage lender.

The property owner's attorney has stated that the SEC filing includes the total value of the business purchased, which includes other assets in addition to the real estate.

The local county board of revision granted the revision at the first level of review and the case is currently on appeal.

Outside consultants – In Pennsylvania, taxing authorities filing complaints to increase assessments are on the rise, particularly in counties that have riot undergone a reassessment in some time, based on the recommendations of outside consultants.

These consultants contract with a particular taxing body, typically the school district, to review assessments and recommend appeals on properties they identify as under assessed.

Although this consultant activity seems most prevalent in the eastern part of the state, the regular practice of school districts filing appeals is spreading across Pennsylvania.

Meanwhile, in Ohio certain school districts have even begun to file complaints to increase values in cases that have previously been tried in court.

Practical pointers

Because sales trigger so many of these cases, it is important to get pre-closing advice on the property tax consequences affecting your specific property.  There may be measures the taxpayer can take in structuring the transaction to avoid or minimize an increase in taxes.

Be aware of the tax consequences of recorded and publicly available documents, including SEC filings, particularly with portfolio asset purchases across multiple states.

Filially, attorneys for the taxing body may use procedural tactics to fish for non-public documents that could help them argue that a property is under assessed.  For example, school districts in Ohio have used the discovery process to subpoena financing appraisals from lenders.

Local expertise is key

Because real estate taxing schemes vary greatly, owners should consult local tax professionals to determine the best strategy to defend against an appeal that seeks to increase the property owner's taxes, or to minimize the potential that such an appeal will be filed in the first place.

Procedural, jurisdictional and evidentiary traps abound for those not well-versed in the local law.

For example, in Ohio, property taxes are levied and paid one year behind, meaning that taxes for the 2016 tax year are paid in calendar year 2017.  Similarly, appeals to reduce or increase the tax assessment are filed one year behind.

If a taxpayer purchases a property and the sale closes on Dec. 31, 2016, for a recorded price that is higher than the current tax assessment, the school district will be aware of that sales price and can contest the 2016 assessment any time from Jan. 1 through March 2017.

If the school district appeals the assessment based on the sales price and is successful, the assessment will be increased to the sales price, effective at the beginning of the 2016 tax year.

That means the buyer could be on the hook for increased taxes for a period of time when he did not own the property.

Local taxing bodies have been filing appeals now more frequently to increase property tax assessments, attempting to generate revenue after property values and sales prices dropped during the economic downturn.

Even though the market has improved, these taxing authorities are unlikely to now abandon the practice.

Consult with professionals who have local experience to defend against these suits in order to maintain fair real estate assessments and taxes.

Cecilia Hyun 2015

Cecilia Hyun is an attorney at the law firm Siegel Jennings Co, L.P.A., which has offices in Cleveland and Pittsburgh.  The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Apr
14

Five Ways Property Owners May Qualify For Property Tax Exemptions In Indiana

But in every instance, obtaining an exemption requires timely and accurate applications.

It is a common misconception in Indiana that property owners must also be non-profit corporations to qualify for a property tax exemption. While tax-exempt status is critical for the application of some exemptions, Indiana law provides for-profit property owners with opportunities to reduce their tax liabilities by claiming exemption.

To obtain the exemption, the property owner must show that it uses the property in a manner that qualifies for tax exemption, and the application must clear mandated procedural hurdles.

There are several property uses that may qualify for exemption from property tax liability. Here are five common scenarios:

  1. The property is owned, occupied and predominantly used for charitable, educational, religious, literary or scientific purposes — To qualify, the owner must file an exemption application and show that it owns the property to further one of these tax exempt purposes.

    Ownership, occupancy and use need not be unified in one entity, and the statute does not require the owner to be a non-profit.

    For example, the tax court in 2014 approved a 100 percent property tax exemption for an office building that a for-profit, limited liability company owned to further the charitable tissue bank operations of its tenant, a related public benefit corporation. The assessor failed to show that the for-profit owner, in fact, had a profit motive for the property.

    Similarly, in a final determination issued that same year, the Indiana Board of Tax Review — the state agency that adjudicates property tax exemption appeals — stated that "involvement of for-profit entities does not preclude a property tax exemption.

    In this latter case, a for-profit entity leased a building to another for-profit entity to provide early childhood education.

    A year earlier, the tax review board approved the 100 percent exemption of a building owned by an individual and leased to a for-profit, faith-based daycare.

    Starting in 2015, the Indiana Legislature explicitly authorized the exemption of property owned by a for-profit provider of certain early childhood education services.
  2. The property is leased to a state agency — Property owned by a for-profit entity and leased to an Indiana state agency qualifies for exemption, but the lease must require the state agency to reimburse the property owner for property taxes.
    The exemption applies only to the assessed value attributable to the part of the real estate that the agency leases.
  3. The property is leased to a political subdivision — Structures leased to political subdivisions, including municipal corporations, are exempt from property tax.
  4. The property is leased to a public university — The Indiana Board of Tax Review considered this provision in 2013, applying a 13 percent property tax exemption for the portion of a for-profit commercial property owner's building that was leased to Purdue University for use as classrooms.
  5. The property is used as a public airport — To qualify for this measure, the owner of an Indiana airport must hold a valid and current public airport certificate issued by the State Department of Transportation. The law states that the applicant may claim an exemption "for only so much of the land as is reasonably necessary to and used for public airport purposes."

Eligible property includes not only the ground used for taking off and landing of aircraft, but also real estate "owned by the airport owner and used directly for airport operation and maintenance purposes" or "used in providing for the shelter, storage, or care of aircraft, including hangars."

The exemption does not apply to areas used solely for purposes unrelated to aviation.

How to apply

What is the process for claiming a tax exemption? Beginning in 2016, applications are due April 1, six weeks earlier than in past years. Indiana's Department of Local Government Finance provides a standard exemption form, Form 136, available on the agency's website at http://www.in.gov/dlgf/8516.htm.

The form can be used to claim both real and personal property tax exemptions. It includes three pages of questions and identifies the information and documents needed to process the request.

The property owner is responsible for explaining why the property is exempt to the assessor and to the county property tax assessment board of appeals, which has the authority to review and approve or reject each application.

Owners may need to provide in-formation beyond what the form requires. For example, assessors often want to review the relevant leases, such as a lease to a state agency or political subdivision. Indiana has 92 counties, and each county has its own procedures for processing applications.

There is no universally reliable test for weighing applications for tax exemption, so each claim stands on its own facts. Whether an owner's property qualifies for the exemption will depend on the statute under which the exemption is claimed and the particular evidence provided to support the claim.

Miss the filing deadline?

Exemptions are not automatically applied each year, but property that has been previously granted an exemption under certain provisions may not require new applications annually, depending on the facts of the case.

If the exemption does not carry forward and the owner fails to properly claim an exemption, it may be waived.

Even if the exemption is waived, however, hope remains. The owner may be able to obtain a legislative solution that permits a retroactive filing for an otherwise untimely application.

 

Brent AuberryBrent A. Auberry is a partner in the Indianapolis office of the law firm Faegre Baker Daniels LLP, the Indiana member of American Property Tax Counsel (APTC), the natonal affiliation of property tax attorneys. Mr. Auberry can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Feb
29

Beware of Excessive Property Taxes After Government Condemnations

Easements negatively affect a property's utility and desirability, reducing its fair market value.

Property valuation for tax purposes shares a common basis with condemnation law when it comes to the impact on property owner rights.

In practical terms, imposing an easement or taking a portion of a property devalues that real estate.

Property owners have a clear legal remedy for compensation when the government takes any of the bundle of rights inherent to property ownership. There is no prescribed procedure, however, that automatically adjusts taxable property value when the government burdens the property through some form of taking.

The property owner must step up and declare that the property is being subjected to a double hit: (1) the loss of some property rights for which compensation presumably was paid; (2) the continued excessive tax burden resulting from the assessor's failure to recognize the value loss commensurate with the taking of some right or rights that contributed to the property's prior value.

The Other Shoe Drops

How do properties burdened by government easements and partial takings suffer a double value loss?

First, the use of the property for some public purpose limits its usefulness to the owner, and therefore reduces its marketability. Second, the property owner incurs an ongoing cost in unfair taxation when the assessor fails to adjust to the diminished value and reduce the value for assessment purposes.

A typical example is a taking for a utility easement across a property. The owner and government will either negotiate a price paid for the easement, or a condemnation proceeding will determine just compensation.

The government acquires the easement legally, typically paying money to do so. Yet the acquisition imposes a value loss on the remainder of the property, a loss that goes unnoted and unacknowledged by the taxing authority.

There are small differences between the loss in value resulting from the imposition of an ·easement or the taking of the fee interest in the affected property, but all takings for a public purpose result in value loss to the remainder of the real estate.

Encumbrances All Around

Some examples of loss resulting from the imposition of an easement, be it a power line, sewer line, green space or pipeline, are the interference with or elimination of future development or use of the property. There is a loss of peaceful enjoyment and use of the property during the construction and development stage, as well as the continued inhibition of full use of the property in perpetuity.

The holder of the easement rights will also have the power forever to re-enter the property to maintain, repair, alter and expand its use within the easement. That right of access usually includes a right of ingress or egress over the whole property as required to get equipment and personnel to the easement.

For instance, agricultural properties subservient to easements, such as for power lines, are subjected to maintenance and repair crews corning to repair the lines and crossing through cultivated fields. Since the lines are most often damaged during storms, the fields will be at their most vulnerable to damage and resultant crop loss.

The crop-loss scenario is equally adaptable to urban commercial property. A sewer line running under the parking lot of a big-box store, a power line across a convenience store entrance, a water line in front of a fast food restaurant, are all subject to failure or modification that could interfere with the enterprise operating on the property.

The point is that the encumbered property, if offered for sale, will not obtain the same price as a competing property that is unencumbered by such a burden.

Calculate the loss

The basic measure of compensation to acquire an easement is the fair market value of the property before the taking versus the fair market value after the taking. The difference between those values represents the compensable loss to the owner.

Assessors ignore this statutory standard, failing to recognize that a property burdened by public easements does not command the same value as unburdened or less burdened properties of similar use.

Properties that have lost size as a result of a taking for public use suffer an even greater value loss to the remainder of the asset. Assessors will typically use some database to justify their value assessment, confronting the taxpayer with statistics. The assessor will rely on market data such as asserting that hotels sell for $X per room, Class A office space for $Y per square foot, convenience stores on one-acre lots for $Z and so on.

But a commercial property diminished in size is invariably diminished in desirability, if not in outright utility.

A very small strip of land taken in front of a fast food restaurant may result in an inferior access. A taking from an office building parking lot may result in a lack of adequate parking that is usually required. The taking may render the entire property nonconforming because setback requirements and building-to-land ratios no longer meet local ordinances.

Assessors rarely, if ever, re-value properties after a taking through eminent domain or a threat of it, and lower the assessed value to reflect the property's lost competitiveness in the marketplace.

The fast food store owner knows that hamburger sales suffer after a street widening or change of access. A shopping center manager knows how diminished parking affects business. Hotel management knows the negative result of lost visibility due to a highway project. The list could go on.

The point is that easements and other takings inflict observable damage on a commercial property's utility and desirability. They all result in lost fair market value, with no acknowledgement by assessors.

Property owners appealing their tax assessments should quantify this value loss and present this data to property tax decision makers. Anything less than a fair adjustment would be an unfair, further burden to the property owner already encumbered by the public use.

Wallach90Jerome Wallach is the senior partner in The Wallach Law Firm based in St. Louis, Missouri. The firm is the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. Jerry Wallach can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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