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Jul
27

Not All Bricks are Created Equal: How Functional Obsolescence Affects Property Taxes

Appraisal districts across Texas often use the cost approach to determine market value for property tax purposes. When valuing certain commercial properties via the cost approach, county appraisers frequently use cost-estimating services. These services enable appraisers to estimate the cost of the subject property's improvements as if they were new, as well as determine the depreciation to apply to the subject.

Cost estimators can be a great resource and valuation tool, but the appraiser is likely to reach an incorrect value conclusion using estimates from one of these services without also incorporating proper analysis of functional obsolescence.

Functional obsolescence is one of the three types of depreciation that measures a building's function and utility against current market standards. Given this, placing all weight on a service's depreciation estimates could lead to incorrect assessments that ignore functional obsolescence within the property's total depreciation.

The trouble with tables

Cost-estimating services typically provide depreciation tables that contain data for multiple commercial property types. County appraisers often cite these tables as their main source of depreciation support when using the cost approach.

It is important to know that these tables typically assume that all components of the improvements for the various property types depreciate equally across time. So for example, a brick used in a multifamily or office development will depreciate at the same rate as a brick used in a fast-food restaurant or movie theater.

Often-overlooked warnings from these services point out that certain real estate product types are subject to functional obsolescence that occurs rapidly and can significantly reduce the economic lifespan conclusion for the applicable property type. Given this information, a determination of total depreciation for the subject property must include an appropriate functional obsolescence analysis.

Evaluating functional obsolescence involves an analysis of the utility of the improvements, and how that degree of usefulness affects total depreciation. As an example, consider the fast food industry, which has evolved drastically over the past few decades.

As fast-food real estate models from the '80s and '90s continue to become obsolete, new models have appeared to attract and retain the millennial and Generation Z customer base. Because of this, it is common practice for fast-food companies to refresh their store models every five to 10 years, with a complete rebuild taking place every 20 to 25 years.

This refresh-and-rebuilding cycle is necessary to fit ever-changing consumer tastes and demands for this real estate product type. While the store refresh may include new flooring, additional exterior decoration and color schemes, a complete rebuild is necessary when the utility of the building no longer fits the current design standards demanded by the market. An economic life of 20 to 25 years may be appropriate to capture the potential functional obsolescence associated with this industry.

Theaters undergo sea change

Movie theaters are another competitive product type that may be subject to functional obsolescence outside standard physical depreciation. Theaters built in the 1990s and 2000s may struggle to compete with the eat-drink-and-play models that continue to increase in popularity. Across Texas, select stand-alone theaters that lack dining, bar, and event options continue to see revenues decline.

Theaters without these features often lack the capacity to add a commercial kitchen, bar service, or bowling alley into their existing structure, which limits the utility of the property based on market tastes and preferences. These older theaters may also contain large projection rooms that were previously used to house large equipment and film reels. Given the arrival of digital cinema, most projection rooms now require less space to house and project content into the auditorium.

Auditorium spaces are also evolving, based on the capacity to house premium luxury sections or reclining seats with independent power modules. These popular seating features have resulted in auditoriums having less seating capacity, given the additional space required for each seat. Clearly, it is important to analyze and recognize any applicable functional obsolescence that could affect this property type.

Real estate product types continue to evolve along with consumer standards and tastes; it will be important to consider the impact these requirements have on a building's utility over time.

Cost-estimating services are a great tool that is used frequently for valuation, but it is important to know what is – and what is not – reflected in their information. Once assessors realize this distinction, they can apply proper analysis of total depreciation in their cost-approach determination of a property's market value.



Kirk Garza holds the MAI designation of the Appraisal Institute and has earned the CCIM designation through the CCIM Institute and the CMI designation from the Institute of Professionals in Taxation (IPT). Kirk is a Director and licensed Texas Property Tax Consultant with the Texas law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. Joseph Jarrell and Jordyn Smith are graduate students at Texas A&M University's Master of Real Estate program. They may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
Jan
30

Attorney: Owners Need to Investigate Whether Possible Tax Increases from New Tax Law can be Abated

''While Republicans and Democrats remain divided on the overhaul's benefits, there is a single undeniable fact: The sharp reduction of the corporate tax rates from 35 percent to 21 percent will be a boon for most businesses"

President Trump's Tax Cuts and Jobs Act is the first sweeping reform of the tax code in more than 30 years. Signed into law on Dec. 22, 2017, the plan drops top individual rates to 37 percent and doubles the child tax credit; it cuts income taxes, doubles the standard deduction, lessens the alternative minimum tax for individuals, and eliminates many personal exemptions, such as the state and local tax deduction, colloquially known as SALT.

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

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

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

Generally speaking, most renovations such as new facades, windows, heating or air conditioning will not change the value or assessment on a property. The general rule is that improvements that do not change the property's footprint or use, such as a shift from industrial to retail, shouldn't affect the property tax assessment. However, an expans1on or construction that alters the layout of a property can -and usually does -result in an increased property assessment. Since realestate taxes are computed by multiplying the subject assessment by the tax rate, these changes or renovations can significantly increase the tax burden.

Tax Exemptions Available for Property Improvements

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

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

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

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

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

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



Jason M. Penighetti is an attorney at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLP, the New York State member of AmericanProperty Tax Counsel, the national affiliation of property tax attorneys. Contact him at JPenighetti@taxcert. com.
Aug
03

Property Owners Celebrate Fair Taxation Ruling by Pennsylvania Supreme Court

"Nearly every state constitution requires uniformity in taxation, meaning that two like properties should receive the same assessment, no matter how they are owned, occupied, built or financed."

Commercial property owners around the country are cheering a recent Pennsylvania Supreme Court decision that breathes new life into constitutional guarantees of uniformity in taxation.  Overruling a decade of lower court decisions, the ruling reestablishes the primacy of constitutional uniformity protections to taxpayers in the strongest possible language, fittingly issued just one day after the July 4 holiday.

Nearly every state constitution requires uniformity in taxation, meaning that two like properties should receive the same assessment, no matter how they are owned, occupied, built or financed.  Yet commercial property owners across the nation have been under attack by assessors attempting to alter appraisal theory in order to pin higher assessments and higher real estate taxes on specific owners.

These assessors have been singling out occupied commercial properties by setting assessments based on financing mechanisms that fail to meet standard appraisal definitions of market sales, incorrectly basing taxable value on data relating to sale-leasebacks, turnkey leases and contract rights arid duties associated with tenant financing.

In Pennsylvania and Ohio, the only states that provide school districts a statutory right to file increase appeals, the school districts have been targeting specific commercial owners for higher assessments using this same flawed methodology.  These selective or “spot” appeals disrupt constitutionally required uniformity in assessment.  Many Pennsylvania school districts have been paying contingency fees to behind-the-scenes consultants to select properties for appeal.

Commercial Portfolio Owners Beware

The consultants’ favorite repeat targets are national real estate portfolio owners that cannot vote in local school board elections.  The practice has gained traction over the past five years, with national companies being forced to defend against an ever-increasing number of increase appeals in which school districts seek discovery of the property owner’s confidential real estate information and then use it against the owner to justify an increase in assessment.

This practice violates fundamental fairness and puts targeted commercial owners at a competitive disadvantage with commercial owners whose assessments are not increased.  It also shifts more of the tax burden from residential to commercial owners, since most school districts are loathe to sue voting residential owners to increase their assessments.

In Valley Forge Towers Apartments LP vs. Upper Merion Area School District, the school district filed increase appeals only against commercial property owners and not against residential owners.  The district selected properties for appeal after consultation with Keystone Realty Advisors, a New Jersey tax consultant that employs trained appraisers and takes a 25 percent contingent fee on any increase in taxes resulting from its recommended appeals.

Four apartment building owners that had been targeted for these appeals challenged the school district’s selection of only commercial owners for appeals as violating the Pennsylvania Constitution’s uniformity in taxation requirement.  Both the trial court and the first-level appellate court denied the taxpayers’ challenge, holding that the school districts goal of increasing revenue justified the selective nature of the appeals.

The Pennsylvania Supreme Court reversed those rulings.  The court stated that all taxpayers must be uniformly treated, whether they are residential or commercial owners, and that no assessment scheme can systematically treat residential and commercial taxpayers differently.

The court stated no less than 13 times that all real estate is a single class.  The court observed that this constitutional tenet has been in place since 1909 and was reaffirmed by the court on multiple occasions, and that the court had no intention of discarding it.  The court then stated that the government may not create sub-classifications of property for different tax treatment, a point it repeated nine more times in its decision.

What the Ruling Means Going Forward

The ruling makes it abundantly clear that all real estate must be taxed uniformly, and that this constitutional protection is for the benefit of the taxpayer:

“First, all property in a taxing district is a single class, and as a consequence, the uniformity clause does not permit the government, including taxing authorities, to treat different property sub-classifications in a disparate manner,” the court stated.  “Second, this prohibition applies to any intentional or systematic enforcement of the tax laws and is not limited solely to wrongful conduct.”

The court then remanded the case to determine if there was a systematic disparate treatment of the Valley Forge taxpayers.  It will be unnecessary to show that the school intended to treat the taxpayers differently from other taxpayers.

The principal takeaway from the case is that all taxes must be uniformly assessed, and that any purposeful or unintentional systematic assessment that treats taxpayers in a disparate manner is unconstitutional.

The Pennsylvania Supreme Court’s decision underscores the need for a real estate taxation standard that treats residential and commercial properties uniformly.  In current practice, assessors around the country assess commercial and residential properties using different standards.  Residential property is taxed on a fee-simple, unencumbered basis: that is, the property is assumed to be vacant and available for purchase as of the assessment date.

Commercial property, on the other hand, increasingly has been assessed on the assumption that it is occupied by a successful business.  In those instances, the assessment reflects the way that the business finances its occupancy, whether it chooses to lease the building or own it outright.  Commercial property frequently trades as part of an ongoing business or with long-term leases, deed restrictions or other use restrictions in place.  But to be uniform, property taxes must rely upon a single interest valued for tax purposes.

The only interest that is uniform across all categories is the fee-simple, unencumbered value.  As the Valley Forge decision makes clear, there can only be one standard because all real estate is a single class.

Now, across the country, tax professionals can use the Valley Forge decision to bring fairness to commercial property owners.

Sharon DiPaolo

Sharon DiPaolo is a Partner in 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. Sharon can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Mar
20

Pennsylvania Supreme Court Takes Up Issue of Reverse Property Tax Appeals Across State

The Philadelphia School District is looking to increase the number of reverse property tax appeals, which could result in more tax dollars for schools such as South Philadelphia High School

Pennsylvania property owners and tenants, who pay some of the highest property taxes in the nation, are no doubt aware of the annual deadline to file a property tax appeal. After all, one look at a new tax bill is often enough to make even the most seasoned tax manager scramble to contact their local tax counsel.

However, very few taxpayers are aware that the assessment they may have accepted as favorable could easily trigger a reverse appeal filed by the local school district.

Assessment appeals filed by the taxing entities, often referred to as reverse appeals, are increasingly common as cash-strapped school districts seek to fill their coffers. Just as a tax manager might view an inflated assessment as a reason to appeal, more and more school districts see potentially under-assessed properties as a much-needed source of additional revenue.

To the bane of many taxpayers, this tactic has now reached the city of Philadelphia. Despite undergoing a citywide property revaluation for the 2014 tax year, with another currently slated for 2018, the Philadelphia School District recently decided to begin filing reverse appeals against properties it feels are under-assessed.

On Sept. 15, 2016, for the first time, the school district authorized the superintendent to contract with an outside law firm for the sole purpose of filing reverse appeals on the district’s behalf. It also authorized the superintendent to contract with Keystone Realty Advisors LLC, a real estate valuation and advisory group that will serve as the primary identifier of under-assessed properties in the city.

Changes a long time in the making

To many in the world of tax appeals, the emergence of reverse appeals in Philadelphia was unsurprising and inevitable. Keystone had previously peddled its services in a number of other Pennsylvania counties, including Lackawanna and Luzerne. Additionally, last year the Philadelphia School District hired Uri Monson to fill the vacant chief financial officer position. Monson previously served as chief financial officer for Montgomery County, another Pennsylvania county that saw a number of school districts utilize Keystone’s services to identify potential reverse appeals.

In Philadelphia, Monson says the reverse appeal initiative will focus on properties that are undervalued by at least $1 million. City Councilman Allan Domb has indicated that there may be up to $75 million in untapped revenue from commercial properties alone. The school district, which receives 55 percent of the city’s total property tax revenue, stands to gain up to $41 million.

According to Monson, reverse appeals are a tool to ensure that the school district’s funding is spread equitably across all taxpayers throughout the city, and are not intended to target particular neighborhoods or classes of property. Commercial taxpayers are not so sure.

Currently pending at the Pennsylvania Supreme Court is the case of Valley Forge Towers Apartments N, LP vs. Upper Merion Area School District and Keystone Realty Advisors, LLC. At issue before the court is whether the Upper Merion Area School District and Keystone Realty Advisors violated the uniformity clause of the Pennsylvania Constitution by selectively filing reverse appeals on commercial properties, while ignoring significantly under-assessed single-family properties.

The court will have to decide whether a school district’s statutory right to file an appeal, and an economic reason for doing so, insulate the district from review when it decides to appeal an assessment.

The long-term results

The Supreme Court’s decision will likely have far-reaching effects. Should the court decide that the school district and Keystone’s method for selecting reverse appeals does indeed violate the uniformity clause, that finding will likely preclude taxing districts throughout the state, including Philadelphia, from selectively filing reverse appeals.

On the other hand, if the court rules in favor of the school district, it will legitimize the current reverse appeal process that is slowly permeating the state. The latter result may even inspire additional taxing districts to explore reverse appeals as a source of revenue generation.

The court has already received over a dozen friend-of-the-court briefs from various groups with an interest in the outcome, seeking to weigh in on the issue.  Oral arguments were heard on March 8, 2017, though it will be months before the court issues a decision.

Whatever the outcome, taxpayers will want to pay close attention to the Supreme Court’s decision, especially those considering purchasing property in Philadelphia or any other school district that actively pursues reverse appeals.

Under the current system, one of the easiest ways for the districts to pick up on potential appeals is to compare the sale price against the property’s current assessment. Unfortunately, this often means unexpected litigation expenses for new property owners and the potential for higher-than-anticipated tax bills.

Gregory Schaffer photo

Gregory Schaffer is an associate at the Montclair, N.J., las firm Garippa Lotz & Giannuario, a New Jersey and Eastern Pennsulvania member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.  He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Dec
31

How Do I Win My Property Tax Appeal?

If the compelling evidence is on your side, the record shows you have a fighting chance.

The best time to consider how an appellate court might view a property tax appeal is not after a trial court delivers an unwelcome decision.  Rather, as the taxpayer carefully plans the evidence to be submitted at trial, it is worthwhile to consider how the evidence will look to appellate judges.

The handling of tax cases in appellate courts receives comparatively little attention.  Yet an appellate court may well make the final decision in a property tax appeal.  That appellate court may even be a state’s highest court, typically (though not always) the state’s supreme court.

Based on the attention given to appellate court strategies in tax literature, the handling of appeals is a neglected orphan in the property tax process.  Innumerable property tax articles address how assessors mass appraisal methods can overstate a property’s market value.

Writers cover pitfalls of the typical cost and sales comparisons and income approaches to value, or detail valuation peculiarities by property type.  Little is written about the key issue that can help tax-payers prevail in the appellate courts.

The Record Rules

Everyone has heard that the three points of consequence for real property are location, location, location.  For a property tax appeal in an appellate court, those three points of consequence are the record, the record and the record.

Whether the taxpayer is the appellant or is responding to an appeal, the best chance of prevailing derives from a record filled with compelling evidence that covers the big-picture points, as well as all of the finer ones.

Some recent decisions confirm these points and show some of the opportunities and challenges that property tax appeals in appellate courts can entail.  In each case the appellate court found that the record showed the tribunal had adopted a wrong principle or made a decision not supported by competent and substantial evidence.

In one Midwestern case, the question at issue was whether the taxpayer had mistakenly reported personal property as taxable in a particular jurisdiction, even though the personal property was not only in other cities, but also in a different state.

At trial, counsel had the taxpayer testify in painstaking detail about the property and its location, including unusual costs the taxpayer incurred to maintain the property.  Notwithstanding this evidence, the tribunal held that the taxpayer had failed to satisfy its burden of proof.

At oral argument in the court of appeals, however, the taxpayer’s counsel was able to read compelling portions of the transcript to show that the trial judge had erred badly.

Sometimes judges cannot be swayed, no matter what is said at oral argument, but in this case the passages quoted grabbed the attention of all three appellate court judges, who seemed to fully understand the injustice that had occurred.  The resulting decision gave the taxpayer a complete victory.

Great Valuation Records

A second case involved a retail property in the Midwest that was almost 80 percent vacant on each of two valuation dates.  The initial tax tribunal decision adopted the appropriate methodology by using the income approach to first value the property at a stabilized occupancy of 85 percent, which the judge determined was the stabilized rate.  The judge then deducted the lost rent and costs involved over the time needed for the property to reach stabilized occupancy level.

Unfortunately, the tribunal’s decision included three technical flaws:

It deducted only a portion of the stabilization costs; it understated the area needed to be leased in order to achieve stabilization; and it included market rent that was inappropriately increased in the second tax year calculation because a gross lease was misconstrued as a net lease.

The record, including both the testimony of the taxpayer’s witnesses as well as a carefully documented appraisal, enabled the appellate court to see that the initial decision erred on all three points.  The taxpayer was fortunate that the three-judge panel deciding the appeal was willing to carefully analyze such technical valuation issues, rather than defer to a tax tribunal judge.  Yet this successful outcome hinged on compelling recorded evidence.

In a third and similar Midwestern case, the appraiser had initially valued a retail property as stabilized and then deducted stabilization costs.  Most of those costs were to cure the property’s extreme deferred maintenance, with a small amount relating to the leasing of vacant space to achieve stabilized occupancy.

The tribunal decision erroneously adopted the interim value before applying the stabilization deductions, With a record very much like the first case, the appeals court recognized that the cost of curing the deferred maintenance had to be accounted for, yet inexplicably failed to order the deduction of the modest costs related to the property achieving stabilized occupancy.

The taxpayer’s counsel made excellent lemonade from this decision by pointing out to the government’s counsel that, undeniably, the decision was logically inconsistent, because if the costs to cure deferred maintenance had to be deducted, then the same was true of the costs to cure the excessive vacancy.

Additionally, the taxpayer’s counsel argued that given the costs of further appeals and the likelihood that the taxpayer would ultimately prevail, a sensible solution would be for the government to agree to the value with the deferred maintenance costs de-ducted.  In fact, the government ultimately did agree and settled with the taxpayer on that basis.

While this case provided the taxpayer with an excellent result, it shows that a compelling record is a necessary – but not always sufficient – condition to prevail.

MandellPhoto90

Stewart Mandell is a Partner and Tax Appeals Practice Group Leader, in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

May
29

What's The Basis For Your Assessment?

Assessors must value only the 'sticks and bricks,' not the business enterprise.

What can Indiana assessors value for property tax purposes? The answer is simple – the fee simple interest and nothing more. Yet assessors stray from that straightforward rule with alarming frequency.

In valuing land and improvements, assessors are not permitted to assign value to personal property; that is assessed separately. They also must refrain from assessing intangible assets – which are non-taxable – or the business operations conducted on or within a property. Profits may be subject to corporate income tax, but not property tax.

The fee simple interest is the absolute, unencumbered ownership of the real property, the sticks and bricks, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat.

A fee simple interest means the owner retains the right to sell, lease or occupy the property. If the assessor values more than the fee simple interest, he or she has gone too far. Such assessments are not only erroneous as a matter of law, but also bad public policy because they result in double or otherwise illegal taxation.

Establishing Precedent

The Indiana Board of Tax Review, which oversees property tax appeals at the state level, has recognized that the market value and market value-in-use standards do not permit “assessors to assess things other than real property rights for ad valorem taxation.” In fact, the Indiana Tax Court has dismissed assessors’ efforts to value more than a property’s fee simple interest.

In 2013, the court rejected an assessor’s reliance on above-market contract rents to establish a commercial property’s value. The taxpayer based its rents on sale-leaseback transactions, which included an investment component, and thus sold more than ownership rights in property.

In an earlier ruling, the court agreed that “one should approach the rental data from [sale-leaseback] transactions with caution, taking care to ascertain whether the sales prices/contract rents reflect real property value alone, or whether they include the value of certain other economic interests.”

Indiana law requires assessors to determine a property’s true tax value, which for property other than agricultural land means the “market value-in-use of a property for its current use, as reflected by the utility received by the owner or by a similar user, from the property.”

Too often assessors misunderstand and misapply this standard by seeking to value the taxpayer’s specific, on-site business operations.

Profitability is Irrelevant

Even if the taxpayer’s business is successful, the building in which its business is regularly conducted must be valued no differently than a similar, vacant building. Consider this ex-ample:

In an industrial park, two 10-year-old buildings sit side-by-side, identical in size, shape, condition, construction materials and workmanship. The same external or economic factors impact both properties’ values.

On the assessment date, an extremely profitable business uses Building A at full capacity and around the clock. In contrast, Building B is vacant, though it had previously served the same general purpose as Building A. Despite the owner’s best efforts, no business is conducted on the property.

Objective, reliable market evidence undisputedly indicates that the true tax value of the fee simple interest of Building B is $1 million as of the date of value.

What is the indicated value of the fee simple interest of Building A? It’s (fee) simple: $1 million.

How can that be, especially when business is going gangbusters inside Building A? The answer is that we are not valuing that business activity. In an arm’s length transaction, assuming a fair sale occurs, a reasonable and prudent third party looking to acquire either building would pay no more than the value of the sticks and bricks – $1 million – regardless of the profitability or lack thereof of business operations conducted there.

Let’s further assume that the owner of Building A was instead the third-party buyer, faced with the same choice of two identical buildings, one vacant and the other occupied for profitable uses.

Even knowing with near certainty that its business operations would be remarkably lucrative, the buyer would not pay $1 more for either property than the market would bear. According to the market, both properties are valued at $1 million.

The buyer is not acquiring a trade name or workforce, or the seller’s trademarks, trade secrets, machinery and equipment, customer lists, licenses or contracts. It is acquiring land, a building, and yard improvements, and the value of those for both buildings is the same.

Nobody said determining the fair value of property is always easy. But in Indiana it should always be fee simple.

Brent Auberry

Brent A. Auberry is a Partner in the Indianapolis law firm of Faegre Baker Daniels LLP, the Indiana member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..  

Jan
12

Michigan Provides Property Tax Lessons for Big Box Retail

"Probably the most important concept affirmed in these Michigan decisions is that assessors must value big box properties based on their value-in-exchange and not their value-in-use."

Owners of big box retail buildings can take lessons from Michigan on the proper way to value these large, free-standing stores for property tax purposes. The state’s well-developed tax law offers a clear model that is applicable in any state that bases its property tax valuation assessments on the fee simple, value-in-exchange standard.

Many states, including Michigan, base real estate taxation on the market value of a property’s fee simple interest using value-in-exchange principles. In other words, a property’s taxable value is its market value, and market value is commonly considered the property’s probable selling price in a cash-equivalent, arms-length transaction involving willing, knowledgeable parties, neither of whom is under duress.

In recent years, the Michigan Tax Tribunal has decided with remarkable consistency a dozen cases involving big box stores. In 2014, the Michigan Court of Appeals affirmed two of these Tax Tribunal decisions, recognizing that the Tribunal’s key rulings in this area rested on established law.

Probably the most important concept affirmed in these Michigan decisions is that assessors must value big box properties based on their value-in-exchange and not their value-in-use. Assessors and appraisers hired by local Michigan governments repeatedly — and improperly — reached value conclusions based on value-in-use rather than value-in-exchange principles.

The violation of this fundamental point was not obvious from a cursory review of the valuation evidence. For example, the assessor’s evidence included both big box property sales with nigh per-square-foot prices and big box properties with high rental rates. Consequently, for the Michigan Tribunal to decide these cases correctly, taxpayers needed to present evidence, including from expert witnesses, which convincingly established the following:

  1. Each big box retailer either builds or remodels its stores to be consistent with the retailer’s marketing, branding and merchandising operations (built-to-suit);
  2. When a big box property sells, the buyer will spend substantial dollars reimaging the property so that it conforms to the new owner’s appearance, layout and other specifications;
  3. Given that big box properties can be costly to build because of their built-to-suit nature, and that the subsequent purchasers will make substantial modifications at significant cost, these properties sell for far less than their construction cost; and
  4. Actual sales confirmed that these properties sell for far less than construction cost.

With evidence establishing each of these points, the Michigan Tribunal has repeatedly recognized that taxable value for a big box property must reflect its value-in-exchange.

For example, the Tribunal could grasp that a sale would not reflect market value if the property had a rental rate designed to compensate the developer for construction to the retailer’s specifications, rather than a rent negotiated between a landlord and tenant for an existing building.

Similarly, with such evidence the Michigan Tribunal could discern that a sale would not reflect market value if the original owner/user of the property sold and leased back the space. A sale-leaseback is typically a financing transaction between two parties with multiple relationships (landlord/buyer and seller/tenant) that are different from an arms-length transaction. That means the rent in a sale-leaseback does not reflect the property’s market rent, which would be used in an income approach to determine value. Similarly, the sale price in such a transaction is not evidence of market value.

Likewise, the Michigan Tribunal recognized that if the assessor used leases with above-market rents to value these properties, it would impermissibly be valuing something other than the property’s fee-simple interest. This is important because it applies anytime a property with above-market rent is used as either a comparable sale or a rent comparable.

Finally, the Michigan Tribunal rejected the claim that each property’s highest and best use as improved was the continued use by the specific retailer that occupied the property. Generally, highest and best use is that which is legally permissible, financially feasible, maximally productive, and physically possible.

To define that use as the continued use by the retailer occupying the property would improperly make the value depend on the identity of the property’s owner. Additionally, it would lead to a value conclusion that reflected the value of the property to that owner, or its value in-use. Thus, the Michigan Tribunal concluded that the highest and best use was simply retail use.

Michigan’s many recent big box property tax decisions spotlight issues applicable to many types of properties, wherever the law requires assessors to value properties based on the market value of a property’s fee simple interest. Perhaps the most important takeaway is that in such cases, taxpayers need to provide evidence from appraisers and other experts to carefully document a property’s market value, and where that value is significantly less than construction cost, explain why this is true.

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Stewart Mandell is a Partner and Tax Appeals Practice Group Leader, in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Nov
18

How Government Machinations Can Slash Property Tax Liability

Taxpayers and tax professionals researching market conditions to determine fair market value should consider any impending government actions. Even a rumor of a government project that would require acquisition of a property through eminent domain, or would impose restrictions on future use, can reduce the property's market value and taxable value.

Property values begin to suffer even before community leaders approve the final plans or begin work on such a project. That's because the belief that the project will occur places a cloud on the property owner's ability to sell and on the price attainable in a sale.

A potential buyer would be reluctant to acquire a property that will be involved in future condemnation litigation, with its inherent costs and delays, nor would a buyer welcome the uncertainty that those plans place on the property's future use.

The government taking may not involve acquisition of the property as a whole. Rather, it may remove some rights of use through restricting zoning, creation of conservation corridors or the diversion or rerouting of traffic, for example.

The property value declines because the wheels are turning to take away some of the rights of ownership, perhaps as much as 100 percent of those rights. The property owner carries the burden of convincing the taxing authority of diminished value resulting from rumored or pending acts of government.

Fair market value determinations must match reality. A title search would not reveal the threat of a government taking, but the valuation process cannot assume clear title in the face of the cloud imposed by the contemplated taking of some of the owner's bundle of rights.

An array of public improvements has the potential to affect property values, with an equally wide range of implications for taxable value. "They sky is falling because a highway is coming through here someday" is at the extreme, but other property owners may learn of the future imposition of a conservation easement on coastal properties, or a restriction on land use, allowable sign dimensions, or other rights. Any of these limitations would have a direct and immediate effect on value.

Calculate the damage

When the reality of a government action hits, it may take up to 100 percent of the property's fair market value. The taxpayer should weigh the seriousness of the threat and the probability and timing of it actually occurring. Then the taxpayer should measure the weighted estimate against the value of the property without the threat.

If the property is in "the path of progress," questions to consider in determining its value are: Who will buy it? What is its anticipated economic life? And what purpose will it serve?

First, determine the seriousness of the threat. What is the likelihood of it occurring? Next, calculate the remaining life of the present use of the property in the face of the impending government action. If it is going to happen, when will that be?

In the case of projected highway takings, the probability is high. Once announced, the highway's completion is almost assured. The present use has a limited and uncertain life.

Market observations show that buyers avoid properties in the path of progress. The development of a highway project is a time-consuming process that can hang over a property for years, suppressing value.

Another diminishing value aspect of an impending road taking is that the property/s neighbors may defer, or altogether cease, to maintain their properties, a condition sometimes called "condemnation blight." Broken windows won't be replaced, leaking roofs won't get patched and buyers won't buy. Buyers will purchase, however, a competing property unthreatened by condemnation.

Regulatory threats

Anticipated or threatened taking for regulatory reasons likewise diminishes market value. Suppressed industrial expansion is one example, such as when a local authority announces it doesn't want noise or the use of industrial-use pollutants in proximity to a new residential development.

The force of regulation frequently drives industrial uses away from new residential development or expanding metropolitan uses. Community leaders may deem junkyards or outdoor storage undesirable and force those uses away. Forcing such uses away from the metropolitan area threatens future use of local properties, and therefore limits property value.

Taxpayers need to help taxing authorities understand that the portion of the government that weakens property values by taking away property rights should suffer the resulting loss of property taxes.

Wallach90Jerome Wallach is the senior partner in The Wallach Law Firm based in St. Louis, Missouri. The firm is the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. Jerry Wallach can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Mar
11

Kansas Legislature To Reform Property Tax Appeals Process?

In the nearly 200 years since the U.S. Supreme Court's ruling in McCulloch v. Maryland, pundits, attorneys, courts and others have deliberated Chief Justice John Marshall's assertion that "the power to tax is the power to destroy."

Today the issue is front and center in Kansas, where the state Legislature seems poised to enact sweeping reform legislation governing tax appeals. The contemplated measures would provide substantive due process in an attempt to level the playing field for taxpayers that seek to challenge state and local property, excise and income taxes.

The current tax appeal system in Kansas combines informal hearing processes at the county level in property tax issues and at the state level on appeals involving excise and/or income taxes. These are followed by an appeal to the Kansas Court of Tax Appeals (COTA), an administrative agency in the executive branch of state government. If a party is displeased with a COTA decision, the prescribed recourse is a direct appeal to the state Court of Appeals.

Mounting Concerns Over COTA
Tax consultants and commercial taxpayers alarmed by recent COTA decisions originated the call for reform. The grassroots effort spotlighted COTA's efforts to deny taxpayers the right to contract with tax consultants that use fee-based contracts.

COTA had ruled that the contracts violated public policy, and voided them. It then refused to hear pending cases where a tax consultant was involved. COTA also sought to deny taxpayers the ability to retain attorneys that took referrals from tax consultants.

Next, COTA dismissed appeals where the tax consultant had signed the appeal form, refusing to recognize the state-issued power of attorney forms the consultants had taxpayers execute.

Taxpayer grievances also extend to the time taken to resolve property tax appeals. A law requires COTA to issue a decision no later than 120 days after a tax hearing, but the law fails to penalize the agency in the event that it exceeds the deadline. Consequently, many cases linger beyond the 120-day mark.

Taxpayer Relief May Be Imminent
House Bill 2614 was introduced to address these issues. As currently written, the bill will make the following changes:

  • Provide for a de novo appeal to the District Court. This change will ensure that a court of competent jurisdiction hears the taxpayer's evidence and makes findings and conclusions, rather than non-lawyer employees appointed by the governor deciding the case.
  • Require a presumption of correctness for any appraisal submitted by a state-licensed appraiser.
  • Permit taxpayers to employ the tax professional of their choosing without interference from COTA.
  • Require tax appeal decisions to be issued within 120 days and, if not, all filing fees paid by the taxpayer will be refunded.
  • Waive the filing fee in the event that a protective appeal for the following year must be filed because the prior year's appeal is still pending.
  • Require COTA to provide for a simultaneous exchange of evidence. This would replace the current method, which requires the taxpayer to provide evidence months before the hearing while protecting the county from disclosure until 20 days prior to the hearing.
  • Change the agency name from the Court of Tax Appeals back to the Board of Tax Appeals, to avoid the suggestion that COTA is a court within the judicial branch. This point also includes a staff salary reduction.
  • Provide a method whereby a party could file to have a board member removed for cause, defined to be failing to issue orders timely or failing to maintain continuing educational requirements.
  • Make cases valued at $3 million or less eligible for filing with the small claims division. This would be an increase from the current cutoff of $2 million.
  • Require the agency to promptly approve stipulations between the taxpayers and the taxing body.

The initial group of taxpayers, tax consultants and attorneys contacted Kansas legislators directly and urged their support for tax appeal system reform. The Kansas Chamber of Commerce later picked up the grassroots effort.

In its "Legislative Agenda 2014 For A Healthy Economy," the chamber endorsed COTA reform to "provide an affordable, accessible and impartial system that can resolve state and local tax disputes expeditiously and efficiently."

Other groups including the lobby for the Kansas Association of Realtors joined the call for reform. Now the legislation has widespread support throughout the business and real estate communities.

TerrillPhoto90Linda Terrill is a partner in the Leawood, Kansas. law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Feb
12

Pittsburgh Taxpayers Face Double Jeopardy on Assessments

Pittsburgh-area commercial property owners who received dramatic increases in their 2013 real estate assessments may see those taxable values go even higher. This wave reflects the growing nationwide issue of changes in property values and how they are assessed.

In the case of the Steel City, Allegheny County's first revaluation in 10 years dramatically increased assessments, which had remained static even during market highs in the mid-2000s and the crash in 2008 and 2009. While the overall increase in county assessments was 35 percent, commercial owners bore the brunt of the increase, seeing their assessments rise 54 percent overall.

More recently, however, local legislators enacted an unusual deadline extension that has effectively put property owners — especially commercial owners — at risk for even higher assessments.

Note that, rather than rely upon a central tax authority, each of Pennsylvania's 67 counties sets its own assessment. Because the state lacks a mandate for periodic revaluation, counties normally only undertake revaluation when a taxpayer files suit but will occasionally do so on the county's own initiative. Historically, reassessments are so infrequent in Pennsylvania (sometimes a decade or more passes between reassessments) that property values spike when a county eventually does reassess, which leads to public outcry and confusion.

Following publication of the new 2013 assessments for Pittsburgh-area properties, property owners filed 100,000 appeals before the original deadline on April 1, 2012. Then, in early 2013, Allegheny County's chief executive asked the county council to reopen the filing of 2013 appeals until April 1, 2013, ostensibly to help property owners.

At the time, the chief executive told local reporters that the deadline extension would give taxpayers another opportunity to appeal. What he didn't say, however, is that extending the deadline also opened the door for school districts to file appeals.

Increases in Store for Property Owners
Reopening the appeals process hurt more property owners than it helped. Most taxpayers who needed to appeal had already filed, but Pennsylvania law gives school districts a right of appeal as well. When the county council voted to reopen the deadline and allow new appeals, thousands of school appeals followed. School districts filed most of the 7,000 new appeals in 2013.

What's more, Pittsburgh's office market was hot in the latter part of 2012. The districts tracked sale prices in the last three quarters of 2012 and subsequently appealed to increase the property owners' new assessments based on these sale amounts. Most of these appeals to increase valuations target commercial owners.

Of the new appeals filed by property owners, the vast majority are attempts to re-hear appeals that were previously filed. Those are likely to be thrown out by the courts. That will leave mostly school-initiated appeals.

As of this writing, administrative hearings are complete for the original 100,000 appeals, and administrative decisions that caused the taxpayer or school district to be unhappy with the outcome are already pending in court. Hearings on the 7,000 new appeals are underway.

What to Do
When a taxing district files an appeal, state law requires it to send notice of the appeal to the address listed in county records as the property's Change Notice Mailing Address, which is published on the county's website (alleghenycounty.us). Some of the county records are outdated as to owners' addresses and, in those instances, some new owners are unaware of appeals on their properties.

New owners should check the address the county has on record for their properties and watch for notices sent to this address in the coming months. If a school district does appeal, the property owner would be wise to seek counsel, appear at hearings and defend his property's taxable value, otherwise risk having his assessment increased even more.

dipaolo web Sharon F. DiPaolo is a partner in the law firm of Siegel Siegel Johnson & Jennings Co., LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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