According to Gilbert Davila, principal at Popp Hutcheson PLLC, an Austin-based law firm specializing in property taxes, the hikes are primarily attributable to basic increases in construction and investment in self-storage properties across Texas. Based on how pricing for commercial real estate in Texas has generally skyrocketed in recent years, appraisal districts are now able to derive very low cap rates for many of the properties they assess. In addition, Davila says appraisal districts are only just beginning to have access to comprehensive data to use in valuing properties in this sector. "Prior to the last couple years, appraisal districts weren't very aggressive on self-storage owners, and now they're playing a  game of catch-up" he says. "However, we should be past the worst of the exponential increases and should see more stagnant property tax valuations for the year 2018."

Davila also points out that many self-storage owners are now protesting their assessments in court. Because Texas law requires all properties within a certain jurisdiction to be assessed equally and uniformly with facilities of similar sizes, this litigation should help lower the median level of valuation for self-storage assets.

A proposed law to close the "LLC Loophole" from real estate transfer taxes is a solution in search of a problem.

Ohio legislators are drafting a measure to apply the state's real estate transfer tax to the transfer of any ownership interest in a pass-through entity that owns real property. This proposal will cause more problems than it solves.

Ohio assesses its transfer tax, called a conveyance fee, on each real estate transaction based on the purchase amount reported on a conveyance fee statement and filed with the deed. If a pass-through entity owns the property, a sale of interest in that entity is exempt from transfer tax. The proposed changes would apply the conveyance fee to those transfers, however.

Also, if the property purchase price exceeds currently assessed value, recording the conveyance fee statement and deed with the county will usually trigger a lawsuit by the school district to increase the assessment and tax bill.

Transfers exempt from transfer tax include gifts between spouses or to children; sales to or from the U.S. government, the State of Ohio or any of its political subdivisions; transfers to provide or release security for a debt or obligation; and sales to or from a non-profit agency that is exempt from federal income tax, when the transfer is without consideration and furthers the agency's charitable or public purpose. Generally, the policy is to impose the transfer tax only after a market transaction with market consideration.

What's the problem?

Lawmakers consider the proposal on transfer tax and pass-through entities a tool to fix the problem of real estate value escaping taxation, both at the time of transfer and, more importantly, as part of the assessment. The two supposed loopholes that the proposal aims to close are:

1. The transfer tax loophole argument assumes that some buyers may structure their purchase as an entity transfer, in part, to avoid the transfer tax, which can be significant for a highly valuable property.

1. The property tax loophole describes the more likely "problem" the proposed law purports to address. This argument suggests that some buyers attempt to avoid real estate tax increases when the purchase price is higher than the current tax assessment by structuring the deal as an entity transfer

Ohio assumes that a recent, arm's length sale price is the best evidence of property value for real estate taxation. Filing the deed and conveyance fee statement prompts the school district to file a lawsuit to increase the taxes. The conveyance fee statement indicates the purchase price, carries evidentiary weight and is presumed to be completed under oath, even though as a practical matter it is more like a clerical function and seldom completed by any party to the sale.

When interest in the ownership entity transfers without direct conveyance of the real estate, the transfer tax is inapplicable under current law and no purchase price is recorded. Some sales may be structured this way, trying to avoid exposure to an increase in property taxes by filing a conveyance fee statement.

Everyone should bear their share of the tax burden based on fair property valuation, but this proposed bill does not solve the problem of people skirting their responsibility. It also can lead to unintended consequences including the loss of privacy, increased transaction costs, implementation and enforcement costs, and less real estate investment.

A multilayered dilemma

There is no indication that using a pass-through entity is even an effective way for investors to avoid triggering an increased assessment. Ohio school districts file increase complaints not only when deeds and conveyance fee statements are recorded, but also in response to mortgages, LLC transfers, SEC filings, and sometimes the opinion of outside consultants. There is little evidence that significant numbers of sales are missed because they are the transfer of ownership interests. Thus, there is no loophole that needs to be closed.

The proposal disrupts uniformity, because using a recent purchase to set the assessment midway through Ohio's three-year valuation cycle treats taxpayers who've recently bought their properties differently than others. This is non-uniform treatment, which the Ohio Constitution prohibits.

The conveyance fee statement is often completed and filed by someone not a party to the sale. Common errors occur, usually in allocating the total asset purchase price. Historically, these incorrectly reported purchase prices were being applied to set real estate tax values with increasing rigidity, leading to assessments that did not accurately reflect the value of the real estate.

Assessments should only value real estate, but assessments based on these total asset prices would include the value of non-real estate items as well. To the extent that the value of these other items -- for example, an ongoing, successful business operation -- were also being taxed through sales taxes or a commercial activity tax, these taxpayers were subjected to double taxation.

The solution exists

A recent amendment to the tax law mandates that a real estate assessment reflect the unencumbered fee simple interest. The Ohio Supreme Court recently confirmed in its Terraza 8 LLC vs. Franklin City Board of Revision decision that the amendment requires assessors and tribunals to evaluate all circumstances of a sale, and not blindly apply the number reported on the conveyance fee statement.

The appraisal of the unencumbered fee simple interest provides uniform assessment for all taxpayers, while acknowledging the circumstances of real world transactions. It limits double taxation by making sure real estate tax is based on real estate value only, and yields consistent results whether a sale price is higher or lower than the current assessment.

It ensures uniform measurement and taxation for everyone; just as you would not impose taxes based on gross profits for one taxpayer and net profits for another. It also ensures that the tax is applied consistently, whether the owner just bought the property, has owned it for decades, leases it, occupies it, owns it individually or owns it through interests in a pass-through entity. Valuing the unencumbered interest also results in predictability, aids budgeting, and alleviates deal-killing uncertainty.

There are legitimate reasons to convey property through the transfer of ownership interests in an LLC or other pass-through entity, including privacy or other tax planning. The proposed bill undercuts those legitimate concerns without addressing the perceived problem of real estate value escaping taxation. Consistently valuing the unencumbered fee simple interest of real property through uniform assessment and uniform application ensures that no real estate value escapes taxation, and that no taxpayer bears more than their fair share of the burden.

​Savvy commercial real estate professionals keep property-tax planning on their checklists for acquisitions and capital projects.​

Why? Because they know that considering property taxes early can save money and reduce hassle later, whether the project is acquiring a business that owns real estate, developing real estate, remodeling a property or adding to existing improvements. And given that businesses overall spend more on property tax than any other state and local tax, considering property tax while planning these projects is a valuable opportunity to improve the bottom line.

The first step is to identify how the acquisition or other proposed actions might affect the property's taxable value. This depends on the local jurisdiction's assessing practices and on how an assessor will relate the sale price or project cost to taxable market value.

States treat sales information in varying ways. Ohio, for example, presumes a property's sale price to be its market value for calculating property taxes. Other states include the sale price in the overall algorithm for all properties but do not use it to determine the value of the specific property that sold. Still others ignore the price altogether.

There are several ways that price may differ from value. For one, the transaction may include non-taxable elements, such as a business, in addition to real property. Or the sale price of an office building may reflect added value for a lease at an above-market rental rate.

In a common scenario, the price paid for a portfolio of senior-living facilities will include the value of each facility's real property, the value of each facility's tangible personal property, and the value of each facility's resident lists, service arrangements, goodwill and other intangible (and therefore untaxable) personal property. The allocation of the purchase price among the various components may not reflect the market value of each component, even when the overall transaction price reflects market value. And sometimes a buyer pays more for a property than it is worth generally on the market. This is often due to the buyer's own investment strategies and thus requires an assessor to distinguish between investment value and market value.

A buyer should ideally evaluate how the price relates to the property's market value in the lead-up to the transaction. This is key to projecting property taxes going forward, in light of the transaction and the way the particular jurisdiction reacts to (or ignores) different types of transactions. It is also important to ensuring that the assessor receives accurate information in states where assessors learn of and react to sales prices.

This early planning can influence the portion of the price allocated to taxable value and help limit it to market value. Part of this is specifically identifying nontaxable, intangible components in the transaction documents in a way that conforms to the jurisdiction's property tax laws.

Another key step is to make sure any documents filed for real estate transfer taxes reflect the value of the taxable component instead of an overall value, thereby managing both the real estate transfer tax and future property taxes. Opportunities may exist to avoid or minimize the transfer tax, depending on the specific laws in each jurisdiction.

Many a buyer has reported the full sale price (or allowed the seller to do so, in jurisdictions where the seller reports the transaction), realizing too late that the reported sum included components that should have been reported differently. The buyer should also consider property taxes when reviewing any press release about the transaction. The new owner may find itself bound to what was reported, whether to government or the media, in later property tax appeals.

Also, preserving certain transaction details, such as the valuation analysis and rationale, may help later as support material or to dispute errors in discussions with the assessor.

Lastly, if information about the transaction goes public in a way that may lead to a misunderstanding by the assessor, reacting promptly can be crucial. This often involves discussing the information with the assessor to provide additional context, such as explaining when a buyer paid a premium above the property's market value.

Similar considerations apply to other types of project strategies, such as plans to develop real estate, renovate or remodel a property, or add to existing improvements. In each instance, early consideration of property taxes often proves useful. Doing so not only aids in projecting future property taxes, but can also guide the owner in reducing those taxes through choices made while carrying out the project.

Norman J. Bruns and Michelle DeLappe are attorneys in the Seattle office of Garvey Schubert Barer, where they specialize in state and local tax. Norman Bruns is the Idaho and Washington representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Norman Bruns can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.. Michelle DeLappe can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

The federal government has long encouraged owning a home over renting. Housing subsidies in the tax code effectively lower the after-tax cost of homeownership, which has helped taxpayers move out of residential rentals and into their own homes. The Jeffersons might not have credited tax policy for it in their 1970's sitcom, but it has assisted taxpayers in "moving up" to bigger and better homes. The Tax Cuts and Jobs Act of 2017 (TCJA) makes sweeping changes to the tax code for individual taxpayers that directly impact their ability to transition from renting to owning their home.

About 34 million households, or 44 percent of U.S. homes, carry a mortgage with annual interest charges that exceeded the prior standard deduction. With the new standard deduction, that group shrinks to around 14 million, or 15 percent of U.S. households, according to the National Association of Realtors (NAR).

And while the TCJA nearly doubles the standard deduction, it caps the deduction for state and local taxes -- including income, sales, and property taxes -- at $10,000 for both single and married taxpayers. This one-two punch could significantly impair some taxpayers' appetite for homeownership.

Two household examples

NAR prepared an analysis that illustrates this potential impact. In the first of two examples, a single taxpayer earns $58,000 per year, rents an apartment, and claims the standard deduction. Her tax liability for 2018 under the prior law would have been $7,491 but, under the TCJA, she pays just $6,060 and enjoys a tax cut in the amount of $1,431.

Now assume she purchases a home for $205,000, putting down 3.5 percent with a 30-year mortgage fixed at 4 percent interest. Further assume her first-year mortgage interest would total $7,856 and she would pay property taxes of $2,050.

As a first-time homeowner, her tax liability under the prior law would be $5,393. The tax benefits under the prior law save $2,098, which effectively lowers her monthly mortgage payment by $175 per month. Under the TCJA, her tax would be $5,423 (a $30 increase!) and the differential between renting and owning a home, which was $2,098 under the prior law, has shrunk to just $637 or $53 per month.

In the second NAR example, a married couple with three children and an annual household income of $120,000 leases a home and takes the standard deduction. Their tax liability for 2018 under the prior law would have been $11,370 but, under the TCJA, they pay $8,999 and enjoy a tax cut in the amount of $2,371.

Now assume they purchase a home for $425,000, putting down 10 percent with a 30-year, fixed rate mortgage at 4 percent interest. Further assume their first-year mortgage interest would total $15,189 and they would pay property taxes of $4,250.

Under the prior law, the couple would lower their tax liability for 2018 by $3,219 by purchasing a home instead of renting. This amount effectively lowers their monthly mortgage payment by over $268 per month. Under the TCJA, their tax would be $8,051 (a $100 decrease) and the differential between renting and owning a home, which was $3,219 under the prior law, has shrunk to just $948 or $79 per month. (For NAR's analysis and further discussion of Apartment Lists' examples, visit https://www.nar.realtor/tax-reform/the-tax-cuts-and-jobs-act-what-it-means-for-homeowners-and-real-estate-professionals.)

As these examples illustrate, the TCJA offers an incentive to homeownership, but it is considerably less valuable than the previous incentive. Thiseffectively levels the playing field between renting and owning a residence. In fact, after accounting for additional costs associated with homeownership such as maintenance, neighborhood association dues and local district fees, the scales may now tip in favor of renting.

Thus, taxpayers may forego the traditional path, and choose not to move up from renting to purchasing a home. Instead, they may choose to climb within the rental market. That is, they may move to bigger and better residences and may spend more on their residences , but they are likely to rent rather than buy.

At the same time, the TCJA is fueling investors' interest in the rental market so that more options will likely be available for taxpayers who forego owning a home in favor of renting. To that end, the TCJA offers more favorable treatment of pass-through income. And, income property owners are still able to deduct interest payments on mortgages, with no cap.

These factors make it more profitable for investors to own income-generating property such as multifamily apartments or single family rentals. So, while the TCJA may increase taxpayer demand for renting homes, it also encourages investors to invest in residential properties and make bigger and better rental units available to renters. Whether by accident or design, the TCJA is likely to result in significant benefits to the rental market.

Energy-efficient buildings may not yet command premium rents and prices in smaller markets, but green features could mean property tax savings.

A growing number of commercial properties incorporate energy-efficient attributes that exceed basic code requirements. While conserving resources, these sustainable building strategies can also enhance the owner's bottom line by reducing operating costs. As investors consider developing or buying green properties in certain markets, though, they should consider a less-obvious source of savings – their property tax bills.

No single set of attributes defines a green building; rather, sustainable structures lie on a spectrum. At one end are otherwise-conventional buildings with modest upgrades, ranging to a high end of properties employing comprehensive design and operational strategies that approach zero net consumption of energy or water.

The features most commonly associated with green building tend to be efficient heating and cooling equipment, better insulation, rainwater catchment and on-site power generation methods such as solar, wind, or geothermal. While roof-top solar panels garner attention, other design attributes including passive solar collection, drought-tolerant landscaping, and building-control systems can be equally effective at achieving sustainability objectives. Ultimately, each attribute adds costs to the construction or operation of a property, while not necessarily generating the same incremental gain in value.

How green is the market?

Green design and operations have become standard for Class A properties in many primary markets. With above-average adoption rates, the investment premium for energy-efficient attributes may disappear and properties lacking those attributes may decline in value. Similarly, buildings without green features may be at a competitive disadvantage in attracting potential tenants and buyers.

In many secondary and tertiary markets including across the Midwest, Southeast, Great Plains and elsewhere, however, buyers and tenants have not shifted their preferences toward green construction. This greatly reduces the direct economic benefits of green features. When the pool of tenants willing to pay premium rent for energy-efficient features approaches zero, the pool of buyers demanding those features likewise declines.

Accordingly, whether green attributes have an overall positive or negative impact on a property's market value is highly dependent on the local market, even when the nation overall shifts demand toward such features. Energy-efficient construction may be a market prerequisite in one location, while constituting over-engineering and over-building in another. The question for owners of sustainable buildings evaluating their tax assessments, then, is how buyers and sellers in that market react to specific green features.

Necessary, adequate or superadequate?

Assessors often value properties, at least initially, based on the costs of construction, using either replacement cost tables or information from construction permits. But most green buildings have higher upfront costs, with a goal of achieving long-term efficiency objectives. A green building assessed purely on a cost basis, without considering whether its features are above-market, may be over-assessed and, as a result, overtaxed.

Any cost-based property valuation must account for all depreciation, from ordinary wear-and-tear to obsolescence brought about by market factors. One type of functional obsolescence is superadequacy, which applies to an attribute that exceeds current market requirements. Essentially, a superadequacy is a cost without a corresponding value increase.

Importantly, obsolescence is measured against the market, so even a newly constructed property with no physical deterioration could suffer from substantial obsolescence. A particular green feature might represent a positive value element, a market requirement, or functional or external obsolescence, depending on the property type and location.

Of course, as market demands evolve, some features that were superadequate when originally constructed may become standard. Tax assessments must reflect property and market conditions on a certain date, however, and until the market changes, must account for superadequacies.

And while superadequacy is an element of the cost approach to value, it should be a consideration in income- or sales-based analyses as well. The value of green features, like everything else in an appraisal, must be supported with market research and data. If no demand is found for the property's features, that must be reflected in the value conclusion.

Getting the value right

Assessors may ask: "If a green building has an out-of-pocket cost of $1 million, how can it appraise for only $750,000? Why would an investor spend the extra money?"

Certain items may motivate a particular owner, but property tax assessments are usually based on the real estate's market value alone, regardless of business value or intangible value. If the market does not recognize a feature as valuable, then the value a particular user assigns to that feature is irrelevant for property tax purposes.

In questioning how a green feature affects a property's market value (as opposed to its value to the user), consider whether the feature creates a direct monetary benefit to the property owner or user, either in the form of higher income or lower expenses. Sustainability features may boost the owner's business, perhaps resulting in goodwill or broader market recognition, but that increase will not necessarily accrue to the real property itself. And indirect benefits – those nonmonetary benefits to the community or environment – are unlikely to change real estate value.

Valuing a green building involves most of the techniques used for conventional properties, but the nuances and complexities require greater knowledge and training. Local tax assessors, particularly in smaller jurisdictions where sustainable features have not reached market acceptance, often lack that requisite knowledge. It is no wonder that assessments often fail to consider all of the relevant market factors, creating opportunities for taxpayers to appeal excessive assessments.

As demand for sustainable buildings expands, assessors want to capture that growth in the local tax base. But by focusing on whether the local market demands or ignores energy-efficient features, diligent owners can reduce their property's tax assessments and achieve significant savings.

All too often, tax assessors ignore functional and economic obsolescence that increasingly afflict hospitals, instead treating these assets as financially productive institutions that hold their value. Hospital owners, however, can leverage obsolescence to reduce taxable values and property tax bills.

Click the link below to continue reading.

https://www.beckershospitalreview.com/finance/use-obsolescence-to-lower-hospital-property-taxes.html

Daniel R. Smith, Esq., is a principal with and general counsel for Austin, Texas law firm Popp Hutcheson PLLC, the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. Kevin Shalley, CMI, is a tax consultant and manager with Popp Hutcheson PLLC, specializing in healthcare properties.

 Contact Daniel at This email address is being protected from spambots. You need JavaScript enabled to view it. and Kevin at This email address is being protected from spambots. You need JavaScript enabled to view it..

​Due diligence is required to determine whether possible tax increases can be abated.​

President Trump's Tax Cuts and Jobs Act is the first sweeping reform of the tax code in more than 30 years. Signed into law on Dec. 22, the plan drops top individual rates to 37 percent and doubles the child tax credit; it cuts income taxes, doubles the standard deduction, lessens the alternative minimum tax for individuals, and eliminates many personal exemptions, such as the state and local tax deduction, colloquially known as SALT.

While Republicans and Democrats remain divided on the overhaul's benefits, there is a single undeniable fact: The sharp reduction of the corporate tax rates from 35 percent to 21 percent will be a boon for most businesses. At the same time, employees seem to be benefiting too, with AT&T handing out $1,000 bonuses to some 200,000 workers, Fifth Third Bancorp awarding $1,000 bonuses to 75% of its workers, Wells Fargo raising its minimum wage by 11% and other companies sharing some of the increased profits with employees.Companies are showing understandable exuberance at the prospect of lower tax liability, but investments many firms are making in response to the changes may trigger increases in their property tax bills.

Some companies already are reinvesting in their own infrastructure by improving and upgrading inefficient machinery or renovating aging structures. Renovations to address functional or economic obsolescence can help to attract new tenants and, most significantly, command higher rentals for the same space.

The real property tax systems in place for most states are based on an ad valorem (Latin for "according to value") taxation method. Thus, the real estate taxes are based upon the market value of the underlying real estate. Since the amounts on tax bills are based on a property's market value, changes or additions to the real estate can affect the taxes collected by the municipality.

Generally speaking, most renovations such as new facades, windows, heating or air conditioning will not change the value or assessment on a property. The general rule is that improvements which do not change the property's footprint or use, such as a shift from industrial to retail, shouldn't affect the property tax assessment. However, an expansion or construction which alters the layout of a property can – and usually does – result in an increased property assessment. Since real estate taxes are computed by multiplying the subject assessment by the tax rate, these changes or renovations can significantly increase the tax burden.

Recognizing that this dynamic could chill business expansions, many states offer a mechanism to phase-in or exempt any assessment increases. This can ease the sticker shock of a markedly higher property tax bill once construction is complete.

New York offers recourse in the form of the Business Investment Exemption described in Section 485-b of the Real Property Tax Law. If the cost of the business improvements exceeds $10,000 and the construction is complete with a certificate of occupancy issued, the Section 485-b exemption will phase-in any increase in assessment over a 10-year period. The taxpayer will see a 50 percent exemption on the increase in the first year, followed by 5 percent less of the exemption in each year thereafter. Thus, in Year 2 there will be a 45 percent exemption, 40 percent in Year 3 and so on.

Most other states have similar programs to encourage business investments and new commercial construction or renovations. The State of Texas has established state and local economic development programs that provide incentives for companies to invest and expand in local communities. For example, the Tax Abatement Act, codified in Chapter 312 of the tax code, exempts from real property taxation all or part of an increase in value due to recent construction, not to exceed 10 years. The act's stated purpose is to help cities, counties and special-purpose districts to attract new industries, encourage the development and improvement of existing businesses and promote capital investment by easing the increased property tax burden on certain projects for a fixed period.

Not long ago, the City of Philadelphia, Pennsylvania, enacted a 10-year tax abatement from real estate taxes resulting from new construction or improvements to commercial properties. Similarly, the State of Oregon offers numerous property tax abatement programs, with titles such as the Strategic Investment Program, Enterprise Zones and others.

Minnesota goes a step further and automatically applies some exemptions to real property via the Plat Law. The Plat Law phases-in assessment increases of bare land when it is platted for development. As long as the land is not transferred and not yet improved with a permanent structure, any increase in assessment will be exempt. Platted vacant land is subject to different phase‑in provisions depending on whether it is in a metropolitan or non‑metropolitan county.

Clearly, no matter where commercial real estate is located, it is prudent for a property owner to investigate whether any recent improvements, construction or renovations can qualify for property tax relief.

​It's critical for owners to identify both economic and functional obsolescence in order to fight unfair tax assessments.​

New technologies, shifting markets and aging buildings can drive economic obsolescence across entire industries. Equally important for the taxpayer, these factors also affect individual property values from a functionality perspective. Understanding both economic and functional obsolescence is essential to properly evaluate tax assessments for accuracy.

Determining functional obsolescence requires an analysis of the property's layout and technologies in use. This exercise attempts to quantify any adjustment in value that amplifies or outpaces downward trends occurring in the market, or accelerates depreciation beyond a straight-line basis. This may include external trends having a unique negative effect on the property's functionality.

Likewise, economic obsolescence can affect a property's value.Such an analysis involves external factors not necessarily specific to the property that may compromise its value on the open market.Declining trends in markets within an industry can signify reasons for impaired values both nationally and regionally.Moreover, international competition may underscore weaknesses within an industry that explain a reduction in a particular property's value.

In ascertaining the decline in a property's value due to economic obsolescence, the analysis must attempt to quantify that decline and offer reasons explaining it.These reasons need to be identified and reasonable, a rationale correlating values assigned to those reasons. For example, a facility may have a decline in excess of industry averages, such as changes in transportation costs and infrastructure in comparison to other supplying markets.It could become much less expensive to ship product from South America than to ship by rail in parts of the United States.

In an uncertain economic climate or a declining or stagnant real estate market, the need to evaluate obsolescence in property assessments is obvious. But even in times of growth and rising real estate prices, taxpayers should consider functionality in reviewing an assessment.

In Georgia, for example, regulations governing property assessments require local taxing authorities to take obsolescence into account. The statute lacks any description of the precise mechanics involved in measuring obsolescence, however, and assessors often forego such an evaluation.

A given jurisdiction's tax return may apply depreciation schedules, but those may not incorporate the concept of functionality. If unaddressed in depreciation schedules, then functional obsolescence needs to be captured as an adjunct to depreciation. Poor economic times or deterioration in a property's utility will exacerbate normal depreciation.

The degree of functional obsolescence is reflected in the utilization of the property. A comparison between full versus actual property usage can indicate the degree of functional obsolescence. Look for evidence of the gap between full and actual historical changes in operating income and production.

Functional vs. Economic Obsolescence

Given that the discrepancy between full and actual property utilization is unique to the facility and not industry-wide, it is functional. This could be explained by technological differences between competing facilities and the subject property. At the same time, external economic factors may contribute to the property's comparative decline.

For example, a printer may use antiquated equipment and technology that require it to keep large facilities for both production and warehousing. Comparisons will identify a gap in functionality between the property and those of more modern competitors using smaller facilities and newer technology. Faster production at newer printing operations may also require less warehousing, because projects are completed more quickly for shipping. The impact of this obsolescence on value is unique to the subject property, reflecting reduced functionality.

On the other hand, great changes are transforming the printing industry. These external factors may be detected in exactly the same way as functional change, but on an industry-wide basis.

Declining demand for an industry overall can impair a particular property's value. Such a sea change can exist within a robust economy, too: In our example, a digital culture has rejected the traditional model for printing to a significant degree, as the widespread use of electronic records and communication has reduced demand for paper printing.

A mine provides another example. Over time, miners extract the most accessible minerals using the least costly means. The layout and operation would have been originally set up to facilitate this process.

As mining continues, the remaining minerals may become more expensive to extract per unit of raw material. This added cost reduces operating income. The mine may require new infrastructure to continue operations. These periodic expansions may be inefficient, again increasing processing costs.

It may be true that, were the mine to be redesigned from scratch, no one would duplicate the existing operation because of the production costs. This reflects deteriorating functionality. On the other hand, industrial demand for the mined product may evaporate due to innovations that make the material unnecessary in processes that once required it.

Changing market forces can impact value. Until recently, the United States was a net importer of natural gas, supporting demand for facilities that enabled the import of liquid natural gas. Now that the United States is a net exporter of natural gas, those same facilities that handled the import of natural gas are more obsolete and less valuable.

Obsolescence is an important consideration in valuing property, regardless of economic conditions. This is especially true for functional obsolescence, but can also be true for economic obsolescence. In valuing property, it is important to remember there is significant overlap between the two, and many factors and influences may explain overall obsolescence.

This paper responds to the guide issued by the IAAO Special Committee on Intangibles relating to the handling of intangible assets and real estate in property tax valuation and assessment. The response supports use of appraisal methods which directly appraise and remove the full value of identified non-taxable intangible assets in the valuation and assessment of taxable real property. The response also addresses some of the methods discussed in the IAAO Committee's guide and identifies concerns with the legal authorities cited in the guide.

In early 2017 the International Association of Assessing Officers (IAAO) Special Committee on Intangibles issued a white paper addressing the scope of the intangible asset exemption: "Understanding Intangible Assets and Real Estate: A Guide for Real Property Valuation Professionals,"[2] hereafter the "IAAO Guide" or "Guide. "The  IAAO describes the purpose of the IAAO Guide as follows: "This guide is intended to assist assessors in understanding and addressing intangible assets in property tax valuation" and "to assist in identifying intangible assets and exclude them from real property assessments." [3]The Guide purports to describe the legal and appraisal requirements for removing the value of intangible assets and rights in the assessment of real estate for property tax purposes. However, the Guide advocates appraisal methods that do not remove the value of intangible assets from assessment, omits essential appraisal authority, mis-cites court decisions, and ignores controlling law. This paper exposes the unbalanced nature of and errors in the Guide, including techniques which purportedly minimize or eliminate the value of intangible assets from assessment and other omissions.

The Qualified Nature of the IAAO Guide

Not all IAAO publications have equal weight. The IAAO Guide expressly provides the following self-limiting disclosure immediately below the title of the paper: " This guide was developed by the IAAO Special Committee on Intangibles for informational purposes only and does not necessarily represent a policy position of IAAO. This guide is not a Technical Standard and was developed for the benefit of assessment professionals."[4]

An IAAO "technical standard" represents an official position of the IAAO: "International Association of Assessing Officers (IAAO) maintains technical standards that reflect the official position of IAAO on various topics related to property tax administration, property tax policy, and valuation of property including mass appraisal and related disciplines. These standards are adopted by the IAAO Executive Board. IAAO assessment standards represent a consensus in the assessing profession."[5] The IAAO Guide is not an IAAO technical standard, so it has not been approved by the IAAO Executive Board and cannot be described as endorsing a "consensus" in the assessing profession.

Excluding the Value of Intangible Assets: Issues Raised in the IAAO Guide

The IAAO Guide correctly acknowledges that in "the majority of jurisdictions, intangible assets are not taxable, at least not as part of the real estate assessment. As a result, assessors must ensure their real estate assessments are free of any intangible value" and that "the value of intangible assets is excluded. " The Guide also says "assessors seek methods that measure the value of the real property but exclude any intangible asset value" and "[assessors] must utilize methods to ensure the value of intangible assets is excluded from real estate assessments."[6]

The question is whether the IAAO Guide actually proposes methods that meet this standard.The bare assertion that all of the intangible assets have been removed from an assessment must be tested:if the appraisal methodology is recognized to encompass non-taxable intangible assets, then it must demonstrate exactly how intangibles are removed and what value was ascribed to each of those removed intangibles.The methods advocated by the Guide can be evaluated by asking whether a particular method of appraisal subsumes intangible assets and, if so, what those intangibles are, their values, and whether those values are actually excluded.

A fundamental question raised by any assessment or appraisal method is whether it is likely to include intangible assets.Capitalizing operating revenue very likely means that business enterprise, and/or business enterprise components such as assembled workforce, working capital, licensing rights or such, are included in the assessment.If the cost indicator includes a line item for operating permits or environmental emission credits, then an intangible asset is being assessed.If the sales price is paid for a rental property, and that price is based on an above market lease in place and/or fails to account for lease-up costs and delay, then intangible assets are implicated. Thus, an initial question is whether the nature of the property at issue and the appraisal method implicates intangible assets.

There are a number of issues addressed in the IAAO Guide which are accepted in the appraisal profession as being consistent with correct methods for handling the identification, segregation and removal of intangibles.For example, several paragraphs in the Guide point out that the Cost Approach, as applied to the tangible real and personal property, "inherently excludes" the value of non-taxable intangible assets and rights.[7]The Guide also states that when the Sales Comparison Approach or the Income Approach are used to value going-concern type properties, it is likely that non-taxable intangibles are subsumed in the going-concern value conclusion, and those intangibles that were captured need to be identified and their values excluded.[8]In addition, the Guide cautions that sales prices for real property sold along with a business may include intangibles' values.[9]Therefore, from an introductory perspective, the Guide satisfactorily identifies those situations in which intangibles may be implicated in an appraisal.

There are other issues addressed in the IAAO Guide which are not accurately or correctly discussed.The first is the "separability" criteria for identifying intangibles.The second is the role of ownership in the intangibles exclusion process. The third is the use of accounting and tax records to allocate value to intangible assets.And the fourth is the efficacy of the Rushmore "Management Fee" method for removing the value of non-taxable intangibles.Each of these issues is addressed below.

1.Separability Is Not Necessary for the Identification of Intangible Assets

The Issue

The IAAO Guide asserts that "separability" is necessary for identification of intangibles because some intangible assets are "intertwined" in that one intangible is dependent upon another and the intangibles "are not easily separated."The Guide also states "the question is whether the business . . . could be separated from the real estate" or, more broadly, "[i]f the real estate [could] be sold without the intangible."[10]

The Response

An intangible asset need not "be capable of being separate and divisible from real estate" as the IAAO Guide contends for the intangible to be recognized, and the "separability test" is unnecessary.No reason is given for separability in the IAAO's list of requirements for identifying intangibles.In fact, so long as there is adequate data available for placing a value on an intangible, even one that is not easily separated from real estate, the ability to divide the intangible from the real estate is irrelevant.

California's State Board of Equalization (SBE) addressed the issue of "separability" when it approved Assessors' Handbook Section 502 in December 1998.[11]In Issue Paper Number 98-031, which was released prior to approving Assessors' Handbook Section 502, the California SBE considered the question of separability.[12]On December 7, 1998, the California SBE's Property Tax Committee determined that separability was not necessary in order to recognize an intangible asset or right for purposes of removing the intangible's value in the property tax assessment of taxable real and personal property.[13]Based on this decision, the California SBE included language in Assessors' Handbook Section 502, Chapter 6 (entitled "Treatment of Intangible Assets and Rights") stating that while some intangible assets and rights may be identifiable but not capable of segregation, the inability to separate an intangible "does not prevent recognition of the value" of the intangible.[14]The California SBE's guidance is consistent with that of Reilly and Schweihs issued ten years later:"[T]here is absolutely no requirement that the intangible asset has to be transferable separately from other assets.In other words, the subject commercial intangible asset may be sold with other tangible assets and/or with other intangible assets."[15]

The IAAO Guide is unclear about what types of intangibles must be found separable.The example provided is the "historical significance" of the Waldorf Astoria Hotel in New York City.[16]The Guide then refers to other types of "real property attributes" that are intangible in nature and cannot be sold without the real property, such as view, proximity (location), prestige and appeal.[17]Later, the Guide refers to "real property intangibles" such as zoning and air rights.[18]All of these intangible attributes of real property are properly tied to the real property because they are integral to the property (just as a property's layout, design, or architectural style is integral to the property).These intangible real property attributes are taxable under California Revenue and Taxation Code section 110(f) and the California Supreme Court's guidance:"[I]ntangible attributes of real property" include location, proximity, zoning, view, architecture and other attributes that "are an integral part of" the real property, but "intangible attributes" do not include rights exercised in connection with the use of real property.[19]But aside from this limited set of intangible real property attributes, the value of all other intangible attributes, even those closely aligned with the real property, must be removed.

2.Ownership Is Not Relevant in the Intangibles Value Exclusion Process

The Issue

The IAAO Guide states that "the sale of a hotel with a franchise and management agreement in place does not include the value of those assets [the agreement]" because the value of the agreement inures to the hotel management company and not the hotel owner.The first sentence of the paragraph in which this statement appears provides the context:"a property sells and the intangible assets are included in the price."Another place in the Guide says that the "intangible assets owned by others, such as the franchisor or third-party management agreement [of a hotel]," need not be excluded even if they were included in the purchase price for the sale of a going-concern that includes real estate, personal property and an ongoing business.In the Income Approach context, the Guide also asserts that management and franchise are owned by the management or franchise company.[20]

The Response

In the circumstance where a purchase price is paid for a going-concern consisting of real property, personal property and intangible assets, that purchase price must be allocated to all of the assets that were included in the purchase.While the IAAO Guide generally concurs with this, the Guide also singles out hotel management and franchise agreements as not being subject to this standard.But when intangible assets are included in the purchase price paid for a hotel property, a portion of that price must be allocated to those assets, i.e., the management/franchise agreement.Likewise, when the management/franchise agreement generates revenues for a going-concern, a portion of that going-concern's value must be allocated to the intangible.That is so regardless of who owns the agreement because the benefits flowing from that intangible agreement accrue to both the hotel manager and the hotel owner.Those benefits accrue to the manager and the owner because they share the legal rights to use (a) the real property and (b) the intangible assets/rights under the management/franchise agreement.This issue is discussed in more detail in the "Management Fee" method section below.

Similar misdirection appears in the IAAO Guide's discussion of assembled workforce:"Typically, the management company of a hotel, not the owner, hires the managers and workers.Therefore any value of the assembled workforce belongs to the management company."[21]Again, the issue is not who "owns" the workforce, but who benefits from the presence of the workforce and who holds the legal right to use and benefit from that workforce.Both the hotel manager and the hotel owner benefit from a hotel's workforce – the manager earns a management fee, and the owner makes revenues.(Moreover, even if the manager hires the workforce, the hotel owner pays the salaries and wages of the managers and workers in that workforce.)

3.Accounting/Tax Records Should Not Be Used to Allocate Value to Intangibles

The Issue

In the context of analyzing property sales, particularly sales of going-concern properties which include intangibles, the IAAO Guide encourages assessors to consider sales price allocations appearing in financial reports and accounting documents as well as filings under Internal Revenue Code section 1060.[22]However, the Guide also counsels assessors not to rely on accounting valuations because "[t]he classification and method for estimating and allocating intangible value for accounting purposes are rarely the same [as those] for property tax purposes," and not to rely on financial reporting information because "the type of value required for financial reporting [accounting purposes] is typically fair value. . . .The definition of fair value is different from that for property tax purposes (typically market value)."[23]

The Response

The instructions on Page 47 of the IAAO Guide are proper.Reliance on valuations performed for accounting or tax reporting purposes are nearly always irrelevant and inappropriate for use in property tax assessment appraisals.This is demonstrated by the Guide's citation to the decision in Hilliard City Schools Board of Education v. Franklin County Board of Revision,[24] where the Ohio Supreme Court declined to use accounting information in favor of an appraisal.[25]Similarly, the use of value allocations made for federal tax purposes was rejected by the California Court of Appeal:

[T]he proposition that a sales price is prima facie evidence of fair market value . . . holds . . . true with respect to an arm's length, open market sale . . . with the proviso that the probative value of such sale may be displaced by a variety of factors, including the influence of tax and other business considerations.. . .[P]laintiffs' contractual allocation of the purchase price . . . minimized the value of the [real] property as compared with the business assets [intangibles].These allocations largely reflected plaintiffs' own construction of the values, and at least one of them was specifically made for federal tax purposes.[26]

The IAAO Guide's discussion of this topic concludes:"Valuation and allocation for accounting purposes may be different from, and possibly not applicable to, the value of real property in a property tax assessment scenario.. . .Although accounting documents may not prove or disprove the presence or value of intangible assets, they do represent another piece to the puzzle that could assist the appraiser or assessor in reaching a supportable estimate of value."[27]The equivocating nature of these statements casts doubt on accounting (or tax) reporting documents, and such information should not be used for purposes of allocating value to intangibles in the property tax assessment of real property.

4.The "Management Fee" Method Does Not Remove the Value of Intangibles

The Issue

The Rushmore "Management Fee" method asserts generally that deducting a management and/or franchise fee or other operating costs accounts for (removes) the value of intangible assets from assessment: "Rushmore's assertion is that, by deducting the costs associated with intangible value . . . from a property's operating expenses, the remaining NOI is for the real property only."[28] Put another way:

The management fee approach is based on the premise that any intangible value arising from a going-concern can be measured by capitalizing the management fee necessary to compensate a third part to run the business.. . .Theoretically, under this method, any value arising from the management of the business has been excluded.Under the theory of substitution, no one would pay more for a business or building than the presumed cost to replace it.[29]

The IAAO Guide contends that "hotels usually sell with the intangibles excluded from the transaction price through [management fee] deductions in the pricing decision that represent business-related intangible assets."[30]Finally, the Guide also asserts that when an income approach is used, the Rushmore "Management Fee" method is the "best method for excluding intangible value in an income approach" and "is the most valid approach for excluding intangible assets in an income approach."[31]

The Response

The Relationship between the Hotel Owner and Hotel Operator under the Management/Franchise Agreement

When an income capitalization approach is used to value a property and the income used in the approach is generated by all forms of property in use, including real property, personal property, and intangible property, the resulting value represents the value of all forms of property that generated the income, including the real property, personal property and intangible property.The general appraisal principle is set forth in a decision by the California Court of Appeal:"When the capitalization-of-income approach is used as a basis for an opinion of or considered in determining the market value of an operating enterprise, the result is a determination of the total value of all of the items of property which are a part of that enterprise."[32]

The Rushmore "Management Fee" method assumes that a hotel owner and a hotel manager have entered into a hotel management or franchise agreement under which the manager will operate a hotel on the hotel owner's behalf.Under this agreement, the hotel owner provides a hotel facility for the hotel manager to operate.In return, the hotel manager provides to the hotel owner the benefits of the hotel manager's management expertise as well as the benefits relating to the hotel manager's name or "brand."

The intangible contractual rights of the hotel owner and the hotel manager, and the interests created by those rights, are aligned under the management/franchise agreement because the owner and manager are both engaged in an ongoing hotel enterprise using the same tangible and intangible property, and their mutual success depends on how well the hotel performs financially.Success under the management/franchise agreement comes in two parts.First, the hotel manager succeeds if it receives a management fee as called for in the contract.Because the management fee is usually a percentage of revenues generated, the fee is tied to the hotel's performance.(The IAAO Guide asserts that any return to the business from a management/franchise agreement arises from this percentage of revenues element.[33]But because the entire percentage management fee is paid to the manager, and not the hotel owner, the percentage fee does not capture any of the value of the management/franchise agreement to the owner.)And second, the hotel owner succeeds if the hotel produces revenues sufficient to pay the hotel manager's fee and the hotel produces incremental additional revenue over and above the fee paid to the hotel manager, which revenue goes to the hotel owner.

"Return of" and Return on" the Management/Franchise Agreement

The Management Fee method deducts the management or franchise fee as a regular operating expense in a standard income capitalization analysis:"the management fee approach can be applied by including a going-concern management fee as an operating expense."[34]The deduction of the management/franchise fee in the Management Fee method amounts to the hotel owner's repayment of the fee to the hotel manager.It is, in the strictest sense, the cost to the hotel owner for having a management company or franchisee operate the owner's hotel.As such, it literally represents the "return of" the management fee to the hotel manager.Referring back to a portion of the IAAO Guide cited above, it represents the "cost to replace" the management agreement under the "theory of substitution."[35]

The Management Fee method's contention that the deduction of the management fee represents the full value of the intangible non-taxable hotel management/franchise agreement is short-sighted and misleading.First, no hotel owner would hire a hotel manager if doing so did not produce additional revenue to the hotel owner.Why would a hotel owner pay a hotel manager a management/franchise fee if, at the end of the year, the revenue brought in by the hotel manager's efforts was only enough to pay the management/franchise fee to the manager?All of the revenue attributable to hiring the hotel manager would be paid to the manager, and the hotel owner would be no better off than if he had not hired the manager in the first place.

Clearly, the hotel owner will only hire a hotel manager if the manager will increase the hotel's revenue by more than the amount of the management/franchise fee paid to the manager.In other words, the hotel owner will not hire a hotel manager if there is only a "return of" the management/franchise agreement through payment of the management/franchise fee.There also has to be a "return on" the management/franchise agreement to the hotel owner, meaning that as a result of hiring the hotel manager and entering into the management/franchise agreement, the hotel owner receives additional revenue over and above the fee paid to the hotel manager.

An example is in order.Assume a hotel owner can make $10 million per year operating a hotel by himself.Alternatively, the owner can engage a hotel manager to operate the hotel under a management agreement which requires payment of a four percent (4%) management fee (or $400,000).For the owner to pay the manager the management fee and make the same $10 million as before, the manager's efforts have to increase the hotel's revenues by the amount of the management fee (4% or about $400,000) to $10.4 million.However, at this level of operating revenue the hotel owner only nets $10 million after paying the management fee to the manager (the "return of" the management fee), and so the owner will be ambivalent about whether or not to retain the manager.The hotel owner will only hire a manager (enter into a management agreement) if the manager's efforts increase the hotel's revenues by more than 4% (more than $400,000) so that the hotel owner receives a "return on" his investment in the hotel management agreement over and above the "return of" the management fee to the manager.

This is where the second fallacy in the Management Fee method arises.The Management Fee method asserts that the hotel management company holds all of the rights to the management/franchise agreement or, stated another way, that all of the benefits and value of that agreement resides with the manager.But such is not the case for two reasons:(a) the hotel owner has obtained access to the rights held by the manager/franchisor by virtue of the management/franchise agreement (as described above, the hotel owner and manager are essentially partners or joint venturers in the hotel enterprise by virtue of the management/franchise agreement); and (b) although the management fee ("return of") may be paid to the manager/franchisor, the additional revenue earned by the hotel as a result of the management/franchise agreement over and above the management fee, the "return on," belongs to the hotel owner based on the allocation of intangible contractual rights under the management/franchise agreement.The manager does not receive the additional revenue generated by the management/franchise agreement over and above the management fee, only the hotel owner does.It is this "return on" which arises from the manager's and owner's shared rights in the management/franchise agreement which the Management Fee method fails to take into consideration.

Note that this analysis is not dependent on who "owns" the rights under the management/franchise agreement (in fact, there is an allocation of rights under that agreement).If the total revenues generated by the hotel are being used in an Income Approach to value the hotel, the resultant business enterprise value includes return to both the hotel owner and the hotel manager.In this circumstance, the full value of the management/franchise agreement must be removed, i.e., return of and return on, and the ownership of the agreement is irrelevant.

Investors demand both a return of their investment (a recapture of the investment) and return on their investment (a yield on the investment).Thus, "return of" and "return on" are always required if an investor is to undertake any form of investment.This is true both for investments in real property as well as investment in a hotel management/franchise agreement.The California SBE has recognized the "return on" requirement in its Assessors' Handbook Section 502:"An investor's expected return must include both an economic reward and a recovery of invested capital.The economic reward is the return on capital, … ."[36]The "return on" concept was explicitly applied to the Management Fee method by the California SBE:

The value of intangible assets and rights cannot be removed by merely deducting the related expenses from the income stream to be capitalized.Allowing a deduction for the associated expense does not allow for a return on the capital expenditure.. . . Similarly, the deduction of a management fee from the income stream of a hotel does not recognize or remove the value attributable to the business enterprise that operates the hotel.[37]

This is consistent with California Property Tax Rule 8(e) relating to the Income Approach which states:"When income from operating a property is used, sufficient income shall be excluded to provide a return on working capital and other nontaxable operating assets [i.e., intangible assets and rights] and to compensate unpaid or underpaid management."[38]Rule 8(e) has the force of law in California.

The IAAO Guide asserts:"whether a deduction of a management fee and related brand expenses adequately removes business or other intangible asset values in a hotel valuation by a real property appraiser should be based on verified market behavior."[39]Quoting Elgonemy:"Appraisers should value hotels the same way that investors analyze deals."[40]If investors demand a return of and a return on their investment in a hotel management/franchise agreement, then the "Management Fee" method, which only provides a return of, is not "consistent with the observed market behavior" of hotel investors in the "transaction market [which] is the primary source of appropriate valuation methodology to replicate in any appraisal."[41]It is noteworthy that the Guide provides no statements from hotel investors as to how they treat intangibles in hotel investment decisions.

California's Court of Appeal Has Disapproved the "Management Fee" Method

The application of the Rushmore "Management Fee" method to a major resort hotel was expressly disapproved by the California Court of Appeal in 2014:

We disagree with the County's claim that "the intangible value was removed by deducting the management and franchise fee."The Assessor . . . did not explain how that deduction captured the "majority" of intangible property. . . . The Assessor's reliance on the deduction of the management and franchise fee – and its refusal to identify and value certain intangible assets – is akin to paying "lip service to the concept of exempting intangible assets from taxation," a practice condemned in GTE Sprint [Communications Corp. v. County of Alameda (1994)] 26 Cal.App.4th at p. 1005.[42]

In the final analysis, the Rushmore "Management Fee" method capitalizes operating revenues into a going concern value.The fact that the management/franchise fee is deducted does not prevent that result.That being the case, there is no difference between the Management Fee method and a standard income capitalization approach that arrives at a business enterprise value.Furthermore, if the operating revenue being capitalized is generated in part from the presence of intangible assets, but nothing is removed from the resulting indication of value by the income approach for those intangibles, the resulting value will necessarily subsume the value of intangible assets.

To sum up, the IAAO Guide states:"Rushmore's assertion is that, by deducting the costs associated with intangible value . . . from a property's operating expenses, the remaining NOI is for the real property only."[43]Thus, a standard income approach, without any other adjustment, does not include the value of intangible assets.But, as the appellate court said in SHC Half Moon Bay, there is no explanation provided as to how the deduction of a management or franchise fee removes the value of the intangible rights embodied in the management/franchise agreement.The Guide afforded the IAAO an opportunity to address this and related questions in a non-litigation context.While IAAO Committee documented their awareness of these issues in the Guide, they did not address them in any meaningful way.

The Rushmore "Management Fee" Method Is Not Widely Embraced by Courts

The IAAO Guide asserts that the Rushmore Management Fee method is "widely embraced by the courts" and lists judicial decisions in support of this view.[44]

Careful review of those decisions reveals the following.The Guide cites thirteen cases in support of the Rushmore Management Fee method (fourteen cases are discussed, but the Maryland decision, RRI Acquisition Company, Inc. v. Supervisor of Assessments of Howard County,[45] is cited twice).Of those thirteen cases, six were issued by the New Jersey Tax Court.The two Michigan decisions were issued by the Michigan Tax Tribunal, which is not a court (although the Guide refers to the Michigan Tax Tribunal as court), and one of those decisions contains some criticism of the Rushmore method.The Guide cites two decisions from the District of Columbia, both relating to the same hotel property.The 2015 decision was issued by a trial court (Superior Court).The 2009 District of Columbia decision is not reported, so the specific tribunal and the content of the decision cannot be confirmed.Finally, the Guide cites to the 2013 California Court of Appeal decision in EHP Glendale, LLC v. County of Los Angeles (EHP II),[46] even though that decision was subsequently decertified and depublished by the California Supreme Court.

Regarding New Jersey, two of the cited decisions contain the following language:

This decision is based upon the consideration of the reasoning and supporting data addressed in the record of this case for the particular adjustments proposed.It should not be understood as a definitive pronouncement on appraisal practices designed to extract real estate value from the assets of a business or as binding precedent with respect to adjustments of the kind proposed here, should they be offered in other cases with different records.[47]

The second case, BRE Prime Properties, LLC v. Borough of Hasbrouck Heights,[48] has not been certified for publication by the New Jersey Tax Court Committee on Opinions.And in a third case, the New Jersey Superior Court Appellate Division found that the taxing jurisdiction's opinion of value under the income approach did not account adequately for the value of the intangible business assets in the valuation of a casino-hotel.[49]

To summarize, the IAAO Guide reports that the Rushmore Management Fee method has been embraced by courts in only six states.Six of the thirteen decisions cited are from New Jersey, but three of those decisions do not unequivocally approve the Rushmore method.Two of the thirteen decisions were not issued by a court but by the Michigan Tax Tribunal and so have limited precedential value.The two decisions from the District of Columbia pertain to the same property, although the citation to one of those decisions cannot be located, and the other decision is by a lower court.And the California decision cited by the Guide has been decertified and depublished by the California Supreme Court.In light of the above, it is difficult to support the Guide's assertion that the Rushmore method "has been widely embraced by the courts."Moreover, there is at least one case disapproving the Management Fee Method:SHC Half Moon Bay LLC v. County of San Mateo.

The IAAO Guide Mis-Cites Pertinent Law and Ignores Key Authorities

The IAAO Guide reads like a legal brief, citing 52 cases or administrative decisions.But this legalistic patina is thin.The main problem is that the Guide does not acknowledge the basic hierarchy of authority:a tax tribunal or trial court decision is not binding authority as a general rule, and is not equivalent to a published appellate court decision.The Guide cites many authorities, but the citation-heavy format should not be construed to add credibility.Careful review reveals undisciplined and indiscriminate references to authorities, most of which are not binding, and the omission of authorities which are in fact precedential.Moreover, many of the authorities cited are difficult to obtain because they are opinions by state or provincial boards of review or equalization which have no binding or precedential effect.In some cases, the decisions are not readily accessed, which makes vetting such references impossible without significant additional effort.

1.Skilled and Assembled Workforce

The IAAO Guide's reliance on questionable citations is illustrated by focusing on its discussion of skilled and assembled workforce.[50]The Guide offers five legal citations in support of its advice that the assembled workforce intangible need not be recognized or deducted in valuing real property:

(1)Boise Cascade Corporation v. Department of Revenue[51]:"The Oregon Tax Court rejected the workforce argument in a case involving the assessment of a veneer mill.In that case, the court said, 'management or work force in place [value] . . . should not be deducted from any estimate of market value'."

(2) EHP Glendale, LLC v. County of Los Angeles (EHP I)[52]:"The court rejected the workforce argument, stating 'Absent superior management of an exceptional workforce, though, the presence of prudent management and a reasonably skilled workforce are required to put a property to its beneficial and productive use, and no additional value needs to be deducted from the income stream'."

(3) SHC Half Moon Bay, LLC v. County of San Mateo[53]:"[T]he court determined that the assessor failed to remove the value of the hotel's assembled workforce, stating, '. . . the deduction of the management fee from the hotel's projected revenue stream did not – as required by California law – identify and exclude intangible assets such as the hotel's assembled workforce'."

(4) Fairmont Hotels & Resorts v. Capital Assessor, Area No. 01[54]:"The court recognized that a trained workforce is intertwined with the real estate, and its frequent turnover negates its value, stating, 'With respect to an assembled workforce, while we accept that there must have been an initial investment in hiring and training a workforce, we do not accept that the initial investment necessarily continues to have discreet market value. . . . We find that such value is inextricably intertwined with the realty'."

(5) CP Hotels Real Estate Corp. v. Municipality of Jasper[55]: "[T]he court recognized an assembled workforce might not be desired by a potential buyer, saying, 'the assembled workforce may actually be a liability, instead of an asset'."

Each of these five citations is problematic for the reasons set forth below.

Boise Cascade Corporation.The Oregon Legislature amended Oregon Revised Statutes section 307.020 in 1993 to expressly include assembled workforce within the statutory definition of intangible assets.The IAAO Guide cites as authority a case that was superseded by subsequent legislation.

EHP Glendale, LLC.The language in the IAAO Guide attributed to EHP I is not found in that case.The quoted language is actually found in a later 2013 decision by the California Court of Appeal in the same case.[56].EHP II was wrongly decided and inconsistent with California law, and the California Supreme Court decertified EHP II and ordered it be depublished on December 18, 2013.Depublished cases are not citable authority under California law.The Guide also includes the following statement relating to EHP II:"The court approved the Rushmore approach, despite the California State Board of Equalization Assessors' Handbook, Section 502, disallowing the use of the management fee approach alone."[57]Plainly, this reference is also invalid.In sum, the Guide cites as authority language from a case that is not citable and not deemed reliable by the California Supreme Court.

SHC Half Moon Bay.The IAAO Guide correctly cites this case, which contradicts the Guide's support for the Rushmore Management Fee method.Contrary to the Guide, there are no "conflicting rulings" relating to workforce in the California Court of Appeal[58] because the EHP II decision is not good law.In fact, the Guide fails to cite three other California Court of Appeal cases in accord with SHC Half Moon Bay, all holding that assembled workforce is an intangible asset that must be removed from assessment.[59]Neither does the Guide disclose the California SBE's recognition of assembled workforce as an intangible asset (workforce is a component "of enterprise value that create[s] value separate and apart from any value inherent in the tangible assets") and requiring that such value be removed from the assessment.[60]So the Guide misleads the reader into thinking that California courts have ruled that assembled workforce is not a recognized non-taxable intangible when the opposite is the case.

Fairmont Hotels & Resorts / CP Hotels Real Estate Corp.These are Canadian assessment review board decisions and are not precedential authority.Moreover, the Guide ignores legal authority that is contrary to the remarks contained in Fairmont Hotels & Resorts to the effect that if the intangible and tangible assets are "intertwined," then the intangible assets need not be removed from the assessment.The California Supreme Court has expressly explained that even if an intangible asset is "intertwined" so that it is necessary for the "beneficial and productive use" of the real property, the value of such intangible components must still be removed from the assessment:

[I]f the intangible assets are necessary to the beneficial and productive use of the taxable property, the court must determine whether the plaintiff has put forth credible evidence that the fair market value of those assets has been improperly subsumed in the valuation.If so, then the valuation violates [Revenue and Taxation Code] section 110(d)(1), which prohibits an assessor from using the value of intangible rights and assets to enhance the value of taxable property, and the fair market value of those assets must be removed.[61]

Courts in other states have similarly found that the "inextricably intertwined" argument does not overcome the principle that real property assessments should not be based on business value.[62]

Thus, the Guide identifies no citable authority with precedential effect in support of its position on assembled workforce, and the sole valid authority it does cite, SHC Half Moon Bay, rejects the premise underlying the Rushmore Management Fee method (deduction of employee salaries and wages as an operating expense removes the value of workforce) and actually requires that the value of an assembled workforce be removed from assessment.This is an example of selective citation intended to advance a particular viewpoint, instead of a balanced consideration of actual authority which is inconsistent with the advocated policy.The important conclusion is the Guide's citation of authority cannot be taken at face value:each assertion must be examined for validity and accuracy before it may be relied upon.

2.Start-up Costs and the Business Enterprise Value Approach

The IAAO Guide contends that business start-up costs are not an intangible that should be recognized in the assessment of properties.The Guide reasons that start-up costs, such as pre-opening marketing and workforce training for a hotel property, only occur at the initial opening of a property.The Guide concludes that because marketing and workforce costs are deducted as operating expenses when existing hotels are appraised, the deduction of start-up expenses as an intangible asset is unnecessary and improper.[63]The start-up costs issue is a subset of the business enterprise value (BEV) approach.The IAAO Guide dismisses the BEV approach because the approach is not broadly accepted in the appraisal community or the market.[64]

The purpose of this response is not to side with those favoring deduction of start-up expenses or those opposed to doing so, or to become involved in the broader dispute between those who support and those who do not support the BEV approach.However, the lack of depth to the legal authorities cited in the IAAO Guide as support for the views opposing deduction of start-up costs and the BEV approach is noteworthy.The IAAO Guide cites eight cases in all relating to start-up costs and the BEV approach.Four of those cases are cited as supporting the Guide's views on both topics.

Five of the cases cited in the IAAO Guide support the "no start-up cost" viewpoint, and one does not.One of those five cases was issued by a trial court.[65]Three other decisions were issued by tax tribunals.[66]These decisions, from the District of Columbia, Maryland, Canada and Maine, are trial court or assessment review board decisions, and some of them have limited precedential impact.The Guide only references one published court decision from New Jersey as opposing the start-up costs position.[67]

The IAAO Guide also cites five decisions that oppose the BEV approach, and one that supports its.The Guide says there are other cases which have "embraced the BEV approach," but does not cite to any of those cases.[68]One such case is a decision by the Appeals Court of Massachusetts which held that the assessor and tax appeal board were required to make deductions for hotel business enterprise value elements.[69]Of the five opposition decisions cited in the Guide, three are from assessment review boards and may have limited precedential effect.[70]One decision was issued by the Iowa Supreme Court twenty years ago; the Guide reports that an Iowa statute required that the court reject the BEV approach in that case because it was not widely accepted by the appraisal community at that time.[71] The only other opposing decision cited by the Guide is once again the New Jersey decision in the Saddle Brook Marriott Hotel case.[72]The IAAO Guide puts considerable reliance on this one decision by the New Jersey Tax Court, also citing the case three other times.[73]

3.Leases-in-Place and Above- and Below-Market Leases

The IAAO Guide states that fee-simple value for leased properties is found by using market rents, and goes on to say that above-market leases are part of real property and are not intangible.[74]The Guide cites no authority for the latter assertion other than USPAP FAQ 193.[75]The Guide does not cite a conflicting Wisconsin Supreme Court decision which found that above-market leases are not real property or part of fee simple estate property rights.[76]The Guide also does not reference Indiana Tax Court and Kansas Court of Appeals decisions that reached the same conclusion.[77]

4.Goodwill

The IAAO Guide says "Because . . . courts have ruled the value of goodwill is reflected in a management fee, it is safe to say that applying the management fee technique in an income approach effectively removes any goodwill value in the estimate of real property."[78]This conclusion is based solely on the IAAO's incorrect reading of the California Court of Appeal's decision in the SHC Half Moon Bay case.

In SHC Half Moon Bay the taxpayer identified goodwill as the residual value in a cost segregation appraisal.Because of that, the Court of Appeal found that the taxpayer had failed to present sufficient evidence showing that the deduction of the management fee did not remove goodwill.But this finding must be understood in the context of the review standards used by California appellate courts.In this case, the appellate court determined that the taxpayer had not presented substantial evidence (i.e., facts) showing that the management fee did not remove the value of the hotel's goodwill.However, the court also said that other evidence might have been presented that would show how the management fee failed to remove the value of goodwill: "[t]here may be situations where the taxpayer can establish the deduction of a management and franchise fee from a hotel's income stream does not capture the intangible asset of goodwill, but SHC, the taxpayer, has failed to do so here."[79]

The SHC Half Moon Bay decision left open the possibility that another taxpayer could demonstrate that goodwill is not removed by the deduction of a management fee.Stated another way, the Court of Appeal did not rule as a matter of law, and therefore did not foreclose the possibility that another taxpayer might show, based on different facts, that deduction of a management fee does not in and of itself remove the value of goodwill.Thus, the IAAO's conclusory statement that the management fee technique removes goodwill value was not established as a matter of law in SHC Half Moon Bay, but only under the facts of that particular case.

The deduction of goodwill as an intangible asset has been approved by courts in other states.[80]Also, the California SBE says that goodwill is an intangible and that its value should be deducted.[81]

5.Go-Dark Valuation

The IAAO Guide contains a brief discussion of the go-dark valuation issue.[82]Go-dark valuation has engendered significant controversy, and the IAAO has recently issued a "Draft Big Box Position Paper" relating to the "dark store" or go-dark valuation topic.[83]Discussion of go-dark valuation is beyond the scope of this response.

Conclusion:Direct Valuation and Removal of Identified Intangibles

The primary purpose of the IAAO Guide is to identify and explain appraisal methods which assessors can use to "effectively exclude" intangibles from property tax assessment without "valuing intangible assets directly."[84]To that end, the Guide asserts that the Rushmore Management Fee method under an income approach is one of the primary ways to remove the value of intangibles when assessing real property.[85] However, as discussed in this response, the Management Fee method is problematic, and the Guide's explanation as to how the method removes intangibles is inadequate.This inadequacy was highlighted by the California Court of Appeal in SHC Half Moon Bay LLC v. County of San Mateo.Furthermore, the weaknesses that plague the Guide's explanation of the Management Fee method, including the inaccurate and unbalanced citation to legal authority, also extend to the Guide's discussion of assembled workforce, start-up costs, leases-in-place and goodwill.

Instead of using methods which claim to "effectively exclude" non-taxable intangibles, such as the Management Fee method, appraisers should value identified intangibles directly and deduct the full value of those intangibles – similar to the "parsing income" technique described in the IAAO Guide.[86]Although the Guide says "[t]he courts have generally rejected the parsing income method for property tax purposes," it only cites Saddle Brook and Fairmont Hotels v. Area 01 to support this assertion.[87]In fact, for over two decades the California Court of Appeal, the California Supreme Court, and the California SBE (in its Assessors' Handbook and Property Tax Rule 8(e)) have accepted the method of directly identifying and valuing the separate stream of income associated with an identified intangible asset as a valid method for removing the full value of intangible assets in property tax assessment.[88]

The IAAO Guide says that "the real estate market determines whether intangibles are included or excluded," and that the Management Fee method mimics the market.[89]However, the Guide provides no specific proof that the Management Fee method comports with how market participants evaluate properties.Regardless, most state laws require that the value of intangible assets be excluded from ad valorem property tax assessments.[90]The Guide does not explain how the Management Fee method, an indirect method for removing intangibles, "effectively excludes" the full value of non-taxable intangibles.Directly identifying, valuing and deducting the full value of intangible assets, the method California's appellate courts and the California SBE have followed since the GTE Sprint Communications Corp. decision was issued in 1994, is a more effective approach.

[1] Cris K. O'Neall, Greenberg Traurig, LLP, (949) 732-6610, This email address is being protected from spambots. You need JavaScript enabled to view it.; C. Stephen Davis, Greenberg Traurig, LLP, (949) 732-6527, This email address is being protected from spambots. You need JavaScript enabled to view it..The authors thank attorney Sharon F. DiPaolo of Siegel Jennings Co., LPA in Pittsburgh, PA and attorney Lisa F. Stuckey of Ragsdale, Beals, Seigler, Patterson & Gray, LLP in Atlanta, GA for their assistance in researching some of the legal authorities cited in this article.The authors also thank attorney Jennifer Kim of Greenberg Traurig, LLP for her assistance in preparing this article for publication.

[2] International Association of Assessing Officers (IAAO), Understanding Intangible Assets and Real Estate: A Guide for Real Property Valuation Professionals (Special Committee on Intangibles, 2017) 14 Journal of Property Tax Assessment & Administration pp. 41-91 <http://www.iaao.org/library/2017_Intangibles_web.pdf> (as of June 18, 2017) (hereafter IAAO Special Committee 2017).

[3] Id. at pp. 41, 68.

[4] Id. at p. 41.

[5] International Association of Assessing Officers, Technical Standards, <http://www.iaao.org/wcm/Resources/Publications_access/Technical_Standards/wcm/Resources_Content/Pubs/Technical_Standards.aspx.> (as of June 18, 2017, italics added).

[6] IAAO Special Committee 2017, supra, pp. 41, 48, 65.

[7] Id. at pp. 49-50.

[8] Id. at pp. 50, 51, 60, 65, 66.

[9] Id. at pp. 45, 48, 65, 66.

[10] Id. at pp. 42-45, 66.

[11]State Board of Equalization (SBE), Assessor's Handbook Section 502: Advanced Appraisal (Dec. 1998)<http://boe.ca.gov/proptaxes/pdf/ah502.pdf> (as of June 18, 2017) (hereafter SBE AH 502).

[12]State Board of Equalization, Issue Paper Number 98-031 (Nov. 5, 1998) <https://www.boe.ca.gov/proptaxes/pdf/1998.pdf> (as of June 18, 2017).

[13] State Board of Equalization, Property Tax Committee Meeting Minutes (Dec. 7, 1998) <http://www.boe.ca.gov/proptaxes/pdf/PTC_Minutes_120798.pdf> (as of June 18, 2017).

[14] SBE AH 502, supra, p.153.

[15] Reilly and Schweihs, Guide to Property Tax Valuation (Willamette Management Associates Partners 2008) p. 326.

[16] IAAO Special Committee 2017, supra, p. 43.

[17] Ibid.

[18] Id. at 59.

[19] Elk Hills Power, LLC v. Bd. of Equalization (2013) 57 Cal.4th 593, 620-21 (hereafter Elk Hills Power).

[20] IAAO Special Committee 2017, supra, pp. 44-45, 50, 53.

[21] IAAO Special Committee 2017, supra, p. 56.

[22] Id. at 50.

[23] Id. at pp. 47, 66.

[24] (Ohio B.T.A. 2007) Nos. 2007-M-277, 2007-M-278, affd. per curiam (2011) 128 Ohio St.3d 565.

[25] Id. at p. 51.

[26] American Sheds, Inc. v. County of Los Angeles (1998) 66 Cal. App. 4th 384, 394, fn.6. italics added; see also In re Ames Shopping Plaza Wellsboro Borough (Pa. Commw. Ct. 1984) 476 A.2d 1001, 1004.

[27] IAAO Special Committee 2017, supra, p. 51, italics added.

[28] Id. at p. 52.

[29] Id. at pp.51-52.

[30] Id. at p. 55.

[31] Id. at pp.51, 54.

[32]Los Angeles SMSA Ltd. Partnership v. State Bd. of Equalization (1992) 11 Cal.App.4th 768, 776, fn.6; Hershey Entertainment and Resorts Co. v. Dauphin County Bd. of Assessment Appeals (Pa. Comm. Ct. 2005) 874 A.2d 702.

[33] IAAO Special Committee 2017, supra, p. 52.

[34] Id. at p. 51.

[35] Ibid.

[36]SBE AH 502, supra, p. 62.

[37] Id. at p. 162, italics added.

[38] Italics added.

[39] IAAO Special Committee 2017, supra, p. 55.

[40] Id. at p. 53.

[41] Id. at p. 55.

[42]SHC Half Moon Bay LLC v. County of San Mateo (2014) 226 Cal.App.4th 417, 492 (hereafter SHC Half Moon Bay).

[43] IAAO Special Committee 2017, supra, p. 52.

[44] IAAO Special Committee 2017, supra, pp. 53-54.

[45] (Md. T.C.M. 2006) No. 03-RP-HO-0055.

[46] (2013), 219 Cal.App.4th 1015 (hereafter EHP II).

[47] Chesapeake Hotel LP v. Saddle Brook Township (N.J. T.C. 2005) 22 N.J.Tax 525, 536-37 (hereafter Saddle Brooke); BRE Prime Properties, LLC v. Borough of Hasbrouck Heights (N.J. T.C. 2013) Nos. 005271-2010, 005644-2011, unpub. (hereafter BRE Prime Properties).

[48] BRE Prime Properties, supra, Nos. 005271-2010, 005644-2011, unpub.

[49] Marina District Development Co., LLC v. City of Atlantic City (N.J. 2013) 27 N.J. Supp. 469.

[50] IAAO Special Committee 2017, supra, pp. 55-57.

[51] Boise Cascade Corporation v. Dept. of Revenue (Or. T.C. 1991) 12 OTR 263.

[52] EHP Glendale, LLC v. County of Los Angeles (2011) 193 Cal.App.4th 262 (hereafter EHP I).

[53]SHC Half Moon Bay LLC, supra, 226 Cal.App.4th 417.

[54] Fairmont Hotels & Resorts v. Capital Assessor, Area No. 01, [2005] CarswellBC 3760 (Can. Tax. A.B.C.).

[55] CP Hotels Real Estate Corp. v. Municipality of Jasper, [2005] CarswellAlta 2573 (Can. Tax. A.B.C.).

[56]EHP II, supra, 219 Cal.App.4th 1015.

[57] IAAO Special Committee 2017, supra, p. 54.

[58] IAAO Special Committee 2017, supra, p. 57.

[59] GTE Sprint Communications Corp. v. County of Alameda (1994) 26 Cal.App.4th 992, 1007 (hereafter GTE Sprint Communications Corp.); County of Orange v. Orange County Assessment Appeals Bd. (1993) 13 Cal.App.4th 524, 533; Shubat v. Sutter County Assessment Appeals Bd. (1993) 13 Cal.App.4th 795, 798.

[60] SBE AH 502, supra, pp.154, 156, 160, fn. 130.

[61] Elk Hills Power,supra, 57 Cal.4th at p. 615.

[62] Walgreen Co. v. City of Madison (Wis. 2008) 752 N.W.2d 687, 705; Gregg County Appraisal District v. Laidlaw Waste Systems, Inc. (Tex.Ct.App.1995) 907 S.W.2d 12, 19-20.

[63] IAAO Special Committee 2017, supra, pp. 57-58.

[64] Id. at pp. 62-63.

[65] CHH Capital Hotel Partners LP v. Dist. of Columbia (2015 D.C. Super. Ct.) No. 2009 CVT 9455.

[66] RRI Acquisition Co., Inc. v. Supervisor of Assessments of Howard County (Md. T.C.M. 2006) No. 03-RP-HO-0055 (hereafter RRI Acquisition); CP Hotels Real Estate Corp. v. Municipality of Jasper, [2005] CarswellAlta 2573 (Can. Tax. A.B.C.); GGP-Maine Mall, LLC v. City of South Portland (Me. B.A.R. 2008) No. 2008-1 (hereafter GGP-Maine Mall).

[67] Saddle Brook, supra, 22 N.J.Tax 525.

[68] IAAO Special Committee 2017, supra, p. 63.

[69] Analogic Corporation v. Bd.of Assessors of Peabody (Mass.Ct.App. 1998) 700 N.E.2d 548, 552-554.

[70]RRI Acquisition, supra, No. 03-RP-HO-0055; Wolfchase Galleria Ltd. Partnership, Shelby County (Tenn. S.B.E. Mar. 16, 2005); GGP-Maine Mall, supra, No. 2008-1.

[71] Merle Hay Mall v. Bd. of Review (Iowa 1997) 564 N.W.2d 419.

[72] Saddle Brook, supra, 22 N.J.Tax 525.

[73] IAAO Special Committee 2017, supra, pp. 53, 58, 65.

[74] IAAO Special Committee 2017, supra, p. 59.

[75] The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice (2016-2017 ed. 2016) p. 299.

[76] Walgreen Co. v. City of Madison, supra, 752 N.W.2d 687, 700-01.

[77] Grant County Assessor v. Kerasotes Showplace Theatres, LLC (Ind. T.C. 2011) 955 N.E.2d 876, 882-83; Shelby County Assessor v. CVS Pharmacy, Inc.(Ind. T.C. 2013) 994 N.E.2d 350, 354; In Re Equalization Appeal of Prieb Properties, LLC (Kan.Ct.App. 2012) 275 P.3d 56, 134-36.

[78] IAAO Special Committee 2017, supra, pp. 60-61.

[79] SHC Half Moon Bay LLC, supra, 226 Cal.App.4th at p. 493, italics added.

[80] T-Mobile USA, Inc. v. Utah State Tax Comm'n (Utah 2011) 254 P.3d 752; GTE Sprint Communications Corp, supra, 26 Cal.App.4th 992; County of Orange v. Orange County Assessment Appeals Bd., supra, 13 Cal.App.4th 524.

[81] SBE AH 502, supra, pp. 154, 157, fn. 118, 157-158, 159, 160, fn. 130.

[82] IAAO Special Committee 2017, supra, pp. 61-62.

[83] International Association of Assessing Officers, Draft Big Bix Position Paper (2017) <http://www.iaao.org/media/Exposure/Big_Box_6-1-17.pdf >.

[84] IAAO Special Committee 2017, supra, pp. 48, 50, 66.

[85] Id. at pp. 51, 54, 66.

[86] IAAO Special Committee 2017, supra, pp. 64-65.

[87] Id. at p. 65.

[88] GTE Sprint Communications Corp., supra, 26 Cal.App.4th 992; Elk Hills Power LLC v. Bd. of Equalization, supra, 57 Cal.4th at pp. 617-19; SBE AH 502, supra, pp. 161-62.

[89] IAAO Special Committee 2017, supra, pp. 54, 55, 63, 67.

[90] Id. at p. 41, 48.

The Cook County Board of Commissioners may have dealt manufacturing districts in South and Southwest Cook County, Illinois, their final blow.

The use of property tax incentives has increased over the past several decades and has been a vital economic development tool in this manufacturing belt. The industrial corridor suffered a one-two punch during the Great Recession and is still hanging onto the ropes, trying to recover while the rest of Cook County thrives.

Cook County property tax incentives reduce assessed values used to determine a property's tax bill. Assessors normally set taxable value at 25 percent of a property's market value, while assessing real estate qualifying for the incentive at 10 percent of market value. This yields a taxable value 60 percent lower than the asset would carry under the standard calculation.

The recession gutted Cook County's manufacturing belt. Numerous manufacturing companies either closed their doors for good or relocated to nearby Indiana, recruited with the promise of a feather-weight tax burden. The migration left a glut of vacant facilities in its wake, driving market values and the assessment base into a downward spiral.

As the market and occupancy rates plummeted, local tax rates spiked, exceeding 35 percent in some suburban municipalities. Without reinvestment in their communities, these municipalities could never recover, and the tax rate would not recede. The most valuable economic development tool available to these municipalities was the property tax incentive.

Crossed purposes

Over the past several years, the Cook County Board of Commissioners has suffocated the utility of the incentive program by imposing wage and other labor requirements on owners and operators of incentivized real estate. Most recently in March, the Commissioners imposed a "prevailing wage requirement," which mandates that any property that receives an incentive after September of this year must" pay all laborers ,workers and mechanics engaged in construction work not less than the prevailing wage paid for public works."

The new rule is expected to increase construction costs by 30 percent. Additionally, the new ordinance mandates participation in federally approved apprenticeship programs. Moreover, the change adds burdensome administrative costs to the incentive holder, which must keep detailed records of employee wages, contractor wages and other minutia. They must make quarterly reports to municipal agencies, or else live under the threat of having the incentive taken away.

But why would the Cook County Board of Commissioners impose mandates that effectively eliminate any incentive benefit? The decision is even more remarkable given the strong opposition it drew from the affected communities. Thirty mayors from the south and south western suburban municipalities testified in front of the county commissioners against the most recent ordinance. Local news media, which typically refrains from dive deeps into nuanced economic development issues, came out against the proposed ordinance.

Cook County elections were March 20. Commissioners in thriving districts were not going to risk their re-election prospects on an issue that didn't affect their constituents. So, the ordinance passed.

Act now

For entities looking to take advantage of the incentive program in Cook County, the most important task is to file the incentive application with the municipality and/or Cook County Assessor's Office prior to Sept.1. Any taxpayer who is attempting to sell or lease their property should apply for an incentive now instead of waiting for a prospective tenant or buyer. If the application is filed prior to Sept. 1, the prevailing wage mandate will not apply to any construction.

It is critical to note that the expansion of a facility will also trigger the prevailing-wage mandate for the additional square footage, even if the property already has an incentive. The property owner must apply for an additional incentive for the new space. Thus, any property owner considering such an expansion should make the required filing before Sept.1.

Most property owners in manufacturing districts that rely heavily on incentives for economic development only protest tax assessments when the property is reassessed. They would be wise to appeal their taxes every year, however.

The unpredictability of the incentive program itself is enough to drive up cap rates by two basis points, which will lower market values across the board. That creates the opportunity to achieve a lower assessment on appeal. The ability to quantify these issues is critical in an appeal, and failure to do so further diminishes the value of the real estate.

Most likely, due to the unnecessary restrictions imposed on the current incentive programs, the entire existing incentive program for Cook County may be scrapped. It is unfair that certain municipalities struggling with economic development are now political carnage. Any new incentive program should put the authority in the local municipalities' hands, rather than leave it under the political machinations of the rest of Cook County.