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Property Tax Resources

Jul
10

Reduce Property Taxes Through Acquisition and Capital Project Planning

Savvy commercial real estate professionals keep property-tax planning on their checklists for acquisitions and capital projects.

Why? Because they know that considering property taxes early can save money and reduce hassle later, whether the project is acquiring a business that owns real estate, developing real estate, remodeling a property or adding to existing improvements. And given that businesses overall spend more on property tax than any other state and local tax, considering property tax while planning these projects is a valuable opportunity to improve the bottom line.

The first step is to identify how the acquisition or other proposed actions might affect the property's taxable value. This depends on the local jurisdiction's assessing practices and on how an assessor will relate the sale price or project cost to taxable market value.

States treat sales information in varying ways. Ohio, for example, presumes a property's sale price to be its market value for calculating property taxes. Other states include the sale price in the overall algorithm for all properties but do not use it to determine the value of the specific property that sold. Still others ignore the price altogether.

There are several ways that price may differ from value. For one, the transaction may include non-taxable elements, such as a business, in addition to real property. Or the sale price of an office building may reflect added value for a lease at an above-market rental rate.

In a common scenario, the price paid for a portfolio of senior-living facilities will include the value of each facility's real property, the value of each facility's tangible personal property, and the value of each facility's resident lists, service arrangements, goodwill and other intangible (and therefore untaxable) personal property. The allocation of the purchase price among the various components may not reflect the market value of each component, even when the overall transaction price reflects market value. And sometimes a buyer pays more for a property than it is worth generally on the market. This is often due to the buyer's own investment strategies and thus requires an assessor to distinguish between investment value and market value.

A buyer should ideally evaluate how the price relates to the property's market value in the lead-up to the transaction. This is key to projecting property taxes going forward, in light of the transaction and the way the particular jurisdiction reacts to (or ignores) different types of transactions. It is also important to ensuring that the assessor receives accurate information in states where assessors learn of and react to sales prices.

This early planning can influence the portion of the price allocated to taxable value and help limit it to market value. Part of this is specifically identifying nontaxable, intangible components in the transaction documents in a way that conforms to the jurisdiction's property tax laws.

Another key step is to make sure any documents filed for real estate transfer taxes reflect the value of the taxable component instead of an overall value, thereby managing both the real estate transfer tax and future property taxes. Opportunities may exist to avoid or minimize the transfer tax, depending on the specific laws in each jurisdiction.

Many a buyer has reported the full sale price (or allowed the seller to do so, in jurisdictions where the seller reports the transaction), realizing too late that the reported sum included components that should have been reported differently. The buyer should also consider property taxes when reviewing any press release about the transaction. The new owner may find itself bound to what was reported, whether to government or the media, in later property tax appeals.

Also, preserving certain transaction details, such as the valuation analysis and rationale, may help later as support material or to dispute errors in discussions with the assessor.

Lastly, if information about the transaction goes public in a way that may lead to a misunderstanding by the assessor, reacting promptly can be crucial. This often involves discussing the information with the assessor to provide additional context, such as explaining when a buyer paid a premium above the property's market value.

Similar considerations apply to other types of project strategies, such as plans to develop real estate, renovate or remodel a property, or add to existing improvements. In each instance, early consideration of property taxes often proves useful. Doing so not only aids in projecting future property taxes, but can also guide the owner in reducing those taxes through choices made while carrying out the project.

Norman J. Bruns and Michelle DeLappe are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local tax. Norman Bruns is the Idaho and Washington representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Norman Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. Michelle DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jan
05

Struggling with Vacancy? You May Get a Break on Property Taxes

To determine whether your property may qualify for relief, identify the market occupancy rate for that property type and submarket.

In many states, abnormally high vacancy at commercial properties should mean a lower tax bill. Market transaction evidence essentially dictates this result: States that assess taxable value on commercial properties based on market value, as though leased at market rents, should allow a deduction from that value when the property incurs above-market vacancy and collection losses.

Would buyers pay as much for a vacant income-producing property as they would for an identical property that is fully leased at market rates? Of course not. For the same reason, in states that value the property as though leased at market rents, below-market occupancy should result in a lower property tax assessment.

To determine whether your property may qualify for relief, identify the market occupancy rate for that property type and submarket. Loan underwriting is a good source of this information because lenders underwrite property loans based on the normal, stabilized occupancy rate.

For example, in many areas lenders assume 95 percent stabilized occupancy for shopping centers. In those areas, a shopping center that is only 80 percent occupied has below-market occupancy and, therefore, is worth less than otherwise similar properties with the higher market occupancy rates.

Similarly, the prospect of the imminent departure of a major tenant reduces the price a buyer would pay, even if the property currently enjoys market occupancy. And a vacant anchor space diminishes value even when the owner continues to receive rent on the dark space. All these circumstances signal an opportunity for property tax relief.

Start the process

If any of these circumstances apply, the best first step is usually to contact the tax assessor's office and inform the appraiser responsible for valuing the subject property. Providing data about the vacancy problem may be all it takes to reduce taxable value in the next assessment.

If this fails to achieve a reduced value, consider a property tax appeal. Engaging counsel experienced with property tax matters will help the owner evaluate the merits of appeal opportunities. Counsel may also be able to give the conversation with the assessor's office a fresh try.

An appraisal may be necessary to support a property tax appeal. The property owner's counsel should help select a good appraiser who can testify, if necessary. Counsel will also instruct the appraiser on what will be needed for property tax purposes.

Deduct a vacancy shortfall

In states where below-market occupancy affects property tax valuation, the appraiser should engage in a two-step analysis. First, determine the property's stabilized value. Then estimate the amount of vacancy shortfall to deduct from the stabilized value to account for the costs, risk, effort and skill that a buyer of the property would require to bring it to stabilized occupancy.

The three components of a vacancy shortfall deduction are direct costs, indirect or opportunity costs and entrepreneurial incentive. Direct costs include tenant improvements and leasing commissions that would be required to lease up the vacant space. Indirect costs include lost rent until the space is leased, lost expense recoveries and any free rent or other concessions the new tenants would require, based on market lease terms.

Finally, the entrepreneurial incentive profit margin represents the additional deduction from the stabilized value that value-add investors require for the extra risk, skill and effort required to bring the property to stabilized occupancy. The entrepreneurial incentive profit margin can range from as little as 20 percent to over 100 percent of the vacancy shortfall costs.

Another approach to account for entrepreneurial incentive is to increase the capitalization rate used in the income approach to calculating stabilized value during the first step. That does not show the effect of the abnormal vacancy as clearly. Ideally, step one includes several valuation approaches rather than relying on the income approach alone and concludes a reconciled value as if stabilized. Then the full effect of the abnormal vacancy can be isolated in the second step of the appraisal (i.e., in the vacancy shortfall analysis).

To value property with below-market occupancy, the appraiser must understand how buyers and sellers treat such properties in actual transactions. The appraiser will need to verify comparable sales prices directly with buyers and sellers or their brokers to determine how they determined the selling price for properties that sold subject to below-market occupancy. Though each party to the transaction may differ in its analysis, both will likely have performed this two-part examination to determine the as-is selling price of the struggling property. This market evidence will bolster the subject property's tax appraisal.

Just as a buyer typically would negotiate a lower price for deferred maintenance such as a leaky roof, buyers pay less for properties struggling with vacancy issues. Typically value-add investors expect a significantly higher return to compensate them for the elevated risks of trying to create additional value. Many states appropriately recognize this in lower property tax assessments.

Michelle DeLappe and Norman J. Bruns are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local taxes. Bruns is the Idaho and Washington representative 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.  DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..​
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Jan
29

Seize Tax Opportunities When The Price Is Right

Reporting the sales price on a transaction for a real estate excise tax affidavit or refund petition can be tricky in the State of Washington, depending which side of the coin you’re on.

Seattle's hot real estate market presents two special tax-saving opportunities – or, for the unwary, two tax traps – involving Washington State's real estate excise tax.

The first arises when above-market rents in place at a property contribute to its selling price. The second occurs when the sale of a property experiences high vacancy. In both scenarios, some buyers and sellers report prices that are higher than they should be for the real estate excise tax. At nearly 1.8 percent of the property's sale price, real estate excise tax is a sizable trans-action cost that deserves attention.

Skewed By High Rents
With above-market rents, a portion of the sale price may reflect the value of contracts and business efforts. The tax only applies to the consideration paid for real estate, so the consideration paid for above-market contracts should be separated out as nontax-able.

Although we believe Washington law is clear on this, the Department of Revenue has been struggling to determine its position. The department recently agreed taxable value excludes the portion of the purchase price attributable to above-market rents, but then it changed its position.

Since these vacillations occur in the context of individual taxpayer cases, other taxpayers do not necessarily know what the department's position is at any given time. The department has not published any rules or guidance specific to this scenario.

Impaired By Vacancy
In the scenario involving the sale of a property with high vacancy, the buyer and seller frequently agree on a price as though occupancy were full and then deduct an amount for the vacancy shortfall. The deduction reflects the costs to lease the remaining space, and also the entrepreneurial profit the buyer requires for undertaking the risk and work required to achieve full occupancy.

Some parties to a transaction mistakenly report the stabilized value instead of the amount actually paid for the property. The only price they should report for tax purposes is the sum after deducting for vacancy, as that represents the actual amount paid.

Both parties have an incentive to ascertain and report the correct price on the real estate excise tax affidavit. Though the parties can negotiate who pays the tax, the seller is responsible for its payment by law. And yet, the Department of Revenue can enforce payment by placing a lien against the property, making the buyer indirectly liable.

Both buyer and seller sign the affidavit reporting the sales price, under penalty of perjury. Buyers may feel the ongoing effect of the reported price in the form of property taxes, since county assessors pay attention to the affidavits in determining property tax values. With this in mind, both parties should care about correctly reporting the transaction.

Buyers and sellers in either scenario can put themselves in a favorable tax position by presenting the information about the transaction carefully, whether in the affidavit or in a refund petition to the Department of Revenue. Note that a refund petition, if applicable, must be filed within four years of the transaction date.

Information about the transaction should be presented to the taxing authorities in a clear manner to establish the correct facts and legal analysis. In the first scenario, a detailed explanation of the facts ideally includes an appraisal that excludes the price paid for the value of the above- market leases in place, as opposed to the real property.

In reviewing the transaction, the Department of Revenue should presume the price paid is taxable, but the taxpayer can rebut that position. When the transaction price reflects more than the price for real estate alone, the department often next turns to the property's assessed value instead.

The taxpayer can argue that, by law, an appraisal as of the sale date trumps the assessed value as evidence of the taxable amount. For this reason, an appraisal is important for the above-market rent scenario.

In the high-vacancy scenario, however, the presumption applies that the price paid is taxable, and no appraisal should be needed. Therefore, the parties should report the actual price paid after accounting for the vacancy shortfall.

Recent experience indicates the Department of Revenue may choose to challenge an affidavit or deny a refund claim if it takes the position that the portion of the price attributable to above-market rent is untaxable. That does not mean the department is right, however, and its vacillations suggest its directors feel uncertain about their position. Taxpayers with strong facts should pursue the issue and work diligently to make a strong case that will help the department get to the right result.

Whether a sale involves the added value of contracts or a deduction for high vacancy, seeking professional advice about how to best report the transaction on the real estate excise tax affidavit, or in a refund petition, can turn the sale into a significant tax opportunity.

MDeLappeBrunsNorman J. Bruns and Michelle DeLappe are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local tax. Bruns is the Idaho and Washington representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
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Dec
16

Recent Cases Affirm Tax-Exempt Status of Intangible Value

Whether a business is a seniors housing facility, a racetrack or other service-oriented operation - or even a manufacturing plant - part of the business’ value may be intangible and exempt from property tax. Recent court cases underscore this critical premise and provide valuable reference points for taxpayers struggling against unfair tax practices.

Local governments in all states have authority to impose property tax on the value of real estate. Local governments in all but seven states also impose property tax on the value of at least some tangible personal property, or property that can be moved, such as equipment.

But in most states, local authorities are prohibited from taxing any additional value of a business as a going concern, meaning value attributable to a brand, reputation for product quality, intensive management, licenses, contractual rights, proprietary technology, and other intangible assets.

For example, if a manufacturing plant receives additional revenue because it packages items with a well-known brand’s label instead of a generic one, that brand is an intangible asset. In numerous cases it has been seen that the value of intangible assets equal or exceed the value of the taxable property. Whatever the business, removing intangible assets from the property tax bill is key.

California tests intangibles

Some states provide clearer guidance than others on identifying and quantifying intangible assets. California, in particular, has been a hotbed of controversy over the treatment of intangibles in valuation for tax purposes lately.

Stephen Davis, a partner in the Los Angeles law firm of Cahill, Davis & O’Neall, summed up the latest developments during a presentation at the Seattle Chapter of the Appraisal Institute Fall Real Estate Conference in October by saying that major cases in the last two years capped two decades of controversy. He should know, since his firm was counsel of record in the SHC Half Moon Bay vs. County of San Mateo case, decided in May 2014. Davis commented that the result of this new case law has been “a few new controversies instead of a clean resolution,” but much was resolved favourably for taxpayers and provided helpful lessons that should apply anywhere in the nation.

The main takeaway from California’s recent cases is the importance of an appraisal of each intangible asset in order to deduct that value from the overall business value.

In SHC Half Moon Bay vs. County of San Mateo, the four-star Ritz Carlton Half Moon Bay Hotel proved that the assessor inappropriately included in the hotel’s taxable value approximately $2.8 million of exempt value attributable to its workforce and to contractual rights involving a parking lot and golf course. Granting a significant victory to taxpayers, the appeals court made clear that merely subtracting franchise fees from the value indicated by the income approach to value did not account for the value of the hotel’s franchise rights and other goodwill.

What does that mean for taxpayers? Under this case, an appraisal that provides evidence of the value of each intangible asset should result in removing those intangible values from property tax assessments. The reasoning espoused in this decision from California should apply in any state where intangible property is exempt from property tax.

For example, just last year the Montana Supreme Court declared invalid a Montana Department of Revenue regulation that attempted to narrow that state’s broad exemption for intangibles, such as by requiring valuation of goodwill only by the accounting method.

A growing volume of cases argues for valuing the intangible assets of a wide range of businesses by using generally accepted appraisal practices, bolstering the position of taxpayers defending themselves against unfair taxation of those assets.

Source URL: http://nreionline.com/tax-strategies/recent-cases-affirm-tax-exempt-status-intangible-valueRecent

MDeLappe Bruns Norman J. Bruns and Michelle DeLappe are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local tax. Bruns is the Idaho and Washington representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
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Aug
04

Recovering Seattle Market Generates Property Tax Fallout

"Multifamily housing in King County may be particularly susceptible to inflated assessments in the upcoming years."

Each week seems to bring news of yet another record-selling price for a commercial property in Seattle, including assets ranging from office and retail to apartments and even development sites. Increasing occupancy rates for industrial and retail properties also suggest that property values are headed up.

The King County assessor has undoubtedly tracked these price trends, too. In 2012, the assessor's office reported overall increases in taxable values for major office buildings, major retail properties, hotels and apartments. As a result, many commercial property owners in the Puget Sound region saw increases on their 2012 assessed value notices. In March, King County's chief economist projected that total assessed values in the county would reach nearly $327 billion in 2013 (for taxes payable in 2014), up nearly 4 percent from $315 billion in 2012.

For many taxpayers, notices in 2013 will reflect assessment increases even greater than 4 percent. The general recovery in the Seattle market should not trigger increased assessments for all properties. For example, some suburban areas have missed out on the trend toward increasing property values. And there are always individual properties that do not experience the same increases as their neighbors. Accordingly, owners should be attentive to potentially overstated assessed values.

Multifamily housing in King County may be particularly susceptible to inflated assessments in the upcoming years. One reason is the high prices paid in recent transactions. Another is the ongoing development of many new apartment projects. Even as that construction fervor gives assessors the idea that apartments are hot commodities, these new projects increase the risk of value-sapping oversupply in some submarkets.

Assessed values for Single-family residences make up roughly two thirds of the tax base in Seattle. With that said, home prices have risen 10.6 percent in the past 12 months, according to the Standard & Poor's/Case-Shiller Home-Price Index that was released in late May. As many homeowners receive higher assessments in 2013, that should provide at least some measure of relief for commercial taxpayers.

Prepare For Tax Increases

Budgeting for an upcoming year's property tax bill is always a challenge, in part because tax rates can vary significantly by year and location. Seattle's tax rates decreased each year from 2004 through 2008, then rose a whopping 13 percent in 2009. They have continued to climb each year since. A further, small increase in 2014 tax rates is likely. Within King County, tax rates can vary widely even within a single year. While Bellevue has a tax rate of less than 1 percent for 2013, suburbs in South King County employ tax rates that are half-again higher: Kent, Des Moines and Federal Way rates range from 1.45 percent to 1.6 percent. In order to guard against an in- Dated tax bill professionals must ensure that assessed value notices get routed to a responsible person. If an assessment seems too high, then the appeal petition must be filed within 60 days of the notice's mailing date to preserve the owner's appeal rights.

Most commercial property owners should budget for increased tax liability for 2014 taxes, given the prospect of generally rising assessed values in 2013 and the likelihood of higher tax rates in 2014. Property owners should receive notification of new assessed values by this fall. Then in late January, when counties publish final tax rates, property owners can calculate their tax burden and revise budgets accordingly.

MDeLappe Bruns Michelle DeLappe and Norman J. Bruns are attorneys at Garvey Schubert Barer, Washington and Idaho member of American Property Tax Counsel, the national affiliation of property tax attorneys. Michelle DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Norman Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
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