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Property Tax Resources

Feb
03

Why Assessor Estimates Create Ambiguity

Kieran Jennings of Siegel Jennings Co. explains how taxpayers and assessors ensure a fair system, with tremendous swings in assessment and taxes.

A fundamental problem plaguing the property tax system is its reliance on the government's opinion of a property's taxable value. Taxes on income or retail sales reflect hard numbers; real estate assessment produces the only tax in which the government guesses at a fair amount for the taxpayer to pay.

Assessors' estimates of taxable property value create ambiguity and public scrutiny not found in other taxes, and incorrect assessments can lead to fiscal shortfalls that viciously pit taxing authorities against taxpayers seeking to correct those valuations. Worse yet, the longer a tax appeal takes to reach its conclusion, the worse the outcome for both the taxpayer and government. Paradoxically, swift correction of assessment roll protects the tax authority as well as the taxpayer.

As an example, Utah daily newspaper Desert News reported in December 2019 that, due to a clerical error, Wasatch County tax rolls recorded a market-rate value of $987 million for a 1,570-square-foot home built in 1978. The value should have been $302,000. The Wasatch County assessor said the error caused a countywide overvaluation of more than $6 million and created a deficit in five various county taxing jurisdictions, according to the county assessor. The Wasatch County School District had already budgeted nearly $4.4 million, which it was unable to collect.

How does an overvaluation error cause taxing districts to lose money? In many, if not most jurisdictions, the tax rate is determined in part by the overall assessment in the district as well as the budget and levies passed. Typically, there is a somewhat complex formula that turns on the various taxing districts, safeguards and anti-windfall provisions.

Simply stated, tax rates are a result of the budget divided by the overall assessment in the district. A $1 million budget based on a $100 million assessment would require a 1 percent tax rate to collect the budgeted revenue. If the assessment is corrected after the tax rate is set, however, then not all the revenue will be collected and the district will incur a fiscal shortfall.

The sooner a commercial property assessment is corrected the healthier it is for all involved. In the Utah example, had the error been corrected prior to the tax rate being set there would have been no impact on the taxpayer, the school or any of the taxing authorities.

FAIRNESS FOR THE COMMON GOOD

Most state tax systems are flawed and provide inadequate safeguards for taxpayers—if the tax systems were designed better, there would be less need for tax counsel. By understanding the workings of the property tax system, however, taxpayers can help maintain their own fiscal health as well as help to maintain the community's fiscal well being.

As with all negotiations, it is important to understand the opponent's motivations. Although residential tax assessment typically is the largest pool of overall assessment, taxing authorities know that commercial properties individually can have the greatest impact on a system when they are improperly assessed, to the detriment of schools and taxpayers. That makes it important to act as quickly as possible in the event of an improper assessment. And, importantly, resolutions that minimize impacts to the government can maximize the benefit to the taxpayer.

A lack of clear statutory definitions, political tax shifting or a simple error can cause a breakdown in the tax system. In Johnson County, Kan., the assessor raised the assessments on all big box retail stores, in some cases by over 100 percent. Recently, the Kansas State Board of Tax Appeals found those assessments to be excessive. The board reduced taxable values in several of the lead cases back to original levels, and the excessive assessment caused a shortfall.

The Cook County, Ill., assessor has been in the news for raising assessments on commercial real estate in many cases by more than 100 percent. If those assessments are found to be excessive, it could be detrimental for the tax authorities and taxpayers alike. In Cook County, the assessor has stated that the increase is in response to prior underassessment.

SEEK UNIFORMITY, CLARITY

With tremendous swings in assessment and taxes, how can taxpayers and assessors ensure a fair system? Uniform standards and measurements are the answer.

Like the income tax code, the property tax code is criticized for being confusing and overly wordy. To achieve greater equity and predictability, clarity is key. Defined measures of assessed value and standards to ensure uniform assessment results will help create transparency and ensure fundamental fairness between neighbors and competitors, so that no one has an advantage nor a disadvantage.

All taxpayers must be subject to the same measurement. For instance, a government cannot apply an income tax as a tax on gross income for one taxpayer and on net income for another. Likewise, one taxpayer should not be taxed on the value of a property that is available for sale or lease, and another owner taxed based on the value of its property with a tenant in place. Because tax law under most state constitutions must be applied uniformly, one set of rules must be established for all, and what is being taxed should be clearly defined.

Tax laws often include phrases like "true cash value" and "fair value." To be clear, the only measure of taxable value common to all property types is the fee simple, unencumbered value. The value of a property that is measured notwithstanding the current occupant or tenant is not necessarily the price that was paid for the property; it could be higher or lower. And because this concept is difficult for many taxpayers and assessors to understand, there needs to be a second check on the system; that safeguard is taxpayers' right to challenge their assessment based on their neighbors' and competitors' assessments.

To protect themselves on complex matters, it is often helpful for taxpayers to hire counsel that is intimately familiar with the law, real estate valuation and the local individuals with whom the taxpayer will be negotiating. To reduce the need for counsel, get involved with trade groups and state chambers of commerce, which can aid in correcting the tax system.

Uniform measurements of assessment, the ability to challenge the uniformity of results, and swift resolutions combine to create fairness and stability, which in turn enhance the fiscal health of both taxpayers and tax districts.

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.

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  • Kieran Jennings of Siegel Jennings Co. explains how taxpayers and assessors ensure a fair system, with tremendous swings in assessment and taxes.
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Jan
05

2020 Annual APTC Client Seminar

2020 Client Seminar - Virtual

The American Property Tax Counsel will be holding a VIRTUAL Client Seminar for 2020! 

Mark your calendars for the following dates. Registration details for invited guests will be available shortly.

Virtual Seminar Presentations
2:00-3:30pm ET/11:00-12:30pm PT (unless otherwise noted)

September 17 - Session I: COVID-19 and Effects on Retail/Office Space
Moderator
: Aaron Vansant, Esq, DonovanFingar, LLC
Speaker: KC Conway, MAI, CRE, Director of Research and Corporate Engagement, University of Alabama, Culverhouse College of Business, AL Center for Real Estate, Chief Economistfor CCIM Institute

September 24 - Session II: COVID-19 and Effects on the Economy
Moderator
: Bart Wilhoit, Esq, Mooney, Wright & Moore, PLLC
Speaker:
William R. Emmons, Ph.D., Federal Reserve Bank of St. Louis

October 1 - Session III: COVID-19 and Effects on Industrial
Moderator
: Michele Whittington, Esq, Morgan Pottinger McGarvey
Speaker
: Rob Vodinelic, MAI, MRICS, Newmark Knight Frank

October 8 - Session IV: COVID-19 and Effects on Centrally Assessed Properties
Moderator
: Bart Wilhoit, Esq, Mooney, Wright & Moore, PLLC
Speaker
: Robert Reilly, CPA, Willamette Management Associates

October 15 - Session V: Distant Cousins: Comparing Real Estate and Business Valuation Rates in a COVID World
Moderator
: Kathleen Poole, Nixon Poole Lackie
Speaker
: Mary O'Connor, ASA; Partner, Forensics and Valuation Services of Sikich LLP

October 21 - Session VI: National Legal Update
Moderator
: Wendy Beck Wolansky, Esq, Rennert Vogel Mandler & Rodriguez. PA
Panelists
: Gilbert Davila, Esq, Popp Hutcheson PLLC
Sharon DiPaolo, Esq, Siegel Jennings
William Elias, Esq, Elias, Books, Brown & Nelson

October 22 - Session VII: COVID-19 and Effects on Hospitality
Moderator
: Aaron Vansant, Esq, DonovanFingar, LLC
Speaker
: David Lennhoff, MAI, SRA, AI-GRS, Lennhoff Real Estate Consulting LLC 

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.


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 Economist at the Federal Reserve Bank of St. Louis and 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 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

David Lennhoff, MAI, SRA, AI-GRS

David C. Lennhoff, MAI, SRA, AI-GRS is a principal with Lennhoff Real Estate Consulting, LLC, which is officed in Gaithersburg, Maryland. 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. International presentations have been in Tokyo, Japan; Beijing and Shanghai, China; Berlin, Germany; Seoul, South Korea; and Mexico City, Mexico. He has been a development team member for numerous Appraisal Institute courses and seminars and was editor of its Capitalization Theory and Techniques Study Guide, 3rd ed. He was the lead developer for the Institute's asset allocation course, Fundamentals of Separating Real and Personal Property from Intangible Business Assets, and edited the two accompanying business enterprise value anthologies. He also authored the Small Hotel/Motel Valuation seminar. David is a principal member of the Real Estate Counseling Group of America, a national organization of analysts and academicians founded by the late William N. Kinnard, Jr., PhD. He is a past editor-in-chief of and frequent contributor to The Appraisal Journal, and a past recipient of the Journal's Armstrong/Kahn Award and Swango Award.


Mary O'Connor, CMI, ASA, CRE 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, big box stores, manufacturing, theatres, healthcare facilities and agribusiness properties. Prominent tax appeal 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. 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. She holds the CMI designation from IPT and is a Counselor of Real Estate (CRE).

Mary O'Connor, ASA

Robert Reilly, CPA

Robert Reilly has been a firm managing director at Willamette Management Associates (WMA) for approximately 30 years. WMA is a valuation consulting, forensic analysis, and financial advisory services firm. Before WMA, Robert was a valuation partner for the Deloitte & Touche accounting firm. Robert's practice includes unit valuation and property valuation analyses for property tax planning, compliance, and controversy purposes.

Robert holds a BA degree in economics and an MBA degree in finance, both from Columbia University. He is a certified public accountant, certified management accountant, certified global management accountant, accredited tax advisor, and an enrolled agent (to practice before the IRS). He is accredited in business valuation and certified in financial forensics. He is a chartered financial analyst, certified business appraiser, certified valuation analyst, certified valuation consultant, certified review appraiser, accredited senior appraiser, certified real estate appraiser, and stated-certified general appraiser in Illinois and several other states.

Robert is the co-author of 12 valuation-related textbooks, including Best Practices: Thought Leadership in Valuation, Damages, and Transfer Price Analysis (published by Valuation Products & Services), Guide to Intangible Asset Valuation (published by the American Institute of Certified Public Accountants) and Practical Guide to Bankruptcy Valuation (the second edition published by the American Bankruptcy Institute), and Guide to Property Tax Valuation. He currently serves as a contributing editor for the following professional journals: Construction Accounting and Taxation and Practical Tax Strategies.


Rob Vodinelic joined Newmark Knight Frank in 2017 and currently serves as a Senior Managing Director and Market Leader for the Ohio, Indiana and Kentucky markets for the Valuation & Advisory group. He is also the National Practice Leader for the Industrial/Logistics specialty practice for the V&A group.

Since beginning his career in valuation in 1998, he has worked with clients on a wide variety of property types and has provided valuation analyses on Federal and State Historic Tax Credits, Tax Increment Financing (TIF) arrangements, and a variety of tax abatements. Rob Vodinelic also has significant experience in litigation assignments including the preparation of appraisals and providing expert witness testimony for property tax appeals and bankruptcy proceedings.

Mr. Vodinelic joined Newmark Knight Frank after serving as Senior Managing Director and Regional Leader for Cushman & Wakefield in the Ohio region. His time at Cushman & Wakefield began in 1995 as a Senior Accountant in the Corporate Finance Group in the New York World Headquarters office. In April 1998 he transitioned to Valuation & Advisory until relocating to Ohio in September 2002. At Cushman & Wakefield he was promoted to Director in 2005, Senior Director in 2010, Managing Director in 2014 and then Senior Managing Director in 2017.

With Newmark Knight Frank, Mr. Vodinelic's responsibilities include business development, aggressively recruiting top appraisal professionals, continuing to provide outstanding service to clients, overseeing a team of appraisers within the Ohio, Kentucky and Indiana offices of Newmark Knight Frank, and being the National Practice Leader for the Industrial/Logistics specialty practice. He is also involved with the preparation and review of appraisal reports on a diverse spectrum of property types, and he provides expert witness testimony throughout the state of Ohio.

Rob Vodinelic, MAI, MRICS

Wendy Beck Wolansky, Esq.

Wendy Beck Wolansky concentrates her practice in the ad valorem taxation area, where her expertise is in representing property owners throughout the State of Florida before Value Adjustment Boards in administrative appeals challenging the valuation of commercial property including regional malls, anchor department stores, big box stores, hotels, hotel condominium buildings, major office buildings, low income housing tax credit apartment buildings and major apartment buildings, among others. 


Gilbert D. Davila, CMI, joined Popp Hutcheson in 1998 and has devoted his entire legal career to representing commercial property owners in every aspect of their property tax needs. Gilbert provides a wide range of services to his clients, including advocacy at administrative hearings (ARB's) as well as litigation negotiation and settlement. His current area of concentration is multi-family and low-income housing properties, as well as representing shopping centers, office buildings, mini-storage facilities and freestanding retail. Gilbert is the Chair of the firm's Team Development Committee which focuses on the continuing education needs of team members and enhancing the unique culture of the firm.

Gilbert has become a frequent speaker at professional seminars and conferences across the country. Gilbert also instructs various property tax law courses and is a frequent author of property tax related articles which have been featured in numerous national publications including The National Real Estate Investor, Apartment Finance Today and Affordable Housing Finance. Gilbert is a Registered Senior Property Tax Consultant and is a member of the Texas Association of Property Tax Professionals, the American Property Tax Counsel and several bar associations.

Gilbert was the valedictorian of his graduating class at the high school in his hometown of Hebbronville, Texas. Gilbert received his B.A. from Rice University in 1994. At Rice, Gilbert double majored in English and Managerial Studies and was on the President's Honor Roll. Gilbert received a J.D. from the University of Texas School of Law in 1997 where he was an active member of the Student Recruitment Committee, Hispanic Law Student's Association and Research Editor for the Hispanic Law Journal. Gilbert donates his time and resources to local civic organizations which focus on at-risk youth and is an avid supporter of the arts community in Austin.

Gilbert Davila, CMI, Esq

Sharon DiPaolo, Esq.

Sharon F. DiPaolo is a partner in the property tax law firm of Siegel Jennings, Co., L.P.A. where she is a member of the Executive Board and manages the firm's Pennsylvania practice. Ms. DiPaolo concentrates her law practice exclusively in property tax law representing commercial taxpayers. 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 on the planning committee for Siegel Jennings' Annual Appraisal Summit where Siegel Jennings attorneys gather with some of the best appraisers in the county to discuss a specific appraisal topic; past summits have included hospitality valuation and senior housing valuation.

Siegel Jennings is a Founding Member of the American Property Tax Counsel which, in 2019, celebrated its 25th anniversary. Ms. DiPaolo was the Conference Chair for the American Property Tax Counsel's. 25th Annual Client National Conference. She is the Western Pennsylvania representative the American Property Tax Counsel remains an active member of the organization's national conference committee, which she chaired for six years.


Bill Elias is the Oklahoma member of the American Property Tax Counsel. His practice focuses primarily upon property tax, oil and gas law, commercial litigation and state and local taxation. Bill has been recognized in Oklahoma Magazine's Superlawyer Section as one of the top Oklahoma lawyers. He holds an AV rating from Martindale Hubbell and has more than thirty years of experience in a wide variety of property tax litigation and appeal matters. Bill received a B.A. in Political Science from Oklahoma State University and a J.D. from the University of Tulsa. He is a frequent guest speaker and lecturer on oil and gas and property tax related matters.

William Elias, Esq

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Nov
21

Achieving Fair Taxation Of Big Box Retrofits

Issues to address to ensure a big box retrofit doesn't sustain an excessive tax assessment.

As more and more large retail spaces return to the market for sale or lease, creative investors are looking for ways to breathe new life into the big box. These retrofits saddle local tax appraisal districts with the difficult task of valuing a big box in a new incarnation.

When the appeal season approaches, it is important to look for key changes to the appraisal district's valuation model for the existing structure to ensure that the property is being assessed fairly after the retrofit. Whether the jurisdiction employs the income or cost approach to value commercial property, having the correct classification, effective age, effective rent and correct net rentable area are among the most important factors for an accurate assessment. In addition, the assessor will need to account for functional obsolescence and the possible existence of surplus land.

Valuation models previously used by taxing authorities likely factored in a single-tenant building. If the new use converts the building to a multitenant structure, the assessor should factor in the conversion. Perhaps the appraisal district previously classified the use as Freestanding Retail or Big Box Retail, and now it is a Call Center, Church, or Gym. Ensuring that the classification of the property is correct is the first step in getting a more accurate assessed value for property tax purposes.

Next, it will be important to note the effective age the appraisal district is using to value the newly retrofitted box. Appraisal districts often use the effective age of a building, based on its utility and physical wear and tear, rather than the actual number of years since the construction date. Was there a significant adjustment made to the effective age based on a remodel or tenant improvements? Has the retrofit enhanced the utility of the structure?

There is no doubt that transforming vacant big boxes requires great expense. Big boxes are generally considered to be mediocre-quality buildings. Many times, big boxes are cookie-cutter structures and not necessarily constructed to last more than 30 years without a major overhaul. Typical big boxes have a linear alignment of lighting and structural bays, and if the box is subdivided for multitenant use, there is a good chance that additional electrical work, plumbing and HVAC may be required.

Converting a box from single to multitenant use may also require additional exterior entryways. If the property is being valued using the income approach, keeping track of the expense required to convert the box into another use will be important so that an effective rental rate can be later calculated. On an income approach, if an appraisal district appraiser does not account for the cost of the retrofit in some way, the assessed value may be overstated.

Another challenge with big box retrofits is the depth of bays. Oftentimes, even after what can be considered a successful adaptive reuse, portions of the building may never be used again by the new user. The appraisal district should factor decommissioned square footage into the valuation model and make a distinction between gross building area and net rentable area. If there is square footage that is unusable or used for storage or warehouse purposes, it may warrant a different rental rate than the main portion of the converted space.

The fact that big boxes are generally build-to-suit properties should also be considered. Though costly, it may be easy to remove the previous user's brand from the interior of the building, but what about the exterior? Big box retailers purposefully built their boxes in a manner that would allow passersby to identify them instantly. The new owner is then left with the difficult task of getting rid of the very recognizable trade dress that the original owner required. Regardless of the new use, there is likely functional obsolescence created by the original user's specific branding and needs. Functional obsolescence can be due to size, ceiling height, ornamental fronts or various other factors.

An additional factor that may be relevant to the valuation of the retrofit for property tax purposes is the land. Big boxes typically require large parking lots and infrastructure that other users may not need. Analysis can determine whether the new user is left with surplus land. If the extra land cannot be sold separately and lacks a separate highest-and-best use, the appraisal district may be able to adjust the land value.

Ensuring that a big box is accurately valued for property tax purposes in the first year after a retrofit will have a long-term impact on the asset's tax liability. It is, therefore, worthwhile to invest the time it takes to review the assessment and the methodology used to arrive at the assessed value. 

Darlene Sullivan is a partner in Austin, Texas, law firm 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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  • Issues to address to ensure a big box retrofit doesn’t sustain an excessive tax assessment.
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Nov
19

Beware of New Property Tax Legislation

Many states are attempting to change established law, causing commercial property taxes to skyrocket.

No one wants to be blindsided with additional tax liability. This is why many businesses belong to industry groups that closely monitor liability for income taxes. Unfortunately, these same companies rarely stay on top of legislation that may have a significant impact on their property tax liability.

It is often too late when a taxpayer learns that their tax liability for real estate has increased under a new statute or assessment practice. Property owners that fail to keep up with proposed rule changes are at risk of incurring unexpectedly high tax bills at a time when they may be least-prepared to pay them.

Property owners may take for granted that key precepts assessors use in determining taxable value are so widely held and accepted as to be immutable. Almost every state's tax law holds that a property owner pays property taxes on the asset's "real market value.," Real market value is the price a willing buyer and willing seller would agree upon in an open-market transaction

In a retail real estate sector that is still reeling from widespread store closures and mounting competition from e-commerce, the lease rate for a lease in place may not reflect market rent. Thus, it is the "fee simple" estate that is being valued for tax purposes: What rent does the market data support as of the tax assessment's date?

Valuing the fee simple estate at market rent is a significant taxpayer protection in the changing landscape of today's marketplace for retail spaces. Sales of brick-and-mortar stores have plummeted due to changing consumer spending habits, a decline in international tourism spending and a lack of investor demand for many big boxes. It is no secret that internet sales have battered the department store sector. The resulting closures of large department stores have further dampened investors' appetite for large-box spaces, and these effects have trickled down to impair the value of smaller retail spaces.

Assessors question assumptions

In the past several years, some assessing authorities have pushed to change the definition of real market value to disregard the perspective of a willing buyer in an open market, and to instead create a false value as if the property were fully leased at market rates as of the assessment date.

In Oregon, recent rules are being proposed (and the theory tested in court) with the assumption that a property can always receive a stabilized rent in the market place. Thus, an assessor would use a property's expected occupancy and market rent in using the income approach to determine the fee simple interest. The costs to get to a stabilized rent, according to the new rules, cannot be applied to discount the stabilized rent. Thus, a vacated department store, or a brand new vacant building, will be assessed as if it is receiving full market rent, without reflecting any of the costs associated to get there.

For example, the proposed rule states that it is implied in the cost approach that valuation reflect not only construction and materials but also all indirect costs, such as the cost of carrying the investment in the property after construction is complete but before stabilization is achieved, as well as all marketing costs, sales commission and any applicable holding costs to achieve a stabilized occupancy in a normal market. Thus, even though the taxpayer has not yet incurred all these expenses, they can be added to the taxable value and the taxpayer may not subtract them in arriving at market value for property tax assessment purposes.

The result is that not only will a new vacant space be valued as if it is fully rented, but a second-generation retail space may be assessed under the cost approach as if it is fully leased. The reality of lease-up costs, including holding costs and tenant improvement costs, are simply to be ignored.

The International Association of Assessing Officers (IAAO) recently published a paper titled Commercial Big-Box Retail: A Guide to Market-Based Valuation. This paper appeared to ignore generally accepted appraisal methods for valuing these types of properties and to advocate for the changes in accepted definitions of property rights that taxing entities in many states are now seeking. Importantly, when American Property Tax Counsel reviewed the IAAO's paper, its lawyers found that many of the propositions cited in the paper were based on cases or laws that had been overturned and were clearly inconsistent with established case law and law.

These attempts by the assessing authorities to change the definition of real market valuation for property taxation purposes should worry commercial property owners, and particularly owners of retail properties, given the continuing potential for prolonged vacancy. For these properties to remain viable, the owners need to mitigate all costs, including property taxes.

A reduction in property taxes can benefit a property owner significantly. Oregon has the benefit of a five-year statutory hold, with some exceptions, on a successful appeal to property taxes. Thus, a $100,000 reduction in property taxes through the appeal process could result in a $500,000 savings.

With the assessing authorities' proposed changes to the tax rules, however, market realities and real market value are compromised.

Cynthia M. Fraser is an attorney specializing in property tax and condemnation litigation at Foster Garvey, the Oregon and Washington member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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Nov
18

How to Reduce Multifamily Property Taxes

Take advantage of the following opportunities for tax savings in the booming multifamily market.

With healthy multifamily market fundamentals and increasing demand from investors, apartment property values are on the rise. For owners concerned about property tax liability, however, there are still opportunities to mitigate assessments and ensure multifamily assets are taxed fairly.

Here are key considerations for common scenarios.

Property Acquisition

Whether an investor is buying a single property or a portfolio, it is wise to understand how the transaction will affect property taxes going forward. In some taxing districts, the assessors will move the value to 80%-90% of the sale price in the assessment year following an acquisition. If the sale is an arm's length, open market transaction with no unusual investment drivers, there remain few arguments against increasing taxable value to equal the sale price, less personal property.

When running income and expense projections on a potential acquisition, look to how the sale will affect taxable value. To pencil in reasonable budgets, consult with local experts who can zero in on a likely tax rate. Those who know the market can forecast local rate increases with some accuracy.

When there are non-open-market factors in a sale – such as unusual financing, tax shelter exchange considerations or a portfolio value allocation based on forecasts – there is more room to make arguments for a value based on an income approach. In discussing this approach with assessors, the greatest source of disagreement is the capitalization or cap rate used to extrapolate value from the income stream.

For apartments in the Midwest, initial cap rates can range from 4.5% to 6.5%, and assessors will often choose rates from the lower end of the range or use an average. Taxpayers who can demonstrate or work with the assessor to derive the correct cap by using appropriate comparable sales will enjoy a more reasonable value discussion.

Opportunity Zones

An opportunity zone stimulates investment within its perimeter by enabling investors to reap tax benefits on deferred capital gains and spur growth. This vehicle has been of special interest to developers of student and low-income housing. To get the full benefit of the new program, investors must decide to invest in a qualified opportunity fund (QOF) by the end of 2019.

Investors in QOFs which were formed to meet a June deadline must invest these funds into qualified property by year end. Investors that miss the deadline will be subject to IRS penalties. After 10 years of investment, 100% of the gain will be free of capital gains. This can enhance returns considerably.

The race to the year-end finish line could lead investors to initiate apartment deals that fail to meet market development yields. When looking at the values for property tax purposes, the costs of such projects driven by tax advantages can be discounted in a valuation analysis.

Procedural Concerns

Property owners' increased sophistication in challenging assessed values has led many taxing jurisdictions to use procedural arguments to shut down a petitioner's case, citing failure to comply with minute details of technical rules such as income disclosure requirements.

• In some jurisdictions, petitioners must disclose certain information for an appeal to go forward. For example, in Minnesota a petitioner that contests the assessed value of income-producing property must provide a slew of information to the county assessor by Aug. 1 of the taxes-payable year. These include: year-end financial statements for both the year of the assessment date and the prior year;
• a rent roll on or near the assessment date listing tenant names, lease start and end dates, base rent, square footage leased and vacant space;
• identification of all lease agreements not disclosed on the above rent roll, listing the tenant name, lease start and end dates, base rent and square footage leased;
• net rentable square footage of the building or buildings; and
• anticipated income and expenses in the form of a proposed budget for the year subsequent to the year of the assessment date.

The duty to disclose is strictly enforced, even if there is no prejudice to the taxing authority. In the case of an appeal for an apartment project, it would be prudent for a petitioner to clarify with the assessor in advance what data is required. Particularly if there is a commercial component to the project, where license agreements can be considered leases, a prior agreement with the assessor on what is required will remove the risk of a case ending on procedural grounds.

Seniors Housing

Many seniors housing complexes include independent living sections; assisted living areas, usually with smaller unit sizes and limited or no kitchen facilities; and memory care areas with even more limited furnishings, locked access and egress and full-time staffing by case professionals.

No matter what type of living area is involved, the monthly rental payment covers services provided to residents over and above rental of an apartment unit. These services are most intensive and comprehensive for residents in memory care, who require the most direct staff attention and receive all meals and services through the facility.

Even assisted living and independent living residents enjoy significant non-realty services, including wellness classes and other programming, spiritual services, medication dispensing, field trips for shopping or other events, onsite dining facilities and operation, and access to full-time staffing at the facility. These services are part of what residents pay, and it's important when trying to determine the real estate value for tax purposes that the service income component is excluded from the valuation analysis.

Although the market is robust for both multifamily investment sales and construction, taxpayers who apply a data-based approach with knowledge of local market conditions, procedures and opportunities can achieve a reasonable property tax bill.

Margaret A. Ford is a partner at Smith, Gendler, Shiell, Sheff, Ford & Maher P.A., the Minnesota member of American Property Tax Counsel, the national affiliation of property tax attorneys​.

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Nov
11

How Value Transfers Reduce Tax Liability

Investment value is not market value for property tax purposes because the excess value transfers elsewhere, according to attorney Benjamin Blair. But where does the value go?

When a new building enters the market with a headline-grabbing development budget, the local tax assessor is often happy to use the value stated on the construction permit as a blueprint for a high initial tax burden. After all, would a property owner fight an assessment equal to construction cost? The answer is yes, and here is why the taxpayer should file a protest.

Consider this all-too-common scenario: A new building's publicized development cost is, say, $50 million. The first year after the completion of construction, the assessor assigns the property a market value of $50 million. The owner, now a taxpayer, protests the assessment, relying on an appraisal that shows the property's value to be only $40 million.

The initial reaction of virtually every assessor that faces this common pattern is skepticism—skepticism sometimes shared by the judges deciding the tax appeal. How can it be that the property "lost" $10 million in value so quickly? Why would the owner have even constructed the building if it was an economic loser?

An owner who can explain this value loss—or, more accurately, this value transfer—will be better prepared to ensure a property's tax assessments are based solely on the value of the real estate in question. And, when appropriate, that owner will be prepared to challenge inaccurate assessments.

COST IS NOT MARKET VALUE

Anyone who has ever purchased a new car or made-to-order clothing understands that cost may not equal value. Regardless of the price the buyer paid, those items are worth less to the market after the initial sale. The same factors that immediately depreciate a new car or custom suit affect some types of real estate.

A property can have an off-the-rack market value and then minutes later have a resale value that is different. This does not mean that the owner overpaid for the asset. Rather, the owner paid what the asset was worth to that owner, but a second buyer will not necessarily pay the same price at a later sale.

Real estate buyers will not pay for branding elements, design elements or items of personal preference. When a building is built to the specifications of a specific user, the design, layout and components make it unlikely that cost will equal market value. These buildings exist because they are worth the cost to the first user, not because they inherently have an increased market value.

Investment value is not market value for property tax purposes because the excess value transfers elsewhere. The key question is, where does the value go?

WHERE THE VALUE GOES

Circumstances vary and different properties will transfer value in different ways. Here are some common ways it can occur.

The examples of a custom suit or built-to-suit building illustrate how value can transfer to a person or organization, but value can also transfer to another property. For example, a golf course surrounded by homes is unlikely to have a market value equal to its development cost. The golf course's value is not in the golf course alone; much of its value is reflected in the increased sales prices garnered for the surrounding homes. Likewise, amenities in a subdivision or common spaces in a condominium tower have little value on their own because their value is transferred to the adjacent properties.

Value can also transfer within a property. For example, a parking garage or conference center in a suburban office development is unlikely to generate sufficient rent to make those assets independently feasible, but the increase in rents achievable to the adjoining tenant spaces can make those amenities valuable to the whole. Were the parking garage to sell in the open market, it would almost certainly garner a sale price below its development cost.

Finally, value can transfer to the community. A highway interchange will never have a market value equal to its multimillion-dollar price tag, and public transit systems and arenas would never be justified based on ticket sales alone. Communities deem these projects worthwhile, however. The value of such properties transfers to the community.

Similarly, in many markets the cost of "green" building features, such as a green roof or permeable parking surfaces, is rarely recovered upon the property's sale. Developers still incur those development expenses, even when they will not contribute to the property's profitability. The value of those features is transferred to the community, which receives air purification and water retention benefits.

FIGHT FOR TRANSFERRED VALUE

Understanding the concept of transferred value is important, both because it explains the motivations of those who build and own properties that are worth less than cost to the open market, and because it can help to avoid overvaluing the property. Property can be overvalued in many situations—for example, for insurance or financing purposes—but the pain of overvaluation is most acute in property taxation, since overvaluation generates a higher tax bill and corresponding lower profitability for the life of the asset.

Understanding transferred value can also assist enterprising owners in generating additional revenue streams. If part of the property's value transfers to another person, property or the community at large, then the owner may be able to build a case for monetizing the value transferred to others.

In times of stagnant growth and personnel cutbacks, assessors are eager to capitalize on published construction costs. But by explaining how cost relates to market value, and being able to show where the value went, 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 the international law firm Faegre Baker Daniels LLP, the Indiana and Iowa member of American Property Tax Counsel, the national affiliation of property tax attorneys​.

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  • Investment value is not market value for property tax purposes because the excess value transfers elsewhere, according to attorney Benjamin Blair. But where does the value go?
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Nov
06

Retail Property Taxes Will Rise

​Unless assessors can recognize the challenges facing shopping centers, taxes will increase dramatically.

As retailers rise and fall in the age of Amazon, property taxes remain one of the retailer's largest operating expenses. That makes it critical to monitor assessments of retail properties and be ready to contest unfairly high taxable valuations.

Assessors – and property owners attempting to educate those assessors – must understand how the changes taking place in the retail sector affect property value. Assessors must adjust their models to reflect new market realities, and property owners or their representatives must be able to explain why previously held valuation assumptions could no longer be valid.

No going back

Changing consumer tastes have always required retailers to adapt in order to survive, but traditional retailers are facing a different kind of challenge today. The increasing role of e-commerce in overall sales reflects a fundamental change in consumer behavior that will not reverse course with the whims of fashion. The ability to shop online is resetting consumer expectations, and retailers are struggling to adapt and stay competitive.

This struggle is evident in store closings that in 2019 are outpacing closings from the prior year. In addition to the threat of e-commerce, some economists believe a recession is coming in 2020. Falling retail sales, rising assessed property values and changing consumer demographics could combine to accelerate store closings in the years to come.

With millennials and Generation Z mixing into the workforce and increasing the demand for online shopping, retailers and property owners are facing new challenges in catering to consumer expectations unique to these generations. Strategies range from adjusting store buildouts to completely changing the store footprint to fulfill online orders as retailers do what they can to compete with online sellers. In addition to these changes, many property owners are stepping away from traditional big box retailers and are instead looking to restaurants and entertainment venues to anchor shopping centers and drive customer traffic.

Restaurants and experiential retail

Across the nation, retail property owners are working to fill vacant spaces with tenants that will offer millennials and Generation Z an exciting and unique shopping experience. In doing so, these owners are attempting to "e-commerce proof" their centers by shifting from big box anchors to an experiential model. Some retailers catering to these two tech-savvy generations are using tenant improvement allowances to build out highly specialized spaces, while others focus on social media. Select retailers even offer discounts to shoppers who share photos of their store or products on platforms such as Instagram.

Retail developments that once contained 40% to 50% restaurants are now filling as much as 70% of their spaces with restaurant operators in an attempt to drive traffic. A rising threat to this strategy are food delivery services such as Grubhub, Uber Eats, and Door Dash, which are collaborating with major restaurants that have previously had no food delivery. Pizza chains and other food-delivery-based retailers losing market share must now re-think their strategy and even partner with these third parties to expand their customer base.

Home food delivery partnerships continue to evolve as well, with restaurant operators looking into cloud kitchen concepts. These allow restaurant operators to operate from industrial space, avoiding retail rents and the need to pay back above-market tenant improvement allowances. Once the cloud kitchen space is running, the operator can rely on third-party delivery services to get the product to the consumer. This is a growing risk to shopping centers that rely on a restaurant tenant base to draw customers.

Clicks and bricks

Physical retailers attempting to compete with Amazon's fast delivery have introduced buy online pick-up in store (BOPIS). Many sellers have found BOPIS difficult to implement due to expensive software that tracks live inventory and requires staff training. Essentially converting a retail-only property into a retail and warehouse hybrid, the method may require modifications to the real estate. This reclassification should be discussed with assessors, because retail space typically commands higher rental rates than warehouse space.

Grocery anchors have also begun to adopt the BOPIS model, and some are finding the logistics a challenge given their existing footprint. As a result, some stores are expanding into smaller, adjacent in-line suites to offer this service. Where this happens, a property owner that was once receiving all in-line rents may now collect reduced rents for these suites, given they are now part of the anchor space. In this scenario, it is important for the valuation to weigh the potential grocer expansion into these in-line suites and adjust as needed.

Assessors must understand the changes rapidly taking place for this product type and their implications for valuation metrics. Given millennials' and Gen Z's familiarly with the internet, e-commerce as a percentage of retail sales is expected to continue to rise.

As property owners increase tenant improvement allowances so retailers can keep up with changing consumer tastes, appraisal districts need to consider how above-market tenant improvement allowances affect the lease rate the tenant is responsible for paying. Assessors must analyze the rental rate to factor in these build out costs and, if needed, adjust rent over the least term to reflect the portion that is paying for more costly buildouts. Only then can the assessor conduct a proper rental analysis for the subject property.

Nuanced classification

In addition to thoroughly analyzing rental rates and vacancy risk, assessors must also consider retail classification. With restaurants stepping into the anchor role in many shopping centers, increased traction by cloud kitchens may pose a threat to these tenants' long-term strength. Struggling retailers attempting to implement BOPIS compound this uncertainty, particularly with a potential recession on the horizon. Assessors must consider these factors before selecting appropriate rental rates, capitalization rates and vacancy and collection loss inputs to calculate taxable value.
Kirk Garza is a Director and licensed Texas Property Tax Consultant with the Texas law firm 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. He was assisted by Sam Auvermann and Krishtian Bazan, summer interns with the firm.

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Sep
17

Environmental Contamination Reduces Market Value

Protest any tax assessment that doesn't reflect the cost to remediate any existing environmental contamination.

Owners of properties with environmental contamination already carry the financial burden of removal or remediation costs, whether they cure the problem themselves or sell to a buyer who is sure to deduct anticipated remediation expenses from the sale price. Fortunately, New York law allows those property owners to reduce their property tax burden to reflect their asset's compromised value.

Tax types

Most local governments in the United States impose a property tax on real estate as a primary source of revenue, levied and calculated by either ad valorem or specific means. Latin for "according to value," ad valorem taxes are imposed proportionately based upon the market value of the property. Thus, the higher the market value, the higher the real estate tax.

Specific taxes, on the other hand, are fixed sums without regard to underlying real estate value. School, county and town governments nearly always compute real property taxes using the ad valorem method, whereas lighting, garbage or sewer districts typically apply specific taxes. Because school and county/town taxes account for the overwhelming majority of a property tax bill, property owners frequently use assessment litigation concerning the market value of the subject property to reduce assessments and, as a result, lower the real property tax burden.

The cardinal principle of property valuation for tax purposes is that assessments cannot exceed full market value. Many states including New York codify this in their constitutions. The concept of full value is regularly equated with market value, which is the highest price a willing buyer would pay and a willing seller accept, both being fully informed.

Disagreements often arise if the subject property is afflicted with environmental contamination. The treatment of environmental contamination and remediation costs is of particular concern to both owners and municipalities. Owners seeking to depress taxable values and thereby reduce their tax burden claim these expenses dollar-for-dollar off the market value under the principle of substitution. In other words, a proposed buyer would not pay more than $8,000 for a parcel worth $10,000 which needs $2,000 of remediation.

On the other hand, municipalities would prefer the adoption of a rule (either via legislation or court decision) barring any assessment reduction for environmental contamination. Otherwise, they claim, polluters would succeed in shifting the cost of environmental cleanup to the innocent taxpaying public, in contravention of the public policy of imposing remediation costs on polluting property owners and their successors in title.

Pivotal case

Fortunately for property owners, a seminal 1996 court decision guides the treatment of environmental costs to cure taxable value in New York. In Commerce Holding Corp. vs. Town of Babylon, the petitioner purchased 2.7 acres of land in the Town of Babylon, Suffolk County. A former tenant of the property had performed metal plating on the premises and discharged wastewater containing multiple heavy metals into on-site leaching pools, ultimately resulting in the severe contamination of the parcel. The owner filed tax appeals and argued the value of the property should be reduced by the considerable costs needed to clean up the parcel.

As expected, the town's position relied on a public policy approach and urged the court to reject any argument for a reduced assessment. Ultimately, the case traveled to New York's highest court, which summarily rejected the public policy arguments that polluters should not be rewarded with lower assessments.

Instead, the court applied the constitutional and statutory requirements of full market value assessments, holding that the full value requirement is a "constitutional" mandate which cannot be swept aside in favor of public policy. Thus, property must be valued as clean, with the value reduced by the costs to cure the remediation per year. Challenges seeking the limitation or outright reversal of the Commerce Holding case have been continually rejected.

A recent clarification

The New York State Court of Appeals did not address remediation again in a property tax litigation context for almost 20 years after Commerce Holding. In a 2013 case, Roth vs. City of Syracuse, a property owner sought to have the assessment on certain rented properties reduced because of the presence of lead-based paint.

The court declined to expand the application of Commerce Holding in this case for two significant reasons. First, the owner continued to rent the buildings and collect income. Second, the owner had not taken any steps to remove or remediate the lead paint and restore the properties. Thus, to successfully claim an assessment reduction, a property owner should not stand idle but take definitive actions to remediate the property. 

Jason M. Penighetti is an attorney at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLC, the New York State member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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  • Protest any tax assessment that doesn’t reflect the cost to remediate any existing environmental contamination.
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Sep
05

Big Property Tax Savings Are Available

Millions of property tax dollars can be saved by understanding seven issues before buying real estate.

We asked property tax lawyers around the country for tax advice they wish their clients would request before an acquisition to avoid excessive taxation. Their responses, like tax laws, vary by state:

Ask Early. Transaction timing can help avoid having an assessment increased to equal the sale price, says Gilbert Davila, a Principal with property tax law firm Popp Hutcheson in Austin, Texas. Texas reassesses every Jan. 1, so a transfer in the third or fourth quarter is likely to receive an assessment increase the following January. Closing the transaction in the first or second quarter allows time to gather facts for an appeal.

In Chicago, real estate taxes following a purchase depend on location and where the county is in its three-year revaluation cycle, says Mary Anne "Molly" Phelan, a partner with Siegel Jennings Co. LPA. Local counsel can advise whether to expect an immediate increase or a couple years of stable property taxes.

Structure the Transaction. Purchasing an entity that owns real estate or combining the purchase of assets and real estate may offer advantages. For example, Pennsylvania authorities calculate transfer tax using current assessed value when a buyer acquires 100% of interests in a property's holding company. With an outright purchase of real estate, however, transfer tax applies to the purchase price.

If a property is under-assessed, purchasing the holding company can reduce the tax amount and avoid the need to appeal an assessment based on a purchase price well above the current assessed value. The buyer saves on transfer taxes upfront and will likely save on future real estate taxes with an unchanged assessment.

In cities like Pittsburgh, where transfer tax is 4.5% and soon to be 5%, the savings can be significant. Some savvy buyers have structured their purchases of Pittsburgh properties using the "89/11" provisions of the tax statute. This precluded transfer tax for buyers who acquired 89% or less of the owning entity, then purchased the remaining 11% after a three-year hold. The strategy drew a public outcry following some high-profile transfers, prompting a recent legal change that made this approach more difficult.

Chicago buyers of a business that owns real estate may avoid a property tax increase altogether, Phelan observes. A local attorney is critical in such cases to advise on not only the law, but also on nuances of its application and the local political climate.

Allocate Properly. Property sale prices often include going-concern value, business value and personal property. Phelan cautions buyers to carefully segregate the real from the non-real components exempt from property tax. Then, "document, document, document," she says. "Having documentation in the file to back up the buyer's allocation of the various components can make all the difference if an appeal is filed down the road."

Similarly, Robb Udell, an attorney with Rennert Vogel Mandler & Rodriguez PA in Miami, advises that Florida law imposes a documentary stamp tax on consideration paid for real estate. There is no documentary stamp tax due for personal property or intangible value, however, so ensure the recorded price excludes those values. Hotel transactions include significant tangible and intangible personal property value.

Details Matter. Details may strengthen arguments opposing an assessor's attempt to increase the assessment to equal the sale price. For example, 1031 exchanges, portfolio transactions or purchases by a REIT may not meet a jurisdiction's criteria for an arms-length, market value sale.

What Information Will Be Public? Ask a local attorney what information will become public in a sale. Texas buyers are not required to divulge their acquisition price on the deed, Davila says, so assessors go to great lengths to discover Texas sale prices. They may search for loan documentation or use subscription services documenting recent sales, for example, to estimate the price.

Budget Correctly. Buyers who fail to understand the law when budgeting for real estate taxes can overpay on acquisitions by millions of dollars. This is especially true in states like Pennsylvania and Ohio, where taxing entities can appeal to increase a property's assessment.

School districts often appeal assessments to chase sale prices, then file "fishing expedition" discovery requests of the buyer's financial information to support the district's case. Out-of-state buyers have overpaid for property due to their budgeting on historical real estate taxes not accounting for the potential government-initiated increase appeal. This common practice in Pennsylvania has drawn increasing challenges from property owners outraged at being unfairly singled out for an increase.

In Georgia, it is the assessors who increase assessments on properties using recent sale prices. Lisa Stuckey, partner in the Atlanta law firm of Ragsdale Beals Seigler Patterson & Gray LLP, advises that – due to a recent change in Georgia law – assessors can value recently traded properties as high as the purchase price, but not higher. Since the statutory change, many assessors have adopted a policy of increasing assessments to full sale prices in the year following the sale.

Understand Assessment Caps. In Florida, there are two values related to property taxes: market value and assessed value. County property appraisers determine market value annually and cap increases in the assessed value of non-homestead properties at 10% from one year to the next. School districts tax uncapped market value, however, so that portion of a property owner's tax bill is sensitive to increases in market value.

Udell cautions that capped assessments reset to market value the tax year following a change of property ownership or control, so a purchase price consistent with the prior year's market value can still have a significant tax impact if the previous assessment was capped at a low value. Capped assessments also reset to market value the tax year following an improvement that increases market value by 25% or more, and other factors also can affect the cap's applicability. Thus, proper budgeting for tax consequences requires a clear understanding of Florida law.

Asking the right questions can save enormous tax dollars. 

Sharon DiPaolo 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. Tammy L. Ribar is a director of Pittsburgh law firm Houston Harbaugh PC and Chair of its Real Estate Department.

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  • Millions of property tax dollars can be saved by understanding seven issues before buying real estate.
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Jun
18

Use Restrictions Can Actually Lower A Tax Bill

Savvy commercial owners are employing use restrictions as a means to reduce taxable property values.

Most property managers and owners can easily speak about their property's most productive use, in addition to speculating on a list of potential uses. Not all of them, however, are as keenly aware of their property's specific use restrictions; even fewer realize how those limitations affect the property's value for tax assessment purposes. 

Government-Imposed Restrictions

Local zoning laws impose the most common use restrictions. Their impact on property uses and potential values is commonly understood. A property zoned for development as a retail power center, for example, will generally have a higher market value than a property that is limited to uses, such as auto repair or animal kenneling. Market values are often used to set tax assessment values, so a use restriction that increases or reduces market value will also increase or reduce a property's tax assessment value. 

Less common restrictions that can impair a property's value include covenants or agreements entered into with a municipality. Whether this pertains to the future development of a parking structure, to meet open-space standards, or to fire department ingress and egress lanes these covenants typically limit the owner's ability to fully develop the property and, thereby, reduce its market value. Historical designations by local government also generally reduce a property's market value. This is because they limit the owner's ability to configure the property to produce maximum rental income. 

Even fire suppression requirements reduced market value for one commercial property. This multi-building campus was constructed to suit a technology company, with all fire suppression controls located in a single building. When the technology firm moved out, regulations enforced by the local fire department prohibited the new owner from leasing or selling individual buildings because all but one of the structures lacked onsite control of the existing sprinkler system, those being in another building. 

Semi-private Restrictions 

The complexities of government imposed restrictions pale in comparison with semi-private restrictions that are often created during a property's development. Consider the covenants, conditions and restrictions (CC&Rs) on use imposed when property is subdivided for development. 

CC&Rs are not typically classified as "government-imposed," as they are based on an agreement between the developer and property owners within a development. Yet, these covenants do limit how the property may be used. While CC&Rs often govern planned residential developments, they also regulate property usage in some industrial parks and retail centers. Because CC&Rs lack the uniformity of government-imposed zoning laws which, theoretically, would apply equally to competing commercial properties, the restrictions in CC&Rs usually impact property market values negatively by limiting potential uses. 

Another complex area involves easements between adjacent property owners or among multiple owners within a larger development. Like CC&Rs, easements limit property uses and can reduce market value.

Private Restrictions 

The most common private usage constraint is the deed restriction, which prevents the buyer of a property from using it for certain purposes. The treatment of deed restrictions and other limitations imposed by property owners varies by state. In some states like California, property tax assessors must ignore private use restrictions, while in other states, such restrictions are taken into consideration when assessing properties. 

Deed restrictions and other privately imposed usage limitations can significantly affect real estate values. A property restricted to residential use where neighboring properties are allowed retail or industrial uses will have a lower market value. However, if the local tax assessor is prohibited from considering such private restrictions, the property's assessed value may be much higher than the market would otherwise indicate. 

State, Local Laws Often Prevail 

Clearly, use restrictions — whether government-imposed or privately imposed — will usually impact a property's market value. From a property tax perspective, however, an assessor may or may not consider use restrictions in determining taxable value. 

Whether and how an assessor considers use restrictions in an assessment usually depends on state and local tax laws. In California, property tax regulations, court decisions and guidance documents issued by the State Board of Equalization assist property owners in understanding how use restrictions may or may not affect their property's taxable value. 

In some cases, the treatment of use restrictions is based on local tax assessment policies that are not set forth in any particular statute, regulation or court decision. Tax or legal advisers who interact regularly with local tax assessors can be invaluable resources in those jurisdictions. 

Use restrictions play a significant role in property tax assessments. Knowing a property's use restrictions and how those restrictions affect value is crucial to obtaining a fair property tax assessment. Armed with information about their particular use restrictions, savvy property managers and owners will find out how the local assessor uses those restrictions to determine taxable value. In most cases, that will involve collaborating with a professional experienced in handling local property taxes. 

Cris K. O'Neall is a shareholder with the law firm of Greenberg Traurig LLP in Irvine, California. The firm is the California member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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