The seniors housing sector can't seem to catch a break. Owners grappling with staffing shortages and other operational hardships lingering from the pandemic are facing new challenges related to debt and spiraling costs. High interest rates and loan maturations loom over the industry, with $19 billion in loans coming due within the next 24 months, according to Cushman & Wakefield's "H1 2024 Market Trends and Investor Survey" on senior living and care.

Factors driving high costs include wage pressures, inflation and — incredibly — rising property taxes. Despite operational challenges and declining occupancy at many facilities during the COVID-19 pandemic, property tax relief for seniors housing was mixed. Many assessors resisted downward adjustments to taxable values, maintaining that recovery was around the corner. Now, seniors housing operators face property tax assessments that equal or exceed pre-pandemic levels.

As in the hospitality sector, most seniors housing owners understand that their operating properties include more value components than real property alone. In evaluating whether a tax assessment is reasonable and fair, however, owners need to realize that how an assessor addresses their real estate, personal property and intangible assets can drastically affect property tax liability.

Intangibles have value

The Appraisal Institute's "The Appraisal of Senior Housing, Nursing Home, and Hospital Properties" states that the valuation of a going concern in the sector includes real property, tangible personal property and intangible personal property. Real property or real estate equates to fee-simple, leased-fee or leasehold interests; tangible personal property is furniture, fixtures and equipment.

Intangible personal property can include assembled workforces, licenses, certifications, accreditations, approvals such as certificates of need, employment contracts, medical records, goodwill and management.

The Appraisal Institute's text also cites a requirement from the Uniform Standards of Professional Appraisal Practice in stipulating that the market value of real estate must be identified and valued separately, apart from the tangible and intangible personal property. Adopted by Congress in 1989, the Uniform Standards serve as ethical and performance standards for appraisal professionals in the United States.

Assessors and real estate appraisers are familiar with the process of separating real property and tangible personal property for purposes of valuation. Valuing intangible personal property, however, is often less clear.

Top-down vs. ground-up valuation

Appraisers often back into an intangible personal property value by first developing a going-concern value and then subtracting values for real property and tangible personal property. In practice, the whole does not always equal the sum of the parts.

Appraisers frequently opt for this "top-down" approach, so described because the appraiser develops a value opinion for the total going concern and then works "from the top down," assigning values to the various components based on market statistics or other data.

By contrast, some appraisers take a "ground-up" approach by valuing all the components independently and then adding those amounts to value the going concern. If done properly, both methods should yield similar value indications for each component.

For especially difficult property tax cases, taxpayers may find it worthwhile to have two appraisers perform independent appraisals using each method and then present both conclusions to the trier of fact.

Either method can help to demonstrate the considerable investment value imbued in many elements of intangible personal property. The assembled workforce may have taken several months to adequately staff and train, for example, while acquiring and maintaining licenses requires investments of time, capital and effort to overcome regulatory and adherence challenges. The loss of licenses or a portion of the workforce at a seniors housing facility can impair its operation and send effects rippling throughout the business, reaching beyond intangible personal property.

Business appraisers, who are accustomed to valuing intangible assets as part of mergers, acquisitions and similar activities, can provide clarity for taxpayers building a case for a tax assessment reduction on their seniors housing property. A business appraiser can be invaluable in these circumstances, allowing for a ground-up approach to valuing the elements of the intangible personal property and even working alongside real estate appraisers to come up with a clearer picture of the going concern.

Accounting counts

Most seniors housing operators fastidiously follow Generally Accepted Accounting Principles (GAAP) and strive to maintain compliance with accounting rules from the Internal Revenue Service (IRS) and Securities and Exchange Commission (SEC). These taxpayers would be wise to include a fourth consideration for their accounting team, which is to understand how their state and local governments define taxable real estate.

Tax definitions may vary slightly from one jurisdiction to another. Thus, it is possible to have one allocation for IRS, SEC or GAAP guidelines while having a different allocation for property tax purposes that corresponds to tax practices in the area. This type of nuance is one of the reasons seniors housing owners or operators can improve their odds of success in a property tax dispute by working with an adviser who understands both local case law and the area assessor's approach to valuing components of seniors housing properties.

In several states and municipalities across the country, assessors will simply increase a property's assessment to the purchase price entered in county records. This can lead to sticker shock when an operator receives their first tax bill after an acquisition.

By working with tax professionals and valuation experts during the due diligence and acquisition process, and by documenting the consideration paid for each component of an acquired asset's value, operators can limit upside exposure for future increases in property taxes and retain the necessary documentation to support these allocations.

Property assessments change. Are you keeping up with them?

Benjamin Franklin has been credited (dubiously) with the saying, "in this world nothing can be said to be certain, except death and taxes." The Greek philosopher Heraclitus has been credited (also dubiously) with the saying, "the only constant in life is change." To synthesize dubious quotes from two brilliant minds, "you will certainly have to pay taxes, and they will constantly change."

With property tax bills subject to constant change, property owners hoping to predict and plan for future tax liability have their work cut out for them. Here are the chief factors taxpayers should consider in tax planning.

Track reassessments

Governments base property taxes on two things: assessed value and tax rate. Both elements change on a regular basis, and it can be mind-boggling for taxpayers to stay on top of just exactly when and by how much their properties' taxes will increase.

Reappraisal systems vary. While most jurisdictions reappraise either annually or on a regular, multiyear cycle, some jurisdictions do not. Famously, California's Proposition 13 requires reappraisal based on changes in ownership and other triggers, rather than on any regular cycle.

A jurisdiction's reappraisal history is no guarantee of its future cycle. For example, the Arkansas Legislature amended its reappraisal statute in 2023, transitioning from counties being on either 3-year or 5-year cycles to mandated 4-year cycles for all. However, even this information is not enough to know when a particular county's next reappraisal will be, because the transition will be phased to reach a substantially equal number of counties reappraising each year.

Various variables

While knowing the jurisdiction's reappraisal cycle is important, the taxpayer's team has many other local rules to follow, including potential caps on annual increases. For example, in Alabama, which reappraises properties annually, the legislature recently capped annual increases at 7%, effective in Tax Year 2025.

Once the taxpayer knows a jurisdiction's reappraisal cycle and methodology, there is still the question of how much assessed values will change from one reappraisal to the next. For jurisdictions that have longer cycles, value changes can be drastic.

For example, Tennessee assessors reappraise properties on a cycle of four, five, or six years, depending on the county. Nashville, one of the fastest-growing cities in the country, will undergo a reappraisal in 2025 for the first time in four years. Based on the exponential growth that has occurred in that interim, property owners will likely experience sticker shock once assessments come out in May.

Across the United States, all taxpayers receiving revised assessments in 2025 face uncertainty about how current events will affect new valuations. How Donald Trump's election and initiatives will affect the real estate market is unclear.

The Federal Reserve reduced the fed funds rate three times in 2024 after more than a year of tightening, but the future impact of their tinkering is uncertain. Office market fundamentals have deteriorated to an alarming degree, and multifamily transaction volume has slowed from a firehose blast in 2024 to a trickle today. Will the assessors of America take macro-economic changes into account, or will they fixate on conditions in early 2022, before interest rate hikes and the decimation of the office market?

Rate watch

After assessors establish taxable value, taxpayers still face the question of the tax rate. Rates can change in any year, whether there is a reappraisal or not. However, one important thing to know about any jurisdiction undergoing a reappraisal is whether it has a truth-in-taxation law.

These laws aim to ensure transparency by requiring local governments to inform taxpayers in advance about potential increases. Tennessee, for example, requires local governments in a reappraisal year to certify a tax rate that will result in revenue remaining neutral, or equal to the previous tax year's revenue. Then, if leaders wish to increase the tax rate to generate more revenue than the prior year, they must take a separate vote later.

Typically, values increase greatly in the reappraisal and the tax rate plummets to generate neutral revenue, due to the truth-in-taxation law. This prevents local governments from obscuring a potential tax windfall following reappraisal, because they must vote to increase the tax rate before anticipated revenue can exceed the neutral amount.

In the end, every jurisdiction is different. Staying on top of a portfolio's upcoming reappraisals requires the taxpayer or their advisors to understand and follow a host of variables, from the reappraisal cycle to potential caps, exemptions, truth-in-taxation laws and more. A seasoned, local advisor can help property owners understand current laws, monitor proposed changes, maintain relationships with local assessors, and identify the most effective strategies for limiting potential overassessments due to reappraisals in each property's jurisdiction.

The American Property Tax Counsel is pleased to announce that Washington, DC will be the site of an in-person meeting for the 2025 Annual APTC Client Seminar.

Save the Dates! October 22-24, 2025 - Hotel Washington, Washington, DC

APTC seminars provide an exclusive forum where invited guests can collaborate with nationally known presenters and experienced property tax attorneys to develop strategies to successfully reduce and manage property taxes.

Can incentives cure the city's property market funk?

The City of New York's tax assessment valuations remain on an upward trajectory that compounds the burden on property owners. In stark contrast to this fiction of prosperity and escalating valuation, real estate conditions tell of a growing threat that menaces all asset classes across the city.

Pharmacies, retail stores and restaurants with deep roots in the community are vanishing at astonishing rates, victims to changes in consumer habits post COVID-19, competition with e-commerce, and rising costs associated with labor and supply chains.

Remote and hybrid work practices have taken a heavy toll on commercial office buildings. Submarket vacancy rates in the sector are cresting 20 percent, while individual office properties wrestle with vacancies ranging from 50 percent to 100 percent.

While hotels have improved due to demand for temporary migrant housing, they still have not fully recovered to pre-pandemic occupancy levels. Meanwhile, multifamily rents continue to rise, straining the budgets of long-term residents and driving many renters to an affordable housing sector where supply remains insufficient to meet the needs of an expanding population.

Despite the challenging market conditions, the city's property tax bills continue to increase, driven by a host of underlying factors.

Assessments ascending

Taxable, billable assessed value citywide increased by 4.2 percent this year to $298.9 billion. Assessments climbed 4.5 percent for co-ops and condominiums, but also increased in hard-hit commercial sectors. Retail valuation climbed 1.6 percent, and total valuation for office properties grew 2.5 percent from the previous year.

Why the disconnect between challenges in the real estate market and the rising burden of property taxes? Several factors could be pressuring assessors to increase assessment values. Here are just a handful:

Need to raise revenue. Property taxes represent approximately 30 percent of the city's budget, and the municipality's financial obligations continue to grow. The city continually seeks additional revenue to fund employment agreements, pension obligations, expenses associated with homelessness and migrant populations, and other expanding costs.

Market myopia. Property taxes are based on annual valuation updates that may not accurately reflect the quick shifts the market is experiencing, such as skyrocketing vacancy rates and the need to make costly building improvements to attract and retain tenants. As a result, property owners may face tax bills that do not correspond to the current economic environment

Debt, disregarded. The city's property assessments ignore debt service, leading to overestimations of taxable value. Commercial real estate sectors are facing growing pressures related to renewing existing debt, especially at today's high interest rates. Debt service obligations on many commercial properties now exceed the asset's market value, making it increasingly difficult for property owners to refinance, operate or sell their properties at a profit.

Dated data. Even where there is increased vacancy, the assessors still use outdated estimates of market rents and occupancy to impute income for vacant spaces, thus keeping assessments artificially high.

Tax relief options

Amid these mounting challenges, a property owner can often mitigate their tax burden by contesting the assessor's conclusions and arguing for a reduced assessment. Alternatively, or additionally, taxpayers can apply for relief under the city's abatement and exemption programs. An adviser experienced in the property tax law and local practices for the subject property's jurisdiction can be a valuable aid in identifying and pursuing tax relief options.

Here are the major real estate tax programs the city offers to provide property owners with relief while incentivizing investment in the community:

The Industrial and Commercial Abatement Program (ICAP) provides property tax abatements for businesses that make capital improvements in commercial and industrial properties. For both renovations and new construction, it provides a 10- or 12-year benefit for renovations in Manhattan below 59th Street, and 15 or 25 years of benefits above 96th Street and outside of Manhattan. By renovating and repurposing older, underutilized properties, ICAP helps generate productive spaces and revitalize neighborhoods. Without these incentives, the cost of construction and renovation is often prohibitive for the property owner.

ICAP was set to expire next spring, but the State Legislature recently extended the program to April 1, 2029. While this is a great program to encourage property rehabilitation, it hinges on the owners' ability to pay for substantial capital improvements and to secure tenants at market rents. Not all properties can fit that profile.

The Affordable Housing from Commercial Conversions program offers tax exemptions for owners who convert commercial properties into residential rental units. Also known as the 467-m program, this initiative seeks to increase the supply of residential housing and is a boon to owners of some outmoded office properties who seek to revitalize their buildings through a change in use.

The benefits are great – owners pay zero taxes during construction and 90 percent of normal taxes for 35 years after completion. However, 25 percent of the units must be offered at affordable rents.

The problem with this program is that many office buildings are poorly suited to residential conversion under current residential building and zoning codes. Achieving workable apartment layouts and window locations can be challenging, and in some cases, conversion may exceed the cost of new multifamily construction.

The Affordable Neighborhoods for New Yorkers program, or 485-x, incentivizes the creation of affordable rental housing across the city and is the successor to the 421-a program. Developers of buildings with more than 11 rental units, and who make 20 percent to 25 percent of the property's units affordable, are eligible for property tax exemptions for up to 40 years.

485-x is a critical tool in expanding the city's affordable housing stock as rising rents displace long-time residents. The affordable component remains in effect beyond the benefit period, however, which deters many developers.

The snapshot of NYC's assessment quandary is this: The market is demonstrating lower valuations, but tax assessments remain stubbornly high. The incentive programs require substantial new capital outlays for construction, and the end product needs to be economically viable.

As in all stories, time will tell how New York addresses its property tax dilemma. But if market conditions continue to decline, the current incentives will not resolve the problem of excessive property taxation. 

Property tax assessors in nation's capital city ignore post-COVID freefall in office pricing, asset values.

Commercial property owners in the District of Columbia are crawling out of a post-pandemic fog and into a new, harsh reality where office building values have plummeted, but property tax assessments remain perplexingly high.

Realization comes slowly

Immediately following the pandemic, many office property owners adopted a wait-and-see attitude toward the volatility permeating the sector, clinging to hopes that the rising popularity of remote work and similar office worker practices would prove temporary. Once the Federal Reserve began raising interest rates to combat generational inflation in 2022, however, hopes for a "return to normal" vanished and a grim reality set in.

Recent transactions involving office properties in the District clearly indicate that investors recognize the negative impact these market forces have exerted on office building valuations and are now pricing those changes into the amounts they are willing to bid for acquisitions. These recent sales show office building values have declined by more than 50 percent from pre-pandemic levels.

The other shoe began to drop on office market pricing in early 2023 with a rise in distress transactions, in which the office owner sells or forfeits the property to resolve some form of trouble, typically financial. These turnovers in ownership have continued to increase and now exert a growing influence on office pricing and valuations. Although properties have continued to transfer by traditional, arm's length transactions, the occurrence of foreclosures, deed-in-lieu arrangements, and lender takebacks is increasing. The proliferation of these non-standard transfer mechanisms is irrefutable and has a direct effect on the overall office market.

Denying reality

So, how has the District of Columbia adjusted its methodology to properly value office assets in this new and more challenging environment? In short, it hasn't.

A quick look at the 2025 tax year's assessment values (valued as of Jan. 1, 2024) shows the District largely ignored any change to the market. Among properties that traded in 2023 and 2024, the District's assessment-to-sale-price ratio is close to 200 percent! In other words, the District's methodology is producing assessments that are twice the values those properties are trading for.

This divergence from market evidence is perplexing, given that District of Columbia Courts have ruled that a recent purchase price provides the best indication of a property's value. In its 1992 decision in Levy vs. District of Columbia, the D.C. Superior Court observed that "a recent arms-length sale of the property is evidence of the 'highest rank' to determine the true value of the property at that time."

How does the District get around this decision when valuing office properties today? By ignoring any sales that it finds inconvenient and disqualifying them from inclusion in its assessment model.

Setting aside the impropriety of disqualifying these marketed, arm's-length transactions, the District has also excluded distressed transfers from its model. These exchanges of property, which may involve a lender's sale of real estate obtained through foreclosure, may not involve a sale between a conventional buyer and seller but they nevertheless establish value for the transferred real estate.

When non-standard transfers have become standard, as they have in the post-pandemic office market, assessors should include these transfers in their valuation models. That's according to the International Association of Assessing Officers (IAAO), which provides guidance on the topic in its Standards on Verification and Adjustment of Sales (2020 edition).

The publication states that when non-standard sales become more common, sales "in which a financial institution is the seller typically should be considered as potentially valid for model calibration and ratio studies if they account for more than 20 percent of sales in a specific market area."

The IAAO's Standards echo this qualification when addressing short sales. In that section, the IAAO states, "these sales should be treated like other foreclosure-related sales and considered for model calibration and ratio studies when, in combination with other foreclosure-related sales, they represent more than 20 percent of all sales in the market area, but only after a thorough verification process for each sale."

This 20 percent threshold is the IAAO's acknowledgement that when the market evolves, mass appraisal models must reflect the market's change. That means the District of Columbia can no longer ignore distressed transfers and should recalibrate the mass appraisal model used to value commercial properties in the District to include these types of transactions.

Despite these non-standard transfers representing well over 20 percent of DC's office market, the District has failed to adjust its model in accordance with IAAO guidance. As a result, assessors overwhelmingly base assessments on years-old data that does not reflect current market conditions.

Next steps

Moving forward, the most effective avenue for change will be aggressive advocacy by office market participants. Owners of commercial properties in the District must continue to engage with elected officials and actively appeal their assessments.

Fortunately, independent third parties administer the Real Property Tax Appeals Commission and D.C. Superior Court – two of the three levels of real property tax appeals in the District. If the District is unable or unwilling to change with times, the tax appeal process gives taxpayers the opportunity to force its hand.

Commercial property owners can maximize returns by minimizing property taxes, writes J. Kieran Jennings of Siegel Jennings Co. LPA.

Investing should be straightforward—and so should managing investments. Yet real estate, often labeled a "passive" investment, is anything but. Real estate investment done right may not be thrilling, but it requires active management, particularly in controlling one of the largest ongoing expenses, property taxes.

In recent years, the real estate industry has faced numerous challenges that harbored opportunities for savvy investors. From the COVID-19 pandemic and interest rate spikes to the work-from-home trend and increased vacancies, these disruptions were not just problems to solve—they were openings to reassess strategies, particularly regarding property taxes. Investors who seized these moments to reduce their tax burdens likely reaped significant benefits.

Consider the advice of the late judicial philosopher, writer and judge Learned Hand, who famously said: "Anyone may so arrange their affairs that their taxes shall be as low as possible; they are not bound to choose that pattern which will best pay the Treasury. There is not even a patriotic duty to increase one's taxes."

For real estate investors, this principle underscores the importance of addressing their largest tax expense: annual property taxes. These taxes not only erode returns year after year but can also negatively affect refinancing terms and eventual sales prices.

The best time to act? Now

Opportunities to reduce property taxes arise from shifting markets, new tax laws, court decisions, and even turnover among local assessors and prosecutors. Staying proactive means regularly reviewing these factors to determine whether each new assessment warrants a challenge.

To illustrate how market conditions and legal frameworks create opportunities, consider the following scenarios. Although these are hypothetical, they derive from true situations and case histories.

Tax is for tangibles: Soon after an investor purchased a hotel in Florida four years ago, the local assessor valued the property at 80 percent of its purchase price—a reasonable valuation for tax purposes at the time. Recent case law casts that value in a different light, however. Assessors must now exclude intangible business value, which can constitute up to 50 percent of a hotel's total value, from property tax liability. Ensuring the assessor valued their property correctly under the new directive enabled the subject property's owner to achieve a substantial reduction in the hotel's taxable valuation, saving tens of thousands of dollars annually.

Interest rates reconsidered: A multifamily complex acquired in 2021 was assessed at 90 percent of its purchase price. Although the owners had secured favorable interest rates at the time of acquisition, the taxpayer was still able to obtain a 30 percent assessment reduction in 2023. How? By citing the impact of rising interest rates on market conditions, which had suppressed property values due to buyers' increasing cost for debt financing. This assessment reduction helped improve the owners' cash flow and property valuation during refinancing negotiations.

Advanced to obsolescence. A newly constructed industrial facility in Ohio built to serve a rapidly developing industry faced obsolescence challenges as the needs of its intended tenant base changed in the evolving subsector. Under Ohio law, such properties are classified as special-use and must be assessed based on value to the user. The owners demonstrated significant economic obsolescence, effectively reducing the property's valuation. Additionally, the owners showed that many fixtures the assessor had initially included in the valuation were personal property. With strict adherence to legal definitions in revisiting the assessment, the assessor excluded the personal property from taxation. Understanding the legal definitions of assessable property and providing evidence of obsolescence enabled the owners to achieve meaningful tax savings.

These three examples highlight how market shifts and legal precedents create opportunities to lower tax burdens, even when the immediate need for action isn't obvious.

How to recognize a fair assessment

The methods for determining whether a property is fairly assessed depend on local and state laws, which vary widely and change frequently. Staying informed requires continuous monitoring of tax laws and local tax authority practices.

A taxpayer or tax advisor determined to stay current on local tax conditions should be sure to follow three key steps as part of their inquiries:

1. Understand local laws and definitions. Assessors calculate fair market value based on jurisdiction-specific guidelines.
2. Identify potential exemptions. Elements such as business fixtures might be reclassified as personal property and excluded from taxation.
3. Evaluate risks. Be aware that challenging an assessment involves risks, which can range from minimal to significant, depending on local laws and circumstances.

Combining a thorough understanding of jurisdictional laws with an analysis of property-specific facts is critical. This approach ensures taxpayers know what evidence to produce and will know when they're being fairly assessed.

The bottom line is that commercial property owners must exercise vigilance, expertise and a proactive mindset to manage their property taxes effectively. By viewing challenges as opportunities, property owners can minimize expenses, maximize returns, and protect the long-term value of their assets. Regardless of whether an assessment appeal requires an attorney, thinking like a lawyer will yield dividends.

Anemic transaction volume complicates taxpayers' searches for comparable sales data.

Evaluating the feasibility of a property tax appeal becomes increasingly complex when property sales activity slows. While taxpayers can still launch a successful appeal in a market that yields little or no recent sales data, the lack of optimal deal volume does require a thorough understanding of valuation methods beyond the sales-comparison approach.

This article will provide critical information for taxpayers in a low-transaction-volume market to successfully contest property tax assessments directly or to better vet industry experts to assist in those appeals. Many of the concepts are valuation-oriented, underscoring the need for an in-house or outsourced expert to guide appeals that venture outside the parameters of conventional, comparison-based valuations.

Brave new markets

The market for commercial office space changed, perhaps irrevocably, during the COVID-19 pandemic. Occupier demand in the sector has steadily decreased since then. The widespread adoption of remote work, space sharing and similar practices have persisted and, as a corollary, physical and economic occupancy rates for office space have plummeted, along with rents.

Much of the recent transaction volume for office properties has been by distressed sellers forced to sell due to their inability to refinance. Moreover, assessment boards or courts generally reject these sales as poor evidence of fair market value.

Conversely, at the high end of the market there has been a flight to quality; historically, the top-scale properties have always found both buyers and tenants. Valuing buildings that occupy the middle space between these two extremes is perhaps the most challenging, however, and demands a more complex approach suited to the scarcity of comparable market transactions.

Dealing with data

The key to establishing value under these circumstances can be to expand the geographical area of the transaction search and to include less-recent sales for comparison. While those may seem like easy solutions, as in most nuanced situations, the devil is in the details.

These details include the need to vet the accuracy and defensibility of the appraiser's adjustments once a wider net has snared potentially comparable sales. Or more generally, how should the appraiser adjust expanded sales areas and older deals to demonstrate accurate value for the building in the current market?

In a sales-comparison approach, an appraiser can expand the geographic area for current sales beyond the immediate vicinity of the subject property. There is no hard-and-fast rule that comparable sales need to be in the same city, or county, for that matter.

Real estate appraisers often establish a market area that includes not only the county of the subject property but also several surrounding counties, as long as they are "similar." For most commercial properties, similarity for valuation purposes depends on key geographic and demographic qualities.

The appraiser may use analyses of population data, household incomes and traffic patterns to justify adjustments to expanded sales areas for the current market. These are universally accepted valuation elements for retail properties but can also apply to other property types to aid in adjusting market areas.

Sales from previous calendar years, such as those going back five years or so, can still be relied upon to establish current market value if the properties share similar structural and geographic qualities. Using these older sales as a starting point, the appraiser must make critical adjustments for changes in the market conditions which have occurred since the date of the prior sales.

Needed adjustments typically include allowing for current market occupancy rates, both economic or leased rates and physical, onsite occupancy. Elevated levels of unleased space or leased but underutilized offices create a major risk to buyers, driving them to demand higher capitalization rates (and lower asset prices) to reflect increased risk.

In valuation, rising cap rates trigger downward adjustments in overall market value. Also, operational costs have increased markedly in the past few years, especially for insurance. Appraisers must reflect these additional costs in their adjustments to older transaction data.

Complementary approaches

Appraiser training teaches multiple valuation methods, providing alternative methods for establishing value when deal volume is low. These include surveying of market participants, analysis of brokers' for-sale listing volumes, length of market exposure, and analysis of rent or net-income differentials. When taken together, this data will provide reliable information that enables an appraiser to make accurate adjustments and demonstrate current market value for a subject property.

In addition to the sales-comparison approach, commercial property owners can and should consider other valuation methods to establish the current market value of their property. With knowledge of current market rental rates, expense ratios, lending requirements and capitalization rates, an owner can value their commercial property using the income approach, for example.

The more recent the respective leases were negotiated and signed, the more indicative of the current market rental rate. Current expense statements and capitalization rates can be used to ultimately present a credible, current market value of the property.

Taxpayers deciding whether to appeal a property tax assessment may be frustrated or confused by the market's low deal volume. Property tax professionals are equipped to provide advice and assessment appeal strategies in any market type, however. That means tax relief may be available despite the difficulty the current market has placed on the sales comparison approach to valuation.

Understand the issues in filing strategic property tax appeals to reduce property tax.

Data centers are the current darling of CRE – which makes them a targeted sector of commercial real estate on which local assessors are laser focused. Due to the nature of the investment, there is less political heat for putting the tax burden on data centers. These taxpayers comprise a distant-faceless corporation, unlike other real estate classes who either have local employees or residents who can be affected by higher taxes. Combine the political ease with the fact that it is one of the few sectors that seems to have a clear growth forecast for the next several decades, ensuring that it's in for a tough battle with assessing offices. But the growth flurry in this marketplace shouldn't cause taxpayers to be unfairly taxed.

Data centers are a relatively new sector, compared to office, industrial and retail. The majority of assessors have likely had few, if any, of this property type in their townships. Thus, the probability that assessors have the understanding and expertise regarding the nuance and specialization of this property is highly unlikely, and a recipe for illegal taxation. It is critical that owners annually fight to keep their taxes at a reasonable level. A compelling argument, focusing on depreciation, business value and personal property allocation is critical.

Accelerated Depreciation

As Artificial Intelligence, AI, enters into its Golden Era, new requirements for data centers have exploded. The convergence of AI, autonomous driving vehicles, and smart residential properties will more than double the need for global storage capacity by 2027, according to JLL's Data Centers 2024 Global Outlook. But second generationcenters will have a difficult time getting their piece of the windfall.

AI clustered servers are much more powerful than previous servers and emit significantly more heat.Thus, the electrical and cooling requirements will be markedly different from the data center designs of the past. Energy efficient designs, locations in areas with affordable and reliable power supplies, sustainable power supplies, as well as local development incentives, will be the main drivers of demand moving forward.But as the new design requirements evolve in the future, the older centers will lose value quickly.

Depreciation is much more rampant on special use properties like data centers. Typically, an industrial building has as economic life of 50-60 years, with 2% annual depreciation. However, data centers will depreciate 5-10% annually. This is due to functional issues associated with the special use, according to Ed Kling, MAI Appraiser at Caton Valuation.

For example, the requirements of the mechanical and electrical hardware will be out of date within 15-20 years, according to Malcolm Howe, critical systems partner at engineering consultancy Cundall. Accelerating depreciation on 30% to 50% of the capitalized costs is typically achievable. Factors such as the level of security, the complexity of cooling systems, the number of redundant systems, and site improvements will determine this percentage.

Business Value

Assessors will wrongly assume that the rents associated with data centers, or their value in the market, is solely based on the bricks and stick of the real estate itself. However, as any operator is well aware, one can't disregard the business reputation of the owners and operators, as well. Much like hotels and self-storage, where the value differentials in many cases are due to the level of service, data center operators are known for their expertise. Users base their choice of vendors on criteria such as scalability (how can your needs grow with this provider), reliability (what is the historical uptime of the provider), deployment efficiency (can your infrastructure be set up timely and efficiently), network ecosystem (simplicity of multi-cloud interconnection and management) and financial stability (does the provider have a strong history or could it close within a year).

Unlike other commercial real estate, data center operators are actively monitoring every aspect of their properties to ensure that the client's data is secure. Generally speaking, if any building system fails in another real estate sector in the short term, the harm to the commercial tenant is minimal. However, short term system failure in data storage could mean the complete operations of an organization could be decimated permanently. Therefore, much like the energy costs to operate, the insurance costs are extremely high due to the multitude of risks inherent in providing services.

Similar to Hotels and Self Storage, data center owners are allowed to have a "return of" and a "return on" their personal property and operations investments, as well as deductions for management and reserves for replacement. Thus, some profits should be deducted with other expenses in calculating Net Operating Income.

But more importantly for the savvy operator, the appraiser should account for the stellar reputation of the operator compared to the general market. Logically, a provider with excellent business practices, highly functioning property management and historical success should be able to garner higher rents than other operators. But that escalated rent is due to the business of the operator, not the real estate itself.

Taxation as Personal Property

Data center operators also need to thoughtfully identify real property from personal property for taxation purposes. Forgoing this exercise may result in double taxation in states with personal property tax, or over taxation in states without personal property taxes where such property is wrongfully taxed by local assessors.

And the time is... now

Based on the strategies listed above, owners of data centers must thoughtfully appeal their assessed valuations on an annual basis. This sector must be looked at through a completely different lens than any other property type, due to the accelerated depreciation issues, strategic business value integrated into the property and potential for double taxation. Investors must work with seasoned professionals who understand the complexities of this product type and present the nuanced argument thoughtfully and convincingly to assessing official, or else the bottom line will be unfairly affected.

State's replacement-cost valuation methodology skews some property assessments, thwarting uniform and equal taxation.

Pivotal property tax rulings by the Nevada Supreme Court presume that strict adherence to valuation methodology ensures that similar properties are assigned similar taxable values. But what if the state's required valuation methodology results in differing taxable values for similar properties?

Uniform and Equal

The Nevada Constitution protects property owners from arbitrary tax assessments by requiring the Legislature to "provide by law for a uniform and equal rate of assessment and taxation" and "prescribe such regulations as shall secure a just valuation for taxation of all property, real, personal and possessory."

Twenty years ago, in what was called a "tax revolt," property owners in Incline Village relied on this provision of the Constitution to successfully challenge the methodology the Washoe County Assessor used to value their properties. The revolt found its way to the Nevada Supreme Court, which ultimately issued two opinions.

In State, Board of Equalization vs. Bakst, the Nevada Supreme Court in 2006 rejected the assessor's property valuation because the methodologies he used had not been approved by the Nevada Tax Commission, were not applied uniformly in Washoe County, and were not the same as the methods used by assessors in other counties. The Court noted "the Constitution clearly and unambiguously requires that the methods used for assessing taxes throughout the state must be 'uniform'."

In 2008, the success achieved in the Bakst case was reaffirmed in State, Board of Equalization vs. Barta, where the court stated that "like properties' taxable values must be obtained using uniform assessment methods." In the same ruling, the Court elaborated that "a property value determined using unconstitutional and nonuniform methods is necessarily unjust and inequitable."

An Imperfect Process

In Nevada, the taxable value of improved property is calculated using a replacement-cost approach that is defined by state law. Under this statutory approach, assessors value the land component and improvement component separately. The land component is valued "consistently with the uses to which the improvements are being put," while the improvement is valued at replacement cost, less depreciation.

Assessors must determine replacement cost using Marshall & Swift cost manuals. And, instead of relying on market-derived depreciation, state law requires assessors to depreciate improvements at the rate of 1.5% per year for 50 years. Assessors compute a parcel's final taxable value by adding the value of the land component and the value of the improvement component.

In Barta, the Court expressed an assumption underpinning both the Bakst and Barta cases when it stated that this replacement-cost approach, if "properly applied, will necessarily produce the same measure of taxable value for like properties."

Does it, though? If this assumption fails to prove consistently true, then the statutory replacement-cost approach is burdening some property owners with more than their fair share of property tax.

Inequity in Action

To test whether this is the case we compared the taxable value of two homes which recently sold in Washoe County. We chose single-family residences because of the availability of sales data, but the conclusion we draw from this data should be just as applicable to commercial properties.

One property sold for $1 million, and the other for $975,000. The attributes of the two homes were different but their market values were roughly equivalent.

One would expect the taxable values of the two homes to be similar as well, but that is not what we found. The house which sold for $975,000 is assigned a taxable value which is more than twice the taxable value of the home which sold for $1 million.

More likely than not, the difference in the taxable value assigned to the two properties is the result of strict adherence to the statutory replacement-cost approach. That approach requires the assessor to reduce the value of a home by depreciation, even if the home is appreciating in value.

In our example, the house which sold for $1 million was built in 1970 and is assigned a taxable value which is 26.2% of its sales price, while the one which sold for $975,000 was built in 2021 and is assigned a taxable value which is 58.0% of its sales price.

Similar examples abound. Among the sales we reviewed, the average sales ratio (calculated by dividing taxable value by sales price) for homes built before 1971 is 31.6%, while the average sales ratio for homes built after 2012 is 65.5%.

This problem extends to all property types including commercial, because the assessor is required to follow the same statutory replacement-cost approach.

What does this mean for taxpayers? Property owners with improvements constructed relatively recently should evaluate whether the taxable value of their property is unreasonably high when compared to the taxable value of other properties put to the same use.

If an assessment is inequitable, redress is available by filing a timely protest. The county boards of equalization have the authority to reduce the taxable value of property where it has been assessed at a higher value than other property with identical usage and a similar location.

In summary, adherence to the statutory replacement-cost methodology is not resulting in evenly measured taxable values for like properties. Instead, the methodology has created systemic inequality. Properties with older improvements which have appreciated are systematically undervalued. As a result, some properties are assessed at less than half the value of comparably priced properties with newer improvements.

This disparity calls into question whether Nevada is achieving its Constitutional promise of a just valuation and uniform and equal taxation. Property owners should make certain their tax assessment meets the constitutional requirements of uniform and equal or seek help from a property tax professional to make that determination.

As rising interest rates and other challenges worry commercial property owners with loans nearing maturity, a running theme in the real estate industry is to "survive until '25." For hotel owners, however, the year-to-year struggle to stay afloat has been ongoing.

Hoteliers that survived the industry's downturn from the COVID-19 pandemic may have thought their troubles were ending, only to be slammed with record-setting inflation and skyrocketing interest rates. During the pandemic and the uncertainty it unleashed on hospitality operations, many jurisdictions across the country provided hotel owners with some form of property tax relief. For example, one jurisdiction removed all improvement value from hotel assessments and only applied land value in determining property tax liability.

Relief measures are winding down, however. Many jurisdictions have begun to value hotel properties as they did prior to COVID, claiming that the hospitality industry has rebounded.

While in many instances, industry statistics such as occupancy and revenue per available room or RevPar show some markets recovering, it is important to know that each hotel property is unique. That's why it is critical for property owners to review individual property tax assessments annually and determine whether the asset may be a good candidate for a reduction.

Competing approaches

Many jurisdictions have recognized that hospitality properties are operating businesses, with real estate serving as only one component of the overall valuation. Property owners typically must prove the proper allocation of that real estate component when challenging their tax assessments.

Over the last two decades, appraisers, tax assessors and property owners have employed two competing methodologies to allocate value to the real estate component of hotel properties in calculating taxable value. Those are the Rushmore Method and the Business Enterprise Value Method.

Taxing jurisdictions often value hospitality properties using the Rushmore Method, which removes management and franchise fees from the income stream as part of an income-based assessment. Proponents of this method argue that removing management and franchise fees offsets the business value, and that all remaining income should be applied to the real estate value.

By contrast, the Business Enterprise Value Method applies a more in-depth analysis to identify income streams attributable to each component of a hotel's going-concern value. The appraiser or assessor can then capitalize the remaining income stream, which is attributable to the real estate alone, to determine taxable property value.

A hotel owner should be sure to differentiate and clearly communicate the business' various income streams on a profit-and-loss statement. This will ensure that their property tax counsel and appraiser adequately understand and allocate income to appropriate components of the business.

While these methodologies may seem foreign to some hotel owners or taxing jurisdictions, they are familiar to business valuation professionals. These experts apply similar methods to valuing business components during mergers or the outright acquisition of a business.

In a conventional, income-based real estate valuation, an appraiser applies a market capitalization rate to a property's income stream to determine value. In the valuation of a business, experts can develop an appropriate capitalization rate for components of the business' income by taking the weighted average cost of capital, less an appropriate long-term growth rate, such as an inflation forecast. A similar approach can derive a going-concern or valuation of non-realty components from individual income streams within a larger hotel operation.

On top of analyzing the income streams for a hospitality property, it is important for the taxpayer's appraiser to analyze property improvement plan requirements. Hotel owners report anecdotally that as the effects of COVID have waned, hotel brands have grown stricter in enforcing post-COVID property improvement plan requirements.

Taxing jurisdictions often review building permits pulled during these renovation periods to gauge improvements made to the property. This often translates into higher property tax assessments. Depending on a jurisdiction's laws, however, these improvement plans carried out for brand compliance do not necessarily increase real estate value.

Business Enterprise Value advances

Rushmore was taxing authorities' go-to method for valuing hospitality properties for a long time because of it simplistic and straightforward nature. Over the past decade, however, significant legal decisions have found the Business Enterprise Value Method preferable over the Rushmore Method.

The first major decision in this area was SHC Half Moon Bay LLC vs. County of San Mateo. In this 2014 California case, the court found that the county's real property valuation methodology failed to properly exclude business values for the hotel's workforce, the hotel's leasehold interest in the employee parking lot, and the hotel's agreement with a golf course operator.

The second major decision occurred in 2020 in Florida. In Singh vs. Walt Disney Parks and Resorts U.S. Inc., the court found that in using the Rushmore Method, the county's appraiser failed to remove all intangible business value from the real property assessment.

Although taxpayers have notched key victories in employing the Business Enterprise Value Method to allocate value to the real estate component of hotels, there are still jurisdictions that steadfastly apply the Rushmore Method to hotel property tax assessments.

Hospitality owners seeking to improve their odds of success in a property tax dispute should consider working with tax counsel that intimately knows both the case law in their jurisdiction and the differences between competing valuation methodologies. This knowledge is critical to communicating strong arguments to tax tribunals and assessors.