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Property Tax Resources

Dec
19

Runaway Property Taxes in New Jersey

Tax courts don't always recognize market value in setting property tax assessments.

Most real estate is taxed ad valorem, or according to the value. The theory is that each person is taxed on the value of the real property they own.

The New Jersey Constitution (Article VIII, Section 1, paragraph 1) stipulates that property is to be assessed for taxation by general laws and uniform rules, and that all non-agricultural real property must be assessed according to the same value standard.

Our statutes define the standard of value as the true property value. We call this market value, or the most probable price a property will bring in a competitive and open market under conditions requisite to a fair sale. That assumes the buyer and seller are each acting prudently and knowledgeably, and that the price is unaffected by undue stimulus.

In 2005, the state Tax Court, in a General Motors case, openly admitted it was making a determination that the highest and best use of the property was as an auto assembly facility. By this determination, the court set public policy indicating that this highest and best use fairly and equitably distributed the property tax burden.

In this case the court felt it was necessary to conclude the highest and best use of the property at issue was an auto assembly plant because to do otherwise may allow features of the property to go untaxed and therefore lower the value of the plant. The court also stated that this determination was consistent with and effectuates the public policy of fairly and equitably distributing the property tax burden. All of this was concluded while the market data suggested a different result, given that no auto manufacturing facility had ever before been sold to another automobile manufacturer. Further, by law, the tax court's role is to determine value, not to redistribute the tax burden.

The history of the Tax Court has, in practice if not in theory, interpreted the constitution and statutes of real property taxation to find value in a uniform and stabilized manner. In other words, although the market may vary over a period of years under review, the court would attempt to stabilize the effect of the differences when rendering opinions.

The Tax Court would also set precedent by using methods of valuation not normally used in the marketplace because it deemed the data before it at trial to be lacking. It has, for example, applied a cost approach to determine value when a buyer would purchase a property based on an income approach. This is common in court decisions, but often runs afoul of true market motivations and distorts the conclusion of value. The more the courts reach these types of decisions, the further away they move from concluding market value.

The court's attempt to carry these principles forward has appeared in various ways over the years. As early as 1996, in a case involving a super-regional mall with anchors not separately assessed, the Tax Court deemed the income approach inappropriate to value the stores and instead valued the stores on a cost approach. Today, the legacy of that decision requires plaintiffs to present a cost approach, which is not evidence of market value. This may well distort a property's valuation.

Issues such as capitalization rates are also problematic for certain assets in Tax Courts findings. Over the years, court precedent has set rates that often do not reflect the market. This is especially evident today when valuing regional malls classified as B or C grade. The market capitalization rates are well over those the courts have historically found. Although transactions verify this market data as accurate, the courts fail to recognize it, making it difficult for plaintiffs to prevail with values based on actual, transactional data.

In January 2018, after a number of decisions that rejected plaintiffs' approach, our Tax Court appears to have taken some pause. It recognized that by rejecting proofs from the market and data forwarded by taxpayers, it was ultimately failing to conclude to warranted assessment adjustments.

It stated:

"there has been some criticism of late, that the Tax Court perhaps has raised the bar for meeting the standard of proof too high in property tax appeals, given arguendo, what could be viewed as a growing trend seen in a number of recent decisions, where the court rejected expert opinions and declined to come to value. While such a suggestion may give the Tax Court pause for self-examination and reflection, it must not serve to invite expert appraisers to abrogate their responsibility of providing the court with 'an explanation of the methodology and assumptions used…'"

The quote seems to recognize that the proof bar was getting so high that a plaintiff could never prove its case. A more realistic view of the proofs provided by a taxpayer comes with it the recognition that market data and actions from market participants are the touchstones of value that should establish our assessments.

Philip Giannuario, Esq. is a partner at the Montclair, N.J. law firm Garippa Lotz & Giannuario, the New Jersey and Eastern Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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May
08

How the New Tax Law Affects Property Taxes

Due diligence is required to determine whether possible tax increases can be abated.

President Trump's Tax Cuts and Jobs Act is the first sweeping reform of the tax code in more than 30 years. Signed into law on Dec. 22, the plan drops top individual rates to 37 percent and doubles the child tax credit; it cuts income taxes, doubles the standard deduction, lessens the alternative minimum tax for individuals, and eliminates many personal exemptions, such as the state and local tax deduction, colloquially known as SALT.

While Republicans and Democrats remain divided on the overhaul's benefits, there is a single undeniable fact: The sharp reduction of the corporate tax rates from 35 percent to 21 percent will be a boon for most businesses. At the same time, employees seem to be benefiting too, with AT&T handing out $1,000 bonuses to some 200,000 workers, Fifth Third Bancorp awarding $1,000 bonuses to 75% of its workers, Wells Fargo raising its minimum wage by 11% and other companies sharing some of the increased profits with employees.Companies are showing understandable exuberance at the prospect of lower tax liability, but investments many firms are making in response to the changes may trigger increases in their property tax bills.

Some companies already are reinvesting in their own infrastructure by improving and upgrading inefficient machinery or renovating aging structures. Renovations to address functional or economic obsolescence can help to attract new tenants and, most significantly, command higher rentals for the same space.

The real property tax systems in place for most states are based on an ad valorem (Latin for "according to value") taxation method. Thus, the real estate taxes are based upon the market value of the underlying real estate. Since the amounts on tax bills are based on a property's market value, changes or additions to the real estate can affect the taxes collected by the municipality.

Generally speaking, most renovations such as new facades, windows, heating or air conditioning will not change the value or assessment on a property. The general rule is that improvements which do not change the property's footprint or use, such as a shift from industrial to retail, shouldn't affect the property tax assessment. However, an expansion or construction which alters the layout of a property can – and usually does – result in an increased property assessment. Since real estate taxes are computed by multiplying the subject assessment by the tax rate, these changes or renovations can significantly increase the tax burden.

Recognizing that this dynamic could chill business expansions, many states offer a mechanism to phase-in or exempt any assessment increases. This can ease the sticker shock of a markedly higher property tax bill once construction is complete.

New York offers recourse in the form of the Business Investment Exemption described in Section 485-b of the Real Property Tax Law. If the cost of the business improvements exceeds $10,000 and the construction is complete with a certificate of occupancy issued, the Section 485-b exemption will phase-in any increase in assessment over a 10-year period. The taxpayer will see a 50 percent exemption on the increase in the first year, followed by 5 percent less of the exemption in each year thereafter. Thus, in Year 2 there will be a 45 percent exemption, 40 percent in Year 3 and so on.

Most other states have similar programs to encourage business investments and new commercial construction or renovations. The State of Texas has established state and local economic development programs that provide incentives for companies to invest and expand in local communities. For example, the Tax Abatement Act, codified in Chapter 312 of the tax code, exempts from real property taxation all or part of an increase in value due to recent construction, not to exceed 10 years. The act's stated purpose is to help cities, counties and special-purpose districts to attract new industries, encourage the development and improvement of existing businesses and promote capital investment by easing the increased property tax burden on certain projects for a fixed period.

Not long ago, the City of Philadelphia, Pennsylvania, enacted a 10-year tax abatement from real estate taxes resulting from new construction or improvements to commercial properties. Similarly, the State of Oregon offers numerous property tax abatement programs, with titles such as the Strategic Investment Program, Enterprise Zones and others.

Minnesota goes a step further and automatically applies some exemptions to real property via the Plat Law. The Plat Law phases-in assessment increases of bare land when it is platted for development. As long as the land is not transferred and not yet improved with a permanent structure, any increase in assessment will be exempt. Platted vacant land is subject to different phase‑in provisions depending on whether it is in a metropolitan or non‑metropolitan county.

Clearly, no matter where commercial real estate is located, it is prudent for a property owner to investigate whether any recent improvements, construction or renovations can qualify for property tax relief.

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Apr
10

Assessment Shock and Awe in NYC, and your Properties are the Target

The newly released New York City Tax Assessment Roll had a total market value of$1.258 trillion. These results are shockingly bad news for the real estate industry. On average, tax assessments increased by about 9.4 percent.

The breakdown of increases in the assessments are also very surprising, with residential apartments growing by 11.51 percent, while taxable values on commercial properties climbed 7.85 percent. By borough, Brooklyn leads the way in increases, followed by the Bronx, Queens and Manhattan. Staten Island had the lowest percentage of increase at 6.36 percent.

Residential apartment buildings, rentals, cooperatives and condominiums showed strong valuation increases, which appear to be at odds with recent market weakness noted in all these property types. It is well documented that residential rents are slipping or flat, concessions are on the rise, and sales of co-ops and condos have stalled and are showing further signs of decline.

Furthermore , the loss of state and local tax deductions under the new federal tax law increases the burden on taxpayers. All of these factors exert a negative influence on market values.

What we will see in this assessment roll, and in statistics compiled by the New York City Department of Finance, is a strong emphasis on increasing tax burdens across all property types. This effort disregards the current pressures the market's real estate owners are already facing.

It is significant that the mayor has the sole discretionary authority to increase this specific tax. Virtually every other tax collected in the city needs approval from the state legislature, which may be why property taxes are continuing to go up. Just over 45 percent of all revenues for the City of NewYork now come from real estate taxes.

Even hotels, which are experiencing lower revenue per available room and competition that has intensified in recent years with the addition of thousands of new rooms, face an increase of 4 to 5 percent. This rubs more salt in to the wound for this property class.

What the city is doing in this new tax roll is killing the goose that gave us the golden eggs. We see more vacancies and empty store fronts, traffic at a standstill, mass transit in failure and mounting subway line closures. How tough are they making it for the real estate industry to survive?

There is a great need for property tax reform in this city. The percentage of taxes levied on real estate is out stripping taxpayers' ability to pay for it. In effect, the government is almost a 40 percent partner of all the real estate properties without sharing in the risk or having skin in the game. This ever­ growing push to squeeze the last dollar out of our industry will only hasten its fall.

We should call on our government to be more reasonable and limit property taxes to an affordable level. This would be a better strategy, priming the pump of the local economy and permitting future growth. When owners find that their property's largest single expense is its tax burden, which is out of control, they must do something about it-and do it now.


​​​​​​​Joel R. Marcus is a partner in the New York City law firm of Marcus & Pollack LLP, the New York member of the 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.

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Jan
05

RETAIL SUFFERS FROM EXCESSIVE TAX ASSESSMENTS Assessors attempt to ignore market realities when valuing retail property.

Retail property owners' pursuit of fair treatment in real estate taxation seems to generate a river of appeals and counter-appeals each year. What makes this ongoing melee especially perplexing and frus­trating for property owners is a sense that taxing entities will often ignore market realities and established valu­ation practices to insist upon inequi­table, inflated assessments. This tendency to forsake indus­try norms is rampant, and calls for a dose of reality. This article uses the term "real value" to describe that of­ten ignored element of true property value or genuine value of the real es­tate only, meaning the market value that buyers and sellers recognize as a product of an asset's attributes and the real-world conditions affecting it. Real value in this usage is not a legal term, but encompasses issues that real estate brokers, property owners, appraisers, lawyers and tax managers regularly discuss in retail valuation. The array of issues that affect real value or market value range from the influence of ecommerce on in-store sales to build-to-suit leases, sales of vacant space, capi­talization rates for malls of varying quality, proper ac­counting for eco­nomic or functional obsolesce and more.

All of these important and timely issues find their way into an age-old discussion of how to properly value the real estate, and only the real estate, in retail properties for property tax purposes. Although these topics may involve complex calcula­tions or judgments, buyers and sell­ers regularly use these concepts to ar­rive at mutually agreeable transaction prices, which is exactly the sort of real value that assessors should recognize for taxation. Some taxpayers may be surprised to learn that the arms-length sale of a property on the open market isn't universally accepted among taxing entities as representing that property's real or taxable value. The path to rem­edying assessors' tendency to avoid finding the real value of the real estate only is to educate tax authorities and their assessors by appealing unjust as­sessments, and by sharing the details of beneficial case law that continues to shape tax practices across the country.

Cases in Point
Tax laws vary from state to state so that the applicable principle that comes from the case decision in one region may not fit neatly in another region. Nevertheless, trends and con­cepts are always important guideposts that need to be recognized. Taxpayers who present case law from other re­gions to their local courts can begin the process of introducing the truth of real value in their market. A number of new retail property tax cases have come from the Midwest. These cases deal with issues that tax­ payers coast to coast have argued and continue to argue in the struggle to establish real value in court for retail property. ln 2016, the Indiana Tax Court heard an appeal from the Marion County tax assessor, who was unhappy with an Indiana Board of Tax Review decision that granted lowered assessments on Lafayette Square Mall for the 2006 and 2007 tax years. The assessor had origi­nally valued the property at $56.3 mil­lion for 2006, but the county's Property Tax Assessment Board of Appeal re­duced that amount by more than half. Simon Property Group, which owned the mall during the years in question, appealed to the Board of Tax Review, which further reduced the property's taxable value to $15.3 million for 2006 and $18.6 million for 2007. During the appeal, taxpayer, Simon Property Group, presented evidence of the mall's $18 million sale in late 2007. It stated it had begun to market the property for sale because it was suffering from vacancy and leasing is­sues and the property no longer fit its investment mission. The taxpayer's appraiser indepen­dently verified the sale and concluded it to be arms-length, having been ad­equately marketed and there being no relationship between buyer and seller and no special concessions for financ­ing.This scenario seems like what most of us in the tax assessment community would consider a textbook example of market-defined value. Yet the county assessor appealed the review board's conclusion to the tax court.

What is noteworthy here is that the court affirmed the tax board's conclu­sions, which were also in line with the taxpayer's evidence from a real-world transaction. The sad part about this event is that it required years of review and expense to prove that a sale in the open market reflected value. In Michigan in 2014, the Court of Appeals heard a case presented at the Michigan Tax Tribunal which con­cluded in favor of the taxpayer, Lowe's Home Centers. The case is significant because the court accepted a market­ based value as true taxable value. The taxpayer's expert testified re­garding its appraisals and indicated that they were appraising fee simple interest or the value of the property to an owner, and at the highest and best use as a retail store, valued as vacant. They distinguished between existing facilities and build-to-suit facilities, ex­plaining that the subject property is an existing facility and that the build-to­ suit market rent or sale price is based upon cost of construction, whereas the existing market sale price or rent is a function of supply and demand in the marketplace. Basing his analysis on the above fun­damental premise, the taxpayer's ap­praiser valued the property in detail. Again, what makes this case signifi­cant is that the tribunal accepted the taxpayer's argument, and the court af­firmed that decision.

Incremental Acceptance
While these principles seem univer­sal, they have been rejected in many regions of our country. Tax-assessing communities wage battles to impose excessive values based on a rejection of the actual market. As most tax systems are based in the market value concept, the only resource for these taxing juris­dictions is to distort the concept. These issues are as old as dirt, but resolution remains elusive. The lesson here for the retail prop­erty owner appealing an assessment is to advance arguments that reflect real-world conditions supported by evi­dence. The decisions in these cases and others tell us that someone is listening to those arguments, and taking heed.

​Philip Giannuario is a partner at the Montclair New Jersey, law firm Garippa, Lotz & Giannuario. the New Jersey and Eastern Pennsylvania member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Philip Giannuario can be reached at  This email address is being protected from spambots. You need JavaScript enabled to view it.

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Aug
22

Delaware Court Unlocks Opportunities to Reduce Property Tax Burden

Reducing property tax assessments can be challenging under the best of circumstances, and distinctions between state tax systems make minimizing that burden across an office or industrial portfolio especially daunting. But a recent Delaware Supreme Court decision provides taxpayers with a new, yet surprisingly familiar, opportunity to ease the tax burden on properties in The First State.

Delaware's Tax Assessment System Shows its Age

Under Delaware law, property must be valued at its "true value in money," a term interpreted to mean the property's "present actual market value." However, in order to implement the Delaware Constitution's mandate of tax uniformity, the state applies a base­year method of assessing property. That means that all property in a jurisdiction is assessed in terms of its value as of a certain date, and that value remains on the books indefinitely until the jurisdiction performs a general reassessment. For Delaware's northernmost county, New Castle County, the last reassessment occurred in 1983, so all property therein is valued as of July 1, 1983.

A major challenge to contesting assessments in Delaware is that a taxpayer must determine the property's 1983 market value. Determining what a property is worth today is not always easy, but proving a property's value as of three decades ago has proven increasingly difficult. Furthermore, in the absence of regular adjustments to a property's assessed value, the county asserts that a property should be valued either as it existed in 1983 or, if it was built after 1983, as if it is new and undepreciated.

Delaware's courts have explained that taxpayers have two options in assessment appeals. The first option is to use data from the base year. The property owner could, for example, find sales of comparable properties in or around 1983, or using prevailing market rents and capitalization rates from 1983. The alternative route is to calculate the current market value of the property and "trend back" that amount to 1983. The County Board of Assessment Review has expressed a near-absolute preference for 1983 data, and rarely finds a taxpayer's trending formula acceptable.

The inequities of this practice are blatant. Under the county's interpretation of the base year system, a building constructed in 1983 and located next door to a similar new building should be assessed and taxed at the same level, even though buyers, sellers and tenants are likely to value the buildings quite differently. If the owner of the 34-year-old building wanted to contest its assessment, the owner would have to identify data for new buildings in 1983. Of course, as time marches on and years turn to decades, relevant data from the base year becomes increasingly difficult to find.

Taxpayers Highlight the System's Obsolescence

Taxpayers have raised many challenges to Delaware's assessment system, but most successful challenges have been fact-specific, and no recent court has gone so far as to order Delaware's counties to complete a reassessment. But after several attempts, the taxpayers in Commerce Associates LP v. New Castle County Office of Assessment successfully underscored the largest flaw in the system.

One Commerce Center is an office condominium building in Wilmington, Delaware. The county originally assessed each office condominium upon construction in 1983. After keeping the same tax assessment for decades, the owners of several of the condominiums challenged their assessments in 2015.

Before the County Board of Assessment Review, the owners presented five different analyses. Two analyses relied on comparable sales transactions, one using 1983 sales of buildings that were about 32 years old, and one using modern asking prices trended back to 1983 using the Consumer Price Index (CPI). Two analyses relied on income, one using 1983 data and one using 2015 data trended back to 1983 using the GPI. The fifth analysis employed a cost approach using the original construction expense and reflecting depreciation. These approaches showed that the properties were over-assessed by more than 40 percent.

The county presented evidence of the condominiums' sale prices in 1985, when each unit was relatively new. The county also presented an income approach using 1983 data and a cost approach reflecting no depreciation. The county's approaches all supported the original assessed values, and the board ultimately denied the taxpayers' appeals.

State Supreme Court Approves a Decrease

After having their appeals denied by the Superior Court, the taxpayers brought their challenge to the Delaware Supreme Court. In a tersely worded decision, the Supreme Court reiterated that assessors must consider all relevant factors bearing on the value of a property in its current condition. While the County argued that no depreciation was needed because the properties were brand new in 1983, the court noted that the properties were, in reality, more than 34 years old. Failing to account for their age and any resulting depreciation or appreciation resulted in a flawed value.

Although the county has yet to implement the court's decision, the effects of the decision will likely be widespread. Most properties in New Castle County built after 1983 are assessed without any depreciation. Because each tax year brings with it a new opportunity to challenge an assessment, property owners can bring a new appeal reflecting the property's current depreciation to the Board of Assessment Review every year. Ultimately, this could result in the downfall of the decades-old base-year assessment, as the county finds it necessary to update assessments for a larger number of properties.

A number of questions remain unanswered by the court's ruling. How should assessors value properties in areas that were rural in 1983 but are now highly developed? How can taxpayers quantify and reconcile appreciation and depreciation?

Future cases will need to resolve these questions, but for now, owners of Delaware property should evaluate their portfolios and determine whether opportunities exist to improve profitability by reducing property taxes.

Benjamin Blair is an attorney in the Indianapolis office of the international law firm of Faegre Baker Daniels, LLP, the Indiana and Iowa 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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May
31

Tax Exemptions Draw Scrutiny

Owners face hidden pitfalls when applying for commercial property tax exemptions.

Municipalities are taking a hard look at real estate tax exemption applications, hoping to offset revenue losses stemming from a rash of successful assessment challenges.

It’s unsurprising that taxpayers are mounting protests in record numbers, considering the dollars at stake. Commercial real estate taxes in the Northeast are among the highest in the nation, and the high cost of living in the area compounds the financial pressure on property owners. That also explains why many property owners are seeking relief from those costs by applying for exemptions.

Most states provide an avenue which exempts religious, educational and not-for-profit entities from the payment of real estate taxes. Some states, such as Maine, limit tax exemptions to a dollar amount. Others including Rhode Island impose a property size limitation, while some states have no discernible limits on the property size or exemption amount, which is the case in New York. Despite these limitations, tax exempt applications represent a significant loss of potential tax revenue for a municipality.

To qualify for the tax exemption, each state has its own application, which must be filed with the proper agency, typically the assessor or assessment department. Many states require taxpayers to file a new application each year, along with supporting documentation.

Once submitted, there are three possible outcomes: The application may be granted in full, meaning the property is 100 percent exempt from real estate taxes; it may be granted in part, meaning only a portion of the property will receive tax-exempt status; or it may be denied.

Provided the exempt organization is operated exclusively for the purposes specified in its enabling statute, and the entire property is wholly used for its specified purpose and no profit is made by the property owner, the application should be granted. Many courts have determined that all parts of the exempt property must be used in connection with its exempt purpose to qualify for a 100 percent exemption. Any property not utilized in this respect will be placed back on the assessment roll.

If a building or portion of the property is not being used or is vacant, the property may still qualify for the exemption, provided that a clearly defined plan is in place to utilize the property in the near future for exempt purposes. Construction plans, grading of the property, renovations and the like would  satisfy this requirement.

In recent practice, these three conditions have been strictly interpreted, with municipalities seizing every opportunity to place previously tax-exempt property back on the assessment roll.

Praying for Relief

Recently, a small yet nationally recognized church of about 75 congregants in New York needed to retain legal counsel to defend its tax-exemption application. The 13-acre property was improved with a number of free standing buildings used for administration, housing for the pastor and places of worship. The church had owned the property for decades and always received a 100 percent tax exemption.

Sometime in the winter of 2015, a pipe not properly winterized burst in one of the buildings. The property flooded and sustained considerable damage. To save on renovation costs, the church and its members took on the repair of the building themselves. The church’s subsequent application for the real property tax exemption duly related this information, and as a result, the application was denied in part.

The municipality reasoned that because the building was now vacant and not being used for an exempt purpose (it could not be used while under renovation), it was no longer entitled to tax-exempt status. The taxing entity placed the property back on the assessment roll and issued a tax bill totaling more than $100,000.

The church did not have the funds to pay, and faced the distinct possibility of foreclosure and the loss of the property by tax lien sale. Negotiations by the local attorney for the reinstatement of the 100 percent tax exemption stalled. Ultimately, the church successfully challenged the partial denial in court via motion for summary judgment.

Tax-exempt Lessees

Problems can also arise when a privately owned property is leased to a tax-exempt entity seeking a tax exemption. In other words, would a taxable building be entitled to an exemption based on a lessee’s status as an exempt entity? The answer is unequivocally “no.”

New York Real Property Tax Law 420(b)(2) carves a limited exception to the above, however. If a for-profit entity that owns a property leases the entire parcel to a non-profit, the only time the property would be entitled to tax-exempt status would be if any money paid for its use is less than the amount of carrying, maintenance and depreciation charges on the property. However, the terms “carrying charge,” “maintenance charge and “depreciation charge are undefined in the statute.

Nevertheless, courts have interpreted carrying charges as outlays necessary to carry or maintain the property without foreclosure, such as insurance, repairs and assessments for garbage disposal, sewer, and water services. Amortization of mortgage principal for these purposes should be excluded from carrying charges, as should corporate franchise taxes, which are crucial to the corporation’s existence but not to the maintenance of the building. Legal expenses for the collection of rent or penalties and late fees should also be excluded.

Maintenance charges include costs to maintain and repair the property. They may not include enhancements that increase the property’s value, replacements that suspend deterioration, or changes that appreciably prolong the life of property.

Depreciation can be defined as a decline in property value caused by wear and tear, and is usually measured by a set formula that reflects these elements over a given period of useful property’s life.

Clearly, while real property tax exemptions are becoming more popular, potential applicants would be wise to contact an attorney or expert familiar with applicable statutes and case law before submitting an application for property tax exemption.

 

Jason Penighetti 217x285Jason M. Penighetti is an attorney at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLP, the New York State member of Amercian Property Tax Counsel, the national affiliation of property tax attorneys.  Contact Jason at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Dec
07

Superstorm Sandy's Impact On Property Taxes

Mistaking rehabilitation for new construction, assessors inflate post-superstorm tax assessments.

Four years have passed since Superstorm Sandy slammed the East Coast and crippled the Northeast. The overwhelming majority of media coverage centered on the devastation suffered by residential properties, paying little attention to the tens of thousands of commercial property owners who suffered equally historic destruction.

The rebuilding process has been a feast for local tax assessors, who have increased property assessments throughout these Sandy-stricken areas based on the misguided opinion that rehabilitated commercial properties should be valued as newly constructed buildings, ignoring the financial realities and stigma attached to "Sandy properties."

The post-Sandy rebuilding process has taken years, requiring commercial property owners to overcome insurance claim nightmares, bureaucratic red tape, and the massive exodus of tenants who either lost their businesses or relocated as a result of the storm. Too often, local tax assessors ignored the hardships suffered by these property owners, taking advantage of the reconstruction by increasing assessments well above pre-Sandy values to increase their tax base.

Fortunately, the laws of each state allow landlords or property owners to reduce unfairly increased property tax assessments by filing a commercial tax appeal. These appeals offer the owner or the owner's representative the opportunity to prove that the property is worth less than its current taxable value. Whether that tax-reduction opportunity occurs at an administrative hearing, through negotiations or in the courtroom, taxpayers are best served by seeking the expertise of an attorney experienced in navigating the appeals process and the valuation of commercial properties.

Proper Valuation vs. Unfair Increases

Traditional methods to valuing commercial real estate for property taxation include the sales-comparison, cost, and income capitalization approaches.  Sales comparison typically relies upon arms length sales data. Unfortunately, there is very little arms-length transaction data in Sandy-ravaged areas because the market has been flooded with sales of distressed properties.

The cost approach should only be applied when valuing new construction or specialty properties.

When tax assessors value commercial buildings as in-come-producing properties, they capitalize the subject's net income stream, or if owner-occupied, the income it would generate if leased. Appraisal professionals and the courts agree that this income-capitalization approach is the preferred method of valuation at a commercial tax appeal.

Nevertheless, local tax assessors have been leaning on the cost approach when valuing post-Sandy re-habilitated retail properties. These assessors mistakenly perceive a property owner's rehabilitation or reconstruction work as equivalent to a capital improvement or new construction, at the same time ignoring the economic realities that these property owners faced as a result of the storm. More specifically, the cost approach ignores increased expenses, extended periods of vacancy and the difficulty that landlords continue to face in luring tenants back to properties destroyed by the storm. This unfortunate valuation practice has inflated tax assessments and created unfair tax burdens.

Hidden Costs Linger

Sandy's impact runs deeper than brick and mortar reconstruction. Cleanup, rehabilitation and lingering stigma have forced landlords to contend with increased expenses and lengthy vacancies. The stigma that follows a "Sandy property" is similar to that attached to cars sold in New Orleans after Hurricane Katrina, engendering the burdensome label of "Katrina cars."

Like suspicious car buyers in Katrina's wake, prospective tenants either ran for the hills or demanded low rents with short-term leases after learning that a property was ravaged by Sandy. The fear of the unknown resulted in tenants searching for what they perceived as less risky locations further inland.

In addition to disproportionately high vacancies, Sandy-stricken property owners have had to contend with significantly increased expenses. Insurance is one example. Not only have premiums skyrocketed due to the perceived risk of owning property near Sandy's point of impact, but the Federal Emergency Management Agency has issued new flood zone maps that expand many flood zones inland. Flood zone boundaries have compelled landlords to purchase flood insurance in areas that are relatively far from the shore, regardless of whether their property incurred damage from the storm.

Property owners typically bore the costs to rehabilitate flooded and destroyed properties, because many insurance companies exclude wind or hurricane damage from coverage. Other properties sustained damages in excess of policy limits. Unfortunately, many owners lacked the necessary funds to rehabilitate, leaving entire shopping centers abandoned.

Property owners who were lucky enough to have full coverage still had to deal with empty buildings and high carrying costs for many months during ongoing construction.

Taxpayers Fight Back

The key to a successful property tax appeal is to arrive armed with data supporting the argument that the subject property is worth less than its assessed, taxable value. For commercial property, the owner or their representative should analyze the subject's income and expense history, together with market data of similar properties in the area. For a Sandy property, this analysis should concentrate on the actual economic harm suffered as a result of Sandy and its aftermath.

In order to do this, prior to filing a property tax challenge, the taxpayer's representative should review copies of the leases, rent rolls and income and expense data of the subject from the last five years. Assuming the asset suffered major vacancies, the property owner's representative must be prepared to discuss and produce documentation or an affidavit attesting to the hardships faced in trying to rent the property and overcome the stigma associated with marketing Sandy-stricken space. In addition, the owner must be prepared to produce and discuss all insurance claims, including awards and denials, and provide an accounting of all out-of-pocket costs associated with the property's rehabilitation.

A carefully prepared and documented presentation of the facts offers the owner a real possibility to avoid unfairly high property tax assessments on these Sandy-impaired properties.

Hild and PenighettiRyan C. Hild and Jason M. Penighetti are attorneys at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLP, the New York State member of Amercian Property Tax Counsel, the national affiliation of property tax attorneys.  Contact Ryan at This email address is being protected from spambots. You need JavaScript enabled to view it. or Jason at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Dec
05

In Tax Law, There Are No Insignificant Cases

Throughout the United States, taxpayers can expect to bear the burden of proof in property tax appeals. Standards vary by jurisdiction, but owners who seek to change a municipality’s assessment must convince a board or court that the property owner is correct in challenging the assessor’s conclusion. If they fail in that argument, the assessment remains unchanged.

Commercial taxpayers and their tax professionals often review decisions by local courts to glean direction and weigh prospects of a favorable outcome in their own cases. These stakeholders tend to only view complex commercial property cases for insight, ignoring residential and small commercial cases. But seemingly insignificant residential and small commercial cases are rich in detail that may aid taxpayers with a more sophisticated case when preparing to meet the standard of proof.

Some of these smaller cases shine a light on changing expectations of the court. For example, courts may begin to deem evidence that once would have been acceptable to meet the court’s threshold is no longer adequate. Thus, while the court does not change the law or create new standards, its interpretation of “sufficient competent evidence” may well move the goal post. The education obtained from these cases is not a guiding light to win a case, but rather a reminder of how not to lose one.

In New Jersey, law presumes that any property assessment is correct. Based on this presumption, any taxpayer appealing that valuation has the burden of proving the assessment is erroneous. The presumption is more than an allocation of which party carries the burden of proof. Rather, it expresses that in tax matters, the law presumes that the assessor correctly exercised their governmental authority. In a 1998 decision, MSGW Real Estate Fund vs. the Borough of Mountain Lak, the court stated that the presumption of correctness stands until sufficient competent evidence to the contrary is presented.

Courts must decide whether the evidence presented is sufficient to counter the assessor’s conclusion. To meet that standard, the evidence presented must be sufficient to determine the value of the property under appeal, thereby establishing the existence of a debatable question as to the correctness of the assessment.

This language is common in most jurisdictions. In New Jersey, it is also increasingly more common to see a change in the trial court’s interpretation of what meets the level of proof to question the assessor’s assumptions. The danger to taxpayers occurs when a court of special expertise establishes case law that, in effect, raises the standard of proof by simply increasing the evidence barrier to attain a reduction.

For example, in January of this year a New Jersey tax court decided Arteaga vs. Township of Wyckoff, where the taxpayer challenged the assessment of a single-family home assessed at approximately $900,000. The property owner offered an expert and an appraisal report for the years under appeal, while the municipality did not complete an appraisal, instead relying on the presumption of correctness.

The taxpayer’s expert cited three sales in a sales comparison and concluded a value of approximately $775,000. In a 10-page opinion, the court rejected the expert’s conclusions, finding fault with his adjustments to the comparable sales.

The court stated that an expert’s testimony must have a proper foundation to be of any value in an appeal. Citing earlier cases, the court stated that an expert must offer specific underlying reasons for their opinions, not mere conclusions. An expert witness is required to “give the why and wherefore of his expert opinion, not just a mere conclusion.” In this case, the court found that the plaintiff’s expert provided no substantive factual evidence to support the adjustments made.

The trend toward requiring a higher level of evidence has been growing over a number of years. As the court noted in a 1996 case, Hull function Holding Corp. vs. Princeton Borough, expert opinion unsupported by adequate facts has consistently been rejected by the tax court. Other rulings have stated that while the court has an obligation to apply its own judgment to valuation data submitted by experts in order to arrive at a true value and find an assessment for the years in question, the court must receive credible and competent evidence to make an independent finding of true value.

In the recent case, the court stated it was not provided with credible and competent evidence. As a result, the court had insufficient information from which to determine valuation. The court concluded that in general the expert provided no market analysis for any of the adjustments he made to his comparable sales.

The lesson to be learned: be aware of the potential of a new, heightened level of proof to establish a reduction. The case law has not been changed or altered. However, while most jurisdictions have case law suggesting that a court be mindful of the expense and reasonableness of data it should expect from a taxpayer to prove its case, trends have started to appear that swing the decisions toward a more difficult and expensive standard.

A number of recently decided residential tax appeals have followed this path to a find of no-change to the assessment. While the courts may be correct in the conclusions that evidence was lacking, they set a disturbing tone as to the level of expectation required for data to prove a value reduction.

The answer for taxpayers seeking a solution to this issue cannot be detailed so as to follow a definitive path to victory. For taxpayers seeking reductions in assessments, they must be aware and wary of not only the law, but the court’s most recent expectations.

Phil Giannuario photoPhilip Giannuario is a partner at the Montclair, N.J. law firm Garippa, Lotz & Giannuario, the New Jersey and Eastern Pennsylvania member of American Property Taxc Counsel (APTC), the national affiliation of property tax attorneys.  Contact Philip at Ryan at This email address is being protected from spambots. You need JavaScript enabled to view it. or Jason at This email address is being protected from spambots. You need JavaScript enabled to view it.

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May
31

Tax Resolution Conundrum

Pittsburgh resolves to reduce taxpayers' inflated property assessments.

Politics makes strange bed fellows. Pittsburgh's city council recently ordered its finance director to draft policies that protect taxpayers from assessment appeals by the city, and even to file appeals on taxpayers' behalf.

Unlike many states, Pennsylvania allows the three entities that levy real estate taxes (counties, schools and municipalities) to appeal annual real estate assessments, just as taxpayers do.

Taxpayers file appeals when they believe their property is over-assessed, in order to reduce their assessment and their real estate taxes.

When taxing authorities file annual appeals, they seek to increase assessments and taxes. The city of Pittsburgh has historically filed appeals following the sale of a property assessed at a lower value than the sale price. This practice, where taxing authorities essentially sue individual taxpayers (and voters) to increase real estate tax payments, is common in Western Pennsylvania.

In a strange twist, first-term city councilman Dan Gilman recently introduced legislation to limit the city's ability to file increase appeals and, in some cases, to even direct the city to file appeals to decrease property assessments. The resolution passed and the mayor signed the measure on Feb. 23.

The resolution starts off with two self-limiting provisions. First, it bars the city from appealing the assessment of a property for two years after the property sells. Second, the resolution prohibits the city from using a property's sale price as the basis for an appeal seeking an assessment increase.

These provisions restrict the city from doing what it is permitted to do by Pennsylvania statute, which states that "[Any county, city, . . school district . . which may feel aggrieved by any assessment of any property . . shall have the right to appeal" an assessment the same as the property's owner.

The resolution further limits the city to appealing a property's assessment once every three years. Pennsylvania's statute allows taxing authorities to appeal annually.

David "J.R." Sachs, president of A-1 Van Service recently battled Pittsburgh taxing authorities over his property's assessment, and believes the new resolution is a good idea.

After Sachs purchased three dilapidated buildings and contaminated land along the banks of the Allegheny River in 2013, the school district appealed his assessment, seeking an increase to the purchase price. Sachs saw his assessment mushroom from $489,800 to $540,000 following the appeal, while the assessments of neighboring properties without recent sale prices remained unchanged.

The new resolution "gives people a chance to invest in their properties and improve them before getting hit with a tax increase," Sachs says.

Perhaps most unusual is the resolution's requirement directing the city to generate a list of properties with assessments 50 percent or more greater than their market value, and to "appeal values downward on behalf of those owners." This provision turns current practice on its head.

In a taxpayer-initiated appeal seeking an assessment reduction, the city's legal department has historically defended the assessment and fought against reductions. Now, the city will be required to file appeals seeking reductions on behalf of taxpayers.

This last provision is not entirely unprecedented in Pittsburgh. In 2005, Allegheny County, where Pittsburgh is located, conducted a countywide reassessment following a court mandate, releasing the new assessment figures but refusing to certify the assessment. Instead, the county resisted implementing the assessments in litigation that wound up in Pennsylvania's Supreme Court.

During this litigation, in April 2006, Allegheny County filed 11,000 appeals on behalf of taxpayers who saw their assessments rise since the prior reassessment in 2002 as a result of previous appeals by school districts or municipalities. Allegheny County brought these appeals to hearing and requested reductions. City and school district representatives appeared and defended the assessments.

The city's recent initiative may have unintended consequences, according to Pittsburgh lawyer, Michael I. Werner of ZunderWerner, LLP. Werner has extensive experience representing property owners in appeals of their property assessments. "When the county did the same thing in 2006, property owners were confused. In some instances, the owners did not want the county to file appeals on their properties," he says. "This put us in an odd position: Because the owner was not the appellant, we were unable to withdraw the appeals. The county was trying to help, but they inadvertently created new obstacles for many property owners."

"It is a noble thing they are trying to do, but it raises the question of whether a city employee, who does not know the specific property and who does not have an attorney-client relationship with the property owner, is in a position to properly represent that owner's interests," Werner says. "City-initiated appeals to reduce an assessment should only be filed at the request of the property owner."

The city's resolution also calls for its finance director to collaborate with the Pittsburgh school district and Allegheny County to implement and expand its new policies. Given the history, it seems unlikely that the school district will join the city, either in self-limiting its appeal rights or in filing appeals seeking lower assessments.

Pennsylvania school systems are strapped for cash due to the state legislature's budget impasse: lawmakers are more than eight months past deadline to pass the 2015-2016 budget, and many school districts have been forced to take out loans to meet operating expenses. Increasingly, school districts have become more aggressive in filing increase appeals as they seek new sources of revenue.

What happens next is open for debate. Even though Pittsburgh's mayor ratified the resolution on Feb. 23, one councilwoman introduced a measure on Feb. 22 to repeal it. The new proposal remains in committee. All assessment appeals for properties in Pittsburgh were due March 31, and hearings will begin in May and June.

sdipaolo150Sharon 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..

 

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May
05

Property Tax Assessments Spiral Out Of Control In New York

Massive assessment hikes in New York City confirm that Mayor Bill de Blasio intends to extract as much revenue as possible from real estate, one of the city’s most important industries. This will kill the golden goose underlying the city’s economic recovery.

The city released its tentative assessment roll for the 2015-2016 tax year on Jan. 15, 2015, revealing painful and substantial increases in market value for both residential and commercial properties. The city pumped up the value of residential properties by almost 11 percent, while driving up commercial assessments by 12 percent over the prior tax year.

These increases are nearly double the rate of increase effected by last year’s final assessment roll, where residential market values increased by 6.6 percent and commercial market values increased by 7 percent over the 2013­-2014 roll.

The compound effect of year-after-year increases is a crushing burden to owners and tenants, but the higher end of the commercial property spectrum was particularly hard hit in the latest assessment roll. Owners of trophy office buildings saw their market values spike by more than 31 percent over the prior year’s values.

Even worse, owners saw the market value of luxury hotels soar almost 65 percent over the previous year’s values for assessment purposes. The city is rough-handling these properties with mounting harshness on both sides of the income and expense equation.

As a result of the new citywide assessments, real estate taxes in the city continue to substantially erode owners’ and developers’ bottom lines. Based on an analysis of the most re­cent assessment roll, the percentage of income now dedicated to paying real estate taxes is so high that the city has essentially become a silent partner in these properties — without the inher­ent risks of ownership, of course.

Consider the example of a non-exempt Manhattan residential property, with annual net operating income of $1 million before real estate taxes. Factoring in the current municipal residential tax rate and the prevailing capitalization rates used by the City Department of Finance, our hypothetical property yields a taxable assessed value of approximately $3.6 million and a property tax bill of about $463,000.

That burden means the property owner in this example is paying 46 percent of his or her net income in real estate taxes alone. Even analyzing the numbers based on a gross income of $1.4 million (based on the Department of Finance’s most recent expense guidelines), city property taxes account for more than one-third of the property’s overall expenses.

The situation is similarly oppressive for commercial properties, although they currently enjoy a lower property tax rate and higher capitalization rates than their residential counterparts — at least according to the most recent New York City Department of Finance Assessment Guidelines. Utilizing a similar analysis to the residential example above, the owner of a midtown Manhattan office building with a net operating income of $1 million would be paying just under 40 percent of its net operating income and almost 30 percent of its gross income in real estate taxes.

Based on the de Blasio administration’s ever-increasing crusade for revenue, owners and developers can expect this trend to continue. However, there are a number of avenues for them to pursue in order to ameliorate the effects of this rapid and seemingly endless rise.

While the release of the 2015-2016 assessment roll may have upset many taxpayers, it also marks an opportunity. That’s because the roll’s release begins the process under which owners and developers can initiate challenges to their property tax assessments. Based on the situation described above, it is likely that most of them will be doing exactly that.

Owners must challenge their assessments by filing applications and supporting documentation to the New York City Tax Commission. The owner’s representative must prepare a detailed analysis of conditions at the property, an analysis of leasing and vacancy, and a carefully prepared set of comparable properties to support the relief sought.

The Tax Commission is the administrative agency charged with annually hearing owners’ real estate tax challenges. The agency has the power to offer a reduction in the challenged assessment. Owners who are dissatisfied with the results of this Tax Commission review are entitled to challenge their assessments in New York State Supreme Court.

JoelMarcusJoel R. Marcus is a partner in the New York City law firm of Marcus & Pollack LLP, the New York City 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..

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