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Property Tax Resources

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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Apr
09

A Tax Recipe for Failure in District of Columbia

"Washington is unique in its reliance on property taxes, and in particular commercial property taxes, for a disproportionate share of its revenue. This is due in large part to factors outside of the council's control, such as the large amount of federally owned, tax-exempt property in the district, and to Congress' decision to prevent the district from taxing income earned in the district by non-residents..."

By Scott B. Cryder, Esq., as published by National Real Estate Investor - online, April 9th, 2013

Most property owners in the District of Columbia would welcome a plan to increase the accuracy of tax assessments by providing assessors with the most up-to-date information available. But if that plan also reduced the time D.C. assessors have to conduct their assessments to two months, rather than the current six months, many of those same taxpayers might reconsider. And if this plan would also reduce the time for assessors to handle initial administrative appeals, which has been an efficient mechanism to pare down the number of formal appeals, to six weeks instead of the current four-month window, most reasonable people would likely balk at the entire notion.

The truth is, legislation mandating these exact changes is pending before the Council of the District Columbia. And if statements from key councilmembers and District officials are any indication, this legislation has a good chance of becoming law in the next few months. How did we get here?

First, understand that Washington is unique in its reliance on property taxes, and in particular commercial property taxes, for a disproportionate share of its revenue. This is due in large part to factors outside of the council's control, such as the large amount of federally owned, tax-exempt property in the district, and to Congress' decision to prevent the district from taxing income earned in the district by non-residents.

Nonetheless, this heavy reliance on property taxes has created the public perception that Washington's assessment division is a revenue-generating department. Misplaced as this view may be—and it is misplaced—it has resulted in the assessment division being subject to frequent charges of "giving away" taxpayer dollars.

The most recent iteration of this line of criticism came to a head last year when the Washington Post published a series of articles suggesting that the Real Property Assessment Division was improperly settling commercial assessment appeals. To pile on, the Washington D.C. Office of the Inspector General issued a report shortly thereafter roundly criticizing many key practices and policies in the Assessment Division.

Although many of the criticisms levied at the Assessment Division were unmerited, the top staff of the Assessment Division determined that action needed to be taken. Naturally, one would anticipate that a working committee of stakeholders was convened and suggestions of the assessors sought, since they would be implementing any changes.

One would also expect such a committee, or someone in authority, to thoroughly review implications of any proposed changes. Unfortunately, though not unsurprisingly, none of this occurred. Instead of engaging in an "all—of-the-above" type of conversation, district officials quickly rolled out a wholesale overhaul of the assessment process without anything resembling the thorough vetting needed.

Good intentioned as those public servants proposing these changes may be, most professionals involved in the assessment and appeal process (including every assessor the author has queried) agree that the recommended changes will have a negative impact on the quality of assessments, and will ultimately increase both the number of appeals and the average time required to resolve an appeal. While this is surely not the outcome that district officials desire, it will likely be the one they achieve.

Cryder600 Scott B. Cryder is an associate in the law firm of Wilkes Artis Chartered, the District of Columbia member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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Mar
08

Cap Rates And Property Taxes

Changing cap rate spreads may inflate property taxes.

"Accurate capitalization or cap rates (the ratio between the annual net operating income of an asset and the capital cost or market value) enable an appraiser or investor to calculate an asset's value from its net operating income..."

By Michael Shalley, as published by Shopping Center Business, March 2013

A scarcity of comparable sales data is driving many property tax assessors to rely on historical rules of thumb that may threaten inflated tax bills for shopping center owners. Studying the problem requires a clear understanding of the events that have weighed down transaction volume, how mass appraisal software works, and how extrapolations from the few property sales available today can lead appraisers astray.

A Recipe for Confusion

The recent credit crunch may be regarded as one of the worst in American history. The crisis hit hard in March 2008, as investment bank Bear Stearns became the first of dozens of major American financial institutions to fail or be bailed out by the Fed. The causes were many, starting with subprime mortgages and extending to consumer credit, commercial mortgage backed securities and credit default swaps. But one of the greatest impacts for the commercial real estate market came in the form of uncertainty regarding property values and future access to credit.

This vast uncertainty that followed the crisis halted or cratered most transactions in commercial real estate, making it almost impossible to accurately appraise property and peg asset prices. Appraisers and property tax assessors struggled to find comparable sales, and many times looked back to historical rules of thumb to extrapolate data gathered from a few current sales for application in a wide range of assessments. It is the use by property tax assessors of these old standards in mass appraisal valuation models that may overburden some property owners.

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Accurate capitalization or cap rates (the ratio between the annual net operating income of an asset and the capital cost or market value) enable an appraiser or investor to calculate an asset's value from its net operating income. So an assessor who knows the cap rate from a recent property sale can use that data in assessing similar properties.

In normal and functioning commercial real estate markets, the spread in capitalization rates between Class A, B and C properties has generally held a consistent range. Historically, the variance or spread in cap rates between Class A or investment-grade properties and Class B properties typically averaged between 75 basis points and 150 basis points. A similar cap rate spread existed between Class B and C properties. However, these old rules of thumb have become at least temporarily obsolete.

There has been a flight to quality among investors and well-leased Class A shopping centers' cap rates are getting really aggressive," says Rafi Zitvar, a principal at Global Fund Investments LLC, which specializes in retail real estate. On the other hand, "Class B and B-minus centers have to be priced very attractively, say 200 to 300 basis points above Class A centers, for us to even look at them." The PWC Real Estate Investor Survey — compiled quarterly by PricewaterhouseCoopers and formerly known as the Korpacz Real Estate Investor Survey — reveals this widening trend for cap rates among asset classes in the national strip shopping center category. The survey data confirms that the average cap rate spread between institutional grade and non-institutional grade properties has increasingly widened for the past six years (as shown in the chart).

Modeling Mishaps

Many property tax assessors use a mass appraisal income approach model that uses cap rates to assess shopping centers. The model breaks down various components of each shopping center that are usually predicated on the classification of the center. The rental income, expenses and a corresponding cap rate for each shopping center are driven by the class inputted into the valuation model. Cap rates for each classification of shopping center are calculated off a sliding scale, where the base rate is usually a Class A cap rate supported by a sale or sales in the market, and then all other classes are modeled out using a scale based on typical spreads. It is the scaling or setting of cap rates for Class B and C shopping centers using a Class A cap rate that can result in overvaluation.

Clearly, the cap rate spreads between the top-quality shopping center assets and other classes have significantly changed over the past few years. Therefore, when assessors use historical cap rate spreads between different classes of shopping centers, the mass appraisal model overvalues properties from all but the highest class. It takes some experience, diligence and a detailed understanding of the assessor's model to ensure that a shopping center is being accurately appraised using today's standards.

ShalleyMichael Shalley is a principal at the Austin, Texas, law firm of Popp Hutcheson PLLC., which focuses its practice on property tax disputes, and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. 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
07

Canada: 10 provinces, 10 Tax Regimes

"...as in the United States, local counsel is essential to understanding the tax system and use best means of pursuing a positive outcome..."

By Bradford Nixon, as published by Real Estate Forum, March 2013

The key to understanding ad valorem property assessment and taxation in Canada is to recognize that each province has its own unique system adhering to me basic principles of market value and equity. Each of the J 0 provinces has established a distinct regime of municipal assessment and property taxation. Although each province has different terminology, the general principle of market value derived from a value in exchange is consistently applied.

A second, crucially important principle which applies in nine of the 10 provinces (except Quebec) requires an equitable distribution of assessments and property taxes amongst similar properties. In the United States, this concept is known as uniformity.

Most provinces limit real estate tax levies to the assessed value of real property. Personal property is generally non-taxable in Canada except in Alberta, which taxes personal property in the oil and gas industry.

While the goal of the assessment is to obtain a correct current value as a conclusion, every individual taxpayer is entitled to an assessment that is equitable with comparable properties. As in the individual stales in the US, provincial legislation dictates how to properly determine the correctness and fairness of a property assessment. In a few provinces such as Ontario, the property tax system is complicated by tax caps and clawbacks, or legislative phase-ins of assessment increases or decreases.

Generally, each province provides taxpayers with a level of administrative appeal to a quasi-judicial tribunal, which is in turn subject to appeal on questions of law to the superior court of the province. The tribunals are independently appointed and usually separate from the local municipality. The assessment function may be performed by a provincial corporation in some cases, as it is in Ontario and British Columbia; or alternatively, the assessment roll may be prepared and defended by public or private sector agents of the local municipalities, as in Alberta, Manitoba and Quebec.

Each province has established its own set of exemptions from property taxation, which will include property owned by the federal and provincial governments or by churches, universities, schools and various nonprofit organizations.

Representatives performing assessment and tax services on behalf of taxpayers are coming under increasing scrutiny and regulation. For instance, in Quebec, only licensed appraisers may give opinion of value evidence before the assessment appeal tribunals.

In Ontario, only lawyers or paralegals licensed to provide legal services by the Law Society of Ontario may file and prosecute appeals.

Deadlines for assessment appeals will vary from province to province. For instance, in Ontario, there is an annual right of appeal and an appeal in the initial year of the four-year cycle will be deemed in effect for the subsequent 3 years, whereas in Quebec an appeal of the tri-annual assessment can only be made in the first year of the cycle. Knowing the local laws and practices are critical Thus, as in the United States, local counsel is essential to understanding the tax system and use best means of pursuing a positive outcome.

BradNixon2Brad Nixon is a partner in the Toronto law firm Walker Poole Nixon LLP, the Canadian member of American Property Tax Counsel, the national affiliation of properly tax attorneys. He may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it.. The views expressed here are the author's own.

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Jan
01

Buying Property? Beware Of Inflated Assessments

"The first step toward making a tax-informed decision on a real estate purchase is to consult with a property tax professional knowledgeable in the market..."

By Sharon DiPaolo, Esq., as published by rebusinessonline.com, January 2013

Someone buys a commercial property after months of research and negotiation, and soon afterward the property's real estate taxes skyrocket. The pattern — or at least the degree of the tax increase — often catches even sophisticated buyers unaware because rules that govern real estate assessments vary from state to state and town to town.

Investors who blindly assume that real estate taxes will remain flat after a sale risk disastrous consequences. Tax increases of 50 percent or more are not uncommon following a sale. A clear understanding of how the taxes could change can significantly influence what a buyer is willing to pay for real estate.

"It happens every day," says J. Kieran Jennings, managing partner of Cleveland-based law firm Siegel Jennings, which specializes in commercial property tax. "The phone rings and it's the new owner of a property who has just been hit with a huge tax increase, wanting to know what happened. Sometimes we can fight the tax increase after the fact, but it's always better to know what to expect before you buy. We prefer to get the phone call before the purchase, when we can help plan."

Know the market

Real estate taxes are based on a property's assessment, but tax rules vary widely by location. Some states ban the assessor from changing a property's assessment to match the sale price. Other states automatically raise the assessment to the sale price. Some states have a hybrid system in which a taxing district can file an appeal to increase the assessment after a sale. Knowing the rules of the particular jurisdiction is critical to proper tax planning.

Pennsylvania, for example, has a hybrid system. Pennsylvania law prohibits the county assessor from spot assessing, or independently changing the assessment of only one property. Under another Pennsylvania statute, however, taxing districts can file appeals to increase specific assessments, and many districts use sales to cherry-pick which properties to appeal.

Within Pennsylvania, and even within a particular county, school districts diverge in their practices of filing appeals. In Pittsburgh alone, one district might file appeals on all properties with sales greater than a certain percentage of the assessment, while another district might not file any appeals where the sale price is less than $1 million. A few districts have decided not to file any appeals.

Across the state line, in Ohio, the situation is a little different. Ohio has 88 counties and county auditors set assessments. "It boils down to knowing the county," says Jennings. Ohio has a six-year reappraisal cycle when every property gets a new assessment, and a three-year update cycle when the assessment can be modified.

Owners should expect the sale to be taken into account in a reappraisal year. Mid-cycle, the county auditor also can change an assessment to reflect a sale price. Just as in Pennsylvania, districts can file increase appeals, and many do. Generally, Pennsylvania and Ohio see more increase appeals by taxing districts than do other nearby states.

In New Jersey, the law is similar to Pennsylvania's, but the practical effect is different. "It's a trap for the unwary," says Philip J. Giannuario, a property tax lawyer with Garippa Lotz & Giannuario in New Jersey.

Giannuario cautions property owners to investigate the tax climate carefully before buying. Under New Jersey law, assessments are set by towns. A town's assessor cannot use a recent sale as a reason to change a property's assessment.

Just as in Pennsylvania, such spot assessments are banned. The towns can, however, opt to file assessment appeals to increase the assessments of properties that sell. With more than 650 towns in the state, Giannuario says that whether a particular town actually files increase assessment appeals depends on the town. The key is to know each town's practice.

Budget for worst-case scenario

The first step toward making a tax-informed decision on a real estate purchase is to consult with a property tax professional knowledgeable in the market. Based on the nuances of the particular jurisdiction, if an increase in an assessment is a possibility the tax professional can help the buyer to project a budget as if the assessment were raised to the potential sale price. That analysis could reduce the sum that the potential buyer is willing to offer for the property.

Knowing the worst-case scenario also can help the buyer notify tenants about potential outcomes so that they, in turn, can budget or even escrow funds. A little preparation goes a long way and is an easy step to avoid surprises down the road.

sdipaolo150Sharon F. 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

The Supreme Court Speaks; Some Taxpayers Shudder

"It was not of constitutional moment, the court decided, that the Indianapolis lump-sum payers were stuck for the full amount of their assessments while the installment payers received forgiveness reductions. Terminating the installment payers' obligations to make their remaining installments, the court observed, permitted the city to avoid "maintaining an administrative system for years ..."

By Elliott B. Pollack, Esq., Commercial Property Executive, January 2013

Property owners frequently raise legitimate questions about hard-to-fathom differences between assessments of similar properties, as well as the failure of municipal and county assessors to equalize values. Property owners may question the constitutionality of such unreasonable governmental actions in court. Attorneys, however, have long counseled clients that attempting to toss out an assessment, or a valuation system, on constitutional grounds is a very steep hill to climb. The U.S. Supreme Court underscored the accuracy of this advice last June in a rather prosaic piece of litigation involving sewer assessments.

The city of Indianapolis' policy to pay for sewer construction and line extensions was to apportion the cost among abutting lots. After assessing the initial project, the city divided the cost among the number of affected lots. The city also made adjustments to reflect differences in lot size and configuration. Upon completion of the project, each lot received a final assessment. So far, so good.

Once in receipt of the proposed assessment, a lot owner could choose to pay the amount due in a lump sum or in installments, a choice typically given to property owners facing capital assessments in most U.S. jurisdictions. One particular sewer extension project affected 180 Indianapolis homeowners; 38 chose to pay their obligations at once, and the remainder opted for installments.

Just one year later, the city abandoned the lot apportionment assessment methodology, instead adopting a complicated payment plan based on project bond financing, which need not be discussed here. The key to the new system was that it reduced the liability of the individual lot owners affected by this project.

This was good news for the 142 homeowners who had opted for the installment payment plan, but it went over like a lead balloon for the 38 homeowners who had paid in full. Why? Because in the course of adopting the new financing plan, the city forgave all remaining installments owed under the old format but did not attempt to make refunds to those homeowners who had paid in full.

Understandably upset that they did not receive the same financial consideration that the installment payers received, the lump sum payers initiated refund litigation. The property owners met with initial success but lost the case in the Indiana Supreme Court, which ruled that the city had a rational basis for forgiving the remaining installment payments. Among the reasons the city offered, and the court approved, was a reduction in the city's administrative costs because the cost of calculating refunds to the lump sum payers and making refunds did not warrant doing so. The city also indicated an interest in providing financial relief to the installment payment homeowners. The homeowners took their case to the U.S. Supreme Court, which agreed to hear their appeals.

The Supreme Court concluded that as long as "there is any reasonably conceivable state of facts which could provide a rational basis for the decision" made by Indianapolis, it was constitutional. This thinking is in keeping with a long line of rulings that make it clear the justices are almost always unwilling to wade into the tax-fairness swamp. Commentators suggest that this reluctance is based on the court's perception that once it starts deciding whether a particular tax or tax refund plan is constitutional, it will be deluged with hundreds of cases from all over the country. As a result, the court has developed a jurisprudence that requires it to defer broadly to the judgment of local taxing authorities, except in extreme circumstances.

It was not of constitutional moment, the court decided, that the Indianapolis lump-sum payers were stuck for the full amount of their assessments while the installment payers received forgiveness reductions. Terminating the installment payers' obligations to make their remaining installments, the court observed, permitted the city to avoid "maintaining an administrative system for years ... to collect debts arising out of (many different construction) projects involving monthly payments as low as $25 per household."

The fact that Indianapolis authorities were concerned about potential financial hardships that might be suffered by certain installment payers if their remaining obligations were not forgiven stuck in the craw of the lump sum payers and probably made them wonder why the city did not think of their potential financial hardship, as well. Nevertheless, the Supreme Court ruled that the "city's administrative concerns are sufficient to show a rational basis" for its action. Once the court discerned a rational basis, it refused to take its fairness and constitutional analysis any further.

The June 4, 2012, ruling was signed by Justices Breyer, Kennedy, Thomas, Ginsburg, Sotomayor and Kagan. Justices Scalia and Alito joined Chief Justice Roberts' vigorous dissenting opinion.

Pollack Headshot150pxElliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley L.L.C. The firm is the Connecticut 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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Dec
13

Building Value

How to Save Money by Allocating Prices in Real Estate Transactions

"Federal regulators recognize operations account for a significant component of hotel income and value..."

By Morris A. Ellison, Esq., as published by Commercial Property Executive, December 2012

Commercial real estate investors generally acquire properties based on total cash flow, rather than on the perceived value of the property's individual components generating that cash flow. Increasingly, however, lenders are attempting to underwrite real estate loans through component analyses by breaking down a property into income-generating elements under the theory that separately valuing components reduces risk.

Taxing authorities already generate separate tax bills, often at different rates, for real property, personal property and business licensing fees. A similar approach from lenders, which are under increasing regulatory pressure to reduce risk, may impinge on commercial real estate financing and slow the industry's recovery.

A purchaser often analyzes components of cash flow when evaluating how to improve a property's operational performance and the impact of taxes on potential returns. Common considerations include real estate transfer taxes, allocation of basis for income tax purposes, real and personal property tax assessments, and segregation of readily depreciable or amortizable assets from non-depreciable or non-amortizable assets. Allocation generally involves four components: (i) land (non-depreciable); (ii) buildings or improvements (generally depreciable); (iii) tangible personal property (generally depreciable); and (iv) goodwill or ongoing business value represented by intangible personal property or business enterprise value (BEV).

Hotel properties are prime examples of component analysis, as the analysis is often a major negotiating point. Hotels are generally sold as going concerns—that is, operating businesses with a value distinct the underlying real estate. Integrating a well thought- out allocation into a purchase agreement potentially simplifies recordkeeping yields significant savings on income, property and transfer taxes, sometimes worth tens millions of dollars. The federal Internal Revenue Code applies different depreciation rates and tax calculations to different property types. Commercial businesses with substantial goodwill associated with operations (such as hotels, shopping centers, healthcare facilities and marinas) can significantly benefit from a comprehensive allocation analysis.

For example, much of the value of healthcare facilities rests in operating licenses. These and other intangible assets are generally not subject to ad valorem taxation, and accurately reflecting value will prevent overpaying property taxes due to an incorrect allocation of value. In states where the federal income tax basis is used to calculate property taxes for purchased assets, an allocation analysis is critical. For federal income tax purposes, the tax basis of purchased assets is allocated according to the residual method, which generally allocates a purchase price into classes of assets. Except for land, certain tangible assets are depreciable for federal income tax purposes.

Valuing such assets typically involves obtaining a real estate appraisal, extracting improvement values from land value and valuing tangible personal property such as furniture using the most appropriate methodology for that asset type. Because the federal income tax basis of property is determined at the time of acquisition, allocating the purchase price should be part of due diligence and not put off until after closing. Closing is a great opportunity to establish the various business assets' tax basis, and separate conveyance documents should be prepared for each major asset to document allocated value.

Property Tax Implications

After closing, governments generally separately assess taxes against the real property, tangible personal property and intangible personal property (usually in the form of a business licensing fee).

Tangible personal property, which is subject to a faster depreciation schedule, includes furniture, fixtures, equipment and supplies. Business enterprise value might include startup costs, an assembled workforce, a reservation system and residual intangible assets. The Uniform Standards of Professional Appraisal Practice (USPAP), promulgated by the Appraisal Standards Board of the Appraisal Foundation, require separation of a hotel's business value from other components. However, there is no consensus on the method for calculating BEV.

Some taxing authorities contend BEV is an illusion conjured by disreputable appraisers and property owners seeking to reduce ad valorem taxes, but the Appraisal Institute and federal regulators recognize that the operating business of a hotel, for example, accounts for a significant component of its income and overall value.

Since Oct. 1, 2011, the Small Business Administration has required affiliated lenders to obtain a going-concern appraisal for any real estate involving an ongoing business. Affected property types include hospitality, healthcare facilities, restaurants and nightclubs, entertainment venues, manufacturing firms, office buildings, shopping centers and apartment complexes. SBA lenders must obtain an appraisal valuing the separate components from an appraiser who has taken specified courses in valuing going concerns.

The Office of the Comptroller of the Currency, which regulates commercial banks, simply requires lenders to use a competent appraiser and does not specify course requirements for the appraiser. While OCC appraisals need only comply with USPAP, stricter standards may apply if required by what the OCC calls "principles of safe and sound banking."

USPAP does not specifically require appraisers to value component elements when appraising going-concern properties. Although USPAP Rule 1-4(g) states, "(w)hen personal property, trade fixtures or intangible items are included in the appraisal, the appraiser must analyze the effect on value of such non-real property items," the Appraisal Foundation has made it clear that this standard does not mandate an appraisal of the property's individual components of value. However, "the appraiser may be required to value the individual components because of what the analysis produces and/or the manner in which the analysis was applied." Thus, USPAP implicitly require an appraiser to allocate values under certain circumstances.

The OCC appears to be seeking to require more. The Federal Deposit Insurance Corp. Improvement Act of 1991 imposed additional requirements on institutions subject to OCC regulations, which require each institution to adopt and maintain written real estate lending policies "consistent with principles of safety and soundness and that reflect consideration of the real estate lending guidelines." Exactly what this means is unclear.

A recent article published by the Appraisal Institute contends that appraisals of going concern properties must allocate values. Although not attributable to USPAP requirements, the FDIC, as well as the Financial Institutions Reform, Recovery and Enforcement Act of 1989, may require allocation in order to ensure "safety and soundness." Whether these principles require different interest rates for different components of value remains an open question.

Component analysis makes sense in analyzing operations and in calculating taxes. The ongoing debate over how to calculate BEV, however, illustrates the difficulty of transporting component analysis into transactions and real estate lending. For example, large hotel loans are typically made by a lender's corporate loan department, not the real estate department, and with good reason. Furthermore, incorporating the concept of component analysis into real estate lending seems likely to increase interest rates at a time when available credit is already scarce. That debate is just beginning.

ellison mMorris A. Ellison is a member of the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice L.L.P., and is the South Carolina 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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Nov
18

Are You Being Taxed for your Reputation?

"The taxing jurisdictions argued that "accounting goodwill is not intangible property but rather taxable tangible property..."

David J. Crapo Esq., as published by Commercial Property Executive Blog, November 2012

A recent Utah Supreme Court decision may influence taxes throughout the country by clarifying whether goodwill is a component of taxable real estate value. Most states exclude intangible property from taxation, so identifying intangible components of a business can significantly reduce property tax liability.

In T-Mobile vs.Utah State Tax Commission, the Court declared that accounting goodwill is intangible property and not subject to property tax. The Court defined goodwill as "a business' reputation, patronage, and other intangible assets that are considered when appraising the business."

The taxing jurisdictions argued that "accounting goodwill is not intangible property but rather taxable tangible property." They relied on a 2000 Utah Supreme Court decision in Beaver County vs. WilTel to argue that the synergistic value of a company's intangible property, working together with the tangible property, constituted enhanced value and was taxable because the enhancement value was directly attributable to tangible property.
As the taxing jurisdictions saw it, goodwill was enhancement value, and therefore taxable.

The Court disagreed with the counties and held that goodwill constitutes intangible property and is therefore not subject to taxation. The Court stated that goodwill includes such items as "customer base, customer service capabilities, presence in geographic markets or locations, nonunion status, strong labor relations, ongoing training programs, and ongoing recruitment programs." The Court then stated that these items "are associated with the business being conducted on the property; they are not directly attributable to tangible property."

By clarifying the accounting of goodwill, the Utah case provides a reference point and reminder for taxpayers nationwide. To ensure that property is not over-assessed and thus overtaxed, it is important to make sure the taxing jurisdictions have made all the proper adjustments to remove intangible property. And that entails the exclusion of business value attributable to goodwill.

dcrapo David J. Crapo is a partner in the Bountiful, Utah law firm of Crapo Smith, the Utah 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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Nov
02

Guest Column: Tax Relief for Obsolete Retail Space

"A critical question for the taxpayer is when, if ever, to share that documentation. Appraisal evidence properly prepared with an attorney in advance of litigation will often protect that document from individuals with whom the owner does not wish to share it, and should allow the owner's team the opportunity to present the evidence at the time and place that is most advantageous to the owner..."

By J. Kieran Jennings, Esq., as published by Commercial Property Executive, November 2012

Since 2001, major retailers have closed about 5,000 stores per year. Certainly there are more closings in challenging times, and in other years there are more store openings than closings. There is one constant, however: Real estate owners and operators must determine what to do with vacated space. Assessors also should weigh the impact on the property, and taxpayers should decide how to reduce taxes based on inevitable tenant turnover.

For many years, the assessing community refused to fully recognize the devaluation of a shopping center due to vacancies. Assessors argued that vacant space has worth, and that an income approach to valuation ignores the income-producing potential intrinsic to empty space. In certain instances, the assessor's argument is true, and including an estimate of potential income for vacant space is an integral part of a shopping center assessment. But what should be done when the space no longer has value or becomes a detriment to the property?

Assessors are often reluctant to acknowledge the nominal or negative value of space that no longer adds to a property's value. When that occurs, a financial study of highest and best use can prove that the space simply cannot be reused economically. Specifically, the property owner can show that build-out and other costs required to prepare the space for the highest and best use outweigh the potential rent the space would earn.

Take for instance a small cinema complex that must update to digital projectors or go out of business. An article in the Sept. 30 edition of USA Today described the owner of a four-screen theater who lamented that he lacked the profit margin to support the $250,000 conversion. The cinema operator's plight should raise a question for the real estate assessor. Is the current usage designation of the space, in its current condition, financially feasible? If the answer is no, then the highest and best use study takes a look at the financial viability of either upgrading — in this example, to digital projection — or renovating the space for a different use and user.

When looking at potentially renovating and changing the use of the property, the appraiser or assessor must determine whether the conversion is physically possible. There may be demand for rentable space, but can the existing structure be adapted for that use? Other considerations include whether the use is legally permissible. A bar, hotel or casino may be a great idea, but do zoning and other laws permit the use? The proposed use should also be reasonable and probable. A conversion to a use that harms the rest of the shopping center is not appropriate.

In many secondary markets in particular, the cost of renovation may exceed the amount of rent that would be collected at market rates over the life of the potential lease. Repurposing a cinema, for example, incurs costs that competing retail properties don't have to bear, such as the expense of leveling sloped floors, adjusting ceiling heights and removing lobbies. If the costs do not justify the change, then the appraiser as well as the owner will need to determine if the building is a detriment to the center. In some cases, the only avenue available is demolition of the property, after which the land can be held for future development.

The days of just discussing the issues of obsolete spaces with the assessor are long since over. Chinese Gen. Sun Tzu's famous admonition, "Know your enemy and know yourself, in a hundred battles you will never be in peril," is apropos in tax contests. A successful appeal requires knowing how the opponent ticks and what proof is necessary.

Owners are often best served in preparing for a hearing or meeting by obtaining an appraisal from a reputable third party. A critical question for the taxpayer is when, if ever, to share that documentation. Appraisal evidence properly prepared with an attorney in advance of litigation will often protect that document from individuals with whom the owner does not wish to share it, and should allow the owner's team the opportunity to present the evidence at the time and place that is most advantageous to the owner.

The final question is, when should the taxpayer raise these arguments? Experience suggests that the taxpayer should attack the issue of obsolete space as soon as the market begins to question the existing use. Tax contests can be lengthy, and profitability — or even survival — may depend upon minimizing non-productive expenses such as taxes.

kjenningsKieran Jennings is a partner with the law firm of Siegel & Jennings, which focuses its practice on property tax disputes and is the Ohio and Western Pennsylvania 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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