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Property Tax Resources

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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Oct
07

How Assessors Can Veer Off Course

"In a contracting economy, with real estate values falling, the differential between contract rent and market rent can become quite significant."

By John E. Garippa, Esq. as published by National Real Estate Investor, October 2008

In a faltering economy, tax authorities want to cling to contract rents — the amount agreed upon by the landlord and tenants — as the basis for valuing property. Instead, assessors should rely on market rent, the rental income a property would command in the open market. Relying on contract rents to determine a property's value results in increased revenues from property taxes, but causes owners to pay excessive taxes.

Most taxing jurisdictions in the United States are supposed to value property based on market evidence, which is essentially what a willing buyer would pay a willing seller for property with neither party being under duress to act. In a growing economy, most property owners grasp this concept.

However, when the economy weakens and real estate values become depressed, this same concept is not as easy to comprehend. More importantly, even some taxing authorities have difficulty understanding exactly how this concept should work in a recessionary climate.

Why rent isn't rent

Contract rent represents the actual rental income specified in a lease and can be greater or less than market rent, often referred to as economic rent. Market rent has become the basis for valuing property because it allows assessors to uniformly value all property based on the same standard of value.

In a contracting economy, with real estate values falling, the differential between contract rent and market rent can become quite significant. The differences between the two types of rent give rise to the need for diligence by property owners and managers.

This hypothetical example illustrates the point: Assume a 100,000 sq. ft. office building has been well managed for a significant period of time. As a result of superior management, the building is 100% occupied with an average rent of $30 per sq. ft. The leases were negotiated more than two years ago.

Since that time, the office market has deteriorated. Current market rents at similar properties reach no higher than $25 per sq. ft. net with a 10% capitalization rate.

Using contract rents, the value of the property comes to $30 million, but employing market rents, the value is only $20 million (rent multiplied by square footage divided by capitalization rate). Based on a 3% effective tax rate, the assessment at the contract rate comes to $900,000, while the market rate assessment is $600,000, a tax savings of $300,000 (see chart).

garripaGRaphAn owner or property manager examining the rental income from the office property above can rest easy because it's clear that no problem exists. Here's a well-managed property fully leased in a weak economy. However, taxpayers must not be lulled into ignoring the need for a review of any tax assessment received in an economy under duress.

If the taxing authorities are assessing on a market level, they should ignore contract rents and focus on appropriate market rent standards. The example shows that when valued properly the property — which by contract standards is correctly worth $30 million — should be assessed for tax purposes at no greater than $25 million, a significant differential.

Clearly, if the property's assessment comes in above $25 million, it has been over assessed and requires a tax appeal in order to establish its value at the current market level of other properties.

 

 

Make your case

The persuasiveness of a taxpayer's presentation to the assessor depends on differentiating the property's rental history from the marketplace realities. First, every available office rental comparable needs to be analyzed during the relevant time period.

Some of the physical elements of comparison should include security, HVAC, electrical systems, tenant finish, parking and location.

Second, the property owner should develop a scenario that explains why demand has eroded in the market. The owner should focus on factors such as changes in the workforce, the requisite space per worker, and analysis of vacancy rate changes over several years.

This study should cover the time period beginning with the building's lease-up. A study that demonstrates deteriorating market vacancy over a period of several years buttresses the argument that demand will naturally be weaker.

In a declining market, taxpayers must challenge property tax assessment based on contract rents. Unless your assessment is based on market rents, a tax appeal should be the next step.

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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Oct
05

Understand Highest and Best Use Before Filing a Tax Appeal

"HBU is not a conclusion reached mechanically; it requires at least a bit of thought. Ignoring the chance that your current use is inferior to the HBU of your property is not a wise gamble."

By Elliott B. Pollack , Esq. and Richard R. Wright, as published by Corporate Real Estate Leader, September/October 2008

Before deciding to challenge the value of your property in U.S real estate tax appeal proceedings, spend a few moments considering its highest and best use as of the relevant date of value. Highest and best use is not an arid expression of appraisal jargon; it is a critical point of analysis for the property owner, in concert with his expert advisors and counsel, before putting his property in play.

Most states require real estate values to be determined, at least after informal proceedings have concluded, on the basis of expert testimony from appraisers. In order to furnish an opinion as to market value, it is necessary to have an understanding of a property's highest and best use. Market value, as we know, is the amount which in cash or cash equivalents would be paid to a knowledgeable seller by an equally knowledgeable buyer, both free of constraints not typical in the applicable market place.

Highest and best use (HBU) is the most valuable use, in terms of dollars (or these days, perhaps euros!) to which a property may be devoted. Many owners fall into the trap of making the unwarranted assumption that the current use of their property is its highest and best use.

In a dynamic real estate market, reflexively deciding that current use equals HBU can be dangerous. It's equivalent to believing absolutely that the future will be the same as the past.

HBU Isn't Always Visible in a Rear View Mirror

The current use of a property is the use to which it has been put based on past understandings of the market and historic economic judgments. Depending on how long ago that decision was made, its accuracy as a current HBU may be subject to challenge. Just because someone decided to construct a strip mall on a 20 acre tract of verdant farmland 20 years ago does not mean that the existing strip mall is the HBU today. Just because a service station was constructed on the corner of a busy intersection in one of New York City's five boroughs shouldn't blind the owner to a future user's objectives. And although a surface parking lot has been generating substantial monthly and transient revenues for its owner does not necessarily mean that a buyer would reach the same economic conclusion as to future use.

Of course, the less significant the buildings and improvements are on a parcel, the more likely a fresh look at HBU is required. But the fact that a major office building or hotel occupies a certain land parcel may have nothing to do with the future use to which the market tells us that the parcel should be put. And, of course after all, we must listen to the market if we are to correctly gauge market value!

The foregoing remarks suggest that if the current use is not economically advantageous, prosecuting a tax appeal may or may not make sense. For example, the obsolete hotel which faces demolition may or may not be replaced by a more economically valuable use. Viewed from the perspective of at least several years down the road, the property may currently be worth less for ad valorem tax purposes than the assessor believes. If, however, following demolition, the site is to be rapidly repositioned for an intensive mixed use development, the current hotel improvement may tell us less about market value than we think it does.

Gas Stations Typify Current HBU Issues

Should the owner of the abovementioned hypothetical gasoline station challenge her ad valorem assessment? Perhaps the station generates less revenue than she thinks it should, not as a result of fundamentals but due to a poor operation, grungy building, unattractive flag or changes in neighborhood traffic patterns. Poor economic results may also indicate that a use once thought to be one of the most commercially intensive and profitable uses available to a smaller parcel has been eclipsed by other uses.

Recent market data indicate that certain gasoline station sites were being sold at multiples of five and ten times what they would be worth as ongoing filling stations. Why? Research showed that developers have been able to reposition gas station properties for retail and, occasionally, residential uses, depending, of course, on the location and environmental compliance, due to changing neighborhood and macro-market conditions. Neighborhoods once thought to be somewhat unattractive are now in great demand to yuppies and empty nesters. The lack of urban development sites, measured against the rather modest improvements found at gas stations, has raised the value of some corner service stations beyond what they could ever fetch based on the current, use. The owner of that property might challenge her ad valorem assessment at his peril.

Conversely, the gasoline station owner may properly conclude that, if sold, her property would yield less than she thought. For example, new highway construction diverting traffic away from a formerly easily accessible and visible site might be one of many reasons for lowering HBU and therefore market value.

How Owners Can Use HBU

HBU represents the foundation of a real estate appraisal and, in almost every case, an assessor's or board of tax appeal's market value judgment. The Uniform Standards of Professional Appraisal Practice (USPAP), the "bible" to which appraisers must conform their work, tells us that appraisers must develop a market value opinion based on HBU. The factors to be reviewed by an appraiser include:

  • The physical capabilities and potential of the site;
  • The impact of applicable land use regulations;
  • Economic supply and demand; and
  • Neighborhood, local and regional economic factors

Many property owners, either acting themselves or through others, initiate ad valorem assessment review proceedings, if even on an informal basis, before an HBU judgment is reached. Sometimes, contests are initiated simply because taxes increased over a prior year or because some predetermined ratio of taxes to gross operating income has been violated. Hopefully, the foregoing discussion shows how unwise this approach can be in certain cases.

The pitfalls of bringing a tax appeal without thoughtful consideration of HBU are amply displayed by an actual event not involving the authors or their employers. A large commercial property developer engaged a consultant officed in a distant state to appear before the local Connecticut board to challenge the assessment of a vacant land parcel. He came charging up to the appeal on a snowy evening in early March. As part of his informal presentation, he showed the board a valuation analysis his client had prepared both on an "as vacant" and "as improved" basis. Since the property was in the midst of a hot development market, the board fastened on the "as improved" conclusion and tripled the assessment which the hapless fellow had come before it to appeal!

The same observation is applicable to ill considered assessment challenges which fail to recognize the likelihood of an assessor reaching a higher HBU opinion than the current use. Calling the property to the assessor's or the board's attention can trigger a reconsideration which will increase an assessment. Spending the time to consider the potential of this risk before rushing off to an assessment contest is highly recommended.

HBU is not a conclusion reached mechanically; it requires at least a bit of thought. Ignoring the chance that your current use is inferior to the HBU of your property is not a wise gamble.

Pollack_Headshot150pxElliott B. Pollack is a member of Pullman & Comley in Hartford, Connecticut and chair of the firm's Valuation Department. The firm is the Connecticut 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..

 

Richard R. Wright is Senior Property Tax Manager of J.C. Penney Company, Inc. in Dallas, Texas.

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Sep
07

Tax Assessments in Flux in New Market

"During times of market transition, especially from an up market to a down one, taxpayers should spend extra time to carefully analyze their tax assessments."

By Mark S. Hutcheson, Esq., as published by Hotel Journal, September 2008

The hotel market was booming during the past three years. Purchase prices broke records and set historically low capitalization rates. Across this period, investors in more traditional real estate holdings moved into the hospitality segment, seeking to maximize the anticipated bounce following the post 9/11 downturn. While market conditions were great for investors, both asset managers and property tax professionals faced uphill battles at local assessment offices.

In response to the market upswing, assessors lowered cap rates in their valuation models to match those implied from sales prices. Now, with the crisis in the credit markets prompting a market downturn, taxpayers must ensure that their assessments reflect current economic conditions, which indicate relatively flat income projections. The key to fair property tax assessments lies in deriving a proper cap rate—one that does not assume significant upside potential.

Cap rates and upside potential

Generally a lag exists between hotel assessments and current market conditions. The lag is caused by valuation methods that focus on trailing income and expense as well as the use of cap rates from prior-year sales surveys. These factors provide great benefits for owners when the market is going up, but do not bode well for them when the market peaks and starts to turn down.

With a market in transition, assessors commonly err by using cap rates implied from prior sales in the rising market to capitalize current income streams, which show no upside potential. The math is best understood through an example. To keep the example simple, no intangibles are removed from the sale (but they should always be excluded in a proper assessment). Assume a hotel, which was on the market in early 2007, had a prior-year net income of $1 million and sold for $15 million. By dividing the income by the sales price, the transaction implies a low cap rate of 6.6%. At the time of the sale, however, the buyer estimated that the net income would increase by 30% over the following year to $1.3 million. Thus, the cap rate of 6.6% would be adjusted up to the "real" cap rate of 8.6% once the buyer's anticipated upside is taken into consideration.

Utilizing the stabilized cap rate

Now assume the same property is being assessed for tax year 2008. The assessor knows of the prior sale and has calculated the 6.6% cap rate, which he intends to use to value the property. Over the course of 2007, the buyer's expectations were exceeded and the property's net income grew to $1.4 million. The assessor plugs the income information into his valuation model and calculates a whopping $21.2 million for the hotel ($1.4 million divided by .066).

As a result of the changing market conditions, however, the income projections are flat. If the lack of upside potential reflected in the market is considered, the assessor should have used the stabilized 8.6% cap rate, which would have resulted in a value of $16.3 million, approximately a $5 million difference in assessed value.

Losses from sub-prime mortgage holdings have profoundly affected the availability of commercial credit. Lenders with holdings tied to sub-prime mortgages are now scrambling for cash, as investors flee to other sectors of the market. This lack of cash has restricted funds for commercial lending and changed the playing field for hotel transactions. Greater underwriting scrutiny and more risk recognition in interest rates have increased the cost of capital, making deals more difficult to justify.

Unreliability of market extraction

The impact of the current credit crisis is abundantly evident in the market. For example, the share price for one large independent commercial lender dropped from more than $61 last June to around $10 in March, and the lender recently announced it will sell assets to address concerns about a cash shortage.

When interest rates increase because of the lack of commercial credit and with tighter underwriting standards, cap rates must go up to reflect these market conditions. Evidence of this increase however, may be difficult to establish. Assessors typically use the "market extraction" method, which derives cap rates by dividing net income by the sales prices of transactions in the local market.

When the volume of sales transactions declines, the market extraction method becomes less reliable because there are fewer transactions from which to develop an appropriate market cap rate. One alternative is to build up the cap rate through a band -of-investment analysis, wherein a return of and on the debt and equity components can be independently established.

This analysis requires greater knowledge of valuation principles, but may be the best alternative during a time of market transition.

Ensure the assessment matches market

During times of market transition, especially from an up market to a down one, taxpayers should spend extra time to carefully analyze their tax assessments. The underlying valuation methodology and the cap rate applied may not reflect current market conditions concerning income growth and the availability and cost of capital. As the market continues its cycle, the tax dollar saved today will pay dividends tomorrow.

MarkHutcheson140Mark S. Hutcheson is a partner with the Austin, Texas law firm of Popp, Gray & Hutcheson. 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. Hutcheson can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Sep
07

Winning Tax Appeals in a Down Market

"Proving market value in a declining market can be difficult, especially when that market is beset by contraction of the economy..."

By John E. Garippa , Esq. as published by Real Estate New Jersey, September 2008

Property owners in New Jersey face a very challenging year in 2008. Rental rates have eroded across all classes of property, and vacancy rates continue to rise. Having anticipated these erosions in value, many prudent property owners have filed tax appeals on their properties to reduce taxes. However, proving market value in a declining market can be a most difficult task, especially when that market is beset by an overall contraction of the economy, as well as a significant malaise in the capital markets.

By law, all property in New Jersey must be valued by taxing jurisdictions as of October 1 of the prior tax year. This means that for assessments established in 2008, the appropriate valuation date is October 1, 2007. The problem facing taxpayers this year is how to prove market value when that value has been eroding every quarter since last year.

The following examples illustrate the issues. Assume a 10 year old class A office building that as of 1/1/2006 enjoys tenancies averaging $30 per square foot and a vacancy rate of 5%. For the next 18 months, these lease rates begin to diminish. During 2007, the average rental in the first quarter falls to $28 per square foot, and in each succeeding quarter continues to decline by a dollar a square foot until the fourth quarter ending December 31, 2007, when it reaches $25 per square foot.

Under this scenario, a taxpayer should contend that the proper valuation of this property can be no more than $26 per square foot, which is reflected as of the October 1, 2007 quarterly analysis. Moreover, even though the $25 per square foot rentals for the 4th quarter of 2007 come later than the October 1, 2007 valuation date, this data corroborates the fact that shrinking rentals are affecting the property. Thus, the value of the tenancies should be no greater than the $26 per square foot valuation for the 3rd quarter. Averaging the rentals for the entire year does not properly value the property as of the valuation date.

A similar fact pattern can be outlined with vacancy rates. Assume the property begins to demonstrate a weakening demand, suggesting that the vacancy rate of 5%, which was appropriate for 2006, erodes each quarter and continues to do so throughout 2007. Toward the latter part of 2007, the vacancy rate at the property reaches 10%. In this case, a taxpayer should contend that the proper vacancy at the property, based on current market evidence, is approaching 10%. Although the average vacancy for the 2007 tax year might be only 7%, the continual increase in the vacancy rate throughout the entire year provides substantiating evidence of higher vacancies. This scenario clearly points to a reduced market value.

A second problem: While the evidence discussed above demonstrates that the property suffers from reduced demand, under New Jersey law, the taxpayer must show that this deterioration exists in other similar property. Thus, the taxpayer must produce data supporting the fact that all office property in the competitive area has endured reduced demand for rentals and increased vacancies.

This opens an opportunity for a carefully crafted forensic appraisal, one that effectively portrays the story behind declining value and demand. A competent appraiser should review all of the market data that documents an overall reduced demand for similar property. Also, there should be an exhaustive review of vacancy factors proving that the reduced demand at the taxpayer's property is not due to mismanagement, but rather to reduced demand in the market area.

A comprehensive review of economic data becomes singularly important to demonstrate that the entire area surrounding the taxpayer's property is experiencing a slow down in demand. Some of the factors to include in this review are: unemployment statistics, bankruptcy filings, business closings, population growth/decline, housing data, availability of office space as well as the general population trends in the state. All of these statistics form the basis for explaining reduced demand and increased vacancy.

As taxing jurisdictions face the growing reality of reduced resources due to the slowing economy, obtaining tax reductions will become even more difficult for taxpayers. In order for owners to prevail in a tax appeal, a compelling story must be developed concerning the taxpayer's property and market in which that property competes. Critical to this story is solid evidence that the market has sustained declines, continues to decline, and the property is part and parcel of that same competitive market.

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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Sep
07

Why Assessors Need to Take a Mulligan

"Assessors prefer the cost approach because the availability of cost data from national valuation services makes the determination of a value rather straightforward.Taxpayers argue that an income approach is better suited to derive the value of a golf course..."

By Andy Raines , Esq., as published by National Real Estate Investor, August 2008

As the old joke goes, the fastest way to become a millionaire as a golf course owner is to start out with $5 million. Unfortunately some property tax assessors don't get the joke. They continue to assess golf courses as if their value is increasing or holding steady.

During the 1990s, the supply of golf courses expanded by 24% while the number of golfers rose by just 7%, according to the National Golf Foundation. What's more, in the first quarter of 2008 there has been a 3.5% drop in rounds played.

Golf course owners now face numerous challenges. Although more courses have closed than opened over the past two years, the oversupply will likely take several years to absorb. Additionally, the soft economy and rising oil prices negatively affect travel to golf courses and course operating costs.

Property assessors have failed to take these factors into account in making their assessments. But golf course owners have begun to fight city hall by filing property tax appeals. If successful, the appeals can result in significant tax savings.

The accompanying chart demonstrates the magnitude of assessment reductions obtained by four different golf courses as a result of their tax appeals. On average, these appeals achieved a 40% reduction.

Why do assessors' valuations of golf courses differ so dramatically from the values contended by taxpayers and, in many instances, adopted by boards of equalization and judges? The assessor and taxpayer each use different valuation approaches that yield different values.

Methodology matters

The generally accepted valuation approaches include the cost, income capitalization, and sales comparison approaches. The appropriate valuation approach depends on various factors:

  • the amount and reliability of the data collected in each approach;the inherent strengths and weaknesses of each approach as it relates to a particular property type;
  • the relevance of each approach to the particular property at issue.

Raines_graph2Assessors typically value golf courses using a cost approach. That approach starts with land value, adds the cost of property improvements, and subtracts physical depreciation. Assessors prefer the cost approach because the availability of cost data from national valuation services makes the determination of a value rather straightforward.

Taxpayers argue that an income approach is better suited to derive the value of a golf course. That approach starts with a determination of revenue and deducts operating expenses to arrive at net operating income. Net operating income is then divided by a capitalization rate, thus yielding the value.

The issue centers on which method of golf course valuation is preferable: the assessor's cost approach, or the taxpayer's income approach?

 

Courts side with owners

The judges in these cases rejected the assessor's cost approach for several reasons. The cost approach rests on the principle of substitution, but replacement sites are difficult to find in the golf course industry. One judge cited an appraisal industry publication, which concluded that the cost approach is generally inapplicable to golf courses.

The cost approach used by the assessor deducted only the physical depreciation, based on age, but did not factor in external obsolescence. External obsolescence results from outside forces such as the oversupply of courses.

Again, a judge cited the appraisal industry publication that noted the difficulty in estimating external obsolescence in a market where prices have fallen 50% or more since the late 1990s. The judges found that investors rarely use a cost approach to determine the purchase price to pay for a golf course.

The judges held that the income approach offers the best valuation method for a golf course because buyers typically buy courses to produce income. The approach measures this capacity and converts it into a projected sales price.

The assessor's cost approach has been found not to be par for the course, so owners should consult their property tax professional to determine if an income approach can reduce their property tax liability.

RainesPhoto90Andy Raines is a partner in the Memphis law firm of Evans & Petree PC, the Tennessee member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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