Mistaking rehabilitation for new construction, assessors inflate post-superstorm tax assessments.

Four years have passed since Superstorm Sandy slammed the East Coast and crippled the Northeast. The overwhelming majority of media coverage centered on the devastation suffered by residential properties, paying little attention to the tens of thousands of commercial property owners who suffered equally historic destruction.

Ryan C. Hild and Jason M. Penighetti are attorneys at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLP, the New York State member of Amercian Property Tax Counsel, the national affiliation of property tax attorneys.  Contact Ryan at This email address is being protected from spambots. You need JavaScript enabled to view it. or Jason at This email address is being protected from spambots. You need JavaScript enabled to view it.. 

Throughout the United States, taxpayers can expect to bear the burden of proof in property tax appeals. Standards vary by jurisdiction, but owners who seek to change a municipality’s assessment must convince a board or court that the property owner is correct in challenging the assessor’s conclusion. If they fail in that argument, the assessment remains unchanged.

Commercial taxpayers and their tax professionals often review decisions by local courts to glean direction and weigh prospects of a favorable outcome in their own cases. These stakeholders tend to only view complex commercial property cases for insight, ignoring residential and small commercial cases. But seemingly insignificant residential and small commercial cases are rich in detail that may aid taxpayers with a more sophisticated case when preparing to meet the standard of proof.

Some of these smaller cases shine a light on changing expectations of the court. For example, courts may begin to deem evidence that once would have been acceptable to meet the court’s threshold is no longer adequate. Thus, while the court does not change the law or create new standards, its interpretation of “sufficient competent evidence” may well move the goal post. The education obtained from these cases is not a guiding light to win a case, but rather a reminder of how not to lose one.

In New Jersey, law presumes that any property assessment is correct. Based on this presumption, any taxpayer appealing that valuation has the burden of proving the assessment is erroneous. The presumption is more than an allocation of which party carries the burden of proof. Rather, it expresses that in tax matters, the law presumes that the assessor correctly exercised their governmental authority. In a 1998 decision, MSGW Real Estate Fund vs. the Borough of Mountain Lak, the court stated that the presumption of correctness stands until sufficient competent evidence to the contrary is presented.

Courts must decide whether the evidence presented is sufficient to counter the assessor’s conclusion. To meet that standard, the evidence presented must be sufficient to determine the value of the property under appeal, thereby establishing the existence of a debatable question as to the correctness of the assessment.

This language is common in most jurisdictions. In New Jersey, it is also increasingly more common to see a change in the trial court’s interpretation of what meets the level of proof to question the assessor’s assumptions. The danger to taxpayers occurs when a court of special expertise establishes case law that, in effect, raises the standard of proof by simply increasing the evidence barrier to attain a reduction.

For example, in January of this year a New Jersey tax court decided Arteaga vs. Township of Wyckoff, where the taxpayer challenged the assessment of a single-family home assessed at approximately $900,000. The property owner offered an expert and an appraisal report for the years under appeal, while the municipality did not complete an appraisal, instead relying on the presumption of correctness.

The taxpayer’s expert cited three sales in a sales comparison and concluded a value of approximately $775,000. In a 10-page opinion, the court rejected the expert’s conclusions, finding fault with his adjustments to the comparable sales.

The court stated that an expert’s testimony must have a proper foundation to be of any value in an appeal. Citing earlier cases, the court stated that an expert must offer specific underlying reasons for their opinions, not mere conclusions. An expert witness is required to “give the why and wherefore of his expert opinion, not just a mere conclusion.” In this case, the court found that the plaintiff’s expert provided no substantive factual evidence to support the adjustments made.

The trend toward requiring a higher level of evidence has been growing over a number of years. As the court noted in a 1996 case, Hull function Holding Corp. vs. Princeton Borough, expert opinion unsupported by adequate facts has consistently been rejected by the tax court. Other rulings have stated that while the court has an obligation to apply its own judgment to valuation data submitted by experts in order to arrive at a true value and find an assessment for the years in question, the court must receive credible and competent evidence to make an independent finding of true value.

In the recent case, the court stated it was not provided with credible and competent evidence. As a result, the court had insufficient information from which to determine valuation. The court concluded that in general the expert provided no market analysis for any of the adjustments he made to his comparable sales.

The lesson to be learned: be aware of the potential of a new, heightened level of proof to establish a reduction. The case law has not been changed or altered. However, while most jurisdictions have case law suggesting that a court be mindful of the expense and reasonableness of data it should expect from a taxpayer to prove its case, trends have started to appear that swing the decisions toward a more difficult and expensive standard.

A number of recently decided residential tax appeals have followed this path to a find of no-change to the assessment. While the courts may be correct in the conclusions that evidence was lacking, they set a disturbing tone as to the level of expectation required for data to prove a value reduction.

The answer for taxpayers seeking a solution to this issue cannot be detailed so as to follow a definitive path to victory. For taxpayers seeking reductions in assessments, they must be aware and wary of not only the law, but the court’s most recent expectations.

Philip Giannuario is a partner at the Montclair, N.J. law firm Garippa, Lotz & Giannuario, the New Jersey and Eastern Pennsylvania member of American Property Taxc Counsel (APTC), the national affiliation of property tax attorneys.  Contact Philip at Ryan at This email address is being protected from spambots. You need JavaScript enabled to view it. or Jason at This email address is being protected from spambots. You need JavaScript enabled to view it.. 

The perceived similarity between condominiums and timeshare projects often leads tax assessors to treat those properties as identical.  “If it looks like a duck, quacks like a duck and walks like a duck, then it probably is a duck,” right?

But when it comes to property assessments for taxation, looks can be deceiving.  Fundamental differences between timeshares and condominiums can lead to significantly divergent value calculations.  All too often, it falls to the taxpayer to see that the assessor acknowledges and accounts for those factors in order to accurately assess timeshare properties.

In 2015, an assessor increased the assessment for a timeshare project at a Utah ski resort by 10 percent from the previous year.  The property owner appealed the assessment and provided evidence of the project’s fair market value.  The assessor challenged that evidence, however, based in part on an increase in sale prices for condominiums during previous years.

Under Utah law, the value of a wholly-owned condominium does not provide a meaningful comparison to the value of a timeshare project for several reasons.  First, such a comparison assumes that units within a timeshare project could be resold as wholly-owned condominiums.  This is impossible, given the legal structure of timeshare properties.  Once a timeshare project is put into place, it cannot be altered.  Unlike condominiums, individual units can never be sold.

Although the Utah assessor identified a 30 percent increase in per-unit condominium sale prices near the project, there was not a similar 30 percent increase in timeshare sales.  The only consistent figure shared by timeshares and condominiums each year is the number of units subject to foreclosure.

Second, treating timeshares like condominiums fails to take into account the costs associated with operating a timeshare project.  Utah law recognizes that timeshares are significantly different from condominiums and requires assessors to exclude costs that are unique to timeshare properties.

Specifically, those factors include any intangible property and rights associated with the acquisition, operation, ownership and use of the timeshare interest or timeshare estate.  The assessor must also exclude fees and costs associated with the sale of timeshare interests and timeshare estates that exceed those fees and costs normally incurred in the sale of other similar properties.  Other excluded costs include the operation, ownership and use of timeshare interests and timeshare estates, vacation exchange rights, vacation conveniences and services, club memberships and any other intangible rights and benefits available to a timeshare unit owner.

Sales commissions for timeshares are typically about 18 percent, whereas sales commissions for condominiums are closer to 6 percent.  Because the law requires an adjustment for costs and fees which “exceed those fees and costs normally incurred in the sale of other similar properties,” the property owner is entitled to remove the excess 12 percent portion of commissions.

There are other fees and costs for operating a timeshare that, by law, may be deducted from the value.  Those fees and costs may be difficult to identify or to allocate to individual units, but would include fees and costs for customer service, management costs necessitated by the existence of numerous owners, accounting and similar expenses.

A third distinction is that the assessor may need to make a personal property adjustment for timeshare property.  In Utah, the personal property of timeshares is separately assessed and, to avoid double taxation, must be excluded from the real property assessment.  In the pending Utah appeal, the assessing county challenged the property owner’s proposed personal property adjustment because it exceeded the reported value for the project’s personal property tax assessment.

In Utah, personal property assessments reflect depreciation schedules, which are rough estimates of the depreciated value of certain classes of personal property.  When those schedule-based values diverge from fair market value, an adjustment removing the fair market value of that property (for purposes of the real property assessment) will not perfectly correspond to the personal property tax assessment.  Nevertheless, a fair market value assessment of the timeshare property should include an appropriate adjustment for personal property which is otherwise taxable.

Timeshare units are simply incomparable to wholly-owned condominiums.  Under Utah law, the most appropriate way to value timeshare units is to look at sales of similar timeshare units, making adjustments consistent with the tax code.  Laws in other states may require similar adjustments.

When reviewing local assessments of timeshare properties for comparison, be aware of the distinctions between condominiums and timeshares, and ensure that proper adjustments were made in each.  If those timeshare assessments are comparable to assessed values of condominiums, then the assessor likely neglected to account for the unique characteristics and expenses associated with timeshares.

Pamela B. Hunsaker serves as counsel in the Salt Lake City office of law firm Holland & Hart and is a Montana, New Mexico, Utah and Wyoming member of American Property Tax Counsel, the national affiliation of property tax attorneys.  She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Pamela B. Hunsaker serves as counsel in the Salt Lake City law office of Holland & Hart and is a Montana, New Mexico, Utah and Wyoming member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reched at This email address is being protected from spambots. You need JavaScript enabled to view it..

Resurgent demand for commercial real estate is driving sale prices to record highs, pressuring assessors to increase taxable property values substantially. In the Minneapolis-St. Paul area, tax bills on some suburban and downtown Minneapolis buildings have shot up 30 percent or more within two years following a sale.

These assessment spikes yield staggeringly larger tax bills, with some buildings now taxed at $8 to $10 per square foot, up from $5 to $6.50, for taxes payable in 2014.

For landlords with well-occupied properties, the tax burden itself is less important than the increased occupancy cost it creates, because most tenants compare lease proposals by total occupancy cost rather than by net rent alone. It does not matter to a tenant where the rent dollar goes; for every dollar that taxes increase, tenants will likely try to reduce net rent payments by that same amount in order to keep occupancy costs flat.

Assessors under Pressure

The Minnesota Department of Revenue prepares an annual sales-ratio study that compares assessments to sales prices. This puts pressure on assessors to react strongly to rising sale prices when properties are revalued each year.

If a sale price is 50 percent higher than the assessed value, then a 20 percent assessment increase in the first year after the sale, and 20 percent again the next year, will only raise the value to something approaching the sale price.

For example, a downtown Minneapolis property assessed at $107 million sold for $200 million. The assessments increased only 10 percent the first year and another 10 percent the second year, but jumped another 34 percent in year three. These repeated increases drive building costs well beyond owner and taxpayer expectations.

Assessors increased another property’s value by 30 percent in the year after the sale. Yet another pair of buildings were assessed 10 percent higher the year before they sold, then increased 30 percent and 50 percent in the year following the sale, putting them at approximately 90 percent of the purchase price.

Tenant Repercussions

Tenants notice operating cost increases, especially those recurring over consecutive years. Operating cost increases can discourage a tenant from renewing its lease at a higher rent.

As an example, a local tenant in a build-to-suit property had projected taxes at $4 per square foot, but with taxes of $10 per square foot this year, the tenant faces occupancy costs far in excess of projections. Whether the difference is looked at in an absolute sense as $6 per square foot or as 250 percent higher than expectations, the tenant is in a very different financial position than anticipated. How can the next lease be at the same net rate?

Many national tenants demand lease provisions that cap annual increases in real estate tax charges as protection against these increases, turning a triple-net lease into a quasi-gross lease, at least for taxes. Common in retail properties and found in flex space or office buildings as well, this practice puts a dent into the owner’s return. As in many other states, Minnesota assessors try to equalize assessments, so a few high-priced sales may trigger increased assessments for neighboring buildings. If an assessor is trying to avoid being accused of “chasing sales,” then one or two sales in a market area can lift all assessments. Comparable properties may see an increase in taxes with no changes to their own net rents or occupancy. Such increases can be a burden if the assessor has done a poor job of equalizing.

One of the biggest surprises for new buyers can occur when trying to renew leases. Many landlords discover that higher assessments lead to lower net rents or increased vacancy numbers that are far different from the assumptions made at the time of purchase. Relatively few buyers project double-digit tax increases, so tax hikes approaching 30 percent can inflict a troublesome dampening effect on net rents and occupancy.

Even tax increases limited to 10 percent annually for two or three years will exceed the 3 percent increases that a typical buyer builds into a discounted cash flow analysis when evaluating a purchase. That unexpected cost can decrease cash flow in future years to the point that the purchase price appears too optimistic. When this increase in taxes is combined with lower net rents as tenants fight to keep occupancy costs under control, the entire analysis at the time of sale becomes a meaningless historical curiosity.

Clearly, potential buyers must perform due diligence on assessor practices when a contemplated sale price is significantly higher than current assessments, or risk nasty surprises in the next few years.

John Gendler is a partner in the Minneapolis law firm of Smith, Gendler, Shiell, Sheff, Ford & Maher, P.A., the Minnesota member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Know the many factors that often make property tax value different than the purchase price.

Don’t worry about challenging a property tax value that is less than the taxpayer’s purchase price, right? Wrong! There are numerous factors that distinguish a purchase price from a taxable assessed value, and the failure to closely review an assessment can cost a property owner dearly.

The legal standard for determining property tax values can differ from state to state, but it is generally equivalent to fair market value.  That is the probable price that the property would bring in a voluntary, arms-length transaction between a willing and knowledgeable buyer and seller, in an open and competitive market, with neither party being under undue duress, as of the valuation date.

While it is possible for a purchase price to be the same or similar to market value, there are many instances where the two deviate.  Here are some common examples:

A sale is not an arms-length market transaction if it occurs between related parties and isn’t exposed to the open market.  A sale between a company and its subsidiary, for example, may not reflect fair market value.

Fee Simple vs. Leased Fee

For property tax purposes, fair market value is most often based on the fee simple estate, unencumbered by Leases or other third-party interests in the property.  If the property is subject to an above-market lease, perhaps in a sale / leaseback transaction, the leased fee purchase price might greatly exceed the property’s fee simple valuation used for assessment purposes.

Portfolio Sales and M&A

A transfer of real estate in connection with a merger or acquisition is not a market transaction with respect to that particular property.  Likewise, an assessor shouldn’t use the sales price for a portfolio of properties, which might be bundled together and marketed as a whole, to determine the market value of one small component of the transaction.

Although buyers regularly make purchase price allocations for these types of transactions, such allocations are not synonymous with fair market value standards used for assessment purposes.

Unique Sales Terms

Sellers and buyers often think outside the box to close a deal.  Seller concessions come in all shapes and sizes and can drastically affect the final purchase price.  For instance, a seller may agree to provide certain services or take on additional obligations after closing that would not be part of a typical market transaction.

1031 Exchanges

Buyers motivated to defer substantial income tax liability by executing a 1031 exchange before a deadline may pay above-market prices.

Special Financing Terms

The purchase price may be artificially inflated because of unusual or favorable financing terms.  Institutional investors, with greater access to the capital markets, are able to obtain more favorable financing terms than the average market participant.  This lower cost of capital allows the institutional investor to pay above-market prices on lower cap rates in order to beat out competing bidders, while still achieving the same return as the typical investor.

Construction Costs

Developers and expanding businesses often find their projects detailed in the newspaper, with anticipated costs or total project investment.  Often these amounts include expenses not associated with the real estate, such as equipment, employee training and the like.  And just because something costs a certain amount to build does not mean it can be sold for a similar price.

Declining Market

Markets heat up and markets cool down.  Overpaying at the height of the market may mean a poor return, but this should not justify an overassessment.

A prudent assessor looks beyond the price to determine if a sale is a true, market-value transaction.  Despite the best intentions, even the most diligent assessor cannot account for all of the factors that can skew a sale price away from market value.  Referencing non-market deals for comparison will erroneously influence the sales data and can lead to artificially higher assessments.  The assessor’s reliance on an assumed purchase price for the subject property can have an even more dramatic and costly effect on that taxpayer’s assessment.

Many states charge a transfer or privilege tax to record a deed, which may require the buyer or seller to disclose a purchase price.  Assessors will look at these stated purchase prices and will quickly flag any that are higher than the assessed value.  A taxpayer should consult with local counsel to avoid overstating the purchase price.  For instance, a purchase price may include personal property, intangibles or perhaps additional real estate that should not be included in the consideration amount required to be disclosed.

Real estate brokers should not be surprised when contacted by assessors or subscription services to confirm details of a sale.  Before quickly confirming a sale as a market transaction, the broker should be mindful of the issues discussed in this article.  The failure to do so might significantly increase the purchaser’s future tax assessment.

All real estate investors should have a property tax review plan in place, with professionals knowledgeable of local valuation standards, rules and procedures.  When purchasing or developing real estate, remember to provide your tax professional with the particulars of the transactions, including any reasons why the purchase price or investment may not indicate market value.

Always keep in mind that purchase price and market value are not synonymous, so there is no need to concede a high assessment without first looking beyond the price on the deed.

  Aaron D. Vansant is a partner in the law firm of DonovanFingar LLC, the Alabama member of American Property Tax Counsel (APTC) the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

Municipalities and school districts increasingly file lawsuits to increase property tax assessments.

As property owners increasingly participate in transactions across multiple states and countries, they could be shocked to find themselves defending against a lawsuit filed to increase their real estate taxes.

A minority of states allow the local real estate tax assessing body or school district to appeal a tax assessment, arguing that the property's value and resulting taxes should be higher.  States where these types of appeals are allowed include Ohio, Pennsylvania and New Jersey.  Property owners in those states should  be aware that someone may be filing a lawsuit to increase their property taxes.

Method to the madness

Taxpayers cannot prevent a school district or assessing body from appealing a property tax assessment in states that allow them to do so.  Property owners should be especially watchful in the following situations where it is more likely to occur:

Sales – In Ohio, if a recorded sales price is higher than the current assessment, it is almost guaranteed that the local school district will file a complaint to increase an assessment, particularly in large markets around urban areas.

School district attorneys routinely review recorded sales for comparison to the current assessment.  Although recent legislative changes have increased assessors' ability to consider all relevant facts of a sale, a recorded sales price is still a formidable challenge to overcome.

In Pennsylvania, and particularly in Western Pennsylvania, sales are the most common trigger for an appeal to increase a tax assessment.  In states where chasing sales price may run afoul of constitutional protections, the local taxing authority may wait until a few years after the sale closes before filing the appeal.

Mortgages – In response to lower sales prices and increased sales volume resulting from foreclosure or bankruptcy during the Great Recession, taxing bodies also file appeals to increase taxes based on recorded mortgages.

Similar to the tracking of recorded sales, attorneys for the taxing authority will review the amounts of recorded mortgages and compare them to the current assessment.

When the mortgages are secured by collateral that includes other assets in addition to the real estate, this practice can lead to inaccurate and inflated real estate tax assessments.

Other available filings – A recent case in Ohio shows the spread of this practice from recorded mortgages and deeds to Securities and Exchange Commission (SEC) filings.

The local school district filed an appeal to increase the assessment of an apartment in Athens from approximately $12.6 million to $48.98 million, based on an SEC filing by a mortgage lender.

The property owner's attorney has stated that the SEC filing includes the total value of the business purchased, which includes other assets in addition to the real estate.

The local county board of revision granted the revision at the first level of review and the case is currently on appeal.

Outside consultants – In Pennsylvania, taxing authorities filing complaints to increase assessments are on the rise, particularly in counties that have riot undergone a reassessment in some time, based on the recommendations of outside consultants.

These consultants contract with a particular taxing body, typically the school district, to review assessments and recommend appeals on properties they identify as under assessed.

Although this consultant activity seems most prevalent in the eastern part of the state, the regular practice of school districts filing appeals is spreading across Pennsylvania.

Meanwhile, in Ohio certain school districts have even begun to file complaints to increase values in cases that have previously been tried in court.

Practical pointers

Because sales trigger so many of these cases, it is important to get pre-closing advice on the property tax consequences affecting your specific property.  There may be measures the taxpayer can take in structuring the transaction to avoid or minimize an increase in taxes.

Be aware of the tax consequences of recorded and publicly available documents, including SEC filings, particularly with portfolio asset purchases across multiple states.

Filially, attorneys for the taxing body may use procedural tactics to fish for non-public documents that could help them argue that a property is under assessed.  For example, school districts in Ohio have used the discovery process to subpoena financing appraisals from lenders.

Local expertise is key

Because real estate taxing schemes vary greatly, owners should consult local tax professionals to determine the best strategy to defend against an appeal that seeks to increase the property owner's taxes, or to minimize the potential that such an appeal will be filed in the first place.

Procedural, jurisdictional and evidentiary traps abound for those not well-versed in the local law.

For example, in Ohio, property taxes are levied and paid one year behind, meaning that taxes for the 2016 tax year are paid in calendar year 2017.  Similarly, appeals to reduce or increase the tax assessment are filed one year behind.

If a taxpayer purchases a property and the sale closes on Dec. 31, 2016, for a recorded price that is higher than the current tax assessment, the school district will be aware of that sales price and can contest the 2016 assessment any time from Jan. 1 through March 2017.

If the school district appeals the assessment based on the sales price and is successful, the assessment will be increased to the sales price, effective at the beginning of the 2016 tax year.

That means the buyer could be on the hook for increased taxes for a period of time when he did not own the property.

Local taxing bodies have been filing appeals now more frequently to increase property tax assessments, attempting to generate revenue after property values and sales prices dropped during the economic downturn.

Even though the market has improved, these taxing authorities are unlikely to now abandon the practice.

Consult with professionals who have local experience to defend against these suits in order to maintain fair real estate assessments and taxes.

Cecilia Hyun is an attorney at the law firm Siegel Jennings Co, L.P.A., which has offices in Cleveland and Pittsburgh.  The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

The retail real estate sector has been slow to recover from the Great Recession, and vacancy levels remain elevated for neighborhood shopping centers. As retail property owners search for ways to reduce carrying costs, many are scrutinizing one of the largest expenses their properties incur: real estate taxes.

Fortunately, the laws of each state provide a vehicle for landlords to reduce unfairly high property tax burdens by filing a commercial property tax appeal. At these appeal hearings, the property owner must prove that the property is worth less than its current taxable market value, and seek a fair value either through negotiation or a valuation trial in the local court.

Building a strong case to reduce an assessed taxable value requires technical expertise at any time, and it’s an even more complicated proposition for retail properties in a period of economic recovery.

The three traditional approaches used to value a shopping center are the cost approach, sales comparison approach and the income capitalization approach. Unless the shopping center was recently constructed, the cost approach is seldom used. The sales comparison approach is only used when comparable sales data is available, which is rare. Therefore, appraisal professionals and the courts agree that the income capitalization approach is generally the most reliable analysis.

The income approach requires the capitalization of a net income stream into a present value. Prior to filing a property tax challenge, the shopping center owner or their tax professional should gather copies of leases, rent rolls, and income and expense data for the prior and current year. Each is required in order to estimate the property’s market value.

Post-recession issues

Prior to the economic crash of 2008, a review of the property’s leases, vacancy rates and expenses helped paint a picture of the center’s ability to produce income. After applying a proper capitalization rate — the rate of return reflecting the risk of investment — to the center’s net income, an owner’s tax professional would be able to estimate the center’s market value for property tax purposes.

Following the crash of 2008, however, an increasing number of shopping center landlords have been forced to make rental concessions in order to keep tenants. As a result, the mere analysis of the center’s occupancy, lease rates and expenses is no longer enough.

A better strategy is to conduct a comprehensive inquiry with the owner’s leasing representative or property manager to identify any concessions such as reductions in rent, recalculations of base tax years for property tax reimbursement, or a reduced reimbursement of common area maintenance charges.

Much of the data in the typical yearend income and expense report for a shopping center may be misleading or inconclusive, requiring detailed discussion with the landlord or the landlord’s accountant. For example, some owners report tenants’ payments to the landlord for reimbursement of property tax or for common area maintenance as rental income. Yet if this data were capitalized along with rental income in a valuation, it would inflate the center’s taxable value and reduce the owner’s chance of securing a property tax reduction at a valuation hearing or trial.

After determining rental income, the taxpayer or tax professional will review the shopping center’s vacancy history in order to determine the property’s effective gross income, or gross income less vacancy and collection losses.

The economic health of any shopping center depends upon the percentage of the total space rented. Therefore, the taxpayer must consider an appropriate vacancy and collection loss factor when refining gross income into economic gross income. Shopping centers are rarely fully occupied today, and this factor must be considered in the analysis. Vacancy rate estimations should reflect a review of the subject’s vacancy rate together with local and regional market statistics.

Next, analyze expense data to estimate the subject’s net income, subtracting expenses typically incurred by the landlord from the property’s effective gross income. To ascertain typical expenses, study a number of shopping centers and compare those findings with the subject’s actual expense data. Generally, shopping center expenses include management, insurance, leasing fees and commissions, un-reimbursed common area maintenance charges, and utilities not paid by tenants.

Depending on the region, these expenses can total 15 percent to 30 percent of gross income.

The income capitalization approach to market value requires the application of a capitalization rate to the shopping center’s net income in order to estimate fair market value. The capitalization rate is a percentage that expresses risk, return, equity and property tax rates.

Considerations in estimating these rates include the degree of risk, market expectations, prospective rates of return for alternative investments, rates of return for comparable properties in the past and the availability of debt financing. It’s always helpful to determine caps rates utilized in the jurisdiction.

Many things to consider

Clearly, there are many factors to consider when evaluating a shopping center’s taxable value today. In addition to the factors mentioned above, the property owner must consider the subject’s size, location, access, competition, parking, tenants and other traits to form a value opinion.

Prior to presenting a case to the assessor or judge for a property tax reduction, the taxpayer must thoroughly analyze the individual economics of the shopping center and employ a valuation approach that produces a logical and well supported estimate of taxable market value.

Given that most shopping centers have experienced economic hardship since 2008, owners of these properties should seek professional advice to evaluate their property tax bill. A skilled property tax attorney will know how to conduct the necessary analyses and effectively argue on the taxpayer’s behalf for a property tax reduction.

Ryan C. Hild and Jason M. Penighetti are attorneys at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLP, the New York State member of Amercian Property Tax Counsel, the national affiliation of property tax attorneys.  Contact Ryan at This email address is being protected from spambots. You need JavaScript enabled to view it. or Jason at This email address is being protected from spambots. You need JavaScript enabled to view it.. 

When comparing hotels for valuation purposes, a common method of making adjustments for the difference between properties is to examine revenue per available room (RevPAR), a measurement of hotel performance.  If executed poorly, these calculations can distort property value and lead to unfairly heavy tax burdens on hospitality owners.

There are two different ways to calculate RevPAR.  The first is to multiply the average rental income per room by the number of rooms occupied, then divide by the number of days in the period.  The other method is to divide total guestroom revenue by the number of available rooms and divide that figure by the number of days in the period.

In an article titled “Using RevPAR as a Basis for Adjusting Comparable Sales,” published in February 2002 by HospitalityNet.org, appraiser Erich Baum voiced a common argument shared by appraisers who advocate for RevPAR adjustments.  Baum contends that the adjustments are appropriate because the revenue a hotel generates is tied to its location and the quality of its product.

The question in valuation for property taxation is whether or not RevPAR incorporates additional, non-real estate values such as quality of brand, management, goodwill, etc., and whether or not the RevPAR adjustment reflects those non-real estate items.

If the appraiser’s purpose is to compare values of hotels as a going concern, including all tangible and intangible items, this adjustment may make sense.  If, however, the purpose is only to value the tangible real estate and exclude intangible business value, as in an ad valorem tax valuation, a RevPAR adjustment may be inappropriate.

Appraisers generally accept that there is intangible value associated with the going concern value of a hotel.  The Appraisal Institute discusses this concept further in the 14th edition of The Appraisal of Real Estate (2013) Chapter 35, “Valuation of Real Property with Related Personal Property or Intangible Property.”  This is important in the world of ad valorem tax valuations because intangibles are not taxable.

Determining Values

To understand whether RevPAR adjustments are appropriate in a property tax setting, consider a nationally branded hotel that loses its brand.  Compare the hotel to its closest competitors using a RevPAR adjustment both with and without its flag.  Conversely, look at a non-branded hotel that becomes a nationally branded hotel and adjust its competitors’ RevPAR -using the same metrics.

Source Strategies produced a study to determine brand values by tracking the subsequent difference in revenue realized by hotels in Texas that gained or lost a nationally branded flag.  A detailed examination of the study appeared in the summer 2012 edition of The Appraisal Journal.

Researchers compared hotels on the basis of their RevPAR index, which measures a hotel’s performance relative to its competitive set.  An index of 100 indicates that a subject hotel is get-ting its fair share of revenue in comparison to its competitors.  An index higher than 100 indicates the subject is realizing more than its fair share of revenue and an index below 100 indicates the subject is realizing less.

Gaining or Losing a Brand

The study tracked five different brands of hotels in Texas between 1990 and 2010 and found that properties which gained or lost a national brand saw a respective drop or increase in their RevPAR index by as much as 40 percent.  Two hotels from the brand study provide an opportunity to test the utility and appropriateness of RevPAR adjustments.

One of the hotels studied was a Hampton Inn in San Antonio.  In 2004, its second-to-last year as a Hampton, the hotel was outperforming its competitive set.  This is indicated by a RevPAR index of 109.  The hotel’s average daily rate (ADR) was $55.60, or 9.4 percent higher than its competitors’ average of $50.82.

The year after the hotel lost its Hampton Inn brand, it operated as a non-branded hotel.  That year the same competitive set outperformed the now non-branded hotel.  The subject saw its RevPAR Index drop to 64, and its average daily rate fall to $39.89, or 35.7 percent lower than the $62.12 average in its competitive set.

Using a RevPAR adjustment would require a positive adjustment of 9.4 percent in one year and a 35.7 negative adjustment just two years later for the same real estate.

Now consider the effects of a RevPAR adjustment to a hotel that starts out as an independent hotel and then becomes nationally branded.  The study showed that one such hotel in Houston went from unbranded to being a Holiday Inn Express.  In 2004, its last year as an independent, this hotel generated less revenue than its competitors, as evidenced by the subject’s RevPAR index of 51.  The competitors’ average daily rate was $29.52, or twice that of the subject’s $14.72 ADR.

The year after the subject became a Holiday Inn Express it outperformed the same competitive set, as evidenced by the increase in its RevPAR index to 129.  As a nationally branded hotel, the subject’s ADR was $40.76, or 29.7 percent higher than the competing set’s $31.43 ADR.

In both cases the RevPAR index changed significantly for the subject properties, while the real estate remained unchanged.  The comps and methods of comparison remained the same.  The only change was the removal or addition of the brand and its resultant change in revenue.

These results indicate that the revenue shift reflects the change in brand and possibly management or goodwill, none of which are a part of the real estate.  Rather, they are separate and intangible components of the going concern.  Because these items are tied to RevPAR, a RevPAR adjustment will entail adjustments to the differences in both the tangible real estate and intangible items such as brand, management and goodwill.  RevPAR adjustments are therefore inappropriate when calculating only the tangible real estate value of a hotel. 

Greg Hart is an attorney and tax consultant at the Austin, Texas law firm of Popp Hutcheson, PLLC, and Kevin Sullivan is an appraiser and tax consultant with the firm.  Popp Hutcheson PLLC represents taxpayers in property tax disputes and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Hart can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. and Sullivan at This email address is being protected from spambots. You need JavaScript enabled to view it..

Most multifamily owners are familiar with reserve requirements for items such as fire alarms and alarm replacement. Yet those owners may be surprised to learn that complying with the latest fire code changes can jeopardize statutory caps on property tax increases. In fact, recent changes to the International Fire Code (IFC) could substantially increase fire safety requirements, trigger loan defaults and escalate repair and property tax costs for apartment owners.

By their nature, apartment buildings are not, and cannot be, constructed to meet future unanticipated building code requirements. In many jurisdictions, property owners know that if their building suffers more than a 50% loss, they will be required to satisfy new code requirements during reconstruction. However, few owners expect to be saddled with retroactive application of new code requirements even if there is not a casualty.

The IFC provides a comprehensive regulatory framework of code templates setting minimum standards aimed at both safeguarding buildings from fires and protecting building occupants when fires occur. Among other things, the IFC addresses the installation and maintenance of automatic fire alarm and sprinkler systems and fire safety requirements for new and existing buildings.

States and local jurisdictions are often slow to adopt and apply the latest building codes to existing properties. So while the 2015 version of the IFC has been published, many state and local governments are still coming to grips with the 2009 version, which incorporated retroactive requirements regarding the installation of fire alarms into existing buildings. For property owners, significant concerns arise when governmental officials adopt an IFC version that retroactively imposes new requirements.

For example, the 2009 IFC included several potentially expensive retrofit requirements for existing buildings. Chapter 46 of the IFC recommended the installation of smoke detectors in each bedroom for existing structures. For buildings that are more than three stories high or contain more than 16 multifamily units, the IFC imposes retroactive requirements, including installing manual or automatic fire alarm notification systems; installing audible fire alarms in each unit; and wiring all units to ensure visual fire alarms may be installed for the hearing impaired.

Retroactive application of new requirements creates issues for owners of existing properties. Modifications to meet new regulations for existing buildings can cost thousands of dollars per unit, and failure to make required upgrades can have serious consequences, including fines, possible insurance and liability problems not to mention that violation of local building codes generally constitutes an event of default under standard loan documents such as the Freddie Mac form loan agreement.

Moreover, the capital reserves that most permanent lenders require borrowers to maintain for building maintenance are seldom adequate to fund fire-safety retrofits, since borrowers and lenders could not reasonably anticipate the nature and cost of these improvements when establishing reserves. Most apartment complexes are owned by single purpose entities. Their loan documents strictly limit obtaining new loans. If cash flow is tight, these owners face financial challenges in funding retroactive code-mandated improvements.

Increases in property taxes represent an additional hidden risk to property owners in jurisdictions where statutory caps limit property tax increases, such as Florida and South Carolina. Caps limit increases in taxable value for properties subject to reassessment that would otherwise rise to reflect the market. Florida, for example, generally limits annual increases in taxable value to 10% of the prior year's assessment. South Carolina limits increases to 15% of the property's prior assessed value unless there has been a property improvement, ownership change, or assessable transfer of interest.

Caps can be removed if an existing project undergoes renovations, adding a substantially heavier tax burden atop the renovation expense. For that reason, property owners who are required to make IFC-mandated improvements must determine whether the renovated properties will run afoul of the statutory cap limitations, and prepare accordingly.

There is no problem in California where the law protects properties from reassessment unless renovations make the property "substantially equivalent to new."

IFC compliance measures are more likely to jeopardize assessment caps in states such as South Carolina where state law requires taxing authorities to include the value of new construction when valuing properties. South Carolina excludes minor construction or repairs from taxation, but does not define these terms and interpretation is often left to local taxing authorities.

No one advocates ignoring fire safety, but multifamily owners must investigate all potential costs – both obvious and hidden – of bringing their properties into compliance.

Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Carlyle Sandridge & Rice LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. Morris Ellison can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

California has a carbon cap-and-trade program.  British Columbia, Canada, has a carbon tax.  Washington is ready to join those West Coast efforts to reduce carbon emissions, but no one knows what mechanism the state will choose.  Washington is now considering a clean air rule that would cap greenhouse gas (GHG) emissions.  In November, Washington voters may establish a carbon tax.  However, the Association of Washington Business (AWB) argues that Washington businesses already lead the nation in protecting the environment and that a carbon cap or tax would negatively affect the state’s small businesses and consumers.

Possibility #1: A Regulatory Cap on GHG Emissions

In 2009 former Gov. Christine Gregoire tried to persuade the Legislature to pass a cap-and-trade program.[1]  In 2015 Gov. Jay Inslee (D) tried again, to no avail.[2] Inslee’s plan labeled the state’s oil refineries and other major industrial plants “major polluters” and would have required them to buy emission allowances in an auction for the region, in conjunction with British Columbia, Oregon, and California.[3] He expected the auction to raise nearly $1 billion in revenue annually.

Because those efforts failed, Inslee has moved at a breakneck pace on an alternative plan to cap and reduce GHG emissions.  In mid-2015 Inslee tasked the state’s Department of Ecology (DOE) with proposing a clean air rule by January 2016 and adopting a final one by summer 2016 after input from stakeholders.  After meeting its deadline for issuing a proposed rule, stakeholders representing both industry and environmental concerns made it clear that the rule needed significant work.  The DOE withdrew the rule in February and issued a revised proposal May 31.  The public comment period on the new draft rule closed July 22.

The clean air rule, unlike the cap-and-trade proposal, would not have any centralized marketplace for trading emission allowances and therefore would not raise revenue for the state.[4] The updated rule “would require businesses and organizations that are responsible for large amounts of greenhouse gases like natural gas distributors, petroleum product producers and importers, power plants, metal manufacturers, waste facilities, and others to show once every three years that they’re reducing their emissions an average of 1.7 percent annually.”[5] Sarah Rees, special assistant on climate policy for the DOE, described the rule’s strategic priority as slowing climate change by capping and reducing statewide GHG emissions under the state’s existing Clean Air Act.  The goal is to have reduced emissions to 1990 levels by 2010, to 25 percent below 1990 levels by 2035, and to 50 percent below 1990 levels by 2050.  Businesses that do not sufficiently reduce emissions could comply by buying emission reduction units that businesses with extra reductions could sell.[6] The rule would use a special formula to try to address the needs of energy-intensive, trade-exposed industries in order to both target emission reductions based on comparisons with national emissions for the particular industry and encourage the business to remain, and even expand, in Washington.[7]

Scott DuBoff, who practices law in environmental and energy matters at Garvey Schubert Barer, questioned how effective the rule would be: “Despite the commendable objectives of the Washington Department of Ecology’s proposed Clean Air Rule, the state’s proposal is in tension with, among other things, the fundamental reality that the problem to which it is addressed – global climate change – requires broad national and multinational solutions.” Last week, DOE adopted the rule and declared that it will take effect October 17.

Possibility #2: A Carbon Tax

A similar goal drives Initiative 732, a citizen initiative backed by Carbon Washington, which describes itself as “a non-partisan grassroots group of individuals who are keen on bringing a BC-style carbon tax to Washington State.”[8] I-732 would establish a carbon tax starting in 2017 at $15 per ton, with gradual increases to $100 per ton by 2059 (plus adjustments for inflation).  I-732 would also reduce the state sales tax from 6.5 percent to 5.5 percent and reduce the business and occupation (B&O) tax on manufacturing from 0.44 percent of gross receipts to 0.001 percent.  To help further offset the regressive effect of the carbon tax on low-income households,[9] I-732 would fund a working family tax rebate, which would provide a 25 percent match to the federal earned income tax credit.

The goal is a revenue-neutral measure.  Greg Rock, an executive committee member at Carbon Washington, explained that its predictable pricing schedule over the next 40 years and offsets on other taxes reflect a “centrist policy” with the hope of attracting bipartisan support.  By increasing the price of carbon emissions, Carbon Washington hopes to change behaviors at all levels of the economy – industries, investors, and consumers.

Whether I-732 would achieve revenue neutrality has sparked much debate.  The Department of Revenue concluded in April that the measure would result in $800 million of lost revenue during its first five years in effect (revised from the $900 million loss the DOR projected in January).[10] The Sightline Institute, an environmental think tank, analyzed the DOR fiscal note and concluded, ‘‘I-732 is revenue neutral, to the best of anyone’s ability to forecast it.”[11] Sightline pointed to numerous difficulties in predicting the revenue effects of the various aspects of I-732 as well as several errors in the DOR’s analysis.[12] Rock enthusiastically reported that Carbon Washington has experienced a “whirlwind of activity” since Sightline issued its analysis.  He said he anticipates that the DOR fiscal note would be I-732’s major hurdle at the polls.  Most environmental groups oppose the measure largely because of its projected revenue loss.  For example, the Sierra Club said it worries that losing revenue would put “already underfunded budgets for education, social services, and the environment at greater risk” and sees even Sightline’s analysis as indicating a significant revenue loss.[13]

But another aspect of I-732 worries Drew Shirk, the DOR’s senior assistant director of tax policy: how to implement the working family tax rebate.  Washington does not have an individual income tax.  Implementing the working family tax rebate would mean creating a computer database that the DOR does not have.  The DOR fiscal note assumes that the state would need 60 or more full-time employees to administer I-732, a number Rock sees as exaggerated.  Sight-line did not examine that aspect of the DOR projection; the cost is small ($20 million) compared with other costs projected in the fiscal note.

Even if the measure achieves system wide revenue neutrality, it would not be revenue neutral regarding many individual taxpayers.  “Boeing will probably come out ahead,” Rock said, whereas Ash Grove Cement Co., which burns coal to produce cement in downtown Seattle, has told Carbon Washington that it would come out behind.  Rock admitted that Carbon Washington struggled to determine how to offset the carbon tax most effectively for manufacturers because it developed I-732 without access to companies’ financial information.  Also, some businesses previously eliminated their manufacturing B&O tax through legislative incentives for specific industries, such as food processing.[14] For those taxpayers, I-732 mostly represents an added cost.  Still, Rock said that for the manufacturing sector as a whole, the tax reductions would fully offset the cost of the carbon tax.

Some manufacturers that perform in-state extracting activities, such as logging, may experience little or no relief from I-732’s virtual elimination of the B&O tax on manufacturing.  That is because of the multiple activities tax credit, which is designed to minimize repetitive B&O tax on the same taxpayer for the same finished product.[15] Currently, a manufacturer can take a credit against the B&O tax on manufacturing for any B&O tax paid on extracting the products in the state.  If the manufacturing B&O tax is practically eliminated, the business would still have to pay full B&O tax on its extracting activities, resulting in little to no change to offset that manufacturer’s carbon tax burden.

Overall, Carbon Washington said it thinks that the off-setting reductions would encourage industries to remain in the state.  And given Washington’s abundance of hydroelectricity, which would remain untouched by any carbon pricing policy, Rock said that “businesses may flock to Washington because of its low-carbon energy” as carbon pricing efforts spread to other states.  AWB’s campaign against I-732 says the opposite, based on California’s modest rate of growth in manufacturing since it established its carbon pricing policy through the cap-and-trade program: “If the carbon tax passes, companies looking to expand or move into a new market will simply decide to go elsewhere.”[16]

Possibility #3: Both the Cap and the Tax

Though both Inslee and Carbon Washington want to reduce emissions, they strongly disagree about what mechanism would more effectively achieve that goal.  Inslee said that a cap is the most powerful mechanism for reducing emissions.  “If you go just the taxation route, the numbers you have to get to really change behavior and investment are not politically tenable,” Inslee said.[17] But Rock argued that an early indication of the effects of a carbon tax show otherwise, because British Columbia’s petroleum consumption per capita dropped 16 percent since the tax while the rest of Canada’s petroleum consumption per capita increased 3 percent.

Neither the cap nor the tax would fund mitigation, adaptation, or preventive efforts regarding reducing pollution.  I-732’s carbon tax revenue would go to the state’s general fund.  According to Rock, that is based on the belief of most economists that carbon pricing is more effective than incentives for reducing emissions.  Citing a lesson learned during his studies in sustainable energy engineering, he said, “It is always more effective to tax what you don’t want than to subsidize what you do want.”  Carbon Washington does not oppose subsidies and targeted investments, but it sees carbon pricing as the more important step.

Inslee’s emphasis on a cap suggests that, should he win a second term in November, he would implement the cap regardless of I-732’s fate.  But Rees, in discussing the clean air rule in May, said that would not be the case.  She said that businesses would not have to contend with both the clean air rule and the carbon tax if I-732 passes.  On the other hand, Rock said he sees no reason why a cap and a tax could not coexist.  He explained that the tax is simply a mechanism to put a price on carbon emissions, similar to a trading mechanism through a marketplace like California’s, and that a cap and a tax, even if operating separately, could be effective.  Some have even contemplated the possibility of a cap-and-trade system combined with a carbon tax or with other tax elements, such as tax credits.[18] Still others have argued that a cap-and-trade program is the equivalent of a tax.[19] At this point, all options seem possible in Washington.

Possibility #4: Other Options

Through all this, AWB, while supporting the overarching goal of reducing carbon emissions, has argued that Washington businesses have already worked hard to make Washington one of the greenest states in the country.  AWB is sponsoring a “No on 732”campaign based on the premise that “we should lead the world by continuing to reduce emissions through collaboration and innovation.”[20] AWB has highlighted business efforts on that front for years, such as in its annual Green Manufacturing Award, which recognizes businesses that have “maximized energy efficiency levels, gone above and beyond regulatory requirements, minimized waste from the production process and reduced its carbon footprint.”[21] Similarly, the Washington Business for Climate Action, a group of businesses, many of which are well-known leaders in the state, joined together in recent years around a declaration that supports businesses’ voluntary efforts, such as investments in renewable energy, clean technologies, and energy efficiency.[22] That group has apparently taken no official position with regard to either the clean air rule or I-732.

A major concern with any environmental regulation is that the added costs could burden local businesses to the point that they cannot compete against businesses in locations where environmental laws are more lax, or that local businesses themselves move to those locations.  Having a clean domestic plant that provides the local community with jobs and tax revenue is far preferable overall to importing products from a dirty or dangerous plant.  Any measure to reduce emissions must ensure that it will not impair the competitiveness of the states’ businesses.  Both the proposed clean air rule and I-732 say they would avoid harm to Washington businesses.  Regardless, though, some businesses would inevitably suffer under either regime.

Property taxes could also change as an unintended consequence of either regime.  Companies that face increased burdens under the clean air rule or I-732 may, as a result, experience a change in the market value of their property.  According to Chris Davis, Inslee’s adviser on carbon markets, discussions of climate policy disregard that as a factor.  But for companies whose products are inextricably tied to emitting carbon dioxide, the ultimate goal of those policies is an effect similar to that of Prohibition on a brewery or a distillery.  Property specific to brewing beer or distilling alcohol would have naturally suffered extraordinary obsolescence when those products became illegal.  That type of external force can produce a drastic decline in a property’s market value and its assessed value for property taxes.  Though often overlooked, that is one of the likely impacts under either the cap or tax scenario.  Their effect on both carbon-intensive businesses and the communities that depend on the businesses’ value for property tax revenue should be considered.

Conclusion

The carbon controversy in Washington is part of a much older debate: Should we use taxes to influence behavior or should we strive for tax neutrality in which only direct regulation and government subsidies regulate behaviors?[23] Tax systems routinely feature attempts to regulate behaviors: Sin taxes seek to reduce tobacco and alcohol use and Pigouvian taxes seek to charge those who engage in undesirable activities for the social costs they cause.  Some argue that tax laws should serve as a mechanism for addressing “the externalities of the harmful effects of carbon, which the market does not take into account”;[24] others contend that taxes should serve strictly “for raising revenue, not engineering whatever it is we’re trying to engineer this week.”[25] The bottom line, however, is that taxes and regulations can be effective in changing behaviors but can also impose costs on businesses and consumers.

Whether consciously or not, Washington voters will weigh in on this perennial debate in November.  The state may tax carbon emissions or cap emissions by means of a new clean air rule – with the possibility of both at some point.  Neither of those two mechanisms is intended to raise revenue for the state.  But either way, some will face significant costs with the changes.

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