Taxpayers and tax professionals researching market conditions to determine fair market value should consider any impending government actions. Even a rumor of a government project that would require acquisition of a property through eminent domain, or would impose restrictions on future use, can reduce the property's market value and taxable value.

Property values begin to suffer even before community leaders approve the final plans or begin work on such a project. That's because the belief that the project will occur places a cloud on the property owner's ability to sell and on the price attainable in a sale.

A potential buyer would be reluctant to acquire a property that will be involved in future condemnation litigation, with its inherent costs and delays, nor would a buyer welcome the uncertainty that those plans place on the property's future use.

The government taking may not involve acquisition of the property as a whole. Rather, it may remove some rights of use through restricting zoning, creation of conservation corridors or the diversion or rerouting of traffic, for example.

The property value declines because the wheels are turning to take away some of the rights of ownership, perhaps as much as 100 percent of those rights. The property owner carries the burden of convincing the taxing authority of diminished value resulting from rumored or pending acts of government.

Fair market value determinations must match reality. A title search would not reveal the threat of a government taking, but the valuation process cannot assume clear title in the face of the cloud imposed by the contemplated taking of some of the owner's bundle of rights.

An array of public improvements has the potential to affect property values, with an equally wide range of implications for taxable value. "They sky is falling because a highway is coming through here someday" is at the extreme, but other property owners may learn of the future imposition of a conservation easement on coastal properties, or a restriction on land use, allowable sign dimensions, or other rights. Any of these limitations would have a direct and immediate effect on value.

Calculate the damage

When the reality of a government action hits, it may take up to 100 percent of the property's fair market value. The taxpayer should weigh the seriousness of the threat and the probability and timing of it actually occurring. Then the taxpayer should measure the weighted estimate against the value of the property without the threat.

If the property is in "the path of progress," questions to consider in determining its value are: Who will buy it? What is its anticipated economic life? And what purpose will it serve?

First, determine the seriousness of the threat. What is the likelihood of it occurring? Next, calculate the remaining life of the present use of the property in the face of the impending government action. If it is going to happen, when will that be?

In the case of projected highway takings, the probability is high. Once announced, the highway's completion is almost assured. The present use has a limited and uncertain life.

Market observations show that buyers avoid properties in the path of progress. The development of a highway project is a time-consuming process that can hang over a property for years, suppressing value.

Another diminishing value aspect of an impending road taking is that the property/s neighbors may defer, or altogether cease, to maintain their properties, a condition sometimes called "condemnation blight." Broken windows won't be replaced, leaking roofs won't get patched and buyers won't buy. Buyers will purchase, however, a competing property unthreatened by condemnation.

Regulatory threats

Anticipated or threatened taking for regulatory reasons likewise diminishes market value. Suppressed industrial expansion is one example, such as when a local authority announces it doesn't want noise or the use of industrial-use pollutants in proximity to a new residential development.

The force of regulation frequently drives industrial uses away from new residential development or expanding metropolitan uses. Community leaders may deem junkyards or outdoor storage undesirable and force those uses away. Forcing such uses away from the metropolitan area threatens future use of local properties, and therefore limits property value.

Taxpayers need to help taxing authorities understand that the portion of the government that weakens property values by taking away property rights should suffer the resulting loss of property taxes.

Jerome 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 jwallach@wallachlawfirm.com.

Owners appealing unfair tax assessments must aggressively and specifically examine the general economic climate.

"While area bankers express high hopes for the coming year, that optimism is not reflected in actual lending practices for the past year. According to the St. Louis Federal Reserve Bank, commercial and industrial loan volume in the United States totaled $16.4 billion in 2012, up slightly from $14 billion in 2011."

By accident or design, assessors tend to punish commercial property owners by increasing the assessed value of properties that outperform the market, thereby generating more taxes for the local government. The problem arises from real property valuations based upon a cash flow analysis, which fails to take into account intangible qualities that boost cash flow but are unconnected to intrinsic real estate value.

Intangible qualities that can increase a commercial property's cash flow include the skills of the management and general business reputation of the owners. Assessors have a tendency to value the business rather than the real property. Consequently, assessors punish owners for efficient and successful management. In order to guard against such an outcome, owners appealing unfair tax assessments must aggressively and specifically examine the general economic climate. In analyzing commercial property, appraisers dedicate pages within each appraisal report to the local economy. Time after time, appellate reviewers in their rush to focus on the cash flow of the specific property simply skip over the plethora of general economic data that fills appraisal reports.

Two measures of local market performance are particularly important in appealing an assessment, however. One metric is retail sales, which provide a clear barometer of general economic conditions. Sales reflect the health of the consumer base and, most notably, employment. With diminished employment, sales fall in the marketplace. The other dataset to examine is the availability of credit for commercial property acquisition and/or development. While valuation authorities rarely acknowledge the relationship, retail sales and credit are inextricably linked.

Follow Sales Tax Receipts

A look at retail sales and availability of credit in the St. Louis marketplace provides a far better foundation for value analysis than do the population counts and various economic facts tacked onto assessors' reports.

In the city of St. Louis, total sales tax receipts increased every year from 2008 through 2012, with just a slight decline in 2010 (see chart). In 2013, however, the trend's trajectory has changed. The city of St. Louis has collected $30.7 million in sales tax receipts year-to-date through May, down 4.9 percent from $32.3 million during the same period a year ago.

Annual sales tax receipts for 2013 in St. Louis based were previously projected to reach just over $120 million based on the actual receipts for the first five months of 2013 and previous years' receipts during the last seven months of the year. However, the closing of a Macy's store in downtown St. Louis in May will dim this picture even further. Banks are feeling regulatory pressure to lower the concentration of commercial real estate loans in their portfolios. Lending to acquire or develop commercial buildings or residential subdivisions tanked during the Great Recession. Today, lenders give more scrutiny to a potential borrower's creditworthiness than before the downturn. The credit quality of borrowers or developers has in many respects become an important factor in the intrinsic value of the project or the real estate itself.

While area bankers express high hopes for the coming year, that optimism is not reflected in actual lending practices for the past year. According to the St. Louis Federal Reserve Bank, commercial and industrial loan volume in the United States totaled $16.4 billion in 2012, up slightly from $14 billion in 2011. Compared to the market's peak loan volume of $26 billion originated in 2008, credit availability in the sector is clearly constrained.

Focus On Fair Market Value

Property owners should keep in mind that the determination of fair market value is based upon not only a willing seller, but also a willing buyer. A willing buyer must obtain financing, and the St. Louis market has tightened up considerably in that regard. A tax appeal based on the scrutiny of credit availability and retail sales will go a long way toward ensuring that careful, prudent entrepreneurship and management will go unpunished by an excessive tax burden.

Jerome Wallach is a partner at The Wallach Law Firm, the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at jwallach@wallachlawfirm.com

When an altered traffic route handicaps your retail center, it's time for an assessment appeal.

"Owners should appeal their property tax assessment immediately after a public announcement of a highway or road change that will divert traffic away from their property..."

By Jerome Wallach, Esq., as published by National Real Estate Investor, September 2011

Once motorists lose sight of the property or can no longer access it conveniently, customers stop coming. At the very least, an owner facing such a loss is entitled to a fair property tax bill that reflects the asset's diminished commercial value.

Owners should appeal their property tax assessment immediately after a public announcement of a highway or road change that will divert traffic away from their property. Don't wait for evidence of changing traffic counts. The damage to property value occurs when the public announcement of the traffic diversion is made.

Effect on value

Assessed values are based upon market value, and market value in turn is predicated on a willing buyer and a willing seller. A public announcement that traffic will be rerouted for a period of time is an external event that appraisers refer to as external obsolescence, or something beyond the perimeter of the property that has an impact upon the property's value. Altered traffic routes are something a prudent buyer would consider in determining what to pay for an asset.

The announcement of an impending traffic shift will affect properties in varying time sequences and severity. For instance, the economic lifespan of a highway commercial property such as a convenience store will be limited to the opening date of the new roadway. A prudent buyer will base the purchase price upon the net operating income for that economic life.

There could very well be some residual value after the opening of the new road, but certainly not for convenience-store purposes. The carcasses of functionally obsolete convenience stores can be viewed from any recently moved.

Calculating the loss

Determining the property value after a road realignment plan is announced requires the stabilization of the declining income over the predictable remaining life of the property.

Consider, for example, a strip retail center. After the announcement but before construction, there may be no observable effect on retail sales at the center. From the time that the yellow barrels go up and the construction starts, and through the opening of the new road, however, sales and tenancy will decline.

Assuming the center is functioning at 95% of its gross potential at the time of the announcement, there may be a slight drop-off in the first and second year. But assuming a three-year building period for the roadway, leases that expire are not likely to be renewed. Leases in place also are in danger because patronage is expected to decline subsequent to the road opening.

The tenant will lack the ability to make the rental payments and may walk away. As spaces within the center go Notesdark, the property will lose its synergy of crossover customers. At the end of a 10-year period after the announcement, the center will be either dark or attract only an inferior class of tenant, and will at best be a marginal performer.

The property owner must analyze this declining income stream to determine a stabilized income over the remaining economic life of the property. The capitalization rate is then applied to the stabilized income over the property's remaining life as opposed to using the historic data, which becomes meaningless in the face of the changing traffic pattern.

It is critical to remember that the property owner's loss of value occurs at the time the road relocation project is made public, not at some future date. Thus, delaying a tax assessment appeal will only add to the property owner's losses.

Jerome Wallach is a partner in the law firm of The Wallach Law Firm, the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at jwallach@wallachlawfirm.com.

Highway 40 reconstruction will reduce property values

"Local authorities appear to believe the interference with the traffic pattern will cause a short-term loss and a very positive long-term potential gain. However, the Federal Highway Administration concluded in a recent study that such projects result in "noise, loss of access, loss of parking, diversion of traffic, odors and emissions, loss of business profits and good will, interim construction loss, loss of use and loss of visibility."

By Jerome Wallach, Esq., as published by Midwest Real Estate News, May 2007

Owners of real property in the east-west corridor leading into the core city of St. Louis and the core city itself face a double "whammy" in 2007. First, on January 1, the two-year assessment tax cycle begins in Missouri. Then, in the spring of this year massive $535 millions rebuilding starts on the primary artery into the core city from the west. This reconstruction project on Highway 40 (also known as Interstate 64) is scheduled to close 10-and-a-half miles of this major artery into the city for at least three years. Past experience with highway projects has shown that forecasted completion dates are most often way too optimistic.

With assessors already in the process of reevaluating property for tax purposes and a major reconstruction project beginning in spring, assessors face the task projecting the impact this reconstruction project will have on property values along the Highway 40 corridor and in the core city. Office buildings, service businesses, light manufacturing and residences will suffer from dramatically decreased access, traffic jams, indirect routes extending commuting time and loss of traffic for retail and service outlets.

And all this happens just as the core area of St. Louis is beginning to feel the impact of the dramatic revitalization that has been ongoing over the last several years. One need only look at the new baseball stadium, the approved Ballpark Village with its shops and residences, the dynamic loft developments of shell buildings in the near downtown area and the expansion of Barnes Hospital in the West portion of the city. The revitalization has resulted in rising property values, representing good news for owners and investors. The good news turns bad for property values as the area contemplates the long reconstruction process.

Local authorities appear to believe the interference with the traffic pattern will cause a short-term loss and a very positive long-term potential gain. However, the Federal Highway Administration concluded in a recent study that such projects result in "noise, loss of access, loss of parking, diversion of traffic, odors and emissions, loss of business profits and good will, interim construction loss, loss of use and loss of visibility."

The negative aspects brought about by the reconstruction may well force owners of residential and commercial properties to offer rent abatements in order to hold onto tenants along the Highway 40 corridor and in the core city. Many commercial and residential tenants may just move out because of traffic snarls, noise and the mess of construction. Then, too, commercial tenants may just not be able to tolerate the diminished traffic and attendant loss of revenue and profit. All of this disruption means lower market values, which must result in lower property taxes if taxpayers are to be fairly taxed during the reconstruction period.

Owners should be alert and prepared to react to the new 2007 assessments with an appropriate tax appeal challenging the assessed valuation of a property that may be affected by the reconstruction project. The Missouri Highways and Transportation Commission itself has recognized the decline in business and in occupancy that will result from the project. Comments by public officials demonstrate that various other government agencies know the project will prove bad for business on a short-term basis. Just how bad is an open question. Therefore, taxpayers with property in the Highway 40 area and in the core city must carefully review their assessments to ensure that the assessors have taken into account in their 2007-2008 valuations the negative impact of the reconstruction.

The due date for filling appeals from the assessments is the third Monday in June for St. Louis County and the second Monday in May for St. Louis. Two separate jurisdictions assess properties in the 40 corridor and the core city —- St. Louis County and the city of St. Louis. Taxpayers may find both take the position that the long term effect of a new highway will be beneficial to property values, thus, no interim dip in assessed values are appropriate. The contrary argument, and the one that makes the most sense, holds that in the next two years the market value of most properties in the reconstruction area and the core city will decline. To state it another way, the income stream of commercial properties will not grow until the highway projects is completed.

Since reassessment comes in the odd numbered year of the two-year cycle, the assessors have another shot at determining value as of January 1, 2009. The market at that time will tell the world whether property values have held constant, grown or declined during the reconstruction, which will still be in progress at the end of 2008. Until that time, taxpayers should be on guard and proactive in seeking proper reduction of their tax burden.

Jerome 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 jwallach@wallachlawfirm.com.