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Oct
23

How to Avoid Excessive Property Taxes

Knowing what to look for in monitoring your assessments can help avoid over taxation.  

By Gilbert D. Davila

As robust occupancies and escalating investor demand in many markets drive up property tax bills for multifamily housing, apartment owners must continue to monitor their assessments to avoid overtaxation. Knowing what to look for can ease this task, and the place to start is with a firm grasp of the assessor's methodology.

Many taxpayers are unaware that assessors typically use a mass appraisal technique to derive assessments without referencing or even collecting details about a property's unique characteristics or performance. Property owners who understand the mass appraisal procedure have a distinct advantage in identifying assessment errors, and this knowledge can inform the apartment owner's arguments when they choose to fight excessive valuations.

Rooted in Generalities
The burden on appraisers to generate thousands of property values, often annually, is colossal. For this reason, assessors determine most market values for assessment purposes through mass appraisal, which is the process of valuing a group of properties as of a given date using common data, standardized methods, and statistical testing. Assessors using mass appraisal rely upon valuation equations, tables, and schedules developed through mathematical analysis of market data.

Mass appraisal analysis begins with assigning properties to classes or strata based on highest and best use. Valuation models are created for defined property groups, such as industrial or office, and are then calibrated to reflect the market factors for that specific market or submarket.

The International Association of Assessing Officers (IAAO) sets mass appraisal standards for assessors, by which an assessor can appraise the fee simple interest in property at market value. These standards set the preferred methods for mass application of the three traditional approaches to value (cost, sales comparison, and income). Armed with this information, apartment owners can attack mass appraisal procedures that result in values that don't reflect a property's true market value.

Property Data Errors
IAAO standards dictate that valuation models should be consistently applied to property data that are correct, complete, and up-to-date. However, assessor records commonly contain errors relating to a property's age, total square footage, net leasable area, number of apartments, unit mix, and facility amenities. An error in one of these fundamental property characteristics can significantly increase a property's overall assessment.

When arguing errors in specific property data, apartment owners should be prepared to share a current rent roll with their assessor in order to document the property's square footage, net leasable area, number of units, and unit mix. It may also be helpful to provide the assessor with copies of the property's most recent marketing materials, which show the project's various floor plans and amenities. Finally, pointing out land-size discrepancies or external nuisances such as traffic or airport noise can be helpful in arguing for lower values.

Income Approach
Assessors typically use the income approach in valuing apartments. Mass appraisal application of the income approach begins with collecting and processing income and expense data gathered from the marketplace. Appraisers then compute normal or typical gross incomes, vacancy rates, and expense ratios to arrive at a net income that is capitalized using a market-driven cap rate. This approach is often problematic because it fails to take into account a property's unique economic performance in a dynamic market.

Perhaps the best defense against excessive appraisals is to attack an assessor's mass appraisal income pro forma. Apartment owners should distinguish their property's rental rates and expense ratios from market data by providing current and prior-year operating statements if the numbers support a value reduction. Assessors often overestimate rent and underestimate expenses.

Owners should also provide occupancy reports to portray the property's occupancy trends, compare the property's occupancy level with market comparables, and outline any concessions and allowances the owner provides renters to maintain occupancy. The standardized vacancy and collection loss factor used in a mass appraisal income approach rarely captures the true physical and economic occupancy of a project.

Finally, owners should refute cap rates derived from sales of properties that aren't comparable to the subject.

Mass appraisal is a necessary evil that apartment owners should guard against. Knowing how assessors apply the procedure will help taxpayers in their continued fight to reduce property taxes.


Gilbert Davila is a partner in the law firm of Popp Hutcheson PLLC , the Texas 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.
Apr
11

Look Beyond Price to Cut Property Taxes

The Purchase amount isn't necessarily a valid proxy for taxable value.

Multifamily Property owners and Appraisers are often creatures of habit. They generally calculate a property's value for tax purposes the same way they do for an investment. If an apartment complex recently traded for 10 million, the buyer's appraiser may reason that the property would be assessed at $10 million for taxation purposes.

This line of thinking is particularly common in states that use market value as the standard and where the purchase price was based on an appraisal. While this approach might be reasonable for budgeting worst-case tax accruals, such thinking could result in missed opportunities to reduce the actual tax burden on the property.

PERMISSIBLE APPROACHES TO VALUATION VARY

There are several reasons a property's investment value, or even its market value, might differ from its value for tax purposes. Such considerations include whether the acquisition or investment value includes non-real estate items such as personal property, or intangibles such as long-term leases. Taxpayers should closely examine all of those issues to ensure that only taxable property is being assessed (and, then, at the correct value).

There's another,often-overlooked dimension of savings available to many taxpayers, in the form of seemingly hidden tax benefits conferred by statute. Indiana, for example, has a number of assessment statutes that dictate specific approaches to determining taxable value, depending on the type of property at issue. One property type receiving this unusual valuation treatment is apartment or multifamily rental properties.

Even as investors continue to bid up asking prices in the marketplace, Indiana law requires apartments to be assessed at the lowest valuation determined by applying the three standard approaches to valuation: cost, sales comparison, and income. This means owners and appraisers would miss the mark in estimating the taxable value of apartments or multifamily rental proper­ties if they applied only the typical approaches used to evaluate a property's investment value or market value.

The Indiana Board of Tax Review has issued several decisions confirming this mandate. One such case, Merrillville Lakes DE LLC v. Lake County Assessor, involved a taxpayer challenging his 2010-2014 assessments for an apartment complex in Merrillville, Ind. Both the assessor and the taxpayer presented appraisals at the administrative hearing, but only the taxpayer relied on the specific apartment-valuation statute to develop his opinion of taxable value. The board rejected the assessor's appraisal.

Based on the statutory code and the appraisal in the Merrillville Lakes case, the Indiana Board of Tax Review ultimately lowered the assessed value of the apartment complex for each contested year based on the taxpayer's cost analyses. Because the statute dictates that the lowest of three approaches determines the tax value, even if the owner had purchased the property for far more than the cost-approach indication of value, the board couldn't have increased the value to the higher sales price.

DUE DILIGENCE CAN YIELD SAVINGS

While it may seem like common sense to assume that a property's purchase price is a valid proxy for its taxable value, as the Indiana ruling shows, that's not always the case. A little due diligence could result in a lower valuation and, with that, significant savings.

David A. Suess is a partner in the Indianapolis office of the law firm Faegre Baker Daniels, the Indiana 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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