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Property Tax Resources

Feb
12

Atlanta: Undue Assessments May Be Coming

Here's what taxpayers should do if the tax controversy now brewing causes large property tax increases

Recent headlines questioning the taxable values of Atlanta-area commercial properties may threaten taxpayers throughout Fulton County with a heightened risk of increased assessments.

Changes in the Midtown Improvement District, which extends northward from North Avenue and along both sides of West Peachtree and eastward, are rapidly reshaping the Atlanta skyline. Multiple new buildings under construction rise 19 to 32 stories, ushering in more than 2,000 new apartment units as well as hotel and office uses.

Amid this intense construction, Fulton County tax assessors have come under fire in newspaper and broadcast news reports that showed assessed taxable values were well below the acquisition prices paid for many commercial properties. Both Atlanta and Fulton County have ordered audits to determine whether assessors consistently undervalued properties, resulting in lost revenue.

While it may be unsurprising that assessors failed to keep up with rapidly changing market pricing in a development hotspot like Midtown, the news coverage and government scrutiny may pressure assessors to increase commercial assessments across the board. Owners of both newly constructed and older properties should diligently review the county's tax assessment notices, sent out each spring, to determine whether they should appeal their assessed values.

Know the assessment process

Understanding the permissible approaches to valuation is key for the taxpayer to determine whether to appeal an assessment. The two most commonly used methods are the income approach and the market or sales comparison approach, both of which can be problematic if incorrectly applied by the county assessor.

Assessors typically value apartments and office buildings using the income approach. Initially, however, assessors use mass appraisal methods that may not reflect the specific financial realities of the individual property. Taxpayers should examine each of the various components of the county's income model and question whether each element of the formula is appropriately applied to their property.

By utilizing data from the market, has the assessor overestimated the rental rates for the property? Property owners should analyze and discern whether it is beneficial to provide the previous year's rent roll to the assessor in order to argue that the county's model rental rate is inaccurate for their property. An older complex or building may have new competition from a recently built property offering up-to-date amenities. Not only will the older property be at a disadvantage to charge premium rents, but the newer construction is also driving its taxes higher.

Has the assessor used a market occupancy rate that does not correctly indicate the property's occupancy level? In order for the income approach to accurately achieve both physical and economic occupancy, the vacancy and collection loss should take into account both the occupancy rate and concessions that the owner provides to renters to maximize occupancy. Again, in a fluctuating market with new construction competing against old, occupancy rates can be affected.

In using market data, has the assessor underestimated the expenses for the property? Perhaps the expense ratio used is inappropriate for the property. If so, property owners can demonstrate this by providing the previous year's income and expense statement to the assessor, differentiating their property from the mass appraisal model.

A common area of disagreement is the capitalization rate. A capitalization rate is the ratio of net operating income to property asset value. Has the assessor used a cap rate that is derived incorrectly from sales of properties that are not comparable to the taxpayer's property?

Has the assessor properly added in the effective tax rate to the reported base cap rate from the comparable sales because the real estate taxes were not included in his allowable expenses? If the effective tax rate is not added to the base cap rate, and real estate taxes are not included in the expenses, the result is a lower cap rate, and thus, an artificially and incorrectly higher value. An analysis of the accurate application of the sales comparison or market approach is helpful in making the determination of the appropriate cap rate.

Many factors go in to determining if sales are sufficiently similar and can be relied upon. The comparable sales used should be of a similar age as the subject property. Older properties usually command a lower price per unit or lower price per square foot than newly constructed properties.

The comparable sales used should be similar in square footage to the subject property, with similar square footages in the various units within the property, because larger average unit size usually generates higher rents and also results in a quicker lease-up.

Consider the type of purchaser involved in the comparable sale transactions. Private investors typically pay less for properties than institutional purchasers such as real estate investment trusts because REITs are able to obtain lower-cost loans.

Similarly, if below-market-rate financing was already in place and the buyer was able to assume the loan, then the sale price may have been artificially inflated. Another circumstance to examine is, if the seller provided a significant amount of financing in the sale, there may have been unusually favorable financing terms; if so, the sales price must be adjusted.

Another aspect to investigate is the existence or lack of substantial deferred maintenance at the time of sale in comparison to the subject property. The necessity for additional capital expenditures after a purchase can affect the purchase price.

It is helpful to inquire into the effective real estate tax rates of the sold properties in order to determine if they are sufficiently similar to the subject property. Jurisdictions or taxing districts with lower tax rates can cause properties to sell for higher prices. Taxing neighborhoods with higher tax rates tend to generate sales with lower values, and thus, higher cap rates.

All commercial real property owners in Fulton County should carefully examine their tax assessment notices, because higher valuations by county assessors may be on the horizon. Property owners do not want to pay sky-high taxes based on what may be reflexive assessments stemming from the latest headlines.

Lisa Stuckey and Brian Morrissey are partners 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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May
08

Don’t Forget Obsolescence in Property Tax Appeals

It's critical for owners to identify both economic and functional obsolescence in order to fight unfair tax assessments.

New technologies, shifting markets and aging buildings can drive economic obsolescence across entire industries. Equally important for the taxpayer, these factors also affect individual property values from a functionality perspective. Understanding both economic and functional obsolescence is essential to properly evaluate tax assessments for accuracy.

Determining functional obsolescence requires an analysis of the property's layout and technologies in use. This exercise attempts to quantify any adjustment in value that amplifies or outpaces downward trends occurring in the market, or accelerates depreciation beyond a straight-line basis. This may include external trends having a unique negative effect on the property's functionality.

Likewise, economic obsolescence can affect a property's value.Such an analysis involves external factors not necessarily specific to the property that may compromise its value on the open market.Declining trends in markets within an industry can signify reasons for impaired values both nationally and regionally.Moreover, international competition may underscore weaknesses within an industry that explain a reduction in a particular property's value.

In ascertaining the decline in a property's value due to economic obsolescence, the analysis must attempt to quantify that decline and offer reasons explaining it.These reasons need to be identified and reasonable, a rationale correlating values assigned to those reasons. For example, a facility may have a decline in excess of industry averages, such as changes in transportation costs and infrastructure in comparison to other supplying markets.It could become much less expensive to ship product from South America than to ship by rail in parts of the United States.

In an uncertain economic climate or a declining or stagnant real estate market, the need to evaluate obsolescence in property assessments is obvious. But even in times of growth and rising real estate prices, taxpayers should consider functionality in reviewing an assessment.

In Georgia, for example, regulations governing property assessments require local taxing authorities to take obsolescence into account. The statute lacks any description of the precise mechanics involved in measuring obsolescence, however, and assessors often forego such an evaluation.

A given jurisdiction's tax return may apply depreciation schedules, but those may not incorporate the concept of functionality. If unaddressed in depreciation schedules, then functional obsolescence needs to be captured as an adjunct to depreciation. Poor economic times or deterioration in a property's utility will exacerbate normal depreciation.

The degree of functional obsolescence is reflected in the utilization of the property. A comparison between full versus actual property usage can indicate the degree of functional obsolescence. Look for evidence of the gap between full and actual historical changes in operating income and production.

Functional vs. Economic Obsolescence

Given that the discrepancy between full and actual property utilization is unique to the facility and not industry-wide, it is functional. This could be explained by technological differences between competing facilities and the subject property. At the same time, external economic factors may contribute to the property's comparative decline.

For example, a printer may use antiquated equipment and technology that require it to keep large facilities for both production and warehousing. Comparisons will identify a gap in functionality between the property and those of more modern competitors using smaller facilities and newer technology. Faster production at newer printing operations may also require less warehousing, because projects are completed more quickly for shipping. The impact of this obsolescence on value is unique to the subject property, reflecting reduced functionality.

On the other hand, great changes are transforming the printing industry. These external factors may be detected in exactly the same way as functional change, but on an industry-wide basis.

Declining demand for an industry overall can impair a particular property's value. Such a sea change can exist within a robust economy, too: In our example, a digital culture has rejected the traditional model for printing to a significant degree, as the widespread use of electronic records and communication has reduced demand for paper printing.

A mine provides another example. Over time, miners extract the most accessible minerals using the least costly means. The layout and operation would have been originally set up to facilitate this process.

As mining continues, the remaining minerals may become more expensive to extract per unit of raw material. This added cost reduces operating income. The mine may require new infrastructure to continue operations. These periodic expansions may be inefficient, again increasing processing costs.

It may be true that, were the mine to be redesigned from scratch, no one would duplicate the existing operation because of the production costs. This reflects deteriorating functionality. On the other hand, industrial demand for the mined product may evaporate due to innovations that make the material unnecessary in processes that once required it.

Changing market forces can impact value. Until recently, the United States was a net importer of natural gas, supporting demand for facilities that enabled the import of liquid natural gas. Now that the United States is a net exporter of natural gas, those same facilities that handled the import of natural gas are more obsolete and less valuable.

Obsolescence is an important consideration in valuing property, regardless of economic conditions. This is especially true for functional obsolescence, but can also be true for economic obsolescence. In valuing property, it is important to remember there is significant overlap between the two, and many factors and influences may explain overall obsolescence.

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. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
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Feb
22

Snakes In The Property Tax Woodpile

Real estate acquisitions and improvements harbor traps for the unwary taxpayer.

Estimating the costs of purchasing or improving real proper ties may seem a simple exercise. However, tax traps await owners who are unaware of the dangers to avoid or otherwise veer off the trail. Prudent investors will be alert to the hidden tax snakes inherent in real estate decisions. Missteps taken at the time of purchase can lead to substantially higher property taxes later. To avoid these snakebites, the prudent investor will carefully research a property's existing tax treatment before closing, consider whether to execute an allocation engagement and ensure that the transaction is properly documented.


In some states, statutory caps limit valuation increases that would oth­erwise rise to reflect the market. For example, California's Proposition 13 limits increases in assessed value to 2 percent per year even if the property's market value is increasing at a faster rate, so long as ownership remains unchanged. Property owners should know that acquisitions and improve­ments can dramatically impact tax values that were previously limited by statutory caps.

In most states, acquisitions trigger reassessments at the next applicable valuation date. In researching existing tax values prior to purchase, prospec­tive buyers often research the taxing authority's online tax records. Online research may fail to distinguish be­tween capped or taxable value versus fair market value, however. If the ac­quisition removes the prior cap and the buyer estimates taxes based on the capped value rather than the fair market value, the new property owner could be in for a very rude awakening come tax time.  

Acquisitions can also change dead­lines for filing tax appeals in some ju­risdictions. For example, the normal filing deadline for appeals in South Carolina is January 15, but most coun­ty assessors will mail new assessment notices during the year following an acquisition. In those circumstances, the filing deadline is 90 days after the date of the reassessment notice.

Failure to take simple but essential steps in documenting a purchase can have substantial tax ramifications. For example, South Carolina law poten­tially exempts as much as 25 percent of a commercial property's purchase price from later ad valorem taxation, but only if the purchaser files for the exemption on or before January 30 fol­lowing the closing. Failure to file can cost purchasers tens of thousands of tax dollars or more. Yet many purchas­ers are unaware of this exemption un­til after they receive the new tax bill, when it is generally too late to file for the exemption.

Closing documents can increase future property tax bills. Many asses­sors calculate taxable value based on the consideration recited in a deed. Purchasers typically acquire income­ producing properties based on existing or potential cash flow.It is the com­bination of the real property, tangible personal property and intangible per­sonal property which generates that cash flow.

The deed consideration should re­flect only the value of the real property and improvements, not the total trans­action value. Similarly, title insurance should reflect the real property's value and exclude value attributable to tan­gible or intangible personal property. A well-thought-out allocation agreement potentially simplifies later record keep­ing and yields significant savings on income, property and transfer taxes, sometimes worth millions of dollars.

For example, operating hotels are generally sold as going concerns. That distinct from the underlying real es­tate. The hotel's intangible personal property, such as its brand, reserva­tion system or on-line presence, may substantially increase cash flow but is generally exempt from ad valorem tax­ation.Using the transaction's value, rather than the value of the real estate and improvements, in the deed not only increases documentary stamps but could lead to unwarranted higher ad valorem taxes.

Pre-purchase cost segregation stud­ies are often useful in documenting these separate values, but many pur­chasers and their lenders are reluctant to engage in this component analysis. For example, large hotel loans typical­ly proceed from a lender 's corporate loan department,not the real estate de­partment, and with good reason. Loan officers can be reluctant to explain to their superiors or to regulators why title insurance values might be lower than the face amount of the note, when the loan is really underwritten on the value of the cash flow and not the in­dividual components contributing to that cash flow. That reluctance could manifest itself in reduced loans being made available for borrowers.

Similarly, loans secured by retail real estate occupied by national credit ten­ants previously garnered less scrutiny from lenders and regulators in assessing loan risk. That laissez faire attitude may be changing as e-commerce erodes sales at brick-and-mortar stores, which continue to close in large numbers.

In some jurisdictions, changes in the property's condition such as a vacancy by a major retail tenant do not trigger a reassessment, and may not be factored into tax bills. The key inquiry in those situations is whether the change in condition occurred after the applicable valuation date.

Property improvements also cre­ate taxation pitfalls. In states that cap taxable property values, the caps may come off when improvements are made. In other words, the cost of im­provements could include not only construction expenses but also a substantially greater tax burden.

The effect of improvements on prop­erty taxes varies by jurisdiction. Flor­ida has adopted a bright-line test that examines whether the completed improvement increases value by at least 25 percent. California law protects properties from reassessment so long as any work is normal maintenance or repair, or the improvement does not convert the property to a state "substantially equivalent to new." Whether new construction or improvements fall into this category is "a factual deter­mination that must be made on a case­ by-case basis," the California statute states. South Carolina law contains no such guidance.

Timing also matters. Most jurisdic­tions prohibit taxing improvements until after the improvements are com­pleted, as defined by applicable stat­ute. If the applicable valuation date is Dec. 31, 2018, an owner might consider delaying completion until after Jan. 1,2019, to delay a major tax increase. Re­gardless, careful analysis and plannirig can help property owners address the hidden cost of increased taxes.With careful planning, the prudent property owner can avoid being bit­ten by the lurking snake of increased property taxes and walk the property tax trail with confidence.

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Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Bond Dickinson LLP. The firm is the South Carolina member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
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Feb
01

Missing Property Tax Deadlines Costs Money

Put filing deadlines and other key tax dates on the calendar to preserve your rights to appeal and protect incentives.

Timing can be everything when it comes to property tax appeals. Failure to file an appeal on time will almost certainly lead to its dis­missal, and paying taxes too late can lead to the same fate. Those aren't the only important dates to keep in mind when it comes to property taxes, however. Knowing the correct assessment dates, exemp­tion filing periods and other relevant time elements can be critical for a taxpayer looking to minimize its property tax liability.

At a basic level, all taxpayers should know when to file returns, when assessors determine values, when protests and appeals must be filed, when taxing entities issue tax bills and when payment is due. This may seem simple enough, but there is often more than meets the eye. These dates vary from state to state, county to county and even municipality to municipality. Many jurisdictions revalue real property annually, while others do so on a less frequent cycle. In some jurisdictions, such as Florida, a taxpayer may re­ceive a discount for paying property taxes early. The following are some examples of timing issues that a taxpayer should keep in mind.

Assessment, Valuation Dates

Each jurisdiction assesses real and personal property as of a certain date each year. Many states, including Florida, Georgia and Tennessee, use a valuation date of Jan.1. In Alabama, the valuation date is Oct. 1 of the year proceeding the tax year, such as a valuation date of Oct. 1 2017, for the 2018 tax year, with a tax bill due Oct. 1,2018, and tax payments deemed delinquent if not paid by Dec.31,2018. Events occurring at or to the property after the assessment/valuation date are typically excluded from consideration when determining the taxability or value of the property for the relevant tax year.

The assessment or valuation date can have significant implications for the owner's property tax liability. For instance, a casualty event could result in vastly different assessments depending on whether the property damage occurred a few days before or a few days after the applicable valuation date.If a purchaser's new use will result in the property losing an exemption or being assessed at a higher assessment ratio, there might be an opportunity for substantial first-year tax savings if the closing occurs after the relevant assessment or valuation date.

The assessment date will also determine which sales and rent comparable examples the assessor can consider, and which years of income information are relevant. In the case of construction in progress, knowing the valuation date and properly documenting the status of construction as of that date can greatly affect the assessed value.

The assessment date may also dictate who is entitled to receive notices, file property tax protests or claim exemptions, so it is important for a purchaser to consider these issues at closing to ensure that its rights are protected. A prudent purchaser should promptly ensure that the property is assessed in its name and request that the seller immediately forward any tax notices it receives. Tax appeals are often required to be filed in the owner's name as of the assessment date, and in such cases, a purchaser should obtain the right to appeal in the name of the previous owner.

Some jurisdictions reappraise property on an annual basis, with values subject to increase or decrease each year, while others are on longer reappraisal cycles of up to six years. In jurisdictions with multiyear reappraisal cycles,there still may be instances where a value is adjusted before the next appraisal cycle, including new construction, casualty, sale of the property or other conditions.

Assessment, Claim Deadlines

Most states have various exemptions, property tax incentives and favorable assessment classifications that, when applicable, must be claimed with the local assessor. These may include charitable exemptions, current-use valuation for timber or agricultural properties, statutory abatements and the like. In many jurisdictions, properties are broken down into classifications such as commercial or residential, which may be assessed at a higher or lower rate.

In order to receive the benefit of these exemptions or lower assessment rates, it is of utmost importance to comply with all filing deadlines. In certain instances, exemptions and other favorable assessments can be waived if the taxpayer fails to claim them within the prescribed time periods.

Taxpayers must also remember to file personal property returns on time, where applicable. Missing a deadline can result in penalties, incorrect assessments and the waiver of exemptions. The person preparing the return should confirm the correct assessment date to ensure that only those items owned on the applicable assessment date are included on the return.

Protest, Appeal Deadlines

A taxpayer must be diligent in determining when valuation notices are issued (if at all) and the correct deadlines for filing protests to dispute high valuations. The failure to do so may result in missed deadlines, waiver of appeal rights and the payment of excessive taxes. Protest deadlines can vary widely, even within the same state, and are often 30 days or less from the date of the valuation notice. In some instances such as in Alabama when the value has not increased from the previous year, no notice is even required to be sent. Therefore, it is incumbent on the taxpayer to determine when the values were issued and what date protests must be received.

Appeals beyond the initial administrative level typically have specific filing deadlines and other procedural and jurisdictional requirements that must be strictly met in order to maintain an appeal. These requirements may include paying the taxes before they become delinquent, filing of a bond and other procedural requirements that are not always intuitive, so it is important to consult with local professionals who are well acquainted with the requirements in any particular jurisdiction.

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Sep
25

Louisiana: Tax Exemption For Partially Completed Construction?

Passage of a new ballot initiative will confirm exemption of partially completed property from taxation."

Any taxpayer planning to develop a new property must consider how local taxing entities will treat the project during construction, but the question is especially important in evaluating and comparing overall costs of potential development locations during an industrial site search.

States generally recognize Construction Work in Progress (CWIP) as property that is in the process of changing from one state to another, such as the conversion of machinery, construction materials and other personal property from inventory into an asset or fixture by installation, assembly or construction. There is no clear consensus among taxing jurisdictions as to whether (or how) a tax assessor should value such par­tially completed construction on the applicable assessment date.

Many states including Alabama, Missouri and North Carolina value CWIP based on the value or percentage of completion on the assessment date. Kansas values incomplete construction based on the cost incurred as of the assessment date. Florida, Maryland, Virginia and West Virginia assess CWIP when the work has progressed to a degree that it is useful for its eventual purpose. And in South Carolina, improvements are only assessed upon completion.

With the exception of a few errant assessments in the early 1930s, Louisiana has never assessed partially completed construction for property tax purposes. Rather, taxing jurisdictions assess and add the completed property to tax rolls as of January 1 of the year immediately following completion of construction. This complements Louisiana's industrial tax exemption program, which exempts certain manufacturing property from ad valorem taxation for a specified number of years.

Unfortunately, properties on which ad valorem taxes have been paid are ineligible for participation in the exemption program. Thus, if a taxpayer has paid taxes on a project as partially completed construction, the property is no longer eligible for the industrial tax exemption and remains on the taxable rolls, subject to assessment each year. Obviously, assessing projects with partially finished construction in this manner would significantly diminish the value of the exemption pro­gram to taxpayers and undermine its usefulness to economic develop­ment agencies as an incentive tool.

In 2016, a local assessor broke with established practice and initiated an audit that included construction work in progress on a major industrial taxpayer. This audit raised statewide and local uniformity concerns over the assessment of a single taxpayer's partially completed construction in a single parish, and jeopardized the taxpayer's existing industrial tax exemption.

The taxpayer immediately filed an injunction action in district court, and the Louisiana Legislature took up the situation during its regular 2017 legislative session. Recognizing the need to formalize the exemption, the Legislature referred to voters a constitutional amendment that would codify the exemption of construction work in progress from assessment. Louisiana is one of 16 states that require a two-thirds supermajority in each chamber of the Legislature to refer a constitutional amendment to the ballot, so their vote underscores the strong support among lawmakers to codify the exemption.

Act 428 would add a subsection to Article VII, Section 21 of the Louisiana Constitution, which lists property that is exempt from ad valorem tax assessment. The new provision would exempt from ad valorem tax all property delivered to a construction project site for the purpose of incorporating the property into any tract of land, building or other construction as a component part. This exemption would apply until the construction project is completed (i.e. occupied and used for its in­tended purpose).

The exemption would not apply to (1) any portion of a construction project that is complete, available for its intended use, or operational on the date that property is assessed; (2) for projects constructed in two or more distinct phases, any phase of the construction project that is complete, available for its intended use or operational on the date the property is assessed; (3) certain public service property.

If voters approve the ballot item, CWIP will be exempt from property taxes until construction is "completed." The proposed amendment defines a completed construction as occurring when the property "can be used or occupied for its intended purpose." The exemption would thus remain effective until the construction project or given construc­tion phases of the project are ready to be used or occupied.

A constitutional amendment does not require action by the Governor. This constitutional amendment will be placed on the ballot at the state­wide election to be held on Oct. 14, 2017.

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. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
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Oct
20

Purchase Price Isn't Property Tax Value

Know the many factors that often make property tax value different than the purchase price.

Don’t worry about challenging a property tax value that is less than the taxpayer’s purchase price, right? Wrong! There are numerous factors that distinguish a purchase price from a taxable assessed value, and the failure to closely review an assessment can cost a property owner dearly.

The legal standard for determining property tax values can differ from state to state, but it is generally equivalent to fair market value.  That is the probable price that the property would bring in a voluntary, arms-length transaction between a willing and knowledgeable buyer and seller, in an open and competitive market, with neither party being under undue duress, as of the valuation date.

While it is possible for a purchase price to be the same or similar to market value, there are many instances where the two deviate.  Here are some common examples:

A sale is not an arms-length market transaction if it occurs between related parties and isn’t exposed to the open market.  A sale between a company and its subsidiary, for example, may not reflect fair market value.

Fee Simple vs. Leased Fee

For property tax purposes, fair market value is most often based on the fee simple estate, unencumbered by Leases or other third-party interests in the property.  If the property is subject to an above-market lease, perhaps in a sale / leaseback transaction, the leased fee purchase price might greatly exceed the property’s fee simple valuation used for assessment purposes.

Portfolio Sales and M&A

A transfer of real estate in connection with a merger or acquisition is not a market transaction with respect to that particular property.  Likewise, an assessor shouldn’t use the sales price for a portfolio of properties, which might be bundled together and marketed as a whole, to determine the market value of one small component of the transaction.

Although buyers regularly make purchase price allocations for these types of transactions, such allocations are not synonymous with fair market value standards used for assessment purposes.

Unique Sales Terms

Sellers and buyers often think outside the box to close a deal.  Seller concessions come in all shapes and sizes and can drastically affect the final purchase price.  For instance, a seller may agree to provide certain services or take on additional obligations after closing that would not be part of a typical market transaction.

1031 Exchanges

Buyers motivated to defer substantial income tax liability by executing a 1031 exchange before a deadline may pay above-market prices.

Special Financing Terms

The purchase price may be artificially inflated because of unusual or favorable financing terms.  Institutional investors, with greater access to the capital markets, are able to obtain more favorable financing terms than the average market participant.  This lower cost of capital allows the institutional investor to pay above-market prices on lower cap rates in order to beat out competing bidders, while still achieving the same return as the typical investor.

Construction Costs

Developers and expanding businesses often find their projects detailed in the newspaper, with anticipated costs or total project investment.  Often these amounts include expenses not associated with the real estate, such as equipment, employee training and the like.  And just because something costs a certain amount to build does not mean it can be sold for a similar price.

Declining Market

Markets heat up and markets cool down.  Overpaying at the height of the market may mean a poor return, but this should not justify an overassessment.

A prudent assessor looks beyond the price to determine if a sale is a true, market-value transaction.  Despite the best intentions, even the most diligent assessor cannot account for all of the factors that can skew a sale price away from market value.  Referencing non-market deals for comparison will erroneously influence the sales data and can lead to artificially higher assessments.  The assessor’s reliance on an assumed purchase price for the subject property can have an even more dramatic and costly effect on that taxpayer’s assessment.

Many states charge a transfer or privilege tax to record a deed, which may require the buyer or seller to disclose a purchase price.  Assessors will look at these stated purchase prices and will quickly flag any that are higher than the assessed value.  A taxpayer should consult with local counsel to avoid overstating the purchase price.  For instance, a purchase price may include personal property, intangibles or perhaps additional real estate that should not be included in the consideration amount required to be disclosed.

Real estate brokers should not be surprised when contacted by assessors or subscription services to confirm details of a sale.  Before quickly confirming a sale as a market transaction, the broker should be mindful of the issues discussed in this article.  The failure to do so might significantly increase the purchaser’s future tax assessment.

All real estate investors should have a property tax review plan in place, with professionals knowledgeable of local valuation standards, rules and procedures.  When purchasing or developing real estate, remember to provide your tax professional with the particulars of the transactions, including any reasons why the purchase price or investment may not indicate market value.

Always keep in mind that purchase price and market value are not synonymous, so there is no need to concede a high assessment without first looking beyond the price on the deed.

  adv headshot resize Aaron D. Vansant is a partner in the law firm of DonovanFingar LLC, the Alabama 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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May
17

Smartphones, Showrooming Impact Cost

Smartphones lead the way in making mobile a key player in consumer purchases in-store and online.

The battle between physical stores and online retail rages on, but the recent explosion in smartphone usage is blurring the battle lines. Using smartphones, consumers in a store now can simultaneously shop and compare pricing and product availability at competing stores or online. The practice is sometimes referred to as “showrooming.” Increasingly, retailers must simultaneously invest in the problem. a combination of brick-and-mortar stores, websites, digital marketing and merchandise delivery to sell goods.

Only the real estate component of that infrastructure is subject to property tax. If property owners identify the portion of store sales attributable at least partially to online shopping, they can argue for taxable property values more accurately based on the remaining sales volume attributable to a store’s physical location and condition.

Retailers that think mobile is a channel use the wrong metrics to measure the smartphone’s impact on retail. Smart retailers focus on the impact on overall business rather than trying to measure only app downloads or channel sales.

Extrapolating a retail property’s value from base rent is relatively easy, but what happens when rent is based on sales? How do sales that take place in the store via smartphone, or online transactions that stem from a store visit, affect percentage rent?

Assessors and appraisers don’t yet have satisfactory answers to these questions and developing appropriate metrics is challenging. Taxpayers can help shape the debate, and their own tax liability, by understanding the problem.

Digital Influence Spreads

The lion’s share of U.S. retail sales continues to revolve around physical stores. Forrester Research reports that in 2015, e-commerce sales totaled approximately $334 billion, while off-line sales totaled $2.9 trillion, more than eight times more. However, many offline sales were digitally influenced, meaning shoppers connected with digital touch points, particularly mobile phones.

Forrester estimates that $1.2 trillion of U.S. retail sales in 2015 were web-influenced, and that by 2020, $1.6 trillion of all off-line retail sales will be web-influenced. The penetration of online buyers using smartphones increased to 86 percent in 2015, up from 54 percent in 2011, Forrester found.

Shoppers want to receive products quicker and cheaper than ever before, but still prefer to shop in physical stores in order to touch merchandise and obtain products immediately. Successful physical retailers combine physical stores and digital tools, enabling customers to touch and receive goods in a more cost-effective way than ever before.

Physical retailers must realize the key role smartphones play in unlocking sales. American adults use smartphones to locate stores and to check store hours, requiring retailers to keep websites current. Forrester estimates that in the first quarter of 2016, more than one-quarter of U.S. online mobile phone users ages 18 to 34 used their phones to compare prices online for products they were considering buying.

Shoppers also research product information on smartphones, often while in a store. Retailers, therefore, must monitor price variances and adjust prices in real time, against both physical and virtual competition.

Physical retailers also need to address perceived problems with off-line shopping, such as long lines and out-of-stock merchandise. Some sophisticated retailers have addressed these issues by developing store-specific data. Forrester reports that companies such as Target and The Home Depot now direct shoppers, via smartphones, to look for items in specific locations within stores, thereby reducing wait time and frustration. Nike store employees can look up inventory and make sales immediately with their smartphones. Shipping continues to pose a problem for both physical and virtual retailers. When the product is in stock, the physical retailer does not have a problem. However, maintaining inventory in stores potentially imposes the added costs of the inventory itself, additional rent and associated property taxes.

In January 2016, The Wall Street Journal reported that Gap, Inc., which includes retailers Banana Republic and Old Navy, was narrowing its free shipping window to 5 to 7 business days, down from 7 to 9 business days. Is this enough to satisfy the demands of consumers who expect immediate delivery of products, particularly from physical retailers?

Challenge to Retailers

Physical retailers face three very expensive budget items: associates, real estate occupancy costs (including taxes) and inventory. They must create a more pleasurable, yet competitive, shopping experience in order to beat digital competitors. Stores must become increasingly immersive and engaging experiences that enable customers to do everything from trying on wearable goods to playing with and testing products, or attending cooking classes and food demonstrations. The importance of enhancing the shopping experience in physical stores often means creating easy availability to other amenities such as restaurants and coffee bars.

While it may seem counterintuitive, the quality of a retailer’s online presence will influence sales, and hence the underlying value of the retailer as a tenant in a shopping center. Developers need to attract retailers who simultaneously focus on brick-and-mortar store sales, websites, digital marketing and merchandise delivery to sell goods. Percentage rent clauses in leases must appropriately capture sales.

All of this takes money and increases the complexity of measuring costs. Costs, such as property taxes, play a key role as retailers compete for sales and profits. Online retailers generally pay property taxes for distribution centers but can often reduce this cost by obtaining tax incentives, such as fee in lieu of tax agreements. Physical retailers, which often have a greater impact on the local economy, have less leverage to control property taxes. They face the challenge of showing assessors how mobile technology and e-commerce, not location alone, impact sales.

In January 2016, Forrester reported that “too often, companies measure what they can, rather than what they should, because they lack the analytics to generate the insights they need. Retailers track mobile sales rather than influenced sales because they can, and, more often than not, do treat mobile as a [separate] sales channel.”

This is precisely the problem tax assessors and physical retailers face in measuring mobile technology’s impact on a retail property. The assessor’s job is to value the real estate, not the business, which is increasingly affected by mobile innovation. Theoretically, one can use only in-store sales volume in the valuation but to what degree is a store-front simply an advertising medium — like a billboard. Stores can encourage customers to order while browsing at the store but have it shipped to their house and/or pickup at a nearby location that has lower property tax, possibly a warehouse on a side street.

Increasingly, retailers must balance between the physical and the virtual, with the smartphone serving as the key touchpoint. Retail success is still about location — location of the actual shopper inside or outside the store, at home, at work, at a competitor’s store or on a website or smartphone  — it’s just not about physical storefronts anymore.

Morris Ellison Photo Current july 2015Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. Morris Ellison can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar
28

Property Owners Beware

"The varying directions of price trends demonstrate that now, more than ever, Atlanta property owners should closely review property tax assessments and make specific determinations regarding the correctness of the valuation. General sales trends and perceptions provide insufficient basis for deciding whether or not to appeal the county assessment notice..."

The year following a real estate acquisition is a critical tax year or the property's owner. An assessor will typically latch onto the recent sale price to support a reassessment of the property's taxable value to equal that transaction amount, effective in the following tax year.

When the new assessment arrives, some taxpayers will recognize the familiar sales price amount reflected in the property's assessed taxable value, breathe a sigh of resignation and plan to be taxed accordingly. Yet there is good reason to question the new assessment's accuracy, even if it equals the acquisition price.

Georgia law provides that the transaction amount a buyer pays for real estate in an arms-length, bona fide acquisition shall be the property's maximum allowable fair market value for property tax purposes for the following tax year. Accordingly, purchasers of property in one tax year should expect to receive ad valorem tax assessment notices for the subsequent tax year at a value no higher than the purchase price. In other words, the taxable value may be lower than the acquisition amount.

Differentiate Price, Value

There are several analyses that a wise taxpayer should consider when reviewing the tax assessment received in the year following the property's purchase.

Some county taxing authorities use the purchase price as the taxable value for the next tax year by default. That price may not be an appropriate valuation, however.

Often the assessor is unaware that the purchase price may reflect an analysis of factors other than the value of the real estate alone, and that the price, therefore, may exceed the true fair market value. In that event, the taxpayer should identify and explain those factors to the assessor.

Examples might be special financing arrangements, the financial stability of certain tenants, the duration of existing rental terms, or the transference of non-real estate items such as personal property and/or intangibles. Intangibles may include an in-place work force, favorable contracts for property management or other non-taxable items.

Another potential consideration is that the property's financial performance may have varied from the expectations the purchaser entertained at the time of the acquisition. Perhaps physical changes to the property since the time of purchase have decreased its value; for example, the owner may have razed or demolished part of the improvements in preparation for remodeling or repair that did not occur before Jan. 1.

In short, the purchaser should not blindly accept a transaction value from the previous year as the real estate's de facto taxable value.

Is It Fair?

Be on the lookout for sale-chasing assessors. Sale chasing occurs when a tax assessor changes assessments only on properties sold in a given year and leaves assessments unchanged on similar properties that did not change hands.

Property owners should be diligent, comparing the assessment of newly purchased property relative to assessments of similar properties in the same market that have not sold, to determine if their own assessment is accurate. Compare assessments of similar properties on a per-square-foot basis, a per-key basis, or on a per-unit basis, depending on the property type, to determine if a question about fairness in valuation may exist, and whether further analysis is warranted.

In addition to comparing the assessment of the purchased property to the assessments of comparable properties that have not sold, the wise property owner should also compare the assessment to the assessments of com-parable properties in the same market that were sold in the preceding year.

The taxpayer may need to calculate and compare a gross rent multiplier ratio. To determine this ratio, divide the assessment of the real estate by its annual rental income before expenses such as taxes, insurance, utilities, etc. (It may require a market survey or direct inquiry to acquire that data.)

While this method ignores differences in vacancy rates, if the gross rent multiplier for the taxpayer's real estate is much higher than the multiplier for similar properties that sold in the same market and calendar year as the subject property, then the taxpayer may have a legitimate cause for complaint.

In a hypothetical example, a property sold for $25.3 million in 2014, has the potential to generate $2.5 million in rent annually, and received a 2015 county tax assessment of $25.25 million. The ratio of the county assessment divided by the rent potential results in a gross rent multiplier of 10.1.

Another property sold in 2014 at a price of $27.4 million, has annual rent potential of $3.4 million, and the 2015 county tax assessment on this property was $23.2 million. This second property's gross rent multiplier is 6.82. A third property that did not sell was assessed at $30.68 million for 2015 and its annual rent potential was $4.5 million, resulting in a gross rent multiplier of 6.82.

After making these comparisons, the taxpayer in this example can make a good argument for a lower assessment. It is worth mentioning that taxpayers must adhere strictly to applicable appeal deadlines.

Clearly, sale price does not necessarily equal fair market value. Shrewd taxpayers in Georgia should carefully review, research and analyze their assessment notices to determine whether the county taxing authority has merely made a cursory assessment of the fair market value of their property based solely on the purchase price. If so, an appeal may be in order.

Stuckey

Lisa Stuckey 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. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Dec
31

Beware The Costs Of Hidden Capital

Owners Must Examine The Tax Consequences Of Making Capital Improvements Before Breaking Ground

For nearly 40 years, states have attempted to protect property owners from rapidly escalating property tax bills by limiting increases in the taxable value of real estate.  Often referred to as “caps,” these limitations are myriad and complicated, but share a tendency to distort the market for developers of new space and for property owners seeking to improve existing commercial properties.

How so?  Laws are state-specific, but taxpayers purchasing or improving real estate may lose the benefit of the cap on their property’s value, and incur a substantial tax increase on top of the acquisition or improvement cost.  In other words, caps discourage property owners from improving their properties, while owners who know how caps apply can access tremendous savings.

Caps in Action

Caps apply by limiting increases in taxable value for properties subject to reassessment that would otherwise rise to reflect the market.  For example:  California’s Proposition 13 generally limits annual valuation increases to 2 percent, even if the property’s market value is rising at a faster rate.  Common triggers for reassessment are an ownership change, countywide reassessment and improvements to the property.

Some states exempt a fixed percentage of any increased assessed value following an ownership change.  Ownership changes can include not only title transfers but also internal transfers of interests in the entity that owns the property.  To access this exemption, the taxpayer may need to take some timely action, such as filing a claim or meeting other state requirements.  Miss the deadline, and the exemption disappears.

Consequences of an oversight can be dramatic.  For example, an apartment complex previously assessed, capped or otherwise, at $20 million sells for $30 million.  Rather than incur taxes reflecting the full $10 million increase in value included in the sale price, the buyer qualifies for a 25 percent tax exemption, or $7.5 million.  Yet, failure to file a timely exemption application could result in taxation of that otherwise exempt $7.5 million of the total value.

Many jurisdictions cap value increases during periodic reassessment.  Florida generally limits annual increases to 10 percent of assessed value for the prior year.  South Carolina, which theoretically reassesses every five years, limits increases to 15 percent of the property’s prior assessed value unless there has been a property improvement or a change in ownership.

Some limits disappear if there has been an ownership change.  Florida generally defines an ownership change as any sale or transfer of title or control of more than 50 percent of the entity that previously owned the property.  South Carolina has adopted a much more complicated system of assessable transfers of interest (ATI’s).  The definition of an ATI runs for four full pages in the South Carolina Code.

Impaired by Improvements

With tax caps, taxpayers who improve their properties face even greater potential tax consequences, because states generally remove artificial caps on new construction and major renovations.  In other words, the total cost of improvements can include not only construction expenses but also a substantially heavier tax burden.  The result places an improved income-producing property at a serious disadvantage in competing with unimproved properties.

What constitutes an improved property? Florida has adopted a bright line test by examining whether the improvements increase value by at least 25 percent.  California law protects properties from reassessment so long as any work is normal maintenance or repair, or the improvement does not make the property “substantially equivalent to new.”

South Carolina is much more complicated and unclear.  The state requires assessors to include the value of new construction in valuing properties, but its statutes fail to define “improvements,” leaving interpretation to local taxing authorities.

The result is a patchwork quilt of inconsistency.  In order to circumvent South Carolina’s 15 percent cap on periodic reassessment, some counties have adopted a stepped approach to increases in value, although such a procedure is clearly unauthorized by statute.  Other counties simply add the value stated in building permits to existing assessed value in order to derive a new value, though the market would never see a sale on that basis.  Still other counties assume stabilization in valuing a new or improved income-producing property such as a hotel rather than accurately valuing the property before stabilization.  Clearly, a property owner improving a property faces a potential hidden cost in the form of increased taxes by loss of the statutory cap.

Reimplementation of tax caps on an improved income-producing property further complicates an owner’s prediction of costs.  Whatever the method of valuing the improvements, how does South Carolina’s 15 percent general cap apply to future valuations when the property value may be much greater?

If the taxing authority simply adds the cost of the increased value set forth in building permits, has the taxing authority fully captured an increase in value which, in turn, may be subject to re-imposed caps?  To state the obvious, an owner will not improve a property merely to re-cover the cost of improvements, but rather sees the potential of income gains exceeding improvement costs.

Most income-producing properties will generally require some period of time for lease up or stabilization.  Should the taxing authority be allowed to make assumptions of future income that the market would not make if the property sold prior to stabilization?  These questions have no easy answers.

Regardless of the system used for valuing new improvements, caps give a competitive advantage to owners of unimproved property in the form of lower costs.  Property owners must examine the obvious – and hidden – tax consequences of improvements to determine whether potential income from improvements justifies the costs.

Morris Ellison Photo Current july 2015Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. Morris Ellison can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Oct
30

Undermining A Public Purpose

"Economic development tools are under assult in Louisiana by tax assessors"

Louisiana tax assessors have begun assessing taxes on properties that have been exempt from property tax under economic development incentive programs, undermining one of the state's essential tools for promoting job growth and commerce.

Louisiana offers a handful of enticements to attract new business and spur economic development, including the industrial property tax exemption, inventory tax credits, payments in lieu of taxes (PILOTs) and cooperative endeavor agreements (CEAs) with private companies. Each of these incentives involves reducing a private entity's property tax liability.

Article 7, Section 14 of the Louisiana Constitution authorizes the state and its political subdivisions to enter into cooperative endeavor agreements that serve a public purpose, and Section 21 of the same article provides that public lands and other public property used for public purposes are exempt from property tax. The Louisiana Supreme Court has also recognized that economic development is a public purpose.

Under a typical cooperative endeavor agreement, a political subdivision leases industrial property to a private entity for development and operation. Since a political subdivision owns the property, it is exempt from property taxes. Unfortunately, some assessing authorities have decided otherwise, and have attempted to collect property tax in connection with these assets.

In Pine Prairie Energy Center LLC vs. Soileau, in 2014, a local industrial development board issued bonds and loaned the proceeds to privately held Pine Prairie to build an underground natural gas storage facility and associated facilities and pipelines. Prior to entering into the transactions, the industrial development board, Pine Prairie, and even the local tax assessor all agreed that, as long as Pine Prairie paid the agreed-upon lease payments and payments in lieu of taxes, the property would be exempt from property taxes during the lease period.

Pine Prairie built the facility, sold it to the industrial development board and then leased the property back for operations. The assessor subsequently listed the property on the tax rolls as Pine Prairie's property. Pine Prairie paid the taxes under protest and sued for a refw1d and declaratory judgment that it did not owe property taxes on an asset owned by the industrial development board.

The assessor contended that the property was not being used for a public purpose. The Third Circuit Court of Appeal noted that actual public use was not the criteria by which public purpose was determined. Rather, public use is synonymous with public benefit, public utility or public advantage, and involves using the natural resources and advantages of a locality to extract their full development in view of the general welfare.

Considering that Pine Prairie's investment resulted in approximately $700 million in local economic value, the court held that the project was beneficial to the public and thus the property was indeed being used for a public purpose.

In Board of Commissioner of Port of New Orleans vs. City of New Orleans, the Port of New Orleans leased property to two private entities that provide warehousing, freight forwarding and intermodal transportation services at the port. As i n Pine Prairie, the assessor assessed property taxes on the private companies that leased the properties, not on the public entity that owned them. When the companies failed to pay the taxes, the assessor attempted to sell the leased properties at a public tax sale.

The assessor argued that, because the activities of the private companies did not qualify as a public purpose as they did not constitute a governmental function, a benefit to the general public or a dedication for use by the general public, the property was not being used for a public purpose. The port authority demonstrated that the companies' activities were necessary for the operation of a port facility and that they furthered its broad public mission to maintain, develop and promote commerce and traffic at the port. The Fourth Circuit Court of Appeal punted on the question in 2014, and ordered a hearing on whether the specific activities conducted by the companies served a public purpose. That case is ongoing.

Cases like these obviously erode business confidence in the reliability of tax incentives. Although Pine Prairie won its case, it had to pay some $122,000 in taxes under protest and then sue to recover its funds. And the Port of New Orleans had its property seized and offered at tax sale, and now has to prove up that traditional port activities like warehousing, freight forwarding and intermodal transportation services, which have always been necessary to the operation of a port facility, serve a public purpose. This kind of uncertainty is devastating to economic development efforts.

Adolph Angela

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. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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