Save the Dates! October 19-21, 2022 - Fairmont Chicago, Millennium Park - Chicago, Illinois

THEME - Managing the Future in a Changing World

APTC seminars provide an exclusive forum where invited guests can collaborate with nationally known presenters and experienced property tax attorneys to develop strategies to successfully reduce and manage property taxes.

Event Information

This year's seminar will address recent developments and current trends in the areas of property taxation and real estate. We will bring together nationally-known economic, technological, appraisal, and legal experts to provide valuable insight on managing the future of property taxation in a system that continues to change based on economics and other influences.

See the Featured Speakers appearing at the 2022 Seminar.

Featured Speakers

Member Speakers

Shopping center owners need to be especially vigilant regarding unfair taxation in 2022.

Property owners should expect to receive a Notice of Appraised Value from their appraisal district by mid-April. This year it is imperative that retail property owners submit an assessment protest prior to the deadline and help to establish fair taxable valuations in the post-pandemic marketplace.

Since March of 2020, COVID-19 has brought uncertainty and ongoing challenges to real estate owners. People often discuss the commercial real estate "winners and losers" of COVID-19, and of the four commercial real estate food groups, retail certainly suffered one of the heaviest initial blows. But how has the property type recovered as the pandemic has evolved? This article explores where exactly retail falls, and then offers strategies to argue more effectively for reduced assessments.

Evolving trends

To develop a full picture of the current state of shopping centers, one must look back to 2019 and early 2020 before the pandemic. In 2018, approximately 5,800 retail stores closed nationwide and only 3,200 opened, for an overall deficit of 2,600 locations. In 2019, the size of the annual store deficit nearly doubled with 5,000 more closures than openings. Ecommerce sales volume rose steadily from 2010 through 2019, which, coupled with accelerating physical store closures, clearly indicate a slowdown in the need for traditional storefronts.

In 2021, county assessors were generally conservative in raising values, primarily due to pandemic-related issues such as tenants going out of business and owners being forced to defer and abate rent. Additionally, shopping center transaction volume dropped throughout 2020, which forced appraisal districts to rely on limited data to arrive at market rents and capitalization rates for their 2021 models.

County appraisal districts preparing assessments for 2022 will most likely attempt to significantly raise taxable values to reflect what they view as a retail rebound that occurred during 2021. While assessors may conclude that retail is recovering well as the pandemic evolves, the data and overall trends fail to support that position.

If an appraisal district takes an aggressive stance in raising values, citing the "booming return of in-person retail shopping," it will be crucial for appellants to show the lingering state of uncertainty in the retail real estate market. Toward that end, the following three strategies will be keys to successfully arguing for reduced assessments.

1. Consider the tenant mix. When appealing taxable assessed values, either during the administrative process or later in district court, property owners must consider the tenant mix of their shopping centers and how the pandemic affected their retailers.

For instance, a center containing a drycleaner and a trampoline park will take much longer for those tenants to recover from the pandemic than many other properties. With work-from-home becoming the norm, many people no longer need pressed clothes. In addition, ball pits and trampolines crowded with children fail to appeal to a pandemic-conscious society. These trends are reflected in rents, with rates for specific uses such as these flattening or even declining since the onset of the pandemic.

2. Review the property's classification. The second strategy for appealing values is to review how the property is classified on the tax rolls. As many owners begin to utilize space in alternative ways, the center may no longer be operating entirely as a retail center. In other words, it may be more appropriate for it to receive either a light industrial or fulfillment center classification.

Amazon, for example, has been converting shopping malls into last-mile distribution centers steadily for the past six years. Amazon converted about 25 shopping malls into distribution centers between 2016 and 2019, Coresight Research reported. Converting stores to distribution spaces in a shopping center will drastically reduce foot traffic for any remaining retail tenants and negatively affect the customer experience, resulting in a lack of desirability for retail investors.

3. Demonstrate shrinking retailer footprints. It is no secret that consumer visits to physical retail locations is nowhere near pre-pandemic levels. Black Friday foot traffic in 2021, for instance, was down approximately 28 percent from 2019 levels, according to Sensormatic Solutions data. While in-person shopping will likely remain an element of the retail experience, there is a lingering sense of uncertainty surrounding its significance, especially with the strong adoption of curbside pickup.

Some major retailers have addressed this issue by downsizing stores. Target stores, for example, have historically averaged 130,000 square feet, but of the 30 stores the brand opened in 2020, all but one used a smaller format, according to pymnts.com. These small-format and college campus stores average 40,000 square feet, while some are much smaller.

It is reasonable to suspect that other retailers will follow suit, rendering many larger, anchor spaces within shopping centers obsolete and harder to fill with tenants. As the tide shifts to a "less is more" philosophy when it comes to store footprints, both appraisal districts and taxpayers should incorporate this increased risk into value calculations by raising cap rates in their models. Not only do shrinking store footprints and conversion of space to distribution uses bring an increased level of uncertainty to the asset class, but last-mile distribution centers also fail to command retail rents.

When shopping center owners receive assessed values for property taxation in the coming months, they should compare the assessments to values received in prior years, especially 2019. If the valuation trend of a particular property fails to make sense – either due to the overall uncertainty and risk surrounding brick-and-mortar retail or due to property-specific issues such as tenant mix and use of space – it will be extremely important for the taxpayer to act by protesting the property's taxable assessed value. 

Multifamily owners can avoid excessive property taxes by being prepared with the right research and documentation.

Property tax systems vary from state to state across the country, with differing procedures in each assessor's jurisdiction. Complicating things further, the personalities of assessors and their staff influence the way they interact with property owners or their agents.

It is the responsibility of the property owner or their agent to learn and adapt to the procedures and behaviors at work in their assessor's offices. However, there are universal preemptive steps that property owners in any jurisdiction can take to combat excessive valuations. These property-specific action items and best practices can significantly increase the chances of a successful valuation protest.

1. Document Property Financial Statements

In most appraisal systems, income-producing apartment property will be valued using the income approach. Arguably the most important pieces of information the apartment owner can present in protesting assessed values are the property's rent rolls and profit-and-loss statements. The timely preparation and completion of these documents prior to a protest is essential to any discussion of fair market value. Key line items such as potential gross income, vacancy and collection loss, and net operating income can assist in negotiating lower assessed values. Market rent, in-place rents, and occupancy are key indicators on a rent roll and should be shared with assessors, in most cases, to help them determine how a property is performing.

2. Conduct Market Rent Surveys

Collaborating with property managers to finalize market rent surveys can provide extremely valuable evidence to discuss with the assessor. Most jurisdictions rely on general market data to compute values across the submarket. Market surveys specific to a property typically entail more reliable data and can be used to strengthen the property owner's market value analysis.

3. Vet Comparable Sets

In addition to a market value analysis, many jurisdictions allow taxpayers to present an equity argument. In an equity claim, property owners or their agents will be looking at assessed values of the subject property's set of comparables, which are similar properties in the area that can provide reference points in determining market value. If the appraiser's list of comparables contains apartments not found on the market survey, the taxpayer will have a good reason to request that those be removed from the set being discussed. This strategy is valuable when an appraiser or assessor is using higher-class apartments in the subject property's submarket, thereby inflating the equitably assessed value.

4. Document Deferred Maintenance and Bids

An argument often heard during valuation protests is "my property has deferred maintenance, and therefore should be valued at a discount." This argument will be more likely to succeed if the taxpayer validates their assertions using contractor bids, pictures, or some proof of the amount of maintenance that needs to be done. Obtain bids before the valuation date, detailing work that needs to be done, including the cost of materials and labor. Also before the valuation date, document damages with pictures, if possible. Following this advice will differentiate the subject property from a long list of others claiming deferred maintenance with no support for the cost of repairs.

5. Learn Relevant Tax Laws

Property owners should educate themselves about the property tax system in their property's state and specific jurisdiction. Deadlines play a very important role, so make sure to meet and understand them. Missing a deadline can forfeit the opportunity to contest an assessed value, precluding relief for an excessive appraisal. Property tax laws and local regulations can be daunting, and the avenues that lead to success can be easily overlooked. In some situations, the property owner will want to speak with a local property tax professional to explore available options.

6. Build and Maintain Assessor Relationships

It is important to realize that the assessor assigned to a protest will likely be someone the taxpayer will be interfacing with throughout the valuation process and potentially for the entire term of property ownership. Integrity and honesty in every interaction with the assessor will help to establish trust and strengthen this relationship over time, which will benefit the taxpayer in the long run. The simple act of beginning a dialogue with the assessor early in the protest process can increase a property owner's chances of reaching a timely and successful settlement.

Advance completion of financial statements that could support a tax protest should be an annual priority for any property owner, as this data is invaluable in arguing for a lower assessment. While this sounds like a routine process for most property owners, the assessment timeline is different in every jurisdiction and may not coincide with your typical year-end financial audit. Finalizing market rent surveys and collecting bids for deferred maintenance will add to the chances of success. Learning the property tax rules and deadlines affecting the property, or having an educated team versed in the state or local market, will directly impact success. Finally, building long-lasting relationships with assessors based on openness and reliability is not only common courtesy, but can make assessors more receptive during the appeal process, and therefore increase the likelihood of achieving desired results.

Consider each of these proven strategies to minimize ad valorem tax bills.

Record-breaking commercial real estate trading activity during 2021 is having a marked impact on property values in 2022. Transactions in 2021 were up 88% from 2020 and were 35% above 2019 levels, according to Ernst & Young. The large number of sales in 2021 extended to all categories of real estate, and many commercial property types experienced significant price increases.

Market values are the basis for property tax assessments in most taxing jurisdictions. As post-pandemic market values fluctuate due to higher prices, property owners need to adopt strategies to keep their assessed property values down. As we emerge from COVID-19 here are seven key considerations to minimize property tax assessments even as prices increase.

1. Report Property Operating Metrics. A commercial property's market value is based on its financial performance. A weak property will have poor performance indicators, such as excessive vacancy or below-market rental rates. Poor performance is usually the basis for a reduced assessment and a lower property tax bill. Where possible, property owners should report these types of performance indicators to taxing authorities each year before assessed values are set and tax bills go out.

2. Allocated Prices in Real Estate Portfolios Are Not Market Values. A buyer purchasing a real estate portfolio will typically allocate the total price paid over all the acquired real properties as well as other, non-real-estate assets. Investors create these portfolio purchase allocations for income tax, accounting, financing or other purposes, and they may commission an "allocation" appraisal for bookkeeping or underwriting purposes. Allocations of total portfolio price or value to individual properties in a portfolio are rarely a good indication of a property's market value, however. Likewise, allocation appraisals are unhelpful or even detrimental in determining taxable market values because they may not account for the unique aspects of an individual property.

3. Transaction Type May Affect Value. Market values can also be impacted by the nature of the transaction and its participants. For example, REITs set purchase prices for real estate portfolios based, in part, on income tax considerations. Similarly, when a transaction involves the acquisition of an entity that holds various types of assets, the price paid will include payment for assets other than real estate alone. Non-real-estate motivations for purchasing properties and non-realty components of a transaction must be removed in order to determine the market value of the real estate alone. Otherwise, the values for the real estate will be above market.

4. Only Real Estate Is Subject to Property Taxation. As previously mentioned, property portfolios will sometimes convey with other assets. These can include personal property, such as fixtures and equipment, or intangible assets and rights like contracts, licenses and goodwill. Market values for these non-real-estate items are evaluated differently from real property and some, such as intangible assets and rights, are not subject to property taxation at all. In addition, any "synergy" or "accretive" value from a portfolio sale is intangible and should be excluded when assessing a specific property's value for property tax purposes.

5. Properties May Not Stabilize at Pre-Pandemic Levels. Properties that were hardest hit by changes related to COVID-19 may take years to return to pre-pandemic performance levels, and some may never fully recover. Awareness of a particular industry's recovery will be key to understanding whether market values and property tax assessments for that property type will return to pre-2020 levels. Uncertainties about time to stabilization reduce real estate values. The knowledge that some properties may never achieve pre-pandemic performance levels puts long-term investment value into question, which decreases the current value of those properties and lowers their taxable value.

6. Leasehold Interest Values May Not Match the Market. Investors buy and sell commercial properties based on the net income they produce. However, if the leases generating that income are above or below market, the value derived from rents will not be at market. In addition, lease rates from synthetic or operating leases used to finance the purchase of a portfolio of properties will not produce market value for individual properties unless those lease rates happen to be set at market levels.

7. If All Else Fails, File a Property Tax Appeal. Taxpayers who work proactively with their local tax assessor are often able to achieve reduced assessed values and lower property tax bills. Property owners should address each of the previous six points with the local assessor. Nevertheless, there will be times when attempts to reduce assessed values are unsuccessful. In those cases, property owners should be prepared to file an appeal by the deadline and pursue it, preferably with the assistance of a knowledgeable property tax advisor.

Reported transaction prices tend to show up again as overstated taxable property values, advises attorney Jerome Wallach.

The old maxim that no good deed goes unpunished might well be applied to official disclosure of the acquisition price on real estate.

Many jurisdictions require the disclosure of a property's sale price after the sale closes. All too often, buyers respond by reporting a number which includes non-real-estate components. Although they are acting in good faith, these investors seldom realize that the local tax assessor may use the acquisition price they report in determining the property's market value for ad valorem tax purposes. That can result in an overstated assessment when the price reflects the value of the going concern constructed on the property rather than the real estate alone.

Disclosure exposure

There are several reasons a buyer will broadcast the exchange price for acquired real estate to the public domain. The new owner may want the number known because it will enhance the public image of the buyer's business. It may be a legal requirement to report the purchase price. Many jurisdictions require the filing of a certificate of value, for example. Whatever the reasons, the buyer and soon-to-be owner closing on a real estate acquisition should be careful how the deal is characterized when reported.

Tax assessors, appraisers and other real estate professionals are skilled at tracking down sale prices. There are also services that regularly publish sale prices gleaned from a variety of sources. Taxpayers should assume that the assessing authorities will learn the price of their property acquisition.

While purchasers of real property typically factor in the effect of property taxes on the net cash flow, they may not consider the impact the exchange price can have on property taxes in the coming years. Frequently, the higher the published transaction value, the more that news will bolster the buyer's business reputation. Not so for property tax consequences, however, because assessments and ongoing property tax liability will often increase in proportion to the published transaction amount.

An assessor seeing a certificate of value or reading a published sale price can and frequently will rely on that number as the property's market value, against which ad valorem taxes are levied. Unfortunately, that number may not fairly represent the taxable value of the real estate if it includes value from non-real-estate components, which are not subject to ad valorem taxes.

Differentiate real estate value

Hotels provide an example of how the reported sale price differs from the real estate value. Appraisers cite comparable hotel sales in terms of value per room, which may include the television, beds and other items in each room as well as the hotel's brand and other components of business value that are exempt from property taxation. Some analysts adjust for the non-realty components of per-room sales data, but most do not.

However, the problem isn't unique to the hospitality sector and may apply equally to other property types.

In the larger view, the same miscalculation could apply to other properties where non-realty components were part of the transaction. Non-real-estate sources of transaction value can include leases in place, brand recognition, in-place management and trained workforce, personal property such as vehicles and furniture, and ongoing business operations within the property. The assessor may have included all these elements, inappropriately, in the value of the real estate. This is a situation the taxpayer could have avoided by correctly reporting that the price exchanged for the property included non-real-estate items.

Disclose with care

Exercising some foresight in describing the elements of the sale at the time of closing could mitigate the unwanted effect of triggering an inflated tax assessment on the subject property. In reporting, the buyer should pay attention to how they characterize the acquisition price, with a view toward how the information may influence an assessor's calculation of taxable value.

It is predictable that the assessor will be aware of the purchase price. In fact, the number is required public disclosure and will, in all probability, become the assessor's opinion of market value. At any hearing or proceeding resulting from the taxpayer challenging the assessor's opinion of market value, the assessor will likely put forth the public disclosure document as prima facie evidence of market value.

The new owning entity can protect itself by laying the groundwork for assessment appeals when it discloses the transaction amount. When appropriate, the closing statement should clearly represent that the acquisition is for going-concern value, which encompasses both real estate and the business operating in that real estate. An asterisk after the number, with an accompanying footnote, would suffice as long as there is a clear indication that the number relates to enterprise value.

Assessors frequently rely on the acquisition price of a going concern as equaling the value of the real estate alone. When that occurs, a buyer's footnote on a price disclosure can pay dividends in any proceeding challenging the assessor's opinion of value.

District of Columbia taxpayers can appeal assessed property valuations through three levels of review.

In the District of Columbia, a prudent taxpayer must observe important steps and deadlines to appeal a real property tax assessment. Strict code provisions, government policies and procedures govern the appeal process, so understanding the typical lifecycle of an appeal provides a head start in making sure a property is fairly assessed.
Here is a look at what to expect as a case advances:

Assessment and notification
Assessors reassess all real property in the District each year using a Jan. 1 valuation date that precedes the start of that tax year. For example, Tax Year 2023 runs from Oct. 1, 2022 through Sept. 30, 2023. Thus, corresponding assessed values are as of Jan. 1, 2022.

The District typically will mail assessment values and update the MyTaxDC.gov website on or around March 1 each year, sending its estimate of market value to the owners of more than 205,500 parcels. This will be the taxpayer's first glimpse of the valuation and potential tax liability for the following tax year.

These assessed values are released without supporting documentation, however.

To determine how an assessor derived the value, the taxpayer or a duly authorized agent must contact the Office of Tax and Revenue to request a copy of the assessor's workpapers. These documents will be critical in formulating the basis for any possible appeal.

1.) Office of Tax and Revenue
The first-level tax appeal deadline is April 1. While the property owner may not have all the relevant documents they need to properly analyze their assessment by this time, the taxpayer must meet the filing deadline or waive their right to any further appeal for the tax year.

Fortunately, the first-level petition is a one-page form completed online and requires only basic property information to satisfy the requirement. Continuing with a first-level appeal, however, demands further analysis.

The assessor may use one of the three common approaches to derive a proposed value — the income, cost and/or sales comparison approach — or any other approach that can be supported. For large commercial properties, the most common practice is to use the income approach in conjunction with the District's mass-appraisal model.

Mass appraisal uses market assumptions based on property type, submarket and classification. These assumptions derive from taxpayer-submitted income and expense reports (I&E) for the previous tax year. The assessor derives the property's net operating income using market assumptions and divides the result by a market capitalization rate loaded with the applicable tax rate. Or, in the case of retail properties, the assessor uses a net lease rate and an unloaded capitalization rate to arrive at taxable value.

Consequently, the yearly filing of income and expense reports is an integral part of the assessment process and is mandatory for most owners of income-producing properties. At the beginning of each calendar year, the District issues its notice of income and expense report filing requirements, along with unique access and submission codes for taxpayers to report their sensitive financial information using an online portal.

This portal opens in January, giving taxpayers adequate time to comply with the I&E submission deadline, which is on or about April 15 each year. (Due to a holiday, Tax Year 2023 I&Es are due Monday, April 18, 2022.) Timely compliance with this requirement is imperative, as failure may result in a 10 percent penalty on the subsequent tax year's liability. A local tax advisor can be a great help with this complicated process.

Once complete, and when applicable, the I&E will be a vital component to the analysis and validity of a tax appeal. If the taxpayer believes an appeal is warranted, they can move to a first-level hearing. This administrative appeal to the assessor of record generally occurs in May or June. The assessor reviews information the taxpayer provides and can adjust the value by first-level decision.

2.) Appeals Commission
If the initial appeal does not provide a satisfactory result, property owners may continue to the next administrative level. The taxpayer must initiate an appeal to the Real Property Tax Appeals Commission (RPTAC) within 45 days of the first-level decision or forfeit additional appeal rights.

Filing a petition with RPTAC requires the taxpayer to produce specific information such as property and financial data as well as supporting evidence to prove the current assessment is incorrect.

In other words, the assessment is presumed correct unless and until the taxpayer proves otherwise. RPTAC hearings generally occur between early October and the end of January. Hearings before a panel of two or three commissioners allow both parties to argue their positions and to answer commissioners' questions. The Commission should issue its decisions by Feb. 1 of the relevant tax.

3.) D.C. Superior Court
The District issues real property tax bills in March and September of the relevant tax year. This means, barring extraordinary disruptions that can include global pandemics, administrative appeals should be completed prior to the issuance of these bills.

If an administrative appeal does not achieve a result the taxpayer believes is fair, a further appeal to D.C. Superior Court is available.

To appeal to the Superior Court, the taxpayer must first pay all taxes in full and file a petition by Sept. 30 of the related tax year.
The proceeding will ostensibly become a "refund" lawsuit and may take several years to reach a resolution. However, if successful, taxing entities will be required to provide an additional 6 percent interest with any refund amount.

Importantly, any tax representative must be an active member of the D.C. Bar Association to handle this stage of appeal, which is a court proceeding. Therefore, to maximize the effectiveness of a tax appeal, a local tax attorney is best situated to guide a taxpayer through the life cycle of a property tax appeal.

New York City has published three tax-year assessments since COVID-19 swept into our world. The New York City Tax Commission and New York City Law Department have had ample opportunity to reflect and refine their thinking on those assessments.

The disease broke out in Wuhan, China, in late 2019 and soon spread around the world. Most of New York City noticed its impact in February and March of 2020 as businesses shut down at an accelerating rate, warranting government mandates and additional closures.

So, what did New York City do for the 2020-2021 tax year? It significantly raised tax assessments. The Tax Commission and other review bodies refused to base their valuations upon the devastating catastrophic effects of COVID-19 that had ravished the city.

Why do this? The answer is technical. New York City values real estate on a taxable status date, which is Jan. 5 each year. On Jan. 5, 2020, COVID-19 did not exist in assessors' evaluation process. Nor did it exist in the review of assessments later in the year.

Employment restrictions, mask mandates and lockdown requirements made it impossible to operate theaters, hotels, restaurants and many other businesses. These restrictions took effect long before the first installment of property tax payments for the 2020-2021 year had to be paid. Yet hotels found that their tax bills exceeded their total revenue. Other businesses had similar experiences.

The city's next assessment, for the 2021-2022 tax year, reduced assessments by 10 to 15 percent in some sectors, and by as much as 20 percent for hotels. It was too little, too late, and many businesses were failing. The assessment review process was slow and unsympathetic to the plight of businesses devastated by COVID-19.

The Jan. 5, 2022 assessment roll attempted to recoup a modest amount of the value trimmed from taxpayers' properties the previous year in spite of the destructive effects of the Omicron variant that were at their height on the Jan. 5 valuation date. That is the truth: New York City's newly released fiscal 2022-2023 property tax assessment roll presents a market value of almost $1.4 trillion, an 8 percent increase in taxes and estimated taxable assessments of $277.4 billion. That sounds like too much!

Real estate tax increases have come at a time when most property owners and businesses have not even begun to recover from the pandemic's economic impact. Foreign and business travel have disappeared; street traffic is down and empty storefronts abound.

Commercial rents in Herald Square, for example, are down 27 percent from pre-pandemic levels. However, high bills due to ever-increasing inflation remain to be paid. Mortgages, payrolls and maintenance costs add to the burdens of businesses in New York City. Most properties are still struggling, and many are falling behind.

The hospitality sector has been hit especially hard. Hotel revenues and prices have dropped to unsustainable levels. COVID-related rules and fears have evaporated any sustainable growth in tourism. One example of the pandemic hotel market value decline is the recent sale price of the DoubleTree Metropolitan at 569 Lexington Ave., which was 50 percent less than the price it sold for in 2011.

While a few market values have increased, tax increases should have been delayed. For Class 1 real estate, which includes residential properties of up to three units, total citywide market value rose 6.7 percent to $706.8 billion from the previous year's tax roll.

For Class 2 properties­ — cooperatives, condominiums and rental apartment buildings —the total market value registered $346.9 billion, an increase of $27.8 billion, or 8.7 percent, from the 2022 fiscal year. For Class 3 properties, which include properties with equipment owned by gas, telephone or electric companies, market value is tentatively set by the New York State Office of Real Property Tax Services at $43.6 billion.

Last but definitely not least, total market value for commercial properties (Class 4) increased by 11.7 percent citywide to $300.8 billion. Manhattan had the smallest percent increase in market value at 10.3 percent. Class 4 market value is down $25.2 billion, or 7.7 percent, below its level for the 2021 fiscal year. Hotels registered a market value increase of only 5.3 percent.

These slight increases in market value do not warrant this year's increase in taxes. Businesses are still being affected by the economic impact of the pandemic and need time to recuperate. The city's Department of Finance admits that although values increased for the 2023 fiscal year, they remain below the 2021 fiscal year values for many properties due to the impact of the pandemic.

The Department of Finance also acknowledged in its announcement of the tentative tax roll that commercial property values remain largely below pre-pandemic levels. This underscores why the increase in taxes should have been delayed, at least until properties and businesses attain pre-pandemic values.

Strategies for Relief

In appealing assessments, property owners can improve their chances for obtaining relief by quantifying property value losses. For hotel owners and operators, this means gathering documentation showing closure dates, occupancy rates and any special COVID-19 costs incurred. Most industry forecasts anticipate at least a four-year recovery period for hotels to reach pre-pandemic revenues.

Retail and office property owners should be prepared to show any declines in gross income and rents received or paid on their financial reports filed with the city. Residential landlords should list tenants that vacated and those that are not paying rent.

In conclusion, tax assessments must reflect the entirety of what this pandemic has done to the real estate industry over the past 24 months. New York City authorities must provide tax relief for property owners, and taxpayers and their advisors will need to take an active part in obtaining reduced assessments.

There's a spotlight on self-storage real estate values these days, which means owners need to make sure they're receiving a fair assessment of their property. Consider the following strategies to counteract excessive property taxes.

Since the arrival of COVID-19, no real estate sector has seen property values rise faster than self-storage. It's even outpacing warehouses, which are skyrocketing in the face of demand for fulfillment centers to handle spiking e-commerce volumes.

Simply put, self-storage is booming, and it isn't going unnoticed by investors; nor will assessors, who are charged with valuing properties for ad valorem tax purposes, ignore the trend. For this reason, owners and their advisors should be revisiting tried-and-true tax strategies and considering new ways to combat excessive property assessments.

Historically, many self-storage owners have been content to fly under the radar, accepting their assessed values without protest to avoid drawing too much attention. Given the recent industry growth, however, assessors will likely shine a light on the segment, pushing for higher assessed values. When that spotlight hits, it'll be time for taxpayers to fight for fairness. Until then, you should explore the tactics that have worked previously and new ones that might now be beneficial.

An Apartment for Your Stuff

One traditional method of lowering tax liability is to value self-storage like apartments. Most assessors and multi-family owners rely on the income approach, looking at rents, subtracting expenses, and capitalizing net operating income (NOI) based on the amount of risk in the investment.

The rental rates for apartments, like those for self-storage, are easily obtained online. But a key to accurate valuation is differentiating between asking rents and actual rents. The latter are always lower. If the owner or assessor isn't using actual rents or fails to fully consider all concessions, the property is being over-assessed.

Another strategy is to attack the cost approach, which assessors sometimes use instead of the income approach. It determines the replacement cost as if new of all the property's improvements, depreciates those improvements, and adds in the land value as if vacant. Almost everyone who employs the cost approach uses the Marshall & Swift Valuation Service cost manual (M&S). This practice has flaws, particularly when used by assessors in a mass appraisal setting. While M&S determines physical depreciation based on age, it can't and doesn't consider functional or economic obsolescence.

Functional obsolescence is a method of depreciating replacement cost based on issues within a facility, such as design flaws or property aspects that aren't as desirable in the marketplace as they once were. Economic obsolescence, also referred to as external obsolescence, is a method of depreciating the replacement cost based on factors outside of the property, such as a recession or, say, a global pandemic. Since M&S doesn't take these obsolescence features into account—and neither do assessors—self-storage owners and their representatives had better make sure they do.

If these time-tested methods don't yield the desired market value, the owner may choose to employ newer methods that've helped to achieve assessment reductions for other property types.

A Hotel for Your Stuff

When valuing hotels, many owners and assessors will use the income approach. They'll take the room revenue, subtract expenses, factor in risk and capitalize the NOI to reach a value. The problem with this method is some revenue in the income stream comes from intangible, non-taxable sources.

For example, a hotel's franchise or flag and the management agreement, among other items, can add to the revenue stream. These intangible elements should be identified and removed from the income approach to preclude valuing or taxing something that's intangible and, therefore, non-taxable.

There's a corollary argument to be made when it comes to self-storage. The "Big 5" brands in the market are publicly traded real estate investment trusts, each with an easily recognizable name and reputation that's likely to drive more traffic and revenue than an off-brand or non-branded facility. And a brand is an intangible asset, exempt from property tax.

As the Big 5 are also involved in the management side of the business, they're likely to bring intangible value from their operational expertise into the income stream. That revenue has nothing to do with the property's real estate value. The same can be said of the income generated from the sale of packing items such as boxes, tape and locks. These sales don't indicate value to the real estate, but rather value to the business.

Hotels can also suggest comparison metrics applicable to other property types. In addition to comparisons by price per square foot, hotel analyses can consider value per key, room revenue multipliers and revenue per available room. Like hotels, self-storage properties can be compared to each other in several ways. These can include value per lock, unit revenue multipliers and revenue per available unit. Of course, an appraiser or assessor would need to adjust for factors like interior vs. exterior access, climate-controlled vs. non-climate-controlled space, and single vs. multi-story improvements.

Which units of comparison to use for the most advantageous outcome will vary by taxing jurisdiction and the type of self-storage property. If it's in an area that requires all individual property types to be valued fairly and equitably, these units of comparison and the adjustments become ever more important to arrive at the correct value.

With nowhere to hide from the assessor's spotlight, the hope is that self-storage owners and their representatives will actively protest their increasing assessments. It's time for them to be proactive and creative in their arguments to achieve reductions.

Attorney Molly Phelan on how to reduce property tax liability.

Office property owners may feel they are getting squeezed from all sides in 2022, but the right strategy can help them turn lemons into lemonade by reducing property tax liability.

The Bad News: Inflation was up 7.1 percent year over year in December, its highest rate since 1982.

The Culprits: Supply chain issues (raw material shortages, seaport congestion and logistic limitations), labor shortages (general wages up 5 percent, retail wages up 15 percent), and a housing shortage (national apartment vacancy at 2 percent and average rent growth above 15 percent year over year).

The Response: The Federal Reserve signals a shift to tightening monetary policy, indicating future interest rate increases.

The office market is facing headwinds of its own. Numerous corporations have announced permanent shifts to hybrid in-person/work-from-home operations for office staff, significantly decreasing demand for office space. Rental rates have dropped anywhere from 5 percent to 33 percent during the pandemic, depending on market and class. Although Manhattan rents for Class A space have increased 2 percent in the past year, the net operating income for these properties is down 7 percent due to increased costs and lease concessions.

In the Midwest, office landlords previously expected to provide one month of free rent per year to woo tenants. Now brokers are reporting a free rent ratio of 1.6 months per year, with leases over 10 years pushing two months per year. Tenant improvement costs have increased approximately 44 percent since the beginning of the pandemic, and turnaround time for occupancy has increased from 30 days to 60 days.

Farther down the balance sheet, things aren't much better. Energy prices tracked in the S&P Goldman Sachs Commodity Index ended 2021 59 percent higher than in the beginning of the year. Labor costs, from janitorial staff to property managers, have increased as well.

The Good News: Although the market has handed office landlords a bucket of lemons that are putting downward pressure on average net incomes, landlords can make lemonade from this data to significantly reduce their real property tax liabilities, even if their NOI has not yet taken a hit.

The Strategy: Pivoting from a direct capitalization value analysis to a discounted cash flow approach can capture the effects of investor outlook data on a property's market value. Appraisers and assessors who value office properties typically figure direct capitalization in their income analysis to estimate fee simple market values. This is standard practice in stabilized markets but is a poor fit to current conditions.

With the dramatic changes and uncertainty in the office market, appraisers should be conducting discounted cash flow analyses, which identify the market conditions investors are anticipating as of the valuation date. The DCF analysis examines the market like an investor would, considering trends such as rental rate reductions and increases in operation costs and vacancy. These factors are then built into pricing models.

Savvy investors are aware of a sleeping giant that few assessors or taxpayers are identifying, and that is shadow vacancy. While landlords are still collecting income on current leases, there is no reflection of the market's precarious situation in their income. A DCF, however, identifies upcoming vacancy and reductions in market rents, which may have a significant effect on NOI.

Methods Compared

Let's compare the two approaches, beginning with a look at direct capitalization applied to a 500,000-square-foot office complex. As of Jan. 1, 2022, its tenants are paying $25 per square foot in net rent, or a maximum $12.5 million in annual attainable rent. Stabilized vacancy is 8 percent and operating expenses are 20 percent, or $2.3 million annually. A capitalization rate of 6.5 percent indicates a market value of $141,538,462. In Illinois, outside of Cook County, an assessment level of 33.33 percent and a tax rate of 5 percent equates to a tax liability of $2,358,738.

Paired with the estimated increases in interest rates as indicated by the Federal Reserve, the cap rate could easily increase to 7.5 percent for the specific property. The DCF analysis using these factors indicates the market value is $102,120,000 and the taxes are reduced to $1,701,830. The difference in tax liability is $656,909, or a reduction to the tenants of $1.31 per square foot in tax pass throughs.

Commercial real estate investors across the board rely on the discounted cash flow model, but few taxpayers or their advisors use the strategy in contesting property assessments. Given the additional information and analysis required to perform the analysis, not all appraisers can properly construct a credible discounted cash flow model.

For success, it is critical that both the taxpayer's advisor and appraiser be able to knowledgeably discuss the differences between the two models, and in an assessment appeal, be able to explain why the discounted cash flow model is a more reliable methodology in this market.

To remain competitive, landlords must reduce occupancy costs for tenants and their own holding costs as they take back more vacant space. Even if an assessment has been lowered or remained stable over the past few years, having a credible team provide an alternative view can offer a competitive advantage moving forward.

Ensure tax bills reflect continuing value reductions for office assets caused by COVID's long-term effects.

Since early 2020, the COVID-19 pandemic has upended lives and disrupted the normal course of businesses, including those in the commercial real estate market. As in many other sectors, however, this public health crisis has not affected all commercial properties equally.

Real estate occupied by essential businesses such as grocery stores, sellers of household goods, and warehouse clubs, for example, have weathered the pandemic well. A few have even increased their market share. By contrast, many office buildings, hospitality and non-essential retail properties have suffered severely.

Taxing jurisdictions and assessors have responded to the crisis with varying degrees of success. The Ohio Legislature passed special legislation (spearheaded by Siegel Jennings Managing Partner Kieran Jennings) to allow a onetime, 2020 tax year valuation complaint for a valuation date of Oct. 1, 2020, since the usual tax lien date of Jan. 1 would not have shown the effects of COVID. Other assessors applied limited reduction factors to account for the sudden pandemic-induced decrease in property values.

As values recover, it is important for taxpayers to monitor still-unfolding consequences as they review their property tax assessments.

Initially, hotels and experiential property uses suffered the steepest losses as travel declined or completely halted. While the long-term effects of COVID-19 are still emerging as the pandemic progresses, office properties may be the real estate type changed the most, and perhaps permanently so. Central business districts and suburban campuses or headquarters have been particularly hard hit.

In the last six to 12 months, many people have returned to working in an office at least part of the time, especially since vaccinations have become widely available. However, the emergence of virus variants has stalled the full return to the office that looked imminent earlier this year.

Some firms including Twitter, Zillow, Spotify, and Dropbox decided that they will not require workers to return to the office at all, making remote working a permanent option. Other companies including Google, Nationwide, Microsoft, and Intuit will continue with a hybrid model that requires workers to be in office some of the time.

Many of those employers are using an office hoteling model. Hybrid arrangements require less physical office space per employee, although employers will need to balance having fewer employees onsite against the desire for low-density occupancy.

With more employees working remotely, many office tenants have subleased space they no longer need, adding to available office supply. For example, toward the end of 2020, the Chicago metro region's office market reached a record high in available sublease space, with two-thirds of it in the central business district. For employees who work in CBDs, there is an added concern of commuting via public transit.

In the initial stages of non-essential business closures and governmental stay-at-home orders across the country, many tenants sought rent abatements and concessions. Tenant defaults and increased unemployment exacerbated office vacancy levels.

Some of the workforce in more densely populated markets may have relocated away from central business districts, at least at the beginning of the pandemic, also influencing office space demand. As acceptance of remote work increased, both employers and workers not tied to a physical office location gained employment and talent-search opportunities beyond their local markets. This, too, has influenced the demand for office space.

The Columbus area's overall office vacancy rate was more than 23 percent in the third quarter of 2021, according to Cushman & Wakefield. That vacancy figure includes more than 1 million square feet of sublease space but does not include offices leased but underutilized – or not used at all – because of employees working from home.

As these vacancy rates and over-abundant sublease inventory demonstrate, there is a disconnect between the space that office tenants are currently leasing and their actual real estate needs. As leases expire, it will not be surprising to see tenants renegotiate for smaller footprints and shorter durations as they adjust to their changing requirements.

The shrinking need for office space is not limited to markets with dense populations and public transit commuters. In fact, these trends reverberate in suburban markets. Multiple large suburban office buildings in the Cleveland area, together totaling almost two million square feet, were 75 percent empty in the fall of 2021 because of employees working remotely.

This suggests that property tax assessments may be based on outdated lease information. Accurate valuation of office properties for taxation will require proper consideration of lease renewals and related activity. In reviewing assessments, it will be critical to scrutinize any older sale transactions assessors used for comparison that were based on pre-pandemic leases.

Positive signs are emerging for the commercial real estate market overall. Bloomberg recently reported that domestic U.S. travel for the year-end holidays is expected to be near pre-pandemic levels. Downtown foot traffic, hotel stays, and visitor counts have been climbing back from the lows seen early in the pandemic.

Despite this good news, office properties face persistent challenges. Recently, Marcus & Millichap reported that the office sector was one of the only property types lagging in 2021 commercial real estate transaction volume compared to the same time in 2019. (The other was medical office.) Flexibility on the part of both tenants and owners will be key in riding out the continuing waves of lease maturities and renewals in this changing market.

Since assessors are often using lagging data in their assessments, attention to the continued effects of COVID on office properties will be vital to ensuring that property tax valuations reflect a property's fair market value. Remember, too, that various assessors are treating COVID effects differently, so as always, it is wise for property owners to consult with experts familiar with assessment law and appraisal practice in their local jurisdictions. With careful observation of market changes, strategic planning and review with trusted tax experts, taxpayers can help ensure that their real estate tax burden is fair.