Property Tax Resources


Texas’ Rollback Tax is a Potential Dealbreaker

Land use changes can subject unwary landowners and developers to massive property tax bills.

For real estate developers in Texas, the purchase and development commencement dates on a land project may have heavy tax implications that could make or break a deal.

Agricultural Exemptions

The Texas Property Tax Code allows some landowners to benefit from special property valuations for wildlife management, agriculture, or open-air uses, commonly referred to as agricultural exemptions. Depending on the valuation and exemption in place, a landowner may be excused from paying large amounts of taxes.

Under an agricultural exemption, tax liability is based on the land's productive agricultural value, as opposed to market value. The agricultural exemption supports and promotes the land's agricultural or wildlife- use by providing a discounted land value for use in calculating property tax liability while the land is being used for approved agricultural purposes.

Securing an agricultural exemption is not necessarily an easy process or a guaranteed result for a landowner in Texas. To qualify, land must have been primarily used for agriculture at least five of the past seven years. Accepted agricultural purposes include crop production, raising livestock, beekeeping, timber production, wildlife management, and similar activities. Additionally, many counties set minimum acreage requirements, and some consider the agricultural activity's degree of intensity.

Triggering Rollback

An agricultural exemption does not attach to the land forever, and some developers may be unaware of the rollback tax. This somewhat vague provision of the state's tax code can impose a heavy tax burden when a piece of agricultural land is purchased for development, and/or when the land use changes. This tax burden may be more onerous than simply losing the exemption moving forward.

Appraisal districts maintain two values on the appraisal roll for agricultural land. Similar to how homestead exemptions are recorded, the appraisal roll lists the land's market value and the lower valuation reflecting its wildlife or agricultural production. When appraising agricultural land, the assessor will determine and record both its market value and the value of its capacity to produce agricultural products.

When an assessor calculates the amount of tax due on the land, he/she will also calculate the amount that would have been required had the land not benefited from an agricultural exemption. The difference in the amount of tax imposed under the exemption and the amount that would have been due without an exemption is called the additional tax for that year.

If land that has been designated for agricultural use in any year is sold or diverted to a nonagricultural use, it triggers a rollback tax. The taxes due under this provision include the total amount of additional taxes for the three years preceding the year in which the land is sold plus interest at the rate provided for delinquent taxes. This rollback tax is in addition to the larger, non-exempt tax burden moving forward from the sale.

The chief appraiser determines whether the land has been diverted to a nonagricultural use. A tax lien attaches to the land on the date the usage change occurs to secure payment of the additional tax imposed, as well as any penalties and interest incurred if the tax becomes delinquent.

The lien favors all taxing entities for which the additional tax is imposed. If the usage change applies to only part of a parcel, the additional tax applies only to that portion of the tract and equals the difference between the taxes imposed on that section of the property and the taxes that would have been imposed had that part been taxed on market value.

Monitor Exemptions 

The county appraisal district may have incomplete or incorrect information about a particular property's change in use. It could be that the use is diverting from agricultural use to wildlife management, and the exemption may still apply. This means that an agricultural exemption could be erroneously removed from a property that would still qualify.

This happens most often when a change of ownership and a deed newly recorded with the county triggers the removal of the special valuation. Owners must be diligent in submitting to the county a new application for agricultural or wildlife management use by April 30 of each year to ensure that their exemption stays in place.

Review Annual Assessments

Landowners should not grow complacent about protesting assessments annually. If agricultural owners don't file protests to keep their assessed land value down year over year, they may be on the hook for more taxes when they sell the land to a developer.

A taxpayer may protest a property valuation each year for the current tax year, but many Texas counties do not increase land values every year unless property transactions prompt them to do so. Few taxpayers protest when their assessments do not increase from the previous year, and the protest process is even more likely to be overlooked when the landowner has an agricultural exemption.

Repercussions for the landowner become apparent when they receive a compelling offer to sell. The landowner may make a sweet deal with a developer, but this will always trigger a change of use and the rollback tax. The buyer and seller will need to reach an agreement about satisfying the tax payment upon closing.

This becomes even more difficult for the landowner to manage if their properties are in counties that do not send a notice of appraised value when the value rolls over unchanged from the prior year. Therefore, it is still important and worth the effort to protest the valuation of agricultural land each year, even when the value is unchanged or minimally increased.

To accurately forecast potential property tax liabilities for development projects, landowners and developers alike must be aware of both the taxable and market values of land under consideration for sale or development. The rollback tax provision can be a bit complicated, but the right property tax team can help to navigate the process and avoid pitfalls that could disrupt the project's profit potential.

Beverly Mills is a Tax Consultant at Austin, Texas law firm Popp Hutcheson PLLC, which focuses its practice on property tax disputes. The firm is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys
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Equal, Uniform Property Taxation Is Critical

Fighting for laws that produce equal, uniform taxation best serves taxpayers and state governments.

It has been said that the people who complain about taxes can be divided into two classes: men and women. While we all complain, taxes ensure various levels of government have funds to perform essential functions—to keep society civil and in, more or less, working order.

A tax must be fair to be supported, however. In countless instances, a taxpayer's first complaint about an assessor's valuation is that the amount exceeds their neighbors' valuations. In essence, the property owner claims that the property valuation and resulting tax liability is unfair or non-uniform.

Too many jurisdictions lack an efficient mechanism to address non-uniform taxation. Fortunately, several states specifically require tax uniformity, and two offer legal remedies to help taxpayers combat unfair assessments.

A constitutional concept

Most taxing jurisdictions seek to assess real property at market value, which is the amount the property might sell for as of a certain date. Many states even address the legal requirements of taxation in their governing documents.

Ohio's constitution, for example, requires that "Land and improvements thereon shall be taxed by uniform rule according to value." Virginia's constitution states: "All taxes shall be levied and collected under general laws and shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax."

  • Washington's constitution necessitates that all taxes shall be uniform upon the same class of property within the limits of the assessor's authority, while Missouri's constitution requires that assessments must be based upon market value and be uniform.
  • That all four of these sampled constitutions mention the importance of taxation uniformity underscores the importance of the concept. Taxpayers seeking an effective model for opposing an assessment on the basis of unequal treatment can look to two other states: Texas and Georgia.

Ready remedies

Texas and Georgia have taken great strides in establishing the methods to ensure property assessments meet their constitutional goals of equal and uniform taxation. Both states empower taxpayers by setting out specific steps to show an overvaluation. Taxpayers in these jurisdictions are assured the right to have their property assessed for taxation in a uniform and equal manner when compared to nearby comparable properties.

In Georgia, a property owner can challenge an assessor's valuation of their real property based on uniformity.The state's standard appeal forms have a box to check as to whether the appeal is being filed based on value, taxability or uniformity.

Under a 1991 Georgia case, Gwinnett County Board of Tax Assessors vs. Ackerman/Indian Trail Association Ltd., a property owner who can show that numerous similar properties in the same area and county have lower assessed values can use that information as grounds to advocate for a lower assessed value.

Texas property owners can challenge an assessor's valuation by arguing there has been an unequal appraisal.Texas property owners in this position can file a protest if they believe the property is taxed at a higher value than comparable properties.

To prevail in seeking a lower valuation, the property owner can submit sale or appraisal evidence. Alternatively, the taxpayer can prevail by showing their assessed valuation exceeds the median appraised value of a reasonable number of appropriately adjusted comparable properties.

In a 2001 case, Harris County Appraisal District vs. United Investors Realty Trust, a Texas appeals court found that when there is a conflict between taxation at market value and equal and uniform taxation, equality and uniformity prevail. This means it is more important that taxes be equally and uniformly imposed and collected than it is to arrive at the property's market value when the "corrected" value makes the property a taxation outlier in its competitive set.

A pervasive need

For sure, a tax assessor's job of valuing all land and improvements is daunting, and they must use many data points and much subjectivity to assess values. Given the scope of their job, mistakes in valuation will occur—especially if the valuation incorporates inaccurate data regarding gross building area, square footage, age, condition or other variables.

Because mistakes are inevitable, property tax systems must provide taxpayers with efficient and effective methods of challenging overvaluations. All jurisdictions provide taxpayers the right and some mechanism to contest the assessor's valuation through an administrative and/or judicial process. This procedural right gives taxpayers a means to correct apparent overvaluations and to seek fairness—or at least it provides the opportunity to argue for fairness.

Taxpayers' pursuit of that procedural right most often revolves around valuation and ignores the constitutional requirement of uniformity. Or worse, the available procedure conflates uniformity with valuation by stating that if the assessed value reflects market value, that equates to uniformity. This thinking is only accurate in theory, as achieving market value assessments for all is aspirational but elusive.

If taxpayers in every jurisdiction could argue a solution along the lines of Texas' defense, it would ensure uniform and equal taxation for all.

Many times, an appeal board hearing a valuation complaint will require either evidence of a recent sale of the subject property or an appraisal report before it will adjust an assessor's valuation. However, sales are often unavailable and appraisal reports can be expensive. Given the cost of appraisals, owners of lower value real estate must often weigh cost versus potential tax savings before deciding whether to hire an appraiser and contest an unfair assessment.

Fairness across the assessor's jurisdiction must be the paramount goal. The defenses or means of redress provided by Georgia and Texas are vital to ensure that taxpayers have access to a constitutionally mandated equal and uniform valuation. These statutory provisions provide a cost-effective method for taxpayers to challenge an overvaluation.

Constitutions that provide an equal and uniform defense give taxpayers fair and equitable access to assessors' valuation systems and promote equal and uniform taxation. Expanded taxpayer access and improved assessor responsiveness promotes trust in government.

Every jurisdiction should follow these examples to provide taxpayers an equal and uniform defense.

Steve Nowak is an associate in the law firm Siegel Jennings Co. L.P.A., the Ohio, Illinois and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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Defending Against Tax Jurisdictions’ Attacks on Market Value

Michigan's Menards case offers valuable lessons to help taxpayers get fair property taxation.

While taxpayers typically pay property taxes based upon their property's market value, assessors frequently misapply evidence or even redefine market value to rake in excessive taxes.

The recently resolved Michigan Tax Tribunal case of Menard Inc. vs. City of Escanaba illustrates several of these efforts to collect excessive taxes and suggests arguments a property owner can use to challenge them.

What is market value?

Market value is the price willing, knowledgeable buyers and sellers in an arms-length transaction would agree the property is worth. Market value differs from insurance value or replacement value because it reflects what a typical buyer would pay for a property as it is. Market value also differs from value to the owner, which reflects how a particular property contributes to the owner's business operation.

Appraisers typically determine market value using one or more of three valuation techniques:

The sales comparison approach adjusts sales of similar property to indicate the likely selling price of the subject property. The income approach values property by considering the present value of the income it would likely earn if rented, whether or not it actually is rented. The cost approach values property by considering its cost of replacement, reducing that cost by all forms of depreciation including physical deterioration, functional obsolescence and economic obsolescence. Such depreciation can and should be quantified by data also utilized in the income and sales approaches.

The Tax Jurisdiction's Evidence

The subject property in the Menard case was a big box retail store, larger than most, with a main floor area over 150,000 square feet and with additional accessory space. The owner used the space as part of its multistate retail business operations and as a delivery point for its internet sales. The building was not subject to a lease.

The tax jurisdiction proposed valuing the store using sales of smaller home improvement stores occupied by Lowe's or Home Depot as tenants pursuant to build-to-suit leases. It also sought to use the rental rates in these build-to-suit leases as evidence of market rent. It claimed that the Menards store suffered no material obsolescence, based on evidence drawn from this build-to-suit data.

As the term suggests, tenants under build-to-suit leases have contracted with a developer to build the store to their specifications. The parties set lease terms before construction even starts, calculating the lease rate to cover all construction costs and provide the developer's expected profit. In essence, such leases recover replacement cost even if market value is less than replacement cost.

Taxpayer's counterpoint

The taxpayer successfully argued such evidence did not reflect the market value of Menards' store. The selected sales reflected the value to the owners of using the stores in their specific retail operations. The lease rates were high enough to recover actual construction costs for each property—not what any other retailer would pay to rent a space not built specifically for its business model. This data, virtually by definition, would not indicate obsolescence in the subject property.

When such stores sold, the taxpayer argued, the sales price reflected the value of a lease to a creditworthy tenant that of course was already using the building in its retail operations. Besides generating cash flow designed to recover construction costs, the specific leases were signed during periods of higher interest rates than on the valuation dates, so that by the time of valuation, the leases provided an above-market return on the original building investment. What the tax jurisdiction called sales of comparable buildings were effectively bond sales from one investor to another secured by a retail building.

A buyer of Menards' property, if it sold, would not receive cash flow from a build-to-suit lease. In fact, it would not receive cash flow from any lease. The tax jurisdiction should have either adjusted the sales to remove the effect of above-market leases, or used sales unencumbered by a lease and for which no lease adjustment would be necessary. Some tax jurisdictions derisively call such transactions "dark store" sales, but they are frequently the best evidence of a building's market value. It is the building that is subject to property tax—not the business operating within the building.

Lessons learned from the Tribunal's decision

The tribunal rejected the tax jurisdiction's build-to-suit lease rates and sales with build-to-suit leases in place.Instead, the Tribunal used the taxpayer's proposed lease rates for conventionally leased buildings in the local area.Such lease rates better reflected the market rent a buyer of the subject property could reasonably expect to collect, and therefore best indicated obsolescence suffered by the subject property.

These lessons apply to valuing any type of building. Build-to-suit rents do not reflect market rent-- except by accident. Alleged comparable sales with build-to-suit leases are typically not comparable to a subject property that is owner occupied.

Even if the subject property is already fully leased with a build-to-suit lease, if local law requires use of market rent, the actual rent from the build-to-suit lease could be given far less or no weight. During the Great Recession, in market lease states, even fully occupied buildings at high contract rent had their values reduced because market rents had fallen. Finally, increased e-commerce volume and changing consumer habits may render many existing retail stores oversized. Office buildings and the tenants' current spaces may be oversized due to higher proportions of people working from home or virtually. Oversized buildings in light of current market conditions suffer from obsolescence that must be reflected in market value.

The Michigan Tax Tribunal resolved the Menard case this year after several years of litigation. Perhaps that resolution can now help other taxpayers to recognize unfair assessment practices, and to build stronger cases as they seek fair assessments for their own properties.

Steven P. Schneider is a partner and Tax Appeals Practice Group member in the law firm Honigman LLP, the Michigan member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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How Operators Can Reduce Hotel Property Tax Bills

When the early pandemic sent hotel occupancies plummeting and uncertainty soaring, it also created clear opportunities for many hotel operators to reduce property tax bills by appealing their assessments.

Today, however, it can be difficult to know whether appealing an assessment still makes sense. Record selling prices are being reported on a macro level despite increasing interest rates, rapid inflation and ongoing unpredictability in many markets. This gives taxpayers a potentially confusing array of mixed messages affecting valuation.

Hotel operators should heed the real estate adage that "all properties are unique," a saying that certainly rings true in the current hospitality market. To really understand hotel values, it has become essential to delve into what drives demand at each property.

Value Judgments

I recently heard an appraiser sum up the hotel market recovery as follows: "At the beginning of the pandemic, we thought it was going to take five years [for hotels to recover], but it turned out it was more like two to three," he said. "And if a property isn't recovering by now, then it's probably not going to."

This was, admittedly, an oversimplification, but it seems to reflect the reality in many places.

Laurel Keller, an EVP at of Newmark Valuation & Advisory's gaming and leisure division, observed that the recovery has been uneven across different markets and hotel types. "I've seen a range of recoveries, from midscale hotels that recorded their best top-line revenue and profit margins ever last year, to full-service hotels still performing at levels below pre-pandemic," Keller said. "In most instances, average rate growth has been substantial over the past 18-plus months, though occupancy recovery has been slower."

So, how can an owner or operator know if their hotel is fairly assessed?

For property tax purposes, most states recognize that hospitality properties are operating businesses (also called going concerns) of which real estate is only one value component. The other components are the furniture, fixtures and equipment, and the intangible business value.

To reduce property taxes, an owner must challenge the assessor's property value assessment, and that value pertains only to the real estate component. Failing to prove the proper allocation of overall value among the going concern components can result in an owner paying taxes on non-taxable property.

Two Approaches

There is widespread agreement that a lodging operation carries a business value that must be separated from the real estate to determine taxable property value. However, for the past two decades there has been debate about how to tease out those separate values. This ongoing discussion is dominated by two generally accepted valuation methods. The more conservative of the two assumes that the removal of management and franchise fees from the income stream offsets the hotel's business value. That approach gained favor in many jurisdictions in the early 2000s for its straightforward and simplistic nature.

Several prominent court decisions in recent years have endorsed a more robust analysis, however, to ensure that all non-taxable assets are removed from the real estate assessment. This more detailed approach considers the values associated with intangible items such as a trained workforce, reservation systems and brand goodwill.

One expert witness recently described post-pandemic hotel analysis as "granular," and noted that seemingly minor differences between properties have become more important than ever. As an example, he pointed to two properties in his market with the same flag which would have been considered comparable three years ago, but subtle differences in their locations relative to office submarkets, sporting facilities, and hospitals could now make a big difference in performance and valuation. Despite appearing similar on the surface, each property has unique demand factors.

In a similar vein, an owner of hotels throughout the United States used the term "hyperlocal" to describe property performance in 2022. As an example, the owner cited two upscale hotels about a mile apart from each other in the same submarket, just outside of a large metropolitan area. Pre-pandemic performance at both properties was similar and relatively predictable. Today, the property slightly closer to the airport is thriving while the other struggles to get back to 2019 performance levels.

It also can be difficult to make sense of the news around recent acquisitions. Even as billions of dollars are pouring into the extended-stay sector nationwide, owners in some markets are looking to convert their extended-stay properties to apartments. Similarly, 2022 has seen significant investment in hotels along interstate highways despite indications that occupancy may be starting to decline in that subsector.

"Pandemic recovery has varied widely from property to property and market to market and been far more protracted for some hotel assets," Keller said. "More surprisingly, we are now seeing performance decreases at some hotels that experienced a surge in leisure-oriented travel last year. So, the recovery is ongoing, and perceived rapid recovery at some hotels may have been slightly misleading."

Perhaps the key takeaway from all this is that the reported "recovery" in the industry doesn't equate to a recovery for every hotel.

Just as all properties are unique, all taxing jurisdictions have their own rules and idiosyncrasies. Understanding the intersection between accepted appraisal practices and a jurisdiction's particular laws around the assessment of going concern properties is essential to ascertaining whether a particular hotel is fairly assessed.

Operators seeking assistance in evaluating their property tax assessments should lean toward qualified appraisers and tax counsel with local knowledge, which can help identify opportunities to right-size taxes and articulate the narrative behind each property in question.

Brendan Kelly is a partner in the Pittsburgh office of law firm Siegel Jennings Co. LPA, the Ohio, Illinois and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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The Sanctity of Fair and Square Property Taxation

Assessors often need reminding that property owners are entitled to equal, uniform treatment, notes Stephen Grant of Popp Hutcheson PLLC.

Across the country, state constitutions require that property taxes be equally and uniformly assessed. And thank goodness for that.

Without such constitutional guarantees, local taxing authorities would have the unfettered ability to single out individuals, property types, or categories of property owners for taxation by a different standard, possibly taxing them out of existence.

Fairness Trumps Market Value

Generally, taxpayers can challenge their property tax assessments by arguing that the appraised value of their property exceeds its fair market value. However, if a conflict exists between taxation at market value and equal and uniform taxation, equal and uniform taxation must prevail. Various court cases have upheld this principle and underscore its importance. In short, the guarantee of equal and uniform taxation is designed to protect taxpayers and ensure equal treatment of all commercial and residential property owners.

Despite constitutional protections, unequal appraisal by local taxing authorities persists. There are several reasons for this, including data errors and tax officials' willingness to single out recently sold properties to assign value, commonly referred to as "sales chasing."

Tax assessors continue to appraise recently sold property at or near its actual sales price but leave the taxable values of other, similar properties unchanged. A business cannot compete in its respective market if it is being taxed more heavily than its competitors. Compounding the issue, many commercial leases pass through property tax expenses to tenants who ultimately bear the brunt of higher property tax bills.

Further, a property appraised according to the high end of market values may nonetheless be unequally assessed if other comparable properties are valued at the lower end of the market. Over time, the variation created by that practice would result in affected property owners being saddled with higher assessments and potentially higher tax liabilities than similarly situated properties. At the minimum, this practice raises a question of whether properties within a taxing district are being taxed to an equal and uniform standard.

Taxpayer Recourse

When one parcel is unequally appraised compared to similar properties, what recourse do taxpayers have to ensure equitable taxation?

While most state constitutions require that taxation be equal and uniform, only a few states have adopted a statutory remedy to accomplish that goal. Where available, the statutory unequal appraisal provision permits taxpayers to appeal or protest when an assessor has appraised their property using a different standard than those used for other properties. Accordingly, a property owner can seek relief if their property was treated differently from other properties in the same tax base, even when their appraised value does not exceed fair market value.

Texas has what may be the most robust statutory unequal appraisal remedy in the country. The provision states that a property shall be valued for property taxes based upon the median level of appraisal of a reasonable number of comparable properties, appropriately adjusted.

When selecting comparable properties, it is important to consider several factors, including but not limited to the properties' use, competitive set, neighborhood, and size. While the Texas statute does not define what a "reasonable number" of comparable properties is, consideration should be given to the quality and number of comparable properties used.

After selecting a reasonable number of comparable properties, adjustments are then made to the appraised values of the comparable properties to put them on equal footing. The adjustments account for differences between the selected comparable properties and the subject property, such as location, age, and size. When determining what adjustments to make, the focus should be on elements that directly affect the properties' value.

The final step is to compare the median adjusted value per square foot of the comparable properties and see how they correlate to the subject property. If the subject property has a higher value per square foot than the calculated median, then there is an equity issue.

Fair Fights

The equal and uniform remedy serves as a helpful tool for taxpayers when challenging their property's assessed value. For instance, disputing a property's market value may not be viable in some situations, and a taxpayer's only recourse may be to argue that their property has been unequally appraised.

For example, a hypothetical taxpayer purchased a 300,000-square-foot, Class-A office building for $55 million during the prior tax year. The appraisal district subsequently assessed the building for property tax purposes based upon the purchase price, despite assessing other Class-A office buildings of similar size and location at a lower price per square foot.

By engaging in sales chasing, the appraisal district has unfairly appraised the subject property in relation to its competitors. However, if the state had adopted an equal and uniform remedy, then the taxpayer could challenge the property's value on the grounds that it was unequally appraised even if the assessor deemed the sales price to be fair market value for property tax purposes.

Challenging tax values on an equal and uniform basis is an effective remedy. It addresses the practice of sales chasing, counters assessors' tendency to use high sales prices to raise property taxes across an entire market and offers a coherent alternative to simply arguing that an assessment is excessive.

The unequal appraisal remedy is a readily accessible argument, particularly for homeowners, because it provides taxpayers with a more straightforward option than a market value appeal. It enables taxpayers to forego the high cost of procuring expert appraisers by allowing them to instead build an argument by identifying a representative sample of similar properties from the appraisal district's own website.

In sum, if your state has an equal and uniform remedy—use it. If your state does not have an equal and uniform remedy, consider urging lawmakers to adopt one in your state.

Stephen Grant is an associate at the Austin, Texas, law firm Popp Hutcheson PLLC. Popp Hutcheson focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Seniors Housing Needs Long-Term Tax Care

Follow these steps to stop excessive property tax assessments.

In a nation that has faced a host of new challenges since the pandemic began, the seniors housing sector has carried one of the heaviest burdens. COVID-19-related mortality risk for those 85 years old or older is 330 times higher than for those 18 to 29 years old, according to the Centers for Disease Control and Prevention.

Notwithstanding those odds, 51% of all seniors housing properties including independent care, assisted living and skilled nursing reported zero deaths from COVID-19. Yet the industry continues to grapple with increased costs, worker burnout, hiring challenges and occupancy issues that have ravaged their operations.

Like a vaccine that stimulates a stronger immune response, hard times can spur organizations to boost efficiency and fortify themselves against other threats, such as inflation. In this vein, seniors housing owners must identify ways to turn their troubles into positive influences.

As the industry seeks to allocate money from areas that don't compromise care, property tax strategy should be near the top of their lists for potential savings. Moreover, reduced taxes tend to have a long-term impact. When assessments are low, they tend to stay low, which may serve to insulate the industry from the impacts of inflation.

How to reduce property tax liability

Obtaining those property tax savings is not easy, however. Although it seems apparent that the industry has suffered, taxpayers that want a reduction in taxes must prove their property has lost value; they cannot rely on the good will of assessors to adjust the assessment.

Taxpayers must look at their tax challenges in a way that reflects the impact to the business. That said, assessors will want to concentrate on real estate value irrespective of the business. Many will reference sales of properties that were priced on the value of contractual leases to the operator, or assessors may look at the income to the owner based on contract rents. Taxpayers need well-documented arguments to counter these positions.

While separating the real property value from the business value, real estate assessments must also consider the negative effect that a struggling business exerts on the real estate.

Taxpayers can follow a three-step financial feasibility study to help prove the need for an assessment reduction.

1. Determine the net operating income (NOI) under COVID-19 and its legacy. It is important to document the new costs necessary to safeguard and serve residents in this new environment.

2. Separate income associated with services from real estate income. Be sure to remove from income any governmental stimulus that will not be ongoing.

3. Finally, use the resulting real estate NOI to show the effects of that income stream on real estate value.

Step 2 is critical, and it must start with the business. Conduct a forward-looking income analysis that includes all increased costs, from the added costs of employing and motivating a weary workforce to inflation and expenses associated with new health standards.

After documenting the new NOI from the independent living, assisted living, or skilled nursing operation, determine whether that income is sufficient to justify the business. Taxpayers can do this by applying a return to the cost of services. The expenses that are separate from normal real estate operations are associated with the service side of the business, and those outlays are expected to generate sufficient income to create a return on that investment. Remove the return from the overall net operating income, thus separating the income from business and real estate. The result is NOI that reflects more closely that of the real estate.

Perform a similar analysis to determine whether the net income attributable to real estate is sufficient to justify the real estate cost. It is important to remind the assessor that the operating business can only pay rent if there is money available, even if that rent is just a figure used in a formula to determine real estate value. At this point, the taxpayer can apply a capitalization rate to the net real estate income to arrive at the real estate value.

Apply to other valuation approaches

The financial feasibility study described above will also help taxpayers and assessors determine how to adjust the cost approach to valuing real estate. Likewise, the analysis can inform adjustments to comparable sales data. Indeed, that initial financial feasibility will help in all aspects of the tax challenge and should be well documented.

Assessors are not all-knowing, so unless the taxpayer shows them a good reason to change approaches, they will work with their normal procedures. Often, assessors look to the property's construction cost (less physical depreciation based on age), sales of similar properties and/or the income generated from contract rents to determine an assessed value.

Without an initial feasibility analysis, an assessor may focus on construction costs without regard to whether the property's use will justify those costs. Or they may use contract rents for the subject property or competing properties, either of which were likely established with pre-pandemic metrics.

Simplistic shortcuts, such as assuming a percentage of the total net income that should be attributable to business and the other to real estate, are not ideal and may lead to inflated values of taxpayers' properties.

In theory, there should be a greater impact on the value of those properties that require more service. But because of the variations between properties and nuances of seniors housing types, a fresh look is needed for all of them.

A good starting position for the taxpayer is to ask, "what would we pay to acquire the property, knowing what we know today?" Comparisons to sales of other properties are more complicated than in the past and should be adjusted with an eye toward the feasibility analysis. Properties that cannot achieve sufficient occupancy and income to justify operation are not directly comparable to optimally occupied properties.

There are states where a reduction in the assessment may carry forward indefinitely. Approaching assessed value with a strong team will pay dividends for years. Conversely, an approach that is not well thought out will make future attempts to reduce taxes more difficult. But by taking the proper steps, a taxpayer can position themselves to drive the best result and be able to provide the service and living standards that our most vulnerable residents deserve.

J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio, Illinois and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Net-Lease Tenants Can Appeal Property Taxes

New York Court of Appeals rejects lower court decision, affirms that occupiers obligated to pay property tax have the right to protest assessments.

In a far-reaching decision, New York's highest court has affirmed the rights of tenants under a commercial net lease to protest assessments and reduce their real property tax burden. The ruling reversed a State Supreme Court dismissal of a petition on the grounds that only a property's owner can file an administrative grievance with the Board of Assessment Review.

In a net lease, the tenant is responsible for paying real estate taxes and other expenses stated in the lease. In The Matter of DCH Auto vs. Town of Mamaroneck, the Court of Appeals in June 2022 published a unanimous decision stating that tenants contractually obligated to pay real estate taxes and authorized to protest assessments may file tax appeals even when they do not hold title to the underlying real estate.

Restoring a precedent

DCH Auto operated a car dealership in a net leased property in Mamaroneck, New York. Its lease with the owner required DCH to pay the property's real estate taxes in addition to rent.

Commercial tenants with this type of lease commonly file tax appeals to correct excessive tax bills and mitigate operating costs. These occupiers include retailers such as department and big-box stores, office building users, banks, drug stores and other businesses.

In the subject lease, DCH had the express right to challenge the subject tax assessment. Pursuant to the statute, it filed an administrative grievance with the town's Board of Assessment Review. The Board denied the challenge, after which DCH petitioned for judicial review.

The town moved to dismiss, arguing that the petition was invalid because the incorrect party had filed the administrative grievance before the Board of Assessment Review. They alleged that the failure of the property owner to file the administrative appeal precluded judicial review of the board's determination.

The lower court agreed and dismissed the petitions on the ground that only a fee owner may file the initial grievance complaints under the New York statutory scheme. The State Supreme Court's Appellate Division, Second Judicial Department, affirmed the petition's dismissal.

Thus, in one fell swoop, the Appellate Division obliterated over 100 years of precedent, which held that a net lessee that pays the real estate taxes is a proper party to file an administrative complaint challenging the assessment. Prior to the DCH lower court decision, it was never disputed that a net lessee was a proper complainant for filing both an administrative complaint and judicial petition. The lower court's ruling effectively required absentee property owners – who do not pay the real estate taxes and have no skin in the game – to file an administrative appeal before a net lessee can file a judicial petition.

The Appellate Division decision placed in jeopardy thousands of real estate tax assessment appeals filed by commercial net lessees who have relied upon common, accepted practice and precedent, and interposed an owner standard where none is present in the plain terms of the relevant statutes.

Fortunately, the Court of Appeals reversed the lower court's decision.

Who's who?

The case turned on statutory interpretation and analysis of legislative intent. At issue was Section 524(3) of the New York Real Property Tax Law (RPTL), which sets forth the process for the review of real property tax assessments. The provision specifies that an administrative complaint must be made by "the person whose property is assessed." If a complaint is denied, then "any person claiming to be aggrieved" can file a judicial appeal pursuant to Article 7 of the RPTL.

The Town of Mamaroneck's position was that the property owner must file the administrative complaint before any aggrieved person can challenge the result in court.

The Court of Appeals held that DCH and all commercial net lessees with the right to challenge assessments are included within the meaning of "the person whose property is assessed" under RPTL Section 524(3).

In its decision, the Court of Appeals considered the text of the statute and noted that "a person whose property is assessed" is not defined. A comprehensive review of the legislative history ensued, beginning with an analysis of the initial text of the statute as it existed prior to 1896. The original statute permitted "any person" to file an administrative complaint. In 1896, lawmakers amended the wording to "a person whose property is assessed." The Court examined the record, cited the New York State Commissioners of Statutory Revision that addressed the change in 1896, and noted that "there is no change of substance" with the revised wording.

In reversing the lower court's action, the Court of Appeals based its decision upon the evolution of the statutory text and the consideration of the underlying legislative intent. The Court made clear that it was not the legislature's intent to limit the meaning of "a person whose property is assessed" to the owners of real property, and that the reference includes net lessees contractually obligated to pay the real estate taxes.

Notwithstanding the DCH decision, commercial net lessees should ensure their tax appeals are not challenged by making certain that their right to file a tax appeal is clearly stated in their lease.

Jason M. Penighetti is an attorney at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLC, the New York State member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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John Stark: Obtain Fair Property Tax Assessments for Student Housing

Student housing valuation is often saddled by two common units of comparison that multiply the opportunities for confusion and disagreement in appraising value for property taxation. For a more convincing property tax appeal, it is important for the taxpayer to ensure their property's valuations line up on both a per-square-foot and a per-bed basis.

This article will discuss the importance of a proper unit mix and rent roll analysis to reconcile values between these units of comparison. We will also discuss current trends in student housing, including free services and concessions designed to boost occupancy, that should be accounted for in an income analysis to make sure appraisal districts do not overvalue the real estate.

Price Per Square Foot vs. Price Per Bed

Although student housing owners typically lease their properties by the bed and calculate investment value by that metric, many appraisal districts value student housing on a price per-square-foot basis. This can lead to errors in an assessor's potential gross income assumptions. Further exacerbating overvaluations, many appraisal districts do not distinguish lease-per-bed student housing from traditional, lease-per-unit multifamily apartments. This failure to differentiate leads to erroneous assumptions of market rents and cap rates.

Student housing properties often have different rental rates and occupancy rates for various lease tiers. One-bedroom units, for example, typically garner the highest rents; the more beds in a unit, the lower the per-bed rental rate is likely to be. These variations make it imperative that an assessment accounts for occupancy in relation to the lease tiers in which those occupancies or vacancies occur. In reviewing an assessment or building a case for revaluation, make sure the more expensive, one-bedroom rental rates are not grossed up against cheaper, four-bedroom vacancy rates.

The taxpayer can factor rental rates and occupancy by unit type into mirrored, weighted-average analyses to establish two parallel income calculations with matching indications of value. Showing a similar value result on both a per-square-foot basis and on a per-bed basis makes for a persuasive property tax appeal.

Other Income and Intangibles

Within these mirrored, weighted-average analyses, it is also important to consider other income and any intangible property that may not belong in the calculation of taxable real estate income. Market definitions may vary by jurisdiction, so be sure to follow local practices in determining what income is attributable to the real estate.

Common examples of other income and intangibles include free internet, valet trash collection, utility allowances, pet fees, free shuttle service to campus, meal plans, premiums for unit add-ons (view, balcony, high floor), in-unit washer/dryer vs. appliances rental fees, furnished units, and free vs. paid parking. There are sure to be other examples of "freebies" and "perks" that a property provides to entice occupancy.

Because many assessors will include an assumed 8 percent to 12 percent of other income on top of the potential gross income gleaned from the rent roll and income statement, it is easy for an assessor to accidentally double dip on other income or accidentally include as taxable some intangibles baked into the achieved or scheduled rent.

Likewise, when performing a comparative analysis or determining market rents, it is also important to adjust for these sources of other income and intangibles. Not every competing property within the same market will offer an identical set of perks, amenities, or concessions to drive up occupancy.

Market Trends

Since COVID-19 and the return to campus, many student housing properties are providing substantial concessions to stabilize occupancy. At some properties, these concessions equate to as much as 25 percent of potential gross income for the 2022/2023 academic year.

It is hard to know whether this trend will continue in coming academic years, but it is important to realize that many assessors do not automatically adjust for concessions when using asking rents in their calculations of potential gross income. When discussing the property with an assessor, be sure to distinguish between asking rents (often labeled "market rents" on a rent roll) and actual achieved or scheduled rents after concessions.

Because assessors frequently lump together student housing with traditional multifamily properties in their market surveys, they often use cap rates driven by traditional, multifamily transactions when they value student housing. Given that student housing cap rates are typically 50 to 100 basis points higher than conventional multifamily cap rates, it is important to make sure assessors are using appropriate cap rates in their analyses.

When preparing property tax appeals for student housing properties, it is important to keep in mind how much these properties differ from traditional multifamily real estate. The differences in leasing structure, units of comparison, higher rates of other income, numerous intangibles, required concessions and higher cap rates all contribute to a unique model that is distinct from traditional multifamily apartments.

Providing a reconciled approach that combines price per square foot with price per bed is a great place to start discussions with the assessor and to make sure you are talking "apples-to-apples." Additionally, differentiating asking/market rents from achieved/scheduled rents – while adjusting for intangibles, other income, and concessions – will smooth out most differences with the assessor's income-based assessment.

John Stark is a tax consultant at the Austin, Texas-based law firm Popp Hutcheson PLLC, which focuses its practice on property tax disputes. The firm is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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New Legislation, Programs Incentivize Affordable Housing Developers

Owners who understand the nuances of tax incentives, abatements and exemptions can gain an upper hand in reducing their property taxes.

The Low-Income Housing Tax Credit (LIHTC) has long been a key device in the affordable housing tool chest. Although it has been the primary source of financing for the construction and preservation of affordable housing, the tax credit has not allowed the vast expansion of affordable housing development
that many communities need to keep up with rapidly growing demand.

With rents and materials costs rising amid rapid U.S. inflation, cities and rural areas alike need more resources to help keep many Americans in quality affordable housing.

According to the National Low Income Housing Coalition, only two states (West Virginia and Arkansas) have housing costs that put a two-bedroom rental within the reach of a fulltime worker earning less than $15 per hour.

The recent spike in residential real estate prices and now increasing interest rates are forcing more potential home buyers to rent. This has left fewer units available, which drives up rents and further reduces the supply of affordable housing throughout the country. As of April 2022, more than half of U.S. consumers were living paycheck to paycheck, reports financial services company LendingClub.  

According to the U.S. Department of Housing and Urban Development, the Federal Reserve Bank of St. Louis and the U.S. Census Bureau, the national median rent increased more than 145 percent from 1985 to 2020, while median income increased by only 35 percent.

Clearly, more needs to be done to assist developers in the construction of affordable housing. Fortunately, many cities and states are implementing new legislation and programs that will directly assist developers who expand the affordable housing market.

State, Local Initiatives
Texas — In Austin, Affordability Unlocked is a development bonus program that waives or modifies some development restrictions in exchange for providing affordable housing.

In return for setting aside half of a development's total units as affordable, developers can receive increased height and density limits, parking and compatibility waivers and reductions in minimum lot sizes for the project.

The program is designed to increase the number of affordable housing units developed in Austin and to fully leverage public resources by allowing housing providers to build more units in developments that include significant amounts of affordable housing.

Washington, D.C. — Tax abatements for affordable housing are available that provide a reduction equivalent to 75 percent of the difference between the property tax owed before and after development. To be eligible, at least 5 percent of the units in the development must be reserved for low-income households, and an additional 10 percent of units must be reserved for households earning up to 60 percent of area median income (AMI).

The tax abatement is good for 10 years. The affordability requirements apply for at least 20 years, with a $10,000 penalty per year for each unit that does not meet income set-aside requirements during the final 10 years.

Illinois — In 2021, Illinois enacted legislation to develop and coordinate public and private resources targeted to meet the affordable housing needs of low-income and very low-income residents. The act applies to all counties within the state and allows each county to administer the applications for the property tax incentive.

In Cook County, for example, property owners with seven or more multifamily units may apply for the Affordable Housing Incentive, if they can prove a set of conditions that would qualify the property for one of three tiers of relief.

For example, an applicant with a pre-existing building that has spent more than $8 per square foot on rehabilitation of major building systems and has at least 15 percent of the units available at or below 60 percent of AMI qualifies for the "15 Percent Tier" incentive.

Major building systems include heating and cooling, electricity, windows, elevators and more. This incentive will reduce the property tax assessment by 25 percent for 10 years and can be renewed for two consecutive terms.

New York — Although state lawmakers allowed New York's longstanding 421a abatement to expire in June 2022, some property owners can still qualify for relief under the New 421a Program. The New 421a is available to projects that began construction between Jan. 1, 2016, and June 15, 2022, and will be completed on or before June 15, 2026.

Projects that commenced construction on or before Dec. 31, 2015, also may opt into the new program if they are not currently receiving 421a benefits. Applications must be filed within one year after completion, and construction benefits would be retroactive.

Benefits of the New York program include a construction period tax exemption of up to three years, plus post-construction exemptions of 10 years (two years full, plus an eight-year phase-out period); 15 years (11 years full, plus a four-year phaseout); 20 years (12 years full, plus an eight-year phaseout); or 25 years (21 years full, plus a four-year phaseout).

In post-construction periods, qualifying properties are exempt from the increase in real estate taxes resulting from the work. The length of benefits depends on location, commencement of construction and affordability within the project.

All market-rate rental units become subject to rent stabilization for the duration of the benefits, with initial rents approved by the Department of Housing Preservation and Development. Affordable rental units are rent stabilized for 35 years.

Massachusetts — Multifamily property owners can claim a tax exemption for any portion of the property used for affordable housing purposes. The exemption is calculated by multiplying the amount of tax ordinarily due by the percentage of floor area set aside for affordable housing purposes.

The exemption is granted on a year-to-year basis for units serving households earning up to 80 percent of AMI, and the local board of assessors reviews tenants' income information to confirm eligibility. Because the exemption is granted on a year-to-year basis, there is no long-term affordability requirement.

Oregon — The Multiple-Unit Limited Tax Exemption Program requires that at least 20 percent of rental units be affordable to households earning 60 percent of AMI,or 80 percent of median family income in high-cost areas, for the 10-year term of the exemption.

Hundreds of programs throughout the country offer tax credits, abatements or other incentives. In markets that are happy to assist willing partners in providing affordable rental housing for their communities, developers can gain an upper hand by learning to fully understand and navigate the application process.

Molly Phelan is a partner in the Chicago office of the law firm of Siegel Jennings Co. L.P.A., the Ohio, Illinois and Western Pennsylvania member of American Property Tax Counsel (APTC) , the national affiliation of property tax attorneys.
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New Jersey Tax Court Supports Taxpayers’ Rights

A New Jersey township learns that tax courts don't always buy into theoretical constructs.

Our tax courts live in a hypothetical world where they review property tax assessments in a theoretical manner to mimic the actual marketplace. Often municipal officials use this paradigm to distort concepts and achieve high values that cannot be realized in the market. The case of CIBA Specialty Chemical Corp. vs. Township of Toms River highlighted this dichotomy.

The subject property is an industrially zoned, 1,211-acre former chemical plant in Toms River, New Jersey. The plant produced industrial dyes and resins for over 40 years. Unfortunately, the manufacturing process also created significant industrial waste that was treated and disposed of on site, significantly contaminating the soil and groundwater.

The environmental contamination was so severe and pervasive that the entire property was designated a Superfund Site and was placed on the U.S. Environmental Protection Agency's (USEPA) National Priorities List in 1983.

Commercial operations at the site ceased in 1996, but environmental remediation work has been both active and ongoing. The controversial nature and extent of the contamination has embroiled the property and township in public controversy, federal criminal prosecution, and a number of civil lawsuits initiated by both public entities and private citizens.

Further complicating matters, the subject property is in a protected coastal zone adjacent to a tributary known as Toms River. This added layer of government oversight by the New Jersey Department of Environmental Protection serves to safeguard sensitive coastal areas and endangered species from overdevelopment. When put into practice at the subject property, these regulations either completely prohibit or severely restrict redevelopment activity on most of the property.

Any proposed redevelopment at the property would require the prospective developer to navigate this labyrinth of federal and state regulations, obtain consent and cooperation from a number of federal and state agencies, and garner support from the local municipality and public interest groups to avoid politicization of the zoning and planning processes at all levels.

Undaunted by these regulatory restrictions, the town asserted that not only could the property be developed, but that numerous residential housing units could be constructed on the site despite the current zoning or the pervasive contamination. And, of course, the town sought to tax the property on its potential residential value.

It was undisputed that the USEPA was the primary regulatory authority from whom a market participant would have had to obtain approval before attempting to redevelop any portion of the site. The town's own expert conceded this fact. The USEPA has total control over the property while remediation is taking place and will reject any proposal it believes may interfere with selected remedial action, or that would lack public support.

Despite overwhelming evidence that USEPA regulations would prohibit any development, that the zoning didn't allow residential construction, and that the public opposed the site's redevelopment, the town was undeterred. Its leaders argued that high-density housing could have been developed on the property with a rezoning, justifying its revaluation as residential rather than industrial real estate.

The frequent use of hypothetical scenarios encourages assessors to fly far from the reality of the marketplace to justify otherwise unsupportable assessments and increased tax burdens. Finding comfort in this hypothetical world, the town appealed to the perceived taxing-authority bias of the New Jersey Tax Court.

To create their hypothetical world in court, the town redefined key words in the USEPA regulations to establish results that were completely inappropriate for a rational reading of the rules. They stretched logic and applied to the subject property actions that USEPA had taken at other Superfund Sites. In doing so, they assumed that all contaminated sites can be treated the same, and that the case workers at this site will make decisions based on events at other remote Superfund sites, rather than basing decisions on the facts related to the subject property.

The town contrived its self-serving arguments to satisfy an outrageous assessment. It is all too often that the hypothetical nature of the court's standards and the theatrical nature of appraisal theory invite the clear distortion of marketplace reality.

The only saving grace in the system is that the courts assigned to decide these cases are trusted to end the nonsense and craft a decision based on fact and actual dealings. That does not always happen, but here, it did. In a detailed and thorough decision, the court summarized the overwhelming data that proved the taxpayer's case.

The court concluded that the entirety of 1,211 acres was development-prohibited, due to its status as an active Superfund Site and USEPA's ongoing institutional controls. The USEPA's oversite documents, which are legally enforceable and filed with the county clerk, restrict any development at the property unless the USEPA approves, or the site is partially or fully delisted as a Superfund site.

Reality finally hit home for the municipality when it was compelled to refund the taxpayer over $18 million.

These types of rulings in taxpayers' favor are rare. Nonetheless, taxpayers must continue to press courts to recognize market reality. It is not the courts' job to protect the municipal tax base.

Brian A. Fowler, Esq.
Philip Giannuario, Esq.
Philip Giannuario and Brian A. Fowler are partners at the Montclair, New Jersey, law firm Garippa Lotz & Giannuario, the New Jersey and Eastern Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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