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Property Tax Resources

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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Apr
08

Improper Use of Cap Rates Proves Costly

"In developing property tax assessments, assessors too often rely on the extraction method and its simple math to generate what they see as a correct cap rate. In fact, the proper extraction and application of a cap rate is a complex calculation that takes into account many factors to provide taxpayers with fair and equitable valuations of their properties."

By Mark S. Hutcheson, Esq., as published by National Real Estate Investor, April 2008

Developing a capitalization rate for tax assessment purposes seems like a relatively simple task. Using the market extraction approach, the one most commonly employed by assessors and appraisers, a property's net operating income (NOI) is divided by the sale price to extract a cap rate. Sounds simple, right? While the math offers no challenge, the proper application of this method for tax assessment purposes presents a quite complex problem.

Property tax assessors and appraisers usually take a few recent comparable sales and do the quick math to establish an applicable cap rate for a property. However, just because the comparable sales look and function similarly to the appraised property does not necessarily mean they are financially similar. This is where the extraction method's complexity comes into play.

What's so complicated?

When using the extraction method, assessors seldom, if ever, consider three critical issues. First and foremost, there must be reliable and sufficient data on the comparable sales. The data should reveal the property's anticipated net income, operating expense ratio, financing terms, lease structure, the relevant market conditions and whether the property was part of a larger transaction.

Second, the NOI must be calculated or estimated using the same factors the assessor plans to apply to the assessed property. For instance, if the assessed property reports net income based on trailing 12-month financial statements, the comparables must report on the same basis.

Effects of improper methods

The following example shows how an assessor's failure to properly utilize the extraction method can cause taxpayers to pay unwarranted property taxes. Let's assume your local property tax assessor in Texas develops a cap rate to value your office building using the market extraction method. In your jurisdiction, the property tax law dictates that an assessor must value the property at market value, based on prevailing market conditions as of a specific date, usually Jan. 1.

The assessor pulls comparable sales data in your competitive market area and corresponding NOI for each sale. Next, he simply divides the NOI by the sales price and determines that 9% represents a market cap rate for your property. This cap rate is then divided into your property's $1.25 million NOI, resulting in an assessed value of $13.9 million. This seems like a simple exercise, but the devil is in the details.

In your review of the assessor's comparable sales, it becomes apparent that the sales transactions he used to generate a cap rate contained below-market rental rates and short-term leases. As a result, the 9% cap rate developed by the assessor to set your $13.9 million value represents a cap rate for properties with significant upside potential.

Your property, on the other hand, has above-market rental rates and long-term leases with national tenants who have outstanding credit. As you investigate the 9% cap rate, you discover that one of the assessor's comparables sold for $5 million and produced $450,000 NOI. The assessor divided that income by the sales price and derived a cap rate of 9%.

Additional research, however, reveals that the property had below-market leases that were about to expire. Further, when you adjust the property leases to market rates, the comparable creates at least a $500,000 NOI. This $500,000 is divided by the $5 million sales price, yielding a 10% cap rate, rather than the 9% rate developed by the assessor.

By applying the 10% cap rate to your property's income of $1.25 million, the assessed value would be $12.5 million. As the accompanying chart shows, you'd cut your property tax assessment by just over $1.4 million.

In developing property tax assessments, assessors too often rely on the extraction method and its simple math to generate what they see as a correct cap rate. In fact, the proper extraction and application of a cap rate is a complex calculation that takes into account many factors to provide taxpayers with fair and equitable valuations of their properties.

By understanding all the factors used in developing your cap rate, you can avoid excessive property taxes.

Mark_Hutcheson90Mark 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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Apr
08

Be On Guard over Shift to GIM

"The key question for owners is: are these new assessments as accurate as they were before the new GIM technique was employed?

By Joel R. Marcus, Esq., as published by Real Estate New York, April 2008

The Tentative Assessment Roll for 2008/2009 demonstrates a significant shift in assessments for class 2 properties (rented apartment buildings, cooperatives and condominiums). This is due to the New York City Department of Finance abandoning the time-honored approach of net income capitalization in favor of the gross income multiplier (GIM) approach, which for the very first time ignores age, condition, location and expense factors. The key question for owners is: are these new assessments as accurate as they were before the new GIM technique was employed?

Different Methods, Different Results

First, what are the differences in the past and present methodologies and where are the pitfalls in adopting one formula over another? Net income capitalization has been used by assessors and endorsed by New York State courts for more than a century. In 1962, the New York Appellate Division ruled that value arrived at by capitalization provides the surest ground for sound appraisal. In an earlier case, the New York Court of Appeals determined that: "the net income of a property is more persuasive evidence of what a property is worth than using a sales price derived from a similar property. What an investor will pay for a property is measured in large part by the amount and certainty of the income that can be obtained."

The Finance Department provided two reasons for renouncing the capitalization approach: 1) expenses for some buildings were higher than others leading to lower assessments, while in some cases the expenses may have been overstated by the owner. 2) using the GIM eliminated the need to study expenses or expense ratios and offered a simpler, more predictable one-step method.

While GIM offers more predictability, it fails to provide more accuracy. GIM is not seriously employed by any major developer, investor, lender or appraiser today, nor has any New York court embraced it.

In the most recent edition of its handbook, the Appraisal Institute warned appraisers to be careful when using this GIM method. The handbook cautions that all properties used as a basis for this approach must be comparable to the subject property and to one another in terms of physical, location and investment characteristics. If properties have different operating expense ratios this method may not be comparable for GIM valuation purposes.

The GIM approach presents one overriding problem. It is applied to all residential property regardless of location, age physical conditions or the level of services. Also, using GIM throws retail rents, antenna, signage or health club income into the mix, thus, offering the distinct possibility of grossly inaccurate and unfair assessments for many types of properties.

In addition, many substantial valuation disparities occur due to factors such as rent controls, rent stabilization and complexes composed of a large group of buildings. There may be substantially different expense ratios for an aging multi-building housing complex and a 100-unit, mid-block, non doorman apartment house in the West Village. These differences generate unfair tax assessments.

Legal Flaws in GIM

Initially, the Finance Department used different GIMs depending on income level and whether the property is rental, co-op or condominium. This directly violates state law, which mandates that these properties must be assessed uniformly. Therefore, the New York City Law Department ordered Finance Department to make changes; co-ops and condominiums had their assessments lowered and rentals saw their assessments increase.

The fact remains that for all rent-producing properties, the city possesses detailed real property income and expense information from legally mandated filings, and requires detailed statements by CPAs in all but the smallest assessment challenges. This surely provides a database for accurate net income capitalization and takes into account location, condition and other significant factors which ordinarily would render GIM suspect.

As the Finance Department begins to use the GIM to derive property tax assessments, owners need to be on guard against property tax increases. When these increases appear, an owner's only defense is filing a property tax appeal. Income capitalization may be down, but it is not out.

MarcusPhoto290Joel R. Marcus is a partner in the New York City law firm Marcus & Pollack, LLP, the New York City member of American Property Tax Counsel (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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Apr
08

Keeping an Eye on Commercial Property Tax Assessments

"...whenever the assessor seeks income information, the property owner should ensure that only income attributable to the real estate is provided."

By Robert L. Gordon, Esq., as published by Midwest Real Estate News, April 2008

Throughout the United States, assessors constantly search for new ways to squeeze value from commercial property. Assessing the business value of the property rather than just its real estate value has become one of the most common stratagems assessors employ. They do this by purporting to value the property on a traditional income approach, but then use the income generated from a business conducted on the property to derive the property's value. This violates the fundamental rule of ad valorem taxation, which states that only value generated by the real estate itself can be taxed.

This generally causes no problem for leased property. To take a simple example, a commercial office building clearly can be assessed based on the rental income it generates to the owner. Unquestionably, such income represents pure real estate income, generated by the real estate itself. No assessor would seriously seek to assess an office building by including income generated by the law firms, accounting firms and other commercial tenants who rent the office space.

The problem arises for owner-occupied property, where no rental income stream exists that the owner can identify as income generated by the real estate itself. In such cases, it becomes easier for the assessor to take the income generated by the business the owner operates at that location and try to portray that business income as income generated by the property.

In some cases, it should be obvious that the assessor cannot do so. For example, a successful retailer may generate several hundred dollars of retail income per square foot by selling high-end consumer electronics at its owner-occupied location. It would be difficult in that case for the assessor to claim that the income was attributable to the real estate and not the retailer's business skills. On the other hand, as we will see, where a business operated by the owner is less clearly separable from the real estate, the assessor will have an easier time trying to ascribe the income to the real estate.

Court weighs in on business value

Three Wisconsin appellate court decisions on this issue prove instructive and provide a fairly universal guide to steps property owners in any jurisdiction can take to ensure that assessors capture only the value of their real estate, and not the value of a business conducted on that real estate.

Wisconsin courts require that the real estate itself must have the "inherent capacity" to produce income before that income can be considered in assessing the property. In the first Wisconsin case on this issue, the Court of Appeals rejected a regional mall owner's argument that the mall should be assessed at less than its purchase price on the theory that the purchase price included a business value independent of the real estate. The court held that since regional malls exist for the purpose of leasing space to tenants, all the income generated by leasing this space is "inextricably intertwined" with the real estate and, thus, assessable.

In a second case, the Wisconsin Supreme Court found that income generated by a state-licensed, owner-operated landfill could be included in the property's assessment. The court stated that since the license was "specific to the site" and could not be transferred to any other property, the land itself had " an inherent capacity to accept waste that would not be present" in sites without licenses. The court noted, however, that neither side had been able to find evidence of leases in the local market, that is, instances where landfill operators paid the property owner market rent to lease a landfill site. The court indicated that had such market information been available, it likely would not have permitted the landfill income to be used in formulating the assessment.

Actions Owners Should Take

Property owners in any jurisdiction can glean several lessons from these decisions. First and foremost, whenever the assessor seeks income information, the property owner should ensure that only income attributable to the real estate is provided. For example, this will be relatively easy in the case of a retail sales location, since retail sales income is not properly attributable to real estate.

In more difficult cases, some income may be attributable to the real estate and some may not. In such instances, owners need to carefully structure their operating statements so that income sources not directly pertaining to the real estate are reported and categorized separately, and not intermingled with the real estate income. The more the owner blurs the real estate and other income together in a single operating statement, the easier it will be for the assessor to cite that statement as proof that the income in question is "inextricably intertwined" with the real estate income.

Finally, as the Wisconsin landfill decision makes clear, the best defense against an assessor seeking to include business income in a property assessment is actual evidence of local market rental rates for similar properties. Property owners need to exhaust all possibilities for finding like businesses that lease their space, since such market evidence makes it next to impossible for the assessor to claim that business income which exceeds those market rental rates is attributable to the real estate.

In sum, property owners who carefully review and understand the basis for their property tax assessments, and who regularly focus their attention on how their business income is reported to the assessor, stand the best chance of avoiding unlawful property taxation of their business income.

Gordon_rRobert L. Gordon is a partner with Michael Best & Friedrich LLP in Milwaukee, where he specializes in federal, state and local tax litigation. Michael Best & Friedrich is the Wisconsin 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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Apr
08

Surprise: Falling Real Estate Market Brings Rising Taxes

"While sophisticated owners and mangers understand these facts, they often ignore the effect when they see a fully leased building. This remains the classic mistake made by owners when dealing with property taxes."

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

The office market in New Jersey has softened considerably according to statistics cited in a recent Wall Street Journal article. While sales of large commercial buildings have declined nationally, the drop in Northern and Central New Jersey has been significant. The area's office vacancy factor remains at 17.8% for the 4 th Q4 of 2007. Then, too, according to Real Capital Analytics, Inc., a New York real estate research firm, the area is tied with Kansas City, Missouri and Sacramento California for the largest percentage decline in sales volume in the 50 major U.S. markets.

These facts bring into focus a key question: What will this slump do to property tax assessments? The answer depends on the level of due diligence performed by the tax mangers and owners responsible for these properties.

Historical precedent tells us that even with a long term upward trending real estate market, there will always be periods of repose, and in some instances contractions. We are currently in such a contracting period. This means owners will put considerable effort into reducing operating expenses as portfolios are devalued. And, the single biggest expense, after debt repayment, for all types of properties is property taxes.

Many owners and managers fail to realize that property taxes must be examined annually to ensure equitable treatment across time for their properties. A property may be fairly valued and assessed for years and then, suddenly, become over-assessed.

This is precisely what the current confluence of events has precipitated this year in New Jersey. First, office market vacancy rates continue to remain at high levels with no indication of reduction. Second, the meltdown in the subprime mortgage market has seriously eroded the capital markets. Banks and financial institutions are requiring significantly more capital infusion from prospective buyers. This, coupled with lender fears, has forced capitalization rates to rise. Third, the employment climate in the state continues to weaken as fears of an economic recession rise.

While sophisticated owners and mangers understand these facts, they often ignore the effect when they see a fully leased building. This remains the classic mistake made by owners when dealing with property taxes.

For property tax assessment purposes, property must be valued each year as if a snapshot of the market is taken on October 1 st of the prior year. For 2008 property tax assessments, owners must ask themselves: What would the current economic market rent, vacancy, and capitalization rate be for each property as of October 1, 2007? Because of the events previously described, any reasonable level of analysis would conclude that most commercial property must be valued below the prior year. Therefore, even if the assessment remains static year to year, the property becomes over assessed because of macroeconomic forces.

Assume the following example: A 100,000 square foot office building leases for an average rental of $25 per square foot based on leases that are several years old. The average vacancy in the building is 5%. If current economic rates indicate that as of October 1, 2007 the appropriate market rent for that building, were it exposed to the market, would be $20 per sf with a 15% vacancy rate, using this example, the building's gross income would drop by more than 29%. This alone results in a significant change in value for this property.

However, the building's market value falls even more when a change in the capitalization rate is appropriate. Based on the macro economic changes described above, an increase in the capitalization rate would be appropriate. In this example, if the capitalization rate changed from 9% to 10%, the value of the property would decrease more than 35% from its original valuation. While a buyer examining the rent roll and net income, as indicated in the example, sees no change based on contract rent, enormous changes have taken place based on economic rent and current market conditions.

Holding a commercial property for long term capital appreciation represents a sound investment policy. Operating under such a policy puts enormous pressure on owners not to ignore cyclical downturns. Even in the short term, those down drafts can dramatically affect a property's valuation for property tax purposes, costing owners untold thousands of dollars in tax expense.

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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Mar
11

Mass Appraisals May Lead to High Taxes

"Hotel owners and managers should resist attempts by the taxing authority to use short-cut methods to derive their valuation for property tax purposes."

By Mark S. Hutcheson, Esq., as published by Hotel News Resource, March 11th, 2008

Every year, most assessors across the nation face the daunting task of determining market value for every property in their jurisdiction. By virtue of necessity, they are required to use 'mass appraisal' techniques to value thousands of properties within a very short time frame.

When these mass appraisal short-cuts are used to value hotels, however, the results often yield widely inaccurate valuations for property tax purposes.

Wide-spread agreement exists within the appraisal industry that determining the tangible (taxable) value of a hotel is one of the most difficult tasks. The best minds in the appraisal community differ greatly on the proper way to segregate non-taxable intangibles in hotel valuations.

  • Capitalizing the trailing 12-months net income, but subtracting management and franchise fees as expenses.
  • Capitalizing net income and subtracting a percentage, usually between 20% and 30%, for 'business value.'
  • Applying a standard gross room revenue multiplier (GRRM) for each hotel type.
  • And, most simplistically, taking the year-end RevPar multiplied by 1,000, multiplied by the room count.

If these approaches yield a proper assessment, it is just by coincidence. Applying a standard adjustment for business value or a GRRM may yield acceptable values. But, an owner who accepts this kind of short-cut method in one year may face totally unacceptable values in future years when market conditions change.

Hotel owners and managers should resist attempts by the taxing authority to use short-cut methods to derive their valuation for property tax purposes. This calls for owners to perform an independent analysis every year by using market income, adjusting for the return on and of start-up costs and business personal property and employing appropriately determined capitalization rates. Such an analysis provides owners with the necessary data to begin discussions with the assessor for more accurate and equitable tax assessments on their hotels.

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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Feb
22

Tax Matters: Critical Issues for Taxpayers Desiring Tax Reductions

"Many assessors routinely send Chapter 91 requests to taxpayers seeking information about income producing property."

By John E. Garippa, Esq., as published by Globest.com Commercial Real Estate News and Property Resource, February 22nd, 2008.

New Jersey taxpayers need to know about two critical issues as they consider possibilities for property tax relief.

The first issue is the filing deadline. All property tax appeals in New Jersey must be filed no later than April 1, 2008. This date requires that the appeal be received by the Tax Court on that date. Merely mailing the appeal with a postmark of April 1st will result in a dismissal. As a precaution, taxpayers would be well advised to file their appeal anytime after January 1, 2008. When the appeal is filed, all property taxes due and owing must be paid in order for the appeal to be considered by the court.

The second issue revolves around the need to timely respond to Chapter 91 requests that have been made by the assessor. Many assessors routinely send Chapter 91 requests to taxpayers seeking information about income producing property. These requests, which must be answered within 45 days of receipt, are sometimes ignored by taxpayers. That is a fatal error. If the assessor sends out such a request, it must be answered in order for the taxpayer to have the right to file a tax appeal the following year. Many valid tax appeals have been dismissed for this failure.

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

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Feb
08

ICAP Would Trim Developers' Incentives

Under the proposed ICAP legislation, retail facilities benefits would be dramatically reduced

"Most knowledgeable developers disagree with restricting the program's benefits and eligibility and want the program extended unchanged."

By Joel R. Marcus, Esq., as published by Real Estate New York, February 2008

The Industrial and Commercial Incentive Program is New York City's largest commercial real estate incentive program, with approximately 15,000 applications filed since its 1984 inception. KIP provides partial real estate tax exemptions for new and renovated industrial and commercial buildings in most areas of the city. While the program's renewal seems certain, it's likely to undergo significant legislative revisions.

Critics contend that lClP operates at a substantial fiscal loss for the city, with approximately $371 million in real estate tax revenues foregone in 2006 alone. The city demands reforms to the current ICIP. Specifically, they want to restrict benefits to commercial and manufacturing buildings in geographic areas that truly require special real estate tax incentives to encourage construction, stimulate employment and foster significant new economic activity. Most knowledgeable developers disagree with restricting the program's benefits and eligibility and want the program extended unchanged. In the proposed legislation, three elements are particularly noteworthy:

1. Abatement vs. Exemption

The current IClP offers tax exemption for new and renovated buildings based upon building assessment increases directly attributable to construction, i.e. "physical increases" described in the application. Industrial and commercial buildings located in special exemption areas also qualify for exemption from assessment increases arising from inflation or market value appreciation, i.e. "equalization increases." It appears ICIP amendments will provide a tax abatement rather than an exemption. For that reason, the revised legislation is generally referred to as the Industrial and Commercial Abatement Program. While exemptions reduce the amount of assessment subject to real estate taxation, abatement's are tax credits that directly reduce tax liabilities imposed upon the property. A project's abatement base will reflect the difference between the assessed value of the completed building and 11 5% of its pre-construction assessed value.

2. Reduction of Retail Eligibility

Under the proposed new lCAP legislation, benefits for retail facilities would be dramatically reduced and would depend upon the type of project and its location. Critics of KIP contend that new retail facilities frequently displace sales from existing locations in the city rather than create new economic activity. Retail space within newly constructed or renovated commercial buildings in Manhattan south of City Hall would remain eligible for [CAP benefits. Commercial buildings in Manhattan between City Hall and 59th Street would not be eligible for abatement benefits on any retail space greater than 5% of the total floor area. In regular commercial benefit areas, retail space in excess of 10% of the building's floor area would not qualify for abatement benefits.

3. Reduction of Eligible Construction Period

The old ICIP program called for commercial or industrial construction work to be performed between the date the first building permit is issued and the sixth taxable status date (Jan. 5) there after. Failure to meet these construction benchmarks would not mean denial of benefits but merely serves as a cap on the exemption base.

Under ICAP, owners generally would have to complete new buildings within five years of the permit date and renovation projects within two years of the permit date. Failure to complete construction within these periods would mean revocation of all abatement benefits granted from inception. The abatement base would be limited to physical assessment increases within three years after the permit date for new buildings and one year after the permit date for renovations. ICAP would reduce the lClP construction period from almost six years to one to three years, depending upon whether the project is a new or renovated structure. Clearly, ICAP offers far less generous benefits than those available under KIP. To capture lClP benefits, owners must 1) file a preliminary application with the New York City Department of Finance prior to June 30,2008 and 2) obtain a building permit no later than July 31,2008. These dates are critical if owners want to qualify their projects under IClP rather than ICAP.

MarcusPhoto290Joel R. Marcus is a partner at the law firm of Marcus & Pollack LLP: a member of American Property Tax Counsel, an 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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Feb
08

When the Cost Approach Proves Unfair

Using comparable market sales for taxation can correct errors assessor errors.

"The tax professionals' initial work identified three relatively recent sales of comparable properties that suffered from functional and external obsolescence, much like the taxpayer's property."

By Stewart L. Mandell, Esq., as published by National Real Estate Investor, February 2008

Assessors typically value industrial and commercial properties using a cost approach that starts with land value, adds the cost of property improvements and subtracts some physical depreciation, often based on the property's age. Deducting only the physical depreciation from a property tax valuation often results in egregiously excessive taxation. However, by applying data regarding comparable market sales, taxpayers can remedy this problem, sometimes with extraordinary results.

Seldom are such factors as functional or external obsolescence, which can dramatically diminish property values, used in assessors' property tax valuations. Functional obsolescence arises from the flaws that exist in a property. Examples include an abnormal size, shape, or height, concrete floors that are exceptionally deep or too shallow and so forth.

External obsolescence results from outside forces such as industrial properties becoming vacant because production moves offshore, or a change in tax laws that reduces commercial property values. Fortunately, data from comparable property sale can be used to identify specific amounts of functional and external obsolescence; amounts that must be deducted from assessors' valuations to eliminate unlawfully excessive taxation.

Consider an industrial facility with above market operating expenses that houses manufacturing barely surviving global competition. In an actual case similar to this example, the assessor made a mere 4% reduction for functional and external obsolescence even after the taxpayer had fully described the obsolescence. Ultimately the taxpayer retained property tax professionals who knew how to use sales of comparable properties to demonstrate the diminished values the obsolescence caused.

How the process works

Assessor's records commonly contain errors in a property's age, total square footage, net leasable area, number of units, unit mix, and facility amenities. An error in the property's basic data can significantly increase a property's overall assessment. Providing a current rent roll to the assessor can help correct mistakes in a property's basic data. An owner may also wish to produce a site plan for the property along with the most recent marketing materials that show the project's different floor plans and amenities. Correcting basic errors in the assessor's records remains the simplest path to lower a tax assessment.

The tax professionals' initial work identified three relatively recent sales of comparable properties that suffered from functional and external obsolescence, much like the taxpayer's property. The professionals used these sales to quantify depreciation in a way that enabled them to reasonably estimate the obsolescence in the taxpayer's property. Using the steps followed by the professionals, taxpayers can garner stunning property tax reductions. Here's how:

  • Determine the value of improvements by subtracting the value of the land from its sale price for each of the comparable properties.
  • Determine the construction cost of improvements when new by researching construction costs in national estimating services such as Marshall Valuation.
  • Calculate the property's total depreciation by subtracting the value of the improvements today from the cost to construct the improvements.
  • Ascertain physical depreciation by dividing the property's effective age by its life expectancy.
  • Estimate functional and economic obsolescence by subtracting the physical depreciation from its total depreciation.

The taxpayer's reward

Completing this analysis for the three comparable sales produced an indication of functional and external obsolescence that was far greater than the assessor recognized in his assessment. Having established a 40% to 48% range for obsolescence, the professionals then determined whether any further adjustments were warranted such as those due to differences between the sold properties and the taxpayer's property.

For example, unlike the sold properties, the taxpayer's property was both excessively large and had an unusual shape. These features would cause the taxpayer's property to suffer from even greater obsolescence than the sold properties.

As a result of the analysis, the assessor agreed that a proper cost approach required both the physical depreciation originally calculated plus an additional 40% reduction for obsolescence, an $8 million assessment reduction.

This example demonstrates that the property owner was able to deduct functional and external obsolescence without relying on an income analysis. In this case, property was located in a market where virtually all of the industrial properties were either owner occupied or vacant, making it impossible to obtain income information.

In the cost approach, where physical depreciation represents the only deduction, taxpayers should expect that properties with functional and external obsolescence will be overvalued.

When that happens it is crucial that taxpayers take action. To paraphrase the renowned philosopher, Mick Jagger, when it comes to property taxation, taxpayers may not be able to get what they want, but armed with the right information and professional assistance, they may be able to get what they need.

MandellPhoto90Stewart L. Mandell is a partner in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Feb
08

Taxpayers Beware: New Jersey Sets Revaluation

"Over the past 18 months, the residential market has faced significant erosion and downward pricing pressure with the subprime mortgage meltdown reducing the value of most residential property. The increasing inventory of unsold housing units causes additional downward pressure."

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

At the start of a new year, it is vitally important for New Jersey taxpayers to understand the challenges they should expect regarding property tax assessments. For 2008, many taxing jurisdictions have completed municipal-wide revaluations. Under New Jersey law, in a revaluation all tax parcels are valued at 100% of fair market value. The revaluation set for the 2008 tax year values all property as of October 1, 2007.

The difficulty in properly completing this assignment arises because it generally takes 18 months to properly complete an accurate revaluation. Most often, in the process of their work, revaluation firms consider comparable sales data and comparable income data derived during a 12-month period prior to the October 1 st date. They place greater reliance on that data which is closest to the October 1 st date.

Problems occur with revaluations when the data relied upon does not accurately measure the true value of property at October 1, 2007. In some markets, where a significant value change takes place, accuracy is almost impossible. This year that market will almost certainly be residential revaluations.

Over the past 18 months, the residential market has faced significant erosion and downward pricing pressure with the subprime mortgage meltdown reducing the value of most residential property. The increasing inventory of unsold housing units causes additional downward pressure. Revaluations commencing in 2008 are relying upon sales dating back to 2006, still a period of strength for the residential market. Taxpayers should carefully review their tax notices to determine if these revaluation notices accurately reflect the value of their property as of October 1, 2007.

In Commercial, a continuing challenge will be the fact that now most assessors routinely send Chapter 91 requests to taxpayers every year. These requests are designed to assist the assessor in determining current information about all income-producing property within a taxing jurisdiction. A taxpayer has 45 days to respond to this inquiry.

A failure to respond results in the automatic dismissal of any tax appeal filed thereafter for that tax year. Every year, hundreds of tax appeals are dismissed by the Tax Court because taxpayers failed to properly respond to these requests. While all taxpayers should be diligent in answering Chapter 91 requests, owners with larger portfolios need to stay particularly vigilant regarding these requests.

Taxpayers owning income-producing property also face challenges. High vacancies continue to be seen in many office markets, and the prospect of a slowdown in the economy puts pressure on many commercial values as well. Likewise, with the subprime mortgage market affecting other sectors, retail properties will face price pressure.

All of this makes valuing these properties difficult during 2008. Many of these properties will be worth less in the months after October 1, 2007, than they were prior to October 1. While that fact may not assist in reducing an assessment for 2008, it can be useful in negotiating assessments for 2009.

Key Points You Need to Know: Remember, it is not unusual during the tax appeal process for a tax assessor to request a dismissal for a prior year in order to reduce the following year's tax assessment. This allows the assessor to reduce an assessment for a subsequent year prior to collecting any taxes. The ploy puts the taxing jurisdiction in a position where they will not have to pay any property tax refunds.

The law in New Jersey presumes that assessments are correct. The burden falls on the taxpayer to demonstrate through probative evidence that the value placed by the assessor isn't correct. This makes it especially difficult for taxpayers when market value changes month to month and value must be proven as of October 1, 2007.

Once the tax rolls are closed and certified, a procedure that takes place by the end of the prior tax year, only by filing a valid tax appeal can an assessment be lawfully changed. The tax appeal process can be difficult and expensive, requiring significant proofs. Each taxpayer needs to be aware of the significant difficulties involved, and the fact that these problems are even more pressing when significant economic issues come into play.

Valuing real property in normal static times is difficult enough, valuing them during times of significant change can be almost impossible. Taxpayers face significant obstacles throughout all of 2008 as they try to obtain equitable tax assessments. Bringing together the combined knowledge and expertise of your entire tax team will benefit taxpayers in this tough environment.

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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