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Property Tax Resources

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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Jul
07

Tax Matters: Court Provides Protection for Some Taxpayers

"...if the property is considered owner occupied, a taxpayer no longer has to respond in order to have valid appeal rights."

By John E. Garippa, Esq., as published by Globest.com Commercial Real Estate News and Property Resource, July 31, 2008

A recent decision of the Appellate Division in the State of New Jersey established a defense for some taxpayers who have failed to respond to assessor requests for income and expense information. Before this decision, if a taxpayer failed to respond to a tax assessor's request for income and expense information made during any given tax year, any tax appeal filed for that subsequent tax year was subject to dismissal, regardless of the merits of the appeal. In addition, even if a property were owner occupied, if the owner failed to respond to the assessor's request by informing him that the property was "owner occupied," that appeal could be dismissed as well.

As a result of the Appellate Division's recent decision, if the property is considered owner occupied, a taxpayer no longer has to respond in order to have valid appeal rights. However, the court warned taxpayers that if there were even small elements of rental income earned on the property, and the owner fails to report that income when requested by the assessor, the potential would still exist for dismissal of an appeal.

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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Jul
07

Assessment Appeals Skyrocket as Property Values Go Down

"Assessors are in a tough position, because they're looking at what has happened and trying to apply it to their next assessment. Events change quickly, and it's hard for them to keep up," said Maher. "You have to illustrate that there's been a market shift that is either affecting this property individually or other like property types. You try to negotiate and reach settled solutions. That's sometimes more of a process now."

APTC member, Mark Maher of Smith Gendler Shiell Sheff Ford & Maher was quoted in the article by Dan Hellman, as published by Minnesota Lawyer, July 2008.

Tax Court has seen a big influx of filings this year. In some pockets of Minnesota, the real estate market is finally starting to stabilize. But that doesn't erase the fact that the last two years have seen ever-increasing foreclosure rates - and plunging property values - throughout the state. County assessors have struggled to keep up with the declining market, but in many cases have fallen behind. Predictably, the number of property owners unhappy with their assessments has skyrocketed - and that's meant increased work for real estate attorneys, assessment appeals boards and the place where many such disputes end up: Minnesota's Tax Court. "We're feeling a little bit stretched," said Tax Court Chief Judge George W. Perez. "There's more trials, more motions, more hearings -just generally more work." "We're filing a relatively high number of cases," said Mark Maher, an attorney with Smith Gendler Shiell Sheff Ford and Maher in Minneapolis. "The whole economic slowdown is having an effect on properties' ability to maintain occupancy, and that leads to lower assessments."

Perez said this is the first time in his 11 years with the Tax Court that he's anticipated such a rise in property-related appeals.

At this point, we're coping -we're built to handle these fluctuations," he said. "But we'll see more of an increase before we see a decrease." The last resort The assessment appeals process is designed to funnel only the most disputed cases to the Tax Court, which devotes about one-third its caseload to property-related appeals. Most assessment appeals are dealt with at the municipal or county level, going to a local board of appeal, or heard at an "open-book" meeting for taxpayers, usually held at city council meetings. Those meetings are designed to give the property owner enough information about what went into the assessment so that, ideally, he or she leaves satisfied with the valuation.

If that doesn't happen, the property owner can request that the county do an on-site reappraisal of the property. The next step is to file an appeal, via the county, either to the small-claims division of the Tax Court (reserved for farms, single-dwelling residential properties and other properties valued at less than $300,000), or to the Tax Court proper. From there, a small handful of cases - no more than a few per year, according to Perez - go to the Minnesota Supreme Court.

Even with that system in place, the Tax Court will have its work cut out for it as appeals start coming in. Perez said that from Hennepin County alone, in the coming year the Tax Court will see 1,240 assessment appeals, up from 992 in 2007.

Hennepin is the only Minnesota county that has provided the Tax Court with final figures reflecting how many appeals will be coming their way, but Perez said he and fellow Tax Court judges Sheryl A. Ramstad and Kathleen H. Sanberg expect that the uptick will be about the same - about 25 percent - from Minnesota's other 86 counties.

"Usually there's a little bit of a lag between what happens in the marketplace and what we see in the court system," Perez said. "We're just seeing the beginnings of it. The numbers are starting to increase. When the economic news is poor, our caseload increases."

Residential spike is on the way Most assessment appeals filings that are pushed to the Tax Court are from the industrial-commercial sector, said Tom May, director of assessment for Hennepin County. And while this year's level of Tax Court appeals is unusual, it's hardly unprecedented. "We've been up that high before," May said. "In 2003 we had 1,253, and in 1992 there were more than 3,100. It goes up and down with the commercial-industrial market." May said he expects figures from the commercial-industrial market to hold steady, but that the Tax Court could see more filings in the future from owners of large rental and other residential properties. "Most of the impact that you're seeing in the residential market now will be reflected in 2009 assessments," he said. "At the county level, we will probably have a few more calls and a few more appeals next spring."

Bruce Malkerson, an attorney with Malkerson Gilliland Martin in Minneapolis, said a significant amount of assessment appeals and further litigation is likely to come from owners of both standalone vacant lots and multiple vacant lots that were bought with an eye toward development that never took place. "Generally, those properties have gone down in value, and there is an increase in tax appeal cases in all of those categories," he said. "If assessors don't keep up with the market, more people will appeal their assessed valuations out of necessity. In most locations, I think values will stay flat or go down further." Malkerson commented that an increase in assessment appeals could start to emerge from valuations going back as far as 2006. "The market for single-family residential land was already showing itself to have problems at that point," he said.

A balancing act for assessors Maher said that in many cases, appeals come from funds or institutional investors who two or three years ago acquired clusters of properties whose assessed value hasn't kept pace with what it has cost to keep and maintain the properties.

Part of the job of property owners - and their attorneys - is to avoid Tax Court by working with assessors to understand the context in which the value of certain properties might rise and fall. "Assessors are in a tough position, because they're looking at what has happened and trying to apply it to their next assessment. Events change quickly, and it's hard for them to keep up," said Maher. "You have to illustrate that there's been a market shift that is either affecting this property individually or other like property types. You try to negotiate and reach settled solutions. That's sometimes more of a process now."

Part of what leads to assessment disputes is that assessors have to be part historian and part soothsayer, said May. They have to be aware of past market cycles, and try to predict when they'll come back around. How successful they are at making those educated guesses will have an impact on how many assessment appeals make their way to the Tax Court in 2009. But Perez is expecting another spike. "What's really going to be interesting will be next year," he said. "My guess is that with the way the housing market is going, the number of filings is going to increase again."

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Jun
07

Industrial Properties Get Their Due

"In most jurisdictions, the taxing authorities include in industrial property tax assessments the value of the real estate and the value of the intangibles, despite the fact that in many states intangibles are not taxable assets..."

By Cris O'Neall, Esq., as published by National Real Estate Investor, June 2008

For over a decade, tax authorities in many jurisdictions have recognized that intangible assets and rights must be removed when assessing certain types of properties for tax purposes. This recognition of non-taxable intangibles has typically been limited to hospitality and retail properties, where intangible assets are easier to pinpoint.

Assessors often believe industrial properties consist of solely taxable real estate and personal property, and don't remove the intangible assets for valuation purposes. That could change, however, in the next few years, due to changes in financial reporting standards made earlier this decade, including the advent of FASB 141 and 142, which address the reporting treatment of intangibles acquired by publicly traded companies.

INDUSTRIAL INTANGIBLES PROVE DIVERSE
New reporting requirements enable industrial property owners to call attention to intangible assets so they can be deducted from property valuations.

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Gaining traction

As auditors have learned to apply FASB 141 and 142, the number and types of intangibles reported to regulatory authorities has increased. The above chart provides a few examples of the kinds of data industrial companies have begun to report to the Securities and Exchange Commission following large industrial plant acquisitions.

In each example, a portion of the purchase price paid was allocated to specific intangible assets and rights. For instance, Harvest Energy Trust allocated over $118 million of the price it paid for a refinery in Newfoundland, Canada in 2006 to engineering drawings, marketing contracts and customer lists. In the past, intangibles were usually reported along with property, plant and equipment and not delineated. Thus, assessors could not see the intangible assets much less understand their value. FASB 141 and 142 have changed that. The identification of specific intangible assets by industrial companies in financial reporting of acquisitions represents a big step forward. It gives legitimacy to specific intangibles, both for the company reporting them and for other companies in the same industry. Intangibles are exempted from taxation in a number of states. For example, in California, statutes, regulations and appellate court decisions exempt most industrial plant intangibles.

Property taxpayers who can identify and place a value on intangible assets and rights are entitled to exclude the value of those intangibles in determining their property's assessed value. Similar tax exemptions can be found in other states, such as Texas and Washington.

Doing the math

Once intangibles are identified, the amount of intangible value to be deducted from the property's total value must be determined. This is established by a review of comparable sales or a cash flow analysis. An appraiser should be retained to develop the valuation using the appropriate ad valorem tax standard.

For example, every industrial property has employees and a market expense to recruit and train can be estimated. This figure is an "avoided cost" to a buyer and represents the fair market value of that workforce for ad valorem tax purposes.The same technique can be used to value drawings, manuals and software.

Normally, property owners do not determine the value of intangibles by using the local property tax value standard. By valuing intangibles that way, the taxpayer derives a quantitative value for the tangible real and personal property that should be subject to property tax.

In most jurisdictions, the taxing authorities include in industrial property tax assessments the value of the real estate and the value of the intangibles, despite the fact that in many states intangibles are not taxable assets. Therefore, owners and operators of industrial properties need to follow these key steps:

  • Determine how the taxing authorities appraise your properties for ad valorem tax value. If they include real estate and intangibles in their assessment, take stock of the intangible assets and rights used in connection with your properties.
  • Order appraisals for all the properties' intangibles, basing those appraisals on local ad valorem value standards.
  • Present the facts to the taxing authorities and request that the value of the intangibles be excluded from the taxable value of your properties.

If you and the authorities cannot agree, file a tax appeal.

CONeallCris K. O'Neall is a partner in the Los Angeles law firm of Cahill, Davis & O'Neall LLP, the California member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. O'Neall can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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May
28

Tax Matters: Generating Future Tax Savings

"Current market conditions such as eroding rental values and escalating vacancy rates impact the current market value and will not typically be taken into consideration by the assessor."

By John E. Garippa, Esq., as published by Globest.com Commercial Real Estate News and Property Resource, May 28th, 2008

New Jersey property owners need to begin reviewing their property tax assessments that were not appealed, now that the April 1st deadline for filing a tax appeal on 2008 taxes has passed. This is an important exercise because of the rapidly changing market conditions faced by New Jersey property owners.

A proper review calls for a current market analysis on the value of the taxpayer's property. The value discovered from the market analysis should be compared to the current assessed fair market value used by the assessor. Don't forget to include the latest Chapter 123 ratio because the assessor's valuation includes this ratio.

Assessments in New Jersey do not change year-to-year. Typically, once a revaluation cycle has been completed, those assessments remain in place for a number of years. Current market conditions such as eroding rental values and escalating vacancy rates impact the current market value and will not typically be taken into consideration by the assessor. This causes a significant disparity between the current assessment and what that assessment should be if it properly reflected the current market conditions.

By performing this exercise on every property in a portfolio, the taxpayer will be in a position to meet with the assessor months before a new appeal cycle starts.

The views expressed here are those of the author and not of Real Estate Media or its publications.

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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Apr
28

Going Green Shouldn't Increase Property Taxes

"Most experts suggest that the hard costs to go 'green' have come down significantly in the past couple of years, but in hotels, 'green' start-up costs (operational training and certification process) still present a financial challenge."

By Michael J. Shalley, Esq., as published in Hotel News Resource, April 28th, 2008

A key question remains: do the added start-up costs of going 'green' translate into higher property taxes for hotels? The answer is they can and here's how you can prevent it.

Eco-friendly operations and design have moved into the mainstream of real estate and changed the way the market approaches renovation and new development. Hotel owners and operators are now fully engaged in the 'green' movement, as they have witnessed the positive market response to these initiatives in other areas of real estate. Most experts suggest that the hard costs to go 'green' have come down significantly in the past couple of years, but in hotels, 'green' start-up costs (operational training and certification process) still present a financial challenge. A key question remains: do the added start-up costs of going 'green' translate into higher property taxes for hotels? The answer is they can and here's how you can prevent it.

The wider availability of 'green' materials, improvements in recycling, and additional experience in 'green' construction methods have resulted in a decrease in hard costs. Industry experts indicate that the actual hard costs for 'green' construction today just about equal conventional construction costs. However, the operation of 'green' hotels cause an increase in soft costs and raise numerous operational issues not found in 'non-green' hotels.

For example, experienced and certified 'green' consultants can be costly and need to be retained to guide the project through the dizzying array of 'green' credits required for proper accreditation.

On the operational side, managing a 'green' hotel takes a special skill set not found in most management companies, and those companies possessing the necessary skills cost more money. The additional costs to operate and maintain special mechanical systems such as water recycling systems, eco-friendly grounds and solar power create operational challenges for a 'green' hotel. These operational issues require specific training, marketing and documentation, all of which drive start-up costs higher.

From a property tax perspective, three components comprise a hotel property: the real estate, the tangible personal property (furniture, fixtures and equipment), and the operating business. The real estate and tangible personal property are the two components, and the only two components, that by law are subject to property taxation in most states.

Many tax assessors use the income approach to value hotels, and most recognize that certain income adjustments must be made in order to remove the value of the hotel's business for property tax purposes. Once specific business start-up costs for a 'green' hotel are established, appropriate adjustments should be made to the income model to remove: 1.) the costs associated with the 'green' business initiatives and 2.) the expected rate of return on the 'green' investments. When owners fail to remove these items from their hotel's valuation, the eco-initiatives that drive additional business value for the 'green' hotel can be inadvertently taxed as real estate value.

ShalleyMichael Shalley is Director of Appeals 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. Shalley can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it..

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