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Sep
26

Washington's Carbon Experiment

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.


[1] Warren Cornwall, “Lawmakers Thwart Gregoire’s Cap-and-Trade Plan on Climate,” The Seattle Times, Mar. 16, 2009.

[2] HB 1315/SB 5283 (Carbon Pollution Accountability Act).

[3] 3Office of the Governor, “2015 Carbon Pollution Reduction Legislative Proposals,” available at http://bit.ly/2bTrwt6.

[4] Office of the Governor, “Inslee Directing Ecology to Develop Regulatory Cap on Carbon Emissions”(July 28, 2015), available at http://bit.ly/2cpjzyn.

[5] Department of Ecology news release (June 1, 2016), available at http://bit.ly/2cpjKJT.

[6] Department of Ecology, “Frequently Asked Questions About the Washington Clean Air Rule,” available at http://bit.ly/1RzQSxS.

[7] Department of Ecology, “Energy-Intensive, Trade-Exposed Industries and the Clean Air Rule,” available at http://bit.ly/2c5ksM7.

[8] Carbon Washington website, “Our Team,” http://yeson732.org/ our-team/.

[9] Natalie Chalifour, ‘‘A Feminist Perspective on Carbon Taxes,”22 Can. J. Women & L. 169, 194 (2010) (“While a carbon tax policy can be designed to mitigate regressivity, the whole raison d’être of carbon taxes is to raise the costs of goods and services based on their carbon content. The price increases that inevitably result from the tax will be harder on people with lower incomes than on those with higher incomes”).

[10] Paul Jones, “Carbon Tax Initiative Revenue Neutral, Think Tank Says,” State Tax Notes, Aug. 15, 2016, p. 528.

[11] Sightline Institute, “Does I-732 Really Have a ‘Budget Hole’?”(Aug. 2, 2016), available at http://bit.ly/2aJTNFt.

[12] Id.

[13] Sierra Club Seattle, Aug. 23, 2016, available at http://bit.ly/2ckkXoi.

[14] Laws of 2015, ch. 6, 3d Spec. Sess. (among other things, extending a B&O tax exemption for food processors).

[15] RCW 82.04.440.

[16] AWB, “Campaign Launches to Defeat Proposed Carbon Tax”(July 21, 2016), available at http://www.noon732.com/news/.

[17] David Roberts, “The Greenest Governor in the Country Tells Grist About His Big Climate Plan,” Grist (Jan. 13, 2015), available at http://bit.ly/1syriig.

[18] See, e.g., David Gamage and Darien Shanske, “Using Taxes to Improve Cap and Trade, Part II: Efficient Pricing,” State Tax Notes, Sept. 5, 2016, p. 807; Chalifour, supra 9, at 179; and David Suzuki Foundation, “Carbon Tax or Cap-and-Trade?” available at http:// bit.ly/1Ny3cOu.

[19] See, e.g., Jennifer Carr, “California Businesses Call Cap-and-Trade Auction an Illegal Tax,” State Tax Notes, Apr. 22, 2013, p. 246.

[20] No on 732 website, “Why No on 732,”available at http:// www.noon732.com/what-we-do.

[21] AWB website, ‘‘Awards,” available at https://www.awb.org/ awards/.

[22] Washington Business for Climate Action website, available at http://bit.ly/2cdLy5f; and Ceres, “Washington Business Climate Declaration FAQs,” available at http://bit.ly/2ckTwtU.

[23] See, e.g., Carlo Garbarino and Giulio Allevato, “The Global Architecture of Financial Regulatory Taxes,”36 Mich. J. Int’l L. 603, 610 (2014-2015).

[24] Patrick Dowdall, “Should a State Adopt a Carbon Tax?” State Tax Notes, May 30, 2015, p. 695.

[25] David Brunori, “Judge Not, That Ye Be Not Judged,” State Tax Notes, Aug. 22, 2016, p. 639.

 

MDeLappe 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..
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Aug
25

When Law Firms Collaborate, Property Owners Reap The Benefits On Their Bottom Line

Traditionally, a commercial real estate owner would retain several law firms, each with its own area of expertise. One firm may handle development, construction, acquisition, and leasing issues, while another firm handles contract disputes and litigation.

Although it may have become conventional, this service model is losing its appeal. Law firms with mutual clients often fail to communicate with each other, sending mixed signals to the client and leading to inconsistent advice.

As owners become more astute and the market for legal services grows increasingly competitive, owners can now demand that law firms seeking their business distinguish themselves from the competition.

One of those distinguishing attributes is the ability of the firm or its real estate practice group to address an owner’s overall real estate needs, not just a specific function. This better enables the firm or practice group to demonstrate its understanding of the owner’s business and commitment to achieving owner goals.

Some service-oriented law firms recognize this and have learned to provide value in practice areas beyond those for which they were hired. They are now looking to bring in additional professionals to ensure that their client-service teams have the expertise to handle the universe of challenges a client faces, with the experience to deliver results.

Rather than attempting to hire specialists in practice areas they don’t have, savvy law firms accomplish the broadening of expertise through collaboration.

An example of specialties that a firm may handle through collaboration is property tax representation.

Although real estate law firms have clients with large property portfolios and corresponding property tax expenses, property tax is a practice area that few real estate law firms or practice groups cover.

They typically lack the valuation experience and relationships with appraisal districts necessary to best handle their clients’ property tax issues. There are other, specialized attorneys that do have property tax expertise, however.

Several boutique law firms and practice groups in larger firms devote all of their efforts to protecting clients from appraisal districts’ excessive and erroneous property valuations and exemption determinations.

Through this focused scope of service, they have developed appraisal expertise and the ability to effectively navigate the traps and pitfalls of the property tax practice area. As a result, they can deliver significant tax savings to property owners.

When these boutique practices collaborate with a client’s primary law firm, they become critical components of the client service team. Importantly, collaborating with the primary firm’s attorneys enables property tax lawyers to maximize efficiencies in pursuing tax protests and obtaining successful outcomes – adding value that clients are coming to expect.

The most notable efficiencies come with sharing information. The client’s primary law firm will likely have institutional knowledge about the client’s business and properties that could be greatly beneficial in a tax protest.

This could include details about the client’s purchase of the property, such as purchase agreements, appraisal reports, settlement statements and financing documents.

Additional details could include the client’s reasons for acquiring the property and improving it to include specific features, construction contracts and expense reports, and financial records concerning income that the property generates along with corresponding expenses.

Lawyers at the client’s primary firm, moreover, may offer explanations as to why certain properties have decreased in desirability, resulting in obsolescence and falling demand, and thus reduced value. This is all helpful information that a property tax specialist would want to use in advocating for the client.

Without this collaboration, the client’s tax protest may be compromised because important information, which could affect the outcome of the protest, may be overlooked or forgotten.

Conversely, specialists can potentially bring different approaches to solving client problems, offering perspectives from their property tax experience.

Property tax attorneys pay close attention to capitalization rates, financing trends and sales of comparable properties, which the client’s primary attorneys may use in negotiating real estate transactions.

Because of their valuation expertise, property tax attorneys can advise other counsel on assessing damages in real estate partnership disputes or construction defect claims, and can provide recommendations for quality appraisers to serve as expert witnesses.

Property tax counsel can further provide regular updates on the evolving area of property tax law and advise on how best to position the client to minimize tax liability through tax exemptions or abatements, or other means. This collaboration would mutually serve all counsel involved for the ultimate benefit of the client.

Clients want to see that their business interests are being looked after, and are beginning to ask that lawyers collaborate to ensure the right professionals are on their team. This collaboration provides added value to property owners.

daniel smith active at popp hutcheson

Daniel R. Smith is general counsel  in the Austin law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He represents commercial property owners in property tax appeals across the state, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Aug
22

How to Fight Aggressive Property Tax Assessments

The student housing market is robust, generating strong market data that tax assessors are using to support increasingly aggressive property tax assessments. Thus, student housing owners must monitor their property values and arm themselves with the tools to fight excessive valuations.

Forecasters expect the student housing market to grow for the next several years, primarily because of its stability. Healthy investor interest led to a 71 percent year-over-year increase in student housing sales volume at the end of the third quarter of 2015, according to Real Capital Analytics. In addition, the market’s average overall cap rate was down 37 basis points from the first quarter of 2015 to the first quarter of 2016.

Combined with increased demand for beds that accompanies accelerating enrollment at the largest universities, these healthy fundamentals will encourage assessors to boost property tax assessments. In many cases, assessors will produce inflated valuations that cannot be supported by market data or realistic operating scenarios.

Student housing owners should consider the following issues to combat aggressive assessments:

Evaluate the approach

Assessors commonly derive a market value using one or more of the three classic approaches to value: cost, income or sales comparison.

The cost approach is arguably the least reliable method if the property is more than a few years old, especially given the difficulties of estimating depreciation and obsolescence factors for older properties. An assessor will most likely rely on an income and/or sales comparison approach when valuing student housing. Taxpayers can achieve lower assessments by disputing how the assessor has applied a valuation methodology to a specific property.

Challenge sales data

Assessors are using the sales comparison approach more frequently, given the huge sale volumes previously mentioned. Student housing owners should remind assessors that a sale price does not necessarily equate to market value.

While discussing comparable-sales data with the assessor, the taxpayer can sometimes discredit a sale’s relevance by outlining the physical and economic differences between the property sold and the assessed property. Point out to the assessor the factors influencing a buyer’s decision to purchase a property, which may make the sale incomparable to the taxpayer’s property.

Did the assessor reference any portfolio purchases in the sales comparison? Point out that properties in a portfolio are typically priced as a group, and may not reflect market value.

Finally, emphasize buyer motivations such as time constraints or income tax consequences that affected the price of the comparable property. Owners should consider a tax appeal even if the recent purchase price of their complex is higher than the current property tax assessment. Buyers pay for properties based on factors beyond real estate, so a purchase price should provide no more than a touchstone for an assessor.

Taxpayers should outline the factors they considered in purchasing the property, such as special financing considerations. Show how the property’s performance differs from projections made at the time of purchase.

Sharing the purchase price may lead to a higher assessment, but student housing owners can mitigate the amount of the increase with a meaningful purchase price discussion with the assessor.

Beware incompatible income comparisons

Properties built and/or operated specifically as student housing projects are often referred to as purpose-built properties. An alternative student housing solution in college areas is conventional, market-rate apartments, also known as student competitive apartments.

On the surface, purpose-built and student competitive projects are similar in use and function. When an assessor is using an income approach to value, however, the properties’ differences become significant.

Competitive properties usually include more studio and one- or two-bedroom apartments, while purpose-built properties have more three- and four-bedroom units. Competitive complexes rent by the apartment, while purpose-built properties rent by the bed. Rental rates and amenities also can differ dramatically between the two property types.

In an income approach, assessors typically use market-driven rent, vacancy, and expense factors to arrive at a net operating income figure that is then capitalized using a market-driven capitalization rate. The most common mistake assessors make using this approach is applying competitive market data in their analysis rather than purpose-built market factors.

Student housing owners should be quick to point out the differences between these two property types: For example, competitive apartments are valued per square foot, while purpose-built housing is valued by unit or bed.

Owners should emphasize occupancy fluctuation differences between competitive apartments and a purpose-built property, which may have low occupancy during the summer. Also point out the influence of the on-campus housing supply on the performance of an off-campus, purpose-built project.

Finally, be mindful of how a property’s distance from campus affects rental rates. There is typically a direct correlation between proximity to campus and higher rent levels, leasing velocity and occupancy for purpose-built properties. The correlation isn’t as strong at student competitive properties.

Even if an assessor is using appropriate data from comparable purpose-built properties, owners should challenge the market factors in the assessor’s analysis with data taken directly from the property’s current and previous year’s operating statements, if such data is in the property owner’s favor. An operating statement can help distinguish the owner’s property from projects that lead to higher assessments. Pointing out specific income and expense items can show trends in rental rates, occupancy and expenses that differ from the market trends alleged by the assessor.

Even in a strong market, student housing owners should constantly monitor their property tax assessments, and have the courage to combat assessments derived from sales or income data.

Davila Photo 3Gilbert Davila is a partner in the Austin law firm of Popp Hutcheson PLLC, which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Davila can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jul
01

Is Your Hotel Paying Too Much Property Tax?

The value of a hotel for purposes of tax assessment is not the same number as its value as a going concern.  Understanding the difference between the two will save the hotel owner from an excessive property tax bill.

For assessors, the challenge is to correctly distinguish taxable assets from the non-taxable, and therein lies both a problem and an opportunity. By fully separating the assets, the property owner may reduce its taxes. But failing to properly prove the allocation results in the owner paying real estate taxes on non-real estate—and likely non-taxable property.

Let’s step back for a moment and note that hotel operation comprises four closely related asset components: land; the building or buildings; furniture, fixtures and equipment; and the business itself.

The main distinction here is that land and buildings are taxable as real estate, whereas the business components and fixtures, furniture and equipment are not. Nevertheless, each asset component is tightly linked to the others in making up the value of the going concern.

Reckoning Value

Because these assets are investments, each must generate income to justify its cost. Calculating the return of and on these investments can serve to separate the asset’s value from the going concern and isolate the real estate value.

Clearly, room revenue in a hotel operation is based on more than nightly room charges; it also includes income attributable to the furnishings and services. Separating the value of furniture, fixtures and equipment is the obvious first step to allocating the assets. Assuming that the taxpayer can make a supportable estimate of the market value of the fixtures, furniture and equipment, the taxpayer can then subtract the value attributable to the use of, and profit from,  those items. In other words, the value calculation should recognize both a return of—and a return on—furniture, fixtures and equipment.

To be sure, furnishings are hardly the only investment in hotel operations. Services such as marketing and reservation systems, food and beverage, recreational amenities, and quality of the flag or brand, among other components, all contribute to the property’s value.

These cost centers are business assets that are part of the going concern, but they are not taxable as real estate. Still, many assessors mistakenly accept only the removal of the depreciated cost of the furniture, fixtures and equipment, and erroneously attribute the full net operating income to the real estate. Crucially, that includes the non-taxable business income associated with the hotel operation.

In order to pay tax only on the real estate, property owners should allocate value to the non-taxable business assets. That step allows the owner to more accurately segregate the value of the real estate from the going concern.

Robust Debate

Within the valuation community, there is robust debate over the extent of items related to business value that should be removed from the going concern. Some appraisers go so far as to assign a value to the initial investment in personnel and training, while others may just remove the food and beverage component and apply a rent to the restaurant or meeting space.

Make no mistake: Appraisers and courts agree that a business value component exists. When that value is clearly demonstrated and the valuation is properly supported, courts and appraisers will also agree that it should be removed from the going concern in order to isolate the real estate. Until persuaded otherwise, however, taxing authorities usually take the position that expenses associated with hotel cost centers offset the income, and the management and franchise fees cover all of the business and intangible values associated with a hotel.

Blending the contributory value of the furnishings and business with the real estate is a disservice to the taxpayer and unjustifiably burdens the property with an excessive fixed cost. A well-developed real estate appraisal for a lodging property will go beyond addressing the value of the going concern, and will also analyze each asset category to correctly identify the taxable real estate component. By drilling down into the operation of the property and segregating the asset components, a capable valuation expert may be able to offer some relief to the taxpayer.

The final key to minimize taxes is local knowledge. This requires an understanding of the jurisdiction and the methodologies that local tax assessors find acceptable, and knowing the personalities of opposing counsel and appraisers. Many ideas surround asset allocation, and knowing which ones to employ may keep hotel owners from overpaying real estate taxes.

KJennings90

Anthony Barna jpeg

J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

Anthony C. Barna, MAI, SRA, is a principal of Pittsburgh appraisal firm Kelly\Rielly\Nell\Barna Associates.   He specializes in appraisal and consulting for litigatgion support.  He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..                                                         


     

 

 

 

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May
31

Tax Resolution Conundrum

Pittsburgh resolves to reduce taxpayers' inflated property assessments.

Politics makes strange bed fellows. Pittsburgh's city council recently ordered its finance director to draft policies that protect taxpayers from assessment appeals by the city, and even to file appeals on taxpayers' behalf.

Unlike many states, Pennsylvania allows the three entities that levy real estate taxes (counties, schools and municipalities) to appeal annual real estate assessments, just as taxpayers do.

Taxpayers file appeals when they believe their property is over-assessed, in order to reduce their assessment and their real estate taxes.

When taxing authorities file annual appeals, they seek to increase assessments and taxes. The city of Pittsburgh has historically filed appeals following the sale of a property assessed at a lower value than the sale price. This practice, where taxing authorities essentially sue individual taxpayers (and voters) to increase real estate tax payments, is common in Western Pennsylvania.

In a strange twist, first-term city councilman Dan Gilman recently introduced legislation to limit the city's ability to file increase appeals and, in some cases, to even direct the city to file appeals to decrease property assessments. The resolution passed and the mayor signed the measure on Feb. 23.

The resolution starts off with two self-limiting provisions. First, it bars the city from appealing the assessment of a property for two years after the property sells. Second, the resolution prohibits the city from using a property's sale price as the basis for an appeal seeking an assessment increase.

These provisions restrict the city from doing what it is permitted to do by Pennsylvania statute, which states that "[Any county, city, . . school district . . which may feel aggrieved by any assessment of any property . . shall have the right to appeal" an assessment the same as the property's owner.

The resolution further limits the city to appealing a property's assessment once every three years. Pennsylvania's statute allows taxing authorities to appeal annually.

David "J.R." Sachs, president of A-1 Van Service recently battled Pittsburgh taxing authorities over his property's assessment, and believes the new resolution is a good idea.

After Sachs purchased three dilapidated buildings and contaminated land along the banks of the Allegheny River in 2013, the school district appealed his assessment, seeking an increase to the purchase price. Sachs saw his assessment mushroom from $489,800 to $540,000 following the appeal, while the assessments of neighboring properties without recent sale prices remained unchanged.

The new resolution "gives people a chance to invest in their properties and improve them before getting hit with a tax increase," Sachs says.

Perhaps most unusual is the resolution's requirement directing the city to generate a list of properties with assessments 50 percent or more greater than their market value, and to "appeal values downward on behalf of those owners." This provision turns current practice on its head.

In a taxpayer-initiated appeal seeking an assessment reduction, the city's legal department has historically defended the assessment and fought against reductions. Now, the city will be required to file appeals seeking reductions on behalf of taxpayers.

This last provision is not entirely unprecedented in Pittsburgh. In 2005, Allegheny County, where Pittsburgh is located, conducted a countywide reassessment following a court mandate, releasing the new assessment figures but refusing to certify the assessment. Instead, the county resisted implementing the assessments in litigation that wound up in Pennsylvania's Supreme Court.

During this litigation, in April 2006, Allegheny County filed 11,000 appeals on behalf of taxpayers who saw their assessments rise since the prior reassessment in 2002 as a result of previous appeals by school districts or municipalities. Allegheny County brought these appeals to hearing and requested reductions. City and school district representatives appeared and defended the assessments.

The city's recent initiative may have unintended consequences, according to Pittsburgh lawyer, Michael I. Werner of ZunderWerner, LLP. Werner has extensive experience representing property owners in appeals of their property assessments. "When the county did the same thing in 2006, property owners were confused. In some instances, the owners did not want the county to file appeals on their properties," he says. "This put us in an odd position: Because the owner was not the appellant, we were unable to withdraw the appeals. The county was trying to help, but they inadvertently created new obstacles for many property owners."

"It is a noble thing they are trying to do, but it raises the question of whether a city employee, who does not know the specific property and who does not have an attorney-client relationship with the property owner, is in a position to properly represent that owner's interests," Werner says. "City-initiated appeals to reduce an assessment should only be filed at the request of the property owner."

The city's resolution also calls for its finance director to collaborate with the Pittsburgh school district and Allegheny County to implement and expand its new policies. Given the history, it seems unlikely that the school district will join the city, either in self-limiting its appeal rights or in filing appeals seeking lower assessments.

Pennsylvania school systems are strapped for cash due to the state legislature's budget impasse: lawmakers are more than eight months past deadline to pass the 2015-2016 budget, and many school districts have been forced to take out loans to meet operating expenses. Increasingly, school districts have become more aggressive in filing increase appeals as they seek new sources of revenue.

What happens next is open for debate. Even though Pittsburgh's mayor ratified the resolution on Feb. 23, one councilwoman introduced a measure on Feb. 22 to repeal it. The new proposal remains in committee. All assessment appeals for properties in Pittsburgh were due March 31, and hearings will begin in May and June.

sdipaolo150Sharon DiPaolo is a partner in the law firm of Siegel Jennings Co., L.P.A., the Ohio and Western Pennsylvania 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..

 

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May
17

Property Taxes And The Growing Millennial Impact On The Retail Sector

As researchers continue to debate how market conditions affect the value of commercial real estate, one thing is certain: Appraisal districts across Texas are recalculating taxable property values. To ensure fair tax assessments, it is crucial for retail property owners to monitor demographic and technological changes that can disrupt retailers’ sales and a shopping center’s overall income potential.

Here are a few points for taxpayers to broach when helping assessors determine correct taxable property value.

Consumers spent more on dining out than at the grocery store last year, a historical first, according to Marcus and Millichap’s 2016 U.S. Retail Investment Forecast. With millennials dining out more than other age groups, this trend will likely continue. Some landlords are shifting the balance of stores, restaurants and bars at their properties to lure millennia) shoppers.

Conversely, changing consumer demand is weighing on outdated shopping centers that require significant renovation to remain relevant. Even with the right updates, a center could suffer from external obsolescence, or conditions outside the property that reduce its value.

Millennial Impact

The growing influence of millennials has also increased demand for convenience commerce.

Businesses such as Instacart now enable consumers in some markets to order groceries and goods directly from major grocery chains using smartphones, to be delivered to their home in as little as one hour.

E-commerce companies are adapting services that were once accessible only in a retail space and delivering those conveniences to the consumer. Entrepreneurs have already begun to experiment with mobile services ranging from dog grooming, manicures, hair styling and even massage therapy.

As the availability of services grows in step with millennials’ disposable income, owners of shopping centers offering similar services may see a decrease in foot traffic within their developments.

Shopping centers with tenants that cannot adapt to this service delivery model may be exposed to significant vacancy risk.

Adapting to the Market

Many national retailers adapting to e-commerce growth have announced store closures in 2016. Many of these retailers are investing significant capital into their omni-channel platform, suggesting that additional store closures are still to come.

With the continued growth of e-commerce, some industry observers believe that retailers will reduce the size of their showrooms or sales floors to allow more square footage for warehouse fulfillment space.

More warehouse space would allow retailers to process merchandise for pickup or delivery without interfering with the shopping space for customer foot traffic.

In this scenario, market rental rates that represent part showroom and part warehouse space would be appropriate for assessors to use when applying the income approach to value.

Adapting to Change

Taxpayers must always ensure that assessors use correct rates and values as comparables, otherwise the assessor could reach an improper value.

Additionally, as retailers across the nation continue to experiment with smaller store footprints, assessors must consider the potential for that trend to reduce the market value of large boxes and inline spaces, with a corresponding impact on property values.

Shifting demographics, the evolution of convenience commerce and retailers’ adaptation to e-commerce can profoundly increase or decrease a retail property’s value.

These trends demand that assessors carefully analyze a property’s individual characteristics as well as the market area in which the subject is located.

Apparel tenants may be the most at risk of losing sales, but landlords must also consider the viability of other tenants that could occupy the retail space at market rents.

The assessor should consider this uncertainty when selecting capitalization rates. Also discuss with the assessor year-over-year changes in income and expenses, and in tenant health, within the subject property.

By protesting property taxes, landlords can pass any tax savings onto their tenants, who typically reimburse the landlord for taxes, depending on the terms of the lease. In addition, a successful tax protest may enable the landlord to quote lower operating expenses, which can help attract and retain retailers. Correct analysis can identify any obsolescence that may exist, enabling the assessor to adjust taxable value accordingly.

And with a more accurate picture of the property’s marketability, the assessor will be in a better position to judge proper market rents, vacancy and collection loss, and capitalization rates. Only with all these essential pieces can the assessor correctly determine a retail property’s taxable value. 

kirk garza activeKirk Garza is part of the Member Appraisal Institute and a 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 the American Property Tax Counsel, the national affiliation of property tax attorneys. Reach him at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

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May
17

Smartphones, Showrooming Impact Cost

Smartphones lead the way in making mobile a key player in consumer purchases in-store and online.

The battle between physical stores and online retail rages on, but the recent explosion in smartphone usage is blurring the battle lines. Using smartphones, consumers in a store now can simultaneously shop and compare pricing and product availability at competing stores or online. The practice is sometimes referred to as “showrooming.” Increasingly, retailers must simultaneously invest in the problem. a combination of brick-and-mortar stores, websites, digital marketing and merchandise delivery to sell goods.

Only the real estate component of that infrastructure is subject to property tax. If property owners identify the portion of store sales attributable at least partially to online shopping, they can argue for taxable property values more accurately based on the remaining sales volume attributable to a store’s physical location and condition.

Retailers that think mobile is a channel use the wrong metrics to measure the smartphone’s impact on retail. Smart retailers focus on the impact on overall business rather than trying to measure only app downloads or channel sales.

Extrapolating a retail property’s value from base rent is relatively easy, but what happens when rent is based on sales? How do sales that take place in the store via smartphone, or online transactions that stem from a store visit, affect percentage rent?

Assessors and appraisers don’t yet have satisfactory answers to these questions and developing appropriate metrics is challenging. Taxpayers can help shape the debate, and their own tax liability, by understanding the problem.

Digital Influence Spreads

The lion’s share of U.S. retail sales continues to revolve around physical stores. Forrester Research reports that in 2015, e-commerce sales totaled approximately $334 billion, while off-line sales totaled $2.9 trillion, more than eight times more. However, many offline sales were digitally influenced, meaning shoppers connected with digital touch points, particularly mobile phones.

Forrester estimates that $1.2 trillion of U.S. retail sales in 2015 were web-influenced, and that by 2020, $1.6 trillion of all off-line retail sales will be web-influenced. The penetration of online buyers using smartphones increased to 86 percent in 2015, up from 54 percent in 2011, Forrester found.

Shoppers want to receive products quicker and cheaper than ever before, but still prefer to shop in physical stores in order to touch merchandise and obtain products immediately. Successful physical retailers combine physical stores and digital tools, enabling customers to touch and receive goods in a more cost-effective way than ever before.

Physical retailers must realize the key role smartphones play in unlocking sales. American adults use smartphones to locate stores and to check store hours, requiring retailers to keep websites current. Forrester estimates that in the first quarter of 2016, more than one-quarter of U.S. online mobile phone users ages 18 to 34 used their phones to compare prices online for products they were considering buying.

Shoppers also research product information on smartphones, often while in a store. Retailers, therefore, must monitor price variances and adjust prices in real time, against both physical and virtual competition.

Physical retailers also need to address perceived problems with off-line shopping, such as long lines and out-of-stock merchandise. Some sophisticated retailers have addressed these issues by developing store-specific data. Forrester reports that companies such as Target and The Home Depot now direct shoppers, via smartphones, to look for items in specific locations within stores, thereby reducing wait time and frustration. Nike store employees can look up inventory and make sales immediately with their smartphones. Shipping continues to pose a problem for both physical and virtual retailers. When the product is in stock, the physical retailer does not have a problem. However, maintaining inventory in stores potentially imposes the added costs of the inventory itself, additional rent and associated property taxes.

In January 2016, The Wall Street Journal reported that Gap, Inc., which includes retailers Banana Republic and Old Navy, was narrowing its free shipping window to 5 to 7 business days, down from 7 to 9 business days. Is this enough to satisfy the demands of consumers who expect immediate delivery of products, particularly from physical retailers?

Challenge to Retailers

Physical retailers face three very expensive budget items: associates, real estate occupancy costs (including taxes) and inventory. They must create a more pleasurable, yet competitive, shopping experience in order to beat digital competitors. Stores must become increasingly immersive and engaging experiences that enable customers to do everything from trying on wearable goods to playing with and testing products, or attending cooking classes and food demonstrations. The importance of enhancing the shopping experience in physical stores often means creating easy availability to other amenities such as restaurants and coffee bars.

While it may seem counterintuitive, the quality of a retailer’s online presence will influence sales, and hence the underlying value of the retailer as a tenant in a shopping center. Developers need to attract retailers who simultaneously focus on brick-and-mortar store sales, websites, digital marketing and merchandise delivery to sell goods. Percentage rent clauses in leases must appropriately capture sales.

All of this takes money and increases the complexity of measuring costs. Costs, such as property taxes, play a key role as retailers compete for sales and profits. Online retailers generally pay property taxes for distribution centers but can often reduce this cost by obtaining tax incentives, such as fee in lieu of tax agreements. Physical retailers, which often have a greater impact on the local economy, have less leverage to control property taxes. They face the challenge of showing assessors how mobile technology and e-commerce, not location alone, impact sales.

In January 2016, Forrester reported that “too often, companies measure what they can, rather than what they should, because they lack the analytics to generate the insights they need. Retailers track mobile sales rather than influenced sales because they can, and, more often than not, do treat mobile as a [separate] sales channel.”

This is precisely the problem tax assessors and physical retailers face in measuring mobile technology’s impact on a retail property. The assessor’s job is to value the real estate, not the business, which is increasingly affected by mobile innovation. Theoretically, one can use only in-store sales volume in the valuation but to what degree is a store-front simply an advertising medium — like a billboard. Stores can encourage customers to order while browsing at the store but have it shipped to their house and/or pickup at a nearby location that has lower property tax, possibly a warehouse on a side street.

Increasingly, retailers must balance between the physical and the virtual, with the smartphone serving as the key touchpoint. Retail success is still about location — location of the actual shopper inside or outside the store, at home, at work, at a competitor’s store or on a website or smartphone  — it’s just not about physical storefronts anymore.

Morris Ellison Photo Current july 2015Morris 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..

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Apr
16

Don't Lose Out on Construction Tax Exemptions

Tax Exemptions Can Apply To Income-Producing Real Estate From Apartments To Manufacturing Facilities

The construction cranes that punctuate our city skylines confirm that economic recovery is again driving commercial real estate development. Property tax considerations should not be the tail that wags the dog when it comes to timing construction or leasing. However, the savvy investor and tax manager may want to make sure they are not leaving money on the table by overlooking potential tax savings. Most should also be aware that, in many states, property under construction is exempt from property taxes.

Most states encourage the development of commercial and industrial facilities by sheltering construction projects from the payment of property taxes until the property is in use or occupied, and therefore producing income to pay the taxes. As with most property tax exemptions, however, taxpayers must follow statutory procedures and meet specific conditions to qualify. Frankly, many taxpayers inadvertently fail to meet the criteria for receiving the full benefit of the tax  exemption.

A tax exemption typically will apply to a commercial or industrial building under construction, including ramps, loading docks, and paved areas used for parking or storage built in conjunction with the project. In most states, the key to receive the exemption is that the property must be constructed to produce an income.

Exemptions most often apply to hotels, apartments, office buildings, retail stores and manufacturing plants. Even a condominium project may be entitled to the exemption because it is built to produce an income. A qualifying income may be from a one-time sale of the property, as with a condominium project, or an ongoing income stream from a lease or use of the property in business.

The tax exemption may also apply to construction of an addition in an existing building or structure, such as a new wing for a building already on a site. In most cases, the modification must change the nature of the building, perhaps increasing manufacturing space or adding a new wing onto a shopping mall, thus increasing the property's income-producing potential.

In many states, the construction exemption also applies to machinery added to the space. This is usually limited to machinery and equipment installed or affixed to the new building, structure or addition. Unfortunately, most states disallow equipment installed subsequent to construction to qualify for this construction-in-progress exemption.

The exemption seldom applies to preparing the land for construction. That means that site development such as excavation or grading the property to prepare for construction will not qualify as property under construction for a tax exemption.

An exemption will be denied if the applicant fails to meet one of the conditions. For example, in Oregon the property must be under construction on Jan. 1 of the assessment year. As discussed earlier, site preparation is not considered part of the construction, nor is demolition of an existing building; construction commences when work begins on the foundation.

Timing can be critical to securing the tax exemption. In Oregon, if the user occupies any part of the property before Jan. 1 of the year following the year for which the exemption is claimed, the property is disqualified for a construction-based tax exemption.

Partial occupancy is one of the fatal stumbles that many taxpayers make, losing their tax exemption. For example, user occupancy of the first floor retail space in a multi-story commercial or apartment building would disqualify the entire building from exemption, even if floors 10-15 are still under construction on Jan. 1. Thus, the occupancy of the retail space, in advance of the apartment complex completion, may result in hundreds of thousands of dollars in lost property tax exemption.

Additionally, many jurisdictions require a full year of construction, from Jan. 1 to Jan. 1, to qualify for a property tax exemption. If the building is first occupied on day 363 of the tax year, then the property owner could lose the entire year of property tax exemption.

Finally, most states require that the taxpayer apply for an exemption before starting construction. Oregon's statute requires the applicant to file the application on or before April 1 of the assessment year for which the exemption is claimed.

Most states limit how long a taxpayer may benefit from the tax exempt status for property under construction. Usually, this exemption is no more than two consecutive years.

The taxpayer must carefully review their statutes to determine the criteria and conditions for a construction-in-progress tax exemption. The under construction provision is one of many exemptions that can yield significant tax savings for property owners who take the initiative to learn effective tax strategies for their markets. This is particularly true of the commercial projects taking shape under those construction cranes gracing our skylines today.

 

CfraserCynthia M. Fraser is a partner at the law firm Garvey Schubert Barer where she specializes in property tax and condemnation litigation. Ms. Fraser is the Oregon representative of American Property Tax Counsel, the national affiliation of property tax attorneys. Ms. Fraser can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
15

Valuation Education

How to spot - and challenge - unfair tax bills
Even if there is life left in this market cycle, commercial property owners should maximize returns now in preparation for the next buyer’s market, whenever it may begin. Property tax is one of the largest expenses for most owners, so protecting the property, investment and tenants requires a thorough understanding of the tax system. With that understanding, the taxpayer will be better equipped to spot an inflated assessment and contest unfair tax bills.

Keep it (fee) simple
Merely knowing for how much a property would sell is insufficient to ensure proper taxation. Specifically, taxpayers need to know fair taxation starts with a fair measurement of value.

The assessment is the measurement to which taxing entities apply the tax rate. In order to treat all taxpayers uniformly, assessors must measure the fee simple value of the property, or the value without any encumbrance other than police power.

Why is that important? The principle is that a leased property and an identical owner occupied property, valued on the same date and under the same market conditions, would be taxed the same. By contrast, leased fee value or value affected by encumbrances can vary greatly, even between identical properties. The concept is simple; the application, not so simple.

Assessors and courts alike struggle to determine an asset’s fundamental real estate value because their primary source of data is leased-fee sales, or sales priced to reflect cash flow from existing leases. Several courts across the country have understood the necessity to assess properties uniformly and have mandated that assessors adjust sales data to reflect the unencumbered value of the real estate.

In Ohio, the state Supreme Court ruled that an appraiser who was valuing an unencumbered property had to adjust the sale prices of comparable properties to reflect the fact that the subject property was unencumbered (by leases, for example) and would therefore likely sell for less. The decision recognized that an encumbered sale is affected by factors besides the fundamental value of the real estate.

Courts across the country have been wrestling with the fee simple issue. For real estate professionals, the idea that tenancy, lease rates, credit worthiness and other contractual issues affect value is commonplace. In order to tax in a uniform manner, however, assessors must strip non-market and non-property factors from the asset to value the property’s bare bricks, sticks and dirt.

Doing the math
Although part of the purchase price, contractual obligations and other valuable tenant-related attributes are not components of real estate. What is part of the real estate is the value attributable to what the property might command in rent as of a specific date. This may appear to be splitting hairs, but the difference between values based on these calculations can be significant.

In the first instance, the landlord and tenant have a contractual obligation. For example, suppose the rent a tenant pays under a 20-year-old lease were $30 per square foot. If the tenant were to vacate, however, that space might only rent for $10 per square foot today. The additional $20 per square foot premium is in the value of the contract, not the value of the real estate. Moreover, the contract only holds that value if the market believes the tenant is creditworthy and will continue to pay an above-market price.

When the tenant vacates, it’s the real estate itself that determines the current market-rate lease of $10.

Good data, good results
Identifying an inflated assessment brings the taxpayer halfway to a solution. Step two is finding the best way to challenge the inappropriate assessment. Each state has its own tax laws and history of court decisions, but a few key principles will help taxpayers achieve a fee simple value.

First, sales and rents must have been exposed to the open market. A lease based on construction and acquisition costs reflects only the cost of financing the acquisition and construction of a building, not market prices.

Another principle assessors often fail to apply is that the data they use must be proximate to the date of the tax assessment. Therefore, a lease established years before the assessment is not proximate, even if the lease itself is still current.

What does make for good data is a lease that has been exposed to the open market, where the property was already built when the landlord and tenant agreed to terms free of compulsion. Equally reliable is the sale of a vacant and available property, or where the lease in place reflects market terms proximate to the assessment date.

Taxpayers who challenge assessments that are not based on fee simple values help themselves maintain market occupancy costs, which will in turn lead to better leasing opportunities and retention of tenants.

KJennings90J. Kieran Jennings is a partner in the law firm of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
14

Washington County Pennsylvania 2017 Property Tax Reassessment

Sharon DiPaolo, an attorney for Siegel Jennings tax law firm, discusses the upcoming property tax reassessment for Washington County Pennsylvania in 2016/2017 and what you can do to file an appeal. 


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