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Property Tax Resources

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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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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