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Property Tax Resources

Feb
25

Tax Relief for LIHTC Properties

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

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

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

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

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

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

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

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

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

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

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

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

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

KJennings90J. Kieran Jennings is a partner in the law firm of Siegel Siegel Johnson & Jennings, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Feb
18

Tax Law Changes Threaten California Property Owners

"In recent years, state and local governments have become more aggressive in their efforts to identify ownership changes in entities holding real property..."

By Cris K. O'Neall, Esq., as published by National Real Estate Investor City Reviews, February 2011

As California struggles through its economic downturn, local tax authorities are looking for ways to increase tax revenues. And property owners may not be aware of the tough penalties they could face if they fail to quickly report changes in ownership.

Most California property owners know that changes in ownership result in property tax reassessment under Proposition 13, and such reassessments are typically triggered when a transfer deed is recorded.

What may surprise some taxpayers is that changing the ownership of a legal entity that holds the real property may also trigger a reassessment. This occurs even if the property-owning entity, such as a corporation, remains the recorded owner of the underlying real property.

Legal entity transfers have long been a concern for California tax authorities. Real property transfers caused by a change in an entity's ownership are not documented by a recorded deed, which is the normal manner in which tax assessors learn of property ownership changes. In this circumstance, tax authorities must look to state franchise tax returns and business property filings to discover ownership changes affecting real property.

In recent years, state and local governments have become more aggressive in their efforts to identify ownership changes in entities holding real property.

Previously, it was up to the tax authorities to identify those changes and provide taxpayers with the appropriate reporting forms. Last year, tax authorities upped the ante considerably — giving property owners the job of reporting legal entity transfers within strict deadlines and removing the tardy reporting "grace" period.

Delays in reporting can trigger consequences

Now owners who fail to report transfers quickly are subject to significant penalties on all of their California properties, even if only one property changed ownership as a result of a legal entity transfer.

Additionally, the revised law requires reporting of ownership changes even in cases where the transfer falls under a change of ownership exception. Those exceptions include transfers of less than a controlling interest in a legal entity, and transfers in which the type of entity changes, say from a corporation to a limited partnership, but the owners and their ownership percentages remain the same.

In effect, the revised law penalizes the failure to file the requisite reporting form, regardless of whether there has been a change in ownership of the underlying real property.

More tax liability?

If the above did not already cause enough headaches, local tax authorities have added to property owners' burdens by attempting to expand another California tax — the documentary transfer tax (DTT) — to include legal entity transfers.

Traditionally, the DTT has only been collected upon the recording of a deed or similar instrument transferring a property's ownership. In fact, the DTT is usually understood to be an excise tax on the right to transfer property and use county recorder services.

This view has recently changed as Los Angeles County and other local jurisdictions seek to bring legal entity transfers where no document is recorded within the purview of the transfer tax law. They have been aided in their discovery of such transfers by statutory changes which give county recorders access to the records of county assessors' offices.

As a result, county recorders' offices now have access to legal entity transfer information which was once only available to county assessors. Armed with this new information, counties and cities are seeking to charge transfer taxes on entity transfers where no deed has been recorded.

Fortunately, property owners can repel attempts by county recorders and city clerks to collect transfer tax. Most counties and cities have ordinances adopting California's statewide statute regulating the issue.

That statute, with one limited exception relating to dissolution of partnerships through a legal entity transfer, only permits collection of DTT when a deed or other instrument is recorded. Property owners confronted with a request for payment of the tax for a legal entity transfer need only point to the local ordinance in order to parry the unlawful attack.

So long as California remains in its economic downturn, the local tax authorities will continue to be vigilant in looking for ways to increase tax revenues. And real property owners would do well to report legal entity transfers promptly to avoid draconian penalties.

Fortunately, efforts are under way to eliminate the harsh effects brought about by the recent changes in legal entity transfer reporting. As for the documentary transfer tax, property owners should only pay that tax on transfers made by a recorded document. And, as with every transfer of real property in California, property owners should consider whether their transfer falls under one of the exceptions to a change in ownership in order to avoid reassessment.

 

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, the California member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Feb
07

Technology Advances - Property Taxes Retreat

"Businesses today have greater difficulty than ever before in predicting future space needs as business requirements and market conditions change rapidly. Federal, state and local laws and regulations, too, have become unpredictable..."

By Terry Gardner, Esq., and Stephen H. Paul, Esq., as published by The Leader, January/February 2011

Technological advances are rapidly altering the way corporations use commercial real estate, and recognizing these fundamental shifts can have a profound effect in efforts to reduce property taxes.

Our world changed at an incredible pace in the last 100 years, and those changes have accelerated in the 21st Century. As one technology enthusiast observed in 1999, "From 1946 until now, if the automobile had been improved as much as the computer has been improved, you'd have a car that would go a million miles an hour and cost a penny!"

There was little telecommuting 10 years ago, when the average cubical size ranged from 50 to 75 square feet and the BlackBerry was the latest fad in a mobile technology industry still in its infancy. Corporate campuses with sprawling Frank Lloyd Wright-style buildings were the norm. Today those edifices of expansive glass, with their inefficient angles and giant atriums, are considered too expensive to maintain and are becoming the exception rather than the rule.

Technology and the commercial real estate boom that ended in 2007 have combined to fuel a dramatic shift in the use of commercial space from the aesthetic to the practical. Companies realize that every dollar saved by a more efficient use of real estate not only makes them more environmentally responsible, but also goes directly to the bottom line.

The New Workplace

At Indianapolis-based health benefits provider WellPoint, more than 6,000 associates work from home, and as with many other businesses, that number is increasing daily. Most of these associates almost never need to come into the office. At least 1.4 million square feet of commercial office space would be required to house these 6,000 associates. Most of the space once occupied by these telecommuters has been or will soon be returned to the landlord.

Today, preferred venues for companies like WellPoint are square or rectangular in shape, utilize a central core and are easy to maintain. More efficient space design and better technology are changing the physical layout and proportions of the workspace itself, as well. Innovations such as flat screen monitors replacing the cumbersome CRT monitors of old have decreased cubicle sizes to as little as 35 square feet, but have driven up parking requirements to five or six spaces per 1,000 square feet of leased space.

In addition to work-at-home programs, other alternative workplace strategies including hoteling, desk sharing, and more have all come of age. Space once used to provide each individual with a large cubicle or enclosed office is rapidly becoming obsolete.

Businesses today have greater difficulty than ever before in predicting future space needs as business requirements and market conditions change rapidly. Federal, state and local laws and regulations, too, have become unpredictable. As a result, lease flexibility is now a fundamental requirement for many tenants. Lease terms are shorter and often come with enhanced termination and contraction options.

The need for less space, evolution of lease terms, and collapse of the capital markets have led to a substantial loss in value for commercial real estate. But for parties responsible for paying property taxes, this dark cloud has a silver lining in the form of a significant opportunity to reduce the assessed value of real estate in most markets.


Economic factors affecting value

A property's value is driven not merely by the inherent qualities of the asset itself, but also by market factors. The Appraisal Institute, the recognized leader worldwide in real estate appraisal education, has identified four predominant and interdependent influences on property values, rooted in fundamental economic principles of supply and demand. Those are utility, scarcity, desire, and effective purchasing power.

Utility and scarcity weigh in on the supply side of the equation as the ability of a property to satisfy users' needs and desires, in context with the anticipated supply of properties relative to demand. Desire and effective purchasing power are on the demand side, and take into account individual wants beyond essential needs, and the market's ability to pay for property. By looking at these four influential factors, it's easy to see how property values have suffered from evolving appetites for office space and from the recent trends in lease terms and the capital markets.

For example, properties with atriums and other large open spaces are expensive to heat, cool, and maintain. Such features provide little utility, and a surplus of these properties exists on the market. Pair that surplus with a decreasing desire in the market for large expanses of unusable space, and the value of these properties declines.

Or, take into account the increasingly strong position tenants command to negotiate favorable contraction and termination provisions in leases. Clearly, this trend is a reflection of both the surplus of space in the market and a general inability or unwillingness to pay a higher price for unusable property or be compelled to accept less favorable terms.


Translating market influences into assessment reductions

In order to understand how these market dynamics translate into reduced property tax assessments, economic factors influencing value should be viewed within the context of the accepted approaches to property value. The predominant methodologies are the cost approach, sales comparison, and income capitalization.

The first of these approaches to value generally focuses on the replacement cost of the improvements, assigning value upon examining the cost of developing similar structures. This value is adjusted to account for the property's age, condition, and usefulness. The latter point is where inefficient designs come into play as elements of functional or economic obsolescence.

Functional obsolescence refers to the loss in utility resulting from factors that would make it difficult to modify the property for a particular use. Building characteristics tending to contribute more to the aesthetic than to the practical enter into this calculation of functional obsolescence. Enormous atriums, indoor gardens, arboreta, and water features, as well as odd angles and unique architecture, often trace to the preferences of a one-time, build-to-suit tenant and detract from the building's usefulness to subsequent tenants.

Most cost approach values are based on replacement cost, or the cost to substitute an asset of similar size and use but with contemporary materials and design. Because an assessment on the basis of replacement cost doesn't contemplate reproduction of an exact replica, unusable space is excluded from the calculation and results in a lower value.

The public's appetite for sprawling improvements that are distinctively designed and aesthetically pleasing has yielded in the last decade to desires for efficiency and simplicity. To the extent that the property owner can show that tastes have changed in the market, these inefficient design characteristics can demonstrate economic obsolescence, which occurs because of factors outside of the property itself and also reduces the property's value.

The sales comparison approach entails an analysis of sales and listings of similar properties to arrive at an assessed value for a property. The comparable sales used in this analysis should be adjusted to account for variances between the comparables and the property being assessed, including (in some states) the terms of leases on the property. If the comparable sales selected involve inefficient designs that have become abundant on the market and for which the market's desire is dwindling, the comparable sale prices should indicate a reduced willingness to pay a high price for such property.

Sales comparison analysis should employ the most recent sales of similar properties. This way, the sales also reflect latest real estate market trends.

For income-producing property, the income capitalization approach will likely reflect the decreased utility of, and demand for, an inefficiently designed building. Under this approach, property value is assessed by capitalizing annual net operating income. Recent lease activity should reveal terms favoring tenants, as well as increased market vacancy, softening rental rates, and tenant preferences for smaller and simpler designs.

In the case of property encumbered by long-term leases, comparable properties with more recent leases may be reliable indicators of the property's current income-producing capability.

Each approach should reveal that technological and market shifts reducing the utility of oversized, inefficient space, as well as the market's desire to pay for such space, have reduced the taxable value of many commercial properties. Technology is changing ever more rapidly in the 21st Century, and taxing jurisdictions should be open to consider such evidence for its impact on reducing values.

PaulPhoto90_BW Stephen H. Paul is a partner in the Indianapolis law firm of Baker & Daniels LLP, 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..
The authors thank Fenton D. Strickland of Baker & Daniels for his contribution to this article.
TGardnerTerry Gardner is Corporate Real Estate Director for WellPoint Inc., an industry-leading healthcare benefits provider headquartered in Indianapolis, Ind.
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Jan
27

Start That Property Tax Review Today

"First compare your 2010 value to what you think the fair market value should be."

By Raymond Gray, Esq., as published by Commercial Property Executive Blog - January 2011

It may seem odd to be thinking about commercial property tax appeals in January. Yet now is the best time to begin, particularly in Texas, which has an annual reassessment cycle and where the system works quickly and rewards those who prepare early. No matter where you are, however, advance preparation will usually pay off.

First compare your 2010 value to what you think the fair market value should be. This will give you an idea of what to expect for 2011. Review appraisal district records and determine whether assessors are using the income, cost, or sales comparison approach to value.

Follow these key points to keep your review on target.

Seven Simple Steps:

  1. Know the deadlines for administrative appeals, litigation and payment of taxes.
  2. Verify that the taxing records for your property are correct (square footage, net rentable, classification, zoning, etc.)
  3. Diligently reconstruct the income and expense statement to remove non-realty income. This will insure that non-taxable intangible assets, such as business value, are not part of your taxable value.
  4. Do not assume that the purchase price is equal to property tax value, whether for a new acquisition, or when reviewing the assessor's comparable sales.
  5. Determine whether your property is being taxed fairly in comparison to the competition. Newly purchased or recently constructed properties often are taxed at a higher value than the competition.
  6. Consider whether your annual operating statement reflects the market as of the valuation date. Most states value property as of a certain date.
  7. Consistently review the performance of your property tax consultant.

The sooner this work is completed the more options you will have available. Start now and you have the time to hire the right tax counsel — and they'll have the time to do a great job.

RaymondGray154x231pxRGray Raymond Gray is a partner with the Austin, Texas, law firm of Popp, Gray & Hutcheson L.L.P., which focuses on property tax disputes and is the Texas member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jan
19

Finding Relief - How Co-Tenancy Clauses Can Be a Property Tax Benefit

"It is incumbent upon the taxpayer, tax counsel and appraisers to show local assessors how these clauses affect the real estate's valuation..."

By Linda Terrill, Esq., as published by Commercial Property Executive, January 2011

Co-tenancy clauses have become a two-edged sword for commercial property owners. Originally a tool that landlords used to obtain a multi-year lease commitment, co-tenancy clauses typically reduce a tenant's rent if a key tenant or tenants leave or if overall occupancy drops below a certain level. Some cotenancy clauses permit tenants to terminate a lease without penalty.

Today, a co-tenancy clause may detract from the property's value and even compound vacancy problems. Retail stores have been closing at unprecedented rates due to bankruptcies or underperformance. Many retailers have put new leases or construction on hold. In the office market, vacancy rates continue to set new highs and absorption rates are more frequently described as "negative."

For many of these properties, the terms of the lease, rather than the income stream, may define the property's value. Since co-tenancy clauses have the potential to shorten the lease term or otherwise reduce the income stream, co-tenancy should be central to a property tax appeal.

It is incumbent upon the taxpayer, tax counsel and appraisers to show local assessors how these clauses affect the real estate's valuation.

Tenets of Co-tenancy
Co-tenancy clauses are most common in retail properties but have become more prevalent in office buildings. Most fall into one of three timeframes: The first is during the letter of intent phase, during the lease-up phase of a retail project, when a potential tenant's plan to occupy a space is affirmed. The second period is after the lease has been signed but prior to move-in; the third spans the duration of the lease term. Most real estate tax appeals will involve fully developed properties and, therefore, co-tenancy agreements associated with the lease term. Landlords and tenants have negotiated co-tenancy clauses for a number of reasons, and the more clout the tenant has, the more likely the lease will have co-tenancy provisions.

Yet, it has also become more commonplace for smaller retail tenants to negotiate such provisions, particularly if they selected the leased space in order to be in the same center as another tenant that provides foot traffic and has the potential to drive up sales. Smaller office tenants, by contrast, may have a business relationship with the flagship tenant. In those cases, the smaller business may negotiate provisions to reduce rent or terminate the lease early if the flagship tenant quits doing business at the location.

Boost to Tax Appeals
How can a co-tenancy clause assist an owner in a tax appeal? Consider the following example: A significant national retailer occupies 40 percent of a lifestyle shopping center. The lease has one year left, with three five-year renewal options.

The center is fully leased, and all of the other tenants have co-tenancy lease clauses. Some enable the tenant to terminate the lease if the national retailer ceases to do business at that location; others give tenants the right to terminate the lease if vacancy exceeds 50 percent. Alternatively, the clauses adjust tenant rent from a fixed rate to a percentage of sales in the event that the national retailer closes or vacancy crosses the 50 percent mark.

In measuring the effect on value, the first step is to determine whether the national tenant is likely to renew. If the tenant does not want to disclose their business plan for the location, demographics may suggest what that plan entails. For example, are there rising unemployment, rising home foreclosures or declining incomes in the market area? How are the tenant's sales figures? If sales and foot traffic are down, research the national market to see if this retailer has any announced plans to shutter underperforming locations. This information is crucial to making a case based upon the continued viability of the lease.

In this example, if the national tenant were to leave, the effect of the co-tenancy clauses could domino and the center could go from 100 percent occupied to dark in short order. As each tenant leaves, more of the responsibility to cover operating expenses and property taxes shifts to the owner. In some cases, the income stream will not be sufficient to cover debt service.

The best way to demonstrate to the assessor what all this means is to have the property appraised by a competent, experienced appraiser. At a minimum, the taxpayer's counsel should provide the assessor with an extensive lease abstract for each tenant. That abstract should include not only the terms of the lease and the rents to be received but also whether or not there are any lease provisions that could shorten the lease terms, reduce the rental rate and/or otherwise shift previously reimbursed expenses to the property owner. Any of those eventualities will reduce the value of the property.

TerrillPhoto90Linda Terrill is a partner in the Leawood, Kan., 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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Jan
07

Tax Data Reveals Plunge in Atlanta Commercial Property Values

"As of November 2010, 99.1% of appeals from the 2008 tax year had been resolved. For the 2009 tax year, 79.1% of appeals had reached a resolution; while only 16.4% of the cases from the 2010 tax year had been resolved...."

By Lisa Stuckey, Esq., as published by National Real Estate Investor-Online/City Reviews, January 2011

As in many U.S. markets, most property owners in Atlanta believe that commercial real estate values in the local market have been declining, and that the declining trend will continue. What is less clear to taxpayers and taxing entities is the severity of value losses and whether property taxes have come down to a corresponding degree.

An analysis of Atlanta-area commercial property valuations and property tax appeals in years past was conducted to determine if, indeed, the perceived drop in property values has occurred, and if so, what effect that drop had on property taxes. Possible new trends can also be extrapolated from the data.

LStuckey_graph

Measuring loss: Which yardstick?
A review of commercial property sales tracked by CoStar Group confirms that asset values have declined since 2008. Yet the degree of decline varies depending on whether the data are broken down by the number of properties or by square foot.

On a per-unit basis, sale prices for multifamily, retail, office, industrial, healthcare, flex, hospitality and specialty properties in Atlanta-area zip codes fell 25% from the beginning of 2008 through the start of 2010. Looking at those same property types on a per square foot basis, it appears that values fell 15%. Taking those results together, we can say that commercial values have decreased by 15% to 25%, or about 20% on average, from Jan. 1, 2008 to Jan. 1, 2010.

The pool of commercial tax parcels in the city of Atlanta has remained fairly constant over the past three years. The number of commercial parcels in the city was 16,347 for tax year 2008, 16,280 for tax year 2009, and 16,184 for tax year 2010.

Appeals fluctuate
In 2008, 5,069 property owners in Atlanta filed tax appeals, representing approximately 31% of all commercial properties. For tax year 2009, the number of appeals filed by taxpayers fell to 2,087, or approximately 13% of all commercial properties; the number of appeals increased to 3,467 for tax year 2010, representing approximately 21% of the commercial properties.

One possible and likely explanation for the marked decrease in the number of appeals filed from tax year 2008 to tax year 2009 is that Fulton County mailed assessment notices for the revaluation of all commercial properties for tax year 2008. That gave city of Atlanta taxpayers the opportunity to file appeals from the notices. However, for tax year 2009, the County did not issue widespread assessment notices. Only taxpayers who received notices were informed enough to file returns of their opinion of value with the tax assessors and, thereby, were assured of receiving assessment notices from which to appeal.

As of November 2010, 99.1% of appeals from the 2008 tax year had been resolved. For the 2009 tax year, 79.1% of appeals had reached a resolution; while only 16.4% of the cases from the 2010 tax year had been resolved.

In cases from the 2008 tax year, resulting valuations averaged 30% less value than the original assessments. In the 2009 appeals, the average reduction in value was 25%. The few cases resolved from the 2010 tax year brought down the original assessments by an average of 29%.

Clearly then, Atlanta property values as well as Atlanta property taxes have dropped. On a weighted average basis across the three years, assessments reflect a reduction of approximately 30%.

In spite of the inherent limitations of analysis with many appeals still waiting for resolution, the available data from concluded appeals shows a clear trend: A significant number of commercial property owners in the Atlanta area have achieved substantial valuation reductions in the past three years.

New rules kick in
Under a change to state law effective in tax year 2011, which began on January 1, county taxing authorities will send notices of assessed property values to all Georgia taxpayers for each tax year. With this change to the law, property owners will no longer be required to file a return of their opinion of their property value with the county tax assessor in order to receive an assessment notice from which to appeal.

Based on an examination of the past years' data, it appears that approximately 16,000 assessment notices will be mailed to commercial property owners in Atlanta. Judging from recent trends, anywhere from 15% to 30% of those assessments will be appealed.

If the current trend of reductions in property values continues, then it is also to be expected that the filed appeals will result in valuation decreases for tax year 2011 as well.

LStuckey_web90Lisa Stuckey is a partner in the Atlanta, GA law firm of Ragsdale, Beals, Seigler, Patterson & Gray, the Georgia 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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Dec
08

Assessors Seek New Ways to Tax Business Income

"Property owners can take steps to protect themselves from assessments that include business income by carefully reviewing the form of the income information they provide to the assessor..."

By Robert L. Gordon, Esq., as published by Commercial Property Executive, December 2010

A recurring challenge to prevent over-assessment of commercial property is to separate true real estate value from business value. True real estate value is assessable for property taxation, while business value is not.

Commercial property owners who conduct businesses on their property must be vigilant to ensure that the assessor is not capturing the value of their business operations in the guise of assessing their real estate. This can occur if the assessor assesses the property under an income approach and includes the owner's business income in his or her computations, claiming that this income is attributable to the real estate rather than to the owner's independent business operation.

The objective for property owners is to ensure that income solely attributable to the owner's business is excluded from real estate income. In general, courts are more likely to allow assessors to treat business income as real estate income where it can be demonstrated that the land itself, rather than the business skill of the owner, is primarily generating the income.

Property owners can take steps to protect themselves from assessments that include business income by carefully reviewing the form of the income information they provide to the assessor. Owners should structure their operating statements so that all income sources not directly pertaining to the real estate are reported and categorized separately.

Taking this step makes it easier to argue to the assessor that the separately reported income should not be included in the real estate assessment. By failing to categorize income properly, owners allow their real estate income and other income to be blurred together in a single entry in their operating statement. This needlessly gives the assessor an opportunity to point to the operating statement as proof that the other income is intertwined with the real estate income and is thus assessable.

Gordon_rRobert L. Gordon is a partner with Michael Best & Friedrich LLP in Milwaukee, where he specializes in federal, state and local tax litigation. Michael Best & Friedrich is the Wisconsin 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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Nov
20

Why Las Vegas Property Tax Assessments Will Exceed Market Value

"Some analysts suggest the volume of troubled commercial loans could create a wave of foreclosures similar to those that swept through the residential market..."

By Paul D. Bancroft, Esq., National Real Estate Investor, November 2010

The odds are stacked against property owners in Las Vegas, where the commercial real estate market continues to suffer from a severe downturn. With nearly $17.2 billion in distressed assets across all commercial property types, Las Vegas ranks No. 1 among U.S. metros by proportion of distress to total inventory in the local market, according to New York-based Real Capital Analytics.

Some analysts suggest the volume of troubled commercial loans could create a wave of foreclosures similar to those that swept through the residential market, a specter that is eroding confidence in commercial real estate. Meanwhile, the pool of available buyers has shrunk and the return on investment they require has increased, depressing sale prices.

Why_LasVegas_graph2

Vacancy rates are another metric that illustrates the severity of the downturn. The vacancy rate for all classes of office space in Las Vegas has slowed its rate of increase, but is projected to top out at a staggering 24.8% by the end of this year, according to Encino, Calif.-based real estate services firm Marcus & Millichap. By contrast, the firm estimates that the current, national vacancy rate for all classes of office is 17.7%.

Applied Analysis, a research consulting firm based in Las Vegas, reports that vacancy rates have risen for the past four years in every subsector of commercial real estate, from retail to industrial to office. The average price per acre of developable commercial land in Clark County has fallen from a peak of $939,000 at the end of 2007 to $155,000 today, a drop of more than 83%, according to Applied Analysis.

Brian Gordon, a principal at the research company, draws a direct correlation between the weak demand for space and the depressed value of commercial properties.

The cumulative effect of these trends is clear: The market value of commercial property has dramatically declined. The question that remains for property owners is whether the taxable values assessors assign to Las Vegas real estate will reflect the decline in market value. Unfortunately for taxpayers, the short answer is no.

Data lag skews values

During any period of changing real estate values, Nevada's taxable property assessments tend to fall out of step with the current market. The tendency to reflect outdated property values doesn't mean the staff of the assessor's office isn't keeping up with the latest newspaper headlines. Rather, it's because assessors are required to follow a methodology that doesn't reflect recent shifts in market value.

In Nevada, the assessor is required to adhere to a valuation methodology that, in the current market, is biased toward a value that will exceed market value. To begin with, the sales data assessors use to establish pricing is simply outdated.

Nevada tax law requires assessors to value the land and improvement components of an improved parcel separately. The land component is valued by comparing it to the sale of vacant land. The comparable transactions are drawn from sales that occurred six months to three years prior to the valuation date, a point in time when real estate was selling for higher prices than is the case today.

In a market in which values are rising, the reliance on "old" sales data would tend to result in a taxable value that is below market value. In a declining market, however, the reliance on old sales will tend to result in a taxable land value that exceeds market value.

A different problem derives from assessors' methodology for valuing the improvement component of a property. In Nevada, improvements are valued according to replacement cost, or what it would cost to build a duplicate asset today, less depreciation.

Replacement cost is established from cost manuals published by Los Angeles-based Marshall & Swift, which monitors materials pricing for the commercial and residential real estate industries.

Reliance on replacement cost may be relevant in a market that is not overbuilt. But in a market with excess inventory, the replacement cost of a building will not reflect economic obsolescence that makes the space less marketable to tenants, and therefore less valuable.

The appraisers in the Clark County Assessor's office currently are valuing properties for the tax year that begins on July 1, 2011 and runs to June 30, 2012. More likely than not, the methodology they are required to follow will result in taxable values that exceed market value.

If that occurs, the assessor is required to reduce taxable value to market value. As a practical matter, however, it is unlikely the reduction to market value will be made because the assessor's office simply does not have the time or property-specific information on vacancy, rent and expenses to determine the market value of all commercial properties. That limitation puts the onus on the property owner. Taxpayers will receive a notice of the taxable value assigned to their property for tax year 2011-2012 in early December. Even if that taxable value is less than the value it was assigned in the preceding tax year, the bias in the methodology employed by the assessor is likely to have resulted in a taxable value that still exceeds market value.

Owners must ask themselves what a snapshot of their property's market value would be on Jan. 1, 2011. If the market trends previously described continue, any reasonable level of analysis is likely to support a market value for most commercial properties that is less than the taxable value determined by the assessor.

Consequently, owners of most commercial properties in Las Vegas will have good reason to appeal to the county board of equalization for an adjustment this year. The deadline for filing an appeal is Jan. 18, 2011.

PBancroft150Paul Bancroft is a managing partner in the Tucson, AZ law firm of Bancroft, Susa & Galloway, the Nevada and Arizona 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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Oct
23

Lack of Data Complicates Property Valuation

"Consider market developments after the valuation date. Even though an appraiser or the assessor generally ignores after-occurring transactions, an equalization board or court may find the information useful..."

By Elliott B. Pollack, as published by Commercial Property Executive Blog - October 2010

As municipalities reassess real estate within their jurisdictions, those counties and cities which are required to rely upon market value, as opposed to formulaic or historic cost based approaches, have a major problem. The lack of transactions in the late 2007-late 2009 time frame means that appraisers' jobs will be far more complicated.

How to estimate market rent when there are a few tenants signing leases? Is there a way to determine market-based capitalization rates when there are few sales from which rates can be derived? How to calculate band of investment capitalization rates when mortgage financing is so difficult to come by?

When assessors ask themselves these sorts of questions, their reply usually sounds something like this: "I have a job to do. Even in the absence of data, I must determine market value as of my jurisdiction's assessment date. I will do the best job I can in the circumstances."

This means that the ad valorem tax valuation of your commercial property today is difficult to calculate and is likely to be too high.

Take the time to review the accuracy of your assessment with competent appraisal and property tax counsel. If you are fortunate enough to own a trophy asset or a property in a major market, go to internet data sources for a preliminary analysis.

Consider market developments after the valuation date. Even though an appraiser or the assessor generally ignores after-occurring transactions, an equalization board or court may find the information useful.

Look at the values of comparable properties with an eye to determining the equity of your assessment. Even if a valuation appeal isn't possible, an equalization attack may be an option. Most importantly, talk with brokers and lenders. They may hold valuable information about failed financing applications, busted transactions and lease negotiations which will be of great assistance in weighing the approximate accuracy of the assessor's value.

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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Oct
15

Mistaken Reform

How Property Tax Caps Increase Your Tax Burden

"Attacks on the property tax continue. Yet as the table indicates, during the past five years, property taxes have risen no more rapidly than the average of the three tax areas.."

By Mark S. Hutcheson, Esq., as published by Commercial Property Executive, October 2010

Complaints about the burden of ever increasing property taxes are a common refrain. Many property tax reform efforts miss the mark, however, and set the stage for greater inequity from misguided attempts to cap valuations.

In New York state, which has seen strong debate over capping property tax growth, the Senate passed a provision to cap property taxes at 4 percent, while several gubernatorial candidates are touting a 2 percent limit. New Jersey recently passed a 2 percent cap on property tax increases. Voters in Colorado, Louisiana and Indiana will consider tax caps or rollbacks this November.

Attacks on the property tax continue. Yet as the table indicates, during the past five years, property taxes have risen no more rapidly than the average of the three tax areas. (Property tax represents 30 percent of all taxes, sales tax 33 percent and personal income tax 22 percent).

Mistaken_Reform_graph

While one of the most popular efforts is to limit or cap increases in taxable property values, this argument diverts attention from more meaningful budget and spending discussions. Texas, for example, has experienced several unsuccessful attempts to restrain value increases as a means of limiting property tax growth.

A report published by the Lincoln Institute of Land Policy in 2008, titled "Property Tax Assessment Limits: Lessons from Thirty Years of Experience," concluded that, "assessment limits are often put forward as a means of combating two problems popularly associated with rapidly appreciating property values: increasing tax bills and the redistribution of tax burdens.

In fact, 30 years of experience suggests that these limits are among the least effective, least equitable and least efficient strategies available for providing tax relief."

Equality of taxation is one of the foundations of a tax system, and sound public policy recognizes that valuation caps are an ineffective limitation on property taxes. The reasons for this are numerous.

Like all artificial limits, a cap creates grossly unequal values within and among different classes of properties. An appraisal cap creates disparities between a property valued at market and another valued with a cap, so that two identical properties are treated unequally. A cap placed on residential shifts the tax burden from residential to commercial property. If both residential and commercial are capped, there will be a long-term shift from commercial to residential, because homes change hands more frequently.

Caps create unfair competitive advantages as well. Properties that lose a value cap—including newly built, purchased or remodeled assets—will be at an economic disadvantage. On the commercial front, where retail and office leasing is highly competitive, new owners that do not benefit from a cap will likely be forced to reduce their profit rather than quote a higher rental rate than competitors. And an investor may decide not to develop in a market where competing properties receive a cap, rather than compete directly with landlords that can charge less rent to make the same profit.

Moreover, caps increase taxes for owners of personal property, and here is why: Caps seldom apply to personal property at manufacturing plants, refineries, chemical plants or utilities, so a cap shifts the tax burden to these types of properties. Typically, local governments raise tax rates to balance the budget shortfall created by the cap on real property. That means personal property taxpayers will pay based on full market value, and at higher tax rates.

There is also a direct effect on land use that can work against personal property taxpayers in a different way. Communities that limit property value increases compete for retail properties that can generate sales tax income. New housing and non-retail properties become undesirable because they provide less tax growth and increase infrastructure demands.

If there is no limit on tax rates, the cap will simply shift the variable in the property tax equation from the property's value to the taxing unit's tax rate. At best, the property owner's tax bill will remain where it was. At worst, the bill will increase significantly if the taxpayer purchases or improves a property, because they will then lose the benefit of the cap and be required to pay at full market value and at a higher tax rate. In 2010, it is painfully clear that a cap impairs a local government's ability to pay for critical services when state and federal revenues wane and local mandates increase. This shifts governmental control from the local level to the state. Caps impair infrastructure development and result in the imposition of a wide number of local fees and charges to replace property tax revenue. Thus, artificial limits on appraised value have unintended negative consequences. Taxpayers and government alike are better served by pursuing more effective and fairer mechanisms for property tax relief.

MarkHutcheson140Mark S. Hutcheson is a partner with the Austin, Texas, law firm of Popp, Gray & Hutcheson L.L.P., which focuses on property tax disputes and is the Texas member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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