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Dec
07

Superstorm Sandy's Impact On Property Taxes

Mistaking rehabilitation for new construction, assessors inflate post-superstorm tax assessments.

Four years have passed since Superstorm Sandy slammed the East Coast and crippled the Northeast. The overwhelming majority of media coverage centered on the devastation suffered by residential properties, paying little attention to the tens of thousands of commercial property owners who suffered equally historic destruction.

The rebuilding process has been a feast for local tax assessors, who have increased property assessments throughout these Sandy-stricken areas based on the misguided opinion that rehabilitated commercial properties should be valued as newly constructed buildings, ignoring the financial realities and stigma attached to "Sandy properties."

The post-Sandy rebuilding process has taken years, requiring commercial property owners to overcome insurance claim nightmares, bureaucratic red tape, and the massive exodus of tenants who either lost their businesses or relocated as a result of the storm. Too often, local tax assessors ignored the hardships suffered by these property owners, taking advantage of the reconstruction by increasing assessments well above pre-Sandy values to increase their tax base.

Fortunately, the laws of each state allow landlords or property owners to reduce unfairly increased property tax assessments by filing a commercial tax appeal. These appeals offer the owner or the owner's representative the opportunity to prove that the property is worth less than its current taxable value. Whether that tax-reduction opportunity occurs at an administrative hearing, through negotiations or in the courtroom, taxpayers are best served by seeking the expertise of an attorney experienced in navigating the appeals process and the valuation of commercial properties.

Proper Valuation vs. Unfair Increases

Traditional methods to valuing commercial real estate for property taxation include the sales-comparison, cost, and income capitalization approaches.  Sales comparison typically relies upon arms length sales data. Unfortunately, there is very little arms-length transaction data in Sandy-ravaged areas because the market has been flooded with sales of distressed properties.

The cost approach should only be applied when valuing new construction or specialty properties.

When tax assessors value commercial buildings as in-come-producing properties, they capitalize the subject's net income stream, or if owner-occupied, the income it would generate if leased. Appraisal professionals and the courts agree that this income-capitalization approach is the preferred method of valuation at a commercial tax appeal.

Nevertheless, local tax assessors have been leaning on the cost approach when valuing post-Sandy re-habilitated retail properties. These assessors mistakenly perceive a property owner's rehabilitation or reconstruction work as equivalent to a capital improvement or new construction, at the same time ignoring the economic realities that these property owners faced as a result of the storm. More specifically, the cost approach ignores increased expenses, extended periods of vacancy and the difficulty that landlords continue to face in luring tenants back to properties destroyed by the storm. This unfortunate valuation practice has inflated tax assessments and created unfair tax burdens.

Hidden Costs Linger

Sandy's impact runs deeper than brick and mortar reconstruction. Cleanup, rehabilitation and lingering stigma have forced landlords to contend with increased expenses and lengthy vacancies. The stigma that follows a "Sandy property" is similar to that attached to cars sold in New Orleans after Hurricane Katrina, engendering the burdensome label of "Katrina cars."

Like suspicious car buyers in Katrina's wake, prospective tenants either ran for the hills or demanded low rents with short-term leases after learning that a property was ravaged by Sandy. The fear of the unknown resulted in tenants searching for what they perceived as less risky locations further inland.

In addition to disproportionately high vacancies, Sandy-stricken property owners have had to contend with significantly increased expenses. Insurance is one example. Not only have premiums skyrocketed due to the perceived risk of owning property near Sandy's point of impact, but the Federal Emergency Management Agency has issued new flood zone maps that expand many flood zones inland. Flood zone boundaries have compelled landlords to purchase flood insurance in areas that are relatively far from the shore, regardless of whether their property incurred damage from the storm.

Property owners typically bore the costs to rehabilitate flooded and destroyed properties, because many insurance companies exclude wind or hurricane damage from coverage. Other properties sustained damages in excess of policy limits. Unfortunately, many owners lacked the necessary funds to rehabilitate, leaving entire shopping centers abandoned.

Property owners who were lucky enough to have full coverage still had to deal with empty buildings and high carrying costs for many months during ongoing construction.

Taxpayers Fight Back

The key to a successful property tax appeal is to arrive armed with data supporting the argument that the subject property is worth less than its assessed, taxable value. For commercial property, the owner or their representative should analyze the subject's income and expense history, together with market data of similar properties in the area. For a Sandy property, this analysis should concentrate on the actual economic harm suffered as a result of Sandy and its aftermath.

In order to do this, prior to filing a property tax challenge, the taxpayer's representative should review copies of the leases, rent rolls and income and expense data of the subject from the last five years. Assuming the asset suffered major vacancies, the property owner's representative must be prepared to discuss and produce documentation or an affidavit attesting to the hardships faced in trying to rent the property and overcome the stigma associated with marketing Sandy-stricken space. In addition, the owner must be prepared to produce and discuss all insurance claims, including awards and denials, and provide an accounting of all out-of-pocket costs associated with the property's rehabilitation.

A carefully prepared and documented presentation of the facts offers the owner a real possibility to avoid unfairly high property tax assessments on these Sandy-impaired properties.

Hild and PenighettiRyan C. Hild and Jason M. Penighetti are attorneys at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLP, the New York State member of Amercian Property Tax Counsel, the national affiliation of property tax attorneys.  Contact Ryan at This email address is being protected from spambots. You need JavaScript enabled to view it. or Jason at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Oct
10

Recovery Complicates Retail Property Tax

The retail real estate sector has been slow to recover from the Great Recession, and vacancy levels remain elevated for neighborhood shopping centers. As retail property owners search for ways to reduce carrying costs, many are scrutinizing one of the largest expenses their properties incur: real estate taxes.

Fortunately, the laws of each state provide a vehicle for landlords to reduce unfairly high property tax burdens by filing a commercial property tax appeal. At these appeal hearings, the property owner must prove that the property is worth less than its current taxable market value, and seek a fair value either through negotiation or a valuation trial in the local court.

Building a strong case to reduce an assessed taxable value requires technical expertise at any time, and it’s an even more complicated proposition for retail properties in a period of economic recovery.

The three traditional approaches used to value a shopping center are the cost approach, sales comparison approach and the income capitalization approach. Unless the shopping center was recently constructed, the cost approach is seldom used. The sales comparison approach is only used when comparable sales data is available, which is rare. Therefore, appraisal professionals and the courts agree that the income capitalization approach is generally the most reliable analysis.

The income approach requires the capitalization of a net income stream into a present value. Prior to filing a property tax challenge, the shopping center owner or their tax professional should gather copies of leases, rent rolls, and income and expense data for the prior and current year. Each is required in order to estimate the property’s market value.

Post-recession issues

Prior to the economic crash of 2008, a review of the property’s leases, vacancy rates and expenses helped paint a picture of the center’s ability to produce income. After applying a proper capitalization rate — the rate of return reflecting the risk of investment — to the center’s net income, an owner’s tax professional would be able to estimate the center’s market value for property tax purposes.

Following the crash of 2008, however, an increasing number of shopping center landlords have been forced to make rental concessions in order to keep tenants. As a result, the mere analysis of the center’s occupancy, lease rates and expenses is no longer enough.

A better strategy is to conduct a comprehensive inquiry with the owner’s leasing representative or property manager to identify any concessions such as reductions in rent, recalculations of base tax years for property tax reimbursement, or a reduced reimbursement of common area maintenance charges.

Much of the data in the typical yearend income and expense report for a shopping center may be misleading or inconclusive, requiring detailed discussion with the landlord or the landlord’s accountant. For example, some owners report tenants’ payments to the landlord for reimbursement of property tax or for common area maintenance as rental income. Yet if this data were capitalized along with rental income in a valuation, it would inflate the center’s taxable value and reduce the owner’s chance of securing a property tax reduction at a valuation hearing or trial.

After determining rental income, the taxpayer or tax professional will review the shopping center’s vacancy history in order to determine the property’s effective gross income, or gross income less vacancy and collection losses.

The economic health of any shopping center depends upon the percentage of the total space rented. Therefore, the taxpayer must consider an appropriate vacancy and collection loss factor when refining gross income into economic gross income. Shopping centers are rarely fully occupied today, and this factor must be considered in the analysis. Vacancy rate estimations should reflect a review of the subject’s vacancy rate together with local and regional market statistics.

Next, analyze expense data to estimate the subject’s net income, subtracting expenses typically incurred by the landlord from the property’s effective gross income. To ascertain typical expenses, study a number of shopping centers and compare those findings with the subject’s actual expense data. Generally, shopping center expenses include management, insurance, leasing fees and commissions, un-reimbursed common area maintenance charges, and utilities not paid by tenants.

Depending on the region, these expenses can total 15 percent to 30 percent of gross income.

The income capitalization approach to market value requires the application of a capitalization rate to the shopping center’s net income in order to estimate fair market value. The capitalization rate is a percentage that expresses risk, return, equity and property tax rates.

Considerations in estimating these rates include the degree of risk, market expectations, prospective rates of return for alternative investments, rates of return for comparable properties in the past and the availability of debt financing. It’s always helpful to determine caps rates utilized in the jurisdiction.

Many things to consider

Clearly, there are many factors to consider when evaluating a shopping center’s taxable value today. In addition to the factors mentioned above, the property owner must consider the subject’s size, location, access, competition, parking, tenants and other traits to form a value opinion.

Prior to presenting a case to the assessor or judge for a property tax reduction, the taxpayer must thoroughly analyze the individual economics of the shopping center and employ a valuation approach that produces a logical and well supported estimate of taxable market value.

Given that most shopping centers have experienced economic hardship since 2008, owners of these properties should seek professional advice to evaluate their property tax bill. A skilled property tax attorney will know how to conduct the necessary analyses and effectively argue on the taxpayer’s behalf for a property tax reduction.

Hild and PenighettiRyan C. Hild and Jason M. Penighetti are attorneys at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLP, the New York State member of Amercian Property Tax Counsel, the national affiliation of property tax attorneys.  Contact Ryan at This email address is being protected from spambots. You need JavaScript enabled to view it. or Jason at This email address is being protected from spambots. You need JavaScript enabled to view it.

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