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Property Tax Resources

Sep
25

Lower Your Property Taxes with High Tech Tools

"Enter technology. Appropriate software and data management processes can yield consistent appeals results on a large scale. These tools leverage a variety of state and national data sources, both public and proprietary, to the taxpayer's advantage..."

By Walter Wolff, as published by Commercial Property Executive Blog, September 2011

Property taxes represent the largest operating cost for most real estate portfolio owners. By combining powerful technology with a solid data management plan, that pesky annual tax bill can likely be cut, adding dollar-for-dollar to the bottom line.

Successful property tax appeals depend on facts. Not only are facts about the property important, but data pertaining to competing properties, equality of appraisal, intangible components, market trends and macroeconomic forces play a vital role in obtaining meaningful tax savings.

Gathering information about your own property is easy. Rent rolls, income statements and deferred maintenance lists are readily available. Unfortunately, this is where most property tax appeal reviews and preparation end.

It's often the thorough analysis of the myriad of outside data sources available that provides the ammunition needed to maximize tax savings at assessment hearings.

These data are not always easy to access, sort, compare, format and make ready for a convincing presentation. To perform an adequate job, the property owner's tax specialist would need to allocate many days of analysis time for each property.

Now jump into the shoes of your tax consultant, who may be handling thousands of appeals for hundreds of clients in a very tight appeal window. Chances are many stones are left unturned.

Enter technology. Appropriate software and data management processes can yield consistent appeals results on a large scale. These tools leverage a variety of state and national data sources, both public and proprietary, to the taxpayer's advantage.

Good software seamlessly assimilates a property's data, tax roll comparables, recent sales, income models and cost formulas. Equally as important, these efficient systems allow full analysis of each property and printing of final reports in less than 20 minutes.

The next time you meet with your tax consultant, ask for a tutorial on how they analyze your valuations and prepare for hearings. If you don't see a judicious use of technology incorporating third-party data and work-up automation, you may be leaving something big on the table.

Wolff

Walter Wolff is chief technology officer at 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. Wolff can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Aug
29

Pittsburgh Exemplifies Pennsylvania's Property Tax Discord

"Pennsylvania has no mandatory requirement for periodic revaluation, meaning that, as a practical matter, no county spends the time and political currency to reassess properties unless a lawsuit is filed forcing it to do so..."

By Sharon DiPaolo, Esq., as published by National Real Estate Investor Online - City Reviews, August 2011

Imagine you are a property owner trying to budget now for 2012 real estate taxes on your high-rise downtown office building, and no one can tell you what assessment your taxes will be based upon.

What number do you budget? What will you bill your tenants?

That property management nightmare is reality in Pittsburgh. The state Supreme Court ordered Pittsburgh and the rest of Allegheny County to reassess properties in 2012, the county's fourth reassessment in 12 years. But with the third quarter drawing to a close, the county hasn't released even tentative assessments, and has no plan to do so before the 2012 real estate bills go into the mail.

Pittsburgh's debacle is but one chapter in an ongoing tragedy, as Pennsylvania's broken property tax system plays out against the day-to-day practicalities of managing real estate. In recent years, the state's system for assessing real property has been under attack — in the courts, in the legislature, in the media and around kitchen tables.

Decentralized property tax system

Pennsylvania is one of only nine states that decentralize the property tax assessment process to the local government level. Its property assessment system operates under six separate statutes which are implemented and funded at the county level.

Pennsylvania has no mandatory requirement for periodic revaluation, meaning that, as a practical matter, no county spends the time and political currency to reassess properties unless a lawsuit is filed forcing it to do so.

As a result, assessments on aging properties grow stagnant while new construction is assigned higher assessments. New assessments occur on a property-by-property basis, either when taxpayers file individual appeals or when taxing districts cherry pick properties to appeal, usually based on recent sales.

For example, two identical office buildings built at the same time by the same builder might originally be assessed at the same id="mce_marker"0 million. But if one of the buildings sells at id="mce_marker"5 million, the taxing district will appeal the assessment of that property, resulting in two identical properties with dramatically different assessments.

Seven Pennsylvania counties have not reassessed in more than 30 years, and Blair County's last reassessment was in 1958. The reason Allegheny County is undergoing yet another reassessment is that multiple lawsuits have forced it to do so.

Currently, Allegheny County is under order from the Pennsylvania Supreme Court to revalue every property within its borders, with new assessed values to take effect for the 2012 tax year. Erie and Lebanon counties are preparing for reassessments to take effect in 2013.

Washington County is in on-again, off-again litigation and currently preparing for a reassessment for 2014. Lancaster County has cancelled its reassessment for 2013 and now will not reassess until 2017.

Call for statewide solution

When the Pennsylvania Supreme Court ordered Allegheny County to reassess, it stopped short of directing the state's other 66 counties to do the same but called on the legislature to study the system. Motivated by imminent reassessment projects with price tags upwards of id="mce_marker"0 million, both Allegheny and Washington counties asked the legislature to issue a moratorium on reassessments until a state-wide solution could be found.

Two years ago, legislation mandating a moratorium died in committee. Then in late June, 2011, the legislature passed a moratorium on just Washington County's revaluation project in a measure tacked onto Pennsylvania's budget.

On July 8, Gov. Corbett vetoed the bill, so Washington County's reassessment was back on but is now delayed until at least 2014. Currently some legislators are putting together yet another task force to study the issue. If history is any predictor, no statewide solution is on the horizon.

Delay in Allegheny County

Allegheny County's revaluation project has been repeatedly delayed. The county is behind on its preparations for the reassessment project and, in particular, behind on its valuation of commercial properties.

At the latest court conference before Judge Stanton Wettick, who is overseeing the reassessment project, the county admitted that it is behind in valuing commercial properties. At the judge's request, the county produced two alternate plans — neither of which will provide taxpayers with tentative 2012 values until next year.

Under the county's preferred plan, in which it would issue all notices at the same time, preliminary notices would be mailed out Jan. 31, 2012 with final values to be certified by early April 2012.

Under the alternate plan, notices would go out first to property owners in Pittsburgh, in December 2012, with certified values following in February 2012. Property owners in the rest of the county would be forced to wait until March for their preliminary notices and May for certified values.

Further, Allegheny County's plans call for an informal review process to analyze preliminary values. But as the reassessment project and preliminary notices have been delayed while the project drags on, the county has shortened the time for informal reviews from five months to five weeks.

tax_chart_pennsylvania

Complicating the matter for taxpayers and taxing districts alike, Pennsylvania law requires municipalities to set the 2012 tax rates in January, before the 2012 assessment is final. And in Pittsburgh, the school district will issue its 2012 tax bills before the assessment deadline.

Progress?

Last week, Judge Wettick heard a dozen representatives of school districts and municipalities describe how the delay in the reassessment project is affecting their budget process, hiring decisions and tax rates while it increases administrative costs and overhead. The City of Pittsburgh School District reported that it would have to take out a $66 million tax anticipation loan just to make payroll, costing the school district almost id="mce_marker".5 million.

Judge Wettick is expected to select one or the other timetable at a hearing on Sept. 15. Taxpayers and taxing districts alike are keeping a close watch on the outcome.

Gov. William Penn announced Pennsylvania's first property tax in 1683; within two weeks of the tax's enactment, a property owner filed the first complaint challenging an assessment. More than 300 years later, Pennsylvanians still struggle to find the right solution to meet Pennsylvania's constitutional requirement of uniformity in taxation.

dipaolo_webSharon 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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Aug
27

Knowing Your Demographics Can Reduce Taxes

"Readily available data such as this can be used to create a compelling chart documenting the losses sustained by a mall owner. Using somewhat different data, a manufacturer can document the depletion of a skilled work force..."

By Christpher Dicharry, Esq., as published by Commercial Property Executive Blog, August 2011

The value of property is influenced by demographic fluctuations. Thus, when property owners receive their tax assessment each year, it is essential that they and their tax professionals carefully examine demographic changes in the markets where their properties are located.

Estimated demographics are available at any time, but the end of a census provides a unique opportunity to mine for demographic gold.

What's Important about Demographics?

A high-end shopping mall in a metropolitan statistical area (MSA) with a decreasing population is a prime candidate for a valuation reduction. The property owner's ability to sustain sales is declining along with the MSA's population, particularly if those leaving the area are high-income earners.

Shifts in population, household income or other demographics affect other property types besides retail. For example, a manufacturer may not sell to local residents the way a retail center does, but it hires from that community.

As population declines, the value of a manufacturing facility in that market will likely decline. This is particularly true if the manufacturer had targeted a specific MSA to maintain skilled employment levels.

Demographics are Readily Available

Anyone with a computer or iPad can access U.S. Census Bureau data across the United States and convert the relevant information into a compelling graphic.

For example, it has been widely reported in the media that the Century III Mall in West Miflin, Pa. is struggling. A comparison of 2000 and 2010 Census data shows a decrease of 6% in the population within a 30-minute drive of the mall.

Readily available data such as this can be used to create a compelling chart documenting the losses sustained by a mall owner. Using somewhat different data, a manufacturer can document the depletion of a skilled work force.

While many factors affect value, and such raw data may not be admissible for an appeal, it is useful for presenting to the assessor convincing evidence to support an argument for a tax reduction.

DicharryPhoto

Chris Dicharry is a partner in the law firm of Kean Miller LLP, the Louisiana 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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Aug
25

A Proper Property Tax Strategy Saves Money

"Dates and timing involve more than just a knowledge of deadlines. Based on knowledge of the law, the savvy tax payer will know the best time to contest their taxes or to close a deal. Dependent upon the jurisdiction, an investor that enters into a land contract or purchases a property's underlying business entity may be able to put off for years the event that triggers an assessment change..."

By J. Kieran Jennings, as published by Commercial Property Executive Blog, August 2011

There are essentially four elements in developing a strategy to minimize property taxes: The law, dates and timing, risk and reward, and a professional team. As in many aspects of real estate, there are practical considerations and then there are details to be addressed by specialists.

Here are some points to consider in your strategy development:

  1. The law that governs property taxation can vary greatly among states, and practical knowledge of tax law is not confined to simply how frequently jurisdictions reassess, but also to how, and what, is being taxed? In certain states, for instance, property is assessed as it is encumbered by its leases. As a result, a property purchased and improved with a building on leased land likely will not be assessed equally to an otherwise identical, neighboring property. Understanding the law regarding what and how property is taxed remains key to knowing how or if, to fight your property assessment.
  2. Dates and timing involve more than just a knowledge of deadlines. Based on knowledge of the law, the savvy tax payer will know the best time to contest their taxes or to close a deal. Dependent upon the jurisdiction, an investor that enters into a land contract or purchases a property's underlying business entity may be able to put off for years the event that triggers an assessment change.
  3. Risk and reward need to be balanced. In a number of states, an ill-advised tax contest can result in an increased assessment.
  4. Taxing authorities are digging in their heels and some are on the offensive. Owners of real estate that is under-assessed, yet they decide to file tax contests simply due to the weak economy may find that the local jurisdiction has hired professionals seeking to increase the assessment to meet fair market value. Quality professional advice reduces risk.
  5. Your professional team, including expert witnesses and local counsel, should consist of knowledgeable tax professionals that fully understand local tax law as well as individuals that understand valuation. Local knowledge is essential.

With a carefully thought-out strategy, you can work with the motivations of the parties to drive a settlement or avoid a hot-button issue with the judge or assessor.

kjennings

Kieran Jennings is a partner with the law firm of Siegel Siegel Johnson and 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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Aug
16

Property Taxation Runs Amok in the District of Columbia

"This pumping up of assessments allowed politicians the luxury of claiming that they did not raise the tax rate during the entire period. If taxes went up, even dramatically, well then that's just the marketplace talking."

By Stanley Fineman, Esq., as published by National Real Estate Investor Online - City Reviews, August 2011

Real estate taxes, which are based on assessor opinions, are the only subjectively determined taxes on the planet. And unlike other building expenses, which are largely controllable, property taxes are volatile, chaotic and often quixotic. Above all else, in the District of Columbia, they are high.

So, how high are your property taxes? Presumably all owners can answer that question on a cost-per-square-foot basis. But there are other perspectives to consider. How much have those taxes changed in the past five years? What percentage of the property's overall operating expenses do property taxes represent, and has that ratio altered over the years?

SFineman_graph

Here in D.C., we keep track of such things — and the results are startling. Office building taxes ballooned from $4.97 per sq. ft. in 2004 to $8.81 per sq. ft. in 2009, an increase of 77%. That's more than double the rate of increase in office contract rents, which averaged $45.31 per sq. ft. in 2009, up 35% from $33.46 in 2004.

None of the tax increases in those five years resulted from changes in the millage rate, or tax per id="mce_marker",000 of valuation, which remained essentially constant for the entire period. The increase was the product of assessment legerdemain, and would have been much higher had property owners failed to wage relentless and successful administrative and judicial tax appeals.

This pumping up of assessments allowed politicians the luxury of claiming that they did not raise the tax rate during the entire period. If taxes went up, even dramatically, well then that's just the marketplace talking.

Never mind that the tax rate might have been significantly reduced, softening the blow of the assessment spikes, but it was not. After all, there were pet projects that needed feeding.

Economic toll

We can examine the impact of mushrooming assessed values on the bottom line. Non-tax building expenses including fixed costs, maintenance, utilities, administration and services rose modestly from 2004 through 2009, by perhaps 20%.

With tax bills growing at a faster rate, however, the tax burden as a percentage of total building costs increased dramatically over that same period.

By 2009, property taxes climbed to an astounding 42.25% of all operating expenses, up from 33.24% five years earlier. In the early 1990s, taxes were as low as 24% of all operating expenses.

The overall effect on property cash flow was to significantly blunt the profitability one might have expected from the general rise in property values over the period.

Let's examine that further. Average rental rates increased 35% over a five-year period. If property taxes had increased at the same rate, taxes on the average office building would be $6.71 per sq. ft.

But because property taxes actually climbed 77% over that five years, the average office taxes is $8.81 per sq. ft. That's $2.10 per sq. ft. lost from the bottom line.

In a 250,000 sq. ft. office building, not uncommon in D.C., that equates to a loss of $525,000, annually.

Let's now look at it from the perspective of the taxing authority. There are approximately 1,000 privately owned office buildings in D.C. If the average size were, say, 175,000 sq. ft., D.C. arguably would be gaining excess tax revenues approaching $400 million annually.

That is a staggering sum, a massive shift of the tax burden heaped quietly onto the shoulders of commercial owners.

The D.C. government, always a minority partner in real estate enterprises, has been biting off heftier chunks of the commercial pie through taxation as the years roll by.

This has allowed it to subsidize homeowners (i.e. voters) through reduced tax rates and capped increases. And everybody's happy. Oh, except commercial owners and their tenants, the geese that lay the golden eggs. And we all remember what happened to them.

A proposal

Over the years, commercial owners have raised many salient arguments in an attempt to hold down their taxes. For example, commercial taxes in D.C. are considerably higher than in the adjacent jurisdictions, suburban Maryland and Virginia, resulting in a competitive disadvantage for D.C. property owners.

Arguing this point has brought some success in lowering the D.C. tax rate, but a large disparity remains.

Most recently, recalcitrant D.C. assessors were slow to recognize the downturn in the economy that afflicted property values in all jurisdictions. When the economy improves, aggressive assessors will tend to be overzealous in pursuing and overstating the market.

Simply put, property taxes shouldn't increase at a faster rate than rents. In practice, such a rule would require first establishing a base line of rents and taxes, and then utilizing reliable data to establish increases.

There might be lag time involved in acquiring and utilizing the data, but that challenge is a hill, not a mountain, to climb. And most importantly, it would be reasonable and fair.

sfinemanStanley J. Fineman is a shareholder in the law firm of Wilkes Artis Chartered, the District of Columbia member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Jul
27

Oklahoma Courts Rule Low-Income Housing Tax Credits Shouldn't Be Treated As Property Income

"A developer who commits to operate a property as a low-income housing complex can apply for Low Income Housing Tax Credits under Section 42 of the Internal Revenue Code. The developer then sells the credits to investors to generate equity to construct the project..."

By William K. Elias, Esq., as published by National Real Estate Investor - Online Edition, July 2011

The impact of low-income housing tax credits (LIHTC) on the taxable value of real property has been a subject of controversy in Oklahoma for many years. A recent court ruling lays down the law, however, by definitively excluding the credits from calculations of taxable value.

WKElias_graph

Under the Tax Reform Act of 1986, Congress established the low-income housing tax credit program to encourage private development of affordable housing for people with low incomes.

A developer who commits to operate a property as a low-income housing complex can apply for Low Income Housing Tax Credits under Section 42 of the Internal Revenue Code. The developer then sells the credits to investors to generate equity to construct the project.

The recent case of Stillwater Housing Associates v. Jacquie Rose, Payne County Assessor, et al. (Oklahoma Supreme Court No. 108,682) could result in lower tax assessments for many low-income housing properties in Oklahoma.

In the Stillwater Housing decision, the Oklahoma Court of Civil Appeals issued several conclusions to clarify how low-income housing tax credits issued under Section 42 of the Internal Revenue Code affect taxable value.

Case in point

The Stillwater Housing case arose in Payne County, Okla., where limited partnership Stillwater Housing Associates applied to the Oklahoma Housing Finance Agency for low-income housing tax credits to develop a low-income housing complex. The agency granted credits to be allocated over 10 years in the amount of $455,235 per year.

To generate private equity to complete construction, Stillwater sold its low-income housing tax credits to investors, who became limited partners, and the credits flowed through Stillwater directly to those limited partners. Stillwater received no monetary benefit or cash flow from the tax credits.

Stillwater was obligated under a regulatory agreement to rent the units to low-income residents at restricted rents for 40 years. The tax credits were subject to recapture if Stillwater breached the terms of the regulatory agreement during the first 15 years.

Under Oklahoma law, real property is assessed annually as of Jan. 1 at its fair cash value. That's the estimated price the property would bring in a voluntary sale for the highest and best use for which it is actually used, or classified for use, during the previous calendar year.

Assessors can use the cost, income or sales-comparison method to estimate fair cash value. Neither the Oklahoma statutes nor the Oklahoma Tax Commission rules prescribe a methodology for valuing low-income housing tax credit properties.

In 2007, Stillwater protested the assessor's value of the property and asserted a fair cash value of $3.975 million, based upon actual rents. The assessor denied the protest and the developer appealed to the County Board of Equalization. The board instructed the assessor to add $235,347 of tax credits as income under the income approach. As a result, the value increased to more than $8.6 million.

Stillwater appealed the board's value to district court and both sides filed motions for partial summary judgment on the issue of whether low-income housing tax credits should be treated as property income. The district court ruled in favor of Stillwater and the assessor appealed.

The Oklahoma Court of Appeals affirmed the district court, however, and held that low-income housing tax credits are not income and do not replace income to the real property.

The court also held that the credits are tax benefits belonging to the investor, not a right or privilege belonging to the land, meaning the credits are not within the statutory definition of real property. Finally, the court held that the tax credits are intangibles exempt from taxation under Article X, Section 6A of the Oklahoma Constitution.

The assessor asked the Oklahoma Supreme Court to review the appeals court decision, but that petition was denied on March 28, 2011. When published, the appellate court's Stillwater Housing decision will constitute persuasive authority in all Oklahoma courts.

What does Stillwater Housing mean for owners of low-income housing tax credit properties? First, because the tax credits are not income and do not replace income to the property, the credits must be excluded from income-based assessments.

Second, because the credits are tax benefits belonging to the investor and not a right or privilege belonging to the land, then credits do not fall within Oklahoma's statutory definition of real property.

Essentially, regardless of their value to investors, low-income housing tax credits are intangibles exempt from taxation. The Stillwater Housing decision could result in lower tax assessments for many LIHTC properties in Oklahoma.

EliasPhoto_web

William K. Elias is a partner in the Oklahoma City law firm of Elias, Books, Brown and Nelson, P.C., the Oklahoma 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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Jul
06

The Adventures of Valuation

The unique characteristics of a low-income housing tax credit project make it difficult for assessors to apply standard market value definitions and approaches in making a fair assessment.

By Stewart L. Mandell, Esq., as published by Commercial Property Executive, July 2011

Can you visualize how your tax appeal attorney would address an assessor's sales-comparison based property valuation? What if your attorney were Sherlock Holmes? Holmes sits at his desk as Watson enters. "Holmes, old boy, look at the assessor's valuation report on the Franklin Office Center, a multi-tenant office building. The assessor's fl awed cost approach is no surprise, but who would have expected a comparable-sales analysis with five sales to justify a sky-high value as of Jan. 1, 2010?"

Holmes chuckles as he quickly digests the report. "There is nothing here that should trouble you, my dear friend. Our evidence and my cross examination of the assessor will result in a compelling closing argument and a sizable assessment reduction."

"You already know how you'll address these sales?" asks Watson with astonishment.

"Why, of course," says Holmes, rising. "Here's how I'll summarize this in my closing statement: Your Honor, Sale No. 1 obviously is not a valid comparable, given the October 2007 date of sale. As our appraiser testified, from the market's peak in October of 2007 until January 2010, office building values in the area declined more than 40 percent. "You could make a market condition or time adjustment for that reason, and it would be something in excess of 40 percent. But the sale should be rejected because 2007 market conditions were so extremely different from what existed on Jan. 1, 2010. This sale is no more useful than one where the seller exercises an option to buy that was part of a lease agreement negotiated five years earlier."

Selecting his favorite meerschaum from the mantelpiece, Holmes continues: "Sale No. 2 must be rejected on the same grounds as Sale

1. Initially, the assessor made much of the fact that this sale closed on Sept. 16, 2008, which was after the start of the Great Recession, the Bear Stearns collapse and Lehman Brothers' bankruptcy filing.

"On cross examination, however, the assessor admitted that the parties executed the purchase agreement on March 7, 2008. That was well before both the valuation date and the point when the values of offi ce buildings plunged like Professor Moriarty descending the falls at Reichenbach." Having filled his pipe, Holmes turns toward the window.

"Sale No. 3 is irrelevant," he resumes. "Oh, it closed during the last quarter of 2009, near our valuation date, but there is one detail the assessor overlooked: This property was 100 percent leased to one of the 10 largest companies in the country, with 10 years remaining on the lease term. The assessor valued the landlord's interest, also known as the leased fee, and not the fee simple interest. The rent that produced this sizable sale price is well above Jan. 1, 2010, market rents. And in our state, valuation using a leased fee interest and above-market rents is unlawful." The strike of a match punctuates this last revelation.

"Sale No. 4 not only shares the fatal fl aw of Sale 3, but is even less defensible because it is a sale of a leased, built-to-suit property. Here, one of the country's most successful companies had arranged for construction of a facility to its exact specifications, and ultimately an investor acquired not just the property but also the tenant's 35-year lease.

"Of course, the rent is based on the contractor's cost and is unrelated to current market conditions. Not only was the transaction purely financial but as our appraiser's empirical data showed, built-to-suit properties such as this include significant costs that will not increase the property's sale price when subsequently sold." The atmosphere in the room begins to resemble the fog outside the window.

"Sale No. 5 is a sale-leaseback transaction. Town of Cunningham v. Property Tax Appeal Board, a 1992 Appellate Court of Illinois decision, is one of a number of decisions that confirm why this sale is irrelevant. "In the Cunningham case, the property owner initially listed the property with a sale price of $6 million, as well as a leaseback provision that would pay annual rent ranging from $200,000 to $250,000 for a term of 10 to 15 years. Ultimately, the property sold for $9.3 million plus a 15-year leaseback, with annual rent at $615,000. Obviously, the sale price and lease terms were directly related, with a higher rental stream producing a higher sale price. As the court concluded, this was a financing transaction, and the purchase price was unrelated to the property's market value."

Holmes bends to address his companion, seated beneath the swirling cloud. "In short, Your Honor, the assessor's sales-comparison approach is not worth the paper on which it is written."

Clearly, if owners are to achieve fair property tax valuations, they and their attorneys must dig deeply into comparables used by assessors. And that is elementary.

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

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May
18

Weighing the Value of Valuation Methods

"Whichever approach or combination of approaches is used, the value of a property should never be higher than that calculated under the cost method."

By Stephen H. Paul, Esq., as published by Commercial Property Executive Blog - May 2011

Appraisers can choose from three approaches to determine what a buyer would pay for a commercial property. But which approach is the most appropriate method of valuation?

The cost approach assumes that buyers will pay no more for a property than it would cost them to build an equal substitute. The appraiser calculates the cost to build the property and subtracts physical, economic, and functional depreciation.

Appraisers prefer this approach for newer properties that lack an operating history. The cost approach is also preferred for unique or specialty properties because no comparable properties may exist.

The income approach assumes that buyers will pay no more for the commercial real estate being assessed than it would cost to purchase an equally-desirable, substitute investment. The appraiser calculates the net income from the property over a given number of years, and discounts the result to its present value.

Appraisers prefer the income approach for income-producing properties that are typically bought and sold by investors. However, this approach requires accuracy in setting the interest rate and predicting future expenses.

The sales approach assumes that buyers will pay no more for the property than it would cost them to purchase an equal substitute. The appraiser locates sales of comparable properties and adjusts the prices to reflect the subject property. Although this approach may be the most accurate in that it provides a price in a particular market, finding a truly comparable property can sometimes be difficult.

Whichever approach or combination of approaches is used, the value of a property should never be higher than that calculated under the cost method. A buyer would not pay more for a property than it would cost to build, unless something else was included in the value. Anything above the value given by the cost approach must be business value, which is excluded from value calculations for property tax purposes.

PaulPhoto90Stephen H. Paul is a partner in the Indianapolis office of Baker & Daniels LLP, 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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May
18

Tax Grab: Are New York Assessors Inflating Values for the Wrong Reasons?

"The real estate tax is based on the tax rate and a property's assessed value. In the face of all the troubles and distress seen in real estate over the last three years, the City of New York has made some outsized increases in its estimates of market values, which it uses to assess properties for taxation..."

By Joel R. Marcus, Esq., as published by National Real Estate Investor, April 2011

The New York City real estate community has been through the wringer since 2007. It has endured a dearth of major property transactions, suffered through the meltdown of the financial services industry and watched available debt financing evaporate. Lenders and special servicers are more in control of the real estate market than ever before.

In the real world of property ownership and development, many taxpayers are experiencing a drop in occupancy for office, hotels and rental apartment buildings. Condo sales have slowed to a trickle and construction of new office, hotels and apartment buildings has come to a virtual standstill.

In this environment of dropping office rents, condominium fire sales and increasing costs of operations, real estate taxes — the largest component of a building's expenses — have skyrocketed. Why is this happening?

New York City satisfies its budget needs through a variety of taxes, and of all of them, the real estate tax is the most important and durable. The city now finds itself facing a cutback in state and federal aid and has big budget deficits. This is happening at a time when corporate and personal income taxes and sales taxes have declined, and other taxes such as transfer and mortgage-recording taxes have all but disappeared.

The city's revenue options are few. People and businesses can move to New Jersey or other areas to escape New York City's income taxes or sales taxes, and this puts a practical limit on what New York City can extract. Real estate, however, is stuck in New York City and can't escape the city's tax grip.

Excessive taxes erode equity.

The real estate tax is based on the tax rate and a property's assessed value. In the face of all the troubles and distress seen in real estate over the last three years, the City of New York has made some outsized increases in its estimates of market values, which it uses to assess properties for taxation.

A snapshot provided by the City of New York Department of Finance highlights some of these amazing hikes in estimated market value. In Queens, for instance, assessors raised the market values for cooperatives 32.37% (on average12.05% citywide) from last year and Queens luxury hotels experienced a 27.97% increase as well. Manhattan luxury hotels underwent a 14.82% raise in values, while values climbed 9.65% for cooperatives and 15.91% for condominiums.

Many in the commercial real estate industry believe that the jump in assessed real estate market values is related to the city's budget woes, rather than to actual changes in the market place. The city vociferously denies this notion, but as Shakespeare's Hamlet said, "The lady doth protest too much, methinks."

How much tax is too much?

An analysis of the city's system for assessing properties shows that in office and other commercial properties the property tax bite consumes almost 34% of a property's pre-tax net income. Let's examine with this hypothetical example the formulas used by assessors.

An office building charges $45 rent per sq. ft. Its operating expenses are $12 per sq. ft., and its amortized leasing and tenant expenses are another $4.50 per sq. ft. Therefore the pre-tax net income is $28.50 per sq. ft.

The city divides that income by 13.64%, which is derived by adding a 9% capitalization rate to 4.64%, or 45% of the 10.312% tax rate. That yields a fair market value of $209 per sq. ft.

Assessed at 45% of fair market value, the result is a tax assessment of $94 per sq. ft. and a tax bill of $9.70 per sq. ft., based on the 10.312% tax rate. Therefore the city is a partner in 34% of the net operating income without any equity investment at all! This is before debt service, depreciation and capital improvements are accounted for — expenses that only the owner has to pay but for which the owner gets no credit from the city. Not bad if you can get away with it.

For apartment buildings, the pattern is even more egregious. If rents are $45 per sq. ft. and expenses are $12 per sq. ft. as in the office example, the assessor takes 45% of the 13.353% Class-2 tax rate (which is 6.009%) and adds a 7.5% cap rate to get a loaded cap rate of 13.509%. Divide the cap rate into the net operating income of $33, and the fair market value is $244.28 per sq. ft.

The assessment, therefore, is $110 per sq. ft., and this applies to the tax rate results in annual taxes of $14.69 per sq. ft. That's 44.5% of the property's pre-tax net income. Boy, what a deal the city has! If major capital repairs are needed for such expenses as the facade or elevator modernization, a roof or an apartment makeover, they are borne solely by the owner. None of these expenses are factored into the city's formula.

Property owners can always appeal their assessments, but many believe that it's the city's policy on taxes instead, that needs a reassessment.

MarcusPhoto290Joel R. Marcus is a partner in the law firm of Marcus & Pollack LLP, the New York City 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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May
09

Cost Approach Used to Determine Value of Taxable Property in Assisted Living Facilities Transaction

By Cris K. O'Neall, Esq., and Michael T. Lebeau, Esq.1, as published by IPT May 2011 Tax Report, May 2011

On January 6, 2011, the Assessment Appeals Board in Orange County, California issued a significant decision for owners and operators of assisted-living facilities, particularly facilities dedicated to providing "memory care" services. In a nutshell, the Board found that a significant portion of the assessed values enrolled by the Orange County Assessor's Office for memory care facilities acquired in 2007 included the value of non-taxable intangible assets and rights.2 The Board's decision not only demonstrated the correct handling of intangibles under California's property tax statutes, case law and State Board of Equalization guidance document, but also found that the cost approach should be used to extract non-taxable intangibles from business enterprise purchase prices in order to arrive at values for taxable real and personal property.

The Nature of Memory Care Facilities

Memory care is one of the fastest growing segments of the assisted-living care industry. Memory care facilities specialize in the housing and treatment of persons suffering from senile dementia, Alzheimer's disease, and similar "memory loss" maladies. Persons with these conditions typically suffer from moderate to severe memory loss. Consequently, the nature of the facilities that house persons with these conditions and the operation of those facilities differ from most other types of assisted-living facilities and operations.

In order to protect patients or residents from leaving the facility unattended or unescorted, memory care facilities incorporate design features which are not typically found in other types of assisted-living or even convalescent care facilities. The facilities must be laid out so that residents can be observed continually, and so that they do not wander away from the facility by themselves. Points of egress must be limited in number and must be designed to allow electronic monitoring at all times. Despite these severe design restrictions, the families of residents housed in memory care facilities usually want such facilities to have the ambience of a residential or home setting.

The operation of memory care facilities also requires significantly more staffing than the typical assisted living care facility. This includes additional nursing staff as well as staff to observe and work with residents.

There must be sufficient staff to monitor residents at all times in order to insure that they do not leave the facility unattended. In addition, because residents are typically ambulatory, a variety of planned on-site and off-site activities are usually provided to them, which requires a larger number of employees. This higher level of service requires a resident-to-staff ratio that is up to twice that for general assisted-living facilities, and a more skilled, better trained, and more highly paid management and employee staff than is typically found in other assisted-living situations.

Treatment of Intangibles under California's Acquisition-Based Property Tax Regime

California's Proposition 13 made acquisition prices the touchstone for taxable value in many instances. However, Proposition 13 did not explain what to do in those situations where an acquisition price includes a business enterprise comprised of real property, personal property and intangible assets and rights. Fortunately, California Revenue and Taxation Code sections 110(d)-(f) and 212(c) explain that intangible assets and rights are not taxable, and the values of identified intangibles must be excluded from the value allocated to a business enterprise in order to arrive at the value of taxable real and personal property. This is confirmed by published appellate court decisions such as GTE Sprint Communications Corp. v. County of Alameda (1994) 26 Cal.AppAth 992 as well as by the California State Board of Equalization's guidance in Assessors' Handbook Section 502, "Advanced Appraisal" (1998), Chapter 6, pages 150-165 ("Treatment of Intangible Assets and Rights"). Similarly, California Property Tax Rule 8(e) (18 Cal. Code Regs., § 8(e» requires that where a property is valued using the income approach, "sufficient income shall be excluded to provide a return on ... nontaxable operating assets."

Purchase Transaction Created Challenges for Purchaser

In early 2007, a number of memory care facilities and operations in several states, including four facilities and related operations in Orange County, California, were acquired by a large assisted-living facility operator.

The acquisition included not only the real and personal property at the four Orange County locations, but also the government-issued facility operating license, existing workforce, and business operating at each site. While the real and personal property were subject to property taxation, the purchaser contended that the facility operating licenses, workforce and other business-related assets (contracts, relationships, etc.) were not taxable under California law.

The transaction documents for the 2007 transaction did not assign a specific value to the various categories of assets (real property, personal property, and intangibles) for each of the Orange County locations. Fortunately, the seller of the properties had commissioned an appraisal for each of the properties.

Those appraisals were provided to the buyer, however, they were of limited utility in the property tax context because they were "going concern" appraisals which determined a business enterprise value for each facility and, therefore, included a value for all property at each of the Orange County facilities that encapsulated real and personal property as well as non-taxable intangibles. Furthermore, the buyer had used the going concern values shown in the appraisals as the basis for reporting the acquisitions to the Orange

County Assessor's Office and the Assessor's Office had simply enrolled the reported values as the taxable value for each property. Thus, there was a clear "chain" of documentation showing that the Assessor's Office had enrolled the value of all property, including intangible assets and rights, as the taxable value of the property at each facility.

The situation was further complicated by the fact that the purchaser had acquired the intangible assets (namely the operating licenses) through a saleleaseback arrangement and not through the purchase and sale agreement by which the real and personal property were transferred. This was done because a considerable amount of time is usually needed to transfer memory care facility licenses to a new owner, and waiting for the licenses to be transferred would have delayed the transaction for a year or more. Use of the sale-leaseback arrangement was typical in the industry, and had facilitated the transaction. The buyer's representative testified at the Assessment Appeals Board hearing that the buyer would not have acquired the four Orange County properties without the facility operating licenses as it would have taken too long to go through the process of obtaining new licenses. However, because the licenses had not transferred with the purchase and sale agreement, it created an impression that the buyer had not acquired the licenses, which were perhaps the most significant intangible asset in the transaction. On a positive note, the purchaser was helped by the fact that the seller's purchase appraisals exhibited the extreme disparities between the assessed values enrolled by the Assessor's Office (based on the income approach values) and the purchaser's values which relied on the cost approach: the Assessor's values were as high as $500 per square foot, several times the buyer's values for real property; the Assessor's values were also more than twice the cost new without depreciation for the improvements; and the Assessor's values were based on net income figures the majority of which were unrelated to the real estate at each location. All of this served to demonstrate that the Assessor's values subsumed the value of non-taxable intangible assets and rights in violation of California property tax law.

Cost Approach the Key to Taxable Values

The purchaser used the cost approach as the basis for proving the value of the taxable real and personal property. The purchaser retained the seller's appraiser, who had prepared the appraisals used to establish and allocate the total purchase price paid for all of the acquired facilities, to testify at the Assessment Appeals Board hearing. The appraiser explained that the appraisals were going concern appraisals, and for that reason the income and sales comparison approach values in those appraisals represented business enterprise values or the values of the going concern operating at each location.

The buyer's appraiser also testified that only the cost approach conclusions in the appraisals would represent the value of the taxable real and personal property. In support of this, the appraiser relied upon the Appraisal Institute's text The Appraisal of Nursing Facilities (J. Tellatin, 2009), particularly the portions of that text stating that "property tax assessments should exclude the value of intangible assets" and identifying intangible assets to include operating licenses and assembled workforce (pages 37, 40, 314, 315). The appraiser also focused the Board's attention on two key passages from the Appraisal Institute's text: The greatest usefulness of the cost approach could be in allocating the total assets of the business to real estate, tangible personal property, and intangible personal property assets under the theory that the value of an asset cannot exceed the cost to replace it in a timely manner, less reasonable amounts of depreciation. (Page 284)

When the depreciated cost of the tangible assets and the land are less than the overall business enterprise value, the cost approach can be a proxy for real estate value. (Page 315) These conclusions were supported by portions of the California State Board of Equalization's Assessors' Handbook Section 502 at page 159, note 126, and page 163: "The cost approach does not typically capture the value of intangible assets and rights because the appraisal unit only includes the subject property." With this background, the purchaser's appraiser demonstrated that the cost approach values in his appraisal report for each of the four facilities represented solely the values of the taxable tangible real and personal property.

The Assessment Appeals Board's Decision

The Orange County Assessment Appeals Board upheld the buyer's values, with adjustments for increased land values and minor increases in construction costs to account for inflation. The Board supported the buyer's position that the intangible assets and rights, particularly the operating licenses, had transferred along with the real and personal property as part of the same transaction: 42. The Board finds that the purchase agreement, the master lease, the sublease and a financing agreement that were all part of the same transaction, within the meaning of California Civil Code section 1642, and the purchase price did reflect and include intangible assets which are not subject to taxation.

Critical to this finding was testimony by the purchaser's representative that the payments under the lease agreements were not based on market rates, but were related to financing the transaction. In fact, evidence presented to the Board showed that the amount of each facility's lease payment exceeded or nearly exceeded the total revenue generated by each facility. Civil Code section 1642 provides that "several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together."

The Board also ruled that the cost approach was the proper method for valuing the properties because it excluded the value of intangible assets and rights: 43. The Board finds that the cost approach is the most accurate measure of accurate [sic] value since the comparable sales approach and the income approach both captured the value of the property as a going concern and that it includes the value attributable to nontaxable assets and rights. Hence, the Board utilized the [cost approach portions of the] appraisals submitted by the Applicants as a starting point for its valuation analysis.

The Orange County Assessment Appeals Board's decision to use the cost approach, and to reject the income approach and sales comparison approach values from the buyer's going concern appraisals, affirmed Assessors' Handbook Section 502's counsel to avoid use of going concern appraisals (page 157) and to rely upon the cost approach when other approaches cannot segregate the value of taxable real and personal property from the value of intangible assets and rights. The Board's decision is a clear statement of the correct approach to be applied in the multi-facility purchase context in order to exclude the value of intangible property and determine the value of taxable real and personal property.

1. The authors acknowledge Max Row of Complex Property Advisors Corporation in Southlake, Texas and David H. Fryday of Tellatin, Short & Hansen, Inc. in Salem, Oregon for their comments and input to this article.

2. The facilities are owned by NorthStar Realty Finance.

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