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Property Tax Resources

Aug
03

Is Your Brownfield Being Fairly Assessed?

"While the case law and appraisal science continue to evolve, the framework for valuing properties subject to environmental contamination remains relatively unchanged..."

The legal and appraisal communities have embraced the notion that environmental contamination can impair real estate value. After all, a property's potential uses or limitations on those uses have a direct bearing on the asset's marketability and profit potential.

An investor seeking to rein-in the tax burden on a contaminated property must navigate a legislative and regulatory framework that imposes liability on the property owner for environmental cleanup costs and remediation. In addition to the value lost when a property is directly contaminated, properties in proximity to the contaminated site can also lose value because they are subject to contamination.The devil is in the details, however, and uantifying the direct or proximate impact on value can prove problematic.

The State of New Jersey is a leader in attempting to define the impact of contamination on property value, and its highest court discussed this perplexing problem in the 1980s case of Inmar Associates Inc. vs. Carlstadt.

The New Jersey Supreme Court recognized that the costs associated with cleaning up environmentally contaminated properties would have a depreciating effect upon the properties' true value. The court also noted that deducting those costs dollar-for-dollar from the true value of the property is an unacceptable methodology, and deferred to the appraisal community to arrive at an appropriate valuation method.

Years later, in the case of Metuchen vs. Borough of Metuchen, the court identified a procedure it found acceptable. Without question, uncontaminated land is worth more than contaminated land, the court reasoned. Therefore, as contaminated land is cleaned up, its value increases. The legal question is, how should this capitalization of the cleanup costs affect the market value of the subject property?

In Metuchen, the tax court used the principles established in Inmar to form a foundation or core principles for assessing the value of unused, contaminated property that is subject to mandatory cleanup at the owner's expense, at an estimated but undetermined cost. Those are: cleanup cost, the effect on market value, calculating the impact and treating the cost of cleanup as a depreciable capital improvement.

Taking the lead from the New Jersey Supreme Court's ruling in Inmar, the tax court in Metuchen deferred to the appraisers to determine the costs of cleanup and appropriate capitalization time period. The parties essentially agreed upon the unimpaired value of the property and the court easily reconciled the difference in opinion on cleanup costs.

While the case law and appraisal science continue to evolve, the framework for valuing properties subject to environmental contamination remains relatively unchanged since Metuchen. That formula entails discounting the present value of cleanup costs and subtracting that from the property's clean value.
Most recently, the tax court used the Metuchen formula to find value in an unreported decision.

While courts, property owners and assessors use the Metuchen formula to determine the value of contaminated land, this method fails to deal with other factors associated with contaminated sites. One of those factors is environmental stigma, a term the appraisal community uses in attempting to quantify the adverse effect on property value produced by the market's perception of increased risk. Even after environmental cleanup and remediation, environmental stigma may still lower the otherwise unimpaired property's value.

pgiannuarioPhilip J. Giannuario is a partner in the Montclair, NJ law firm Garippa, Lotz & Giannuario, the New Jersey and Eastern Pennsylvania member of American Property Tax Counsel. He may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jul
16

Some Justice for Taxpayers

How a Compelling, Well-Prepared Property Tax Appeal Can Defeat An Unlawfully Excessive Assessment

" A compelling case that is well presented gives the taxpayer the best chance at success."

It's no secret to taxpayers that appealing property tax assessments can be challenging. Typically, taxpayers bear both the burden of proof and the risk of a decision that not only protects government revenue but also ignores the facts and applicable law. Nevertheless, sometimes a compelling and well-prepared property tax appeal can result in tax justice.

A 2013 Michigan Tax Tribunal decision exemplifies the potential for achieving a fair outcome. In this case, the tribunal determined the market value of an apartment complex with 779 units. The analysis was substantially the same for both tax years involved, so just the first valuation date is discussed here.

The taxpayer claimed that the property was worth less than $13,400 per unit. Based on sales of apartments in the area, on an absolute and relative basis, this is a low value for an apartment property in the subject market. To prevail, the taxpayer had to carefully present its case using three essential components:

  • A convincing explanation of why the subject property's per-unit value was so low;
  • A well-reasoned appraisal based upon both the income approach and sales comparison approach, which demonstrated that the property was worth what the taxpayer contended and refuted the contentions and analysis of the government's assessor and appraiser; and
  • Legal authorities whose testimony supported the taxpayer's position.
  • The taxpayer needed each of these three ingredients to achieve total victory. It would have been insufficient for the taxpayer to have simply presented an appraisal that reached value conclusions supporting their contentions. In recent years, there have been numerous cases where the tribunal found taxpayer-filed appraisals to be flawed and unpersuasive.

Winning the Case

The taxpayer gave a compelling explanation for the property's low value. In this case, the property's one- and two-bedroom units averaged a mere 581 square feet. The onebedroom units, which comprised more than 70 percent of the apartments, were only 550 square feet. Those measurements were far smaller than those of the area's other apartment complexes, which averaged 750 and 850 square feet for one- and two-bedroom units, respectively.

As the owner explained to the tribunal, the original developer had built the units decades before to serve relatively unskilled young adults working in area factories. The small unit sizes made the apartments affordable for these first-time renters.

The Great Recession reduced demand for all types of apartments, which hurt occupancy and rental rates for the entire apartment market. This economic obsolescence adversely impacted the subject property's value. Further, the recession negatively impacted the subject property far more than other apartment properties because the huge downturn eliminated so many factory jobs for relatively young and unskilled workers. As those jobs disappeared, so did single renters who wanted small units, saddling the property with enormous functional obsolescence.

Given these explanations of the property's deficiencies, the judge could readily accept that even when occupancy improved and became stabilized, the complex would have above-market vacancy and would be limited in the rents it could charge, while forcing the owner to bear most of the utility costs.
These facts were an integral part of the direct capitalization income approach in the taxpayer's appraisal. In this income approach, the appraiser first determined the property's net operating income with occupancy that had reached a stabilized level. This required providing and analyzing the income and expenses of comparable properties as well as the subject property's financial results in recent calendar years. The appraiser applied an appropriate capitalization rate to the stabilized net operating income to determine the property's value as stabilized. The appraiser then subtracted the costs of rent concessions and lost rents the property would experience as it increased occupancy to a higher stabilized level.

In the sales comparison approach, the appraiser presented sales of six comparable properties, and where applicable, made adjustments for numerous elements of comparison, including location and age. Significantly, the appraiser's analysis included not only the commonly used per-apartment unit basis but also a per-square-foot analysis.

The appraiser gave some weight to this sales comparison approach but relied primarily on the income approach. Their testimony, supported by testimony of one of the taxpayer's senior managers, not only satisfied the taxpayer's burden of proof but presented a compelling case.

Having heard this powerful evidence, during the cross-examination of the government's witnesses, it was easier for the judge to see the flaws in the assessor's income and sales comparison approaches. Also, the taxpayer's counsel was able to cite a legal precedent to refute the government's cost approach, which ignored functional and economic obsolescence.

Ultimately, the tribunal rejected the government's value contention, which was 50 percent higher than the taxpayer's, and adopted the taxpayer's claimed value.
For taxpayers who are inexperienced in handling property tax appeals, these cases can be fraught with pitfalls that result in excessive taxation and exasperating endings. A compelling case that is well presented, however, gives the taxpayer the best chance at success. And as this case shows, there are times when tax justice is indeed attainable.

MANDELL Stewart

Stewart L. Mandell is a partner in the law firm of Honigman Miller Schwartz and Cohn L.L.P., the Michigan member of the 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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Jul
12

A Taxing Situation in Cleveland

Owners at risk of unfairly high assessments pending Ohio Supreme Court guidance

"Recent history shows that districts are using sale prices to impose unreasonable tax burdens on taxpayers..."

Like much of the nation, Cleveland is experiencing sluggish but discernible improvements in its real estate market, and buyers are beginning to purchase real estate at prices that exceed the property's tax assessment value. The resulting real estate price volatility puts many Ohio property owners — and recent buyers in particular — at greater risk of receiving an unexpected and potentially unfair increase in their property tax bill. When property values are fragile, unexpected increases in expenses can be disastrous, and that includes an unexpected rise in real estate taxes. Ohio is one of the few states where school districts and other taxing entities have the legal authority to protest the assessed values of properties in their districts and to seek increases in taxable value. In fact it is customary for school districts in Ohio to seek an increased valuation and consequent rise in taxes on properties that have recently sold.

While the practice is customary, it is neither predictable nor uniform. The assessment on a property that recently sold can be significantly higher than the assessments on neighboring properties based on its sale price. Moreover, different taxing districts have different policies as to the extent and manner in which they pursue this remedy. For instance, some taxing districts may not aggressively chase sales. Others may seek not only to raise future assessments, but also to retroactively increase the assessment for the past year.

Taxing Sales

In many cases, a recent sale of real property is the best indication of its value, but there are exceptions. Modern real estate transactions frequently include the simultaneous transfer of non-real estate items, or the amount of consideration paid may reflect factors other than the fair market value of the real property. If these non-real estate items are not specifically identified and distinguished from the real estate value, they can be included in the value assigned to the property for files an increase complaint.

Recent history shows that with increasing frequency districts are using sale prices to impose unreasonable tax burdens on taxpayers. In an effort to correct this trend, on June 11, 2012, the state of Ohio enacted a statute that clearly states that real estate assessments must be based on fee simple estate, as if unencumbered. Moreover, the new statute further provides that where there is a recent arm's length sale, the auditor may consider the sale to be true value.

Read together, in order for the assessor to consider the sale price to be true value, that sale would have to reflect the fee simple estate, as if unencumbered. To understand why and how that is so important, it is useful to look back over developments in Ohio law over the past decade.

The Changing Law

Ohio law always provided that assessments shall be made based on true value and that "the auditor shall consider the sale price of such tract, lot, or parcel ... to be the true value for taxation." In 2005, the Ohio Supreme Court interpreted that statutory language to mean that there is no further evidence necessary to prove true value. Later, the Supreme Court expanded the ruling by stating that leased fee sales were also acceptable. (Leased fee value is based on a landlord's expected rental income from a leased property.) Even worse, later cases expanded the law to include leased fee transactions as comparable sales even when appraising fee simple, owner-occupied properties. And finally, other cases set precedents that precluded the county auditor, the state Board of Tax Appeals, or Common Pleas Courts from taking into consideration circumstances which indicated that the sale was not representative of market value. Despite the state's recent efforts to stop counties and school boards (which can file suits) from preying on investors buying property in Ohio, the trend has continued.

KJenningsGraph2013

Real estate buyers in Cleveland must be even more careful to take appropriate steps to ensure fair treatment. As recently as March 2013, an assessor used the sale price of the ongoing business of a 127-bed nursing home, which was part of a sale that included 72 other nursing home operations in a multi-state transaction, to determine its assessed value. The sale price of the nursing home was $10.6 million, and the assessor valued the property at that price. The taxpayer's appraisal valued only the real estate, which came to $3.5 million (see chart). In short, the county is now taxing the value of the personal property and business operation at the nursing home when it only has authority to tax the real estate.

State lawmakers have attempted to make the law more uniform and equal by establishing a standard of fee simple, as if unencumbered, while providing flexibility to use a sale where it is warranted. What is still needed is guidance from the Supreme Court to enforce that standard.
Until the court has an appropriate case to provide that needed guidance, investors need to structure transactions with taxation in mind. To be recently purchased must be treated like those that have not been sold. Unfortunately, the burden falls on the parties in the transaction to make sure that all documents involved in the sale, particularly those that are recorded publicly, reflect only the real estate value.

Countermeasures Emerge

As an alternative, many investors have taken to purchasing the entity that owns the property rather than the real estate. Purchasing the entity eliminates the need to record a new deed, which is often the triggering event for school districts to file complaints seeking additional property taxes. As a result, the county may unknowingly be forced to treat all taxpayers alike. Moreover, state law prevents the schools from using the purchase of an entity to treat new buyers differently than existing owners. In 2000 and in 1998, the Ohio Supreme Court ruled that the sale price of all the shares of a company's stock does not establish the value of the company's real property. This is true even where the only asset of the company is its real estate. By purchasing an entity rather than the bare real estate, a taxpayer has at least a fighting chance to have equal treatment under the law. Given the complexities of such a transaction, however, buyers should seek local counsel when using this acquisition strategy.


kjennings Kieran Jennings 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. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Jun
22

Scandal Fallout Threatens Los Angeles Property Tax System

The response to alleged improprieties by Los Angeles County Assessor John Noguez has hurt taxpayers in ways that were unforeseeable when Noguez took office more than two years ago, or when the investigation into those improprieties started last year.

Prosecutors filed dozens of new charges on April 23 in relation to a corruption probe that began more than a year ago. Prosecutors have alleged that Noguez accepted bribes to illegally lower assessments on a number of properties represented by tax consultant Ramin Salari, and named Mark McNeil, one of Noguez's aides, in the charges as well. Prosecutors contend that the scheme cost taxpayers at least $9.8 million in lost tax revenue.

As if the scandal alone weren't enough, the response by the Los Angeles County Assessor's Office to those improprieties has impaired taxpayers' ability to communicate with the assessor's office to resolve property tax appeals. This new communication breakdown, in turn, has increased the cost and time required to process appeals.

New policies

After Noguez took a leave of absence in mid-2012, the Los Angeles County Board of Supervisors appointed an interim assessor who launched an internal investigation of the assessor's office. The temporary assessor published a "First 100 Days" report in October 2012, establishing two policy initiatives that have significantly damaged the property assessment system's function and efficiency. One measure assigns new personnel to represent the assessor's office before the county's assessment appeals board; the second institutes higher assessed value approval thresholds for settlement of cases pending before the board.

The latter initiative was instituted after a former appraiser in the assessor's office unilaterally changed assessed values for wealthy property owners without management approval. Requiring approval from upper management has reduced the number of cases settled prior to hearing, and either forces more property tax appeals to go to hearing (a surge which has overwhelmed the appeals board's limited resources) or necessitates postponement (which adds to the backlog of pending cases).

Report by independent auditors

The investigation of Noguez also prompted the county's board of supervisors to retain independent auditors to evaluate the assessor's management practices. In late 2012, those auditors issued a comprehensive report which included specific recommendations for the handling of property tax assessment appeals. For example, the auditors recommended that the assessment appeals board force appeals to hearing by not granting more than one hearing postponement to taxpayers.

The assessor's office and the appeals board agreed with some of the auditors' suggestions: The assessor adopted a suggestion that the assessor's office not share case data informally with taxpayers prior to appeals board hearings, and the appeals board concurred with the suggestion that a fee be charged to file assessment appeals.

The changes suggested by the independent auditors, particularly prohibiting informal pre-hearing information exchanges with taxpayers, reduces the possibility of resolving cases short of hearing. The auditors' recommendation that the appeals board avoid granting taxpayers postponements is unrealistic because, in many cases, the assessor is the party asking for more time.

Registration of property tax agents

Another recommendation by the independent auditors was to require persons who represent taxpayers to register as "tax agents." As of this writing, the board of supervisors is considering a registration program that will require people who appear before the assessment appeals board or have contact with the assessor's office, tax collector's office or auditor-controller's office to register as tax agents and pay an annual fee of $250. The program will cover in-house company tax representatives, attorneys and enrolled agents. Registrants would have to follow an 11-point code of ethics and report all political contributions made to any public official in Los Angeles County. Individuals who fail to comply with the registration program would be fined and their names would be listed on the county's website. The California Legislature has also introduced a bill with provisions similar to the proposed Los Angeles County ordinance.

The policy changes described above have slowed the assessment appeal process in Los Angeles County at a time when the system can least afford it. In 2012, assessment appeal filings in the county increased to more than 40,000, a four-fold increase since 2007. The changes in personnel representing the assessor at the appeals boards, new limits on staff authority to settle cases prior to hearings, the recommendation to limit postponements coupled with a restriction on informal information exchanges with taxpayers before hearings, and the requirement that taxpayers' agents register with the county, all work against the speedy resolution of assessment appeals.

The county's assessment appeal system was intended to promote informal and rapid resolutions of property tax appeals. The changes recently implemented or to be implemented by the county and its assessor will thwart those aims, hampering taxpayers' ability to obtain speedy redress of their claims and undermining the effectiveness of the assessment appeal process.

CONeallCris K. O'Neall specializes in property and local tax matters as a partner in the law firm of 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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Jun
17

Three Questions Buyers Should Ask, About Utah Property Taxes

In Utah, only real and personal tangible properties are subject to property tax. Intangible property is exempt from Utah property tax. This includes such things as licenses, contracts, trade names custom software, trained workforce, copyrights and goodwill. If a property owner acquired any of these intangible properties along with the real estate, then there is an opportunity to reduce the property tax obligation for the real estate and other personal property. The key is to identify and separate the portion of the total purchase price that is associated with the intangible properties.

What is the standard of value for property tax?

Utah is a fair market value standard state. In simple terms, fair market value is the price a typical, willing buyer would pay a typical, willing seller for a property, with both parties being knowledgeable of all relevant facts. Accordingly, investment value or the price a specific buyer paid to acquire a property for a particular use may not indicate the fair market value. The price may need to be adjusted if the owner is trying to use it as evidence of the taxable property value.

What are the reporting requirements?

Generally, property owners will not have a reporting requirement for locally assessed land and buildings. Utah is a non-disclosure state, which means a buyer isn't required to disclose to the county assessor the price paid for real estate.
However, a buyer will likely receive a questionnaire from the assessor requesting voluntary disclosure of the purchase price, as well as access to the property to conduct an appraisal.

After reviewing the real estate, the assessor will issue an assessment that estimates what the property's fair market value was on Jan. 1. The county assessor is required to send notices indicating the property's fair market value and the associated tax by July 22. Appeals are due by Sept. 15, and taxes are due by Nov.

30. Utah does require reporting' of any business personal property. Each year, owners must submit a self-assessment of personal property tax liability, identifying 'the personal property, its cost and date of acquisition. Then the owner must apply a percent good factor to the property based upon the age and type of property in order to estimate the fair market value for the property. The tax commission is required to update and publish the percent good factors each year.

Apply the tax rate to the estimated fair market value to determine the amount of personal property tax due. Generally, signed personal property statements will be due to the county assessor by May 15. Appeals on personal property taxes are also due by May 15, or within 60 days after the mailing of a tax notice. While this brief discussion is certainly not a thorough review of Utah property taxes, it does cover the three basic things an investor should know when making a decision to acquire property in Utah.

dcrapo David J. Crapo is the managing partner at Crapo Smith PLLC, Utah Member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Jun
08

Potential Tax Increase Threatens Georgia Property Owners

"Regardless of property type, commercial owners should vigilantly review assessment notices upon receipt and determine whether the particular property has indeed increased in valuation, or if assessors using mass appraisal techniques have over generalized..."

By Lisa Stuckey, Esq., as published by Southeast Real Estate Business, June 2013

Under a recently enacted law, taxpayers who purchased property in Georgia in 2011 or 2012 face potentially steep hikes on upcoming tax bills. The new statute, which took effect on Jan. 1,2011, provides that the sale amount paid or real estate in an arms-length transaction shall be the property's maximum allowable fair market value for property tax purposes for the following tax year. That means owners of properties purchased in 2011 received ad valorem assessment notices for 2012 at a value no higher than the purchase price.

For tax year 2013, however, the county assessors' offices were free from this limitation on valuation for those specific properties purchased during 2011. For those properties, assessors were required to review the market, make a determination of fair market value as f Jan. 1, 2013, and issue assessment notices based on the new review for those properties. The same is true for owners of properties purchased in 2012. The assessment notices those owners receive for 2014 will be unfettered by the sale amount limitation that held values in check for those properties in 2013. Clearly, new property owners in Georgia must guard against a false sense of security based on property valuations and tax bills received during the year after the purchase of their property.

Georgia property owners need be mindful that tax authorities issue assessment notices in April, May and June, and taxpayers will only have 45 days from the date of the notice to file an appeal if they disagree with the county's valuation. Taxpayers cannot appeal tax bills. If an owner fails to timely file an appeal, there is no further opportunity to appeal the valuation or have any input into the amount of property taxes.

A review of the last few years of commercial sales tracked in the CoStar Group database for tl1e metropolitan Atlanta area, as well as discussions with the major metro Atlanta county assessors' offices, suggests that the property type with the greatest potential for increases in valuation over the next few years is office, but other property types are potentially subject to valuation changes as well.

Regardless of property type, commercial owners should vigilantly review assessment notices upon receipt and determine whether the particular property has indeed increased in valuation, or if assessors using mass appraisal techniques have over generalized. Be aware of the specific attributes affecting the value of the individual property, and ensure that the county appraisal staff has properly considered those factors in determining value.

Worthwhile points to review with the appraiser include a significantly higher vacancy rate at the property compared with other properties in the area, as well as how long the vacant space in the subject property has gone untenanted. Discuss any real or perceived reasons why the vacant space cannot be leased. What rent has been lost? What rent is in arrears, and for how long?

Also make the appraiser aware of any tenant instability or perceptions of tenant instability based on the type of company, and any necessary rent or expense concessions. How does the length of new lease terms compare with older leases? What will be needed in terms of capital improvements cost? And be sure to point out noteworthy or w1usual common area maintenance expenses, or unsuccessful marketing attempts and unsatisfactory responses to that marketing. There are plenty of other fact-specific arguments that will vary by property. When comparing your real estate to sold properties, various important considerations which may be relevant include geographic desirability and demographic comparability (or lack thereof) between the properties; actual and effective age; quality or class of the asset; and size. Consider, too, each property's condition, which may include any physical depreciation or property-specific peculiarities, and the presence of any intangible assets such as branding that affect value. Are the properties functionally equivalent, or is there disparity between the subject and the sold properties, such as differing qualities or quantities of parking, traffic anomalies, and other distinctions?

There are many promising areas for taxpayers to draw from in arguing with county assessors to reduce property valuations, and thus a decrease in the property tax burden. But in Georgia, it is critical for new owners to be diligent about taking appropriate action upon receipt of the county assessment notice.

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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Jun
06

Actual Expenses Establish Low-Income Housing Value in Dispute

"The actual expenses, coupled with the rent restrictions, would cause a willing buyer to pay less for this type of a housing project as opposed to a market-rate apartment complex. Thus, the taxpayer carried its burden in proving that its property tax assessment was excessive..."

By Gregory F. Servodidio, Elliott B. Pollack as published by Affordable Housing Finance Online, June 2013

Property owners and assessment authorities continue to clash over the proper valuation for property tax purposes of rent-restricted, low-income housing. One of the most recent disagreements flared up in the small town of Beattyville, the county seat of Lee County in east central Kentucky.

A developer had converted a former Beattyville school into 18 units of low-income housing apartments. In connection with that conversion, authorities placed a restrictive covenant on the land use, to remain in place for 30 years. Under the restrictions, the Beattyville School Apartments could only take in tenants with incomes equal to or less than 50 percent of the local median income.

The Lee County property valuation administrator valued the property for tax purposes at $662,700, or about $37,000 per unit, in 2011. This value appropriately excluded any value attributable to the issued tax credits. Nevertheless, it was still well above the value of $130,000, or about $7,200 per unit, that the taxpayer presented on appeal. What created such a dramatic gap between those opinions?

The Kentucky Constitution mandates that assessors must value all property for tax purposes at fair cash value, meaning the price that the property is likely to bring at a fair voluntary sale. In arriving at fair cash value, the assessor is not obligated to consider every characteristic of a particular property, but the law requires her to consider those factors that most impact the property's value. In the case of rent-restricted, low-income housing, this requires considering those property characteristics that differentiate the asset from market-rate housing.

Interestingly enough, Lee County's assessor and the taxpayer agreed on just about all of the steps in estimating the property's fair cash value. Specifically, they agreed that the income approach to value was the most appropriate valuation methodology for this property type. They further agreed that the property's actual restricted rents should be used in the development of the income approach. They even agreed that the income approach should use a 10 percent capitalization rate, which is surprising, considering that capitalization rate selection is often a subjective determination and a point of contention between opposing valuation professionals.

The consensus broke down on the issue of expenses. The county's assessor had obtained the property's actual audited expenses as reviewed and approved by both the Department of Housing and Urban Development and the Kentucky Housing Corp. The assessor deemed those expenses to be excessive and decided to cap the expenses used in her valuation model at 35 percent of income. The assessor used the same expense ratio to value other businesses in Lee County. Using lower, capped expenses as opposed to actual expenses produced a value that was five times higher than the taxpayer thought it should be.

On appeal, the hearing officer for the Kentucky Board of Tax Appeals sided with the property owner on the expense issue. He concluded that it was inappropriate to cap the expenses used in the income approach since these expenses are to a certain extent a function of applicable state and federal law, which pushes them higher than those at market-rate apartments. To ignore the actual expenses is to overlook an important characteristic of the property that has a significant impact on its value.
If the assessor felt that the actual expenses were excessive for specific reasons, she could have provided evidence to that effect at the appeal hearing. Simply arguing that they were too high, however, was insufficient to convince the hearing officer to reject the use of audited and approved expenses.

The actual expenses, coupled with the rent restrictions, would cause a willing buyer to pay less for this type of a housing project as opposed to a market-rate apartment complex. Thus, the taxpayer carried its burden in proving that its property tax assessment was excessive.

In concluding that the complex should be valued at $150,000, the hearing officer and in turn the Board of Tax Appeals were mildly critical of the taxpayer's valuation presentation. The hearing officer noted that the taxpayer's appeal petition valued the property between $110,000 and $150,000. During the hearing, the taxpayer refined its value position to $130,000, but in a way that was not entirely clear from the record.

Citing an earlier Kentucky court ruling, the Board of Tax Appeals refused to put the taxpayer in a more advantageous position on appeal than the position it had staked out in its filing. This serves as yet another confirmation that a taxpayer should place the lowest supportable value on its appeal form, so as not to place a floor on its value position during the appeal process.

 

GServodidio pollack

Gregory F. Servodidio, CRE, and Elliott B. Pollack represent clients in property tax appeals and eminent domain matters at the Connecticut law firm of Pullman & Comley, LLC, the Connecticut member of the American Property Tax Counsel, the national affiliation of property tax attorneys. Servodidio can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Pollack at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

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May
15

What's the Property Tax Impact of Lifestyle Centers on Enclosed Malls

"The replacement cost approach has enabled property owners to obtain reduced assessments for steel mills, hospitals and other property types. The same theory can apply to an enclosed mall..."

By Brent A. Auberry, Esq., as published by REBusinessOnline.com, May 2013

This is not your mother's shopping experience. In the never-ceasing cycle of trying to stay hip and cool (or perhaps just relevant), mall owners in recent years have shifted away from the traditional, inward-facing enclosed mall to today's outward-facing lifestyle center. This change in design for new shopping centers brings with it a potential change in valuation techniques for older malls.

Assessors often apply a modified reproduction cost to malls, basing value on the cost of recreating the property's identical shape, size, design and layout. A more relevant value is replacement cost, or the cost to replace the asset with a modern shopping center with the same utility. In other words, in certain circumstances assessors should assess large enclosed malls as if they were the less costly, more efficient lifestyle centers that could be developed on the same site. The difference might result in property tax savings for the owner.

Lifestyle centers typically range between 150,000 and 500,000 square feet of leasable retail area and include at least 50,000 square feet devoted to upscale national chain stores, according to the International Council of Shopping Centers. Many rely on multiplex theaters or other entertainment components rather than traditional anchor stores.

Most importantly, lifestyle centers are open, with streets or outdoor pedestrian walkways rather than enclosed corridors, and are easily accessible from the parking area. There is no common entrance, no massive food court, no inline space or mezzanines — and none of the costs that go with those expensive construction items.

According to Sara Coers, managing director at Valbridge Property Advisors in Indianapolis, lifestyle centers reflect a pedestrian-centric, Main Street idea where customers can park near and access their favorite retail properties from the exterior. Shoppers avoid the extra time needed to find and enter a common entrance, traverse a long stretch of the mall's interior to find a particular store, and then reverse the process after making a purchase. For these reasons and others, lifestyle centers are the new, trendy kid on the shopping block.

Costs Are Key Consideration

Large interior spaces make enclosed malls bigger and more expensive to build and operate. That interior space must be heated and cooled, lit, cleaned, secured and insured. Those higher costs can translate into a lower property tax assessment, and here is how. Under the cost approach, the assessor should value the enclosed mall as a modern property of the same utility as the existing property, and the mall's modern equivalent may very well be a smaller and more efficient lifestyle center.

A penalty for the property's excess construction cost is only part of the equation. The assessor should also consider reducing the enclosed mall's assessment based on its excess operating costs, which penalize the existing mall's value. An assessment for property tax purposes should be adjusted downward to reflect that penalty.

However, not every enclosed mall should be replaced with a lifestyle center for assessment purposes. The demographics of the market served must support the case. Lifestyle centers will be sustained by a higher-income customer base. Consider the competition as well. Would customers flock to a lifestyle center, if another regional mall were nearby?

Is the climate compatible? A developer might replace an enclosed mall with a lifestyle center in Florida but not necessarily in Minnesota, where indoor shopping is a significant customer draw during severe winter weather.

The replacement property must have the same utility as the existing, assessed property. How utility is measured is open for discussion, and might be leasable square footage, the number of customers served, or something else. A utility measuring stick of some kind is a necessity, however.

How To Bolster Your Case

Sometimes property owners need to speak the language of the local assessor. That language is often cost, and applying cost means looking at replacement value. Enclosed mall owners must ask themselves, "What would a modern replacement for this property be?" If the answer is "a lifestyle center," then there may be an opportunity to negotiate a property tax reduction.

The replacement cost approach has enabled property owners to obtain reduced assessments for steel mills, hospitals and other property types. The same theory can apply to an enclosed mall. Even if the mall would not be "replaced" with a lifestyle center, a reduction is likely justified if the property is overbuilt or inefficiently configured and a smaller enclosed mall design would support the same utility.

Property owners shouldn't be afraid to ask themselves if a lifestyle choice might reduce their property tax assessment.

auberryBrent A. Auberry is a partner in the Indianapolis office of the law firm Faegre Baker Daniels LLP, the Indiana member of American Property Tax Counsel (APTC). Brent A. Auberry can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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May
10

New York City Assessors Elevate Forms over Substance

"New York City has launched an all-out effort to deprive taxpayers of hard fought tax exemptions and find new ways to impose high penalties for late and defective filing. The measures are all calculated to bring in additional revenue..."

By Joel R. Marcus, Esq., as published by National Real Estate Investor - online, May 10th, 2013

The New York City Department of Finance has generated millions of dollars in additional revenue for the city coffers by directing new and greater efforts to serve penalties and remove tax exemptions from property owners who fail to make complete and timely filings of routine information statements. In the process, however, the city has deprived many property owners of valuable tax exemptions that they were entitled to, or charged stiff penalties for what amount to minor infractions and late or incomplete returns.

Late last year, property owners received notices to file a certificate of continuing use for commercial tax exemptions like the Industrial and Commercial Incentive Program and the Industrial and Commercial Abatement Program. The notices warned that even though a property owner may qualify for continued benefits on these multi-year, legislative as-of-right incentive programs, failure to timely file the renewal form would result in the exemption's cancellation.

This form only asked a few routine questions, requiring the property owner to list the square footage of commercial or industrial space, the number of permanent employees at the building, and report the number of employees who were New York City residents. In fact, the city had discontinued the form for the past 10 years.

Many owners were either unfamiliar with the form or failed to receive notices that were mailed to the wrong address, in many cases because the city failed to note a change in ownership that occurred during the past decade. To complicate matters, only a form specifically generated by the Department of Finance for each property could be used, requiring those who did not receive it to request a duplicate. So where a property owner had multiple parcels and lacked the correct form for one or more of its properties, the city refused to accept a standard form that did not carry its barcode.

The city allowed no margins for error. If the property owner left even one question blank, as in the number of permanent city residents that worked in a shopping center or office building, this was grounds to declare the form incomplete and invalid.

Not-for-profits received a similar request to renew Educational, Charitable and Religious exemptions by returning a different renewal form on a timely basis. Many houses of worship and schools that failed to receive the notice or were negligent in completely filling out and returning the form on time saw their exemptions removed.

Many not-for-profit organizations had enjoyed an exemption for decades, if not longer, and considered the exemptions to be granted by the State Constitution and state legislation. Some of those organizations were unfamiliar with this new policy and ill-equipped to delineate details of tax exempt uses and purposes. After all, this information previously was only required on the initial exemption application, filed long ago by people long since departed.

In the process, a great many of these venerable institutions lost an exemption for which they were absolutely qualified. In many instances they were forced to engage counsel and file appeals at the tax commission, which found that the removals were unjustified.

The most severe of the form-failure penalties fell on Real Property Income and Expense (RPIE) filers. The RPIE is a mandatory report of income and expenses, but some properties fall into one of several filing exemptions, such as those with new owners. Although exempt from filling out the entire form, new owners had to check a box on the form affirming that they were exempt from filing. Therefore a failure to report back to the city that they weren't required to file the form became a reason to charge a penalty for failing to file a form on time. Here the penalties, rarely if ever experienced before, became commonplace.

Last year the city collected fines of $100,000 or more for minor infractions of the filing deadlines. To make matters worse, the city imposed many penalties a year or more after the alleged infractions, with the unfortunate result of saddling new owners with penalties because the previous owners failed to file two years earlier. Filing errors not being of record, title companies are unable to insure against such losses.

Notwithstanding that for more than 20 years RPIE compliance has been greater than 99 percent and only three examples of fraud are on record, the Department of Finance now is proposing legislation to tighten the screws again. The department refuses to trust taxpayers to file these returns themselves, and has asked the City Council to move the annual due date up from Sept. 1 to June 1, with a new requirement that the form be completed and certified by a certified public accountant (CPA).

Property owners who submitted RPIE statements digitally on the Department of Finance website each September previously will now have to file using a CPA ertificate by June 1 each year. That means owners will incur certification fees for all commercial properties with an assessed valuation of $1 million or more (a CPA fee is usually $10,000 or more depending on the property). This burden never existed before.

Since the Department of Finance online entry system doesn't adhere to generally accepted accounting principles, and because it excludes large categories of income and expense, it may prove impossible for many CPA's to comply. Also, by excluding these categories, the report doesn't mirror the owner's actual operating information, making it impossible for anyone to sign or attest to it.

These policies elevate "form over substance" to an entirely new — and sinister — level.


JoelMarcusJoel R. Marcus is a partner in the New York City law firm Marcus & Pollack, LLP, the New York City member of American Property Tax Counsel(APTC), the national affiliation of property tax attorneys. He may be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
13

Taxing Times

"What assessors may try to ignore is how unsteady this recovery truly is in light of stalled economic growth."

How to Avoid Unfair Tax Assessments Due to the Economic Recovery

By Darlene Sullivan Esq., as published by Commercial Property Tax Executive, April 2013

Property taxes are the largest expense for many commercial real estate owners, so in today's stagnant economic climate, it would be wise to take initiative to ensure that tax assessments fairly represent property values.

Property tax systems vary from state to state, but no matter how the local system operates, there are some key things to keep in mind. As the nation's commercial real estate market continues its slow recovery, local assessors will try to capitalize on what appears to be a visible improvement in the availability of capital and an increased number of real estate transactions. What assessors may try to ignore, however, is how unsteady this recovery truly is in light of stalled economic growth.

One way assessors may attempt to reflect the market's recovery is by applying a lower capitalization rate to an inflated net operating income in order to arrive at a higher assessed value. Capitalization rates are a buyer's expected annual rate of return on a property purchase. Assessors observing improvement in the commercial real estate market will expect a stronger cash flow from the property combined with a decreased risk. Whether or not that expectation applies to the property, it will likely affect assessed value. While it is true that absorption levels have improved across property categories over the past year, rents have remained flat or decreased from pre-recession levels, and revenue growth still has not caught up to what it was five years ago. Local assessors need to be reminded that with revenues still struggling to recover, the absorption gains should not automatically translate into higher assessed values.

Strong performances recently by real estate investment trusts provide another way assessors may try to increase values unfairly. In this scenario, an assessor unfairly applies the limited number of REIT property sales within a sector to all of the assets in the area that fall within the same property code. Yet such a comparison may be inapplicable to a particular asset.

Following are some guidelines to ensure fair treatment from an assessor: First, review the 2013 property assessment promptly and do not miss any appeal deadlines. Most local assessing jurisdictions have Web sites and online resources to guide taxpayers through the appeal process. When reviewing your assessment, ask yourself: Did the value increase, decrease or stay flat from the previous assessment? Scrutinize it and consider an appeal of any increases in assessed value from 2012 to 2013. Second, evaluate the property's individual characteristics: Was occupancy up or down? Did revenues and expenses increase or decrease? Are there any significant items of deferred maintenance? Any changes, either positive or negative, may impact assessed value.

Third, in many states the expectation is that assessed values will increase significantly in 2013. For example, in three of the largest counties in the state of Texas, assessed values increased between 2.5 percent and 9 percent across property types from tax year 2011 to tax year 2012. Given the increased number of transactions and the signs of recovery, property owners should expect increases in 2013 at least equal to those in 2012.

In some cases, however, assessors will be even more aggressive to compensate for what they now perceive to be modest increases in 2012. If an assessment increases significantly, make sure to have the proper tools and a property tax professional to fight that assessment.

Finally, recognize that the management of property taxes may impact how quickly a particular asset recovers from the recession. A lower property tax expense means a higher net operating income and more cash flow. The money can then go back into the asset to cover any capital expenditures or can be distributed back to investors. As an added benefit, lower property taxes can impact other aspects of the property, such as occupancy. For example, keeping the property tax expense under control may allow a shopping center owner to quote lower expenses to prospective tenants, providing an edge over the competition when it comes to attracting and retaining quality retailers.

Be vigilant when it comes to property tax expense in 2013, and don't let the signs of an improving commercial real estate market drive assessed value to distorted proportions. Be aware of tactics your local assessor may be using to increase values, and know how to counter them.

DarleneSullivan140 Darlene Sullivan is a partner in the Austin-based law firm of Popp Hutcheson P.L.L.C. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Sullivan can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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