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Property Tax Resources

Jan
06

Will 2021 Bring Property-Tax Relief?

COVID-19, wildfires and civil unrest all threatened property values and tax revenues in 2020, notes Foster Garvey attorney Cynthia Fraser.

Across America, 2020 transformed the urban core. Hotels sit vacant, deprived of business by travel that has been all but suspended. Restaurants under occupancy restrictions struggle to break even or have closed for good where winter weather precludes outdoor dining. In some locations, plywood sheets encase office and commercial buildings for protection against vandalism. In my own city of Portland, Ore., walking through parts of downtown is like walking through a ghost town of shuttered businesses that once teemed with commerce.

Suburban and rural properties have sustained similar impacts, while fires have ravaged many communities. With skyrocketing unemployment in many states, governments have set eviction moratoriums, and the number of tenants not paying rent continues to grow. Landlords may begin to file for bankruptcy protection in increasing numbers as their own bills—including property taxes—come due.

How long it takes for cities to bounce back from the events of 2020, and for property values to recover, will depend upon each community's economic vibrancy. Because property tax is a state tax, any relief from this tax burden depends upon each state's statutory date of value and whether its tax law contains a force majeure clause, which frees a party from a contract's obligations when an unforeseen event prevents their performing its terms.

MATTERS OF TIME

Most states value property as of Jan. 1 for taxes due later in the same year. Thus, in most jurisdictions a property's taxable value for the recent tax year reflects what was known or could have been known about the property and market conditions as of Jan. 1, 2020.

Lockdown for COVID-19 did not begin in most states until March 2020. The fires that devastated forests, agricultural land and communities across that nation took place over the summer and fall. No crystal ball predicted these events, nor the catastrophic fallout and snowballing impacts on property values.

Many contracts contain force majeure clauses. In most states, a force majeure law provides an adjustment to the market value for property taxes when there was a catastrophic event that destroyed or damaged property during the tax year. These statutes typically provide for an adjustment based on the event's timing, and in most states recognizing force majeure, it is critical to appropriately report the property damages to receive this retrospective reduction in taxable property value.

Some states, including Oregon, have passed legislation extending the deadline to report property damage from fire that will allow for a reduced real market value for a portion of the tax year.

Force majeure laws do not typically recognize a decline in property value due to a pandemic or the economic effects of boarded-up city blocks. Any records tracking the decline of property values will help taxpayers address novel valuation issues for this coming tax cycle. The long-term effects of these economic forces will weigh on property values for years and to varying degrees.

PREPARE TO PROTEST

Assessors will vigorously fight the taxpayer's request for a reduction in taxable value when their coffers are already low due to the loss of other tax revenues. For apartment landlords, it will be important to track nonpaying tenants, particularly in the states and cities that have enacted laws preventing evictions for nonpayment of rents. Retail landlords should track local market conditions and news of business closures that result in stores and restaurants going vacant, as that information will be important in supporting tax appeals this coming year.

Perhaps the largest unknown in the market is what will happen to the office sector. Office workers the world over have adapted to remote working. Zoom, Microsoft Teams or Webex have replaced conferences and board meetings, client visits and even many court hearings. The need to live close to a downtown office, or even in the same city, has diminished. Businesses are rethinking the need to staff their offices full time, and workers may be reluctant to commute to an office when they can effectively do their job at home.

Multiple factors will shape the real market value of properties this coming year. In 2020, taxpayers may have struggled to pay or protested tax liabilities that were based on values and valuation dates which preceded the crises that were to come that year.

By contrast, the uncertainties of the pandemic and its economic fallout will be tied to what is known as of Jan. 1, 2021. Property values across the nation will surely be affected, and this time around, taxpayers will be able to appeal assessments that fail to reflect the detrimental effects that many of the past year's events have inflicted upon their property's market value. Be sure to have the facts, figures and experts to deliver this information lined up in order to achieve a successful property tax appeal.

Cynthia Fraser is an attorney specializing in property tax and condemnation litigation at Foster Garvey, the Oregon and Washington member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Dec
20

Tough Burden of Proof in Tarheel State

Owners in North Carolina must satisfy legal tests in arguments for reduced taxable valuations.

   Notice of a commercial property's revaluation to an increased taxable value can deliver a shock to the taxpayer. Although actual tax liability will depend on the completed valuation, new budgets and a tax rate that is still to be set, the taxpayer fears that an inflated value will result in an unfairly high property tax bill.
The typical taxpayer response is to assert the new value is too high, particularly for the larger assessment increases. The assertion alone, however, is not enough to change the valuation. While many jurisdictions have different burden of proof statutes, under North Carolina law, the onus is on taxpayers to prove specific criteria meriting a reduced assessment.
   Unfortunately, the state's valuation practices set the stage for assessor mistakes and inaccurate valuations. Unlike many jurisdictions, North Carolina only requires that real property subject to taxation be revalued every eight years, although recently most counties have opted to revalue every four years. In light of dramatic property value swings over the past decade or two, however, these lengthy gaps between valuations often result in significant increases, with assessments spiking by as much
as 40 percent.
   Undertaking a county-wide real property revaluation is a behemoth project for any taxing authority. Countless hours of factual investigation, analysis, and number crunching go into the process. Those involved are performing a necessary public function and do their best to get it right.
   Given the scope of a revaluation, lawmakers have set limitations to discourage taxpayers that simply disagree with the new assessment from demanding a full appeal and hearing based solely on the merits of the value. Aside from the time deadlines in the appeal process, a significant governor on the appeal process in North Carolina is the burden of proof.

Proof vs. persuasion
    In North Carolina, tax assessments are presumed correct. The State Supreme Court spelled out this premise in a 1975 case involving AMP Inc.'s appeal of the taxable valuation assessed on inventory stored at a Greensboro facility.
    In finding that AMP failed to prove its case, the Court encapsulated the burden of proof when a taxpayer attempts
to rebut the presumed correctness of an assessment. This is a presumption of fact that may be rebutted by producing evidence that tends to show that both an arbitrary or illegal method of valuation was used and that the assessment substantially exceeded the true value of the property.
    A taxpayer appealing an assessment must come forward with evidence tending to show both of these conditions: that the method used to establish the assessed value was wrong, and that the value derived from that method was substantially greater than the true value (the assessed value was unreasonably high).
   The burden is not one of persuasion but one of production. In layman's terms, the burden is not to persuade the decision maker that the taxpayer's opinion of value is correct and the assessor's is wrong. Rather, the taxpayer must show simply that there is evidence both that the assessor used an incorrect method in its appraisal, and that the resulting value is substantially greater than it should be.
   Once the taxpayer has produced evidence to rebut the presumption of correctness, the burden of coming forward with evidence shifts to the county. The assessing entity must establish that its method did, in fact, produce true value; that the assessed value is not substantially higher than called for by the statutory formula; and that it is reasonable. The latter is a burden of persuasion, meaning the assessor must convince the decision maker that it applied a correct method and arrived at true value.
   The terms "arbitrary" and "illegal," which the Court used in AMP in referring to the taxpayer's burden of showing the assessor used an improper method, sound a bit harsher than they need be. The courts simply hold that a property valuation methodology is arbitrary or illegal if it fails to produce "true value" as defined by tax law in General Statute 105, Section 283. That section defines true value as meaning market value. Market value is the price estimated in terms of money at which the property would change hands between a willing and financially able buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of all the uses to which the property is adapted and for which it is capable of being used."
    A variety of methods have been found to be illegal or arbitrary, such as failing to consider the effect of obsolescence in the face of testimony of obsolescence and relying only on the cost approach to value income-producing property. A tax professional will be knowledgeable of many other examples.
   Given the burdens inherent in challenging assessments, a taxpayer planning to appeal its assessed value needs to be prepared to assemble and present information supporting its value opinion. In addition, the taxpayer should obtain and understand the taxing authority's method of arriving at the assessed value, in order to challenge that method as may be appropriate.
   At the local level, taxpayers have traditionally focused arguments on value alone, but, as an appeal reaches higher levels, the burden can become a critical evidentiary obstacle to overcome. Failure to get over this initial hurdle can result in dismissal of the appeal without the actual assessed value being considered on its merits.

Gib Laite is a partner in the law firm Williams Mullen, the North Carolina member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.
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Dec
11

Property Tax Process Adjusts to Pandemic

Leaders from five central appraisal districts share how COVID-19 drove procedural changes, some of which may be here to stay.

In early 2020, the rapidly unfolding pandemic threatened to derail Texas' property tax assessment and appeal process. 

With stay-at-home orders being issued at the same time that appraisal districts were sending out initial values for 2020, uncertainty cast doubt on how the process would proceed, or even whether it would proceed at all. Taxing entities were concerned with revenue impacts, and taxpayers were concerned about their ability to pay.

Every year, Texas launches the property tax cycle every Jan. 1 with a revaluation of property. In most jurisdictions, taxpayers expect to receive notices of appraised value sometime in April, with the deadline for protesting the appraised value typically falling in May. Under normal circumstances, these dates begin the property tax protest cycle for the year.

On March 31, 2020, however, the "typical year" quickly became anything but.

Appraisal districts faced the nearly impossible task of navigating an unprecedented scenario with limited time and resources. Their success in maintaining a functioning appeals process is a testament to the professionalism of the state's chief appraisers and personnel and to the fundamental strength of Texas' property tax system.

We queried chief appraisers and commercial supervisors from several appraisal districts about their experiences from the past year and their expectations for the property tax protest process in 2021 and beyond. 

Their observations provide not only a summary of their responses to the crisis, but also offer a blueprint for a successful appraisal and appeals system.

Popp Hutcheson: What were some initial challenges for you and your personnel when the stay-at-home orders were first announced?

Michael Page, Director of Appraisal, Hays Central Appraisal District: "When the stay-at-home orders hit in Hays County, we were just a few weeks away from our scheduled date to send notices. Our first challenge was to complete the notice process and simultaneously ensure the majority of our staff could work from home."

Scott Griscom, Assistant Chief Appraiser, Bexar Appraisal District: "Waiting on guidance from state officials with regard to the 2020 reappraisal effort pushed back our mailing dates for notices… The delay in mailings pushed back the protest deadline for all properties this year."

Jack Barnett, Chief Communications Officer, Harris County Appraisal District: "The Harris County Appraisal District was faced with two major challenges that resulted from the pandemic – avoiding transmitting the diseases in the building and social distancing."

Popp Hutcheson: Once it was clear the process was not returning to "normal" in 2020, what were the largest challenges in moving forward with protests?

Brent South, Chief Appraiser, Hunt County Appraisal District: "Logistical matters were the biggest challenge. Coordinating remote hearings and scheduling panels, conducting hearings remotely or telephonically/videoconferencing."

Ken Nolan, Chief Appraiser, Dallas Central Appraisal District: "Notices were mailed one month later than normal. No in-person, informal meetings with appraisers were allowed. One-member ARB [Appraisal Review Board] panels were used, and no in-person hearings were held until after certification. All hearings during the summer were by telephone."

Michael Page (Hays Central): "Our next challenge was to devise a way to conduct hearings if we were unable to reopen the office. My staff went to work investigating how to do this, starting from scratch as we had never conducted virtual hearings before."

Jack Barnett (Harris County): "Within approximately 60 days, the creation of virtual hearings went from an idea to reality – through development, which included submitting evidence; writing the instructions for appraisers, the ARB members and property owners; testing; and getting the instructions to the property owners."

Popp Hutcheson: What were some major successes from the 2020 property tax protest process?

Jack Barnett (Harris County): "The major successes were keeping employees healthy and employed and keeping the virus out of the building… Another big success was the development of virtual meetings with appraisers and ARB hearings. Even with a record number of protests this year, the ARB turned over the appraisal records for certification in August so the district could get the appraisal rolls to the jurisdictions."

Ken Nolan (Dallas Central): "Certifying the appraisal roll during the summer, successfully implementing the 'Tax Transparency Website' on time and limiting the spread of the virus."

Brent South (Hunt County): "Having the ability to provide the taxing units (with) a certified estimate was a major success. Without this most CADs would not have been able to provide entities a timely appraisal roll."

Scott Griscom (Bexar): "We found that working remotely with agents and the public proved to be far more efficient than we had ever dreamed… Even though we sent notices later, we were able to certify at over 90% complete on July 25."

Popp Hutcheson: Do you expect any of the procedural changes to stay in place in 2021 and beyond?

Ken Nolan (Dallas Central): "We will once again limit in-person informal meetings with appraisers and stay focused on online protests and telephone meetings to resolve protests. We will probably revert to in-person hearings, since it allows many more hearings to be scheduled each day."

Scott Griscom (Bexar): "We fully intend to continue to offer appearance at the ARB via Zoom as well as telephone and electronic meetings/hearings that have been met with favorable comments from owners, agents, and staff alike. We will continue to expand the online protest option for nearly all properties and encourage the use of it to resolve protests as well. We plan to stay closed to the public for the foreseeable future due to the upswing in positivity rate experienced within the community at large."

Jack Barnett (Harris County): "We will continue to offer and improve the virtual meetings and give property owners more options to work with the district from their homes or other off-site locations."

Michael Page (Hays Central): "Feedback from property owners shows that many like the ability to attend a video conference hearing without actually traveling to the district office. I foresee us continuing to offer this option to owners in the future as a way to provide improved customer service."

Moving forward
Along with the challenges COVID-19 forced upon the property tax system, appraisal districts discovered tremendous opportunities to innovate and take advantage of their successes in adapting to change. The efficiency with which appraisal districts revolutionized processed that had been in place for decades - in a significantly short time - is commendable.

And moving forward, the procedural transformation we witnessed in 2020 will continue to redefine the working environment within the property tax system.

Rachel Duck, CMI is a Director and Senior Property Tax Consultant at the Austin, Texas, law firm Popp Hutcheson PLLC. Popp Hutcheson devotes its practice to the start to finish representation of taxpayers in property tax matters and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys.
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Dec
03

Office Trends Raise Property Tax Concerns

During the pandemic, landlords and tenants need to track and document all issues affecting net
operating income to help with the property tax valuation process.

With property taxes comprising a significant portion of the real estate operating budget at most companies, both tenants and landlords need to understand how trends sparked by COVID-19 can impact their property tax valuations.

The pandemic has spurred governments to impose unprecedented restrictions on office capacity and fueled widespread uncertainty among companies that own or lease office space. Organizations are asking if, when, and how they will use their offices in the months ahead, and are scrutinizing expenses to reduce costs.

Many businesses are reevaluating their space requirements after adopting work-from-home initiatives, while greater familiarity with Zoom and other applications that support remote training and online collaboration has firms reconsidering their ongoing need for conference or meeting space. It is essential for real estate decision makers to monitor the effect of such trends on taxable property values.

Office demand evolves

In the early 1990s it was common for companies to occupy 350 square feet of office space per person. This requirement changed as some businesses sought to maximize density and encourage collaboration.

In a COVID-19 world where social distancing precludes density, many companies are limiting the number of employees returning to the workplace. Some companies have adopted permanent work-from-home policies. If this trend continues, office tenants may renegotiate leases to occupy smaller spaces, or decline to renew.

Taxpayers working with assessors need to understand renewal probability, which measures the likelihood of a tenant renewing their lease during the holding period. Before the pandemic, renewal probability in a given market may have been 80% to 90%, while a post-COVID renewal probability could well be 50% or less.

Because assessors typically value property annually, they seldom consider renewal probabilities. Given the uncertainty of a pandemic, however, property owners need to discuss renewal plans with any tenants that have leases expiring within the next twelve months, and then share that information with assessors. If there are a significant number of tenants at risk of vacating, and this is a trend that is being observed in the market, the assessor may need to adjust the capitalization rate used in the income approach to value the property.

Adjust assumptions

Owners of office buildings operating at a stabilized occupancy level for their market must work with assessors to evaluate and analyze their vacancy risk. Buildings that lack stable occupancy as of the valuation date will face additional challenges as the pandemic continues.

When working with assessors, owners must properly forecast an appropriate absorption period for their vacant office space, in addition to projecting appropriate costs to build out spaces for occupancy. With the volume of office space offered for sublease increasing at a record pace across the nation, and often at below-market rental rates, taxpayers and assessors must consider an additional layer of competition that could create downward pressure on rental rates for direct office space. An office building that may have reached stable occupancy in 12 months in a healthy real estate market could now require 24 to 36 months to stabilize.

COVID-19 has also ushered in new health and safety measures that office owners and operators may be required to address when building out office space. Touchless entry systems, improved HVAC and filtration, and antimicrobial construction materials are just a few build-out responses companies are evaluating to bring workers back into the office safely.

If these additional costs become standard, they must be considered in a lease-up analysis. Furthermore, these calculations must include any additional time needed to complete build outs at a time when construction crews across the nation are operating under their own COVID policies.

Office protocols will likely continue to evolve into 2021. That makes it important for users of office space to save all documentation that may have a bearing on the property's net operating income. This includes rent relief agreements, renewal information, relocation requests, lease terminations, build out costs and other records to help ensure the assessor can properly consider all factors affecting the valuation for the upcoming tax year.

For the next few years, office space will remain at risk for declining values at least until a vaccine can be developed and properly administered across the nation. In this challenging period, it will be critical to ensure that assessors appropriately weigh all relevant documentation when selecting metrics in property tax valuation models.

Kirk Garza is a Director and licensed Texas Property Tax Consultant with the Texas law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. Valarie Bradley and Caleb Snow, summer interns with the firm, are students at Texas A&M University's Masters of Real Estate program.
Valarie Bradley
Caleb Snow
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Nov
16

Tax Pitfalls, Opportunities in Pittsburgh

Here's what investors should know before buying or developing in the Steel City.

Over the past decade, Pittsburgh has been named the most livable city in the continental U.S., a hipster haven, a tech hub and other trendy titles. Publications laud the city's affordable housing stock in a stable real estate market, access to the arts in an established cultural community, and world-class healthcare and higher education that place the Steel City at the forefront of medicine and robotics.

This attention has drawn real estate investors to submarkets well beyond downtown Pittsburgh's Golden Triangle. Even in the midst of the pandemic and the economic uncertainty that has come with it, a surprising amount of new development has continued in the region.As investors from outside the region consider investing in this real estate market, they should be aware of idiosyncrasies and pitfalls lurking in Pennsylvania tax law.

Welcome, Stranger

As in most states, assessors in Pennsylvania cannot independently change a property's assessment upon its transfer. However, Pennsylvania lets local taxing districts appeal assessments and request value increases, which they often do following a sale. Locals call this the "welcome stranger" tax.

"One of the most common reactions I hear from our out-of-state clients who are new to this market is disbelief that school districts can appeal assessments," says Sharon F. DiPaolo, Esq., the managing partner of Siegel Jennings' Pennsylvania property tax practice. "Of course, in most states that's called a spot assessment, but in Pennsylvania it's just another appeal."

In fact, local school districts (which take the largest piece of the property tax pie) filed more assessment appeals than property owners in 2017-2019, according to The Allegheny Institute for Public Policy data. "The most difficult part for buyers is accurately estimating what is obviously a large part of a property's value equation," DiPaolo explains. "Buyers can budget for the legal costs of defending against an appeal by the government, but it's much harder to underwrite the real estate taxes when they can't know where the assessment will eventually be set. We have seen many investors choose not to enter this market because of the uncertainty."

Allegheny County in particular is unusual in that it has a March 31 assessment appeal deadline, and Pennsylvania uses the filing date as the effective date of value for assessment appeals.This means that properties already under appeal for 2020 should be valued as affected by the early fallout from COVID-19, and 2021 appeals will have to consider the pandemic's continuing impacts on property values.

Understanding the local legal landscape can help investors budget for potential risks, and thoughtfully structuring a deal can sometimes help reduce that risk. For instance, when appropriate, transferring a property's holding company rather than the property itself can avoid triggering an increase appeal.

Further, properly allocating a purchase price—either among multiple properties in a portfolio or among the different components of a going concern—can avoid misinterpretation of deeds and transfer tax statements by local taxing authorities. This also ensures Pittsburgh's 5% transfer tax is applied to the real estate only.

Net lease investors should also be aware that, while many states can be described as "fee simple" or "leased fee" jurisdictions, Pennsylvania is unique in that, in practice, its courts will usually tax a leased property according to whichever of those values yields greater taxes. Through a series of cases over 15 years, Pennsylvania's appellate courts have struggled to base a property's taxation on its "economic reality."

Currently, a property achieving above-market rent is assessed according to its leased fee value (which will be greater than the fee simple value), while a property with below-market rent will be taxed at its fee simple value (which will be greater than its leased fee value). Under this system, two physically identical properties within the same taxing district can be assessed at wildly different values.

Neighborhood Discrepancies

Anthony Barna, senior managing director of Integra Realty Resources Pittsburgh, cautions investors to vet property specifics. "People keep saying,'Pittsburgh's hot,' but it's not the whole region," he says. "It's not even the whole city."

While office vacancy in the CBD had reached a 10-year high even before the onset of the pandemic, some nearby neighborhoods including Oakland and the Strip District can barely satisfy demand. Similarly, new apartments in popular neighborhoods like Lawrenceville are stabilizing quickly at record rental rates, yet rents and occupancies in other neighborhoods remain flat.

"The lack of a significant population increase in the city, coupled with the large number of new residential units coming online, threatens the economic balance and risks an oversupply," Barna observes.

Even more fundamentally, Barna says "a lot of our neighborhoods don't yet have the infrastructure to actually support what someone might want to build." In fact, Amazon cited infrastructure concerns as a major factor in its decision to drop Pittsburgh as a final contender in its HQ2 search.

Similarly, developers should investigate available tax breaks, which vary by location. Frequently these come in the form of Tax Increment Financing (TIF) or Local Economic Revitalization Tax Assistance (LERTA). In 2019, Pittsburgh opened all neighborhoods to potential tax benefits for new developments that meet certain employment or affordability requirements.

Tammy Ribar, Esq., Director at Houston Harbaugh who concentrates her law practice in commercial real estate transactions, advises that additional opportunities are available through various government bodies and can entail program-specific deadlines. "I think the best advice I can give to buyers is to research and understand in advance what programs are available and be informed about applicable deadlines, so that a relatively easy opportunity for savings is not missed," says Ribar.

Based on the recent pace of construction throughout the city, many investors have clearly decided that Pittsburgh's anticipated rewards outweigh its risks. And as many have learned, working with knowledgeable locals during planning can help to avoid headaches – and create significant savings later.

Brendan Kelly is an attorney in the Pittsburgh office of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Nov
12

The Pandemic and Property Taxes: Should You Appeal Your Property’s Value?

Local and state governments are expected to see annual revenues decline by between 4.7 percent and 5.7 percent over the next three years, excluding fees to hospitals and higher education, according to Brookings. But most vital government functions continue, and soon, counties will assess property values to prepare property tax bills for 2021. They expect timely payment. They also should expect a flood of appeals to lower property values, says Linda Terrill, president of the American Property Tax Counsel and a partner with the Property Tax Law Group, who spoke with SCT contributing editor Joe Gose.

How do you anticipate 2021 property tax assessments unfolding?

The good assessors know that a decline is coming and will try to make some serious examinations to see whether they need to come in at a different number from the prior year. My cynical view is that when there is an increase in value, they're very quick to notice it but if it's a decrease, there's a lag before they notice it.

It sounds like you expect a lot of appeals. What can property owners do to prepare for one?

Planning is the key to everything. You need to find out the state requirements for when you can file and who can file to make it legal — some states require corporations to be represented by legal counsel, some don't – and you need to know the state's definition of market value. You also need to get ahead of the curve and begin interviewing professionals who can help you, especially appraisers, before all the good ones are representing others. It's best to find an appraiser that does property tax or condemnation work.

What is the most important element in an appeal?

The highest and best use analysis. A lot of appraisers would confess that they go into an analysis thinking that the current use is indeed the highest and best use, but I don't think they can assume that anymore. Property owners need to tell their appraisers to really do the work and math because as of Jan. 1, 2021, the highest and best use of a shopping mall charging $20 per square foot in rent might now be a fulfillment center charging $5 per square foot. Or maybe it's an adaptive reuse that includes converting part of the mall to office or adding apartments.

How might declining rental rates influence an appeal?

Shopping center owners can make a terrific argument that if they had to lease space on Jan. 1, 2021, the current contract rent would have no reflection at all on market rent. There are an awful lot of leases being renegotiated and amended that will have to be considered, even though they might not get done before Jan. 1. Property owners need to put a trail of paperwork together to tell a good story. That means keeping correspondence with tenants to show the back-and-forth of what's happening and whether or not they are staying.

Is there anything property owners can do to reset to a more appropriate value prior to an appeal?

The best bet is to see if you can work something out early, particularly if you're a shopping center that is historically a top provider of tax receipts in your jurisdiction. You might want to start talking to the county assessor now and see if you can get a better result when the values come out in 2021. I don't know of any assessor that wouldn't welcome the opportunity to have a legitimate discussion about what's happening and come to a number. Many states also have a local-level appeal that you go through before going to court or an administrative body. In either case, you may have to settle for something less than what you would like, but if it helps keep you afloat, then it's a good outcome.

How long does a typical appeals process take?

If you're in [my state of] Kansas and want a hearing in 2021, you're not going to get one anytime soon because we haven't had any in 2020 yet. Thousands of cases are backed up, and I think there are many states in a similar situation. Counties are going to want to hire more people to handle these cases, but at the same time, they're going to be laying off people because of budgets. For all those reasons, it's going be impossible to come to a resolution quickly.

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Oct
05

Unjust Property Taxes Amid COVID-19

​Cris K. O'Neall Esq. of Greenberg Traurig LLP discusses why multifamily property taxes are excessive and what taxpayers should do about it.

While COVID-19 has diminished value and property tax liability for all types of real property, it has been especially hard on multifamily housing owners.

State and local shelter-in-place orders that limited business operations have contributed to reduced rental income and vacancies for most commercial property types. In extreme cases, residents have gone out of business or into bankruptcy, eliminating revenues. Many owners have shuttered vacant commercial properties during the pandemic, which at least allowed them to curb spending on utilities and other operating costs.

Few multifamily owners have had that luxury. People still need a place to live, so they continue to occupy their apartments even though they may not be paying rent. As a result, many multifamily operations have lost revenue without reducing occupancy, exacerbating anemic rent collections by compelling landlords to pay operating expenses on fully occupied complexes.

THE PROBLEM: RESIDENTIAL EVICTION MORATORIUMS

In March, COVID-19 prompted the federal government and many states to declare emergencies; counties and cities immediately placed moratoriums on evictions of apartment dwellers for nonpayment of rent. California's experience was typical, with over 150 cities and nearly all metropolitan counties in the Bay Area and Southern California passing eviction moratoriums. Similar restrictions adopted throughout the nation prevented residential landlords from evicting residents for not paying rent.

The specter of millions of apartment dwellers forced from their homes remains very real. With over 45 million renter households in the U.S., the magnitude of potential evictions and the possibility of creating a huge homeless population overnight is staggering.

In August, Stout Risius Ross LLC estimated that 42.5 percent of renter households nationwide were unable to pay their rent and at risk of eviction due to the economic impact of COVID-19. Mississippi showed the highest percentage of renters in distress at 58.2 percent, while Vermont had the lowest at 20.0 percent. Percentages in the major states ranged from the low 30s to 50s.

MORATORIUMS EXTENDED

Many eviction moratorium ordinances either expired by June or were set to expire in early September. The Centers for Disease Control and Prevention responded by issuing an order on Sept. 2 (85 FR 55292) that, prior to Jan. 1, 2021, courts must not evict renters for failure to pay rent. Two days prior to the CDC order, the California Legislature passed an emergency statute (AB 3088) prohibiting nonpayment evictions through March 31, 2021.

California's governor asserted the state's statute takes precedence over the CDC's order. The statute preempts similar county and city ordinances, and the CDC's order states that eviction moratoriums in states that provide greater health-care protections than the CDC calls for are to be applied in lieu of the CDC's order.

The CDC's order and California's new law set renter income thresholds, but only to require greater documentation of need due to COVID-19's effect on a household. In California, the threshold is $100,000 for individuals or 130 percent of the median income in the county.

Renters below these thresholds need only submit a short hardship declaration to their landlord. The CDC's order and California's statute do not absolve residents, who must pay back-rent by Jan. 31, 2021 (CDC), or March 31, 2021 (California). In addition, California requires residents by Jan. 31, 2021, to pay 25 percent of rent owed for September 2020 through January 2021.

EVICTION MORATORIUMS AND PROPERTY TAXES

The National Apartment Association in 2019 estimated 14 cents of every dollar of rent goes to property taxes. Property owners receive 9 cents, while 27 cents pays property operating expenses and 39 cents goes to the property's mortgage.

Obviously, if there is no rent being paid but properties are still being occupied, owners must continue to pay property taxes, operating expenses, and their mortgages (mortgage relief is generally only available, under the CARES Act, to small property owners or owners with government-backed mortgages).

How will these moratoriums affect multifamily property taxes? Whether residents will resume paying rents early next year is far from certain, and back rent may never be paid. These unknowns will affect what multifamily properties' taxable values should be in 2020 and what they will be in 2021.

County assessors generally value multifamily properties using an income approach, starting with gross income netted against operating expenses. Capitalizing that income indicates a value that is the basis for determining the amount of property tax owed. The capitalization rate is based in part on the anticipated risk associated with the property's ownership, or the likelihood the property will continue to generate income.

The difficulty with using the income approach right now is that gross income declined precipitously and remains depressed many months later while operating expenses continue unabated, and there is no assurance back rents will be paid in 2021. The result in many cases is negative net income, which implies negative values and lower property taxes. In addition, capitalization rates are difficult to forecast because no one knows when COVID-19 health restrictions and related eviction moratoriums will be lifted. This uncertainty increases capitalization rates which, in turn, lower property values.

APPEAL ASSESSMENTS NOW

Given the economic challenges confronting renters, any multifamily property is highly likely to have declined in value in the short term, and potentially for the next year or longer. While assessors have promised "to take a hard look" at values in 2021 to see if they should reduce values and lower taxes, whether they will do so remains to be seen.

In view of this, multifamily property owners and managers would do well to appeal their property tax bills this year or during the next available appeal season. This will help ensure tax assessments for this year and future years account for the damage COVID-19 eviction moratoriums have inflicted on multifamily property values.

Cris K. O'Neall is an attorney shareholder in the law firm of Greenberg Traurig LLP, the California member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Sep
28

How to Fight Excessive Property Taxes During COVID-19

Cash-strapped municipalities may look to extract more revenue from commercial properties.

It would be difficult to conceive of a more impactful event for the commercial real estate market than the coronavirus pandemic. Short of finding a cure for COVID-19, the tremendous state of flux in the sector will test the resourcefulness of commercial property owners and operators for months or years to come.

Market changes always create winners and losers; the more dramatic the shift, the greater the wins and losses. In the current market shakeout, commercial property owners are asking how to best position themselves to land on the winning side. The old standby that "cash is king" is sure to apply as the economic fallout settles, and reducing the real estate tax burden is a great way to conserve capital.

But it won't be easy. Taxpayers who plan to contest high taxable values on their commercial properties face an uphill climb. Here are some common difficulties to expect, along with opportunities to consider in tax appeals.

Valuation date dilemmas. The first problem for many owners who want to reduce their tax burden relates to the timing of the pandemic. Most U.S. communities began feeling the impact of COVID-19 in March or later. However, most jurisdictions had already assessed properties with a fixed valuation date of January 1, 2020. Also, most assessors are unwilling to consider the coronavirus in valuation until January 2021.

Damage provisions. Some jurisdictions have statutory provisions that may apply to properties for the damage done by COVID-19. There is a push to clarify Ohio's statute to recognize the effects of COVID-19, for example. There are similar provisions under consideration in Illinois. Additionally, Pennsylvania has valuation dates that could prove useful for taxpayers. NAIOP and other real estate organizations have supported these actions at various levels. Owners should determine whether they can claim pandemic-related damages in contesting tax bills they are now receiving.

What about next year? Even if a taxpayer cannot pursue a challenge on the current assessment, they can take steps to reduce future assessments. This means meeting with the local assessor to establish a proper assessment before it becomes final.

For taxpayers who choose to follow this advice and address future assessments now, make sure to treat any informal meeting as if it were a hearing. Come prepared — with accurate data demonstrating the impact on property value. Discussing anecdotally that stay-at-home orders and other restrictions affected the property value is insufficient — these circumstances are the reason the taxpayer can begin the conversation, but not the substance of a compelling case for revaluation.

Substantiate arguments. Show the assessor hard numbers demonstrating how COVID-19 or the post-COVID economy affected the specific property. Have social-distancing measures, residential migration or other changes created density challenges? Is there a measurable decline in occupier demand, or a decline in foot traffic and business activity at tenants' businesses? What is the economic feasibility of the tenant base? Whatever the reasons for revisiting the valuation, the property owner should be prepared to show the impact with the same supporting material they would use to pitch the project to investors or lenders. Use facts and figures. Bring in experts. Many taxpayers are fighting for the survival of their investment, and they should act accordingly.

Vet the team. Insist that any outside tax counsel or consultants understand the taxpayer's position. This is not business as usual, so educate advisors about the real estate's value. Work as a member of the team and communicate with its members, from local counsel to the valuation expert, and talk with the individual who will meet with the assessor. Formulate a plan together and then be flexible, allowing people to pivot when they see something changing. If the team understands how to determine assessed value and understands the owner's position, then trust them to make changes in the moment as they see fit.

Anticipate challenges. How can a taxpayer prove what the assessment should be amid so much uncertainty, and with little to no sales evidence to assist in determining value? Always attack the obvious head on. For instance, if the price paid for a recently purchased property is unhelpful, analyze the sale using the same expectations established in due diligence. This may eliminate the sales price as an indicator of market value, allowing the team to then present more beneficial and relevant points. Use the law, use facts and use prior experience where similar facts lined up.

Prepare for resistance. State and local governments are in a tough spot. All over the country, there are budgetary shortfalls at the local level because of the pandemic. Many communities and schools rely on income tax, sales tax and property tax, but in the current environment there is little sales tax revenue, and it appears income tax will take a hit. Property tax is all that is left.

Appeals will not be easy. The team's appraiser must be able to establish a value and defend it. Their testimonial skills, whether in court, at a hearing or informally, are as important or more important than the valuation itself. Also, contact a local expert; market value may not be the only available avenue to a fair and uniform assessment. Owners fortunate to have their commercial properties fairly and uniformly assessed (and not negatively impacted in the pandemic) can perhaps refrain from filing an appeal. In a state where a board or court can raise assessments, an unwarranted appeal may lead to an increase in assessment, although in most states, increased assessment from a tax appeal is rare.

J.Kieran Jennings is a board member of Ohio and Northern Ohio NAIOP and a partner in the Cleveland, Ohio office of the law firm Siegel Jennings Co. L.P.A., the Ohio, Western Pennsylvania and Illinois member of American Property Tax Counsel (APTC), the national affiliation of property attorneys.
Greg Hart is an attorney in the Austin, Texas law firm Popp Hutcheson, PLLC, the Texas member of APTC.
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Sep
01

Intangibles Are Exempt from Property Tax

Numbers of lawsuits remind taxpayers and assessors to exclude intangible assets from taxable real estate value.

A recent case involving a Disney Yacht and Beach Club Resort in Orange County, Florida demonstrates how significantly tax liability can differ when an assessor fails to exclude intangible assets. For Disney's property, the tax assessor's and Disney's valuation of the property differed by a whopping $127.8 billion.

Real estate taxes are ad valorem, or based on the value of the real property. And only on real property.

The precise definition of real property varies by jurisdiction but generally is "the physical land and appurtenances affixed to the land," which is to say the land and any site and building improvements, according The Appraisal of Real Estate, 14th Edition.

Your real property tax assessment, then, should exclude the value of any non-real-estate assets. That includes tangible personal property like equipment, or intangible personal property like goodwill.

When real estate is closely linked to a business operation, such as a hotel, it can be difficult to separate business value from real estate value. If the business activity is subject to sales, payroll, franchise, or other commercial activity taxes, then the assessor's inclusion of business value in the property assessment results in impermissible double taxation.

In Singh vs. Walt Disney Parks and Resorts US Inc., the county assessor appraised the Disney resort using the Rushmore method, which accounts for intangible business value by excluding franchise and management expenses from the calculation of the net income before capitalizing to indicate a property value.

Disney argued the Rushmore method did not adequately separate income from food, beverage, merchandise and services sold on the real estate, not generated by leasing the real estate itself. Disney also argued that the assessor included the value of other intangible assets like goodwill, an assembled workforce, and the Disney brand in the valuation.

The trial court did not rule on the propriety of the Rushmore method but found its application in this case violated Florida law. Referencing an earlier case involving a horse racing track (Metropolitan Dade County vs. Tropical Park Inc.), the court agreed with Disney that "[w]hile a property appraiser can assess value using rental income or income that an owner generates from allowing others to use the real property, the property appraiser cannot assess value using income from the taxpayer's operation of business on the real property."

The trial court decision was appealed to the district court (appeals court). The appeals court found the Rushmore method, not just its application, violated Florida law by failing to remove all intangible business value from the tax assessment. When the case returned to the trial court on another issue, the appeals court instructed that the Rushmore method should not be used to assess the property.

In deciding Disney, both courts found SHC Halfmoon Bay vs. County of San Mateo instructive. That case involved the Ritz Carlton Half Moon Bay Hotel in California. The California court had rejected the Rushmore method because it "failed to identify and exclude intangible assets" including an assembled workforce, leasehold interest in a parking lot, and contract rights with a golf course operator from the property tax assessment.

The Disney trial court also looked to the Tropical Park horse track case, where the tax assessment improperly included income generated from the business betting operation not the land use.

Similarly, in an Ohio case involving a horse racing facility, the state Supreme Court rejected a tax valuation that included the value of intangible personal property in the form of a video-lottery terminal license (VLT) valued at $50 million by the taxpayer's expert (Harrah's Ohio Acquisition Co. LLC vs. Cuyahoga County Board of Revision). The property had a casino and 128-acre horse racing facility including a racing track, barns, and grandstand.

The Ohio Court recognized that the VLT had significant value that should be excluded from the real property tax assessment. It rejected the argument that the license was not an intangible asset because it could not be separately transferred or retained. Looking at its prior decisions, the Court had recognized a non-transferable license could still be valuable to the current holder of that license, and that value should be exempt from real property taxation.

Experts continue to disagree about the best method to appraise assets with a significant intangible business value component.Nonetheless, these court cases underline again how important it is for your tax assessment to exclude intangible assets. With most commercial property owners facing onerous tax burdens based on pre-COVID-19 valuation dates, it is even more critical that intangible assets are removed from valuations for property tax purposes. Work closely with assessors, knowledgeable appraisers, and tax professionals to ensure you only pay real estate taxes on the value of your real estate.

Cecilia J. Hyun is a partner with Siegel Jennings Co., L.P.A. The firm is the Ohio, Illinois and Western Pennsylvania member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Cecilia is also a member of CREW Network.
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Jul
09

Expect Increased Property Taxes

Commercial property owners are a tempting target for cash-strapped governments dealing with fallout from COVID-19, writes Morris A. Ellison, a veteran commercial real estate attorney.

Macro impacts of the microscopic COVID-19 virus will subject the property tax system to unprecedented strains, raising the threat that local governments will turn to property tax increases as a panacea for their fiscal woes.

Local governments face formidable financial challenges. One article by Smart Cities Dive suggests that the crisis will blow "massive holes" in municipal budgets, with 96 percent of cities seeing shortfalls due to unanticipated revenue declines. The Washington Post reported that more than 2,100 U.S. cities expect budget shortfalls in 2020, with associated program cuts and staff reductions. The National League of Cities recently estimated that the public sector has lost over 1.5 million jobs since March. Governmental temptation to increase the tax burden on commercial properties will be difficult to resist.

Commercial property owners face similarly unprecedented challenges. Many owners of properties that traditionally served long-term uses for hospitality, retail, office and restaurant activities are now questioning whether those uses will continue. Many properties will need to be repurposed, but to what? Some owners are reportedly considering converting hotels to apartments, for example.

Property taxes are a major component of the costs landlords must examine in determining when and how to reopen. High property taxes, which are generally passed along to commercial tenants, will exacerbate those business' economic problems. While owners can influence some occupancy costs, others, such as taxes and insurance, are largely beyond their control.

RATES, DATES AND VALUES

Real estate taxes reflect both taxation rates and assessed values, but property tax appeals must focus on a property's value. Values hinge on key concepts such as valuation dates, capitalization rates, and highest and best use. The property tax system assumes that values change only gradually, often assessing a property's value by creating a fictitious sale between a willing buyer and seller on a statutorily defined valuation date.

With valuation dates set in the past, assessors tend to value through the rearview mirror. Looking to make a deal, investors, by contrast, look prospectively in deciding whether to buy or sell a property. These viewpoints can clash, particularly when events affecting value occur after the valuation date.

That is why the commercial property owners clamoring for immediate property tax reductions will likely be disappointed, at least until a tax year when their statutorily mandated valuation date postdates COVID-19's onset.

For example, if a taxpayer's bill is based on a fictional sale occurring on Dec. 31, 2019, before the black swan of COVID-19, the assessor is statutorily bound to value the property at its pre-pandemic value.

Some jurisdictions maintain a valuation date for years. That value may change substantially once the valuation date postdates early March 2020, but few state statutes will authorize revaluations based on COVID-19 as a "changed circumstance." A pre-COVID-19 valuation could therefore burden a property for years.

Like the systemic market downturn of 2008, the COVID-19 pandemic will create great uncertainty in capitalization rates, which reflect risk associated with a property's income. This will provide good fodder for argument in tax appeals. The difference this time may be the added uncertainty surrounding the highest and best uses of various commercial properties.

In negotiating a transaction involving income-producing properties, prudent parties analyze future trends. Looking forward, they would interpret weakening tenancy with heightened risk associated with occupancy, rent collections and overall tenant credit-worthiness. They would know that tenants' missed rent payments can lead owners to miss mortgage payments, which can lead to foreclosure.

Contrary to this real-world tendency to look ahead in a transaction, assessors have often assumed a property's highest and best use is its traditional or current use. Trends of working remotely, social distancing, and the rapid, dramatic shift to online retailing turn this assumption on its head.

OBSOLESCENCE ISSUES

Some businesses that closed during the pandemic, including many retailers, may never reopen. Anecdotal evidence of the market shift is manifold. Even before the COVID-19 pandemic, analysts were describing the shift to online retail as "apocalyptic" for many brick-and-mortar stores. Seasoned retailers including Neiman Marcus, Pier 1 Imports and J. C. Penney have declared bankruptcy. Many hotels have only been able to meet debt service obligations by tapping heretofore sacrosanct capital reserves, and airline travel has fallen off a cliff. In April, CNBC estimated that 7.5 million small businesses may not reopen. UBS projects that 20 percent of American restaurants might close permanently.

Social distancing rules that reduce restaurants' serving capacity may remain in place indefinitely. Combined with the loss of clientele, such as office workers that no longer work nearby, these conditions could mean closures for low-margin restaurants. Increasing occupancy costs and revenue declines accompanied by increased taxes could tip the balance.

Office values have historically been less volatile than retail property values, but this may change with the move to remote work. Change will be less apparent where many tenants remain subject to long lease terms, but some form of remote working is likely here to stay, and this suggests office tenants may well need less or different space.

Will an office tenant renew its lease? If so, at what rate? And will the tenant downsize? A key indicator of a weakening market is when tenants with long terms remaining on leases sublet space. In a declining market, tax assessors seldom look behind historic income statements to consider these weaknesses, which should be a risk reflected in the capitalization rate.

DON'T DELAY TAX PLANNING

Retail, office, and hospitality property values almost certainly will decline, at least in the short run. For transactional and property-tax purposes, commercial property owners should examine carefully whether the property's "highest and best use" has changed. Local governments that ignore these market changes in an effort to generate short-term tax revenues may exacerbate their long-term revenue problems.

Smart property owners may be able to mitigate the fallout by focusing tax appeals on the concepts of valuation date and highest and best use. They should also note the uncertainty inherent in capitalization rates.

Tax appeals in 2020 may prove especially challenging for cash-strapped commercial taxpayers because statutorily mandated valuation dates likely predate COVID-19. However, the longer-term risk rests with local governments. If they ignore changes in highest and best uses, and if taxing authorities fail to account for the increased risk in capitalization rates, governments may unwittingly increase the pandemic's economic damage.

Morris Ellison is a partner in the Charleston, S.C., office of the law firm Womble Bond Dickinson (US) LLP. The firm is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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