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Property Tax Resources

Nov
26

The Silver Tsunami Portends Excessive Tax Assessments

What You Need to Know to Successfully Appeal Your Inordinate Property Taxes

For some time, owners and operators of seniors housing properties have been aware of the staggering demographic statistics, such as the Census Bureau's projection that the baby boomer population will exceed 61 million when the youngest boomers reach 65 in 2029. This is truly the Silver Tsunami. Yet, even seniors housing professionals may be surprised by excessive property tax assessments that break otherwise carefully constructed budgets.

Before discussing what seniors housing owners can do to combat an excessive property tax assessment, it will help to review why some taxpayers will receive such unwelcome notifications. Factors include the large and increasing number and variety of seniors housing projects, coupled with the mass-appraisal methods that assessors typically employ.

With tens of thousands of units constructed each year, the country now has over 3 million seniors housing units ranging from independent living to assisted living, memory care and/or nursing care. Appropriate assessment methods depend on whether a property is an all-encompassing, continuing care retirement community; freestanding with only one component (such as independent living only); or comprising several (but not all) of these subtypes.

Unfortunately, assessors with limited resources usually use a cost-based methodology that is cost-effective for valuing a large number of properties. That may work for residential assessments in areas with similar homes, but given the significant differences between seniors housing properties, this approach can create an enormous tax problem for taxpayers who own seniors housing.

An outrageous assessment

In one recent case, the owner of a newly constructed property was shocked to receive an assessment valuing the property about 30 percent above its actual cost.The resulting taxes would have exceeded the owner's budget by over $250,000, not only ruining cash flow, but also destroying more than $2 million of market value.

Fortunately, there are measures taxpayers can take to counter excessive assessments. A critical initial step is to confirm any appeal deadline. Not only do rules differ across the country, but in many states the appeal deadline depends on when the notice is sent.

Further complicating this point is that more than one formal appeal may need to be filed, and taxpayers often have a narrow window within which to file. Generally, if a taxpayer receives a notice and misses a required appeal deadline, there are no second chances for that tax year.

Other important steps are to determine the applicable value standard and the assessment's basis. Usually (but not always) the standard will be market value, or the probable cash-equivalent price the property would fetch if buyer and seller are knowledgeable and acting freely. To determine that value, the assessor usually will have used an incomplete and improper cost approach that only adjusted for physical depreciation.

For these typical cases where the assessor has estimated market value using a flawed cost approach, drilling down deep into the assessor's cost methodology may produce a gusher of tax savings. In the aforementioned case, the assessor had used the costs for constructing a very expensive skilled nursing facility. Correctly using the assessor's cost estimator service for the subject property, which was mostly comprised of independent living units, reduced the cost by about $10 million.

Additionally, an assessor's cost-based valuation often will only account for depreciation from the property's physical condition. A proper cost approach must also account for any functional or external obsolescence.

Functional obsolescence can be substantial, especially for older properties, because consumer preferences change over time. What consumers may have desired years ago may now constitute a poor offering.

External obsolescence, which is often due to adverse economic conditions, can impact a property regardless of its age. For example, there will be external obsolescence if new properties overwhelm market demand in an area, or if the inevitable next economic downturn lowers market values.

Other scenarios

While atypical, sometimes assessors will use an income approach or sales comparison approach to value seniors housing properties. As with the cost approach, those approaches introduce many ways for assessors to reach erroneous and excessive value conclusions. One potentially large error is valuing the entire business and failing to remove the value attributable to services, intangibles or personal property.

In the previously mentioned case, the taxpayer's appraiser used the income approach and concluded that the seniors housing property had a total business value of approximately $22 million. The appraiser then determined that about $1 million of that value was attributable to services and intangibles and about $800,000 was attributable to tangible personal property as shown in the table below.

Market Value of Total Business Assets ---- $22M
Less Tangible Personal Property ---- ($800,000)
Less Services and Intangibles ---- ($1M)
Market Value of real property ---- $20.2M

In a similar vein, the Ohio Supreme Court recently reversed the Ohio Board of Tax Appeals in the case of a nursing home property where a taxpayer's appraiser had determined that only about sixty-two percent of the total paid for all assets was for the real property. The Board of Tax Appeals had summarily rejected the appraiser's analysis as a matter of principle. The Ohio Supreme Court reversed and ordered the Board to reconsider the appraiser's analysis, and determine what amount, if any, should be allocated to items other than real estate.

These cases underscore that an assessor who uses the income or sales comparison approach and mistakenly values the entire business, rather than the real property alone, can improperly inflate a real property assessment by a material amount.

Another step taxpayers can take to achieve tax justice is to involve experienced tax professionals and appraisers. As the above analysis shows, property tax valuation appeals have many procedural nuances as well as legal and factual issues that must be addressed. In addition, in some jurisdictions there may be a basis to obtain relief based on the assessments of comparable properties.

As the inevitable Silver Tsunami inundates markets, there will be more seniors housing properties and more instances of excessive tax assessments. To the extent that the surge in the elderly population depletes local government finances, whether due to government pension plan shortfalls or otherwise, there should be no surprise if property tax bills increase.

The owners and operators of seniors housing properties will need to carefully monitor their property tax assessments and remain vigilant to avoid painful and excessive taxation.

Stewart Mandell is a partner and leader of the Tax Appeals Practice Group at law firm Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Sep
30

Why Assisted Living Is The New Property Tax Frontier

"Like hotels, these facilities feature non-taxable intangibles."

Assisted living is moving to the forefront of the ongoing debate over the role of intangible assets in property taxation. Over the past 10 or more years, property tax professionals and the courts have focused discussions of intangible assets on hotel and resort properties, which tend to rely on brands, assembled workforces and other intangible assets in their operations.

Intangibles are exempt from property taxation in most states, so hospitality property owners have fought to exclude the value of those intangibles from their property assessments.

The courts have resolved the question of whether the value of intangibles can be included in the value of hospitality properties, establishing case law through key decisions such as those by California's Supreme Court and Court of Appeal in Elk Hills Power vs. Board of Equalization and SHC Half Moon Bay v. County of San Mateo.

In those cases, the courts have explained that assessors must remove the value of non-taxable intangible assets and rights from a property's value so that only real property is assessed for property tax purposes.

Owners should take page from hotel playbook

Now tax industry professionals are asking whether the principles used to exclude intangibles from hospitality property assessments can also apply to assisted living properties. The answer to that question might have been "no" just 15 years ago, prior to the explosion in the number and sophistication of assisted living communities. At that time, it would have been impossible to argue that there were significant intangible assets and rights involved in the operation of most assisted living facilities.

But assisted living operations have become more sophisticated in recent years, incorporating more valuable and more numerous intangibles. That trend has created opportunities to reduce property taxes in the same way that hospitality operators limit tax exposure for their properties.

Today's assisted living facility is much more than a building with a license to provide convalescent care. Top-rated facilities employ staffs with a variety of expertise in caring for the aged, including highly specialized skills to care for residents suffering from memory loss due to dementia or Alzheimer's disease.

Staff-to-resident ratios can be as high as 2-to-1. And the personal care for residents occurs 24 hours a day, seven days a week, so the number of employees needed to operate an assisted living facility has greatly increased.

In addition, high-end assisted living facilities offer more services to their residents today than properties typically provided in the 1990s, making them increasingly similar to hospitality businesses. Nowadays, residents have full food and beverage services, often with a choice of several meal plans.

Assisted living facilities also offer hairdressing and barber services, laundry, housekeeping, transportation and, in some cases, staff-coordinated activities. The operator provides all of the services mentioned above in addition to any medical supervision, physical therapy or other healthcare offerings.

Nearly all of the recent improvements in assisted living reflect the increased number of intangible assets and rights that assisted living facilities must use in order to deliver the services that their residents require — and the residents' families demand.

Much like a high-end hotel or resort, the many services that upscale assisted living facilities provide to residents bear little relation to the building and location where the service delivery occurs. Rather, the trained workforce provides those services.

Generally speaking, only the building and land are subject to property taxation. Consequently, value created by the workforce and the services it provides is a non-taxable intangible asset, which must be excluded for property tax purposes.

To identify assisted living intangibles, first consider that the facility is an income-producing property. The income produced there derives from more than the rental of space. In fact, rent for residents' living space accounts for as little as one-quarter or one-third of the revenue an assisted living facility generates.

The balance of the income that assisted living facilities receive is payment for services that the workforce provides. In addition, some assisted living properties likely benefit from brand recognition or have accumulated business goodwill.

Three ways to remove intangibles from equation

Property tax practitioners have three primary ways of removing identifiable, non-taxable intangible assets and rights from the value of an assisted living enterprise.

1. Determine the cost of the land and buildings that the facility uses. This method directly values the "sticks and bricks" at the facility, and works well if the facility is fairly new so that there has been little physical deterioration. Some taxing authorities recommend this method, as does a textbook on the appraisal of assisted living facilities, published by the Appraisal Institute.

2. Identify facilities where an operator leases the land and buildings, so the rental payment only represents rent for use of the land and building. Similarly, professionals who appraise or value assisted living facilities for property tax purposes should seek sales of assisted living center land and buildings only for a proper comparison. Unfortunately, leases and sales of only land and buildings for assisted living tend to be elusive.

3. Value the specific intangible assets and rights in use and deduct the value of those intangibles from the full business enterprise value of the facility. This method applies to most assisted living facilities. Assessors already use this method for hospitality properties, so it is readily applied to assisted living.

Property taxes are a significant expense for assisted living operators. Fortunately, the hospitality industry has already blazed the path to tax relief. With some ingenuity, the taxpayer can borrow the same methods that help control hospitality property taxes and use them to reduce taxes on assisted living facilities as well.

 

CONeallCris K. O'Neall is a partner with Cahill, Davis & O'Neall LLP, the California member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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