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Oct
17

Contingent Fee Consultants Target Large Property Owners for Tax Increases

While the taxing jurisdictions' consultants maintain that they are not doing appraisal work or appraisal consulting work, a review of USPAP definitions suggests differently. The Uniform Standards define appraisal consulting as "the act or process of developing an analysis, recommendation, or opinion to solve a problem, where an opinion of value is a component of the analysis leading to the assignment results."

By John E. Garippa, Esq. & Brian A. Fowler, Esq., as published by National Real Estate Investor - Online, October 2012

As U.S. Supreme Court Chief Justice John Marshall observed two centuries ago, "the power to tax involves the power to destroy." That statement applies today in the Delaware Valley, where taxing jurisdictions are delegating the tax assessment function to outside consultants.

Incredibly, these consultants are compensated on a contingent fee basis for the additional tax revenue they can accumulate for the jurisdiction. In a typical contract, the fee has been 25 percent of the additional revenue received over a three-year period.

In practice, these consultants can pick and choose which properties to recommend for reassessment. It's not surprising that the most valuable commercial assets, which offer the largest potential for gain in a reassessment, attract the most attention from these bounty-hunting consultants.
Here's how the process typically works. Once consultants have determined which properties are under-assessed, the school districts file affirmative appeals to raise the assessments on the affected properties. Property owners who choose to defend their existing assessments must hire attorneys and independent appraisers at considerable cost.

This system of taxation grows less uniform with each reappraisal. And while it may seem absurd to hand over the reins of tax policy to an outside consultant, the practice is becoming routine under current Pennsylvania law.

Taxing questions

Experience has shown that at any given time there will always be disparities in tax assessments within a given jurisdiction. However, most taxpayers assume that the assessment function is being performed by tax assessors in an ethical and uniform manner, and that those assessors are not paid based on the increased revenue they find.

The increasingly prevalent use of tax assessment consultants raises serious issues that communities must address.
First, the Pennsylvania legislature has prohibited contingent fee agreements where it has deemed them to be contrary to public interest. Specifically, Pennsylvania law prohibits real estate appraisers from accepting an appraisal assignment where the fee is contingent on the valuation reached.
While consultants to taxing entities might argue that they are not appraisers, the fact that they are concluding to a value or value range arguably makes their work product an appraisal.

Second, Pennsylvania has adopted the Uniform Standards of Professional Appraisal Practice (USPAP), which can help to level the playing field for the property owner in appealing an assessment. Those rules include minimum standards for the retention of records, referred to as the "record-keeping rule." An appraiser or consultant must prepare a work file for each appraisal, appraisal review or appraisal consulting assignment.

A work file must exist prior to the issuance of any conclusion, and a written summary of any oral report must be added to the work file within a reasonable time after the issuance of the oral report. Any appraiser or consultant who willfully or knowingly fails to comply with the obligations of this record keeping rule is in violation of the state's ethics rule.

While the taxing jurisdictions' consultants maintain that they are not doing appraisal work or appraisal consulting work, a review of USPAP definitions suggests differently. The Uniform Standards define appraisal consulting as "the act or process of developing an analysis, recommendation, or opinion to solve a problem, where an opinion of value is a component of the analysis leading to the assignment results."

The Uniform Standards also indicate that an appraisal may be numerically expressed as a "range of numbers or as a relationship (e.g. not more than, nor less than) to a previous value opinion or numerical benchmark (e.g. assessed value, collateral value)." Clearly, concluding that certain properties are under-assessed requires a conclusion of value and a comparison to an existing assessment benchmark. The point is, if it looks like a duck, walks like a duck, and quacks like a duck, it is a duck--or in this case, an appraisal.

Allowing consultants to wander the tax lists on the basis of bounty hunting for under-assessed properties is essentially a free trip for the taxing authorities, which bear no burden of cost. When the targets are identified and appeals are filed to increase the assessments, the consultants are rewarded for their efforts by being paid a fee contingent on whatever additional revenue is raised.

If taxing authorities had to fund these efforts on an ongoing basis, rather than on a contingent fee basis, much of this bounty hunting would end. Moreover, if state licensing authorities would examine this conduct under existing appraisal law and the Uniform Standards, the inevitable conclusion would be that appraisal consulting services are taking place. Again, this would serve to restrain the current, unbridled practice of targeting large taxpayers.

 

Garippa155 John E. Garippa is senior partner and Brian A. Fowler is an associate in the law firm of Garippa, Lotz & Giannuario with offices in Montclair, N.J., the New Jersey member of the American Property Tax Counsel, the national affiliation of property tax attorneys.
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Jun
14

Taxpayers Increasingly Use Appraisal Standards in Tax Appeals

One useful aid in arguing a property owner's appeal is often overlooked because it comes right out of the appraiser's tool box. The Uniform Standards of Professional Appraisal Practice (USPAP) can help to level the playing field for the property owner.

By John E. Garippa, as published in National Real Estate Investor Online, June 2012.

Property owners throughout New Jersey have observed that more tax appeals are headed to trial. More than ever, cases that would have been settled had they occurred a few years ago are now routinely in the litigation track.

What's behind this trend? The most significant reason is that government is under increasing pressure to preserve the municipal treasury. And as the drive for tax revenue brings more taxpayers to court, many of those property owners find an uneven playing field during litigation. The assessment is presumed to be correct until it is overcome by the preponderance of the evidence. The level of proof the taxpayer must provide to reach this standard has become increasingly more difficult to attain.

One useful aid in arguing a property owner's appeal is often overlooked because it comes right out of the appraiser's tool box. The Uniform Standards of Professional Appraisal Practice (USPAP) can help to level the playing field for the property owner. Taxpayers need to understand this set of regulations because it affords opportunities to attack the credibility of the taxing jurisdiction's presentation.

Any licensed appraiser in the state of New Jersey is subject to USPAP, which mandates that an "appraiser shall ensure that all appraisals shall, at a minimum, conform to the Uniform Standards of Professional Appraisal Practice." An appraiser's failure to comply with the provisions of USPAP may be construed to be professional misconduct in violation of New Jersey tax law.

For example, USPAP sets minimal standards for the retention of records, referred to as the "recordkeeping rule." An appraiser must prepare a work file for each appraisal, appraisal review or appraisal consulting assignment. A work file must exist prior to the issuance of any report, and a written summary of any oral report must be added to the work file within a reasonable time after the issuance of the oral report. Such a work file must include the report as well as the information used in creating the report.

The standards set time requirements as well. The work file must be retained for at least five years after preparation or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment, whichever period expires last. Any appraiser who willfully or knowingly fails to comply with the obligations of this recordkeeping rule is in violation of the state's ethics rule.

In further clarifying the recordkeeping rule, USPAP states that it applies to "appraisals and mass appraisal, performed for ad valorem taxation assignments."

USPAP is adopted by statute, so a violation of its standards may leave a violating appraiser susceptible to sanctions imposed by the governing professional association. In addition, New Jersey's tax statute provides explicitly that for engaging in an act of professional misconduct, the professional licensing board may penalize the offender by suspending or revoking any certificate, registration or license.

It is not unusual to find situations where appraisers are brought in to assist tax assessors in setting assessments. This is certainly understandable when complicated properties are being appraised. Now, however, as the appraiser advises the assessor as to value in setting an assessment, that advice and conclusion is now discoverable by the taxpayer. This presents a significant opportunity for taxpayers to discern the machinations behind the setting of an assessment.

Under USPAP, the appraiser must have a work file demonstrating all of the evidence relied upon to determine that value. It does not matter whether the advice given the assessor is written or oral; the work file must contain written evidence supporting the advice and conclusions given to the assessor. This now becomes a potential gold mine of information that can be used to damage the presumption of correctness of the assessment.

In another common scenario, taxing jurisdictions that rely on outside appraisers to assist the assessor in setting the assessment will typically retain those same appraisers to defend the assessments before the tax court. Because of the backlog of cases in the tax court, this means that an appraiser that originally assisted in setting an assessment could be testifying about value several years after the assessment was set.

This presents an opportunity for the taxpayer to probe the appraisal report prepared for trial and compare it to the work file prepared when the assessment was made. Was the value predetermined because of the early work in setting the assessment? Does the early work erode the conclusions of the later work?

These are all important considerations, and will significantly help to level the playing field against recalcitrant taxing jurisdictions. Appraisers who lend their licenses and credibility to taxing jurisdictions in setting assessments need to be aware that there could be a day of reckoning.

Garippa155 John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair, N.J. The firm is the New Jersey and Eastern Pennsylvania member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Dec
31

New Appraisal Principles for Tough Times

"An urgent need exists for better forensic appraisal methods to support property valuations in this time of declining values."

By John E. Garippa., as published by Real Estate New Jersey, November/December 2009

Over the past 18 months, property values have declined significantly for all asset types in New Jersey. While this resulted in record numbers of property tax appeals, actual transactions between buyers and sellers demonstrating this erosion of value are limited. This can be problematic when dealing with the finite valuation dates demanded by the New Jersey Tax Court.

Tax Court judges won't accept opinions of expert witnesses unless they provide supporting evidence that a property's value has declined. Despite the fact that few actual sales are available between buyers and sellers, property values can still continue to erode. The real question is: What steps can a property owner and appraiser take under such difficult conditions?

Events over the past year have proven that valuing property at a specific point in time, a necessity for tax appeals, can be almost impossible using the typical valuation parameters of comparable sales. Under New Jersey tax law, all real property must be valued for the 2009 tax year based on a valuation date of Oct. 1, 2008. But the events of last summer and fall were cataclysmic for all property types.

The entire nation watched as our financial system began a meltdown that culminated in the collapse of Lehman Brothers on Sept. 15, 2008. During this several-month period, the stock market lost almost 40% of its value. This tsunami affected real estate just as much as it did stock portfolios.

To demonstrate this point, consider a hypothetical sale where the deed was transferred on Oct. 1, 2008. In stable times, such a transaction might be the gold standard of defining what a willing buyer would pay and a willing seller would accept for a property on the very date defined by New Jersey tax laws for valuations. However, if this sale were like most others, the parties would have negotiated the terms at least three to six months before.

Looking back to the period six months prior to the Lehman Brothers collapse reveals an entirely different world, from an economic standpoint, than the one America faces today. No one would suggest that value parameters arrived at during that quieter time would reflect the disastrous conditions found on Oct. 1. Under stable market conditions, comparable sales can be relied upon to demonstrate market value. The lack of sales transactions in the past year has rendered comparable sales a limping metric for property tax purposes. Thus, an urgent need exists for better forensic appraisal methods to support property valuations in this time of declining values.

It's easy to forget that the basic laws of economics govern the real estate market. The economic base of a community revolves around businesses generating income from their activity. Therefore, the first step to take in demonstrating eroding values is an examination of the industries and businesses that generate employment and income in a community. Such a study would review changes in employment levels as well as population trends because these issues affect household income and other important factors that ultimately affect the demand for, and worth of, real estate.

Next, look at movement in rents, levels of rent concessions, increases/decreases in foreclosures, building occupancy figures for both office and commercial properties and even the direction of delinquencies in mortgage payments to determine the scope of property value diminishment. (For information on housing trends dig into Standard & Poor's Case Shiller Home Price Indices as well as data provided by the National Association of Realtors in reference to velocity of sales and median prices.)

In times of great price turmoil, analyze the loss in value in the various stock market indices as this may define how individuals view their wealth. Another important index to study is the Purchasing

Managers Index. The PMI represents a composite of five sub-indicators (production levels, new orders from customers, supplier deliveries, inventories and employment levels) that are extracted through surveys produced by the Institute of Supply Management. These surveys are sent to more than 400 purchasing managers around the country. While this measures only manufacturing trends, it is considered a good predictor of changes in gross domestic product and the economy as well.

As a result of the enormous instabilities experienced in the past year, the former methods of valuing property must be reexamined.
 
GarippaJohn E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. John E. Garippa is also the president of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
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Aug
01

Don't Lose Your Tax Appeal Rights

"..the lesson here shows that whenever there may be a doubt as to the status of a property, always respond to assessors' requests for income and expense data, called Chapter 91 requests. It's the only way to protect your right to a tax appeal..."

By John E. Garippa, Esq., as published by Globest.com - NJ Alert, August 2009

Recent New Jersey case law has made it easier for assessors to thwart tax appeals filed by commercial property owners. One of the most potent weapons in the tax assessor's arsenal is the use of their power to request income and expenses associated with the taxpayer's property.

New Jersey law requires that on receipt of a written request from the assessor, every owner of income producing property in a taxing district must provide:

  • A full and true account of the owner's name.
  • The location of the real property.
  • The income produced by the property.
  • The expenses generated by the property.

In the event the taxpayer fails to timely respond to this request, any tax appeal filed by that owner for that tax year will be dismissed.

The statute imposes three strict obligations upon the assessor. First, the letter must include a copy of the text of the statute. Second, it must be sent by certified mail to the owner of the property. Third, the letter must spell out the consequences of failure to comply with the assessor's demand. The courts have strictly applied these standards to the tax assessor by indicating that the "government must speak in clear and unequivocal language where the consequence of non compliance is the loss of the right to appeal assessments."

In a recent case, the Tax Court of New Jersey faced the unusual issue of a property that historically produced income, but during the year in question, the property was vacated in order to make significant physical improvements. Thus, no income was produced by the property that year.

When the assessor sent the taxpayer a request for income and expense, the owner failed to respond. The taxpayer believed that no response was necessary because the property was owner occupied and non-income producing at the time of the request.

The Tax Court dismissed the taxpayer's appeal based on the New Jersey statute. The court concluded that this property never lost its character as income producing property. Temporary vacancies brought about by renovations are no different than the temporary loss of a tenant, or a tenant that has withheld rent. The flow of rental payments that ceased for the year in question was brought about by the taxpayer's business decision to renovate the income producing property.

Since the tax assessor previously recognized the property as income producing, and had received no response to her information request, she was left to formulate assessments for the property without economic data concerning the operation of the property. The assessor was unaware that the building was vacant and uninhabitable during the year in question, a factor that would have been important in developing the assessment.

For taxpayers, the lesson here shows that whenever there may be a doubt as to the status of a property, always respond to assessors' requests for income and expense data, called Chapter 91 requests. It's the only way to protect your right to a tax appeal. Appropriate responses can include explanations of major vacancies and ongoing renovations, thereby providing the assessor with valuable information for his use in developing assessments.

GarippaJohn E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. Mr. Garippa is also president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
05

Taxpayers Take More Hits

"Property owners will be severely challenged as they try to manage depressed property values in an environment where one road block after another confronts them."

By John E. Garippa, Esq., as published by Globest.com, April 2009

By all accounts, more tax appeals were filed in New Jersey as of the April 1st filing deadline than at any time in recent memory. Across all classification of properties, owners filed appeals in both the New Jersey Tax Court and at the County Boards of Tax Appeals.

While the flood of appeals would have normally been filed as of April 1, 2009, a recent law allowed property owners who experienced a revaluation to file as late as May 1, 2009. This means the tidal wave of appeals that swept across New Jersey as of April 1st will continue right through May 1st.

These mass filings will take a toll on the judicial system and ultimately the taxpayer. The first impact will be significant backlogs in the Tax Court. In the recent past, a typical commercial tax appeal might take two years in order to get a hearing and resolution. In this current environment, considering the fact that no new judges will be added to the Tax Court, that backlog will easily reach three years or more.

Even more important for hard pressed taxpayers, under New Jersey law, in order to have standing before the court, all property taxes must be paid in full. If the taxes are unpaid by any amount in any year, that year's tax appeal will be subject to dismissal. This is a difficult pill to swallow for a commercial property owner with significant vacancies.

A review of commercial real estate's current status underscores why a torrent of appeals exist. Many commercial landlords are losing retail tenants at an ever-increasing pace. According to the April 8th Wall Street Journal, with research provided by Reis Inc., the amount of occupied space in shopping centers and malls throughout the US declined by 8.7 million square feet in the first quarter of 2009. This loss of more than 8 million square feet of retail space in just one quarter was more than the total amount of space retailers handed back to landlords in all of 2008.

The decline in occupied space increased the vacancy rate for malls and shopping centers in the top 76 US markets to 9.1%. According to Reis, the vacancy rate is now at its highest level since the 1990's. Even as landlords cut lease rates in order to attract tenants, the vacancy rates continue to rise.

Another unforeseen impact will be visited on taxpayers in this current market maelstrom. The burden of proving the value of a property in a tax appeal has always rested on the taxpayer. It will not be enough for a taxpayer to cite a plethora of empty stores and a growing vacancy rate as proof of a low value.

The Tax Court will demand that competent market evidence be brought before the court to prove, by the preponderance of the evidence, the current market value of the property in question. And to make the task even more daunting for the taxpayer, there may not be enough comparable rentals to prove value, since it is near impossible to find anyone to rent retail stores. Also, it may be equally impossible to prove a capitalization rate because banks are not lending on any type of commercial property.

Property owners will be severely challenged as they try to manage depressed property values in an environment where one road block after another confronts them. Understanding the nature of the road blocks and where they can be found, offers the best potential for attacking the problems.

GarippaJohn E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Dec
05

Tax Matters: Due Diligence Steps to Successful Tax Appeals

"Tax departments should conduct periodic reviews of the tax assessments on comparable property so that discussions about uniformity and fundamental fairness of assessments can be made when presenting the company's case to the taxing authorities."

By John E. Garippa, Esq. as published by Globest.com, December 5, 2008

With the economy mired in a significant recession affecting a broad range of property values, the beginning of the New Year presents an appropriate time to examine a series of steps that property tax managers should take to effectively reduce their company's property taxes. A company's entire property needs to be reviewed annually to determine the effect of market forces on all assets. Any recently purchased property should be looked at to see if the price paid for that property results in assessment reductions.

Tax departments should conduct periodic reviews of the tax assessments on comparable property so that discussions about uniformity and fundamental fairness of assessments can be made when presenting the company's case to the taxing authorities. Further, an annual review of property inventory should take into consideration whether an intangible component continues to be reflected as real property value in the assessment.

Properties that contain significant business components such as hotels, regional shopping centers and senior living facilities all possess intangible values, for example. These business components should not be assessed as real property, but when they are, a tax appeal is necessary.

Tax departments also need to be aware of those legal constraints in New Jersey relating to the proper filing of a tax appeal. All appeals must be filed by April 1, 2009 and all property taxes and municipal charges must be paid in full in order for the department to file an appeal.

In addition, all written requests from the local assessor's office for income and expense information must be answered in a timely fashion. Failure to respond to such requests will result in the dismissal of an appeal. Once all of these preliminary steps have been taken, the road to filing a successful tax appeal will be properly paved.

GarippaJohn E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Nov
06

Time to Appeal That Tax Bill?

"If home price drops, so should property taxes. Home owners might be smart to initiate a property tax appeal."

By John E. Garippa, Esq. as published by REALTOR® Magazine, November 2008

In these uncertain times, many home owners have had to face the fact that the current market value of their homes is less than they once thought.

Yet, most of these home owners continue to pay property taxes based on that higher value.

Higher taxes may also make a property less appealing and affordable to buyers, since higher taxes will increase their overall costs, at least until the property is reassessed. That's why it's a smart strategy to advise past clients who might be considering a sale to appeal their property taxes at the next opportunity.

Evaluating Your Assessment

The vast majority of taxing jurisdictions throughout the United States assess residential property based on market value: the amount a willing buyer would pay a willing seller without duress. However, assessments are generally not reviewed on an annual basis, so a property's assessment will never be 100 percent of market value.

To compensate, taxing bodies apply an equalization ratio, which is designed to ensure that assessments are relatively equal among different taxing districts to all assessed values. For example, a property worth $100,000 with an equalization ratio of 50 percent would be assessed at $50,000. Home owners can obtain their equalization ratio from local taxing authorities.

If, after a review with a residential broker or appraiser, a home's assessed value seems out of line with current market values, the home owner should undertake an investigation to determine what might have caused the incorrect valuation. Here are some steps for your client to follow.

  • Arrange a visit with the local tax assessor and request a complete copy of the home's tax records. Property record cards are public records and are universally available.
  • Pay particular attention to the market comparables listed on the property record card. These recently sold homes are the basis for the assessor's valuation of your client's home. Visit those houses or view them online, and compare them to the client's house.
  • Take the appropriate equalization ratio and multiply the market value you believe appropriate for the home by that rate. If the number is lower than the current assessment, your client should file a tax appeal.

Filing an Appeal

Most home owners should be able to properly file the appeal without counsel, but most jurisdictions require a licensed real estate appraiser to prepare an expert analysis of local market values for the local tax board.

Home owners should work closely with the appraiser to review all the amenities and issues that might affect the valuation of their home. Many times an appraiser may not be aware of construction, zoning, or general neighborhood issues that negatively affect value.

Real estate brokers familiar with the property and the area may also be a valuable resource for this type of information. They may also be able to assist the appraiser in determining which properties are the best comparables for a particular home. All of the appraiser's conclusions need to be properly documented with supporting evidence in the appraisal report that will be submitted with other supporting paperwork prior to the hearing.

In addition to compiling evidence, the taxpayer should take care to learn and follow the rules of the local board of assessment review. Each taxing jurisdiction has appropriate appeal forms. It is also critical to determine the deadline for filing an appeal.

The final step in an appeal is a hearing before the assessment appeal board. Proper preparation is the key to a successful hearing. The home owners and the appraiser should prepare a script detailing the important points that need to be made during the appraiser's testimony in order to prove a lower market value and assessment.

The key focus should be comparing the home in question with every presented comparable. The appraiser should be prepared to analyze each important amenity and discuss how it positively or negatively affects value.

During uncertain economic times, the effort of appealing a property tax bill reduction may prove well worth the time and effort involved.

GarippaJohn E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. Mr. Garippa is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Oct
07

How Assessors Can Veer Off Course

"In a contracting economy, with real estate values falling, the differential between contract rent and market rent can become quite significant."

By John E. Garippa, Esq. as published by National Real Estate Investor, October 2008

In a faltering economy, tax authorities want to cling to contract rents — the amount agreed upon by the landlord and tenants — as the basis for valuing property. Instead, assessors should rely on market rent, the rental income a property would command in the open market. Relying on contract rents to determine a property's value results in increased revenues from property taxes, but causes owners to pay excessive taxes.

Most taxing jurisdictions in the United States are supposed to value property based on market evidence, which is essentially what a willing buyer would pay a willing seller for property with neither party being under duress to act. In a growing economy, most property owners grasp this concept.

However, when the economy weakens and real estate values become depressed, this same concept is not as easy to comprehend. More importantly, even some taxing authorities have difficulty understanding exactly how this concept should work in a recessionary climate.

Why rent isn't rent

Contract rent represents the actual rental income specified in a lease and can be greater or less than market rent, often referred to as economic rent. Market rent has become the basis for valuing property because it allows assessors to uniformly value all property based on the same standard of value.

In a contracting economy, with real estate values falling, the differential between contract rent and market rent can become quite significant. The differences between the two types of rent give rise to the need for diligence by property owners and managers.

This hypothetical example illustrates the point: Assume a 100,000 sq. ft. office building has been well managed for a significant period of time. As a result of superior management, the building is 100% occupied with an average rent of $30 per sq. ft. The leases were negotiated more than two years ago.

Since that time, the office market has deteriorated. Current market rents at similar properties reach no higher than $25 per sq. ft. net with a 10% capitalization rate.

Using contract rents, the value of the property comes to $30 million, but employing market rents, the value is only $20 million (rent multiplied by square footage divided by capitalization rate). Based on a 3% effective tax rate, the assessment at the contract rate comes to $900,000, while the market rate assessment is $600,000, a tax savings of $300,000 (see chart).

garripaGRaphAn owner or property manager examining the rental income from the office property above can rest easy because it's clear that no problem exists. Here's a well-managed property fully leased in a weak economy. However, taxpayers must not be lulled into ignoring the need for a review of any tax assessment received in an economy under duress.

If the taxing authorities are assessing on a market level, they should ignore contract rents and focus on appropriate market rent standards. The example shows that when valued properly the property — which by contract standards is correctly worth $30 million — should be assessed for tax purposes at no greater than $25 million, a significant differential.

Clearly, if the property's assessment comes in above $25 million, it has been over assessed and requires a tax appeal in order to establish its value at the current market level of other properties.

 

 

Make your case

The persuasiveness of a taxpayer's presentation to the assessor depends on differentiating the property's rental history from the marketplace realities. First, every available office rental comparable needs to be analyzed during the relevant time period.

Some of the physical elements of comparison should include security, HVAC, electrical systems, tenant finish, parking and location.

Second, the property owner should develop a scenario that explains why demand has eroded in the market. The owner should focus on factors such as changes in the workforce, the requisite space per worker, and analysis of vacancy rate changes over several years.

This study should cover the time period beginning with the building's lease-up. A study that demonstrates deteriorating market vacancy over a period of several years buttresses the argument that demand will naturally be weaker.

In a declining market, taxpayers must challenge property tax assessment based on contract rents. Unless your assessment is based on market rents, a tax appeal should be the next step.

GarippaJohn E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. Mr. Garippa is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Sep
07

Winning Tax Appeals in a Down Market

"Proving market value in a declining market can be difficult, especially when that market is beset by contraction of the economy..."

By John E. Garippa , Esq. as published by Real Estate New Jersey, September 2008

Property owners in New Jersey face a very challenging year in 2008. Rental rates have eroded across all classes of property, and vacancy rates continue to rise. Having anticipated these erosions in value, many prudent property owners have filed tax appeals on their properties to reduce taxes. However, proving market value in a declining market can be a most difficult task, especially when that market is beset by an overall contraction of the economy, as well as a significant malaise in the capital markets.

By law, all property in New Jersey must be valued by taxing jurisdictions as of October 1 of the prior tax year. This means that for assessments established in 2008, the appropriate valuation date is October 1, 2007. The problem facing taxpayers this year is how to prove market value when that value has been eroding every quarter since last year.

The following examples illustrate the issues. Assume a 10 year old class A office building that as of 1/1/2006 enjoys tenancies averaging $30 per square foot and a vacancy rate of 5%. For the next 18 months, these lease rates begin to diminish. During 2007, the average rental in the first quarter falls to $28 per square foot, and in each succeeding quarter continues to decline by a dollar a square foot until the fourth quarter ending December 31, 2007, when it reaches $25 per square foot.

Under this scenario, a taxpayer should contend that the proper valuation of this property can be no more than $26 per square foot, which is reflected as of the October 1, 2007 quarterly analysis. Moreover, even though the $25 per square foot rentals for the 4th quarter of 2007 come later than the October 1, 2007 valuation date, this data corroborates the fact that shrinking rentals are affecting the property. Thus, the value of the tenancies should be no greater than the $26 per square foot valuation for the 3rd quarter. Averaging the rentals for the entire year does not properly value the property as of the valuation date.

A similar fact pattern can be outlined with vacancy rates. Assume the property begins to demonstrate a weakening demand, suggesting that the vacancy rate of 5%, which was appropriate for 2006, erodes each quarter and continues to do so throughout 2007. Toward the latter part of 2007, the vacancy rate at the property reaches 10%. In this case, a taxpayer should contend that the proper vacancy at the property, based on current market evidence, is approaching 10%. Although the average vacancy for the 2007 tax year might be only 7%, the continual increase in the vacancy rate throughout the entire year provides substantiating evidence of higher vacancies. This scenario clearly points to a reduced market value.

A second problem: While the evidence discussed above demonstrates that the property suffers from reduced demand, under New Jersey law, the taxpayer must show that this deterioration exists in other similar property. Thus, the taxpayer must produce data supporting the fact that all office property in the competitive area has endured reduced demand for rentals and increased vacancies.

This opens an opportunity for a carefully crafted forensic appraisal, one that effectively portrays the story behind declining value and demand. A competent appraiser should review all of the market data that documents an overall reduced demand for similar property. Also, there should be an exhaustive review of vacancy factors proving that the reduced demand at the taxpayer's property is not due to mismanagement, but rather to reduced demand in the market area.

A comprehensive review of economic data becomes singularly important to demonstrate that the entire area surrounding the taxpayer's property is experiencing a slow down in demand. Some of the factors to include in this review are: unemployment statistics, bankruptcy filings, business closings, population growth/decline, housing data, availability of office space as well as the general population trends in the state. All of these statistics form the basis for explaining reduced demand and increased vacancy.

As taxing jurisdictions face the growing reality of reduced resources due to the slowing economy, obtaining tax reductions will become even more difficult for taxpayers. In order for owners to prevail in a tax appeal, a compelling story must be developed concerning the taxpayer's property and market in which that property competes. Critical to this story is solid evidence that the market has sustained declines, continues to decline, and the property is part and parcel of that same competitive market.

GarippaJohn E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. Mr. Garippa is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jul
07

Tax Matters: Court Provides Protection for Some Taxpayers

"...if the property is considered owner occupied, a taxpayer no longer has to respond in order to have valid appeal rights."

By John E. Garippa, Esq., as published by Globest.com Commercial Real Estate News and Property Resource, July 31, 2008

A recent decision of the Appellate Division in the State of New Jersey established a defense for some taxpayers who have failed to respond to assessor requests for income and expense information. Before this decision, if a taxpayer failed to respond to a tax assessor's request for income and expense information made during any given tax year, any tax appeal filed for that subsequent tax year was subject to dismissal, regardless of the merits of the appeal. In addition, even if a property were owner occupied, if the owner failed to respond to the assessor's request by informing him that the property was "owner occupied," that appeal could be dismissed as well.

As a result of the Appellate Division's recent decision, if the property is considered owner occupied, a taxpayer no longer has to respond in order to have valid appeal rights. However, the court warned taxpayers that if there were even small elements of rental income earned on the property, and the owner fails to report that income when requested by the assessor, the potential would still exist for dismissal of an appeal.

GarippaJohn E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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