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Property Tax Resources

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.

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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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Nov
08

Bay Area Governments Expand the Use of Transfer Taxes to Boost Collections

"Lately, cities and counties have been seeking ways to collect transfer tax from these legal entity transfers. For guidance, they have looked to California's property tax regime, which generally reassesses property when legal entity transfers occur..."

By Cris O'Neall, as published by National Real Estate Investor, November 2011

Property owners in and around San Francisco face an increasing tax burden as local governments attempt to bolster their struggling budgets by expanding the scope of transfer tax laws. In recent years, the cities of San Francisco and Oakland as well as Santa Clara County have gone beyond just collecting transfer tax when a deed is recorded, and now collect the tax for real property ownership changes that occur when one company buys or takes over another. The new laws may be working, as transfer tax revenues in all three jurisdictions have recently risen. From the time of its first implementation in the 1960s until recently, local governments only levied documentary or real property transfer taxes when a deed or other legal instrument was recorded based upon a transfer of "realty sold." The amount usually ranged from $0.55 cents to $3 for each increment in the reported price paid for the property.

However, the advent of new types of legal entities which are readily bought and sold has altered the way properties transfer now. As a result, the traditional system for collecting transfer tax via recorded deeds cannot always keep up with today's transactions.

For example, owners frequently transfer single-member limited liability companies and limited partnership interests to other owners. When these legal entities own real property, tracking real estate transfers can be difficult: While a deed is recorded when Company A sells real estate to Company B, no deed recording occurs when Company A buys a controlling interest in Company B, which owns real estate and continues to operate. Because the change in control of a legal entity that owns real property does not require a deed to be recorded, transfer tax is not collected when such legal entity transfers occur. Until now, that is.

New Implementation

Lately, cities and counties have been seeking ways to collect transfer tax from these legal entity transfers. For guidance, they have looked to California's property tax regime, which generally reassesses property when legal entity transfers occur. Amending their transfer tax laws to follow California's property tax system, jurisdictions have adopted ordinances that expand the scope of the transfer tax to include legal entity transfers. Santa Clara County was the first Bay Area jurisdiction to enact a transfer tax on legal entity transfers. The county's law imposes transfer tax whenever a legal entity that holds real property experiences a change in control, either directly or indirectly.

CONeall NREINNov2011

San Francisco adopted an easier approach. It simply redefined the term "realty sold" in the 1960s transfer tax statute to mean a change in ownership control for a legal entity that holds real property. Oakland followed suit, amending its law to include language similar to that in San Francisco's ordinance.

The amendments to these three Bay Area jurisdictions' laws were intended, at least in part, to close a perceived loophole in the transfer tax and thereby increase the amount of tax collected. For instance, when Oakland amended its transfer tax law, it expected to increase transfer tax revenues by $550,000 each year.

Amounts rising

The strategy may be working. In the past one to two years, the amount of transfer tax collected by San Francisco, Oakland and Santa Clara County has been on the rise. By far, the largest rise was in San Francisco where collections have shot up by more than 160 percent over the past two years, while Oakland and Santa Clara County experienced modest gains in transfer tax revenues.

The reason for the increase is less clear. Obviously, a higher number of transactions due to the recovery of the Bay Area real estate market drove some of the surge. And in San Francisco, transfer tax revenues also rose because the city raised tax rates to 2 percent for transactions valued at more than $5 million and to 2.5 percent for transactions million or more, up from 1.5 percent previously.

For comparison, the amounts of transfer tax collected by Berkeley, the City of San Mateo and Contra Costa County—none of which collect transfer tax on legal entity transfers—have been flat in recent years. The experience of these other jurisdictions may be an indication that the expansion of transfer tax laws by San Francisco, Oakland and Santa Clara County to capture legal entity transfers is indeed having the intended effect.

To combat transfer taxes, property buyers should structure transactions to fall under one of the exceptions in California's transfer tax law. If an exception is not available, buyers should timely advise tax authorities of their transaction to avoid costly non-reporting penalties.

CONeallCris K. O'Neall specializes in property and local tax matters as a partner in the Los Angeles law firm of Cahill, Davis & O'Neall LLP. His firm is the California member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Nov
08

Recipes to Reduce Property Taxes Can Ease the Pain of Challenging Economic Times

"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 Stewart L. Mandell as published by National Real Estate Investor Online, November 2011

In his 1948 book, "How to Stop Worrying and Start Living," Dale Carnegie titled one chapter, If You Have a Lemon, Make A Lemonade. That advice has been passed down through the years to anyone facing a tough situation. How do you take something that's bad and turn it into a positive? The metaphor is apt for commercial real estate owners today, many of whom are stuck with piles of lemons.

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. Imagine an intersection with four 150,000-sq.-ft. office buildings, one on each corner. The four buildings are physically identical, but have economic incongruities that could result in significantly different property taxation. These differences include vacancy rates, current rents, lengths of leases, creditworthiness of tenants and recent financing transactions.

Building A's rents average $25 per sq. ft., which is $5 more than the market average of $20 per sq. ft. But its leases with above-market rents will be ending sooner than the average lease in the other buildings at the intersection. Building A is 90 percent occupied, versus the market average of 80 percent.

If a tax assessor values the property using the actual contract rents, current occupancy and a capitalization rate obtained from a national survey, the property owner might well suffer excessive taxation. Arguing for a few adjustments to that calculation might substantially reduce Building A's taxes. The law of the jurisdiction might authorize a valuation that uses market rent, rather than above-market contract rents. Furthermore, leases that will be ending soon could justify a capitalization rate that is much higher than that reported in a national survey; rates from national surveys often are derived from fully leased, stabilized properties and not ones that soon could have significant vacancy.

If Building A's value is assessed according to its superior attributes and taxed at 2.5 percent of market value, its taxes would be more than $520,000 (see chart). If, however, its valuation is similar to a building with market attributes, its taxes would be around $360,000, almost 30 percent less.

Building B has the market's average vacancy rate of 80 percent and the same, above-market rents as Building A. The property recently sold in a sale-leaseback transaction that priced the building above its assessment.

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As with Building A, the applicable law might provide for using market rents in the assessment. Additionally, the sale-leaseback transaction price doesn't preclude a lower assessed value. Some state supreme courts have recognized that sale-leasebacks are simply financing transactions and should not be used to value properties for taxation.

Buildings C and D both have below-market average rents of id="mce_marker"5 per sq. ft. Building C has accepted tenants with greater credit risk to achieve 90 percent occupancy. Building D is in the worst shape, with below-market rents and a below-market 70 percent occupancy rate.

Certainly any tax appeal for Building D would rely on the property's below-market rents and occupancy. Additionally, the taxpayer may be able to show that these problems warrant a higher capitalization rate, which also would reduce the property's indicated value and taxes.

To the extent that Building C, like Building D, has below-market rents, the same holds true. With the above-market occupancy, the owner of Building C will need to determine whether the jurisdiction would accept a valuation that uses market vacancy, and if not, seek an adjustment based on the greater likelihood of defaults.

Dale Carnegie also wrote, "We all have possibilities we don't know about." Well-advised property owners, too, may learn of possibilities for property tax reductions they didn't know about.

MandellPhoto90Stewart L. Mandell is a partner in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Oct
27

A Highest and Best Use Analysis Can Reduce Property Tax Liability

"The assessor's mistake was failing to apply a consistent use to the property's land and improvements. While the land value suggested a high-density use, the existing improvements could not support that value..."

By Kevin Sullivan, as published by Commercial Property Executive Blog, October 2011

Property owners often assume that an assessor has valued their asset under the correct use, but performing a highest-and-best-use analysis can prepare the owner with data to recognize and dispute an over assessment.

"The Appraisal of Real Estate, 13th Edition" describes four tests which must be performed sequentially: Is the use legally permissible, physically possible, financially feasible, and maximally productive?

In a recent case in Texas, an assessor valuing a historic home operating as a bed and breakfast treated the property as a single-family residence. Tax counsel discovered that the property was zoned for commercial use and legally could not be a single family residence.

Having failed to meet the first test for highest and best use, the assessor incorrectly appraised the property at double its market value. Using the income approach and valuing the property under the correct highest and best use, as a bed and breakfast, lowered the assessment.

In another example, an assessor applied an appropriate land value to a high-rise condo development, but then applied the same per-square-foot value to the land under a nearby, free-standing retail building, inflating the latter property's value. The principle of consistent use states that the land and improvements on one property must be valued based on the same use.

The assessor's mistake was failing to apply a consistent use to the property's land and improvements. While the land value suggested a high-density use, the existing improvements could not support that value. The property was not under an interim use, therefore the highest and best use was a free-standing retail building, requiring a lower land value.

A highest-and-best-use analysis can clearly demonstrate where deficiencies may exist in an assessor's valuation. Performing this analysis can give you the tools you need to reduce your property tax liability.

Kevin Sullivan is an Appraiser and Tax Consultant with the Austin, Texas, law firm Popp, Gray & Hutcheson. 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. Mr. Sullivan can be reached atThis email address is being protected from spambots. You need JavaScript enabled to view it.

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Sep
29

Combatting the Road Less Traveled

When an altered traffic route handicaps your retail center, it's time for an assessment appeal.

"Owners should appeal their property tax assessment immediately after a public announcement of a highway or road change that will divert traffic away from their property..."

By Jerome Wallach, Esq., as published by National Real Estate Investor, September 2011

Once motorists lose sight of the property or can no longer access it conveniently, customers stop coming. At the very least, an owner facing such a loss is entitled to a fair property tax bill that reflects the asset's diminished commercial value.

Owners should appeal their property tax assessment immediately after a public announcement of a highway or road change that will divert traffic away from their property. Don't wait for evidence of changing traffic counts. The damage to property value occurs when the public announcement of the traffic diversion is made.

Effect on value

Assessed values are based upon market value, and market value in turn is predicated on a willing buyer and a willing seller. A public announcement that traffic will be rerouted for a period of time is an external event that appraisers refer to as external obsolescence, or something beyond the perimeter of the property that has an impact upon the property's value. Altered traffic routes are something a prudent buyer would consider in determining what to pay for an asset.

The announcement of an impending traffic shift will affect properties in varying time sequences and severity. For instance, the economic lifespan of a highway commercial property such as a convenience store will be limited to the opening date of the new roadway. A prudent buyer will base the purchase price upon the net operating income for that economic life.

There could very well be some residual value after the opening of the new road, but certainly not for convenience-store purposes. The carcasses of functionally obsolete convenience stores can be viewed from any recently moved.

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Calculating the loss

Determining the property value after a road realignment plan is announced requires the stabilization of the declining income over the predictable remaining life of the property.

Consider, for example, a strip retail center. After the announcement but before construction, there may be no observable effect on retail sales at the center. From the time that the yellow barrels go up and the construction starts, and through the opening of the new road, however, sales and tenancy will decline.

Assuming the center is functioning at 95% of its gross potential at the time of the announcement, there may be a slight drop-off in the first and second year. But assuming a three-year building period for the roadway, leases that expire are not likely to be renewed. Leases in place also are in danger because patronage is expected to decline subsequent to the road opening.

The tenant will lack the ability to make the rental payments and may walk away. As spaces within the center go Notesdark, the property will lose its synergy of crossover customers. At the end of a 10-year period after the announcement, the center will be either dark or attract only an inferior class of tenant, and will at best be a marginal performer.

The property owner must analyze this declining income stream to determine a stabilized income over the remaining economic life of the property. The capitalization rate is then applied to the stabilized income over the property's remaining life as opposed to using the historic data, which becomes meaningless in the face of the changing traffic pattern.

It is critical to remember that the property owner's loss of value occurs at the time the road relocation project is made public, not at some future date. Thus, delaying a tax assessment appeal will only add to the property owner's losses.

Wallach90Jerome Wallach is a partner in the law firm of The Wallach Law Firm, the Missouri 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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Sep
25

Distribution Center Dilemma

"Compared to other commercial property types, distribution centers often sustain accelerated physical depreciation soon after construction. Assessors rarely have the manpower to understand the complexities of a particular property, however, and typically apply a very modest depreciation amount annually. Thus, it is the responsibility of the owner's valuation expert to recognize and quantify these issues in an opinion of value..."

By John Murphy, as published by Commercial Property Executive, October 2011

In construction terms, industrial buildings may be the simplest of commercial real estate holdings. But assessing industrial properties—and in particular distribution centers—for property tax liability requires a good grasp of the way the assets function, as well as an understanding of which assessment methods do—and do not—apply to this property type. Owners who understand some essential concepts about valuing distribution centers can better determine whether an assessed value is fair or if a tax appeal is in order.

Important distribution center attributes to consider include building age, building size, land size, land-to-building ratio, interior clear ceiling heights, column spacing, cubic feet and freeway access. Both the sales comparison and income approaches are reliable valuation methods for this product type, but researching lease and sales information can be tricky. For one thing, the value of distribution centers on a per-square-foot basis can change depending on overall size and other factors affecting the building's functionality. The following general rules will help to match comparables research to the property's size:

For buildings 500,000 square feet and smaller, market research starts with the local market, county and surrounding areas:

  • For buildings 500,000 to 1 million square feet, market research extends to state and regional levels.
  • For distribution centers measuring 1 million square feet or more, research should span the national market. With new facilities, assessors typically cite actual construction costs. It is important to note that the cost approach will result in an excessive assessed value without deductions for physical, external and functional depreciation.

Compared to other commercial property types, distribution centers often sustain accelerated physical depreciation soon after construction. Assessors rarely have the manpower to understand the complexities of a particular property, however, and typically apply a very modest depreciation amount annually. Thus, it is the responsibility of the owner's valuation expert to recognize and quantify these issues in an opinion of value.

The same principle applies to physical building attributes that benefit a specific user without improving the building's marketability. For example, new distribution centers typically have clear ceiling heights in the 32- to 36-foot range, while a few have ceilings as high as 110 feet.

Obviously, the latter properties are built for particular users, and the additional clear height will not translate to additional value in the marketplace.

On the contrary, that excess would result in a functional obsolescence deduction. The cost approach is a valid valuation method with newer facilities, provided that all forms of depreciation are applied. Market extraction depreciation, or analyzing actual sales of comparable properties, is an appropriate way to capture all forms of obsolescence.

Another way to look at the excessive ceiling height issue is to consider cubic volume. Consider the example of a 500,000-square-foot facility constructed in 2008 with a 70-foot clear height. The height is a functional obsolescence issue, as the market will not pay for the additional clearance above the standard 32 to 36 feet. How can the property owner's valuation professional measure that obsolescence?

One useful technique to level the comparable playing fi eld is to determine the subject's cubic feet of space. In this example, arguably, the cubic feet of the building would be comparable to properties with twice the square footage.

So the comparables selected for the income and sales-comparison approaches would be 1 million square feet in size, with clear heights of about 35 feet.

The Abatement Trap

Many companies are constructing distribution centers using abatements, which provide real estate tax relief for a time. While these incentives are enticing, it is a good practice for the property owner to obtain an opinion of value from an experienced appraiser even during the years that the abatement is in effect. Assessed values, however, tend to be overstated during the abatement period. If an owner sits idly by and ignores assessments during the abatement period, it will be extremely difficult to challenge an assessed value once the abatement expires. Annually reviewing the property's value should ensure a correct assessment both during and after the abatement.

Property owners need to be conscientious about the complexities involved in valuing distribution centers. This is especially true when a facility has physical characteristics that are outside the norm. Physical, functional and external forms of obsolescence should be recognized by the assessing jurisdiction, and owners must take responsibility for ensuring that assessors fully understand and account for all forms of obsolescence.

JohnMurphy175

John Murphy is director of real estate assessments at the Austin, Texas, law fi rm Popp Gray & Hutcheson. The fi rm 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. Murphy can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Sep
25

How Eden Prairie Mall Challenged the Minnesota Tax Court

"It is now clear that the Minnesota Tax Court doesn't need to merely pick one of the taxable property values presented at trial and can find a taxable value outside the range of values introduced at trial..."

By John Gendler, Esq., as published by NREIonline, September 2011

In several cases over the past few years, the Minnesota Tax Court has found a taxable property value higher than the amounts presented in witness testimony from either side of a tax argument.

Because the Tax Court has the power to increase values as well as decrease them, this trend has raised concerns when considering whether a case should be taken to trial. However, a Minnesota Supreme Court opinion issued this year suggests that the Tax Court's decisions in the future are more likely to reflect facts presented in testimony.

Legal showdown

The pivotal decision stems from Eden Prairie Mall, LLC vs. County of Hennepin in which the Minnesota Supreme Court rejected the Tax Court's value increase for a recently renovated mall from $90 million to id="mce_marker"22 million.

The Supreme Court has said the Minnesota Tax Court cannot simply copy a county attorney's memorandum — including arithmetic mistakes — when deciding to find a value for a property that is higher than that testified to by either appraiser.

Both the taxpayer and government presented appraisals prepared by independent appraisers who had earned the MAI designation from the Appraisal Institute. (The professional accreditation refers to "Member, Appraisal Institute.")

The diverse appraisal testimony included value opinions for Jan. 2, 2005, and for Jan. 2, 2006, as a separate value must be found for each year in Minnesota.

The taxpayer's appraiser relied exclusively on an income approach, citing the lack of comparable sales, and testified to a value of $68.75 million in 2005 and a value of $60.55 million in 2006.

The original assessments being appealed put the mall's market value at $90 million in 2005, increasing to id="mce_marker"00 million in 2006. The government's appraiser gave most weight to the income approach, testifying to a value of id="mce_marker"10 million in 2005 and id="mce_marker"15 million in 2006. Neither appraiser prepared a discounted cash flow analysis.

The judge based her decision on a direct-capitalization income approach, finding that the government's cost and sales approaches were not meaningful given the recent major renovation of the mall. The Tax Court found the value of the mall to be id="mce_marker"22.9 million the first year and a slightly lower id="mce_marker"20.1 million for the later assessment.

In the decision, the Tax Court adopted an argument made by the government's attorney, which resulted in the indicated value being higher than that found by the government's appraiser. Like the government's attorney, the court stated that the government's appraiser had made a mistake in his calculations.

JGendler_eden_chart

Independent judgment

The Supreme Court said that the Tax Court did have the authority to make a value determination that is higher or lower than the testimony of the experts because the judges bring their "own expertise and judgment in valuation matters."

The Supreme Court noted, however, that "market value determinations involve the exercise of complex and sophisticated judgments of market conditions, anticipated future income, and investor expectations ...." In other words, the Tax Court can set taxable values based on its own analysis supported by the factual record. But did that analysis occur?

The Supreme Court pointed out that the Tax Court rejected both appraisers' opinions of market value and adopted, verbatim, a calculation presented by the government's attorney in a post-trial brief, "including several arithmetic errors."

The Supreme Court said "adopting verbatim the recalculated assumptions and nearly verbatim the value determinations ... presented in a post-trial brief raises doubts over whether the Tax Court exercised its own skill and independent judgment."

Although the Supreme Court affirmed other portions of the case, including the increase in value of a separate anchor store, this part of the case was returned to the Tax Court for additional explanation, including its use of income higher than that used by either appraiser.

Furthermore, the Supreme Court explicitly stated the Tax Court could reopen the record and admit additional evidence. It is not clear whether the Tax Court must admit additional evidence, but presumably the taxpayer will seek to do so when the Tax Court reconsiders its decision. At this writing, the Tax Court has not issued a new decision.

It is now clear that the Minnesota Tax Court doesn't need to merely pick one of the taxable property values presented at trial and can find a taxable value outside the range of values introduced at trial.

Importantly, however, it is also clear that the Minnesota Supreme Court will scrutinize those findings, demanding that the Tax Court explain in detail why it is rejecting the testimony and substituting its own opinions and data.

This precedent-setting case could encourage the Tax Court to stay within the range of testimony from the various appraisers, absent a compelling explanation for doing otherwise.

jgendler

John Gendler is a partner in the Minneapolis law firm of Smith, Gendler, Shiell, Sheff, Ford & Maher, P.A., the Minnesota 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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