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Property Tax Resources

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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May
05

A Growing Dilemma Over Tax Abatements

"States struggle to keep economic development incentives viable amid budget tightening...."

By Darlene Sullivan, Esq., CMI., as published by National Real Estate Investor, May 2011

Policy makers have long used property tax abatements and incentives to draw investment, rehabilitation and other economic development to particular locations. While the economic effects of abatements and incentives are typically positive, officials facing budget deficits at state and local levels have begun to look for ways to hold onto more of their potential tax revenues while still enticing new business and development.

It is a difficult balancing act for lawmakers, and the changes they seek vary by state. For property owners and developers considering construction, expansion, or renovation of a new facility, now is the time to study any proposed changes to incentive rules and to ensure compliance with existing incentive agreements.

In Texas, state legislators are considering revisions to several economic development incentives the state has successfully used to attract new companies. Lee Higgins, president of Austin-based Business Economic Incentives LLC, fears that a major overhaul of business incentives offered by the state would slow economic growth in the state.

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Smaller steps

To counterbalance a potential slowdown in economic growth in North Carolina, state officials are working to find ways to support projects that would not have qualified for state or local government support before the economic downturn.

For instance, in better times, companies typically would have to create 50 to 100 jobs and commit to invest $2 million to $5 million in capital expenditures before a state or local agency would show much interest in supporting a project.

Now, a company can create as few as 20 new jobs and spend less than $1 million on capital improvements and still gain the support of local government.

In addition, economic development officials in North Carolina have shown flexibility and a willingness to discuss support for projects that entice existing employers to remain in the region, especially as companies are in the process of consolidating operations across the U.S.

In North Carolina, Gov. Bev Purdue schedules public announcements when companies add as few as 15 new jobs to show her commitment to economic development, says Craig Fisher, managing member in the Charlotte, N.C. office of Tax Incentives Consultants LLC.

Many state and local economic development officials are working with companies struggling to meet job creation numbers agreed to before the slump.

Flexible programs

In the Northeast, the economic downturn has limited the amount of incentives that states can offer, but government officials have been granted freedom to exercise more creativity with programs that promote economic development.

In Massachusetts, the Economic Development Incentive Program offers a negotiated state investment tax credit and municipal tax increment financing. Once highly utilized, the program has been capped at $25 million annually as of Jan. 1, 2010.

Massachusetts has increased flexibility for the investment tax credit to equal as much as 10% of construction and start-up costs for projects in locations designated for economic development. In areas of Massachusetts not designated as economic target areas, a project that creates 100 or more jobs also is eligible to receive a 10% investment tax credit.

Scot Butcher, managing member in the Boston office of Tax Incentives Consultants LLC, says the tax credit amount may be taken as credit against future taxes or collected as a refund. The tax credit can run as high as 40% for some manufacturing projects.

The trends in Texas, Massachusetts and North Carolina signify that tax abatements and incentives are still available to property owners. To take advantage of abatement laws in their region, owners need to understand the laws governing them and stay abreast of the changes that have occurred in these laws.

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

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Apr
24

The Pitfalls of Sales Comparisons

"By overlooking seller financing, assessors inflate taxable values..."

By Michael Shalley - as published by National Real Estate Investor - April 2010

It's no secret that commercial real estate sales volume is down. Sales transactions of U.S. commercial real estate valued at $5 million or more totaled 3,336 for all of 2009, down 60% from the previous year, according to Real Capital Analytics (RCA).

Despite more stringent underwriting and a growing reluctance by lenders to make commercial real estate loans, buyers and sellers closed a few select deals. Today, tax assessors are using those sales as a basis to value property for 2010.

Improper conclusions by tax assessors based on these imperfect sales could result in excessive values on which property tax assessments will be based.

Only 15% of U.S. property transactions last year represented a distressed situation, but the year's deals typically reflected a decline in value from highs of the preceding five years.

Due to the scarcity of credit available for real estate purchases, assumable mortgages and seller financing emerged as the dominant means of closing transactions in 2009, according to RCA. That means that many of the past year's deals closed without the use of market-rate loans that would have pushed down closing prices.

True market value?

The prevalence of those significant price reductions, mortgage assumptions and seller financing in 2009 sales data poses a challenge for appraisers and tax assessors, and a threat to taxpayers.

If not properly adjusted for in a sales comparison approach to valuing property, these same three factors that sellers used to bolster sales may understate how far actual market values have declined.

Special financing or sales concessions often characterize transactions in depressed markets. Understanding the details behind each transaction is important for establishing a credible sales comparison approach to value at any time, but it becomes absolutely critical during volatile periods with few sales.

Suppose an assessor valuing office buildings for his tax district believes that most property values have declined, but he has a limited number of transactions to determine market value. In a review of recent sales, he sees that a 100,000 sq. ft. office building has sold for a reported $10 million, or $100 per sq. ft.

The same property sold five years ago for $12 million, or $120 per sq. ft. With no further investigation of the transaction details, the assessor concludes that office building values in the neighborhood have declined 17% in five years and are now trading at $100 per sq. ft.

The devil is in the details

On its face, the assessor's conclusion appears reasonable, but with depressed markets we must dig deeper into the details of every transaction. In this example, the use of seller financing reveals a market value that is significantly lower than the $10 million transaction price would lead us to believe.

Assume the seller provides a higher loan-to-value ratio and lower interest rate than what the market offers. This props up the sale price by $1 million.

Adjusting the sale price for below-market financing, you arrive at a market value of $9 million, or $90 per sq. ft. That represents a 25% decline, as opposed to the assessor's 17% calculation.

As RCA reported, seller financing has become one of the primary alternatives to new loans, and it usually provides below-market financing terms for the buyer. Additionally, it provides the seller with a continued investment in real estate and avoids the need for a redeployment of capital into alternative investments.

Assessors are bound by the Uniform Standards of Appraisal Practice, which require an appraiser to address whether financing terms are at, below, or above market interest rates. The assessor also must determine whether a sale reflects unusual conditions, terms, or incentives.

Most sales closed today have a story behind the deal. By uncovering the details of each transaction, you might find that an adjustment is necessary to arrive at a true market value, and those details will give you a stronger case to present to the assessor in seeking a reassessment.

ShalleyMichael Shalley is director of appeals at the Austin law firm of Popp, Gray & Hutcheson, the Texas member of the 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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Apr
18

Real Estate and the Yankees

Why Hotels and Nursing Homes Prove Especially Vulnerable to Inaccurate Taxation

"The most valuable asset the team would acquire through that contract would be a continued association with the Derek Jeter name, a brand in which the team has invested a great deal. The Yankees' challenge in reaching a new contract with Jeter, recently accomplished, indeed echoes the difficulty faced by many municipal assessors in valuing properties that are as much business as they are parcels of real estate."

By Elliott B. Pollack, Esq., as published by Commercial Property Executive, April 2011

Tax laws across the United States typically prohibit assessors from including intangible assets such as good will, franchise value or business value in a property tax assessment. Only tangible real and personal property may be placed on assessment rolls. But taxpayers and assessors alike sometimes have difficulty differentiating between tangibles and intangibles.

That's understandable on the part of taxpayers who may need to include intangibles in their calculations when buying or selling a hotel, nursing home or assisted-care property. For purposes other than property taxes, intangibles often are part of a property's overall value. Indeed, rivers of ink in appraisal and valuation literature—not to mention judicial rulings— have been devoted to the issue of intangibles.

Unfortunately, many assessors don't fully understand how to exclude these non-taxable elements from their calculations, either. For the unwary property owner, the resulting overassessment can result in an equally overstated tax bill. One way to gain a clearer perspective on the degree to which intangible assets can affect value is to turn our lenses on another field entirely—a baseball field, in fact. On Nov. 10, 2010, sports columnist Richard Sandomir presented an illuminating look at the talents of the New York Yankees' redoubtable shortstop, Derek Jeter, in an article for the New York Times. "The Yankees would not quite be the Yankees if (Derek Jeter) suited up with another team," Sandomir noted. The writer contended that Jeter adds substantially to the Yankees' overall value, much in the same way, it can be argued, that a respected brand boosts the worth of a hotel. Without Jeter's headline-grabbing performances, the team would be less valuable, just as an unflagged hotel is likely to be less valuable than its branded competitor. Sandomir quoted a business consultant who observed that Jeter's playing, were he less celebrated, might be worth $10 million a year. But as an iconic draw for ticket sales, Jeter's value to the team is closer to $20 million each year. The Yankee captain's "value as a brand builder," the expert noted, not merely as a hitter or infielder, is what drives his intangible worth differential, again, very much like the business value inherent in a well-managed hotel or convalescent facility.

With Jeter's lengthy contract concluded, it would be foolish for the Yankees not to sign him up again as he enters free agency, even though his baseball skills have eroded, the expert opined. The most valuable asset the team would acquire through that contract would be a continued association with the Derek Jeter name, a brand in which the team has invested a great deal. The Yankees' challenge in reaching a new contract with Jeter, recently accomplished, indeed echoes the difficulty faced by many municipal assessors in valuing properties that are as much business as they are parcels of real estate.

After years of resistance from taxpayers and their attorneys, it seems taxing authorities in the United States are getting the message about intangible assets. It now appears that the majority of assessors recognize that the net operating income generated by a hotel, as an example, does not result exclusively from its real estate value. In fact, the management expertise—which drives revenues from non-occupancy hospitality services such as food service, special events and recreation revenues—is an asset independent of and severable from the real estate itself.

Similarly, the intensive services furnished to the patients of long-term-care convalescent facilities are distinct from the property in which those services operate. Indeed, nursing and medical care, meals and rehabilitation produce revenues that have little to do with the real property and should not be capitalized when the health-care facility is valued using an income methodology.

There is case law to provide examples of the correct way to value commercial real estate without inflating taxable value by rolling intangible assets into the equation. Taxpayers interested in doing a little research will find one court's approach toward the separation of intangibles and the valuation of health-care real property in the case of Avon Realty L.L.C. v. Town of Avon, decided in 2006 by the Superior Court of Connecticut, Judicial District of New Britain. In that case, the owner of the Avon Convalescent Home, a 120-bed skilled nursing facility, appealed an assessed value in excess of $5 million on the grounds that the assessor hadn't deducted sufficient value attributable to intangible assets from the business's overall value. Upon review, the court deemed the value to be a little more than $4 million, supporting the taxpayer's appeal.

A thorough understanding of the issues and methodologies involved in properly differentiating and valuing tangibles and intangibles marks the difference between fair and excessive property tax assessments for hotels, nursing homes and assisted-care facilities.

 

Pollack_Headshot150pxElliott B. Pollack is chair of the property valuation department of the Connecticut law firm Pullman & Comley L.L.C. He cautions that he is an avid Boston Red Sox fan. The firm is the Connecticut 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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Apr
18

Taxes Target Green Pastures

"Property owners must stay vigilant to maintain agricultural-use status on farmland and avoid financial penalties..."

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

Local governments are under the greatest financial stress since the Great Depression, and assessing authorities are aggressively pursuing revenue to combat these financial woes. One target in assessors' crosshairs is the preferential tax treatment of land with agricultural status.

Developers who are considering the purchase of agricultural land or holding acreage for eventual development need to be aware of the potential tax consequences. Depending on the way assessors categorize the land, the owner could face an unexpected rise in tax costs.

All states offer some tax relief for qualified agricultural property, but each jurisdiction has specific and often complex legal requirements for agricultural status. Investors in land held for future development must know the laws governing agricultural status if they hope to maintain this preferred tax position.

Most real estate is assessed at market value, which typically reflects the most probable price a buyer would pay in a competitive market. The most common benefit of an agricultural designation is that the land is assessed at use value instead of market value. Use value reflects how the property is currently used, i.e., for agriculture, rather than its highest and best use, which may be for residential or commercial development.

Eligibility for agricultural status varies by jurisdiction. The following are the major eligibility requirements.

  • Use: Typically, states require that land be actively engaged in agricultural use and used exclusively or primarily for commercial agriculture. That can include growing crops, dairying, raising and breeding livestock, or horticulture.
  • Acreage: A majority of states impose an acreage requirement to qualify for agricultural use, meaning a minimum number of acres. Qualifying acreage is typically low relative to average farm size. Some states have no minimum acreage requirement, while others allow local authorities to establish size criteria.
  • Productivity: Most states impose minimum productivity requirements. These laws vary by jurisdiction, but most require property to generate a minimum amount of annual income from farming or raising livestock. Some states average the measure of income over a period of years. Other states require that a minimum percentage of the owner's or lessee's annual income is earned from agricultural activity on the land.
  • Prior Usage: About half the states require property to be used for agricultural purposes for a period of years before it qualifies for preferential tax treatment. These laws are meant to discourage owners from changing a tract's use to take advantage of the tax benefits. Two or three years immediately preceding approval is typical.

Check for penalties

Many states impose a penalty when farmland is converted to non-agricultural use. In some states the penalty takes the form of a recapture or rollback tax, which is the difference between the taxes that would have been paid and the taxes actually paid while the land qualified as agricultural. This recapture period varies between three and 10 years.

In other states, if farmland is converted from agricultural use within a certain period after qualifying for preferential treatment, penalties are calculated based on the property's fair market value when its use changes or it is sold.

Most states require owners to periodically submit extensive information to demonstrate that the land continues to be used agriculturally. This may include IRS Form 1040F, leases, invoices and receipts, among other documents.

Each state's eligibility requirements, application process and potential penalties play a part in determining whether properties qualify for agricultural status. But a property's agricultural status can translate into significant tax savings. Local counsel may be required to navigate the complexity of obtaining or maintaining the agricultural status.

Douglas S. John is with the Tucson, Arziona law firm of Bancroft Susa & Galloway, the Nevada and Arizona 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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Apr
18

Improve Your Odds of Winning Property Tax Disputes

"Look for release of damages provisions that waive the right to sue if there are surface impairments. Make sure that the property has not flooded in recent years, especially if it's near a stream, lake or low lying area. Flood plain maps are periodically updated, so current information is crucial."

By Howard Donovan, Esq., as published by Commercial Property Executive Blog - April 2011

In ad valorem tax disputes, commercial property owners and their tax counsel often are so focused on rent rolls, occupancy, capitalization rates and other big-picture considerations that they overlook special conditions affecting value. There is "ore to be mined" in less obvious areas, however.

Here are five factors to consider in making sure a tax protest covers all the bases.

  1. Subsurface Conditions. Geology can weigh heavily in determining fair market value. Common examples include old mining activity, limestone formations and sinkholes, earthquake events, flood plains and periodic flooding. The property owner may already have information along these lines, and mining maps, flood plain maps and seismic activity information are generally available. Look for release of damages provisions that waive the right to sue if there are surface impairments. Make sure that the property has not flooded in recent years, especially if it's near a stream, lake or low lying area. Flood plain maps are periodically updated, so current information is crucial.
  2. Environmental Impairments. Obviously, the presence of asbestos, petroleum products or other types of pollutants either in the improvements or subsurface will strongly influence value. Ensure that expert reports are brought current and provided to the appraiser. Reports should address costs of remediation, which can be used to argue that value should be reduced by the costs. Finally, keep in mind the need for confidentiality with respect to this information. See if the jurisdiction will agree not to duplicate reports and to return them after review.
  3. ADA Compliance. Even after 20 years under the Americans with Disabilities Act, many properties fail to comply with the act's provisions. The costs of compliance can be submitted as reason to reduce assessed value.
  4. Easements, Restrictions and Covenants of Record. Every jurisdiction that applies the fair market value standard recognizes that title restrictions, easements and covenants affect value and strongly influence market transactions. This is true not only of the subject property, but also of any property transactions cited by the assessor as comparable sales. Examples include use restrictions, size of the improvements, density, amenities and the accompanied assessments, curb cuts, traffic signals and other factors. Verify that your file includes current copies of such covenants, and that any appraiser is aware of these items.
  5. Personal Property Returns. Most large commercial buildings, malls and shopping centers have associated personal property that is critical to property operations. Yet the personal property tax return is often a forgotten part of the overall value of the property.

Personal property values are generally calculated based on the depreciated original cost method, so make certain that the useful life of the personal property is realistic. Also check to see that the tax return excludes property that has been discarded or is no longer on site. If the real estate is the subject of a recent sale, find out what dollar value was allocated to the personal property and if that number is consistent with the values the tax assessor is showing.

hdonovanHoward Donovan is a partner in the Birmingham, Ala. law firm of Donovan Fingar, LLC, the Alabama member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar
25

Don't Be Afraid to Protest Property Tax Assessments

"Analyze the costs and potential tax savings associated with an appeal to ensure that the protest makes economic sense... ."

By Gilbert D. Davila, Esq. - as published by Affordable Housing Finance - News Headlines Online, April 2010

Low-income housing tax credit (LIHTC) property owners must monitor their tax valuations without fail, especially given the current economic climate. When they receive their property tax assessments, owners should ask themselves the following questions:

Should I appeal?

LIHTC owners should familiarize themselves with valuation laws and the definition of market value in their taxing jurisdiction before deciding whether to appeal an assessment. Taxable value can hinge on how the assessor treats tax credits.

Analyze the costs and potential tax savings associated with an appeal to ensure that the protest makes economic sense. Most successful valuation appeals consist of attacking errors made by the assessor, so consider the time, resources, and documents that will be required to make an effective case.

Is my data correct?

Assessors' records frequently misstate a property's age, square footage, net leasable area, number of rental units, unit mix, and amenities. Such errors can significantly increase an assessment.

Providing a current rent roll and perhaps a site plan to the assessor can help to correct these common inaccuracies. Improving the accuracy of the assessor's records is the simplest path to a lower tax assessment.

How did the assessor arrive at my valuation?

Owners must question the assessor's approach to determining value and help the assessor appreciate the unique challenges facing LIHTC owners. The most common mistake an assessor will make when deriving an LIHTC property's market value is to treat the asset like a traditional multifamily complex.

The following are talking points to help property owners and their assessors to distinguish LIHTC properties from a typical apartment complex:

Restrictions: The Land Use Restriction Agreement (LURA) and LIHTC regulations limit the property's income potential, and penalties for violations are severe. Rental restrictions cap rent per unit at much lower rates than comparable conventional properties are able to charge. Resident restrictions increase vacancy risk and complicate marketing efforts.

Expenses: Overhead is higher for LIHTC owners because they must meet certain reporting, record-keeping, and documentation edicts beyond conventional practice. The median income growth rate dictates rental rates, so when expenses growing at the rate of inflation rise faster than median incomes, a property's net operating income can decrease.

Illiquidity: Tax credits come with many restrictions. An owner cannot sell, transfer, or exchange the property unless they obtain government approval and meet certain conditions. In addition, the LURA dictates who the property can be sold to, and the property's restrictions survive a sale. The income tax benefits associated with the tax credits expire after 10 years, but the transferability restrictions may continue for another 20 years. These factors make for an extremely illiquid asset especially in today's economic environment.

Intangible value: Tax credits are not a benefit attributable to the real estate and are thus intangible value that should not be a component of the market value assessment. Owners should be prepared to provide the assessor with a copy of the LURA for the property and argue that the unique characteristics of the LIHTC project warrant a deviation from conventional appraisal methods.

Did the assessor consider equality and uniformity? Most jurisdictions require that assessments among comparable properties be equal and uniform. The fact that assessors often value LIHTC properties without considering the assessment of like projects presents an additional opportunity for owners to argue for a reduced value.

A tax credit property should fall within a uniform range of values when compared with other LIHTC properties and not with conventional apartment projects. Owners should compare their property's assessment to other LIHTC properties on a square-footage basis. If an owner's property is assessed disproportionately higher, then the owner can argue for a value reduction based on equality and uniformity, regardless of the assessor's "market value" claims.

The decision to appeal a tax assessment can yield significant tax savings when owners ask themselves the appropriate questions, identify inaccuracies, and show assessors the error of their ways.

DavilaPhoto90Gilbert Davila is a partner 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, the national affiliation of property tax attorneys. Davila can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar
08

Put a Lid on Tax Caps

"The tax cap is an old device that's found new life in these hard times..."

By Michael P. Guerriero, Esq., as published by Commercial Property Executive, March 2011.

The recession has left its mark on the budgets of state and local governments nationwide. Revenue shortfalls have forced states to slash their budgets and, oftentimes, withdraw state aid pledged to local governments.

Cities, towns and school districts are now forced to raise property taxes, their main (and sometimes only) revenue source. Struggling with escalating tax burdens, taxpayers cry out to their elected representatives to put a lid on the always rising local property tax and support property tax cap initiatives.

The tax cap is an old device that's found new life in these hard times. At the forefront of tax cap initiatives is newly elected Gov. Andrew Cuomo of New York, who proposes to limit the property tax dollars a school district can collect annually. The bill passed the New York State Senate and now must pass the State Assembly.

New York's bill caps tax growth at 4 percent or 120 percent of the inflation rate, whichever is less. School districts may exceed the cap with voter approval, but voters can impose an even stricter cap or bar increases entirely.

Roughly 40 states have some kind of property tax restriction. Arizona, Idaho, Kentucky, Massachusetts and West Virginia have a fixed cap of 5 percent or less. Colorado, Michigan and Montana limit growth to the inflation rate; while California, Illinois, Missouri, New Mexico, South Dakota and Washington limit growth to the lesser of a fixed percentage or the inflation rate.

Tax cap advocates say a cap forces school districts to cut wasteful spending while causing little to no harm.

Critics note that a cap simply slows down the rate of tax increases and does little to change the main drivers behind high property taxes. For example, caps cannot slow increasing costs for health care or fuel, nor do caps lessen demand for essential public services.

History has shown that tax caps simply shift the burden of funding schools to other sources, such as income tax, sales tax, fees and state aid. The bottom line is, a tax cap simply places a lid on the problem and kicks the can down the road for others to deal with.

GuerrieroPhoto_resizedMichael Guerriero is an associate at the law firm Koeppel Martone & Leistman LLP in Mineola, N.Y., the New York State member of American Property Tax Counsel (APTC), 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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Feb
27

Why Inflated Tax Assessments Persist

"Under most states' property tax laws, your assessment should reflect the purchasing power of a typical buyer, not that of an extraordinarily well-capitalized investor..."

By Mark S. Hutcheson, Esq., as published by National Real Estate Investor, January/February 2011

With well-capitalized buyers driving transactions, assessors routinely overstate taxable property values. Real estate investment trusts (REITs) and insurance companies are big buyers of commercial real estate these days, and their advantage in the capital markets is driving up prices. In turn, assessors are using the price data generated from these sales to institutional buyers to produce inflated taxable values for commercial properties owned by less-capitalized investors.

Assessors typically value commercial real estate using a direct capitalization income approach by dividing the property's annual net operating income (NOI) by an overall capitalization rate. The NOI can be based on the trailing 12 months or projected over the next 12 months.

Determining a proper capitalization rate, however, is often more challenging. That's especially true in this economic environment. An overall cap rate reflects the relationship between a single year's net operating income expectancy and the total property price or value.

Crux of the problem
To determine cap rates, assessors usually look to sales of comparable commercial properties. Relatively weak transaction volume since the start of the recession, however, has forced assessors to extrapolate cap rates from the small number of transactions that have occurred.

These sales increasingly involve high-priced properties sold to well-capitalized institutions. Deal volume for assets priced at $25 million or more rose 126% for the first 11 months of 2010 compared with the same period in 2009, says Real Capital Analytics. From this data, assessors will likely derive cap rates that reflect the buying power of well-capitalized buyers and apply those rates to all investment-grade property.

REITs and insurers have access to particularly low-cost capital resources. Their strategy primarily has been to focus on acquisitions of large, core assets in major cities. Low-cost capital enables these investors to achieve greater returns on lower cap rates than average investors.

Insurers also have far lower default and delinquency rates on loans than other lender groups. The 60-day delinquency rate for commercial mortgages originated by life insurance companies was just 0.29% at mid-year 2010, reports the American Council of Life Insurers.

Compare that with loan delinquencies in commercial mortgage-backed securities at greater than 7%, according to credit rating agency Realpoint. Meanwhile, Real Capital Analytics pegs the commercial real estate loan delinquency rate for banks at 4.28%. Low delinquencies mean insurance fund managers are able to focus more on deploying capital and less on working out distressed assets.

Doing the math
Increasing acquisition volume by well-capitalized buyers gives assessors market data to support lower cap rates, as the following hypothetical example illustrates. LRG, a large insurance company, purchases an office building with a $650,000 NOI for $10 million, reflecting a 6.5% cap rate. SML, a small real estate investment firm, seeks to buy a comparable building across the street that also generates NOI of $650,000.

Due to SML's lack of capital and lower credit rating, the firm's debt structure on the deal is approximately 300 basis points higher than that of LRG. SML would need to purchase the property at an 8% cap rate to achieve the same return at 50% loan-to-value.

SML offers to purchase the building for a little more than $8 million. However, because this price is significantly lower than the LRG purchase price across the street, the seller backs out and the transaction never occurs.

Should the assessor use the 6.5% cap rate reflected by the LRG purchase, or adjust the rate to reflect what a more typical investor like SML might offer in the open market? This is the issue confronting assessors and those who represent property owners in ad valorem tax disputes.

Under most states' property tax laws, your assessment should reflect the purchasing power of a typical buyer, not that of an extraordinarily well-capitalized investor. A careful review of how the assessor arrived at both the value and the underlying cap rate is critical to ensure your property is fairly assessed.

MarkHutcheson140Mark S. Hutcheson is a partner with the Austin, Texas, law firm of Popp, Gray & Hutcheson LLP, the Texas member of American Property Tax Counsel. He can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Feb
25

Tax Relief for LIHTC Properties

"Because assessors cannot simply go out and look at properties and know that they carry LIHTC restrictions, the properties often sustain improperly high assessments..."

By J. Kieran Jennings, as published by Housing Finance - News Online - February 2010

Improperly assessed property taxes on a low-income housing tax credit (LIHTC) property can destroy its economic viability. LIHTC property owners can protect themselves from destructive taxation by understanding several key issues that lead to improper tax assessments. Additionally, owners can take some practical steps to maintain proper assessments in the future.

Unlike other real estate, the values of LIHTC projects generally do not vary greatly from year to year. Restrictions placed on rents and administrative costs often leave LIHTC actual market values so low that a small incremental difference becomes immaterial. Thus, if a project is fairly assessed, it should be able to remain fairly assessed over its contract period.

Property taxes for conventional multifamily housing projects typically comprise one of the largest expenses for an owner. However, because rents are reduced and operating expenses are higher, LIHTC properties labor under significantly tighter margins than most conventional properties. As a result, taxes can mean the difference between making debt service and feeding a property.

LIHTC developments include single apartment buildings, townhomes, single-family developments, and scattered single-family home sites. Many states are coming to a consensus, assessing projects using reduced contract rents and the higher operating expenses associated with LIHTC properties. However, a problem arises because LIHTC properties can take various different forms, making it difficult for an assessor to know, without additional information, whether a property is conventional or a LIHTC property.

Because assessors cannot simply go out and look at properties and know that they carry LIHTC restrictions, the properties often sustain improperly high assessments. This forces LIHTC taxpayers to challenge assessments each and every time they go through a reassessment. Thus, a continuous battle ensues, causing additional expenses to the taxing jurisdiction and the taxpayer.

A solution for this problem is within reach. It calls for putting in place a system that helps the assessor produce a fair assessment year after year. Such a system incorporates meeting with the assessor to present information that indicates the LIHTC nature of the property. The presentation also needs to include the project's financial statements and the Land Use Restriction Agreement (LURA), all of which provide the necessary information to assist assessors in initially establishing a fair assessment. The taxpayer should work with the assessor to ensure that the property card, database, and tax bill are labeled as LIHTC.

Similar to property tax abatements, this labeling should be maintained throughout the LURA period. By employing the same mechanisms as used in abatements, an assessor can flag a property for the remaining years in the LURA period, allowing the tax authorities to identify and properly assess LIHTC properties across time.

Establishing a long-term workable solution for LIHTC assessments contemplates some compromises. In the case of property owners, this means sharing financial information with the assessors. Many property owners show some reluctance to provide assessors with income and expense information. They should not resist sharing financials because LIHTC properties' income potential is typically reduced due to the restrictions, and that income provides the basis for the tax authority to establish a fair assessment.

Taxing authorities also have to compromise. In order not to fight over assessments throughout the life of a LIHTC project, assessors need to accept the fact that LIHTC properties have a certain level of economic obsolescence.

The obsolescence can be quantified by examining the value of the property under the LURA and the value as if it were a conventional property. For example, if a LIHTC property is worth $600,000 under the LURA and $1 million as a conventional property, then it suffers from a 40 percent obsolescence factor. Therefore, the assessor can simply reduce the value of the property by 40 percent when reappraising it and continue to do this for the life of the LURA.

No system is perfect, but if parties can agree to a long-term assessment formula, budgets should be closer and disagreements fewer, allowing for economic sustainability for taxpayers and proper assessments by assessors.

KJennings90J. Kieran Jennings 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. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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