The perceived similarity between condominiums and timeshare projects often leads tax assessors to treat those properties as identical.  “If it looks like a duck, quacks like a duck and walks like a duck, then it probably is a duck,” right?

But when it comes to property assessments for taxation, looks can be deceiving.  Fundamental differences between timeshares and condominiums can lead to significantly divergent value calculations.  All too often, it falls to the taxpayer to see that the assessor acknowledges and accounts for those factors in order to accurately assess timeshare properties.

In 2015, an assessor increased the assessment for a timeshare project at a Utah ski resort by 10 percent from the previous year.  The property owner appealed the assessment and provided evidence of the project’s fair market value.  The assessor challenged that evidence, however, based in part on an increase in sale prices for condominiums during previous years.

Under Utah law, the value of a wholly-owned condominium does not provide a meaningful comparison to the value of a timeshare project for several reasons.  First, such a comparison assumes that units within a timeshare project could be resold as wholly-owned condominiums.  This is impossible, given the legal structure of timeshare properties.  Once a timeshare project is put into place, it cannot be altered.  Unlike condominiums, individual units can never be sold.

Although the Utah assessor identified a 30 percent increase in per-unit condominium sale prices near the project, there was not a similar 30 percent increase in timeshare sales.  The only consistent figure shared by timeshares and condominiums each year is the number of units subject to foreclosure.

Second, treating timeshares like condominiums fails to take into account the costs associated with operating a timeshare project.  Utah law recognizes that timeshares are significantly different from condominiums and requires assessors to exclude costs that are unique to timeshare properties.

Specifically, those factors include any intangible property and rights associated with the acquisition, operation, ownership and use of the timeshare interest or timeshare estate.  The assessor must also exclude fees and costs associated with the sale of timeshare interests and timeshare estates that exceed those fees and costs normally incurred in the sale of other similar properties.  Other excluded costs include the operation, ownership and use of timeshare interests and timeshare estates, vacation exchange rights, vacation conveniences and services, club memberships and any other intangible rights and benefits available to a timeshare unit owner.

Sales commissions for timeshares are typically about 18 percent, whereas sales commissions for condominiums are closer to 6 percent.  Because the law requires an adjustment for costs and fees which “exceed those fees and costs normally incurred in the sale of other similar properties,” the property owner is entitled to remove the excess 12 percent portion of commissions.

There are other fees and costs for operating a timeshare that, by law, may be deducted from the value.  Those fees and costs may be difficult to identify or to allocate to individual units, but would include fees and costs for customer service, management costs necessitated by the existence of numerous owners, accounting and similar expenses.

A third distinction is that the assessor may need to make a personal property adjustment for timeshare property.  In Utah, the personal property of timeshares is separately assessed and, to avoid double taxation, must be excluded from the real property assessment.  In the pending Utah appeal, the assessing county challenged the property owner’s proposed personal property adjustment because it exceeded the reported value for the project’s personal property tax assessment.

In Utah, personal property assessments reflect depreciation schedules, which are rough estimates of the depreciated value of certain classes of personal property.  When those schedule-based values diverge from fair market value, an adjustment removing the fair market value of that property (for purposes of the real property assessment) will not perfectly correspond to the personal property tax assessment.  Nevertheless, a fair market value assessment of the timeshare property should include an appropriate adjustment for personal property which is otherwise taxable.

Timeshare units are simply incomparable to wholly-owned condominiums.  Under Utah law, the most appropriate way to value timeshare units is to look at sales of similar timeshare units, making adjustments consistent with the tax code.  Laws in other states may require similar adjustments.

When reviewing local assessments of timeshare properties for comparison, be aware of the distinctions between condominiums and timeshares, and ensure that proper adjustments were made in each.  If those timeshare assessments are comparable to assessed values of condominiums, then the assessor likely neglected to account for the unique characteristics and expenses associated with timeshares.

Pamela B. Hunsaker serves as counsel in the Salt Lake City office of law firm Holland & Hart and is a Montana, New Mexico, Utah and Wyoming 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..

Pamela B. Hunsaker serves as counsel in the Salt Lake City law office of Holland & Hart and is a Montana, New Mexico, Utah and Wyoming member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reched at This email address is being protected from spambots. You need JavaScript enabled to view it..

The music continued to play in 2015 for the white-hot multifamily market, as many investors saw rents and occupancies climb higher and cap rates fall. Sales of apartment projects still under construction remain commonplace. Record-high sales prices seem to be the norm.

Accompanying the high prices, however, are rapidly increasing property tax valuations. Multifamily investors should be prepared for such increases, and be ready to combat overassessments. All multifamily investors should also be aware of the myriad property tax issues associated with the development, purchase or sale of their particular project.

The amount of attention property owners pay to property taxes often depends on the investor's specific situation. For instance, property taxes may indeed be the most pressing concern for a long-term owner of an apartment complex who receives a tax notice 50 percent higher than the previous year's bill, based on a lofty sales price paid for a new project down the road. Not only does this investor have to compete for tenants against a new development with better amenities; he or she now has to pay more in taxes because of that same development, effectively slashing the property's net operating income.

On the other hand, a developer might be preoccupied with his own, more immediate concerns, such as site selection, construction schedules and financing. Even so, the developer should be mindful of important property tax considerations: Are there property tax incentives available, such as affordable-housing exemptions, brownfield abatements and many others? What is the valuation date for assessment purposes? How do assessors assess the value of construction in progress? Will a change in use trigger any roll-back taxes, or increase the tax rate?

Careful property tax planning is of vital importance to purchasers of multifamily properties. A purchaser of a newly constructed apartment complex must determine how an assessor will value the property after closing. Will the assessor base the value on construction costs, sales of comparable properties, income information or a combination thereof?

Unfortunately, some investors wrongly assume that property tax values will remain unchanged following a transaction. Although a sale will not necessarily result in a new tax value, tax assessors are increasingly trying to catch up to sales prices that exceed current assessed market values.

Underestimating property taxes at the time of the purchase can significantly reduce the investor's actual return. For that reason, a purchaser should carefully scrutinize any tax estimate based on an assessed value that is lower than the purchase price.

Purchasers of low-income housing tax credit (LIHTC) properties should consult local counsel to confirm whether the jurisdiction allows assessors to consider rent restrictions and tax credits in determining fair market value. In some jurisdictions, local tax laws may compel the assessor to value an LIHTC property much higher than the actual sales price.

In states that require the deed to show the purchase price, assessors frequently rely upon these deed amounts in determining fair market values. The declared transaction value on the deed too often includes consideration not attributable to the real property, such as value for personal property or intangibles, although assessors rarely take this into account. Similarly, assessors may not look behind a sale to consider factors that distinguish the acquisition from a market transa<.1:ion, such as an allocated purchase price as part of a portfolio sale.

As the multifamily market continues to sizzle, lower rates of return diminish the margin for error when estimating property taxes. Investors must recognize the importance of appropriate property tax planning, or risk an unpleasant surprise at tax time that could jeopardize their property's cash flow.

By consulting knowledgeable local professionals, investors can equip themselves to make better-informed decisions when estimating taxes. A seasoned tax expert can review tax notices for accuracy and fairness, and navigate any local rules and deadlines to challenge unfairly high assessments.

  Aaron D. Vansant is a partner in the law firm of DonovanFingar LLC, the Alabama 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.

There was a time when closing a real estate sale cost the seller a few hundred dollars for transfer tax stamps on the transfer deed, but those days are long gone.  Nowadays, transfer tax can be a major consideration in structuring and funding a property transaction.  And the requirements for complying with, or being excluded from, transfer taxes have multiplied.

In some markets, transfer tax can exceed the property tax burden in the first few years after an acquisition.  For example, in San Francisco the transfer tax on property transactions valued at more than $10 million is 2.5 percent of the sales price.

Historically, transfer taxes were only collected when the county recorder’s office recorded a deed.  If a transfer occurred through the acquisition of a legal entity that owned the property, and that entity continued to exist without requiring a transfer deed, then no transfer tax was owed.

Today, however, many real estate transactions occur through the buying or selling of ownership interests in legal entities which hold title to real property, and which continue to exist and hold property after the transaction has concluded.  Technically, there is an indirect change in ownership because the legal entity is now owned by a different entity or owner, even though the title for the real estate remains unchanged.

The proliferation of these indirect property transfers has spurred tax authorities to enact laws that assess transfer taxes on indirect sales.  The deed-recording process cannot capture indirect sales, so counties and cities now require buyers and/or sellers to report such transfers through other means.

The most common way of tracking indirect transfers is to align transfer tax reporting with the property tax system.  In California, for example, taxpayers must report legal entity transfers to the state Board of Equalization, which in turn reports the transfers to county assessors.  Counties and cities which collect transfer taxes on indirect sales can now access assessor databases to learn about indirect transfers in their jurisdictions.

Most transfer tax laws contain numerous exclusions.  For example, if there is a mortgage against a property, the amount financed is excluded from the purchase price when calculating the transfer tax.  Similarly, transfers of property between entities which have the same ownership percentages are excluded from transfer taxes.  A third example is the exclusion from transfer tax for marital dissolutions.

In recent years, however, tax authorities have repealed some exclusions from transfer tax. Some jurisdictions have deleted the mortgage deduction.  Likewise, gifts and transfers upon death, and transfers to non-profit entities, which were once generally excluded, are now subject to transfer tax.

The declining number of exclusions restricts a market participant’s ability to structure transactions to be exempt from transfer tax.  That task has grown only more difficult as variations in tax rules have increased between jurisdictions at the local level.

The transfer tax has traditionally been and continues to be a local tax.  Consequently, individual counties and cities determine what elements to include or not include in their transfer tax ordinances.  Transfer taxes are an attractive way for local governments to raise revenue, particularly when other sources of tax income are limited.

In California, most counties and cities operate under the traditional transfer tax laws that the state Legislature established almost 50 years ago.  But more than a dozen counties and cities have modified the transfer tax law enacted by the Legislature.  The courts have approved such changes under the home rule doctrine, which allows communities to govern themselves with laws that don’t conflict with state or federal law.

These modifications have two primary goals: The first is to impose transfer tax on indirect transfers of real property caused by changes in the ownership of legal entities.  The second goal is to repeal the exclusions that existed in the original transfer tax laws.  In addition, the modifications have often added penalties for failure to pay transfer taxes.

California, like most states, has dozens of counties and hundreds of cities, which means that buyers and sellers of real property must familiarize themselves with the specific provisions in local transfer tax ordinances.

Transfer tax compliance used to be as simple as checking a box.  But high transfer tax rates, the prevalence of indirect property sales and rising property values have increased the significance and complexity of transfer taxes in property transactions.  Awareness of tax rates, available exclusions from the transfer tax and compliance and reporting requirements is essential to maximize property value and avoiding reporting pitfalls.

Cris K. O'Neall is a shareholder at the law firm Greenberg Traurig, LLP and focuses his practice on ad valorem property tax assessment counseling and litigation.  The firm is the California member of the 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..

There was a time when closing a real estate sale cost the seller a few hundred dollars for transfer tax stamps on the transfer deed, but those days are long gone.  Nowadays, transfer tax can be a major consideration in structuring and funding a property transaction.  And the requirements for complying with, or being excluded from, transfer taxes have multiplied.

In some markets, transfer tax can exceed the property tax burden in the first few years after an acquisition.  For example, in San Francisco the transfer tax on property transactions valued at more than $10 million is 2.5 percent of the sales price.

Transfer tax scope widens

Historically, transfer taxes were only collected when the county recorder’s office recorded a deed.  If a transfer occurred through the acquisition of a legal entity that owned the property, and that entity continued to exist without requiring a transfer deed, then no transfer tax was owed.

Today, however, many real estate transactions occur through the buying or selling of ownership interests in legal entities which hold title to real property, and which continue to exist and hold property after the transaction has concluded.  Technically, there is an indirect change in ownership because the legal entity is now owned by a different entity or owner, even though the title for the real estate remains unchanged.

The proliferation of these indirect property transfers has spurred tax authorities to enact laws that assess transfer taxes on indirect sales.  The deed-recording process cannot capture indirect sales, so counties and cities now require buyers and/or sellers to report such transfers through other means.

The most common way of tracking indirect transfers is to align transfer tax reporting with the property tax system.  In California, for example, taxpayers must report legal entity transfers to the state Board of Equalization, which in turn reports the transfers to county assessors.  Counties and cities which collect transfer taxes on indirect sales can now access assessor databases to learn about indirect transfers in their jurisdictions.

Fewer exclusions, a patchwork of requirements

Most transfer tax laws contain numerous exclusions.  For example, if there is a mortgage against a property, the amount financed is excluded from the purchase price when calculating the transfer tax.  Similarly, transfers of property between entities which have the same ownership percentages are excluded from transfer taxes.  A third example is the exclusion from transfer tax for marital dissolutions.

In recent years, however, tax authorities have repealed some exclusions from transfer tax. Some jurisdictions have deleted the mortgage deduction.  Likewise, gifts and transfers upon death, and transfers to non-profit entities, which were once generally excluded, are now subject to transfer tax.

The declining number of exclusions restricts a market participant’s ability to structure transactions to be exempt from transfer tax.  That task has grown only more difficult as variations in tax rules have increased between jurisdictions at the local level.

The transfer tax has traditionally been and continues to be a local tax.  Consequently, individual counties and cities determine what elements to include or not include in their transfer tax ordinances.  Transfer taxes are an attractive way for local governments to raise revenue, particularly when other sources of tax income are limited.

In California, most counties and cities operate under the traditional transfer tax laws that the state Legislature established almost 50 years ago.  But more than a dozen counties and cities have modified the transfer tax law enacted by the Legislature.  The courts have approved such changes under the home rule doctrine, which allows communities to govern themselves with laws that don’t conflict with state or federal law.

These modifications have two primary goals: The first is to impose transfer tax on indirect transfers of real property caused by changes in the ownership of legal entities.  The second goal is to repeal the exclusions that existed in the original transfer tax laws.  In addition, the modifications have often added penalties for failure to pay transfer taxes.

California, like most states, has dozens of counties and hundreds of cities, which means that buyers and sellers of real property must familiarize themselves with the specific provisions in local transfer tax ordinances.

Transfer tax compliance used to be as simple as checking a box.  But high transfer tax rates, the prevalence of indirect property sales and rising property values have increased the significance and complexity of transfer taxes in property transactions.  Awareness of tax rates, available exclusions from the transfer tax and compliance and reporting requirements is essential to maximize property value and avoiding reporting pitfalls.

Cris K. O'Neall is a shareholder at the law firm Greenberg Traurig, LLP and focuses his practice on ad valorem property tax assessment counseling and litigation.  The firm is the California member of the 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..

Frequent reassessments benefit Pittsburgh-area property owners.

Pittsburgh-area properties are being reassessed more frequently than in the past – and that is good news for property owners.  Periodic reassessment helps to keep property assessments current with actual values and ensure that everyone pays their fair share.

Unfortunately, frequent reassessments are not the norm throughout Pennsylvania.  Pittsburgh and surrounding counties are the exception, with Allegheny County (in which Pittsburgh is located) having four reassessments in the last 15 years.  Nearby Indiana County is undergoing a reassessment now for tax year 2016, its first since 1968, and neighboring Washington County is undergoing a reassessment for tax year 2017.

Pennsylvania lacks a mandatory revaluation cycle.  A revaluation or reassessment is a thorough analysis of every property in the entire county, with the objective of bringing each property’s assessment into line with its current market value.  Revaluations are often conducted by outside firms, usually with the assistance of the local assessment office.  Occasionally, in-house assessment offices conduct reassessments.

Without a mandate to reassess, some counties go decades without a reassessment.  Rural Franklin County, for example, last reassessed in 1961.   Assessors there attempt to keep properties equalized by placing newly constructed assets on the tax rolls for what they believe the properties would have been worth in 1961.

The more time that passes, however, the more tenuous this methodology becomes.  Further, assessors are prohibited from “spot assessing,” or changing assessments on existing properties without a countywide reassessment.  Thus, as different parts of the county appreciate at different rates, the equality of assessment becomes more and more skewed.

Blair County, west of Pittsburgh, decided to undertake a reassessment for tax year 2017 after commissioning a study from the attorneys at Weiss Burkardt Kramer.  Comparing actual sales in the county to assessments, the study concluded that Blair County’s more than 50-year-old assessments do not meet the constitutional uniformity requirement.

Says attorney M.  Janet Burkardt, a partner at Weiss Burkardt Kramer: “If assessment systems are not periodically adjusted, they become regressive so that properties appreciating at a higher rate are taxed at less than their fair share, and properties appreciating at a lesser rate or those who have depreciated in value, pay more than their fair share in taxes.”

Because properties that benefit from unfairly low assessments rarely appeal those values, inequities become locked in over time.  For instance, in one county where revaluation had not occurred in decades, major office buildings were, on the whole, dramatically under-assessed.

Some under-assessed buildings paid such low taxes that they enjoyed a competitive advantage in attracting tenants.  A neighboring office building, despite paying dramatically higher taxes than its competition, had no recourse to appeal because it was also under-assessed and could not meet the test that its market value was too high.  The solution? A county-wide reassessment.

The longer a county goes between reassessments, the harder the next reassessment becomes.  First, big increases in assessments spark taxpayer outrage, tempting county leaders to push the problem off to another day.

Infrequent reassessments are also more time-consuming and expensive; reassessments in Pennsylvania usually stem from litigation, which is expensive and inefficient.  Less frequently, county leaders prompt the reassessment, as Indiana County did when it had reached the statutory cap on its tax rate.

In marked contrast, Erie County, to Pittsburgh’s north, was the first county to impose a reassessment cycle on itself.  “Our goal in reassessing is to gain uniformity and accuracy,” said Scott Maas, Erie County’s chief assessor.  “We meet with property owners informally and we welcome the opportunity to update our data and make corrections.  We want to get it right.” Maas initiated the county’s periodic reassessment cycle and oversaw the 2003 and 2013 reassessments.

Pittsburgh’s record four reassessments in 15 years followed years-long litigation in two different cases that went all the way to the Pennsylvania Supreme Court.  Ultimately, the Supreme Court ordered the reassessment.  Pittsburgh’s reassessment in 2013 sparked 100,000 appeals; for 2015, only a few thousand taxpayers appealed, demonstrating that most properties’ assessments have been resolved to the property owners’ satisfaction.  If Pittsburgh were to continue to reassess in the next three to five years, building on this fresh data and satisfactory values, the likelihood is that there would be minimal appeals year-to-year.

Frequent reassessments benefit property owners.  When the appeals process corrects errors, the data under under-lying the assessments improves and yields more accurate values in the next reassessment.  Pennsylvania law requires that reassessments be revenue-neutral, meaning that rather than local governments enjoying a windfall when assessed values increase, governments must reduce tax rates, so many property owners see a reduction in taxes when reassessments occur.

Most importantly, reassessment yields more uniform assessments.  Uniformity of assessment is required by Pennsylvania’s constitution.  When assessments are uniform, everyone pays their fair share.  Pennsylvania’s Supreme Court spoke to this in 1909: “While every tax is a burden, it is more cheerfully borne when the citizen feels that he is only required to bear his proportionate share...”

Sharon DiPaolo is a partner in the law firm of Siegel Jennings Co., L.P.A., the Ohio and Western Pennsylvania 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..

Where the value of commercial properties has failed to keep pace with local governments’ revenue needs, real estate assessors have pursued unconventional arguments and valuation methods to protect and grow the property tax base. Among those arguments and methods, assessors increasingly contend that manufacturing and other commercial properties are “special-purpose properties,” and therefore the property tax assessments on these assets should exceed the value that would result from the use of traditional market data.

While special-purpose properties certainly exist, these assessors’ arguments typically fail in three ways. First, they erroneously confuse limited-market property with special-purpose property. Second, they refuse to consider available market evidence that, even if imperfect, provides information about the value of the property. Third, even when a property is a special-purpose property, assessors often value the wrong interest, valuing more than the fee simple real estate, for example.

Wrong definition, incorrect assessments

The Dictionary of Real Estate Appraisal defines special-purpose property as "[a] limited-market property with a unique physical design, special construction materials, or a layout that restricts its utility to the use for which it was built; also called special-design property.” Thus, special-purpose property is both a limited-market property and a property having a unique physical design, special construction materials or a layout that restricts it to the use for which it was built. By definition, special-purpose properties are a subset of limited-market properties; they are not synonymous.

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A subset, not the same set

In general, special-purpose properties are a subset of limited-market properties, which are a small subset of commercial properties.

Appraisers often identify certain categories of property as special purpose, such as churches, schools, railroad stations and sports arenas. But such properties, in addition to being limited-market properties, also reflect specific evidence of unique physical design, highly restricted use and/or special construction materials.

The facts of a New Jersey case illuminate the difference between properties with special features and special-purpose properties. In Ford Motor Co. vs. Township of Edison, the New Jersey Supreme Court in 1992 concluded that an automotive manufacturing plant was a general-purpose property, even though it was constructed with heavy steel framing, paint booths, baking ovens, massive boilers, terrazzo amenities, and electrical, steam and plumbing infrastructure that exceeded normal industrial requirements. Although the property was a limited-market property, the court noted that “[a] property does not qualify as special-purpose where it possesses certain features which, while rendering the property suitable to the owner’s use, are not truly unique.”

Importantly, whether a property is special-purpose is a fact-specific inquiry, and courts rightly reject attempts to classify properties as special-purpose in the absence of evidence that the property is special-purpose. Other cases reinforcing this concept include a 2015 decision in Certain Teed Corp. vs. County of Scott, in which a Minnesota tax court rejected the contention that a shingle factory was a special-purpose property; and TD Bank vs. City of Hackensack, a 2015 case in which a New Jersey tax court rejected an argument that a bank branch is a special-purpose property.

Refusal to consider market data may lead to higher assessments

Assessors typically argue that special-purpose properties may only be valued using the cost approach; that market comparable sales may not be used to value special-purpose property, and/or that the value of the special-purpose property is so intimately tied to the property’s owner or user that the assessor must use income from business operations (as opposed to rents) to value the property.

These arguments share a flawed premise that, due to the property’s unique nature, there is simply no market data available to value the property. These arguments often fail because they conflict with real world evidence.

For example, while it may be true in a given case that there are few or no comparable market transactions for a special-purpose property, this is not an appraisal rule or point of law. That is why the Minnesota Supreme Court in 2007 reversed the decision of a tax court that had refused to consider available sales data based on the classification of the property as special-purpose. In that case, Southern Minnesota Beet Sugar Coop vs. County of Renville, the Court acknowledged that if market transactions exist and shed light on the value of a special-purpose property, it should be considered even if adjustments must be made to account for differences between the comps and the subject property.

Just as it is wrong to refuse categorically to consider market transactions when valuing special-purpose property, it is inappropriate to consider taxpayer-specific income data reflecting more than the value of the real property. For example, special-purpose manufacturing properties are seldom rented in the market. Attempting to value the real estate based on non-rental income from the manufacturing operations would produce a highly misleading estimate of value, since such income is derived from non-real estate elements such as intangibles and personal property. Examples of intangibles include an in-place work force, intellectual property and goodwill; personal property includes items such as manufacturing machinery and equipment.

Given the tenuous link between manufacturing income or business income and the value of a special-purpose property in which the manufacturing occurs, taxpayers can—and should—object to the assessor’s use of such income information to value the real property, even if it is a special purpose property.

When assessors increase assessments or defend excessive assessments by claiming that the property is special-purpose, taxpayers should request the evidence on which the classification and the valuation are based. In many cases, taxpayers will find that such assessments lack support, conflict with generally accepted appraisal practices, and should be appealed.

David Suess is a Partner in the Indianapolis law firm of Faegre Baker Daniels LLP, the Indiana member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

With apologies to Charles Dickens, a tale of two corporate office campuses underscores the fickle nature of real estate fads and the difficulty property owners face in convincing tax tribunals that standard valuation matrices may not apply in properly assessing these large, suburban properties.

Aetna’s challenge

Aetna Life Insurance Co. developed more than 1.6 million sq. ft. of corporate and computer center space together with parking garages in the early 1980s in a rural area of Middletown, Conn., spending almost $170 million in the process. In 1995, the property owner challenged the city’s $250 million market valuation.

Aetna held that the property’s highest and best use was as a multi-tenant office project, rather than as a corporate headquarters designed for its exclusive use. This argument seemed reasonable because, among other matters, the developer had built the property with large atria and excessive common areas, together with a number of special amenities such as cafeterias and recreational space which a typical office building would not contain. These amenities obviously drove up the assessor’s value, but mattered little in the market place.

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The city contended that since the property was used as a corporate headquarters, its highest and best use was its continued use for that purpose, and that regardless of its inefficient features and super adequacies, it was typical of headquarters structures. In that sense, the highest and best user, not use, determined
market value.

Key to the owner’s argument in the tax appeal was that the reproduction cost was legally suspect because it was highly unlikely that anyone would reproduce such a quirky, outmoded structure as the 20th century ended. The owner argued that the situation called for a replacement cost approach that would eliminate the inefficiencies and super adequacies of the property.

Although a Connecticut appellate court upheld the trial court’s reliance on the reproduction cost approach, when Aetna’s occupancy concluded in 2010 and the property owner was unable to find another headquarters corporate occupant, it demolished the building—albeit too late to affect the valuation case.

Union Carbide’s conundrum

Union Carbide Corp. moved to Danbury, Conn. from New York City in 1985. It selected a beautifully wooded location close to the New York border to construct an idiosyncratic, multi-level property that floated above the site in so dramatic a fashion that many of its occupants referred to the building as “Battlestar Galactica.” Faced with excessive operating costs and a declining need for such a large area under one roof, Union Carbide reduced its occupancy, but was unable to find many subtenants.

The development’s unusual qualities and its practical insufficiencies prompted a property tax appeal. The company argued, as had Aetna, that whatever the construction cost might have been, the assessor should base its campus’ market value on replacement cost and/or income analysis. The resulting value, the company maintained, was far less than the one the City of Danbury’s assessor had produced.

Here again, the court was unsympathetic, given the huge amount of money spent on development, a juicy sale-leaseback deal which had little relationship to market realities, and what was likely the prevailing view 20 years ago that cost equals value.

Value the use, not the user

A valuation that relies on a single corporate occupant or user assumes a sale to a similar occupant. That essentially converts the market-value-in-exchange analysis, which is legally required in most states, to a market-value-in-use construct.

In the second decade of the 21st century we know that these buildings are seldom re-used by single occupants. Demolishing a bad decision, as with Aetna’s Middletown campus, or subdividing the structure for multiple users as in the case of Union Carbide, is far more likely.

Reliance by local assessors on the single occupant, value-in-use theory ignores the much greater likelihood of multiple occupancy, with attendant significant renovation, subdivision and tenant improvement costs, as well as a considerable period of vacancy while the building is marketed for lease.

The Egyptian pharaohs coerced thousands of slaves to build their pyramids three millennia ago, creating the classic single-user structure in the process. While these potentates succeeded in creating their brand and in making a profound statement about their majesty and importance, both in life and in death, most corporate campus headquarters lack these qualities and must stand the test of economic utility.

That so many campuses failed is one of the dramatic real estate stories of the last 40 years or so. Owners faced with appealing the assessments of overvalued headquarters assets today should emphasize that whether or not value in use to the user was ever a valid yardstick, is utterly irrelevant today.

Elliott B. Pollack is a member and Valuation Department chairman in the law firm of Pullman & Compley LLC, the Connecticut 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.  Melton Spivak, retired, was vice president of corporate property taxes for JPMorgan Chase & Co.

Taxing jurisdictions have struggled to properly value big-box retail buildings for many years, and the potential for improperly assessing the real estate value of these buildings remains high. Yet the ongoing dance between big-box owners and assessors provide useful insights for property owners in other commercial property types, particularly industrial.

A big box of confusion

Assessing the taxable value of a big-box retail property touches on many of the hot-button issues in property tax law. Some of the circumstances that often lead to incorrect tax assessments include development of big-box retail under build-to-suit arrangements, in which the tenant’s rent is a contractual repayment of the developer’s costs, rather than a market-rate rent. Big-box tenants are often creditworthy national companies under absolute net leases, valuable to a potential investor as a guaranteed income stream, but irrelevant to taxable value of the real estate.

The sale/leaseback transactions that big-box retailers often enter to free up capital for business operations, and the strong investor demand to buy buildings leased on a net basis to a single user that handles all property expenses, can all lead to incorrect tax assessments. Many assessors value the wrong interest, confused over whether to reflect investment value, leased-fee interest, fee simple interest, or value in use versus value in exchange.

The potential for improperly capturing non-taxable items in the property tax assessment is high. Often assessors and appraisers lack sufficient education about the nuances of valuing these types of properties. Depending on whether a tax assessor adopts the correct methodology, the difference in both value and tax liability can be significant. And for cash-strapped governmental entities, there is a strong inclination to try to capture as much taxable value as possible.

Implications beyond retail

Owners of non-retail property types shouldn’t dismiss these valuation issues as pertaining only to big-box retailers. Consider the potential for similar valuation errors with other single-tenant properties developed and exchanged in a similar way. A corporate headquarters building with “superadequacies” - or features only valuable to that particular tenant - is particularly vulnerable to overvaluation, for example.

In Ohio, the state tax appeal board recently dealt with that scenario, related to a large industrial building. The property was constructed to a national bank tenant’s unique specifications for its use as a data center, with gated entrances, impact-resistant windows, raised floors with subfloor cooling, battery backup rooms, and fire-suppression systems. The tenant had specific security needs based on its use, and had the building constructed to protect servers from weather events.

The two expert appraisers involved in the case concluded to drastically different overall values. One appraiser viewed the building as used for general office or warehouse space, and did not perform a cost -approach analysis because of the large degree of economic obsolescence related to a single-tenant industrial building used as an operations center.

The other appraiser posited that the building was unique, rather than tailored to the use of that particular tenant. That conclusion led the appraiser to use out-of-state sales for comparison in his analysis and to develop a cost approach. The resulting difference in the conclusions of value was $8.38 million, and the appeals board adopted the higher value.

According to the current appeal pending at the Ohio Supreme Court, more than half of the property was basic office and warehouse space; and the tenant only used a small portion of the remaining space for its specific purpose: a data center.

A recent Pennsylvania case involved a large, industrial, single-occupant, mixed-use property that consisted of an office building, a conference center, and a third building used for offices, research and development, and manufacturing, all constructed at different times. Again, the value conclusions and appraisal methodologies of the experts differed significantly.

Similar to the Ohio case, one appraiser viewed the property as a special-purpose facility with a limited market. Both appraisers developed cost and sales comparable approaches to value, but the appraiser who viewed the property as special-purpose put more weight into a cost-based conclusion, while the other put more weight on his sales-comparison approach.

Unlike the Ohio case, however, neither appraiser included the replacement costs of specific features that an entity replacing the facility would consider unnecessary, such as acoustic rooms, vibration floor slabs, special piping and chilling equipment.

As in assessments of big-box properties, this divergence in appraisal methodology and the definitions of the interest to be valued led to significant gulfs in the final tax assessments. Assessors are more likely to value properties deemed to be special-purpose with primary reliance on the cost approach, with its inherent difficulties in accurately measuring all forms of depreciation and obsolescence, both functional and economic.

Traditionally, appraisers applied this special-purpose classification to properties that did not readily transfer in the open market-houses of worship, sports arenas, schools. Additionally, primary reliance on the cost approach lacks the built-in market “check” that is present when using data from actual sales and rent transactions that have occurred in the marketplace. Even if not considered as special use, improvements only valuable to the current user can be improperly included in the assessment. Rather, the assessor should measure the value-in-exchange, and avoid cherry picking data for comparables.

Avoid complacency in industrial

The U.S. industrial real estate market is booming, with Los Angeles and the Inland Empire standing out as particularly hot markets, according to Diana Golob, managing director at Hanna Commercial Real Estate in Cleveland, Ohio, who represents both U.S. and European multinational firms. Speculative development has even started to reappear in multiple markets.

Do not let the good news of a thriving market create a blind spot when it comes to reviewing property tax assessments.

In the retail context, jurisdictions are still identifying the correct interest to be valued for real estate tax purposes, and the best appraisal methods to do so. Courts, legislatures, tax assessors and independent appraisers are all grappling with these nuanced issues.

It appears that owners of single-tenant, net-leased or owner-occupied industrial properties will be dealing with similar assessment issues. The applicable assessment law is in flux and sometimes is the polar opposite from one jurisdiction to the next.

It is vital to consult with professionals, familiar with both the legal and appraisal complexities of the jurisdiction, to determine whether a property tax assessment is fair. With a few changes, an expression from psychologist Abraham Maslow is appropriate here: Do not view every assessment challenge as a nail because you only have a hammer in your belt; make sure you have the right tool - for the right assessment approach - for the job.

Cecilia Hyun is an associate attorney 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. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Commercial property owners must challenge burdensome and unfair property taxes, and more often than not that task requires challenging the assessor’s assumption of a market cap rate.

The process may begin as informal meetings with assessing authorities, followed by administrative appeals and ultimately, if needed, court proceedings. The parties to these dialogues all recognize that the preferred method to determine the value of commercial properties is the income approach, and will usually agree on the factual elements related to the value calculation.

The most critical element in the income approach is the cap rate, however, and that point is also the most likely source of disagreement.

Cap rates by nature are subject to opinion and manipulation, because cap rates reflect judgments of multiple factors. In defending their value opinion, assessors frequently cite a “market-derived cap rate.” While there is some validity to determining a cap rate from sales of similar properties in the same market, the method as widely used by assessors yields errant results.

Sometimes the assessor’s market-derived cap rate is supported by sales, but the assessor rarely provides an analysis of those sales, showing some performance history of the sold properties. The assessor simply matches market income against the sale price, magically determining a cap rate. The assessor then applies the rate thus determined to case after case, in a one-size-fits-all analysis. It’s all pretty impressive and takes on an air of finality, as if carried down from the mountain on stone tablets.

The fallacy is that a cap rate derived as described bears no relevance to the value of the commercial real estate under appeal.

The assessor, by law, is limited to valuing real property. But the sales used as the basis for the assessor’s market-derived cap rate are the sales of entire enterprises, and consequently indicate value for the entire enterprise. It fails to achieve the goal of finding a value indicator of the real property that houses the enterprise.

The cap rate derived from sales of going concerns is different from one derived from sales of the properties that the enterprises occupy.

Taxpayers must challenge the assessor’s market-derived cap rate to achieve equitable taxation. The flawed methodology is as inappropriate as using the sales comparison approach of going concerns to determine real property value.

The enterprise value cap rate is based on the return on the investment, in the form of property value appreciation and rental income, plus the return of the investment in the form of business revenue. In addition to tangible components, enterprise value entails tax-exempt intangibles such as advertising, a trained work force, market niches or dominance, furniture, fixtures, affiliation such as franchise rights, all of which must be separated from the real property component in a property tax assessment.

Real property value is just one component of enterprise value, so an assessor’s market-derived cap rate that fails to segregate non-real-estate components is useless in valuing the property.

Plan of attack

Prepare to challenge an assessment by analyzing the assessor’s data base used in the valuation. What sold, and at what sale price? Investors buy and sell commercial properties as going concerns, which may generate returns that are more or less than the return from the property alone.

Consider the design and function of the properties used in the assessor’s data base as compared to the subject property. For instance, an assessor in the Midwest recently valued a large corporate headquarters building using a market-derived cap rate. Its data base consisted of regional office building sales, including gross income at the time of sale, sales price, size and location. It used market rents to determine property income.

The assessors study used sales of fully occupied, multitenant buildings, then applied that information to a single-tenant structure which had been designed as a national corporate headquarters and was roughly 33 percent occupied. Typical of such studies, the data was inapplicable to the single-tenant, largely vacant subject building.

To say that the going concern cap rate for hotels is X, or that the rate for golf courses is Y, fails to shed light on the cap rate for the real property component of a property.

Market-derived cap rate studies invariably end up being used as indicators—at best—of the value of going concerns, of which one component may be real property. They may look impressive, even somewhat persuasive, but they must be carefully reviewed to determine just what they represent, otherwise the taxpayer may be saddled with a grossly excessive property tax assessment.

Jerome Wallach is the senior partner in The Wallach Law Firm based in St. Louis, Missouri. The firm is the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. Jerry Wallach can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..