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Property Tax Resources

Aug
07

How to Avoid High Property Taxes

"Understanding the difference between market value and sale price can lead to a tax reduction."

The foundation for a property tax appeal rests on an analysis of the property's value for real estate tax purposes. The valuation analysis can be based on numerous comparisons, the most important of which is the comparison of market price to sale price. The analysis also must include the property's ability to generate revenue.

This valuation analysis provides the first clue regarding whether the assessor's valuation of a property is equitable. Market value is most often defined as the probable price a willing buyer would pay a willing seller in the open market. It implies that the property has been on the market for a reasonable length of time, and that both buyer and seller know the present and potential use of the property.

The sale price at which a property sells does not necessarily reflect market value for property tax purposes. For example, a developer probably pays more than market value for parcels needed for a site being assembled to build a shopping center. On the other hand, a seller needing cash in a hurry probably sells at below market price.

Further, in most cases the sale price includes more than just the tangible real estate. Non-real estate value components, such as personal property (furniture, fixtures, equipment and inventory), contract rights, brand name, patents, copyrights, an assembled work force, special financing and business enterprise value are included in the sale price. Non-real estate elements have no place in the formulation of a property tax assessment.

Owners need to closely scrutinize all of the components of the sale price as well as the motivation behind the sale to determine whether the sale price is equal to the property's value for real estate tax purposes.

Market rent vs. contract rent

The buyer of a single-family home makes the purchase to enjoy the benefits that the property will afford in the future. Likewise, the buyer of an investment property pays the purchase price in order to receive future benefits -- the annual income stream generated in rents.

In making decisions about buying or selling a property, investors, the typical owners of income-producing property, rely primarily on the property's ability to produce income. Analyzing the property's income potential can determine if the property tax assessment is fair.

Of the various types of rents, taxing authorities usually base their property tax assessments on either market rent or contract rent.

Market rent is the rate justified for a property based on what owners of comparable properties in the area charge to rent their space. With certain exceptions, property tax assessments are generally determined based on mark et rent.

However, the assessor may use contract rents as the basis for tax assessments. Contract rent represents the rent payments required of a tenant under the terms of a lease. Often, market rent and contract rent calculations arrive at the same number, but where contract rent is less than market rent, property tax value is affected. So, depending on whether the assessor uses market or contract rent as the basis for determining a property tax assessment, an owner can pay more or less tax.

Real-life applications

Let's say a tenant signs a lease agreeing to pay $5 per sq. ft. for office space that rents on the open market for $10 per sq ft. If the property tax assessment is determined based on the $5 per sq ft contract rent, the property generates less revenue, and therefore has less value, than if the assessment is determined based on the $10 per sq ft. market rent.

Consequently, if the taxing authority bases the assessment on market rent, the contract rent supports a lower assessment than market rent. In such a case, a property tax appeal may well be successful.

Owners must understand whether the law requires taxing jurisdictions to value property base on market rent or contract rent, and whether the owners' property is charging a market rent. With this information, an appropriate decision can be reached concerning the appeal of the assessment.

Before making a final decision to appeal a property tax assessment, it may be useful for the owner to obtain a property tax appraisal to help verify the property's value for tax purposes.

Failing to understand what constitutes value from a property tax point of view results in high property taxes.

vnorman Vickie L. Norman is counsel at Faegre Baker Daniels in Indianapolis, the Indiana member of the American Property Tax Counsel. The APTC is the national affiliation of property tax attorneys.
She can be reached at vickie.norman@faegrebd.com

Jul
07

Condo Converters Face a Taxing Question

"Projects Being Assessed at Full-Market Value During Renovation"

Developers who buy rental properties with the intention of converting them to condos and reaping a handsome profit may be forking over more than their fair share of that future gain to local governments.

In a sense, condo converters have become victims of their own success, according to Andy Raines, a partner with Stokes Bartholomew Evans & Petree in Memphis, Tenn., whose firm is a member of American Property Tax Counsel (APTC), the national affiliation of property-tax attorneys. The public perception of condo markets works against developers in cash-strapped municipalities.

"Condo developments are seen as being high-end and lucrative and local governments are saying: 'Hey, we can get a piece of that pie,'" said Raines.

What is happening is that many condo-conversion projects are being assessed at their full, future, market value during the months-lo9ng (or even years-long) renovation state - and well before the developer is ready to sell the units.

"Some assessors come in and essentially value or tax the individual units as if they've been totally renovated and the conversion is complete and estimate what the units would sell for based on market information," said Gilbert Davila of Popp & Ikard in Austin, Texas, a law firm that specializes in the field of property tax and also a member of the APTC.

Davila said that's a mistake because the assessment should be a "snapshot in time" of the property. If a property is only 50percent complete at evaluation time, the assessor should not approximate or speculate what it will be worth at a future date, he added.

"[Assessors] can't predict the future," said Davila. "There might be problems, construction delays, a myriad of different problems on the road to getting a project completed."

What's a developer to do? With property tax laws varying so widely from state to state, it's difficult to give blanket advice. But Raines did say that "timing is very important. To the extent the developer can postpone [assessment] at the full value, they may sell the units by then, and after they sell, it's the buyers issue."

And both Davila and Raines stressed that developers should be aware of their state's legal process for challenging assessments they don't agree with.

Jun
08

A Judge Makes Policy, Taxpayers Pay More

"By law, the Tax Court's role is to determine value, not to redistribute the tax burden."

General Motors vs. Linden, one of the oldest pending tax cases in the country, writes yet another chapter in the continuing saga of issues taxpayers must combat everyday. Each year from 1983 through 2004, General Motors appealed its local property tax assessments on its automobile assembly plant in Linden. In 1991, the Tax Court rendered a decision that found the highest and best use of the property to be an automobile assembly plant and, therefore, taxed all of the plant's machinery and equipment.

In 1993, the New Jersey Appellate Division reversed that decision and sent the case back to the Tax Court. In so doing, it stated quire clearly to the Tax Court that it was a mistake to characterize the highest and best use of the General Motors' Linden plant as an automobile assembly plant.

Recently, a judge sitting on the New Jersey Tax Court rendered an opinion of the highest and best use of the property. This was not the same judge who ruled in the 1991 case. This judge completely rejected the reversal of the Appellate Court some 12 years ago, and concluded essentially the same decision that was rendered in the 1991 case. What is astounding about this opinion is not only did the court totally ignore the principles set forth in the reversal, but it blatantly stated it was doing so to enforce a policy of the Tax Court to equalize the tax burden of certain taxpayers across the state.

This should send a chill up the spines of all non-residential taxpayers in New Jersey and across the country. In a time when activist judges are being called into question in high profile issues such as Presidential elections, the right to life and the right to die, property tax cases fly well under the radar. Nonetheless, make no mistake about it - this insidious activism is just as harmful as those issues attracting much more attention.

The seminal decision in New Jersey on the issue of "highest and best use" was rendered in Ford Motor Co. v. Edison Township in 1992. In that case, the New Jersey Supreme Court delineated the appropriate standard to be used in valuing property for tax assessment purposes. It very clearly made the point that property must be valued based on what a willing buyer would pay a willing seller for the property given the use to which it would put.

In the Ford case, the Supreme Court crafted a doctrine which recognized that limiting the review of the subject's highest and best use to its current use as an automobile assembly plant would distort how the market would analyze the property if it were sold. The property's highest and best use must be achievable, and not speculative or remote.

Thus, in order to reach its conclusion, the Tax Court in the General Motors case totally rejected the law in the Ford litigation despite the incredible symmetry of the cases. It concluded that the property should be valued not as a general-purpose industrial property, but as an automobile assembly plant. the Court made this finding in spite of the fact that experts from both the plaintiff and defendant testified that if the plant were ever offered for sale it would never be purchased for use as an automobile assembly plant and, thus, would trade as a general industrial facility.

The Tax Court openly admitted it was setting tax policy. The New Jersey Tax Court stated, "determining a highest and best use that will result in value being attributed to the automobile assembly features of the subject property is consistent with and effectuates the public policy of fairly and equitably distributing the property tax burden."

The focus of the Tax Court's policy is to tax industrial property at its highest value, not to tax it as the statutes require, at the true value in the marketplace. Its opinion merely furthers its policy objectives without regard to how market forces will treat this property. By law, the Tax Court's role is to determine value, not to redistribute the tax burden.

This latest 2005 General Motors opinion is saturated with the singular focus of a misguided philosophy regarding redistributing the tax burden. It replaces adherence to the law with policymaking by the judiciary. Judicial activism must be met with appeals to the highest courts in order to preserve property owners' rights under the law.

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

Phil 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.

Apr
09

Sec. 42 Owners Can Reduce Property Taxes

"Real estate taxes are one of the few expenses that can be reduced when all other costs are rising. The devil, however, is in the details."

While owners of low-income housing are already facing increased expenses across the board, local governments are trying to raise property taxes to combat budget shortfalls. But owners of projects with tax credits or other subsidy can take steps to ward off increased taxes and reduce excessive taxes.

In many ways, Sec. 42 housing isn't very different from other multifamily housing. Owners have seen utility costs continue to rise, insurance costs almost double, and property taxes go up persistently. Furthermore, these increased expenses fail to add to the life of the property or to its desirability.

Real estate taxes are one of the few expenses that can be reduced when all other costs are rising. The devil, however, is in the details. Sec. 42 housing, by its very nature, differs from project to project. Income is calculated differently based on area demographics, expenses vary based on turnover, and the disparities in size, style and tenancy all contribute to a project's unique characteristics.

These are some reasons why several schools of thought exist about how to assess these properties. In some states, specific laws dictate whether assessors can consider the value of the tax credit when establishing assessments. Most states don't have such statutory laws. Where the state hasn't established rules, the courts will decide the issues.

Methods of Assessment

The cost of construction for low-income housing is often greater than its fair market value. It is the low-income housing tax credits (LIHTCs) that make the project economically feasible. Unfortunately, it is not uncommon for assessors to use cost of construction to establish assessments on newly renovated or constructed buildings, leaving a great number of LIHTC projects over assessed. And reducing the assessments on these properties can be a challenge.

Ideally, the assessor should look to the income potential of the property, given its restricted rents and often higher expenses. This means the assessor should develop fair market value by using the operating cash flow before taxes, debt service and depreciation and dividing it by a suitable capitalization rate. Some assessors actually do this.

However, some states require that property be assessed as an unencumbered fee simple estate. In other words, the property must be assessed as if there were no Sec. 42 restrictions, producing values based solely on market conditions. As a result, market rents are used rather than restricted rents, and market expenses and vacancy rates also apply. In these states, market rents would likely be higher than the restricted rents and the vacancy loss would also be higher, given that the property would not be financially feasible for certain tenants. Here, sales of comparable conventional apartments can be used to help persuade the assessor to establish a reasonable fair market value.

Tools to Use When Law Unclear

In other instances, the law may not be entirely clear when it comes to LIHTC properties. In a jurisdiction that has not established clear law, the best advice is to argue that the credit is separate from the real estate, and therefore not taxable as real property. After all, the federal government passed a law establishing the credit as an incentive to encourage construction of affordable housing. Thus, the credit isn't real estate. As an alternative approach, taxpayers can try to prove that the credits are intangible personal property.

One way to establish the credit as personal property is to show that it can be removed from the real estate. Because the credits regularly sell without the real estate, this stands as proof that the credits are separate from the real property. Although the fact that a tax credit is not real estate appears to be self evident, in at least one Pennsylvania court, it was decided that all items that could affect the purchase of the property must be taken into consideration. In that instance, the remaining tax credits along with the restrictions were used to establish the assessed value.

A number of issues come into play if the assessment is to be established with the added value of the credits. Are the credits actually sold? Once sold they can no longer add value. The value of the credits has been separated, which is no different than selling off excess acreage. Once the asset is sold, it's gone.

Taxpayers can use another argument: Long after the credits expire the restriction continues. Therefore, the additional value becomes part of a discounted cash flow analysis aimed at finding the overall effect of the restriction and the credit. This argument faces the problem that the speculative nature of the future restrictions subjects the methodology to manipulation and error.

Finally, the fact remains that by increasing the tax burden on restricted properties, the assessor is working counter to the state and federal government in their attempts to encourage affordable housing. This argument may be used either as common sense persuasion or as part of a legal theory.

The issues relating to Sec. 42 housing assessment are varied. Some steps to challenge a tax assessment can be taken informally and may result in a decrease in taxes. Others present more of a legal challenge, requiring strong local representation. In any case, always review assessments when they arrive in order to ensure that a property is paying only its fair share of taxes.

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

Feb
07

Assessors Exploit Their Advantage

"Mountains of data give tax authorities clout in assessment disputes, but owners can fight back"

In the late 1970s, property owners were on an equal footing with the local assessor. In those days it was almost impossible to obtain important information about properties such as sales prices, recent construction costs and current financial statements. Appraisers reigned supreme, as they had the best collection of information about properties. Their numerous past assignments to value properties for banks, developers and lawyers enabled them to amass a database of tax assessment information useful in protest proceedings.

Over the years, changes in reporting laws and efficiencies in data collection technology shifted the knowledge base advantage to the assessor. In many jurisdictions today, the tax authorities compel taxpayers to annually produce income and expense statements, sales data, closing statements, rent rolls, escalation clauses, renewal options and lists of vacancies. In most jurisdictions, building permits, sales tax on construction costs and even building plans and zoning descriptions are available to governmental officials, just for the asking.

Furthermore, the advances in technology put the necessary valuation information a keystroke away from the assessor. In New York City, for example, all commercial property owners must annually report their income and expenses, provide a breakdown of expenses and list vacancies.

Tax authorities compare this information along with income tax, sales tax and other confidential taxpayer filings, creating profiles that even the taxpayer cannot see. And finally, computer ticklers alert the assessor to new sales transactions as well as building permit applications.

Not a Level Playing Field

Make no mistake, assessors have more information than ever before and the ability to access it quickly. While some of this data may be available to property owners and their tax attorneys, a sizable amount of valuation data is out of the public's reach. That's due to the cumbersome Freedom of Information laws, the way data is compiled and the confidentiality rules ostensibly made for the protection of property owners. However, these confidentiality rules don't apply to governmental bodies.

Owners typically use many different attorneys, accountants and architects on numerous, unrelated building activities. In so doing, they fail to capture and compile critical information. When property taxes are contested, the assessor enjoys the distinct advantage of bountiful information to use against an owner.

The fact that the tax authorities maintain copious information on properties comparable to an owner's property compounds the problem. They can, and will, use this information against the owner in a tax appeal. It sounds like the Star Chamber (17 th century British court that used arbitrary, secretive proceedings that violated personal rights) and often operates that way, since privacy laws actually prohibit the assessor from revealing information they possess concerning a neighboring property. Nonetheless, that won't inhibit their internal use of the information to make an owner's assessment higher or to turn down their appeal.

The real danger isn't only that assessors have more information than the taxpayer, but that they may not quite understand the data or its implications for a property's valuation, causing assessors to reach the wrong conclusions, to the taxpayer's detriment.

Counter Attack

Despite the distinct advantage assessors' hold, owners can take three steps to meet this challenge and prevail:

Commercial property owners must realize that their activities are being monitored and compiled. Consequently, they need to begin capturing and computerizing the same types of information assessors maintain. An owner's property tax attorney should be able to assist in the data gathering.

Owners and their attorneys can subscribe to broker services such as Costar Group, which offers details on vacancies and lease terms in urban areas. They also can join the Institute for Professionals in Taxation (IPT) or their local real estate board, where court decisions and appraisal data are often disseminated.

Choosing the appropriate tax counsel is the most effective strategy for fighting an unfair assessment. Counsel should use the Freedom of Information laws to gather all available data from government records, develop their own programs to dissect the voluminous information on comparable properties and obtain recent court records for relevant information.

The age-old axiom applies in this case: to be forewarned is to be forearmed.

JoelMarcusJoel 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..

Dec
08

Dramatic New Possibilities for Hotel Property Tax Reductions

" A group of eight hotel owners retained Sean Hennessey to explore the valuation of hotel real estate not by extracting business value but by determining what the hotel real estate itself would rent for. The research examined the rental of the hotel property by a non-hotel affiliated owner to a hotel operator similar to the rental of an office or apartment. The results were striking. "

Property taxes remain a major expense for hotel owners and operators. For the first time in many years, exciting developments in the valuation of hotel properties provide optimism for the significant reduction of these expenses. The first development is the increased acceptance of a new valuation methodology that results in increased deductions for the business value portion of the hotel operation. The second is the re-emergence of the use of whole-property leases as an indicator of the real property value of a hotel business.

Hotel owners know that the investment in and operation of a hotel is much different than other types of real estate such as office buildings and apartments. They know that hotel properties contain a business value component in addition to real estate and personal property. Although taxing authorities generally agree that a hotel involves more than just the rental of space, this is apparently the extent of the agreement. There is no agreement over the methodology for the identification and the quantification of business value. Further whatever agreement there is seems to be ever changing and elusive.

A brief history is useful to an understanding of the lack of agreement. In the early 1980's, hotel owners supported a valuation methodology, which accounted for business value through a deduction of franchise fees and management fees. The applicability of this approach was the primary debate between owners and tax authorities. By the mid-90's, tax authorities had generally accepted this approach only to find it rejected by owners. As more study was given to the area, owners argued that management and franchise fees were nothing more than an expense to the owner and did not represent an indicator of return on the business portion of a hotel. Thus owners sought new ways to explain business value and its deduction for property taxes.

By 2000, David Lennhoff and other hotel appraisers developed methods that quantified business value differently than just a deduction for management and franchise fees. Their methodology provided that to arrive at the real estate portion of a hotel going concern, it was necessary to extract the business value as represented by start-up costs and the residual intangibles of the going concern. These concepts were consistent with the Appraisal Institute's textbook, the Appraisal of Real Estate, and Course 800: Separating Real and Personal Property from Intangible Business Assets. Yet acceptance by the tax authorities was slow.

The first exciting development for property owners is not the development of this methodology but its initial acceptance. Recent trials in New Jersey and Tennessee involved a direct comparison between the old method and the new method. In both instances, the court ruled that the new method was preferable for the purpose of extracting out the business value for property tax purposes. This is the possible start of a growing acceptance of this theory.

The second development comes from Texas. A group of eight hotel owners retained Sean Hennessey to explore the valuation of hotel real estate not by extracting business value but by determining what the hotel real estate itself would rent for. The research examined the rental of the hotel property by a non-hotel affiliated owner to a hotel operator similar to the rental of an office or apartment. The results were striking. The results indicated a rental of the real estate for a range of six to thirteen per cent of revenue on an absolute net basis. This correlated closely with the extraction method.

These two developments will provide dramatic opportunities for property tax reductions. The adoption of a valuation methodology by the courts is typically the first step in adoption by the tax authorities. As more courts agree so will more tax authorities. The whole-property lease approach frames the methodology in a context easily understood by tax authorities and lends further support to the business value methodology. Based on the early results, it appears that used in conjunction, hotel owners may experience significant reductions in their property taxes.

Jim Popp Web-ResJim Popp is a partner with the law firm of Popp Hutcheson PLLC Austin, Texas. Popp Hutcheson PLLC devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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