Here are a number of approaches to defending against excessive tax assessments.

Countless companies have seen their top and bottom lines decimated by COVID-related shutdowns, travel restrictions and changing consumer preferences since the start of the pandemic. Yet for many taxpayers, property tax values have changed little or even increased.

Many of these taxpayers have been surprised to receive property tax bills that do not reflect the real and lingering economic challenges that the retail, hospitality, office and other industries have, are, and will continue to face. These taxpayers – and even those in industries better suited to weather the storm – should give special attention to ensuring they receive fair and reasonable assessments.

Observe Valuation Dates, Notices and Appeal Deadlines

With a large percentage of employees working remotely, together with an inconsistent postal service, it is more important than ever to have dedicated employees and knowledgeable property tax professionals reviewing property value assessments annually and filing timely protests when warranted. Failure to receive a tax valuation notice rarely excuses a missed protest deadline, so it is vital to know and comply with applicable deadlines.

Many property tax bills issued in 2020 were based on statutory valuation dates that preceded the emergence of COVID-19. For instance, assessors working under a valuation date of Oct. 1, 2019, or January 1, 2020, were quick to tell taxpayers to "wait until next year" before assessments could reflect any impact from COVID-19.

Not surprisingly, some assessors are now arguing that the pandemic was temporary and that its worst effects have passed. In some jurisdictions, assessors simply carried forward the prior year's cost-based value with no adjustments to account for additional depreciation or functional and economic obsolescence. In other cases, assessors have relied on pre-pandemic sales during the relevant tax cycle to justify increases over the preceding tax year.

Many locales had few sales in the early stages of the pandemic, and in these cases, the assessor may downplay or entirely ignore the actual impact of COVID-19 on market values. In contesting assessments in each of these cases, it is helpful to not only demonstrate the immediate difficulties that began in March 2020, but also the pandemic's lingering effects on the taxpayer's current and future operations.

Although the pandemic has affected all industries, certain sectors face unique challenges that will persist well beyond the initial virus surges and vaccine rollouts. These include, but are not limited to, brick and mortar retailers competing with ever-expanding e-commerce, office buildings competing with flexible work options including remote work, and hotels competing for elusive business travel in a cost-cutting environment. Some of these challenges are trends that began long before the pandemic, such as the slow death of enclosed malls as consumers increasingly favor lifestyle centers and online shopping.

COVID-19 Influences by Property Sector

Retail. Since the early 2000's, e-commerce's share of total retail sales has increased each year. The pandemic accelerated that trend, arguably by years, when people who had long resisted shopping online no longer had the same in-store options, and experienced online shoppers became more comfortable buying things like groceries and large-ticket items online.

These evolving shopping habits certainly affect the desirability and value of retail real estate, especially of those buildings constructed before the scope of today's e-commerce world could be contemplated. Landlords must now think outside the box when re-tenanting shopping centers, often filling vacancies with restaurants, service and entertainment concepts. These uses can create parking, zoning and other challenges for centers built for traditional retail.

In the case of big box stores, companies such as Walmart are looking at converting portions of existing stores to warehouse or fulfillment space for e-commerce. All these changes to keep up with the rapidly evolving marketplace shine a light on the functional and economic obsolescence present in many retail properties.

Office. Office landlords are also facing rapid market evolution, including an accelerating trend toward more remote and flexible work options. The pandemic made Zoom meetings ubiquitous and gave employees a taste, and perhaps a future expectation, of more work-from-home opportunities.

In light of the Delta variant's spread, many large companies have delayed their anticipated returns to the office, with Google now postponing its return until at least January 2022. Although some of the pandemic's effects on office occupancy have already occurred, the full impact will continue to play out as leases expire and companies reevaluate the volume and design of office space they require.

Hospitality. The hotel and travel industry suffered some of COVID-19's most immediate and devastating financial casualties. Leisure and business travel ground to a near halt, with hotel stays and flight counts falling to once-unimaginable lows. Corporate travel has yet to make a meaningful recovery and remains at a fraction of pre-pandemic levels. Throughout the country, corporations are cutting back on travel budgets as they weigh its costs and health risks against alternatives such as video conferencing.

Business travel and events are unlikely to return to pre-pandemic levels until 2024, according to a recent American Hotel & Lodging Association survey. Although the leisure travel industry benefitted from pent-up demand during the summer of 2021, the Delta variant has undermined that temporary resurgence. And even with the recent increase in leisure travel, airplane traffic is still well below 2019 levels.

These are just a few of the industries that will continue to see COVID-19 weigh down their businesses and property values. Property and business owners should closely review their property tax values to make sure assessments adequately reflect the specific challenges affecting their properties, to include the pandemic's immediate, ongoing and future financial impact.

Strategies for getting value adjustments on assets impacted by the pandemic, from attorney Cynthia Fraser.

Last January I penned an article for this publication titled: "Will 2021 Bring Property-Tax Relief?" I never imagined we would enter a second phase of outbreaks and continued economic fallout related to COVID-19.

Because most states assess property for taxes as of Jan. 1 each year, last year's assessments did not reflect the pandemic's catastrophic impact on real estate in 2020. This year, as jurisdictions certify tax rolls to reflect real market values as of Jan. 1, 2021, property tax relief may depend on the taxing jurisdiction's recognition of external obsolescence due to COVID-19.

Businesses and commercial properties in my hometown of Portland, Ore., are still suffering from not only work-from-home policies and social distancing mandates related to COVID-19, but also the long-term effects of civil unrest downtown following the death of George Floyd. While downtown experienced a glimmer of revival this summer, many once-vibrant small businesses and restaurants remain boarded up or vacant. Whether from COVID-19 or riots, these external influences affected property market value during 2020.

Across the nation, many companies have extended remote-work policies through the end of the year, leaving office buildings a ghostly reflection of their bustling heydays and slowing recovery of commerce dependent on office worker customers.

A visible occupancy decline for commercial real estate that housed offices, restaurants, small retail stores and hotels should be hard to ignore. Unfortunately, tax assessors have been reluctant to recognize these realities when assessing taxable property value, even when the marketplace reflects downward trends.

Obtaining relief will require the taxpayer to effectively document the market impact of COVID-19 during 2020 and into 2021. Their focus should be on the market, property class, rents, vacancies and property sales, as well as the property characteristics that tenants and investors were seeking on the date of value, Jan. 1, 2021. The following paragraphs cover key points to consider.

Will Workers Return to the Office Full Time?

The office market may undergo the most significant long-term adjustments to the pandemic. In fact, office changes that started in 2020 will continue into this next tax year. The shrinking of office footprints appears to be lasting as remote work becomes acceptable and, in fact, necessary to attract and keep talent.

Younger office workers in particular are voicing a strong desire to work from home permanently or part-time. The reality is that most office workers have gotten off the merry-go-round of spending 12 hours of each day commuting and working. Walking to the kitchen table or a bedroom office with coffee in hand has its appeal to many.

Work from home may be a necessity for many with younger children at home. During 2020, most schools and daycare facilities closed completely, leaving parents no choice but to pivot to full-time daycare on top of work.

Likewise, in 2020 businesses began projecting space needs going into 2021. In Portland, mass transit operator TriMet polled its workers and found an overwhelming aversion to a return to the office. Accordingly, the public agency reduced its office footprint, redesigned workspaces to accommodate "hoteling" or shared workstations, and allowed many employees to permanently work from home. The private industry is quietly following suit, as 2021 shows no real slowdown in COVID-19.

The Hotel Industry Languishes

Perhaps no other industry has been harder hit than the hotels and conventions industry that collapsed in 2020. Not only did pleasure travel come to a standstill, but Zoom meetings and virtual conventions replaced business travel to become the new normal in 2021. The result was high vacancy in 2020 and lingering uncertainty over how long these properties will continue to be underutilized, sending a ripple effect through other commercial spaces.

The Market Wild Card: Housing

The wild card for 2020 was housing. Single-family homes across the nation saw exponentially rising prices that should make a tax assessor's heart soar. However, rent moratoriums for most of 2020 devastated some landlords. Documenting the costs associated with nonpaying renters, including higher management fees for evictions, may be used for challenging this past year's taxes. Rent moratoriums are an external market force outside a landlord's control, making them an incurable, negative external factor.

Demonstrating External Obsolescence

When requesting a lower assessed value for 2020, taxpayers should be ready to show how pandemic effects contributed to external obsolescence for their properties, requiring a depreciation adjustment to real market value. It will be important to address not only how changing occupier demand is affecting values in that property type but also the real estate's location and the degree to which its value depends on the surrounding submarket.

Identify all external factors, including those addressed in this article that impacted the property in 2020. These are economic influences outside the taxpayer's control and create an external obsolescence to the property that is incurable.

Appraisers recognize external obsolescence as an acceptable valuation adjustment to a property's market value. The Appraisal of Real Estate, published by the Appraisal Institute, recognizes the term and its application as a form of depreciation.

External obsolescence can be temporary or permanent and has a marketwide effect that typically influences an entire class of properties. This depreciation or obsolescence adjustment can be applied on a year-by-year basis to reflect the impacts of COVID-19 on the real estate for 2020.

Any assessor's argument that there may not be long-term impacts on the real estate is irrelevant to the 2020 assessment year when using an external obsolescence adjustment. For tax year 2020, at least, there can be no doubt that the majority of commercial real estate was hit hard by the pandemic and merits an external or economic adjustment. When approaching the assessor to request a value reduction for 2020, come prepared with economic market data to support an external obsolescence adjustment.

How to use these factors to reduce a senior living property's tax assessment.

The longstanding debate over intangible value in commercial real estate taxation rages unabated, and nowhere is the squabbling fiercer than in valuing seniors living facilities. Because these properties generally transact based on income from a going concern rather than from real estate, taxpayers planning to acquire a seniors facility should consider how to separate intangible value prior to acquisition. Simply waiting for the annual tax bill is a recipe for incurring inflated cost and an inferior investment return.

Skilled nursing facilities, assisted living and other seniors housing subtypes often require state-issued licenses personal to the operator. Critically, seniors housing sales typically involve the transfer of a going concern including a valid operating license, assembled workforce and other business assets required for the operation. In other words, sales involve more than just the real estate, and the intangible personal property component involves more than just goodwill.

Acquisition pitfalls

A seniors housing owner's overall return may hinge on tax consequences. Common considerations include real estate transfer taxes, allocation of basis for income tax purposes, real and personal property tax assessments, and segregation of readily depreciable or amortizable assets from non-depreciable or non-amortizable assets.

A common mistake is to use the transaction price as the consideration in the deed. That consideration is the basis for transfer taxes and should exclude tangible and intangible personal property value. Many assessors will revalue the property based on deed consideration, which is easily identifiable and theoretically reflects both parties' valuation of the land and improvements. Thus, citing overall transaction value on the deed can lead to inappropriate excessive taxation.

Instead, define consideration in an allocation agreement at or before closing, which is when the property's federal income tax basis is determined. This generally identifies four components: land (non-depreciable); buildings or improvements (generally depreciable); tangible personal property (generally depreciable); and goodwill or ongoing business value, represented by intangible personal property or business enterprise value. A cost segregation study is helpful but not required.

Loans secured by senior living facilities often pose valuation challenges. Lenders underwriting on a going concern basis need to address whether the state-issued licenses can be secured. The Small Business Administration requires SBA lenders to obtain a going-concern appraisal for real estate involving an ongoing business. Those appraisals must value the separate components and be completed by an appraiser trained in valuing going concerns.

The federal Office of the Comptroller of the Currency, which regulates commercial banks, requires lenders to use a competent appraiser but does not specify appraiser course requirements.

Property tax issues

State law generally requires tax assessors to value only real estate, based on a hypothetical transaction involving the real estate only. Therein lies the rub, because the property's income reflects a combination of real property and tangible and intangible personal property. There is now general agreement that hotels and most seniors living facilities involve intangible value.

The problem is isolating the intangible value. For example, in a 2020 decision involving Disney's Yacht & Beach Club Resort, the Florida Court of Appeals noted that though the nearly 1,200-room hotel's business and real estate values are linked, the assessor is required to value only the real estate, not the going concern.

Some older literature suggests that real estate value contributes only 73 percent to the value of independent living properties, 53 percent to assisted living values, and only 36 percent to the value of a skilled nursing facility. The remaining, non-taxable value, is from the going concern.

The Appraisal of Real Estate provides that going-concern value "includes the incremental value associated with the business concern, which is distinct from the value of the tangible real property and personal property." The Dictionary of Real Estate Appraisal, 6th Edition, defines intangible property as "nonphysical assets, including but not limited to franchises, trademarks, patents, copyrights, goodwill, equities, securities, and contracts as distinguished from physical assets such as facilities and equipment."

State-issued seniors housing licenses fall squarely in the definition of intangible personal property but can be difficult to value, demanding business valuation skills in addition to real estate appraisal skills.

Appropriate approaches

Appraisers typically try to value real estate using the cost, sales comparison, and income approaches, none of which fit seniors housing well. Moreover, charged with valuing many properties, assessors often employ mass appraisal techniques ill-suited for valuing complex going concerns.

Sales comparison drawbacks include the skewing effects of portfolio sales. Common in seniors housing, portfolio prices can obscure the consideration for individual properties or may include significant price premiums over individual sale prices, for reasons completely separate from real estate value.

Some appraisers will use the nearest multifamily sale as a comparable transaction. Yet most types of seniors housing offer abbreviated individual kitchens, if any, and smaller individual living spaces designed to encourage seniors to use the common facilities. If an appraiser is going to use a traditional multifamily property as a comparable, it must be adjusted to retrofit the property as conventional apartments.

To use an income approach, the appraiser must recognize that a huge portion of the seniors housing rent is not attributable to shelter but to services. As noted, seniors apartments are typically designed to get people out of individual units and into common areas. Common spaces usually generate higher expenses and are built to encourage the use of services such as shared dining rooms.

Similarly, compared with standard apartments, expenses for seniors living facilities involve higher maintenance, utility, management and administrative fees generally associated with the property's intangible value. Further, continuing care retirement communities exercise significant synergies between service levels as residents age. Proper analysis of these income and expense figures requires expertise generally removed from an assessor relying on mass appraisals.

Recognizing that many seniors living facilities include substantial intangible value, a 2017 white paper by the International Association of Assessing Officers (IAAO) suggests the cost approach is the proper method for extracting intangible value. Replacement cost certainly offers an easily understandable way for extracting that value.

While correct in valuing new construction, however, the cost approach has questionable utility for older facilities. Replacement cost will often not reflect value, since one can question whether a seniors facility would be rebuilt in the absence of a license. That raises a problem best analyzed as whether the facility represents the property's highest and best use.

The real valuation answer is anything but simple.

At its heart, the debate over how to value seniors care facilities rests on assessors engaged in a hypothetical exercise which is not reflective of the market. Without agreement on how to value the real property when a transaction involves a going concern, the debate will continue.

Cris K. O'Neall of Greenberg Traurig on new avenues for challenging property tax assessments.

Changes brought by the recent pandemic continue to impact the property tax regimes of many states. Clearly, COVID-19 greatly reduced property values and property tax revenues, particularly where real estate markets determine the fair market value used in setting assessments.

But the pandemic has had other far-reaching effects, some of which may continue for years to come. Here are three trends reshaping property tax dynamics, and ways taxpayers can use those factors to reduce their tax liability.

1. Downturn Horizons Extend (Will Things Ever Return to Normal?)

Many property types have experienced value declines over the past 18 months. The question is how much longer the declines will continue. For example, will hospitality property revenues and values rebound in 2023? Or 2024? Will consumers continue to make online purchases, as they were forced to do during the pandemic, forever abandoning the traditional brick-and-mortar retailing outlets usually found in power centers and shopping centers?

The difficulties in estimating time horizons for the recovery of real estate markets creates uncertainty. At the same time, it presents opportunities for short-term and longer-term property tax relief for many property owners and managers. This is particularly the case where pandemic-driven change has permanently changed markets and created "new normals" for some real estate subsectors.

2. Local Tax Authorities Offer More Leniency

When the pandemic commenced in spring 2020, property owners sought to extend the time within which property taxes had to be paid. Rather than penalize property owners for not paying by deeming them in default, many jurisdictions allowed property owners more time to pay, extending deadlines that were once thought unchangeable. Some jurisdictions extended deadlines for more than just payment: They gave taxpayers additional time to file property renditions, property tax appeals and exemption requests.

While many tax advisors expected this leniency to cease following the worst of the pandemic, the opposite has happened. Some property tax jurisdictions continue to give taxpayers more time to pay and have extended deadlines to comply with filing requirements. An example of this is seen in the California State Board of Equalization's July announcement that it plans to author legislation giving the tax agency more power to extend deadlines under certain circumstances.

3. Restricted Access Drives Property Value Declines

COVID-19 has tested and perhaps expanded the valid reasons taxpayers can cite to prove property value declines and seek property tax reductions in many states. Prior to the pandemic, taxing jurisdictions were quite willing to grant property owners value reductions and property tax refunds for properties damaged by fire, earthquake, flood or other calamities. But such value reductions were always based on the physical condition of the property: If the calamity caused physical damage to the property, making it less useable, then a value reduction and tax refund would be granted.

The pandemic changed this. COVID-19 had the unique effect of making properties unusable and, therefore, less valuable solely due to restricted access. Public health concerns in general and government orders prohibiting citizens from frequenting public places depressed property values without inflicting any physical damage at all. Thus, government stay-at-home orders and public health fears made ghost towns of shopping centers, hotels and resorts, entertainment venues and other places where large crowds previously congregated. Almost overnight, the values of those properties greatly declined, sometimes to a fraction of pre-pandemic values.

Existing laws relating to property tax relief were not written to address restricted-access value declines. Nevertheless, many local assessors recognized the effect of pandemic-driven property value declines, including those caused by restricted access. Some taxing jurisdictions have even been proactive in reducing assessments due to downturns caused by COVID-19 in selected real estate markets, not waiting for taxpayers to file administrative appeals or lawsuits challenging property tax assessments. For example, California county assessors have asked commercial property owners to voluntarily submit valuation data early in the assessment cycle in order to reduce assessed values before the deadline for filing property tax appeals.

Despite recent real estate market value declines and efforts by local assessors to recognize such losses, the values of property tax rolls have continued to grow. In Los Angeles, the largest property tax jurisdiction in the U.S., the assessment roll increased by 6 percent during 2020, which was consistent with the preceding three years. Tax assessment rolls in San Francisco and San Diego hit record highs during 2020. Miami, Seattle and even Oklahoma City experienced similar increases. This stable growth of property tax rolls during the pandemic has allowed assessors to grant assessment relief to properties most affected by restricted access.

So the question arises, how long will local assessors continue to give COVID-19 property tax relief? Further, have the pandemic's restricted-access property value declines created new opportunities for future property tax value reductions? Time will tell.

Property Tax Reduction Opportunities Abound

The pandemic has created many opportunities to reduce property taxes, particularly in states where assessments reflect fair market values, and especially in sectors hard hit by restricted access issues. Uncertainty as to when market values will rebound, if ever, means property value reductions may remain in effect for more than a few years or assessment cycles.

Furthering this opportunity is the willingness of local taxing jurisdictions to extend deadlines and consider pandemic-induced property devaluations, including those caused by restricted access. This year and next, and perhaps beyond that, property owners and managers would do well to work with local taxing authorities to reduce their property tax assessments and, if need be, file property tax appeals.

Self-storage has become a hot investment and values are up, but many owners find themselves with excessive property-tax bills that eat into their cash flow. Here's an overview of how tax assessments are made and some ways to potentially lower your bill.

Self-storage facilities continue to command great cash flow, but many owners find themselves funneling more of their income toward exorbitant property-tax bills. Those who take the time to review their assessments and liabilities with a local expert often discover they're being taxed unfairly. This is why you should identify and question your assessor's methods, assumptions, data and calculations. By exercising your right to contest your assessment and presenting a convincing argument, you might be rewarded with a lower tax bill.

Self-storage is especially vulnerable to errant valuations by assessors who fail to differentiate taxable from non-taxable value. Key questions include whether the sale of a self-storage facility is completely subject to transfer tax and if the price directly equates to taxable value for real property tax. It can be argued that much of the value associated with self-storage is business value and personal property, which is typically exempt from transfer or property taxes.

Let's examine how self-storage tax assessments are made and arguments you can use to contest one assigned to your own property. A successful appeal can save significant money, so it's worth pursuing.

The Trouble With Assessment

Arguing that the value of your self-storage facility is largely derived from non-real-estate sources can be problematic. Much of the difficulty comes into play when the assessor obtains a copy of the finance appraisal, or when a purchase and sale agreement includes an allocation separating the real estate from non-realty items.

Assessors want to believe that all the value in a sale or from financing is derived from real estate. In the Ohio case St. Bernard Self-Storage LLC vs. Hamilton County Board of Revision, the state supreme court stated that although the purchase and sales agreement carved out goodwill in the acquisition price, it was unconvinced that the sale of a self-storage facility had any goodwill. Conversely, lenders are often unable to lend on value that isn't attributable to real estate.

For property owners, the first step toward minimizing taxes and maximizing their financing is watching definitions; the definition of the interest being appraised is paramount. Appraisers can properly find for two different values on the same property, depending on whether they're valuing for the purpose of financing or tax assessment, so it's important to establish the interest being appraised.

When it comes to financing, lenders can and do lend on the stabilized value of a property performing as a going concern. In other words, they're appraising the property's leased fee value. So, for financing, appraisers can rightfully take into consideration the income from the operation at stabilization, but that isn't necessarily true for tax assessors.

Many states require assessors to value the fee simple interest in the real property only. The fee-simple appraisal is based on the real estate value alone and excludes value from the return of and on personal property. When it comes to self-storage, the assessor's calculation of taxable value must ignore value associated with units, computer systems, national marketing and so on, based on circumstances. Individual units are capable of being assembled and disassembled, which means they are at best a business fixture and not real estate.

Many assessors and appraisers recognize the removal of the depreciated value of personal property, which means they must also remove the personal property—and any income attributable to it—from the going-concern value. The comingling of values from multiple sources is especially evident when there's a sale.

Arguments in Your Favor

When the assessor cites a tax assessment based on the sale of your self-storage property, you can make several arguments. First, look at the building's construction and acquisition costs without factoring in things like security, computer systems, marketing and individual units.

If your facility was recently converted from a different type of building, that too can give you an advantage. Properties like those transformed from big-box retail space often trade at much lower price before lease-up and stabilization, and the conversion costs are typically associated with the personal property and eventual occupancy. So, as the owner, you can present sales of comparable pre-conversion properties to support an argument for a reduced assessment. It's better than using the sales of operating self-storage facilities as comps because there's no need to remove the personal property from the equation.

In cases when there are few comparable sales of big-box properties to reference or your self-storage facility truly isn't comparable to others that have been sold, it's appropriate to assess the property based on the replacement costs associated with building new. However, the appraiser should stop short of including costs specific to individual units, otherwise they'd need to apply depreciation from all sources, including age and any economic or functional depreciation.

The last line of counterargument is based on the income approach to valuation. Income-based assessment is the most complex when it comes to removing non-realty income. The easiest and cleanest way to respond is to look at examples of same-generation retail or light-industrial rents.

That said, when trying to defeat a sales price, it may be necessary to look at the actual income and then determine the appropriate amount for the non-realty value. Appropriate income will be based on the initial investment to install personal property as well as the return from that personal property. The income derived from that non-realty component is then removed from the actual net income. This is an activity easier said than done, but appraisers can establish the return. After removing the non-realty income, they should apply an appropriate capitalization (cap) rate to arrive at the property value.

Preferably, the cap rate used by the appraiser or assessor should be created from a mortgage constant and equity returns rather than from sales of comparable self-storage facilities because cap rates from this industry have comingled interests.

As you can see, it's appropriate for self-storage owners to use different values for their property, including one for financing and another for taxable or assessed value. These will differ because the appraisals that produce them are truly measuring different property interests.

Simultaneously protesting an assessment and a government taking can put taxpayers in a quandary.

There are multitudes of ways for property owners to reduce their tax burdens, as well as missteps that can derail a tax strategy. With that in mind, taxpayers should beware of trying to prove a low value for a tax appeal while simultaneously claiming a higher value in another proceeding. And here is how it can happen.

Protesting a high assessment

Most real estate taxes in the Northeast -- including those in New York, Pennsylvania, Connecticut and Massachusetts -- have an "ad valorem" or "value-based" assessment method. Thus, the greater a property is worth, the higher its real estate tax burden. A property tax bill is calculated by multiplying the property assessment by the tax rate. The assessment or taxable value is determined by the local assessor or board of assessors and is typically a percentage of market value.

This percentage varies among states and even municipalities. In New York, it is based on a comprehensive analysis of sales. The percentage is released annually by the state's Office of Real Property Tax Services and is different for each municipality. Connecticut sets its percentage by statute. In Pennsylvania, it is set by the state's Tax Equalization Board. But regardless of the state or method, local statutes fortunately allow property owners to reduce their real property tax burden by protesting the assessment they receive.

To successfully appeal a tax assessment, property owners must file a tax appeal and conclusively prove a lower market value. There are a few accepted ways to do this, namely the sales comparison, income capitalization, and cost approaches to determining value. No matter which method is used, the calculation must value the property according to its actual use and condition as it existed on a specific date in the past. New York designates this as a taxable status date and most states use the same or a similar term.

Asserting a higher value

The "actual use and condition" guideline in setting taxable value stands in stark contrast with condemnation and eminent domain guidelines, which value property when it is taken for a public purpose. In that scenario, the property must be valued according to its highest and best use, regardless of how the property is actually being used.

When the government takes private property for a public purpose, it must compensate the owner for the damages to the property's most valuable use. This valuation standard is known as "highest and best use," and has a specific meaning in the appraisal and eminent domain world.

According to the Appraisal Institute's reference text, "The Appraisal of Real Estate," and a multitude of state and federal court cases, the highest and best use of a property must be (1) physically possible, (2) legally permissible, (3) financially feasible, and (4) maximally productive. A taxpayer building a case for maximum value will typically need a lawyer, along with an appraiser and/or engineer, to evaluate these four categories for the specific property, look at the range of uses that qualify under each of those categories, and then conclude which use will result in the highest market value.

For example, a vacant, five-acre, commercial-zoned parcel of land on Madison Avenue in New York City would not be valued as vacant land, but as whatever its maximum use could have been, such as an office building.

At crossed purposes

There can be a serious conflict between the two guidelines when there is a partial taking, such as when a government takes a strip of a larger tract for a road widening, during the pendency of a tax assessment appeal on the larger property. The conflict can arise when the property's highest and best use happens to be its present use and condition.

In that scenario, a property owner is in the difficult position of claiming a low market value for the tax assessment proceedings and claiming a higher market value during the condemnation proceeding. When that happens, the taxpayer's team must perform an analysis to determine which proceeding will potentially result in the greatest benefit to the owner.

A good rule of thumb would be to withdraw the tax appeal and concentrate on the eminent domain claim. This is because for condemnation, the damage has occurred on a single date (the date of the taking). Tax appeals, on the other hand, are filed annually, and market values can change from year to year. A wise petitioner would proceed with a tax appeal only after the eminent domain claim is concluded.

Property tax assessments show market-wide value declines for the first time in 25 years but fall short of reflecting taxpayers' true losses.

Judith Viorst, author of the children's book Alexander and the Terrible, Horrible, No Good, Very Bad Day, had nothing on 2020. By virtually every metric, 2020 was a terrible, horrible, no good, very bad year.

Most states have some sort of catastrophe exemption for a property tax abatement or reduction tied to a defined disaster event. These statutes are state-specific, however, and few states had authority to address whether a property had to have sustained physical damage to qualify for catastrophe relief on property taxes.

Most states, including Texas, eventually concluded that some form of physical damage was necessary for property values to be reduced following a disaster. Its neighbor, Louisiana, went the other direction, concluding that its disaster statute did not require physical damage, only that the property be inoperable due to a declaration of emergency by the governor. Accordingly, property values for the 2020 tax year could be reduced in Louisiana due to COVID-19-related economic losses.

Pandemic paper trails

Fortunately, 2021 gives all taxpayers a fresh start. Most states use Jan. 1 as the "lien date," or valuation date for determining fair market value of property subject to ad valorem tax. For income-producing properties, taxpayers now have a full year's documentation of COVID-19 impacts, which more accurately demonstrate the fair market value of their properties in the current, COVID-19 economic climate. At a high level, such documentation may include financial statements with year-over-year and month-over-month comparison of revenues to expenses and profits to losses.

Drilling down, taxpayers should be able to demonstrate the source of these changing numbers, such as reduced employee hours, decreased production outputs and sales, unoccupied rooms, canceled conferences and the like. Comparable sales information should also now be available.

This information generally relates to economic obsolescence, which is a loss in value due to causes outside the property and which are not included in physical depreciation. Taxpayers also must consider whether their property exhibits functional obsolescence, or a loss in value due to the property's lack of utility or desirability.

Functionality is tied to a property's amenities, layout and current technology. A property's functional obsolescence is measured through reduced or impaired use. Taxpayers can quantify the lack of use in 2020 and compare it to pre-2020 capacity and usage in arguing for a reduction in taxable value.

Value and evolving utility

Historical information is key to the taxpayer's case — as is evidence of adaptation to current market trends. For instance, a year ago, who would have imagined that neighborhood and big-box stores of all stripes would start delivering their products directly to customers' homes? Suddenly, abundant check-out lanes, wide aisles, sampling stations and sprawling parking lots are unnecessary. Retailers would rather have drive-thru lanes and dedicated carryout parking.

Hotels have been similarly affected. Traditional amenities such as atriums, event space and intimate lounges that preclude safe social distancing are passé. Motels with open-air access are enjoying a renaissance. Resourceful restauranteurs have figured out how to make street-side dining desirable. Patios are now essential. While many of these changes in use are likely temporary, some are expected to be longer-lasting.

Consider commercial office space. Prior to the pandemic, many office-using employers permitted only limited remote work but working from home has now become the new normal. Facility planners expect the traditional office environment to shift to a hybrid model, with expanded remote working, office-sharing, and fewer in-person communications. Large conference rooms are out and state-of-the-art multimedia systems have taken their place.

These trends impact real estate values because they affect how property is used, or more importantly, not used. Commercial real estate developers will not be laying out offices the same way they used to, and hoteliers will not be building out the same large conference centers post-COVID. And the reality is that much existing buildout, furniture and equipment is going unused. So for now, a replacement cost analysis is the most appropriate valuation method for those property types, because it reflects the functionality of the property and the fact that the property would not be rebuilt as is.

Of course, as more and more businesses adapt to post-pandemic market trends, the lack of utilization may be deemed industrywide rather than property specific. At that point, appraisers should treat the lost value as economic obsolescence, which is value losses stemming from factors occurring outside the property. In either case, taxpayers should be prepared to demonstrate the inutility of their property, and the cost of such inutility, to reduce taxable value.

Better than terrible

Whether or not 2021 is radically better than last year, at least taxpayers are now in a better position to show the adverse impact the pandemic has had on fair market values. And if that translates to lower ad valorem tax liabilities, then this decade is off to a very good start.

Insights into managing real property tax liabilities in the nation's capital.

After the tumult and disruptions of 2020, the last thing taxpayers need is another surprise. Our society craves predictability more than ever before, and commercial real estate owners want predictability in their property taxes. 

In the District of Columbia, commercial real estate owners keen to make their future expenses more predictable can start by familiarizing themselves with the full gamut of real property liabilities. In addition to the standard annual property tax, the District imposes a variety of charges on real estate that vary by the property's location, use and payment history. 

Managing these real estate charges can help a taxpayer budget for upcoming expenses and minimize the risk of incurring unplanned costs. What follows is a primer to help taxpayers manage real property tax liabilities in the District: 

Start with the basics 

The DC Office of Tax and Revenue (OTR) recently launched MyTax. DC.gov, a new taxpayer website intended to streamline the tax assessment and billing processes. This single portal offers insight into taxes on individual income, businesses and real property, as well as fees administered by OTR. 

The site features self-service tools that enable taxpayers to review and pay property tax bills online, view assessment histories, apply for tax relief benefits, request mailing address changes and submit mixed-use declarations, among other features. While this centralized system should help to organize the billing and payment processes, it offers little information about the District's fees and may leave owners still wondering: What are these charges? 

The BID tax 

Many commercial property owners in the District incur a business improvement district (BID) tax. The District defines a business improvement district as "a self-taxing district established by property owners to enhance the economic vitality of a specific commercial area." Each of the District's 11 BIDs assess a surcharge to the real property tax liability, which the District collects and then returns to the BID. Each BID dictates how it spends its funds, typically supporting the community with programs promoting cleanliness, maintenance, safety and economic development. 

The DC Code establishes BIDs and their geographic boundaries. These provisions empower each BID to establish its tax rates. How those taxes are calculated varies by BID. For example, an individual district may base its tax on the number of rooms in a hotel, a building's square footage and a percentage of the tax assessment value. Thankfully, these organizations often have robust, informative websites that can be useful resources for property owners. 

As with real property taxes, a property owner that fails to pay its BID tax on time and in full can incur penalties and interest charges on its tax account. Therefore, mismanaging a property's BID tax can lead to pricey consequences. 

Public space or vault rent 

To optimize the operation of an asset, many property owners rent-adjacent, District-owned space known as "public space." The District categorizes these offerings as either "vault space," which is below ground level; or above-ground "café space." Examples include outdoor café space, above or below-grade parking and areas for storage of utilities. 

The formula for calculating vault rent is Land Rate x Vault Area x Vault Rate. Therefore, changes in a property's taxable land assessment value will result in a change in the rental charge for associated public space. Unlike BID taxes, public-space rent is charged to the renter as a separate bill. This requires extra attention to avoid those pesky penalty and interest charges. 

Special assessments 

A variety of supplementary special assessments may arise to fund city-wide projects. Examples of these charges include a ballpark fee, Southeast Water and Sewer Improvement fee and the New York Avenue fee. The levy of these assessments is governed by specific criteria set forth in the related DC Code provision. 

Given the often-complex nature of the code, taxpayers may choose to consult a tax or legal professional to help navigate these less-common levies. 

Credits 

A credit on a property owner's tax account will likely come as a welcomed surprise, but the taxpayer should give these circumstances the same scrutiny they would give to unexpected charges. Understand that a credit is not free money, nor is it always an accurate designation. 

If a credit appears on the account, it will likely stem from a prior overpayment. This may reflect a reduction in tax liability that occurred after a bill was issued. Other possible causes include a DC Superior Court Refund Order, a dual payment from a third-party vendor or a prepayment of the full year tax liability on a first-half tax bill. 

Before enjoying the benefit of the lowered tax liability, it is important to verify this credit is justified. If the credit was wrongfully applied, a taxpayer will still be liable for the remaining balance. The District may issue a corrected bill for the outstanding amount, or the balance may appear on a future tax bill. A failure to remedy this balance can once again lead to penalty and interest charges. 

Penalties and interest 

The most unwanted surprise charges are penalties and interest. These charges can arise under several circumstances such as when the taxpayer has failed to file a yearly income and expense form with the District, or after missed, late or incomplete payments. 

Penalties and interest can cause a headache for taxpayers. The District will apply any future payment to penalties and interest before the account's principal balance. Therefore, it is easy for a small charge to cause a cascading liability if it is not timely addressed. In addition, while a taxpayer may petition for these charges to be waived, this process is often lengthy and the issuance of such a waiver is at the sole discretion of the OTR. 

The prospect of navigating these charges may seem overwhelming but it is a vital part of owning and managing real estate in the District. Therefore, it is best to learn the tax rules or consult with a local tax attorney who has experience dealing with these issues, as well as with the corresponding governmental entities. A knowledgeable expert can sort through this complicated web of liabilities, penalties and errors.

Georgia taxpayers should start preparing arguments to lower their property tax assessments.

Few commercial properties emerged with unscathed values from the harsh economic climate of 2020. Yet Georgia and many jurisdictions like it valued commercial real estate for property taxation that year with a valuation date of Jan. 1, 2020 – nearly three months before COVID-19 thrust the U.S. economy into turmoil.

This means governments taxed commercial properties for all of 2020 on values that ignored the severe economic consequences those properties endured for more than 75% of the calendar year. When property owners begin to receive notices of 2021 assessments, which Georgia assessors typically mail out in April through June each year, property owners can at last seek to lighten their tax burden by arguing for reduced assessments.

The pandemic hurt some real estate types more than others, however, and with both short-term effects and some that may continue to depress asset values for years. For taxpayers contesting their assessments, the challenge will be to show the combination of COVID-19 consequences affecting their property, and the extent of resulting value losses.

The experiences of 2020 can serve as a roadmap for valuations in the current year and, in certain settings, in future years.

A three-pronged attack

COVID-19 can inflict a three-pronged assault on a commercial property's value, and taxpayers should explore each of these areas for evidence of loss as they build a case for a lower assessment.

Widespread losses. The first prong of the trident may be a drop in value stemming from an overall decline in the market. Like the Great Recession of 2008, the pandemic has reduced many property values by impeding economic performance in general.

Reduced income and cash flow, for example, can indicate reduced property value. Valuing the property with a market and income analysis approach can reveal this type of loss.

Reduced functionality. Is the property's layout or format less functional than models that occupiers came to prefer during the pandemic? In Georgia, functional impairments may have curable and incurable components beyond normal obsolescence. In other words, when changing occupier demand has rendered a property obsolete, there may be some features the owner can address to restore utility and increase value.

Adverse economic trends. Economic factors occurring outside the property can suppress property value. Georgia tax law recognizes that economic trends can reshape market demand and render some property models obsolete. This economic obsolescence can be short term while the economy is down or a permanent change.

Subsector considerations

Retail. Big-box stores, malls and inline shopping centers had already experienced a functional decline and an economic downturn, both of which accelerated as shopping habits changed during the pandemic. Big box properties were already becoming functionally obsolete as retailers reduced instore inventory requirements and shrank showrooms, which left little demand for the large-format buildings.

Moreover, outside economic factors such as declining instore sales, competition with ecommerce retailers, and high carrying costs have also undercut the value of these properties. The pandemic accelerated this decline, and it is unlikely there will be much, if any, recovery.

Hospitality. The pandemic has severely diminished travel and vacations, and hotel vacancies have skyrocketed. The income yield per room is declining. Operating costs have increased per visitor as amenities have been shut, curtailed or reconfigured. Many hotels have eliminated in-house dining and offer only room service.

The cost to maintain kitchen services is disproportionate to the number served. This decline is solely a product of COVID-19 and, over time, will revert to near normal. Some increased costs may remain elevated, such as extra cleaning supplies and labor to disinfect the property.

Office. COVID-19's effect on office buildings, especially high-rises, may be long-lasting. Fully leased buildings have seen less of a direct affect, but properties with significant unleased space are already hurting. Demand will diminish as more employees work remotely and companies consolidate with shared workspaces, motivated to reduce occupancy cost. This trend will produce both functional and economic effects on the value of office buildings.

Industrial. To a lesser extent, some manufacturing plants can suffer industry-specific economic consequences of COVID-19. Reduced travel has compelled airlines to reduce flights and sideline aircraft, reducing the demand for new and replacement aircraft. Less aircraft being built reduces the value of aircraft manufacturing plants, including the buildings that house them. Likewise, oil production, storage and consumption is down, due to reductions in leisure and business travel and commuting as more people work remotely. Excess capacity for drilling, storage and processing petroleum makes those facilities temporarily obsolete.

Multifamily residential. COVID-19 may have had little negative effect on multifamily complexes. During the pandemic, the supply of available housing on the market has contracted, driving up rents. As a result, apartments remain in high demand from renters and investors, although some areas may be overbuilt.

Despite high occupancy rates, properties may have non-paying or late-paying tenants. It would seem that yields per square foot may be higher, which would suggest increased property values for apartment complexes now. This is not always the case, however, and multifamily values must be considered individually.

Expect resistance

COVID-19 has also affected the mindset of taxing authorities, whose operating costs have remained the same or increased during the crisis. Taxing authorities will be reluctant to decrease tax revenue and will push back against property owners' arguments for reducing taxable values.

Just as individuals have taken personal health precautions against COVID-19, property owners must take precautions to protect the financial health of their properties from the virus' detrimental effects. All commercial property owners in Georgia should carefully examine assessment notices. Wise owners should strongly consider consulting with property tax experts to determine whether to file an appeal.