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Property Tax Resources

May
05

A Growing Dilemma Over Tax Abatements

"States struggle to keep economic development incentives viable amid budget tightening...."

By Darlene Sullivan, Esq., CMI., as published by National Real Estate Investor, May 2011

Policy makers have long used property tax abatements and incentives to draw investment, rehabilitation and other economic development to particular locations. While the economic effects of abatements and incentives are typically positive, officials facing budget deficits at state and local levels have begun to look for ways to hold onto more of their potential tax revenues while still enticing new business and development.

It is a difficult balancing act for lawmakers, and the changes they seek vary by state. For property owners and developers considering construction, expansion, or renovation of a new facility, now is the time to study any proposed changes to incentive rules and to ensure compliance with existing incentive agreements.

In Texas, state legislators are considering revisions to several economic development incentives the state has successfully used to attract new companies. Lee Higgins, president of Austin-based Business Economic Incentives LLC, fears that a major overhaul of business incentives offered by the state would slow economic growth in the state.

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Smaller steps

To counterbalance a potential slowdown in economic growth in North Carolina, state officials are working to find ways to support projects that would not have qualified for state or local government support before the economic downturn.

For instance, in better times, companies typically would have to create 50 to 100 jobs and commit to invest $2 million to $5 million in capital expenditures before a state or local agency would show much interest in supporting a project.

Now, a company can create as few as 20 new jobs and spend less than $1 million on capital improvements and still gain the support of local government.

In addition, economic development officials in North Carolina have shown flexibility and a willingness to discuss support for projects that entice existing employers to remain in the region, especially as companies are in the process of consolidating operations across the U.S.

In North Carolina, Gov. Bev Purdue schedules public announcements when companies add as few as 15 new jobs to show her commitment to economic development, says Craig Fisher, managing member in the Charlotte, N.C. office of Tax Incentives Consultants LLC.

Many state and local economic development officials are working with companies struggling to meet job creation numbers agreed to before the slump.

Flexible programs

In the Northeast, the economic downturn has limited the amount of incentives that states can offer, but government officials have been granted freedom to exercise more creativity with programs that promote economic development.

In Massachusetts, the Economic Development Incentive Program offers a negotiated state investment tax credit and municipal tax increment financing. Once highly utilized, the program has been capped at $25 million annually as of Jan. 1, 2010.

Massachusetts has increased flexibility for the investment tax credit to equal as much as 10% of construction and start-up costs for projects in locations designated for economic development. In areas of Massachusetts not designated as economic target areas, a project that creates 100 or more jobs also is eligible to receive a 10% investment tax credit.

Scot Butcher, managing member in the Boston office of Tax Incentives Consultants LLC, says the tax credit amount may be taken as credit against future taxes or collected as a refund. The tax credit can run as high as 40% for some manufacturing projects.

The trends in Texas, Massachusetts and North Carolina signify that tax abatements and incentives are still available to property owners. To take advantage of abatement laws in their region, owners need to understand the laws governing them and stay abreast of the changes that have occurred in these laws.

DarleneSullivan140

Darlene Sullivan is a partner with the Austin law firm of Popp, Gray & Hutcheson LLP, the Texas member of the American Property Tax Counsel (APTC). 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

The Pitfalls of Sales Comparisons

"By overlooking seller financing, assessors inflate taxable values..."

By Michael Shalley - as published by National Real Estate Investor - April 2010

It's no secret that commercial real estate sales volume is down. Sales transactions of U.S. commercial real estate valued at $5 million or more totaled 3,336 for all of 2009, down 60% from the previous year, according to Real Capital Analytics (RCA).

Despite more stringent underwriting and a growing reluctance by lenders to make commercial real estate loans, buyers and sellers closed a few select deals. Today, tax assessors are using those sales as a basis to value property for 2010.

Improper conclusions by tax assessors based on these imperfect sales could result in excessive values on which property tax assessments will be based.

Only 15% of U.S. property transactions last year represented a distressed situation, but the year's deals typically reflected a decline in value from highs of the preceding five years.

Due to the scarcity of credit available for real estate purchases, assumable mortgages and seller financing emerged as the dominant means of closing transactions in 2009, according to RCA. That means that many of the past year's deals closed without the use of market-rate loans that would have pushed down closing prices.

True market value?

The prevalence of those significant price reductions, mortgage assumptions and seller financing in 2009 sales data poses a challenge for appraisers and tax assessors, and a threat to taxpayers.

If not properly adjusted for in a sales comparison approach to valuing property, these same three factors that sellers used to bolster sales may understate how far actual market values have declined.

Special financing or sales concessions often characterize transactions in depressed markets. Understanding the details behind each transaction is important for establishing a credible sales comparison approach to value at any time, but it becomes absolutely critical during volatile periods with few sales.

Suppose an assessor valuing office buildings for his tax district believes that most property values have declined, but he has a limited number of transactions to determine market value. In a review of recent sales, he sees that a 100,000 sq. ft. office building has sold for a reported $10 million, or $100 per sq. ft.

The same property sold five years ago for $12 million, or $120 per sq. ft. With no further investigation of the transaction details, the assessor concludes that office building values in the neighborhood have declined 17% in five years and are now trading at $100 per sq. ft.

The devil is in the details

On its face, the assessor's conclusion appears reasonable, but with depressed markets we must dig deeper into the details of every transaction. In this example, the use of seller financing reveals a market value that is significantly lower than the $10 million transaction price would lead us to believe.

Assume the seller provides a higher loan-to-value ratio and lower interest rate than what the market offers. This props up the sale price by $1 million.

Adjusting the sale price for below-market financing, you arrive at a market value of $9 million, or $90 per sq. ft. That represents a 25% decline, as opposed to the assessor's 17% calculation.

As RCA reported, seller financing has become one of the primary alternatives to new loans, and it usually provides below-market financing terms for the buyer. Additionally, it provides the seller with a continued investment in real estate and avoids the need for a redeployment of capital into alternative investments.

Assessors are bound by the Uniform Standards of Appraisal Practice, which require an appraiser to address whether financing terms are at, below, or above market interest rates. The assessor also must determine whether a sale reflects unusual conditions, terms, or incentives.

Most sales closed today have a story behind the deal. By uncovering the details of each transaction, you might find that an adjustment is necessary to arrive at a true market value, and those details will give you a stronger case to present to the assessor in seeking a reassessment.

ShalleyMichael Shalley is director of appeals at the Austin law firm of Popp, Gray & Hutcheson, the Texas 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..

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Apr
18

Taxes Target Green Pastures

"Property owners must stay vigilant to maintain agricultural-use status on farmland and avoid financial penalties..."

By Douglas S. John, Esq., as published by National Real Estate Investor, April 2011

Local governments are under the greatest financial stress since the Great Depression, and assessing authorities are aggressively pursuing revenue to combat these financial woes. One target in assessors' crosshairs is the preferential tax treatment of land with agricultural status.

Developers who are considering the purchase of agricultural land or holding acreage for eventual development need to be aware of the potential tax consequences. Depending on the way assessors categorize the land, the owner could face an unexpected rise in tax costs.

All states offer some tax relief for qualified agricultural property, but each jurisdiction has specific and often complex legal requirements for agricultural status. Investors in land held for future development must know the laws governing agricultural status if they hope to maintain this preferred tax position.

Most real estate is assessed at market value, which typically reflects the most probable price a buyer would pay in a competitive market. The most common benefit of an agricultural designation is that the land is assessed at use value instead of market value. Use value reflects how the property is currently used, i.e., for agriculture, rather than its highest and best use, which may be for residential or commercial development.

Eligibility for agricultural status varies by jurisdiction. The following are the major eligibility requirements.

  • Use: Typically, states require that land be actively engaged in agricultural use and used exclusively or primarily for commercial agriculture. That can include growing crops, dairying, raising and breeding livestock, or horticulture.
  • Acreage: A majority of states impose an acreage requirement to qualify for agricultural use, meaning a minimum number of acres. Qualifying acreage is typically low relative to average farm size. Some states have no minimum acreage requirement, while others allow local authorities to establish size criteria.
  • Productivity: Most states impose minimum productivity requirements. These laws vary by jurisdiction, but most require property to generate a minimum amount of annual income from farming or raising livestock. Some states average the measure of income over a period of years. Other states require that a minimum percentage of the owner's or lessee's annual income is earned from agricultural activity on the land.
  • Prior Usage: About half the states require property to be used for agricultural purposes for a period of years before it qualifies for preferential tax treatment. These laws are meant to discourage owners from changing a tract's use to take advantage of the tax benefits. Two or three years immediately preceding approval is typical.

Check for penalties

Many states impose a penalty when farmland is converted to non-agricultural use. In some states the penalty takes the form of a recapture or rollback tax, which is the difference between the taxes that would have been paid and the taxes actually paid while the land qualified as agricultural. This recapture period varies between three and 10 years.

In other states, if farmland is converted from agricultural use within a certain period after qualifying for preferential treatment, penalties are calculated based on the property's fair market value when its use changes or it is sold.

Most states require owners to periodically submit extensive information to demonstrate that the land continues to be used agriculturally. This may include IRS Form 1040F, leases, invoices and receipts, among other documents.

Each state's eligibility requirements, application process and potential penalties play a part in determining whether properties qualify for agricultural status. But a property's agricultural status can translate into significant tax savings. Local counsel may be required to navigate the complexity of obtaining or maintaining the agricultural status.

Douglas S. John is with the Tucson, Arziona law firm of Bancroft Susa & Galloway, the Nevada and Arizona member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Feb
27

Why Inflated Tax Assessments Persist

"Under most states' property tax laws, your assessment should reflect the purchasing power of a typical buyer, not that of an extraordinarily well-capitalized investor..."

By Mark S. Hutcheson, Esq., as published by National Real Estate Investor, January/February 2011

With well-capitalized buyers driving transactions, assessors routinely overstate taxable property values. Real estate investment trusts (REITs) and insurance companies are big buyers of commercial real estate these days, and their advantage in the capital markets is driving up prices. In turn, assessors are using the price data generated from these sales to institutional buyers to produce inflated taxable values for commercial properties owned by less-capitalized investors.

Assessors typically value commercial real estate using a direct capitalization income approach by dividing the property's annual net operating income (NOI) by an overall capitalization rate. The NOI can be based on the trailing 12 months or projected over the next 12 months.

Determining a proper capitalization rate, however, is often more challenging. That's especially true in this economic environment. An overall cap rate reflects the relationship between a single year's net operating income expectancy and the total property price or value.

Crux of the problem
To determine cap rates, assessors usually look to sales of comparable commercial properties. Relatively weak transaction volume since the start of the recession, however, has forced assessors to extrapolate cap rates from the small number of transactions that have occurred.

These sales increasingly involve high-priced properties sold to well-capitalized institutions. Deal volume for assets priced at $25 million or more rose 126% for the first 11 months of 2010 compared with the same period in 2009, says Real Capital Analytics. From this data, assessors will likely derive cap rates that reflect the buying power of well-capitalized buyers and apply those rates to all investment-grade property.

REITs and insurers have access to particularly low-cost capital resources. Their strategy primarily has been to focus on acquisitions of large, core assets in major cities. Low-cost capital enables these investors to achieve greater returns on lower cap rates than average investors.

Insurers also have far lower default and delinquency rates on loans than other lender groups. The 60-day delinquency rate for commercial mortgages originated by life insurance companies was just 0.29% at mid-year 2010, reports the American Council of Life Insurers.

Compare that with loan delinquencies in commercial mortgage-backed securities at greater than 7%, according to credit rating agency Realpoint. Meanwhile, Real Capital Analytics pegs the commercial real estate loan delinquency rate for banks at 4.28%. Low delinquencies mean insurance fund managers are able to focus more on deploying capital and less on working out distressed assets.

Doing the math
Increasing acquisition volume by well-capitalized buyers gives assessors market data to support lower cap rates, as the following hypothetical example illustrates. LRG, a large insurance company, purchases an office building with a $650,000 NOI for $10 million, reflecting a 6.5% cap rate. SML, a small real estate investment firm, seeks to buy a comparable building across the street that also generates NOI of $650,000.

Due to SML's lack of capital and lower credit rating, the firm's debt structure on the deal is approximately 300 basis points higher than that of LRG. SML would need to purchase the property at an 8% cap rate to achieve the same return at 50% loan-to-value.

SML offers to purchase the building for a little more than $8 million. However, because this price is significantly lower than the LRG purchase price across the street, the seller backs out and the transaction never occurs.

Should the assessor use the 6.5% cap rate reflected by the LRG purchase, or adjust the rate to reflect what a more typical investor like SML might offer in the open market? This is the issue confronting assessors and those who represent property owners in ad valorem tax disputes.

Under most states' property tax laws, your assessment should reflect the purchasing power of a typical buyer, not that of an extraordinarily well-capitalized investor. A careful review of how the assessor arrived at both the value and the underlying cap rate is critical to ensure your property is fairly assessed.

MarkHutcheson140Mark S. Hutcheson is a partner with the Austin, Texas, law firm of Popp, Gray & Hutcheson LLP, the Texas member of American Property Tax Counsel. He can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jan
07

Tax Data Reveals Plunge in Atlanta Commercial Property Values

"As of November 2010, 99.1% of appeals from the 2008 tax year had been resolved. For the 2009 tax year, 79.1% of appeals had reached a resolution; while only 16.4% of the cases from the 2010 tax year had been resolved...."

By Lisa Stuckey, Esq., as published by National Real Estate Investor-Online/City Reviews, January 2011

As in many U.S. markets, most property owners in Atlanta believe that commercial real estate values in the local market have been declining, and that the declining trend will continue. What is less clear to taxpayers and taxing entities is the severity of value losses and whether property taxes have come down to a corresponding degree.

An analysis of Atlanta-area commercial property valuations and property tax appeals in years past was conducted to determine if, indeed, the perceived drop in property values has occurred, and if so, what effect that drop had on property taxes. Possible new trends can also be extrapolated from the data.

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Measuring loss: Which yardstick?
A review of commercial property sales tracked by CoStar Group confirms that asset values have declined since 2008. Yet the degree of decline varies depending on whether the data are broken down by the number of properties or by square foot.

On a per-unit basis, sale prices for multifamily, retail, office, industrial, healthcare, flex, hospitality and specialty properties in Atlanta-area zip codes fell 25% from the beginning of 2008 through the start of 2010. Looking at those same property types on a per square foot basis, it appears that values fell 15%. Taking those results together, we can say that commercial values have decreased by 15% to 25%, or about 20% on average, from Jan. 1, 2008 to Jan. 1, 2010.

The pool of commercial tax parcels in the city of Atlanta has remained fairly constant over the past three years. The number of commercial parcels in the city was 16,347 for tax year 2008, 16,280 for tax year 2009, and 16,184 for tax year 2010.

Appeals fluctuate
In 2008, 5,069 property owners in Atlanta filed tax appeals, representing approximately 31% of all commercial properties. For tax year 2009, the number of appeals filed by taxpayers fell to 2,087, or approximately 13% of all commercial properties; the number of appeals increased to 3,467 for tax year 2010, representing approximately 21% of the commercial properties.

One possible and likely explanation for the marked decrease in the number of appeals filed from tax year 2008 to tax year 2009 is that Fulton County mailed assessment notices for the revaluation of all commercial properties for tax year 2008. That gave city of Atlanta taxpayers the opportunity to file appeals from the notices. However, for tax year 2009, the County did not issue widespread assessment notices. Only taxpayers who received notices were informed enough to file returns of their opinion of value with the tax assessors and, thereby, were assured of receiving assessment notices from which to appeal.

As of November 2010, 99.1% of appeals from the 2008 tax year had been resolved. For the 2009 tax year, 79.1% of appeals had reached a resolution; while only 16.4% of the cases from the 2010 tax year had been resolved.

In cases from the 2008 tax year, resulting valuations averaged 30% less value than the original assessments. In the 2009 appeals, the average reduction in value was 25%. The few cases resolved from the 2010 tax year brought down the original assessments by an average of 29%.

Clearly then, Atlanta property values as well as Atlanta property taxes have dropped. On a weighted average basis across the three years, assessments reflect a reduction of approximately 30%.

In spite of the inherent limitations of analysis with many appeals still waiting for resolution, the available data from concluded appeals shows a clear trend: A significant number of commercial property owners in the Atlanta area have achieved substantial valuation reductions in the past three years.

New rules kick in
Under a change to state law effective in tax year 2011, which began on January 1, county taxing authorities will send notices of assessed property values to all Georgia taxpayers for each tax year. With this change to the law, property owners will no longer be required to file a return of their opinion of their property value with the county tax assessor in order to receive an assessment notice from which to appeal.

Based on an examination of the past years' data, it appears that approximately 16,000 assessment notices will be mailed to commercial property owners in Atlanta. Judging from recent trends, anywhere from 15% to 30% of those assessments will be appealed.

If the current trend of reductions in property values continues, then it is also to be expected that the filed appeals will result in valuation decreases for tax year 2011 as well.

LStuckey_web90Lisa Stuckey is a partner in the Atlanta, GA law firm of Ragsdale, Beals, Seigler, Patterson & Gray, the Georgia 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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Nov
20

Why Las Vegas Property Tax Assessments Will Exceed Market Value

"Some analysts suggest the volume of troubled commercial loans could create a wave of foreclosures similar to those that swept through the residential market..."

By Paul D. Bancroft, Esq., National Real Estate Investor, November 2010

The odds are stacked against property owners in Las Vegas, where the commercial real estate market continues to suffer from a severe downturn. With nearly $17.2 billion in distressed assets across all commercial property types, Las Vegas ranks No. 1 among U.S. metros by proportion of distress to total inventory in the local market, according to New York-based Real Capital Analytics.

Some analysts suggest the volume of troubled commercial loans could create a wave of foreclosures similar to those that swept through the residential market, a specter that is eroding confidence in commercial real estate. Meanwhile, the pool of available buyers has shrunk and the return on investment they require has increased, depressing sale prices.

Why_LasVegas_graph2

Vacancy rates are another metric that illustrates the severity of the downturn. The vacancy rate for all classes of office space in Las Vegas has slowed its rate of increase, but is projected to top out at a staggering 24.8% by the end of this year, according to Encino, Calif.-based real estate services firm Marcus & Millichap. By contrast, the firm estimates that the current, national vacancy rate for all classes of office is 17.7%.

Applied Analysis, a research consulting firm based in Las Vegas, reports that vacancy rates have risen for the past four years in every subsector of commercial real estate, from retail to industrial to office. The average price per acre of developable commercial land in Clark County has fallen from a peak of $939,000 at the end of 2007 to $155,000 today, a drop of more than 83%, according to Applied Analysis.

Brian Gordon, a principal at the research company, draws a direct correlation between the weak demand for space and the depressed value of commercial properties.

The cumulative effect of these trends is clear: The market value of commercial property has dramatically declined. The question that remains for property owners is whether the taxable values assessors assign to Las Vegas real estate will reflect the decline in market value. Unfortunately for taxpayers, the short answer is no.

Data lag skews values

During any period of changing real estate values, Nevada's taxable property assessments tend to fall out of step with the current market. The tendency to reflect outdated property values doesn't mean the staff of the assessor's office isn't keeping up with the latest newspaper headlines. Rather, it's because assessors are required to follow a methodology that doesn't reflect recent shifts in market value.

In Nevada, the assessor is required to adhere to a valuation methodology that, in the current market, is biased toward a value that will exceed market value. To begin with, the sales data assessors use to establish pricing is simply outdated.

Nevada tax law requires assessors to value the land and improvement components of an improved parcel separately. The land component is valued by comparing it to the sale of vacant land. The comparable transactions are drawn from sales that occurred six months to three years prior to the valuation date, a point in time when real estate was selling for higher prices than is the case today.

In a market in which values are rising, the reliance on "old" sales data would tend to result in a taxable value that is below market value. In a declining market, however, the reliance on old sales will tend to result in a taxable land value that exceeds market value.

A different problem derives from assessors' methodology for valuing the improvement component of a property. In Nevada, improvements are valued according to replacement cost, or what it would cost to build a duplicate asset today, less depreciation.

Replacement cost is established from cost manuals published by Los Angeles-based Marshall & Swift, which monitors materials pricing for the commercial and residential real estate industries.

Reliance on replacement cost may be relevant in a market that is not overbuilt. But in a market with excess inventory, the replacement cost of a building will not reflect economic obsolescence that makes the space less marketable to tenants, and therefore less valuable.

The appraisers in the Clark County Assessor's office currently are valuing properties for the tax year that begins on July 1, 2011 and runs to June 30, 2012. More likely than not, the methodology they are required to follow will result in taxable values that exceed market value.

If that occurs, the assessor is required to reduce taxable value to market value. As a practical matter, however, it is unlikely the reduction to market value will be made because the assessor's office simply does not have the time or property-specific information on vacancy, rent and expenses to determine the market value of all commercial properties. That limitation puts the onus on the property owner. Taxpayers will receive a notice of the taxable value assigned to their property for tax year 2011-2012 in early December. Even if that taxable value is less than the value it was assigned in the preceding tax year, the bias in the methodology employed by the assessor is likely to have resulted in a taxable value that still exceeds market value.

Owners must ask themselves what a snapshot of their property's market value would be on Jan. 1, 2011. If the market trends previously described continue, any reasonable level of analysis is likely to support a market value for most commercial properties that is less than the taxable value determined by the assessor.

Consequently, owners of most commercial properties in Las Vegas will have good reason to appeal to the county board of equalization for an adjustment this year. The deadline for filing an appeal is Jan. 18, 2011.

PBancroft150Paul Bancroft is a managing partner in the Tucson, AZ law firm of Bancroft, Susa & Galloway, the Nevada and Arizona 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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Oct
08

Caught in 'The Twilight Zone'

"Property owners haunted by flawed approach to tax assessments..."

By Stewart L. Mandell, Esq., as published by National Real Estate Investor, October 2010

Flawed cost-based assessments are a common cause of unlawfully high property taxation. Year after year, inflated valuations by government assessors can impose excessive tax bills on a property, notwithstanding annual taxpayer efforts to correct them.

For property owners, persistently unfair assessments are like Talky Tina, the infamous talking doll in the television series The Twilight Zone. The evil toy ultimately prevails against homeowner Erich Streator, notwithstanding his repeated efforts to remove the doll from the Streator family home. The bad news for taxpayers is that assessors will continue to impose excessive, flawed assessments because they often employ error-prone appraisal methods in the interest of expediency. The following demonstrates a common route to a cost-based assessment.

Software can help assessors quickly calculate the cost of reproducing property improvements, an amount I'll call "cost to build today." To account for physical deterioration of improvements, assessors can use an age-life method.

Twilight_Zone_graph2

For example, let's say a five-year old structure's estimated life is 50 years and its cost to build today is $10 million. The assessor deducts 10% for physical deterioration and adds the resulting $9 million value to the land value for a quick — and often inflated — assessment. The good news for taxpayers is that, unlike the Twilight Zone's Streator family, they have the means to seek and obtain justice.

A compelling case

A recently litigated tax appeal regarding a big-box retail building offers a persuasive example. The taxpayer-submitted appraisal included not only income- and sales-comparison based valuations, but also a proper cost approach.

The cost-based analysis differed in several ways from the tax assessor's hasty valuation. First, the appraisal explained that in addition to physical deterioration, depreciation must reflect functional obsolescence or drawbacks to the property itself, as well as external obsolescence. The latter refers to factors outside the property, such as reduced demand for space due to a recession.

The taxpayer proved that the original assessment was flawed because only physical deterioration had been subtracted from the cost to build today. Additionally, the property owner's appraiser presented comparable sales of other big-box locations where a taxpayer had purchased a site, developed a building and sold the property within a few years. These comparable sales were properties in which the owners had a fee simple interest.

For each comparable sale, the appraiser established the total depreciation of the improvements by first subtracting the original land purchase amount from the recent sale price to arrive at a current depreciated value for the building. Then the appraiser compared that building value to the cost to build today, which showed how much the building had depreciated over time.

The total depreciation at these similar properties supported the case for a lower assessment. In the most extreme example from several comparable sales, the value of the building and improvements was 56% less than the cost to build today. Total depreciation of the improvements in the comparable examples ranged from 42% to 56%. Applying this analysis, even after adding back the property's $700,000 land cost, the property assessment should have been about $3 million instead of more than $5 million.

In this case, the appraiser had comparable sales data on similar properties where land acquisition, construction and a sale had taken place in a relatively short time. In cases where the available comparable sales are of older properties, land sales may be used to establish the land value, rather than using the actual original price. As the accompanying chart shows, the taxpayer demonstrated that the government's assessment was unlawfully inflated by over 40%. Clearly, comparable sales can help taxpayers fight the kind of excessive taxation that should only exist in the fictitious world of The Twilight Zone.

MandellPhoto90Stewart L. Mandell is a partner in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Sep
23

Golf Course Owners Teed Off Over Taxes

"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.

Golf_Courses_graph2One 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.

MMartone_ColorMichael 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..

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Aug
23

Controversy Emerges Over Michigan Business Tax Credits for Industrial Owners

"The tax credits threaten to reduce tax revenue to the state. To minimize lost revenue, taxing entities are attempting to limit use of the tax credits for industrial personal property by seeking to reclassify many of those assets as commercial..."

By Michael Shapiro, Esq., as published by National Real Estate Investor - online, August 2010

Detroit, along with the rest of Michigan is wrestling with two major tax issues that frequently involve litigation and have costly implications for owners of commercial and industrial properties. The first issue relates to the fact that the applicable tax statute in Michigan treats industrial properties differently than office, retail, hotel and other commercial properties.

tax-char 08-20

Starting with the 2008 tax year, the Michigan legislature granted Michigan Business Tax credits to owners of industrial personal property. These credits are intended to offset property taxes and reduce the tax rate levied on industrial personal property.

As the accompanying chart indicates, for the 2009 tax year, Detroit's rate for commercial personal property was $70.92 per $1,000 taxable value (generally 50% of market value). Meanwhile, the personal industrial property rate was $59.14 per $1,000, effectively reduced to $38.44 per $1,000 by the Michigan Business Tax credits.

The tax credits threaten to reduce tax revenue to the state. To minimize lost revenue, taxing entities are attempting to limit use of the tax credits for industrial personal property by seeking to reclassify many of those assets as commercial.

The Michigan Department of Treasury recently announced that it filed almost 10,000 property tax classification cases affecting 2009 property taxes. In addition, state officials have encouraged local communities to file classification appeals in the State Tax Commission for 2010, all with the intent of changing property classifications from industrial personal property to commercial personal property.

Raw deal for industrial owners

Many of the actions have been initiated by the state or local jurisdiction based solely on the name of the owner, and without regard to the actual use of the property or the property's legal classification. If a company's name is Joe's Manufacturing, it will not have a classification action brought against it, whereas Joe's Warehouse will be the subject of such an action.

Because the law involved is relatively new, most taxpayers receiving notice of these appeals have little to no idea what the action involves.

At the heart of the issue is the definition of industrial personal property, and the statute is reasonably clear that personal property located on industrial real property is industrial personal property.

Notwithstanding the statute, the state and State Tax Commission claim that the use of personal property governs its classification and that personal property has to be used for manufacturing or processing in order to be deemed industrial. There is nothing in the applicable statute to support that position, however.

The classification appeals recently filed make it apparent that the state and State Tax Commission recognize their claims may not prevail. As a result, in more recent filings they are seeking to change the classification of the underlying real estate from industrial to commercial.

It appears that most actions by the State Tax Commission and the State have been taken without any property specifics other than the name of the owner. If those reclassifications succeed, then the personal property at the site would also be redefined as commercial and not industrial personal property.

Taxpayers affected by such actions should consult with competent property tax counsel for advice on whether to defend such claims and, if so, how to proceed. In some instances, the government may have missed a critical deadline, which will give taxpayers an additional basis for prevailing.

Backlog of appeals

The second source of property tax litigation in Detroit and other Michigan communities is shared by thousands of property owners across the country. Nearly everywhere in the United States, property values are depressed by as much as 40% or more from where they were before the onset of the recession in December 2007.

And just like local governments in other states, Michigan's taxing entities are strapped for cash and reluctant to voluntarily lower valuations to reflect current market conditions. It's no surprise that thousands of property owners have appealed assessments in hopes of lowering their property tax bills.

What may be surprising to property owners who haven't already filed an appeal is that an unprecedented deluge of valuation protests has slowed down the panel that reviews them. As of July 31, there were approximately 2,600 non-small-claims cases pending before the Michigan Tax Tribunal for the 2008 tax year, and another 5,600 cases for 2009. Approximately 3,900 such new cases have been filed in 2010.

The tax tribunal recently adopted new procedures and is laboring to reduce this backlog and expedite the time it takes cases to move from filing to resolution. Most property tax practitioners applaud the tribunal's recent efforts in this regard. Even so, for anyone considering an appeal, it makes sense to start the process sooner rather than later and get in line to have the case heard.

SHAPIRO_Michael2008Michael Shapiro chairs the tax appeals practice group at Michigan law firm Honigman Miller Schwartz and Cohn LLP. The firm is the Michigan 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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Feb
25

How To Contest Clawbacks Provisions

"Companies out of compliance on tax abatement agreements can still make a compelling case for relief."

By Stephen Paul, Esq. & Fenton Strickland, Esq. - as published by National Real Estate Investor, January/February 2010

The race among states and cities to lure new companies and retain existing businesses has been furious, featuring aggressive offerings of significant tax allowances in exchange for promises of jobs and capital investment.

But taxpayers must be cautious. When the government lends a bigger hand that hand can claw back realized tax savings.

Deals involving property tax abatement usually include a promise by a business to invest certain sums of money in its properties and create and/or retain a certain number of jobs.

In return, the local taxing authority exempts all or a portion of the property taxes a business otherwise would have to pay on the new development over some specific period of time.

Governments often insist that abatement contracts permit them to recoup tax savings if a company falls short of its investment and/or hiring aims. Generally referred to as "clawbacks," these provisions in tax abatement agreements are becoming more commonplace and governments are keen on enforcing them.

Many current beneficiaries of tax abatements operate under agreements that originated prior to the recession that began in December 2007, when business expansion appeared more attainable.

However, new economic challenges have frustrated expansion objectives. And with governments mired in search of additional revenue, the potential for clawback appears greater.

Recognizing that clawback is a risk commensurate with the tax benefit, tax abatement recipients facing the prospect of clawback still have the possibility of avoiding the risk.

Escaping clawbacks

When a company enters into an abatement agreement with a municipality, it should be fully aware of the ramifications if the investment and/or hiring fall short of promised levels.

Agreements often allow taxing authorities to cancel abatements when companies fall out of compliance and may also require reimbursement of past tax savings in proportion to investment or employment shortfalls.

In other cases, noncompliance could mean recoupment by the tax collector of all tax abatement savings to date. Total recoupment of tax savings is illustrated in the chart above, where the recipient of a long-term abatement complied with job requirements for seven years but fell out of compliance in year eight, violating the abatement agreement.

When a clawback provision exists, the owner should examine the language to see if it applies to the circumstances of his property. Some clawback language might excuse shortcomings because of factors beyond the property owner's control.

This amorphous test often is tied to an unforeseeable reduction in demand for the company's product or services, or something similar. Because of the recent economic downturn, much litigation can be expected regarding these issues.

Contest_Clawbacks_graph_bigIn some situations, a taxpayer should consider renegotiating the abatement agreement. A business can be in a surprisingly strong negotiating position, especially in instances where it can boast contributions to the local economy.

Confronted with the possibility of losing such a business to another municipality, local officials might be willing to work out a deal.

Where negotiation fails, a business can consider fighting the government's clawback.

Special attention should be paid to the applicable statutes. The local government's clawback effort might run afoul of statutory abatement cancellation and reimbursement schemes to such a degree that the provision should be nullified.

When a business has complied with abatement terms before the shortfall, a court might hesitate to award the government a windfall recoupment of all tax abatement savings.

Every case is unique, but the value of the abatement makes fighting the clawback worthwhile.

 

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

stricklandf

Fenton Strickland can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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