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Property Tax Resources

Jun
13

Tips for Reducing Affordable Housing Property Taxes

"The first thing any taxpayer needs to know to determine if they want to appeal their taxes is whether a reduction in assessed value yields tax savings. In states that place no limits on the amount of tax increase possible, owners can be certain that reduction in assessed value will generate a tax savings. However, several states' laws require the taxes rise by only a limited percentage in a given year."

By J. Kieran Jennings, Esq., as published by Affordable Housing Finance, Summer Special Edition 2007

Affordable housing owners looking for ways to save money and eliminate non-productive overhead should start by examining their property taxes. That doesn't require taxpayers to become experts in real estate tax law; they need only a working knowledge of the issues to identify when or if should hire an expert .

The basic issues

The first step in this process is to learn how assessors determine property taxes. One of the main indicators of fair market value that assessors use is the income that could be produced from the property using current rents, vacancies, and market expenses. In most states, real estate assessments are based on some percentage of a property's fair market value. Most often, the actual taxes are calculated using a millage rate (for example, $.001) multiplied by the assessment.

Right now owners of affordable housing face unprecedented increases in fuel and utility costs. And, because net income is a key indicator of market value, an increase in operating expenses likely causes a decrease in value. That means an owner's property might not be worth what the taxman says it is, and an appeal may be necessary.

Where does the taxpayer begin?

The first thing any taxpayer needs to know to determine if they want to appeal their taxes is whether a reduction in assessed value yields tax savings. In states that place no limits on the amount of tax increase possible, owners can be certain that reduction in assessed value will generate a tax savings. However, several states' laws require the taxes rise by only a limited percentage in a given year. In such states, a complex analysis is required to determine whether a reduction in assessed value actually results in a tax savings. This type of analysis calls for the skills of a property tax professional.

Some states' assessments may be based on ratios sometimes known as sale ratios or common-level ratios. In states such as New Jersey and Pennsylvania, an assessment may have originally been based on 100 percent of the appraised market value of the property, but over time that 100 percent assessment no longer reflects market value. So, at regular intervals, each county in these states conducts a study comparing the sale prices of all properties sold in a given period with the last assessed value of these same properties. For example, if the assessed values of properties sold for an average of 50 percent of the sales prices of those same properties, then the sales ratio for that period of time will be 50 percent for all properties in the municipality. This ratio then is used to convert the assessed value back to market value. Owners will want to track down the current-year ratio percentage and then review their assessment to ensure that the correct ratio has been applied in developing their assessment.

Finally, many states establish predetermined ratios. Ohio, for instance, places its predetermined ratio of assessment at 35 percent of the appraised market value every year in all counties. Assessed market value is determined by dividing the assessed value by the ratio percentage. As an example, a $35,000 assessment divided by 35 percent yields an assessed market value of $ 100,000, which then can be compared to the actual fair market value of the property. If the assessed market value appears to be higher then the actual fair market value (what a willing buyer would pay a willing seller in an arm's length transaction), then the taxpayer should consider contesting the assessment.

What can taxpayers do when over-assessed?

If you determine that your property has been over—assessed, file an appeal to reduce your real estate taxes. In some states, that will mean filing a formal complaint by a particular date. In other jurisdictions, the filing deadline depends on the mailing date of the assessment notices. Some jurisdictions mandate that parties must appeal their assessment within 15 days of receiving notice. If the deadline passes, in most jurisdictions, the taxpayer is prohibited from contesting their taxes until the following year. It is, therefore, imperative to know the local rules.

How does the taxpayer prove the case in an appeal?

As with every aspect of assessment law, proving the case varies from jurisdiction to jurisdiction. Most typically, an appeal that has merit can be proven with a qualified appraisal. However, the rules regarding how that appraisal is prepared can vary from state to state. For instance, some states mandate that actual income and expenses be used to determine the market value of the property. In other states, an appraiser or property owner must prove the value based on unencumbered market conditions. An unencumbered market condition exists when a property built under Sec. 42, with a majority of its rents restricted, is appraised as if the property were conventional apartment. However, a property that enjoyed greater occupancy or rents because of Sec. 8 rent subsidy may be able to use a lower income figure based on prevailing market conditions. The income approach to value represents the common thread across exists the country for establishing market value.

Must an attorney file a property tax appeal?

Rules governing appeals vary greatly from state to state. In most states, an attorney is not required to file an appeal at the local level, but an appeal in court almost always requires an attorney. However, in a number of states, the courts have determined that the filing of property tax appeal is the practice of law, requiring an attorney

What risks and benefits come with contesting taxes?

Risks come into play when the appeals process is poorly handled, as that can impair a taxpayer's ability to reduce a property's value to its proper level in the future. Evidence poorly presented often remains in the record and is not retractable. Furthermore, in several states and with increasing frequency, school districts participate in the appeals process. In those states, the hearings may put the taxpayer at risk for an increase in assessment, if such is warranted.

The benefits of controlling real estate taxes far outweigh any risks involved, and by spending a little time learning the process, taxpayers can all but eliminate those risks. A newly established assessment often forms the basis for future assessment. Thus, a reduced tax this year positions an owner for future years because tax increases compound over the years. Even if assessments steadily climb in future years, having started at lower base can save money indefinitely.

Keeping real estate taxes and all non-productive expenses down becomes crucial to the economic health of an affordable housing property.

KJennings90J. Kieran Jennings, partner at Siegel Siegel Johnson & Jennings Co., LPA, with offices in Cleveland and Pittsburgh. The firm is the Ohio and Western Pennsylvania 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..

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Jun
12

Consolidation Raises Tax Opportunities and Challenges

"Taxpayers with multiple properties, and tax professionals, will generally find the site is worth the fee. Properties can be accessed by the PVA's parcel identification number and also by the owner's name or the property address."

By Bruce F. Clark, Esq., as published by Midwest Real Estate News, June 2007

With the January, 2003 merger of the Louisville and Jefferson County governments, Louisville/Jefferson County became the largest metro area in Kentucky. As a result, property owners in Louisville and unincorporated areas of the county now pay real property taxes to the metro government. In addition, the owners in the 83 suburban cities in the metro area may continue to pay city property taxes, similar to those that were assessed prior to the merger.

Regardless of a property's location, tax assessments are made by the Jefferson County Property Valuation Administrator (PVA). Tony Lindauer assumed the office after the November, 2006 election. The Jefferson County PVA's office has consistently been one of the most professionally-administered offices in the state, and it appears this distinction will continue under Mr. Lindauer's administration. Taxpayers in the Louisville Metro Area need to be aware of the services offered by the Administrator's office and use them to alleviate their property tax burdens.

Get Help

The PVA's website, found at www.pvalouky.org, provides an invaluable tool for taxpayers and tax professionals. In October 2006, the website won the Web Marketing Association's 2006 Government Standard of Excellence Web Award in a competition with over 2,300 other entries.

While certain information can be obtained from the website at no charge (such as parcel identification numbers and current assessments), the majority of the information is only available by subscription — $25 per month or $300 per year. Taxpayers with multiple properties, and tax professionals, will generally find the site is worth the fee. Properties can be accessed by the PVA's parcel identification number and also by the owner's name or the property address. The site provides information on the current assessment, including: a breakdown by land and improvement values; property characteristics, including acreage, building square footage and construction; sketches and photographs of the improvements; assessment history; sales history; and links to the current year's tax bills.

This information helps taxpayers challenge their tax assessments. Verifying the data on which the Administrator's office based their assessment represents one important use of the information. For example, the PVA often calculates the square footage of a building based on an exterior measurement that may not reflect the actual or usable square footage. Then, too, the possibility exists that the PVA holds incorrect information regarding some characteristics of the property, such as the percentage of an industrial property with HVAC. If the Administrator's office possesses incorrect information, the taxpayer can provide the correct information and likely obtain a tax reduction.

The PVA has underway the reassessment of nearly all the land in Jefferson County, so taxpayers may be seeing significant increases in their assessment. In some areas, 2006 land assessments increased by over 25 percent from the previous year. The PVA's values are backed by a "land study" of recent sales, but this does not mean a taxpayer lacks recourse. In some circumstances, land values can be challenged. A taxpayer may have paid a premium for a particular tract of land due to considerations such as location or market coverage (often the case with banks, service stations, etc.). Thus, the sales price might not be equivalent to the "fair cash value" (the standard for assessments in Kentucky). In such cases, a taxpayer can use the PVA's website to gather sales data on nearby tracts of land in order to demonstrate that the taxpayer paid more than "fair cash value" for the property, and that the assessment should be reduced accordingly.

For possible tax savings, owners also need to analyze the assessed value of their improvements by using depreciation or other obsolescence factors. For example, the Administrator's office placed a value on a building based on the value stated in the building permit at the time of construction. Depending on the type of building (usually industrial or warehouse properties), the taxpayer may be able to argue that the value should be decreased to account for normal or abnormal wear and tear (physical depreciation). Arguments for lower valuation also exist when changes in the market occur for that type of building (economic obsolescence) or when outdated or unusual features of the building make it less marketable (functional obsolescence).

New Requirements

The Jefferson County PVA now requires taxpayers who challenge their assessments to sign an affidavit stating an opinion of value for their property. While it has been customary for a taxpayer challenging the assessment to make a declaration of value, the fact that the PVA now demands that the taxpayer swear to that value is somewhat troubling, since filing a false affidavit could result in criminal penalties. If asked to complete the new form, taxpayers need to insure that their opinion of value rests on a reasonable basis.

The affidavit also calls for the property owner to attest that all of the taxpayer's property has been listed with the Administrator's office. This appears to put a taxpayer in the position of guaranteeing that the PVA has picked up any additions or expansions to the property. While Kentucky law always required a taxpayer to "list" all property with the PVA, this affidavit seems to put an even greater burden on the taxpayer.

The Jefferson County PVA's office remains one of the most user-friendly offices in the state. A taxpayer dissatisfied with his or her assessment should not hesitate to contact the office about protesting an assessment. By providing the Administrator's office with the right information, a taxpayer may be able to obtain a reduction in an assessment, and in any case, can get a full and satisfactory explanation as to how the Administrator assessed the property. The PVA's office offers taxpayers their first chance to obtain a property tax reduction, but remember, good documentation is critical.

BruceFClarkBruce F. Clark is a partner in the Frankfort office of Stites and Haribson, the Kentucky member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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May
13

Direct Impact

Highway 40 reconstruction will reduce property values

"Local authorities appear to believe the interference with the traffic pattern will cause a short-term loss and a very positive long-term potential gain. However, the Federal Highway Administration concluded in a recent study that such projects result in "noise, loss of access, loss of parking, diversion of traffic, odors and emissions, loss of business profits and good will, interim construction loss, loss of use and loss of visibility."

By Jerome Wallach, Esq., as published by Midwest Real Estate News, May 2007

Owners of real property in the east-west corridor leading into the core city of St. Louis and the core city itself face a double "whammy" in 2007. First, on January 1, the two-year assessment tax cycle begins in Missouri. Then, in the spring of this year massive $535 millions rebuilding starts on the primary artery into the core city from the west. This reconstruction project on Highway 40 (also known as Interstate 64) is scheduled to close 10-and-a-half miles of this major artery into the city for at least three years. Past experience with highway projects has shown that forecasted completion dates are most often way too optimistic.

With assessors already in the process of reevaluating property for tax purposes and a major reconstruction project beginning in spring, assessors face the task projecting the impact this reconstruction project will have on property values along the Highway 40 corridor and in the core city. Office buildings, service businesses, light manufacturing and residences will suffer from dramatically decreased access, traffic jams, indirect routes extending commuting time and loss of traffic for retail and service outlets.

And all this happens just as the core area of St. Louis is beginning to feel the impact of the dramatic revitalization that has been ongoing over the last several years. One need only look at the new baseball stadium, the approved Ballpark Village with its shops and residences, the dynamic loft developments of shell buildings in the near downtown area and the expansion of Barnes Hospital in the West portion of the city. The revitalization has resulted in rising property values, representing good news for owners and investors. The good news turns bad for property values as the area contemplates the long reconstruction process.

Local authorities appear to believe the interference with the traffic pattern will cause a short-term loss and a very positive long-term potential gain. However, the Federal Highway Administration concluded in a recent study that such projects result in "noise, loss of access, loss of parking, diversion of traffic, odors and emissions, loss of business profits and good will, interim construction loss, loss of use and loss of visibility."

The negative aspects brought about by the reconstruction may well force owners of residential and commercial properties to offer rent abatements in order to hold onto tenants along the Highway 40 corridor and in the core city. Many commercial and residential tenants may just move out because of traffic snarls, noise and the mess of construction. Then, too, commercial tenants may just not be able to tolerate the diminished traffic and attendant loss of revenue and profit. All of this disruption means lower market values, which must result in lower property taxes if taxpayers are to be fairly taxed during the reconstruction period.

Owners should be alert and prepared to react to the new 2007 assessments with an appropriate tax appeal challenging the assessed valuation of a property that may be affected by the reconstruction project. The Missouri Highways and Transportation Commission itself has recognized the decline in business and in occupancy that will result from the project. Comments by public officials demonstrate that various other government agencies know the project will prove bad for business on a short-term basis. Just how bad is an open question. Therefore, taxpayers with property in the Highway 40 area and in the core city must carefully review their assessments to ensure that the assessors have taken into account in their 2007-2008 valuations the negative impact of the reconstruction.

The due date for filling appeals from the assessments is the third Monday in June for St. Louis County and the second Monday in May for St. Louis. Two separate jurisdictions assess properties in the 40 corridor and the core city —- St. Louis County and the city of St. Louis. Taxpayers may find both take the position that the long term effect of a new highway will be beneficial to property values, thus, no interim dip in assessed values are appropriate. The contrary argument, and the one that makes the most sense, holds that in the next two years the market value of most properties in the reconstruction area and the core city will decline. To state it another way, the income stream of commercial properties will not grow until the highway projects is completed.

Since reassessment comes in the odd numbered year of the two-year cycle, the assessors have another shot at determining value as of January 1, 2009. The market at that time will tell the world whether property values have held constant, grown or declined during the reconstruction, which will still be in progress at the end of 2008. Until that time, taxpayers should be on guard and proactive in seeking proper reduction of their tax burden.

Wallach90Jerome Wallach is the senior partner in The Wallach Law Firm based in St. Louis, Missouri. The firm is the Missouri member of American Property Tax Counsel, the national affiliation of property tax attorneys. Jerry Wallach can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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May
13

Industrial Equipment as Real Estate

"In point of fact, industrial property owners will save themselves time and trouble if they retain a knowledgeable property tax expert to help sort out the most defensible method for categorizing the various machinery, apparatus and equipment in their plants. At the same time, the New Jersey legislature would serve constituents well by clarifying once and for all the language defining what is and is not industrial machinery and equipment for property taxes purposes."

By Philip J. Giannuario, Esq., as published by Real Estate New Jersey, May 2007

Amazingly, every possibility exists that the major equipment in a New Jersey industrial plant is taxed as real property if the owner's case lands before one judge, but if a different judge hears the case, the equipment is not taxed as real property. How did New Jersey put industrial owners in this kind of dilemma and what can be done about it?

In 1990, the Tax Court heard the case of Texas Eastern v. Director, Div. Of Taxation, a case dealing with Texas Easter's gas pipeline distribution facility in New Jersey. The Court determined that the vast majority of the contested property was real property subject to local taxation. Based on the finding, Tax Eastern appealed.

In 1991, relying in part on Texas Eastern, the New Jersey Tax Court decided in the General Motors case that most of the major equipment in the case was real property subject to local taxation. Both this and the Texas Eastern decisions seemed at odds with legislative history-as far back as 1966, New Jersey sought to exclude business personal property (machinery, apparatus and equipment) from taxation as real property. No real property tax assessment can be levied on business personal property, thus, the more such property is defined as business personal property, to lower the real property tax assessment. As a result of these decision and others, in 1992, the legislature passed the Business Retention Act (BRA) to clarify what industrial equipment should be taxed as business personal property and which as real property. Despite BRA and the Appeals Court remanding the original General Motors case for retrial, the second General Motors trial, decided in 2002, resulted in a new judge ruling the same way the first judge had ruled in the original case.

As the original General Motors case, the Appeals Court remanded the Texas Eastern case to different judge for retrial. BRA, passed after both cases had been appealed, attempted to remind taxing authorities that business machinery, apparatus and equipment should not be taxed as real property but rather as personal business property. The Appeals Court appeared to understand the legislature's intent in BRA and remanded both cases to the original court for reconsideration. The new judge in Texas Eastern reconsidered the original court ruling in 2006 and concluded that none of the property was subject to taxation as real property. Much of the machinery and equipment in he Texas Eastern facility was comparable in size and quality to that in the General Motors plant. Despite the similarity, the Texas Eastern Court rendered a decision diametrically opposed to both decisions of the court in the General Motors case.

In Texas Eastern, the court stated that BRA sought more broadly to exclude from local property taxation personal property used or held for use in business. The Act came as a response to the prior decisions in General Motors and Texas Eastern and to cases like this where business equipment is taxed as real property rather than as personal property. The conflicting opinions in the General Motors case in 2002and Texas Eastern in 2006 create an anomalous situation for industrial taxpayers. Two directly opposite Tax Court decisions regarding BRA put taxpayers in a quandary. Do they account for equipment and machinery as business personal property or as real property? One judge ruled one way and another a different way. Since categorizing these assets as business personal property will reduce real property taxes, many taxpayers will, without too much thought, attempt to argue non-taxability as route to lower taxes. While simple on its face, this alterative could put some taxpayers at risk.

In point of fact, industrial property owners will save themselves time and trouble if they retain a knowledgeable property tax expert to help sort out the most defensible method for categorizing the various machinery, apparatus and equipment in their plants. At the same time, the New Jersey legislature would serve constituents well by clarifying once and for all the language defining what is and is not industrial machinery and equipment for property taxes purposes. The state needs stability in this critical area. Conflicting options on the tax law disadvantage any taxpayer that needs to make cogent decisions about investment and taxes in this state.

Philip J. Giannuario is a partner in the Montclair, NJ law firm Garippa Lotz and Giannuario, the New Jersey and Eastern Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
14

How to Fight High Property Taxes?

Challenging the sales approach can save you big bucks

By Elliott B. Pollack, Esq., as published by Apartment Finance Today, April 2007

In many parts of the country, multifamily properties are very hot and command extremely high sale prices. These transactions often make very little sense in terms of the underlying cash flow they can generate. Indeed, there seems to be a speculative fever abroad in the land, probably resulting from investors chasing this property category due, at least in part, to asset diversification needs and other financial asset motivations.

For example, an apartment property owner is not even thinking about selling her property. Then, she receives a telephone call from the assessor advising that her property assessment will increase because of recent sales of comparable properties at relatively stratospheric levels. Can this problem be managed? A recently published case illustrates that the answer to this question is yes. In that case, the approach employed by New York property valuation attorney William D. Siegel was to attack the assessor's sales comparison approach head on. In a tax appeal filed for a 276-unit garden apartment complex in Middletown, N.Y., the property owner challenged the $15 million value estimate offered by the assessor's appraiser, using the appraisal and trial testimony of this expert. The owner's appraiser placed the property's market value at $10 million.

The assessor's expert might have thought he was sitting in the catbird seat with a number of sales at high unit values. However, the property owner's appraiser, William R. Beckmann, located a number of different sales, which resulted in a far lower range of values per apartment unit. Beckmann went even further, though, rejecting the sales approach and resting his value estimate on the income capitalization methodology.

He maintained to the court that a detailed understanding of the income and expenses of the comparable sales used in the assessor's appraisal was absolutely necessary. Otherwise, there was no factual basis for concluding that the sales in the comparable~presented were, in fact, comparable to the owner's property. This litigation suggests that when assessors use the sales approach, owners may be able to challenge increased values by arguing lack of reliability in this approach.

When owners face high valuations based on the sales approach, they should rigorously explore the following questions:

Are the comparable sales relied upon by the assessor relatively recently constructed or older properties? If the sales relied upon by the assessor were relatively newly constructed, they will likely generate higher prices per unit than would a 30-plus-year-old property due to lower repair and replacement expectations.

Pollack_HowTO_Fight_High_AFTApril07_clip_image002Just because your local assessor relied on comparable sales to give your property a higher valuation and a bigger tax bill doesn't mean you should pony up without a fight. Take a look at the comps and see how comparable they really are: You may be able to successfully argue that properties built recently, featuring larger unit sizes, or selling with Effective local tax assumable financing were able to fetch much higher sales prices than your property rates are a critical could reasonably command.

What was the average square footage of the various units in these comparables? Average unit square footage is critical because, to a certain degree, larger apartments command higher rents and are easier to lease.

Were the buyers in these sales real estate investment trusts (REITS) or private investors? If many of the buyers in the assessor's sales were REITs, this is important to note because it is well known that investment trusts generally pay significantly more for property than do private investors. They can do this because of their lower cost of funds and financial market pressure to invest.

Was below-market-rate financing in place and assumable? Assumable below-market-rate financing would undoubtedly tend to increase the sales price because, in effect, the buyer's cost of funds is being subsidized by the assumable financing. (The same issue would arise in the event of significant seller financing in the sale.)

Are the capitalization rates apparently revealed by the assessor's sales fairly comparable to the rate which could be commanded by the property? The capitalization rates paid for more attractive, larger, more newly constructed properties tend to eclipse the rates associated with older property sales for many of the reasons discussed in this article. This is true even though cash-on- cash returns will not differ significantly.

Was there significant deferred maintenance? The existence of marked deferred maintenance will almost always affect the purchase price due to the investor's expectations that significant funds will have to be devoted to the property after purchase to bring it up to snuff.

What were the effective real estate tax rates in the communities in which the sale properties were located? Effective local tax rates are a critical element in determining sales prices because properties in low-tax towns tend to sell at higher unit values and at lower cap rates than do properties in more heavily taxed communities. Put differently, investors are frequently willing to pay more to be taxed less. While a number of these issues are beyond the knowledge base of the average property owner, expert appraisal, legal, and other market-oriented consultants' efforts may be helpful in distinguishing an owner's property from those sky-high sale properties relied upon by the assessor.

Of course, if an apartment complex stacks up favorably on most counts to the sales used by the assessor, there will be less running room within which to dialogue with the assessor.

Pollack_Headshot150pxElliott B. Pollack is a partner at Pullman & Comley in Hartford, Conn. He is the Chairman of the firm's Property Valuation Department. Pullman & Comley is the Connecticut member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar
15

Defending Against Property Taxes

Many now believe that filing a tax appeal in the Tax Court remains their only salvation from the ever increasing property tax burden.

"The courts have given significant protection to the assessments. To offer meaningful defense against these protections, a team effort is generally required right from the inception of the appeal. This team should include the taxpayer, property tax counsel and expert witnesses."

By John E. Garippa, Esq., as published by Real Estate New Jersey, March 2007

Legislation in New Jersey inflicts an ever-increasing property tax burden on commercial and industrial property owners. Many now believe that filing a tax appeal in the Tax Court remains their only salvation. With the deadline for filing appeals approaching quickly, owners need to understand the issues and the process involved.

All tax appeals in New Jersey must be filed by April 1st of each new year. At the time of the filing, all taxes due must be paid. having filed an appeal, a chronology of events takes place that ultimately leads to the court determining the value of the property.

Within four months of filing the appeal, the taxpayer will answer interrogatories relating to substantive issues regarding the property. These interrogatories normally focus on specific aspects of the property including the income and expenses.

Since most tax appeals relate to value, the taxpayer at some point needs to retain a real estate appraiser to value the property. This step should be taken in conjunction with a tax attorney. The taxpayer should choose an appraiser who understands the court's expectations as well as the rules of evidence.

These forensic appraisals are considerably different than the garden variety appraisals used in other settings such as financing, insuring and determining value for property sale purposes. In a forensic appraisal, the property must be valued on a standard of value based on competent market evidence. This evidence should include recent comparable sales data and recent competent lease transactions.

Throughout the tax appeal, the property owner must focus on the fact that the burden of proof always remains on the taxpayer - the assessment levied by the assessor is considered presumptively correct. Only cogent and probative evidence can overcome this presumption of correctness.

Taxing jurisdictions do not rely on testimony of the assessor in tax appeals. Rather, they retain independent appraisers to complete a forensic appraisal, which they use in defense against the appeal. Often, the spread between the assessor and the tax jurisdiction's appraisal can be enormous.

For many types of ordinary income-producing property, the appeal trial can be completed in one day. As the complexity of the property increases, the time required to complete the trial also increases. It's unusual for trials involving some of the more complex commercial and industrial property to take several days or more. These more complex properties include corporate headquarters, super-regional malls and major industrial complexes.

Much of the trial's time is devoted to cross-examination of expert witnesses, where every component of the appraisal is subject to intense scrutiny. Often, prior appraisals and testimony by the appraiser comes before the court to demonstrate inconsistencies in the theories espoused by the appraiser. Anyone involved in this process on a regular basis understands that real estate appraising is an art, not a science.

At the end, the court renders a final judgment. If the taxpayer is successful, the jurisdiction will have 45 days to refund the overpayment. Also, the taxpayer receives interest at the rate of 5% a day from the date the original tax payment was made. More importantly, once the court renders final judgment, under New Jersey law, that judgment will not only cover the years appealed, but also two succeeding years. This is called the Freeze Act, and it significantly helps taxpayers in bringing stability to a property tax assessment.

Only rarely can a jurisdiction void application of the Freeze Act. One exception is when a jurisdiction completes a municipal-wide revaluation on all property. The other is if a significant change occurs in the value of the property at a rate higher than other properties in that jurisdiction.

Prevailing in a New Jersey tax appeal has become a Herculean task. The courts have given significant protection to the assessments. To offer meaningful defense against these protections, a team effort is generally required right from the inception of the appeal. This team should include the taxpayer, property tax counsel and expert witnesses. In the end, the team effort should produce a significant return, well justifying the expenditure of time and money.

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

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

 

 

 

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Mar
15

Don't Get Boxed in By Excessive Taxes

Retail Owners Can Fight Assessors' High Valuations

"All too often assessors get away with over assessing big-box properties owned or occupied by national chains. Assessors see cost of construction, sale-leaseback rents or the capitalized value of the lease and just use the information without looking at the relevancy of those figures to market value."

By Linda Terrill, Esq., as published by National Real Estate Investor, March 2007

All too often assessors get away with over assessing big-box properties owned or occupied by national chains. Assessors see cost of construction, sale-leaseback rents or the capitalized value of the lease and just use the information without looking at the relevancy of those figures to market value.

To bring fairness to the property taxation of big boxes, taxpayers need to understand a number of key issues. The following tax appeal case serves as an example of how taxpayers should approach their property tax assessment, even if they think it appears fair.

TerrillLowesPhoto110

Store Victory: Home improvement retailer Lowe's recently won a property tax appeal case, resulting in a valuation reduction of $2.2 million

In 1997, a developer constructed a large retail warehouse building for a Lowe's. The 133,000 sq. ft. building was built to this user's specifications at a cost in excess of $8 million. A 20-year lease was entered into with a triple-net rental rate of $7.25 per sq. ft. One year prior to the tax appeal, the property was sold for about $9.2 million. The assessor valued the property at $8.5 million, even though it was marketed for $15 million.

At first blush, the facts in this case appear not to warrant a property tax appeal. The assessor valued the property at about what it cost to build, and less than the price at which it sold. This scenario represents the trap that ensnares all too many big-box owners.

However, in this particular case, the taxpayer correctly analyzed the facts, decided an appeal was warranted and successfully litigated a reduction in value to $6.3 million. In litigating the case the assessor and the taxpayer both relied heavily on the market and income approaches to value, but each with a different take.

The market approach

The assessor argued that the capitalized value of the lease was equal to the value of the real estate. Since the value of the lease could be established by the sale, it was crucial for the taxpayer to identify and remove from the sales price any value attributable to the lease in place.

Here the taxpayer had an advantage because the company owned a number of similar properties in different locations. As the market for larger boxes increased, the taxpayer closed the smaller ones and marketed them for sale. There were enough sales to prove two important points. First, the sales were never to another national retailer. Second, these properties always sold for substantially less than their cost to construct.

So, the court had evidence showing the amount the buyer paid for the leased property and what similar buildings sold for without any leases in place. The court ruled that the difference between the selling price of a property with a lease and one without a lease represents the intangible value attributable to the lease in place. The value of the lease isn't the value of the real estate, and only real estate market value is subject to property tax.

The income approach

The battle here was a familiar one. Does the contract rent, the actual rent paid by the lessee, represent market rent? The assessor relied on other build-to-suit and sale-leaseback rental rates. Conversely, the taxpayer argued that these types of rental rates are irrelevant as they are based on financing costs and are not market-driven rates.

The cost to finance construction of a property forms the basis for establishing the lease rental rate, whereas market rates are a function of buyers and sellers agreeing on a rental rate. The taxpayer relied exclusively on marketplace leases as evidence of what one could expect to receive in rent. Again, the taxpayer's argument prevailed.

Scholarly advice

As taxpayers receive their new assessment notices, they need to remember these general principles:

  • For property tax purposes, leased fee and fee simple are different. Don't assume a leased fee sale will also represent the value of the fee simple. If they are the same amount, it's coincidental.
  • Some rents are functions of financing, others are a function of market. Financing rents are prevalent in build-to-suit and sale-leaseback arrangements. If financing rents are equal to market rents, it's coincidental.
  • Remember, the value of the property to the taxpayer is irrelevant. The only relevant issue is what buyers are willing to pay for the property. If the amount a buyer would pay to buy a property equals the taxpayer's investment in it, it's coincidental.

An experienced property tax professional can help with the factual and legal arguments raised here. As a taxpayer, don't let coincidence or other irrelevant issues become the basis for a property's real estate value.

TerrillPhoto90Linda Terrill is a partner in the Leawood, Kansas law firm 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..

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Mar
13

April 1 An Important Date for Property Taxpayers

"April 1 is the last day to file for these cancellations, exemptions and special assessments, and assessing authorities do not have discretion to accept a late filing."

By David Canary, Esq., as published by The Daily Journal of Commerce, March 13th 2007

April 15th is "tax day" for federal and state income taxpayers, but April 1 is equally important to property taxpayers that wish to avoid paying property taxes for the upcoming year. There are a host of exemptions for selected types of properties for which applications or statements must be filed with the local county assessor or the Oregon Department of Revenue on or before April 1. Those exemptions include:

Cancellation of assessment for commercial facilities under construction

New buildings or additions to existing buildings are exempt from property tax assessment for up to two years while under construction. The structure must have been under construction on Jan. 1, 2007, not used or occupied before that time and constructed in the furtherance of the production of income (e.g. an industrial or commercial building or condo). In the case of a nonmanufacturing facility, the structure must first be used or occupied not less than one year from the time construction commenced.

For a manufacturing facility, any machinery and equipment located at the construction site that is or will be installed in or affixed to the structure under construction may also be exempt.

Cancellation of assessment of pollution control facilities

A pollution control facility constructed in accordance with specific Oregon statutes and that has been certified by the state Environmental Quality Commission may be exempt to the extent of the highest percentage figure certified by the commission as the portion of the actual cost properly allocable to the prevention, control or reduction of pollution.

Exemption of nonprofit student housing

Housing that is rented exclusively to students of any educational institution which offers at least a two-year program acceptable for full credit toward a bachelor's degree may be exempt from certain ad valorem assessment. The exemption applies to student housing of an educational institution that is either public or private.

Exemption of low-income housing

Property owned or being purchased by a nonprofit corporation that is occupied by low income residents or held for future development as low-income housing, or a portion thereof, may qualify for tax exemption.

Exemption of ethanol production facilities

The real and personal property of an ethanol production facility may qualify for exemption of 50 percent of the assessed value of its property for up to five assessment years.

Exemption of rural healthcare facilities

The real and personal property of a health care facility with an average travel time of more than 30 minutes from a population center of 30,000 or more may be exempt from property taxation if the property constitutes new construction, new additions, new modifications or new installations of property as of Jan. 1.

Additionally, the exemption must be authorized by the county governing body in which the facility is located. The exemption can be for up to three years.

Exemption of long-term care facilities

The real and personal property of a nursing facility, assisted living facility, residential care facility or adult foster home may qualify for exemption if the facility has been certified for the tax year as an essential community long-term care facility.

The state Legislature specifically declared that a property tax exemption would enable essential long-term care facilities to increase the quality of care provided to the residents because the full value of the exemption is applied to increasing the direct caregiver wages and physical plant improvements that directly benefit the facility residents and staff.

Special assessment of nonexclusive farm-use zoned farmland

Any land that is not within an exclusive farm use zone but that is being used, and has been used for the preceding two years, exclusively for farm use may qualify for farm use special assessment if the gross income derived from the farming operation meets a certain amount that depends upon the size of the farmland.

Special assessment of designated forestland in Western and Eastern Oregon

Forestland being held or used for the predominant purpose of growing and harvesting trees of a marketable species and that has been designated as forestland or land in either Western or Eastern Oregon, the highest and best use of which is the growing and harvesting of trees may qualify for special assessment if certain other requirements are met and a timely application filed.

Taxpayers that believe they qualify for cancellations of assessments, exemptions or special assessments should contact the office of the county assessor in which the property is located or contact the Oregon Department of Revenue to request application forms and instructions.

The fact that a cancellation, exemption or special assessment is granted for one year does not mean the property automatically qualifies for exemption in subsequent tax years. A number of these cancellations, exemptions and special assessments require that applications be filed with the county assessor or the state Department of Revenue each year. That is, an exemption or special assessment may be lost if an application is not filed in each successive year.

April 1 is the last day to file for these cancellations, exemptions and special assessments, and assessing authorities do not have discretion to accept a late filing.

Canary90David Canary has specialized in state and local tax litigation for the past 18 years. He has worked for the past 13 years as an owner in the Portland office of Garvey Schubert Barer and prior to that was an assistant attorney general representing the Oregon Department of Revenue. He has the distinction of trying several of the largest tax cases in Oregon's history. He is the Oregon member of American Property Tax Counsel and an active member of the Association of Oregon Industries' Fiscal Policy Council. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Feb
15

New Methodology Hits Hotels with High Taxes

"For over 75 years, hotel assessments took into consideration the fact that a hotel comprised both a piece of real estate and an operating business. Numerous court cases pointed out that using business income and expenses for assessing hotel buildings was incorrect. The courts reminded assessors that business income could not be used to assess real estate."

By Joel R. Marcus, Esq., as published by Real Estate New York, February 2007

The Department of Finance does an abrupt about face by dramatically ratcheting up the new 2007/08 property tax assessments after issuing generally lower ones last year. This represents one of the largest leaps ever in hotel assessments.

The Finance Department raised the tentative hotel assessments citywide by an average of 35%. However, the increases were even more pronounced for some of the City's premier hotels. For example, the Marriott marquis saw an increase from $162.5 million to $227.2 million (an 80% change), the Grand Hyatt went from $75.1 million to $135.4 million, and there were over 40% jumps at The Pierre, Sheraton Manhattan, Le Parker Meridian, Waldorf, and Roosevelt Hotels. The outer boroughs were not spared either, as Brooklyn hotels' assessments increased by 74%. Queens hotels' assessments jumped by 34%, while Staten Island saw a 19% increase and the Bronx only experienced a 6% jump.

Some city newspapers speculated that industry leaders and consultants met with the City last year and convinced them to change the method of arriving at the assessed value for hotels. This new method may have contributed to the modest assessments for the 2006/07 tax year because the Finance Department was using only out-of-date 2004 filings, which covered a period when hotels were not doing as well as they are now. This year, by using current 2006 figures, the new methodology dramatically increased assessments.

For over 75 years, hotel assessments took into consideration the fact that a hotel comprised both a piece of real estate and an operating business. Numerous court cases pointed out that using business income and expenses for assessing hotel buildings was incorrect. The courts reminded assessors that business income could not be used to assess real estate. Instead, some method of allocation or extraction had to be employed to remove the income related to furniture, fixtures and equipment and franchise and business value.

In New York City, assessors accepted this premise but chose different approaches over the years to accomplish the job. In some years, they deducted a factor for business value when using sales to value hotels. In recent years, since sales no longer form the basis for assessing most commercial properties, income capitalization has become the primary valuation method. Hotels were sometimes assessed by applying higher capitalization rates, sometimes by deducting business income and sometimes by applying an expense ratio of 75% to room revenues before capitalization. All these approaches have now been abandoned.

Under the new method, assessments are based on a unique gross income multiplier formula where room revenues are converted into market value. The record indicates that this formula is not used anywhere else in the country.

The first step in the new formula calls for estimating room revenue by taking the latest income statement and adjusting it upward to account for normal occupancy, alterations and so on. A percentage of food, beverage, conference and exhibit revenue is then added to this room revenue number. The total gross income thus derived is divided by 365 and then multiplied by 960 for luxury hotels. According to the Finance Department, this calculation provides a fair market value for the hotel's real estate. Should the hotel also contain apartments, retail, office, garage, signage/billboard, telephone or other income, the net income from these categories is then capitalized and added to the prior calculation. To determine the assessment value, the assessor multiplies by 45% the final number derived from these steps.

To illustrate how the new formula works, consider a hotel with a room income range of $295 to $371. The new formula puts the hotel's income at $475, with an estimated market value of 4456,000 per room, an assessment of $205,200 per room, and property taxes of $22,572 per room. These calculations give no effect whatsoever to the age and condition of the property, its franchise, its advertising budgets or whether it is a union or nonunion operation.

The unfairness and inaccuracies of this new method of valuing hotels are overwhelming, so much so that the assessors have already spoken our decrying this methodology and claiming it was a contrived deal made by a consultant and the industry leaders. The Chief reported in a May 2006 article that David Moog, the assessor's union leader, claimed the method violated good assessing practices and was an improper way to determine fair market value.

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

MarcusPhoto290Joel R. Marcus is a partner in the New York City law firm of Marcus & Pollack LLP, the New York City member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Feb
15

How Owners Can Keep Property Tax Bills in Check

"Creating an ongoing dialogue with the assessor becomes the key to avoiding excessive property tax valuations. This dialogue should educate the assessor about the distinctive nature of LIHTC properties and send the message that the LIHTC owner will be cooperative, yet aggressive in protesting excessive property valuations."

By Gilbert D. Davila, Esq., as published in Affordable Housing Finance, February 2007

The unique characteristics of low-income housing tax credit (LIHTC) projects make it difficult for assessors to appraise these properties for property tax purposes, and can ultimately lead to excessive valuations. However, LIHTC owners need not despair, as they can use several methodologies to determine whether property taxes are excessive and challenge those assessments.

How to recognize excessive taxation: Errors in basic data

The initial step calls for a review of the basic data contained in the taxing authority's property records. This examination offers the LIHTC owner the first and easiest place to determine the appropriateness of levied tax assessments. Assessors' records commonly contain errors in one or more of the following areas: a property's age, square footage, unit mix, and/or facility amenities. An error in even one of these fundamental property characteristics can significantly increase a property's overall assessment.

A more significant error commonly made by assessors results from their assessing a LIHTC project as if it were a traditional multifamily complex. Property codes are commonly assigned to property types, which dictate what criteria will be used in arriving at the property tax assessment. A simple coding error can result in an excessive valuation in the millions of dollars. LIHTC owners should verify that their projects have been coded as low income housing properties.

Most jurisdictions provide taxpayers with specific protest avenues to correct these common mistakes. LIHTC owners should be prepared to share a current rent roll with their assessor in order to document the property's square footage and unit mix. Owners should also provide the assessor with a copy of the property's Land Use Restriction Agreement (LURA) to confirm its LIHTC status.

Lack of equality and uniformity

LIHTC owners should ensure that their property has been valued fairly and equally in comparison to other LIHTC projects in the taxing jurisdiction. Many states require that assessments among comparable properties be equal and uniform. A LIHTC owner's assessment should fall within a uniform range of values when compared to other LIHTC properties.

For example, if an owner's project is valued at $60 per square foot and there are 10 other comparable LIHTC projects in the taxing jurisdiction valued between $40 and $45 per square foot, the owner's property should also fall within the $40 to $45 range.

This example clearly demonstrates the importance of assessors properly categorizing and coding a LIHTC project in its records. A low-income housing project should not be valued at the same level as a traditional market project.

Owners need to compare their property's assessment to other LIHTC properties on a square footage and per-unit basis. If an owner's property is assessed disproportionately higher than comparable properties on these two factors, an argument can be made for a value reduction based on equality and uniformity, regardless of the assessor's "market value" claims.

Educating the assessor about LIHTCs

In most jurisdictions, the assessor's statutory responsibility is to value a property as its "market value" as of a particular valuation date. Assessors commonly derive a market value using one or more of the three classic approaches to value: the cost, income, or sales comparison. They will encounter difficulty in applying these valuation methodologies to an LIHTC property because of the unusual restrictions imposed by the LURA.

The cost approach presents inherent obstacles for the assessor due to the need to quantify functional and, in particular, economic obsolescence brought about by the LURA restrictions. Under the income approach, the assessor experiences problems with the quantification of income (actual versus market), the extraordinary expenses incurred by LIHTC projects and the calculation of a reasonable capitalization rate. Finally, the sales comparison approach will be difficult to apply when there are no sales of comparable properties and because of the restrictive covenants that run with the land.

LIHTC owners find it beneficial to educate themselves about the difficulties assessors face when valuing projects. This helps the LIHTC owner educate the assessor about the unique characteristics of the project and helps to inspire confidence in the appraisal methodologies proposed as a solution to the valuation difficulties.

Points to discuss with the assessor

Creating an ongoing dialogue with the assessor becomes the key to avoiding excessive property tax valuations. This dialogue should educate the assessor about the distinctive nature of LIHTC properties and send the message that the LIHTC owner will be cooperative, yet aggressive in protesting excessive property valuations. The following points provide owners with arguments to prove to the assessor that they should deviate from their normal appraisal methods.

Intangible value

A debate continues among assessors concerning whether tax credits should be considered when valuing a LIHTC project. A LIHTC property's total value derives from two primary components: the real estate and the tax shelter benefits. Appraisal scholars argue that, for tax assessment purposes, these benefits should be segregated into tangible value (that is, the benefits attributable to the real estate) and intangible value (that is, the benefit attributable to the LIHTC). this classification is crucial because, in most jurisdictions, assessors cannot include intangible values in their property tax assessments.

If a LIHTC owner's property is located in a jurisdiction that does not give the assessor guidance on the tangibility issue, owners should always argue that the credits are not a benefit attributable to the real estate but rather, comprise intangible value that should not be a component of the market value assessment. This argument will always lead to reduced property values. To help bolster this argument, an owner should show the assessor sample legislation from other jurisdictions that dictates that tax credits are intangible. Even better, LIHTC owners should join forces and lobby their state legislators to enact statutes that direct assessors to exclude tax credits from the valuation equation.

Illiquidity

A LIHTC owner cannot sell, transfer, or exchange the property without meeting certain conditions and obtaining government approvals. In addition, the LURA dictates whom the property can be sold to, and whether the property's restrictions survive a sale. These factors make for an extremely illiquid asset. Most "market value" definitions assume a willing buyer and willing seller in the open market. Such a definition cannot be easily applied to a LIHTC project. Owners should argue that the illiquidity of a LIHTC project be accounted for in the property tax assessment. One suggestion is to recommend a 15percent to 25 percent discount off the indicated value via the income approach to account for the illiquidity of the investment.

Restrictions and expenses

A LIHTC property operates under limited potential due to the restrictions associated with the LURA. The restrictions are long term, with severe penalties for violations. Resident restrictions result in additional risk and effort.

In addition, LIHTC owners experience higher expenses because they must meet certain reporting, record-keeping, and documentation edicts beyond conventional practice. Rental rates are limited, but expenses are not.

Owners should insist that the assessor take into account the effects of these restrictions and expenses on a property's tax assessment. An owner could argue that the restrictions, risk, and expenses that distinguish a LIHTC project from a typical market complex support the use of a higher capitalization rate in an income analysis. This will, in turn, produce a reduced taxable value. Armed with methods of recognizing excessive tax assessments and arguments to thwart these excesses, LIHTC owners will be in a good position to gain fair taxation of their properties.

DavilaPhoto90Gilbert Davila is a partner with the Austin-based law firm of Popp, Gray & Hutcheson, LLP. Popp, Gray & Hutcheson devotes its practice exclusively to the representation of taxpayers in property tax appeals and lawsuits and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. Mr. Davila can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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