Property Tax Resources


Controversy Emerges Over Michigan Business Tax Credits for Industrial Owners

"The tax credits threaten to reduce tax revenue to the state. To minimize lost revenue, taxing entities are attempting to limit use of the tax credits for industrial personal property by seeking to reclassify many of those assets as commercial..."

By Michael Shapiro, Esq., as published by National Real Estate Investor - online, August 2010

Detroit, along with the rest of Michigan is wrestling with two major tax issues that frequently involve litigation and have costly implications for owners of commercial and industrial properties. The first issue relates to the fact that the applicable tax statute in Michigan treats industrial properties differently than office, retail, hotel and other commercial properties.

tax-char 08-20

Starting with the 2008 tax year, the Michigan legislature granted Michigan Business Tax credits to owners of industrial personal property. These credits are intended to offset property taxes and reduce the tax rate levied on industrial personal property.

As the accompanying chart indicates, for the 2009 tax year, Detroit's rate for commercial personal property was $70.92 per $1,000 taxable value (generally 50% of market value). Meanwhile, the personal industrial property rate was $59.14 per $1,000, effectively reduced to $38.44 per $1,000 by the Michigan Business Tax credits.

The tax credits threaten to reduce tax revenue to the state. To minimize lost revenue, taxing entities are attempting to limit use of the tax credits for industrial personal property by seeking to reclassify many of those assets as commercial.

The Michigan Department of Treasury recently announced that it filed almost 10,000 property tax classification cases affecting 2009 property taxes. In addition, state officials have encouraged local communities to file classification appeals in the State Tax Commission for 2010, all with the intent of changing property classifications from industrial personal property to commercial personal property.

Raw deal for industrial owners

Many of the actions have been initiated by the state or local jurisdiction based solely on the name of the owner, and without regard to the actual use of the property or the property's legal classification. If a company's name is Joe's Manufacturing, it will not have a classification action brought against it, whereas Joe's Warehouse will be the subject of such an action.

Because the law involved is relatively new, most taxpayers receiving notice of these appeals have little to no idea what the action involves.

At the heart of the issue is the definition of industrial personal property, and the statute is reasonably clear that personal property located on industrial real property is industrial personal property.

Notwithstanding the statute, the state and State Tax Commission claim that the use of personal property governs its classification and that personal property has to be used for manufacturing or processing in order to be deemed industrial. There is nothing in the applicable statute to support that position, however.

The classification appeals recently filed make it apparent that the state and State Tax Commission recognize their claims may not prevail. As a result, in more recent filings they are seeking to change the classification of the underlying real estate from industrial to commercial.

It appears that most actions by the State Tax Commission and the State have been taken without any property specifics other than the name of the owner. If those reclassifications succeed, then the personal property at the site would also be redefined as commercial and not industrial personal property.

Taxpayers affected by such actions should consult with competent property tax counsel for advice on whether to defend such claims and, if so, how to proceed. In some instances, the government may have missed a critical deadline, which will give taxpayers an additional basis for prevailing.

Backlog of appeals

The second source of property tax litigation in Detroit and other Michigan communities is shared by thousands of property owners across the country. Nearly everywhere in the United States, property values are depressed by as much as 40% or more from where they were before the onset of the recession in December 2007.

And just like local governments in other states, Michigan's taxing entities are strapped for cash and reluctant to voluntarily lower valuations to reflect current market conditions. It's no surprise that thousands of property owners have appealed assessments in hopes of lowering their property tax bills.

What may be surprising to property owners who haven't already filed an appeal is that an unprecedented deluge of valuation protests has slowed down the panel that reviews them. As of July 31, there were approximately 2,600 non-small-claims cases pending before the Michigan Tax Tribunal for the 2008 tax year, and another 5,600 cases for 2009. Approximately 3,900 such new cases have been filed in 2010.

The tax tribunal recently adopted new procedures and is laboring to reduce this backlog and expedite the time it takes cases to move from filing to resolution. Most property tax practitioners applaud the tribunal's recent efforts in this regard. Even so, for anyone considering an appeal, it makes sense to start the process sooner rather than later and get in line to have the case heard.

SHAPIRO_Michael2008Michael Shapiro chairs the tax appeals practice group at Michigan law firm Honigman Miller Schwartz and Cohn LLP. The firm is the Michigan member of American Property Tax Counsel, the national affiliation of property tax attorneys. HE can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Is the Current Use the Highest & Best Use?

"Appraisers seem conditioned to accept the property's current status, and it is almost politically incorrect to challenge it..."

By Elliott B. Pollack, Esq., as published by Hotel News Resource - July 2010

The first step a real estate appraiser must take before valuing a property is to identify its highest and best use (HBU). Indeed, it is a truism that everything in an appraisal flows from this determination.

HBU is "the reasonable, probable and legal use of vacant land or improved property, which is physically possible, appropriately supported, financially feasible and that results in the highest value." That being said, appraisers rarely conclude that the HBU of a property is different from the current use. Why? Appraisers seem conditioned to accept the property's current status, and it is almost politically incorrect to challenge it. Moreover, the fee structure under which many appraisers function discourages them from taking on this often expansive mission.

Nevertheless, the horrible economic conditions of the last two-plus years have severely undermined the viability of many hospitality properties. As more operations become marginal, appraisers should question whether the profitable years of a particular hotel may be in its past. This is true even if it wouldn't make sense to immediately demolish and construct some other use, or to simply turn the property into a parking lot.

Take the case of a tired, decades-old, un-flagged property that suffers from deferred maintenance. Is it reasonable to conclude that a buyer, or even the current owner, would make the necessary investment to prolong its life much longer? If not, then the appraiser should consider whether the amount of physical, functional and economic obsolescence inherent in the property has numbered its days. Even though operations may continue for another few years, given the lack of alternative uses presently, the effect on appraised value is the same.

With properties struggling to remain viable, the appraiser should research whether or not current hospitality HBU will likely come to an end in the foreseeable future. If that outcome is likely, the appraiser should consider developing a discounted cash flow that incorporates demolition costs and future revenues as a surface parking lot or some other improved use. If similar properties in the area have been demolished or converted to alternate uses, such as housing for senior citizens, then support for a new HBU becomes even stronger.

The appraiser who fails to grapple with the sort of fact pattern set forth above will be doing his client a disservice, and may generate an excessive valuation and an unduly heavy ad valorem tax burden for her client.

Pollack_Headshot150pxElliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley, LLC. The firm is the Connecticut member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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New York Wrestles with 'Takings' Rulings

"In Kelo, the Court held that while government may not take one's property for the sole benefit of another private party..."

By Michael R. Martone, Esq., as published by - July 2010

Constitutional limits on the government's power to take property for use by private entities for the public purpose of economic revitalization have been the subject of much debate in New York. The state has struggled to define itself in the wake of the Supreme Court's controversial 2005 ruling in Kelo v. City of New London, which sparked a national debate about the eminent domain power.

In Kelo, the Court held that while government may not take one's property for the sole benefit of another private party, it may do so for the public purpose of economic revitalization. The ruling deferred to the City's taking of private property for inclusion in its redevelopment plan, hoping to revitalize its depressed economy.

The Takings Clause of the Fifth Amendment of the Federal Constitution mandates "nor shall private property be taken for public use, without compensation." Kelo says that where a legislature adopts a comprehensive economic plan it determines will create jobs, increase revenues and revitalize a depressed area, the project serves a public purpose and qualifies as a permissible public use under the Takings Clause.

An outraged public ridiculed Kelo as a gross violation of property rights for the benefit of large corporations at the expense of individual property owners. Since the ruling, 43 states have taken legislative action limiting the use of eminent domain. New York, however, has been criticized for failing to take similar action.

Condemnation in New York

Under New York's Eminent Domain Procedure Law, the State must first conduct a public hearing and determine that a taking would serve a public purpose so as to qualify as a public use. Next, the State must provide the property owner with just compensation for property taken. Each step is subject to judicial review.

Historically, it is extremely difficult for affected property owners to challenge a finding of public necessity to prevent a taking. Courts generally defer to a legislative prerogative, and vague definitions of public purpose can be used to justify most seizures. The courts have scrutinized economic revitalization as a justifiable cause for seizure, however, property owners have challenged the power of the Empire State Development Corp. (ESDC) to force the sale of private property.

The ESDC, the state's development arm, can force the sale of property either for a civic purpose or to eradicate urban blight - amorphously defined as substandard and insanitary. Two recent decisions closely examined the ESDC's involvement with private development projects in the name of economic revitalization.

Atlantic Yards Project

In Goldstein v. NYS Urban Development Corp., the Court of Appeals upheld the ESDC's taking of private properties in Brooklyn for inclusion in a 22-acre mixed-use development project known as the Atlantic Yards. The project includes a basketball arena for the New Jersey Nets and 16 commercial and residential high-rise towers.

The ESDC relied upon studies finding that the area was blighted and warranted condemnation for development. The Court noted that the removal of blight is a sanctioned predicate for the exercise of eminent domain and rejected the challenge to the blight findings, accepting as reliable the comprehensive studies supporting the ESDC's determinations.

The Court said it must defer to what is the legislature's prerogative and may intervene only where no reasonable basis exists, which was not the case in Goldstein. The dissent invited close scrutiny of blight findings, arguing that the courts give too much deference to the self-serving determinations of the ESDC.

Columbia University Expansion

Meanwhile, in Kaur v. NYS Urban Development Corp., the Appellate Division rejected as unconstitutional the ESDC's takings to assist Columbia University in building a satellite campus in the Manhattenville area of West Harlem. The court denounced the ESDC's blight determination as mere sophistry that was concocted years after Columbia developed its plans. Citing a conflict of interest, the Court chastised the ESDC for hiring Columbia's own planning consultant to conduct the blight study.

The Court declared that as a private, elite institution, Columbia could not claim a civic purpose to its expansion sufficient to meet the public use standards. That the University was the sole beneficiary of the project is reason alone to invalidate the taking, the Court wrote, especially because the alleged public benefit is incrementally incidental to the private benefits of the project.

The State appealed and it remains to be seen how the Court of Appeals harmonizes the Appellate Division's aggressive Kaur approach with its own deferential Goldstein holding. The rights of property owners throughout the state hang in the balance.


Michael R. Martone is the Managing Partner in the Mineola law firm of Koeppel Martone & Leistman, L.L.P., the New York State member of American Property Tax Counsel, the national affiliation of property tax attorneys. Michael Martone can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. Michael Guerriero contributed to this column. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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When Rent is Not Rent?

"Paying attention to what rent includes can result in lower tax bills..."

By Cris K. O'Neall , as published by Commercial Property Executive Blog - June 2010

Rental income has always been the touchstone for calculating real property values and is a key element in determining taxable value for ad valorem property taxes. Because it plays such a crucial role in the property tax valuation, paying attention to what rent includes can result in lower tax bills.

Rental income for properties such as multi-family residential is closely associated with real estate usage and is easily capitalized into an indication of taxable value. That is not the case, however, for properties used by service-oriented businesses, such as full-service hotels or stores in high-end retail malls. In those situations, the stream of income generated by the facility may represent both a return to the real property as well as to franchises, branding, or a trained and assembled workforce.

In most states, these non-realty rights and assets are not subject to property tax. If local tax assessors calculate assessments using income that includes a return on non-realty elements, the property owner will overpay property taxes.

Similarly, in those situations where landlords participate in their tenants' revenues through percentage rent, taxpayers should determine whether those rents represent a return solely to real property or if they also allow the landlord to share in profits that the tenant generates from customer services and branding. This situation frequently arises when private companies operate in government-owned facilities, such as public airports with privately run concessions.

So, what should investment property owners do? First, determine whether service-oriented businesses are operating in the property or whether percentage-rent arrangements are in effect. If either is the case, contact the local tax assessor and learn the basis for the property's tax valuation. If the assessed value is based on property income, the property tax may be based in part on non-taxable income. In that case, the property should receive a reduction in taxes.

CONeallCris K. O'Neall specializes in ad valorem property tax matters as a partner in the Los Angeles law firm of Cahill, Davis & O'Neall, LLP. His firm is the California member of American Property Tax Counsel, the national affiliation of property tax attorneys. Mr. O'Neall can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

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New Appeal

Seeking Reassessment? Act Now, Tax Attorneys Warn

By Suzann D. Silverman as published by Commercial Property Executive, June 2010

With the Federal Reserve repeatedly calling attention to commercial real estate assets' decline in market value and reduced access to financing, taxing jurisdictions have shown greater openness of late to appeals for reduced property taxes. That trend has offered many owners some badly needed breathing room. But as municipalities themselves become more strapped for cash, winning tax appeals looks likely to become much more challenging.

The commercial property sector is a natural place for municipalities to look for revenue, noted Elliott B. Pollack, chairman of the property valuation department of Pullman & Comley L.L.C. and a director of the American Property Tax Counsel. After all, commercial properties already make up a large proportion of communities' tax bases, and most legislators would much rather hike taxes on a local office building than on their constituents.

Some states have enacted tax caps, according to Stephen Paul, a partner at Baker & Daniels L.L.P. and vice president of the Tax Counsel.

But those limits can be deceiving. In Indiana, where he practices, residents' taxes are limited to 1 percent of value, while apartments are capped at 2 percent and commercial property at 3 percent. The risk, Paul said, is that the greatest pressure to raise assessments will be on commercial properties, which have the highest ceiling by percentage.

And when property values do inevitably begin to climb, the raw tax liability will naturally rise with them.

Paul expects a surge in tax litigation to result, with local appeals becoming harder to win and a greater number reaching the state level.

Eventually, these cases will get a fair hearing, he believes, but that outcome may require a time-consuming, expensive effort by owners.

The steady erosion of municipal finances across the country presents an additional reason for concern, according to John E. Garippa, senior partner of Garippa Lotz & Giannuario and president of the Tax Counsel.

While bonding capacity should yield enough cash for municipalities to cover refunds, at least in theory, Garippa foresees potential for reductions in many municipalities' ability to bond. Legislation may also cause delays by extending the deadlines for municipalities to distribute tax refunds.

The predicted rise in interest rates is also likely to have an impact, he noted, driving cap rates up and asset values down. "That's why it's important for clients to be on top of this," he cautioned.

When it comes to property tax disputes, being on top of it means preparing in advance to appeal to ensure that deadlines are met, and then gathering the details necessary to persuade the court. While many property owners file appeals every year (most settle rather than try their luck in the backlogged courts), there are still a good number that do not, Garippa said. But with assessments based on the previous year's data, current assessments may not fully reflect the market downturn. That offers an opportunity to argue for an assessment decrease.

In New York City, for instance, the Real Property Income & Expense filings that the finance department required in 2009 were based on 2008 data, which did not reflect the full extent of the commercial real estate market crash that occurred at year-end 2008, explained Joseph Giminaro, special counselor & co-manager of the tax certiorari department for Stroock & Stroock & Lavan L.L.P. It is too soon to evaluate how the tax commission will view updated data, but Glenn Newman, president of the commission, has indicated that he wants to see all data that shows the difficulties property owners are enduring. "I think it's very favorable that the tax commission is openly saying it wants to hear these stories," Giminaro observed.

That positive attitude seems common nationally. Tax certiorari attorneys, who specialize in tax appeals, are achieving some significant reductions.

In the hospitality arena, for example, "it is not unusual to see total assessments drop by more than a third," said Garippa, who represents some of the nation's largest hotel operators. Big-box stores saw a similar drop in the past year, he noted. Pollack, too, has seen significant decreases; he reports that appeals for hotel properties are typically garnering tax reductions of 20 to 40 percent. And while hotel and retail properties have been subject to the largest overassessments, owners of other property types can also mount successful appeals. Older industrial properties are another big area.

Taxing jurisdictions typically have based value largely on income capitalization and replacement value, not comparable sales, but one area that offers growing potential to strengthen appeals is brand value, since so-called intangible benefits are not taxable. Retail and hospitality properties are the categories whose brand value is most readily recognized by tax courts, according to Paul. Part of hotels' income is derived from the flag, and shopping centers typically count on big-name stores to attract customers.

Mall owners have brought branding to a new level in recent years with efforts for company name recognition among consumers. Office property owners are newer to this strategy and have had less success. However, that will come with time, Paul predicted.

In the meantime, with data now available on the softer market and municipal difficulties looming, "now's the time to take a tax appeal," Paul said.

Stephen H. Paul is a partner in the Indianapolis law firm of Baker & Daniels LLP, the Indiana member of the American Property Tax Counsel. He can be reached at stephen.paul@bakerd. com

Elliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley, LLC. The firm is the Connecticut member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. Mr. Garippa is also president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Get Real About Tax Assessments

Get Real About Tax Assessments

"A property's chain affiliation may affect its assessed value for property-tax purposes..."

By Stephen H. Paul, Esq., as published by Scotsman Guide, June 2010

Imagine this scenario: Two hotels in the same city are of similar age, size and construction quality. Both are located in popular areas with convenient access to sites attractive to overnight travelers. They're nearly indistinguishable — hotel guests would enjoy comparably satisfying overnight stays. But one hotel's assessed value for property-tax purposes is materially greater than the other. Why the difference?

There is a good chance that the hotel with the higher assessment operates under the flag of a recognized hotel chain and the other does not.

Should the flagged property's owner face the penalty of a higher tax bill because of the flag? Uniform appraisal standards and various state-tax authorities say that it should not. After all, tangible real property is assessed, not intangible personal property.

Moreover, in the past 10 to 12 years, several courts have handed down opinions that intangible value, such as that springing from a flagged hotel's identity, must be excluded from the real property's value. But including intangible value in the real-property assessment of properties such as flagged hotels remains an important and ongoing local property-tax issue across the country.

Other property types — such as restaurants, shopping malls, theaters, racetracks and casinos — also are affected by this issue. Property-owners and others concerned about their taxable values — e.g., potential buyers, their mortgage brokers, real estate agents and lenders — must be aware of this. Owners and buyers should be prepared to challenge assessments, and brokers should understand how to assure that these properties' tax valuations are performed correctly.

Property assessors and appraisers refer to the intangible value in varying fashions. They may talk about "business enterprise value," "going concern value" or "capitalized economic profit." But the basic concept is the same: It refers to including the intangible assets and rights that make the taxable property usable in the value. It is the value associated with the business operation, rather than the property itself.

There are three generally accepted approaches to valuing real property: the cost approach, the sales-comparison approach and the income-capitalization approach.

Regardless of the method used, assessors should be identifying and excluding all value outside of the real estate itself from the real property's value. How an assessment limits the property's valuation to the real estate's taxable value varies by approach.

The cost approach

Because this approach focuses on costs of land and improvements, it might appear unlikely that added value associated with the property's economic activity could embellish the assessment. Assessors must pay close attention to functional and economic obsolescence that may reduce the property's cost value, however. Functional obsolescence is the loss in a property's utility resulting from distinctive floor plans, site designs, or difficulty of upgrading or modifying property for a particular use, among other things.

Flagged or chain properties often are constructed according to designs specific to the chain. They also often have logos and other items that can hurt the real property's value because of the costs of modifying the property for other uses.

Economic obsolescence occurs because of external factors. For chain hotels, restaurants and other businesses, property-value reductions often come from market-demand changes because of a recession, changes in the public's tastes and market saturation with similar chain businesses.

Owners of chain-business properties more frequently cannot sell or lease property for as much as the tax-assessed value based on cost. Functional and economic obsolescence can factor into this.

An appraiser should identify and quantify the obsolescence and exclude it from the property's value. Failing to reduce the assessment for obsolescence may result in assessing the property too high because of characteristics attributable to the chain venture.

Sales-comparison approach

With this approach, appraisers analyze recent sales of comparable properties to determine the subject property's value. They adjust the comparable sales to quantify differences between the sold properties and the subject property. An appraisal used for real estate tax purposes should identify the intangible values reflected in the comparable properties' sales prices and eliminate them from the sales.

If sales of vacant properties, properties of non-chain-business enterprises, or sales of chain or flagged properties to non-chain operators who drop the chain affiliation are available, the sales approach should be used to avoid overstatement of value that otherwise might result.

Essentially, appraisers should use sales of comparable properties, sans the flagged or chain business, to arrive at a value.

The income approach

This approach aims to determine the property value by capitalizing the annual net operating income. For real estate assessment purposes, the income considered must come from the real estate only and not from the business interest occupying the property.

Thus, the income attributable to the property's intangible component — as well as to the tangible personal property — must be identified and extracted to arrive at a value. This can be difficult, but it is necessary if an appraisal relies on the income approach.

An appraiser might identify and analyze the comparable properties' incomes to develop a market value. As with the sales approach, in developing a model to determine market value based on income, the appraiser should select non-chain properties to avoid contaminating the data with associated intangible value and should reconcile income and expense items to account for property differences.

Regardless of the approach, a flagged property's value must be scrutinized to eliminate intangible value. The cost approach must account for functional and economic obsolescence. The sales approach must avoid inclusion of going-concern value in comparable sales. And the income approach should not entail simply a capitalization of the net operating income of the business occupying the property without isolating and eliminating business-enterprise value.

Owners of flagged or chain properties must be aware of how intangible value can disrupt property values and must be prepared to challenge assessments. Potential buyers should scrutinize appraisals for overvaluation arising out of the inclusion of intangible value. Brokers and lenders should approach appraisals with equal scrutiny in evaluating the security for mortgages. If intangible value is included in a flagged hotel's assessment and the hotel later loses its chain affiliation, the loan's security would be compromised. Lenders can mitigate this risk by being aware of the issue and assuring that any intangible value is identified and eliminated in the property's initial valuation.

Appraisers of flagged properties have the difficult task of identifying and quantifying intangible value attributable to a business enterprise and distinguishing it from the real property value. With diligent prodding from parties interested in the property's appraisal, an incorrectly large assessment is avoidable.


Stephen H. Paul is a partner in the Indianapolis law firm of Baker & Daniels LLP, the Indiana member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
Mr. Paul thanks his colleague Fenton D. Strickland for his contributions to this article.

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Valuation Dispute Strategies - 4 Easy Pieces

"These steps enhance your chances for a successful appeal"

By Howard Donovan, as published by Commercial Property Executive Blog, May 2010

When it's tax appeal time, taking the right steps can be critical for winning an assessment dispute. Follow these four steps to make the best case.

  1. 1. Provide current and accurate property information. Review the assessor's property card at least annually and correct any errors. This is also an opportunity to determine if there is reason to dispute the valuation. Consider public records, appraiser credentials, and national cost or capitalization guides. Look for inaccurate information regarding land size or improvements, as well as inaccurate depreciation of improvements.
  2. 2. Make sure the proper party files the administrative protest. In most jurisdictions, only the owner or owner's agent can file a protest or appeal a decision of the administrative board. An agent's authorization by the current owner must be legal or dismissal may result. If there has been an ownership change during the year, determine whether the party filing the appeal is the owner as of the lien date, or as of the payment date. In some states, parties other than the owner can protest, such as tenants or mortgage holders.
  3. Make sure that submitted lease information supports the taxpayer's position as to fair market value. Almost every state requires the assessment of property at fair market value. Not every lease represents the market, however, or results in a proper value calculation.
  4. Make sure that all encumbrances, deed covenants and restrictions, environmental contamination or other impairments are considered in the fair market value determination. Any factor may be considered in determining fair market value, so consider the impact of the state of the property's title, such as easements, conditions and restrictions. Did the assessor compare the asset to similar properties, or to real estate with more profitable uses than those allowed on the taxpayer's property?

These steps enhance your chances for a successful appeal.

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

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Easing the Stress of Distressed Properties

"By being informed, vigilant and flexible, owners can make their taxes more manageable."

By Linda Terrill, Esq. - as published by Real Estate Forum - April 2010

Whether a distressed property is underwater, held by a lender or somewhere in the bankruptcy process, it is important to be aggressive about lowering holding costs. Other than debt service, a property's largest expense is likely the property tax bill, and the right approach can help to rein in that tax burden.

It is never too early to start the process of whittling down a tax assessment. Confer with your tax counsel and visit the county assessor prior to the values being mailed out. Learn all the appeal deadlines.

Advise your tenants of efforts to get the taxes reduced and seek permission to disclose any helpful information such as declining sales per square foot, occupancy costs and changes in lease terms. Disclose to the assessor all lease modifications and rent concessions. Let them know if any tenants are significantly behind in rent payments. Disclose any discussions with your lender about adjusting the repayment terms of your mortgage.

Don't be fooled by a valuation notice showing a decline in value. Lower values may not translate into lower taxes. Plan to have your property appraised by an expert, and interview several appraisers before selecting one for the job.

Keep in mind that local governments are struggling financially. Dramatic drops in real estate values, coupled with little or no new construction have contracted tax bases everywhere.

Think creatively and offer to work with the assessor to reach a mutually agreeable arrangement. That could mean offering to take any refund due as a credit forward. See if the county would agree to less of a reduction in the current year in exchange for a more significant reduction in 2011. If possible, convince the assessor to split the cost of hiring an independent appraiser and agree to accept the conclusion of value.

Beyond the preceding owner strategies, lenders that have taken ownership of a property should consider a few additional measures. Have tax counsel review the portfolio to identify which valuations should be appealed. Remember the list price may become the market value, so be realistic in pricing the property. Extend transparency to potential buyers, disclosing all efforts to get the tax load reduced. Should the property sell while awaiting an appeal hearing, the sales price may form the basis of a settlement.

Bankruptcy proceedings introduce additional opportunities to slash taxes. If the property is involved in a bankruptcy, the taxpayer can initiate litigation to reduce taxes. In some cases, delinquent taxes can be reduced, and normal appeal deadlines may not apply. In any case, be prepared with an appraisal.

By being informed, vigilant and flexible, owners can make their taxes more manageable. And make the effort to appeal: Remember that market values may fall further before they turn around.

TerrillPhoto90Linda Terrill is a partner in the Leawood, Kansas. law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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The Appeal of Tax Appeals

"If there is one saving grace to this downturn, it's that hotel owners can reap big savings by combating their property taxes."

Interview with APTC Members, by Maria Wood - as published by Hotels Interactive - April 2010

The April 15 deadline for filing tax returns has passed. But for savvy hotel owners, an in-depth review—or possibly an appeal—of their property taxes could net a big refund.

As the lodging sector continues to bleed cash, more and more owners are pursuing property tax appeals to lessen what is typically one of a hotel's largest expense items. Yet while the reward in terms of a reduction can be great, the process is not easy, especially with many jurisdictions fighting to hang onto every last dollar of tax revenue during a lingering recession.

Hotel Interactive spoke to a trio of members of the American Property Tax Counsel (APTC), a national affiliation of attorneys that specialize in property tax appeals. All agree they are seeing more hotel owners fighting their property tax assessments.

"You are seeing significant drops in RevPAR, ADR and all the metrics that hoteliers look at," relates Mark S. Hutcheson, a partner at Popp, Gray & Hutcheson L.L.P. in Austin, TX. "That, combined with assessing communities seeking to maintain their tax base, means you are necessarily going to come to a head."

No income-producing property sector has escaped unscathed from the economic maelstrom. But hotels may have been hit hardest and therefore, owners are battling more aggressively now.

"What we are finding is that more hotel properties are actually litigating their values now than in the past," Hutcheson says. "The reason why is because hotels—of all the different property types—have probably experienced the greatest decline in value, which is directly related to their drops in revenue."

In fact, Fitch Ratings predicts that hotel property values may recede as much as 50% from their peak in 2007.

But just how do you value a hotel in a flat or declining market? The historical measurement of comparable property sales, which gives a snapshot of current cap rates, is of little value when few hotels are being sold these days. And to look back at sales completed at the height of the market distorts the present value of a lodging asset.

According to the APTC attorneys, there are myriad methods to value a hotel in a stagnant market, and they typically revolve around the all-important issue of what is an appropriate cap rate for a specific hotel in today's marketplace.

Stewart L. Mandell, a partner at Honigman Miller Schwartz and Cohn, L.L.P. in Detroit, says that he has used what is known as the income approach with great success in resolving valuation disputes between a taxpayer and a taxing authority.

According to Mandell, among the tools that use income and cash flows to determine a property's value are the direct capitalization and discounted cash flow methods.

In the direct capitalization method, a hotel's value is calculated by dividing the property's net operating income by an appropriate capitalization rate. In a discounted cash flow model, the net cash flow for each year during a given period is determined. Then, Mandell explains, the present value of each year's cash flow is added along with the current value of the property at the end of the period.

One point of contention between taxpayer and taxing jurisdiction is what revenue stream to use when valuing a property. According to Hutcheson, tax assessors may argue that 2009's poor showing was an aberration and that a property's stabilized income should be greater, more in the range of 2000-08 levels.

Conversely, taxpayers maintain that market conditions have changed dramatically for hotels and 2009 may end up being more of the norm than the peaks experienced in 2007 and 2008, Hutcheson says.

Due to the lack of meaningful sale transactions, Hutcheson's firm has recently applied the band of investment approach for determining cap rate. This formula usually yields hotel cap rates in the 10 to 12 percent range.

In that methodology, several factors are considered, such as the cost of debt and equity as well as what current loan-to-value ratios look like. However, Hutcheson points out that one of the disadvantages to the band of investment approach is the lack of market data for the equity dividend rate, or the return an investor would require on a down payment after debt services.

At the heart of that equation is whether a buyer thinks there is upside potential in a prospective acquisition.

"If, for example, the investor looks at a trailing 12-month income stream and thinks the property is going to do significantly better, then you'll end having a lower cap rate," Hutcheson says. "The same is true if the assessor for 2009 were looking at a trailing 12-month income stream over the last 12 months of 2008. There would probably be downside potential in that cap rate, because going forward there was an expected decline.

"What most taxpayers are having struggles with now is how to develop a cap rate when there aren't any transactions, when the surveys [of cap rates] have very large spreads between buyers and sellers and where it's very difficult to relate that cap rate to whether there is upside or downside potential in the income stream," Hutcheson continues.

As if that weren't enough to make valuing a hotel in today's environment more of a hair-pulling exercise, there is also the question of how to separate the worth of the tangible and intangible personal property from the actual value of the bricks and mortar.

Tangible and intangible personal property includes everything from a liquor license and the furnishings in a hotel to the estimated value of a management contract and brand affiliation.

"In some states, such as Michigan, personal property is taxed, so there is a calculation that the assessor comes up with in terms of valuing the personal property," Mandell says. "That one, at least in Michigan, can be pretty easily agreed upon by the parties. But sometimes in those valuation issues, the analysis needs to be pretty sophisticated to give you some confidence that it's given you a number in the ballpark."

In a down market, the issue of how to assess the business value of those tangible and intangible assets becomes particularly thorny, Hutchenson says. "The taxing jurisdictions will seek to allocate as much of the overall value as possible to the taxable value," he says. "Of course, the taxpayers or the hoteliers will seek to allocate [out] as much as possible to mitigate their tax liability."

In many instances, assessors use a cost approach to valuation by calculating the cost to build new and deducting physical depreciation, according to Mandell. A proper cost approach, however, requires also deducting any functional obsolescence (room types that are no longer desirable) and external obsolescence caused by the current economic downturn.

"Especially in a recessionary period, it's the economic obsolescence that causes so much of the loss in value," Mandell explains. "If you look across the board at all sorts of properties, it's the economy that has driven the property values lower. Here in Michigan, we have such properties under appeal, virtually brand new hotels. They are built exactly to be what the market wants today, yet they're performing poorly because of the economy. So if an assessor values that property based on what it costs, less a little bit of physical depreciation, that property is going to be egregiously overvalued."

So what can an owner do if he feels his property, as Mandell states, is egregiously overvalued? What can he expect to recoup if he decides to pursue an appeal? And how much of a pushback will he encounter from a taxing authority?

Much depends on the particular jurisdiction. Some will battle tooth and nail for every last dollar of tax revenue; others may be more open to negotiation.

"You are finding more taxing authorities challenging the appraisals to their assessments," Hutcheson says. "But by and large, most jurisdictions recognize that hotels have been hit hard. The issue is not that there is a decline, the issue is what the magnitude of that decline is. Most assessors and taxing units are obviously trying to hedge as much as possible to maintain their tax base. The issue boils down to negotiation."

For example, Hutcheson can present a cap rate of 11.5 percent using the band of investment approach based on a trailing 12-month income stream for a particular property. Meanwhile, the assessor might counter with a 9.5 percent cap rate, but based on a forecast.

Ultimately, settling on an agreeable value is more important than whatever method is used, Hutcheson finds.

Likewise, Kiernan Jennings, a partner with Siegel Siegel Johnson & Jennings Co. L.P.A. in Cleveland, says that a less adversarial stance may work best and get the taxpayer a resolution sooner. It's not uncommon for tax appeals to drag on for several years.

"When the taxing authorities are looking to hold onto their money longer because of their own circumstances, you need to find win/win solutions to the real estate tax problem," he says. "We've found that by working with the taxing jurisdiction we can come to a settlement that helps both the district and the taxpayer. You need to be creative and understand where [the taxing agencies] are coming from and vice versa. That speeds up the process."

In some instances, the taxing district may be willing to accept a lower assessment for tax purposes in future years in exchange for no break in payments due to a tax dispute. "By reducing the assessment for future years and possibly taking a credit on the reduction for the past year, you can help the tax district even out their budgetary constraints due to overall falling assessments," Jennings says. "If there is a wave of tax reductions coming, and you are able to get to a resolution sooner, you are actually helping the tax district."

Jennings estimates that a successful tax appeal can cut an owner's tax liability by at third of what it was several years earlier.

"If values have fallen by 30 percent and you were properly assessed previously, then you could expect you could reduce your taxes by about 30 percent," he maintains.

Mandell agrees owners can reap a hefty savings on their tax bills, but the exact percentage is hard to pin down.

"The vast majority of hotels that we are seeing need to be appealed because they are excessively taxed," he says. "But whether [the reduction] is 10, 20, 30 or even 50 percent, which we sometimes do see, it varies depending upon the profile of the property and in particular, the income."

Many hotel owners routinely review their property assessments. But all can benefit from hiring an appraiser or property tax attorney, even if the upfront cost is great. "In many jurisdictions, once you establish a value that value carries forward for future years," Hutcheson says. "So it could be the investment that keeps on giving if properly made now. And this is probably the best time to have a thorough, detailed analysis done simply because values are likely to be as low now as they have ever been, or at least over the past five or six years."

Since property tax laws vary from state to state, Mandell advises hiring an attorney that practices in the state where the hotel is located. Moreover, that attorney should be a skilled and experienced trial lawyer.

Equally as important as a skilled lawyer, an owner should find an appraiser who truly understands lodging real estate, Hutcheson adds.

But whatever assessment method is used or whomever the hotel owner hires as his attorney, undertaking, or at least considering, a tax appeal is simply good business.

"Especially these days, when everybody is very focused on the bottom line, it's imperative that people look at their property taxes," Mandell says. "To not appeal excessive property taxation is to throw money away. There is no difference. If you have a property that is excessively valued and excessively taxed, if a property owner doesn't appeal that, it's the same as throwing money away."



Stewart L. Mandell is a partner with the Detroit law firm of Honigman Miller Schwartz and Cohn LLP, Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

J. Kieran Jennings is a partner with the Clevland law firm of Siegel Siegel Johnson & Jennings, Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Mark S. Hutcheson is a partner with the Austin law firm of Popp, Gray & Hutcheson, Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it..

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How To Contest Clawbacks Provisions

"Companies out of compliance on tax abatement agreements can still make a compelling case for relief."

By Stephen Paul, Esq. & Fenton Strickland, Esq. - as published by National Real Estate Investor, January/February 2010

The race among states and cities to lure new companies and retain existing businesses has been furious, featuring aggressive offerings of significant tax allowances in exchange for promises of jobs and capital investment.

But taxpayers must be cautious. When the government lends a bigger hand that hand can claw back realized tax savings.

Deals involving property tax abatement usually include a promise by a business to invest certain sums of money in its properties and create and/or retain a certain number of jobs.

In return, the local taxing authority exempts all or a portion of the property taxes a business otherwise would have to pay on the new development over some specific period of time.

Governments often insist that abatement contracts permit them to recoup tax savings if a company falls short of its investment and/or hiring aims. Generally referred to as "clawbacks," these provisions in tax abatement agreements are becoming more commonplace and governments are keen on enforcing them.

Many current beneficiaries of tax abatements operate under agreements that originated prior to the recession that began in December 2007, when business expansion appeared more attainable.

However, new economic challenges have frustrated expansion objectives. And with governments mired in search of additional revenue, the potential for clawback appears greater.

Recognizing that clawback is a risk commensurate with the tax benefit, tax abatement recipients facing the prospect of clawback still have the possibility of avoiding the risk.

Escaping clawbacks

When a company enters into an abatement agreement with a municipality, it should be fully aware of the ramifications if the investment and/or hiring fall short of promised levels.

Agreements often allow taxing authorities to cancel abatements when companies fall out of compliance and may also require reimbursement of past tax savings in proportion to investment or employment shortfalls.

In other cases, noncompliance could mean recoupment by the tax collector of all tax abatement savings to date. Total recoupment of tax savings is illustrated in the chart above, where the recipient of a long-term abatement complied with job requirements for seven years but fell out of compliance in year eight, violating the abatement agreement.

When a clawback provision exists, the owner should examine the language to see if it applies to the circumstances of his property. Some clawback language might excuse shortcomings because of factors beyond the property owner's control.

This amorphous test often is tied to an unforeseeable reduction in demand for the company's product or services, or something similar. Because of the recent economic downturn, much litigation can be expected regarding these issues.

Contest_Clawbacks_graph_bigIn some situations, a taxpayer should consider renegotiating the abatement agreement. A business can be in a surprisingly strong negotiating position, especially in instances where it can boast contributions to the local economy.

Confronted with the possibility of losing such a business to another municipality, local officials might be willing to work out a deal.

Where negotiation fails, a business can consider fighting the government's clawback.

Special attention should be paid to the applicable statutes. The local government's clawback effort might run afoul of statutory abatement cancellation and reimbursement schemes to such a degree that the provision should be nullified.

When a business has complied with abatement terms before the shortfall, a court might hesitate to award the government a windfall recoupment of all tax abatement savings.

Every case is unique, but the value of the abatement makes fighting the clawback worthwhile.



Stephen Paul is a partner in the Indianapolis law firm of Baker & Daniels, the Indiana member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..


Fenton Strickland can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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