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Property Tax Resources

Mar
02

Property Tax Pitfalls in 'Crane City USA'

Tennessee's appeal process allows Nashville taxpayers to challenge the complicated assessment of new construction.

Over the past decade, Nashville has enjoyed a baffling explosion of growth that sent cranes shooting up all over the city, festooned with developer names like Bell, Clark and Giarratana. Highrise towers of glass and steel rose out of the old rail yards like the emerging monolith in the opening scene of "2001: A Space Odyssey" multiplied in a funhouse mirror.

The Metropolitan Government is eager to add new projects to its tax rolls, and its Assessor of Property decides when and how that happens. The assumptions made by the Assessor's office about a project's cost and timing dictate how quickly and how much a new building is taxed. So, as always, taxpayers need to keep an eye on what the assessor is doing.

The assessor's difficult job has become even more complicated in the post-COVID quagmire of supply chain failures. Twelve-month projects have stretched into 24-month projects, and the assessor's assumptions about completion times have been thrown out of whack. To make matters worse, Tennessee's property tax statutes were not designed to give relief for construction delays or lengthy projects, and the clock is ticking.

New Construction Assessed at Material Cost

The last Davidson County reappraisal was in 2021, and the next will be in 2025. Normally, the assessor's values remain unchanged over the four-year cycle, but new construction is an exception to that rule.

Under the statute for assessing projects under construction, if a new improvement is partially complete on Jan. 1, the assessor is to value the property for that year at land value plus the cost of materials used in the improvement as of that date. This materials-only value favors taxpayers because it excludes labor costs.

The construction documents that are generally accepted as evidence of project costs do not typically segregate labor versus material costs, however. Those costs are most often listed as combined totals, making the exact material costs difficult to determine.

One example from a recently reviewed document described work that included a $279,000 line item for "caulking." Unless labor and materials are both included in that number, that's a heck of a lot of white goop! Rather than demand proof of exact material costs, assessors will sometimes allocate material costs based on a pre-established rule of thumb.

Substantially Complete?

Now for the tricky part. The new construction statute allows assessors to pick up new improvements after Jan. 1, so long as the structure is "substantially complete" prior to Sept. 1 that same year. So, for example, if a building is 50 percent complete at Jan. 1 and 100 percent complete at Sept. 1, the assessor will prorate at the 50 percent value for eight months of the year, and at the 100 percent value for four months of the year. If the improvements are not "substantially complete" by Sept. 1, the assessor must wait to pick up the as-complete value in the following year.

Tennessee has no statutory definition of "substantially complete" for purposes of adding the full value to the tax rolls, but cases make it clear that tenant finish-out and certificates of occupancy are not required. In the absence of simple, objective standards for completion, assessors make subjective judgments about completion that may not favor the taxpayer. Taxpayers can challenge those judgments through an administrative appeal.

Adding Insult to Injury

Under Tennessee law, new improvements may not be valued as incomplete for more than one year after construction began. Now, your immediate reaction might be, "That's ridiculous! How can you value an incomplete property as complete just because it took longer than 12 months to construct!?"

The assessor in Davidson County has taken the position that the statute prevents them from using the taxpayer-favorable, materials-only value in the second year a property is incomplete. They will likely still use the cost approach to determine the appraised value but add back the cost of labor that was taken out in the first year, greatly increasing the tax burden before the property is generating income. The legislature has not acted to provide relief from this further insult to developers already injured by increasingly protracted construction timelines.

The Good News

Tennessee assessors are only authorized to reassess a property at specific times, but taxpayers can appeal the assessor's Jan. 1 value of Nashville property to the Metropolitan Board of Equalization every year. If the assessor issues a prorated assessment for a new construction project later in the year, the taxpayer can appeal that value directly to the State Board of Equalization.

In light of the complexity of Tennessee's law on the assessment of new construction, owners of new projects in Nashville should seek counsel as to whether their assessments are fair and legal and avail themselves of the right to appeal if appropriate.

Drew Raines is a shareholder in the Memphis law firm of Evans Petree PC, the Arkansas and Tennessee member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Jan
01

Tennessee Property Tax Updates

UPDATED march 2024

Tax Relief for Damaged Property

Taxpayers should be aware of relief provided for damaged property under Tennessee law.  Tennessee assessors value property in its condition as of January 1st, regardless of its condition during the rest of the year.

An exception to this general rule exists if, before September 1st, an improvement is demolished, destroyed, or substantially damaged.  If it is not restored and nothing else is constructed before September 1st, then the assessor must value the property in its damaged condition from the date of damage until December 31st.  The value is then prorated between the January 1st value and the date of damage value.

It is important to note that if damaged improvements are repaired or rebuilt before September 1st, then there is no relief.  The January 1st value will remain on the property all year, though the property may not have been in service for several months.

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Evans Petree PC
American Property Tax Counsel (APTC)

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Mar
11

Rocky Top Tax Relief

"Reappraisal process allows Shelby County taxpayers to appeal assessed values every year."

Tennessee's fiscally strapped cities and counties are pressuring assessors more than ever before to aggressively value commercial property. Taxpayers must be aware of their rights under state law, lest an assessor attempt to prematurely capture any value increases prior to the next scheduled reappraisal.

With a proper understanding of the reappraisal process, commercial property owners in Memphis and Shelby County could get some property tax relief over the next three years, whether the fair market value of their properties increase or decrease.

Work the Reappraisal Cycle

Many states require assessors to reappraise property values annually. In Tennessee, counties have the option to reappraise property every four, five or six years. Shelby County reappraises every four years; its last reappraisal was in 2013 and the next one will be in 2017.

The purpose of reappraisals is for the assessor to adjust values for tax assessment purposes to actual fair market value. In a market that is moving up or down, the effect of a four-year reappraisal cycle is that appraised values fall out of sync with the market in between reappraisals.

Shelby County's reappraisal process is designed to favor taxpayers by enabling them to appeal assessed values every year, while the assessor can only adjust values in a reappraisal year (with some exceptions). This means that taxpayers can account for decreases in value annually, but the assessor can only capture increases in value every four years — when values increase.

The commercial real estate market in Memphis has been improving, and values have been steadily increasing, for certain types of property for the past year or two. For example, recent sales of medical office buildings indicate a much stronger market than in prior years. Demand for Class A multifamily properties have likewise increased, driving up sales prices. In the sought-after Poplar Avenue/240 corridor, vacancy in Class A+ office buildings had fallen to 7.7 percent in the third quarter of 2013, down from a peak of 20 percent in 2010, according to Cushman & Wakefield.

Owners have a right to an official notice from the assessor if the value on a property changes. The owner may then file an appeal with the Board of Equalization to contest the value change.

Owners should scrutinize the basis of a change in value by the assessor. Although there are certain times the assessor can change a value in a non-reappraisal year, there are other times when a change is not appropriate.

For example, an assessor should not "chase sales" to value a recently sold property at its sale price. Such a revaluation would constitute an illegal spot reappraisal. Also, the assessor should not revalue a property to reflect ongoing maintenance or repairs due to a turnover in tenants. Such actions by owners are ongoing and the revaluation of these properties would essentially amount to a reappraisal.

In what circumstances can the assessor revalue a property prior to the next reappraisal date? One example is when an addition or renovation is made to a property. In that case, the assessor may legally revalue the property because its physical condition has changed. Another example is when the Board of Equalization has reduced the value of a property due to its circumstances, such as being completely vacant. If the property is leased up, the assessor may revalue the property in subsequent years, even if not a reappraisal year.

Some property types in Memphis are still languishing under depressed values. The industrial vacancy rate stood at 14.1 percent in the third quarter of 2013, Cushman & Wakefield found. Industrial rents remained soft, as many users have relocated south of Memphis, across the state line in DeSoto County, Miss. Class C and D multifamily properties are still suffering from elevated vacancy and collection issues. Expenses, such as insurance, are rising at faster rates than rents. Many former tenants of Class C and D apartments have taken advantage of the institutional purchase and rental of single-family homes.

Fortunately, Tennessee law allows owners of these properties to file appeals every year. The assessor is not required to send an official notice to the taxpayer when the value stays the same, however. This means that taxpayer must remain vigilant to prevent the assessor from leaving the value for tax assessment purposes unchanged when the true fair market value of the property is decreasing. Taxpayers in this situation should exercise their annual right to appeal in order to avoid paying the same amount of property taxes on a property that is not worth as much as it was a year ago.

 

araines Andy Raines is a partner in the Memphis, Tennessee law firm of Evans Petree PC, the Tennessee 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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