Fighting for laws that produce equal, uniform taxation best serves taxpayers and state governments.

It has been said that the people who complain about taxes can be divided into two classes: men and women. While we all complain, taxes ensure various levels of government have funds to perform essential functions—to keep society civil and in, more or less, working order.

A tax must be fair to be supported, however. In countless instances, a taxpayer's first complaint about an assessor's valuation is that the amount exceeds their neighbors' valuations. In essence, the property owner claims that the property valuation and resulting tax liability is unfair or non-uniform.

Too many jurisdictions lack an efficient mechanism to address non-uniform taxation. Fortunately, several states specifically require tax uniformity, and two offer legal remedies to help taxpayers combat unfair assessments.

A constitutional concept

Most taxing jurisdictions seek to assess real property at market value, which is the amount the property might sell for as of a certain date. Many states even address the legal requirements of taxation in their governing documents.

Ohio's constitution, for example, requires that "Land and improvements thereon shall be taxed by uniform rule according to value." Virginia's constitution states: "All taxes shall be levied and collected under general laws and shall be uniform upon the same class of subjects within the territorial limits of the authority levying the tax."

• Washington's constitution necessitates that all taxes shall be uniform upon the same class of property within the limits of the assessor's authority, while Missouri's constitution requires that assessments must be based upon market value and be uniform.

• That all four of these sampled constitutions mention the importance of taxation uniformity underscores the importance of the concept. Taxpayers seeking an effective model for opposing an assessment on the basis of unequal treatment can look to two other states: Texas and Georgia.

Ready remedies

Texas and Georgia have taken great strides in establishing the methods to ensure property assessments meet their constitutional goals of equal and uniform taxation. Both states empower taxpayers by setting out specific steps to show an overvaluation. Taxpayers in these jurisdictions are assured the right to have their property assessed for taxation in a uniform and equal manner when compared to nearby comparable properties.

In Georgia, a property owner can challenge an assessor's valuation of their real property based on uniformity.The state's standard appeal forms have a box to check as to whether the appeal is being filed based on value, taxability or uniformity.

Under a 1991 Georgia case, Gwinnett County Board of Tax Assessors vs. Ackerman/Indian Trail Association Ltd., a property owner who can show that numerous similar properties in the same area and county have lower assessed values can use that information as grounds to advocate for a lower assessed value.

Texas property owners can challenge an assessor's valuation by arguing there has been an unequal appraisal.Texas property owners in this position can file a protest if they believe the property is taxed at a higher value than comparable properties.

To prevail in seeking a lower valuation, the property owner can submit sale or appraisal evidence. Alternatively, the taxpayer can prevail by showing their assessed valuation exceeds the median appraised value of a reasonable number of appropriately adjusted comparable properties.

In a 2001 case, Harris County Appraisal District vs. United Investors Realty Trust, a Texas appeals court found that when there is a conflict between taxation at market value and equal and uniform taxation, equality and uniformity prevail. This means it is more important that taxes be equally and uniformly imposed and collected than it is to arrive at the property's market value when the "corrected" value makes the property a taxation outlier in its competitive set.

A pervasive need

For sure, a tax assessor's job of valuing all land and improvements is daunting, and they must use many data points and much subjectivity to assess values. Given the scope of their job, mistakes in valuation will occur—especially if the valuation incorporates inaccurate data regarding gross building area, square footage, age, condition or other variables.

Because mistakes are inevitable, property tax systems must provide taxpayers with efficient and effective methods of challenging overvaluations. All jurisdictions provide taxpayers the right and some mechanism to contest the assessor's valuation through an administrative and/or judicial process. This procedural right gives taxpayers a means to correct apparent overvaluations and to seek fairness—or at least it provides the opportunity to argue for fairness.

Taxpayers' pursuit of that procedural right most often revolves around valuation and ignores the constitutional requirement of uniformity. Or worse, the available procedure conflates uniformity with valuation by stating that if the assessed value reflects market value, that equates to uniformity. This thinking is only accurate in theory, as achieving market value assessments for all is aspirational but elusive.

If taxpayers in every jurisdiction could argue a solution along the lines of Texas' defense, it would ensure uniform and equal taxation for all.

Many times, an appeal board hearing a valuation complaint will require either evidence of a recent sale of the subject property or an appraisal report before it will adjust an assessor's valuation. However, sales are often unavailable and appraisal reports can be expensive. Given the cost of appraisals, owners of lower value real estate must often weigh cost versus potential tax savings before deciding whether to hire an appraiser and contest an unfair assessment.

Fairness across the assessor's jurisdiction must be the paramount goal. The defenses or means of redress provided by Georgia and Texas are vital to ensure that taxpayers have access to a constitutionally mandated equal and uniform valuation. These statutory provisions provide a cost-effective method for taxpayers to challenge an overvaluation.

Constitutions that provide an equal and uniform defense give taxpayers fair and equitable access to assessors' valuation systems and promote equal and uniform taxation. Expanded taxpayer access and improved assessor responsiveness promotes trust in government.

Every jurisdiction should follow these examples to provide taxpayers an equal and uniform defense.

Michigan's Menards case offers valuable lessons to help taxpayers get fair property taxation.

While taxpayers typically pay property taxes based upon their property's market value, assessors frequently misapply evidence or even redefine market value to rake in excessive taxes.

The recently resolved Michigan Tax Tribunal case of Menard Inc. vs. City of Escanaba illustrates several of these efforts to collect excessive taxes and suggests arguments a property owner can use to challenge them.

What is market value?

Market value is the price willing, knowledgeable buyers and sellers in an arms-length transaction would agree the property is worth. Market value differs from insurance value or replacement value because it reflects what a typical buyer would pay for a property as it is. Market value also differs from value to the owner, which reflects how a particular property contributes to the owner's business operation.

Appraisers typically determine market value using one or more of three valuation techniques:

The sales comparison approach adjusts sales of similar property to indicate the likely selling price of the subject property. The income approach values property by considering the present value of the income it would likely earn if rented, whether or not it actually is rented. The cost approach values property by considering its cost of replacement, reducing that cost by all forms of depreciation including physical deterioration, functional obsolescence and economic obsolescence. Such depreciation can and should be quantified by data also utilized in the income and sales approaches.

The Tax Jurisdiction's Evidence

The subject property in the Menard case was a big box retail store, larger than most, with a main floor area over 150,000 square feet and with additional accessory space. The owner used the space as part of its multistate retail business operations and as a delivery point for its internet sales. The building was not subject to a lease.

The tax jurisdiction proposed valuing the store using sales of smaller home improvement stores occupied by Lowe's or Home Depot as tenants pursuant to build-to-suit leases. It also sought to use the rental rates in these build-to-suit leases as evidence of market rent. It claimed that the Menards store suffered no material obsolescence, based on evidence drawn from this build-to-suit data.

As the term suggests, tenants under build-to-suit leases have contracted with a developer to build the store to their specifications. The parties set lease terms before construction even starts, calculating the lease rate to cover all construction costs and provide the developer's expected profit. In essence, such leases recover replacement cost even if market value is less than replacement cost.

Taxpayer's counterpoint

The taxpayer successfully argued such evidence did not reflect the market value of Menards' store. The selected sales reflected the value to the owners of using the stores in their specific retail operations. The lease rates were high enough to recover actual construction costs for each property—not what any other retailer would pay to rent a space not built specifically for its business model. This data, virtually by definition, would not indicate obsolescence in the subject property.

When such stores sold, the taxpayer argued, the sales price reflected the value of a lease to a creditworthy tenant that of course was already using the building in its retail operations. Besides generating cash flow designed to recover construction costs, the specific leases were signed during periods of higher interest rates than on the valuation dates, so that by the time of valuation, the leases provided an above-market return on the original building investment. What the tax jurisdiction called sales of comparable buildings were effectively bond sales from one investor to another secured by a retail building.

A buyer of Menards' property, if it sold, would not receive cash flow from a build-to-suit lease. In fact, it would not receive cash flow from any lease. The tax jurisdiction should have either adjusted the sales to remove the effect of above-market leases, or used sales unencumbered by a lease and for which no lease adjustment would be necessary. Some tax jurisdictions derisively call such transactions "dark store" sales, but they are frequently the best evidence of a building's market value. It is the building that is subject to property tax—not the business operating within the building.

Lessons learned from the Tribunal's decision

The tribunal rejected the tax jurisdiction's build-to-suit lease rates and sales with build-to-suit leases in place.Instead, the Tribunal used the taxpayer's proposed lease rates for conventionally leased buildings in the local area.Such lease rates better reflected the market rent a buyer of the subject property could reasonably expect to collect, and therefore best indicated obsolescence suffered by the subject property.

These lessons apply to valuing any type of building. Build-to-suit rents do not reflect market rent-- except by accident. Alleged comparable sales with build-to-suit leases are typically not comparable to a subject property that is owner occupied.

Even if the subject property is already fully leased with a build-to-suit lease, if local law requires use of market rent, the actual rent from the build-to-suit lease could be given far less or no weight. During the Great Recession, in market lease states, even fully occupied buildings at high contract rent had their values reduced because market rents had fallen. Finally, increased e-commerce volume and changing consumer habits may render many existing retail stores oversized. Office buildings and the tenants' current spaces may be oversized due to higher proportions of people working from home or virtually. Oversized buildings in light of current market conditions suffer from obsolescence that must be reflected in market value.

The Michigan Tax Tribunal resolved the Menard case this year after several years of litigation. Perhaps that resolution can now help other taxpayers to recognize unfair assessment practices, and to build stronger cases as they seek fair assessments for their own properties.

When the early pandemic sent hotel occupancies plummeting and uncertainty soaring, it also created clear opportunities for many hotel operators to reduce property tax bills by appealing their assessments.

Today, however, it can be difficult to know whether appealing an assessment still makes sense. Record selling prices are being reported on a macro level despite increasing interest rates, rapid inflation and ongoing unpredictability in many markets. This gives taxpayers a potentially confusing array of mixed messages affecting valuation.

Hotel operators should heed the real estate adage that "all properties are unique," a saying that certainly rings true in the current hospitality market. To really understand hotel values, it has become essential to delve into what drives demand at each property.

Value Judgments

I recently heard an appraiser sum up the hotel market recovery as follows: "At the beginning of the pandemic, we thought it was going to take five years [for hotels to recover], but it turned out it was more like two to three," he said. "And if a property isn't recovering by now, then it's probably not going to."

This was, admittedly, an oversimplification, but it seems to reflect the reality in many places.

Laurel Keller, an EVP at of Newmark Valuation & Advisory's gaming and leisure division, observed that the recovery has been uneven across different markets and hotel types. "I've seen a range of recoveries, from midscale hotels that recorded their best top-line revenue and profit margins ever last year, to full-service hotels still performing at levels below pre-pandemic," Keller said. "In most instances, average rate growth has been substantial over the past 18-plus months, though occupancy recovery has been slower."

So, how can an owner or operator know if their hotel is fairly assessed?

For property tax purposes, most states recognize that hospitality properties are operating businesses (also called going concerns) of which real estate is only one value component. The other components are the furniture, fixtures and equipment, and the intangible business value.

To reduce property taxes, an owner must challenge the assessor's property value assessment, and that value pertains only to the real estate component. Failing to prove the proper allocation of overall value among the going concern components can result in an owner paying taxes on non-taxable property.

Two Approaches

There is widespread agreement that a lodging operation carries a business value that must be separated from the real estate to determine taxable property value. However, for the past two decades there has been debate about how to tease out those separate values. This ongoing discussion is dominated by two generally accepted valuation methods. The more conservative of the two assumes that the removal of management and franchise fees from the income stream offsets the hotel's business value. That approach gained favor in many jurisdictions in the early 2000s for its straightforward and simplistic nature.

Several prominent court decisions in recent years have endorsed a more robust analysis, however, to ensure that all non-taxable assets are removed from the real estate assessment. This more detailed approach considers the values associated with intangible items such as a trained workforce, reservation systems and brand goodwill.

One expert witness recently described post-pandemic hotel analysis as "granular," and noted that seemingly minor differences between properties have become more important than ever. As an example, he pointed to two properties in his market with the same flag which would have been considered comparable three years ago, but subtle differences in their locations relative to office submarkets, sporting facilities, and hospitals could now make a big difference in performance and valuation. Despite appearing similar on the surface, each property has unique demand factors.

In a similar vein, an owner of hotels throughout the United States used the term "hyperlocal" to describe property performance in 2022. As an example, the owner cited two upscale hotels about a mile apart from each other in the same submarket, just outside of a large metropolitan area. Pre-pandemic performance at both properties was similar and relatively predictable. Today, the property slightly closer to the airport is thriving while the other struggles to get back to 2019 performance levels.

It also can be difficult to make sense of the news around recent acquisitions. Even as billions of dollars are pouring into the extended-stay sector nationwide, owners in some markets are looking to convert their extended-stay properties to apartments. Similarly, 2022 has seen significant investment in hotels along interstate highways despite indications that occupancy may be starting to decline in that subsector.

"Pandemic recovery has varied widely from property to property and market to market and been far more protracted for some hotel assets," Keller said. "More surprisingly, we are now seeing performance decreases at some hotels that experienced a surge in leisure-oriented travel last year. So, the recovery is ongoing, and perceived rapid recovery at some hotels may have been slightly misleading."

Perhaps the key takeaway from all this is that the reported "recovery" in the industry doesn't equate to a recovery for every hotel.

Just as all properties are unique, all taxing jurisdictions have their own rules and idiosyncrasies. Understanding the intersection between accepted appraisal practices and a jurisdiction's particular laws around the assessment of going concern properties is essential to ascertaining whether a particular hotel is fairly assessed.

Operators seeking assistance in evaluating their property tax assessments should lean toward qualified appraisers and tax counsel with local knowledge, which can help identify opportunities to right-size taxes and articulate the narrative behind each property in question.

Follow these steps to stop excessive property tax assessments.

In a nation that has faced a host of new challenges since the pandemic began, the seniors housing sector has carried one of the heaviest burdens. COVID-19-related mortality risk for those 85 years old or older is 330 times higher than for those 18 to 29 years old, according to the Centers for Disease Control and Prevention.

Notwithstanding those odds, 51% of all seniors housing properties including independent care, assisted living and skilled nursing reported zero deaths from COVID-19. Yet the industry continues to grapple with increased costs, worker burnout, hiring challenges and occupancy issues that have ravaged their operations.

Like a vaccine that stimulates a stronger immune response, hard times can spur organizations to boost efficiency and fortify themselves against other threats, such as inflation. In this vein, seniors housing owners must identify ways to turn their troubles into positive influences.

As the industry seeks to allocate money from areas that don't compromise care, property tax strategy should be near the top of their lists for potential savings. Moreover, reduced taxes tend to have a long-term impact. When assessments are low, they tend to stay low, which may serve to insulate the industry from the impacts of inflation.

How to reduce property tax liability

Obtaining those property tax savings is not easy, however. Although it seems apparent that the industry has suffered, taxpayers that want a reduction in taxes must prove their property has lost value; they cannot rely on the good will of assessors to adjust the assessment.

Taxpayers must look at their tax challenges in a way that reflects the impact to the business. That said, assessors will want to concentrate on real estate value irrespective of the business. Many will reference sales of properties that were priced on the value of contractual leases to the operator, or assessors may look at the income to the owner based on contract rents. Taxpayers need well-documented arguments to counter these positions.

While separating the real property value from the business value, real estate assessments must also consider the negative effect that a struggling business exerts on the real estate.

Taxpayers can follow a three-step financial feasibility study to help prove the need for an assessment reduction.

1. Determine the net operating income (NOI) under COVID-19 and its legacy. It is important to document the new costs necessary to safeguard and serve residents in this new environment.

2. Separate income associated with services from real estate income. Be sure to remove from income any governmental stimulus that will not be ongoing.

3. Finally, use the resulting real estate NOI to show the effects of that income stream on real estate value.

Step 2 is critical, and it must start with the business. Conduct a forward-looking income analysis that includes all increased costs, from the added costs of employing and motivating a weary workforce to inflation and expenses associated with new health standards.

After documenting the new NOI from the independent living, assisted living, or skilled nursing operation, determine whether that income is sufficient to justify the business. Taxpayers can do this by applying a return to the cost of services. The expenses that are separate from normal real estate operations are associated with the service side of the business, and those outlays are expected to generate sufficient income to create a return on that investment. Remove the return from the overall net operating income, thus separating the income from business and real estate. The result is NOI that reflects more closely that of the real estate.

Perform a similar analysis to determine whether the net income attributable to real estate is sufficient to justify the real estate cost. It is important to remind the assessor that the operating business can only pay rent if there is money available, even if that rent is just a figure used in a formula to determine real estate value. At this point, the taxpayer can apply a capitalization rate to the net real estate income to arrive at the real estate value.

Apply to other valuation approaches

The financial feasibility study described above will also help taxpayers and assessors determine how to adjust the cost approach to valuing real estate. Likewise, the analysis can inform adjustments to comparable sales data. Indeed, that initial financial feasibility will help in all aspects of the tax challenge and should be well documented.

Assessors are not all-knowing, so unless the taxpayer shows them a good reason to change approaches, they will work with their normal procedures. Often, assessors look to the property's construction cost (less physical depreciation based on age), sales of similar properties and/or the income generated from contract rents to determine an assessed value.

Without an initial feasibility analysis, an assessor may focus on construction costs without regard to whether the property's use will justify those costs. Or they may use contract rents for the subject property or competing properties, either of which were likely established with pre-pandemic metrics.

Simplistic shortcuts, such as assuming a percentage of the total net income that should be attributable to business and the other to real estate, are not ideal and may lead to inflated values of taxpayers' properties.

In theory, there should be a greater impact on the value of those properties that require more service. But because of the variations between properties and nuances of seniors housing types, a fresh look is needed for all of them.

A good starting position for the taxpayer is to ask, "what would we pay to acquire the property, knowing what we know today?" Comparisons to sales of other properties are more complicated than in the past and should be adjusted with an eye toward the feasibility analysis. Properties that cannot achieve sufficient occupancy and income to justify operation are not directly comparable to optimally occupied properties.

There are states where a reduction in the assessment may carry forward indefinitely. Approaching assessed value with a strong team will pay dividends for years. Conversely, an approach that is not well thought out will make future attempts to reduce taxes more difficult. But by taking the proper steps, a taxpayer can position themselves to drive the best result and be able to provide the service and living standards that our most vulnerable residents deserve.

New York Court of Appeals rejects lower court decision, affirms that occupiers obligated to pay property tax have the right to protest assessments.

In a far-reaching decision, New York's highest court has affirmed the rights of tenants under a commercial net lease to protest assessments and reduce their real property tax burden. The ruling reversed a State Supreme Court dismissal of a petition on the grounds that only a property's owner can file an administrative grievance with the Board of Assessment Review.

In a net lease, the tenant is responsible for paying real estate taxes and other expenses stated in the lease. In The Matter of DCH Auto vs. Town of Mamaroneck, the Court of Appeals in June 2022 published a unanimous decision stating that tenants contractually obligated to pay real estate taxes and authorized to protest assessments may file tax appeals even when they do not hold title to the underlying real estate.

Restoring a precedent

DCH Auto operated a car dealership in a net leased property in Mamaroneck, New York. Its lease with the owner required DCH to pay the property's real estate taxes in addition to rent.

Commercial tenants with this type of lease commonly file tax appeals to correct excessive tax bills and mitigate operating costs. These occupiers include retailers such as department and big-box stores, office building users, banks, drug stores and other businesses.

In the subject lease, DCH had the express right to challenge the subject tax assessment. Pursuant to the statute, it filed an administrative grievance with the town's Board of Assessment Review. The Board denied the challenge, after which DCH petitioned for judicial review.

The town moved to dismiss, arguing that the petition was invalid because the incorrect party had filed the administrative grievance before the Board of Assessment Review. They alleged that the failure of the property owner to file the administrative appeal precluded judicial review of the board's determination.

The lower court agreed and dismissed the petitions on the ground that only a fee owner may file the initial grievance complaints under the New York statutory scheme. The State Supreme Court's Appellate Division, Second Judicial Department, affirmed the petition's dismissal.

Thus, in one fell swoop, the Appellate Division obliterated over 100 years of precedent, which held that a net lessee that pays the real estate taxes is a proper party to file an administrative complaint challenging the assessment. Prior to the DCH lower court decision, it was never disputed that a net lessee was a proper complainant for filing both an administrative complaint and judicial petition. The lower court's ruling effectively required absentee property owners – who do not pay the real estate taxes and have no skin in the game – to file an administrative appeal before a net lessee can file a judicial petition.

The Appellate Division decision placed in jeopardy thousands of real estate tax assessment appeals filed by commercial net lessees who have relied upon common, accepted practice and precedent, and interposed an owner standard where none is present in the plain terms of the relevant statutes.

Fortunately, the Court of Appeals reversed the lower court's decision.

Who's who?

The case turned on statutory interpretation and analysis of legislative intent. At issue was Section 524(3) of the New York Real Property Tax Law (RPTL), which sets forth the process for the review of real property tax assessments. The provision specifies that an administrative complaint must be made by "the person whose property is assessed." If a complaint is denied, then "any person claiming to be aggrieved" can file a judicial appeal pursuant to Article 7 of the RPTL.

The Town of Mamaroneck's position was that the property owner must file the administrative complaint before any aggrieved person can challenge the result in court.

The Court of Appeals held that DCH and all commercial net lessees with the right to challenge assessments are included within the meaning of "the person whose property is assessed" under RPTL Section 524(3).

In its decision, the Court of Appeals considered the text of the statute and noted that "a person whose property is assessed" is not defined. A comprehensive review of the legislative history ensued, beginning with an analysis of the initial text of the statute as it existed prior to 1896. The original statute permitted "any person" to file an administrative complaint. In 1896, lawmakers amended the wording to "a person whose property is assessed." The Court examined the record, cited the New York State Commissioners of Statutory Revision that addressed the change in 1896, and noted that "there is no change of substance" with the revised wording.

In reversing the lower court's action, the Court of Appeals based its decision upon the evolution of the statutory text and the consideration of the underlying legislative intent. The Court made clear that it was not the legislature's intent to limit the meaning of "a person whose property is assessed" to the owners of real property, and that the reference includes net lessees contractually obligated to pay the real estate taxes.

Notwithstanding the DCH decision, commercial net lessees should ensure their tax appeals are not challenged by making certain that their right to file a tax appeal is clearly stated in their lease.

Owners who understand the nuances of tax incentives, abatements and exemptions can gain an upper hand in reducing their property taxes.

The Low-Income Housing Tax Credit (LIHTC) has long been a key device in the affordable housing tool chest. Although it has been the primary source of financing for the construction and preservation of affordable housing, the tax credit has not allowed the vast expansion of affordable housing development
that many communities need to keep up with rapidly growing demand.

With rents and materials costs rising amid rapid U.S. inflation, cities and rural areas alike need more resources to help keep many Americans in quality affordable housing.

According to the National Low Income Housing Coalition, only two states (West Virginia and Arkansas) have housing costs that put a two-bedroom rental within the reach of a fulltime worker earning less than $15 per hour.

The recent spike in residential real estate prices and now increasing interest rates are forcing more potential home buyers to rent. This has left fewer units available, which drives up rents and further reduces the supply of affordable housing throughout the country. As of April 2022, more than half of U.S. consumers were living paycheck to paycheck, reports financial services company LendingClub.  

According to the U.S. Department of Housing and Urban Development, the Federal Reserve Bank of St. Louis and the U.S. Census Bureau, the national median rent increased more than 145 percent from 1985 to 2020, while median income increased by only 35 percent.

Clearly, more needs to be done to assist developers in the construction of affordable housing. Fortunately, many cities and states are implementing new legislation and programs that will directly assist developers who expand the affordable housing market.

State, Local Initiatives
Texas — In Austin, Affordability Unlocked is a development bonus program that waives or modifies some development restrictions in exchange for providing affordable housing.

In return for setting aside half of a development's total units as affordable, developers can receive increased height and density limits, parking and compatibility waivers and reductions in minimum lot sizes for the project.

The program is designed to increase the number of affordable housing units developed in Austin and to fully leverage public resources by allowing housing providers to build more units in developments that include significant amounts of affordable housing.

Washington, D.C. — Tax abatements for affordable housing are available that provide a reduction equivalent to 75 percent of the difference between the property tax owed before and after development. To be eligible, at least 5 percent of the units in the development must be reserved for low-income households, and an additional 10 percent of units must be reserved for households earning up to 60 percent of area median income (AMI).

The tax abatement is good for 10 years. The affordability requirements apply for at least 20 years, with a $10,000 penalty per year for each unit that does not meet income set-aside requirements during the final 10 years.

Illinois — In 2021, Illinois enacted legislation to develop and coordinate public and private resources targeted to meet the affordable housing needs of low-income and very low-income residents. The act applies to all counties within the state and allows each county to administer the applications for the property tax incentive.

In Cook County, for example, property owners with seven or more multifamily units may apply for the Affordable Housing Incentive, if they can prove a set of conditions that would qualify the property for one of three tiers of relief.

For example, an applicant with a pre-existing building that has spent more than $8 per square foot on rehabilitation of major building systems and has at least 15 percent of the units available at or below 60 percent of AMI qualifies for the "15 Percent Tier" incentive.

Major building systems include heating and cooling, electricity, windows, elevators and more. This incentive will reduce the property tax assessment by 25 percent for 10 years and can be renewed for two consecutive terms.

New York — Although state lawmakers allowed New York's longstanding 421a abatement to expire in June 2022, some property owners can still qualify for relief under the New 421a Program. The New 421a is available to projects that began construction between Jan. 1, 2016, and June 15, 2022, and will be completed on or before June 15, 2026.

Projects that commenced construction on or before Dec. 31, 2015, also may opt into the new program if they are not currently receiving 421a benefits. Applications must be filed within one year after completion, and construction benefits would be retroactive.

Benefits of the New York program include a construction period tax exemption of up to three years, plus post-construction exemptions of 10 years (two years full, plus an eight-year phase-out period); 15 years (11 years full, plus a four-year phaseout); 20 years (12 years full, plus an eight-year phaseout); or 25 years (21 years full, plus a four-year phaseout).

In post-construction periods, qualifying properties are exempt from the increase in real estate taxes resulting from the work. The length of benefits depends on location, commencement of construction and affordability within the project.

All market-rate rental units become subject to rent stabilization for the duration of the benefits, with initial rents approved by the Department of Housing Preservation and Development. Affordable rental units are rent stabilized for 35 years.

Massachusetts — Multifamily property owners can claim a tax exemption for any portion of the property used for affordable housing purposes. The exemption is calculated by multiplying the amount of tax ordinarily due by the percentage of floor area set aside for affordable housing purposes.

The exemption is granted on a year-to-year basis for units serving households earning up to 80 percent of AMI, and the local board of assessors reviews tenants' income information to confirm eligibility. Because the exemption is granted on a year-to-year basis, there is no long-term affordability requirement.

Oregon — The Multiple-Unit Limited Tax Exemption Program requires that at least 20 percent of rental units be affordable to households earning 60 percent of AMI,or 80 percent of median family income in high-cost areas, for the 10-year term of the exemption.

Hundreds of programs throughout the country offer tax credits, abatements or other incentives. In markets that are happy to assist willing partners in providing affordable rental housing for their communities, developers can gain an upper hand by learning to fully understand and navigate the application process.

A New Jersey township learns that tax courts don't always buy into theoretical constructs.

Our tax courts live in a hypothetical world where they review property tax assessments in a theoretical manner to mimic the actual marketplace. Often municipal officials use this paradigm to distort concepts and achieve high values that cannot be realized in the market. The case of CIBA Specialty Chemical Corp. vs. Township of Toms River highlighted this dichotomy.

The subject property is an industrially zoned, 1,211-acre former chemical plant in Toms River, New Jersey. The plant produced industrial dyes and resins for over 40 years. Unfortunately, the manufacturing process also created significant industrial waste that was treated and disposed of on site, significantly contaminating the soil and groundwater.

The environmental contamination was so severe and pervasive that the entire property was designated a Superfund Site and was placed on the U.S. Environmental Protection Agency's (USEPA) National Priorities List in 1983.

Commercial operations at the site ceased in 1996, but environmental remediation work has been both active and ongoing. The controversial nature and extent of the contamination has embroiled the property and township in public controversy, federal criminal prosecution, and a number of civil lawsuits initiated by both public entities and private citizens.

Further complicating matters, the subject property is in a protected coastal zone adjacent to a tributary known as Toms River. This added layer of government oversight by the New Jersey Department of Environmental Protection serves to safeguard sensitive coastal areas and endangered species from overdevelopment. When put into practice at the subject property, these regulations either completely prohibit or severely restrict redevelopment activity on most of the property.

Any proposed redevelopment at the property would require the prospective developer to navigate this labyrinth of federal and state regulations, obtain consent and cooperation from a number of federal and state agencies, and garner support from the local municipality and public interest groups to avoid politicization of the zoning and planning processes at all levels.

Undaunted by these regulatory restrictions, the town asserted that not only could the property be developed, but that numerous residential housing units could be constructed on the site despite the current zoning or the pervasive contamination. And, of course, the town sought to tax the property on its potential residential value.

It was undisputed that the USEPA was the primary regulatory authority from whom a market participant would have had to obtain approval before attempting to redevelop any portion of the site. The town's own expert conceded this fact. The USEPA has total control over the property while remediation is taking place and will reject any proposal it believes may interfere with selected remedial action, or that would lack public support.

Despite overwhelming evidence that USEPA regulations would prohibit any development, that the zoning didn't allow residential construction, and that the public opposed the site's redevelopment, the town was undeterred. Its leaders argued that high-density housing could have been developed on the property with a rezoning, justifying its revaluation as residential rather than industrial real estate.

The frequent use of hypothetical scenarios encourages assessors to fly far from the reality of the marketplace to justify otherwise unsupportable assessments and increased tax burdens. Finding comfort in this hypothetical world, the town appealed to the perceived taxing-authority bias of the New Jersey Tax Court.

To create their hypothetical world in court, the town redefined key words in the USEPA regulations to establish results that were completely inappropriate for a rational reading of the rules. They stretched logic and applied to the subject property actions that USEPA had taken at other Superfund Sites. In doing so, they assumed that all contaminated sites can be treated the same, and that the case workers at this site will make decisions based on events at other remote Superfund sites, rather than basing decisions on the facts related to the subject property.

The town contrived its self-serving arguments to satisfy an outrageous assessment. It is all too often that the hypothetical nature of the court's standards and the theatrical nature of appraisal theory invite the clear distortion of marketplace reality.

The only saving grace in the system is that the courts assigned to decide these cases are trusted to end the nonsense and craft a decision based on fact and actual dealings. That does not always happen, but here, it did. In a detailed and thorough decision, the court summarized the overwhelming data that proved the taxpayer's case.

The court concluded that the entirety of 1,211 acres was development-prohibited, due to its status as an active Superfund Site and USEPA's ongoing institutional controls. The USEPA's oversite documents, which are legally enforceable and filed with the county clerk, restrict any development at the property unless the USEPA approves, or the site is partially or fully delisted as a Superfund site.

Reality finally hit home for the municipality when it was compelled to refund the taxpayer over $18 million.

These types of rulings in taxpayers' favor are rare. Nonetheless, taxpayers must continue to press courts to recognize market reality. It is not the courts' job to protect the municipal tax base.

Nuances of ownership and operations can reduce or eliminate ad valorem liability for property owners.

How municipalities and counties tax medical real estate can vary by modes of ownership, location and how a property affects the local economy. Much, however, depends on each taxing entity's goals and its degree of interest in attracting hospitals, creating medical hubs, enlarging commercial areas or encouraging excellent health care locally.

A typical approach to achieving some or all of these goals is for local government to control the property. This can be through outright ownership, where the facilities are leased out. Governments can also create an economic zone and issue bonds to finance the area's development. Each of these methods poses property tax issues.

In a direct ownership scenario, the government owner is exempt from taxation. The operating and management company that leases the property has tax liability for its going concern, however. That going concern has untaxed intangible value, but also will have onsite assets such as medical equipment that can be taxed under standard code approaches at fair market value. They can also be taxed under a modified fair market value, which is a common incentive designed to entice investment by medical businesses.

If the local government chooses a development-bond approach, it will create a development district entity to issue bonds, with proceeds from bond sales paying for construction of the hospital or other facility. A private entity would lease the facilities under the cost of the bonds, with lease payments going toward retiring the bonds. Lease provisions would set out agreed-upon valuations for property tax purposes. These valuations can be flat or adjusted over time. Once the bonds are paid off, the terms of the lease can be extended or modified.

After using one of these favorable property tax techniques to establish a footprint for a healthcare district, development or zone, the governmental body may widen its impact by offering lower taxes within the area. These adjustments would favor medical facilities that support hospitals or medical practices nearby.

For example, a community could use tax breaks to encourage construction of medical office buildings. If the economic district includes other buildings that would be useful to the healthcare industry, it can offer similar tax incentives to encourage development and use of those facilities. Likewise, such incentives can be used for standalone facilities within the economic district.

For governments that do not envision a medical district but want to foster broader access to healthcare providers, tax policy can create special tax methods without uniformity restrictions. This would encourage small medical investments throughout the community. Examples would include free-standing treatment facilities such as "doc in a box" walk-in clinics, urgent care facilities and small medical office buildings.

Strategies for tax exemption

In Georgia, hospitals can be owned in a couple of ways to avoid taxation. First, the government can own the hospital and lease it to a non-profit manager or operator. So long as the lessee remains a non-profit, the real property is tax exempt. If the leasehold transfers to a for-profit entity, the tax exemption disappears and the management or operational entity becomes responsible for the property tax.

Second, the local government can create an economic development zone using bonds. Within any leaseholds created by the bond issuer, property tax responsibility can be addressed by contract. This can range from zero liability to points on a sliding scale, and will usually correlate to the gradual elimination of the bonds.

Another scenario involves an exempt property that is then acquired by a for-profit operator. In Michigan and Georgia, such a transfer will void the tax exemption, subjecting the facility to full taxation at fair market value. A question remains about a retransfer of the operations to a non-profit, which may or may not restore the tax exemption. In Minnesota and Kansas, the ownership is through the government but the facility must be operated as a non-profit.

In some jurisdictions hospitals can be a taxing authority. In Texas and Iowa, rural hospital districts can levy a component of the property tax millage rate. The hospital district then uses that portion of the millage rate to pay part of its operating expense. This allows rural hospitals to maintain their operations by spreading costs throughout the community, rather than to the users of the system. In recent years states have tended to reduce property taxes overall, which has squeezed revenue for rural health systems in states that allow hospitals to participate in taxation.

Personal property, which is movable property such as medical equipment, can be treated in different ways. If the operation is a non-profit, the personal taxes are exempt. Liability is more complicated if the owner of the personal property is a for-profit entity operating within an exempt property; in such instances the personal tax rates apply.

On the other hand, a non-profit may operate within a taxable medical office building, in which case the personal property is still exempt. In fact, a building may have multiple tenants, some of which are non-profits and some of which are for-profit. In such a scenario, each business would have to be examined to determine whether personal tax exemptions apply.

Save the Dates! October 19-21, 2022 - Fairmont Chicago, Millennium Park - Chicago, Illinois

THEME - Managing the Future in a Changing World

APTC seminars provide an exclusive forum where invited guests can collaborate with nationally known presenters and experienced property tax attorneys to develop strategies to successfully reduce and manage property taxes.

Event Information

This year's seminar will address recent developments and current trends in the areas of property taxation and real estate. We will bring together nationally-known economic, technological, appraisal, and legal experts to provide valuable insight on managing the future of property taxation in a system that continues to change based on economics and other influences.

See the Featured Speakers appearing at the 2022 Seminar.

Featured Speakers

Member Speakers

Consider each of these proven strategies to minimize ad valorem tax bills.

Record-breaking commercial real estate trading activity during 2021 is having a marked impact on property values in 2022. Transactions in 2021 were up 88% from 2020 and were 35% above 2019 levels, according to Ernst & Young. The large number of sales in 2021 extended to all categories of real estate, and many commercial property types experienced significant price increases.

Market values are the basis for property tax assessments in most taxing jurisdictions. As post-pandemic market values fluctuate due to higher prices, property owners need to adopt strategies to keep their assessed property values down. As we emerge from COVID-19 here are seven key considerations to minimize property tax assessments even as prices increase.

1. Report Property Operating Metrics. A commercial property's market value is based on its financial performance. A weak property will have poor performance indicators, such as excessive vacancy or below-market rental rates. Poor performance is usually the basis for a reduced assessment and a lower property tax bill. Where possible, property owners should report these types of performance indicators to taxing authorities each year before assessed values are set and tax bills go out.

2. Allocated Prices in Real Estate Portfolios Are Not Market Values. A buyer purchasing a real estate portfolio will typically allocate the total price paid over all the acquired real properties as well as other, non-real-estate assets. Investors create these portfolio purchase allocations for income tax, accounting, financing or other purposes, and they may commission an "allocation" appraisal for bookkeeping or underwriting purposes. Allocations of total portfolio price or value to individual properties in a portfolio are rarely a good indication of a property's market value, however. Likewise, allocation appraisals are unhelpful or even detrimental in determining taxable market values because they may not account for the unique aspects of an individual property.

3. Transaction Type May Affect Value. Market values can also be impacted by the nature of the transaction and its participants. For example, REITs set purchase prices for real estate portfolios based, in part, on income tax considerations. Similarly, when a transaction involves the acquisition of an entity that holds various types of assets, the price paid will include payment for assets other than real estate alone. Non-real-estate motivations for purchasing properties and non-realty components of a transaction must be removed in order to determine the market value of the real estate alone. Otherwise, the values for the real estate will be above market.

4. Only Real Estate Is Subject to Property Taxation. As previously mentioned, property portfolios will sometimes convey with other assets. These can include personal property, such as fixtures and equipment, or intangible assets and rights like contracts, licenses and goodwill. Market values for these non-real-estate items are evaluated differently from real property and some, such as intangible assets and rights, are not subject to property taxation at all. In addition, any "synergy" or "accretive" value from a portfolio sale is intangible and should be excluded when assessing a specific property's value for property tax purposes.

5. Properties May Not Stabilize at Pre-Pandemic Levels. Properties that were hardest hit by changes related to COVID-19 may take years to return to pre-pandemic performance levels, and some may never fully recover. Awareness of a particular industry's recovery will be key to understanding whether market values and property tax assessments for that property type will return to pre-2020 levels. Uncertainties about time to stabilization reduce real estate values. The knowledge that some properties may never achieve pre-pandemic performance levels puts long-term investment value into question, which decreases the current value of those properties and lowers their taxable value.

6. Leasehold Interest Values May Not Match the Market. Investors buy and sell commercial properties based on the net income they produce. However, if the leases generating that income are above or below market, the value derived from rents will not be at market. In addition, lease rates from synthetic or operating leases used to finance the purchase of a portfolio of properties will not produce market value for individual properties unless those lease rates happen to be set at market levels.

7. If All Else Fails, File a Property Tax Appeal. Taxpayers who work proactively with their local tax assessor are often able to achieve reduced assessed values and lower property tax bills. Property owners should address each of the previous six points with the local assessor. Nevertheless, there will be times when attempts to reduce assessed values are unsuccessful. In those cases, property owners should be prepared to file an appeal by the deadline and pursue it, preferably with the assistance of a knowledgeable property tax advisor.