Property Tax Resources


Get Real About Tax Assessments

Get Real About Tax Assessments

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

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

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

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

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

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

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

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

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

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

The cost approach

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

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

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

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

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

Sales-comparison approach

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

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

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

The income approach

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

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

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

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

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

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


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

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Valuation Dispute Strategies - 4 Easy Pieces

"These steps enhance your chances for a successful appeal"

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

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

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

These steps enhance your chances for a successful appeal.

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

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Easing the Stress of Distressed Properties

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

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

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

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

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

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

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

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

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

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

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

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

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The Appeal of Tax Appeals

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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

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

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

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How To Contest Clawbacks Provisions

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

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

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

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

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

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

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

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

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

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

Escaping clawbacks

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

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

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

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

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

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

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

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

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

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

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



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


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

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New Taxman Tightens the Screws

"[David ] Frankel is exploring ways to make property tax more transparent, easier to understand and fairer... ."

By Joel R. Marcus, Esq. - as published on , January 22, 2010

New York CITY Mayor Bloomberg's recent appointment of David Frankel as the new commissioner of finance will result in significant changes at the Department of Finance. Frankel's priority calls for aggressive pursuit of companies and individuals who do not pay the correct amount of taxes or avoid paying taxes altogether. His goal is to level the playing field so that tax avoiders lose their competitive advantage over the vast majority of other law abiding taxpayers.

Frankel, a seasoned Wall Street professional, signaled in his first briefing to industry groups this fall, a number of changes he would make at his agency. He announced several key personnel changes and has reorganized the management structure so that only a few of the 24 department heads report directly to him.

He announced plans to hire 29 new auditors and picked a former Assistant US Attorney as his new general counsel. The auditors will use new databases and software tools to look for inconsistencies in tax receipts, income tax filings, data on licenses and permits, and to review the findings of other audits conducted by all levels of government, including State and Federal. However you feel about your taxes, you've got to pay them, said Frankel.

As for policy changes, Frankel is exploring ways to make the property tax more transparent, easier to understand and fairer. As an example of how the tax is confusing, Frankel noted that it would be simpler if the city-taxed properties on full market value instead of assessed value at 45%.

For residential housing, he expressed an interest in exploring the idea of valuing small houses (Class 1) and cooperatives and condominiums (Class 2) with the same sales method. He would consider moving away from the methodology of valuing coops and condominiums as if they were conventional rented housing. Frankel seems sensitive to claims that cooperative housing is underassessed compared to condos.

Since many current policies followed by the DOF are dictated by state law, some of his larger goals may take a few years to realize. The current administration will leave office in four years, so much of his agenda will have to be tackled quickly.

Frankel has identified a number of issues which he believes need attention. One such issue is revising the legal mandate that requires co-ops and condominium housing to be valued on the same basis as conventional rental apartment buildings, which was enabled by Section 581 of the Real Property Tax Law. Another thorny issue revolves around rectifying the astronomical increase in vacant land assessments that happened in the 2009/10 tax year.

The new commissioner has indicated a desire to move the due date of the RPIE (real property income and expense) submission to June 1 from September 1 to allow greater time for the DOF to review the information. In addition, Finance is soliciting on a voluntary basis, income forecasts from property owners to enable the Department to predict possible reductions in market values in future years.

One change just implemented by the DOF involves a new procedure for the taxation of generators and other equipment. Where the owner of the building and equipment are the same, the equipment will be valued based on the cost approach (reproduction cost new less depreciation). However, where appropriate, it will be valued on its rental income for established buildings, and that income should be included in the RPIE statement. For tenant owned equipment, generators will be taxed and assessed directly to that tenant, and the generator will have its own assessment identification number and its value will be calculated on the cost approach. For many years, much of this type of property was not taxed separately, if at all.

Frankel noted that the department was looking at a number of ways to more accurately reflect the recent downturn in market values for the new assessments. How many of his goals and initiatives will be realized over the next four years still remains unclear. The ability to enact major legislation aimed at real property tax reform has stymied each of his immediate predecessors because of the financial and political impact on residential taxpayers.

However, you can count on one thing for sure: a new approach to administering and collecting taxes is going to take place at the DOF, starting with more review and enforcement of tax liabilities. If you are not paying your fair share of taxes, beware: the Taxman is lurking.

MarcusPhoto290Joel R. Marcus is a partner in the New York City law firm Marcus & Pollack, LLP, the New York City member of American Property Tax Counsel, the national affiliation of property tax attorneys. He may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Trouble Coming in 2010 Assessments

"Tax assessors usually remain behind the curve of market trends."

By Joel R. Marcus ., as published by Real Estate New York, November/December 2009

All New York City property will be revalued on Jan. 5, 2010. Although that date is not yet here, rest assured that trouble awaits commercial property owners in this revaluation.

First of all, tax assessors usually remain behind the curve of market trends because the Real Property Income and Expense form requires mandatory filing of income and expense statements, which show only the property's calendar year 2008 performance. Since the market fell off a cliff after September 2008, these operating statements don't demonstrate the dramatic loss in real estate value.

Adding to the burgeoning taxes is the five-year phase-in of actual assessments mandated by New York law, whereby each increase over the past five tax years is added to the transition assessment or taxable assessment in 20% increments. Therefore, even if the actual assessment remained the same or was lower, the transition assessment, to which the tax rate is applied, would still reflect the impact of the prior five years' increases.

Hotels took the worst hit in the recession, suffering a 50% decline in earnings. The horrible expense ratio they now exhibit compounds their plunging profits. Instead of expenses approximating 70% of income, hotels find that costs may equal or exceed gross room revenue.

To create property tax assessments, the city employs a gross income multiplier, which ignores actual expenses. While the occupancy of many hotels has decreased along with their room rates, they still have to provide a level of service, staffing and other expenses that leaves marginal hotels or properties operating in the red. Hotels may find some degree of relief because the Tax

Commission has expressed a willingness to consider expenses in setting tax assessments. However, even here the old 70% ratio method has more traction with the tax authority.

Owners of condo properties with many unsold units find themselves in a tough bind. Condos do not generate rental income and sales are at a virtual standstill, yet condos are valued as if they were rental properties. This squeeze of higher property taxes and little income throws owners into the hands of their lenders.

Since rental income from conventionally rent-producing apartment buildings has only declined 10% to 15%, not much relief in tax valuations can be demonstrated by objective calculations. Moreover, data from luxury rentals is also derived from the 2008 calendar year filings, which, as mentioned, are not yet showing the full measure of market fall-off. Often, too, the burnoff or expiration of abatement programs significantly raises taxes.

Office and other commercial properties will show their decrease in income more slowly because the 10-year lease, which is most common, often masks the drop in fair market rental value. The only reduction seen in the market comes from increasing vacancies and renewals at lower rents. The impact of reduced rents, loss of operating and tax escalation income associated with the signing of a new lease and establishment of a new base year will not be fully realized for several years. In the meantime, income statements mask the problem by showing lease cancellation income and, in the case of new leases, the straight-lining of free rent and the amortizing of leasing commissions and tenant work.

To bring real estate taxes down to a viable level, a difficult task even in normal times, owners will need sophisticated analysis and effective presentation. A compelling presentation to the assessor regarding the rise in capitalization rates is paramount.

Hotels need accurate data to reflect current conditions, including labor and staffing requirements. They must also show the assessor how the increase in new rooms and new hotels precipitates lower rates and higher vacancies.

Condos need to create valuation models using realistic market conditions, high capitalization rates and a broader mixture of comparable assessments and data. Showing condo price reductions will not prove your case.

Office and commercial properties must clearly demonstrate the lack of any net absorption of space, indicating a 15% vacancy and loss factor in a 100% occupied property. In addition, any large vacancy is likely to be sustained for the foreseeable future, thus, the need for downward adjustment of occupancy.

MarcusPhoto290Joel R. Marcus is a partner in the New York City law firm Marcus & Pollack, LLP, the New York City member of American Property Tax Counsel, the national affiliation of property tax attorneys. He may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

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New Appraisal Principles for Tough Times

"An urgent need exists for better forensic appraisal methods to support property valuations in this time of declining values."

By John E. Garippa., as published by Real Estate New Jersey, November/December 2009

Over the past 18 months, property values have declined significantly for all asset types in New Jersey. While this resulted in record numbers of property tax appeals, actual transactions between buyers and sellers demonstrating this erosion of value are limited. This can be problematic when dealing with the finite valuation dates demanded by the New Jersey Tax Court.

Tax Court judges won't accept opinions of expert witnesses unless they provide supporting evidence that a property's value has declined. Despite the fact that few actual sales are available between buyers and sellers, property values can still continue to erode. The real question is: What steps can a property owner and appraiser take under such difficult conditions?

Events over the past year have proven that valuing property at a specific point in time, a necessity for tax appeals, can be almost impossible using the typical valuation parameters of comparable sales. Under New Jersey tax law, all real property must be valued for the 2009 tax year based on a valuation date of Oct. 1, 2008. But the events of last summer and fall were cataclysmic for all property types.

The entire nation watched as our financial system began a meltdown that culminated in the collapse of Lehman Brothers on Sept. 15, 2008. During this several-month period, the stock market lost almost 40% of its value. This tsunami affected real estate just as much as it did stock portfolios.

To demonstrate this point, consider a hypothetical sale where the deed was transferred on Oct. 1, 2008. In stable times, such a transaction might be the gold standard of defining what a willing buyer would pay and a willing seller would accept for a property on the very date defined by New Jersey tax laws for valuations. However, if this sale were like most others, the parties would have negotiated the terms at least three to six months before.

Looking back to the period six months prior to the Lehman Brothers collapse reveals an entirely different world, from an economic standpoint, than the one America faces today. No one would suggest that value parameters arrived at during that quieter time would reflect the disastrous conditions found on Oct. 1. Under stable market conditions, comparable sales can be relied upon to demonstrate market value. The lack of sales transactions in the past year has rendered comparable sales a limping metric for property tax purposes. Thus, an urgent need exists for better forensic appraisal methods to support property valuations in this time of declining values.

It's easy to forget that the basic laws of economics govern the real estate market. The economic base of a community revolves around businesses generating income from their activity. Therefore, the first step to take in demonstrating eroding values is an examination of the industries and businesses that generate employment and income in a community. Such a study would review changes in employment levels as well as population trends because these issues affect household income and other important factors that ultimately affect the demand for, and worth of, real estate.

Next, look at movement in rents, levels of rent concessions, increases/decreases in foreclosures, building occupancy figures for both office and commercial properties and even the direction of delinquencies in mortgage payments to determine the scope of property value diminishment. (For information on housing trends dig into Standard & Poor's Case Shiller Home Price Indices as well as data provided by the National Association of Realtors in reference to velocity of sales and median prices.)

In times of great price turmoil, analyze the loss in value in the various stock market indices as this may define how individuals view their wealth. Another important index to study is the Purchasing

Managers Index. The PMI represents a composite of five sub-indicators (production levels, new orders from customers, supplier deliveries, inventories and employment levels) that are extracted through surveys produced by the Institute of Supply Management. These surveys are sent to more than 400 purchasing managers around the country. While this measures only manufacturing trends, it is considered a good predictor of changes in gross domestic product and the economy as well.

As a result of the enormous instabilities experienced in the past year, the former methods of valuing property must be reexamined.
GarippaJohn E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. John E. Garippa is also the president 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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Thinking Outside the Box

"Smart shopping center owners follow Hoteliers' approach to reducing property taxes."

By Cris K. O'Neall, Esq., as published by National Real Estate Investor, November/December 2009

Why do taxing authorities recognize intangibles for hospitality properties, but not shopping center properties? The answer may be the way mall intangibles have been chara­acterized for tax purposes.

Intangibles include such items as business franchises, licenses and pera­mits, operating manuals and procedures, trained workforce, commercial agreea­ments and intellectual property.

Owners of hospitality properties know that branding their properties with well-recognized franchises or flags, such as Marriott, increases revenues. Because branding usually delivers access to resera­vations and management systems, traina­ing programs and other value-added benefits, it attracts clientele willing to pay premiums for hospitality stays and related amenities.

While hospitality properties benefit from their property tax exemption for franchises and other intangibles, shopa­ping mall properties haven't garnered the same benefits.

A recent unfavorable decision by the Minnesota Tax Court in an appeal filed by Eden Prairie Center in suburban Minneapolis typifies the difficulty shopa­ping center owners face in obtaining exemptions for intangibles. Mall owners who could use a respite from high propa­erty taxes are understandably frustrated.

Identifying intangibles

Hotel owners have succeeded in claiming the intangibles tax exemption by identia­fying specific types of intangibles, such as franchises and employee workforce, and assigning values to those tax-exempt items. This approach is particularly suca­cessful in states like California where statutes and court decisions support deductions for intangibles.

In contrast, shopping center owners typically urge tax assessors to reduce assessments based on residual "business enterprise value" (BEV). These owna­ers ascribe to BEV the higher in-line store rents produced by the presence of high-end anchor tenants or a particularly advantageous tenant mix.

Taxing authorities are reluctant to accept taxpayers' requests for BEV assessa­ment reductions. Court decisions involva­ing shopping center properties usually point to difficulties in proving BEV and the problem of separating intangibles from real estate.

Mall owners should focus on intana­gible assets and rights specific to their properties, as hospitality owners have done, rather than rely on the more neba­ulous BEV. They should identify and determine the value of intangibles such as anchor tenant and/or mall trade names, management agreements, and advertising arrangements. Creativity in identifying and valuing intangibles can bring significant assessment reductions, but success depends on owners' efforts. For example, proving to taxing authorities the benefits of having upscale anchor tenants likely requires an appraiser's analysis and may also depend upon data for competing properties.

Making the case

After intangibles are identified, an appraiser who specializes in intangible valuation should be retained to appraise the identified assets and rights. Then the total value of the tax-exempt intangibles is deducted from the entire property's value to arrive at the value of the taxable real property.

If the value of all intangibles is suba­stantial, this should be presented to the assessor. Ideally, informal negotiations with the taxing authority result in lower assessments. Even with the best efforts, however, it's still possible that the assessor won't reduce a shopping center's value by removing tax-exempt intangibles. In that event, a tax appeal should be filed.

CONeallCris K. O'Neall is a partner with Cahill, Davis & O'Neall LLP, the California 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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Property Tax Reform Goes Awry

Caps on property value cause unfair taxation.

"In economic downturns, like today, the amount of state and federal money available to local areas declines, while state and federal mandates increase the need for more funding..."

By Darlene Sullivan, Esq., as published by National Real Estate Investor, October 2009

At first blush, it appears that a cap on property tax values, often called appraisal or assessment caps, provides a panacea for limiting increasing property taxes. However, a closer look reveals that artificial caps precipitate other larger, more far-reaching problems, rather than producing a solution for rising property taxes.

The popular answer to the call for property tax relief continues to be a "cap" or limitation on increases on taxable value. Consider the effect of a property tax cap on two identical office buildings.

With no cap on taxable value, a building valued at $1 million sustains valuation growth at the rate the market increases, in this example, 10% annually. A cap on taxable value of 3% limits the rise of taxable value. Thus, the non-capped building's valuation skyrockets from a $1 million to over $1.6 million in five years, while the capped property's valuation grows to only about $1.16 million over the same period.

Illustrating the point

The [enclosed] chart demonstrates the difference in taxes paid by identical buildings, one with a tax cap, the other without.


Because non—capped property values increase at a faster rate than capped values, the non-capped property's taxes grow exponentially over time. This chart highlights the difference over time on two buildings initially valued at $1 million.

To appease voters, some states place a cap on residential property only. This results in commercial property paying higher taxes over time and paying a greater percentage of all property taxes than before the cap was established.

Let's suppose that before the cap was instituted, the commercial property sector paid 60% of all property taxes, while the residential sector paid 40%. The residential cap causes a reduction in the total amount of revenue collected from property taxes. To offset the revenue loss, the tax authority raises tax rates.

Since residential properties valuations are capped, commercial property now has a higher tax rate on its ever-increasing valuation. Thus, the commercial and residential sectors trade places, with commercial now paying 65% of all property taxes compared with residential's 35%.

The residential cap, in effect, lets residential property owners pay taxes on less than the full market value of their property, while commercial owners pay based on full market value.

Still more pitfalls

Appraisal caps also lead to other negative effects. Like all artificial limits, a cap creates artificial and unfair competitive advantages. Properties receiving no value caps, such as those newly built, purchased or remodeled, will have an economic disadvantage when compared to competing properties that benefit from the cap.

Suppose a newly purchased office building is assessed by market value when purchased. Also assume that other like-kind office buildings, not newly built, purchased or remodeled, have capped valuations. The owners of these like-kind properties, who enjoy assessment caps, have lower property taxes than the owners of newly purchased buildings and, as a result, can charge lower rents.

In addition, caps don't typically apply to personal property in manufacturing plants, refineries, chemical plants and utilities. The real property cap shifts the tax burden to personal property because local governments will raise tax rates to balance the budget shortfall caused by the real property cap.

That means increased taxes for personal property owners, since their tax assessment is based on full market value and they will be charged a higher tax rate on that value.

A cap also impairs local governments' ability to provide critical services. In economic downturns, like today, the amount of state and federal money available to local areas declines, while state and federal mandates increase the need for more funding.

Thus, local fees and charges for municipal services increase but can't compensate for the lost tax collections resulting from caps, inhibiting infrastructure development. Artificial limits on property valuations produce a myriad of unintended negative consequences. Beware the so-called gift of property tax caps.

DarleneSullivan140Darlene Sullivan is a partner in the Austin-based law firm Popp, Gray & Hutcheson, the Texas member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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