"Buyers of completed projects have potentially the most difficult assessment problem to overcome. In the eyes of the assessment community, the purchase price proves the market value of the property."

By Kieran Jennings, Esq. as published by Affordable Housing Finance Newsletter, January 2009

Local tax assessment rules and practices have a lasting effect on returns to developers and owners of affordable housing. Investors face many difficulties—uncertainty about property taxes should not be one of them. A developer who builds a property is subject to a different set of risks than a buyer who purchases a property as an ongoing project or for rehabilitation.

When a builder constructs affordable housing, in many cases, taxing authorities have reasonably good records regarding land sales and construction costs. Therefore the assessor's knee-jerk reaction is typically to value the property at the total cost of land and construction. For the assessor, it's fast, easy, and makes some sense; for the developer, it often means paying significantly more property tax than comparable properties. Affordable housing requires additional support to make the project viable, and an unfair tax burden can be the difference between a stable, viable property and one that fails

New projects

Prior to beginning a project, the developer should have a discussion with the assessor regarding the assessment laws and local practices. If aggressive, intervening taxing authorities, such as a local school district, exist in the jurisdiction, then prior to building it may be wise to seek payments in lieu of taxes (PILOT). Ideally the tax would be based on the prevailing taxes paid by like properties and incorporated into the budget for the project. In this way the developer has already agreed with the taxing bodies as to the amount of taxes to be paid, often over a period of five to 10 years.

Rehabilitated projects

Buyers who acquire property for rehabilitation may find that some taxing bodies tend to overreach. This tends to happen when a property is purchased at or below the assessed market value, and then the buyer immediately invests a large percentage of the project costs into refurbishing the property. These costs are public record, and because the tax credits are based on capital costs, the costs are known and well documented. What most assessors would like to do is simply add up all the land and construction costs to derive an assessment value. However, unless a fair PILOT agreement can be arranged, the property owner must not sit idly by and take costs as a measure of assessment.

Owners can make two arguments against this approach. First, assessed market value should be based on the income generated from the project. The concept of income as a measure of value enjoys almost universal acceptance in the assessing community, so the likelihood of success with this strategy is higher.

However, the second argument, "obsolesce," needs to be well-presented in order to persuade an assessor of its merit. Simply put, when buildings are rehabilitated, project costs include demolition and subsequent rebuilding of many building components. This drives the cost up significantly, yet at the end of the project the tenant can still only afford to pay what the market (subsidized or not) can bear. Therefore, for example, walls, plumbing, and wiring purchased initially, and later demolished, disposed of, and subsequently rebuilt are no more valuable to the tenant than they were initially. Finally, when discussing obsolescence with an assessor, don't use that term; merely explain that your costs do not necessarily equate to increased value. Assessors almost universally have an aversion to terms such as obsolescence.

Completed projects

Buyers of completed projects have potentially the most difficult assessment problem to overcome. In the eyes of the assessment community, the purchase price proves the market value of the property. Assessors tend not to take into account arguments such as 1031 tax deferral, purchase of reserves, or any host of non-real estate issues that actually drove the deal. As a result it may be better to set forth the argument in the closing statements by recording the properly allocated purchase price. For example, buying an operating housing project includes not only the purchase of the land and building, but also the in-place leases (no lease-up costs/concessions), the management contract, the HAP contract, and the reserves. All of these assets should be separately quantified, and only the land and building should be recorded as real estate. Note, however, that allocations and proper recording vary from state to state. Furthermore, changes in classifications may also affect federal taxes, so your federal tax adviser should be consulted prior to closing.

Or, an owner may acquire the business entity rather than the actual asset. In some jurisdictions it is permissible and advisable to buy the corporate shell, meaning the LLC or partnership interest. In such a transaction, the deed is not recorded, which may avoid the conveyance tax or transfer tax and also shield the purchase price from the public as well as the assessor. The assessor would be forced then to treat the acquired property in the same manner as any similar property. Of course, a number of states require buyers and sellers to disclose the purchase price regardless of how the property is acquired. On the other hand, some states do not require disclosure of the purchase price, even if it is a typical asset acquisition.

Finally, all owners, regardless of how they acquired or developed their properties, should understand the nuances of their taxing jurisdiction. Within the same state and county, there can be differences in how a taxpayer should plan. For instance, where the jurisdiction is friendly, it may be advisable to meet the tax authorities personally and discuss all aspects of the project. Conversely, you may be faced with aggressive assessors and equally aggressive school boards, where sales or new mortgages are sought out and records subpoenaed. By engaging local tax counsel, an owner can learn what to expect and can better plan for the long term. Assessments that go up tend to stay up and are difficult to reduce and those that are low tend to stay low. Possessing knowledge about the taxing jurisdiction makes all the difference.

J. Kieran Jennings is a partner in the law firm of Siegel Siegel Johnson & Jennings, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

"Tax departments should conduct periodic reviews of the tax assessments on comparable property so that discussions about uniformity and fundamental fairness of assessments can be made when presenting the company's case to the taxing authorities."

By John E. Garippa, Esq. as published by Globest.com, December 5, 2008

With the economy mired in a significant recession affecting a broad range of property values, the beginning of the New Year presents an appropriate time to examine a series of steps that property tax managers should take to effectively reduce their company's property taxes. A company's entire property needs to be reviewed annually to determine the effect of market forces on all assets. Any recently purchased property should be looked at to see if the price paid for that property results in assessment reductions.

Tax departments should conduct periodic reviews of the tax assessments on comparable property so that discussions about uniformity and fundamental fairness of assessments can be made when presenting the company's case to the taxing authorities. Further, an annual review of property inventory should take into consideration whether an intangible component continues to be reflected as real property value in the assessment.

Properties that contain significant business components such as hotels, regional shopping centers and senior living facilities all possess intangible values, for example. These business components should not be assessed as real property, but when they are, a tax appeal is necessary.

Tax departments also need to be aware of those legal constraints in New Jersey relating to the proper filing of a tax appeal. All appeals must be filed by April 1, 2009 and all property taxes and municipal charges must be paid in full in order for the department to file an appeal.

In addition, all written requests from the local assessor's office for income and expense information must be answered in a timely fashion. Failure to respond to such requests will result in the dismissal of an appeal. Once all of these preliminary steps have been taken, the road to filing a successful tax appeal will be properly paved.

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..

Don't value medical office buildings higher than general office space.

"These facilities require certain specialized construction components and finishes to accommodate industry needs."

By Stephen Paul, Esq., as published by National Real Estate Investor, December 2008

Construction of medical office buildings is burgeoning throughout the country due to the aging population and its healthcare needs. Because these facilities generally operate as for-profit medical services, they usually become subject to property tax. Medical office owners often find their buildings assessed for real property tax purposes at excessive values when compared to general office properties.

Assessors normally use the cost approach to determine the value of newly constructed property. For the most part, medical office buildings house multiple tenants, including medical practitioners and associated healthcare facilities such as pharmacies, diagnostic imaging, labs or medical administrative services.

These facilities require certain specialized construction components and finishes to accommodate industry needs. Generally, the construction finishes are higher quality than available in the average office. So, logically, if construction costs more, the return on investment needs to be higher to offset these increased costs.

Two obvious construction cost differences stand out between general office and medical office space. First, medical offices require more partitioning due to the need for numerous small exam rooms, medical staff offices and nursing stations and for extensive file storage.

Secondly, medical office space calls for more plumbing fixtures because every exam room must have facilities to maintain sanitary conditions as doctors move from patient to patient.

Major costs also are incurred when an office building must accommodate X-ray machines, magnetic resonance imagining equipment, or CAT-scan equipment/ rooms that require special shielding, such as cinder blocks and double or triple thicknesses of drywall or lead. Moreover, some medical office buildings include outpatient surgical centers, which demand nonporous finishes, high intensity lighting and greater electrical service. Thus, the cost per square foot of medical office space rises well above that of conventional office space.

Data from Marshall & Swift Valuation Service, the industry bible, supports these facts. The data shows that the base cost to construct medical office space is 26% higher than the cost of building general office space.

Highly persuasive argument

Let's examine a property tax appeal involving a medical office property in Indianapolis in 2007. The assessor valued a newly constructed building at $16.9 million. At the same time, the valuation on an Indianapolis general office building with the same square footage amounted to $11.3 million.

The cost to build the medical building was $15 million; the general office property cost $12.4 million to construct. The assessor valued the medical office building $5.6 million higher than the general office property, or nearly 50% more.

In preparation for the tax appeal, the taxpayer documented each construction component and compared it to general office buildings of similar size. This comparison showed that the real estate should be valued based on the basic components of a general office building.

Because each building has the exact same basic components, no justification exists for a larger tax assessment on the medical office building. In the appeal, the taxpayer also argued that an alternate or second user of the medical office building would likely purchase the property simply for office space.

As a result of this painstaking development and presentation of the relevant facts, the Appeal Board ruled in favor of the taxpayer and reduced the property's valuation by $1.3 million to $15.6 million. While this reduction was warranted, the medical office building remains valued higher than the general office building, proving that medical office buildings pay higher property taxes.

Lesson for assessors

Although the cost may be greater to construct medical office space, the added cost doesn't automatically justify higher property tax assessments. Because it is expensive to retrofit medical office space to fit general office needs, those costs should be deducted from construction costs to arrive at what would be market value for a general office building. Clearly, using the cost approach to value properties produces higher property valuations for medical office space than for general office space.

In a property tax appeal, the taxpayer must demonstrate that medical office property requires specialized construction and finishes, and lay out these facts to obtain an appropriate reduction in the property's assessment.

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

"If home price drops, so should property taxes. Home owners might be smart to initiate a property tax appeal."

By John E. Garippa, Esq. as published by REALTOR® Magazine, November 2008

In these uncertain times, many home owners have had to face the fact that the current market value of their homes is less than they once thought.

Yet, most of these home owners continue to pay property taxes based on that higher value.

Higher taxes may also make a property less appealing and affordable to buyers, since higher taxes will increase their overall costs, at least until the property is reassessed. That's why it's a smart strategy to advise past clients who might be considering a sale to appeal their property taxes at the next opportunity.

Evaluating Your Assessment

The vast majority of taxing jurisdictions throughout the United States assess residential property based on market value: the amount a willing buyer would pay a willing seller without duress. However, assessments are generally not reviewed on an annual basis, so a property's assessment will never be 100 percent of market value.

To compensate, taxing bodies apply an equalization ratio, which is designed to ensure that assessments are relatively equal among different taxing districts to all assessed values. For example, a property worth $100,000 with an equalization ratio of 50 percent would be assessed at $50,000. Home owners can obtain their equalization ratio from local taxing authorities.

If, after a review with a residential broker or appraiser, a home's assessed value seems out of line with current market values, the home owner should undertake an investigation to determine what might have caused the incorrect valuation. Here are some steps for your client to follow.

• Arrange a visit with the local tax assessor and request a complete copy of the home's tax records. Property record cards are public records and are universally available.
• Pay particular attention to the market comparables listed on the property record card. These recently sold homes are the basis for the assessor's valuation of your client's home. Visit those houses or view them online, and compare them to the client's house.
• Take the appropriate equalization ratio and multiply the market value you believe appropriate for the home by that rate. If the number is lower than the current assessment, your client should file a tax appeal.

Filing an Appeal

Most home owners should be able to properly file the appeal without counsel, but most jurisdictions require a licensed real estate appraiser to prepare an expert analysis of local market values for the local tax board.

Home owners should work closely with the appraiser to review all the amenities and issues that might affect the valuation of their home. Many times an appraiser may not be aware of construction, zoning, or general neighborhood issues that negatively affect value.

Real estate brokers familiar with the property and the area may also be a valuable resource for this type of information. They may also be able to assist the appraiser in determining which properties are the best comparables for a particular home. All of the appraiser's conclusions need to be properly documented with supporting evidence in the appraisal report that will be submitted with other supporting paperwork prior to the hearing.

In addition to compiling evidence, the taxpayer should take care to learn and follow the rules of the local board of assessment review. Each taxing jurisdiction has appropriate appeal forms. It is also critical to determine the deadline for filing an appeal.

The final step in an appeal is a hearing before the assessment appeal board. Proper preparation is the key to a successful hearing. The home owners and the appraiser should prepare a script detailing the important points that need to be made during the appraiser's testimony in order to prove a lower market value and assessment.

The key focus should be comparing the home in question with every presented comparable. The appraiser should be prepared to analyze each important amenity and discuss how it positively or negatively affects value.

During uncertain economic times, the effort of appealing a property tax bill reduction may prove well worth the time and effort involved.

John 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..

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

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

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

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

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

Why rent isn't rent

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

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

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

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

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

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

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

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

Make your case

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

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

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

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

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

John 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..

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

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

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

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

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

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

HBU Isn't Always Visible in a Rear View Mirror

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

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

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

Gas Stations Typify Current HBU Issues

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

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

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

How Owners Can Use HBU

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

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

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

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

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

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

Elliott B. Pollack is a member of Pullman & Comley in Hartford, Connecticut and chair of the firm's Valuation Department. The firm is the Connecticut member of American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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

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

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

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

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

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

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

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

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

Methodology matters

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

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

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

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

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

Courts side with owners

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

John 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..

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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..