Rather than simply redevelop existing buildings to suit their needs, the build-to-suit model calls for the development and construction of new buildings that match the trade dress of other stores in a national chain. Think CVS pharmacy, Walgreens and the like...

By Michael P. Guerriero, Esq., as published by Rebusinessonline.com, March 2012

The build-to-suit transaction is a modern phenomenon, birthed by national retailers unconcerned with the resale value of their properties. Rather than simply redevelop existing buildings to suit their needs, the build-to-suit model calls for the development and construction of new buildings that match the trade dress of other stores in a national chain. Think CVS pharmacy, Walgreens and the like. National retailers are willing to pay a premium above market value to establish stores at the precise locations they target.

In a typical build-to-suit, a developer assembles land to acquire the desired site, demolishes existing structures and constructs a building that conforms to the national prototype store design of the ultimate lessee, such as a CVS. In exchange, the lessee signs a long-term lease with a rental rate structured to reimburse the developer for his land and construction costs, plus a profit.

In these cases, the long-term lease is like a mortgage. The developer is like a lender whose risk is based upon the retailer's ability to meet its lease obligations. Such cookie-cutter transactions are the preferred financing arrangement in the national retail market.

So, how exactly does an assessor value a national build-to-suit property for tax purposes? Is a specialized lease transaction based upon a niche of national retailers' comparable evidence of value? Should such national data be ignored in favor of comparable evidence drawn from local retail properties in closer proximity?

How should a sale be treated? The long-term leases in place heavily influence build-to-suit sales. Investors essentially purchase the lease for the anticipated future cash flow, buying at a premium in exchange for guaranteed rent. Are these sales indicators of property value, or should the assessor ignore the leased fee for tax purposes, instead focusing on the fee simple?

The simple answer is that the goal of all parties involved should always be to determine fair market value.

Establishing Market Value

Assessors' eyes light up when they see a sale price of a build-to-suit property. What better evidence of value than a sale, right?

Wrong. The premium paid in many circumstances can be anywhere from 25 percent to 50 percent more than the open market would usually bear.

Real estate is to be taxed at its market value — no more, no less. That refers to the price a willing buyer and seller under no compulsion to sell would agree to on the open market. It is a simple definition, but for purposes of taxation, market value is a fluid concept and difficult to pin down.

The most reliable method of determining value is comparing the property to recent arm's length sales, or to a sale of the property itself. It is necessary to pop the hood on each deal, however, to see what exactly is driving the price and what can be explained away if a sale is abnormal.

Alternatively, the income approach can be used to capitalize an estimated income stream. That income stream is constructed upon rents and data from comparable properties that exist in the open market.

For property tax purposes, only the real estate, the fee simple interest, is to be valued and all other intangible personal property ignored. A leasehold interest in the real estate is considered "chattel real," or personal property, and is not subject to taxation. Existing mortgage financing or partnership agreements are also ignored because the reasons behind the terms and amount of the loan may be uncertain or unrelated to the property's value.

Build-to-suit transactions are essentially construction financing transactions. As such, the private arrangement among the parties involved should not be seized upon as a penalty against the property's tax exposure.

Don't Trust Transaction Data

In a recent build-to-suit assessment appeal, the data on sales of national chain stores was rejected for the purposes of a sales comparison approach. The leases in place at the time of sale at the various properties were the driving factors in determining the price paid.

The leases were all well above market rates, with rent that was pre-determined based upon a formula that amortizes construction costs, including land acquisition, demolition and developer profit.

For similar reasons, the income data of most build-to-suit properties is skewed by the leased fee interest, which is intertwined with the fee interest. Costs of purchases, assemblage, demolition, construction and profit to the developer are packed into, and financed by, the long-term lease to the national retailer.

By consequence, rents are inflated to reflect recovery of these costs. Rents are not derived from open market conditions, but typically are calculated on a percentage basis of project costs.

In other words, investors are willing to accept a lesser return at a higher buy-in price in exchange for the security of a long-term lease with a quality national tenant like CVS.

This is illustrated by the markedly reduced sales and rents for second-generation owners and tenants of national chains' retail buildings. Generally, national retail stores are subleased at a fraction of their original contract rent, reflecting pricing that falls in line with open market standards.

A property that is net leased to a national retailer on a long-term basis is a valuable security for which investors are willing to pay a premium. However, for taxation purposes the assessment must differentiate between the real property and the non-taxable leasehold interest that influences the national market.

The appropriate way to value these properties is by turning to the sales and leases of similar retail properties in the local market. Using that approach will enable the assessor to determine fair market value.

Michael Guerriero is an associate at law firm Koeppel Martone & Leistman LLP in Mineola, N.Y., the New York state member of the American Property Tax Counsel. Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it..

"The tax cap is an old device that's found new life in these hard times..."

By Michael P. Guerriero, Esq., as published by Commercial Property Executive, March 2011.

The recession has left its mark on the budgets of state and local governments nationwide. Revenue shortfalls have forced states to slash their budgets and, oftentimes, withdraw state aid pledged to local governments.

Cities, towns and school districts are now forced to raise property taxes, their main (and sometimes only) revenue source. Struggling with escalating tax burdens, taxpayers cry out to their elected representatives to put a lid on the always rising local property tax and support property tax cap initiatives.

The tax cap is an old device that's found new life in these hard times. At the forefront of tax cap initiatives is newly elected Gov. Andrew Cuomo of New York, who proposes to limit the property tax dollars a school district can collect annually. The bill passed the New York State Senate and now must pass the State Assembly.

New York's bill caps tax growth at 4 percent or 120 percent of the inflation rate, whichever is less. School districts may exceed the cap with voter approval, but voters can impose an even stricter cap or bar increases entirely.

Roughly 40 states have some kind of property tax restriction. Arizona, Idaho, Kentucky, Massachusetts and West Virginia have a fixed cap of 5 percent or less. Colorado, Michigan and Montana limit growth to the inflation rate; while California, Illinois, Missouri, New Mexico, South Dakota and Washington limit growth to the lesser of a fixed percentage or the inflation rate.

Tax cap advocates say a cap forces school districts to cut wasteful spending while causing little to no harm.

Critics note that a cap simply slows down the rate of tax increases and does little to change the main drivers behind high property taxes. For example, caps cannot slow increasing costs for health care or fuel, nor do caps lessen demand for essential public services.

History has shown that tax caps simply shift the burden of funding schools to other sources, such as income tax, sales tax, fees and state aid. The bottom line is, a tax cap simply places a lid on the problem and kicks the can down the road for others to deal with.

Michael Guerriero is an associate at the law firm Koeppel Martone & Leistman LLP in Mineola, N.Y., the New York State 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..

States moving to address proper valuations of LIHTC projects

"The cost approach calculates the expense of replacing a building with a similar one. That doesn't work in this context because without the tax credit subsidy, LIHTC projects could not be built in the first place..."

By Michael Martone, Esq., and Michael P. Guerriero, Esq., Affordable Housing Finance, September 2010.

An unfair property valuation by a local tax assessor can cripple the operation of a low-income housing tax credit (LIHTC) operation. Unfortunately, the inconsistency and uncertainty of how assessors value completed developments is a common impediment to financing LIHTC projects.

Without guidance at the state level, local assessors may value projects without consideration of the regulations that encumber the property and limit its income producing potential. Tax assessments based upon the highest use, rather than the actual use, of the property can even prevent development altogether.

The majority of states base their property tax valuations on fair market value. Typically, assessors value real estate by one of three methods—the market approach, the cost approach, or the income approach—and each presents challenges in relation to LIHTC assets.

The market approach of analyzing comparable sales is difficult to apply because there exists no market of tax credit property transactions to rely upon.

The cost approach calculates the expense of replacing a building with a similar one. That doesn't work in this context because without the tax credit subsidy, LIHTC projects could not be built in the first place.

The income approach is generally favored when valuing income-producing property, such as an apartment building that generates a cash stream of paid rent. However, conflict exists over whether to value the property based upon estimated market rents or the actual restricted rents that are inherent in an LIHTC operation.

For example, in New York, just as in many states, there existed no clear statutory guidance or case law to provide a uniform method of assessment for affordable housing. Many times assessors took the position that these properties should be assessed on an income basis as though they operated at market rents. The result was inflated property tax bills based on market rents that LIHTC projects cannot charge due to rent restrictions.

State legislation has slowly matured in this area. In 2005, New York became the 14th state to address the proper valuation of LIHTC properties. Other states that have passed legislation adopting a uniform method of assessment include Alaska, California, Colorado, Florida, Georgia, Illinois, Indiana, Iowa, Maryland, Nebraska, Pennsylvania, Utah, and Wisconsin.

New York's Real Property Tax Law directs local assessors to use an income approach that excludes tax credits or subsidies as income when valuing LIHTC properties.

To qualify, a property must be subject to a regulatory agreement with the municipality, the state, or the federal government that limits occupancy of at least 20 percent of the units to an "income test." The law requires the income approach of valuation be applied only to the "actual net operating income" after deduction of any reserves required by federal programs.

The New York statute is representative of other states, such as California, Illinois, Iowa, Maryland, and Nebraska.

Maryland's tax code states that tax credits may not be included as income attributable to the property and that the rent restrictions must be considered in the property valuation.

Likewise, California mandates that "the assessor shall exclude from income the benefit from federal and state low-income tax credits" when valuing property under the income approach.

However, there are still many states without legislation, leaving the valuation of these projects to the whims of a local assessor who may not understand the intricacies of an LIHTC project.

Michael Martone is the managing partner of law firm Koeppel Martone & Leistman LLP in Mineola, N.Y. Michael Guerriero is an associate at the firm, the New York member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Michael Martone can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"Taxpayers are left to rely on the courts to compel assessors to value golf courses by present use and condition only..."

By Michael Martone, Esq., and Michael P. Guerriero, Esq., National Real Estate Investor, September 2010

A battle is raging in New York and across the country between assessors and taxpayers at odds over the market value of golf courses and their associated membership clubs.

The front lines in this conflict are clearly demonstrated in Nassau County, N.Y., home to 400 overlapping tax districts and a population suffering the highest taxation burden in the state. The recession and nationwide decline in property values for golf courses have pushed many clubs into severe financial straits as thinning rosters force them to lower dues or scrap fees.

One prominent Long Island club recently sold to a developer. Another declared bankruptcy, and surviving golf courses are fighting to avoid similar fates. Closures outpace new openings as demand for golf declines and revenue growth remains flat in the face of rising costs especially property taxes.

Exacerbating the tax problem are assessors who turn a blind eye to the economic forces threatening the survival of private clubs, and who instead pay undue attention to alternative land uses. Taxpayers are left to rely on the courts to compel assessors to value golf courses by present use and condition only.

In most all cases a golf course sells for a price that includes its business operation and personal property, but only the value of the real estate may be considered in setting the property tax assessment.

Development factor

Many courses are bought and sold for their development potential, grossly inflating values. Where developable land is at a premium, reliance on comparable sales could tax private golf courses from existence. The cost approach, too, is generally reserved for specialty property.

For these reasons, courts require the assessor to value the private golf course based on its value in use when employing the income capitalization approach. With this approach, a not-for-profit private club is valued as if it were a privately operated, for-profit, daily fee operation.

The courts tend to determine a golf course's income stream by capitalizing the amount a golf operator would pay a property owner as rent for the course. They use this methodology because golf course operators typically pay a percentage of gross revenues as rent. That amount can be capitalized to arrive at a value. The capitalization of golf rent to value is a hotly litigated issue and influences the percentage rent to be used.

Conflicting formula

Rents for golf course leases are influenced by differences in tax burdens from one location to the next. Similar golf courses operating under a similar operating basis, yet in differing locations with disparate tax burdens, must be equalized to arrive at a fair and uniform tax value. In a recent case, the court sought how best to keep the influence of high tax burdens from unfairly distorting value.

In that case, the assessor preached the application of an ad-hoc, subjective adjustment to the percentage rent to reflect a greater or lesser tax burden. This approach assumes the rental amounts would be triple-net. In a triple-net lease the tenant pays the real estate taxes, and the percentage rent is adjusted to reflect local taxes on a case-by-case basis.

The taxpayer offered another, more reliable method, the "assessor's formula". This formula lets the assessor follow the law, which calls for like-kind properties to be equally and uniformly assessed. The formula takes into account the income stream, the cap rate and the tax rate.

For example, consider two identical properties a city block apart, but in separate tax districts. One district has high tax rates, and the other a low tax rate. Because the assessor's formula weighs all three elements used to arrive at market value, it produces fair tax assessments as opposed to a subjective adjustment that is not computed on a scientific basis.

The accompanying chart shows the difference in assessments when the assessor's formula is used instead of an ad hoc, subjective tax adjustment. The assessor's formula provides a superior method that both assessor and taxpayer can rely on.

Michael Martone is the managing partner of law firm Koeppel Martone & Leistman LLP in Mineola, N.Y. Michael Guerriero is an associate at the firm, the New York member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. They can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and This email address is being protected from spambots. You need JavaScript enabled to view it..