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Property Tax Resources

Dec
11

Big Boxes and Industrial Plants Unfairly Taxed

Assessors' misuse of highest and best use principle proves costly.

"To support inflated values, taxing units attempt to narrowly define the highest and best use of the property."

By Michael Shapiro, Esq., as published by National Real Estate Investor, December 2007

In many states, the war over property tax assessments based on "value to the owner" as opposed to "market value" has ended with a clear victory for market value. Nonetheless, some jurisdictions continue to try changing this outcome by misusing "highest and best use."

Assessors' attempts to misuse highest and best use can be seen most often in buildings used by big-box retailers and manufacturers, as opposed to properties such as hotels, office buildings and shop-

ping centers, typically valued using the income approach.

To support inflated values, taxing units attempt to narrowly define the highest and best use of the property. They claim that a taxpayer's comparable sales aren't evidence of market value because the sale properties have a different highest and best use than the property being assessed.

Two methods, two results

An assessor may contend, for example, that only stores purchased by Jones Corporation can be used to value a store used by Jones Corporation. This effectively eliminates comparable sales as a basis for valuation. One tax court addressed this issue when it held that a property's highest and best use cannot be defined "so narrowly that it precludes analysis and value based on market data."

The accompanying chart demonstrates the difference between the assessor's valuation of two big-box stores based on his narrow definition of highest and best use and the actual selling price of those same stores in the open market.

The assessor defined highest and best use as that use being exercised by that specific retailer. That definition led the assessor to value big-box store No. 1 at $62 per sq. ft. and big box store No. 2 at $58 per sq. ft. Actually, store No. 1 sold to another retailer for $49 per sq. ft. and store No. 2 was bought by a different retailer for $38 per sq. ft.By narrowly defining highest and best use, the assessor ignored market data and over assessed the property.

The relevance of a comparable sale's highest and best use was addressed in the case of Newport Center v. City of Jersey City. The New Jersey Tax Court held that a comparable sale should be admissible evidence of value, regardless of its highest and best use, if the claimed comparable sale provides logical, coherent support for an opinion of value.

Many jurisdictions want to effectively reinstate value to the owner, in legal terms called "value-in-use," as the lawful standard for property tax valuations, thereby inflating assessments by eliminating from consideration the sales-comparison approach to value. In the sales comparison approach, sales often provide the best indication of a big box or manufacturing property's market value.

Sales prices reflect loss in value from replacement cost due to obsolescence. That obsolescence generally includes a significant amount of external obsolescence, which represents loss in value caused by some negative influence outside the property.

For example, external obsolescence could result from limited market demand for a big-box store or manufacturing plant built to meet the needs of a specific user. Value may also be adversely influenced by functional obsolescence, a loss in value due to design deficiencies in the structure, such as inadequate ceiling heights, bay spacing or lighting.

Shapiro_Big_Boxes_NREI_Dec07_clip_image002

What's a comparable sale?

Appraisers are taught to only use sales comparables with the same or similar highest and best use to that of the property being appraised. However, even this limitation is too restrictive.

For example, years ago a former automobile assembly plant was offered for sale and eventually sold for demolition and construction of a shopping center. No automobile manufacturer, or for that matter any other manufacturer, was willing to pay more for this property than the developer who bought it to build a shopping center.

Thus, the market spoke and defined the market value of the former automobile plant. In short, if a property is physically similar to the property being valued, but sells for an unusual use, that sale should not necessarily be disregarded as a comparable sale.

The sale of the former automobile assembly plant for use as a shopping center may not be the ideal comparable sale to value industrial property. However, that sale certainly puts a cap, or limit, on the value of a similar industrial facility, subject of course to adjustments for relevant differences such as location or size.

By understanding the issues involved in using comparable sales to achieve market value assessments, taxpayers can successfully appeal property tax assessments when they are based on the misuse of highest and best use.

SHAPIRO_Michael2008Michael Shapiro is a partner in the law firm of Honigman Miller Schwartz and Cohn LLP, the Michigan member of American Property Tax Counsel (APTC). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Dec
08

421a Changes Increase Property Taxes

By Joel R. Marcus, Esq. as published in Real Estate New York, December 2007

The new law also curtails exemption benefits for as-of-right areas

"The new law, however, greatly expanded the exclusion zones throughout the city to include all of Manhattan and most of Brooklyn's Carroll Gardens, Cobble Hill, Boerum Hill, Park Slope, Sunset Park and Downtown Brooklyn; along with parts of Long Island City, Astoria, Woodside, Jackson Heights and Willets Point in Queens."

On Aug. 24, Gov. Eliot Spitzer signed into law three bills that dramatically revamped New York City's 421a exemption program. The program was created in 1971 to encourage the construction of new multifamily dwellings by granting a partial exemption from increases in real estate taxes resulting from the new residential construction.

The new law compared to the old law. The previous law covered only projects commend prior to July 1,2008 and made 421a benefits available in any area of the city, except for those areas identified as geographical exclusion areas. The areas not classified as exclusion areas are commonly called "as-of-right' areas. The exclusion areas generally included portions of Manhattan between 14th and 96 th streets and the Williamsburg-Greenpoint areas of Brooklyn. Projects qualified for benefits in the exclusion zones if at least 20% of the units were created as affordable housing or if the developer purchased negotiable certificates for creation of affordable housing units off-site.

The new law, however, greatly expanded the exclusion zones throughout the city to include all of Manhattan and most of Brooklyn's Carroll Gardens, Cobble Hill, Boerum Hill, Park Slope, Sunset Park and Downtown Brooklyn; along with parts of Long Island City, Astoria, Woodside, Jackson Heights and Willets Point in Queens. Projects started between July 1,2008 and Dec. 27,2010 in these areas qualify for benefits only if at least 20% of the building's units are affordable to families whose income at initial occupancy doesn't exceed 60% of the area median income.

The new law reduces 421a benefits outside the exclusion zones. The controversy surrounding the new citywide exclusion zones may obscure the fact that the new law dramatically curtails 421a exemption benefits for as-of-right areas.

Under the old law, all assessment increases in excess of the pre-construction assessment, commonly known as the mini-tax, were exempt. Under the new law, benefits for as-of right projects are restricted to the first $65,000 in assessed valuation per dwelling unit. The cap increases by 3% each year, beginning in 2009/10. For the current tax year, the cap is equal to $7,750 in actual taxes per unit ($65,000 x 11.928%).

The new law also dramatically reduces tax benefits for nonresidential space in new multifamily dwellings. Under the old law, up to 12% of the building area could be used for commercial purposes, without loss of exemption. Developers often incorporated valuable retail space in their buildings to lease at market rates while enjoying full 421a exemption benefits. Under the new law, all commercial space in a building is considered one unit and is subject to the $65,000 exemption cap, greatly reducing the tax break for commercial space.

To demonstrate the effect of the exemption cap, consider a new 100,000-sf condominium building with 100 dwelling units and one retail unit constructed in an as-of-right area. The building includes 12,000 sf of retail space and carries a $100,000 mini-tax. The completed building is assessed for $1 5 million. Under both the old and new laws, the project would qualify for a 15-year exemption benefit.

Under the old law, taxes during the construction period and for the first 11 years after completion equaled the mini-tax multiplied by the tax rate. Assuming that the 2007/08 tax rate of 11.928% remains in effect, annual taxes for the entire building would equal $1 1,9280 approximately $118 per residential and retail unit. The exemption would not be affected by the retail space as it does not exceed 12% of the building's floor area. Under the new law, taxes for the entire building, including the retail space, would still be the same mini-tax ($100,000) each year during construction. However, for the first 11 years after construction is completed, the 101 - unit building would be subject to the exemption cap, as adjusted. For the first year, only $6,565,000 (101 units x $65,000) of the building's $15-million assessment qualifies for exemption. Taxes for the fiat year of the benefit period would exceed $1 million for the building or approximately $9,960 per residential and retail unit, a 1,000% increase. The new law will likely affect the feasibility and pricing of all new projects.

MarcusPhoto290Joel R. Marcus is a partner at the law firm of Marcus & Pollack LLP: a member of American Property Tax Counsel, an 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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Dec
08

Freeze Act May Reduce Your Property Taxes

"When the taxpayer rejects the protection of the Freeze Act, they must file a tax appeal and prosecute it in the normal course of events. More often than not, a taxpayer thinks twice, or maybe more, about rejecting the Freeze Act's protection, since filing tax appeals requires significant expenditures of time and capital."

By John E. Garippa, Esq., as published by Real Estate New Jersey, December, 2007

New Jersey taxpayers have long struggled against high tax assessments and property taxes imposed by the tax authorities. Historically, even when taxpayers successfully reduced high assessments, there were taxing jurisdictions that filed appeals year after year to increase those reduced assessments. Despite the fact that a taxpayer successfully reduced his assessment in a court proceeding, there was nothing to prevent an increase in assessment for the following tax year.

As a result of this abuse of the system, the Legislature passed New Jersey Statute 54:51A-8, a law commonly referred to as the Freeze Act. The single greatest defensive tool any taxpayer in New Jersey can employ, it was passed to protect taxpayers from the need to file and prosecute annual tax appeals. Now more than ever, it has become crucial that taxpayers have a clear understanding of how the Freeze Act works and under what conditions it may not work.

For the Freeze Act to apply, a final judgment by the Tax Court must have been rendered regarding a real property tax assessment, and that judgment must be binding and conclusive on all parties, including the taxing district and municipal assessor. Generally, the Act makes that final judgment of the Tax Court binding for the next two successive assessment years.

However, exceptions exist to this general rule. If the taxpayer's property increased in value more than the general rate of increase in value of all other property in that taxing jurisdiction, the jurisdiction must file an appeal to void the Freeze. For the most part, the Tax Court has strictly interpreted this change in value standard in a manner that protects taxpayers.

The appeal process requires the tax authority to take two steps. In the first, they have to prove an increase in value more than other properties in the area. Second, they still bear the burden of proof in substantiating the correctness of their valuation of the property.

Some unusual external changes have precipitated the voiding of the Freeze Act protection. For instance, the increase in value of property in close proximity to the proposed casino district in Atlantic City gave rise to an increase in property value that voided the Freeze Act protection.

Another example of how the Freeze act was voided involved the development of a super regional mall near a commercial property that was protected under the Freeze Act. The court concluded that the construction of the super-regional mall and the development of the casino district in Atlantic City, in each instance, caused a substantial change in property values to commercial property in those vicinities.

The following four other conditions cause the Freeze Act to be voided: A complete reassessment or revaluation of all property in the taxing jurisdiction, the subdivision of a property, a zoning change to the property and any construction change to the property that results in an added assessment. In each of these conditions, the taxing jurisdiction merely asserts that one of these is met at the subject property. No need then exists for the court to determine if a change in value has occurred.

In certain circumstances, the taxpayer may determine that it is in their best interests to waive the protection of the Freeze and seek an even lower assessment. This situation may take place where real estate values continue to deflate. When the taxpayer rejects the protection of the Freeze Act, they must file a tax appeal and prosecute it in the normal course of events. More often than not, a taxpayer thinks twice, or maybe more, about rejecting the Freeze Act's protection, since filing tax appeals requires significant expenditures of time and capital.

The use of the Freeze Act and the decision to waive its protection requires an exercise of professional due diligence, which calls for the taxpayer to appraise the property to determine whether continued erosion in the value of the property or a change in the ratio of assessment to value in that taxing jurisdiction has been experienced. If a review of either of these determinants indicates that the property continues to be over assessed, it might be prudent to forsake the protection of the Freeze Act and proceed in filing an appeal.

However, this is not a step to be taken lightly because, in dealing with New Jersey property taxes, prudence is often the better part of valor.

GarippaJohn E. Garippa is a senior partner of the law firm of Garippa, Lotz & Giannuario of Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Dec
07

New Opportunity for Hotel Property Tax Reductions

"In 2001, the Appraisal Institute developed Course 800, to provide the theoretical and analytical framework for separating the tangible and intangible assets of operating properties."

By Raymond Gray, Esq., as published by Hotel News Resource, December 7th, 2007

Disputes over hotel property taxes continue to mount all across the country and basically for one reason. Taxing authorities attempt to include both the real estate and the non-real estate values in developing their tax assessments when the law states that property taxes can be levied against only the real estate.

The appraisal profession established standards requiring that real estate must be separated from non-real estate interests for valuation purposes. Although the message is abundantly clear, the separation and measurement of the value of the tangible and intangible assets of operating properties, such as hotels, has been a challenge.

In 2001, the Appraisal Institute developed Course 800, to provide the theoretical and analytical framework for separating the tangible and intangible assets of operating properties. In 2005, Course 800 was slated for updating by the Institute and should have returned to the Institute education schedule in short order.

However, it appears that the course was lost in the rush to redevelop the entire Appraisal Institute curriculum due to the significant change in required hours for licensing and certification mandated by the Appraisal Foundation. Thus, the course was not offered by the Institute, leading a number of taxing jurisdictions and their experts to claim that Course 800 had been repudiated by the Institute and that the principles of the course were inapplicable to hotel valuation. The key underlying principles included economic and business value concepts such as:

  1. Defining and describing the 'total assets of the business' as distinguished from the 'going concern' concept,
  2. Providing a methodology to segregate and value individual income streams associated with a business enterprise, and
  3. Defining and describing the concept of 'capitalized economic profit'.

The Appraisal Institute has recently contracted with several members of the original development team, plus a couple of new contributors, to update Course 800. The preliminary outline suggests much of the original content will be incorporated in the update, especially the economic principles and business value concepts. There will be more real property case studies - highlighting the fact that this is not a 'hotel valuation course', but a course on valuing each of the value components of an operating property. The new course, anticipated to hit the market in mid-to-late 2008, is likely to take the form of a two-day seminar.

Hotel owners and managers will benefit greatly from the 'new Course 800'. As the appraising and assessing community become better educated on the principles espoused in this updated course, property owners and managers will find even greater success in appealing tax valuations that include anything other than tangible property.

raymondgray154x231pxRaymond Gray is a partner with the Austin, Texas law firm of Popp, Gray & Hutcheson. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Gray can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Nov
14

Property Tax Bills Arrive, as Does the Deadline to Appeal

Frustrated by your assessment? You've got until Dec. 31 to fight it.

"To successfully appeal, you need to prove that the actual price for which you could sell your property, its "real" real Market value, is below the assessed value. How do you determine the real market value?"

By David Canary, Esq., as published by Daily Journal of Commerce, November 14th, 2007

Your property tax bills have arrived in the mail and, understandably, you're upset with the amount you're paying on your real and personal property. But there is some good news: You have a right to appeal.

So, what are you appealing? Unfortunately, not the tax itself. The amount of property tax you pay cannot be the basis for an appeal. A property tax is the product of multiplying two numbers, the tax rate and the assessed value of the property. Measure 5 limits the tax rate to 1.5 percent of real market value plus any local option property tax. Only in very limited circumstances may property owners challenge the rate.

What you are appealing is the property's assessed value. The assessed value is the lower of two figures: the maximum assessed value (MAV) or the real market value (RMV) of the property.

Under 1997's Measure 50, except for six exceptions, assessed value cannot increase more than 3 percent per year — which becomes the property's maximum assessed value. Real market value, on the other hand, is the amount the property would sell for between a willing buyer and a willing seller in the open market in an arm's length transaction.

Both the real market value and the assessed value appear on the property tax bill. Typically, the assessed value will be below real market value, in which case you are being assessed on the property's maximum assessed value.

To successfully appeal, you need to prove that the actual price for which you could sell your property, its "real" real Market value, is below the assessed value. How do you determine the real market value? First, if you recently bought the property for less than the assessed value, the sale price is a good indication. However, don't base your appeal upon the assessed value of other properties. The Oregon Tax Court has ruled that the assessed value of other properties isn't a sufficient legal basis for seeking a property tax reduction.

An examination of the income generated by your income-producing property may give you an indication that the assessed value is too high. Income may be generated by lease or rental rates of commercial real estate or, in the case of owner-occupied industrial property, by the cash flow generated by the operating facility. If the income generated from the property is far below the expected rate of return of the debt and equity capital invested in the property, this may indicate that the property is over-assessed because it suffers from functional or economic obsolescence.

The best evidence of the property's real market value is an appraisal by a qualified expert for property tax purposes. It may be that your property has been appraised already for other purposes — insurance, partnership buyout, or estate planning purposes. These appraisals may give you an indication whether the assessment of your property is inappropriately high. But appraisals for property tax purposes require that the appraiser render an opinion of the real market value of the fee simple interest of the property as of January 1 st of the tax year. An insurance appraisal that estimates insurable or replacement value is not sufficient. Likewise, an appraisal for estate planning or investment purposes may not fit the requirements necessary for an appeal.

A competent appraiser will determine the real market value of the property by use of one or more of the three approaches to value: the cost approach, the sales comparison approach, and the income approach. The cost approach adds the land value to the depreciated cost of the property's improvements. The sales comparison approach compares the sale price of comparable properties with the property being appraised and makes adjustments for any differences between the two. Finally, the income approach capitalizes either the market rental rate or the cash flow of the property by an appropriate rate of return that reflects the return on, and return of, the investment.

Taxpayers who own residential or commercial properties must first appeal their assessments to the County Board of Property Tax Appeals. Owners of the industrial property can either appeal to county bard, or appeal directly to the Magistrate Division of the Oregon Tax Court. However you chose to proceed, please remember that your appeal must be filed no later than December 31, 2007.

Canary90David Canary has specialized in state and local tax litigation for the past 18 years. He has worked for the past 13 years as an owner in the Portland office of Garvey Schubert Barer and prior to that was an assistant attorney general representing the Oregon Department of Revenue. He has the distinction of trying several of the largest tax cases in Oregon's history. He is the Oregon member of American Property Tax Counsel and an active member of the Association of Oregon Industries' Fiscal Policy Council. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. or 503-228-3939.

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Nov
11

Cha-Ching

"The Kentucky General Assembly authorized cities and urban county governments to establish programs that grant property tax moratoriums for existing residential or commercial properties "for the purpose of encouraging the repair, rehab, restoration or stabilization of existing improvements."

By Michele M. Whittington, Esq., Bruce F. Clark, Esq., as published in Midwest Real Estate News, November, 2007

The Louisville-Jefferson County Metro Government offers a property tax incentive designed to encourage redevelopment of economically-blighted properties. While not a widely advertised offer, property owners and developers should be aware of this opportunity to reduce their property taxes.

The Kentucky General Assembly authorized cities and urban county governments to establish programs that grant property tax moratoriums for existing residential or commercial properties "for the purpose of encouraging the repair, rehab, restoration or stabilization of existing improvements." This program was established as the result of an amendment to the Kentucky Constitution passed in 1982 by Kentucky voters.

In 1983, Jefferson County was one of the very few local governments to implement the newly passed legislation, and in 2003, the then-merged Louisville-Jefferson County government continued the program. In essence, it encourages redevelopment of existing properties by "freezing" for five years a property's tax assessment at pre-rehab levels. Unfortunately, the moratorium applies only to the "county" portion of the tax assessment, which currently amounts to $0.125 per $100 of assessed value. Efforts to extend the moratorium to other portions of the total property tax assessment have thus far been unsuccessful. Nevertheless, the moratorium presents an additional incentive for a property owner to rehabilitate an eligible property.

The moratorium program is jointly administered by the Jefferson County Property Valuation Administrator ("PVA") and the Louisville-Jefferson County Metro Government's Inspections and Licensing Department ("IPL"). The eligibility requirements for the moratorium are relatively straightforward. First, the existing residential or commercial structure(s) must be at least twenty-five years old. Second, either (a) the cost of the repair or rehab must be at least twenty-five percent of the pre-rehab value (as determined by the PVA's assessment); or (b) the property must be located within a "target area," an economically-depressed area based on residents' income. In the latter case, the cost of the repair or rehab must be at least ten percent of the pre-rehab value.

A property owner wishing to apply for the moratorium needs to submit an application to the IPL. In addition to other requirements, the application must include proof of the building's age, a description of the proposed use of the property, a general description of the work that will be performed to repair or rehabilitate the property and a schedule for completion of the proposed work. The owner should also obtain the necessary building permits and submit them to IPL. Once the application has been submitted, the owner has two years to complete the project. Upon completion of the project, the owner notifies the IPL, which inspects the property for compliance with the rehab plan set out in the application. If the project has been successfully completed, the IPL notifies the PVA, and they issue a moratorium certificate.

The moratorium's benefits can be calculated by determining the difference between the property's pre-rehab and post-rehab value. The PVA certifies the pre-rehab assessment of the property as part of the application process. Once the project is completed, the PVA reassesses the property at the higher post-rehab value; however, with the moratorium in place, the assessment for the county portion of the taxes will be "frozen" at the pre-rehab value. For example, assume that a developer purchases a qualifying property for $1,000,000. After rehab, the PVA reassesses the property for $10 million. With the moratorium in place, the assessment remains at $1,000,000 for purposes of the county portion of the tax, while the assessment for all other property taxes (state, school and others) increases to $10 million. The resulting tax savings for the property add up to approximately $11,250 per year for five years, or a total tax savings of over $55,000.

Property owners considering rehab of an eligible property should pay particular attention to the pre-rehab assessment. If the owner believes the property may be over-assessed, she should meet with the PVA and present evidence of the true value of the property prior to applying for the moratorium. Given the fact that the moratorium freezes the assessment at the pre-rehab value, a decrease in the assessment results in a corresponding increase in the tax savings, once the moratorium certificate is issued.

Conversely, a developer planning to purchase a property for redevelopment should be aware that the PVA's pre-rehab assessment will most likely be governed by the price the developer pays for the property, rather than by the pre-purchase assessment. Using the previous example, assume that a developer purchases a property for $2 million. Prior to the purchase, the PVA had the property assessed at $1 million. The PVA will inevitably pick up the purchase price from the deed and will reassess the property at $2 million, thus decreasing the tax benefit gained from the moratorium.

In any case, owners and developers should be aware of the moratorium process in order to take advantage of the potential tax savings on eligible properties.

MWhittington

Michele M. Whittington is Counsel in the Frankfort office of Stites & Harbison, PLLC, the Kentucky member of American Property Tax Counsel, the national affiliation of property tax attorneys. Michele Whittington can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

ClarkBruce F. Clark is a Member in the Frankfort office of Stites & Harbison, PLLC, the Kentucky 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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Nov
01

Reduce Property Taxes By Using the Cost Approach

"The use of the income approach in the face of increasing sales prices generated considerable push-back from tax assessors because of their discomfort with the resulting allocation of ever increasing amounts to the business enterprise portion of the going concern."

By Mark S. Hutcheson, Esq., as published by Hotel News Resource, November 1st, 2007

The valuation of hotels for property taxes has always been a difficult process. The increasing sales prices of hotel properties and increasing hotel REVPARs over the past several years have made the process even more difficult. The tax assessor response to these increases has resulted in ever increasing value for property taxes purposes and, thus, ever increasing tax bills. Hotel owners traditionally addressed property tax valuations through the use of the income approach. This calls for capitalizing the net income produced by the operating property and then allocating the value among the real estate, personal property and business enterprise components. The use of the income approach in the face of increasing sales prices generated considerable push-back from tax assessors because of their discomfort with the resulting allocation of ever increasing amounts to the business enterprise portion of the going concern.

Thus, many owners now find it useful to step back and approach the issue from a different valuation perspective. They often employ the cost approach, which has proven to be a useful tool in discussions with tax assessors. Over the last 10 to 15 years, the cost approach fell into disuse for valuing hotels for property taxes. Two factors influenced the decision not to use the cost approach: 1) Investors do not give much consideration to the cost approach in determining the purchase prices of hotel properties and 2) It is difficult to measure economic obsolescence attributable to the real estate. While both of these factors are correct, they do not negate the potential use of the cost approach.

A quick review of basic hotel cost information from Marshall & Swift (a recognized source of cost information for appraisers and tax authorities) may indicate whether the cost approach will be useful. This information shows that construction cost ranges from $84 to $139 per square foot for Class A limited service hotels to $99 to $195 per square foot for Class A full service hotels.

If the preliminary review of Marshall & Swift data reveals a potential for the use of the cost approach, a more detailed cost analysis may be in order. The cost approach is one of the three generally accepted approaches to value.

A traditional cost approach involves the following steps:

  1. Estimate hard and soft costs of the improvements.
  2. Estimate entrepreneurial incentive.
  3. Estimate accrued depreciation involving physical deterioration, functional obsolescence and external obsolescence.
  4. Estimate contributory value of land and site improvements.

These steps result in an estimate of the market value of the real estate portion of the hotel business's total assets. Generally, the cost approach is considered to represent the upper-end of value when appraising real property.

The following example demonstrates the usefulness of the cost approach as provided by a property tax appraisal of a full service convention type hotel. The appraisal valued the total assets of the business at $200 million and the cost prior to depreciation at $150 million. The appraiser ascertained that due to the size and location of the hotel, there were a limited number of potential operators. Consequently, his appraisal determined economic obsolescence at over $50 million. This resulted in significant tax savings for the owner.

Thus, owners should give careful consideration to the use of the cost approach for valuing hotels for property tax purposes. With profits at record levels and sales at historically low cap rates, the income and sales comparison approaches create difficulties for assessors. Since tax authorities are comfortable with the cost approach, which they use regularly on other properties, this approach is very useful, especially because a hotel's profitability is not a consideration under the cost approach and the approach necessarily excludes intangible business value.

MarkHutcheson140Mark S. Hutcheson is a partner with the Austin, Texas law firm of Popp, Gray & Hutcheson. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Hutcheson can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Oct
09

Taxpayers beware! Property Bills Come This Month

"When you receive your tax statement, determine if the property belongs to you and if you are responsible for the payment of taxes."

By David Canary, Esq., as published by Daily Journal of Commerce, October 9th, 2007

By statute, county assessors must deliver property tax statements to taxpayers by Oct. 25 of each year- just before Halloween. This requirement applies to all property, real or personal, whether owned by homeowners or utilities. To avoid any unpleasant surprises, it is important that taxpayers understand and carefully review their tax statements.

If you don't receive a tax statement for property you own and you're responsible for the payment of taxes, contact the county assessors office to determine if the assessor is unaware of a recent change of address or ownership.

When you receive your tax statement, determine if the property belongs to you and if you are responsible for the payment of taxes. If there has been a recent sale of the property, the assessor may not have noted the change of ownership, Taxpayers have a duty to now the assessor of changes in title and changes in address. Do not assume the new owner, or lessee of the property (in the case of a triple net lease), will pay the property taxes.

Review the real market value and assessed value appearing in the upper left corner of the tax statement. The assessor calculates a real market value for both land and improvements for the current and previous tax years. Below the total real market value is the assessed value for the total account for the current and previous years.

The assessed value may be less than the total real market value, but it may not be more. This is because Measure 50 requires the assessor to calculate two values — the real market value and the maximum assessed value. The lesser of the two values is the assessed value — the value upon which you pay taxes. If the assessed value is less than the real market value, generally, the real market value has no effect upon the property taxes you pay. Next, it is important to compare the assessed value for the current tax year to the assessed maximum assessed value cannot increase more than 3 percent above the property's assessed value from the prior year. There are exceptions, and the taxpayer must investigate to determine if they apply.

A property's maximum assessed value may exceed the 3 percent cap if the new property or improvements were added. Minor construction or general ongoing maintenance and repair does not constitute new property or an improvement.

Further, the improvements must have been made since the last assessment. Improvements made to the property three or four years ago cannot be added to the tax roll under Measure 50 although assessor may add them as omitted property.

Finally, it is the real market value of the new property or new improvements not the cost that is added to the tax rolls under this exception. This is particularly important if the improvement was a major but necessary repair that did not necessarily add value to the property.

Partitioned or subdivided property may be reassessed by the assessor and with some limitations, the reassessment may increase the assessed value by more than 3 percent. Likewise property that has been rezoned may be reassessed and the assessed value increased, but only if the property is used consistently with the rezoning. However, the total assessed value of properties subject to a lot line adjustment should not be affected by the adjustment by more than 3 percent.

The value of property that is added to the tax roll for the first time as omitted property, or property that becomes disqualified from exemption of special assessment, may increase the previous years assessed value by more than 3 percent under Measure 50. Finally, taxpayer that own or lease business personal property should carefully review their tax statements to determine if any penalties have been assessed. Taxable personal property must be listed, and reported to the assessor by March 1 of each year. If the personal property return is not filed timely, the taxpayer may face penalties up to 50 percent of the taxes due.

Under new legislation, upon application to either the assessor or the Board of Property Tax Appeals, under certain circumstances a taxpayer may obtain a waiver of the penalties. Taxpayers who believe their property has been improperly assessed should contact the assessor immediately. The assessor has the discretion to change the tax roll after it's finished, provided the change reduces the value of the property. But only payers who are vigilant and know their rights scan avoid those nasty Halloween surprises.

Canary90David Canary has specialized in state and local tax litigation for the past 18 years. He has worked for the past 13 years as an owner in the Portland office of Garvey Schubert Barer and prior to that was an assistant attorney general representing the Oregon Department of Revenue. He has the distinction of trying several of the largest tax cases in Oregon's history. He is the Oregon member of American Property Tax Counsel and an active member of the Association of Oregon Industries' Fiscal Policy Council. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Sep
11

What's Fair Market Value?

"Despite the law, there appears to be one abiding maxim that all tax assessors observe: Every high sale price represents a market value sale, and every low sale price is seen as a distress sale."

By John E. Garippa, Esq., as published by Real Estate New Jersey, September 2007

New Jersey, as in most other jurisdictions in the US., all real property must be valued and assessed based on market value. It's the law. Market value is defined as the price paid by a willing buyer to a willing seller, each acting knowledgeably, without duress.

Despite the law, there appears to be one abiding maxim that all tax assessors observe: Every high sale price represents a market value sale, and every low sale price is seen as a distress sale. Further, every high sale can be relied upon to set an assessment and every low sale must be disregarded because it took place under distress. However, the real issue revolves around: Is every sale a market event that represents fair market value for assessment purposes? The Tax Court of New Jersey has focused on this issue and determined that a category of events exists that rule out a sale as a reliable indicator of fair market value for assessment purposes.

A transaction set up as a 1031 tax-free exchange represents one such category identified by the Tax Court. Under 1031, sellers of investment-grade real estate may defer paying capital gains by using the proceeds from one sale as an investment in another similar property or properties. The seller has 180 days from the original closing date to complete the exchange. Also, within 45 days of closing, the taxpayer must provide the IRS a list of three or more potential replacement properties.

In a recent case, the Tax Court agreed with the taxpayers arguments that his 1031 sale price was significantly higher than market value. The court concluded that the sale price was motivated by tax and business issues rather than typical real estate motivations. The court also concluded that the tax free exchange laws placed enormous pressure on a seller to conclude a transaction within 180 days. Fundamentally, the sale took place primarily to defer gains from another sale.

Another category of sales rejected by the Tax Court compromise those that have not been properly marketed. For example, a Fortune 500 company sold a corporate headquarters for $16 million. The sale was conducted via sealed bids over a short period of time. The bid package included language that prohibited the bidders from changing any of the sale terms. The court determined that the bid package was not sent to all potential buyers. As a result of these perceived defects in marketing the property, the court rejected the sale price and concluded to a market value of $49 million.

In contrast to the prior set of facts, the Tax Court has also concluded that the sale of a complex property can be market value. In another case, an oil refinery was sold after it was marketed for more than 18 months. The owner hired an investment banker to market the property. The investment banker identified all of the potential buyers. Comprehensive information packages identifying the property were transmitted all over the world. At the end of this marketing period, the seller received two bids, eventually resulting in a sale. The court concluded that such a significant amounted to a valid sale that could be used to value the property for tax assessment purposes.

Some of the same arguments made with regard to 1031 property can also be advanced for high purchase prices paid by REITs. REITs offer significant tax advantages to shareholders; however, they must meet strict tax requirements in order to qualify for that status. A RElT must distribute 90% of its income to shareholders. Thus, in order for a RElT to grow, it must continually purchase properties, as it cannot grow via the normal accumulation of cash.

Growth is critical because it leads to higher stock prices and allows for more diversification in the portfolio. Additionally, REITs use capital markets to which most other buyers do not have access. These large capital markets fund REIT purchases at low interest rates that further the aims of the REIT. All of these issues would normally cloud the price paid by a "willing buyer, acting without duress."

In an era characterized by unusually high sales prices, tax payers need to remember an important caveat: Even the New Jersey Tax Court recognizes that not every sale represents fair market value for tax assessment purposes. Owners involved in transactions with high sales prices need to carefully examine their property tax assessments to determine whether a valid market price was used in levying their assessment.

GarippaJohn E. Garippa is a senior partner of the law firm of Garippa, Lotz & Giannuario of Montclair and Philadelphia. He is also the president of the American Property Tax Counsel, the national affiliation of property tax attorneys, 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
02

Equal and Uniform Arguments Reduce Hotel Taxes

"Many state constitutions include language calling for equal and uniform property tax valuation. Unfortunately, only a few states actually have a statutory remedy to implement this goal."

By Jim Popp, Esq., as published by Hotel News Resource, August 2nd, 2007

The strong hotel market has resulted in a significant number of hotel sales at levels much higher than in recent memory. These high sales prices dramatically affected property tax officials, encouraging them to raise hotel assessments to ever increasing levels. Of course, the sales price of these properties result from a combination of real estate, personal property and business intangibles values. Knowledgeable owners, appraisers and property tax lawyers and even some tax officials understand that these sales prices do not represent market value for property tax purposes. However, tax officials often give in to the pressure of high sales prices and arguments relating to real estate market value fall on deaf ears.

Sales Activity Inflates Property Tax Values

Several factors account for tax officials' willingness and need to allow sales prices to impact them (commonly known as sales chasing). The first is that all hotel properties are judged by the sales of a few properties. The sales approach has become a fundamental basis of property valuation; however, it must be used with caution when applied to a complicated hotel property that includes several property value components. The phenomenon of the many judged by the few results in hotel properties tending to be valued at greater than market. The second factor relates to tax officials tendency to single out sold properties, causing them to be saddled with assessments higher than their competitors.

Taxpayers often experience difficulty addressing either of these problems directly using solely a market approach to property valuation. Overall this means recent sales activity tends to inflate property tax values.

Remedying the Impact of Sales Prices

Several states with more taxpayer friendly systems addressed sales price chasing by passing remedial legislation that focuses on the equality of property tax valuation. Many state constitutions include language calling for equal and uniform property tax valuation. Unfortunately, only a few states actually have a statutory remedy to implement this goal.

Texas for example enacted such a remedy. The legislation enables Texas taxpayers to challenge a tax valuation based on the traditional tax value in excess of market value. More importantly, they may also challenge based on the contention that the property is unequally appraised. Specifically, the statute provides that a property shall be valued for property taxes based upon the median level of appraisal of a reasonable number of properties appropriately adjusted. The appropriate adjustments are made to account for physical differences between the properties. The application of this remedy may produce a dramatic effect on property taxes.

For example, a hotel property recently sold in the range of $60 million. The tax official, in recognition of business value, appraised the property for tax purposes at approximately $50 million. This may have been some indication of the real estate's market value. The difficulty for the taxpayer came about because a competitive set of hotel properties were valued on a per key basis or per square foot basis at less than half of his property. The application of an equality remedy generated a 50% reduction in tax value, down to $25 million, which was comparable to the competition.

Testing for Tax Equality

Several tests of equality exist, which may prove useful to hotel owners in presenting their case for property tax reduction:

  1. The most basic test compares the per key value of the hotel with comparable properties in its competitive set. Tax authorities generally understand this approach. It makes sense, for example, that adjacent limited service properties that have similar physical characteristics should be valued on the same per room basis.
  2. The next test compares the tax value of the property on a per square foot value allocated among the components of the property. The square footage attributable to rooms, banquet and restaurant facilities, health club and spa and parking facilities is determined. The purpose here is to measure and compare the economic impact of various profit centers. For example, if two properties have an equal room square footage but one has a significantly larger banquet facility, the property with the larger banquet facility will be more valuable. The tax authority inclination to focus on per room values ignores this reality.
  3. Another very useful test is the ratio of taxable value to room revenue. Since many tax officials value property on an income approach using uniform deductions for business value across flags, this allows comparison of the property to the competitive set based on income. It should be noted, however, that this comparison does little to address the effect of flag affiliation on revenue.

These tests have proven effective in states with a specific equality remedy and often are at least considered in states without such a remedy.

Conclusion

The comparison of tax values on an equality basis is a very effective remedy. It addresses the practice of sales chasing. It holds in check the propensity to use high sales prices to raise property taxes across the entire market. It offers an understandable alternative to a purely excess market value argument. If your state has such a remedy, use it. If it does not have such a remedy, a legislative effort to obtain one will prove beneficial.

JimPopp140Jim Popp is a partner with the Austin, Texas law firm of Popp, Gray & Hutcheson. The firm devotes its practice to the representation of taxpayers in property tax disputes and is the Texas member of the American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Mr. Popp can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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