"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..

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

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

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

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

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

Gaining traction

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

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

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

Doing the math

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

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

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

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

• Determine how the taxing authorities appraise your properties for ad valorem tax value. If they include real estate and intangibles in their assessment, take stock of the intangible assets and rights used in connection with your properties.

• Order appraisals for all the properties' intangibles, basing those appraisals on local ad valorem value standards.
• Present the facts to the taxing authorities and request that the value of the intangibles be excluded from the taxable value of your properties.

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

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

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

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

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

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

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

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

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

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..

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

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

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

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

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

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

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

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

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

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

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

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

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..

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

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

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

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

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

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

Court weighs in on business value

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

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

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

Actions Owners Should Take

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

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

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

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

Robert L. Gordon is a partner with Michael Best & Friedrich LLP in Milwaukee, where he specializes in federal, state and local tax litigation. Michael Best & Friedrich is the Wisconsin member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..