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Property Tax Resources

Jan
16

Don't Just Accept Your Tax Assessment

Ensure tax bills reflect continuing value reductions for office assets caused by COVID's long-term effects.

Since early 2020, the COVID-19 pandemic has upended lives and disrupted the normal course of businesses, including those in the commercial real estate market. As in many other sectors, however, this public health crisis has not affected all commercial properties equally.

Real estate occupied by essential businesses such as grocery stores, sellers of household goods, and warehouse clubs, for example, have weathered the pandemic well. A few have even increased their market share. By contrast, many office buildings, hospitality and non-essential retail properties have suffered severely.

Taxing jurisdictions and assessors have responded to the crisis with varying degrees of success. The Ohio Legislature passed special legislation (spearheaded by Siegel Jennings Managing Partner Kieran Jennings) to allow a onetime, 2020 tax year valuation complaint for a valuation date of Oct. 1, 2020, since the usual tax lien date of Jan. 1 would not have shown the effects of COVID. Other assessors applied limited reduction factors to account for the sudden pandemic-induced decrease in property values.

As values recover, it is important for taxpayers to monitor still-unfolding consequences as they review their property tax assessments.

Initially, hotels and experiential property uses suffered the steepest losses as travel declined or completely halted. While the long-term effects of COVID-19 are still emerging as the pandemic progresses, office properties may be the real estate type changed the most, and perhaps permanently so. Central business districts and suburban campuses or headquarters have been particularly hard hit.

In the last six to 12 months, many people have returned to working in an office at least part of the time, especially since vaccinations have become widely available. However, the emergence of virus variants has stalled the full return to the office that looked imminent earlier this year.

Some firms including Twitter, Zillow, Spotify, and Dropbox decided that they will not require workers to return to the office at all, making remote working a permanent option. Other companies including Google, Nationwide, Microsoft, and Intuit will continue with a hybrid model that requires workers to be in office some of the time.

Many of those employers are using an office hoteling model. Hybrid arrangements require less physical office space per employee, although employers will need to balance having fewer employees onsite against the desire for low-density occupancy.

With more employees working remotely, many office tenants have subleased space they no longer need, adding to available office supply. For example, toward the end of 2020, the Chicago metro region's office market reached a record high in available sublease space, with two-thirds of it in the central business district. For employees who work in CBDs, there is an added concern of commuting via public transit.

In the initial stages of non-essential business closures and governmental stay-at-home orders across the country, many tenants sought rent abatements and concessions. Tenant defaults and increased unemployment exacerbated office vacancy levels.

Some of the workforce in more densely populated markets may have relocated away from central business districts, at least at the beginning of the pandemic, also influencing office space demand. As acceptance of remote work increased, both employers and workers not tied to a physical office location gained employment and talent-search opportunities beyond their local markets. This, too, has influenced the demand for office space.

The Columbus area's overall office vacancy rate was more than 23 percent in the third quarter of 2021, according to Cushman & Wakefield. That vacancy figure includes more than 1 million square feet of sublease space but does not include offices leased but underutilized – or not used at all – because of employees working from home.

As these vacancy rates and over-abundant sublease inventory demonstrate, there is a disconnect between the space that office tenants are currently leasing and their actual real estate needs. As leases expire, it will not be surprising to see tenants renegotiate for smaller footprints and shorter durations as they adjust to their changing requirements.

The shrinking need for office space is not limited to markets with dense populations and public transit commuters. In fact, these trends reverberate in suburban markets. Multiple large suburban office buildings in the Cleveland area, together totaling almost two million square feet, were 75 percent empty in the fall of 2021 because of employees working remotely.

This suggests that property tax assessments may be based on outdated lease information. Accurate valuation of office properties for taxation will require proper consideration of lease renewals and related activity. In reviewing assessments, it will be critical to scrutinize any older sale transactions assessors used for comparison that were based on pre-pandemic leases.

Positive signs are emerging for the commercial real estate market overall. Bloomberg recently reported that domestic U.S. travel for the year-end holidays is expected to be near pre-pandemic levels. Downtown foot traffic, hotel stays, and visitor counts have been climbing back from the lows seen early in the pandemic.

Despite this good news, office properties face persistent challenges. Recently, Marcus & Millichap reported that the office sector was one of the only property types lagging in 2021 commercial real estate transaction volume compared to the same time in 2019. (The other was medical office.) Flexibility on the part of both tenants and owners will be key in riding out the continuing waves of lease maturities and renewals in this changing market.

Since assessors are often using lagging data in their assessments, attention to the continued effects of COVID on office properties will be vital to ensuring that property tax valuations reflect a property's fair market value. Remember, too, that various assessors are treating COVID effects differently, so as always, it is wise for property owners to consult with experts familiar with assessment law and appraisal practice in their local jurisdictions. With careful observation of market changes, strategic planning and review with trusted tax experts, taxpayers can help ensure that their real estate tax burden is fair.

Cecilia J. Hyun (This email address is being protected from spambots. You need JavaScript enabled to view it.) is a partner with Siegel Jennings Co., L.P.A. The firm is the Ohio, Illinois and Western Pennsylvania member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Cecilia is also a member of CREW Network.
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Dec
23

APTC: Ohio School Districts Push for Excessive Property Taxes

A recent order from the Ohio Board of Tax Appeals highlights a troubling aspect of real property tax valuation in the Buckeye State, where school districts wield extraordinary authority to influence assessments. In this instance, courts allowed a district to demand a taxpayer's confidential business data, which it can now use to support its own case for an assessment increase.

Ohio is one of the few states that permit school districts to participate in the tax valuation process, allowing a district to file its own complaint to increase the value of a parcel of real estate, and permitting a school district to argue against a property owner that seeks to lower the taxable valuation of a parcel of real estate.

Steve Nowak, Siegel Jennings Co.

Generally, school districts looking to increase tax revenue will review recent property sales for opportunities to seek assessment increases. Likely candidates for an increase complaint include real estate that changed hands at a purchase price or transfer value that exceeds the county assessor's valuation. That is not always the case, however.

In the case that gave rise to this article, there was no recent sale of the subject property, which is a multi-story apartment building. The apartment building owner had done nothing to draw any assessor's attention to their property in recent years — it had not been listed for sale, for example, nor had the owner recently refinanced the property.

Blind assertions

In the apartment building case, the school district filed a complaint to increase the county's valuation from $3.85 million to $4.63 million. At the local county board of revision hearing on the school district's complaint, the school district failed to present any competent and probative evidence that the apartment complex was undervalued as currently assessed.

The school district could not present evidence of a recent sale because there had been no sale. The school district also failed to present an independent appraisal witness to testify that the apartment complex was undervalued. Not surprisingly, the county board denied the school district's request to increase the valuation of the subject property.

This is where things got tough for the property owner, and where other Ohio taxpayers may face similar dilemmas. Having received the county board's denial of its complaint, the school district filed an appeal to the Ohio Board of Tax Appeals (BTA) to relitigate its argument that the apartment complex was undervalued.

Once a case is appealed to the BTA, the parties to the case obtain the right to conduct discovery. This is a process intended to help parties in a legal disagreement to "discover" or learn the case and evidence the opposing side may present against them.

Here, as part of its discovery requests, the school district asked that the property owner provide directly to the school district copies of rent rolls, income and expense information and other business records.

Not wanting to turn over such sensitive information, the property owner filed a motion for protective order and requested the BTA deny the school district's prying requests into the day-to-day operations of the apartment building's financial performance. Because discovery is granted as a matter of right on appeal and the threshold for discovery requests is fairly low, the BTA denied the property owner's request for a protective order.

Facing what it believed to be an unconstitutional infringement of its right to privacy, the property owner appealed the BTA's decision denying the request for a protective order to the next appellate level. The taxpayer laid out its arguments of why the school board's baseless complaint seeking to increase the property owner's valuation was unconstitutional.

The appellate court was unmoved, however, and issued a short order upholding the BTA's decision denying the property owner's motion for protective order.

Private data shared

Faced with the appellate court's order, the apartment building property owner was left with no choice but to turn over to the school district years of rent rolls and years of income and expense records for the property. The school district then provided the property owner's own confidential and sensitive business information to the district's appraiser.

Thus, after failing to produce sufficient supporting evidence of its original valuation assertions, the very evidence the school district will now rely upon to increase the property owner's real estate valuation (and tax bill) will have been provided by the property owner itself.

Cases like the one outlined above illustrate the unfettered discretion that school boards have in deciding on what properties to seek increased valuations. This puts Ohio real estate owners' rights at risk, and needs to be responsibly and reasonably curtailed.

Steve Nowak is an associate in the law firm of Siegel Jennings Co. LPA, the Ohio, Illinois and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Mar
05

COVID-19 Demands New Property Tax Strategies

Commercial real estate owners should build arguments now to reduce fair market value on their properties affected by the pandemic.

The uncertainties and changes brought on by COVID-19 have had far-reaching effects on all facets of daily life. As commercial property owners position themselves to weather the storm, it is crucial that taxpayers most affected by the virus do what they can to control their property tax expenses.

The issues they face are complex, from pre-crisis valuation dates and the need to quantify value losses, to cash-strapped taxing entities that will be reluctant to compromise on values. Taxpayers will need creative, innovative approaches to successfully protest their assessments and see their cases through to having their taxable property values reduced.

Ohio mulls relief

Assessors in Ohio and many other states value real property as of Jan. 1 of the tax year under protest, known as the tax lien date. Other than when a property has recently sold, assessors and courts seldom consider factors occurring after the tax lien date in a property tax case.

For example, the current property tax filing period in Ohio relates to tax year 2020, and real property is required to be valued as of Jan. 1, 2020, for that tax year. That means valuations for 2020 in those jurisdictions typically ignore changes to a property's value that occurred during the COVID-19 pandemic.

Ohio is the only state considering legislation that would require taxing authorities to recognize the effects of COVID-19 on real estate values where the impact occurred after the tax lien date. Depending on where a property is located, taxpayers will need to consider all options if their jurisdiction does not allow for consideration of the impact of COVID-19 in a tax challenge this year.

When it comes to deciding whether to challenge a property's assessment, there are many factors to consider. If the property recently sold, analyze the sales price to indicate the actual market value of the real estate deducting any non-real estate values. Then factor in the pandemic-related issues.

The taxpayer may need to order an appraisal, whether to support their own complaint or in fighting a tax increase complaint filed by a school district. These circumstances are more likely in some jurisdictions than others; experienced local counsel can help the taxpayer decide whether, and when, to obtain an appraisal.

At times, taxing authorities or a court may require testimony from a property owner or other individuals associated with a property. Many taxing authorities are allowing testimony via popular video conferencing applications, which may make it easier than in the past to seek the involvement of witnesses for a hearing.

Variations by property type

Market trends affecting specific property types and operations will provide evidence to support many assessment protests. Hotels, for example, have been directly impacted by COVID-19, therefore data for hotel properties must be carefully evaluated in light of current events.

Compile historical information such as 2020 financials as soon as possible, as well as recent occupancy reports. Hotel owners must be prepared to testify along with their expert appraisal witnesses.

First-hand knowledge of the devastating effects of COVID-19 will be an important component of a case. While Ohio courts in the past have generally disfavored the discounted cash flow method of valuing commercial properties, expert witnesses may need to explore, use, and be prepared to explain that option in a post COVID-19 world.

It is important to note that COVID-19 has not affected all property types in the same manner. The pandemic devastated many hotels, restaurants, and certain retail and office properties, for example. On the other hand, other properties such as industrial properties serving ecommerce operations have fared well.

How trends relating to property type translate into a potential reduction in a property's fair market value depends on what a particular jurisdiction requires from taxpayers to prove their case. Property sales data from 2020 to the present will become an important component of any property tax review, given the events of the past several months. Discussions with an appraiser familiar with local data and trends will be critical.

Even if a taxpayer cannot reference COVID-19 effects in a challenge filed this year, they should consider effective strategies now in preparation for future property tax issues related to the pandemic. Most likely this will involve a long-term approach to contain property taxes, while addressing short-term needs as best as possible. A case settlement may address several tax years, giving the taxpayer some certainty and planning capabilities for the future.

Additionally, a plan for how to approach a case often depends on the regional property tax landscape. Because of this, achieving a good outcome in the future may depend on how the taxpayer prepares their case from the outset, affecting decisions such as whether to have an appraisal and which parties should testify.

The best means to address recent change and today's uncertainties are to remain adaptable and to begin forming effective case strategies as soon as property tax expenses become available for evaluation.

Jason P. Lindholm is a partner and directs the Columbus, Ohio office of law firm Siegel Jennings Co. LPA, the Ohio, Western Pennsylvania and Illinois member of the American Property Tax Counsel, the national affiliation of property tax attorneys.
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Sep
28

How to Fight Excessive Property Taxes During COVID-19

Cash-strapped municipalities may look to extract more revenue from commercial properties.

It would be difficult to conceive of a more impactful event for the commercial real estate market than the coronavirus pandemic. Short of finding a cure for COVID-19, the tremendous state of flux in the sector will test the resourcefulness of commercial property owners and operators for months or years to come.

Market changes always create winners and losers; the more dramatic the shift, the greater the wins and losses. In the current market shakeout, commercial property owners are asking how to best position themselves to land on the winning side. The old standby that "cash is king" is sure to apply as the economic fallout settles, and reducing the real estate tax burden is a great way to conserve capital.

But it won't be easy. Taxpayers who plan to contest high taxable values on their commercial properties face an uphill climb. Here are some common difficulties to expect, along with opportunities to consider in tax appeals.

Valuation date dilemmas. The first problem for many owners who want to reduce their tax burden relates to the timing of the pandemic. Most U.S. communities began feeling the impact of COVID-19 in March or later. However, most jurisdictions had already assessed properties with a fixed valuation date of January 1, 2020. Also, most assessors are unwilling to consider the coronavirus in valuation until January 2021.

Damage provisions. Some jurisdictions have statutory provisions that may apply to properties for the damage done by COVID-19. There is a push to clarify Ohio's statute to recognize the effects of COVID-19, for example. There are similar provisions under consideration in Illinois. Additionally, Pennsylvania has valuation dates that could prove useful for taxpayers. NAIOP and other real estate organizations have supported these actions at various levels. Owners should determine whether they can claim pandemic-related damages in contesting tax bills they are now receiving.

What about next year? Even if a taxpayer cannot pursue a challenge on the current assessment, they can take steps to reduce future assessments. This means meeting with the local assessor to establish a proper assessment before it becomes final.

For taxpayers who choose to follow this advice and address future assessments now, make sure to treat any informal meeting as if it were a hearing. Come prepared — with accurate data demonstrating the impact on property value. Discussing anecdotally that stay-at-home orders and other restrictions affected the property value is insufficient — these circumstances are the reason the taxpayer can begin the conversation, but not the substance of a compelling case for revaluation.

Substantiate arguments. Show the assessor hard numbers demonstrating how COVID-19 or the post-COVID economy affected the specific property. Have social-distancing measures, residential migration or other changes created density challenges? Is there a measurable decline in occupier demand, or a decline in foot traffic and business activity at tenants' businesses? What is the economic feasibility of the tenant base? Whatever the reasons for revisiting the valuation, the property owner should be prepared to show the impact with the same supporting material they would use to pitch the project to investors or lenders. Use facts and figures. Bring in experts. Many taxpayers are fighting for the survival of their investment, and they should act accordingly.

Vet the team. Insist that any outside tax counsel or consultants understand the taxpayer's position. This is not business as usual, so educate advisors about the real estate's value. Work as a member of the team and communicate with its members, from local counsel to the valuation expert, and talk with the individual who will meet with the assessor. Formulate a plan together and then be flexible, allowing people to pivot when they see something changing. If the team understands how to determine assessed value and understands the owner's position, then trust them to make changes in the moment as they see fit.

Anticipate challenges. How can a taxpayer prove what the assessment should be amid so much uncertainty, and with little to no sales evidence to assist in determining value? Always attack the obvious head on. For instance, if the price paid for a recently purchased property is unhelpful, analyze the sale using the same expectations established in due diligence. This may eliminate the sales price as an indicator of market value, allowing the team to then present more beneficial and relevant points. Use the law, use facts and use prior experience where similar facts lined up.

Prepare for resistance. State and local governments are in a tough spot. All over the country, there are budgetary shortfalls at the local level because of the pandemic. Many communities and schools rely on income tax, sales tax and property tax, but in the current environment there is little sales tax revenue, and it appears income tax will take a hit. Property tax is all that is left.

Appeals will not be easy. The team's appraiser must be able to establish a value and defend it. Their testimonial skills, whether in court, at a hearing or informally, are as important or more important than the valuation itself. Also, contact a local expert; market value may not be the only available avenue to a fair and uniform assessment. Owners fortunate to have their commercial properties fairly and uniformly assessed (and not negatively impacted in the pandemic) can perhaps refrain from filing an appeal. In a state where a board or court can raise assessments, an unwarranted appeal may lead to an increase in assessment, although in most states, increased assessment from a tax appeal is rare.

J.Kieran Jennings is a board member of Ohio and Northern Ohio NAIOP and a partner in the Cleveland, Ohio office of the law firm Siegel Jennings Co. L.P.A., the Ohio, Western Pennsylvania and Illinois member of American Property Tax Counsel (APTC), the national affiliation of property attorneys.
Greg Hart is an attorney in the Austin, Texas law firm Popp Hutcheson, PLLC, the Texas member of APTC.
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Sep
01

Intangibles Are Exempt from Property Tax

Numbers of lawsuits remind taxpayers and assessors to exclude intangible assets from taxable real estate value.

A recent case involving a Disney Yacht and Beach Club Resort in Orange County, Florida demonstrates how significantly tax liability can differ when an assessor fails to exclude intangible assets. For Disney's property, the tax assessor's and Disney's valuation of the property differed by a whopping $127.8 billion.

Real estate taxes are ad valorem, or based on the value of the real property. And only on real property.

The precise definition of real property varies by jurisdiction but generally is "the physical land and appurtenances affixed to the land," which is to say the land and any site and building improvements, according The Appraisal of Real Estate, 14th Edition.

Your real property tax assessment, then, should exclude the value of any non-real-estate assets. That includes tangible personal property like equipment, or intangible personal property like goodwill.

When real estate is closely linked to a business operation, such as a hotel, it can be difficult to separate business value from real estate value. If the business activity is subject to sales, payroll, franchise, or other commercial activity taxes, then the assessor's inclusion of business value in the property assessment results in impermissible double taxation.

In Singh vs. Walt Disney Parks and Resorts US Inc., the county assessor appraised the Disney resort using the Rushmore method, which accounts for intangible business value by excluding franchise and management expenses from the calculation of the net income before capitalizing to indicate a property value.

Disney argued the Rushmore method did not adequately separate income from food, beverage, merchandise and services sold on the real estate, not generated by leasing the real estate itself. Disney also argued that the assessor included the value of other intangible assets like goodwill, an assembled workforce, and the Disney brand in the valuation.

The trial court did not rule on the propriety of the Rushmore method but found its application in this case violated Florida law. Referencing an earlier case involving a horse racing track (Metropolitan Dade County vs. Tropical Park Inc.), the court agreed with Disney that "[w]hile a property appraiser can assess value using rental income or income that an owner generates from allowing others to use the real property, the property appraiser cannot assess value using income from the taxpayer's operation of business on the real property."

The trial court decision was appealed to the district court (appeals court). The appeals court found the Rushmore method, not just its application, violated Florida law by failing to remove all intangible business value from the tax assessment. When the case returned to the trial court on another issue, the appeals court instructed that the Rushmore method should not be used to assess the property.

In deciding Disney, both courts found SHC Halfmoon Bay vs. County of San Mateo instructive. That case involved the Ritz Carlton Half Moon Bay Hotel in California. The California court had rejected the Rushmore method because it "failed to identify and exclude intangible assets" including an assembled workforce, leasehold interest in a parking lot, and contract rights with a golf course operator from the property tax assessment.

The Disney trial court also looked to the Tropical Park horse track case, where the tax assessment improperly included income generated from the business betting operation not the land use.

Similarly, in an Ohio case involving a horse racing facility, the state Supreme Court rejected a tax valuation that included the value of intangible personal property in the form of a video-lottery terminal license (VLT) valued at $50 million by the taxpayer's expert (Harrah's Ohio Acquisition Co. LLC vs. Cuyahoga County Board of Revision). The property had a casino and 128-acre horse racing facility including a racing track, barns, and grandstand.

The Ohio Court recognized that the VLT had significant value that should be excluded from the real property tax assessment. It rejected the argument that the license was not an intangible asset because it could not be separately transferred or retained. Looking at its prior decisions, the Court had recognized a non-transferable license could still be valuable to the current holder of that license, and that value should be exempt from real property taxation.

Experts continue to disagree about the best method to appraise assets with a significant intangible business value component.Nonetheless, these court cases underline again how important it is for your tax assessment to exclude intangible assets. With most commercial property owners facing onerous tax burdens based on pre-COVID-19 valuation dates, it is even more critical that intangible assets are removed from valuations for property tax purposes. Work closely with assessors, knowledgeable appraisers, and tax professionals to ensure you only pay real estate taxes on the value of your real estate.

Cecilia J. Hyun is a partner with Siegel Jennings Co., L.P.A. The firm is the Ohio, Illinois and Western Pennsylvania member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Cecilia is also a member of CREW Network.
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Apr
17

Higher Property Tax Values in Ohio

The Buckeye State's questionable methods deliver alarmingly high values.

A recent decision from an Ohio appeals court highlights a developing and troubling pattern in the state's property tax valuation appeals. In a number of cases, an appraiser's misuse of the highest and best use concept has led to extreme overvaluations. Given its potential to grossly inflate tax liabilities, property owners and well-known tenants need to be aware of this alarming trend and how to best respond.

In the recently decided case, a property used as a McDonald's restaurant in Northeast Ohio received widely varied appraisals. The county assessor, in the ordinary course of setting values, assessed the value at $1.3 million. Then a Member of the Appraisal Institute (MAI) appraiser hired by the property owner calculated a value of $715,000. Another MAI appraiser, this one hired by the county assessor, set the value at $1.9 million. The average of the two MAI appraisals equals $1.3 million, closely mirroring the county's initial value.

Despite the property owner having met its burden of proof at the first hearing level, the county board of revision rejected the property owner's evidence without analysis or explanation. The owner then appealed to the Ohio Board of Tax Appeals (BTA).

In its decision on the appeal, the BTA focused on each appraiser's high-est and best use analysis. The county's appraiser determined the highest and best use is the existing improvements occupied by a national fast food restaurant as they contribute beyond the value of the site "as if vacant." The property owner's appraiser determined the highest and best use for the property in its current state was as a restaurant.

With the county appraiser's narrowly defined highest and best use, the county's sale and rent examples of comparable properties focused heavily on nationally branded fast food restaurants (i.e. Burger King, Arby's, KFC and Taco Bell). The BTA determined that the county's appraisal evidence was more credible because it considered the county's comparables more closely matched the subject property.

By analyzing primarily national brands, the county's appraiser concluded a $1.9 million value. Finding the use of the national fast food comparable data convincing, the BTA increased the assessment from the county's initial $1.3 million to the county appraiser's $1.9 million conclusion.

On appeal from the BTA, the Ninth District Court of Appeals deferred to the BTA's finding that the county's appraiser was more credible, noting "the determination of [the credibility of evidence and witnesses]…is primarily within the province of the taxing authorities."

Questionable comparables

Standard appraisal practices demand that an appraiser's conclusion to such a narrow highest and best use must be supported with well-researched data and careful analysis. Comparable data using leased-fee or lease-encumbered sales provides no credible evidence of the use for which similar real property is being acquired. Similarly, build-to-suit leases used as comparable rentals provide no evidence of the use for which a property available for lease on a competitive and open market will be used. However, this is exactly the type of data and research the county's appraiser relied upon.

A complete and accurate analysis of highest and best use requires "[a] n understanding of market behavior developed through market analysis," according to the Appraisal Institute's industry standard, The Appraisal of Real Estate, 14th Edition. The Appraisal Institute defines highest and best use as "the reasonably probable use of property that results in the highest value."

By contrast, the Appraisal Institute states the "most profitable use" relates to investment value, which differs from market value. The Appraisal of Real Estate defines investment value as "the value of a certain property to a particular investor given the investor's investment criteria."

In the McDonald's case, however, the county appraiser's highest and best use analysis lacks any analysis of what it would cost a national fast food chain to build a new restaurant, nor does it acknowledge that the costs of remodeling the existing improvements need to be considered.

If real estate is to be valued fairly and uniformly as Ohio law requires, then boards of revision, the BTA and appellate courts must take seriously the open market value concept clarified for Ohio in a pivotal 1964 case, State ex rel. Park Invest. Co. v. Bd. of Tax Appeals. In that case, the court held that "the value or true value in money of any property is the amount for which that property would sell on the open market by a willing seller to a willing buyer. In essence, the value of property is the amount of money for which it may be exchanged, i.e., the sales price."

Taxpayers beware

This McDonald's case is not the only instance where an overly narrow and unsupported highest and best use appraisal analysis resulted in an over-valuation. To defend against these narrow highest and best use appraisals, the property owner must employ an effective defense strategy. That strategy includes the critical step of a thorough cross examination of the opposing appraiser's report and analysis.

In addition, the property owner should anticipate this type of evidence coming from the other side. The property owner's appraiser must make the effort to provide a comprehensive market analysis and a thorough highest and best use analysis to identify the truly most probable user of the real property.

Steve Nowak, Esq. is an associate 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.
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Jul
23

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.

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..
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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.

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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..

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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..

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