"Whichever approach or combination of approaches is used, the value of a property should never be higher than that calculated under the cost method."

By Stephen H. Paul, Esq., as published by Commercial Property Executive Blog - May 2011

Appraisers can choose from three approaches to determine what a buyer would pay for a commercial property. But which approach is the most appropriate method of valuation?

The cost approach assumes that buyers will pay no more for a property than it would cost them to build an equal substitute. The appraiser calculates the cost to build the property and subtracts physical, economic, and functional depreciation.

Appraisers prefer this approach for newer properties that lack an operating history. The cost approach is also preferred for unique or specialty properties because no comparable properties may exist.

The income approach assumes that buyers will pay no more for the commercial real estate being assessed than it would cost to purchase an equally-desirable, substitute investment. The appraiser calculates the net income from the property over a given number of years, and discounts the result to its present value.

Appraisers prefer the income approach for income-producing properties that are typically bought and sold by investors. However, this approach requires accuracy in setting the interest rate and predicting future expenses.

The sales approach assumes that buyers will pay no more for the property than it would cost them to purchase an equal substitute. The appraiser locates sales of comparable properties and adjusts the prices to reflect the subject property. Although this approach may be the most accurate in that it provides a price in a particular market, finding a truly comparable property can sometimes be difficult.

Whichever approach or combination of approaches is used, the value of a property should never be higher than that calculated under the cost method. A buyer would not pay more for a property than it would cost to build, unless something else was included in the value. Anything above the value given by the cost approach must be business value, which is excluded from value calculations for property tax purposes.

Stephen H. Paul is a partner in the Indianapolis office of Baker & Daniels LLP, the Indiana 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..

By Cris K. O'Neall, Esq., and Michael T. Lebeau, Esq.¹, as published by IPT May 2011 Tax Report, May 2011

On January 6, 2011, the Assessment Appeals Board in Orange County, California issued a significant decision for owners and operators of assisted-living facilities, particularly facilities dedicated to providing "memory care" services. In a nutshell, the Board found that a significant portion of the assessed values enrolled by the Orange County Assessor's Office for memory care facilities acquired in 2007 included the value of non-taxable intangible assets and rights.² The Board's decision not only demonstrated the correct handling of intangibles under California's property tax statutes, case law and State Board of Equalization guidance document, but also found that the cost approach should be used to extract non-taxable intangibles from business enterprise purchase prices in order to arrive at values for taxable real and personal property.

The Nature of Memory Care Facilities

Memory care is one of the fastest growing segments of the assisted-living care industry. Memory care facilities specialize in the housing and treatment of persons suffering from senile dementia, Alzheimer's disease, and similar "memory loss" maladies. Persons with these conditions typically suffer from moderate to severe memory loss. Consequently, the nature of the facilities that house persons with these conditions and the operation of those facilities differ from most other types of assisted-living facilities and operations.

In order to protect patients or residents from leaving the facility unattended or unescorted, memory care facilities incorporate design features which are not typically found in other types of assisted-living or even convalescent care facilities. The facilities must be laid out so that residents can be observed continually, and so that they do not wander away from the facility by themselves. Points of egress must be limited in number and must be designed to allow electronic monitoring at all times. Despite these severe design restrictions, the families of residents housed in memory care facilities usually want such facilities to have the ambience of a residential or home setting.

The operation of memory care facilities also requires significantly more staffing than the typical assisted living care facility. This includes additional nursing staff as well as staff to observe and work with residents.

There must be sufficient staff to monitor residents at all times in order to insure that they do not leave the facility unattended. In addition, because residents are typically ambulatory, a variety of planned on-site and off-site activities are usually provided to them, which requires a larger number of employees. This higher level of service requires a resident-to-staff ratio that is up to twice that for general assisted-living facilities, and a more skilled, better trained, and more highly paid management and employee staff than is typically found in other assisted-living situations.

Treatment of Intangibles under California's Acquisition-Based Property Tax Regime

California's Proposition 13 made acquisition prices the touchstone for taxable value in many instances. However, Proposition 13 did not explain what to do in those situations where an acquisition price includes a business enterprise comprised of real property, personal property and intangible assets and rights. Fortunately, California Revenue and Taxation Code sections 110(d)-(f) and 212(c) explain that intangible assets and rights are not taxable, and the values of identified intangibles must be excluded from the value allocated to a business enterprise in order to arrive at the value of taxable real and personal property. This is confirmed by published appellate court decisions such as GTE Sprint Communications Corp. v. County of Alameda (1994) 26 Cal.AppAth 992 as well as by the California State Board of Equalization's guidance in Assessors' Handbook Section 502, "Advanced Appraisal" (1998), Chapter 6, pages 150-165 ("Treatment of Intangible Assets and Rights"). Similarly, California Property Tax Rule 8(e) (18 Cal. Code Regs., § 8(e» requires that where a property is valued using the income approach, "sufficient income shall be excluded to provide a return on ... nontaxable operating assets."

Purchase Transaction Created Challenges for Purchaser

In early 2007, a number of memory care facilities and operations in several states, including four facilities and related operations in Orange County, California, were acquired by a large assisted-living facility operator.

The acquisition included not only the real and personal property at the four Orange County locations, but also the government-issued facility operating license, existing workforce, and business operating at each site. While the real and personal property were subject to property taxation, the purchaser contended that the facility operating licenses, workforce and other business-related assets (contracts, relationships, etc.) were not taxable under California law.

The transaction documents for the 2007 transaction did not assign a specific value to the various categories of assets (real property, personal property, and intangibles) for each of the Orange County locations. Fortunately, the seller of the properties had commissioned an appraisal for each of the properties.

Those appraisals were provided to the buyer, however, they were of limited utility in the property tax context because they were "going concern" appraisals which determined a business enterprise value for each facility and, therefore, included a value for all property at each of the Orange County facilities that encapsulated real and personal property as well as non-taxable intangibles. Furthermore, the buyer had used the going concern values shown in the appraisals as the basis for reporting the acquisitions to the Orange

County Assessor's Office and the Assessor's Office had simply enrolled the reported values as the taxable value for each property. Thus, there was a clear "chain" of documentation showing that the Assessor's Office had enrolled the value of all property, including intangible assets and rights, as the taxable value of the property at each facility.

The situation was further complicated by the fact that the purchaser had acquired the intangible assets (namely the operating licenses) through a saleleaseback arrangement and not through the purchase and sale agreement by which the real and personal property were transferred. This was done because a considerable amount of time is usually needed to transfer memory care facility licenses to a new owner, and waiting for the licenses to be transferred would have delayed the transaction for a year or more. Use of the sale-leaseback arrangement was typical in the industry, and had facilitated the transaction. The buyer's representative testified at the Assessment Appeals Board hearing that the buyer would not have acquired the four Orange County properties without the facility operating licenses as it would have taken too long to go through the process of obtaining new licenses. However, because the licenses had not transferred with the purchase and sale agreement, it created an impression that the buyer had not acquired the licenses, which were perhaps the most significant intangible asset in the transaction. On a positive note, the purchaser was helped by the fact that the seller's purchase appraisals exhibited the extreme disparities between the assessed values enrolled by the Assessor's Office (based on the income approach values) and the purchaser's values which relied on the cost approach: the Assessor's values were as high as $500 per square foot, several times the buyer's values for real property; the Assessor's values were also more than twice the cost new without depreciation for the improvements; and the Assessor's values were based on net income figures the majority of which were unrelated to the real estate at each location. All of this served to demonstrate that the Assessor's values subsumed the value of non-taxable intangible assets and rights in violation of California property tax law.

Cost Approach the Key to Taxable Values

The purchaser used the cost approach as the basis for proving the value of the taxable real and personal property. The purchaser retained the seller's appraiser, who had prepared the appraisals used to establish and allocate the total purchase price paid for all of the acquired facilities, to testify at the Assessment Appeals Board hearing. The appraiser explained that the appraisals were going concern appraisals, and for that reason the income and sales comparison approach values in those appraisals represented business enterprise values or the values of the going concern operating at each location.

The buyer's appraiser also testified that only the cost approach conclusions in the appraisals would represent the value of the taxable real and personal property. In support of this, the appraiser relied upon the Appraisal Institute's text The Appraisal of Nursing Facilities (J. Tellatin, 2009), particularly the portions of that text stating that "property tax assessments should exclude the value of intangible assets" and identifying intangible assets to include operating licenses and assembled workforce (pages 37, 40, 314, 315). The appraiser also focused the Board's attention on two key passages from the Appraisal Institute's text: The greatest usefulness of the cost approach could be in allocating the total assets of the business to real estate, tangible personal property, and intangible personal property assets under the theory that the value of an asset cannot exceed the cost to replace it in a timely manner, less reasonable amounts of depreciation. (Page 284)

When the depreciated cost of the tangible assets and the land are less than the overall business enterprise value, the cost approach can be a proxy for real estate value. (Page 315) These conclusions were supported by portions of the California State Board of Equalization's Assessors' Handbook Section 502 at page 159, note 126, and page 163: "The cost approach does not typically capture the value of intangible assets and rights because the appraisal unit only includes the subject property." With this background, the purchaser's appraiser demonstrated that the cost approach values in his appraisal report for each of the four facilities represented solely the values of the taxable tangible real and personal property.

The Assessment Appeals Board's Decision

The Orange County Assessment Appeals Board upheld the buyer's values, with adjustments for increased land values and minor increases in construction costs to account for inflation. The Board supported the buyer's position that the intangible assets and rights, particularly the operating licenses, had transferred along with the real and personal property as part of the same transaction: 42. The Board finds that the purchase agreement, the master lease, the sublease and a financing agreement that were all part of the same transaction, within the meaning of California Civil Code section 1642, and the purchase price did reflect and include intangible assets which are not subject to taxation.

Critical to this finding was testimony by the purchaser's representative that the payments under the lease agreements were not based on market rates, but were related to financing the transaction. In fact, evidence presented to the Board showed that the amount of each facility's lease payment exceeded or nearly exceeded the total revenue generated by each facility. Civil Code section 1642 provides that "several contracts relating to the same matters, between the same parties, and made as parts of substantially one transaction, are to be taken together."

The Board also ruled that the cost approach was the proper method for valuing the properties because it excluded the value of intangible assets and rights: 43. The Board finds that the cost approach is the most accurate measure of accurate [sic] value since the comparable sales approach and the income approach both captured the value of the property as a going concern and that it includes the value attributable to nontaxable assets and rights. Hence, the Board utilized the [cost approach portions of the] appraisals submitted by the Applicants as a starting point for its valuation analysis.

The Orange County Assessment Appeals Board's decision to use the cost approach, and to reject the income approach and sales comparison approach values from the buyer's going concern appraisals, affirmed Assessors' Handbook Section 502's counsel to avoid use of going concern appraisals (page 157) and to rely upon the cost approach when other approaches cannot segregate the value of taxable real and personal property from the value of intangible assets and rights. The Board's decision is a clear statement of the correct approach to be applied in the multi-facility purchase context in order to exclude the value of intangible property and determine the value of taxable real and personal property.

1. The authors acknowledge Max Row of Complex Property Advisors Corporation in Southlake, Texas and David H. Fryday of Tellatin, Short & Hansen, Inc. in Salem, Oregon for their comments and input to this article.

2. The facilities are owned by NorthStar Realty Finance.

"Look for release of damages provisions that waive the right to sue if there are surface impairments. Make sure that the property has not flooded in recent years, especially if it's near a stream, lake or low lying area. Flood plain maps are periodically updated, so current information is crucial."

By Howard Donovan, Esq., as published by Commercial Property Executive Blog - April 2011

In ad valorem tax disputes, commercial property owners and their tax counsel often are so focused on rent rolls, occupancy, capitalization rates and other big-picture considerations that they overlook special conditions affecting value. There is "ore to be mined" in less obvious areas, however.

Here are five factors to consider in making sure a tax protest covers all the bases.

1. Subsurface Conditions. Geology can weigh heavily in determining fair market value. Common examples include old mining activity, limestone formations and sinkholes, earthquake events, flood plains and periodic flooding. The property owner may already have information along these lines, and mining maps, flood plain maps and seismic activity information are generally available. Look for release of damages provisions that waive the right to sue if there are surface impairments. Make sure that the property has not flooded in recent years, especially if it's near a stream, lake or low lying area. Flood plain maps are periodically updated, so current information is crucial.
2. Environmental Impairments. Obviously, the presence of asbestos, petroleum products or other types of pollutants either in the improvements or subsurface will strongly influence value. Ensure that expert reports are brought current and provided to the appraiser. Reports should address costs of remediation, which can be used to argue that value should be reduced by the costs. Finally, keep in mind the need for confidentiality with respect to this information. See if the jurisdiction will agree not to duplicate reports and to return them after review.
3. ADA Compliance. Even after 20 years under the Americans with Disabilities Act, many properties fail to comply with the act's provisions. The costs of compliance can be submitted as reason to reduce assessed value.
4. Easements, Restrictions and Covenants of Record. Every jurisdiction that applies the fair market value standard recognizes that title restrictions, easements and covenants affect value and strongly influence market transactions. This is true not only of the subject property, but also of any property transactions cited by the assessor as comparable sales. Examples include use restrictions, size of the improvements, density, amenities and the accompanied assessments, curb cuts, traffic signals and other factors. Verify that your file includes current copies of such covenants, and that any appraiser is aware of these items.
5. Personal Property Returns. Most large commercial buildings, malls and shopping centers have associated personal property that is critical to property operations. Yet the personal property tax return is often a forgotten part of the overall value of the property.

Personal property values are generally calculated based on the depreciated original cost method, so make certain that the useful life of the personal property is realistic. Also check to see that the tax return excludes property that has been discarded or is no longer on site. If the real estate is the subject of a recent sale, find out what dollar value was allocated to the personal property and if that number is consistent with the values the tax assessor is showing.

Howard Donovan is a partner in the Birmingham, Ala. law firm of Donovan Fingar, LLC, 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..

"Property owners must stay vigilant to maintain agricultural-use status on farmland and avoid financial penalties..."

By Douglas S. John, Esq., as published by National Real Estate Investor, April 2011

Local governments are under the greatest financial stress since the Great Depression, and assessing authorities are aggressively pursuing revenue to combat these financial woes. One target in assessors' crosshairs is the preferential tax treatment of land with agricultural status.

Developers who are considering the purchase of agricultural land or holding acreage for eventual development need to be aware of the potential tax consequences. Depending on the way assessors categorize the land, the owner could face an unexpected rise in tax costs.

All states offer some tax relief for qualified agricultural property, but each jurisdiction has specific and often complex legal requirements for agricultural status. Investors in land held for future development must know the laws governing agricultural status if they hope to maintain this preferred tax position.

Most real estate is assessed at market value, which typically reflects the most probable price a buyer would pay in a competitive market. The most common benefit of an agricultural designation is that the land is assessed at use value instead of market value. Use value reflects how the property is currently used, i.e., for agriculture, rather than its highest and best use, which may be for residential or commercial development.

Eligibility for agricultural status varies by jurisdiction. The following are the major eligibility requirements.

• Use: Typically, states require that land be actively engaged in agricultural use and used exclusively or primarily for commercial agriculture. That can include growing crops, dairying, raising and breeding livestock, or horticulture.
• Acreage: A majority of states impose an acreage requirement to qualify for agricultural use, meaning a minimum number of acres. Qualifying acreage is typically low relative to average farm size. Some states have no minimum acreage requirement, while others allow local authorities to establish size criteria.
• Productivity: Most states impose minimum productivity requirements. These laws vary by jurisdiction, but most require property to generate a minimum amount of annual income from farming or raising livestock. Some states average the measure of income over a period of years. Other states require that a minimum percentage of the owner's or lessee's annual income is earned from agricultural activity on the land.
• Prior Usage: About half the states require property to be used for agricultural purposes for a period of years before it qualifies for preferential tax treatment. These laws are meant to discourage owners from changing a tract's use to take advantage of the tax benefits. Two or three years immediately preceding approval is typical.

Check for penalties

Many states impose a penalty when farmland is converted to non-agricultural use. In some states the penalty takes the form of a recapture or rollback tax, which is the difference between the taxes that would have been paid and the taxes actually paid while the land qualified as agricultural. This recapture period varies between three and 10 years.

In other states, if farmland is converted from agricultural use within a certain period after qualifying for preferential treatment, penalties are calculated based on the property's fair market value when its use changes or it is sold.

Most states require owners to periodically submit extensive information to demonstrate that the land continues to be used agriculturally. This may include IRS Form 1040F, leases, invoices and receipts, among other documents.

Each state's eligibility requirements, application process and potential penalties play a part in determining whether properties qualify for agricultural status. But a property's agricultural status can translate into significant tax savings. Local counsel may be required to navigate the complexity of obtaining or maintaining the agricultural status.

Douglas S. John is with the Tucson, Arziona law firm of Bancroft Susa & Galloway, the Nevada and Arizona 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..

Why Hotels and Nursing Homes Prove Especially Vulnerable to Inaccurate Taxation

"The most valuable asset the team would acquire through that contract would be a continued association with the Derek Jeter name, a brand in which the team has invested a great deal. The Yankees' challenge in reaching a new contract with Jeter, recently accomplished, indeed echoes the difficulty faced by many municipal assessors in valuing properties that are as much business as they are parcels of real estate."

By Elliott B. Pollack, Esq., as published by Commercial Property Executive, April 2011

Tax laws across the United States typically prohibit assessors from including intangible assets such as good will, franchise value or business value in a property tax assessment. Only tangible real and personal property may be placed on assessment rolls. But taxpayers and assessors alike sometimes have difficulty differentiating between tangibles and intangibles.

That's understandable on the part of taxpayers who may need to include intangibles in their calculations when buying or selling a hotel, nursing home or assisted-care property. For purposes other than property taxes, intangibles often are part of a property's overall value. Indeed, rivers of ink in appraisal and valuation literature—not to mention judicial rulings— have been devoted to the issue of intangibles.

Unfortunately, many assessors don't fully understand how to exclude these non-taxable elements from their calculations, either. For the unwary property owner, the resulting overassessment can result in an equally overstated tax bill. One way to gain a clearer perspective on the degree to which intangible assets can affect value is to turn our lenses on another field entirely—a baseball field, in fact. On Nov. 10, 2010, sports columnist Richard Sandomir presented an illuminating look at the talents of the New York Yankees' redoubtable shortstop, Derek Jeter, in an article for the New York Times. "The Yankees would not quite be the Yankees if (Derek Jeter) suited up with another team," Sandomir noted. The writer contended that Jeter adds substantially to the Yankees' overall value, much in the same way, it can be argued, that a respected brand boosts the worth of a hotel. Without Jeter's headline-grabbing performances, the team would be less valuable, just as an unflagged hotel is likely to be less valuable than its branded competitor. Sandomir quoted a business consultant who observed that Jeter's playing, were he less celebrated, might be worth $10 million a year. But as an iconic draw for ticket sales, Jeter's value to the team is closer to $20 million each year. The Yankee captain's "value as a brand builder," the expert noted, not merely as a hitter or infielder, is what drives his intangible worth differential, again, very much like the business value inherent in a well-managed hotel or convalescent facility.

With Jeter's lengthy contract concluded, it would be foolish for the Yankees not to sign him up again as he enters free agency, even though his baseball skills have eroded, the expert opined. The most valuable asset the team would acquire through that contract would be a continued association with the Derek Jeter name, a brand in which the team has invested a great deal. The Yankees' challenge in reaching a new contract with Jeter, recently accomplished, indeed echoes the difficulty faced by many municipal assessors in valuing properties that are as much business as they are parcels of real estate.

After years of resistance from taxpayers and their attorneys, it seems taxing authorities in the United States are getting the message about intangible assets. It now appears that the majority of assessors recognize that the net operating income generated by a hotel, as an example, does not result exclusively from its real estate value. In fact, the management expertise—which drives revenues from non-occupancy hospitality services such as food service, special events and recreation revenues—is an asset independent of and severable from the real estate itself.

Similarly, the intensive services furnished to the patients of long-term-care convalescent facilities are distinct from the property in which those services operate. Indeed, nursing and medical care, meals and rehabilitation produce revenues that have little to do with the real property and should not be capitalized when the health-care facility is valued using an income methodology.

There is case law to provide examples of the correct way to value commercial real estate without inflating taxable value by rolling intangible assets into the equation. Taxpayers interested in doing a little research will find one court's approach toward the separation of intangibles and the valuation of health-care real property in the case of Avon Realty L.L.C. v. Town of Avon, decided in 2006 by the Superior Court of Connecticut, Judicial District of New Britain. In that case, the owner of the Avon Convalescent Home, a 120-bed skilled nursing facility, appealed an assessed value in excess of $5 million on the grounds that the assessor hadn't deducted sufficient value attributable to intangible assets from the business's overall value. Upon review, the court deemed the value to be a little more than $4 million, supporting the taxpayer's appeal.

A thorough understanding of the issues and methodologies involved in properly differentiating and valuing tangibles and intangibles marks the difference between fair and excessive property tax assessments for hotels, nursing homes and assisted-care facilities.

Elliott B. Pollack is chair of the property valuation department of the Connecticut law firm Pullman & Comley L.L.C. He cautions that he is an avid Boston Red Sox fan. The firm is the Connecticut member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"The tax cap is an old device that's found new life in these hard times..."

By Michael P. Guerriero, Esq., as published by Commercial Property Executive, March 2011.

The recession has left its mark on the budgets of state and local governments nationwide. Revenue shortfalls have forced states to slash their budgets and, oftentimes, withdraw state aid pledged to local governments.

Cities, towns and school districts are now forced to raise property taxes, their main (and sometimes only) revenue source. Struggling with escalating tax burdens, taxpayers cry out to their elected representatives to put a lid on the always rising local property tax and support property tax cap initiatives.

The tax cap is an old device that's found new life in these hard times. At the forefront of tax cap initiatives is newly elected Gov. Andrew Cuomo of New York, who proposes to limit the property tax dollars a school district can collect annually. The bill passed the New York State Senate and now must pass the State Assembly.

New York's bill caps tax growth at 4 percent or 120 percent of the inflation rate, whichever is less. School districts may exceed the cap with voter approval, but voters can impose an even stricter cap or bar increases entirely.

Roughly 40 states have some kind of property tax restriction. Arizona, Idaho, Kentucky, Massachusetts and West Virginia have a fixed cap of 5 percent or less. Colorado, Michigan and Montana limit growth to the inflation rate; while California, Illinois, Missouri, New Mexico, South Dakota and Washington limit growth to the lesser of a fixed percentage or the inflation rate.

Tax cap advocates say a cap forces school districts to cut wasteful spending while causing little to no harm.

Critics note that a cap simply slows down the rate of tax increases and does little to change the main drivers behind high property taxes. For example, caps cannot slow increasing costs for health care or fuel, nor do caps lessen demand for essential public services.

History has shown that tax caps simply shift the burden of funding schools to other sources, such as income tax, sales tax, fees and state aid. The bottom line is, a tax cap simply places a lid on the problem and kicks the can down the road for others to deal with.

Michael Guerriero is an associate at the law firm Koeppel Martone & Leistman LLP in Mineola, N.Y., the New York State 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..

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

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

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

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

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

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

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

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

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

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

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

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

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

J. 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..

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

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

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

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

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

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

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

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

Delays in reporting can trigger consequences

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

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

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

More tax liability?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The New Workplace

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

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

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

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

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

Economic factors affecting value

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

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

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

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

Translating market influences into assessment reductions

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

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

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

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

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

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

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

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

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

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

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

Terry Gardner is Corporate Real Estate Director for WellPoint Inc., an industry-leading healthcare benefits provider headquartered in Indianapolis, Ind.

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

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

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

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

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

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

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

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

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

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

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

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

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

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