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Property Tax Resources

Sep
08

LIHTC Project hit with Full Property Tax Burden

Concord - An LIHTC project for seniors got no breaks from the New Hampshire Board of Tax and Land Appeals. In Epping Senior Housing Associates, L.P., V. Town of Epping, the court ruled that LIHTCs must be factored into the value of the property for purposes of property tax assessment.

The LIHTCs were one of the bundle of rights that Epping Senior Housing Associates enjoyed by the purchase and development of the 40-unit Whispering Pines II, and so they should be counted in the valuation, explained John McSorley, assistant director of the property appraisal division of the New Hampshire Department of Revenue Administration.

The opinion was rendered in march and was a case of first impression, meaning that no court in the state had previously ruled on the LIHTC/property tax issue. Numerous out-of-state cases were cited by both sides, but the court gave weight to those that included the value of credits in the assessment. It said "the New Hampshire tax statutes do not distinguish between property rights that are 'tangible' [meaning land] and those that are 'intangible" [ meaning LIHTCs] in nature."

"Tax credits may run with the land, but they are subject to recapture if the property is sold, which operates as a dis-incentive to sell before the credit period runs out." said Elliott B. Pollack, chairman of the valuation section of Pullman & Comley, LLC, and the Connecticut member of the American Property Tax Counsel. Pollack recently reported on a later-decided Connecticut case that did not give value to the tax credits (see Affordable Housing Finance, July 2005, page 42.)

The New Hampshire court, however, said that under existing state law, this was the only decision it could reach and that it was up to the legislature to change how LIHTCs would be valued.

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Sep
07

Bleak Future for Business Owners?

"Under the tax court's current interpretation, most equipment used in any manufacturing process will now be taxed as if it were real estate."

In the decades prior to 1982, New Jersey enjoyed a robust industrial and commercial environment. This rosy outlook began to change about 1982, and recent events have cast a significant pall over future prospects for industrial and commercial property owners.

Since 1982, New Jersey has lost more than 22% of its manufacturing establishments, and more than 49% of its manufacturing job base. These losses outpace the country as a whole, and the declining number of establishments and jobs negatively impact New Jersey's economy. This effect rolls into the future as well because the state has lost all that real property that would have been built and the growth that would have taken place in the economy.

Recognizing the importance of maintaining that manufacturing base, in 1992 the legislature enacted the "Business Retention Act" designed to prohibit business personal property from taxation as real property. It was intended to promote business construction, expansion and acquisition.

Unfortunately, the Tax Court recently interpreted that law in a way that completely turns upside down the rationale for its passage. Under the court's interpretation, most equipment used in manufacturing will now be taxed as if it were real estate. This includes business personal property that costs millions of dollars, like process piping, conveyors, pressure tanks, paint booths and ovens, etc. Any company planning to locate a manufacturing plant here or expand an existing plant will now seriously rethink that move in light of the hundreds of thousands of dollars in additional real estate taxes they will face.

As if that action weren't bad enough, the Tax Court has thrown out the New Jersey constitution's "uniformity" clause, requiring that all real property be taxed on a uniform basis of fair market value (what a willing buyer would pay a willing seller in an arm's length transaction). This new ruling significantly increases many business' property tax assessments.

To illustrate this effect, let's take an automobile assembly plant. No plant of this type has ever sold to a new owner who used the plant to assemble cars. Thus, if the plant sold to a new owner the buyer would pay the plant's owner a substantially smaller amount than the value the plant holds for the owner assembling automobiles in it. The new owner pays market value, not the value the property has as an auto assembly plant. The court's ruling means the auto plant will now pay an assessment based on the value of the plant's use, not the value of the plant in today's market.

The auto assembly plant is just one example of a myriad of New Jersey business whose property will sell at prices far below their property tax assessments. Despite this fact, the taxing authority will assess the current owner at dollar amounts substantially above market prices. This new ruling forces business owners, even those most ardent New Jersey supporters, to look at other states for their for business expansion.

Adding insult to injury, the state assembly approved a measure convening a property tax convention to review and make recommendations for constitutional changes in the way New Jersey taxes real property. This bill awaits a vote in the state senate.For those involved in commercial real estate, it is clear this convention will recommend a change in the state constitution's "uniformity" provision. That change will probably substitute a classification system for the "uniformity" clause.

the classification system taxes commercial and industrial property on a higher percentage of value than residential. Currently, residential and business property is taxed uniformly at the same percentage of value. Under a classification system, the taxing authority could assess residential at, say, 50% of its value, while assessing business property at 100%. Clearly, a greater percentage of the tax burden would be on the business community under a classification system.

Because New Jersey fails to cut spending and rein in run away state pensions, the state will continue to hit its tax base with higher reviews. Manufacturing and other enterprises will continue to wither on the vine as the business community faces higher taxes. In an environment where other states seem to bend over backwards to provide a climate that attracts business, New Jersey has taken a completely different course. Who can take seriously the State Department of Commerce slogan, "New Jersey and You - Perfect Together"?

Garippa155 John E. Garippa is senior partner of the law firm of Garippa Lotz & Giannuario with offices in Montclair, NJ and Philadelphia, PA, New Jersey and 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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Sep
07

Checklist for Hiring Best Property Tax Representative

"...distinguishing factual characteristics not marketing boasts..."

Research shows that owners of malls and retail centers look for distinguishing factual characteristics not marketing boasts when they hire property tax representatives to assist them in contesting their property taxes. Four criteria are critical to these owners in making their buying decisions. These criteria are:

  • Experience in property tax but also in related areas such as appraisal or real estate that can aid in the property tax outcome.
  • Resources, the depth of people and scope of expertise to handle the matter and the access to any necessary outside resources such as lawyers and expert witnesses.
  • Leadership, a clear demonstration of a leadership role in property taxes because owners believe that leadership is a factual predictor of success.
  • Relationships, a firm culture that fosters long-term relationships.
  • While owners need to ask tax representatives many questions in order to determine how well they measure up to the criteria, the following 20 areas of questioning are critical:
  • What mall/retail center properties have you represented?
  • What percentage of your clients are owners of mall/retail center properties?
  • What articles relating to malls/retail centers has your firm written and had published in trade and/or professional journals? How many of these articles has your firm written in the last three years?
  • How many administrative hearings or lawsuits involving mall/retails centers have you personally been involved with in the last two years?
  • Describe some of the more significant ones?
  • Which MAI appraisers have you personally worked with on mall/retail center cases? Describe their valuation approaches?
  • Explain the evolution of appraisal theory and describe the content of appraisal literature relating to malls/retail centers?
  • What approaches have you used over the last several years to resolve mall/retail center cases? How do these approaches differ from other tax representatives or from tax authorities?
  • What appraisal designations do any members of your firm have? What courses in appraisal methods have members of your firm taken or taught? In what years were these courses taken or taught?
  • Other than appraisal and tax consultant experience, what other backgrounds do members of your firm possess that would aid in your representation of us?
  • What leadership position(s) has your firm occupied in the property tax field and in what years was this?
  • Have you been involved with your state Legislature in developing property tax law? How were you involved with these legislative matters?
  • What efforts does your firm undertake to keep informed about mall/retail issues in other states?
  • What memberships does your firm hold in national property tax organizations and how often over the last three years have you personally attended their meetings?
  • Describe how you keep informed concerning legal issues relating to malls/retail centers? If the candidate firm is not a law firm, ask, "Describe how you handle matters involving legal issues?"
  • Describe the credentials of members of your firm and the length of time they have been with your firm?
  • Who will specifically handle my case and will my case be moved among various members of your firm?
  • What does your firm do to develop an exchange of ideas among your clients? For example do you introduce your clients to each other?
  • What do you do to insure prompt and effective communication with your clients? What form of reports can I expect?
  • What factually distinguishes your firm from other providers?

Using these questions with appropriate probing for factual answers will provide owners with the information they require to select the most qualified property tax representation.

Jim Popp Web-ResJim Popp is a partner with the law firm of Popp Hutcheson PLLC in Austin, Texas. Popp Hutcheson PLLC is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. Mr. Popp can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Aug
09

Taxation of Business Enterprise Values

"Property owners must help define the parts of a property that are real estate, separating out the non-real estate assessable property. "

The only property in the state of New York subject to taxation is real property. The state legislature has reinforced this point by stating, "Notwithstanding [all other general or local laws to the contrary], personal property, whether tangible or intangible, shall not be liable to ad valorem taxation."

Although local assessors can only levy property taxes on real estate alone, their valuations embrace elements of business value, personal property and intangible property. Depending on the nature of the real estate property type, assessors tend to inflate valuations.

This inflation is best explained by breaking down real property assessments based on asset class.

Hotels. By nature, a hotel operation combines real estate, e.g. bricks and mortar, with business enterprise and personal property. When a patron rents a room, he pays for the use of furniture, hotel services, room service and the reputation of the hotel (franchise value).

Shopping Centers

Much debate has taken place around the country regarding the significant elements of business enterprise value as they relate to shopping centers. An experienced developer has multiple centers and an organization of people who orchestrate the selection and mix of retail tenants, using their expertise to provide incentives that can attract anchor department stores. The marketing, advertising and development skills of the developer account for a mall's success. However, the assessor rarely takes this into account when he capitalizes all of the mall's net income. Of course, the mall derives income from sources such as licenses for pushcarts, car dealer displays, special events an dother items. Despite the fact that none of these income streams derive from real property, no deduction is ever given for the business enterprise value created by the developer. When amlls are rated, sales per foot is the benchmark, not rental rates per sf, which recognizes business enterprise value.

Office Buildings.

Here, profits generated by the owner from sales of services requested by tenantes are included in assessors' total net income for a property. These services may include items such as build-outs and extra services not part of the lease provisions. If the tenant ordered a door or extra cleaning from a vendor, these actions would not be classified as real estate income. However, if the property owner's business provides the service, it somehow transforms itself into real estate value.

If a building has an emergency power generator, it is generally separately assessed, even though the owner reports the tenant's rent, which includes use of the generator. The assessor also values the office building, in effect doubling taxation.

Signage.

Assessors tax billboards and electronic signs on buildings based on the owner's net income from these signs rather than taxing them on the physical value of the signs. An owner of a building that received advertising revenue for the use of billboards on its property will often find that the assessor uses that income to value the real estate. However, when a company like MetLife puts its name on its own building, it pays no extra tax.

Billboards and electronic signs on buildings are also taxed based on the owner's media business net income rather than physical value. Depending on the content and type of business using signage, it produces income, which is often assumed to be part of real estate value. If Ernst and Young put its name on its own office building, no extra tax sould be due, but a Jumbotron in Times Square might pay real estate taxes on its income from advertisers, if assessors could get their hands on it.

If the trade name "Trump Place" were separately rented from its owners, would rental payments be real estate income? What difference in value would occur if a hotel had no TVs, beds, furniture, brand name, good reputation, trained workforce or reservation system? That bare-bones hotel building is the only property that's assessable. It is the fee-simple estate stripped of its intangible business enterprise and personal property that, by law, should be the basis of a property tax bill.

Successful business enterprise models are by nature intangible, brought about by time, expertise and business skills. They consistently produce additional rental income. Property owners and their representatives must help define the parts of a property that are real estate, separating out the non-real estate assessable property; otherwise owners will have paid much in taxes without realizing it.

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

JoelMarcus Joel R. Marcus is a partner in the New York City law firm of Marcus & Pollack, 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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Aug
07

Gateway School District is Challenging Major Property Assessments

Gateway School District is challenging real estate assessments on major commercial properties in Monroeville in lawsuits that could significantly increase tax revenues. Gateway maintains that Monroeville Mall, Miracle Mile Shopping Center and the old Cochran automotive property are undervalued on the tax rolls. Hundreds of thousands of dollars, perhaps millions, are at stake. For every $1 million in assessed value, Gateway, Allegheny County and Monroeville collect $26,300. The school district takes the lion's share, or about $19,410. The tax cases, filed in Common Pleas Court, also offer a glimpse into the arcane world of high-stakes commercial real estate transactions.

The biggest challenge is over Monroeville Mall, which is assessed at $120.8 million. A year ago, according to news accounts, Miami-based Turnberry Associates sold the mall to CBL & Associates, of Chattanooga, Tenn., for $231.2 million. The mall pays about $3.2 million a year in property taxes. Using the sale figure, taxes would increase to $6.1 million. But CBL attorney J. Kieran Jennings testified at a May 27 hearing before the county Board of Property Assessment, Appeals and Review that CBL did not buy the mall for $231 million. "There was absolutely no transfer of property," he said. He said the original owner still owns the land and CBL is the tenant. CBL pays a ground lease of $650,000 a year and has an $11.95 million option to buy. He claimed the property is worth $12 million -- 90 percent less than the appraised value -- in a letter to the assessment board. But he testified at the hearing, "I'm not saying that's what it's worth. That is not what we're proposing. You have an extremely convoluted transaction here."

At $231 million, he said, the mall would be priced "way beyond what we ever see in Allegheny County. And $12 million is certainly a ridiculous number." The correct assessment may come down to separating the value of the mall's real estate from the business' other assets.

Both sides bolstered their cases with documents that CBL filed with the Securities and Exchange Commission, but they ended up confusing the hearing officer. Gateway cited a filing in which CBL declares that it acquired the mall "for total consideration of $231.2 million," including a $134 million debt, $61 million in new partnership shares and $36.25 million in cash. Jennings cited a different SEC filing in which CBL put the "transaction costs" slightly higher, at $231.6 million, including a $134 million debt, $46.2 million in partnership shares, $39.5 million cash and a $12 million obligation in the land underlying the mall.

"I certainly need some help here," said hearing officer Ken Gossett.

"It's confusing," The property should be appraised, Jennings said. "It may be that it gets appraised, and it comes in at $175 million," he said. "It may come in at $120 million. It may come in at $230 million. But ultimately we do know this. We know we have a sale ... that has a tremendous amount of extensions to it. It was certainly not something we'd call a clean deal."

Gossett said he would rule that the evidence was insufficient to change the assessment, and Gateway could appeal to Common Pleas Court. Hearing officers made similar rulings in the other cases. Miracle Mile, at 4100 William Penn Highway, is assessed at $31.1 million.

Oakmont Partners LLC bought the 51-year-old shopping center in March from Casto-Skilken Group, the original developer. The price was not disclosed, and the transaction included several other area shopping centers.

Oakmont partner Stephen Zamias would not say how much Miracle Mile is worth. "As it is now, $31 million is extremely fair, based on where the income level is," Zamias said. Then noting that three store spaces are vacant, he said "It's probably over-assessed."

The Cochran property at 4200 William Penn Highway is assessed at $13,057,300. Cochran Automotive used to sell cars there and now a Lowe's hardware store operates from the site. The property owner is listed as O.F.E.W limited partnership, which traces back to the new No. 1 Cochran automotive complex farther up the highway.

The partnership's attorneys declined to discuss the case. Gateway appealed the Cochran assessment to Common Pleas Court in April and the mall and shopping center assessments on July 12. Gateway Solicitor Lawrence Demase would not say what he thinks the three properties are worth. Gateway was not entitled to private records for the property assessment hearings, he said, but in court he can use the discovery process to get better information. "We can try to unravel the situation," Demase said. He said the cases could take several years to resolve.

(Bill Heltzel can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. or 412-263-1719.)

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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

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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.

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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.

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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..

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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..

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