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Apr
30

Fallacious Cap Rates Unfairly Increase Tax Burden

Commercial property owners must challenge burdensome and unfair property taxes, and more often than not that task requires challenging the assessor’s assumption of a market cap rate.

The process may begin as informal meetings with assessing authorities, followed by administrative appeals and ultimately, if needed, court proceedings. The parties to these dialogues all recognize that the preferred method to determine the value of commercial properties is the income approach, and will usually agree on the factual elements related to the value calculation.

The most critical element in the income approach is the cap rate, however, and that point is also the most likely source of disagreement.

Cap rates by nature are subject to opinion and manipulation, because cap rates reflect judgments of multiple factors. In defending their value opinion, assessors frequently cite a “market-derived cap rate.” While there is some validity to determining a cap rate from sales of similar properties in the same market, the method as widely used by assessors yields errant results.

Sometimes the assessor’s market-derived cap rate is supported by sales, but the assessor rarely provides an analysis of those sales, showing some performance history of the sold properties. The assessor simply matches market income against the sale price, magically determining a cap rate. The assessor then applies the rate thus determined to case after case, in a one-size-fits-all analysis. It’s all pretty impressive and takes on an air of finality, as if carried down from the mountain on stone tablets.

The fallacy is that a cap rate derived as described bears no relevance to the value of the commercial real estate under appeal.

The assessor, by law, is limited to valuing real property. But the sales used as the basis for the assessor’s market-derived cap rate are the sales of entire enterprises, and consequently indicate value for the entire enterprise. It fails to achieve the goal of finding a value indicator of the real property that houses the enterprise.

The cap rate derived from sales of going concerns is different from one derived from sales of the properties that the enterprises occupy.

Taxpayers must challenge the assessor’s market-derived cap rate to achieve equitable taxation. The flawed methodology is as inappropriate as using the sales comparison approach of going concerns to determine real property value.

The enterprise value cap rate is based on the return on the investment, in the form of property value appreciation and rental income, plus the return of the investment in the form of business revenue. In addition to tangible components, enterprise value entails tax-exempt intangibles such as advertising, a trained work force, market niches or dominance, furniture, fixtures, affiliation such as franchise rights, all of which must be separated from the real property component in a property tax assessment.

Real property value is just one component of enterprise value, so an assessor’s market-derived cap rate that fails to segregate non-real-estate components is useless in valuing the property.

Plan of attack

Prepare to challenge an assessment by analyzing the assessor’s data base used in the valuation. What sold, and at what sale price? Investors buy and sell commercial properties as going concerns, which may generate returns that are more or less than the return from the property alone.

Consider the design and function of the properties used in the assessor’s data base as compared to the subject property. For instance, an assessor in the Midwest recently valued a large corporate headquarters building using a market-derived cap rate. Its data base consisted of regional office building sales, including gross income at the time of sale, sales price, size and location. It used market rents to determine property income.

The assessors study used sales of fully occupied, multitenant buildings, then applied that information to a single-tenant structure which had been designed as a national corporate headquarters and was roughly 33 percent occupied. Typical of such studies, the data was inapplicable to the single-tenant, largely vacant subject building.

To say that the going concern cap rate for hotels is X, or that the rate for golf courses is Y, fails to shed light on the cap rate for the real property component of a property.

Market-derived cap rate studies invariably end up being used as indicators—at best—of the value of going concerns, of which one component may be real property. They may look impressive, even somewhat persuasive, but they must be carefully reviewed to determine just what they represent, otherwise the taxpayer may be saddled with a grossly excessive property tax assessment.

Wallach90Jerome Wallach is the senior partner in The Wallach Law Firm based in St. Louis, Missouri. The firm is the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. Jerry Wallach can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
30

FIGHTING BACK - Big-Box Owners Contest User-Based Tax Assessments

The big-box concept changed the face of retail in the 1960s. It also skewed the way that assessors value retail property for tax purposes. To this day, taxpayers across the United States have been fighting back—and in Wisconsin, Kansas and Michigan, they are winning.

The problems arose out of financing arrangements such as prearranged sale-leasebacks or build-to-suit transactions to construct or develop a big box. Companies used these methods to keep cash available for core business purposes, and repaid the sale proceeds as rent.

These arrangements created financing rents that assessors mistakenly adopted as market rents. Further, once the above-market lease was in place, owners typically sold the lease and property to an investor at a sales price reflecting the value of the longterm, above-market lease in place to a high-credit tenant. The sales never reflected the fair market value of bricks and sticks alone, because the transaction transferred more than real estate.

Assessors then relied upon these sales without adjustment to calculate fee-simple value. Finally, assessors used the above-market rents and leased-fee sales to value owner-occupied retail stores, spreading the problem to all retail.

Guiding Principles

The concept of valuing property at its fair market value of the fee simple vanished in many locations as governmental assessors adopted this leased-fee concept, occasioning substantial valuation increases for property tax purposes. The user of the property and their contract rent trumped longstanding appraisal concepts of use and market rent. The trend eroded the requirement for a uniform and equal rate of assessment and taxation at fair market value. The same land and building could now have vastly different real property values, depending on the tenant.

For instance, a building leased to Walmart would have a higher value than if the same were leased to a local department store. How was it possible that the value of a building depended on the name of the tenant? Assessors could not distinguish between sales of properties with an income stream related to the property and sales of properties with an income stream related to the business value of the tenant.

Taxpayers successfully fought back in Wisconsin, Kansas and Michigan.

In 2008, the Wisconsin Supreme Court agreed with Walgreens that the assessor had not valued its properties in fee simple. The court focused on the issue of an above-market lease and the impact on valuation, and concluded that a “lease never increases the market value of the real property rights to the fee simple estate.”

The ruling directed assessors to use market rents, not the contract or financing rents. The court was not persuaded to move away from fee-simple valuation to a business valuation, as argued by the assessor. The assessor’s methodology could cause “extreme disparities and variations in assessments,” something the court was not willing to tolerate.

The Kansas Court of Appeals case followed in 2012, prosecuted by Best Buy, the single tenant in the building. The decision made three things clear for commercial property owners. First, Kansas is a fee-simple state. The court rejected the county appraiser’s argument for a leased-fee value. Second, build-to-suit rates are not market rents and cannot be used unless after review of the lease it can be adjusted to market rental information. Finally, market rents are those rents that a property could expect to pay in an open and competitive market. Market rent is not whatever financing arrangements a tenant can procure based on their costs and credit ratings.

Most recently, the Michigan Supreme Court addressed how these financing arrangements are impacting valuations of owner-occupied big-box retail. In 2014, the court ruled on cases brought by Lowe’s Home Improvement and Home Depot, both owner-occupants.

The court dismissed the township’s argument to consider the user of the property, rather than the use of the property. The county method would mistakenly arrive at a value in use, rather than a market value, the court found.

The court concurred with the taxpayers that the sales comparison approach to value was the most appropriate method to value owner-occupied properties, noting the approach must be developed using market sales of fee-simple interests. Leased fee sales may only be used if adjusted to reflect fee simple. The court was unimpressed by the township appraiser’s conclusion that no adjustments were necessary, with the court finding his report to be shockingly deceptive on this point.

Whether it was failing to understand basic appraisal theory or the desire to inflate values, assessors plugged bad information into market-based valuation models, and it has taken years to begin unwinding the damage and restoring basic appraisal concepts of fee simple, uniformity and equality. Taxpayers are taking the lead from Wisconsin, Kansas and Michigan, and have cases pending in many, if not all, jurisdictions.

TerrillPhoto90Linda Terrill is a partner in the Leawood, Kansas. law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
01

LA's Seismic-Retrofitting Plan May Affect Property Taxes

Mayor Garcetti’s “Resilience by Design” plan may expose building owners to property tax assessments for new construction.

Los Angeles Mayor Eric Garcetti recently unveiled his plan to require owners of older buildings to seismically retrofit their properties.  The Mayoral Seismic Safety Task Force published retrofitting requirements on Dec. 8 as part of a report called “Resilience by Design.”

The question for taxpayers with regards to this report is whether building improvements mandated by the plan may trigger property reassessments that are required on new construction.  Before speculating on how the mayor’s plan will impact their properties, owners should take a close look at the relevant new and existing rules.  The question for taxpayers with regards to this report is whether building improvements mandated by the plan may trigger property reassessments that are required on new construction.  Before speculating on how the mayor’s plan will impact their properties, owners should take a close look at the relevant new and existing rules.

The Seismic-Retrofitting Plan

Mayor Garcetti’s plan targets two types of properties for earthquake upgrades: soft, first-story buildings and reinforced concrete buildings.  The first category consists of wood-frame buildings where the first floor has large openings.  These may include tuck-under parking, garage doors and retail display windows.

The second category includes concrete buildings built before the implementation of the 1976 building code.  Those structures are at higher risk of collapse because parts of the building, such as the columns and frame connectors, are too brittle and may break in strong shaking.  The weight of the concrete in these buildings makes them particularly deadly when they fail.

The Seismic Safety Task Force recommended the passage of ordinances that would require soft, first-story building owners to report if seismic retrofitting is required within one year of the ordinance’s approval, and to complete such retrofits within five years.  The proposed ordinance would also require owners of concrete buildings to report whether seismic retrofitting is required within five years, and to complete such retrofits within 25 years.  Concrete buildings would have to meet the Basic Safety Objective of the American Society of Civil Engineers (ASCE) Standard 41 or an equivalent standard.

Is Retrofitting Assessable as New Construction?

As a general rule, new construction is assessable for property tax purposes in California.  Consequently, the seismic retrofitting required under the plan would constitute assessable “new construction,” thereby raising property tax assessments on the retrofitted properties.  However, under a law approved by California voters in 2010, seismic-retrofitting is excluded from property tax assessment.

The 2010 law exempts from property tax assessment “seismic retrofitting improvements and improvements utilizing earthquake hazard mitigation technologies.”  In layman’s terms, this refers to reconstructing an existing building to remove falling hazards, such as parapets, cornices and building cladding that pose serious dangers.  It also means strengthening an existing building to resist an earthquake and reduce hazards to the life and safety of building occupants exiting the building during an earthquake.

The new law also exempts from taxation new construction performed on an existing building that the local government has identified to be hazardous to life in the event of an earth-quake.  Notably, the law excludes entirely new buildings or alterations to existing buildings that are made at the same time as the seismic-retrofitting, such as new plumbing or electrical systems.

Retrofitting Under LA’s Plan Will Likely Be Exempt

The Mayoral Seismic Safety Task Force did not take into consideration the possibility that seismic-retrofitting work performed under the task force’s proposed ordinances would be assessable as new construction, and therefore subject property owners to increased property tax assessments.  The Task Force could have done so by incorporating the seismic retrofitting construction standards specified in the law approved by voters in 2010.

Nevertheless, some fairly broad language in the property tax exemption statute will likely permit the property tax exemption for seismic retrofitting to be extended to construction work that building owners perform in compliance with Mayor Garcetti’s proposed plan.  It is also possible the city will amend the ordinances proposed by the Seismic Safety Task Force to incorporate the seismic safety standards referenced in the 2010 property tax exemption law.

Claiming the Seismic-Retrofitting Exemption

Although seismic-retrofitting work is generally exempted from property taxation, such exemption is not automatic.  The 2010 law requires owners of properties who have carried out seismic retrofitting to submit a claim form to their county assessor to receive the property tax exemption.

The owner must submit the form prior to or within 30 days of completion of the seismic-retrofitting work.  They must submit documents supporting the claim no later than six months after completing the seismic-retrofitting project.  The property owner, his contractor, architect, or civil or structural engineer may complete the claim form and provide the supporting documentation.

Once the taxpayer has submitted the claim form and supporting documents, the city’s building department must identify the portions of the project that were seismic-retrofitting components.  That will determine whether the property is exempt from a new assessment, or has undergone new construction unrelated to the seismic retrofit that will trigger a new assessment. 

Cris ONeall

Cris K. O'Neall is a partner with Cahill, Davis & O'Neall LLP, the California member of American Property Tax Counsel, the national affiliation of property tax attorneys.  He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar
24

Georgia Taxpayers Risk Losing Arbitration Rights in Tax Appeals

IT'S DECISION TIME

"Georgia taxpayers risk losing arbitration rights in tax appeals."

Although the Georgia General Assembly enacted statutory provisions governing property tax arbitration procedures in 2009, counties file motions to dismiss tax-payer arbitration requests.  An appellate court has yet to weigh in on the issue, but a court decision would help to avoid the repetitious filings of dis-missal motions by counties, and put an end to taxpayers having to continually fight for the right to have their appeals heard in arbitration by a licensed professional appraiser.

- - - - -   It is time for an appellate court decision that could well put this matter to rest.   - - -

The arbitration statute provides that taxpayers may elect to have their real estate property tax appeal heard by a real property arbitrator — an appraiser as classified by the Georgia Real Estate Commission and the Georgia Real Estate Appraisers Board.  After hearing evidence, in the style of baseball arbitration, the arbitrator is required to select either the board of tax assessors’ value or the taxpayer’s value as set forth in the certified appraisal.  The law makes the arbitrator’s decision binding and precludes further appeal.

County tax assessors have filed motions to dismiss and briefs in support in more than one county across Georgia contending that the arbitration provisions violate the Georgia Constitution.  The assessors seek to have the tax appeal arbitration statutory provisions declared unconstitutional and the arbitration appeals dismissed.

Here are the assessors’ main contentions, and the taxpayers’ arguments against those same points.

Judicial authority: Assessors con-tend the arbitration statute violates provisions of the Georgia Constitution that require that the judicial power of the state shall be vested exclusively in the courts.  The assessors’ position is that the arbitration statute creates a separate judicial forum that is required to declare what the law is and apply the law to the case.  They contend that in order to determine the fair market value of a property the arbitrator is required to declare and apply Georgia law.

Taxpayers respond that the Georgia Constitution is not violated because the arbitrator is not a court or a judge.  The arbitrator’s actions are authorized because the General Assembly can create administrative agencies which are permitted to perform quasi-judicial functions.

Separation of powers: Assessors argue that the statute violates provisions of the Georgia Constitution that provide for separation of powers.  The assessors contend that by enacting the arbitration statute, the legislative branch has encroached upon the powers of the judicial branch.

Taxpayers respond that the specified provisions do not apply to local governments, and that there is no prohibition against administrative officers exercising quasi-judicial powers.

Uniform valuation: The assessors further contend that the arbitration statute violates the constitutional requirement that property must be valued uniformly with other property of the same class, because the statute requires that the arbitrator must select either the value set forth by the county tax assessors or the value set forth by the taxpayer.  Similarly, the assessors contend that the arbitration statute violates the equal protection clause of the Georgia Constitution because owners of like properties are not provided equal protection of the law.

Taxpayers respond that just because an arbitrator may possibly not agree with the value set by the county board of tax assessors does not mean that the uniformity provisions of the Georgia Constitution are violated.

The Taxpayer Position

The taxpayers contend that the Georgia Superior Courts have no jurisdiction over the matter because the arbitration provisions only require that the Chief Judge be involved for the purpose of selecting an arbitrator if the parties cannot agree, and issuing an order requiring the arbitration to proceed.  The taxpayers also contend that the tax assessors have no power to sue and cannot obtain a declaration by the court that the statute is unconstitutional.  The taxpayers point out that the assessors have no constitutional rights that have been violated.

At the time of this writing it is unknown which party will prevail, but interesting questions have been raised.  Tax arbitration provisions in various forms have existed on and off in Georgia for more than a century, and if the arbitration provisions are declared unconstitutional, taxpayers will be deprived of a statutory format designed to afford relief from unjust valuations through the mechanism of a decision made by a knowledgeable professional, based on information supplied by the county tax assessors and a certified appraisal obtained by the taxpayer.

It is time for an appellate court decision that could well put the matter to rest, and save taxpayers the need to expend time and effort fighting for their statutorily established right to property tax arbitration.

StuckeyLisa Stuckey is a partner in the Atlanta law firm of Ragsdale, Beals, Seigler, Patterson & Gray, LLP, the Georgia member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar
06

Tax Equation: Know When Your Property Tax Assessment Is Excessive

Restaurant owners and operators manage a long list of expenses, but one cost item that may offer significant savings– real estate taxes – often goes overlooked.  Even if the restaurant leases its space, it may have the right under the lease to protest tax assessments.

Restaurateurs often look at property tax as a fixed expense, one that warrants little attention unless there is a drastic change from one year to the next.  But failure to examine a property tax assessment may mean the taxpayer is leaving money on the table.

For example, the owner of a free-standing restaurant assessed at $1 million files a protest and convinces tax authorities to lower the assessment to $800,000.  Using a local tax rate of 2.5%, the lower assessed value would equal $5,000 per year in savings.  In some areas the tax rate may be significantly higher, meaning greater savings.  Depending on the jurisdiction, that savings could continue for years.

HOW TO REVIEW ASSESSMENTS
What is an assessor attempting to measure in an assessment, and what constitutes a bad assessment?  Procedures vary from state to state, but in most places property taxes are based on the fair market value of the property as determined by the local assessor.  The market value is typically considered to be the price that the property would sell for in an open-market, arm's length sale as of the assessment date.

There are a number of reasons why some assessments miss the mark in attempting to establish a fair taxable value.  Many initial assessments are done by mass appraisal firms on a city- or county-wide scale, without much consideration for the individual situation of a particular property.  Assessors also may have inaccurate data on a given restaurant building, such as incorrect square footage or age, or amenities that do not actually exist.

An assessment may be unfairly high because it is based on a sale that occurred in a better market, or because it reflects costs to construct the building but lacks appropriate deductions for depreciation.  An assessment may also reflect a lease with an above-market rental rate negotiated in different market conditions, or negotiated many years prior to the assessment date.

Given so many opportunities for error, it's a good idea to review each assessment.  The first thing to check is the factual data the assessor used in the determination of value, including building area, acreage, year built, type of building and finish and amenities.  Experienced legal counsel can help with these points and proceed with a more technical review of the assessment to determine whether or not to protest the assessed value.

HOW TO PROTEST
Appeal deadlines vary from state to state.  Some states have an annual filing deadline, such as Ohio, where the deadline is March 31.  Other states allow a certain amount of time – for example, 30 days –from the mailing of the assessment notice or tax bill.

Some jurisdictions have informal procedures prior to filing the formal appeal, where it is possible to meet with the assessor and share information.  In some cases, providing the assessor or reviewing body with income and expense information or comparable sales data will be enough to get the assessment corrected.  Other cases will require a formal appraisal prepared by an independent appraiser.  Appraisals done for tax purposes are unique and in most instances will require testimony from the appraiser.

In many jurisdictions, there is no filing fee for the initial appeal, while others may charge a modest filing fee in the neighborhood of $100.  If the state requires a formal appraisal, that can cost $2,500 or more, de-pending on the property type and complexities of the case.  Legal fees also vary, but property tax attorneys often work on a contingency basis where there is no charge for the initial review of the assessment.

Because valuation methods and appeal procedures differ greatly, not just from state to state but even within states, it is helpful to have an experienced tax professional assist in reviewing the assessment and in taking any necessary steps to correct it.  Knowledge of the local law, appeal procedures, personalities, and appraisers are invaluable in successfully lowering tax liability.

Real estate taxes needn't be a fixed expense that is entirely out of the taxpayer's control.  Review property tax assessments carefully for possible tax savings that could even increase the bottom line.

Cecilia Hyun 2015

Cecilia Hyun is an associate attorney at the law firm Siegel Jennings  Co, L.P.A., which has offices in Cleveland and Pittsburgh.  The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jan
21

APTC Website Redesign Announcement

aptc-responsive-design

APTC is proud to announce the release of our new website. Our new site has been redesigned with a fresh look and new features intended to enhance user experience and make information more accessible across a broad range of viewing devices.

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Jan
16

Reducing Hotel Property Taxes By Properly Valuing Intangible Assets

Most, but not all, taxing authorities acknowledge that hotels include intangible and tangible assets. Reducing property tax costs by removing intangible value has long been controversial due to the challenging task of valuing intangible assets. Intangibles include items such as the assembled workforce, service contracts, reservations systems, web presence and hotel management and franchise agreements.

Most, but not all, taxing authorities acknowledge that hotels include intangible and tangible assets. Reducing property tax costs by removing intangible value has long been controversial due to the challenging task of valuing intangible assets. Intangibles include items such as the assembled workforce, service contracts, reservations systems, web presence and hotel management and franchise agreements.

Fortunately for hotel owners, a recent decision by the California Court of Appeals makes clear that measuring a hotel’s intangible value solely by deducting franchise fees and management fees understates a hotel’s intangible value. Assessors must exclude all intangible value to tax the hotel’s real property properly. Proper exclusion of intangible value will necessarily result in lower taxes.

The debate
It is axiomatic that investors buy operating hotels based on the income generated by the hotel’s business. The income is generated by the combination of the property’s real estate, tangible personal property, and intangible personal property. All of these components are essential and the absence of any of these elements severely compromises a hotel’s ability to generate revenue.

Ad valorem taxing authorities are not investors or lenders. They are charged with valuing only the real estate component of a hotel for tax purposes. Isolating a hotel’s taxable value requires that the assessor remove from the hotel’s overall value both the value of tangible personal property and the value of the intangible personal property used in conjunction with the operating business.

Valuing the hotel’s tangible personal property, such as beds, furniture and the like, is relatively easy. Valuing intangible assets poses a far greater challenge. How should the assessor separate the value of intangible assets from the hotel’s overall value? The answer to that question has been the subject of heated debate.

Evolving methodology
The Appraisal Institute’s current curriculum recognizes the presence of intangible value in hotels but avoids the issue of how to calculate this value. This omission implicitly acknowledges that the value of an operating hotel lies at the intersection of real property appraisal and business valuation, and both skill sets are required to value a hotel property appropriately.

Stephen Rushmore developed the initial approach to the problem over 30 years ago. To account for a hotel property’s intangible value, the Rushmore Approach simply subtracts management fees and franchise fees from the hotel’s revenue and capitalizes the remaining revenue to determine real estate value.

The debate about valuing intangible property in a hotel has been long, loud and heated. While revolutionary at the time, the Rushmore Approach has been criticized for years. Rushmore’s defenders have responded to the criticism on several fronts.

Critics argue the Rushmore Approach offers the attraction of simplicity at the expense of understating the contribution made by intangible personal property to the hotel’s revenue. Critics further argue that the Rushmore Approach’s assumption that the deduction of management and franchise fees effectively accounts for a hotel’s entire intangible value is contrary to the experience of market participants in owning and operating a hotel. Rushmore’s detractors often advocate an alternative method known as the business enterprise approach, which casts a wider net to account for intangibles.

Rushmore’s supporters note the absence of hard data to quantify sales of a hotel’s individual components. The absence of this data, however, is unsurprising, considering investors buy and sell hotels based on income generated rather than on the value of individual components.

Rushmore’s advocates also suggest that alternative approaches overstate intangible value, thereby reducing the mortgage-asset-secured value lenders rely upon for hotel financing.

Courts weigh in
The Rushmore Approach certainly accounts for some intangible value, but, does it reveal the full intangible value associated with a hotel such as licenses to use software and websites?

Until recently, Glen Pointe Associates vs. Township of Teaneck, a 1989 New Jersey opinion, was the seminal hotel property tax decision that adopted the Rushmore Approach to extract the real estate value of an operating hotel. A May 2014 California Court of Appeals opinion, however, suggests the tide may be turning against the Rushmore Approach and in favor of the business enterprise approach.

In SHC Half Moon Bay vs. County of San Mateo, the California Court of Appeals held that “the deduction of the management and franchise fee from the hotel’s projected revenue stream pursuant to the income approach did not - as required by California Law - identify and exclude intangible assets” such as an assembled workforce and other intangibles.

In overturning the taxing authority’s methodology as a matter of law, the appellate court held that the taxing authority had failed to explain how the deduction of the management and franchise fee, i.e. the Rushmore Approach, captures the value of all of the hotel’s intangible property. Considering that consumers increasingly make hotel reservations online instead of using a flag’s reservation system, it is increasingly difficult to argue that the Rushmore Approach sufficiently captures the value of the hotel’s website or its relationship to on-line providers outside of the flags.

The arrival of Airbnb in the market also provides food for thought. Airbnb is a controversial web platform where an apartment owner advertises an apartment online for overnight paying guests. The platform boasts over 800,000 listings in 33,000 cities in 192 countries. Many local governments argue Airbnb allows apartment owners to avoid hospitality taxes or other hotel regulations.

Airbnb’s success demonstrates the difficulty of isolating a hotel’s real estate value by only excluding management and franchise fees. Airbnb doesn’t charge management or franchise fees, yet the service allows owners to increase the income potential of their apartments far beyond market rent.

The debate between advocates and critics of the Rushmore Approach rages on. The challenge for valuing hotel real estate remains. The beauty of the Rushmore Approach is its simplicity, but in the days of the Internet and Airbnb, simplicity may not equate to accuracy. In the wake of the decision from California, the tide may be running out on the Rushmore Approach.

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

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Jan
12

Michigan Provides Property Tax Lessons for Big Box Retail

"Probably the most important concept affirmed in these Michigan decisions is that assessors must value big box properties based on their value-in-exchange and not their value-in-use."

Owners of big box retail buildings can take lessons from Michigan on the proper way to value these large, free-standing stores for property tax purposes. The state’s well-developed tax law offers a clear model that is applicable in any state that bases its property tax valuation assessments on the fee simple, value-in-exchange standard.

Many states, including Michigan, base real estate taxation on the market value of a property’s fee simple interest using value-in-exchange principles. In other words, a property’s taxable value is its market value, and market value is commonly considered the property’s probable selling price in a cash-equivalent, arms-length transaction involving willing, knowledgeable parties, neither of whom is under duress.

In recent years, the Michigan Tax Tribunal has decided with remarkable consistency a dozen cases involving big box stores. In 2014, the Michigan Court of Appeals affirmed two of these Tax Tribunal decisions, recognizing that the Tribunal’s key rulings in this area rested on established law.

Probably the most important concept affirmed in these Michigan decisions is that assessors must value big box properties based on their value-in-exchange and not their value-in-use. Assessors and appraisers hired by local Michigan governments repeatedly — and improperly — reached value conclusions based on value-in-use rather than value-in-exchange principles.

The violation of this fundamental point was not obvious from a cursory review of the valuation evidence. For example, the assessor’s evidence included both big box property sales with nigh per-square-foot prices and big box properties with high rental rates. Consequently, for the Michigan Tribunal to decide these cases correctly, taxpayers needed to present evidence, including from expert witnesses, which convincingly established the following:

  1. Each big box retailer either builds or remodels its stores to be consistent with the retailer’s marketing, branding and merchandising operations (built-to-suit);
  2. When a big box property sells, the buyer will spend substantial dollars reimaging the property so that it conforms to the new owner’s appearance, layout and other specifications;
  3. Given that big box properties can be costly to build because of their built-to-suit nature, and that the subsequent purchasers will make substantial modifications at significant cost, these properties sell for far less than their construction cost; and
  4. Actual sales confirmed that these properties sell for far less than construction cost.

With evidence establishing each of these points, the Michigan Tribunal has repeatedly recognized that taxable value for a big box property must reflect its value-in-exchange.

For example, the Tribunal could grasp that a sale would not reflect market value if the property had a rental rate designed to compensate the developer for construction to the retailer’s specifications, rather than a rent negotiated between a landlord and tenant for an existing building.

Similarly, with such evidence the Michigan Tribunal could discern that a sale would not reflect market value if the original owner/user of the property sold and leased back the space. A sale-leaseback is typically a financing transaction between two parties with multiple relationships (landlord/buyer and seller/tenant) that are different from an arms-length transaction. That means the rent in a sale-leaseback does not reflect the property’s market rent, which would be used in an income approach to determine value. Similarly, the sale price in such a transaction is not evidence of market value.

Likewise, the Michigan Tribunal recognized that if the assessor used leases with above-market rents to value these properties, it would impermissibly be valuing something other than the property’s fee-simple interest. This is important because it applies anytime a property with above-market rent is used as either a comparable sale or a rent comparable.

Finally, the Michigan Tribunal rejected the claim that each property’s highest and best use as improved was the continued use by the specific retailer that occupied the property. Generally, highest and best use is that which is legally permissible, financially feasible, maximally productive, and physically possible.

To define that use as the continued use by the retailer occupying the property would improperly make the value depend on the identity of the property’s owner. Additionally, it would lead to a value conclusion that reflected the value of the property to that owner, or its value in-use. Thus, the Michigan Tribunal concluded that the highest and best use was simply retail use.

Michigan’s many recent big box property tax decisions spotlight issues applicable to many types of properties, wherever the law requires assessors to value properties based on the market value of a property’s fee simple interest. Perhaps the most important takeaway is that in such cases, taxpayers need to provide evidence from appraisers and other experts to carefully document a property’s market value, and where that value is significantly less than construction cost, explain why this is true.

MandellPhoto90

Stewart Mandell is a Partner and Tax Appeals Practice Group Leader, in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jan
09

Finding Relief - Property Tax Appeals for Industrial Assets Yield Rewards

While it is common knowledge that tax relief is available for newly constructed industrial facilities that bring jobs and infrastructure to a region, business owners often overlook the opportunity to reduce property taxes on their existing facilities. That’s a pity, because successful property tax contests are a source of found money that goes straight to the company’s bottom line.

Those savings can be significant. In Pennsylvania, a 2.5 million-square-foot manufacturing plant that had not challenged its assessments in more than a decade was overvalued by $30 million. An appeal ultimately yielded $500,000 in annual tax relief.

Public perception vs. reality. Tax appeals for industrial properties present unique challenges. In rural areas, the property owner is often the region’s largest employer and the largest taxpayer in the jurisdiction, so that reducing the assessment also reduces funds available to local schools. Development costs are both widely publicized and somewhat misleading, because investment in equipment, site preparation, training arid other items frequently exceeds the real estate’s fair market value. News stories about that $100 million plant can come back to haunt the owner who tries to argue for a more realistic assessment.

Moreover, for properties developed with the help of government incentives or tax abatements, an owner seeking a tax reduction may run into community resentment when local media report on the contest.

Expect a fight. Taxing jurisdictions will fight hard against a tax contest. Authorities typically delay the litigation, often from a sense of outrage rather than anything else. When an appeal seeking hundreds of thousands of dollars of tax relief stretches into multiple years, winning a favorable ruling becomes progressively more difficult for the property owner. At trial, the case is typically decided by a local judge, who is mindful that a reduction would have a negative effect on local districts. The property owner must strike a delicate balance, continuously pushing the litigation forward while staying sensitive to its larger impact.

“Face-to-face meetings, both internal and external, are essential when managing property taxes for a large industrial property owner”, said Christine Rohde, manager of property tax and incentives at Alcoa Inc., where she oversees tax protests. When possible, I make every effort to inspect our sites and meet with plant management to explain the process and answer questions. Meeting personally with out-of-state assessors helps build relationships and allows both parties to work through the valuation issues to arrive at assessments that are fair to all concerned.

The property owner’s tax counsel must also push the litigation. Courts seldom specify a timetable for bringing the case to trial and jurisdictions will try to delay the process by asking for continuances. Tax counsel must produce an appraisal promptly, call the jurisdiction’s counsel regularly, invite representatives of the jurisdictions to inspect the facility and ask the judge to schedule conferences or pre-trial meetings. As Rohde noted, tax counsel should meet face to face with the jurisdiction’s representatives whenever possible and be prepared to travel to the property repeatedly.

Valuation challenges. Differences among industrial properties - heavy manufacturing, light manufacturing, office/flex, warehouse and distribution centers - greatly affect valuation, so hire professionals with demonstrated expertise in appraising the specific category of the industrial property in question.

Owner-occupied properties, which have no rental income to capitalize, present another challenging situation. Or the property may have a mix of uses, as with a corporate headquarters campus that has offices, research and development space and training facilities.

Finding comparable properties for the appraisal can be an issue as well. A special-purpose property, such as an ethanol plant, cannot be easily used by another user. Even generic manufacturing space is subject to external obsolescence or incurable factors that affect valuation and are beyond the physical boundaries of the property. External obsolescence might reflect a scarcity of a natural resource used in the manufacturing process, or extended travel time to the closet interstate highways, either of which can severely impair value.

If the property is the only one of its kind in the state, the appraiser may seek comparable sales out of state. The assets being used as the basis of comparison are often attracted by economic incentives to places where they would not otherwise go perhaps far from suppliers or interstate highways. These locational issues detract from fair market value and the associated comps can reduce the assessment and property taxes for the contested property.

The checklist. Evaluate industrial property for potential tax appeals annually, and know the jurisdiction’s idiosyncrasies. Can the property owner meet informally with the assessor? Does the taxing authority have a reputation for being litigious?

Keep the property owner’s public relations department involved, and be mindful of how an appeal is presented and perceived. Get an appraisal from the most experienced professional in the property type and one who presents well on the stand. And finally, push the appeal through to conclusion.

sdipaolo150Sharon DiPaolo is a partner in the law firm of Siegel Jennings Co., L.P.A., the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

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Jan
01

Alabama Property Tax Updates

UPDATED March 2018

Alabama Legislature Requires Disclosure of Additional Information for Sales Comps in Tax Appeals

In March 2018, the Alabama Legislature passed a bill requiring certain disclosures for those intending to offer sales or lease comparables in tax appeals. SB182, which will be codified as Ala. Code (1975) §40-3-27, requires any party (taxpayer or taxing jurisdiction) introducing a sales or lease comparable in a tax appeal to disclose the following:

(1) whether the proposed comparable property was occupied or unoccupied at the time of the transaction; and

(2) whether the proposed comparable property was subject to any use, deed, or lease restriction at the time of the transaction that prohibits the property, on which a building or structure sits, from being used for the purpose for which the building or structure was designed, constructed, altered, renovated, or modified.

Under the new statute, the party introducing the sales or lease comparable must disclose this information at the time it offers the comparable into evidence. Failing to disclose the information carries a harsh penalty, resulting in the comparable being deemed inadmissible.

The new bill is effective immediately upon execution by the Governor, so taxpayers, counsel and appraisers must diligently review their sales and lease comps to ensure compliance with the new act.

Aaron D. Vansant, Esq.
DonovanFingar, LLC

American Property Tax Counsel (APTC)

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