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Property Tax Resources

Jul
16

Minimize Taxation of Medical Office Buildings

Nuances of ownership and operations can reduce or eliminate ad valorem liability for property owners.

How municipalities and counties tax medical real estate can vary by modes of ownership, location and how a property affects the local economy. Much, however, depends on each taxing entity's goals and its degree of interest in attracting hospitals, creating medical hubs, enlarging commercial areas or encouraging excellent health care locally.

A typical approach to achieving some or all of these goals is for local government to control the property. This can be through outright ownership, where the facilities are leased out. Governments can also create an economic zone and issue bonds to finance the area's development. Each of these methods poses property tax issues.

In a direct ownership scenario, the government owner is exempt from taxation. The operating and management company that leases the property has tax liability for its going concern, however. That going concern has untaxed intangible value, but also will have onsite assets such as medical equipment that can be taxed under standard code approaches at fair market value. They can also be taxed under a modified fair market value, which is a common incentive designed to entice investment by medical businesses.

If the local government chooses a development-bond approach, it will create a development district entity to issue bonds, with proceeds from bond sales paying for construction of the hospital or other facility. A private entity would lease the facilities under the cost of the bonds, with lease payments going toward retiring the bonds. Lease provisions would set out agreed-upon valuations for property tax purposes. These valuations can be flat or adjusted over time. Once the bonds are paid off, the terms of the lease can be extended or modified.

After using one of these favorable property tax techniques to establish a footprint for a healthcare district, development or zone, the governmental body may widen its impact by offering lower taxes within the area. These adjustments would favor medical facilities that support hospitals or medical practices nearby.

For example, a community could use tax breaks to encourage construction of medical office buildings. If the economic district includes other buildings that would be useful to the healthcare industry, it can offer similar tax incentives to encourage development and use of those facilities. Likewise, such incentives can be used for standalone facilities within the economic district.

For governments that do not envision a medical district but want to foster broader access to healthcare providers, tax policy can create special tax methods without uniformity restrictions. This would encourage small medical investments throughout the community. Examples would include free-standing treatment facilities such as "doc in a box" walk-in clinics, urgent care facilities and small medical office buildings.

Strategies for tax exemption

In Georgia, hospitals can be owned in a couple of ways to avoid taxation. First, the government can own the hospital and lease it to a non-profit manager or operator. So long as the lessee remains a non-profit, the real property is tax exempt. If the leasehold transfers to a for-profit entity, the tax exemption disappears and the management or operational entity becomes responsible for the property tax.

Second, the local government can create an economic development zone using bonds. Within any leaseholds created by the bond issuer, property tax responsibility can be addressed by contract. This can range from zero liability to points on a sliding scale, and will usually correlate to the gradual elimination of the bonds.

Another scenario involves an exempt property that is then acquired by a for-profit operator. In Michigan and Georgia, such a transfer will void the tax exemption, subjecting the facility to full taxation at fair market value. A question remains about a retransfer of the operations to a non-profit, which may or may not restore the tax exemption. In Minnesota and Kansas, the ownership is through the government but the facility must be operated as a non-profit.

In some jurisdictions hospitals can be a taxing authority. In Texas and Iowa, rural hospital districts can levy a component of the property tax millage rate. The hospital district then uses that portion of the millage rate to pay part of its operating expense. This allows rural hospitals to maintain their operations by spreading costs throughout the community, rather than to the users of the system. In recent years states have tended to reduce property taxes overall, which has squeezed revenue for rural health systems in states that allow hospitals to participate in taxation.

Personal property, which is movable property such as medical equipment, can be treated in different ways. If the operation is a non-profit, the personal taxes are exempt. Liability is more complicated if the owner of the personal property is a for-profit entity operating within an exempt property; in such instances the personal tax rates apply.

On the other hand, a non-profit may operate within a taxable medical office building, in which case the personal property is still exempt. In fact, a building may have multiple tenants, some of which are non-profits and some of which are for-profit. In such a scenario, each business would have to be examined to determine whether personal tax exemptions apply.

Brian J. Morrissey is a partner in the Atlanta law firm of Ragsdale Beals Seigler Patterson & Gray LLP, the Georgia member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Mar
09

New York City Tax Assessments Disregard Reality

New York City has published three tax-year assessments since COVID-19 swept into our world. The New York City Tax Commission and New York City Law Department have had ample opportunity to reflect and refine their thinking on those assessments.

The disease broke out in Wuhan, China, in late 2019 and soon spread around the world. Most of New York City noticed its impact in February and March of 2020 as businesses shut down at an accelerating rate, warranting government mandates and additional closures.

So, what did New York City do for the 2020-2021 tax year? It significantly raised tax assessments. The Tax Commission and other review bodies refused to base their valuations upon the devastating catastrophic effects of COVID-19 that had ravished the city.

Why do this? The answer is technical. New York City values real estate on a taxable status date, which is Jan. 5 each year. On Jan. 5, 2020, COVID-19 did not exist in assessors' evaluation process. Nor did it exist in the review of assessments later in the year.

Employment restrictions, mask mandates and lockdown requirements made it impossible to operate theaters, hotels, restaurants and many other businesses. These restrictions took effect long before the first installment of property tax payments for the 2020-2021 year had to be paid. Yet hotels found that their tax bills exceeded their total revenue. Other businesses had similar experiences.

The city's next assessment, for the 2021-2022 tax year, reduced assessments by 10 to 15 percent in some sectors, and by as much as 20 percent for hotels. It was too little, too late, and many businesses were failing. The assessment review process was slow and unsympathetic to the plight of businesses devastated by COVID-19.

The Jan. 5, 2022 assessment roll attempted to recoup a modest amount of the value trimmed from taxpayers' properties the previous year in spite of the destructive effects of the Omicron variant that were at their height on the Jan. 5 valuation date. That is the truth: New York City's newly released fiscal 2022-2023 property tax assessment roll presents a market value of almost $1.4 trillion, an 8 percent increase in taxes and estimated taxable assessments of $277.4 billion. That sounds like too much!

Real estate tax increases have come at a time when most property owners and businesses have not even begun to recover from the pandemic's economic impact. Foreign and business travel have disappeared; street traffic is down and empty storefronts abound.

Commercial rents in Herald Square, for example, are down 27 percent from pre-pandemic levels. However, high bills due to ever-increasing inflation remain to be paid. Mortgages, payrolls and maintenance costs add to the burdens of businesses in New York City. Most properties are still struggling, and many are falling behind.

The hospitality sector has been hit especially hard. Hotel revenues and prices have dropped to unsustainable levels. COVID-related rules and fears have evaporated any sustainable growth in tourism. One example of the pandemic hotel market value decline is the recent sale price of the DoubleTree Metropolitan at 569 Lexington Ave., which was 50 percent less than the price it sold for in 2011.

While a few market values have increased, tax increases should have been delayed. For Class 1 real estate, which includes residential properties of up to three units, total citywide market value rose 6.7 percent to $706.8 billion from the previous year's tax roll.

For Class 2 properties­ — cooperatives, condominiums and rental apartment buildings —the total market value registered $346.9 billion, an increase of $27.8 billion, or 8.7 percent, from the 2022 fiscal year. For Class 3 properties, which include properties with equipment owned by gas, telephone or electric companies, market value is tentatively set by the New York State Office of Real Property Tax Services at $43.6 billion.

Last but definitely not least, total market value for commercial properties (Class 4) increased by 11.7 percent citywide to $300.8 billion. Manhattan had the smallest percent increase in market value at 10.3 percent. Class 4 market value is down $25.2 billion, or 7.7 percent, below its level for the 2021 fiscal year. Hotels registered a market value increase of only 5.3 percent.

These slight increases in market value do not warrant this year's increase in taxes. Businesses are still being affected by the economic impact of the pandemic and need time to recuperate. The city's Department of Finance admits that although values increased for the 2023 fiscal year, they remain below the 2021 fiscal year values for many properties due to the impact of the pandemic.

The Department of Finance also acknowledged in its announcement of the tentative tax roll that commercial property values remain largely below pre-pandemic levels. This underscores why the increase in taxes should have been delayed, at least until properties and businesses attain pre-pandemic values.

Strategies for Relief

In appealing assessments, property owners can improve their chances for obtaining relief by quantifying property value losses. For hotel owners and operators, this means gathering documentation showing closure dates, occupancy rates and any special COVID-19 costs incurred. Most industry forecasts anticipate at least a four-year recovery period for hotels to reach pre-pandemic revenues.

Retail and office property owners should be prepared to show any declines in gross income and rents received or paid on their financial reports filed with the city. Residential landlords should list tenants that vacated and those that are not paying rent.

In conclusion, tax assessments must reflect the entirety of what this pandemic has done to the real estate industry over the past 24 months. New York City authorities must provide tax relief for property owners, and taxpayers and their advisors will need to take an active part in obtaining reduced assessments.

Joel Marcus is a partner in the New York City law firm Marcus & Pollack LLP, the New York City member of the American Property Tax Counsel, the national affiliation of property tax attorneys.
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Dec
23

APTC: Ohio School Districts Push for Excessive Property Taxes

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

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

Steve Nowak, Siegel Jennings Co.

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

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

Blind assertions

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

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

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

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

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

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

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

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

Private data shared

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

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

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

Steve Nowak is an associate in the law firm of Siegel Jennings Co. LPA, the Ohio, Illinois and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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May
18

The Presentation Of Obsolescence Helps Commercial Property Owners Achieve Successful Tax Appeals

Judith Viorst, author of the children's book Alexander and the Terrible, Horrible, No Good, Very Bad Day, had nothing on 2020. By virtually every metric, 2020 was a terrible, horrible, no good, very bad year.

Most states have some sort of catastrophe exemption for a property tax abatement or reduction tied to a defined disaster event. These statutes are state-specific, however, and few states had authority to address whether a property had to have sustained physical damage to qualify for catastrophe relief on property taxes.

Most states, including Texas, eventually concluded that some form of physical damage was necessary for property values to be reduced following a disaster. Its neighbor, Louisiana, went the other direction, concluding that its disaster statute did not require physical damage, only that the property be inoperable due to a declaration of emergency by the governor. Accordingly, property values for the 2020 tax year could be reduced in Louisiana due to COVID-19-related economic losses.

Pandemic paper trails

Fortunately, 2021 gives all taxpayers a fresh start. Most states use Jan. 1 as the "lien date," or valuation date for determining fair market value of property subject to ad valorem tax. For income-producing properties, taxpayers now have a full year's documentation of COVID-19 impacts, which more accurately demonstrate the fair market value of their properties in the current, COVID-19 economic climate. At a high level, such documentation may include financial statements with year-over-year and month-over-month comparison of revenues to expenses and profits to losses.

Drilling down, taxpayers should be able to demonstrate the source of these changing numbers, such as reduced employee hours, decreased production outputs and sales, unoccupied rooms, canceled conferences and the like. Comparable sales information should also now be available.

This information generally relates to economic obsolescence, which is a loss in value due to causes outside the property and which are not included in physical depreciation. Taxpayers also must consider whether their property exhibits functional obsolescence, or a loss in value due to the property's lack of utility or desirability.

Functionality is tied to a property's amenities, layout and current technology. A property's functional obsolescence is measured through reduced or impaired use. Taxpayers can quantify the lack of use in 2020 and compare it to pre-2020 capacity and usage in arguing for a reduction in taxable value.

Value and evolving utility

Historical information is key to the taxpayer's case — as is evidence of adaptation to current market trends. For instance, a year ago, who would have imagined that neighborhood and big-box stores of all stripes would start delivering their products directly to customers' homes? Suddenly, abundant check-out lanes, wide aisles, sampling stations and sprawling parking lots are unnecessary. Retailers would rather have drive-thru lanes and dedicated carryout parking.

Hotels have been similarly affected. Traditional amenities such as atriums, event space and intimate lounges that preclude safe social distancing are passé. Motels with open-air access are enjoying a renaissance. Resourceful restauranteurs have figured out how to make street-side dining desirable. Patios are now essential. While many of these changes in use are likely temporary, some are expected to be longer-lasting.

Consider commercial office space. Prior to the pandemic, many office-using employers permitted only limited remote work but working from home has now become the new normal. Facility planners expect the traditional office environment to shift to a hybrid model, with expanded remote working, office-sharing, and fewer in-person communications. Large conference rooms are out and state-of-the-art multimedia systems have taken their place.

These trends impact real estate values because they affect how property is used, or more importantly, not used. Commercial real estate developers will not be laying out offices the same way they used to, and hoteliers will not be building out the same large conference centers post-COVID. And the reality is that much existing buildout, furniture and equipment is going unused. So for now, a replacement cost analysis is the most appropriate valuation method for those property types, because it reflects the functionality of the property and the fact that the property would not be rebuilt as is.

Of course, as more and more businesses adapt to post-pandemic market trends, the lack of utilization may be deemed industrywide rather than property specific. At that point, appraisers should treat the lost value as economic obsolescence, which is value losses stemming from factors occurring outside the property. In either case, taxpayers should be prepared to demonstrate the inutility of their property, and the cost of such inutility, to reduce taxable value.

Better than terrible

Whether or not 2021 is radically better than last year, at least taxpayers are now in a better position to show the adverse impact the pandemic has had on fair market values. And if that translates to lower ad valorem tax liabilities, then this decade is off to a very good start.

Angela Adolph is a partner in the law firm of Kean Miller LLP, the Louisiana member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Sep
17

Environmental Contamination Reduces Market Value

Protest any tax assessment that doesn't reflect the cost to remediate any existing environmental contamination.

Owners of properties with environmental contamination already carry the financial burden of removal or remediation costs, whether they cure the problem themselves or sell to a buyer who is sure to deduct anticipated remediation expenses from the sale price. Fortunately, New York law allows those property owners to reduce their property tax burden to reflect their asset's compromised value.

Tax types

Most local governments in the United States impose a property tax on real estate as a primary source of revenue, levied and calculated by either ad valorem or specific means. Latin for "according to value," ad valorem taxes are imposed proportionately based upon the market value of the property. Thus, the higher the market value, the higher the real estate tax.

Specific taxes, on the other hand, are fixed sums without regard to underlying real estate value. School, county and town governments nearly always compute real property taxes using the ad valorem method, whereas lighting, garbage or sewer districts typically apply specific taxes. Because school and county/town taxes account for the overwhelming majority of a property tax bill, property owners frequently use assessment litigation concerning the market value of the subject property to reduce assessments and, as a result, lower the real property tax burden.

The cardinal principle of property valuation for tax purposes is that assessments cannot exceed full market value. Many states including New York codify this in their constitutions. The concept of full value is regularly equated with market value, which is the highest price a willing buyer would pay and a willing seller accept, both being fully informed.

Disagreements often arise if the subject property is afflicted with environmental contamination. The treatment of environmental contamination and remediation costs is of particular concern to both owners and municipalities. Owners seeking to depress taxable values and thereby reduce their tax burden claim these expenses dollar-for-dollar off the market value under the principle of substitution. In other words, a proposed buyer would not pay more than $8,000 for a parcel worth $10,000 which needs $2,000 of remediation.

On the other hand, municipalities would prefer the adoption of a rule (either via legislation or court decision) barring any assessment reduction for environmental contamination. Otherwise, they claim, polluters would succeed in shifting the cost of environmental cleanup to the innocent taxpaying public, in contravention of the public policy of imposing remediation costs on polluting property owners and their successors in title.

Pivotal case

Fortunately for property owners, a seminal 1996 court decision guides the treatment of environmental costs to cure taxable value in New York. In Commerce Holding Corp. vs. Town of Babylon, the petitioner purchased 2.7 acres of land in the Town of Babylon, Suffolk County. A former tenant of the property had performed metal plating on the premises and discharged wastewater containing multiple heavy metals into on-site leaching pools, ultimately resulting in the severe contamination of the parcel. The owner filed tax appeals and argued the value of the property should be reduced by the considerable costs needed to clean up the parcel.

As expected, the town's position relied on a public policy approach and urged the court to reject any argument for a reduced assessment. Ultimately, the case traveled to New York's highest court, which summarily rejected the public policy arguments that polluters should not be rewarded with lower assessments.

Instead, the court applied the constitutional and statutory requirements of full market value assessments, holding that the full value requirement is a "constitutional" mandate which cannot be swept aside in favor of public policy. Thus, property must be valued as clean, with the value reduced by the costs to cure the remediation per year. Challenges seeking the limitation or outright reversal of the Commerce Holding case have been continually rejected.

A recent clarification

The New York State Court of Appeals did not address remediation again in a property tax litigation context for almost 20 years after Commerce Holding. In a 2013 case, Roth vs. City of Syracuse, a property owner sought to have the assessment on certain rented properties reduced because of the presence of lead-based paint.

The court declined to expand the application of Commerce Holding in this case for two significant reasons. First, the owner continued to rent the buildings and collect income. Second, the owner had not taken any steps to remove or remediate the lead paint and restore the properties. Thus, to successfully claim an assessment reduction, a property owner should not stand idle but take definitive actions to remediate the property. 

Jason M. Penighetti is an attorney at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLC, the New York State member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Jun
06

Nothing New About The Old ‘Dark Store Theory’

Statutory law continues to require that assessors value only the real estate, not the success or lack thereof, by the owner of the real estate.

Assessors and their minions frequently take the position that an occupied store is more valuable than an unoccupied store, a conclusion commonly referred to as the "Dark Store: theory. Owners of big-box retail properties and their tax advisers bristle at this erroneous contention, because real property taxes are just that– a tax on the value of the real estate.

It is the assessor's function to value the property's real estate components, which consist primarily of land, bricks and mortar; or in the cases of most big boxes, land, concrete, pop-up concrete or metal slabs. It is a common but mistaken practice of assessors to place a greater taxable value on a big box occupied by a major retailer than on a vacant building of equal design, construction and utility.

This errant valuation methodology has given rise to controversy played out through expert testimony and sophisticated argument before administrative agencies and the courts. It is in this context that the term "Dark Store theory" has come into play.

A call to action

Owners of big-box real estate need to deliver a consistent response in the face of this increasingly pervasive and costly misconception. And because informal meetings between the owner's representative and the assessor are limited in time and scope, providing little opportunity for sophisticated argument, these owners must take a position that can be expressed in laymen's terms and understood by the average taxpayer.

That message is that the dark store theory is not a theory at all. It is a reality. The real estate components of occupied buildings have the same value as the real estate components of vacant buildings.

Dark Store theory has become part of the dialogue when valuing commercial properties for taxation. It's vilified as though it were a new concept with dark connotations, like the revelation of a new and insidious scheme by Darth Vader. In fact, its underlying concept is as old as the exercise of determining value for any purpose.

Unless a particular property has actually sold on a particular date, any opinion of its market value is hypothetical. Any such opinion is subject to informed disagreement within the boundaries of accepted valuation methodology. The standards of that methodology, as expressed, for example, in the Uniform Standards of Appraisal Practices, require that the value of a property is based on the willing-buyer, willing-seller concept. The assumption is that a willing buyer wants to buy and use the property.

Logic, not to mention all standards of appraisal practice, dictates that the hypothetical buyer is buying the property for some purpose. Whatever that purpose, it precludes the seller's continuing to use the property. This discussion is independent of a sale-leaseback transaction, which is a financing strategy.

The reality is that the buyer wants to use the property, as is the case across the spectrum of property purchases.

A residential parallel

The same concept applies to the sale of a suburban bungalow. When the Smiths buy a home from the Joneses, they expect the Jones family to vacate the property by the closing date. The Smith family bought the property expecting it to be available for occupancy on the closing date. Nothing about the selling family's success or possible dysfunction affects the purchase price.

In valuing single-family homes, assessors do not discuss the resident families' success (all the children became neurosurgeons). Yet assessors effectively do so in valuing big boxes, which by all valuation standards must be deemed available for occupancy as of the date of closing.

One does not hear the expression "dark house theory," because the assumption of availability of the property for use by the buyer at closing is intrinsic to the transaction. In appraisal parlance, the concept has been and remains that the exchanged property is "free and clear of all encumbrances," ergo vacant, or in current usage, "dark."

Many big boxes, typically measuring in the neighborhood of 100,000 square feet, have come on the market in recent years due in part to changing consumer buying patterns and reduced store counts by retailers. There is a tendency among assessors to over-value properties occupied by the surviving big-box retailers, in effect imposing a form of income tax that they justify by citing retailers' over-all company sales, while turning a blind eye to the availability of big boxes standing dark in the same market.

The sales volume and profits produced by a big-box store are as unrelated to the real estate's value as apple pie is to a computer. Thus, two side-by-side buildings of the same size and specifications, with one housing a high-profit retailer and the other an empty or dark box, have the same real estate value.

Jerome Wallach is a partner at The Wallach Law Firm in St. Louis, the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Mar
06

Onerous Property Tax Requirements Proposed

True to campaign promises, the new Cook County assessor has proposed sweeping legislation that borrows the most burdensome tax requirements and penalties from jurisdictions across the country. But will this enhance transparency or simply saddle taxpayers with inaccurate assessments and the need for costly appeals?

The 2018 race for Cook County Assessor ended in Fritz Kaegi beating out incumbent and long-time political powerhouse Joseph Berrios. Kaegi's campaign promises targeted the "insider" game of property tax appeals and proposed to bring fairness and transparency to the Illinois property tax appeal system.

The proposed requirements would only be imposed on commercial or income-producing properties worth more than $400,000, or residential properties with seven or more units worth more than $1 million. Residential properties with six units or less, as well as mixed-use commercial/residential buildings with six or fewer apartment units and less than 20,000 square feet of commercial area, are exempt from reporting income data.

In Cook County, these commercial properties will be required to submit income and expense data to the assessor prior to July 1 each year, and attest to the truthfulness of such information. Counties outside of Cook County may adopt the same requirement.

Property owners who fail to file the required information may receive a notice from the assessor demanding its submittal. If the taxpayer fails to report the income pursuant to the notice, the taxpayer will be fined 2 percent of the previous year's total tax bill. If the taxpayer still does not submit evidence within 120 days of the original notice, the proposal adds a second penalty of 2.5 percent of the prior year's tax bill.

As if these financial penalties were not enough, the taxpayer who fails to provide the information within 120 days is precluded from appealing the subject property's tax assessment. Furthermore, the Cook County State's Attorney's office is granted the right to subpoena the income and expense data from the tax payer on an annual basis.

None of the legislation eliminates the right to appeal to the Board of Review, however.

So, will the proposed statute bring fairness and transparency to the appeal process? No.

Round hole, square peg

The requirement to file income and expense data is not revolutionary. In many cases, taxpayers file appeals based directly on the property's income data rather than incur appraisal expenses. On the other hand, income-producing properties that commission an appraisal will provide the income and expense data to the appraiser in order to explain any differences between the actual rents in the subject property and the market rents used to calculate the assessment. Thus, the new rules will not necessarily bring more transparency to the values of multimillion-dollar commercial properties.

For the institutional investor, the greatest concern about the proposal is the validity and application of the collected income and expense data. As the old saying goes "garbage in, garbage out."

The assessor claims that the collection and aggregation of data directly from taxpayers will help identify the true rental market value of specific real estate. The concern is that taxpayers will be reporting a variety of unadjusted rents rather than market rates. Market rates take into account the differences between gross, modified and triple net leases, as well as tenant improvements, concessions, length of lease, sale-leasebacks and a host of other factors. Without adjustment to market rates, the data will be incorrect and the assessments will be inflated. This will produce a higher rate of appeal on an annual basis and impose greater appeal burdens on all involved.

Furthermore, the new requirements will bring the greatest harm to smaller commercial investors who may not be filing property tax appeals at all. Many of these are mom-and-pop organizations that keep handwritten ledgers and have market values between $400,000 and $1 million. The annual reporting requirement and respective penalties would be financially burdensome to taxpayers in this group, many of whom never undertook the expense of filing an appeal. Now those taxpayers may be open to valuation increases on an annual basis and have to spend money on appraisals and attorney representation.

And transparency?

The proposed statue prohibits "non-personal income and expense data" the assessor collects from being accessed through Freedom of Information Act searches. Does this indicate that the data sets the assessor produces cannot be analyzed by the taxpayer for accuracy? Where is the fairness and transparency in that?

If the statute passes, the hurdle for Illinois taxpayers will be to clearly identify the difference between market rents and actual rents for each of their properties, which may result in extremely burdensome requirements and penalties. The mandated steps may require intricate analysis and could result in property owners expending time and money responding to annual notices for documentation, fines for noncompliance, and the inability to challenge illegal assessments as a right.

Much of the income-and-expense statements, rent rolls and other data the assessor seeks are already available in documentation currently being submitted in support of annual appeals. Based upon this readily available data, the assessor should be able to generate guidelines that reflect current rental rates, occupancy levels and capitalization rates.

If Cook County taxes need reform, this is not the reform.

Molly Phelan is a partner in the Chicago office of the law firm Siegel Jennings Co. LPA, which has offices in Cleveland, OH, Pittsburgh, PA and Chicago. IL and is the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys
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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.
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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..

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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..

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