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Property Tax Resources

Jun
01

Shouldering a Costly Burden

States cut homeowners a property tax break, leaving commercial owners to fill the gap

The conventional wisdom is that lower valuations result in lower taxes. Many commercial owners and tax practitioners expect property values to decline this year due to a depressed economy.

By Linda Terrill, Esq., as published by National Real Estate Investor, June 2009

Will Rogers once said: "The only difference between death and taxes is that death doesn't get worse every time Congress meets." Commercial property owners could say the same thing of state legislatures when it comes to property taxation.

In the beginning, most states provided a "uniform and equal" rate of assessment and taxation for all classes of property. Today, the vast majority of states still have the basic "uniform and equal" framework, but all have tinkered with it to shift the weight of taxation to commercial property.

Once the local tax base and budget are determined, a mill levy is set. Some states apply the mill levy against the 100% value of the property. The math is: 100% value a— mill levy = tax due.

Other states have an intermediary level, generally referred to as the assessed value, which is a percentage of the 100% value. In those cases, the mill levy is applied to the assessed value and the computation is as follows: 100% value a— assessment rate a— mill levy = tax due.

Terrill_CostlyBurden_GRAPH

Altering the equation?

Several states have adopted "classification legislation" that provides for differential assessment rates for commercial real estate versus residential. In most cases, the commercial taxpayer carries the larger load.

This disparity grows wider if the residential owner also qualifies for other preferential treatment that some states may provide to seniors, veterans or low-income property owners. Here are examples of the tax system in practice:

In Colorado, all property is assessed at 29%, except residential, which is assessed at 7.96%. In terms of tax dollars, this disparity means that for every $1 paid by the residential owner, a commercial property owner will pay $3.64.

To further illustrate, assume a mill levy of .075 and a commercial and residential property each valued at $200,000. In Colorado, the property taxes for the homeowner are calculated as follows: $200,000 a— 7.96% = $15,920 a— .075 = $1,194. The commercial owner, however, pays 3.6 times as much: $200,000 a— 29% = $58,000 a— .075 = $4,350.

Arizona legislates commercial assessment rates at 22% and residential rates at 10% (see chart). Thus, for every $1 paid by the residential property owner, a commercial property owner will pay $2.20.

Tennessee commercial property owners fork over $1.60 for every $1 paid by a residential property owner, and in Kansas commercial owners pony up $2.17 for every $1 paid by residential owners. The ratio in Minnesota can be as high as 3 to 1.

The states and city included in the chart represent only a sampling of the disparity in the way the property tax load is shared between commercial and residential owners.

Premature celebration?

The conventional wisdom is that lower valuations result in lower taxes. Many commercial owners and tax practitioners expect property values to decline this year due to a depressed economy. It's only logical that taxpayers who see a reduction in their valuation notices for 2009 expect their taxes to decrease.

Such a conclusion is premature in the states with different assessment rates for commercial and residential property, or with any other significant agricultural and/or residential tax relief programs. That's because if the tax base declines and the needs of government remain the same, a mill levy increase is inevitable and commercial property taxpayers will face paying the majority share.

A savvy commercial property owner would be well advised to take the following steps:

  • Determine the tax appeal date and the rules for filing. If your property requires an appraisal, remember that the number of appeals may rise significantly, so hire an appraiser as early as possible.
  • Determine whether your market area comprises a diverse mixture of property types, or is dominated by businesses that are dependent on a single industry.
  • Compare the local unemployment rate with the national numbers.
  • Decide whether you can manage the appeal on your own.
  • Be prepared for it to take longer than you'd expect to traverse what will probably be a crowded tax appeal docket. To be forewarned is to be forearmed.

TerrillPhoto90Linda Terrill is a partner in the law firm of Neill, Terrill & Embree, the Kansas and Nebraska 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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May
05

Retail Landlords Face Quandary

Even as store sales decline, their property taxes climb

"Doing this math gives owners a powerful tool to help determine if tenants are paying rents above, at, or below sustainable market levels."

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

Current market conditions have led to tenant bankruptcies, store closings, vacancies, deals placed on hold and declining sales in many retail centers in the U.S. Given these pressures, it should be easy to argue that property values have declined. But how do you prove to the assessor that your property has hit a slump in value when the property's trailing performance does not reflect current fair market value?

A tenant's retail sales are commonly reported to landlords and provide a tool to measure the viability of a tenant and the center in which the store is located. But just showing a drop in tenant sales may not provide enough evidence to convince the tax assessor to lower a center's taxable value.

The taxpayer must be able to demonstrate in actual numbers the relationship between market rents the center can charge and the retail sales performance of the center's tenants. By taking this approach, an owner can empirically show the current rents that should be applied to the assessor's valuation analysis.

Are rents too high?

Occupancy cost is the term used to describe rent plus expenses that retail tenants pay to their landlords for maintenance of the common area, utilities, taxes and other costs. Tenant occupancy cost ratios are calculated by dividing the tenant's total occupancy costs by the tenant's total sales.

Occupancy cost ratios vary for each property type and merchandising category. Large national discounters have occupancy-cost ratios as low as 1.5%. High-margin retailers, such as jewelry stores in regional malls, can have ratios in excess of 20%.

Median occupancy costs at U.S. neighborhood centers are 8% to 9% of sales, while U.S. regional malls typically range between 9% and 16% of sales. A good rule of thumb is the higher the retailer's markup, the higher percentage of occupancy costs they can afford.

Doing this math gives owners a powerful tool to help determine if tenants are paying rents above, at, or below sustainable market levels.

During a downturn, it is imperative that an owner demonstrate the effects of sales on the value of the property. Ultimately, the amount of rent a retailer will pay for a space is related to its ability to generate sales and maintain healthy profit margins.

A drop in sales, an increase in operating costs, or both, may push the cost of occupancy to an unsustainable level. If a retailer has a relatively high occupancy cost ratio compared to market norms, it signifies that the landlord may have to reduce the rent or risk losing the tenant.

To show the assessor the impact of declining sales on property values, retail centers owners should project annual sales per square foot for each tenant and apply the appropriate occupancy- cost ratio to the annual sales figure.

Illustrating through numbers

Assume that a tenant's sales during the height of the market were $500 per sq. ft., and now those annual sales figures have dropped to $350 per sq. ft. An analysis of industry statistics determines that the average market occupancy cost ratio is 8% for this tenant's merchandising category and the type of center.

Applying the 8% occupancy cost ratio to the booming market sales figure of $500 per sq. ft. indicates that this tenant can be profitable at an occupancy cost of $40 per sq. ft. To illustrate to the assessor the correctness of an owner's claim concerning her property value, the same 8% occupancy cost ratio must be used. The 8% is multiplied by today's annual sales of $350 per sq. ft., producing a new sustainable market occupancy cost for this tenant of $28 per sq. ft., as shown in the accompanying chart.

For the retailer to maintain acceptable profitability margins, the total occupancy costs —rent plus expenses— must be reduced by $12 per sq. ft. This decrease in sustainable occupancy cost provides support for the determination of market rent, which should be utilized by the assessor to value the property for tax purposes.

Shopping center owners should always ensure that the rent used by the assessor in calculating the center's tax assessment is an amount that allows tenants to operate profitably in whatever the existing market environment may be.

Sullivan_NREIInvestor

THE SPIRALING EFFECT OF DECLINING RETAIL SALES
As retail sales fall, tenant's occupancy cost as a percentage of sales goes up. If a tenant's sales were to decline from $500 to $350 per sq. ft., the rent would fall from $40 to $28 per sq. ft. to maintain an 8% occupancy cost radio. The property value should also drop.

Source: American Property Tax Counsel

 

 

 

DarleneSullivan140Darlene Sullivan is a partner with the Austin law firm of Popp, Gray & Hutcheson LLP, the Texas member of the 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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Apr
05

Taxpayers Take More Hits

"Property owners will be severely challenged as they try to manage depressed property values in an environment where one road block after another confronts them."

By John E. Garippa, Esq., as published by Globest.com, April 2009

By all accounts, more tax appeals were filed in New Jersey as of the April 1st filing deadline than at any time in recent memory. Across all classification of properties, owners filed appeals in both the New Jersey Tax Court and at the County Boards of Tax Appeals.

While the flood of appeals would have normally been filed as of April 1, 2009, a recent law allowed property owners who experienced a revaluation to file as late as May 1, 2009. This means the tidal wave of appeals that swept across New Jersey as of April 1st will continue right through May 1st.

These mass filings will take a toll on the judicial system and ultimately the taxpayer. The first impact will be significant backlogs in the Tax Court. In the recent past, a typical commercial tax appeal might take two years in order to get a hearing and resolution. In this current environment, considering the fact that no new judges will be added to the Tax Court, that backlog will easily reach three years or more.

Even more important for hard pressed taxpayers, under New Jersey law, in order to have standing before the court, all property taxes must be paid in full. If the taxes are unpaid by any amount in any year, that year's tax appeal will be subject to dismissal. This is a difficult pill to swallow for a commercial property owner with significant vacancies.

A review of commercial real estate's current status underscores why a torrent of appeals exist. Many commercial landlords are losing retail tenants at an ever-increasing pace. According to the April 8th Wall Street Journal, with research provided by Reis Inc., the amount of occupied space in shopping centers and malls throughout the US declined by 8.7 million square feet in the first quarter of 2009. This loss of more than 8 million square feet of retail space in just one quarter was more than the total amount of space retailers handed back to landlords in all of 2008.

The decline in occupied space increased the vacancy rate for malls and shopping centers in the top 76 US markets to 9.1%. According to Reis, the vacancy rate is now at its highest level since the 1990's. Even as landlords cut lease rates in order to attract tenants, the vacancy rates continue to rise.

Another unforeseen impact will be visited on taxpayers in this current market maelstrom. The burden of proving the value of a property in a tax appeal has always rested on the taxpayer. It will not be enough for a taxpayer to cite a plethora of empty stores and a growing vacancy rate as proof of a low value.

The Tax Court will demand that competent market evidence be brought before the court to prove, by the preponderance of the evidence, the current market value of the property in question. And to make the task even more daunting for the taxpayer, there may not be enough comparable rentals to prove value, since it is near impossible to find anyone to rent retail stores. Also, it may be equally impossible to prove a capitalization rate because banks are not lending on any type of commercial property.

Property owners will be severely challenged as they try to manage depressed property values in an environment where one road block after another confronts them. Understanding the nature of the road blocks and where they can be found, offers the best potential for attacking the problems.

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

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Feb
05

Reassessing Market Value

Assessors' use of historical sales data in a recession inflates property values.

"As a result, assessors typically value individual parcels not so much by looking at the specific characteristics of a particular parcel, but rather by the application of a mass appraisal system that relies heavily on historical data."

By Stewart L. Mandell Esq. and Andy Raines Esq., as published by National Real Estate Investor, February 2009

During periods of economic weakness, U.S. commercial and industrial real estate owners become vulnerable to unrealistic and excessive property tax assessments. Assessors' reliance on mass appraisal methodology and their use of data compiled during strong economic periods are the two main reasons for this problem.

Due to the large number of property tax parcels in a jurisdiction and limited resources to assess them, assessors typically employ mass appraisal methodology. In a mass appraisal, assessors gather and study certain economic data for a one- to three-year period preceding the assessment's effective date, including sales transactions, market rents, vacancy levels and/or levels of operating expenses.

Assessors then use that information to develop a valuation methodology, which they apply to individual parcels. For example, an assessor might study sales from the prior two years, which includes a dozen industrial properties located in his jurisdiction. He may determine from his study that the sold properties should have been valued 5% higher than the value at which they were carried on the assessment roll. The assessor would then increase the value of the entire class of industrial property by 5%.

As a result, assessors typically value individual parcels not so much by looking at the specific characteristics of a particular parcel, but rather by the application of a mass appraisal system that relies heavily on historical data. Recognizing and understanding the traditional methodology many assessors utilize is critical to enabling taxpayers to evaluate their risk of receiving excessive assessments.

Methodology under microscope

Odds are that assessors' usual valuation models for the 2009 tax year may be significantly flawed because a huge disconnect exists between economic conditions two to three years ago and today. This disconnect shows up in many ways.

The office vacancy rate in many markets has been low, from 5% to 10%, in the past few years. The current recession, however, is marked by financial sector turmoil and rising unemployment, resulting in increased office vacancies.

Shopping centers, too, are experiencing higher vacancies due to the recession's adverse impact on retail sales, which has been exacerbated by the reduction in new residential subdivision development and high residential foreclosure rates.

Perhaps the biggest data disconnect lies in capitalization rates, which act as a proxy for buyers' recognition of risk. Before the September 2008 economic crisis, buyers expected rental income and property values to continue rising. Now the reality of declining occupancy and rents, plus higher risk, has raised cap rates and lowered property values.

Upside of a downturn

A change in economic climate affects a property's valuation when the assessor uses historical data instead of current data. In 2007, a warehouse in Austin, Texas could command a net rent of $5 per sq. ft. Back then, vacancy held steady at about 9%. An appropriate cap rate would have been about 7.5%.

In late 2008, the recession caused warehouse vacancy rates in Austin to rise to 14%. The market softness pushed up vacancies, and market rent fell to about $4.50 per sq. ft. This trend raised the cap rate by at least 1%.

Based on the use of historical data, a 500,000 sq. ft. warehouse is valued at $26.4 million (see chart). However, the value based on current data comes to $19.8 million, a 25% reduction. Property taxes would amount to about $595,000 annually with an assessment based on historical data. Using current data, the assessment would result in taxes of about $445,000 annually, a $150,000 difference.

Assessors often use historical data to assist in making property tax assessments. That methodology may suffice in periods of economic stability. Unfortunately, in these volatile and challenging times, assessments based on dated information will be inaccurate and overstated.

If assessors keep using the rear view mirror to determine assessments, taxpayers should file appeals to avoid head-on collisions with excessive property taxation. Critical to a successful appeal is the use of current data to indicate an appropriate property tax assessment.

MandellPhoto90Stewart L. Mandell is a partner in the law firm of Honigman Miller Schwartz and Cohn LLP, the 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..
RainesPhoto90Andy Raines is a partner in the law firm of Evans & Petree, the Arkansas and Tennessee 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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Jan
05

Gain Control of Property Taxes

"Buyers of completed projects have potentially the most difficult assessment problem to overcome. In the eyes of the assessment community, the purchase price proves the market value of the property."

By Kieran Jennings, Esq. as published by Affordable Housing Finance Newsletter, January 2009

Local tax assessment rules and practices have a lasting effect on returns to developers and owners of affordable housing. Investors face many difficulties—uncertainty about property taxes should not be one of them. A developer who builds a property is subject to a different set of risks than a buyer who purchases a property as an ongoing project or for rehabilitation.

When a builder constructs affordable housing, in many cases, taxing authorities have reasonably good records regarding land sales and construction costs. Therefore the assessor's knee-jerk reaction is typically to value the property at the total cost of land and construction. For the assessor, it's fast, easy, and makes some sense; for the developer, it often means paying significantly more property tax than comparable properties. Affordable housing requires additional support to make the project viable, and an unfair tax burden can be the difference between a stable, viable property and one that fails

New projects

Prior to beginning a project, the developer should have a discussion with the assessor regarding the assessment laws and local practices. If aggressive, intervening taxing authorities, such as a local school district, exist in the jurisdiction, then prior to building it may be wise to seek payments in lieu of taxes (PILOT). Ideally the tax would be based on the prevailing taxes paid by like properties and incorporated into the budget for the project. In this way the developer has already agreed with the taxing bodies as to the amount of taxes to be paid, often over a period of five to 10 years.

Rehabilitated projects

Buyers who acquire property for rehabilitation may find that some taxing bodies tend to overreach. This tends to happen when a property is purchased at or below the assessed market value, and then the buyer immediately invests a large percentage of the project costs into refurbishing the property. These costs are public record, and because the tax credits are based on capital costs, the costs are known and well documented. What most assessors would like to do is simply add up all the land and construction costs to derive an assessment value. However, unless a fair PILOT agreement can be arranged, the property owner must not sit idly by and take costs as a measure of assessment.

Owners can make two arguments against this approach. First, assessed market value should be based on the income generated from the project. The concept of income as a measure of value enjoys almost universal acceptance in the assessing community, so the likelihood of success with this strategy is higher.

However, the second argument, "obsolesce," needs to be well-presented in order to persuade an assessor of its merit. Simply put, when buildings are rehabilitated, project costs include demolition and subsequent rebuilding of many building components. This drives the cost up significantly, yet at the end of the project the tenant can still only afford to pay what the market (subsidized or not) can bear. Therefore, for example, walls, plumbing, and wiring purchased initially, and later demolished, disposed of, and subsequently rebuilt are no more valuable to the tenant than they were initially. Finally, when discussing obsolescence with an assessor, don't use that term; merely explain that your costs do not necessarily equate to increased value. Assessors almost universally have an aversion to terms such as obsolescence.

Completed projects

Buyers of completed projects have potentially the most difficult assessment problem to overcome. In the eyes of the assessment community, the purchase price proves the market value of the property. Assessors tend not to take into account arguments such as 1031 tax deferral, purchase of reserves, or any host of non-real estate issues that actually drove the deal. As a result it may be better to set forth the argument in the closing statements by recording the properly allocated purchase price. For example, buying an operating housing project includes not only the purchase of the land and building, but also the in-place leases (no lease-up costs/concessions), the management contract, the HAP contract, and the reserves. All of these assets should be separately quantified, and only the land and building should be recorded as real estate. Note, however, that allocations and proper recording vary from state to state. Furthermore, changes in classifications may also affect federal taxes, so your federal tax adviser should be consulted prior to closing.

Or, an owner may acquire the business entity rather than the actual asset. In some jurisdictions it is permissible and advisable to buy the corporate shell, meaning the LLC or partnership interest. In such a transaction, the deed is not recorded, which may avoid the conveyance tax or transfer tax and also shield the purchase price from the public as well as the assessor. The assessor would be forced then to treat the acquired property in the same manner as any similar property. Of course, a number of states require buyers and sellers to disclose the purchase price regardless of how the property is acquired. On the other hand, some states do not require disclosure of the purchase price, even if it is a typical asset acquisition.

Finally, all owners, regardless of how they acquired or developed their properties, should understand the nuances of their taxing jurisdiction. Within the same state and county, there can be differences in how a taxpayer should plan. For instance, where the jurisdiction is friendly, it may be advisable to meet the tax authorities personally and discuss all aspects of the project. Conversely, you may be faced with aggressive assessors and equally aggressive school boards, where sales or new mortgages are sought out and records subpoenaed. By engaging local tax counsel, an owner can learn what to expect and can better plan for the long term. Assessments that go up tend to stay up and are difficult to reduce and those that are low tend to stay low. Possessing knowledge about the taxing jurisdiction makes all the difference.

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

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Jan
05

Battling Excessive Taxation in Economic Downturns

"Despite the abundant news coverage indicating that real estate continues to sit without being sold, taxpayers will encounter strong opposition when they try to obtain corrections in their assessments."

By Kieran Jennings, Esq., as published by Midwest Real Estate News, January 2009

Two problems now plague Ohio commercial property owners. First, the economic troubles faced by the entire nation also exist in Ohio. Second, the state is one of the very few that permits school districts to intervene in the assessment process.

In almost every commercial assessment hearing, school boards are present, making it virtually impossible for the Board of Revision to continue working toward its original goal, to find efficient ways to correct assessments. Instead, due to the school boards' involvement, tax cases may, and often do, take several years to come to resolution. This presents a real problem for over assessed property owners suffering from vacancies.

Take for instance an office or retail building that experienced a large drop in occupancy just as the market began to soften. Tenants staring into the face of a recession always put on their cost cutting hats. They look carefully at total occupancy costs, not just the rent, and this creates an obstacle for them in signing a lease. The problem is that at a time when taxpayers need fast tax relief in order to attract tenants, school boards seek to protect the tax base, causing prolonged litigation.

Taxpayers, Take Action

In this continuing economic downturn, taxpayers need to focus on those expense items that offer a real opportunity to positively affect the bottom line. All too often, taxpayers fail to recognize that property taxes fall into this category. Every dollar spent on property taxes removes resources that could help to increase sales and/or provide greater efficiency of operation. Thus, taxpayers need to carefully examine their tax assessments and determine whether a tax appeal should be filed. And time is not on the taxpayer's side, as tax complaints must be file in Ohio before March 31, 2009.

The larger southern (Cincinnati area) and central counties (Columbus and Dayton areas) have reassessed for the 2008 tax year. Summit County also reappraised for 2008. The final new values will appear on the first half 2008 tax bill payable at the beginning of 2009.

Property owners in these three areas face a difficult challenge because the data available for reappraisal reflects the peak of the real estate market, not the downturn precipitated by the credit crunch. In counties such as Cuyahoga, Lorain and Lake, assessments continue to be based on the high 2006 values. In all these areas, taxpayers are likely to receive excessively high assessments, which need to be appealed.

Despite the abundant news coverage indicating that real estate continues to sit without being sold, taxpayers will encounter strong opposition when they try to obtain corrections in their assessments. In order to meet this opposition head-on, well-documented arguments for tax relief become a necessity. In some instances that means providing the county Board of Revision with income and expense information and/or comparable sales; in others it may mean submitting an appraisal with testimony from an appraiser.

Unfortunately, it takes more than a well thought-out and documented argument to win a tax appeal, as school districts who receive the lion's share of the property tax revenue will strongly defend their tax base. Therefore, a taxpayer may be successful at the county Board of Revision only to find that the local school board has appealed the decision to the State Board of Tax Appeals.

At this point, the schools' attorneys get the opportunity to investigate taxpayers' evidence and they investigate for months or even years, casting the widest net possible in their fishing expedition. Since school attorneys are not assessors, nothing requires them to seek fair taxation for owners, so they may aggressively seek the highest assessments for their districts.

A critical step in the appeal process involves learning about the attorneys hired by the school districts, how receptive these attorneys may be to determining a fair tax assessment and how predisposed they are to giving the taxpayer a hard time versus looking for a win-win solution. By understanding the adversary, the taxpayer gains some perspective on how to negotiate with the school districts' attorneys.

While owning commercial real estate remains a sound long-term investment, in a down market owners need to diligently scrutinize the basis used by the assessor in determining their property tax assessments. Changes in the economy and financing can dramatically impact the value of real estate. Failure to file tax appeals when appropriate can cost owners tens of thousands of dollars in excessive taxes.

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

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Dec
05

Proper Remedy for Excessive Assessments

Don't value medical office buildings higher than general office space.

"These facilities require certain specialized construction components and finishes to accommodate industry needs."

By Stephen Paul, Esq., as published by National Real Estate Investor, December 2008

Construction of medical office buildings is burgeoning throughout the country due to the aging population and its healthcare needs. Because these facilities generally operate as for-profit medical services, they usually become subject to property tax. Medical office owners often find their buildings assessed for real property tax purposes at excessive values when compared to general office properties.

Assessors normally use the cost approach to determine the value of newly constructed property. For the most part, medical office buildings house multiple tenants, including medical practitioners and associated healthcare facilities such as pharmacies, diagnostic imaging, labs or medical administrative services.

These facilities require certain specialized construction components and finishes to accommodate industry needs. Generally, the construction finishes are higher quality than available in the average office. So, logically, if construction costs more, the return on investment needs to be higher to offset these increased costs.

Two obvious construction cost differences stand out between general office and medical office space. First, medical offices require more partitioning due to the need for numerous small exam rooms, medical staff offices and nursing stations and for extensive file storage.

Secondly, medical office space calls for more plumbing fixtures because every exam room must have facilities to maintain sanitary conditions as doctors move from patient to patient.

Major costs also are incurred when an office building must accommodate X-ray machines, magnetic resonance imagining equipment, or CAT-scan equipment/ rooms that require special shielding, such as cinder blocks and double or triple thicknesses of drywall or lead. Moreover, some medical office buildings include outpatient surgical centers, which demand nonporous finishes, high intensity lighting and greater electrical service. Thus, the cost per square foot of medical office space rises well above that of conventional office space.

Data from Marshall & Swift Valuation Service, the industry bible, supports these facts. The data shows that the base cost to construct medical office space is 26% higher than the cost of building general office space.

Highly persuasive argument

Let's examine a property tax appeal involving a medical office property in Indianapolis in 2007. The assessor valued a newly constructed building at $16.9 million. At the same time, the valuation on an Indianapolis general office building with the same square footage amounted to $11.3 million.

The cost to build the medical building was $15 million; the general office property cost $12.4 million to construct. The assessor valued the medical office building $5.6 million higher than the general office property, or nearly 50% more.

In preparation for the tax appeal, the taxpayer documented each construction component and compared it to general office buildings of similar size. This comparison showed that the real estate should be valued based on the basic components of a general office building.

Because each building has the exact same basic components, no justification exists for a larger tax assessment on the medical office building. In the appeal, the taxpayer also argued that an alternate or second user of the medical office building would likely purchase the property simply for office space.

PaulsgraphAs a result of this painstaking development and presentation of the relevant facts, the Appeal Board ruled in favor of the taxpayer and reduced the property's valuation by $1.3 million to $15.6 million. While this reduction was warranted, the medical office building remains valued higher than the general office building, proving that medical office buildings pay higher property taxes.

Lesson for assessors

Although the cost may be greater to construct medical office space, the added cost doesn't automatically justify higher property tax assessments. Because it is expensive to retrofit medical office space to fit general office needs, those costs should be deducted from construction costs to arrive at what would be market value for a general office building. Clearly, using the cost approach to value properties produces higher property valuations for medical office space than for general office space.

In a property tax appeal, the taxpayer must demonstrate that medical office property requires specialized construction and finishes, and lay out these facts to obtain an appropriate reduction in the property's assessment.

 

 

PaulPhoto90Stephen Paul is a partner in the Indianapolis law firm of Baker & Daniels, the Indiana member of 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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Dec
05

Tax Matters: Due Diligence Steps to Successful Tax Appeals

"Tax departments should conduct periodic reviews of the tax assessments on comparable property so that discussions about uniformity and fundamental fairness of assessments can be made when presenting the company's case to the taxing authorities."

By John E. Garippa, Esq. as published by Globest.com, December 5, 2008

With the economy mired in a significant recession affecting a broad range of property values, the beginning of the New Year presents an appropriate time to examine a series of steps that property tax managers should take to effectively reduce their company's property taxes. A company's entire property needs to be reviewed annually to determine the effect of market forces on all assets. Any recently purchased property should be looked at to see if the price paid for that property results in assessment reductions.

Tax departments should conduct periodic reviews of the tax assessments on comparable property so that discussions about uniformity and fundamental fairness of assessments can be made when presenting the company's case to the taxing authorities. Further, an annual review of property inventory should take into consideration whether an intangible component continues to be reflected as real property value in the assessment.

Properties that contain significant business components such as hotels, regional shopping centers and senior living facilities all possess intangible values, for example. These business components should not be assessed as real property, but when they are, a tax appeal is necessary.

Tax departments also need to be aware of those legal constraints in New Jersey relating to the proper filing of a tax appeal. All appeals must be filed by April 1, 2009 and all property taxes and municipal charges must be paid in full in order for the department to file an appeal.

In addition, all written requests from the local assessor's office for income and expense information must be answered in a timely fashion. Failure to respond to such requests will result in the dismissal of an appeal. Once all of these preliminary steps have been taken, the road to filing a successful tax appeal will be properly paved.

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

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Nov
06

Time to Appeal That Tax Bill?

"If home price drops, so should property taxes. Home owners might be smart to initiate a property tax appeal."

By John E. Garippa, Esq. as published by REALTOR® Magazine, November 2008

In these uncertain times, many home owners have had to face the fact that the current market value of their homes is less than they once thought.

Yet, most of these home owners continue to pay property taxes based on that higher value.

Higher taxes may also make a property less appealing and affordable to buyers, since higher taxes will increase their overall costs, at least until the property is reassessed. That's why it's a smart strategy to advise past clients who might be considering a sale to appeal their property taxes at the next opportunity.

Evaluating Your Assessment

The vast majority of taxing jurisdictions throughout the United States assess residential property based on market value: the amount a willing buyer would pay a willing seller without duress. However, assessments are generally not reviewed on an annual basis, so a property's assessment will never be 100 percent of market value.

To compensate, taxing bodies apply an equalization ratio, which is designed to ensure that assessments are relatively equal among different taxing districts to all assessed values. For example, a property worth $100,000 with an equalization ratio of 50 percent would be assessed at $50,000. Home owners can obtain their equalization ratio from local taxing authorities.

If, after a review with a residential broker or appraiser, a home's assessed value seems out of line with current market values, the home owner should undertake an investigation to determine what might have caused the incorrect valuation. Here are some steps for your client to follow.

  • Arrange a visit with the local tax assessor and request a complete copy of the home's tax records. Property record cards are public records and are universally available.
  • Pay particular attention to the market comparables listed on the property record card. These recently sold homes are the basis for the assessor's valuation of your client's home. Visit those houses or view them online, and compare them to the client's house.
  • Take the appropriate equalization ratio and multiply the market value you believe appropriate for the home by that rate. If the number is lower than the current assessment, your client should file a tax appeal.

Filing an Appeal

Most home owners should be able to properly file the appeal without counsel, but most jurisdictions require a licensed real estate appraiser to prepare an expert analysis of local market values for the local tax board.

Home owners should work closely with the appraiser to review all the amenities and issues that might affect the valuation of their home. Many times an appraiser may not be aware of construction, zoning, or general neighborhood issues that negatively affect value.

Real estate brokers familiar with the property and the area may also be a valuable resource for this type of information. They may also be able to assist the appraiser in determining which properties are the best comparables for a particular home. All of the appraiser's conclusions need to be properly documented with supporting evidence in the appraisal report that will be submitted with other supporting paperwork prior to the hearing.

In addition to compiling evidence, the taxpayer should take care to learn and follow the rules of the local board of assessment review. Each taxing jurisdiction has appropriate appeal forms. It is also critical to determine the deadline for filing an appeal.

The final step in an appeal is a hearing before the assessment appeal board. Proper preparation is the key to a successful hearing. The home owners and the appraiser should prepare a script detailing the important points that need to be made during the appraiser's testimony in order to prove a lower market value and assessment.

The key focus should be comparing the home in question with every presented comparable. The appraiser should be prepared to analyze each important amenity and discuss how it positively or negatively affects value.

During uncertain economic times, the effort of appealing a property tax bill reduction may prove well worth the time and effort involved.

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

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Nov
05

Haven't Gone 'Green'? It May Mean Property Tax Relief

"Taxpayers who show taxing jurisdictions how their hotel's market position has changed with the recent green movement may be able to obtain tax savings that produce huge bottom line impacts for them."

By Michael Shalley, as published online by Hotel Resource, November 2008

In these tough economic times, hotel owners need to proactively manage their property tax liabilities. The massive movement toward 'green' construction presents a meaningful opportunity for existing hotels to reduce their property taxes because 'green' has introduced obsolescence into the property tax equation.

How Obsolescence Works

Two types of obsolescence resulting from the 'green' movement affect hotels and, for that matter, all commercial buildings. Functional obsolescence reduces the ability of a building to perform the function for which it was originally designed and built. For example, in the 1950s and 1960s, the market saw swift and substantial functional obsolescence when the innovation of central air conditioning found its way into commercial buildings. Properties that lacked this new feature quickly saw market demand dry up, causing a loss in value.

Economic obsolescence refers to external forces that affect the ability of the building to continue to perform, such as changes in the types of building design and performance demanded by the market. This changing market demand can be seen in the new 2008 SmartMarket research report. It indicates that green building has become a global phenomenon, with 53% of respondents expecting to be dedicated to green on over 60% of their projects in the next five years.

Today, the biggest functional obsolescence issues for conventionally built hotels involve the acceptance and implementation of green technologies, especially in the areas of energy efficiency and water conservation. Green or cool roofs, photovoltaic panels, rainwater collection systems, and geothermal heating represent just a few technological advances that are being utilized in cutting edge green hotels.

Obsolescence Equals Tax Reductions

Taxpayers who show taxing jurisdictions how their hotel's market position has changed with the recent green movement may be able to obtain tax savings that produce huge bottom line impacts for them. If your hotel competes against others that have incorporated many of the new green building standards and operating protocols, you may have an argument for obsolescence. Should your local building code require green certification for new construction, chances that your hotel competes against green hotels are much greater.

In presenting arguments to the assessor for reducing property taxes, taxpayers need to demonstrate that hotels using green building materials, efficient design, high performance systems and operational protocols produce higher net operating incomes than non-green facilities. While green hotels provide economic, social and environmental benefits, it is the direct monetary benefits received by owners that typically affect market value.

Observed data on market value differences between high performance green hotels and conventionally built hotel is limited. That makes it even more imperative for taxpayers to clearly demonstrate to the assessor the direct economic benefits and the shift in market demand that supports a lower assessment for a non-green hotel.

Thus, it becomes critical that the taxpayer describe and explain to the assessor the technical differences in building components and systems employed in green and non-green hotels. In that way, the taxpayer exposes the assessor to the economic impact that these components and systems have on the market value of their non- green hotel.

ShalleyMichael Shalley is a Director of Appeals at the law firm Popp, Gray & Hutcheson in Austin, Texas. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Shalley can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it..

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