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Property Tax Resources

Oct
30

Big-Box Valuation Fight Jeopardizes Retail Property Profitability

Assessors' incorrect use of the data inflates property taxes.

Tax assessors across the country are drawing battle lines to pit new valuation theories against accepted appraisal methodologies.

This fierce ideological assault threatens the sustainability of retail businesses weighed down by ever-increasing property taxes.

Retail landlords who desire to have their real estate valued on a fee simple basis routinely face assessors who claim that these owners want their property valued as a “dark store.” This prickly issue originally focused on how to value big-box stores for property tax purposes, but its scope has widened to affect a range of retail property types.

Dispute’s Roots Run Deep

Woolworth’s opened the first big-box store in 1962, the same year that McDonald’s introduced the golden arches and ushered in the concept of branding stores with identical interiors and exteriors.

Over the following decades, Walmart, Kmart, Target and other retailers married the big-box format with McDonald’s-style branding. Replicating the same store in many locations increased consumers’ brand recognition and reduced the owner’s cost to develop, stock open and operate new locations.

Much of today’s controversy over assessments stems from alternative financing methods that caught on with these major retailers. The two most common strategies are build-to-suit and sale-leaseback arrangements, both of which generate rent payments that exceed market rates.

A build-to-suit is a financial arrangement where the tenant’s rent is a repayment of the developer’s cost to acquire the land and build a tenant specific building. These transactions can include a variety of other non-real estate costs, such as financed inventory, personal property and/or cashback incentives.

A retailer uses sale-leaseback transactions to free up capital by selling its building and then renting it back under a long-term lease. The rent is purely a function of the amount of capital to be financed and the number of years to pay it back.

In either scenario, a landlord with one of these above-market leases in place to a high-credit tenant will often sell the lease and property to an investor. The resulting sales price is a function of the length of the lease in place and the strength of the tenant, and has nothing to do with the real estate’s fair market value. In other words, the value is no longer what the real estate is worth, but what the investor would pay to receive the income from that user.

Bad Data Proliferates

Property valuations for tax purposes are not done as single-property appraisals. In single-property appraisals, the appraiser uses data specific to a property to develop an opinion of its value. Tax assessors, on the other hand, use mass appraisals. The latter method values a universe of properties using common data.

The problem arises when non-market data taints the assessor’s common data. For instance, if the above-market rents from build-to-suits are included in the common data, the assessor will overstate the market rental rate and subsequently overstate property value under the income approach.

Concurrently, when common data includes investor acquisitions of properties with leases in place under these alternative financing methods, the sales comparison approach to value suffers from the same flawed methodology as the income approach.

The problem doesn’t stop there, as the defective data spills over into depreciation calculations used in the cost approach to valuation, and in developing capitalization rate percentages. Using bad common data will taint every commonly used valuation method and lead to an overvaluation.

Implications Outside the Box

This issue is worth watching for shopping center owners, investors and developers for two reasons. First, big-box tenants traditionally are high-credit national retailers committed to a financing-based lease on an absolute net basis. That makes them a valuable addition to a shopping center as a draw for customers, and to the investor as a guaranteed income stream.

The second reason to closely follow the assessment issue is often overlooked, but has more serious implications. What began as an anomaly in the method assessors used to value and tax big-box stores is now spreading to all retail. Assessors increasingly use incorrect, inflated, non-market data to value anchor stores, discount and department stores and strip centers, overstating valuations for tax purposes.

Most states require assessors to value commercial real estate uniformly and equally. That means that two identical buildings should have the same value.

The taxable value should not be higher if one is leased to a high-credit tenant and the other to an independent local retailer. The value of the business may be greater for one over the other, but the value of the real estate must be the same.

Uniformity and equality dissolve when real estate values fluctuate based on nothing more than the identity of the tenant. And uniformity and equality can exist only when assessors value bricks and mortar alone. That is not valuing a dark store; that is valuing the fee simple.

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Linda Terrill is a partner in the Leawood, Kansas law firm of Property Tax Law Group, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
30

FIGHTING BACK - Big-Box Owners Contest User-Based Tax Assessments

The big-box concept changed the face of retail in the 1960s. It also skewed the way that assessors value retail property for tax purposes. To this day, taxpayers across the United States have been fighting back—and in Wisconsin, Kansas and Michigan, they are winning.

The problems arose out of financing arrangements such as prearranged sale-leasebacks or build-to-suit transactions to construct or develop a big box. Companies used these methods to keep cash available for core business purposes, and repaid the sale proceeds as rent.

These arrangements created financing rents that assessors mistakenly adopted as market rents. Further, once the above-market lease was in place, owners typically sold the lease and property to an investor at a sales price reflecting the value of the longterm, above-market lease in place to a high-credit tenant. The sales never reflected the fair market value of bricks and sticks alone, because the transaction transferred more than real estate.

Assessors then relied upon these sales without adjustment to calculate fee-simple value. Finally, assessors used the above-market rents and leased-fee sales to value owner-occupied retail stores, spreading the problem to all retail.

Guiding Principles

The concept of valuing property at its fair market value of the fee simple vanished in many locations as governmental assessors adopted this leased-fee concept, occasioning substantial valuation increases for property tax purposes. The user of the property and their contract rent trumped longstanding appraisal concepts of use and market rent. The trend eroded the requirement for a uniform and equal rate of assessment and taxation at fair market value. The same land and building could now have vastly different real property values, depending on the tenant.

For instance, a building leased to Walmart would have a higher value than if the same were leased to a local department store. How was it possible that the value of a building depended on the name of the tenant? Assessors could not distinguish between sales of properties with an income stream related to the property and sales of properties with an income stream related to the business value of the tenant.

Taxpayers successfully fought back in Wisconsin, Kansas and Michigan.

In 2008, the Wisconsin Supreme Court agreed with Walgreens that the assessor had not valued its properties in fee simple. The court focused on the issue of an above-market lease and the impact on valuation, and concluded that a “lease never increases the market value of the real property rights to the fee simple estate.”

The ruling directed assessors to use market rents, not the contract or financing rents. The court was not persuaded to move away from fee-simple valuation to a business valuation, as argued by the assessor. The assessor’s methodology could cause “extreme disparities and variations in assessments,” something the court was not willing to tolerate.

The Kansas Court of Appeals case followed in 2012, prosecuted by Best Buy, the single tenant in the building. The decision made three things clear for commercial property owners. First, Kansas is a fee-simple state. The court rejected the county appraiser’s argument for a leased-fee value. Second, build-to-suit rates are not market rents and cannot be used unless after review of the lease it can be adjusted to market rental information. Finally, market rents are those rents that a property could expect to pay in an open and competitive market. Market rent is not whatever financing arrangements a tenant can procure based on their costs and credit ratings.

Most recently, the Michigan Supreme Court addressed how these financing arrangements are impacting valuations of owner-occupied big-box retail. In 2014, the court ruled on cases brought by Lowe’s Home Improvement and Home Depot, both owner-occupants.

The court dismissed the township’s argument to consider the user of the property, rather than the use of the property. The county method would mistakenly arrive at a value in use, rather than a market value, the court found.

The court concurred with the taxpayers that the sales comparison approach to value was the most appropriate method to value owner-occupied properties, noting the approach must be developed using market sales of fee-simple interests. Leased fee sales may only be used if adjusted to reflect fee simple. The court was unimpressed by the township appraiser’s conclusion that no adjustments were necessary, with the court finding his report to be shockingly deceptive on this point.

Whether it was failing to understand basic appraisal theory or the desire to inflate values, assessors plugged bad information into market-based valuation models, and it has taken years to begin unwinding the damage and restoring basic appraisal concepts of fee simple, uniformity and equality. Taxpayers are taking the lead from Wisconsin, Kansas and Michigan, and have cases pending in many, if not all, jurisdictions.

TerrillPhoto90Linda Terrill is a partner in the Leawood, Kansas. law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar
11

Kansas Legislature To Reform Property Tax Appeals Process?

In the nearly 200 years since the U.S. Supreme Court's ruling in McCulloch v. Maryland, pundits, attorneys, courts and others have deliberated Chief Justice John Marshall's assertion that "the power to tax is the power to destroy."

Today the issue is front and center in Kansas, where the state Legislature seems poised to enact sweeping reform legislation governing tax appeals. The contemplated measures would provide substantive due process in an attempt to level the playing field for taxpayers that seek to challenge state and local property, excise and income taxes.

The current tax appeal system in Kansas combines informal hearing processes at the county level in property tax issues and at the state level on appeals involving excise and/or income taxes. These are followed by an appeal to the Kansas Court of Tax Appeals (COTA), an administrative agency in the executive branch of state government. If a party is displeased with a COTA decision, the prescribed recourse is a direct appeal to the state Court of Appeals.

Mounting Concerns Over COTA
Tax consultants and commercial taxpayers alarmed by recent COTA decisions originated the call for reform. The grassroots effort spotlighted COTA's efforts to deny taxpayers the right to contract with tax consultants that use fee-based contracts.

COTA had ruled that the contracts violated public policy, and voided them. It then refused to hear pending cases where a tax consultant was involved. COTA also sought to deny taxpayers the ability to retain attorneys that took referrals from tax consultants.

Next, COTA dismissed appeals where the tax consultant had signed the appeal form, refusing to recognize the state-issued power of attorney forms the consultants had taxpayers execute.

Taxpayer grievances also extend to the time taken to resolve property tax appeals. A law requires COTA to issue a decision no later than 120 days after a tax hearing, but the law fails to penalize the agency in the event that it exceeds the deadline. Consequently, many cases linger beyond the 120-day mark.

Taxpayer Relief May Be Imminent
House Bill 2614 was introduced to address these issues. As currently written, the bill will make the following changes:

  • Provide for a de novo appeal to the District Court. This change will ensure that a court of competent jurisdiction hears the taxpayer's evidence and makes findings and conclusions, rather than non-lawyer employees appointed by the governor deciding the case.
  • Require a presumption of correctness for any appraisal submitted by a state-licensed appraiser.
  • Permit taxpayers to employ the tax professional of their choosing without interference from COTA.
  • Require tax appeal decisions to be issued within 120 days and, if not, all filing fees paid by the taxpayer will be refunded.
  • Waive the filing fee in the event that a protective appeal for the following year must be filed because the prior year's appeal is still pending.
  • Require COTA to provide for a simultaneous exchange of evidence. This would replace the current method, which requires the taxpayer to provide evidence months before the hearing while protecting the county from disclosure until 20 days prior to the hearing.
  • Change the agency name from the Court of Tax Appeals back to the Board of Tax Appeals, to avoid the suggestion that COTA is a court within the judicial branch. This point also includes a staff salary reduction.
  • Provide a method whereby a party could file to have a board member removed for cause, defined to be failing to issue orders timely or failing to maintain continuing educational requirements.
  • Make cases valued at $3 million or less eligible for filing with the small claims division. This would be an increase from the current cutoff of $2 million.
  • Require the agency to promptly approve stipulations between the taxpayers and the taxing body.

The initial group of taxpayers, tax consultants and attorneys contacted Kansas legislators directly and urged their support for tax appeal system reform. The Kansas Chamber of Commerce later picked up the grassroots effort.

In its "Legislative Agenda 2014 For A Healthy Economy," the chamber endorsed COTA reform to "provide an affordable, accessible and impartial system that can resolve state and local tax disputes expeditiously and efficiently."

Other groups including the lobby for the Kansas Association of Realtors joined the call for reform. Now the legislation has widespread support throughout the business and real estate communities.

TerrillPhoto90Linda Terrill is a partner in the Leawood, Kansas. law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Dec
08

Six Steps to Managing Property Taxes for Multiple Assets

"There are several ways of managing tax reviews across a portfolio, ranging from keeping everything in-house to delegating the entire job to an outside firm. In AMC's experience, the best approach has been a combination of those two strategies - with a team effort that relies on contributions from in-house personnel and outsourced tax and appraisal professionals. AMC's six-step tax strategy can serve as a model for other businesses with multiple properties..."

By Brooks Rainer, Thomas Slack, MAI, and Linda Terrill, esq., as published by Leader Magazine, November/December 2011

For companies like AMC Theatres, which has hundreds of locations, the challenge to review assessments for every property and decide whether or not to launch a tax appeal can be daunting. It becomes even more so if the company is a tenant and not the owner of the property.

There are several ways of managing tax reviews across a portfolio, ranging from keeping everything in-house to delegating the entire job to an outside firm. In AMC's experience, the best approach has been a combination of those two strategies - with a team effort that relies on contributions from in-house personnel and outsourced tax and appraisal professionals. AMC's six-step tax strategy can serve as a model for other businesses with multiple properties. Here are the key points:

1. Have the property separately assessed. Whether the company is the anchor tenant or occupies a smaller, in-line space, it's rarely good to be valued with other properties on a single parcel. First, a combined assessment abdicates the right to file an appeal. Second, it may be impossible to discern how the assessor valued the tenant's space versus the other tenants. This leaves each tenant at the mercy of the landlord to appropriately allocate taxes.

2. Involve the company's real estate department. Before a tenant can appeal a valuation from a tax assessor, most jurisdictions require that the lease specifically reserves the tenant's right to contest assessments. The lease may even include language that gives the tenant the exclusive right to decide to appeal and specifically prohibits the owner or landlord from filing on the property. Additionally, the lease should guarantee the cooperation of the property owner throughout the appeal process. Normally, the appeal process will require the owner/landlord to supply financial information, so collaboration and support are necessary.

3. Direct all correspondence where it is needed. Deadlines to appeal property taxes are often very short and can run out during the time it takes to get notices forwarded from the property owner to the tenant. Local taxing authorities will typically cooperate to ensure that all notices, tax bills, etc., are mailed where the tenant designates.

4. Get organized and get help. Once all valuation notices and tax bills are in hand, get assistance from a valuation expert such as an appraiser or valuation consultant. A company with multi-state locations should look to the national market to determine market value, and this kind of information is generally unavailable to local assessors. A third party appraisal can be invaluable when talking to local assessors. Effective tax rates differ enormously from county to county and from state to state. To make better sense of it all, analyze properties on the basis of valuation per square foot in addition to taxes per square foot. Even if the property type is marketed and sold on the basis of value per theater screen or value per apartment unit, most assessors are used to dealing on a square foot basis, and the tenant must be able to speak the language. A valuation consultant also will have access to demographic information that can all be vital in distinguishing one property from another.

5. Analyze properties from an "ad valorem" not "accounting" perspective. Most jurisdictions tax real estate based on the fair market value of the real estate. In other words, in a hypothetical sale, that's the highest price a buyer would be willing to pay for the real estate and the lowest price a seller would be willing to accept, with neither party acting under duress. Working with the appraiser, a tax attorney can analyze the information the assessor produces to determine if the valuations incorrectly include intangible business valuation or personal property or whether the asset was valued using an improper appraisal methodology.

6. Include local tax professionals on the team. The rules for who can file an appeal, when it must be filed, what needs to be included in the appeal and a number of other key requirements vary from state to state, county to county and even from year to year. For multi-property companies, it is virtually impossible to stay on top of these changing rules across the portfolio. By supporting the tax team with local experts, a company can keep abreast of change and ensure that its tax bills are fair and manageable.

The steps outlined will help owners and tenants become more efficient and effective in reining in excessive property tax assessments on their locations across the country.

TerrillSlackBrooksBrooks Rainer is a Vice President at AMC Theatres. Thomas Slack, MAI, is an Appraiser and Principal at Property Tax Services in Overland Park, Kan. Linda Terrill is a Partner in the Leawood, Kan., law firm Neill, Terrill & Embree, which is the Kansas and Nebraska member of the American Property Tax Counsel

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Jan
19

Finding Relief - How Co-Tenancy Clauses Can Be a Property Tax Benefit

"It is incumbent upon the taxpayer, tax counsel and appraisers to show local assessors how these clauses affect the real estate's valuation..."

By Linda Terrill, Esq., as published by Commercial Property Executive, January 2011

Co-tenancy clauses have become a two-edged sword for commercial property owners. Originally a tool that landlords used to obtain a multi-year lease commitment, co-tenancy clauses typically reduce a tenant's rent if a key tenant or tenants leave or if overall occupancy drops below a certain level. Some cotenancy clauses permit tenants to terminate a lease without penalty.

Today, a co-tenancy clause may detract from the property's value and even compound vacancy problems. Retail stores have been closing at unprecedented rates due to bankruptcies or underperformance. Many retailers have put new leases or construction on hold. In the office market, vacancy rates continue to set new highs and absorption rates are more frequently described as "negative."

For many of these properties, the terms of the lease, rather than the income stream, may define the property's value. Since co-tenancy clauses have the potential to shorten the lease term or otherwise reduce the income stream, co-tenancy should be central to a property tax appeal.

It is incumbent upon the taxpayer, tax counsel and appraisers to show local assessors how these clauses affect the real estate's valuation.

Tenets of Co-tenancy
Co-tenancy clauses are most common in retail properties but have become more prevalent in office buildings. Most fall into one of three timeframes: The first is during the letter of intent phase, during the lease-up phase of a retail project, when a potential tenant's plan to occupy a space is affirmed. The second period is after the lease has been signed but prior to move-in; the third spans the duration of the lease term. Most real estate tax appeals will involve fully developed properties and, therefore, co-tenancy agreements associated with the lease term. Landlords and tenants have negotiated co-tenancy clauses for a number of reasons, and the more clout the tenant has, the more likely the lease will have co-tenancy provisions.

Yet, it has also become more commonplace for smaller retail tenants to negotiate such provisions, particularly if they selected the leased space in order to be in the same center as another tenant that provides foot traffic and has the potential to drive up sales. Smaller office tenants, by contrast, may have a business relationship with the flagship tenant. In those cases, the smaller business may negotiate provisions to reduce rent or terminate the lease early if the flagship tenant quits doing business at the location.

Boost to Tax Appeals
How can a co-tenancy clause assist an owner in a tax appeal? Consider the following example: A significant national retailer occupies 40 percent of a lifestyle shopping center. The lease has one year left, with three five-year renewal options.

The center is fully leased, and all of the other tenants have co-tenancy lease clauses. Some enable the tenant to terminate the lease if the national retailer ceases to do business at that location; others give tenants the right to terminate the lease if vacancy exceeds 50 percent. Alternatively, the clauses adjust tenant rent from a fixed rate to a percentage of sales in the event that the national retailer closes or vacancy crosses the 50 percent mark.

In measuring the effect on value, the first step is to determine whether the national tenant is likely to renew. If the tenant does not want to disclose their business plan for the location, demographics may suggest what that plan entails. For example, are there rising unemployment, rising home foreclosures or declining incomes in the market area? How are the tenant's sales figures? If sales and foot traffic are down, research the national market to see if this retailer has any announced plans to shutter underperforming locations. This information is crucial to making a case based upon the continued viability of the lease.

In this example, if the national tenant were to leave, the effect of the co-tenancy clauses could domino and the center could go from 100 percent occupied to dark in short order. As each tenant leaves, more of the responsibility to cover operating expenses and property taxes shifts to the owner. In some cases, the income stream will not be sufficient to cover debt service.

The best way to demonstrate to the assessor what all this means is to have the property appraised by a competent, experienced appraiser. At a minimum, the taxpayer's counsel should provide the assessor with an extensive lease abstract for each tenant. That abstract should include not only the terms of the lease and the rents to be received but also whether or not there are any lease provisions that could shorten the lease terms, reduce the rental rate and/or otherwise shift previously reimbursed expenses to the property owner. Any of those eventualities will reduce the value of the property.

TerrillPhoto90Linda Terrill is a partner in the Leawood, Kan., law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
24

Easing the Stress of Distressed Properties

"By being informed, vigilant and flexible, owners can make their taxes more manageable."

By Linda Terrill, Esq. - as published by Real Estate Forum - April 2010

Whether a distressed property is underwater, held by a lender or somewhere in the bankruptcy process, it is important to be aggressive about lowering holding costs. Other than debt service, a property's largest expense is likely the property tax bill, and the right approach can help to rein in that tax burden.

It is never too early to start the process of whittling down a tax assessment. Confer with your tax counsel and visit the county assessor prior to the values being mailed out. Learn all the appeal deadlines.

Advise your tenants of efforts to get the taxes reduced and seek permission to disclose any helpful information such as declining sales per square foot, occupancy costs and changes in lease terms. Disclose to the assessor all lease modifications and rent concessions. Let them know if any tenants are significantly behind in rent payments. Disclose any discussions with your lender about adjusting the repayment terms of your mortgage.

Don't be fooled by a valuation notice showing a decline in value. Lower values may not translate into lower taxes. Plan to have your property appraised by an expert, and interview several appraisers before selecting one for the job.

Keep in mind that local governments are struggling financially. Dramatic drops in real estate values, coupled with little or no new construction have contracted tax bases everywhere.

Think creatively and offer to work with the assessor to reach a mutually agreeable arrangement. That could mean offering to take any refund due as a credit forward. See if the county would agree to less of a reduction in the current year in exchange for a more significant reduction in 2011. If possible, convince the assessor to split the cost of hiring an independent appraiser and agree to accept the conclusion of value.

Beyond the preceding owner strategies, lenders that have taken ownership of a property should consider a few additional measures. Have tax counsel review the portfolio to identify which valuations should be appealed. Remember the list price may become the market value, so be realistic in pricing the property. Extend transparency to potential buyers, disclosing all efforts to get the tax load reduced. Should the property sell while awaiting an appeal hearing, the sales price may form the basis of a settlement.

Bankruptcy proceedings introduce additional opportunities to slash taxes. If the property is involved in a bankruptcy, the taxpayer can initiate litigation to reduce taxes. In some cases, delinquent taxes can be reduced, and normal appeal deadlines may not apply. In any case, be prepared with an appraisal.

By being informed, vigilant and flexible, owners can make their taxes more manageable. And make the effort to appeal: Remember that market values may fall further before they turn around.

TerrillPhoto90Linda Terrill is a partner in the Leawood, Kansas. law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jun
01

Shouldering a Costly Burden

States cut homeowners a property tax break, leaving commercial owners to fill the gap

The conventional wisdom is that lower valuations result in lower taxes. Many commercial owners and tax practitioners expect property values to decline this year due to a depressed economy.

By Linda Terrill, Esq., as published by National Real Estate Investor, June 2009

Will Rogers once said: "The only difference between death and taxes is that death doesn't get worse every time Congress meets." Commercial property owners could say the same thing of state legislatures when it comes to property taxation.

In the beginning, most states provided a "uniform and equal" rate of assessment and taxation for all classes of property. Today, the vast majority of states still have the basic "uniform and equal" framework, but all have tinkered with it to shift the weight of taxation to commercial property.

Once the local tax base and budget are determined, a mill levy is set. Some states apply the mill levy against the 100% value of the property. The math is: 100% value a— mill levy = tax due.

Other states have an intermediary level, generally referred to as the assessed value, which is a percentage of the 100% value. In those cases, the mill levy is applied to the assessed value and the computation is as follows: 100% value a— assessment rate a— mill levy = tax due.

Terrill_CostlyBurden_GRAPH

Altering the equation?

Several states have adopted "classification legislation" that provides for differential assessment rates for commercial real estate versus residential. In most cases, the commercial taxpayer carries the larger load.

This disparity grows wider if the residential owner also qualifies for other preferential treatment that some states may provide to seniors, veterans or low-income property owners. Here are examples of the tax system in practice:

In Colorado, all property is assessed at 29%, except residential, which is assessed at 7.96%. In terms of tax dollars, this disparity means that for every $1 paid by the residential owner, a commercial property owner will pay $3.64.

To further illustrate, assume a mill levy of .075 and a commercial and residential property each valued at $200,000. In Colorado, the property taxes for the homeowner are calculated as follows: $200,000 a— 7.96% = $15,920 a— .075 = $1,194. The commercial owner, however, pays 3.6 times as much: $200,000 a— 29% = $58,000 a— .075 = $4,350.

Arizona legislates commercial assessment rates at 22% and residential rates at 10% (see chart). Thus, for every $1 paid by the residential property owner, a commercial property owner will pay $2.20.

Tennessee commercial property owners fork over $1.60 for every $1 paid by a residential property owner, and in Kansas commercial owners pony up $2.17 for every $1 paid by residential owners. The ratio in Minnesota can be as high as 3 to 1.

The states and city included in the chart represent only a sampling of the disparity in the way the property tax load is shared between commercial and residential owners.

Premature celebration?

The conventional wisdom is that lower valuations result in lower taxes. Many commercial owners and tax practitioners expect property values to decline this year due to a depressed economy. It's only logical that taxpayers who see a reduction in their valuation notices for 2009 expect their taxes to decrease.

Such a conclusion is premature in the states with different assessment rates for commercial and residential property, or with any other significant agricultural and/or residential tax relief programs. That's because if the tax base declines and the needs of government remain the same, a mill levy increase is inevitable and commercial property taxpayers will face paying the majority share.

A savvy commercial property owner would be well advised to take the following steps:

  • Determine the tax appeal date and the rules for filing. If your property requires an appraisal, remember that the number of appeals may rise significantly, so hire an appraiser as early as possible.
  • Determine whether your market area comprises a diverse mixture of property types, or is dominated by businesses that are dependent on a single industry.
  • Compare the local unemployment rate with the national numbers.
  • Decide whether you can manage the appeal on your own.
  • Be prepared for it to take longer than you'd expect to traverse what will probably be a crowded tax appeal docket. To be forewarned is to be forearmed.

TerrillPhoto90Linda Terrill is a partner in the law firm of Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar
15

Don't Get Boxed in By Excessive Taxes

Retail Owners Can Fight Assessors' High Valuations

"All too often assessors get away with over assessing big-box properties owned or occupied by national chains. Assessors see cost of construction, sale-leaseback rents or the capitalized value of the lease and just use the information without looking at the relevancy of those figures to market value."

By Linda Terrill, Esq., as published by National Real Estate Investor, March 2007

All too often assessors get away with over assessing big-box properties owned or occupied by national chains. Assessors see cost of construction, sale-leaseback rents or the capitalized value of the lease and just use the information without looking at the relevancy of those figures to market value.

To bring fairness to the property taxation of big boxes, taxpayers need to understand a number of key issues. The following tax appeal case serves as an example of how taxpayers should approach their property tax assessment, even if they think it appears fair.

TerrillLowesPhoto110

Store Victory: Home improvement retailer Lowe's recently won a property tax appeal case, resulting in a valuation reduction of $2.2 million

In 1997, a developer constructed a large retail warehouse building for a Lowe's. The 133,000 sq. ft. building was built to this user's specifications at a cost in excess of $8 million. A 20-year lease was entered into with a triple-net rental rate of $7.25 per sq. ft. One year prior to the tax appeal, the property was sold for about $9.2 million. The assessor valued the property at $8.5 million, even though it was marketed for $15 million.

At first blush, the facts in this case appear not to warrant a property tax appeal. The assessor valued the property at about what it cost to build, and less than the price at which it sold. This scenario represents the trap that ensnares all too many big-box owners.

However, in this particular case, the taxpayer correctly analyzed the facts, decided an appeal was warranted and successfully litigated a reduction in value to $6.3 million. In litigating the case the assessor and the taxpayer both relied heavily on the market and income approaches to value, but each with a different take.

The market approach

The assessor argued that the capitalized value of the lease was equal to the value of the real estate. Since the value of the lease could be established by the sale, it was crucial for the taxpayer to identify and remove from the sales price any value attributable to the lease in place.

Here the taxpayer had an advantage because the company owned a number of similar properties in different locations. As the market for larger boxes increased, the taxpayer closed the smaller ones and marketed them for sale. There were enough sales to prove two important points. First, the sales were never to another national retailer. Second, these properties always sold for substantially less than their cost to construct.

So, the court had evidence showing the amount the buyer paid for the leased property and what similar buildings sold for without any leases in place. The court ruled that the difference between the selling price of a property with a lease and one without a lease represents the intangible value attributable to the lease in place. The value of the lease isn't the value of the real estate, and only real estate market value is subject to property tax.

The income approach

The battle here was a familiar one. Does the contract rent, the actual rent paid by the lessee, represent market rent? The assessor relied on other build-to-suit and sale-leaseback rental rates. Conversely, the taxpayer argued that these types of rental rates are irrelevant as they are based on financing costs and are not market-driven rates.

The cost to finance construction of a property forms the basis for establishing the lease rental rate, whereas market rates are a function of buyers and sellers agreeing on a rental rate. The taxpayer relied exclusively on marketplace leases as evidence of what one could expect to receive in rent. Again, the taxpayer's argument prevailed.

Scholarly advice

As taxpayers receive their new assessment notices, they need to remember these general principles:

  • For property tax purposes, leased fee and fee simple are different. Don't assume a leased fee sale will also represent the value of the fee simple. If they are the same amount, it's coincidental.
  • Some rents are functions of financing, others are a function of market. Financing rents are prevalent in build-to-suit and sale-leaseback arrangements. If financing rents are equal to market rents, it's coincidental.
  • Remember, the value of the property to the taxpayer is irrelevant. The only relevant issue is what buyers are willing to pay for the property. If the amount a buyer would pay to buy a property equals the taxpayer's investment in it, it's coincidental.

An experienced property tax professional can help with the factual and legal arguments raised here. As a taxpayer, don't let coincidence or other irrelevant issues become the basis for a property's real estate value.

TerrillPhoto90Linda Terrill is a partner in the Leawood, Kansas law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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