" Few U.S. markets are stable these days, however. In today's economic tumult, a property's leased fee position—its value based on contract lease rates—may not reflect current, dire market conditions that can bring down its taxable value..."

By Mark Maher, Esq., as published by Commercial Property Executive, September 2010

Many states assess commercial property on a fee-simple basis, using market rents and vacancy rates to calculate a property's potential income and value. That may work in a stable market, where multi-tenant properties have rent rolls that continually turn over and are consistent with market rents.

Few U.S. markets are stable these days, however. In today's economic tumult, a property's leased fee position—its value based on contract lease rates—may not reflect current, dire market conditions that can bring down its taxable value. It's more important than ever to educate the assessor to the realities of leasing in 2010.

In many cases, the data in the rent roll don't convey the full story of a property's performance. Tenants may be missing payments or be late in meeting their obligations. Some spaces might be rented but physically vacant as companies close sites and consolidate operations. This "shadow space" that is leased but unoccupied reduces the appeal of the rest of the property to potential new users. Worse yet, shadow space is often available for sublease and directly competes with the landlord for tenants, usually at attractively low rates.

Another common source of overvaluation by assessors is published asking rental rates, which many jurisdictions equate to market rates. Such information is easily available and busy assessors often revert to it as a starting point for valuing properties.

The property owner's leasing team is the best source of information to establish the new, lower market rents that will produce an assessment in line with true value. The taxpayer can build a case by providing examples of tenants signing leases for low rent, but that task may prove challenging because few tenants are currently taking new space.

As an alternative, property owners can marshal anecdotes of failed leasing efforts in order to counter asking-rent data. Lost and dead leasing deals need to be detailed so that assessors can place themselves in the property owner's shoes.

Remember that few assessors have experienced a precipitous downturn before. It's in the taxpayer's best interest to educate assessors on the realities of leasing in a down market.

Mark Maher is a partner in the Minneapolis-based law firm of Smith Gendler Shiell Sheff Ford & Maher, the Minnesota member of American Property Tax Counsel (APTC), 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..

"Assessors are in a tough position, because they're looking at what has happened and trying to apply it to their next assessment. Events change quickly, and it's hard for them to keep up," said Maher. "You have to illustrate that there's been a market shift that is either affecting this property individually or other like property types. You try to negotiate and reach settled solutions. That's sometimes more of a process now."

APTC member, Mark Maher of Smith Gendler Shiell Sheff Ford & Maher was quoted in the article by Dan Hellman, as published by Minnesota Lawyer, July 2008.

Tax Court has seen a big influx of filings this year. In some pockets of Minnesota, the real estate market is finally starting to stabilize. But that doesn't erase the fact that the last two years have seen ever-increasing foreclosure rates - and plunging property values - throughout the state. County assessors have struggled to keep up with the declining market, but in many cases have fallen behind. Predictably, the number of property owners unhappy with their assessments has skyrocketed - and that's meant increased work for real estate attorneys, assessment appeals boards and the place where many such disputes end up: Minnesota's Tax Court. "We're feeling a little bit stretched," said Tax Court Chief Judge George W. Perez. "There's more trials, more motions, more hearings -just generally more work." "We're filing a relatively high number of cases," said Mark Maher, an attorney with Smith Gendler Shiell Sheff Ford and Maher in Minneapolis. "The whole economic slowdown is having an effect on properties' ability to maintain occupancy, and that leads to lower assessments."

Perez said this is the first time in his 11 years with the Tax Court that he's anticipated such a rise in property-related appeals.

At this point, we're coping -we're built to handle these fluctuations," he said. "But we'll see more of an increase before we see a decrease." The last resort The assessment appeals process is designed to funnel only the most disputed cases to the Tax Court, which devotes about one-third its caseload to property-related appeals. Most assessment appeals are dealt with at the municipal or county level, going to a local board of appeal, or heard at an "open-book" meeting for taxpayers, usually held at city council meetings. Those meetings are designed to give the property owner enough information about what went into the assessment so that, ideally, he or she leaves satisfied with the valuation.

If that doesn't happen, the property owner can request that the county do an on-site reappraisal of the property. The next step is to file an appeal, via the county, either to the small-claims division of the Tax Court (reserved for farms, single-dwelling residential properties and other properties valued at less than $300,000), or to the Tax Court proper. From there, a small handful of cases - no more than a few per year, according to Perez - go to the Minnesota Supreme Court.

Even with that system in place, the Tax Court will have its work cut out for it as appeals start coming in. Perez said that from Hennepin County alone, in the coming year the Tax Court will see 1,240 assessment appeals, up from 992 in 2007.

Hennepin is the only Minnesota county that has provided the Tax Court with final figures reflecting how many appeals will be coming their way, but Perez said he and fellow Tax Court judges Sheryl A. Ramstad and Kathleen H. Sanberg expect that the uptick will be about the same - about 25 percent - from Minnesota's other 86 counties.

"Usually there's a little bit of a lag between what happens in the marketplace and what we see in the court system," Perez said. "We're just seeing the beginnings of it. The numbers are starting to increase. When the economic news is poor, our caseload increases."

Residential spike is on the way Most assessment appeals filings that are pushed to the Tax Court are from the industrial-commercial sector, said Tom May, director of assessment for Hennepin County. And while this year's level of Tax Court appeals is unusual, it's hardly unprecedented. "We've been up that high before," May said. "In 2003 we had 1,253, and in 1992 there were more than 3,100. It goes up and down with the commercial-industrial market." May said he expects figures from the commercial-industrial market to hold steady, but that the Tax Court could see more filings in the future from owners of large rental and other residential properties. "Most of the impact that you're seeing in the residential market now will be reflected in 2009 assessments," he said. "At the county level, we will probably have a few more calls and a few more appeals next spring."

Bruce Malkerson, an attorney with Malkerson Gilliland Martin in Minneapolis, said a significant amount of assessment appeals and further litigation is likely to come from owners of both standalone vacant lots and multiple vacant lots that were bought with an eye toward development that never took place. "Generally, those properties have gone down in value, and there is an increase in tax appeal cases in all of those categories," he said. "If assessors don't keep up with the market, more people will appeal their assessed valuations out of necessity. In most locations, I think values will stay flat or go down further." Malkerson commented that an increase in assessment appeals could start to emerge from valuations going back as far as 2006. "The market for single-family residential land was already showing itself to have problems at that point," he said.

A balancing act for assessors Maher said that in many cases, appeals come from funds or institutional investors who two or three years ago acquired clusters of properties whose assessed value hasn't kept pace with what it has cost to keep and maintain the properties.

Part of the job of property owners - and their attorneys - is to avoid Tax Court by working with assessors to understand the context in which the value of certain properties might rise and fall. "Assessors are in a tough position, because they're looking at what has happened and trying to apply it to their next assessment. Events change quickly, and it's hard for them to keep up," said Maher. "You have to illustrate that there's been a market shift that is either affecting this property individually or other like property types. You try to negotiate and reach settled solutions. That's sometimes more of a process now."

Part of what leads to assessment disputes is that assessors have to be part historian and part soothsayer, said May. They have to be aware of past market cycles, and try to predict when they'll come back around. How successful they are at making those educated guesses will have an impact on how many assessment appeals make their way to the Tax Court in 2009. But Perez is expecting another spike. "What's really going to be interesting will be next year," he said. "My guess is that with the way the housing market is going, the number of filings is going to increase again."