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Property Tax Resources

Jan
30

Obsolescence Creates Tax-Saving Opportunities For Shopping Center Owners

"External obsolescence may be market-wide or industry-specific, international, national, or local in origin. It can be temporary or permanent, but in most cases, the property owner is unable to fix the problem..."

By Benjamin A. Blair, Esq., as published by rebusinessonline.com, December 2012

Shopping center owners often find that factors beyond their control detract from the marketability and profitability of their investments, particularly in the current depressed market. Economic change and evolving technology, for example, have altered the way retailers and property owners transact business. While lenders keep a tight grip on potential financing, brick-and-mortar retailers must compete against an increasingly global, virtual marketplace.

Despite — and indeed because of — this bleak picture, property owners have reason for optimism. Several states and localities, including Chicago and Indiana, are in the midst of systematic property reassessments. Because this cycle of reassessments falls during a time when retailers are still struggling under the effects of the recession, property owners have an opportunity to reap tax savings from this market turbulence and increase the property's bottom line.

The goal of a property tax assessment is to apply the tax rate to an accurate property value. This value is generally set at either market value or at the property's value-in-use. A property's value, however it is set, can be affected by any number of factors, the most important of which for retail properties is the property's ability to earn rental income.

Real-life scenario

Imagine a neighborhood shopping center with leaking roofs and peeling paint. Perhaps the tenant spaces are awkwardly shaped or poorly constructed. An investor would value this property less than an otherwise comparable property in better condition. This depreciation, called physical and functional obsolescence, is due to the physical condition or flaws in the construction of the property.

But just as a property can suffer from physical and functional obsolescence, a property can suffer depreciation from sources external to the property itself. This depreciation, termed economic or external obsolescence, is a usually incurable loss in value caused by negative influences outside the property. External obsolescence may be market-wide or industry-specific, international, national, or local in origin. It can be temporary or permanent, but in most cases, the property owner is unable to fix the problem.

In order to use external obsolescence to reduce a property's tax assessment, the owner must first identify whether external obsolescence is present. Then the owner must quantify the effect of the obsolescence on the property. Unsupported claims of obsolescence are unlikely to impress an assessor and encourage a reduction in the property's assessment.

To quantify the obsolescence, the owner must know its source. Shopping centers in today's market are subject to external obsolescence from a variety of sources. General economic conditions have reduced the demand for leases and have resulted in fewer tenants. Existing tenants, feeling pressure from lower-overhead competitors, are seeking lower rents to reduce strain on their business. Many retail lease rents are based on a percentage of sales, and as sales fall, so does rental income.

As a result of the real estate boom in the middle of the last decade, many markets are oversupplied with competitive properties, and some uncertainty exists as to the future of brick-and-mortar retail. Further, buyers and sellers are still cautious while engaging in sales, and lenders continue to restrict available capital. Changes in interest rates, inflation, capitalization rates, and elected officials can all have an effect on property value.

Proving cause and effect

After identifying the source of the property's obsolescence, the owner must be able to show the impact of the obsolescence on the property. For example, if the owner has lowered rents in order to keep or attract tenants, the valuation of the property should reflect that lowered income earning potential. Decreased demand from investors, whether because of financing restrictions or lower income potential, should reduce the assessment to reflect the smaller market for investment properties.

And when determining value by comparing the sale of similar properties, owners should emphasize the differences in market conditions, which reduce the value of the property.

For most properties, the largest expense after debt service is the property tax bill, so any reduction in that tax burden can drastically improve the property's profitability. Thus, while the economic climate may be turbulent for some time, prepared and informed property owners can use the nuances of external obsolescence to help weather the storm.

Blair Ben small Benjamin A. Blair is a tax associate in the national law firm of Faegre Baker Daniels, the Indiana 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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Jan
16

Industrial Park Wants Full Reassessment Review

Tim Schooley, Pittsburgh Business Times Reporter covers the case lead by APTC Pennsylvania Member - Sharon DiPaolo, Esq., as published by Pittsburgh Business Times January, 2012

The owners of the Robert J. Casey Industrial Park on the North Side are petitioning the Allegheny Court of Common Pleas Judge R. Stanton Wettick to ensure commercial property owners have to same opportunity to appeal their reassessments as residential property owners in Allegheny Count, according to a court filing.

The petition to intervene in the ongoing legal challenge of the reassessment values for Allegheny County is the latest plea to argue for uniform standards to tax the value of real estate in Allegheny County in a legal battle in which the issue of uniformity has been upheld by Wettick.

The family ownership of the eight-parcel industrial park saw its reassessed value jump by 340 percent, according to court documents, rising from a little more than $2.6 million in its 2011 assessed value to a reassessed value for 2013 of $11,864)00.

Sharon F. DiPaolo, a lawyer who represent the owners of the Robert J. Casey Industrial Park, argued in her petition that Allegheny County currently provides no information online regarding comparable sales to determine new assessments or other pertinent information used.

"The interests of commercial property owners are not adequately represented by the current parties and intervenors in the instant action", she wrote.

Of major concern for DiPaolo and her client is the ability to pursue an informal hearing before the Board of Property Assessment Appeals and Review, where a broader a discussion of a property's relative worth can be discussed, rather than a formal appeal before the county's board of viewers.

So far, the reassessment appeals process has been negotiated over between Allegheny County, the plaintiffs, who represent residential property owners, and Pittsburgh Public Schools, which convinced Wettick to delay implementation of the new assessed values

until 2013 so that reassessment appeals can be established to determine how to reset tax rates.

According to court documents, the reassessed values of commercial properties in Pittsburgh rose by 71.08 percent while the city's residential property increased by 46.89 percent.

"If this process were to be adopted, a commercial property owner which files an appeal before the Board of Property Assessment Appeals and Review could be entirely deprived .... by its adjudication by a taxing body's unilateral request to move the appeal to the board of viewers," wrote DiPaolo. "If this procedure were to be adopted, it would violate commercial property owners' right to due process."

At a hearing on Thursday morning, Judge Wettick agreed to consider the petition for next Thursday's scheduled hearing, said DiPaolo.

She added that the owners of the industrial park as well as other commercial property owners expressed the concern that the scale of the increased assessments on their real estate could force them out of business.

She emphasized the importance of the informal review process for commercial property owners, noting a commercial appraisal costs $5,000 to $10,000. A successful voluntary review can result in immediate tax relief, she added, further explaining that a burden of proof shifts to the taxing body after a successful informal review as well.

"If the commercial owners have to pay on their new assessments before it gets adjudicated it's really going to hurt," she said.

Tim Schooley covers retail, real estate, small business, hospitality and media. Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it. or (412) 208-3826.

dipaolo web Sharon F. DiPaolo is a partner in the law firm of Siegel Siegel Johnson & Jennings, 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
16

Facts Before Tax

Assessors Often Overvalue Centers, Ignoring Vacancies and Other Issues

"Landlords must diligently review property taxes yearly, looking at assessments based on current marketplace conditions."

Most shopping center owners are being overtaxed and do not even know it. Or they do not realize it until they get their tax bill. The problem is in the way taxes are figured by local assessors- a methodology that was only adequate, at best, during good times, but which has become a severe handicap to landlords during this lengthy economic downturn.

In most states assessors take a mass appraisal approach, trying to determine as quickly and ubiquitously as possible the fair market value of all the shopping centers within a tax district using existing data. The assessor is looking at the market value of the property based upon fee-simple value, which is the value of the real estate without encumbrances - that is, what it would sell for if it were vacant and available for sale or lease at market rates.

"The reality is, there are few cases of commercial property selling where you have a vacant building for sale without encumbrances," said Kieran Jennings, a Cleveland-based partner at Siegel, Siegel, Johnson & Jennings. "Typically, it is partially occupied, fully occupied, et cetera. Often there are deed restrictions in place." Jennings is a member of the Washington-based American Property Tax Counsel, which assists property owners in the U.S. and Canada with tax issues.

"Assessors will look at a market, they will review published sources on cap rates, et cetera, to come up with a model that will be used on shopping centers across the board," said Darlene Sullivan, a partner at Austin, Texas-based Popp, Gray & Hutcheson, and also a member of the APTC. "They have to get their numbers out quickly and apply the model without looking specifically into any condition."

Assessments are levied in similar fashion in Michigan. "In Michigan, as in most states, value is based on market as opposed to contract rent," said Michael Shapiro, a Detroit-based partner at Honigman Miller Schwartz and Cohn, and an APTC member. "In general, the assessor uses a cost approach that has not adequately accounted for obsolescence in the market, reduced demand for property, greater vacancies and increased cap rates. All these factors have a negative impact on value. "There are two general ways overtaxing occurs. The first is the time-lag effect of a slumping market, and the second involves the lease adjustments often made to keep tenants in place, but which assessors do not take into account.

Indiana landlords were being victimized by the calendar until laws there were changed, says Stephen Paul, an Indianapolis-based partner at Baker & Daniels and an APTC member. "Our assessment date is a year behind our value date," Paul said. "For example, the assessment date was March 1, 2009, but the valuation date was January 1, 2008, and the market changed dramatically. On March 1, 2009, market conditions were worse than at the value date. People were taxed currently, but based on values when the market was much better."

The more common failure in tax assessments is the inflexibility of assessors or their inability to consider the lease inducements necessary to keep tenants. "I have a number of clients that are regional and local shopping center owners," said Jennings. "Since the fall of the real estate market, there has been tremendous pressure on them to keep tenants in place. So they have gone from net leases to gross leases, put in buildouts and removed square footage."

All these things mean that actual rents are less than what they appear to be to the assessor. Jennings gives one example where tenants will stay in place, but take up less space. To keep tenants, landlords will allow them to halve their space, which means they have effectively cut income in half. "Now when the assessors come along, they see all of your storefronts are occupied, but many of the tenants have reduced space," said Jennings. ''The landlord has pockets of dead space that will probably never be used again. The assessor is assessing you at rents that are $15 to $20 a square foot, but only half that space is being used, so the effective rent is really $7.50 to $10 a square foot. And it is not showing up in any published data, and assessors can only work from what is published."

That problem rarely gets rectified because, for competitive reasons, shopping center owners are reluctant to share information, which means, of course, that the assessors are working from incomplete data. "Shopping center owners are not amenable to giving out information to assessors," said Paul. "The landlord doesn't want to give out the details of a lease, so the assessor will say: 'If I'm not entitled to look at the lease, I have to make my own assumptions, which will be done on incorrect information. Afterward the taxpayer has to file an appeal against the assessment and layout the reasons why it was excessive."

Overtaxing is a problem not just for the shopping center owners, but for the tenants as well. Most leases are triple-net, which means that taxes are passed through to tenants, so a lower tax will benefit the tenant in the end, Sullivan says. "Tenants need someone to be aggressive for them to keep those triple nets down," she said.

This can also be problem with competitive shopping centers. Consider two similar shopping centers across the street from each other, each with the same type of vacancy. One center is valued at $100 per square foot, and the other at $130 per square foot. Because of triple net, tenants will be enticed to the center taxed at the lower rate, because all things considered, the expense of leasing will be lower.

An assessor equipped with nothing more than the cost approach will find it difficult to quantify value losses without going through a detailed income approach, something that assessor is going to lack the time to do. Most appeals processes will recognize this and adjust accordingly.

In Michigan when an appeal is filed, the parties generally get together and discuss the specifics, and usually the matter is resolved without a hearing or trial, says Shapiro. "We have handled many shopping center appeals, and in recent years we have not gone to trial on a shopping center. Some get resolved while preparing for trial, and some get resolved when a formal, independent appraisal is submitted.

"Not every place is so easy. In Ohio and Pennsylvania third parties such as school systems have joined the fray: fighting to keep assessments high because so much funding comes from levies. Lower assessments mean less revenue for the school districts. "In the event, you are able to convince the assessor to reduce taxes based on, say, half the leased space used," said Jennings. "The school districts in Ohio and Pennsylvania can come in and file their own tax appeal to raise the value of a given property." Landlords must diligently review property taxes yearly, looking at assessments based on current marketplace ' conditions, Shapiro says. "My clients are fighting assessments," he said, "because assessors were ignoring the function obsolescence of their properties, which in some cases meant a 50 percent reduction in value."

DarleneSullivan140 Darlene Sullivan is a partner with the Austin law firm of Popp, Gray & Hutcheson LLP, the Texas member of the American Property Tax Counsel (APTC). She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Paul Steve

Stephen H. Paul is a partner in the Indianapolis office of Faegre Baker Daniels, the Indiana 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..

kjennings

Kieran 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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Michael Shapiro chairs the tax appeals practice group at Michigan law firm Honigman Miller Schwartz and Cohn LLP. The firm is the Michigan 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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Jan
15

Inflated Taxes Threaten Phoenix Property Owners

The "new normal" for Phoenix is likely a prolonged era of deleveraging as the market absorbs these distressed assets. For Arizona property owners, the decline in real estate values has not always translated into a commensurate drop in taxes, however. This has occurred for three reasons..."

By Douglas S. John, Esq., as published by National Real Estate Investor Online, January 2012

As 2012 begins, the real estate collapse ravaging Phoenix continues. Phoenix real estate prices have fallen from their height in early 2008 by 28 percent for retail, 52 percent for industrial and 71 percent for office, according to Navigant Capital Advisors, a Chicago-based investment bank. Phoenix ranks No. 7 on Real Capital Markets' list of the most distressed U.S. markets for commercial real estate.

The city's delinquency rate for commercial mortgage-backed securities (CMBS) loans is the third-highest in the nation, accounting for 3.6 percent of total U.S. CMBS delinquencies. And Phoenix's delinquency count is expected to increase next year.

The "new normal" for Phoenix is likely a prolonged era of deleveraging as the market absorbs these distressed assets. For Arizona property owners, the decline in real estate values has not always translated into a commensurate drop in taxes, however. This has occurred for three reasons.

First, the general decline in assessed property values has not kept pace with the actual decline in asset prices. Second, even though taxable property values have dropped, Maricopa County, where Phoenix is located, has increased its property tax rates: for fiscal 2011, tax rates increased by 18 percent from the previous year.

The third and final reason stems from Arizona's unique system of calculating property tax liability from two statutory values — a full cash value and a limited property value. A property's full cash value can decline while its limited property value, determined statutorily, increases, causing an escalation in tax liability.

Taxpayers must be diligent to ensure they are paying no more than their fair share of taxes. Consider the following points before deciding whether an appeal may be beneficial.

Start early

Arizona's property tax system is complex, difficult to navigate, and requires perseverance. Tax year 2013 property tax notices will be mailed in February 2012. The system entails multiple forms and filing deadlines which, if missed, will result in a taxpayer losing appeal rights.

The process will conclude in October 2012 with State Board of Equalization hearings. Owners should start planning now to challenge their 2013 tax assessments. To do so, they should pay close attention to how their properties are assessed.

Mass appraisal?

To determine if a property has been overvalued, it is important to understand that assessors use computer-based statistical models to derive value. These models have several limitations that can result in a property being over-valued.

phoenix graph2First, the assessor's valuation of an individual property is only as accurate as the data and assumptions used in the statistical model to generate a value for a given submarket. The value created by a mass appraisal system may not account for the specific characteristics of a property, which may make it less valuable than predicted by the mass appraisal model.

Second, the mass appraisal system is dependent on correct, complete, and current property data. Oftentimes, the data that assessors use is not only incorrect but outdated by as much as six to eight months, which can inflate assessments. Part of the reason for outdated data is the existence of statutory cut-off dates for collecting data.

Valuation approach

While appraisers use three generally accepted approaches to value - the cost approach, the sales comparison approach, and the income capitalization approach - the appropriate valuation method depends on the property type. In Maricopa County, assessors value 70 percent of commercial properties using the cost approach, which measures the current replacement cost of the improvements minus depreciation, plus the value of the site. But the application of the cost approach in real estate transactions is limited and is rarely used by investors to determine market value.

 

In a depressed real estate market, the use of the cost approach typically results in an assessment that exceeds market value unless all forms of depreciation, especially obsolescence, are deducted.

Market value vs. property tax value

Even if an owner believes the assessor's valuation is reasonable based on his/her understanding of market value in the business world, the property may still be overvalued. Market value as commonly understood differs from property tax value in two key respects. First, Arizona law requires assessors to determine full cash value based on a property's current use, rather than its highest and best use. In many instances these two value concepts produce radically different values.

Second, market value for property tax purposes is limited to the value of the real estate. Arizona law prohibits the inclusion of personal and intangible property in the assessor's valuation.

Limiting assessments to real property is crucial to lowering the taxes of businesses such as hotels, assisted living facilities, and shopping centers and malls, which derive significant income from personal property and intangibles.

Because of the many deadlines, procedures, and valuation methods used, owners should begin reviewing their property tax values now to maximize their chances for success.

dough johnsmall Douglas S. John is an attorney in the Tucson, Ariz. law firm of Bancroft & John, P.C., the Arizona and Nevada 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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Jan
10

Still Under Appeal

How to Achieve Resolution Despite Many States' Years-Long Tax Court Backlogs

"A tax appeal backlog is a symptom of a system that disfavors taxpayers..."

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

Outside of a handful of primary markets and property types, real estate continues to suffer

Yet in many jurisdictions, assessors have failed to decrease taxable values to keep pace with real estate market declines. As a result, savvy owners and managers have been appealing their assessment with ever-increasing regularity, weighing down local and state tax board and court dockets with a ponderous backlog. In some communities, assessment appeals are now years behind. In litigious markets, the appeals themselves often last several years. Thus, tax cases are taking years longer to resolve at a time when taxpayers needed relief yesterday.

In Ohio, Pennsylvania and New Jersey, to name a few states, tax cases commonly wait on the docket for two or more years, but today some cases are unlikely to be re solved for four or more years. On the other hand, in states like Florida and Texas, taxpayers are still getting relief at the informal and board levels. These states have annual assessments and are accustomed to a large number of appeals. Moreover, since assessors in those states have tended to keep pace with the changing market in annual revaluations, assessments have already been reduced in many instances.

The length of time it takes to resolve a case in a particular state often reflects at which stage of the appeal process most cases reach a resolution. States with a faster turnaround time are genrally those that grant greater leniency for assessors to resolve issues. Where greater flexibility exists, taxpayers with limited evidence can discuss the macroeconomic changes that took place while offering specific evidence, allowing for a true give-and-take negotiation and resulting in fast, meaningful changes to tax assessments.

Where assessors and boards are deprived of sufficient latitude, assessment appeals tend to take on a court-like atmosphere where each fact is argued, often resulting in an appeal of the local board 's decision. This litigation delay is compounded when other taxing authorities, such as school districts, intervene in the process.

A tax appeal backlog is a symptom of a system that disfavors taxpayers. There will always be a group of cases that are complex, may require further appeal, or that involve taxpayers who are not fully satisfied. But delay is almost always against taxpayers' interests, while if a great number of taxpayers routinely appeal to a higher board or court, it is clear they did not get a proper result at the lower level.

Backlog is unfortunately viewed as the problem, and as a result administrators address the backlog and not the underlying issue. For instance, some states are shortening the trial time of a case. For commercial cases, the taxes contested are often in the tens or hundreds of thousands of dollars, having the effect of reducing taxpayers' investment value by millions of dollars.

In Kansas, there has been talk of potentially limiting trials to a half day. That may be insufficient time for cases involving complex commercial properties. In Ohio, the tax commissioner has proposed a small-claims section to alleviate pressure on court time. Several Pennsylvania counties are turning to arbitration, with great success. Other states look at funding or ease of filing as the problem, and are imposing higher filing fees to either raise funds or dissuade taxpayers from filing appeals.

Navigating the logjam

The key to successful litigation in a state with significant backlog is to consider that backlog at the outset and to determine if the benefits of a quick result outweigh a more satisfactory result months or years later. Local counsel is a key to understanding the ebb and flow of court dockets, as well as understanding opposing counsel's needs and wants, to be able to structure the best deal possible for a taxpayer. in some instances, tax payers can take advantage of the backlog when there is a large pending refund. It may be possible to negotiate a reduction in the refund by taking it as a tax credit over time instead of having the possibility of that refund being reduced dramatically or taken away completely in a trial.

Finally, in an environment where government fiscal needs may be in direct opposition to taxpayers' need for fairness and uniformity of taxation, it is helpful to get involved with regional and state chambers of commerce and trade groups. These organizations are working toward solutions to real taxation problems and not just the issue of backlog.

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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Jan
01

Six Questions for Tax Counsel's Stephen Paul

"For the last few years, the country has been mired in a deep recession, which has severely impacted tax values. In determining assessed values, assessors don't have an understanding of —or ignore the realities of— the impact of the recession on property owners. One example revolves around the capitalization rate that should be used under the income approach to value..."

Interview with American Property Tax Counsel's president, Stephen H. Paul, as published by GlobeSt., January 2012

CHICAGO-Fighting for every scrap of legal tender has become an important part of commercial real estate, as loans today require much more cash and fights ensue about property value loss.

The locally based American Property Tax Counsel is an advocate in this fight for real estate owners. The group is comprised of 32 member firms and more than 100 attorneys from across the country selected for membership based on their reputations for practice excellence in their respective jurisdictions.

Recently, the group held their annual election and selected Stephen Paul with Indianapolis-based Faegre Baker Daniels as this year's president. He talked recently with Globest.com about his insights into the current post-recession era, and what owners can do to retain as much value as possible.

Globest.com: What are your thoughts upon being elected president of APTC?

Paul: The legal issues that have arisen since APTC was founded 20 years ago have changed substantially. My goal is to continue the tradition of making our member firms familiar with the most current issues and solutions, from both the legal and the valuation perspectives. Doing so will allow us to continue to best serve our member firms' clients.

Globest.com: What do you see as the most significant issue in property tax litigation today?

Paul: For the last few years, the country has been mired in a deep recession, which has severely impacted tax values. In determining assessed values, assessors don't have an understanding of —or ignore the realities of— the impact of the recession on property owners. One example revolves around the capitalization rate that should be used under the income approach to value. Assessors utilize pre-recession information that is not applicable to the realities of today. Taxpayers need to closely scrutinize the data used by assessors in developing the cap rate employed in their valuation of the owner's property.

Globest.com: Any other issues that you see this year that will affect property tax litigation?

Paul: Most states define taxable value as market value in exchange, that is, what a willing buyer would pay and a willing seller would accept. Many assessors, however, attempt to utilize market value in use instead, which can translate into an unlawful value. For example, imagine a manufacturing facility built forty or fifty years ago, but which continues to serve the purposes of its owner. The property may be more valuable to the owner in its current use than it would be if the owner chose to sell the vacant building to a buyer. Did the assessor value the taxpayer's property employing a value in use concept?

Globest.com: Has the recession caused any issues involving how sales are compared to one another?

Paul: Specifically when valuing a property under the sales comparison approach, issues arise as to which sales should be considered and which should be ignored. As the economy —including the real estate market— remains in a deep recession, a large number of comparable sales involve foreclosed properties. We see assessors trying to disregard the values of those foreclosures, when in fact foreclosed properties may be the only market. The savvy taxpayer will determine whether the assessor has failed to include foreclosures in its comparables.

Globest.com: What are some of the ways assessors inappropriately inflate property value?

Paul: Assessors sometimes attempt to use an allocated portion of the recorded sale price in a bulk transaction sale. However, that price usually reflects other factors, such as the value of intangibles, or the benefits to that particular owner from the economies of scale of owning multiple operational buildings. In other cases, assessors will try to rely on reported Section 1031 exchange values. That is also inappropriate, though, because those values include considerations that are wholly aside from the value of the realty. Make certain that only the value of the real property is being used to determine the valuation of your property for property tax purposes.

Globest.com: What are some issues you see arising as the real estate markets start to recover?

Paul: From a macro point of view, the increasing level of federal government debt will mean that programs and expenditures heretofore made at the federal level will be pushed onto state and local governments due to the burgeoning federal deficit. Local communities will be under even more pressure to raise revenue. The greatest source of revenue for local governments is property tax. So, as was the case during the Reagan presidency, assessors will become more aggressive in attempting to raise revenue to satisfy their local budgets, and that will fall on the shoulders of property owners. In order to assure fair property taxation, owners must carefully review their tax assessments to ensure that no inappropriate factors are used by assessors in valuing their property.

Paul_SteveStephen H. Paul is a partner in the Indianapolis office of Faegre Baker Daniels, the Indiana 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
08

Six Steps to Managing Property Taxes for Multiple Assets

"There are several ways of managing tax reviews across a portfolio, ranging from keeping everything in-house to delegating the entire job to an outside firm. In AMC's experience, the best approach has been a combination of those two strategies - with a team effort that relies on contributions from in-house personnel and outsourced tax and appraisal professionals. AMC's six-step tax strategy can serve as a model for other businesses with multiple properties..."

By Brooks Rainer, Thomas Slack, MAI, and Linda Terrill, esq., as published by Leader Magazine, November/December 2011

For companies like AMC Theatres, which has hundreds of locations, the challenge to review assessments for every property and decide whether or not to launch a tax appeal can be daunting. It becomes even more so if the company is a tenant and not the owner of the property.

There are several ways of managing tax reviews across a portfolio, ranging from keeping everything in-house to delegating the entire job to an outside firm. In AMC's experience, the best approach has been a combination of those two strategies - with a team effort that relies on contributions from in-house personnel and outsourced tax and appraisal professionals. AMC's six-step tax strategy can serve as a model for other businesses with multiple properties. Here are the key points:

1. Have the property separately assessed. Whether the company is the anchor tenant or occupies a smaller, in-line space, it's rarely good to be valued with other properties on a single parcel. First, a combined assessment abdicates the right to file an appeal. Second, it may be impossible to discern how the assessor valued the tenant's space versus the other tenants. This leaves each tenant at the mercy of the landlord to appropriately allocate taxes.

2. Involve the company's real estate department. Before a tenant can appeal a valuation from a tax assessor, most jurisdictions require that the lease specifically reserves the tenant's right to contest assessments. The lease may even include language that gives the tenant the exclusive right to decide to appeal and specifically prohibits the owner or landlord from filing on the property. Additionally, the lease should guarantee the cooperation of the property owner throughout the appeal process. Normally, the appeal process will require the owner/landlord to supply financial information, so collaboration and support are necessary.

3. Direct all correspondence where it is needed. Deadlines to appeal property taxes are often very short and can run out during the time it takes to get notices forwarded from the property owner to the tenant. Local taxing authorities will typically cooperate to ensure that all notices, tax bills, etc., are mailed where the tenant designates.

4. Get organized and get help. Once all valuation notices and tax bills are in hand, get assistance from a valuation expert such as an appraiser or valuation consultant. A company with multi-state locations should look to the national market to determine market value, and this kind of information is generally unavailable to local assessors. A third party appraisal can be invaluable when talking to local assessors. Effective tax rates differ enormously from county to county and from state to state. To make better sense of it all, analyze properties on the basis of valuation per square foot in addition to taxes per square foot. Even if the property type is marketed and sold on the basis of value per theater screen or value per apartment unit, most assessors are used to dealing on a square foot basis, and the tenant must be able to speak the language. A valuation consultant also will have access to demographic information that can all be vital in distinguishing one property from another.

5. Analyze properties from an "ad valorem" not "accounting" perspective. Most jurisdictions tax real estate based on the fair market value of the real estate. In other words, in a hypothetical sale, that's the highest price a buyer would be willing to pay for the real estate and the lowest price a seller would be willing to accept, with neither party acting under duress. Working with the appraiser, a tax attorney can analyze the information the assessor produces to determine if the valuations incorrectly include intangible business valuation or personal property or whether the asset was valued using an improper appraisal methodology.

6. Include local tax professionals on the team. The rules for who can file an appeal, when it must be filed, what needs to be included in the appeal and a number of other key requirements vary from state to state, county to county and even from year to year. For multi-property companies, it is virtually impossible to stay on top of these changing rules across the portfolio. By supporting the tax team with local experts, a company can keep abreast of change and ensure that its tax bills are fair and manageable.

The steps outlined will help owners and tenants become more efficient and effective in reining in excessive property tax assessments on their locations across the country.

TerrillSlackBrooksBrooks Rainer is a Vice President at AMC Theatres. Thomas Slack, MAI, is an Appraiser and Principal at Property Tax Services in Overland Park, Kan. Linda Terrill is a Partner in the Leawood, Kan., law firm Neill, Terrill & Embree, which is the Kansas and Nebraska member of the American Property Tax Counsel

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Nov
20

Why Las Vegas Property Owners Should Challenge Their Tax Assessments

"Business leaders' confidence in the Las Vegas economy has turned pessimistic and continued its downward slide throughout 2011. The Southern Nevada Business Confidence Index, which measures companies' outlook, fell to 99.91 for the fourth quarter, down from 99.96 in the third quarter..."

By Douglas S. John, Esq., as published by National Real Estate Investor Online, November 2011

While the tourism, gaming and hospitality industries are stabilizing, the near-term outlook for the Las Vegas economy remains bleak. Economic factors that affect real estate value, such as demographics, employment, income and housing, portend minimal growth in the next 12 to 24 months.

Business leaders' confidence in the Las Vegas economy has turned pessimistic and continued its downward slide throughout 2011. The Southern Nevada Business Confidence Index, which measures companies' outlook, fell to 99.91 for the fourth quarter, down from 99.96 in the third quarter. Adding to commercial property owners' woes, real estate values for all asset classes are at historic lows. Property owners want to know if the steep decline in market values since the peak in 2008 will be reflected in the 2012-13 property tax assessments.

Taxpayers will soon find out: Clark County's issuance of property tax assessments takes place in early December. When assessments arrive, property owners will need to evaluate the benefit of filing a property tax appeal.

Tragically, few owners will file an appeal, even though, on average, property taxes account for 33 percent of real estate operating expenses. They will simply pay their tax bills based on the belief that their assessment is reasonable and that challenging an assessment is too expensive, complicated and time-consuming.

However, rather than taking an immediate pass on contesting an assessment, Las Vegas property owners should consider the following points and then decide whether an appeal may be beneficial.

Long-term Benefits

For savvy taxpayers, the next few years represent a unique opportunity to reduce long-term tax liability. Because of Nevada's partial abatement law or tax cap, a successful appeal this year will yield tax savings now and in the future. When property values begin to appreciate, the tax cap will limit the annual increase in tax liability to no more than 8 percent over the prior year.

Recapture Tax

Taxpayers must be careful to sidestep Nevada's recapture tax. Even if a property's taxable value declined last year, Nevada's recapture provision applies if a property's taxable value decreased by more than 15 percent between tax years 2010-11 and 2011-12, but increases by 15 percent or more in the upcoming 2012-13 tax year. If the recapture applies, the amount of tax that would have been collected without the tax cap will be levied on the property.

The Law on Value

It is important to understand how assessors value property in Nevada to evaluate if a property is overvalued. Owners may believe the taxable value appears reasonable based on their understanding of market value in the business world. But market value in the business world is different from market value for property tax purposes. Nevada law requires assessors to determine taxable value based on value in use rather than highest and best use. In many key instances, these two value concepts produce radically different values.

DJohn_NREINov2011

The Cost Approach

Nevada law requires assessors to determine the initial value of all property using the cost approach, which measures the current replacement cost of the improvements minus depreciation, plus the value of the site. The cost approach is limited in its application and is rarely used by investors to determine market value. In a depressed real estate market, the cost approach generally yields a result that exceeds market value unless all forms of accrued depreciation are deducted.

Value the Sticks and Bricks

Market value for property tax purposes is restricted to the valuation of the real estate alone, or the "sticks and bricks." Nevada law prohibits the inclusion of personal property or intangible property in the assessor's valuation. This applies particularly to businesses such as hotels and motels, assisted living and nursing facilities, and shopping centers and malls, which derive significant income from personal property and intangibles such as trade names, expertise and business skills.

Deadlines and Procedures

Owners should start planning an appeal before tax notices are mailed. The property tax appeal timeline is highly compressed in Nevada. Tax notices are mailed in early December, and this year taxpayers have until Jan. 17 to file an appeal. This leaves taxpayers with only about 30 days after receiving the tax notice to determine whether an appeal is warranted.

Where to Begin

Owners unfamiliar with the deadlines, procedures, and valuation methods used to arrive at their assessment can easily miss an opportunity to reduce their tax bill. To maximize the chances for success, an owner should consult with a tax professional or property tax lawyer with a sound knowledge of Nevada property tax law, valuation theory and tax assessment practices to identify potential avenues for reducing tax liability.

dough_johnsmall Douglas S. John is an attorney in the Tucson, Ariz. law firm of Bancroft, Susa & Galloway, the Nevada and Arizona 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
20

Is a Consensus Emerging on LIHTC Property Valuations?

"Rental rates and asset values have fallen to staggering lows, while snowballing vacancy has sapped income from commercial projects across property types and markets. And with local governments determined to maximize revenue from shrinking tax bases, it is more important than ever that property owners know the best recipes to minimize tax bills..."

By Douglas S. John, Esq., as published by Affordable Housing Finance, November 2011

For two decades, owners and managers of low-income housing tax credit (LIHTC) projects have labored to control property taxes that for many are their single largest expense. It has been a hard fight, as local assessing authorities, state legislatures, and courts have struggled to develop clear policies on the many complicated valuation issues that LIHTC properties create.

The last 10 years have brought significant clarification in many jurisdictions. At least 32 states have established some statewide guidance to taxpayers on LIHTC valuation, with 17 states passing legislation and nine state courts issuing decisions clarifying some aspect of the law related to the methodology used to value these assets.

There is still a significant number of jurisdictions without a clear policy, but a consensus may be emerging. Here is a rundown on progress­ and remaining challenges ­in those states that have addressed the valuation of LIHTC properties.

Differing valuation methods

Few jurisdictions prescribe a valuation methodology for LIHTC projects, but the vast majority of assessing authorities use the income capitalization approach rather than sales comparison or cost method.

Almost all jurisdictions and appraisal literature agree that the sales comparison method is inapplicable to LIHTC properties because these assets rarely, if ever, are sold. When LIHTC transactions occur, finding similarly situated properties is difficult because land-use restrictions can vary greatly from project to project.

Similarly, the cost approach is a poor indicator of LIHTC property values for several reasons. First, the actual development costs for these assets typically exceed those for an otherwise comparable, market-rent property. Most LIHTC projects include additional amenities to serve the elderly and disabled, and comply with federal regulations for subsidized housing.

Second, tax credit projects preclude the principle of substitution that is an underlying assumption of the cost approach. Substitution holds that a knowledgeable buyer would pay no more for a property than the cost to acquire a similar site and to construct similar improvements. But without federal tax credits, most low-income housing would be financially unfeasible, and thus never constructed.

Finally, taxpayers and assessing authorities continue to argue over the question of how to estimate depreciation or economic obsolescence due to the restrictive covenants and federal regulations imposed on LIHTC operations.

By default, then, the income capitalization approach is the most common method used to assess LIHTC properties. Even with the income capitalization method, however, significant disagreement persists among jurisdictions regarding its application, primarily because of the rental restrictions and tax credits associated with LIHTC properties.

An assessor valuing a LIHTC complex using the income capitalization method must choose between market rent and the property's restricted rent to derive gross potential income. A clear consensus among jurisdictions has emerged that the property's restricted rents should be used.

Currently, 30 jurisdictions mandate the use of restricted rent amounts in valuing LIHTC properties. Remaining jurisdictions provide no clear guidelines.

Credit for tax credits

There is less clarity, however, on the valuation of the federal tax credits given to owners of LIHTC properties.

Nine jurisdictions include the value of the LIHTC allocation as part of a property's net operating income. Those authorities contend that the tax credit enhances a project's value and becomes something a prospective buyer would take into account when estimating the project's value.

By contrast, 21 jurisdictions exclude tax credits from property income. The proponents of excluding tax credits point out that excessive tax assessments make low-income housing less economically feasible, and thereby undermine the credit program's goal of encouraging the development of such projects.

The courts also have emphasized that a buyer would receive only the remainder of the tax credits, if any, and a seller might be subject to a recapture of the tax credits. Thus, if the project is sold near or at the end of the 10-year period when the tax credits expire, the tax credits would not add to the value of the project.

In many jurisdictions, the decision to include or exclude tax credits from income hinges on the tax credits being categorized as intangible property under state law. The courts in Arizona, Missouri, Ohio, Oklahoma, and Washington have ruled that the tax credits are intangible and should not be considered part of income for purposes of valuation. By contrast, the courts in Georgia, Idaho, Indiana, Illinois, Pennsylvania, South Dakota, and Tennessee have reached the opposite conclusion.

Of these jurisdictions, the legislatures of Georgia, Idaho, Indiana, Pennsylvania, and South Dakota have since acted to overturn those court decisions. And in a few places including Connecticut and Michigan, tax credits were found to be intangible, but the courts nevertheless found that the value of the intangible tax credits must be taken into account for purposes of assessing an LIHTC project.

Consensus and dissent

There is certainly a greater consistency and clarity today than there was 10 years ago on the complex legal and valuation issues affecting LIHTC projects. Yet significant disagreements remain in the ways jurisdictions handle these assets.

Each state has a complex property tax system. For LIHTC project owners and managers, working with local counsel is the most effective way to understand how a jurisdiction's policy toward LIHTC valuation will affect their property tax assessment.

dough_johnsmall Douglas S. John is an attorney in the Tucson, Ariz. law firm of Bancroft, Susa & Galloway, the Nevada and Arizona 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
16

Prepare now for Allegheny County Real Estate Assessments

"If the county has no direction as to what address the taxpayer prefers, it uses the property address as a default. Commercial property owners will often want their change notices to go to corporate headquarters and not to the property address..."

by Sharon DiPaolo, Esq., as published by Pittsburgh Post-Gazette, November 2011

There are a few simple things Allegheny County property owners can do now to prepare for their 2012 property assessments.

For city properties, new assessments will be mailed in December 2011. Informal hearings will be held in December 2011 and January 2012. The deadline to file formal appeals is Feb. 3, 2012.

No specific timetable is available for properties outside of the city, but based upon Allegheny County's progress in the reassessment project, notices will likely be mailed in late spring 2012 with a similar timetable for informal and formal appeals.

Even before receiving their new assessments, property owners can get ready now:

Check Your Addresses. The county maintains two addresses for every tax parcel -- the Change Notice Mailing address and the Tax Bill Mailing Address. If the county has no direction as to what address the taxpayer prefers, it uses the property address as a default. Commercial property owners will often want their change notices to go to corporate headquarters and not to the property address. Residential property owners will likely prefer to receive notice of changes in their assessments at the property address, rather than, say, their mortgage company.

To check your addresses go to http://www2.county.allegheny.pa.us/RealEstate/Default.aspx, type in your property address or parcel -- the two addresses for your property are listed on the bottom of the General Information tab.

To change your addresses, go to http://www.county.allegheny.pa.us/re/addrchg.aspx, and complete the Request for Address Change Form, and follow the directions for submission.

Important: The website instructions state that to change the Tax Bill Mailing address, one must notify both the Department of Real Estate and the County Treasurer's office -- the form itself omits the instruction that one must also make the submission to the County Treasurer's office.

Gather Your Information. Getting your information organized now will allow you to hit the ground running when you receive your preliminary notice.

For commercial properties, this means assembling the last three years of income statements, last three years of rent rolls, the lease (for a single-tenant property), and details concerning the structure (building size, acreage, year built and site plans) for owner-occupied properties.

Residential property owners should assemble information regarding sales of homes in their immediate neighborhood, any repair estimates for their home and photos of any problems with their home.

dipaolo web Sharon F. DiPaolo is a partner in the law firm of Siegel Siegel Johnson & Jennings, 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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