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.

J. 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..

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.

J. 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..

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 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..

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.

J. 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..

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.

J. 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..

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.

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.

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.

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 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..

"Despite the abundant news coverage indicating that real estate continues to sit without being sold, taxpayers will encounter strong opposition when they try to obtain corrections in their assessments."

By Kieran Jennings, Esq., as published by Midwest Real Estate News, January 2009

Two problems now plague Ohio commercial property owners. First, the economic troubles faced by the entire nation also exist in Ohio. Second, the state is one of the very few that permits school districts to intervene in the assessment process.

In almost every commercial assessment hearing, school boards are present, making it virtually impossible for the Board of Revision to continue working toward its original goal, to find efficient ways to correct assessments. Instead, due to the school boards' involvement, tax cases may, and often do, take several years to come to resolution. This presents a real problem for over assessed property owners suffering from vacancies.

Take for instance an office or retail building that experienced a large drop in occupancy just as the market began to soften. Tenants staring into the face of a recession always put on their cost cutting hats. They look carefully at total occupancy costs, not just the rent, and this creates an obstacle for them in signing a lease. The problem is that at a time when taxpayers need fast tax relief in order to attract tenants, school boards seek to protect the tax base, causing prolonged litigation.

Taxpayers, Take Action

In this continuing economic downturn, taxpayers need to focus on those expense items that offer a real opportunity to positively affect the bottom line. All too often, taxpayers fail to recognize that property taxes fall into this category. Every dollar spent on property taxes removes resources that could help to increase sales and/or provide greater efficiency of operation. Thus, taxpayers need to carefully examine their tax assessments and determine whether a tax appeal should be filed. And time is not on the taxpayer's side, as tax complaints must be file in Ohio before March 31, 2009.

The larger southern (Cincinnati area) and central counties (Columbus and Dayton areas) have reassessed for the 2008 tax year. Summit County also reappraised for 2008. The final new values will appear on the first half 2008 tax bill payable at the beginning of 2009.

Property owners in these three areas face a difficult challenge because the data available for reappraisal reflects the peak of the real estate market, not the downturn precipitated by the credit crunch. In counties such as Cuyahoga, Lorain and Lake, assessments continue to be based on the high 2006 values. In all these areas, taxpayers are likely to receive excessively high assessments, which need to be appealed.

Despite the abundant news coverage indicating that real estate continues to sit without being sold, taxpayers will encounter strong opposition when they try to obtain corrections in their assessments. In order to meet this opposition head-on, well-documented arguments for tax relief become a necessity. In some instances that means providing the county Board of Revision with income and expense information and/or comparable sales; in others it may mean submitting an appraisal with testimony from an appraiser.

Unfortunately, it takes more than a well thought-out and documented argument to win a tax appeal, as school districts who receive the lion's share of the property tax revenue will strongly defend their tax base. Therefore, a taxpayer may be successful at the county Board of Revision only to find that the local school board has appealed the decision to the State Board of Tax Appeals.

At this point, the schools' attorneys get the opportunity to investigate taxpayers' evidence and they investigate for months or even years, casting the widest net possible in their fishing expedition. Since school attorneys are not assessors, nothing requires them to seek fair taxation for owners, so they may aggressively seek the highest assessments for their districts.

A critical step in the appeal process involves learning about the attorneys hired by the school districts, how receptive these attorneys may be to determining a fair tax assessment and how predisposed they are to giving the taxpayer a hard time versus looking for a win-win solution. By understanding the adversary, the taxpayer gains some perspective on how to negotiate with the school districts' attorneys.

While owning commercial real estate remains a sound long-term investment, in a down market owners need to diligently scrutinize the basis used by the assessor in determining their property tax assessments. Changes in the economy and financing can dramatically impact the value of real estate. Failure to file tax appeals when appropriate can cost owners tens of thousands of dollars in excessive taxes.

J. Kieran Jennings is a partner in the law firm of Siegel Siegel Johnson & Jennings, 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..