"Smart shopping center owners follow Hoteliers' approach to reducing property taxes."

By Cris K. O'Neall, Esq., as published by National Real Estate Investor, November/December 2009

Why do taxing authorities recognize intangibles for hospitality properties, but not shopping center properties? The answer may be the way mall intangibles have been chara­acterized for tax purposes.

Intangibles include such items as business franchises, licenses and pera­mits, operating manuals and procedures, trained workforce, commercial agreea­ments and intellectual property.

Owners of hospitality properties know that branding their properties with well-recognized franchises or flags, such as Marriott, increases revenues. Because branding usually delivers access to resera­vations and management systems, traina­ing programs and other value-added benefits, it attracts clientele willing to pay premiums for hospitality stays and related amenities.

While hospitality properties benefit from their property tax exemption for franchises and other intangibles, shopa­ping mall properties haven't garnered the same benefits.

A recent unfavorable decision by the Minnesota Tax Court in an appeal filed by Eden Prairie Center in suburban Minneapolis typifies the difficulty shopa­ping center owners face in obtaining exemptions for intangibles. Mall owners who could use a respite from high propa­erty taxes are understandably frustrated.

Identifying intangibles

Hotel owners have succeeded in claiming the intangibles tax exemption by identia­fying specific types of intangibles, such as franchises and employee workforce, and assigning values to those tax-exempt items. This approach is particularly suca­cessful in states like California where statutes and court decisions support deductions for intangibles.

In contrast, shopping center owners typically urge tax assessors to reduce assessments based on residual "business enterprise value" (BEV). These owna­ers ascribe to BEV the higher in-line store rents produced by the presence of high-end anchor tenants or a particularly advantageous tenant mix.

Taxing authorities are reluctant to accept taxpayers' requests for BEV assessa­ment reductions. Court decisions involva­ing shopping center properties usually point to difficulties in proving BEV and the problem of separating intangibles from real estate.

Mall owners should focus on intana­gible assets and rights specific to their properties, as hospitality owners have done, rather than rely on the more neba­ulous BEV. They should identify and determine the value of intangibles such as anchor tenant and/or mall trade names, management agreements, and advertising arrangements. Creativity in identifying and valuing intangibles can bring significant assessment reductions, but success depends on owners' efforts. For example, proving to taxing authorities the benefits of having upscale anchor tenants likely requires an appraiser's analysis and may also depend upon data for competing properties.

Making the case

After intangibles are identified, an appraiser who specializes in intangible valuation should be retained to appraise the identified assets and rights. Then the total value of the tax-exempt intangibles is deducted from the entire property's value to arrive at the value of the taxable real property.

If the value of all intangibles is suba­stantial, this should be presented to the assessor. Ideally, informal negotiations with the taxing authority result in lower assessments. Even with the best efforts, however, it's still possible that the assessor won't reduce a shopping center's value by removing tax-exempt intangibles. In that event, a tax appeal should be filed.

Cris K. O'Neall is a partner with Cahill, Davis & O'Neall LLP, the California 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..

"An urgent need exists for better forensic appraisal methods to support property valuations in this time of declining values."

By John E. Garippa., as published by Real Estate New Jersey, November/December 2009

Over the past 18 months, property values have declined significantly for all asset types in New Jersey. While this resulted in record numbers of property tax appeals, actual transactions between buyers and sellers demonstrating this erosion of value are limited. This can be problematic when dealing with the finite valuation dates demanded by the New Jersey Tax Court.

Tax Court judges won't accept opinions of expert witnesses unless they provide supporting evidence that a property's value has declined. Despite the fact that few actual sales are available between buyers and sellers, property values can still continue to erode. The real question is: What steps can a property owner and appraiser take under such difficult conditions?

Events over the past year have proven that valuing property at a specific point in time, a necessity for tax appeals, can be almost impossible using the typical valuation parameters of comparable sales. Under New Jersey tax law, all real property must be valued for the 2009 tax year based on a valuation date of Oct. 1, 2008. But the events of last summer and fall were cataclysmic for all property types.

The entire nation watched as our financial system began a meltdown that culminated in the collapse of Lehman Brothers on Sept. 15, 2008. During this several-month period, the stock market lost almost 40% of its value. This tsunami affected real estate just as much as it did stock portfolios.

To demonstrate this point, consider a hypothetical sale where the deed was transferred on Oct. 1, 2008. In stable times, such a transaction might be the gold standard of defining what a willing buyer would pay and a willing seller would accept for a property on the very date defined by New Jersey tax laws for valuations. However, if this sale were like most others, the parties would have negotiated the terms at least three to six months before.

Looking back to the period six months prior to the Lehman Brothers collapse reveals an entirely different world, from an economic standpoint, than the one America faces today. No one would suggest that value parameters arrived at during that quieter time would reflect the disastrous conditions found on Oct. 1. Under stable market conditions, comparable sales can be relied upon to demonstrate market value. The lack of sales transactions in the past year has rendered comparable sales a limping metric for property tax purposes. Thus, an urgent need exists for better forensic appraisal methods to support property valuations in this time of declining values.

It's easy to forget that the basic laws of economics govern the real estate market. The economic base of a community revolves around businesses generating income from their activity. Therefore, the first step to take in demonstrating eroding values is an examination of the industries and businesses that generate employment and income in a community. Such a study would review changes in employment levels as well as population trends because these issues affect household income and other important factors that ultimately affect the demand for, and worth of, real estate.

In times of great price turmoil, analyze the loss in value in the various stock market indices as this may define how individuals view their wealth. Another important index to study is the Purchasing

Managers Index. The PMI represents a composite of five sub-indicators (production levels, new orders from customers, supplier deliveries, inventories and employment levels) that are extracted through surveys produced by the Institute of Supply Management. These surveys are sent to more than 400 purchasing managers around the country. While this measures only manufacturing trends, it is considered a good predictor of changes in gross domestic product and the economy as well.

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

"Tax assessors usually remain behind the curve of market trends."

By Joel R. Marcus ., as published by Real Estate New York, November/December 2009

All New York City property will be revalued on Jan. 5, 2010. Although that date is not yet here, rest assured that trouble awaits commercial property owners in this revaluation.

First of all, tax assessors usually remain behind the curve of market trends because the Real Property Income and Expense form requires mandatory filing of income and expense statements, which show only the property's calendar year 2008 performance. Since the market fell off a cliff after September 2008, these operating statements don't demonstrate the dramatic loss in real estate value.

Adding to the burgeoning taxes is the five-year phase-in of actual assessments mandated by New York law, whereby each increase over the past five tax years is added to the transition assessment or taxable assessment in 20% increments. Therefore, even if the actual assessment remained the same or was lower, the transition assessment, to which the tax rate is applied, would still reflect the impact of the prior five years' increases.

Hotels took the worst hit in the recession, suffering a 50% decline in earnings. The horrible expense ratio they now exhibit compounds their plunging profits. Instead of expenses approximating 70% of income, hotels find that costs may equal or exceed gross room revenue.

To create property tax assessments, the city employs a gross income multiplier, which ignores actual expenses. While the occupancy of many hotels has decreased along with their room rates, they still have to provide a level of service, staffing and other expenses that leaves marginal hotels or properties operating in the red. Hotels may find some degree of relief because the Tax

Commission has expressed a willingness to consider expenses in setting tax assessments. However, even here the old 70% ratio method has more traction with the tax authority.

Owners of condo properties with many unsold units find themselves in a tough bind. Condos do not generate rental income and sales are at a virtual standstill, yet condos are valued as if they were rental properties. This squeeze of higher property taxes and little income throws owners into the hands of their lenders.

Since rental income from conventionally rent-producing apartment buildings has only declined 10% to 15%, not much relief in tax valuations can be demonstrated by objective calculations. Moreover, data from luxury rentals is also derived from the 2008 calendar year filings, which, as mentioned, are not yet showing the full measure of market fall-off. Often, too, the burnoff or expiration of abatement programs significantly raises taxes.

Office and other commercial properties will show their decrease in income more slowly because the 10-year lease, which is most common, often masks the drop in fair market rental value. The only reduction seen in the market comes from increasing vacancies and renewals at lower rents. The impact of reduced rents, loss of operating and tax escalation income associated with the signing of a new lease and establishment of a new base year will not be fully realized for several years. In the meantime, income statements mask the problem by showing lease cancellation income and, in the case of new leases, the straight-lining of free rent and the amortizing of leasing commissions and tenant work.

To bring real estate taxes down to a viable level, a difficult task even in normal times, owners will need sophisticated analysis and effective presentation. A compelling presentation to the assessor regarding the rise in capitalization rates is paramount.

Hotels need accurate data to reflect current conditions, including labor and staffing requirements. They must also show the assessor how the increase in new rooms and new hotels precipitates lower rates and higher vacancies.

Condos need to create valuation models using realistic market conditions, high capitalization rates and a broader mixture of comparable assessments and data. Showing condo price reductions will not prove your case.

Office and commercial properties must clearly demonstrate the lack of any net absorption of space, indicating a 15% vacancy and loss factor in a 100% occupied property. In addition, any large vacancy is likely to be sustained for the foreseeable future, thus, the need for downward adjustment of occupancy.

Joel 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, the national affiliation of property tax attorneys. He may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

Valuation of Low Income Housing Tax Credit Properties for Real Estate Tax Purposes — an update from the Ohio Supreme Court

By Cecilia Hyun, Esq., as published by CMBA Journal, October 2009

There is a joke that made the rounds by email and on various real estate blogs awhile ago showing a house through the eyes of five different people: yourself, your buyer, your lender, your appraiser, and your tax assessor. (You can see a version of it here). The first image is of a nice, well kept, single family house with flowers, a nicely landscaped front yard and path. This is how you see your house. The next image shows what your potential buyer sees when looking at the same property: a smaller, more modest home resembling a modern log cabin. The next two images show how your lender and appraiser view the property. The lender sees an even smaller structure, with no lot to speak of, that looks like it was constructed piecemeal. Tarp covers part of the roof; the only thing that looks like it may be a window is boarded up, and there is laundry hanging from a clothesline out back. The appraiser sees a property that looks like it has been in the middle of a severe storm at the very least, if not a hurricane, parts of the walls are missing, there is flooding, and trees have been uprooted. The final picture depicts what your tax assessor sees when he looks at your house: a palatial, walled estate, with acres of land, surrounded by professionally landscaped gardens and trees, multiple wings, and at least one carriage or recreation house.

Like all good jokes, it contains a kernel of truth: property can be and is viewed through different prisms and within different frameworks. Different methods of valuing your property can lead to significant differences in value conclusions, and accordingly, your real estate tax bill.

The Ohio Supreme Court recently clarified how to value property constructed pursuant to federal low income housing tax credits ("LIHTC")1. The property in Woda consisted of sixty separate parcels of land improved with sixty detached, single family, homes containing two, three, or four bedrooms. The houses were built in 2002 pursuant to Section 42, Title 26 of the United States Code2 ("IRC 42"). As the court explains, under this program, federal tax credits are given to passive investors in low income housing developments. In return for these credits, rent restrictions are imposed on the property for a minimum of thirty years. These rent restrictions are binding on successive owners and must be recorded in the chain of title. Violations of these restrictions can lead to the recapture of the tax credits with penalties and interest.3 The Supreme Court held the use and rent restrictions are encumbrances that must be considered when valuing these types of properties for real estate tax purposes.

The owner-taxpayer of the low income housing property in Woda filed a complaint contesting the value the Fayette County Auditor placed on the property for tax year 2004. After a hearing at the local county board of revision ("BOR"), the Auditor's value was retained. The taxpayer then filed an appeal of the BOR decision to the Ohio Board of Tax Appeals ("BTA") located in Columbus.4 The BTA held that the taxpayer's evidence was unpersuasive and determined that the Auditor's value was correct.5 After reconsideration by the BTA, but no change in its decision, the taxpayer appealed the BTA decision to the Ohio Supreme Court.

At the BTA hearing, the taxpayer had offered the report and testimony of a state certified general real estate appraiser. The appraiser did not develop a cost approach or sales comparison approach to value, using only the income approach to determine value. (The Ohio Adm. Code Section 5703-25-07 outlines the three recognized approaches to value: 1) the market data or sales comparison approach, 2) the income approach, and 3) the cost approach). In the income approach, the appraiser developed a net operating income for the property, then directly capitalized that income to arrive at an overall value. He also developed a discounted cash flow analysis as if the units could be subdivided and sold to individual buyers (similar to an apartment conversion to condominium units) to serve as a check on the direct capitalization method.

The BTA rejected the appraiser's evidence based on the two main reasons: 1) the Board thought that the highest and best use of the property was for sale as individual units, rather than for continued use as rentals operated as one economic unit; and, 2) the cost approach was not utilized even though the subject property was relatively new, only having been constructed two years before tax lien date.

The Supreme Court reverses and remands the case to the BTA, holding that the effect of the LIHTC use restrictions must be considered when valuing the subject property. In past cases involving subsidized housing, the court had generally held that the properties were to be valued as if unencumbered by lesser estates, deed restrictions, or restrictive contracts with the government.6 Similar to the Woda property, the Alliance Court noted that without the federal loan guarantees, favorable mortgage terms, rent subsidies, and tax advantages associated with these properties, the properties would not have been built because the market rents would prohibitively low. The Alliance Court also notes that the tax shelter advantages associated with such properties are intangible items that do not add any value to the real estate.The Woda Court makes a similar point with respect to the tax credits, explicitly stating that the value of the low income tax credits should not be valued as part of the real estate. The court reasons that the credits are transferable apart from the underlying real estate and the value of the credit is determined by the tax situation of the purchaser, rather than any anticipated value from the real estate itself (or the "bricks and sticks").

On the other hand, the Supreme Court holds that the federal use restrictions in Woda must be taken into account when valuing a low income housing tax credit property , even if the value of the credits themselves are separate from the value of the real estate. In so holding, the Woda Court distinguishes between private e and involuntary government limitations to the estate such as eminent domain, escheat, police power, and taxation.7 The court finds that the LIHTC use restrictions are imposed by the government for the general welfare, qualifying as "police power" restrictions which express the judgment of Congress concerning public policy.8 Therefore, such use restrictions must be taken into account when valuing the property. The case is remanded by the Supreme Court bank to the BTA to receive additional evidence if necessary.

After the Woda decision was announced, the Ohio Department of Taxation issued a memorandum to all county auditors summarizing the holding and indicating that the Department read Woda as requiring the consideration of the use and rent restrictions that run with the land and prohibiting the inclusion of the value of the intangible tax credits when valuing LIHTC property for real estate tax purposes.

It clearly makes a material difference to value if the sixty parcels are valued as sixty individual homes, rather than as one economic unit consisting of rental units, or if the construction cost is used to determine value in a case like Woda. It will also matter in many cases whether contract rent, which could be higher or lower than market rent, is used to determine the income produced by a property. Intangible items unrelated to the value of the real estate, such as the value of the tax credits also must be separated out from the real property value to be taxed. As the joke demonstrates, appraising a property is not an exact science. A property is going to be valued differently by someone who is currently using the property, compared to someone who is considering buying the property, compared to someone who is going to lend you money for its purchase. Similarly, the value conclusion for your property and your resulting tax liability will be different based on what appraisal approach is used and which data is considered.

References:

1. Woda Ivy Glen Ltd. Partnership v. Fayette Cty. Bd. of Revision (2009), 121 Ohio St.3d 175, 2009-Ohio-762.
2. 26 USCA §42.
3. Woda at 179.
4. Woda Ivy Glen Ltd. Partnership v. Fayette Cty. Bd. of Revision (Sept. 21, 2007), BTA Case No. 2005-A-749, unreported.
5. Woda Ivy Glen Ltd. Partnership v. Fayette Cty. Bd. of Revision (Jan. 11, 2008), BTA Case No. 2005-A-749, unreported.
6. Alliance Towers, Ltd. v. Stark Cty. Bd. of Revision (1988), 37 Ohio St.3d 16, 523 N.E.2d 826.
7. Woda at 181 (citing Appraisal Institute, The Appraisal of Real Estate (12 th ed. 2001).
8. Woda at 181.

Cecilia Hyun is an associate attorney with Siegel Siegel Johnson & Jennings Co, LPA, the Ohio member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Stock price offers a reliable indicator for assessed value.

"Prediction of a property's ability to generate income is precisely what the income approach to value in property assessment attempts to accomplish."

By Stephen Paul, Esq., as published in National Real Estate Investor July/August 2009

Assessing the value of REIT assets for property tax purposes has historically been an ordeal for assessors, as well as for owners challenging their work. Published data indicates that property values have dropped over the past two years, but the lack of sales leaves relatively little to prove the declines.

Without an active market of REITs buying and selling property, the sales comparison approach to value loses its usefulness. Even if taxpayers and assessors agree that properties in most REIT sectors are best valued under the income approach, decisions about estimates of future income streams, capitalization rates, and other factors required under the income approach often breed intense discord.

These difficulties are amplified in today's market due to lower predictability of occupancies, lease terms, and percentage rents. Thus, REIT owners need new ways to substantiate for the tax authorities the decline in their property values.

Stock prices are telling

In many REIT sectors, declining stock values actually have the potential to provide suitable proof of decreasing property values. Since the trend in a REIT's stock price represents the market's prediction of the direction in which the capitalized funds from operations of the REIT likely will move, readily available stock market data could be used to show an assessor that assessed values should be reduced.

This methodology is particularly appropriate for REIT properties. The stock price for any ordinary non-REIT company, in effect, states how the market values the company's assets, but any indication of the value oPrediction of a property's ability to generate income is precisely what the income approach to value in property assessment attempts to accomplish.f the real property itself is unclear.

REITs are different. By definition, REIT assets comprise investments in real property. To qualify as a REIT, at least 75% of income must come from real estate sources, and at least 95% of income must be derived from interest, dividends, and the property itself. The trend in the value of a REIT stock thus reveals how the market values the income-producing capability of the REIT's real property.

Prediction of a property's ability to generate income is precisely what the income approach to value in property assessment attempts to accomplish. The income approach estimates future benefits from ownership of the property. But this estimate requires extensive market research to evaluate risk factors in order to accurately predict income streams and expenses.

Examples of these risk factors include whether tenants and locations are favorable, whether acquisitions were prudent, the likelihood that locations will go dark, and the extent to which rent collections might be in jeopardy. Evaluating such risks is problematic during a deep recession like that experienced currently.

In setting the stock price, however, the market already has evaluated the risk factors associated with the properties of a particular REIT. The market has performed the research that is so troublesome in a difficult economic climate.

Because the trend in a REIT's stock price represents a statement by the market in direct relation to the real property itself, the trend in value of the stock price can provide valuable support for reduced assessments and input for analysis under the income approach.

Understanding that REITs generally own many properties, often in multiple states or even worldwide, it should be acknowledged that stock price cannot determine with precision assessed values of individual properties. But the correlation between a REIT's stock price and its property value can be employed to demonstrate the necessity for some assessment reduction on individual properties.

Here's how

A simple linear regression analysis provides an ideal tool to prove the correlation between a REIT's stock price and the value of its properties. To illustrate the point, let's use data from an actual REIT property in the Midwest.

Assume the REIT appeals the 2008 assessment of one of its properties. That property is assessed for 2008 at $5.6 million when the REIT's stock is trading at $11.50 per share. Assume further that the assessed values and stock quotes have been as follows over the last six years

Plotting the stock quotes on the x-axis and assessed values on the y-axis of a graph produces a scatter diagram as shown in the accompanying chart. Using a simple linear regression formula, a trend line can be drawn through the data.

Because the trend line so closely matches the assessments across the six year period, it clearly illustrates that the stock price correlates very closely to the assessed values. Thus, stock price is a reliable predictor of assessed value.

This demonstrated correlation is not exhibited, however, by the 2008 assessment on which the REIT has filed an appeal. During the period illustrated in the chart, the increase in stock price from $9.95 in 2002 to $22.16 in 2007 had been matched by increases in assessed value from about $3.7 to $5.4 million.

But a further increase in assessed value to $5.6 million for 2008 is inconsistent with the stock losing nearly 50% of its value and falling to $11.50 per share.

Therefore, the REIT owner should urge the assessor to reduce the property's 2008 assessment.

In the current market, demonstrating that assessed values should be reduced demands resourcefulness. Absent comparable sales and easily identified factors under the income approach, analysis of the correlation between stock performance and assessed value can help demonstrate a necessary reduction in assessed value.

Stephen Paul is a partner in the Indianapolis law firm of Baker & Daniels, the Indiana member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"..the lesson here shows that whenever there may be a doubt as to the status of a property, always respond to assessors' requests for income and expense data, called Chapter 91 requests. It's the only way to protect your right to a tax appeal..."

By John E. Garippa, Esq., as published by Globest.com - NJ Alert, August 2009

Recent New Jersey case law has made it easier for assessors to thwart tax appeals filed by commercial property owners. One of the most potent weapons in the tax assessor's arsenal is the use of their power to request income and expenses associated with the taxpayer's property.

New Jersey law requires that on receipt of a written request from the assessor, every owner of income producing property in a taxing district must provide:

• A full and true account of the owner's name.
• The location of the real property.
• The income produced by the property.
• The expenses generated by the property.

In the event the taxpayer fails to timely respond to this request, any tax appeal filed by that owner for that tax year will be dismissed.

The statute imposes three strict obligations upon the assessor. First, the letter must include a copy of the text of the statute. Second, it must be sent by certified mail to the owner of the property. Third, the letter must spell out the consequences of failure to comply with the assessor's demand. The courts have strictly applied these standards to the tax assessor by indicating that the "government must speak in clear and unequivocal language where the consequence of non compliance is the loss of the right to appeal assessments."

In a recent case, the Tax Court of New Jersey faced the unusual issue of a property that historically produced income, but during the year in question, the property was vacated in order to make significant physical improvements. Thus, no income was produced by the property that year.

When the assessor sent the taxpayer a request for income and expense, the owner failed to respond. The taxpayer believed that no response was necessary because the property was owner occupied and non-income producing at the time of the request.

The Tax Court dismissed the taxpayer's appeal based on the New Jersey statute. The court concluded that this property never lost its character as income producing property. Temporary vacancies brought about by renovations are no different than the temporary loss of a tenant, or a tenant that has withheld rent. The flow of rental payments that ceased for the year in question was brought about by the taxpayer's business decision to renovate the income producing property.

Since the tax assessor previously recognized the property as income producing, and had received no response to her information request, she was left to formulate assessments for the property without economic data concerning the operation of the property. The assessor was unaware that the building was vacant and uninhabitable during the year in question, a factor that would have been important in developing the assessment.

For taxpayers, the lesson here shows that whenever there may be a doubt as to the status of a property, always respond to assessors' requests for income and expense data, called Chapter 91 requests. It's the only way to protect your right to a tax appeal. Appropriate responses can include explanations of major vacancies and ongoing renovations, thereby providing the assessor with valuable information for his use in developing assessments.

John E. Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair and Philadelphia. Mr. Garippa is also 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..

Tips to help affordable housing owners control their tax burden

"Being a unique property type established largely as a creature of government funding/subsidy programs, affordable housing assessment challenges should not take a cookie-cutter approach."

By Elliott B. Pollack, Esq. as published by Affordable Housing Finance, in a Web Exclusive AHF Newsletter, June 2009

When it comes to property tax considerations for affordable housing, one expert summed it up well. He wrote: "Opinions on the proper assessment of affordable housing real property are varied, and decisions on the best method to use in developing these assessments vary from jurisdiction to jurisdiction."

Thus, controlling the tax burden of affordable housing properties is a difficult matter about which to generalize. However, based on available guidance and experience, a number of questions should be researched by owners in all jurisdictions:

• Is there a state statute of general application that addresses the valuation of affordable housing for ad valorem purposes? If so, is the statute applicable to the type of financing/subsidy arrangement in place at the property? For example, what income or asset tests must be met by residents for the project to qualify?
• Has the local assessment authority issued any regulations dealing with this issue?
• Has a state agency with oversight authority over the local assessment practices carried out its duties?
• What restrictions are imposed on the owner? How long are these restrictions in place?
• If the nature of the financial benefit derives from mortgage financing, when do these restrictions expire?
• How have the courts of the applicable jurisdiction ruled on valuing these properties? What are the reported decisions from the highest appellate court or various trial courts?

Finding highest and best use

With those questions in mind, let's look at the approaches to real estate valuation: costs, sales, and income. With each methodology, determination of value requires understanding, first, and concluding what the highest and best use may be.

In this analysis, the highest and best use finding must be able to include the fact that the property is in some fashion or other rent-restricted and/or return on investment (ROI) limited and dependent on the government subsidy, guaranty, or concession for its creation and ongoing existence.

The cost approach is usually not helpful to value an affordable housing property. For older developments, depreciation and obsolescence generally become difficult to measure. For newer properties, construction cost is irrelevant unless the same government subsidy or program can be determined to be in place to support a new property. In these economically stressed days, that assumption may not hold.

The sales approach contains many of the same deficiencies since most market transactions will not be government-subsidized properties, but rather market-rate projects. Affordable housing projects tend not to trade frequently. By the same token, lack of comparable rent structures and locations will usually render the sales approach of little help.

In most circumstances, the income approach is the best methodology. As Richard E. Polton, MAI, points out, a property in the early years of its rent/net operating income (NOI) restriction covenants is probably best valued using a direct capitalization methodology. However, he continues, a project nearing the end of these restrictions, with a reasonable opportunity to revert to a market rental structure, might be better valued using a discounted cash flow approach.

In order to keep property assessment (and therefore taxes) as low as possible, a very careful analysis of the regulatory regime in place must be undertaken by the expert appraiser. Extraction of relevant provisions from the project documents, which support the restricted rent/NOI theme, usually constitutes a wise approach. Inclusion of applicable federal/state statutes and regulations to support the highest and best use conclusion will make the appraiser's report more credible and readable.

What's the cap rate?

Since the NOI of an affordable housing project should be fairly easy to establish, the key analytical challenge becomes developing and supporting a cap rate in order to express the correct market value.

The most convincing data are cap rates extracted from the sales of other affordable housing projects. If sales cannot be located in the immediate or surrounding jurisdictions, regional or national data should be obtained and examined since many larger affordable housing developments trade in the national market. This national activity typically takes place after the original developer extracts development fees and any applicable tax credits for itself and its investors.

Many experts do not think cap rates derived from market sales of non-restricted properties are terribly relevant in developing rates for income/NOI-restricted units. While restricted projects tend to be perceived as carrying lower risk due to assured income streams, appreciation is nonexistent, and major value upgrading potential such as condo conversion is usually impossible. Therefore, non-restricted properties as a group tend to sell at lower cap rates, meaning higher unit values because of the far greater upsides. Affordable housing owners should determine whether the assessing jurisdiction has attempted to place a separate value on the federal housing assistance contract, low interest rate mortgage, or rent subsidy. While these efforts may inflate value, they usually fail to meet state assessment law requirements, which reject adding the value of intangible financial assets to real estate assessments. In most jurisdictions, an attack on the effort by the authorities to assess intangibles will produce a winning assessment appeal.

The devil's in the details

Everyone would agree that a "fair" assessment should be accepted by an affordable housing project. The "devil" of achieving this goal is in the nitty-gritty associated with relating assessments to the ability of a property to carry a particular tax load.

An owner's inability to pass tax increases through in the form of rent subsidy increases or other financial offsets frequently can convince the assessor to reduce his or her expectations. In one circumstance, a tax professional found it very helpful in the prosecution of an affordable housing tax appeal to ask the owner to send leaflets to the property's 300-plus elderly residents about the tax increase concerns. The dozens of letters to the local assessor expressing concern about potential rent increases presumably had some impact in enabling the case to be settled.

Owners should also review for compatibility and consistency the assessments of affordable housing in their jurisdiction or neighboring communities. Occasionally, a tax appeal asserting lack of equalization will be victorious.

Being a unique property type established largely as a creature of government funding/subsidy programs, affordable housing assessment challenges should not take a cookie-cutter approach. An intimate knowledge of the property, applicable financing and restrictions, and market conditions become critical to keeping an assessment under control and thereby bringing taxes down. In the absence of legally binding guidelines or assessment practices and protocols applicable to affordable housing projects, an owner seeking assessment justice has much homework to do.

Elliott B. Pollack is chair of the Property Valuation Department of the Connecticut law firm Pullman & Comley, LLC. The firm is the Connecticut member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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

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

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

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

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

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

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

Altering the equation?

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

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

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

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

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

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

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

Premature celebration?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

John 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..

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

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

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

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

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

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

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

Methodology under microscope

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

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

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

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

Upside of a downturn

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

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

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

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

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

Stewart 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..

Andy Raines is a partner in the law firm of Evans & Petree, the Arkansas and Tennessee member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..