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Property Tax Resources

Dec
23

Falling Building Values Spur Tax Appeals

J. Kieran Jennings was quoted in the December 14 digital issue of the Wall Street Journal's Property Report, Page B6, titled, "Falling Building Values Spur Tax Appeals." 

Mr. Jennings is a partner in the law firm Siegel Jennings Co., L.P.A, the Ohio, Illinois and Western Pennsylvania member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. 

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Sep
13

Seniors Housing Needs Long-Term Tax Care

Follow these steps to stop excessive property tax assessments.

In a nation that has faced a host of new challenges since the pandemic began, the seniors housing sector has carried one of the heaviest burdens. COVID-19-related mortality risk for those 85 years old or older is 330 times higher than for those 18 to 29 years old, according to the Centers for Disease Control and Prevention.

Notwithstanding those odds, 51% of all seniors housing properties including independent care, assisted living and skilled nursing reported zero deaths from COVID-19. Yet the industry continues to grapple with increased costs, worker burnout, hiring challenges and occupancy issues that have ravaged their operations.

Like a vaccine that stimulates a stronger immune response, hard times can spur organizations to boost efficiency and fortify themselves against other threats, such as inflation. In this vein, seniors housing owners must identify ways to turn their troubles into positive influences.

As the industry seeks to allocate money from areas that don't compromise care, property tax strategy should be near the top of their lists for potential savings. Moreover, reduced taxes tend to have a long-term impact. When assessments are low, they tend to stay low, which may serve to insulate the industry from the impacts of inflation.

How to reduce property tax liability

Obtaining those property tax savings is not easy, however. Although it seems apparent that the industry has suffered, taxpayers that want a reduction in taxes must prove their property has lost value; they cannot rely on the good will of assessors to adjust the assessment.

Taxpayers must look at their tax challenges in a way that reflects the impact to the business. That said, assessors will want to concentrate on real estate value irrespective of the business. Many will reference sales of properties that were priced on the value of contractual leases to the operator, or assessors may look at the income to the owner based on contract rents. Taxpayers need well-documented arguments to counter these positions.

While separating the real property value from the business value, real estate assessments must also consider the negative effect that a struggling business exerts on the real estate.

Taxpayers can follow a three-step financial feasibility study to help prove the need for an assessment reduction.

1. Determine the net operating income (NOI) under COVID-19 and its legacy. It is important to document the new costs necessary to safeguard and serve residents in this new environment.

2. Separate income associated with services from real estate income. Be sure to remove from income any governmental stimulus that will not be ongoing.

3. Finally, use the resulting real estate NOI to show the effects of that income stream on real estate value.

Step 2 is critical, and it must start with the business. Conduct a forward-looking income analysis that includes all increased costs, from the added costs of employing and motivating a weary workforce to inflation and expenses associated with new health standards.

After documenting the new NOI from the independent living, assisted living, or skilled nursing operation, determine whether that income is sufficient to justify the business. Taxpayers can do this by applying a return to the cost of services. The expenses that are separate from normal real estate operations are associated with the service side of the business, and those outlays are expected to generate sufficient income to create a return on that investment. Remove the return from the overall net operating income, thus separating the income from business and real estate. The result is NOI that reflects more closely that of the real estate.

Perform a similar analysis to determine whether the net income attributable to real estate is sufficient to justify the real estate cost. It is important to remind the assessor that the operating business can only pay rent if there is money available, even if that rent is just a figure used in a formula to determine real estate value. At this point, the taxpayer can apply a capitalization rate to the net real estate income to arrive at the real estate value.

Apply to other valuation approaches

The financial feasibility study described above will also help taxpayers and assessors determine how to adjust the cost approach to valuing real estate. Likewise, the analysis can inform adjustments to comparable sales data. Indeed, that initial financial feasibility will help in all aspects of the tax challenge and should be well documented.

Assessors are not all-knowing, so unless the taxpayer shows them a good reason to change approaches, they will work with their normal procedures. Often, assessors look to the property's construction cost (less physical depreciation based on age), sales of similar properties and/or the income generated from contract rents to determine an assessed value.

Without an initial feasibility analysis, an assessor may focus on construction costs without regard to whether the property's use will justify those costs. Or they may use contract rents for the subject property or competing properties, either of which were likely established with pre-pandemic metrics.

Simplistic shortcuts, such as assuming a percentage of the total net income that should be attributable to business and the other to real estate, are not ideal and may lead to inflated values of taxpayers' properties.

In theory, there should be a greater impact on the value of those properties that require more service. But because of the variations between properties and nuances of seniors housing types, a fresh look is needed for all of them.

A good starting position for the taxpayer is to ask, "what would we pay to acquire the property, knowing what we know today?" Comparisons to sales of other properties are more complicated than in the past and should be adjusted with an eye toward the feasibility analysis. Properties that cannot achieve sufficient occupancy and income to justify operation are not directly comparable to optimally occupied properties.

There are states where a reduction in the assessment may carry forward indefinitely. Approaching assessed value with a strong team will pay dividends for years. Conversely, an approach that is not well thought out will make future attempts to reduce taxes more difficult. But by taking the proper steps, a taxpayer can position themselves to drive the best result and be able to provide the service and living standards that our most vulnerable residents deserve.

J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio, Illinois and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Aug
26

Self-Storage Property Taxes: How Assessments are Made and Ways to Potentially Lower Your Bill

Self-storage has become a hot investment and values are up, but many owners find themselves with excessive property-tax bills that eat into their cash flow. Here's an overview of how tax assessments are made and some ways to potentially lower your bill.

Self-storage facilities continue to command great cash flow, but many owners find themselves funneling more of their income toward exorbitant property-tax bills. Those who take the time to review their assessments and liabilities with a local expert often discover they're being taxed unfairly. This is why you should identify and question your assessor's methods, assumptions, data and calculations. By exercising your right to contest your assessment and presenting a convincing argument, you might be rewarded with a lower tax bill.

Self-storage is especially vulnerable to errant valuations by assessors who fail to differentiate taxable from non-taxable value. Key questions include whether the sale of a self-storage facility is completely subject to transfer tax and if the price directly equates to taxable value for real property tax. It can be argued that much of the value associated with self-storage is business value and personal property, which is typically exempt from transfer or property taxes.

Let's examine how self-storage tax assessments are made and arguments you can use to contest one assigned to your own property. A successful appeal can save significant money, so it's worth pursuing.

The Trouble With Assessment

Arguing that the value of your self-storage facility is largely derived from non-real-estate sources can be problematic. Much of the difficulty comes into play when the assessor obtains a copy of the finance appraisal, or when a purchase and sale agreement includes an allocation separating the real estate from non-realty items.

Assessors want to believe that all the value in a sale or from financing is derived from real estate. In the Ohio case St. Bernard Self-Storage LLC vs. Hamilton County Board of Revision, the state supreme court stated that although the purchase and sales agreement carved out goodwill in the acquisition price, it was unconvinced that the sale of a self-storage facility had any goodwill. Conversely, lenders are often unable to lend on value that isn't attributable to real estate.

For property owners, the first step toward minimizing taxes and maximizing their financing is watching definitions; the definition of the interest being appraised is paramount. Appraisers can properly find for two different values on the same property, depending on whether they're valuing for the purpose of financing or tax assessment, so it's important to establish the interest being appraised.

When it comes to financing, lenders can and do lend on the stabilized value of a property performing as a going concern. In other words, they're appraising the property's leased fee value. So, for financing, appraisers can rightfully take into consideration the income from the operation at stabilization, but that isn't necessarily true for tax assessors.

Many states require assessors to value the fee simple interest in the real property only. The fee-simple appraisal is based on the real estate value alone and excludes value from the return of and on personal property. When it comes to self-storage, the assessor's calculation of taxable value must ignore value associated with units, computer systems, national marketing and so on, based on circumstances. Individual units are capable of being assembled and disassembled, which means they are at best a business fixture and not real estate.

Many assessors and appraisers recognize the removal of the depreciated value of personal property, which means they must also remove the personal property—and any income attributable to it—from the going-concern value. The comingling of values from multiple sources is especially evident when there's a sale.

Arguments in Your Favor

When the assessor cites a tax assessment based on the sale of your self-storage property, you can make several arguments. First, look at the building's construction and acquisition costs without factoring in things like security, computer systems, marketing and individual units.

If your facility was recently converted from a different type of building, that too can give you an advantage. Properties like those transformed from big-box retail space often trade at much lower price before lease-up and stabilization, and the conversion costs are typically associated with the personal property and eventual occupancy. So, as the owner, you can present sales of comparable pre-conversion properties to support an argument for a reduced assessment. It's better than using the sales of operating self-storage facilities as comps because there's no need to remove the personal property from the equation.

In cases when there are few comparable sales of big-box properties to reference or your self-storage facility truly isn't comparable to others that have been sold, it's appropriate to assess the property based on the replacement costs associated with building new. However, the appraiser should stop short of including costs specific to individual units, otherwise they'd need to apply depreciation from all sources, including age and any economic or functional depreciation.

The last line of counterargument is based on the income approach to valuation. Income-based assessment is the most complex when it comes to removing non-realty income. The easiest and cleanest way to respond is to look at examples of same-generation retail or light-industrial rents.

That said, when trying to defeat a sales price, it may be necessary to look at the actual income and then determine the appropriate amount for the non-realty value. Appropriate income will be based on the initial investment to install personal property as well as the return from that personal property. The income derived from that non-realty component is then removed from the actual net income. This is an activity easier said than done, but appraisers can establish the return. After removing the non-realty income, they should apply an appropriate capitalization (cap) rate to arrive at the property value.

Preferably, the cap rate used by the appraiser or assessor should be created from a mortgage constant and equity returns rather than from sales of comparable self-storage facilities because cap rates from this industry have comingled interests.

As you can see, it's appropriate for self-storage owners to use different values for their property, including one for financing and another for taxable or assessed value. These will differ because the appraisals that produce them are truly measuring different property interests.

J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio, Western Pennsylvania and Illinois member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Sep
28

How to Fight Excessive Property Taxes During COVID-19

Cash-strapped municipalities may look to extract more revenue from commercial properties.

It would be difficult to conceive of a more impactful event for the commercial real estate market than the coronavirus pandemic. Short of finding a cure for COVID-19, the tremendous state of flux in the sector will test the resourcefulness of commercial property owners and operators for months or years to come.

Market changes always create winners and losers; the more dramatic the shift, the greater the wins and losses. In the current market shakeout, commercial property owners are asking how to best position themselves to land on the winning side. The old standby that "cash is king" is sure to apply as the economic fallout settles, and reducing the real estate tax burden is a great way to conserve capital.

But it won't be easy. Taxpayers who plan to contest high taxable values on their commercial properties face an uphill climb. Here are some common difficulties to expect, along with opportunities to consider in tax appeals.

Valuation date dilemmas. The first problem for many owners who want to reduce their tax burden relates to the timing of the pandemic. Most U.S. communities began feeling the impact of COVID-19 in March or later. However, most jurisdictions had already assessed properties with a fixed valuation date of January 1, 2020. Also, most assessors are unwilling to consider the coronavirus in valuation until January 2021.

Damage provisions. Some jurisdictions have statutory provisions that may apply to properties for the damage done by COVID-19. There is a push to clarify Ohio's statute to recognize the effects of COVID-19, for example. There are similar provisions under consideration in Illinois. Additionally, Pennsylvania has valuation dates that could prove useful for taxpayers. NAIOP and other real estate organizations have supported these actions at various levels. Owners should determine whether they can claim pandemic-related damages in contesting tax bills they are now receiving.

What about next year? Even if a taxpayer cannot pursue a challenge on the current assessment, they can take steps to reduce future assessments. This means meeting with the local assessor to establish a proper assessment before it becomes final.

For taxpayers who choose to follow this advice and address future assessments now, make sure to treat any informal meeting as if it were a hearing. Come prepared — with accurate data demonstrating the impact on property value. Discussing anecdotally that stay-at-home orders and other restrictions affected the property value is insufficient — these circumstances are the reason the taxpayer can begin the conversation, but not the substance of a compelling case for revaluation.

Substantiate arguments. Show the assessor hard numbers demonstrating how COVID-19 or the post-COVID economy affected the specific property. Have social-distancing measures, residential migration or other changes created density challenges? Is there a measurable decline in occupier demand, or a decline in foot traffic and business activity at tenants' businesses? What is the economic feasibility of the tenant base? Whatever the reasons for revisiting the valuation, the property owner should be prepared to show the impact with the same supporting material they would use to pitch the project to investors or lenders. Use facts and figures. Bring in experts. Many taxpayers are fighting for the survival of their investment, and they should act accordingly.

Vet the team. Insist that any outside tax counsel or consultants understand the taxpayer's position. This is not business as usual, so educate advisors about the real estate's value. Work as a member of the team and communicate with its members, from local counsel to the valuation expert, and talk with the individual who will meet with the assessor. Formulate a plan together and then be flexible, allowing people to pivot when they see something changing. If the team understands how to determine assessed value and understands the owner's position, then trust them to make changes in the moment as they see fit.

Anticipate challenges. How can a taxpayer prove what the assessment should be amid so much uncertainty, and with little to no sales evidence to assist in determining value? Always attack the obvious head on. For instance, if the price paid for a recently purchased property is unhelpful, analyze the sale using the same expectations established in due diligence. This may eliminate the sales price as an indicator of market value, allowing the team to then present more beneficial and relevant points. Use the law, use facts and use prior experience where similar facts lined up.

Prepare for resistance. State and local governments are in a tough spot. All over the country, there are budgetary shortfalls at the local level because of the pandemic. Many communities and schools rely on income tax, sales tax and property tax, but in the current environment there is little sales tax revenue, and it appears income tax will take a hit. Property tax is all that is left.

Appeals will not be easy. The team's appraiser must be able to establish a value and defend it. Their testimonial skills, whether in court, at a hearing or informally, are as important or more important than the valuation itself. Also, contact a local expert; market value may not be the only available avenue to a fair and uniform assessment. Owners fortunate to have their commercial properties fairly and uniformly assessed (and not negatively impacted in the pandemic) can perhaps refrain from filing an appeal. In a state where a board or court can raise assessments, an unwarranted appeal may lead to an increase in assessment, although in most states, increased assessment from a tax appeal is rare.

J.Kieran Jennings is a board member of Ohio and Northern Ohio NAIOP and a partner in the Cleveland, Ohio office of the law firm Siegel Jennings Co. L.P.A., the Ohio, Western Pennsylvania and Illinois member of American Property Tax Counsel (APTC), the national affiliation of property attorneys.
Greg Hart is an attorney in the Austin, Texas law firm Popp Hutcheson, PLLC, the Texas member of APTC.
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Feb
03

Why Assessor Estimates Create Ambiguity

Kieran Jennings of Siegel Jennings Co. explains how taxpayers and assessors ensure a fair system, with tremendous swings in assessment and taxes.

A fundamental problem plaguing the property tax system is its reliance on the government's opinion of a property's taxable value. Taxes on income or retail sales reflect hard numbers; real estate assessment produces the only tax in which the government guesses at a fair amount for the taxpayer to pay.

Assessors' estimates of taxable property value create ambiguity and public scrutiny not found in other taxes, and incorrect assessments can lead to fiscal shortfalls that viciously pit taxing authorities against taxpayers seeking to correct those valuations. Worse yet, the longer a tax appeal takes to reach its conclusion, the worse the outcome for both the taxpayer and government. Paradoxically, swift correction of assessment roll protects the tax authority as well as the taxpayer.

As an example, Utah daily newspaper Desert News reported in December 2019 that, due to a clerical error, Wasatch County tax rolls recorded a market-rate value of $987 million for a 1,570-square-foot home built in 1978. The value should have been $302,000. The Wasatch County assessor said the error caused a countywide overvaluation of more than $6 million and created a deficit in five various county taxing jurisdictions, according to the county assessor. The Wasatch County School District had already budgeted nearly $4.4 million, which it was unable to collect.

How does an overvaluation error cause taxing districts to lose money? In many, if not most jurisdictions, the tax rate is determined in part by the overall assessment in the district as well as the budget and levies passed. Typically, there is a somewhat complex formula that turns on the various taxing districts, safeguards and anti-windfall provisions.

Simply stated, tax rates are a result of the budget divided by the overall assessment in the district. A $1 million budget based on a $100 million assessment would require a 1 percent tax rate to collect the budgeted revenue. If the assessment is corrected after the tax rate is set, however, then not all the revenue will be collected and the district will incur a fiscal shortfall.

The sooner a commercial property assessment is corrected the healthier it is for all involved. In the Utah example, had the error been corrected prior to the tax rate being set there would have been no impact on the taxpayer, the school or any of the taxing authorities.

FAIRNESS FOR THE COMMON GOOD

Most state tax systems are flawed and provide inadequate safeguards for taxpayers—if the tax systems were designed better, there would be less need for tax counsel. By understanding the workings of the property tax system, however, taxpayers can help maintain their own fiscal health as well as help to maintain the community's fiscal well being.

As with all negotiations, it is important to understand the opponent's motivations. Although residential tax assessment typically is the largest pool of overall assessment, taxing authorities know that commercial properties individually can have the greatest impact on a system when they are improperly assessed, to the detriment of schools and taxpayers. That makes it important to act as quickly as possible in the event of an improper assessment. And, importantly, resolutions that minimize impacts to the government can maximize the benefit to the taxpayer.

A lack of clear statutory definitions, political tax shifting or a simple error can cause a breakdown in the tax system. In Johnson County, Kan., the assessor raised the assessments on all big box retail stores, in some cases by over 100 percent. Recently, the Kansas State Board of Tax Appeals found those assessments to be excessive. The board reduced taxable values in several of the lead cases back to original levels, and the excessive assessment caused a shortfall.

The Cook County, Ill., assessor has been in the news for raising assessments on commercial real estate in many cases by more than 100 percent. If those assessments are found to be excessive, it could be detrimental for the tax authorities and taxpayers alike. In Cook County, the assessor has stated that the increase is in response to prior underassessment.

SEEK UNIFORMITY, CLARITY

With tremendous swings in assessment and taxes, how can taxpayers and assessors ensure a fair system? Uniform standards and measurements are the answer.

Like the income tax code, the property tax code is criticized for being confusing and overly wordy. To achieve greater equity and predictability, clarity is key. Defined measures of assessed value and standards to ensure uniform assessment results will help create transparency and ensure fundamental fairness between neighbors and competitors, so that no one has an advantage nor a disadvantage.

All taxpayers must be subject to the same measurement. For instance, a government cannot apply an income tax as a tax on gross income for one taxpayer and on net income for another. Likewise, one taxpayer should not be taxed on the value of a property that is available for sale or lease, and another owner taxed based on the value of its property with a tenant in place. Because tax law under most state constitutions must be applied uniformly, one set of rules must be established for all, and what is being taxed should be clearly defined.

Tax laws often include phrases like "true cash value" and "fair value." To be clear, the only measure of taxable value common to all property types is the fee simple, unencumbered value. The value of a property that is measured notwithstanding the current occupant or tenant is not necessarily the price that was paid for the property; it could be higher or lower. And because this concept is difficult for many taxpayers and assessors to understand, there needs to be a second check on the system; that safeguard is taxpayers' right to challenge their assessment based on their neighbors' and competitors' assessments.

To protect themselves on complex matters, it is often helpful for taxpayers to hire counsel that is intimately familiar with the law, real estate valuation and the local individuals with whom the taxpayer will be negotiating. To reduce the need for counsel, get involved with trade groups and state chambers of commerce, which can aid in correcting the tax system.

Uniform measurements of assessment, the ability to challenge the uniformity of results, and swift resolutions combine to create fairness and stability, which in turn enhance the fiscal health of both taxpayers and tax districts.

J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Mar
28

Unfair Taxation? Governments Need to Fix the Right Problem

​Investors should be wary when taxing authorities single out properties to be assessed in a method that is inconsistent with the treatment of other taxpayers in the same class, says attorney Kieran Jennings.

Recently, The New York Times published an article on property taxes imposed on retailers under the headline "As Big Retailers Seek to Cut Their Tax Bills, Towns Bear the Brunt." This and similar articles question the fairness of how retailers have reduced their tax bills by using sales of unoccupied stores as comparable transactions to establish the assessed value for an occupied store.

The local government has cried foul, and the article concentrates on the perceived end result―lost revenue for government coffers.

What is missing from the article is basic tax law, which holds that all taxpayers in a given class must be taxed uniformly. Thus, the series of bad decisions that led local government to overtax retailers made communities dependent on inflated revenue. The initial mistake many assessors made was to seize upon sales prices associated with leased retail stores without critically examining the transactions.

Investors, and taxpayers in general, should be wary when taxing authorities single out properties to be assessed in a method that is inconsistent with the treatment of other taxpayers in the same class.

FUNDAMENTALS OF FAIRNESS

Most state constitutions specify that taxes must be uniformly assessed, which requires assessors to follow the same rules for all taxpayers within a class. At the most simplistic level, the rules of the game must be consistently applied to all and not changed to affect the outcome.

To understand how equally applied rules achieve fair taxation of property, bear in mind this fundamental truth: The assessor's goal is to measure the value of real estate only. Taxing entities then use that value to determine the tax. A lack of well-thought-out rules and procedures created the problem of non-uniform assessment.

Many states don't even have a clear definition of what they are trying to measure. States use terms such as "true value" or "true market value" without any further defining language. For most people, fair value simply means what a home would sell for in an open-market transaction. But commercial real estate is not that simple and requires clear definitions applied uniformly to all taxpayers.

Commercial property values are influenced by many factors unrelated to real estate. Consider how, under various circumstances, the same property might sell for wildly different values: An owner-occupied property will sell based on what the market will pay for the building once it is vacant, either for the new owner to occupy or as an investment for the buyer to lease-out at market terms.

The same property, were it leased at an above-market rental rate or to a highly credit-worthy tenant, functions much like a bond and will sell based on a market capitalization rate and for a greater price than the owner-occupied property.

Finally, the same property leased with long-term, below-market lease terms or a less credit-worthy tenant might sell for less than the owner-occupied price or the above-market-leased example. In each scenario, the same property sells for different amounts. Without a clear set of guidelines, establishing value based on sales price would be inconsistent even for a single property, much less an entire class.

Of the three scenarios, the only method that can be replicated consistently and applied to owners of both leased and owner-occupied real estate alike is that of the owner-occupied property. Owner-occupied interest is the unencumbered, fee-simple interest, which makes it the measuring stick common to all taxpayers. All other interests are influenced by non-real-estate factors such as lease terms or business value.

MORE CONFUSION

Adding to the confusion is the ever-changing commercial real estate sector, where market data is full of sales that include non-real-estate influences. The single-tenant market, for example, has evolved from almost exclusively retailer occupancy to include specialty uses and even nursing homes and hospitals.

The assessment goal should be to measure the real estate value alone, ensuring that all taxpayers are taxed with the same measuring stick, but confusion comes in when the sales alone don't indicate real estate value. Leased sales indicate the value of the real estate along with the tenant's credit-worthiness, the life of the lease and a host of other factors that can include enterprise zones and outside influences.

The court cases that are clarifying the methodology and the measuring stick appear to reduce assessments, when they are actually correcting the assessments and requiring assessors to value the same interests for all taxpayers. Defining terms and ensuring rule uniformity protects all taxpayers. There is no foul to be called and the losses affecting some local governments are the result of their own mistakes.

The cure is simple, but the short-term pain for community coffers is significant. States must establish clear definitions and guidelines around property rights so that assessors can value all real estate without encumbrances. Local governments cannot rely on a single taxpayer subset to carry the tax burden.

J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Sep
01

Don't Let Taxing Authorities Kill Your Deal

Tips from a veteran attorney on handling the assessments that can spell the difference between a successful closing and coming up short.

Almost every week, I get calls from brokers or investors who want to know how property taxes could impact a potential purchase. With property taxes forming the largest variable expense in most real estate acquisitions, investors should question the tax implications of every deal.

In some jurisdictions, the effective property tax can reach 5 percent of market value, so an unexpected increase can cause a deal to go under. With planning and an understanding of the local environment, however, investors can fully appreciate the risks and expenses, and may be able to come in with a winning bid in a tight market.

Most of the inquiries I receive relate to properties in Ohio or Pennsylvania, where school districts can, and do, file appeals to raise taxes on real estate. In those states, the aggressor is often a school board that seeks to value an asset based on its recent sale price. In other states, it may be the county assessor. Some states have deemed it unconstitutional to "chase" sales in setting taxable value.

Know your district

Knowing which states have aggressive taxing authorities can reveal potential problems, but familiarity with those agencies and their personnel is the key to deciding whether to walk away from a deal or to stay and find a creative solution, resulting in a deal that is favorable to everyone.

An examination of any real estate purchase, whether office, retail, hotel, etc., in the context of various taxing districts' behavior illustrates the importance of thoroughly knowing your taxing authority. In all the following examples, assume that the property is uniformly assessed and that the current assessment is consistent with the value of competing properties.

Also assume that the property is assessed for less than the proposed sale price, and that increasing taxable value to the amount of the purchase price would ruin the deal.The first example takes the case of a taxing district with an aggressive, unyielding district attorney. The tax district's counsel is unwilling or unable to see that the tax increase will end up lowering the property's value below the purchase price.

In this scenario, the assessment is raised to the purchase price, which becomes part of the tax budget. Since taxing entities typically establish tax rates based on the overall assessment of the community, the tax district only gets a single year's increase in tax revenue. In subsequent years, the newly increased tax burden weighs down the property's market value, ending in an eventual refund of taxes. The net effect is a loss for the district and a loss for the taxpayer, though the taxpayer eventually recovers some of those losses. It is altogether a lose-lose situation.

Big gambles

The relatively passive school district occasionally files an increase appeal and generally isn't driven to get the last penny from the taxpayer. At first this seems like a good situation. Although a passive district may be less difficult to deal with than a more aggressive counterpart, it still leaves the buyer with a great deal of uncertainty. Risking large sums of money on chance is gambling, not investing.

The advice to the investor in a passive district rests greatly upon the taxpayer's risk tolerance, and upon local counsel's experience with how cases are typically settled. In some instances, the investor could assume that the case would be settled similarly to past cases. This requires counsel that has enough experience with the district to gauge the risk as well as the possible outcome. It also requires that the buyer fully understand the nature of the risk.

Finally, there are districts with counsel that is both reasonable and creative. In that situation, attorneys have been able to resolve tax questions with the district in advance of closing. This allows for the obvious decrease in risk. As in the previous example, it takes a great deal of experience with the opposing attorney.

Of note, approaching a district early can produce a better result. Taxing authorities have become more likely to pursue appeals of assessments, and the chances that a sale will go unnoticed—and that an assessment will go unchanged—are becoming slimmer.

Due diligence means more than determining what might happen; it requires arranging the deal to whatever extent is possible to bring about the desired outcome. Paper the file with an appraisal that satisfies any allocations, and make notations in the purchase agreement that support the tax strategy.

Being able to explain the nature of the purchase later in a tax hearing is important, but having facts and documents that support those assertions is much more valuable. With the right opportunity and preparation, an investor may be able to enter into an acquisition while eliminating risk that has driven away the competition.

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..
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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.

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Jul
01

Is Your Hotel Paying Too Much Property Tax?

The value of a hotel for purposes of tax assessment is not the same number as its value as a going concern.  Understanding the difference between the two will save the hotel owner from an excessive property tax bill.

For assessors, the challenge is to correctly distinguish taxable assets from the non-taxable, and therein lies both a problem and an opportunity. By fully separating the assets, the property owner may reduce its taxes. But failing to properly prove the allocation results in the owner paying real estate taxes on non-real estate—and likely non-taxable property.

Let’s step back for a moment and note that hotel operation comprises four closely related asset components: land; the building or buildings; furniture, fixtures and equipment; and the business itself.

The main distinction here is that land and buildings are taxable as real estate, whereas the business components and fixtures, furniture and equipment are not. Nevertheless, each asset component is tightly linked to the others in making up the value of the going concern.

Reckoning Value

Because these assets are investments, each must generate income to justify its cost. Calculating the return of and on these investments can serve to separate the asset’s value from the going concern and isolate the real estate value.

Clearly, room revenue in a hotel operation is based on more than nightly room charges; it also includes income attributable to the furnishings and services. Separating the value of furniture, fixtures and equipment is the obvious first step to allocating the assets. Assuming that the taxpayer can make a supportable estimate of the market value of the fixtures, furniture and equipment, the taxpayer can then subtract the value attributable to the use of, and profit from,  those items. In other words, the value calculation should recognize both a return of—and a return on—furniture, fixtures and equipment.

To be sure, furnishings are hardly the only investment in hotel operations. Services such as marketing and reservation systems, food and beverage, recreational amenities, and quality of the flag or brand, among other components, all contribute to the property’s value.

These cost centers are business assets that are part of the going concern, but they are not taxable as real estate. Still, many assessors mistakenly accept only the removal of the depreciated cost of the furniture, fixtures and equipment, and erroneously attribute the full net operating income to the real estate. Crucially, that includes the non-taxable business income associated with the hotel operation.

In order to pay tax only on the real estate, property owners should allocate value to the non-taxable business assets. That step allows the owner to more accurately segregate the value of the real estate from the going concern.

Robust Debate

Within the valuation community, there is robust debate over the extent of items related to business value that should be removed from the going concern. Some appraisers go so far as to assign a value to the initial investment in personnel and training, while others may just remove the food and beverage component and apply a rent to the restaurant or meeting space.

Make no mistake: Appraisers and courts agree that a business value component exists. When that value is clearly demonstrated and the valuation is properly supported, courts and appraisers will also agree that it should be removed from the going concern in order to isolate the real estate. Until persuaded otherwise, however, taxing authorities usually take the position that expenses associated with hotel cost centers offset the income, and the management and franchise fees cover all of the business and intangible values associated with a hotel.

Blending the contributory value of the furnishings and business with the real estate is a disservice to the taxpayer and unjustifiably burdens the property with an excessive fixed cost. A well-developed real estate appraisal for a lodging property will go beyond addressing the value of the going concern, and will also analyze each asset category to correctly identify the taxable real estate component. By drilling down into the operation of the property and segregating the asset components, a capable valuation expert may be able to offer some relief to the taxpayer.

The final key to minimize taxes is local knowledge. This requires an understanding of the jurisdiction and the methodologies that local tax assessors find acceptable, and knowing the personalities of opposing counsel and appraisers. Many ideas surround asset allocation, and knowing which ones to employ may keep hotel owners from overpaying real estate taxes.

KJennings90

Anthony Barna jpeg

J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania 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..

Anthony C. Barna, MAI, SRA, is a principal of Pittsburgh appraisal firm Kelly\Rielly\Nell\Barna Associates.   He specializes in appraisal and consulting for litigatgion support.  He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..                                                         


     

 

 

 

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Apr
15

Valuation Education

How to spot - and challenge - unfair tax bills
Even if there is life left in this market cycle, commercial property owners should maximize returns now in preparation for the next buyer’s market, whenever it may begin. Property tax is one of the largest expenses for most owners, so protecting the property, investment and tenants requires a thorough understanding of the tax system. With that understanding, the taxpayer will be better equipped to spot an inflated assessment and contest unfair tax bills.

Keep it (fee) simple
Merely knowing for how much a property would sell is insufficient to ensure proper taxation. Specifically, taxpayers need to know fair taxation starts with a fair measurement of value.

The assessment is the measurement to which taxing entities apply the tax rate. In order to treat all taxpayers uniformly, assessors must measure the fee simple value of the property, or the value without any encumbrance other than police power.

Why is that important? The principle is that a leased property and an identical owner occupied property, valued on the same date and under the same market conditions, would be taxed the same. By contrast, leased fee value or value affected by encumbrances can vary greatly, even between identical properties. The concept is simple; the application, not so simple.

Assessors and courts alike struggle to determine an asset’s fundamental real estate value because their primary source of data is leased-fee sales, or sales priced to reflect cash flow from existing leases. Several courts across the country have understood the necessity to assess properties uniformly and have mandated that assessors adjust sales data to reflect the unencumbered value of the real estate.

In Ohio, the state Supreme Court ruled that an appraiser who was valuing an unencumbered property had to adjust the sale prices of comparable properties to reflect the fact that the subject property was unencumbered (by leases, for example) and would therefore likely sell for less. The decision recognized that an encumbered sale is affected by factors besides the fundamental value of the real estate.

Courts across the country have been wrestling with the fee simple issue. For real estate professionals, the idea that tenancy, lease rates, credit worthiness and other contractual issues affect value is commonplace. In order to tax in a uniform manner, however, assessors must strip non-market and non-property factors from the asset to value the property’s bare bricks, sticks and dirt.

Doing the math
Although part of the purchase price, contractual obligations and other valuable tenant-related attributes are not components of real estate. What is part of the real estate is the value attributable to what the property might command in rent as of a specific date. This may appear to be splitting hairs, but the difference between values based on these calculations can be significant.

In the first instance, the landlord and tenant have a contractual obligation. For example, suppose the rent a tenant pays under a 20-year-old lease were $30 per square foot. If the tenant were to vacate, however, that space might only rent for $10 per square foot today. The additional $20 per square foot premium is in the value of the contract, not the value of the real estate. Moreover, the contract only holds that value if the market believes the tenant is creditworthy and will continue to pay an above-market price.

When the tenant vacates, it’s the real estate itself that determines the current market-rate lease of $10.

Good data, good results
Identifying an inflated assessment brings the taxpayer halfway to a solution. Step two is finding the best way to challenge the inappropriate assessment. Each state has its own tax laws and history of court decisions, but a few key principles will help taxpayers achieve a fee simple value.

First, sales and rents must have been exposed to the open market. A lease based on construction and acquisition costs reflects only the cost of financing the acquisition and construction of a building, not market prices.

Another principle assessors often fail to apply is that the data they use must be proximate to the date of the tax assessment. Therefore, a lease established years before the assessment is not proximate, even if the lease itself is still current.

What does make for good data is a lease that has been exposed to the open market, where the property was already built when the landlord and tenant agreed to terms free of compulsion. Equally reliable is the sale of a vacant and available property, or where the lease in place reflects market terms proximate to the assessment date.

Taxpayers who challenge assessments that are not based on fee simple values help themselves maintain market occupancy costs, which will in turn lead to better leasing opportunities and retention of tenants.

KJennings90J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania 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..

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