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Property Tax Resources

Jun
09

Navigating D.C.’s Tax Rate Maze

An evolving and imperfect system has increased property taxes for many commercial real estate owners.

If you own or manage real property in the District of Columbia and are wondering why your real estate tax bill has gone up in recent years, you are not alone. One common culprit is rising assessed value, but that may not be the main or only source of an increase.

A less obvious contributor may be a new, different, or incorrect tax rate. Since tax rates vary greatly depending on a property's use, staying diligent when it comes to your real estate's tax class and billed rate is critical.

The District of Columbia applies differing tax rates to residential, commercial, mixed-use, vacant and blighted properties. Why is this important? Because the classification can make a considerable difference in annual tax liability – even for two properties with identical assessment values.

For example, a multifamily complex assessed at $20 million incurs a tax liability of $170,000 per year while the same property, if designated as blighted, incurs an annual tax liability almost twelve times greater at $2 million. Therefore, the assessed value is just one piece of the puzzle.

Keeping a sharp eye on a property's tax bill for the accuracy of any tax rate changes is paramount. This requires knowledge of current rates, the taxpayers' legal obligations, and how to remedy or appeal any issues that arise.

New Rates for Commercial Property

Property owners in the District should be aware of a recent change to tax rates on commercial real estate. The Fiscal 2019 Budget Support Emergency Act increased rates for commercial properties starting with Tax Year 2019 bills.

Prior to the enactment of this legislation, the District taxed commercial properties with a blended rate of 1.65% for the first $3 million in assessed value and 1.85% for every dollar above $3 million. The new measure replaces the blended rate with a tiered system, taxing a commercial property at the rate corresponding to the level in which its assessed value falls. Those levels are:

Tier One, for properties assessed at $0 to $5 million, taxed entirely at 1.65%;

Tier Two, for properties assessed at $5 million to $10 million, taxed entirely at 1.77%; and

Tier Three, for properties assessed above $10 million, taxed entirely at 1.89%.

The residential tax rate for multifamily properties remained flat at 0.85%.

Mixed Use

The District of Columbia Code requires that real property be classified and taxed based upon use. Therefore, if a property has multiple uses, taxing entities must apply tax rates proportionally to the square footage of each use. However, it is ownership's legal obligation to annually report the property's uses by filing a Declaration of Mixed-Use form. Owners of properties with both residential and commercial portions should be hypersensitive to this issue.

The District typically mails the Declaration of Mixed-Use form to property owners in May, and the response is due 30 days thereafter. If the District fails to send a form to an owner, it is the owner's responsibility to request one. Remember, the owner must recertify the mixed-use asset each year. Failure to declare a property as mixed-use may result in the entire property including the residential portion being taxed at the commercial tax rate (up to 1.89%).

Vacant & Blighted Designation

If you have ever opened a property tax bill and faced a staggering 5% or 10% tax rate, congratulations, your property was taxed at one of the District's highest real estate tax rates.

Each year the Department of Consumer and Regulatory Affairs (DCRA) and the Office of Tax and Revenue are charged with identifying and taxing vacant and blighted properties in the District. The D.C. Code defines vacant and blighted properties for this purpose, and there is a detailed process governing why and when DCRA may classify a property as vacant. Nonetheless, in each tax cycle DCRA wrongfully designates properties as vacant or blighted, so it is paramount that the taxpayer understands their appeal rights.

To successfully appeal a vacant property designation, an owner must comply with one of the specifically enumerated and highly technical exemptions. One such exemption applies if the property is actively undergoing renovation under a valid building permit. However, the taxpayer should consult with an attorney, as there may be other requirements to qualify for an exemption. An owner wishing to appeal this designation must file a Vacant Building Response form and provide all applicable supporting documentation to DCRA.

Moreover, an owner may appeal a property's blighted designation by demonstrating that the property is occupied or that it is not blighted. Since an appeal of a blighted designation requires a more detailed review of the condition of the property itself, photographic evidence must be used to supplement any documentation provided.

Fixing Erroneous Rates

When dealing with local government and statutory deadlines, time is not on the taxpayer's side. It is important that as soon as an error is identified, the property owner understands the next steps. In some situations, the D.C. code or official government correspondence will lay out the process precisely for the property owner, identifying the who, what, where, when, why and how's of appealing a property's tax designation. However, sometimes a taxpayer will receive a bill without explanation.

In both scenarios, it is best to consult with a local tax attorney.  These professionals have experience dealing with these issues, as well as with the corresponding governmental entities.  A knowledgeable counselor can be an invaluable resource to guide you through any tax issue.

Sydney Bardouil is an associate at the law firm of Wilkes Artis, the District of Columbia member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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  • An evolving and imperfect system has increased property taxes for many commercial real estate owners.
May
04

Texas' Taxing Times

​How changes to the Texas property tax law may impact you, and how COVID-19 plays a role this season.

Property taxes are big news in Texas. Last year, property taxes were a primary focus of the 86th Legislature, and Gov. Greg Abbott deemed property tax relief so important that he declared it an emergency item.

The 2019 legislative session produced significant modifications to tax law. Here's a rundown on the most noteworthy changes affecting taxpayers in 2020, along with a look at how fallout from the COVID-19 pandemic may complicate the taxpayer's position.

Removing the Veil

Property taxes are not only big news, but they are also confusing, particularly given the "Texas two-step" appraisal and assessment process. After an appraisal district values a property, taxing entities separately tax that property based upon the final determined value. For a single property, a taxpayer may owe five or more taxing entities spread among three assessors' offices. Understanding the ultimate tax liability for such a property can be a monumental task for taxpayers.

Senate Bill 2 addressed the confusion and promoted transparency and truth in taxation, earning it the title of "The Texas Property Tax Reform and Transparency Act of 2019." Each appraisal district is now required to maintain a website with useful information that allows taxpayers to better understand their tax bills. The website must include the three pertinent tax rates summarized in the table below (the names of which Senate Bill 2 also revised for clarity). Additionally, appraisal districts will calculate the effect that each taxing entity's proposed rate would have on its overall tax collection and include an estimate for any proposed increase's effect on a $100,000 home. Finally, the websites must provide the date and location of public hearings to address concerns with any proposed increases.

 Revenue Increase Limits

In addition to transparency, lawmakers fought to create some avenue of property tax relief. What ultimately passed between Senate Bill 2 and House Bill 3 was a limit on tax revenue increases by jurisdiction. This restricts the amount that taxing entities can increase revenues through tax rate setting.

Beginning in 2020, most taxing entities will have a maximum revenue increase limit of 3.5% year over year. To adopt a tax rate that increases revenue over 3.5%, that taxing entity must call an election for approval. This new cap is significantly lower than the prior law, which allowed for up to an 8% increase in tax rates year over year without voter approval. Junior college districts, hospital districts and other small taxing units including those with tax rates of 2.5 cents or less per $100 of valuation retain their 8% permitted increase. (For clarity, this article expresses tax rates in dollars per $100 of assessed value.)

Relief from school district taxation falls under a separate calculation, which was revised by House Bill 3. For the 2019-2020 school year, maintenance and operations (M&O) rates will be compressed by 7%. For school districts with a Tier 1 $1.00 M&O rate, the rate drops by 7 cents to 93 cents on the dollar.

For 2020-2021, local school district rates will compress by an average of 13 cents, based on statewide property value growth exceeding 2.5%. The M&O rate caps will vary across school districts, and the Texas Education Agency will publish all maximum compressed rates.

Other Relevant Procedures and Policies

While tax system demystification and revenue increase limits were the major reforms, lawmakers enacted many administrative and procedural changes as well. Administrative process changes now prohibit value increases at an Appraisal Review Board (ARB) hearing, add ARB member training requirements, and create special ARB panels to hear protests for complex properties. Additionally, the business personal property rendition date moved to April 15.

In a win for those litigating appraised values, the state revised Section 42.08 of the property tax code, allowing a taxpayer to pay less than the full amount of tax on a property with pending litigation. Previously, if the final property value from a lawsuit resulted in a tax burden exceeding the amount originally paid, the taxpayer incurred delinquent penalties and interest on the remaining amount owed. The revision removes the taxpayer's risk for attempting to discern where a litigated value may settle by eliminating the possibility of penalties and interest on the additional tax due.

Uncertain Times

Despite changes enacted in the 2019 Legislative Session, at least some of those reforms are on hold as the state and its communities respond to the coronavirus pandemic. Gov. Abbott's Mar. 13 disaster declaration allows cities, counties and special districts to use the old 8% threshold on revenue increases rather than the new 3.5% limit.

Further, the governor has the authority to change deadlines during a disaster. As of Mar. 19, Texas had suspended in-person Appraisal Review Board hearings and may extend that suspension into the normal administrative protest season.

Rapid developments may continue to disrupt the property tax assessment and appeal process in 2020. How the disaster will ultimately affect the 2020 property tax cycle remains to be seen, but the recent changes enacted in law will shape the property tax process in Texas for years to come.

For more detailed information on property tax law changes, please refer to the 2019 Texas Property Tax Code, additional resources on the Texas Comptroller's webpage, and consult with a property tax professional.

Rachel Duck, CMI, is a Director and Senior Property Tax Consultant at the Austin, Texas, law firm Popp Hutcheson PLLC. Popp Hutcheson devotes its practice to the representation of taxpayers in property tax matters and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.
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Deck - Summary for use on blog & category landing pages

  • How changes to the Texas property tax law may impact you, and how COVID-19 plays a role this season.
Apr
17

Higher Property Tax Values in Ohio

The Buckeye State's questionable methods deliver alarmingly high values.

A recent decision from an Ohio appeals court highlights a developing and troubling pattern in the state's property tax valuation appeals. In a number of cases, an appraiser's misuse of the highest and best use concept has led to extreme overvaluations. Given its potential to grossly inflate tax liabilities, property owners and well-known tenants need to be aware of this alarming trend and how to best respond.

In the recently decided case, a property used as a McDonald's restaurant in Northeast Ohio received widely varied appraisals. The county assessor, in the ordinary course of setting values, assessed the value at $1.3 million. Then a Member of the Appraisal Institute (MAI) appraiser hired by the property owner calculated a value of $715,000. Another MAI appraiser, this one hired by the county assessor, set the value at $1.9 million. The average of the two MAI appraisals equals $1.3 million, closely mirroring the county's initial value.

Despite the property owner having met its burden of proof at the first hearing level, the county board of revision rejected the property owner's evidence without analysis or explanation. The owner then appealed to the Ohio Board of Tax Appeals (BTA).

In its decision on the appeal, the BTA focused on each appraiser's high-est and best use analysis. The county's appraiser determined the highest and best use is the existing improvements occupied by a national fast food restaurant as they contribute beyond the value of the site "as if vacant." The property owner's appraiser determined the highest and best use for the property in its current state was as a restaurant.

With the county appraiser's narrowly defined highest and best use, the county's sale and rent examples of comparable properties focused heavily on nationally branded fast food restaurants (i.e. Burger King, Arby's, KFC and Taco Bell). The BTA determined that the county's appraisal evidence was more credible because it considered the county's comparables more closely matched the subject property.

By analyzing primarily national brands, the county's appraiser concluded a $1.9 million value. Finding the use of the national fast food comparable data convincing, the BTA increased the assessment from the county's initial $1.3 million to the county appraiser's $1.9 million conclusion.

On appeal from the BTA, the Ninth District Court of Appeals deferred to the BTA's finding that the county's appraiser was more credible, noting "the determination of [the credibility of evidence and witnesses]…is primarily within the province of the taxing authorities."

Questionable comparables

Standard appraisal practices demand that an appraiser's conclusion to such a narrow highest and best use must be supported with well-researched data and careful analysis. Comparable data using leased-fee or lease-encumbered sales provides no credible evidence of the use for which similar real property is being acquired. Similarly, build-to-suit leases used as comparable rentals provide no evidence of the use for which a property available for lease on a competitive and open market will be used. However, this is exactly the type of data and research the county's appraiser relied upon.

A complete and accurate analysis of highest and best use requires "[a] n understanding of market behavior developed through market analysis," according to the Appraisal Institute's industry standard, The Appraisal of Real Estate, 14th Edition. The Appraisal Institute defines highest and best use as "the reasonably probable use of property that results in the highest value."

By contrast, the Appraisal Institute states the "most profitable use" relates to investment value, which differs from market value. The Appraisal of Real Estate defines investment value as "the value of a certain property to a particular investor given the investor's investment criteria."

In the McDonald's case, however, the county appraiser's highest and best use analysis lacks any analysis of what it would cost a national fast food chain to build a new restaurant, nor does it acknowledge that the costs of remodeling the existing improvements need to be considered.

If real estate is to be valued fairly and uniformly as Ohio law requires, then boards of revision, the BTA and appellate courts must take seriously the open market value concept clarified for Ohio in a pivotal 1964 case, State ex rel. Park Invest. Co. v. Bd. of Tax Appeals. In that case, the court held that "the value or true value in money of any property is the amount for which that property would sell on the open market by a willing seller to a willing buyer. In essence, the value of property is the amount of money for which it may be exchanged, i.e., the sales price."

Taxpayers beware

This McDonald's case is not the only instance where an overly narrow and unsupported highest and best use appraisal analysis resulted in an over-valuation. To defend against these narrow highest and best use appraisals, the property owner must employ an effective defense strategy. That strategy includes the critical step of a thorough cross examination of the opposing appraiser's report and analysis.

In addition, the property owner should anticipate this type of evidence coming from the other side. The property owner's appraiser must make the effort to provide a comprehensive market analysis and a thorough highest and best use analysis to identify the truly most probable user of the real property.

Steve Nowak, Esq. is an associate in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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  • The Buckeye State’s questionable methods deliver alarmingly high values.
Apr
16

Property Tax Crush Demands Action

Without steps by government officials, coronavirus-related property devaluations won't be taken into consideration, warns veteran tax lawyer Jerome Wallach.

U.S. businesses and lawmakers face an array of challenges related to the COVID-19 pandemic. Looking ahead, let's add one more legislative task to that list which, if addressed early, will better enable the economy to bounce back from the current disruption: Provide tax relief for the owners and tenants of commercial properties devalued by vacancy stemming from the virus and efforts to slow its spread.

One of the only tools available to federal, state and community leaders seeking to slow the spread of the disease has been to limit opportunities for person-to-person transmission. Ever-tightening restrictions, either voluntary or enforced, limit or halt the use of commercial properties ranging from restaurants, bars and hotels to call centers, office buildings, stores, entertainment venues and other structures.

While necessary, these measures will drive growing numbers of tenants into distress up to and including closing their doors, defaulting on lease payments or both. Near term, this will slash property income streams and reduce property owners' ability to pay expenses including property tax on partially or fully vacated properties. Longer term, companies struggling to regain their footing and new tenants moving into spaces vacated during the crisis can expect much of their monthly occupancy costs to include a weighty property tax burden based on assessments completed when real estate values were near all-time highs.

Widespread devaluations likely

Even before President Trump declared a national emergency related to the coronavirus on March 13, researchers were tracking widespread commercial real estate devaluations as reflected in REIT performance. The day before the emergency declaration, economists at the UCLA Anderson School of Management concluded that the U.S. had already entered into a recession. The following Tuesday, March 16, news reports of a Green Street Advisors presentation conveyed that the performance of REITs and drop in share prices suggested investors had marked down asset values, on average, by 24% over the course of the previous month. According to news coverage, a Green Street presenter predicted that private market real estate values would decline by another 5% to 10% over the next six months.

Such a rapid decline in property income and market value creates worrisome property tax implications for taxpayers in most jurisdictions. In months to come, when landlords and tenants may anticipate struggling to recover from the pandemic in a flat or recessionary economic environment, they can also expect to receive property tax bills (or tax liability passed through and attached to their lease obligation) based on pre-crisis property values. In many cases, those assessed values will far exceed current fair market value.

Assessors in the jurisdiction in which this writer practices value real property for ad valorem tax purposes as of the first year in a two-year cycle. This means that, for most local owners, property tax bills they receive this year and last year both reflect their property's fair market value as of Jan. 1, 2019. The time to appeal the 2019 value as set by the assessor has long since run out. Short of an intervening event such as a fire or tornado damage, or perhaps construction or addition of a building or other physical improvement, the Jan. 1, 2019, base value is effectively carved in stone and is no longer subject to legal review or modification.

In those jurisdictions where the value may be determined later, it is most typically set on Jan. 1 of the current year. Even if time remains to contest those values, however, most tax statutes would treat any change in value occurring after the effective valuation date to be irrelevant to tax bills based on that valuation date.

Appeal to lawmakers

COVID-19's impact on property values will be profound if not catastrophic. It would seem to be a callous response for a government official to say, in effect, "So what? The assessor followed the law and valued your property before the pandemic."

A storied law professor used to tell his students, this writer among them, that "there is no wrong without a remedy." Paying taxes based on a value that no longer exists is a wrong, yet there seems to be no immediate remedy.

Indeed, few tax codes will provide taxpayers with relief from the unfair burden they face in the wake of this sudden, global crisis. Remedy will require educating lawmakers and the public about this pending tax dilemma.

Phone calls, letters, texts and emails to government officials at any level may help. Perhaps, together, we will find a solution that balances government revenue requirements with current property values.

Jerome Wallach is a partner at The Wallach Law Firm in St. Louis, the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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  • Without steps by government officials, coronavirus-related property devaluations won’t be taken into consideration, warns veteran tax lawyer Jerome Wallach.
Apr
15

Property Tax Planning Delivers Big Savings

Ask the right questions, understand your rights and develop a strategy to avoid costly mistakes.

When it comes to property taxes, what you don't know can hurt you. Whether it is failing to meet a valuation protest deadline, ignorance of available exemptions or perhaps missing an error in the assessment records, an oversight can cost a taxpayer dearly. Understanding common mistakes — and consulting with local property tax professionals — can help owners avoid the pain of unnecessarily high property tax bills.

Think ahead on taxes

Many owners ignore property taxes until a valuation notice or tax bill arrives, but paying attention to tax considerations at other times can greatly benefit a taxpayer. For example, it's good practice to ask the following questions before purchasing real estate, starting a project or receiving a tax bill:

Does the property qualify for exemptions or incentives? Every state offers some form of property tax exemptions to specific taxpayers and property types. Examples include those for residential home-steads, charitable activities by some nonprofits and exemptions for pollution control equipment. Similarly, governments use partial or full property tax abatements in their incentive programs for enticing businesses to expand or relocate to their communities. While many of these programs are industry-specific, it is important to consider all of the taxpayer's potential resources and the costs and benefits of pursuing each.

In most cases, a taxpayer must claim an exemption or obtain an abatement in order to receive its benefits. Failing to timely do so may lead to the forfeiture of an applicable exemption. If the taxpayer becomes aware after the deadline that it may have qualified for an exemption, it is still prudent to speak with a local professional.

Once the exemption is in place, review the assessment each year to ensure it is properly applied. Additionally, taxpayers and their representatives should closely follow legislative action affecting the exemptions that may be available.

How will a sale or redevelopment affect the property's tax value? For instance, will the sale trigger a mandatory reassessment or perhaps remove a statutory value cap? If a change in use removes an exemption, will it trigger rollback taxes or liability equal to the amount of taxes previously excused under the exemption? Will the benefit of an existing exemption be lost for the following tax year?

Taxpayers that fail to ask these questions risk underestimating their tax bill, which can quickly under-mine an initial valuation analysis and actual return.

Learn whether the purchaser or developer must disclose the sales price or loan amount on the deed or other recorded instruments. If so, avoid overstating the sales price by including personal property, intangible assets or other deductible, non-real estate items. Assessors often use deed and mortgage records in determining or supporting assessed value, and it can be an uphill battle trying to argue later why a disclosed sales figure is not the real purchase price.

Don't assume, without further inquiry, that the tax value will stay unchanged following a sale; nor that it will automatically increase or decrease to the purchase price. In determining market value, the assessor may consider (or disregard) the sale in a variety of ways depending on the jurisdiction, transaction timing, arm's-length condition and other factors.

Perhaps the assessor will change the cost approach assumptions to chase a higher purchase price, or disregard a lower sales price suspected of being a distressed transaction. A local, knowledgeable adviser can help the taxpayer set reasonable expectations for future assessments following a sale or redevelopment.

Plan to review, challenge

Before the valuation notice or tax bill arrives, make a plan to review it and challenge any incorrect assessments within the time allowed. An advocate who thoroughly under-stands local assessment methodologies and appeal procedures can be invaluable in helping to craft and execute a response strategy.

The first hurdle in any property tax protest is learning the applicable deadlines. This can be more difficult than it appears, as local laws don't always require a valuation notice. For instance, some states omit sending notices if the value did not increase from the prior year. Additionally, many states reassess on a less-than-annual basis, although there may be different periods within the reassessment cycle in which appeals can be filed.

It is critical to understand the reassessment cycle and protest periods in every jurisdiction in which a taxpayer owns property. Missing a deadline or required tax payment can result in the dismissal of a valuation appeal, regardless of its merits.

The owner, or the company's agent, should understand not only appraisal methodology but also legal requirements governing the assessor. Is there a state-prescribed manual that dictates the application of the cost approach? Does the assessor use a market income approach to value certain property types?

In some jurisdictions, assessors reject the income approach to value if the owner fails to submit income in-formation by a specific date. In others, submitting income information may be mandatory.

With mass appraisal, assessors often make mistakes that will go undetected if not discovered by the taxpayer's team. Has the assessor's cost approach used the correct build-ing or industry classification, effective age of improvements, square footage, type of materials, number of plumbing fixtures, ceiling height, type of HVAC system, etc.?

Even one small error could skew the final value and should be timely brought to the assessor's attention, whether or not in a formal protest setting.

In addition to correcting the error for future assessments, the owner should determine whether it is entitled to a refund for previous taxes paid and, if so, timely file any refund petitions.

With countless jurisdictions and varying assessment statutes, it is unreasonable to expect a property owner to master property tax law. Yet with proper planning and local advisors, taxpayers can avoid pitfalls they may have otherwise overlooked.

Aaron Vansant is a partner at DonovanFingar LLC, the Alabama member of American Property Tax Counsel, the national affiliation of property tax attorneys​.
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  • Ask the right questions, understand your rights and develop a strategy to avoid costly mistakes.
Mar
09

The Terrible T’s of Inventory: Timing and Taxes

​States that impose inventory taxes put their constituent businesses at a competitive disadvantage.

Inventory taxes pose an additional cost of doing business in more than a dozen states, and despite efforts to mitigate the competitive disadvantage the practice creates for many taxpayers, policymakers have yet to propose an equitable fix.

Virtually all states employ a property tax at the state or local level. The most common target is real property, which is land and land improvements; and tangible personal property such as fixtures, machinery and equipment.

Nine states also tax business inventory. Those are Texas, Louisiana, Oklahoma, Arkansas,Mississippi, Kentucky, West Virginia, Maryland and Vermont. Another four states – Alaska, Michigan, Georgia and Massachusetts – partially tax inventory. In these 13 states, inventory tax contributes a significant portion of overall property tax collections.

From a policy standpoint, however, inventory tax is probably the least defensible form of property tax: It is the least transparent of business taxes; is "non-neutral," as businesses with larger inventories, such as retailers and manufacturers, pay more; and it adds insult to injury for businesses whose inventory is out of sync with finicky consumer buying habits.

A few fixes

Taxpayers have had few options in attempting to reduce inventory tax liability because an inventory's valuation is seldom easily disputed. So, modeling a classic game of cat and mouse, some enterprising businesses would move their inventory to the jurisdiction with the lowest millage, frantically shuttling property about before the lien date. Taxing jurisdictions eventually caught on, however, and many of these states adopted an averaging system whereby taxpayers must report monthly inventory values that are then averaged for the year. So much for gaming the timing of taxes.

The underlying problem is that imposing an inventory tax puts that state's businesses at a competitive disadvantage. At the same time, local jurisdictions cannot easily afford to give up the revenue generated by inventory taxes.

When West Virginia was contemplating phasing out its inventory tax, one state legislator pointed out that the proposal placed elected representatives in the predicament of telling educator constituents the state could not afford to pay them sufficiently, while turning to another group of business constituents and relieving them of a tax burden which would create a hole in the state's revenues.

Some states including Louisiana and Kentucky have implemented creative workarounds, such as giving income or corporate franchise tax credits to businesses to offset their inventory tax liability. But these imperfect fixes add uncertainty and unnecessary complexity to a state's tax code.

For instance, when Louisiana implemented a straightforward inventory tax credit in the 1990s, businesses paid local inventory tax and were reimbursed for the payments through a tax credit for their Louisiana corporation income/franchise tax liability. The state Department of Revenue fully refunded any excess tax credit.

Between 2005 and 2015, however, the state's liability more than doubled. In 2015, the Legislature imposed a $10,000 cap on the refundable amount of an inventory tax credit and allowed any unused portion of an excess tax credit to be carried forward for a period not to exceed five years. Then in 2016, lawmakers increased the fully refundable cap to $500,000 and adjusted how the excess tax credit could be taken, but left the carry-forward period unchanged. This has created another inventory tax timing problem: Businesses now lose any unclaimed excess tax credit at the end of that carry-forward period, and businesses have no assurances that the tax credit amounts won't be lowered or otherwise made less user-friendly the next time the state faces a fiscal crunch.

Kentucky recently implemented its own inventory tax credit system. Even less taxpayer friendly than Louisiana's approach, it provides only a nonrefundable and nontransferable credit against individual income tax, corporation income tax and limited liability entity tax. The state is phasing in the tax credit in 25% increments each year until it is fully claimable in 2021.

Texas has taken a different tack by offering businesses a limited, $500 exemption for inventory tax. Unadjusted for inflation since its implementation in 1997, however, the exemption for business personal property has lost relative value as the cost of living has increased. The Texas Taxpayers and Research Association recently evaluated Texas' inventory tax and found that the $500 exemption in today's dollars is equivalent to only $367 in 1997 dollars. The association further noted that a property valued at $500 generates, on average, a tax bill of $13, which is less than the likely cost of administering the tax. Not surprisingly and quite rightly, the association recommended increasing the amount of the exemption.

Clearly, these workarounds are not really working for this problem. What's the best solution for Louisiana, Kentucky, Texas and the rest of the inventory tax states? Join the rest of the crowd and simply abolish the inventory tax, as a task force created by the Louisiana Legislature recommended in 2016. No more cat and mouse games, no more paltry exemptions and no more convoluted tax credits. At least in this regard, businesses in all states would be on the same competitive footing.

Angela Adolph is a partner in the law firm of Kean Miller LLP, the Louisiana member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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  • States that impose inventory taxes put their constituent businesses at a competitive disadvantage.
Feb
03

Why Assessor Estimates Create Ambiguity

Kieran Jennings of Siegel Jennings Co. explains how taxpayers and assessors ensure a fair system, with tremendous swings in assessment and taxes.

A fundamental problem plaguing the property tax system is its reliance on the government's opinion of a property's taxable value. Taxes on income or retail sales reflect hard numbers; real estate assessment produces the only tax in which the government guesses at a fair amount for the taxpayer to pay.

Assessors' estimates of taxable property value create ambiguity and public scrutiny not found in other taxes, and incorrect assessments can lead to fiscal shortfalls that viciously pit taxing authorities against taxpayers seeking to correct those valuations. Worse yet, the longer a tax appeal takes to reach its conclusion, the worse the outcome for both the taxpayer and government. Paradoxically, swift correction of assessment roll protects the tax authority as well as the taxpayer.

As an example, Utah daily newspaper Desert News reported in December 2019 that, due to a clerical error, Wasatch County tax rolls recorded a market-rate value of $987 million for a 1,570-square-foot home built in 1978. The value should have been $302,000. The Wasatch County assessor said the error caused a countywide overvaluation of more than $6 million and created a deficit in five various county taxing jurisdictions, according to the county assessor. The Wasatch County School District had already budgeted nearly $4.4 million, which it was unable to collect.

How does an overvaluation error cause taxing districts to lose money? In many, if not most jurisdictions, the tax rate is determined in part by the overall assessment in the district as well as the budget and levies passed. Typically, there is a somewhat complex formula that turns on the various taxing districts, safeguards and anti-windfall provisions.

Simply stated, tax rates are a result of the budget divided by the overall assessment in the district. A $1 million budget based on a $100 million assessment would require a 1 percent tax rate to collect the budgeted revenue. If the assessment is corrected after the tax rate is set, however, then not all the revenue will be collected and the district will incur a fiscal shortfall.

The sooner a commercial property assessment is corrected the healthier it is for all involved. In the Utah example, had the error been corrected prior to the tax rate being set there would have been no impact on the taxpayer, the school or any of the taxing authorities.

FAIRNESS FOR THE COMMON GOOD

Most state tax systems are flawed and provide inadequate safeguards for taxpayers—if the tax systems were designed better, there would be less need for tax counsel. By understanding the workings of the property tax system, however, taxpayers can help maintain their own fiscal health as well as help to maintain the community's fiscal well being.

As with all negotiations, it is important to understand the opponent's motivations. Although residential tax assessment typically is the largest pool of overall assessment, taxing authorities know that commercial properties individually can have the greatest impact on a system when they are improperly assessed, to the detriment of schools and taxpayers. That makes it important to act as quickly as possible in the event of an improper assessment. And, importantly, resolutions that minimize impacts to the government can maximize the benefit to the taxpayer.

A lack of clear statutory definitions, political tax shifting or a simple error can cause a breakdown in the tax system. In Johnson County, Kan., the assessor raised the assessments on all big box retail stores, in some cases by over 100 percent. Recently, the Kansas State Board of Tax Appeals found those assessments to be excessive. The board reduced taxable values in several of the lead cases back to original levels, and the excessive assessment caused a shortfall.

The Cook County, Ill., assessor has been in the news for raising assessments on commercial real estate in many cases by more than 100 percent. If those assessments are found to be excessive, it could be detrimental for the tax authorities and taxpayers alike. In Cook County, the assessor has stated that the increase is in response to prior underassessment.

SEEK UNIFORMITY, CLARITY

With tremendous swings in assessment and taxes, how can taxpayers and assessors ensure a fair system? Uniform standards and measurements are the answer.

Like the income tax code, the property tax code is criticized for being confusing and overly wordy. To achieve greater equity and predictability, clarity is key. Defined measures of assessed value and standards to ensure uniform assessment results will help create transparency and ensure fundamental fairness between neighbors and competitors, so that no one has an advantage nor a disadvantage.

All taxpayers must be subject to the same measurement. For instance, a government cannot apply an income tax as a tax on gross income for one taxpayer and on net income for another. Likewise, one taxpayer should not be taxed on the value of a property that is available for sale or lease, and another owner taxed based on the value of its property with a tenant in place. Because tax law under most state constitutions must be applied uniformly, one set of rules must be established for all, and what is being taxed should be clearly defined.

Tax laws often include phrases like "true cash value" and "fair value." To be clear, the only measure of taxable value common to all property types is the fee simple, unencumbered value. The value of a property that is measured notwithstanding the current occupant or tenant is not necessarily the price that was paid for the property; it could be higher or lower. And because this concept is difficult for many taxpayers and assessors to understand, there needs to be a second check on the system; that safeguard is taxpayers' right to challenge their assessment based on their neighbors' and competitors' assessments.

To protect themselves on complex matters, it is often helpful for taxpayers to hire counsel that is intimately familiar with the law, real estate valuation and the local individuals with whom the taxpayer will be negotiating. To reduce the need for counsel, get involved with trade groups and state chambers of commerce, which can aid in correcting the tax system.

Uniform measurements of assessment, the ability to challenge the uniformity of results, and swift resolutions combine to create fairness and stability, which in turn enhance the fiscal health of both taxpayers and tax districts.

J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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  • Kieran Jennings of Siegel Jennings Co. explains how taxpayers and assessors ensure a fair system, with tremendous swings in assessment and taxes.
Jan
05

2020 Annual APTC Client Seminar

2020 Client Seminar - Virtual

The American Property Tax Counsel will be holding a VIRTUAL Client Seminar for 2020! 

The 2020 Virtual Seminar concluded in October, but the On-demand recordings of each session are still available through the Virtual platform. If you need to register or have forgotten the access information, please This email address is being protected from spambots. You need JavaScript enabled to view it. for assistance.

Virtual Seminar Presentations

September 17 -
Session I: COVID-19 and Effects on Retail/Office Space
Moderator
: Aaron Vansant, Esq, DonovanFingar, LLC
Speaker: KC Conway, MAI, CRE, Director of Research and Corporate Engagement, University of Alabama, Culverhouse College of Business, AL Center for Real Estate, Chief Economistfor CCIM Institute

September 24 - Session II: COVID-19 and Effects on the Economy
Moderator
: Bart Wilhoit, Esq, Mooney, Wright & Moore, PLLC
Speaker:
William R. Emmons, Ph.D., Federal Reserve Bank of St. Louis

October 1 - Session III: COVID-19 and Effects on Industrial
Moderator
: Michele Whittington, Esq, Morgan Pottinger McGarvey
Speaker
: Rob Vodinelic, MAI, MRICS, Newmark Knight Frank

October 8 - Session IV: COVID-19 and Effects on Centrally Assessed Properties
Moderator
: Bart Wilhoit, Esq, Mooney, Wright & Moore, PLLC
Speaker
: Robert Reilly, CPA, Willamette Management Associates

October 15 - Session V: Distant Cousins: Comparing Real Estate and Business Valuation Rates in a COVID World
Moderator
: Kathleen Poole, Nixon Poole Lackie
Speaker
: Mary O'Connor, ASA; Partner, Forensics and Valuation Services of Sikich LLP

October 21 - Session VI: National Legal Update
Moderator
: Wendy Beck Wolansky, Esq, Rennert Vogel Mandler & Rodriguez. PA
Panelists
: Gilbert Davila, Esq, Popp Hutcheson PLLC
Sharon DiPaolo, Esq, Siegel Jennings
Michele Whittington, Esq, Morgan Pottinger McGarvey

October 22 - Session VII: COVID-19 and Effects on Hospitality
Moderator
: Aaron Vansant, Esq, DonovanFingar, LLC
Speaker
: David Lennhoff, MAI, SRA, AI-GRS, Lennhoff Real Estate Consulting LLC 

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.


Featured Speakers 


KC Conway, MAI, CRE

 K.C. Conway is Director of Research & Corp Engagement at University of AL, Culverhouse College of Commerce - ACRE (AL Ctr. for R.E.). He has 30 years commercial real estate experience (25 private industry; 5 within Federal Reserve system 2005-2010). He has been Chief Appraiser, Env. Risk Manager and Sr. Market Intelligence Officer SunTrust Bank 2014-2017 and Chief Economist Colliers | United States 2010-2014 and author of North American Port, Industrial and Office Outlook reports 2012-2014. Conway was the 2007 recipient of the Appraisal Institute's President's Award; 2009 recipient of "Key Player" Award from the Atlanta Federal Reserve and the 2010 recipient of "Superior Contributions" Award by the FFIEC - Federal Financial Institutions Examination Council. He was CRE Risk Specialty Officer - NY FED during Financial Crisis 2009-2010 and briefed Federal Reserve's Board of Governors & Chairman Bernanke in June 2007 on the coming real estate crisis. Conway is a nationally recognized expert and speaker on a wide range of commercial real estate topics ranging from appraisal and bank regulation to ports and securitization. Areas of specialty include housing, industrial, litigation support, industrial and office real estate, North American ports and land development. He has been an expert witness in such prominent cases as the BCCI/First Atlanta Bank scandal and Crescent Resources bankruptcy and instructor and frequently requested speaker for the Federal Reserve, FDIC, FHLB, State bank commissioners, and numerous academic, professional organizations and industry associations, such as the Appraisal Institute, Counselors of Real Estate, ICSC, NAIOP, NAR, RMA, SIOR, ULI, University of Colorado, UF, Univ. of AL (ACRE) GA Tech, NYU, DePaul University, and University of CT.


Bill Emmons is an Economist at the Federal Reserve Bank of St. Louis and President of the St. Louis Gateway Chapter of the National Association for Business Economics (NABE). He conducts research and speaks frequently on topics including the economy, housing and mortgage markets, banking, financial markets, financial regulation, and household financial conditions.

Mr. Emmons received a PhD degree in Finance from the Kellogg School of Management at Northwestern University. He received bachelor's and master's degrees from the University of Illinois at Urbana-Champaign. Mr. Emmons is married with three children.

William R. Emmons, Ph.D

David Lennhoff, MAI, SRA, AI-GRS

David C. Lennhoff, MAI, SRA, AI-GRS is a principal with Lennhoff Real Estate Consulting, LLC, which is officed in Gaithersburg, Maryland. His practice centers on litigation valuation and expert testimony relating to appraisal methodology, USPAP, and allocating assets of a going concern. He has taught nationally and internationally for the Appraisal Institute. International presentations have been in Tokyo, Japan; Beijing and Shanghai, China; Berlin, Germany; Seoul, South Korea; and Mexico City, Mexico. He has been a development team member for numerous Appraisal Institute courses and seminars and was editor of its Capitalization Theory and Techniques Study Guide, 3rd ed. He was the lead developer for the Institute's asset allocation course, Fundamentals of Separating Real and Personal Property from Intangible Business Assets, and edited the two accompanying business enterprise value anthologies. He also authored the Small Hotel/Motel Valuation seminar. David is a principal member of the Real Estate Counseling Group of America, a national organization of analysts and academicians founded by the late William N. Kinnard, Jr., PhD. He is a past editor-in-chief of and frequent contributor to The Appraisal Journal, and a past recipient of the Journal's Armstrong/Kahn Award and Swango Award.


Mary O'Connor, CMI, ASA, CRE is Partner, Forensics and Valuation Services of Sikich LLP, a national accounting and advisory firm. She has worked exclusively in the field of valuation specializing in business valuation and the appraisal of intangible assets for litigation and corporate transactions with special focus in property tax. She has provided consulting and expert witness testimony in Federal, State and local jurisdictions (including US Tax Court, Delaware Chancery and Property Tax Appeal Boards) nationally and internationally in a wide range of complex property tax cases for hotels, senior living centers, big box stores, manufacturing, theatres, healthcare facilities and agribusiness properties. Prominent tax appeal cases include the Glendale Hilton, the Marriott at LA Live, SHC Half Moon Bay, DFS duty-free shopping at San Francisco Airport, and the Desert Regional Hospital. She speaks frequently about intangible asset valuation in property tax appeal to the IPT and APTC and has commented extensively on the various whitepapers published by the IAAO. She is a Senior Member of the American Society of Appraisers accredited in Business Valuation and is certified by Marshall Valuation Service in the application of Cost Approach methodology. She holds the CMI designation from IPT and is a Counselor of Real Estate (CRE).

Mary O'Connor, ASA

Robert Reilly, CPA

Robert Reilly has been a firm managing director at Willamette Management Associates (WMA) for approximately 30 years. WMA is a valuation consulting, forensic analysis, and financial advisory services firm. Before WMA, Robert was a valuation partner for the Deloitte & Touche accounting firm. Robert's practice includes unit valuation and property valuation analyses for property tax planning, compliance, and controversy purposes.

Robert holds a BA degree in economics and an MBA degree in finance, both from Columbia University. He is a certified public accountant, certified management accountant, certified global management accountant, accredited tax advisor, and an enrolled agent (to practice before the IRS). He is accredited in business valuation and certified in financial forensics. He is a chartered financial analyst, certified business appraiser, certified valuation analyst, certified valuation consultant, certified review appraiser, accredited senior appraiser, certified real estate appraiser, and stated-certified general appraiser in Illinois and several other states.

Robert is the co-author of 12 valuation-related textbooks, including Best Practices: Thought Leadership in Valuation, Damages, and Transfer Price Analysis (published by Valuation Products & Services), Guide to Intangible Asset Valuation (published by the American Institute of Certified Public Accountants) and Practical Guide to Bankruptcy Valuation (the second edition published by the American Bankruptcy Institute), and Guide to Property Tax Valuation. He currently serves as a contributing editor for the following professional journals: Construction Accounting and Taxation and Practical Tax Strategies.


Rob Vodinelic joined Newmark Knight Frank in 2017 and currently serves as a Senior Managing Director and Market Leader for the Ohio, Indiana and Kentucky markets for the Valuation & Advisory group. He is also the National Practice Leader for the Industrial/Logistics specialty practice for the V&A group.

Since beginning his career in valuation in 1998, he has worked with clients on a wide variety of property types and has provided valuation analyses on Federal and State Historic Tax Credits, Tax Increment Financing (TIF) arrangements, and a variety of tax abatements. Rob Vodinelic also has significant experience in litigation assignments including the preparation of appraisals and providing expert witness testimony for property tax appeals and bankruptcy proceedings.

Mr. Vodinelic joined Newmark Knight Frank after serving as Senior Managing Director and Regional Leader for Cushman & Wakefield in the Ohio region. His time at Cushman & Wakefield began in 1995 as a Senior Accountant in the Corporate Finance Group in the New York World Headquarters office. In April 1998 he transitioned to Valuation & Advisory until relocating to Ohio in September 2002. At Cushman & Wakefield he was promoted to Director in 2005, Senior Director in 2010, Managing Director in 2014 and then Senior Managing Director in 2017.

With Newmark Knight Frank, Mr. Vodinelic's responsibilities include business development, aggressively recruiting top appraisal professionals, continuing to provide outstanding service to clients, overseeing a team of appraisers within the Ohio, Kentucky and Indiana offices of Newmark Knight Frank, and being the National Practice Leader for the Industrial/Logistics specialty practice. He is also involved with the preparation and review of appraisal reports on a diverse spectrum of property types, and he provides expert witness testimony throughout the state of Ohio.

Rob Vodinelic, MAI, MRICS

Wendy Beck Wolansky, Esq.

Wendy Beck Wolansky concentrates her practice in the ad valorem taxation area, where her expertise is in representing property owners throughout the State of Florida before Value Adjustment Boards in administrative appeals challenging the valuation of commercial property including regional malls, anchor department stores, big box stores, hotels, hotel condominium buildings, major office buildings, low income housing tax credit apartment buildings and major apartment buildings, among others. 


Gilbert D. Davila, CMI, joined Popp Hutcheson in 1998 and has devoted his entire legal career to representing commercial property owners in every aspect of their property tax needs. Gilbert provides a wide range of services to his clients, including advocacy at administrative hearings (ARB's) as well as litigation negotiation and settlement. His current area of concentration is multi-family and low-income housing properties, as well as representing shopping centers, office buildings, mini-storage facilities and freestanding retail. Gilbert is the Chair of the firm's Team Development Committee which focuses on the continuing education needs of team members and enhancing the unique culture of the firm.

Gilbert has become a frequent speaker at professional seminars and conferences across the country. Gilbert also instructs various property tax law courses and is a frequent author of property tax related articles which have been featured in numerous national publications including The National Real Estate Investor, Apartment Finance Today and Affordable Housing Finance. Gilbert is a Registered Senior Property Tax Consultant and is a member of the Texas Association of Property Tax Professionals, the American Property Tax Counsel and several bar associations.

Gilbert was the valedictorian of his graduating class at the high school in his hometown of Hebbronville, Texas. Gilbert received his B.A. from Rice University in 1994. At Rice, Gilbert double majored in English and Managerial Studies and was on the President's Honor Roll. Gilbert received a J.D. from the University of Texas School of Law in 1997 where he was an active member of the Student Recruitment Committee, Hispanic Law Student's Association and Research Editor for the Hispanic Law Journal. Gilbert donates his time and resources to local civic organizations which focus on at-risk youth and is an avid supporter of the arts community in Austin.

Gilbert Davila, CMI, Esq

Sharon DiPaolo, Esq.

Sharon F. DiPaolo is a partner in the property tax law firm of Siegel Jennings, Co., L.P.A. where she is a member of the Executive Board and manages the firm's Pennsylvania practice. Ms. DiPaolo concentrates her law practice exclusively in property tax law representing commercial taxpayers. She has handled thousands of assessment appeals at the administrative, trial court and appellate levels. She handles appeals for commercial property owners throughout Pennsylvania's 67 counties, and also functions as national outside counsel for portfolio clients managing their appeals across the country. Ms. DiPaolo is on the planning committee for Siegel Jennings' Annual Appraisal Summit where Siegel Jennings attorneys gather with some of the best appraisers in the county to discuss a specific appraisal topic; past summits have included hospitality valuation and senior housing valuation.

Siegel Jennings is a Founding Member of the American Property Tax Counsel which, in 2019, celebrated its 25th anniversary. Ms. DiPaolo was the Conference Chair for the American Property Tax Counsel's. 25th Annual Client National Conference. She is the Western Pennsylvania representative the American Property Tax Counsel remains an active member of the organization's national conference committee, which she chaired for six years.


Michele M. Whittington is a Member in the Lexington, Kentucky office of Morgan & Pottinger, where her practice focuses on property taxation and administrative law. She has represented numerous local and national companies in challenging real property tax assessments, personal property tax assessments, and public service company assessments before the Kentucky Department of Revenue, the Kentucky Claims Commission, and various state trial and appellate courts in Kentucky. She has also assisted industry groups in drafting legislation and regulations on tax issues.

Michele is a frequent speaker on state and local tax issues, and has counseled various industry groups on relevant tax issues. She is a member of the Council on State Taxation and the Institute of Professionals in Taxation, and is an affiliate member of the International Association of Assessing Officers. Michele is listed in The Best Lawyers in America for Administrative/Regulatory Law.

Michele serves as a member of the Publications Committee for the Kentucky Bar Association. She currently serves as President of the Alumni Board for Transylvania University in Lexington, Kentucky.

Michele Whittington, Esq

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Nov
21

Achieving Fair Taxation Of Big Box Retrofits

Issues to address to ensure a big box retrofit doesn't sustain an excessive tax assessment.

As more and more large retail spaces return to the market for sale or lease, creative investors are looking for ways to breathe new life into the big box. These retrofits saddle local tax appraisal districts with the difficult task of valuing a big box in a new incarnation.

When the appeal season approaches, it is important to look for key changes to the appraisal district's valuation model for the existing structure to ensure that the property is being assessed fairly after the retrofit. Whether the jurisdiction employs the income or cost approach to value commercial property, having the correct classification, effective age, effective rent and correct net rentable area are among the most important factors for an accurate assessment. In addition, the assessor will need to account for functional obsolescence and the possible existence of surplus land.

Valuation models previously used by taxing authorities likely factored in a single-tenant building. If the new use converts the building to a multitenant structure, the assessor should factor in the conversion. Perhaps the appraisal district previously classified the use as Freestanding Retail or Big Box Retail, and now it is a Call Center, Church, or Gym. Ensuring that the classification of the property is correct is the first step in getting a more accurate assessed value for property tax purposes.

Next, it will be important to note the effective age the appraisal district is using to value the newly retrofitted box. Appraisal districts often use the effective age of a building, based on its utility and physical wear and tear, rather than the actual number of years since the construction date. Was there a significant adjustment made to the effective age based on a remodel or tenant improvements? Has the retrofit enhanced the utility of the structure?

There is no doubt that transforming vacant big boxes requires great expense. Big boxes are generally considered to be mediocre-quality buildings. Many times, big boxes are cookie-cutter structures and not necessarily constructed to last more than 30 years without a major overhaul. Typical big boxes have a linear alignment of lighting and structural bays, and if the box is subdivided for multitenant use, there is a good chance that additional electrical work, plumbing and HVAC may be required.

Converting a box from single to multitenant use may also require additional exterior entryways. If the property is being valued using the income approach, keeping track of the expense required to convert the box into another use will be important so that an effective rental rate can be later calculated. On an income approach, if an appraisal district appraiser does not account for the cost of the retrofit in some way, the assessed value may be overstated.

Another challenge with big box retrofits is the depth of bays. Oftentimes, even after what can be considered a successful adaptive reuse, portions of the building may never be used again by the new user. The appraisal district should factor decommissioned square footage into the valuation model and make a distinction between gross building area and net rentable area. If there is square footage that is unusable or used for storage or warehouse purposes, it may warrant a different rental rate than the main portion of the converted space.

The fact that big boxes are generally build-to-suit properties should also be considered. Though costly, it may be easy to remove the previous user's brand from the interior of the building, but what about the exterior? Big box retailers purposefully built their boxes in a manner that would allow passersby to identify them instantly. The new owner is then left with the difficult task of getting rid of the very recognizable trade dress that the original owner required. Regardless of the new use, there is likely functional obsolescence created by the original user's specific branding and needs. Functional obsolescence can be due to size, ceiling height, ornamental fronts or various other factors.

An additional factor that may be relevant to the valuation of the retrofit for property tax purposes is the land. Big boxes typically require large parking lots and infrastructure that other users may not need. Analysis can determine whether the new user is left with surplus land. If the extra land cannot be sold separately and lacks a separate highest-and-best use, the appraisal district may be able to adjust the land value.

Ensuring that a big box is accurately valued for property tax purposes in the first year after a retrofit will have a long-term impact on the asset's tax liability. It is, therefore, worthwhile to invest the time it takes to review the assessment and the methodology used to arrive at the assessed value. 

Darlene Sullivan is a partner in Austin, Texas, law firm Popp Hutcheson PLLC, which represents taxpayers in property tax matters and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.
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  • Issues to address to ensure a big box retrofit doesn’t sustain an excessive tax assessment.
Nov
19

Beware of New Property Tax Legislation

Many states are attempting to change established law, causing commercial property taxes to skyrocket.

No one wants to be blindsided with additional tax liability. This is why many businesses belong to industry groups that closely monitor liability for income taxes. Unfortunately, these same companies rarely stay on top of legislation that may have a significant impact on their property tax liability.

It is often too late when a taxpayer learns that their tax liability for real estate has increased under a new statute or assessment practice. Property owners that fail to keep up with proposed rule changes are at risk of incurring unexpectedly high tax bills at a time when they may be least-prepared to pay them.

Property owners may take for granted that key precepts assessors use in determining taxable value are so widely held and accepted as to be immutable. Almost every state's tax law holds that a property owner pays property taxes on the asset's "real market value.," Real market value is the price a willing buyer and willing seller would agree upon in an open-market transaction

In a retail real estate sector that is still reeling from widespread store closures and mounting competition from e-commerce, the lease rate for a lease in place may not reflect market rent. Thus, it is the "fee simple" estate that is being valued for tax purposes: What rent does the market data support as of the tax assessment's date?

Valuing the fee simple estate at market rent is a significant taxpayer protection in the changing landscape of today's marketplace for retail spaces. Sales of brick-and-mortar stores have plummeted due to changing consumer spending habits, a decline in international tourism spending and a lack of investor demand for many big boxes. It is no secret that internet sales have battered the department store sector. The resulting closures of large department stores have further dampened investors' appetite for large-box spaces, and these effects have trickled down to impair the value of smaller retail spaces.

Assessors question assumptions

In the past several years, some assessing authorities have pushed to change the definition of real market value to disregard the perspective of a willing buyer in an open market, and to instead create a false value as if the property were fully leased at market rates as of the assessment date.

In Oregon, recent rules are being proposed (and the theory tested in court) with the assumption that a property can always receive a stabilized rent in the market place. Thus, an assessor would use a property's expected occupancy and market rent in using the income approach to determine the fee simple interest. The costs to get to a stabilized rent, according to the new rules, cannot be applied to discount the stabilized rent. Thus, a vacated department store, or a brand new vacant building, will be assessed as if it is receiving full market rent, without reflecting any of the costs associated to get there.

For example, the proposed rule states that it is implied in the cost approach that valuation reflect not only construction and materials but also all indirect costs, such as the cost of carrying the investment in the property after construction is complete but before stabilization is achieved, as well as all marketing costs, sales commission and any applicable holding costs to achieve a stabilized occupancy in a normal market. Thus, even though the taxpayer has not yet incurred all these expenses, they can be added to the taxable value and the taxpayer may not subtract them in arriving at market value for property tax assessment purposes.

The result is that not only will a new vacant space be valued as if it is fully rented, but a second-generation retail space may be assessed under the cost approach as if it is fully leased. The reality of lease-up costs, including holding costs and tenant improvement costs, are simply to be ignored.

The International Association of Assessing Officers (IAAO) recently published a paper titled Commercial Big-Box Retail: A Guide to Market-Based Valuation. This paper appeared to ignore generally accepted appraisal methods for valuing these types of properties and to advocate for the changes in accepted definitions of property rights that taxing entities in many states are now seeking. Importantly, when American Property Tax Counsel reviewed the IAAO's paper, its lawyers found that many of the propositions cited in the paper were based on cases or laws that had been overturned and were clearly inconsistent with established case law and law.

These attempts by the assessing authorities to change the definition of real market valuation for property taxation purposes should worry commercial property owners, and particularly owners of retail properties, given the continuing potential for prolonged vacancy. For these properties to remain viable, the owners need to mitigate all costs, including property taxes.

A reduction in property taxes can benefit a property owner significantly. Oregon has the benefit of a five-year statutory hold, with some exceptions, on a successful appeal to property taxes. Thus, a $100,000 reduction in property taxes through the appeal process could result in a $500,000 savings.

With the assessing authorities' proposed changes to the tax rules, however, market realities and real market value are compromised.

Cynthia M. Fraser is an attorney specializing in property tax and condemnation litigation at Foster Garvey, the Oregon and Washington member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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  • Many states are attempting to change established law, causing commercial property taxes to skyrocket

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American Property Tax Counsel

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