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Property Tax Resources

Nov
08

Bay Area Governments Expand the Use of Transfer Taxes to Boost Collections

"Lately, cities and counties have been seeking ways to collect transfer tax from these legal entity transfers. For guidance, they have looked to California's property tax regime, which generally reassesses property when legal entity transfers occur..."

By Cris O'Neall, as published by National Real Estate Investor, November 2011

Property owners in and around San Francisco face an increasing tax burden as local governments attempt to bolster their struggling budgets by expanding the scope of transfer tax laws. In recent years, the cities of San Francisco and Oakland as well as Santa Clara County have gone beyond just collecting transfer tax when a deed is recorded, and now collect the tax for real property ownership changes that occur when one company buys or takes over another. The new laws may be working, as transfer tax revenues in all three jurisdictions have recently risen. From the time of its first implementation in the 1960s until recently, local governments only levied documentary or real property transfer taxes when a deed or other legal instrument was recorded based upon a transfer of "realty sold." The amount usually ranged from $0.55 cents to $3 for each increment in the reported price paid for the property.

However, the advent of new types of legal entities which are readily bought and sold has altered the way properties transfer now. As a result, the traditional system for collecting transfer tax via recorded deeds cannot always keep up with today's transactions.

For example, owners frequently transfer single-member limited liability companies and limited partnership interests to other owners. When these legal entities own real property, tracking real estate transfers can be difficult: While a deed is recorded when Company A sells real estate to Company B, no deed recording occurs when Company A buys a controlling interest in Company B, which owns real estate and continues to operate. Because the change in control of a legal entity that owns real property does not require a deed to be recorded, transfer tax is not collected when such legal entity transfers occur. Until now, that is.

New Implementation

Lately, cities and counties have been seeking ways to collect transfer tax from these legal entity transfers. For guidance, they have looked to California's property tax regime, which generally reassesses property when legal entity transfers occur. Amending their transfer tax laws to follow California's property tax system, jurisdictions have adopted ordinances that expand the scope of the transfer tax to include legal entity transfers. Santa Clara County was the first Bay Area jurisdiction to enact a transfer tax on legal entity transfers. The county's law imposes transfer tax whenever a legal entity that holds real property experiences a change in control, either directly or indirectly.

CONeall NREINNov2011

San Francisco adopted an easier approach. It simply redefined the term "realty sold" in the 1960s transfer tax statute to mean a change in ownership control for a legal entity that holds real property. Oakland followed suit, amending its law to include language similar to that in San Francisco's ordinance.

The amendments to these three Bay Area jurisdictions' laws were intended, at least in part, to close a perceived loophole in the transfer tax and thereby increase the amount of tax collected. For instance, when Oakland amended its transfer tax law, it expected to increase transfer tax revenues by $550,000 each year.

Amounts rising

The strategy may be working. In the past one to two years, the amount of transfer tax collected by San Francisco, Oakland and Santa Clara County has been on the rise. By far, the largest rise was in San Francisco where collections have shot up by more than 160 percent over the past two years, while Oakland and Santa Clara County experienced modest gains in transfer tax revenues.

The reason for the increase is less clear. Obviously, a higher number of transactions due to the recovery of the Bay Area real estate market drove some of the surge. And in San Francisco, transfer tax revenues also rose because the city raised tax rates to 2 percent for transactions valued at more than $5 million and to 2.5 percent for transactions million or more, up from 1.5 percent previously.

For comparison, the amounts of transfer tax collected by Berkeley, the City of San Mateo and Contra Costa County—none of which collect transfer tax on legal entity transfers—have been flat in recent years. The experience of these other jurisdictions may be an indication that the expansion of transfer tax laws by San Francisco, Oakland and Santa Clara County to capture legal entity transfers is indeed having the intended effect.

To combat transfer taxes, property buyers should structure transactions to fall under one of the exceptions in California's transfer tax law. If an exception is not available, buyers should timely advise tax authorities of their transaction to avoid costly non-reporting penalties.

CONeallCris K. O'Neall specializes in property and local 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. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Sep
29

Combatting the Road Less Traveled

When an altered traffic route handicaps your retail center, it's time for an assessment appeal.

"Owners should appeal their property tax assessment immediately after a public announcement of a highway or road change that will divert traffic away from their property..."

By Jerome Wallach, Esq., as published by National Real Estate Investor, September 2011

Once motorists lose sight of the property or can no longer access it conveniently, customers stop coming. At the very least, an owner facing such a loss is entitled to a fair property tax bill that reflects the asset's diminished commercial value.

Owners should appeal their property tax assessment immediately after a public announcement of a highway or road change that will divert traffic away from their property. Don't wait for evidence of changing traffic counts. The damage to property value occurs when the public announcement of the traffic diversion is made.

Effect on value

Assessed values are based upon market value, and market value in turn is predicated on a willing buyer and a willing seller. A public announcement that traffic will be rerouted for a period of time is an external event that appraisers refer to as external obsolescence, or something beyond the perimeter of the property that has an impact upon the property's value. Altered traffic routes are something a prudent buyer would consider in determining what to pay for an asset.

The announcement of an impending traffic shift will affect properties in varying time sequences and severity. For instance, the economic lifespan of a highway commercial property such as a convenience store will be limited to the opening date of the new roadway. A prudent buyer will base the purchase price upon the net operating income for that economic life.

There could very well be some residual value after the opening of the new road, but certainly not for convenience-store purposes. The carcasses of functionally obsolete convenience stores can be viewed from any recently moved.

JWallach-graph

Calculating the loss

Determining the property value after a road realignment plan is announced requires the stabilization of the declining income over the predictable remaining life of the property.

Consider, for example, a strip retail center. After the announcement but before construction, there may be no observable effect on retail sales at the center. From the time that the yellow barrels go up and the construction starts, and through the opening of the new road, however, sales and tenancy will decline.

Assuming the center is functioning at 95% of its gross potential at the time of the announcement, there may be a slight drop-off in the first and second year. But assuming a three-year building period for the roadway, leases that expire are not likely to be renewed. Leases in place also are in danger because patronage is expected to decline subsequent to the road opening.

The tenant will lack the ability to make the rental payments and may walk away. As spaces within the center go Notesdark, the property will lose its synergy of crossover customers. At the end of a 10-year period after the announcement, the center will be either dark or attract only an inferior class of tenant, and will at best be a marginal performer.

The property owner must analyze this declining income stream to determine a stabilized income over the remaining economic life of the property. The capitalization rate is then applied to the stabilized income over the property's remaining life as opposed to using the historic data, which becomes meaningless in the face of the changing traffic pattern.

It is critical to remember that the property owner's loss of value occurs at the time the road relocation project is made public, not at some future date. Thus, delaying a tax assessment appeal will only add to the property owner's losses.

Wallach90Jerome Wallach is a partner in the law firm of The Wallach Law Firm, the Missouri 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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Sep
25

How Eden Prairie Mall Challenged the Minnesota Tax Court

"It is now clear that the Minnesota Tax Court doesn't need to merely pick one of the taxable property values presented at trial and can find a taxable value outside the range of values introduced at trial..."

By John Gendler, Esq., as published by NREIonline, September 2011

In several cases over the past few years, the Minnesota Tax Court has found a taxable property value higher than the amounts presented in witness testimony from either side of a tax argument.

Because the Tax Court has the power to increase values as well as decrease them, this trend has raised concerns when considering whether a case should be taken to trial. However, a Minnesota Supreme Court opinion issued this year suggests that the Tax Court's decisions in the future are more likely to reflect facts presented in testimony.

Legal showdown

The pivotal decision stems from Eden Prairie Mall, LLC vs. County of Hennepin in which the Minnesota Supreme Court rejected the Tax Court's value increase for a recently renovated mall from $90 million to id="mce_marker"22 million.

The Supreme Court has said the Minnesota Tax Court cannot simply copy a county attorney's memorandum — including arithmetic mistakes — when deciding to find a value for a property that is higher than that testified to by either appraiser.

Both the taxpayer and government presented appraisals prepared by independent appraisers who had earned the MAI designation from the Appraisal Institute. (The professional accreditation refers to "Member, Appraisal Institute.")

The diverse appraisal testimony included value opinions for Jan. 2, 2005, and for Jan. 2, 2006, as a separate value must be found for each year in Minnesota.

The taxpayer's appraiser relied exclusively on an income approach, citing the lack of comparable sales, and testified to a value of $68.75 million in 2005 and a value of $60.55 million in 2006.

The original assessments being appealed put the mall's market value at $90 million in 2005, increasing to id="mce_marker"00 million in 2006. The government's appraiser gave most weight to the income approach, testifying to a value of id="mce_marker"10 million in 2005 and id="mce_marker"15 million in 2006. Neither appraiser prepared a discounted cash flow analysis.

The judge based her decision on a direct-capitalization income approach, finding that the government's cost and sales approaches were not meaningful given the recent major renovation of the mall. The Tax Court found the value of the mall to be id="mce_marker"22.9 million the first year and a slightly lower id="mce_marker"20.1 million for the later assessment.

In the decision, the Tax Court adopted an argument made by the government's attorney, which resulted in the indicated value being higher than that found by the government's appraiser. Like the government's attorney, the court stated that the government's appraiser had made a mistake in his calculations.

JGendler_eden_chart

Independent judgment

The Supreme Court said that the Tax Court did have the authority to make a value determination that is higher or lower than the testimony of the experts because the judges bring their "own expertise and judgment in valuation matters."

The Supreme Court noted, however, that "market value determinations involve the exercise of complex and sophisticated judgments of market conditions, anticipated future income, and investor expectations ...." In other words, the Tax Court can set taxable values based on its own analysis supported by the factual record. But did that analysis occur?

The Supreme Court pointed out that the Tax Court rejected both appraisers' opinions of market value and adopted, verbatim, a calculation presented by the government's attorney in a post-trial brief, "including several arithmetic errors."

The Supreme Court said "adopting verbatim the recalculated assumptions and nearly verbatim the value determinations ... presented in a post-trial brief raises doubts over whether the Tax Court exercised its own skill and independent judgment."

Although the Supreme Court affirmed other portions of the case, including the increase in value of a separate anchor store, this part of the case was returned to the Tax Court for additional explanation, including its use of income higher than that used by either appraiser.

Furthermore, the Supreme Court explicitly stated the Tax Court could reopen the record and admit additional evidence. It is not clear whether the Tax Court must admit additional evidence, but presumably the taxpayer will seek to do so when the Tax Court reconsiders its decision. At this writing, the Tax Court has not issued a new decision.

It is now clear that the Minnesota Tax Court doesn't need to merely pick one of the taxable property values presented at trial and can find a taxable value outside the range of values introduced at trial.

Importantly, however, it is also clear that the Minnesota Supreme Court will scrutinize those findings, demanding that the Tax Court explain in detail why it is rejecting the testimony and substituting its own opinions and data.

This precedent-setting case could encourage the Tax Court to stay within the range of testimony from the various appraisers, absent a compelling explanation for doing otherwise.

jgendler

John Gendler is a partner in the Minneapolis law firm of Smith, Gendler, Shiell, Sheff, Ford & Maher, P.A., the Minnesota 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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Aug
29

Pittsburgh Exemplifies Pennsylvania's Property Tax Discord

"Pennsylvania has no mandatory requirement for periodic revaluation, meaning that, as a practical matter, no county spends the time and political currency to reassess properties unless a lawsuit is filed forcing it to do so..."

By Sharon DiPaolo, Esq., as published by National Real Estate Investor Online - City Reviews, August 2011

Imagine you are a property owner trying to budget now for 2012 real estate taxes on your high-rise downtown office building, and no one can tell you what assessment your taxes will be based upon.

What number do you budget? What will you bill your tenants?

That property management nightmare is reality in Pittsburgh. The state Supreme Court ordered Pittsburgh and the rest of Allegheny County to reassess properties in 2012, the county's fourth reassessment in 12 years. But with the third quarter drawing to a close, the county hasn't released even tentative assessments, and has no plan to do so before the 2012 real estate bills go into the mail.

Pittsburgh's debacle is but one chapter in an ongoing tragedy, as Pennsylvania's broken property tax system plays out against the day-to-day practicalities of managing real estate. In recent years, the state's system for assessing real property has been under attack — in the courts, in the legislature, in the media and around kitchen tables.

Decentralized property tax system

Pennsylvania is one of only nine states that decentralize the property tax assessment process to the local government level. Its property assessment system operates under six separate statutes which are implemented and funded at the county level.

Pennsylvania has no mandatory requirement for periodic revaluation, meaning that, as a practical matter, no county spends the time and political currency to reassess properties unless a lawsuit is filed forcing it to do so.

As a result, assessments on aging properties grow stagnant while new construction is assigned higher assessments. New assessments occur on a property-by-property basis, either when taxpayers file individual appeals or when taxing districts cherry pick properties to appeal, usually based on recent sales.

For example, two identical office buildings built at the same time by the same builder might originally be assessed at the same id="mce_marker"0 million. But if one of the buildings sells at id="mce_marker"5 million, the taxing district will appeal the assessment of that property, resulting in two identical properties with dramatically different assessments.

Seven Pennsylvania counties have not reassessed in more than 30 years, and Blair County's last reassessment was in 1958. The reason Allegheny County is undergoing yet another reassessment is that multiple lawsuits have forced it to do so.

Currently, Allegheny County is under order from the Pennsylvania Supreme Court to revalue every property within its borders, with new assessed values to take effect for the 2012 tax year. Erie and Lebanon counties are preparing for reassessments to take effect in 2013.

Washington County is in on-again, off-again litigation and currently preparing for a reassessment for 2014. Lancaster County has cancelled its reassessment for 2013 and now will not reassess until 2017.

Call for statewide solution

When the Pennsylvania Supreme Court ordered Allegheny County to reassess, it stopped short of directing the state's other 66 counties to do the same but called on the legislature to study the system. Motivated by imminent reassessment projects with price tags upwards of id="mce_marker"0 million, both Allegheny and Washington counties asked the legislature to issue a moratorium on reassessments until a state-wide solution could be found.

Two years ago, legislation mandating a moratorium died in committee. Then in late June, 2011, the legislature passed a moratorium on just Washington County's revaluation project in a measure tacked onto Pennsylvania's budget.

On July 8, Gov. Corbett vetoed the bill, so Washington County's reassessment was back on but is now delayed until at least 2014. Currently some legislators are putting together yet another task force to study the issue. If history is any predictor, no statewide solution is on the horizon.

Delay in Allegheny County

Allegheny County's revaluation project has been repeatedly delayed. The county is behind on its preparations for the reassessment project and, in particular, behind on its valuation of commercial properties.

At the latest court conference before Judge Stanton Wettick, who is overseeing the reassessment project, the county admitted that it is behind in valuing commercial properties. At the judge's request, the county produced two alternate plans — neither of which will provide taxpayers with tentative 2012 values until next year.

Under the county's preferred plan, in which it would issue all notices at the same time, preliminary notices would be mailed out Jan. 31, 2012 with final values to be certified by early April 2012.

Under the alternate plan, notices would go out first to property owners in Pittsburgh, in December 2012, with certified values following in February 2012. Property owners in the rest of the county would be forced to wait until March for their preliminary notices and May for certified values.

Further, Allegheny County's plans call for an informal review process to analyze preliminary values. But as the reassessment project and preliminary notices have been delayed while the project drags on, the county has shortened the time for informal reviews from five months to five weeks.

tax_chart_pennsylvania

Complicating the matter for taxpayers and taxing districts alike, Pennsylvania law requires municipalities to set the 2012 tax rates in January, before the 2012 assessment is final. And in Pittsburgh, the school district will issue its 2012 tax bills before the assessment deadline.

Progress?

Last week, Judge Wettick heard a dozen representatives of school districts and municipalities describe how the delay in the reassessment project is affecting their budget process, hiring decisions and tax rates while it increases administrative costs and overhead. The City of Pittsburgh School District reported that it would have to take out a $66 million tax anticipation loan just to make payroll, costing the school district almost id="mce_marker".5 million.

Judge Wettick is expected to select one or the other timetable at a hearing on Sept. 15. Taxpayers and taxing districts alike are keeping a close watch on the outcome.

Gov. William Penn announced Pennsylvania's first property tax in 1683; within two weeks of the tax's enactment, a property owner filed the first complaint challenging an assessment. More than 300 years later, Pennsylvanians still struggle to find the right solution to meet Pennsylvania's constitutional requirement of uniformity in taxation.

dipaolo_webSharon F. DiPaolo 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. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Aug
27

Knowing Your Demographics Can Reduce Taxes

"Readily available data such as this can be used to create a compelling chart documenting the losses sustained by a mall owner. Using somewhat different data, a manufacturer can document the depletion of a skilled work force..."

By Christpher Dicharry, Esq., as published by Commercial Property Executive Blog, August 2011

The value of property is influenced by demographic fluctuations. Thus, when property owners receive their tax assessment each year, it is essential that they and their tax professionals carefully examine demographic changes in the markets where their properties are located.

Estimated demographics are available at any time, but the end of a census provides a unique opportunity to mine for demographic gold.

What's Important about Demographics?

A high-end shopping mall in a metropolitan statistical area (MSA) with a decreasing population is a prime candidate for a valuation reduction. The property owner's ability to sustain sales is declining along with the MSA's population, particularly if those leaving the area are high-income earners.

Shifts in population, household income or other demographics affect other property types besides retail. For example, a manufacturer may not sell to local residents the way a retail center does, but it hires from that community.

As population declines, the value of a manufacturing facility in that market will likely decline. This is particularly true if the manufacturer had targeted a specific MSA to maintain skilled employment levels.

Demographics are Readily Available

Anyone with a computer or iPad can access U.S. Census Bureau data across the United States and convert the relevant information into a compelling graphic.

For example, it has been widely reported in the media that the Century III Mall in West Miflin, Pa. is struggling. A comparison of 2000 and 2010 Census data shows a decrease of 6% in the population within a 30-minute drive of the mall.

Readily available data such as this can be used to create a compelling chart documenting the losses sustained by a mall owner. Using somewhat different data, a manufacturer can document the depletion of a skilled work force.

While many factors affect value, and such raw data may not be admissible for an appeal, it is useful for presenting to the assessor convincing evidence to support an argument for a tax reduction.

DicharryPhoto

Chris Dicharry is a partner in the law firm of Kean Miller LLP, the Louisiana member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Aug
25

A Proper Property Tax Strategy Saves Money

"Dates and timing involve more than just a knowledge of deadlines. Based on knowledge of the law, the savvy tax payer will know the best time to contest their taxes or to close a deal. Dependent upon the jurisdiction, an investor that enters into a land contract or purchases a property's underlying business entity may be able to put off for years the event that triggers an assessment change..."

By J. Kieran Jennings, as published by Commercial Property Executive Blog, August 2011

There are essentially four elements in developing a strategy to minimize property taxes: The law, dates and timing, risk and reward, and a professional team. As in many aspects of real estate, there are practical considerations and then there are details to be addressed by specialists.

Here are some points to consider in your strategy development:

  1. The law that governs property taxation can vary greatly among states, and practical knowledge of tax law is not confined to simply how frequently jurisdictions reassess, but also to how, and what, is being taxed? In certain states, for instance, property is assessed as it is encumbered by its leases. As a result, a property purchased and improved with a building on leased land likely will not be assessed equally to an otherwise identical, neighboring property. Understanding the law regarding what and how property is taxed remains key to knowing how or if, to fight your property assessment.
  2. Dates and timing involve more than just a knowledge of deadlines. Based on knowledge of the law, the savvy tax payer will know the best time to contest their taxes or to close a deal. Dependent upon the jurisdiction, an investor that enters into a land contract or purchases a property's underlying business entity may be able to put off for years the event that triggers an assessment change.
  3. Risk and reward need to be balanced. In a number of states, an ill-advised tax contest can result in an increased assessment.
  4. Taxing authorities are digging in their heels and some are on the offensive. Owners of real estate that is under-assessed, yet they decide to file tax contests simply due to the weak economy may find that the local jurisdiction has hired professionals seeking to increase the assessment to meet fair market value. Quality professional advice reduces risk.
  5. Your professional team, including expert witnesses and local counsel, should consist of knowledgeable tax professionals that fully understand local tax law as well as individuals that understand valuation. Local knowledge is essential.

With a carefully thought-out strategy, you can work with the motivations of the parties to drive a settlement or avoid a hot-button issue with the judge or assessor.

kjennings

Kieran Jennings is a partner with the law firm of Siegel Siegel Johnson and Jennings, which focuses its practice on property tax disputes and is 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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Aug
16

Property Taxation Runs Amok in the District of Columbia

"This pumping up of assessments allowed politicians the luxury of claiming that they did not raise the tax rate during the entire period. If taxes went up, even dramatically, well then that's just the marketplace talking."

By Stanley Fineman, Esq., as published by National Real Estate Investor Online - City Reviews, August 2011

Real estate taxes, which are based on assessor opinions, are the only subjectively determined taxes on the planet. And unlike other building expenses, which are largely controllable, property taxes are volatile, chaotic and often quixotic. Above all else, in the District of Columbia, they are high.

So, how high are your property taxes? Presumably all owners can answer that question on a cost-per-square-foot basis. But there are other perspectives to consider. How much have those taxes changed in the past five years? What percentage of the property's overall operating expenses do property taxes represent, and has that ratio altered over the years?

SFineman_graph

Here in D.C., we keep track of such things — and the results are startling. Office building taxes ballooned from $4.97 per sq. ft. in 2004 to $8.81 per sq. ft. in 2009, an increase of 77%. That's more than double the rate of increase in office contract rents, which averaged $45.31 per sq. ft. in 2009, up 35% from $33.46 in 2004.

None of the tax increases in those five years resulted from changes in the millage rate, or tax per id="mce_marker",000 of valuation, which remained essentially constant for the entire period. The increase was the product of assessment legerdemain, and would have been much higher had property owners failed to wage relentless and successful administrative and judicial tax appeals.

This pumping up of assessments allowed politicians the luxury of claiming that they did not raise the tax rate during the entire period. If taxes went up, even dramatically, well then that's just the marketplace talking.

Never mind that the tax rate might have been significantly reduced, softening the blow of the assessment spikes, but it was not. After all, there were pet projects that needed feeding.

Economic toll

We can examine the impact of mushrooming assessed values on the bottom line. Non-tax building expenses including fixed costs, maintenance, utilities, administration and services rose modestly from 2004 through 2009, by perhaps 20%.

With tax bills growing at a faster rate, however, the tax burden as a percentage of total building costs increased dramatically over that same period.

By 2009, property taxes climbed to an astounding 42.25% of all operating expenses, up from 33.24% five years earlier. In the early 1990s, taxes were as low as 24% of all operating expenses.

The overall effect on property cash flow was to significantly blunt the profitability one might have expected from the general rise in property values over the period.

Let's examine that further. Average rental rates increased 35% over a five-year period. If property taxes had increased at the same rate, taxes on the average office building would be $6.71 per sq. ft.

But because property taxes actually climbed 77% over that five years, the average office taxes is $8.81 per sq. ft. That's $2.10 per sq. ft. lost from the bottom line.

In a 250,000 sq. ft. office building, not uncommon in D.C., that equates to a loss of $525,000, annually.

Let's now look at it from the perspective of the taxing authority. There are approximately 1,000 privately owned office buildings in D.C. If the average size were, say, 175,000 sq. ft., D.C. arguably would be gaining excess tax revenues approaching $400 million annually.

That is a staggering sum, a massive shift of the tax burden heaped quietly onto the shoulders of commercial owners.

The D.C. government, always a minority partner in real estate enterprises, has been biting off heftier chunks of the commercial pie through taxation as the years roll by.

This has allowed it to subsidize homeowners (i.e. voters) through reduced tax rates and capped increases. And everybody's happy. Oh, except commercial owners and their tenants, the geese that lay the golden eggs. And we all remember what happened to them.

A proposal

Over the years, commercial owners have raised many salient arguments in an attempt to hold down their taxes. For example, commercial taxes in D.C. are considerably higher than in the adjacent jurisdictions, suburban Maryland and Virginia, resulting in a competitive disadvantage for D.C. property owners.

Arguing this point has brought some success in lowering the D.C. tax rate, but a large disparity remains.

Most recently, recalcitrant D.C. assessors were slow to recognize the downturn in the economy that afflicted property values in all jurisdictions. When the economy improves, aggressive assessors will tend to be overzealous in pursuing and overstating the market.

Simply put, property taxes shouldn't increase at a faster rate than rents. In practice, such a rule would require first establishing a base line of rents and taxes, and then utilizing reliable data to establish increases.

There might be lag time involved in acquiring and utilizing the data, but that challenge is a hill, not a mountain, to climb. And most importantly, it would be reasonable and fair.

sfinemanStanley J. Fineman is a shareholder in the law firm of Wilkes Artis Chartered, the District of Columbia 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.

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Jul
27

Oklahoma Courts Rule Low-Income Housing Tax Credits Shouldn't Be Treated As Property Income

"A developer who commits to operate a property as a low-income housing complex can apply for Low Income Housing Tax Credits under Section 42 of the Internal Revenue Code. The developer then sells the credits to investors to generate equity to construct the project..."

By William K. Elias, Esq., as published by National Real Estate Investor - Online Edition, July 2011

The impact of low-income housing tax credits (LIHTC) on the taxable value of real property has been a subject of controversy in Oklahoma for many years. A recent court ruling lays down the law, however, by definitively excluding the credits from calculations of taxable value.

WKElias_graph

Under the Tax Reform Act of 1986, Congress established the low-income housing tax credit program to encourage private development of affordable housing for people with low incomes.

A developer who commits to operate a property as a low-income housing complex can apply for Low Income Housing Tax Credits under Section 42 of the Internal Revenue Code. The developer then sells the credits to investors to generate equity to construct the project.

The recent case of Stillwater Housing Associates v. Jacquie Rose, Payne County Assessor, et al. (Oklahoma Supreme Court No. 108,682) could result in lower tax assessments for many low-income housing properties in Oklahoma.

In the Stillwater Housing decision, the Oklahoma Court of Civil Appeals issued several conclusions to clarify how low-income housing tax credits issued under Section 42 of the Internal Revenue Code affect taxable value.

Case in point

The Stillwater Housing case arose in Payne County, Okla., where limited partnership Stillwater Housing Associates applied to the Oklahoma Housing Finance Agency for low-income housing tax credits to develop a low-income housing complex. The agency granted credits to be allocated over 10 years in the amount of $455,235 per year.

To generate private equity to complete construction, Stillwater sold its low-income housing tax credits to investors, who became limited partners, and the credits flowed through Stillwater directly to those limited partners. Stillwater received no monetary benefit or cash flow from the tax credits.

Stillwater was obligated under a regulatory agreement to rent the units to low-income residents at restricted rents for 40 years. The tax credits were subject to recapture if Stillwater breached the terms of the regulatory agreement during the first 15 years.

Under Oklahoma law, real property is assessed annually as of Jan. 1 at its fair cash value. That's the estimated price the property would bring in a voluntary sale for the highest and best use for which it is actually used, or classified for use, during the previous calendar year.

Assessors can use the cost, income or sales-comparison method to estimate fair cash value. Neither the Oklahoma statutes nor the Oklahoma Tax Commission rules prescribe a methodology for valuing low-income housing tax credit properties.

In 2007, Stillwater protested the assessor's value of the property and asserted a fair cash value of $3.975 million, based upon actual rents. The assessor denied the protest and the developer appealed to the County Board of Equalization. The board instructed the assessor to add $235,347 of tax credits as income under the income approach. As a result, the value increased to more than $8.6 million.

Stillwater appealed the board's value to district court and both sides filed motions for partial summary judgment on the issue of whether low-income housing tax credits should be treated as property income. The district court ruled in favor of Stillwater and the assessor appealed.

The Oklahoma Court of Appeals affirmed the district court, however, and held that low-income housing tax credits are not income and do not replace income to the real property.

The court also held that the credits are tax benefits belonging to the investor, not a right or privilege belonging to the land, meaning the credits are not within the statutory definition of real property. Finally, the court held that the tax credits are intangibles exempt from taxation under Article X, Section 6A of the Oklahoma Constitution.

The assessor asked the Oklahoma Supreme Court to review the appeals court decision, but that petition was denied on March 28, 2011. When published, the appellate court's Stillwater Housing decision will constitute persuasive authority in all Oklahoma courts.

What does Stillwater Housing mean for owners of low-income housing tax credit properties? First, because the tax credits are not income and do not replace income to the property, the credits must be excluded from income-based assessments.

Second, because the credits are tax benefits belonging to the investor and not a right or privilege belonging to the land, then credits do not fall within Oklahoma's statutory definition of real property.

Essentially, regardless of their value to investors, low-income housing tax credits are intangibles exempt from taxation. The Stillwater Housing decision could result in lower tax assessments for many LIHTC properties in Oklahoma.

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William K. Elias is a partner in the Oklahoma City law firm of Elias, Books, Brown and Nelson, P.C., the Oklahoma 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..

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Jul
06

The Adventures of Valuation

The unique characteristics of a low-income housing tax credit project make it difficult for assessors to apply standard market value definitions and approaches in making a fair assessment.

By Stewart L. Mandell, Esq., as published by Commercial Property Executive, July 2011

Can you visualize how your tax appeal attorney would address an assessor's sales-comparison based property valuation? What if your attorney were Sherlock Holmes? Holmes sits at his desk as Watson enters. "Holmes, old boy, look at the assessor's valuation report on the Franklin Office Center, a multi-tenant office building. The assessor's fl awed cost approach is no surprise, but who would have expected a comparable-sales analysis with five sales to justify a sky-high value as of Jan. 1, 2010?"

Holmes chuckles as he quickly digests the report. "There is nothing here that should trouble you, my dear friend. Our evidence and my cross examination of the assessor will result in a compelling closing argument and a sizable assessment reduction."

"You already know how you'll address these sales?" asks Watson with astonishment.

"Why, of course," says Holmes, rising. "Here's how I'll summarize this in my closing statement: Your Honor, Sale No. 1 obviously is not a valid comparable, given the October 2007 date of sale. As our appraiser testified, from the market's peak in October of 2007 until January 2010, office building values in the area declined more than 40 percent. "You could make a market condition or time adjustment for that reason, and it would be something in excess of 40 percent. But the sale should be rejected because 2007 market conditions were so extremely different from what existed on Jan. 1, 2010. This sale is no more useful than one where the seller exercises an option to buy that was part of a lease agreement negotiated five years earlier."

Selecting his favorite meerschaum from the mantelpiece, Holmes continues: "Sale No. 2 must be rejected on the same grounds as Sale

1. Initially, the assessor made much of the fact that this sale closed on Sept. 16, 2008, which was after the start of the Great Recession, the Bear Stearns collapse and Lehman Brothers' bankruptcy filing.

"On cross examination, however, the assessor admitted that the parties executed the purchase agreement on March 7, 2008. That was well before both the valuation date and the point when the values of offi ce buildings plunged like Professor Moriarty descending the falls at Reichenbach." Having filled his pipe, Holmes turns toward the window.

"Sale No. 3 is irrelevant," he resumes. "Oh, it closed during the last quarter of 2009, near our valuation date, but there is one detail the assessor overlooked: This property was 100 percent leased to one of the 10 largest companies in the country, with 10 years remaining on the lease term. The assessor valued the landlord's interest, also known as the leased fee, and not the fee simple interest. The rent that produced this sizable sale price is well above Jan. 1, 2010, market rents. And in our state, valuation using a leased fee interest and above-market rents is unlawful." The strike of a match punctuates this last revelation.

"Sale No. 4 not only shares the fatal fl aw of Sale 3, but is even less defensible because it is a sale of a leased, built-to-suit property. Here, one of the country's most successful companies had arranged for construction of a facility to its exact specifications, and ultimately an investor acquired not just the property but also the tenant's 35-year lease.

"Of course, the rent is based on the contractor's cost and is unrelated to current market conditions. Not only was the transaction purely financial but as our appraiser's empirical data showed, built-to-suit properties such as this include significant costs that will not increase the property's sale price when subsequently sold." The atmosphere in the room begins to resemble the fog outside the window.

"Sale No. 5 is a sale-leaseback transaction. Town of Cunningham v. Property Tax Appeal Board, a 1992 Appellate Court of Illinois decision, is one of a number of decisions that confirm why this sale is irrelevant. "In the Cunningham case, the property owner initially listed the property with a sale price of $6 million, as well as a leaseback provision that would pay annual rent ranging from $200,000 to $250,000 for a term of 10 to 15 years. Ultimately, the property sold for $9.3 million plus a 15-year leaseback, with annual rent at $615,000. Obviously, the sale price and lease terms were directly related, with a higher rental stream producing a higher sale price. As the court concluded, this was a financing transaction, and the purchase price was unrelated to the property's market value."

Holmes bends to address his companion, seated beneath the swirling cloud. "In short, Your Honor, the assessor's sales-comparison approach is not worth the paper on which it is written."

Clearly, if owners are to achieve fair property tax valuations, they and their attorneys must dig deeply into comparables used by assessors. And that is elementary.

MandellPhoto90Stewart L. Mandell is a partner in the Michigan law firm Honigman Miller Schwartz and Cohn L.L.P., the Michigan 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.

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May
18

Tax Grab: Are New York Assessors Inflating Values for the Wrong Reasons?

"The real estate tax is based on the tax rate and a property's assessed value. In the face of all the troubles and distress seen in real estate over the last three years, the City of New York has made some outsized increases in its estimates of market values, which it uses to assess properties for taxation..."

By Joel R. Marcus, Esq., as published by National Real Estate Investor, April 2011

The New York City real estate community has been through the wringer since 2007. It has endured a dearth of major property transactions, suffered through the meltdown of the financial services industry and watched available debt financing evaporate. Lenders and special servicers are more in control of the real estate market than ever before.

In the real world of property ownership and development, many taxpayers are experiencing a drop in occupancy for office, hotels and rental apartment buildings. Condo sales have slowed to a trickle and construction of new office, hotels and apartment buildings has come to a virtual standstill.

In this environment of dropping office rents, condominium fire sales and increasing costs of operations, real estate taxes — the largest component of a building's expenses — have skyrocketed. Why is this happening?

New York City satisfies its budget needs through a variety of taxes, and of all of them, the real estate tax is the most important and durable. The city now finds itself facing a cutback in state and federal aid and has big budget deficits. This is happening at a time when corporate and personal income taxes and sales taxes have declined, and other taxes such as transfer and mortgage-recording taxes have all but disappeared.

The city's revenue options are few. People and businesses can move to New Jersey or other areas to escape New York City's income taxes or sales taxes, and this puts a practical limit on what New York City can extract. Real estate, however, is stuck in New York City and can't escape the city's tax grip.

Excessive taxes erode equity.

The real estate tax is based on the tax rate and a property's assessed value. In the face of all the troubles and distress seen in real estate over the last three years, the City of New York has made some outsized increases in its estimates of market values, which it uses to assess properties for taxation.

A snapshot provided by the City of New York Department of Finance highlights some of these amazing hikes in estimated market value. In Queens, for instance, assessors raised the market values for cooperatives 32.37% (on average12.05% citywide) from last year and Queens luxury hotels experienced a 27.97% increase as well. Manhattan luxury hotels underwent a 14.82% raise in values, while values climbed 9.65% for cooperatives and 15.91% for condominiums.

Many in the commercial real estate industry believe that the jump in assessed real estate market values is related to the city's budget woes, rather than to actual changes in the market place. The city vociferously denies this notion, but as Shakespeare's Hamlet said, "The lady doth protest too much, methinks."

How much tax is too much?

An analysis of the city's system for assessing properties shows that in office and other commercial properties the property tax bite consumes almost 34% of a property's pre-tax net income. Let's examine with this hypothetical example the formulas used by assessors.

An office building charges $45 rent per sq. ft. Its operating expenses are $12 per sq. ft., and its amortized leasing and tenant expenses are another $4.50 per sq. ft. Therefore the pre-tax net income is $28.50 per sq. ft.

The city divides that income by 13.64%, which is derived by adding a 9% capitalization rate to 4.64%, or 45% of the 10.312% tax rate. That yields a fair market value of $209 per sq. ft.

Assessed at 45% of fair market value, the result is a tax assessment of $94 per sq. ft. and a tax bill of $9.70 per sq. ft., based on the 10.312% tax rate. Therefore the city is a partner in 34% of the net operating income without any equity investment at all! This is before debt service, depreciation and capital improvements are accounted for — expenses that only the owner has to pay but for which the owner gets no credit from the city. Not bad if you can get away with it.

For apartment buildings, the pattern is even more egregious. If rents are $45 per sq. ft. and expenses are $12 per sq. ft. as in the office example, the assessor takes 45% of the 13.353% Class-2 tax rate (which is 6.009%) and adds a 7.5% cap rate to get a loaded cap rate of 13.509%. Divide the cap rate into the net operating income of $33, and the fair market value is $244.28 per sq. ft.

The assessment, therefore, is $110 per sq. ft., and this applies to the tax rate results in annual taxes of $14.69 per sq. ft. That's 44.5% of the property's pre-tax net income. Boy, what a deal the city has! If major capital repairs are needed for such expenses as the facade or elevator modernization, a roof or an apartment makeover, they are borne solely by the owner. None of these expenses are factored into the city's formula.

Property owners can always appeal their assessments, but many believe that it's the city's policy on taxes instead, that needs a reassessment.

MarcusPhoto290Joel R. Marcus is a partner in the law firm of Marcus & Pollack LLP, the New York City 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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