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Property Tax Resources

Apr
18

How Office Owners Can Help Lower Sky-High Property Tax Assessments

​The American Property Tax Counsel argues that if a property tax assessment is premised on a uniform per-square-foot value, rental rate or vacancy rate for all office properties in a metro area, the assessor is likely going to overlook distinguishing factors in submarkets that could benefit building owners.

Managing fixed expenses is the best way to ensure the long-term profitability of investment properties, especially in a flat market. The largest continuing expense for most commercial properties is the property tax bill, and in a market with skyline-defining properties and headline-grabbing sales prices, tax assessors have multi-tenant office properties in the crosshairs.

Any reduction in tax burden can drastically improve an investment's profitability, competitiveness and tenant retention. As another assessment season begins across the Midwest, understanding tax assessors' common errors can equip property managers and owners with the tools necessary to review the accuracy and reasonableness of the assessments on their office properties and, when appropriate, challenge those assessments.

Know the relevant market

To an outsider, the office market can appear monolithic. To such people, rent, occupancy and other income characteristics of office properties are consistent throughout the market. But pulling data from the wrong market can lead assessors to an incorrect result.

For example, assessors may assume that Class A downtown office towers are the best-performing assets in the market, and value them accordingly. Contrary to this perception, though, Class A properties may not outperform all Class B or Class C properties, and downtown may not be the strongest office submarket in a certain metro area.

Nowhere is the distinction between office submarkets clearer than in the downtown-suburban divide. In many Midwestern markets, suburban office properties tend to be newer, have better occupancy, and in some cases, command higher rents than their downtown competition.

The factors influencing the relative performance of downtown and suburban office properties vary, but they include employees' desire to work closer to their homes, and comparatively low land prices, which allow office building construction with the larger floorplates many tenants prefer. Suburban office markets also typically are able to offer free parking, while paid parking — which is common in the central business district — increases occupancy costs for tenants and their employees. Downtown towers though may appeal to large law firms, accounting firms and banks seeking a prestigious address.

If an assessment is premised on a uniform per-square-foot value, rental rate or vacancy rate for all office properties in a metro area, the assessor is likely failing to consider distinguishing factors in submarkets. Finding those distinctions can benefit owners on either side of the downtown-suburban divide.

Don't blindly trust sales

Assessors are often too reliant on sales data. Although some properties may be valued by considering sales prices for comparable properties, office properties do not neatly lend themselves to such an analysis. Applying the recent sales price of a downtown office tower to all other office towers in the downtown area may seem reasonable on its face, but fails to recognize how buyers and sellers interact in the office market.

For many real estate types, an assessor can identify comparable sales and adjust those transactions to reflect differences between the comparable and subject properties. Unlike owner-occupied buildings, investment properties that are otherwise similar are not easily adjusted for real estate-related factors. This is because market participants do not settle on sales prices based on attributes of the real property, but on attributes of the income stream.

Buyers of multi-tenant office buildings are motivated by the durability of the income stream, reflecting either potential for growth or existing leases with creditworthy, in-place tenants. Knowing a target's income characteristics, buyers apply their own capitalization rate thresholds and back into the sales price. But that price necessarily reflects the particular income stream being purchased, which may have limited applicability to another property. This approach is opposite to the way many assessors believe sales prices are set.

This is not to say that sales of comparable properties are entirely irrelevant in valuing an office property for tax purposes. For example, because capitalization rates reflect the behavior of investors in the market, sales of properties that are comparable as investments can inform the selection of a capitalization rate in a particular analysis. But if an assessor has used a recent sale as the sole basis to set the assessments of the competitive set, whether their assessments truly reflect the market is questionable.

When income isn't income

As income-generating assets, office properties are most commonly valued using the income approach. But even though office rents are not as attributable to personal or intangible property as is, for example, a hotel's income, the rents paid by office tenants are not entirely attributable to the real estate. Simply capitalizing a building's existing income stream mistakenly assumes it is.

The market for office properties in many areas is extremely competitive, and nearly all leases in some markets reflect tenant incentives like improvement allowances. Even long-standing tenants expect such incentives when their leases are up for renewal, and tenants are accustomed to using those allowances to refresh their space. Landlords, in turn, collect marginally higher rent that amortizes those costs over the lease period. But the impact of above-market allowances must be removed from the lease rate in determining the market level of rent. An assessor cannot say that a lease is $15 per square foot if the landlord paid the tenant $5 per square foot upfront.

Assessors also often misunderstand reimbursement income. Triple-net leases are uncommon in the office market; instead, landlords build an assumed level of expenses into their base rent and if the expense exceeds that base-level in future years, the tenant reimburses the landlord for the excess. Some assessors mistakenly view reimbursement income as additional profit. But, as the word "reimbursement" suggests, landlords only collect reimbursement income when, and to the extent, expenses exceed the base amount. Assessors should be reminded that reimbursement income is not a profit center.

As the office market continues its slow expansion, assessors are eager to capitalize on the most visible parts of the city skyline. But by grounding the assessor in the economic realities of the office market, diligent owners and property managers can reduce fixed expenses, lower tenant occupancy costs and ultimately improve profitability.

Benjamin Blair is a partner in the Indianapolis office of international law firm Faegre Baker Daniels LLP, the Indiana and Iowa member of American Property Tax Counsel, the national affiliation of property tax attorneys​.

Deck - Summary for use on blog & category landing pages

  • The American Property Tax Counsel argues that if a property tax assessment is premised on a uniform per-square-foot value, rental rate or vacancy rate for all office properties in a metro area, the assessor is likely going to overlook distinguishing factors in submarkets that could benefit building owners.
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Mar
28

Unfair Taxation? Governments Need to Fix the Right Problem

​Investors should be wary when taxing authorities single out properties to be assessed in a method that is inconsistent with the treatment of other taxpayers in the same class, says attorney Kieran Jennings.

Recently, The New York Times published an article on property taxes imposed on retailers under the headline "As Big Retailers Seek to Cut Their Tax Bills, Towns Bear the Brunt." This and similar articles question the fairness of how retailers have reduced their tax bills by using sales of unoccupied stores as comparable transactions to establish the assessed value for an occupied store.

The local government has cried foul, and the article concentrates on the perceived end result―lost revenue for government coffers.

What is missing from the article is basic tax law, which holds that all taxpayers in a given class must be taxed uniformly. Thus, the series of bad decisions that led local government to overtax retailers made communities dependent on inflated revenue. The initial mistake many assessors made was to seize upon sales prices associated with leased retail stores without critically examining the transactions.

Investors, and taxpayers in general, should be wary when taxing authorities single out properties to be assessed in a method that is inconsistent with the treatment of other taxpayers in the same class.

FUNDAMENTALS OF FAIRNESS

Most state constitutions specify that taxes must be uniformly assessed, which requires assessors to follow the same rules for all taxpayers within a class. At the most simplistic level, the rules of the game must be consistently applied to all and not changed to affect the outcome.

To understand how equally applied rules achieve fair taxation of property, bear in mind this fundamental truth: The assessor's goal is to measure the value of real estate only. Taxing entities then use that value to determine the tax. A lack of well-thought-out rules and procedures created the problem of non-uniform assessment.

Many states don't even have a clear definition of what they are trying to measure. States use terms such as "true value" or "true market value" without any further defining language. For most people, fair value simply means what a home would sell for in an open-market transaction. But commercial real estate is not that simple and requires clear definitions applied uniformly to all taxpayers.

Commercial property values are influenced by many factors unrelated to real estate. Consider how, under various circumstances, the same property might sell for wildly different values: An owner-occupied property will sell based on what the market will pay for the building once it is vacant, either for the new owner to occupy or as an investment for the buyer to lease-out at market terms.

The same property, were it leased at an above-market rental rate or to a highly credit-worthy tenant, functions much like a bond and will sell based on a market capitalization rate and for a greater price than the owner-occupied property.

Finally, the same property leased with long-term, below-market lease terms or a less credit-worthy tenant might sell for less than the owner-occupied price or the above-market-leased example. In each scenario, the same property sells for different amounts. Without a clear set of guidelines, establishing value based on sales price would be inconsistent even for a single property, much less an entire class.

Of the three scenarios, the only method that can be replicated consistently and applied to owners of both leased and owner-occupied real estate alike is that of the owner-occupied property. Owner-occupied interest is the unencumbered, fee-simple interest, which makes it the measuring stick common to all taxpayers. All other interests are influenced by non-real-estate factors such as lease terms or business value.

MORE CONFUSION

Adding to the confusion is the ever-changing commercial real estate sector, where market data is full of sales that include non-real-estate influences. The single-tenant market, for example, has evolved from almost exclusively retailer occupancy to include specialty uses and even nursing homes and hospitals.

The assessment goal should be to measure the real estate value alone, ensuring that all taxpayers are taxed with the same measuring stick, but confusion comes in when the sales alone don't indicate real estate value. Leased sales indicate the value of the real estate along with the tenant's credit-worthiness, the life of the lease and a host of other factors that can include enterprise zones and outside influences.

The court cases that are clarifying the methodology and the measuring stick appear to reduce assessments, when they are actually correcting the assessments and requiring assessors to value the same interests for all taxpayers. Defining terms and ensuring rule uniformity protects all taxpayers. There is no foul to be called and the losses affecting some local governments are the result of their own mistakes.

The cure is simple, but the short-term pain for community coffers is significant. States must establish clear definitions and guidelines around property rights so that assessors can value all real estate without encumbrances. Local governments cannot rely on a single taxpayer subset to carry the tax burden.

J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.

Deck - Summary for use on blog & category landing pages

  • Investors should be wary when taxing authorities single out properties to be assessed in a method that is inconsistent with the treatment of other taxpayers in the same class, says attorney Kieran Jennings.
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Mar
06

Finding Tax Savings in Free-Trade Zones

The FTZ Act prohibits state and local taxes on tangible personal property.  Here's what you should know about the potential for reducing your tax bill.

Foreign-trade zones can offer substantial tax savings for businesses involved in various aspects of manufacturing and international trade. While there are costs involved in setting up and maintaining such a zone, the prospect of escalating trade wars is spurring companies to explore the FTZ designation as a potential cost-control measure.

First, some background. FTZs are the U.S. equivalent of what are known internationally as free trade zones. Authorized under the Foreign Trade Zones Act of 1934, they are usually in or near U.S. Customs and Border Protection ports of entry, and are generally considered outside CBP control. Many communities have integrated these zones into state or local economic development incentive programs.

Broadly speaking, FTZs are designed to stimulate economic growth and development. In an expanding global market, countries increasingly compete for capital, industry, and jobs, and FTZs promote American competitiveness by encouraging companies to maintain and expand their U.S. operations. The zones accomplish this by removing certain disincentives associated with operating in the U.S.

The best-known incentive is designed to level costs among domestic and foreign- manufactured goods. For a product manufactured in a foreign country and imported to the United States, the duty is based on the finished product rather than on its individual parts, materials, or components.

Domestic manufacturers must often pay duties on multiple parts, materials, or components that are imported to be incorporated into a finished product. When those duty payments are added together, the cost of the finished product is higher than for comparable finished goods. FTZs correct this imbalance by assessing duties on products manufactured in an FTZ as if they were manufactured abroad.

Companies operating in FTZs enjoy a number of other benefits:

• No duties or quotas on re-exports

• Deferred customs duties and federal excise taxes on imports

• Streamlined customs procedures

• Exemption from certain state and local taxes

These benefits become increasingly valuable to domestic companies during trade wars, particularly when the disputants impose steep tariffs on manufacturing parts, materials, and components.

STATE AND LOCAL FTZ RULES

FTZs are subject to the laws and regulations of the U.S., as well as those of the states and communities in which they are located, with one significant exception: The Foreign-Trade Zone Act specifically prohibits state and local ad valorem ("on the value") taxation of imported, tangible personal property stored or processed in one of these zones, or of property produced in the United States and held in the zone for export.

Several states, including Arkansas, Kentucky, Louisiana, Maryland, Mississippi, Oklahoma, Texas, Virginia and West Virginia, impose ad valorem tax on business inventory. In a handful of other states, including Alaska, Georgia, Massachusetts, and Michigan, some jurisdictions tax some inventories. But even in these states, most legislatures have carved out "freeport" exemptions from ad valorem taxes on merchandise being shipped through the state.

The problem is, the longer it takes for the merchandise to be shipped out of state, the greater the temptation for an enterprising tax assessor to conclude that the merchandise is no longer actively in transit. In such cases, the exemption may no longer apply and the merchandise could become subject to an inventory ad valorem tax.

FTZs may offer a safe harbor from these taxes. Foreign and domestic merchandise may be moved into a zone for operations, including storage, exhibition, assembly, manufacturing, and processing. Such merchandise may remain in a zone indefinitely, whether or not it is subject to duties. And, while no retail trade of foreign merchandise may be conducted in an FTZ, foreign and domestic merchandise may be stored, examined, sampled, and exhibited in the zone.

Of course, there is a catch. When a proposed FTZ designation could result in a reduction to local tax collections, the zone's governing authority must consider the potential impact on local finances. Specifically, an applicant must identify the local taxes for which collections would be affected, and provide documentation that the affected taxing jurisdictions do not oppose the FTZ designation. Importantly, in jurisdictions that already have "freeport" exemptions to ad valorem taxes, the adverse impact would be limited only to the amount of ad valorem taxes imposed on inventory that is determined by a tax assessor to have come to rest in the state, such that it is no longer subject to the "freeport" exemption.

There are costs associated with FTZs, including application fees and assessments as well as operating fees to maintain the designation. Therefore, individual companies must conduct their own cost/benefit analyses and determine whether these zones are right for them. A competent legal or tax advisor can help to project initial and ongoing costs.

Considering the other trade uncertainties currently buffeting manufacturers, eliminating ad valorem tax exposure alone may warrant using an FTZ.

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.

Deck - Summary for use on blog & category landing pages

  • The FTZ Act prohibits state and local taxes on tangible personal property. Here's what you should know about the potential for reducing your tax bill.
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Feb
27

Tax Trap: Don't Overlook Occupancy in Property Assessments

Assessors too often value newly constructed apartments as fully occupied, producing excessive assessments.

Developers frequently ask how to estimate property taxes on newly constructed multifamily properties, and tax assessors often provide an easy answer by adding up the value of building permits or by projecting the project's value when fully rented. However, this seemingly simple question grows complex when the assessor's valuation date precedes full occupancy and the ramifications of a wrong answer can linger for years.

Consider these points to value a new multifamily project more accurately.

Valuation Methods

Charged with valuing hundreds or thousands of parcels, assessors often seek a quick way to value a new multifamily project.

The cost approach offers the quickest and easiest route for the assessor, who estimates the current expense to construct an identical structure. One way to do this on a new project is to add the value of the building permits to the land value.

While building costs are clearly a factor in the decision to build, the cost approach ignores the market preference to value income-producing projects based primarily on income.

The assessor's second-easiest option is to rely on an appraisal's stabilization value and ignore the time and cost required to achieve stabilization. In valuing a not-yet-built multifamily project using an income approach, appraisers preparing a financing appraisal should, but don't always, calculate two different values: the "at completion" value and the "stabilized" value.

"At completion" is the project's value when construction is complete but prior to being fully leased. The prospective market value, or "as stabilized," reflects the property's projected market worth when, and if, it achieves stabilized occupancy.

The Dictionary of Real Estate defines stabilized value in terms of the expected occupancy of a property in its particular market, considering current and forecast supply and demand, and assuming it is priced at market rent. To determine a property's fair market value prior to stabilization, one must account for the monetary loss the owner will incur prior to stabilization.

Development Issues

Improvements generally trigger reassessment. The assessor's statutorily mandated valuation date generally ignores the development calendar's key milestones, most importantly the construction commencement, completion and revenue stabilization dates.

The developer makes assumptions during the development process, calculating the cost of building and operating the improvements as well as the rents that can be achieved. This calculation serves as the basis for a pro forma of an income and expense analysis of the project when fully leased.

Construction loans reflect building costs and subsequent time and money needed to achieve full lease-out or stabilization. Banking regulations require the lender to obtain an appraisal. The completed, but not yet stabilized, project incurs costs in the form of income not received during initial leasing, until it reaches stabilization.

Permanent financing depends on the stabilized value, which, in turn, depends on the project's income. Appraisals for permanent loan commitments obtained prior to the project's completion use a prospective valuation date and must contain various assumptions as to the property's financial condition on that prospective date.

The FDIC's Interagency Appraisal and Evaluation Guidelines authorize using a prospective market value in valuing a property interest for a credit decision. The Uniform System of Professional Appraisal Practices requires disclosure of assumptions in an appraisal with a prospective market value, as of an effective date subsequent to the appraisal report's date.

Assumptions regarding the anticipated rent at stabilization and the time required to lease the property are key to calculating stabilized value. Also critical are incentives the owner may offer prospective tenants during lease-up, and the project's projected income once fully leased. The appraisal should clearly disclose these assumptions, but they can still prove incorrect.

Clear disclosure of assumptions is critical. Unfortunately, many appraisers fail to adequately disclose their assumptions, and shortcut to the project's stabilized value.

Valuation Dates

Most state statutes prohibit taxation of improvements while under construction. The project usually comes on line for tax purposes after completion but prior to stabilization.

Being mandated by statute, the valuation date often does not account for where the multifamily project is on the spectrum between completion and stabilization. Unsophisticated assessors charged with valuing these projects often employ mass-appraisal techniques and may value the asset similarly to the market's stabilized properties.

Statutory Caps

Some states cap potential increases in tax value, which may magnify impact of the initial tax valuation. Caps limit increases that would otherwise bring values up to the market. For example, South Carolina properties undergo countywide reassessment every five years, but property values ordinarily cannot increase by more than 15 percent from the previously determined value.

Assessors know that a project's value at completion will nearly always be lower than its stabilized value because stabilization takes time and costs money. Competition may lower the project's achievable income, too. This knowledge can spur assessors to reach for stabilized values regardless of whether the project is yet stabilized. This taxes the unrealized, additional value between completion and stabilized levels.

A Matter of Time

All of the above considerations involve a timing disconnect between the property's actual condition on the statutorily mandated valuation date and its estimated future value based on fallible projections by the lender, developer or assessor. Axiomatically, assumptions don't always hold true. Lease-up may take longer than expected and may require concessions that increase cost. In over-built markets, the stabilized income may be lower than originally anticipated.

Charged with calculating true or fair market value as of a statutorily mandated valuation date, the assessor should examine how the market would value the property as of that date. If the asset has not achieved stabilization, the assessor should discount appropriately for time and financial costs required to achieve stabilization.  That is what the market would do, and is what the assessor is statutorily obligated to do.

And that should be the answer to the seemingly simple question of how to value newly constructed multifamily projects for tax purposes.

Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Bond Dickinson (US) LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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  • Assessors too often value newly constructed apartments as fully occupied, producing excessive assessments
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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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  • Here’s what taxpayers should do if the tax controversy now brewing causes large property tax increases
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Jan
01

2019 Annual APTC Client Seminar

2019 Seminar-Chicago
The American Property Tax Counsel is proud to announce that Chicago, Illinois will be the site of the 2019 Annual APTC Client Seminar.

Save the Dates! October 16-18, 2019 - Omni Chicago Hotel - Chicago, Illinois

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.

 Event Information

This year's seminar will address recent developments and current trends in the areas of property taxation and real estate. We will bring together nationally-known economic, technological, appraisal, and legal experts to provide valuable insight on how to navigate the quickly-changing and often turbulent real estate market.

See the Featured Speakers appearing at the 2019 Seminar.

 Featured Speakers


KC Conway, MAI, CRE

 K.C. Conway is Director of Research & Corp Engagement at University of AL, Culverhouse College of Commerce - ACRE (AL Ctr. for R.E.). He has 30 years commercial real estate experience (25 private industry; 5 within Federal Reserve system 2005-2010). He has been Chief Appraiser, Env. Risk Manager and Sr. Market Intelligence Officer SunTrust Bank 2014-2017 and Chief Economist Colliers | United States 2010-2014 and author of North American Port, Industrial and Office Outlook reports 2012-2014. Conway was the 2007 recipient of the Appraisal Institute's President's Award; 2009 recipient of "Key Player" Award from the Atlanta Federal Reserve and the 2010 recipient of "Superior Contributions" Award by the FFIEC - Federal Financial Institutions Examination Council. He was CRE Risk Specialty Officer - NY FED during Financial Crisis 2009-2010 and briefed Federal Reserve's Board of Governors & Chairman Bernanke in June 2007 on the coming real estate crisis. Conway is a nationally recognized expert and speaker on a wide range of commercial real estate topics ranging from appraisal and bank regulation to ports and securitization. Areas of specialty include housing, industrial, litigation support, industrial and office real estate, North American ports and land development. He has been an expert witness in such prominent cases as the BCCI/First Atlanta Bank scandal and Crescent Resources bankruptcy and instructor and frequently requested speaker for the Federal Reserve, FDIC, FHLB, State bank commissioners, and numerous academic, professional organizations and industry associations, such as the Appraisal Institute, Counselors of Real Estate, ICSC, NAIOP, NAR, RMA, SIOR, ULI, University of Colorado, UF, Univ. of AL (ACRE) GA Tech, NYU, DePaul University, and University of CT.


Bill Emmons is an Assistant Vice President and Economist at the Federal Reserve Bank of St. Louis. He also serves as Lead Economist in the Bank's Center for Household Financial Stability (HFS) and as President of the St. Louis Gateway Chapter of the National Association for Business Economics (NABE). He conducts research and speaks frequently on topics including the economy, housing and mortgage markets, banking, financial markets, financial regulation, and household financial conditions.

Mr. Emmons has been with the St. Louis Fed since 1995. He also serves as an Adjunct Professor of Finance in the Olin Business School at Washington University in St. Louis. Prior to joining the St. Louis Fed and Washington University, he was on the faculty of the Amos Tuck School of Business at Dartmouth College, in Hanover, New Hampshire.

Mr. Emmons received a PhD degree in Finance from the Kellogg School of Management at Northwestern University. He received bachelor's and master's degrees from the University of Illinois at Urbana-Champaign.

Mr. Emmons is married with three children.

William R. Emmons, Ph.D

Todd D. Jones, MBA, MAI, AI-GRS, CRE, FRICS Principal, RealAdvice

An internationally recognized expert, Mr. Jones has provided complex income-producing commercial property valuation, expert testimony, litigation support, ad valorem property tax counseling and representation, appraisal review, investment advice, marketability analysis, and feasibility analysis, including highest and best use analysis for virtually all types of commercial, industrial, residential, and special purpose real estate, on behalf of financial institutions, REIT's, government entities, publicly traded companies, and private concerns since 1985.

As a former President of the Florida Association of Property Tax Professionals, and an inaugural member of the Florida TaxWatch Tax Advisory Council, Mr. Jones regularly addresses the Florida Cabinet, Legislature, and various state agencies on property tax policy and issues impacting taxpayers. The Association successfully collaborated with other influential groups to change the law in Florida affecting how the assessors must develop and support valuations in defending challenged assessments, "leveling the playing field" by lowering the burden of proof for taxpayers in assessment challenges, and requiring the development of uniform rules, policies, and procedures for Value Adjustment Boards across Florida's 67 counties to improve fairness in taxation for all Floridians. In 2011, Mr. Jones served on the Florida Governor's
Tangible Personal Property Taskforce. In 2012, the Florida legislature sought Mr. Jones' counsel on comprehensive property tax reform legislation.

For eight years, Mr. Jones taught the Appraisal Valuation course in the Nathan S. Collier Master of Science in Real Estate (MSRE) degree program at the University of Florida. The UF MSRE program has been consistently ranked in the Top Ten of all university real estate programs in the US and was named the top real estate degree program in the US in 2018. In addition, Mr. Jones taught the appraisal course for the Florida Bankers School for five years. The purpose of the Florida School of Banking (FSB) is to provide bank personnel at the supervisory and officer level the opportunity to increase their knowledge about the banking industry and the economy.


​David C. Lennhoff, MAI, SRA, AI-GRS, is a senior director with Altus Group US, Inc., which is officed in McLean, Virginia. His practice centers on litigation valuation and expert testimony relating to appraisal methodology, USPAP and allocating assets of a going concern. He has taught nationally and internationally for the Appraisal Institute, recently in Tokyo, Japan; Beijing and Shanghai, China; Berlin, Germany; and Seoul, South Korea. He has been a development team member for most of the Institute's income capitalization courses and was editor of their Capitalization Theory and Techniques Study Guide (3rd ed.). He also was lead developer for the new asset allocation course, Fundamentals of Separating Real Property, Personal Property, and Intangible Business Assets, and editor of the two accompanying business enterprise value anthologies, and he authored the Institute's Small Hotel/Motel Valuation seminar. David is a member of RECGA, a national organization of analysts and academicians founded by the late William N. Kinnard, Jr. Ph.D. He is a past editor-in-chief of and frequent contributor to the Appraisal Journal.

David Lennhoff, MAI, SRA, AI-GRS

Mary O'Connor, ASA

Mary O'Connor, ASA is Partner, Forensics and Valuation Services of Sikich LLP, a national accounting and advisory firm.She has worked exclusively in the field of valuation specializing in business valuation and the appraisal of intangible assets for litigation and corporate transactions with special focus in property tax.She has provided consulting and expert witness testimony in Federal, State and local jurisdictions (including US Tax Court, Delaware Chancery and Property Tax Appeal Boards) nationally and internationally in a wide range of complex property tax cases for hotels, senior living centers, theatres, retail stores, healthcare facilities and agricultural properties.Prominent cases include the Glendale Hilton, the Marriott at LA Live, SHC Half Moon Bay, DFS duty-free shopping at San Francisco Airport and the Desert Regional Hospital in Palm Springs, California. She speaks frequently about intangible asset valuation in property tax appeal to the IPT and APTC and has commented extensively on the various whitepapers published by the IAAO.She is a Senior Member of the American Society of Appraisers accredited in Business Valuation and is certified by Marshall Valuation Service in the application of Cost Approach methodology.


Stephen D. Roach, MAI, SRA, AI-GRS has been an appraiser for over 40 years, and has been a co-owner of Jones, Roach & Caringella, Inc. since 1986. His appraisal assignments have included the valuation of numerous income-producing properties, historical valuations dating back to 1900, numerous partial acquisitions, and other significant and complex assignments throughout the United States. He has extensive deposition and trial testimony experience in matters involving condemnation, construction defects, contract breach, fraud, property tax appeal, appraisal methodology, and many other issues. Mr. Roach holds a Bachelor of Science degree in Real Estate from San Diego State University.

Mr. Roach co-wrote the Appraisal Institute's course on Condemnation Appraising and has done extensive curriculum development and oversight for the Appraisal Institute. He has been published twice in The Appraisal Journal and is a contributing editor to 11 Appraisal Institute books and over 30 courses and seminars. His Appraisal Institute teaching experience includes basic and advanced courses on income capitalization, litigation courses, and over 200 additional courses and seminars that have been presented to over 8,000 participants. He has taught workshops and seminars relating to condemnation law and appraisal practice. In addition to teaching courses throughout the United States, Mr. Roach has taught appraisal courses, seminars, or lectures in Switzerland, Germany, South Korea, Japan, China, and Mexico. Mr. Roach has served as a visiting professor of appraisal theory and practice at the International Center for Land Policy Studies and Training in Taipei, Taiwan since 2004, where his courses have been presented to students from more than 85 countries.

Mr. Roach serves the Appraisal Institute as the chair of the Education Committee, a member of the General Comprehensive Examination Panel, a member of the Editorial Board of the Appraisal Journal, a member of the Body of Knowledge Committee, and as a Trustee of the Appraisal Institute Education and Relief Trust. He formerly served as chair of the International Relations Committee and the Curriculum Subcommittee. Mr. Roach is also a Principal Member of the Real Estate Counseling Group of America.

Stephen D. Roach, MAI, SRA, AI-GRS

David Crapo, Esq.

 David Crapo has extensive litigation experience and has tried hundreds of state and local tax matters before administrative tribunals and state and federal courts in Utah and numerous other states.

David is a frequent speaker on state and local tax issues and has presented at the annual Public Utilities workshop on Ad Valorem Taxation; the National Association of Property Tax Representatives, Transportation, Energy and Communications (NAPTR-TEC) Seminar; the American property Tax Counsel Seminar; and the Lincoln Institute of Land Policy; among others.


Sharon F. DiPaolo is a partner in the property tax law firm of Siegel Jennings, Co., where she is a member of the Executive Board and manages the firm's Pennsylvania practice. Ms. DiPaolo concentrates her practice exclusively in assessment law. She has handled thousands of assessment appeals at the administrative, trial court and appellate levels. She handles appeals for commercial property owners throughout Pennsylvania's 67 counties, and also functions as national outside counsel for portfolio clients managing their appeals across the country.

Ms. DiPaolo is the 2019 Chair of the American Property Tax Counsel's 25th Annual National Conference and is the Western Pennsylvania representative to the organization.

Ms. DiPaolo is a frequent speaker on real estate assessment issues.
Sharon DiPaolo, Esq.

John Garippa, Esq.
John E. Garippa, Esquire is the Past President of the American Property Tax Counsel. He served as President for more than 12 years. Mr. Garippa is a senior partner with the law firm Garippa, Lotz & Giannuario. He has specialized in ad valorem taxation for more than 40 years with an emphasis on complex commercial and industrial valuation litigation. Mr. Garippa has authored and published more than 90 articles in the field of taxation and is a contributing author on two treatises on valuation published by the International Association of Assessing Officers. In 1997, Mr. Garippa was awarded the 1997 Literary Achievement Award from the Institute of Property Taxation. Mr. Garippa has been quoted in The New York Times, The Wall Street Journal, and USA Today.

Garippa, Lotz & Giannuario holds the highest legal designation awarded by Martindale-Hubbell Law Directory and is listed in the Registry of Preeminent Lawyers in the United States. This designation is awarded to fewer than 5% of attorneys nationwide.

Mr. Garippa is a graduate of Rutgers University and Seton Hall University Law School. Mr. Garippa is licensed in New Jersey, Pennsylvania, New York and Maryland.

Ad valorem property tax and assessment counseling and litigation (appeal hearings and trials) are Cris' primary practice areas. For 25 years, he has represented a variety of California taxpayers in equalization proceedings before county assessment appeals boards, the State Board of Equalization, the Superior Court, the Court of Appeal and the California Supreme Court.

Cris' clients include owners of oil and gas fields, shopping centers and anchor department stores, power plants, airport concessions, jet aircraft, port terminals, sanitary landfills, aerospace manufacturing facilities, hotels, entertainment venues and theme parks, golf courses, oil refineries, pipelines, billboards, hospitals and assisted living facilities, manufacturing and food-processing facilities, quarries and service stations. He has also testified before the Los Angeles County Superior Court as an expert witness on property tax matters.

Since 1998, Cris has taught over forty one-day courses on California property taxation to accountants, attorneys, real estate professionals, corporate executives, bank trust officers and property tax agents. He has also published articles on property taxation in National Real Estate Investor, Commercial Property Executive, Western Real Estate Business and Seniors Housing Business, real estate industry publications, Cal-Tax Digest, a publication of the California Taxpayers Association, The Journal of Property Tax Assessment & Administration and Property Tax Alert.

As a member of the California Bar Association's State and Local Tax Committee, Cris helped draft property tax regulations and legislation relating to local equalization procedures and revisions to the Assessors' Handbook which were subsequently adopted by the California State Board of Equalization. In addition, he has organized, chaired and spoken at American Bar Association / Institute for Professionals in Taxation (IPT) Advanced Property Tax Seminars, and at IPT's Annual Conferences and Property Tax Symposiums. Cris received the "Property Tax Article of the Year Award" from IPT in 2012.

Cris is a Director of the California Taxpayers Association and the California member of American Property Tax Counsel. Cris has spoken on property taxation topics before the California Taxpayers Association, Western States Petroleum Association, California Bar Association Tax Section, Los Angeles County Bar Association, and other professional organizations and trade associations.

Cris O'Neall, Esq.

Kathleen Poole, Esq.

For close to five years, Kathleen represented clients in the State of California (including a number of fortune 500 companies) in all aspects of employment law, from compliance to advice to litigating in state and federal court. Kathleen was a member of a three-person trial team that won a unanimous jury verdict in Los Angeles Superior Court.

Kathleen's practice now encompasses a variety of assessment and property taxation matters for both private and public sector clients throughout Ontario and Canada.

Kathleen represents taxpayers and municipalities before the Assessment Review Board and Superior Courts in valuation disputes for all types of properties including office buildings and industrial properties. She advises clients on all matters relating to assessment and municipal taxation.


Linda Terrill, Esquire is the current President of the American Property Tax Counsel. She is a partner with the law firm Property Tax Law Group, LLC where she is Co-Chair of the Real & Personal Property Tax Law Section. She has over 30 years of experience in state and local tax issues including real and personal property taxes, sales/use taxes and state income taxes.

Formerly, Ms. Terrill served as the General Counsel for the Kansas Court of Tax Appeals. As a member of the American Property Tax Counsel, she serves as the Chair of the Seminar Committee, Chair of the Marketing Committee and as the representative for the state of Kansas.

She is a frequent speaker and author in the field of property tax and valuation. She served on the national Legal Committee of the International Association of Assessing Officers and was a former President of the Administrative Law Section of the Kansas Bar Association.

Ms. Terrill is a graduate of Kansas University, Washburn University, and Washburn University School of Law. She earned her Master of Law in Taxation from the University of Missouri at Kansas City.

Linda Terrill, Esq.

Michele Whittington, Esq.

Michele M. Whittington is a Member in the Lexington, Kentucky office of Morgan Pottinger & McGarvey, where her practice focuses on property taxation and administrative law. She has represented numerous local and national companies in challenging real property tax assessments, personal property tax assessments, and public service company assessments before the Kentucky Department of Revenue, the Kentucky Claims Commission, and various state trial and appellate courts in Kentucky. She has also assisted industry groups in drafting legislation and regulations on tax issues.

Michele is a frequent speaker on state and local tax issues, and has counseled various industry groups on relevant tax issues. She is a member of the Council on State Taxation and the Institute of Professionals in Taxation, and is an affiliate member of the International Association of Assessing Officers. Michele is listed in The Best Lawyers in America for Administrative/Regulatory Law.

Michele serves as a member of the Publications Committee for the Kentucky Bar Association. She currently serves as President of the Alumni Board for Transylvania University in Lexington, Kentucky. 


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Dec
21

Beware of Double Taxation on Personal Property

While Texas solved the problem, your state may not have addressed the issue.

Many states tax business personal property, a classification that includes furniture, fixtures, equipment, machinery and, in some states, inventory. Whatever the jurisdiction, the values of business personal property and real estate can easily be conflated in ad valorem taxation, unfairly burdening the taxpayer with an additional appraisal and/or taxation.

If you live and work in a state that doesn't tax business personal property, it may be included with the taxes on your real estate anyway. If you are in a state that taxes personal property, you might be taxed for it twice. While it seems contrary to acceptable appraisal practice to include personal property in the real estate value and then to additionally appraise and/or tax the same items, it does happen.

The Texas Legislature wrestled with this problem of additional valuation and taxation for more than a decade. That process and the resulting tax law offer important lessons that may help taxpayers and lawmakers in other states.

Texas gets personal

In 1999, the Texas Legislature enacted Section 23.24, titled "Furniture, Fixtures and Equipment," as a new statute in the State Tax Code. Prior to its enactment, furniture, fixtures and equipment were often included in the appraised value of income-producing real estate for ad valorem taxation. They were also subject to a separate business personal property tax. Section 23.24 eliminates this double taxation as long as the method used to value the real estate takes the business personal property into account.

There are many different kinds of property but only a few approaches to valuation. When the values of real property and personal property are mixed, it is usually because they are being assessed as components of an operating business using the income approach. Hotels and motels, nursing homes, restaurants and convenience stores are among the property types at greatest risk of having real estate and personal property values combined.

An assessor valuing the real estate component of an operating business will likely use the income approach. This method bases value on the income stream a business can generate using the real estate and personal property as components of a business enterprise.

A hotel doesn't have a business without beds, and a restaurant doesn't have a business without tables and chairs. As such, a value determined using the income approach is going to include the value of the real estate and the personal property, as both contribute value to the enterprise's income stream. It's clear to see how using the income approach can conflate real and personal property value into one.

The cost approach keeps those values separate. Using this method, an assessor or appraiser looks only at the value of the land as if it were vacant, then adds the value of improvements based on the cost to construct those improvements minus any depreciation. There is no accounting for, nor any risk of conflating, the business personal property within the real estate while using this approach.

In many instances, however, appraisal districts that were not using the cost approach – or had switched from the cost approach to the income approach from one year to the next – were still additionally appraising and even maintaining a separate account for the business personal property. This would seemingly violate Section 23.24.

Many appraisal districts disagreed, claiming that a separate account for business personal property enabled them to deduct that amount from the real estate. In doing so, they believed that there would be no additional burden on the owner, who would only be paying taxes once on the personal property.

While the tax liability may not be increased, an appraisal district with a separate account for personal property still creates burdens for the owner. The taxpayer is required to file a rendition on the personal property stating either "the property owner's good faith estimate of market value of the property or, at the option of the property owner, the historical cost when new and the year of the acquisition of the property."

If owners fail to file this rendition on personal property already being accounted for in the value of the real estate, they are subject to a penalty that increases their tax liability by 10 percent. It hardly seemed fair that the taxpayer should have these obligations and liabilities regarding property that was already intertwined with the value and tax for the real estate. Two consecutive legislatures agreed.

In 2009, lawmakers created a subsection to Section 23.24. This statute intended to exorcise the appraisal districts' method of having a second account for the personal property and/or attempting to separate or subtract the value of the personal from the real when both values had already been combined in the real estate. Some appraisal districts were still requiring renditions (and seeking penalties for failure to do so) on property value already captured with the real estate.

In 2011, the next legislature removed the additional and needless burden to render business personal property that is not to be appraised separately from real property in the first place. The law now says that if business personal property is being appraised under Section 23.24, then the owner is not required to render anything.

Implications for other states

Check your state's laws regarding the taxation of personal property and make sure you're not already paying those taxes on the real estate.

Texas and Oklahoma tax inventory as well as business personal property, and not only is the tax present, it's prevalent. In 2016, personal property tax made up 12 percent of the property tax base in Texas and nearly 23 percent of Oklahoma's property tax base.

Whether personal property tax is present and/or prevalent in your state, make sure you are not paying personal property taxes where it isn't taxable, or paying it twice in jurisdictions where it is taxable.

Greg Hart is an attorney in the Austin law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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Dec
19

Runaway Property Taxes in New Jersey

Tax courts don't always recognize market value in setting property tax assessments.

Most real estate is taxed ad valorem, or according to the value. The theory is that each person is taxed on the value of the real property they own.

The New Jersey Constitution (Article VIII, Section 1, paragraph 1) stipulates that property is to be assessed for taxation by general laws and uniform rules, and that all non-agricultural real property must be assessed according to the same value standard.

Our statutes define the standard of value as the true property value. We call this market value, or the most probable price a property will bring in a competitive and open market under conditions requisite to a fair sale. That assumes the buyer and seller are each acting prudently and knowledgeably, and that the price is unaffected by undue stimulus.

In 2005, the state Tax Court, in a General Motors case, openly admitted it was making a determination that the highest and best use of the property was as an auto assembly facility. By this determination, the court set public policy indicating that this highest and best use fairly and equitably distributed the property tax burden.

In this case the court felt it was necessary to conclude the highest and best use of the property at issue was an auto assembly plant because to do otherwise may allow features of the property to go untaxed and therefore lower the value of the plant. The court also stated that this determination was consistent with and effectuates the public policy of fairly and equitably distributing the property tax burden. All of this was concluded while the market data suggested a different result, given that no auto manufacturing facility had ever before been sold to another automobile manufacturer. Further, by law, the tax court's role is to determine value, not to redistribute the tax burden.

The history of the Tax Court has, in practice if not in theory, interpreted the constitution and statutes of real property taxation to find value in a uniform and stabilized manner. In other words, although the market may vary over a period of years under review, the court would attempt to stabilize the effect of the differences when rendering opinions.

The Tax Court would also set precedent by using methods of valuation not normally used in the marketplace because it deemed the data before it at trial to be lacking. It has, for example, applied a cost approach to determine value when a buyer would purchase a property based on an income approach. This is common in court decisions, but often runs afoul of true market motivations and distorts the conclusion of value. The more the courts reach these types of decisions, the further away they move from concluding market value.

The court's attempt to carry these principles forward has appeared in various ways over the years. As early as 1996, in a case involving a super-regional mall with anchors not separately assessed, the Tax Court deemed the income approach inappropriate to value the stores and instead valued the stores on a cost approach. Today, the legacy of that decision requires plaintiffs to present a cost approach, which is not evidence of market value. This may well distort a property's valuation.

Issues such as capitalization rates are also problematic for certain assets in Tax Courts findings. Over the years, court precedent has set rates that often do not reflect the market. This is especially evident today when valuing regional malls classified as B or C grade. The market capitalization rates are well over those the courts have historically found. Although transactions verify this market data as accurate, the courts fail to recognize it, making it difficult for plaintiffs to prevail with values based on actual, transactional data.

In January 2018, after a number of decisions that rejected plaintiffs' approach, our Tax Court appears to have taken some pause. It recognized that by rejecting proofs from the market and data forwarded by taxpayers, it was ultimately failing to conclude to warranted assessment adjustments.

It stated:

"there has been some criticism of late, that the Tax Court perhaps has raised the bar for meeting the standard of proof too high in property tax appeals, given arguendo, what could be viewed as a growing trend seen in a number of recent decisions, where the court rejected expert opinions and declined to come to value. While such a suggestion may give the Tax Court pause for self-examination and reflection, it must not serve to invite expert appraisers to abrogate their responsibility of providing the court with 'an explanation of the methodology and assumptions used…'"

The quote seems to recognize that the proof bar was getting so high that a plaintiff could never prove its case. A more realistic view of the proofs provided by a taxpayer comes with it the recognition that market data and actions from market participants are the touchstones of value that should establish our assessments.

Philip Giannuario, Esq. is a partner at the Montclair, N.J. law firm Garippa Lotz & Giannuario, the New Jersey and Eastern Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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Dec
03

Texas Hotel Owners: Proceed with Caution

Confusion Regarding Tax Code's Rendition Requirements Creates Penalty Trap

A provision in the Texas Property Tax Code requires hotel assessments based on an income analysis to include personal property. However, misunderstanding associated rendition requirements can cause unexpected penalties for hotel owners.

In Texas, both real and personal property are taxed at 100 percent of assessed value. Prior to 1999, a hotel's real and personal property were valued under separate accounts. A hotel's income and expense stream, however, incorporates value generated by both real and personal property.

For instance, a nightly hotel room rate covers the rent for the real property (the room itself) as well as personal property (the furniture and fixtures in the room). This blended income formerly created unique challenges when using the income approach to value hotels for property tax assessments.

In a move toward simplification and to protect against potential double taxation, lawmakers added Section 23.24 to the tax code in 1999. This provision prevents furniture, fixtures and equipment included in a real property valuation from being taxed a second time under a separate, personal property account. The statute was amended in 2009 to stipulate that, for properties such as hotels, the value of real and personal property must be combined into one assessment if the assessor uses an income analysis.

Specifically, Section 23.24(b) states that "in determining the market value of the real property appraised on the basis of rental income, the chief appraiser may not separately appraise or take into account any personal property valued as a portion of the income of the real property, and the market value of the real property must include the combined value of the real property and the personal property."

Section 23.24 simplifies the valuation process for hotels valued under an income analysis, presuming that total income reflects the contributory value of the real and personal property and that separating the two is an unnecessary step when both portions are taxed at a 100 percent assessment ratio.

The legislature amended Section 22.01 in 2011 to include subsection "m," which provides that "a person is not required to render for taxation personal property appraised under Section 23.24."

Taxpayer pitfall

As a result of these provisions, many hotel owners assume that their personal property will be included in the real property assessment and do not submit annual renditions to county appraisal districts. But what happens if a jurisdiction does not value a hotel using the income approach?

The caveat in Section 23.24 is that the property is valued "on the basis of rental income." Because the income approach is just one of three recognized approaches to value, this statute does not eliminate the independent consideration of personal property in ad valorem taxation for hotels in Texas.

Although assessors value most hotels based on income, there are several common scenarios in which they may use an alternative method, triggering the creation or continuation of a separate personal property account.

Jurisdictions often value newly constructed hotels using the cost approach during the first one to two years of operation, prior to stabilization. Harris County almost exclusively values hotels on the cost approach for the first year following construction.

Hotels that have been in operation for some time but have reached a point of significant renovation or decline in value may also be valued using the cost approach. In such scenarios, the assessor will value personal property under a separate account, and may require the property owner to submit a personal property rendition report.

Failure to render in a timely fashion results in a penalty equivalent to 10 percent of the total taxes due. Unfortunately, the hotel owner is often unaware of rendition requirements until they are penalized for a late rendition.

Rendition required

The following example illustrates how incorrect assumptions about an assessor's valuation methodology can result in unexpected rendition penalties.

Let's assume the assessor has valued a hotel under an income analysis since the taxpayer acquired it in 2010. Based upon this history and prior interactions with the assessor, the owner did not file a personal property rendition with the county appraisal district for tax year 2018.

The property had suffered a significant decline in performance over the past few years despite dramatic increases in land value in the area. After reviewing the documentation provided, the assessor decides to value the hotel at land value, with a minimal contributory value assigned to the improvements.

Since this approach is based upon a cost analysis and not an income approach as in prior years, Section 23.24(b) no longer applies. The switch in methodology triggers the creation of a separate business personal property account for the hotel.

Because the taxpayer's discussions with the assessor begin at an informal hearing after the rendition deadline, the owner does not learn of the change in methodology or resulting new personal property account until the opportunity to comply has passed. Consequently, the taxpayer incurs a 10 percent penalty for failure to file a timely personal property rendition.

An ounce of prevention

It can be challenging to establish complete clarity on an assessor's methodology prior to the rendition deadline. As in the previous example, scheduled discussions with assessors often occur after the deadline. A hotel owner may choose to file a protective rendition to avoid the possibility of unexpected penalties.

In any case, the key to avoiding unnecessary penalties is to communicate as early and often with the county assessor as possible, or hire someone who is able to do so on the taxpayer's behalf. With a thorough understanding of the property tax code and clear communication with county assessors, hotel owners in Texas may bypass the penalty trap.

Rachel Duck, CMI is a tax consultant at Popp Hutcheson PLLC, which represents taxpayers in property tax matters and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.

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Nov
26

The Silver Tsunami Portends Excessive Tax Assessments

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

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

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

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

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

An outrageous assessment

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

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

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

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

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

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

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

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

Other scenarios

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

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

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

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

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

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

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

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

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

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