"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..

"The key question for owners is: are these new assessments as accurate as they were before the new GIM technique was employed?

By Joel R. Marcus, Esq., as published by Real Estate New York, April 2008

The Tentative Assessment Roll for 2008/2009 demonstrates a significant shift in assessments for class 2 properties (rented apartment buildings, cooperatives and condominiums). This is due to the New York City Department of Finance abandoning the time-honored approach of net income capitalization in favor of the gross income multiplier (GIM) approach, which for the very first time ignores age, condition, location and expense factors. The key question for owners is: are these new assessments as accurate as they were before the new GIM technique was employed?

Different Methods, Different Results

First, what are the differences in the past and present methodologies and where are the pitfalls in adopting one formula over another? Net income capitalization has been used by assessors and endorsed by New York State courts for more than a century. In 1962, the New York Appellate Division ruled that value arrived at by capitalization provides the surest ground for sound appraisal. In an earlier case, the New York Court of Appeals determined that: "the net income of a property is more persuasive evidence of what a property is worth than using a sales price derived from a similar property. What an investor will pay for a property is measured in large part by the amount and certainty of the income that can be obtained."

The Finance Department provided two reasons for renouncing the capitalization approach: 1) expenses for some buildings were higher than others leading to lower assessments, while in some cases the expenses may have been overstated by the owner. 2) using the GIM eliminated the need to study expenses or expense ratios and offered a simpler, more predictable one-step method.

While GIM offers more predictability, it fails to provide more accuracy. GIM is not seriously employed by any major developer, investor, lender or appraiser today, nor has any New York court embraced it.

In the most recent edition of its handbook, the Appraisal Institute warned appraisers to be careful when using this GIM method. The handbook cautions that all properties used as a basis for this approach must be comparable to the subject property and to one another in terms of physical, location and investment characteristics. If properties have different operating expense ratios this method may not be comparable for GIM valuation purposes.

The GIM approach presents one overriding problem. It is applied to all residential property regardless of location, age physical conditions or the level of services. Also, using GIM throws retail rents, antenna, signage or health club income into the mix, thus, offering the distinct possibility of grossly inaccurate and unfair assessments for many types of properties.

In addition, many substantial valuation disparities occur due to factors such as rent controls, rent stabilization and complexes composed of a large group of buildings. There may be substantially different expense ratios for an aging multi-building housing complex and a 100-unit, mid-block, non doorman apartment house in the West Village. These differences generate unfair tax assessments.

Legal Flaws in GIM

Initially, the Finance Department used different GIMs depending on income level and whether the property is rental, co-op or condominium. This directly violates state law, which mandates that these properties must be assessed uniformly. Therefore, the New York City Law Department ordered Finance Department to make changes; co-ops and condominiums had their assessments lowered and rentals saw their assessments increase.

The fact remains that for all rent-producing properties, the city possesses detailed real property income and expense information from legally mandated filings, and requires detailed statements by CPAs in all but the smallest assessment challenges. This surely provides a database for accurate net income capitalization and takes into account location, condition and other significant factors which ordinarily would render GIM suspect.

As the Finance Department begins to use the GIM to derive property tax assessments, owners need to be on guard against property tax increases. When these increases appear, an owner's only defense is filing a property tax appeal. Income capitalization may be down, but it is not out.

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

"Many assessors routinely send Chapter 91 requests to taxpayers seeking information about income producing property."

By John E. Garippa, Esq., as published by Globest.com Commercial Real Estate News and Property Resource, February 22nd, 2008.

New Jersey taxpayers need to know about two critical issues as they consider possibilities for property tax relief.

The first issue is the filing deadline. All property tax appeals in New Jersey must be filed no later than April 1, 2008. This date requires that the appeal be received by the Tax Court on that date. Merely mailing the appeal with a postmark of April 1st will result in a dismissal. As a precaution, taxpayers would be well advised to file their appeal anytime after January 1, 2008. When the appeal is filed, all property taxes due and owing must be paid in order for the appeal to be considered by the court.

The second issue revolves around the need to timely respond to Chapter 91 requests that have been made by the assessor. Many assessors routinely send Chapter 91 requests to taxpayers seeking information about income producing property. These requests, which must be answered within 45 days of receipt, are sometimes ignored by taxpayers. That is a fatal error. If the assessor sends out such a request, it must be answered in order for the taxpayer to have the right to file a tax appeal the following year. Many valid tax appeals have been dismissed for this failure.

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..

"Over the past 18 months, the residential market has faced significant erosion and downward pricing pressure with the subprime mortgage meltdown reducing the value of most residential property. The increasing inventory of unsold housing units causes additional downward pressure."

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

At the start of a new year, it is vitally important for New Jersey taxpayers to understand the challenges they should expect regarding property tax assessments. For 2008, many taxing jurisdictions have completed municipal-wide revaluations. Under New Jersey law, in a revaluation all tax parcels are valued at 100% of fair market value. The revaluation set for the 2008 tax year values all property as of October 1, 2007.

The difficulty in properly completing this assignment arises because it generally takes 18 months to properly complete an accurate revaluation. Most often, in the process of their work, revaluation firms consider comparable sales data and comparable income data derived during a 12-month period prior to the October 1 st date. They place greater reliance on that data which is closest to the October 1 st date.

Problems occur with revaluations when the data relied upon does not accurately measure the true value of property at October 1, 2007. In some markets, where a significant value change takes place, accuracy is almost impossible. This year that market will almost certainly be residential revaluations.

Over the past 18 months, the residential market has faced significant erosion and downward pricing pressure with the subprime mortgage meltdown reducing the value of most residential property. The increasing inventory of unsold housing units causes additional downward pressure. Revaluations commencing in 2008 are relying upon sales dating back to 2006, still a period of strength for the residential market. Taxpayers should carefully review their tax notices to determine if these revaluation notices accurately reflect the value of their property as of October 1, 2007.

In Commercial, a continuing challenge will be the fact that now most assessors routinely send Chapter 91 requests to taxpayers every year. These requests are designed to assist the assessor in determining current information about all income-producing property within a taxing jurisdiction. A taxpayer has 45 days to respond to this inquiry.

A failure to respond results in the automatic dismissal of any tax appeal filed thereafter for that tax year. Every year, hundreds of tax appeals are dismissed by the Tax Court because taxpayers failed to properly respond to these requests. While all taxpayers should be diligent in answering Chapter 91 requests, owners with larger portfolios need to stay particularly vigilant regarding these requests.

Taxpayers owning income-producing property also face challenges. High vacancies continue to be seen in many office markets, and the prospect of a slowdown in the economy puts pressure on many commercial values as well. Likewise, with the subprime mortgage market affecting other sectors, retail properties will face price pressure.

All of this makes valuing these properties difficult during 2008. Many of these properties will be worth less in the months after October 1, 2007, than they were prior to October 1. While that fact may not assist in reducing an assessment for 2008, it can be useful in negotiating assessments for 2009.

Key Points You Need to Know: Remember, it is not unusual during the tax appeal process for a tax assessor to request a dismissal for a prior year in order to reduce the following year's tax assessment. This allows the assessor to reduce an assessment for a subsequent year prior to collecting any taxes. The ploy puts the taxing jurisdiction in a position where they will not have to pay any property tax refunds.

The law in New Jersey presumes that assessments are correct. The burden falls on the taxpayer to demonstrate through probative evidence that the value placed by the assessor isn't correct. This makes it especially difficult for taxpayers when market value changes month to month and value must be proven as of October 1, 2007.

Once the tax rolls are closed and certified, a procedure that takes place by the end of the prior tax year, only by filing a valid tax appeal can an assessment be lawfully changed. The tax appeal process can be difficult and expensive, requiring significant proofs. Each taxpayer needs to be aware of the significant difficulties involved, and the fact that these problems are even more pressing when significant economic issues come into play.

Valuing real property in normal static times is difficult enough, valuing them during times of significant change can be almost impossible. Taxpayers face significant obstacles throughout all of 2008 as they try to obtain equitable tax assessments. Bringing together the combined knowledge and expertise of your entire tax team will benefit taxpayers in this tough environment.

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..

Using comparable market sales for taxation can correct errors assessor errors.

"The tax professionals' initial work identified three relatively recent sales of comparable properties that suffered from functional and external obsolescence, much like the taxpayer's property."

By Stewart L. Mandell, Esq., as published by National Real Estate Investor, February 2008

Assessors typically value industrial and commercial properties using a cost approach that starts with land value, adds the cost of property improvements and subtracts some physical depreciation, often based on the property's age. Deducting only the physical depreciation from a property tax valuation often results in egregiously excessive taxation. However, by applying data regarding comparable market sales, taxpayers can remedy this problem, sometimes with extraordinary results.

Seldom are such factors as functional or external obsolescence, which can dramatically diminish property values, used in assessors' property tax valuations. Functional obsolescence arises from the flaws that exist in a property. Examples include an abnormal size, shape, or height, concrete floors that are exceptionally deep or too shallow and so forth.

External obsolescence results from outside forces such as industrial properties becoming vacant because production moves offshore, or a change in tax laws that reduces commercial property values. Fortunately, data from comparable property sale can be used to identify specific amounts of functional and external obsolescence; amounts that must be deducted from assessors' valuations to eliminate unlawfully excessive taxation.

Consider an industrial facility with above market operating expenses that houses manufacturing barely surviving global competition. In an actual case similar to this example, the assessor made a mere 4% reduction for functional and external obsolescence even after the taxpayer had fully described the obsolescence. Ultimately the taxpayer retained property tax professionals who knew how to use sales of comparable properties to demonstrate the diminished values the obsolescence caused.

How the process works

Assessor's records commonly contain errors in a property's age, total square footage, net leasable area, number of units, unit mix, and facility amenities. An error in the property's basic data can significantly increase a property's overall assessment. Providing a current rent roll to the assessor can help correct mistakes in a property's basic data. An owner may also wish to produce a site plan for the property along with the most recent marketing materials that show the project's different floor plans and amenities. Correcting basic errors in the assessor's records remains the simplest path to lower a tax assessment.

The tax professionals' initial work identified three relatively recent sales of comparable properties that suffered from functional and external obsolescence, much like the taxpayer's property. The professionals used these sales to quantify depreciation in a way that enabled them to reasonably estimate the obsolescence in the taxpayer's property. Using the steps followed by the professionals, taxpayers can garner stunning property tax reductions. Here's how:

• Determine the value of improvements by subtracting the value of the land from its sale price for each of the comparable properties.
• Determine the construction cost of improvements when new by researching construction costs in national estimating services such as Marshall Valuation.
• Calculate the property's total depreciation by subtracting the value of the improvements today from the cost to construct the improvements.
• Ascertain physical depreciation by dividing the property's effective age by its life expectancy.
• Estimate functional and economic obsolescence by subtracting the physical depreciation from its total depreciation.

The taxpayer's reward

Completing this analysis for the three comparable sales produced an indication of functional and external obsolescence that was far greater than the assessor recognized in his assessment. Having established a 40% to 48% range for obsolescence, the professionals then determined whether any further adjustments were warranted such as those due to differences between the sold properties and the taxpayer's property.

For example, unlike the sold properties, the taxpayer's property was both excessively large and had an unusual shape. These features would cause the taxpayer's property to suffer from even greater obsolescence than the sold properties.

As a result of the analysis, the assessor agreed that a proper cost approach required both the physical depreciation originally calculated plus an additional 40% reduction for obsolescence, an $8 million assessment reduction.

This example demonstrates that the property owner was able to deduct functional and external obsolescence without relying on an income analysis. In this case, property was located in a market where virtually all of the industrial properties were either owner occupied or vacant, making it impossible to obtain income information.

In the cost approach, where physical depreciation represents the only deduction, taxpayers should expect that properties with functional and external obsolescence will be overvalued.

When that happens it is crucial that taxpayers take action. To paraphrase the renowned philosopher, Mick Jagger, when it comes to property taxation, taxpayers may not be able to get what they want, but armed with the right information and professional assistance, they may be able to get what they need.

Stewart L. Mandell is a partner in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Under the proposed ICAP legislation, retail facilities benefits would be dramatically reduced

"Most knowledgeable developers disagree with restricting the program's benefits and eligibility and want the program extended unchanged."

By Joel R. Marcus, Esq., as published by Real Estate New York, February 2008

The Industrial and Commercial Incentive Program is New York City's largest commercial real estate incentive program, with approximately 15,000 applications filed since its 1984 inception. KIP provides partial real estate tax exemptions for new and renovated industrial and commercial buildings in most areas of the city. While the program's renewal seems certain, it's likely to undergo significant legislative revisions.

Critics contend that lClP operates at a substantial fiscal loss for the city, with approximately $371 million in real estate tax revenues foregone in 2006 alone. The city demands reforms to the current ICIP. Specifically, they want to restrict benefits to commercial and manufacturing buildings in geographic areas that truly require special real estate tax incentives to encourage construction, stimulate employment and foster significant new economic activity. Most knowledgeable developers disagree with restricting the program's benefits and eligibility and want the program extended unchanged. In the proposed legislation, three elements are particularly noteworthy:

1. Abatement vs. Exemption

The current IClP offers tax exemption for new and renovated buildings based upon building assessment increases directly attributable to construction, i.e. "physical increases" described in the application. Industrial and commercial buildings located in special exemption areas also qualify for exemption from assessment increases arising from inflation or market value appreciation, i.e. "equalization increases." It appears ICIP amendments will provide a tax abatement rather than an exemption. For that reason, the revised legislation is generally referred to as the Industrial and Commercial Abatement Program. While exemptions reduce the amount of assessment subject to real estate taxation, abatement's are tax credits that directly reduce tax liabilities imposed upon the property. A project's abatement base will reflect the difference between the assessed value of the completed building and 11 5% of its pre-construction assessed value.

2. Reduction of Retail Eligibility

Under the proposed new lCAP legislation, benefits for retail facilities would be dramatically reduced and would depend upon the type of project and its location. Critics of KIP contend that new retail facilities frequently displace sales from existing locations in the city rather than create new economic activity. Retail space within newly constructed or renovated commercial buildings in Manhattan south of City Hall would remain eligible for [CAP benefits. Commercial buildings in Manhattan between City Hall and 59th Street would not be eligible for abatement benefits on any retail space greater than 5% of the total floor area. In regular commercial benefit areas, retail space in excess of 10% of the building's floor area would not qualify for abatement benefits.

3. Reduction of Eligible Construction Period

The old ICIP program called for commercial or industrial construction work to be performed between the date the first building permit is issued and the sixth taxable status date (Jan. 5) there after. Failure to meet these construction benchmarks would not mean denial of benefits but merely serves as a cap on the exemption base.

Under ICAP, owners generally would have to complete new buildings within five years of the permit date and renovation projects within two years of the permit date. Failure to complete construction within these periods would mean revocation of all abatement benefits granted from inception. The abatement base would be limited to physical assessment increases within three years after the permit date for new buildings and one year after the permit date for renovations. ICAP would reduce the lClP construction period from almost six years to one to three years, depending upon whether the project is a new or renovated structure. Clearly, ICAP offers far less generous benefits than those available under KIP. To capture lClP benefits, owners must 1) file a preliminary application with the New York City Department of Finance prior to June 30,2008 and 2) obtain a building permit no later than July 31,2008. These dates are critical if owners want to qualify their projects under IClP rather than ICAP.

Joel R. Marcus is a partner at the law firm of Marcus & Pollack LLP: a member of American Property Tax Counsel, an 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..

Assessors' misuse of highest and best use principle proves costly.

"To support inflated values, taxing units attempt to narrowly define the highest and best use of the property."

By Michael Shapiro, Esq., as published by National Real Estate Investor, December 2007

In many states, the war over property tax assessments based on "value to the owner" as opposed to "market value" has ended with a clear victory for market value. Nonetheless, some jurisdictions continue to try changing this outcome by misusing "highest and best use."

Assessors' attempts to misuse highest and best use can be seen most often in buildings used by big-box retailers and manufacturers, as opposed to properties such as hotels, office buildings and shop-

ping centers, typically valued using the income approach.

To support inflated values, taxing units attempt to narrowly define the highest and best use of the property. They claim that a taxpayer's comparable sales aren't evidence of market value because the sale properties have a different highest and best use than the property being assessed.

Two methods, two results

An assessor may contend, for example, that only stores purchased by Jones Corporation can be used to value a store used by Jones Corporation. This effectively eliminates comparable sales as a basis for valuation. One tax court addressed this issue when it held that a property's highest and best use cannot be defined "so narrowly that it precludes analysis and value based on market data."

The accompanying chart demonstrates the difference between the assessor's valuation of two big-box stores based on his narrow definition of highest and best use and the actual selling price of those same stores in the open market.

The assessor defined highest and best use as that use being exercised by that specific retailer. That definition led the assessor to value big-box store No. 1 at $62 per sq. ft. and big box store No. 2 at $58 per sq. ft. Actually, store No. 1 sold to another retailer for $49 per sq. ft. and store No. 2 was bought by a different retailer for $38 per sq. ft.By narrowly defining highest and best use, the assessor ignored market data and over assessed the property.

The relevance of a comparable sale's highest and best use was addressed in the case of Newport Center v. City of Jersey City. The New Jersey Tax Court held that a comparable sale should be admissible evidence of value, regardless of its highest and best use, if the claimed comparable sale provides logical, coherent support for an opinion of value.

Many jurisdictions want to effectively reinstate value to the owner, in legal terms called "value-in-use," as the lawful standard for property tax valuations, thereby inflating assessments by eliminating from consideration the sales-comparison approach to value. In the sales comparison approach, sales often provide the best indication of a big box or manufacturing property's market value.

Sales prices reflect loss in value from replacement cost due to obsolescence. That obsolescence generally includes a significant amount of external obsolescence, which represents loss in value caused by some negative influence outside the property.

For example, external obsolescence could result from limited market demand for a big-box store or manufacturing plant built to meet the needs of a specific user. Value may also be adversely influenced by functional obsolescence, a loss in value due to design deficiencies in the structure, such as inadequate ceiling heights, bay spacing or lighting.

What's a comparable sale?

Appraisers are taught to only use sales comparables with the same or similar highest and best use to that of the property being appraised. However, even this limitation is too restrictive.

For example, years ago a former automobile assembly plant was offered for sale and eventually sold for demolition and construction of a shopping center. No automobile manufacturer, or for that matter any other manufacturer, was willing to pay more for this property than the developer who bought it to build a shopping center.

Thus, the market spoke and defined the market value of the former automobile plant. In short, if a property is physically similar to the property being valued, but sells for an unusual use, that sale should not necessarily be disregarded as a comparable sale.

The sale of the former automobile assembly plant for use as a shopping center may not be the ideal comparable sale to value industrial property. However, that sale certainly puts a cap, or limit, on the value of a similar industrial facility, subject of course to adjustments for relevant differences such as location or size.

By understanding the issues involved in using comparable sales to achieve market value assessments, taxpayers can successfully appeal property tax assessments when they are based on the misuse of highest and best use.

Michael Shapiro is a partner in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..