A recent legal change in Indiana has created a model for property tax reform across the country. Starting in 2011, the Hoosier State has compelled assessing officials to defend excessive assessment increases with objective evidence and meaningful arguments in appeals.

The statute applies whenever the appealed property's value has increased by more than 5 percent over its prior year's value. Moreover, where the prior year's value was reduced on appeal and the reduction was not based on the income approach, the assessor now has the burden of proof to support any increase. Failure to defend the assessment automatically reduces the property's assessment to the prior year's level, and the taxpayer can press to further reduce the value.

Assessors on the defensive

This simple change gives Indiana taxpayers greater protections in appeals than taxpayers have in most other jurisdictions. Why? With no burden of proof on appeal, an assessor may contend that her value is presumed correct. Instead of explaining how she derived a property's value, the assessor may attempt only to discredit the taxpayer's case.

With the burden of proof, however, the assessor must produce probative evidence and logical arguments to support her value. She must explain why her assessment meets the jurisdiction's valuation standard. She must walk the local or state tribunal through her analysis. In short, she must explain how she did her job and produce evidence justifying her increased valuation.

An assessor that fails in those steps will likely lose. To avoid the time, expense and potential embarrassment of a loss, the assessor who carries the burden of proof is more likely to settle a case.

Limits on burden-shifting

For the burden-shifting statute to apply, the property under appeal must be the same property for both the current and prior years. It does not apply where the disputed assessment is based on structural improvements, zoning or uses that were not considered in the assessment for the prior tax year.

If significant new construction or demolitions occur at the property between the prior and current assessment dates, the taxpayer maintains the burden of proof. If the increase in value is due to the assessment of omitted property, such as when the assessor added square footage previously overlooked, then the taxpayer maintains the burden of proof.

The burden-shifting statute applies only to an increase of assessed value, not to an increase in tax burden. Taxpayers carry the burden of proof to show the value should be lower than the prior year's value.

The burden of proof can shift several times during an appeal. For example, assume that an Indiana commercial property is assessed at $800,000 in Year 1. In Year 2, the assessment increases by more than 5 percent to $1 million.

The property's physical status and use are the same in both years, and the taxpayer has an appraisal supporting a value of $500,000 in Year 2. The assessor carries the initial burden of proof to show her $1 million value is proper. If she fails to make a convincing case, the property's assessment will at minimum revert to its Year 1 value of $800,000. The taxpayer then has the burden of proof to show that its appraised value of $500,000 is correct.

If persuasive, the appraised value likely will carry the day; the Indiana Tax Court has said that an appraisal compliant with the Uniform Standards of Professional Appraisal Practice is often the best evidence of value. Even if the appraisal is unpersuasive, the property's assessment will still be lowered to its Year 1 value.

What are the drawbacks?

Who has the burden is sometimes unclear, so deciding the burden of proof may add an argument to the appeal. Parties may file motions in advance of a hearing to decide the burden of proof issue. If multiple years are under appeal, different parties may (depending on the values from year to year) have the burden of proof for different years, which could complicate the presentation of arguments and evidence at the administrative hearing.

The burden-shifting statute is one reason that more assessors are hiring counsel and paying for appraisals in appeals, which might prolong the appeals process in some cases. Taken as a whole, however, Indiana's burden-shifting experience has been a positive one for taxpayers. Taxpayers have always had to present evidence and arguments to prevail and now, in many cases, so do the assessors.

Indiana has compelled assessing officials to explain how they did their jobs correctly—or lose on appeal. Assessors who can't or won't defend their assessments are more likely to settle, saving taxpayers considerable time and resources. Taxpayers in other states should consider pressing lawmakers in their jurisdictions to replicate this Heartland property tax experiment.

Brent A. Auberry is a partner in the Indianapolis office of the law firm Faegre Baker Daniels LLP, the Indiana member of American Property Tax Counsel (APTC), the natonal affiliation of property tax attorneys. Mr. Auberry can be reached at brent.auberry@faegrebd.com

Court Decision Promises to Reduce California Hospitality Property Taxes

A May 22, 2014, decision by the California Court of Appeal may be a game changer for hotel and hospitality property owners and operators. After many years of litigation before local boards of equalization and the courts, in SHC Half Moon Bay v. County of San Mateo, there now appears to be a definitive ruling on whether the "Rushmore approach" may be used to value hotel properties.

First championed by its creator, appraiser Stephen Rushmore, the Rushmore approach is a technique that appraisers use in valuing hotel properties that is intended to remove the value of intangible assets and rights used in hotel operations.

Intangibles, which are generally exempt from property taxation, include assets such as an assembled workforce, service contracts, and hotel management and franchise agreements. Removal of such intangibles is necessary in certain contexts, such as appraisals for property tax purposes. Intangible assets and rights used in the operation of hotels are often closely intertwined with the real property, land and buildings, which are also used in the hotel's operation.

Appraisers have used the Rushmore approach to value hospitality properties for years, and the method enjoys broad acceptance in some contexts, such as with lenders that require appraisals for financing purposes. Yet the Rushmore approach has been a constant source of controversy in the valuation of properties for ad valorem property tax purposes, primarily because the approach fails to remove the entire value (or in some cases any value) of intangibles.

Insufficient Deduction

Stated most simply, the Rushmore approach is supposed to remove the value of intangibles through the deduction of management and franchise fees as an expense when an appraiser or assessor values hospitality properties by capitalizing the revenues generated by such properties.

In its recent decision, the appellate court specifically held that "the deduction of the management and franchise fee from the hotel's projected revenue stream pursuant to the income approach did not—as required by California law—identify and exclude intangible assets" such as workforce and other intangibles. The court also said that the taxing authority had not explained how the deduction of the management and franchise fee captured the value of the intangible property.

Unfortunately, the court's decision upheld the use of the Rushmore approach to remove the value of goodwill for the hotel in the SHC Half Moon Bay case. The court made the decision because the local board of equalization received insufficient evidence on the issue. Because the hotel's goodwill basically represented the value of its franchise, or flag, the court's decision left in place the assessment of that nontaxable intangible.

Fortunately, the appellate court provided a road map for other taxpayers to remove the value of their hotel's franchise value in the future. To achieve that result, taxpayers will have to provide more specific evidence for the value of their hotel franchise or flag, or for other significant hotel intangibles.

Savvy hospitality property owners will find several silver linings in the SHC Half Moon Bay decision. For one, although the ruling came down from a California court, its reasoning has application nationwide.

In addition, the case supports California's general standard for addressing intangibles, which is to identify, value and deduct. For hospitality properties, this means pointing out to the taxing authorities the specific intangibles used in conjunction with the real property and then obtaining an independent appraisal of each identified intangible. The appraised values for all the identified intangibles should then be added together and deducted from the overall value for the hotel, the overall value being calculated from total hotel revenues.

Franchise Value

Also, the taxpayer in the case sought to remove the intangible value of the hotel's franchise using an accounting analysis that was intended for use in financial reporting and which assigned all residual value to goodwill. Careful reading of the Court of Appeal's decision shows that had the hotel separately valued the franchise, as it did for the workforce and other identified intangibles, the outcome might have been very different.

The SHC Half Moon Bay decision has one other benefit in that it confirms that failure by a taxing authority to remove an identified intangible is a legal issue entitled to de novo review by the courts. De novo enables the court to review the case afresh, without reference to previous reviews or assumptions by lower courts or boards. In California, such review is rarely available in judicial appeals of decisions by local boards of equalization, which are difficult to reverse in the courts.

Hospitality property owners should show the SHC Half Moon Bay case to their local assessors and follow the decision by presenting valuations for all of the intangible assets and rights used in their property's operations. If the assessor declines to remove the intangibles in accordance with the appellate court's decision, the owner should pursue their rights before the county board of equalization and in the courts.

Cris K. O'Neall is a partner in the Los Angeles law firm of Cahill, Davis & O'Neall LLP, the California member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. O'Neall can be reached at cko@cahilldavis.com.

"Computing value can get complicated if stores are required to mix online sales with physical sales."

Shopping via smartphones and tablets is here to stay, but the new-found convenience has introduced new uncertainties and complexities to shopping center owners, developers and investors.

The uncertainty stems from the ways e-commerce complicates shopping center valuations and development. Appraisers, assessors and property investors are forced to reconsider previously accepted answers to fundamental questions: What is the relative value of in-line stores and anchors? How should stores on contiguous parcels comprising a regional mall be valued? How fundamental is location? In an e-commerce world, the answers to these questions are increasingly uncertain and complex.

For example, the existing ad valorem tax system taxes a property's real estate value rather than its profitability. The current system assumes rents, which form the basis of commercial property values, relate directly to profitability. Rents in a regional mall are based upon profitability. For example, a jewelry store in a mall's center court may pay $75 per square foot while a family apparel store pays $20 per square foot. What really matters is occupancy cost. When occupancy costs (the total costs paid to the landlord including rent and reimbursable items such as CAM) exceed 12 percent of sales, the tenant may be headed for trouble. Higher sales permit higher occupancy costs. Indeed, appraisers often incorrectly equate real property value to the profitability of the property's business operation when the real property should be valued in fee simple in a tax appeal.

Conventional wisdom suggests strong anchors improve a center's real estate value, stabilize a property's financial statement, reduce an owner's risk and increase the price a buyer would pay for the center. For example, a Nordstrom will often bring inline tenants that would otherwise not go to the mall. A recent variant on this theme is the proliferation of mixed-use centers, which often include office, apartments and other life style uses designed to draw potential shoppers for the retail tenants. Put simply, retail sales historically relate to the center's location, trade area population, trade area household income and foot traffic, not to factors such as web presence. Additional uses also theoretically provide more stability to the project's value.

E-commerce is challenging conventional wisdom about the effect of anchors on overall value as online sales increase pressure on bricks and mortar retailers and diminish their role in overall retail sales. In February 2014, the U.S. Census Bureau reported that 2013 fourth quarter retail e-commerce sales, adjusted for seasonal variation but not for price changes, increased 16 percent from the fourth quarter of 2012, as compared to a 3.9 percent increase in total retail sales for the same period in 2013. E-commerce accounted for 5.8 percent of total sales in 2013 compared to 5.2 percent for the same period in 2012.

On a non-adjusted basis — that is, excluding sales in categories not commonly purchased online — Internet Retailer magazine estimated e-commerce accounted for 7.6 percent of total retail sales during 2013, a 6.8 percent increase from the same period in 2012. Forrester Research projects that by 2017, direct online purchases will account for approximately 10 percent of all U.S. retail sales, representing a nearly 10 percent compound annual growth rate from 2012. Looking beyond purely online purchases, Internet Retailer estimates that by 2017, 60 percent of U.S. retail sales will involve the web.

In some ways, these figures understate e-commerce's impact on bricks and mortar retailers. For example, the figures do not account for lost profitability and price pressure created by consumers who price shop online and visit a center to make a purchase. Further, how many consumers now shop on-line for groceries and either have those groceries delivered to their homes via a provider such as Amazon.com, or collect them from a drive-through checkout line?

Forrester Research predicts U.S. e-commerce spending will increase because larger retail chains will invest in omnichannel" efforts — tying together stores with the web and mobile — along with more consumers using smartphones and tablets, and what the report calls "increased comfort with web shopping."

Onmichannel marketing will likely decrease inherent real estate values and lower ad valorem taxes since e-commerce decreases the importance of bricks and mortar stores and foot traffic. If 60 percent of retail sales will involve the web by 2017, how important is location? How important are anchors?

The answers may be, "Not very much." E-commerce's impact is already evident in store closings by retailers once considered national credit or anchor tenants. In 2013, a major South Carolina grocery chain that anchored many small shopping centers closed most of its stores. Nationally, in early March 2014, RadioShack announced the closure of approximately 1,100 stores while Staples announced plans to close 225 stores. Is it coincidental that Staples is now the number 2 e-tailer behind Amazon?

Historically, the risk in leasing to a large anchor was much lower than leasing to smaller tenants. Different uses generally involve different capitalization rates, or expected rates of return relative to the purchase price. The risk involved with office leases differs from the risk of renting to national retailers. Historically, inline stores arguably should have had a higher capitalization rate than the anchor stores did, since there was more risk. This was never the case as all the department stores have credit ratings below investment grade and are larger stores and therefore have a greater risk than smaller inline stores with better credit. Most malls trade on cap rates in the 6 to 8 percent range, whereas the few department stores that were leased when sold traded in the 10 to 12 percent range. Taxing authorities traditionally only paid lip service to these risk differences in calculating one overall capitalization rate, and tended to gravitate to a lower rate thought to be inherent in the anchor. But in an increasingly online world, is the riskier tenant the inline store, or is it the anchor?

The evolving significance of anchors also raises questions about the inter-relationship between separate parcels. Unsophisticated assessors tend to ignore state laws requiring parcels be individually valued. Instead, taxing authorities value the project by grouping multiple parcels together and applying one blended capitalization rate, regardless of the multiplicity of uses and tenants. Unquestionably, inline stores and anchors have a symbiotic relationship, but how does one measure that relationship value particularly when the anchor is on a different parcel from the mall itself?

The physical location of a closed anchor in a mixed-use center can exacerbate the problem. For example, what happens when a failed anchor, located in the middle of the mall, creates parking or access issues for patients visiting medical offices? How is this impact measured?

While the solutions are still unclear, a few basic issues confronting the industry are coming into focus through the cyber static:

• Appraisers and tax authorities need to recognize most power centers and malls are complex businesses, where anchors and inline stores depend on each other (and internet presence) for profitability.
• The historic relationship of the capitalization rates applied to inline stores versus anchors needs to be scrutinized more closely.
• Some jurisdictions specifically require parcels be valued individually for tax purposes. If so, how does one measure the interdependency of the tenants that comprise the center?
• How does an owner address increased vacancies within mixed-use centers for both profitability and tax purposes?
• How does one calculate a property's real estate value when it is part of the retailer's onmichannel sales effort?

The challenges posed to owners by e-commerce spans the gamut from development to taxes. Valuing regional malls, power centers and even local shopping centers for property tax purposes is increasingly difficult in the e-commerce era. An owner who appropriately quantifies the different and increasingly complex risks associated with these businesses is far more likely to adapt successfully to the e-commerce world, and simultaneously reduce property tax bills. Recognizing the questions and challenges posed by e-commerce is the first step in obtaining the answers.

Morris A. Ellison is a partner in the Charleston, S.C. office of the law firm Womble Carlyle Sandridge & Rice L.L.P., and is the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at mellison@wcsr.com.

Since the onset of the Great Recession in 2007 the home ownership rate in the United States has fallen by a considerable 4 percent, according to the Census Bureau. While the U.S. may not have become a nation of renters, that long-cherished and widely promoted American dream of home ownership appears to be less attainable and less desirable than it was a decade ago.

This shift in housing demand has sparked a construction boom in the multifamily sector. Across the nation, developers are building a vast amount of multifamily units. According to Cassidy Turley's most recent U.S. Macro Forecast, developers are set to deliver 160,000 new units this year, the most robust construction period in 15 years.

There has been a lot of ink spilled regarding the significance of this sea-change in housing. Often overlooked, though, is the effect this construction boom will have on property taxes in the multifamily sector in general. To understand the implications for property taxes, however, taxpayers must first understand how tax assessors typically value multifamily buildings.

Many tax jurisdictions, including the District of Columbia, employ a computer-assisted mass appraisal (CAMA) system to value multifamily buildings. CAMA systems are designed to simplify the assessment process across a product type, with the goal of producing more uniform assessments, as opposed to property-specific valuations.

To accomplish this, the taxing entity first stratifies properties into different categories and sub-categories. For instance, the D.C. assessor's office first categorizes multifamily buildings as either high-rise (five floors or more) or low-rise (four floors or less). It then further segments properties by submarket; in D.C. there are three general areas.

With properties categorized by the taxing jurisdiction's specifications, the assessor's office enters actual rental, expense and vacancy data for products within each specific category into the CAMA system. The computer model then produces statistical market-based indices for the various categories.

Assessors use these market-based indices to assess individual properties within categories, rather than using rental and expense information that is unique to that property. While adjustments can be made on an individual basis for property-specific issues, the goal of the CAMA system is to produce uniform assessments within the stratification.

Notwithstanding general grievances with CAMA valuations (and this writer has many), CAMA systems are based on general market data, which makes them prone to break down during periods of rapid market change, or when the stratifications are not updated in a timely manner.

One such scenario involves an oversupply at one end of the sector, as is now occurring in many cities due to the construction of class-A multifamily product. Too much construction of class-A apartments can result in lower occupancy levels and downward pressure on rents for these properties. In another, less understood scenario is a process that has been described as "filtering," in which new class-A product, with its higher levels of finish and greater amenities, displaces existing class-A product at the high end of the market. The older, formerly class-A buildings effectively join the class-B category, achieving lower rental rates than the newer product.

In the latter scenario, the stratifications within the CAMA system must be updated in a timely manner to reflect the new market realities. If they are not, the CAMA system will break down as it aggregates data from dissimilar properties, thus resulting in inflated values for the former class-A buildings.

Washington D.C. is beginning to experience the onset of this market dynamic. Research by Delta Associates indicates that while class-A rents rose slightly across the district, they actually decreased in established submarkets with relatively little new product, such as in the Upper Northwest. The district hasn't adjusted its market stratification's to reflect this new phenomenon, however. Instead, the system lumps together markets that have seen decreased rental rates with markets that are experiencing rent growth due to the influx of new class-A product.

Moreover, in the district all high-rise buildings are included in the same pool of comparable properties, regardless of when they were built, or what levels of finish or amenities they offer. Consequently, unless D.C. updates its CAMA system to reflect these new market norms, it is likely that in the next few years we will begin to see the CAMA system overstate assessments for older class-A product.

While taxing jurisdictions should be cognizant of these market changes and make timely adjustments to their CAMA systems, it will often fall to the property owners to be vigilant in monitoring and, when necessary, appealing property assessments. Watching a building's rent levels decrease due to competition from newer product is bad enough—having the city also tax that building as if it were the newer product just adds insult to injury.

Scott B. Cryder is an associate in the law firm of Wilkes Artis Chartered, the District of Columbia member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at scryder@wilkesartis.com

Tax expert warns of property taxation issues buyers may be unaware of when acquiring an asset.

In the mysterious realm of property tax valuation, it is hard enough to get a proper and decent property tax value on commercial property on a good day. It's even harder when the deck is stacked against you, and harder still when you are the one stacking the deck.

In many states, property transfers are significant revenue-raising events for taxing entities. In Georgia, the transferor (the grantor or seller in a transaction) takes the lead in filing form PT-61, which is filed along with the deed, and typically the transferor pays the tax. Generally speaking, the transfer tax burden amounts to $1 per $1,000 of asset value, which is less than in other states. The transferee, or the buyer in a transaction, may pay little attention to what happens with form PT-61, especially since the tax is paid by the transferor.

But county tax assessors pay particular attention to the PT-61, with serious implications for the transferee's future property tax liability.

How serious? Consider that even valuation professionals can find it challenging to distinguish between real estate value and the value of a business operated from the real estate. For example, Bill Gates inventing Microsoft and operating it from his garage does not create a billion-dollar garage.

Sometimes distinctions are less clear. Assume someone purchases a daycare center for $2 million. The buyer is acquiring a business that brings the building to life, providing care to hundreds of little ones crawling around and demanding attention, generating revenue to the owner in the process. That business has value and is worth, say, $1 million. Indeed, the business is why the buyer acquired the property.

A closing attorney involved in the deal's real estate aspect sees a $2 million check at closing for a building operating as a daycare center. Suddenly that $2 million appears on the PT-61. Rest assured, when the tax assessor sees $2 million on the PT-61 (and assuming the assessor has no thoughts that the value may be understated), the job is done. The value is affixed to the property. The property owner must show that the affixed value is grossly overstated, a burden complicated by the very closing where the owner acquired the property reflecting the $2 million value. Try explaining that to three lay members of a board of equalization. In these situations, the owner frequently pays twice the real estate taxes which should be owed, often perpetually.

Other types of properties are even more treacherous for buyers. Hotels are one example, especially higher-end properties that collect substantial revenue from needy guests willing to pay for pampering (perhaps hundreds of the not-so-little ones meandering around and demanding attention). At least the appraisal sector has developed some valuation standards for hotels.

A more challenging area is retirement homes or skilled nursing centers. Many of these structures are 50 to 60 years old with linoleum floors or aging carpet, window air conditioning units and in a condition which might charitably be described as basic. Were they standing vacant, the buildings may well be demolished. In such a case, business value derives from the units' designation as worthy of a "certificate of need," a government-issued document that verifies a need for the services provided at the property and grants approval and licenses for that activity.

The real estate and business may be worth $10 million but the real estate by itself may be worth only a minor fraction of that amount. Putting a value of $10 million on the PT-61 form may result in a huge tax liability, both for that property and for those similarly situated.

Calling a certificate of need "real property" is a major stretch. It is a license to operate a particular business from that property, an intangible personal property right subject to revocation. The revenue generation is already subject to income taxes; trying to collect real estate taxes because of that revenue is hard to justify, even if an assessor thinks of this type of business as a "cash cow," as one confided recently.

Even appraisals, most often done to help procure financing, are seldom helpful. Appraisers will talk in terms of the value and number of beds (some of which may be 50 years old) to justify a business' value or cash flow to support the loan. But this ignores the huge expenditures on patient care, nurses, support staff, training, safety, health and related matters for which Medicare, Medicaid and insurance pay for reimbursement. Few appraisals of nursing facilities focus on separating underlying real estate value, and many appraisals are worth little in negotiating with tax assessors.

For properties like these, rent doesn't determine value, either. A renter in these situations is renting a business more than renting real estate.

Despite the complexities of separating business value from real estate value, a buyer can at least avoid common mistakes. Pity the transferee who unknowingly allows a closing attorney to put the entire $15 million purchase price on a PT-61, when the property can't be worth that without including the retirement or nursing home business. Some type of discounted cash construction cost analysis is one way of approaching real estate value.

It is imperative to demonstrate a fair, reasonable and understandable allocation of real and personal property tax values on the PT-61. An assessor will merrily accept the seller's assertion that the full purchase price is applicable to real estate. The purchaser's pride in enriching county coffers will pale when the purchaser can no longer clear enough revenue after taxes to repay loans or even stay in business. The process to avoid that outcome starts when the property is acquired.

William J. Seigler, III is a partner in the Atlanta law firm of Ragsdale, Beals, Seigler, Patterson & Gray, LLP, the Georgia member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be can be reached at bseigler@rbspg.com.

The tax assessor's notice arrives in the mail with the seemingly inevitable increase in your property's assessment. Is this just another expense line item creeping upwards? Should you start budgeting now for an increase in next year's real estate taxes?

Not so fast. Taking the time to review the notice with an experienced property tax professional could reveal opportunities for significant savings.

What Can I Gain?
Successful appeals can generate thousands or even hundreds of thousands of dollars in tax savings per year. Property taxes are one of the few expense line items that a property owner can manage with an eye toward not just keeping the expense flat, but in many cases actually reducing taxes compared with the current and prior years. Yet property taxes are often overlooked as a controllable expense. As Robert L. Gordon, a partner who specializes in property tax with the law firm of Michael Best & Friedrich LLP in Wisconsin, says, "One of the things I continue to see is that clients who are sensitive to the smallest increments in their income taxes, and engage in highly sophisticated planning to manage their income taxes, will at the same time accept property tax assessment increases as an inflexible cost that cannot be managed or addressed."

For many companies, a reduced assessment is the equivalent of "found money" and is a great boost to the bottom line.

Why Assessments Change
Typical conditions triggering an assessment change include new construction, renovation or demolition. More unusual cases can occur in places like California, where a change in ownership will generate a change in the assessment. Another reason for assessment change is error correction, as when an assessor finds that they had missed the existence of a building in previous assessments.

But the No. 1 reason for assessment changes is periodic district-wide reassessments. Most states have mandatory reassessment cycles while a few do not (see table).

In Pennsylvania, which doesn't require periodic reassessment, assessments can get far afield from actual market value, contends attorney M. Janet Burkardt, managing partner of Weiss Burkardt Kramer LLC, which advises Pennsylvania counties on reassessment. "Not reassessing regularly means taxing inefficiently, because counties are not capturing changes in value," Burkardt says. "The more often a county reassesses, the more equitable and uniform the values."

Pennsylvania, Oklahoma and California are examples of states that lack mandated reassessments. States that do reassess vary widely in frequency: Florida, Minnesota, Arizona, Kansas and Washington, D.C., are some states that reassess every property, every year. Some others – Wisconsin, for example – require annual reassessments, but in practice those don't always happen.

Don't Miss an Opportunity to Appeal
Even if an assessment goes unchanged in a given year, there may still be opportunities to reduce real estate taxes. In many states, like Pennsylvania, there is a ratio calculation that does change annually. For example, a property in Butler County, Penn., generated the same $100,000 assessment in 2012 and in 2014. By application of this ratio calculation for each year, the property is on the tax rolls at a fair market value of $523,000 and $740,000 for these years, respectively. If the property is worth $600,000, that would mean an appeal opportunity in 2014, but not in 2012.

Practices vary widely by state and even within states, so reviewing all assessments annually can turn up opportunities that might otherwise be missed.

What Will it Cost?
Filing fees for property appeals are modest, and in many jurisdictions the initial appeal is free. Fees in other places average about $100. The cost of the appraisal will vary based on the property's type, uniqueness, and the relative ease or difficulty of the valuation calculation. Commercial appraisals can range from $2,500 to $25,000 or more. Legal fees vary, but it is common for property tax attorneys to work on a contingency-fee basis, where there is no fee unless an appeal achieves tax savings.

Experience Matters
Asking an experienced property tax professional to evaluate assessment notices pays off. Working with a professional who knows the nuances of the jurisdiction, the law, how the system works in practice, which appraiser is right for the job, and who has a working relationship with the government employees that administer that system can be the difference between winning and losing appeals. Finding the right person to evaluate your assessments on a regular basis is the first step toward realizing tax savings.

Sharon F. DiPaolo is a partner in the law firm of Siegel Siegel Johnson & Jennings, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at sdipaolo@siegeltax.com.

In the nearly 200 years since the U.S. Supreme Court's ruling in McCulloch v. Maryland, pundits, attorneys, courts and others have deliberated Chief Justice John Marshall's assertion that "the power to tax is the power to destroy."

Today the issue is front and center in Kansas, where the state Legislature seems poised to enact sweeping reform legislation governing tax appeals. The contemplated measures would provide substantive due process in an attempt to level the playing field for taxpayers that seek to challenge state and local property, excise and income taxes.

The current tax appeal system in Kansas combines informal hearing processes at the county level in property tax issues and at the state level on appeals involving excise and/or income taxes. These are followed by an appeal to the Kansas Court of Tax Appeals (COTA), an administrative agency in the executive branch of state government. If a party is displeased with a COTA decision, the prescribed recourse is a direct appeal to the state Court of Appeals.

Mounting Concerns Over COTA
Tax consultants and commercial taxpayers alarmed by recent COTA decisions originated the call for reform. The grassroots effort spotlighted COTA's efforts to deny taxpayers the right to contract with tax consultants that use fee-based contracts.

COTA had ruled that the contracts violated public policy, and voided them. It then refused to hear pending cases where a tax consultant was involved. COTA also sought to deny taxpayers the ability to retain attorneys that took referrals from tax consultants.

Next, COTA dismissed appeals where the tax consultant had signed the appeal form, refusing to recognize the state-issued power of attorney forms the consultants had taxpayers execute.

Taxpayer grievances also extend to the time taken to resolve property tax appeals. A law requires COTA to issue a decision no later than 120 days after a tax hearing, but the law fails to penalize the agency in the event that it exceeds the deadline. Consequently, many cases linger beyond the 120-day mark.

Taxpayer Relief May Be Imminent
House Bill 2614 was introduced to address these issues. As currently written, the bill will make the following changes:

• Provide for a de novo appeal to the District Court. This change will ensure that a court of competent jurisdiction hears the taxpayer's evidence and makes findings and conclusions, rather than non-lawyer employees appointed by the governor deciding the case.
• Require a presumption of correctness for any appraisal submitted by a state-licensed appraiser.
• Permit taxpayers to employ the tax professional of their choosing without interference from COTA.
• Require tax appeal decisions to be issued within 120 days and, if not, all filing fees paid by the taxpayer will be refunded.
• Waive the filing fee in the event that a protective appeal for the following year must be filed because the prior year's appeal is still pending.
• Require COTA to provide for a simultaneous exchange of evidence. This would replace the current method, which requires the taxpayer to provide evidence months before the hearing while protecting the county from disclosure until 20 days prior to the hearing.
• Change the agency name from the Court of Tax Appeals back to the Board of Tax Appeals, to avoid the suggestion that COTA is a court within the judicial branch. This point also includes a staff salary reduction.
• Provide a method whereby a party could file to have a board member removed for cause, defined to be failing to issue orders timely or failing to maintain continuing educational requirements.
• Make cases valued at $3 million or less eligible for filing with the small claims division. This would be an increase from the current cutoff of $2 million.
• Require the agency to promptly approve stipulations between the taxpayers and the taxing body.

The initial group of taxpayers, tax consultants and attorneys contacted Kansas legislators directly and urged their support for tax appeal system reform. The Kansas Chamber of Commerce later picked up the grassroots effort.

In its "Legislative Agenda 2014 For A Healthy Economy," the chamber endorsed COTA reform to "provide an affordable, accessible and impartial system that can resolve state and local tax disputes expeditiously and efficiently."

Other groups including the lobby for the Kansas Association of Realtors joined the call for reform. Now the legislation has widespread support throughout the business and real estate communities.

Linda Terrill is a partner in the Leawood, Kansas. law firm Neill, Terrill & Embree, the Kansas and Nebraska member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at lterrill@taxappealfirm.com.

"Reappraisal process allows Shelby County taxpayers to appeal assessed values every year."

Tennessee's fiscally strapped cities and counties are pressuring assessors more than ever before to aggressively value commercial property. Taxpayers must be aware of their rights under state law, lest an assessor attempt to prematurely capture any value increases prior to the next scheduled reappraisal.

With a proper understanding of the reappraisal process, commercial property owners in Memphis and Shelby County could get some property tax relief over the next three years, whether the fair market value of their properties increase or decrease.

Work the Reappraisal Cycle

Many states require assessors to reappraise property values annually. In Tennessee, counties have the option to reappraise property every four, five or six years. Shelby County reappraises every four years; its last reappraisal was in 2013 and the next one will be in 2017.

The purpose of reappraisals is for the assessor to adjust values for tax assessment purposes to actual fair market value. In a market that is moving up or down, the effect of a four-year reappraisal cycle is that appraised values fall out of sync with the market in between reappraisals.

Shelby County's reappraisal process is designed to favor taxpayers by enabling them to appeal assessed values every year, while the assessor can only adjust values in a reappraisal year (with some exceptions). This means that taxpayers can account for decreases in value annually, but the assessor can only capture increases in value every four years — when values increase.

The commercial real estate market in Memphis has been improving, and values have been steadily increasing, for certain types of property for the past year or two. For example, recent sales of medical office buildings indicate a much stronger market than in prior years. Demand for Class A multifamily properties have likewise increased, driving up sales prices. In the sought-after Poplar Avenue/240 corridor, vacancy in Class A+ office buildings had fallen to 7.7 percent in the third quarter of 2013, down from a peak of 20 percent in 2010, according to Cushman & Wakefield.

Owners have a right to an official notice from the assessor if the value on a property changes. The owner may then file an appeal with the Board of Equalization to contest the value change.

Owners should scrutinize the basis of a change in value by the assessor. Although there are certain times the assessor can change a value in a non-reappraisal year, there are other times when a change is not appropriate.

For example, an assessor should not "chase sales" to value a recently sold property at its sale price. Such a revaluation would constitute an illegal spot reappraisal. Also, the assessor should not revalue a property to reflect ongoing maintenance or repairs due to a turnover in tenants. Such actions by owners are ongoing and the revaluation of these properties would essentially amount to a reappraisal.

In what circumstances can the assessor revalue a property prior to the next reappraisal date? One example is when an addition or renovation is made to a property. In that case, the assessor may legally revalue the property because its physical condition has changed. Another example is when the Board of Equalization has reduced the value of a property due to its circumstances, such as being completely vacant. If the property is leased up, the assessor may revalue the property in subsequent years, even if not a reappraisal year.

Some property types in Memphis are still languishing under depressed values. The industrial vacancy rate stood at 14.1 percent in the third quarter of 2013, Cushman & Wakefield found. Industrial rents remained soft, as many users have relocated south of Memphis, across the state line in DeSoto County, Miss. Class C and D multifamily properties are still suffering from elevated vacancy and collection issues. Expenses, such as insurance, are rising at faster rates than rents. Many former tenants of Class C and D apartments have taken advantage of the institutional purchase and rental of single-family homes.

Fortunately, Tennessee law allows owners of these properties to file appeals every year. The assessor is not required to send an official notice to the taxpayer when the value stays the same, however. This means that taxpayer must remain vigilant to prevent the assessor from leaving the value for tax assessment purposes unchanged when the true fair market value of the property is decreasing. Taxpayers in this situation should exercise their annual right to appeal in order to avoid paying the same amount of property taxes on a property that is not worth as much as it was a year ago.

Andy Raines is a partner in the Memphis, Tennessee law firm of Evans Petree PC, the Tennessee member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at araines@evanspetree.com.

Utah taxpayers could soon be required to conduct an item-by-item appraisal of personal property in order to contest its taxable value if Utah assessors have their way. Utah imposes property tax on a business' tangible personal property based upon the personal property's fair market value. Fair market value means the value a knowledgeable, willing buyer would pay a knowledgeable, willing seller for the property operating at its highest and best use.

The taxable value of a business' personal property is self-reported and self-assessed using state guidelines. Every year, a business must submit a signed personal property statement to each county in which it owns property. These statements must include the year of acquisition and purchase price for each item of personal property. The taxpayer then multiplies the prices by a provided percent-good factor to determine its estimated fair market value.

Unfortunately, simply applying the percent-good factor does not always equal the property's fair market value. For example, there may be additional functional or economic obsolescence for which the percent-good factors do not account. Consequently, a taxpayer is allowed to dispute the resulting value.

Some taxing jurisdictions, however, have recently argued that taxpayers may only dispute the resulting value if they prepare an item-by-item appraisal, rather than valuing all the personal property subject to tax as a group or operating unit.

Utah State Tax Commission to Decide
In a case pending before the Utah State Tax Commission, the taxpayer disputed the assessed value of its personal property, arguing that such property suffered from functional and economic obsolescence above that accounted for in the percent-good factors. Consequently, the taxpayer argued that its property was valued above fair market value.

In challenging the value, the tax-payer had an appraisal performed. The appraiser determined that the personal property would most likely be sold as a group of assets operating together, and thus valued the personal property as an operating unit. While the appraisal looked at every piece of personal property, the valuation reflected its aggregate value rather than values placed on each specific piece of personal property. Likewise, in applying obsolescence adjustments, the appraiser applied them to the whole, rather than to specific items of personal property.

The county which imposed the tax argued that such an appraisal was improper and deficient because it failed to appoint a value to each item of personal property separately, and as a result, the taxpayer did not meet its burden of proving that the personal property was over-assessed.

The county's argument appears to lack any precedent. The Utah Constitution and the Utah Code only require that property be valued at its fair market value operating at its highest and best use. The highest and best use value for the separate items of tangible personal property in this case was achieved when the properties were viewed as operating together as a unit. Furthermore, the Utah Constitution and Utah Code do not mandate itemized valuations.

In a 2011 case (T-Mobile USA Inc. vs. Utah State Tax Commission), the Utah Supreme Court stated that "the code simply provides that property shall be assessed by the Commission at 100 percent of fair market value. Requiring the Tax Court to use a specific valuation method ignores the reality that certain methodologies are not always accurate in every circumstance."

In the case pending before the Commission today, a ruling in favor of the taxing entity would drastically change the manner in which a taxpayer is to dispute the value of its personal property. Whereas now, there is no specific method that must be followed in order to determine the fair market value. If the Commission rules in favor of the taxing entity, taxpayers would be required to separately value each item of personal property listed on its personal property signed statement. Then tax-payers would have to add those values together to derive the value estimate for all of the personal property regardless of whether that summation is the fair market value at which the personal property would likely sell.

A ruling in favor of the taxpayer, however, maintains the status quo and further emphasizes that the standard for valuation in Utah is fair market value. So long as that is achieved, it does not matter which valuation method is used.

A decision from the Utah State Tax Commission is expected later this year.

David J. Crapo is the managing partner at Crapo Smith PLLC, Utah Member of American Property Tax Counsel. He can be reached at djcrapo@craposmith.com

Pittsburgh-area commercial property owners who received dramatic increases in their 2013 real estate assessments may see those taxable values go even higher. This wave reflects the growing nationwide issue of changes in property values and how they are assessed.

In the case of the Steel City, Allegheny County's first revaluation in 10 years dramatically increased assessments, which had remained static even during market highs in the mid-2000s and the crash in 2008 and 2009. While the overall increase in county assessments was 35 percent, commercial owners bore the brunt of the increase, seeing their assessments rise 54 percent overall.

More recently, however, local legislators enacted an unusual deadline extension that has effectively put property owners — especially commercial owners — at risk for even higher assessments.

Note that, rather than rely upon a central tax authority, each of Pennsylvania's 67 counties sets its own assessment. Because the state lacks a mandate for periodic revaluation, counties normally only undertake revaluation when a taxpayer files suit but will occasionally do so on the county's own initiative. Historically, reassessments are so infrequent in Pennsylvania (sometimes a decade or more passes between reassessments) that property values spike when a county eventually does reassess, which leads to public outcry and confusion.

Following publication of the new 2013 assessments for Pittsburgh-area properties, property owners filed 100,000 appeals before the original deadline on April 1, 2012. Then, in early 2013, Allegheny County's chief executive asked the county council to reopen the filing of 2013 appeals until April 1, 2013, ostensibly to help property owners.

At the time, the chief executive told local reporters that the deadline extension would give taxpayers another opportunity to appeal. What he didn't say, however, is that extending the deadline also opened the door for school districts to file appeals.

Increases in Store for Property Owners
Reopening the appeals process hurt more property owners than it helped. Most taxpayers who needed to appeal had already filed, but Pennsylvania law gives school districts a right of appeal as well. When the county council voted to reopen the deadline and allow new appeals, thousands of school appeals followed. School districts filed most of the 7,000 new appeals in 2013.

What's more, Pittsburgh's office market was hot in the latter part of 2012. The districts tracked sale prices in the last three quarters of 2012 and subsequently appealed to increase the property owners' new assessments based on these sale amounts. Most of these appeals to increase valuations target commercial owners.

Of the new appeals filed by property owners, the vast majority are attempts to re-hear appeals that were previously filed. Those are likely to be thrown out by the courts. That will leave mostly school-initiated appeals.

As of this writing, administrative hearings are complete for the original 100,000 appeals, and administrative decisions that caused the taxpayer or school district to be unhappy with the outcome are already pending in court. Hearings on the 7,000 new appeals are underway.

What to Do
When a taxing district files an appeal, state law requires it to send notice of the appeal to the address listed in county records as the property's Change Notice Mailing Address, which is published on the county's website (alleghenycounty.us). Some of the county records are outdated as to owners' addresses and, in those instances, some new owners are unaware of appeals on their properties.

New owners should check the address the county has on record for their properties and watch for notices sent to this address in the coming months. If a school district does appeal, the property owner would be wise to seek counsel, appear at hearings and defend his property's taxable value, otherwise risk having his assessment increased even more.

Sharon F. DiPaolo is a partner in the law firm of Siegel Siegel Johnson & Jennings Co., LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at sdipaolo@siegeltax.com.