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Property Tax Resources

Jul
23

Head: Ohio’s Misguided Tax Fix

A proposed law to close the "LLC Loophole" from real estate transfer taxes is a solution in search of a problem

By Cecilia Hyun, Esq.

Ohio legislators are drafting a measure to apply the state's real estate transfer tax to the transfer of any ownership interest in a pass-through entity that owns real property. This proposal will cause more problems than it solves.

Ohio assesses its transfer tax, called a conveyance fee, on each real estate transaction based on the purchase amount reported on a conveyance fee statement and filed with the deed. If a pass-through entity owns the property, a sale of interest in that entity is exempt from transfer tax. The proposed changes would apply the conveyance fee to those transfers, however.

Also, if the property purchase price exceeds currently assessed value, recording the conveyance fee statement and deed with the county will usually trigger a lawsuit by the school district to increase the assessment and tax bill.

Transfers exempt from transfer tax include gifts between spouses or to children; sales to or from the U.S. government, the State of Ohio or any of its political subdivisions; transfers to provide or release security for a debt or obligation; and sales to or from a non-profit agency that is exempt from federal income tax, when the transfer is without consideration and furthers the agency's charitable or public purpose. Generally, the policy is to impose the transfer tax only after a market transaction with market consideration.

What's the problem?

Lawmakers consider the proposal on transfer tax and pass-through entities a tool to fix the problem of real estate value escaping taxation, both at the time of transfer and, more importantly, as part of the assessment. The two supposed loopholes that the proposal aims to close are:

  1. The transfer tax loophole argument assumes that some buyers may structure their purchase as an entity transfer, in part, to avoid the transfer tax, which can be significant for a highly valuable property.
  1. The property tax loophole describes the more likely "problem" the proposed law purports to address. This argument suggests that some buyers attempt to avoid real estate tax increases when the purchase price is higher than the current tax assessment by structuring the deal as an entity transfer

Ohio assumes that a recent, arm's length sale price is the best evidence of property value for real estate taxation. Filing the deed and conveyance fee statement prompts the school district to file a lawsuit to increase the taxes. The conveyance fee statement indicates the purchase price, carries evidentiary weight and is presumed to be completed under oath, even though as a practical matter it is more like a clerical function and seldom completed by any party to the sale.

When interest in the ownership entity transfers without direct conveyance of the real estate, the transfer tax is inapplicable under current law and no purchase price is recorded. Some sales may be structured this way, trying to avoid exposure to an increase in property taxes by filing a conveyance fee statement.

Everyone should bear their share of the tax burden based on fair property valuation, but this proposed bill does not solve the problem of people skirting their responsibility. It also can lead to unintended consequences including the loss of privacy, increased transaction costs, implementation and enforcement costs, and less real estate investment.

A multilayered dilemma

There is no indication that using a pass-through entity is even an effective way for investors to avoid triggering an increased assessment. Ohio school districts file increase complaints not only when deeds and conveyance fee statements are recorded, but also in response to mortgages, LLC transfers, SEC filings, and sometimes the opinion of outside consultants. There is little evidence that significant numbers of sales are missed because they are the transfer of ownership interests. Thus, there is no loophole that needs to be closed.

The proposal disrupts uniformity, because using a recent purchase to set the assessment midway through Ohio's three-year valuation cycle treats taxpayers who've recently bought their properties differently than others. This is non-uniform treatment, which the Ohio Constitution prohibits.

The conveyance fee statement is often completed and filed by someone not a party to the sale. Common errors occur, usually in allocating the total asset purchase price. Historically, these incorrectly reported purchase prices were being applied to set real estate tax values with increasing rigidity, leading to assessments that did not accurately reflect the value of the real estate.

Assessments should only value real estate, but assessments based on these total asset prices would include the value of non-real estate items as well. To the extent that the value of these other items -- for example, an ongoing, successful business operation -- were also being taxed through sales taxes or a commercial activity tax, these taxpayers were subjected to double taxation.

The solution exists

A recent amendment to the tax law mandates that a real estate assessment reflect the unencumbered fee simple interest. The Ohio Supreme Court recently confirmed in its Terraza 8 LLC vs. Franklin City Board of Revision decision that the amendment requires assessors and tribunals to evaluate all circumstances of a sale, and not blindly apply the number reported on the conveyance fee statement.

The appraisal of the unencumbered fee simple interest provides uniform assessment for all taxpayers, while acknowledging the circumstances of real world transactions. It limits double taxation by making sure real estate tax is based on real estate value only, and yields consistent results whether a sale price is higher or lower than the current assessment.

It ensures uniform measurement and taxation for everyone; just as you would not impose taxes based on gross profits for one taxpayer and net profits for another. It also ensures that the tax is applied consistently, whether the owner just bought the property, has owned it for decades, leases it, occupies it, owns it individually or owns it through interests in a pass-through entity. Valuing the unencumbered interest also results in predictability, aids budgeting, and alleviates deal-killing uncertainty.

There are legitimate reasons to convey property through the transfer of ownership interests in an LLC or other pass-through entity, including privacy or other tax planning. The proposed bill undercuts those legitimate concerns without addressing the perceived problem of real estate value escaping taxation. Consistently valuing the unencumbered fee simple interest of real property through uniform assessment and uniform application ensures that no real estate value escapes taxation, and that no taxpayer bears more than their fair share of the burden.

Cecilia Hyun is a partner at the law firm Siegel Jennings Co. L.P.A., which has offices in Cleveland, Pittsburgh, and Chicago. The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel (APTC), 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..
Dec
30

Time for your Annual Property Tax Check

Question: What do the following have in common? A developer of a new mixed-use power center. The owner-operator of nursing homes or assisted living facilities. A national retailer with a large distribution center. A 100+ unit multifamily owner or manager. The owner of hotel chain. A high-tech manufacturer with a research and development facility. Answer: They all pay property taxes.

Whether you are a real estate investor or need real estate to house and facilitate your business operation, your real estate taxes will be one of your highest expenses, and one that you must pay even if your property is vacant or underperforming. Now is the time for your yearly check-up on your Ohio properties to determine whether the values that form the basis of your property taxes are fair.

Review your assessment

Start by reviewing the assessment on your tax bills. In Ohio, your tax valuation should reflect a reasonable sale price under typical market circumstances for the land and improvements as of the tax lien date of January 1, 2017. Verify that the information in the county records is accurate. For many Ohio counties, including Cuyahoga, much of this information will be online. Double-check building size, land size, year built, number of stories, etc.

Grounds for a change in value

The following are the most common types of evidence considered by boards of revision, which is the initial reviewing body:

Sale

One way to demonstrate value is with a recent, arm's length sale price. Generally, if a sale occurred within two years of tax lien date, did not include any non-real estate items, and was typically motivated, the price will be good evidence of the real estate value for tax purposes.

Appraisal

An appraisal can also be used to justify a change in value. Appraisal done for tax appeals must value the property as of the tax lien date. The appraiser should also be ready to testify at the hearing. Appraisals for tax appeals may have requirements that are not necessarily present for appraisals for other purposes, such as financing, so it is helpful to talk to someone familiar with the process.

Property Conditions

If there are unusual conditions, severe deferred maintenance, sudden changes in occupancy, or ongoing vacancy issues that affect the value of your real estate, that information should be brought to the attention of the board. Recent sales of properties similar to yours that support a lower value for your property may also help demonstrate that your valuation is incorrect.

Filing Deadline

The deadline to contest your assessment for properties in all Ohio counties is March 31. Because it falls on a Saturday in 2018, the deadline will be extended to April 2. The complaint form can be obtained from the county in which the property is located. The form is only one page; however, there are restrictions on who can file a complaint (i.e. what relationship they have to the property) as well as some technical requirements that may be missed by those unfamiliar with them. Generally, only one complaint can be filed per triennial period, although there are some exceptions.Once the deadline has passed for a particular tax year, the chance to contest that assessment is lost.

Procedure

After your complaint is filed, the local school district where the property is located has the opportunity to file a counter-complaint. After the period to file both complaints and counter-complaints has expired, the county board of revision will schedule a hearing. Each county board has its own rules regarding the submittal of evidence, requests for continuances, etc. At the board of revision hearing you will have the opportunity to explain why the assessment of your property is inaccurate. Boards of revision are not generally bound by the Ohio Rules of Evidence; boards are also empowered to conduct their own research. The board of revision may adopt the value you are seeking; it may make no change, or grant you are partial decrease. It may even increase the value, so it is important to consider carefully before filing a complaint.

Appealing the BOR decision

If you do not agree with the decision of the board of revision (BOR), you can appeal it to the county court of common pleas, or the Board of Tax Appeals (BTA) in Columbus. The BTA is an administrative tribunal that only hears tax related cases. Proceedings at this level are more formal than at the board of revision. Prior to September 29 of this year, a decision of the BTA could be directly appealed to the Ohio Supreme Court. Now any appeals from the Board of Tax Appeals and courts of appeals to the Ohio Supreme Court are discretionary and not as of right. The Supreme Court can decide not to hear your case. It is unclear yet the consequences of this recent legislative change, but there may be an increase in disparate treatment across the state as a result.

School district increase complaints

All Ohio taxpayers should be aware that Ohio is one of the few states (Pennsylvania is another) where school districts are enabled to file an action to get your tax valuation increased. Usually, this occurs when a recent purchase price is higher than the most recent tax assessment. Be aware of how the taxes will be prorated when you are working on a sale transaction. Depending on the timing of the sale, you may end up owing additional taxes for a period during which you did not actually own the property.

No one enjoys paying taxes, but with some research and preparation, you can make sure that your share of the real estate tax burden is fair.

Oct
18

Why Taxing Authorities are Suing Taxpayers

Municipalities and school districts increasingly file lawsuits to increase property tax assessments.

As property owners increasingly participate in transactions across multiple states and countries, they could be shocked to find themselves defending against a lawsuit filed to increase their real estate taxes.

A minority of states allow the local real estate tax assessing body or school district to appeal a tax assessment, arguing that the property's value and resulting taxes should be higher.  States where these types of appeals are allowed include Ohio, Pennsylvania and New Jersey.  Property owners in those states should  be aware that someone may be filing a lawsuit to increase their property taxes.

Method to the madness

Taxpayers cannot prevent a school district or assessing body from appealing a property tax assessment in states that allow them to do so.  Property owners should be especially watchful in the following situations where it is more likely to occur:

Sales – In Ohio, if a recorded sales price is higher than the current assessment, it is almost guaranteed that the local school district will file a complaint to increase an assessment, particularly in large markets around urban areas.

School district attorneys routinely review recorded sales for comparison to the current assessment.  Although recent legislative changes have increased assessors' ability to consider all relevant facts of a sale, a recorded sales price is still a formidable challenge to overcome.

In Pennsylvania, and particularly in Western Pennsylvania, sales are the most common trigger for an appeal to increase a tax assessment.  In states where chasing sales price may run afoul of constitutional protections, the local taxing authority may wait until a few years after the sale closes before filing the appeal.

Mortgages – In response to lower sales prices and increased sales volume resulting from foreclosure or bankruptcy during the Great Recession, taxing bodies also file appeals to increase taxes based on recorded mortgages.

Similar to the tracking of recorded sales, attorneys for the taxing authority will review the amounts of recorded mortgages and compare them to the current assessment.

When the mortgages are secured by collateral that includes other assets in addition to the real estate, this practice can lead to inaccurate and inflated real estate tax assessments.

Other available filings – A recent case in Ohio shows the spread of this practice from recorded mortgages and deeds to Securities and Exchange Commission (SEC) filings.

The local school district filed an appeal to increase the assessment of an apartment in Athens from approximately $12.6 million to $48.98 million, based on an SEC filing by a mortgage lender.

The property owner's attorney has stated that the SEC filing includes the total value of the business purchased, which includes other assets in addition to the real estate.

The local county board of revision granted the revision at the first level of review and the case is currently on appeal.

Outside consultants – In Pennsylvania, taxing authorities filing complaints to increase assessments are on the rise, particularly in counties that have riot undergone a reassessment in some time, based on the recommendations of outside consultants.

These consultants contract with a particular taxing body, typically the school district, to review assessments and recommend appeals on properties they identify as under assessed.

Although this consultant activity seems most prevalent in the eastern part of the state, the regular practice of school districts filing appeals is spreading across Pennsylvania.

Meanwhile, in Ohio certain school districts have even begun to file complaints to increase values in cases that have previously been tried in court.

Practical pointers

Because sales trigger so many of these cases, it is important to get pre-closing advice on the property tax consequences affecting your specific property.  There may be measures the taxpayer can take in structuring the transaction to avoid or minimize an increase in taxes.

Be aware of the tax consequences of recorded and publicly available documents, including SEC filings, particularly with portfolio asset purchases across multiple states.

Filially, attorneys for the taxing body may use procedural tactics to fish for non-public documents that could help them argue that a property is under assessed.  For example, school districts in Ohio have used the discovery process to subpoena financing appraisals from lenders.

Local expertise is key

Because real estate taxing schemes vary greatly, owners should consult local tax professionals to determine the best strategy to defend against an appeal that seeks to increase the property owner's taxes, or to minimize the potential that such an appeal will be filed in the first place.

Procedural, jurisdictional and evidentiary traps abound for those not well-versed in the local law.

For example, in Ohio, property taxes are levied and paid one year behind, meaning that taxes for the 2016 tax year are paid in calendar year 2017.  Similarly, appeals to reduce or increase the tax assessment are filed one year behind.

If a taxpayer purchases a property and the sale closes on Dec. 31, 2016, for a recorded price that is higher than the current tax assessment, the school district will be aware of that sales price and can contest the 2016 assessment any time from Jan. 1 through March 2017.

If the school district appeals the assessment based on the sales price and is successful, the assessment will be increased to the sales price, effective at the beginning of the 2016 tax year.

That means the buyer could be on the hook for increased taxes for a period of time when he did not own the property.

Local taxing bodies have been filing appeals now more frequently to increase property tax assessments, attempting to generate revenue after property values and sales prices dropped during the economic downturn.

Even though the market has improved, these taxing authorities are unlikely to now abandon the practice.

Consult with professionals who have local experience to defend against these suits in order to maintain fair real estate assessments and taxes.

Cecilia Hyun 2015

Cecilia Hyun is an attorney at the law firm Siegel Jennings Co, L.P.A., which has offices in Cleveland and Pittsburgh.  The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Apr
15

Valuation Education

How to spot - and challenge - unfair tax bills
Even if there is life left in this market cycle, commercial property owners should maximize returns now in preparation for the next buyer’s market, whenever it may begin. Property tax is one of the largest expenses for most owners, so protecting the property, investment and tenants requires a thorough understanding of the tax system. With that understanding, the taxpayer will be better equipped to spot an inflated assessment and contest unfair tax bills.

Keep it (fee) simple
Merely knowing for how much a property would sell is insufficient to ensure proper taxation. Specifically, taxpayers need to know fair taxation starts with a fair measurement of value.

The assessment is the measurement to which taxing entities apply the tax rate. In order to treat all taxpayers uniformly, assessors must measure the fee simple value of the property, or the value without any encumbrance other than police power.

Why is that important? The principle is that a leased property and an identical owner occupied property, valued on the same date and under the same market conditions, would be taxed the same. By contrast, leased fee value or value affected by encumbrances can vary greatly, even between identical properties. The concept is simple; the application, not so simple.

Assessors and courts alike struggle to determine an asset’s fundamental real estate value because their primary source of data is leased-fee sales, or sales priced to reflect cash flow from existing leases. Several courts across the country have understood the necessity to assess properties uniformly and have mandated that assessors adjust sales data to reflect the unencumbered value of the real estate.

In Ohio, the state Supreme Court ruled that an appraiser who was valuing an unencumbered property had to adjust the sale prices of comparable properties to reflect the fact that the subject property was unencumbered (by leases, for example) and would therefore likely sell for less. The decision recognized that an encumbered sale is affected by factors besides the fundamental value of the real estate.

Courts across the country have been wrestling with the fee simple issue. For real estate professionals, the idea that tenancy, lease rates, credit worthiness and other contractual issues affect value is commonplace. In order to tax in a uniform manner, however, assessors must strip non-market and non-property factors from the asset to value the property’s bare bricks, sticks and dirt.

Doing the math
Although part of the purchase price, contractual obligations and other valuable tenant-related attributes are not components of real estate. What is part of the real estate is the value attributable to what the property might command in rent as of a specific date. This may appear to be splitting hairs, but the difference between values based on these calculations can be significant.

In the first instance, the landlord and tenant have a contractual obligation. For example, suppose the rent a tenant pays under a 20-year-old lease were $30 per square foot. If the tenant were to vacate, however, that space might only rent for $10 per square foot today. The additional $20 per square foot premium is in the value of the contract, not the value of the real estate. Moreover, the contract only holds that value if the market believes the tenant is creditworthy and will continue to pay an above-market price.

When the tenant vacates, it’s the real estate itself that determines the current market-rate lease of $10.

Good data, good results
Identifying an inflated assessment brings the taxpayer halfway to a solution. Step two is finding the best way to challenge the inappropriate assessment. Each state has its own tax laws and history of court decisions, but a few key principles will help taxpayers achieve a fee simple value.

First, sales and rents must have been exposed to the open market. A lease based on construction and acquisition costs reflects only the cost of financing the acquisition and construction of a building, not market prices.

Another principle assessors often fail to apply is that the data they use must be proximate to the date of the tax assessment. Therefore, a lease established years before the assessment is not proximate, even if the lease itself is still current.

What does make for good data is a lease that has been exposed to the open market, where the property was already built when the landlord and tenant agreed to terms free of compulsion. Equally reliable is the sale of a vacant and available property, or where the lease in place reflects market terms proximate to the assessment date.

Taxpayers who challenge assessments that are not based on fee simple values help themselves maintain market occupancy costs, which will in turn lead to better leasing opportunities and retention of tenants.

KJennings90J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania 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..

Jul
22

Use Vigilance To Lower Tax Assessments

A firm understanding of how assessors apply market data locally comes in handy for savvy owners.

The real estate market is flourishing, as articles in Heartland Real Estate Business seem to confirm. Recent headlines such as “General Contractors are off to a Running Start,” and “Speculative Industrial Construction is Making a Come Back in St. Louis Market,” certainly are encouraging to readers.

But investors must remain diligent in keeping their assessed property values in check, or risk paying for their complacency later.

By monitoring assessments and challenging them when necessary, taxpayers can maximize profit and stay competitive when the cycle inevitably reaches its peak and the market begins to slide.

To minimize taxes, every taxpayer should understand the property tax system. That requires a grasp of local market dynamics and how assessors apply market data in establishing assessments.

Real estate taxes are merely a function of the tax rate multiplied by the assessment. The assessment is the measure that, if applied equally, and based solely upon bare real estate, that measure will yield uniform taxation for you.

Assessments tend to follow Newton’s law of inertia. Sales often set assessments in motion, but that doesn’t mean that sale prices always lead to assessments.

Price Versus Value

Too often, assessors confuse price with taxable value. Assessed or taxable value should be based on real estate alone. Sale prices, on the other hand, often reflect other factors that greatly affect the sale.

For instance, the business acumen of tenants and property managers often influence commercial property prices.

The lodging industry has an abundance of business and personal property value that is often difficult to distinguish from real estate value.

Hotel buyers are often purchasing in-place contracts, a workforce, personal property, reservation systems, the reputation of food and beverage providers, and other intangible items. As a result, the business value of a hotel tends to fluctuate more rapidly than the actual value of the “bricks and sticks.”

Because these intangible elements are factored into the sale, an assessment that is later based on the sale price will reflect more than the real estate value, unless the taxpayer takes the right steps to prevent that from happening.

What to look for

It is possible to strip away non-taxable components and turn a sale into a useful indicator of market value. An assessor can rely on a properly adjusted sale in the assessment of the subject property, and when valuing comparable properties. But what is the proper method of adjustment?

Excluding intangibles from taxable value can be an elusive goal. Investors often place tremendous value on the credit-worthiness of tenants, length of lease terms and other non-real-estate items. Those components depend on the occupant’s business rather than upon the location or condition of property improvements.

For assessment purposes, sales must be adjusted to reflect what the price would be if the tenant were a typical market tenant, paying market rent under current market lease terms.

State nuances

Taxpayers should consider not only the sale itself when evaluating for assessment, but also the particular state’s laws concerning assessments. For instance, Ohio recently amended its statutes to preserve it in assessments. Prior to the amendment, an assessor “must” have considered a recent sale price to be the new assessment of the property, regardless of any non-real-estate factors that might have affected the sale price.

Under the amended statute, assessors “may” use the sale, assuming that the sale reflects the “fee simple as if unencumbered value.” Thus, Ohio now takes a more nuanced approach, assessing properties based on market rents rather than in-place contract rents, along with the intention that assessors use market occupancy and market creditworthiness in assessments.

Taxpayers in other states have challenged assessment statutes to achieve more equal and taxation. Courts in Michigan addressed the concept of build-to-suit leases and contract rents, which the initial tenant pays in part to repay the developer’s costs, making contract rents incomparable with market rents.

Michigan now requires assessors to utilize market rents and other market indices to determine market value. Likewise, courts in Kansas and Wisconsin have established case law recently that requires more equal and assessment practices.

While there may be similarities between some states regarding their assessment laws, and a general trend of states moving toward more assessment, all states apply their laws differently.

Taxpayers must give due care to their state’s distinct approach.

KJennings90J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania 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..

Jun
26

Big-Box Retail Offers Property Tax Lessons for Industrial Owners

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

A big box of confusion

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

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

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

Implications beyond retail

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

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

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

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

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

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

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

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

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

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

Avoid complacency in industrial

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

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

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

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

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

Cecilia Hyun 2015

Cecilia Hyun is an associate attorney at the law firm Siegel Jennings  Co, L.P.A., which has offices in Cleveland and Pittsburgh.  The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Sep
30

How To Discover Whether Your Tax Assessment Is Fair

Many taxpayers pay more than their fair share of property taxes. Yet in a tax arena fraught with nuance, it can be difficult for a taxpayer to recognize an inflated assessment. The key to spotting a bad assessment lies in knowing precisely what the assessor is measuring and the requirements of the state's property tax law.

What, then, is being assessed? The simplistic answer is that real estate is being assessed, but that response doesn't fully address commercial real estate, where values often hinge on contracts, encumbrances and regional legal definitions.

That said, all states attempt to tax at similar levels properties that are similar to one another.

The challenge to meeting that goal is that commercial real estate is subject to a variety of contracts and encumbrances, creating situations where nearly identical properties are taxed at significantly different assessments. Causing more trouble is assessors' tendency to rely on recent sales to determine values, resulting in tremendous differences in assessments among similar properties.

In a Pennsylvania case, an owner filed to reduce his property's taxable value based on a long-term lease in place at below-market rent. The Pennsylvania Supreme Court held that assessors must weigh all the interests associated with a parcel, specifically the impact of leased-fee interests and leasehold interests on value. However, the typical commercial property sale only reflects the leased-fee portion of the sale, because the buyer is essentially buying a rental income stream.

Kentucky has yet to fully address the uniformity problem. The Kentucky constitution states that "all property, not exempted from taxation by this Constitution, shall he assessed for taxation at its fair cash value, estimated at the price it would bring at a fair voluntary sale." As a result, nearly identical buildings could be taxed at significantly different amounts.

Ohio legislators recently passed a statute to achieve uniform taxation. Ohio simply stated that the assessor must assess all real property at the fee-simple value as if it were unencumbered. In this way the state is requiring the assessor to use market terms regardless of above-market or below-market rents in place at the property.

The remedy to unfair taxation based on recent sales is to tax all property using market terms and market rates applied to the conditions specific to the property. Without knowing what the assessor is measuring, however, a taxpayer may consider a sales price to be a fair assessment value. As demonstrated by these examples, understanding how the states assess properties goes a long way to knowing whether a taxpayer is paying a fair share in that particular state.

KJennings90J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania 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..

Jul
16

Ohio Property Owners Face "Adversarial Culture" Over Taxes

Schools, board of revision routinely thwart efforts aimed at "fair taxation."

When is the best time to submit an appraisal and other evidence in a tax appeal? That depends largely on tax policy and government culture, which dictate how taxpayers manage tax appeals.

In a perfect world, taxing entities would embrace fairness and equality, remembering that their mission is ultimately to serve the taxpayers. The reality is that government tax policy - and more importantly, governmental practice - is subject to the culture that permeates a department.

In Ohio, state lawmakers have been trying to make the state more taxpayer-friendly. For instance, legislators created a more equitable measure of tax by clarifying that property tax is based on the fee-simple, unencumbered market value of the real estate. So from a policy standpoint, Ohio appears to be becoming more taxpayer-friendly. At the local government level, however, taxpayers can face a different and often adversarial culture.

In a perfect world, taxing entities would embrace fairness and equality. The reality is that government tax policy is subject to the culture that permeates a department.

Schools, Counties Have Clout

Ohio taxpayers face two principal antagonists that seem equally determined to thwart the state legislature's pursuit of fair taxation. One opponent is the schools. In Cleveland as well as in other local tax districts, taxpayers encounter resistance and aggression from the schools. School districts routinely file complaints and tie up taxpayers in litigation lasting years.

The Ohio taxpayer's second foe is the county board of revision, which is effectively the judge and jury for tax cases at the local county level and becomes a party to subsequent appeals at the state level.

Recently, Cleveland's Cuyahoga County began posting on its website the evidence that taxpayers submitted in contesting tax assessments. That evidence often includes sensitive information about income and expenses, as well as rent rolls.

And although evidence submitted to a public body becomes a public document and is subject to Freedom of Information Act requests, there is a significant difference between burying evidence in a file and posting taxpayers' private information on the Internet.

The Catch-22 is that the taxpayer must provide sufficient evidence in order to prevail in a tax appeal, and typically that evidence is private income, expenses and rent rolls. Taxpayers understandably want that data to be closely protected, but under the new rules in Cuyahoga County, that personal information will be posted online.

Transparency Versus Privacy

A major hurdle taxpayers have to contend with is that Ohio law requires a complainant to provide the board of revision with all relevant information or evidence within the knowledge or possession of the complainant.

The law further states that if complainants don't provide the information in their initial appeal, they will be precluded from doing so later (unless good cause is shown). The challenge is, how can a taxpayer protect private information and yet still receive due process?

The requirement of private information, combined with the inevitability of it being posted online, can have a dramatic chilling effect. And for certain taxpayers, that prospect of prominent public disclosure becomes an Achilles' heel that prompts them to withdraw their cases, or simply let their assessments go uncontested. The county will have thus won the war without ever having gone to battle.

Tactical Maneuver

Although the facts will dictate how an attorney protects the taxpayer, in certain instances a taxpayer can refrain from hiring an appraiser and submitting sensitive data until after the board of revision hearing. By delaying the production of the appraisal, the taxpayer can still get the data into evidence at the state level via the appraisal even though it did not produce the data earlier.

Thus, the taxpayer can protect the data from Internet exposure and still use it on appeal. The down side of this tactic is the taxpayer does not present its best evidence at the county level.

There is no easy answer to the county board of revision's Catch 22. Each case presents its own set of facts that determine how to protect the taxpayer's privacy and yet prevail. As with all litigation, knowing the opposition, addressing the taxpayer's own weaknesses and understanding the rules and culture surrounding the case goes a long way toward achieving success.

KJennings90J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co., LPA, with offices in Cleveland, Columbus and Pittsburgh. The firm is the Ohio and Western Pennsylvania member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Jul
12

A Taxing Situation in Cleveland

Owners at risk of unfairly high assessments pending Ohio Supreme Court guidance

"Recent history shows that districts are using sale prices to impose unreasonable tax burdens on taxpayers..."

Like much of the nation, Cleveland is experiencing sluggish but discernible improvements in its real estate market, and buyers are beginning to purchase real estate at prices that exceed the property's tax assessment value. The resulting real estate price volatility puts many Ohio property owners — and recent buyers in particular — at greater risk of receiving an unexpected and potentially unfair increase in their property tax bill. When property values are fragile, unexpected increases in expenses can be disastrous, and that includes an unexpected rise in real estate taxes. Ohio is one of the few states where school districts and other taxing entities have the legal authority to protest the assessed values of properties in their districts and to seek increases in taxable value. In fact it is customary for school districts in Ohio to seek an increased valuation and consequent rise in taxes on properties that have recently sold.

While the practice is customary, it is neither predictable nor uniform. The assessment on a property that recently sold can be significantly higher than the assessments on neighboring properties based on its sale price. Moreover, different taxing districts have different policies as to the extent and manner in which they pursue this remedy. For instance, some taxing districts may not aggressively chase sales. Others may seek not only to raise future assessments, but also to retroactively increase the assessment for the past year.

Taxing Sales

In many cases, a recent sale of real property is the best indication of its value, but there are exceptions. Modern real estate transactions frequently include the simultaneous transfer of non-real estate items, or the amount of consideration paid may reflect factors other than the fair market value of the real property. If these non-real estate items are not specifically identified and distinguished from the real estate value, they can be included in the value assigned to the property for files an increase complaint.

Recent history shows that with increasing frequency districts are using sale prices to impose unreasonable tax burdens on taxpayers. In an effort to correct this trend, on June 11, 2012, the state of Ohio enacted a statute that clearly states that real estate assessments must be based on fee simple estate, as if unencumbered. Moreover, the new statute further provides that where there is a recent arm's length sale, the auditor may consider the sale to be true value.

Read together, in order for the assessor to consider the sale price to be true value, that sale would have to reflect the fee simple estate, as if unencumbered. To understand why and how that is so important, it is useful to look back over developments in Ohio law over the past decade.

The Changing Law

Ohio law always provided that assessments shall be made based on true value and that "the auditor shall consider the sale price of such tract, lot, or parcel ... to be the true value for taxation." In 2005, the Ohio Supreme Court interpreted that statutory language to mean that there is no further evidence necessary to prove true value. Later, the Supreme Court expanded the ruling by stating that leased fee sales were also acceptable. (Leased fee value is based on a landlord's expected rental income from a leased property.) Even worse, later cases expanded the law to include leased fee transactions as comparable sales even when appraising fee simple, owner-occupied properties. And finally, other cases set precedents that precluded the county auditor, the state Board of Tax Appeals, or Common Pleas Courts from taking into consideration circumstances which indicated that the sale was not representative of market value. Despite the state's recent efforts to stop counties and school boards (which can file suits) from preying on investors buying property in Ohio, the trend has continued.

KJenningsGraph2013

Real estate buyers in Cleveland must be even more careful to take appropriate steps to ensure fair treatment. As recently as March 2013, an assessor used the sale price of the ongoing business of a 127-bed nursing home, which was part of a sale that included 72 other nursing home operations in a multi-state transaction, to determine its assessed value. The sale price of the nursing home was $10.6 million, and the assessor valued the property at that price. The taxpayer's appraisal valued only the real estate, which came to $3.5 million (see chart). In short, the county is now taxing the value of the personal property and business operation at the nursing home when it only has authority to tax the real estate.

State lawmakers have attempted to make the law more uniform and equal by establishing a standard of fee simple, as if unencumbered, while providing flexibility to use a sale where it is warranted. What is still needed is guidance from the Supreme Court to enforce that standard.
Until the court has an appropriate case to provide that needed guidance, investors need to structure transactions with taxation in mind. To be recently purchased must be treated like those that have not been sold. Unfortunately, the burden falls on the parties in the transaction to make sure that all documents involved in the sale, particularly those that are recorded publicly, reflect only the real estate value.

Countermeasures Emerge

As an alternative, many investors have taken to purchasing the entity that owns the property rather than the real estate. Purchasing the entity eliminates the need to record a new deed, which is often the triggering event for school districts to file complaints seeking additional property taxes. As a result, the county may unknowingly be forced to treat all taxpayers alike. Moreover, state law prevents the schools from using the purchase of an entity to treat new buyers differently than existing owners. In 2000 and in 1998, the Ohio Supreme Court ruled that the sale price of all the shares of a company's stock does not establish the value of the company's real property. This is true even where the only asset of the company is its real estate. By purchasing an entity rather than the bare real estate, a taxpayer has at least a fighting chance to have equal treatment under the law. Given the complexities of such a transaction, however, buyers should seek local counsel when using this acquisition strategy.


kjennings Kieran Jennings 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. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Oct
31

Low Income Housing Valuation

Valuation of Low Income Housing Tax Credit Properties for Real Estate Tax Purposes — an update from the Ohio Supreme Court

By Cecilia Hyun, Esq., as published by CMBA Journal, October 2009

There is a joke that made the rounds by email and on various real estate blogs awhile ago showing a house through the eyes of five different people: yourself, your buyer, your lender, your appraiser, and your tax assessor. (You can see a version of it here). The first image is of a nice, well kept, single family house with flowers, a nicely landscaped front yard and path. This is how you see your house. The next image shows what your potential buyer sees when looking at the same property: a smaller, more modest home resembling a modern log cabin. The next two images show how your lender and appraiser view the property. The lender sees an even smaller structure, with no lot to speak of, that looks like it was constructed piecemeal. Tarp covers part of the roof; the only thing that looks like it may be a window is boarded up, and there is laundry hanging from a clothesline out back. The appraiser sees a property that looks like it has been in the middle of a severe storm at the very least, if not a hurricane, parts of the walls are missing, there is flooding, and trees have been uprooted. The final picture depicts what your tax assessor sees when he looks at your house: a palatial, walled estate, with acres of land, surrounded by professionally landscaped gardens and trees, multiple wings, and at least one carriage or recreation house.

Like all good jokes, it contains a kernel of truth: property can be and is viewed through different prisms and within different frameworks. Different methods of valuing your property can lead to significant differences in value conclusions, and accordingly, your real estate tax bill.

The Ohio Supreme Court recently clarified how to value property constructed pursuant to federal low income housing tax credits ("LIHTC")1. The property in Woda consisted of sixty separate parcels of land improved with sixty detached, single family, homes containing two, three, or four bedrooms. The houses were built in 2002 pursuant to Section 42, Title 26 of the United States Code2 ("IRC 42"). As the court explains, under this program, federal tax credits are given to passive investors in low income housing developments. In return for these credits, rent restrictions are imposed on the property for a minimum of thirty years. These rent restrictions are binding on successive owners and must be recorded in the chain of title. Violations of these restrictions can lead to the recapture of the tax credits with penalties and interest.3 The Supreme Court held the use and rent restrictions are encumbrances that must be considered when valuing these types of properties for real estate tax purposes.

The owner-taxpayer of the low income housing property in Woda filed a complaint contesting the value the Fayette County Auditor placed on the property for tax year 2004. After a hearing at the local county board of revision ("BOR"), the Auditor's value was retained. The taxpayer then filed an appeal of the BOR decision to the Ohio Board of Tax Appeals ("BTA") located in Columbus.4 The BTA held that the taxpayer's evidence was unpersuasive and determined that the Auditor's value was correct.5 After reconsideration by the BTA, but no change in its decision, the taxpayer appealed the BTA decision to the Ohio Supreme Court.

At the BTA hearing, the taxpayer had offered the report and testimony of a state certified general real estate appraiser. The appraiser did not develop a cost approach or sales comparison approach to value, using only the income approach to determine value. (The Ohio Adm. Code Section 5703-25-07 outlines the three recognized approaches to value: 1) the market data or sales comparison approach, 2) the income approach, and 3) the cost approach). In the income approach, the appraiser developed a net operating income for the property, then directly capitalized that income to arrive at an overall value. He also developed a discounted cash flow analysis as if the units could be subdivided and sold to individual buyers (similar to an apartment conversion to condominium units) to serve as a check on the direct capitalization method.

The BTA rejected the appraiser's evidence based on the two main reasons: 1) the Board thought that the highest and best use of the property was for sale as individual units, rather than for continued use as rentals operated as one economic unit; and, 2) the cost approach was not utilized even though the subject property was relatively new, only having been constructed two years before tax lien date.

The Supreme Court reverses and remands the case to the BTA, holding that the effect of the LIHTC use restrictions must be considered when valuing the subject property. In past cases involving subsidized housing, the court had generally held that the properties were to be valued as if unencumbered by lesser estates, deed restrictions, or restrictive contracts with the government.6 Similar to the Woda property, the Alliance Court noted that without the federal loan guarantees, favorable mortgage terms, rent subsidies, and tax advantages associated with these properties, the properties would not have been built because the market rents would prohibitively low. The Alliance Court also notes that the tax shelter advantages associated with such properties are intangible items that do not add any value to the real estate.The Woda Court makes a similar point with respect to the tax credits, explicitly stating that the value of the low income tax credits should not be valued as part of the real estate. The court reasons that the credits are transferable apart from the underlying real estate and the value of the credit is determined by the tax situation of the purchaser, rather than any anticipated value from the real estate itself (or the "bricks and sticks").

On the other hand, the Supreme Court holds that the federal use restrictions in Woda must be taken into account when valuing a low income housing tax credit property , even if the value of the credits themselves are separate from the value of the real estate. In so holding, the Woda Court distinguishes between private e and involuntary government limitations to the estate such as eminent domain, escheat, police power, and taxation.7 The court finds that the LIHTC use restrictions are imposed by the government for the general welfare, qualifying as "police power" restrictions which express the judgment of Congress concerning public policy.8 Therefore, such use restrictions must be taken into account when valuing the property. The case is remanded by the Supreme Court bank to the BTA to receive additional evidence if necessary.

After the Woda decision was announced, the Ohio Department of Taxation issued a memorandum to all county auditors summarizing the holding and indicating that the Department read Woda as requiring the consideration of the use and rent restrictions that run with the land and prohibiting the inclusion of the value of the intangible tax credits when valuing LIHTC property for real estate tax purposes.

It clearly makes a material difference to value if the sixty parcels are valued as sixty individual homes, rather than as one economic unit consisting of rental units, or if the construction cost is used to determine value in a case like Woda. It will also matter in many cases whether contract rent, which could be higher or lower than market rent, is used to determine the income produced by a property. Intangible items unrelated to the value of the real estate, such as the value of the tax credits also must be separated out from the real property value to be taxed. As the joke demonstrates, appraising a property is not an exact science. A property is going to be valued differently by someone who is currently using the property, compared to someone who is considering buying the property, compared to someone who is going to lend you money for its purchase. Similarly, the value conclusion for your property and your resulting tax liability will be different based on what appraisal approach is used and which data is considered.

References:

  1. Woda Ivy Glen Ltd. Partnership v. Fayette Cty. Bd. of Revision (2009), 121 Ohio St.3d 175, 2009-Ohio-762.
  2. 26 USCA §42.
  3. Woda at 179.
  4. Woda Ivy Glen Ltd. Partnership v. Fayette Cty. Bd. of Revision (Sept. 21, 2007), BTA Case No. 2005-A-749, unreported.
  5. Woda Ivy Glen Ltd. Partnership v. Fayette Cty. Bd. of Revision (Jan. 11, 2008), BTA Case No. 2005-A-749, unreported.
  6. Alliance Towers, Ltd. v. Stark Cty. Bd. of Revision (1988), 37 Ohio St.3d 16, 523 N.E.2d 826.
  7. Woda at 181 (citing Appraisal Institute, The Appraisal of Real Estate (12 th ed. 2001).
  8. Woda at 181.

cecilia_hyun90Cecilia Hyun is an associate attorney with Siegel Siegel Johnson & Jennings Co, LPA, the Ohio member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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