Tax issues

Taming Your Taxes

Consider Market Factors to Help Lower Property Taxes.

While property taxes are one of the most significant expenses affecting a property's bottom line, many owners don't take advantage of available strategies to reduce them. Especially in a slow economy, market- and property-specific factors should be considered to reassess a property's value and possibly lower its taxes. However, tax assessors aren't necessarily attuned to market fluctuations or the particulars surrounding a certain property type, and owners often fail to point out such circumstances during revaluations.

In addition to changing market conditions, owners should be aware of timing and local regulations in order to mount a successful property tax challenge. Commercial real estate professionals who own property can benefit from knowing what details to consider when challenging taxes; the information also may help clients and investors looking to improve a building's profitability.

General Strategies

The year a property is revalued or reassessed usually is the best time to challenge an assessment. All jurisdictions reassess properties on a regular basis -- typically every two or four years -- and each jurisdiction has unique regulations for how and when owners may challenge property tax assessments.

Owners considering a challenge should be aware of these requirements; if you miss a deadline or fail to follow the prescribed appeal process, you may lose the opportunity to dispute the assessment until the following year.

When analyzing a property after a municipality's revaluation, consider the following factors to determine if a reassessment is justified.

Did the Purchase Price Trigger a Tax Increase? Certain jurisdictions allow assessors to revise valuations after properties change hands. Invariably, those revisions reflect sales prices significantly higher than assessed values. Even if a sale does not trigger a reassessment, the purchase price could be the basis of an increase for the next revaluation cycle.

If you recently purchased a property and the assessed value increases, consider the following questions.

  • Did the purchase price include personal property?
  • Did any special financing terms or one-time tax credits influence the purchase price?
  • Was the property purchased as part of a going concern and the sales price on the deed is the total of all assets, not just the real estate?
  • Did the purchase price include the value of the business operated on the premises?

If the answer to any of these questions is yes and if the revised value assessment echoes the sales price, an appeal probably is warranted.

Properties involved in Internal Revenue Code Section 1031 tax-deferred exchanges are not subject to reassessment. The Uniform Standards of Professional Appraisal Practice doesn't require appraisers to reassess these properties since exchanges are not arm's-length transactions.

Has the Market Changed? Fair or market value is the normal value standard for assessment purposes, but a number of market factors may have influenced the property and/or business since the assessor's date of value. Pay attention to overall value trends in your particular geographic market and take note if similar properties have sold for prices significantly less than your property's current assessed value.

The value of an income-producing property is extremely sensitive to changes in the market, so determine if the market has softened for your particular property type. When the market or overall economy slows, vacancies rise, rental rates decline, and landlords must offer incentives to attract tenants -- all factors that decrease a property's net operating income and value. In addition, when a property's performance is low, investors require greater returns on their investments, which further decreases value. Assessors must consider such factors when revaluing income-producing properties. Documentation of the changes in an asset's profitability should be available to substantiate and reinforce the claim of a value decline.

Has the Property Changed? Significant changes in use and/or configuration of a specific property also may serve as the basis for a property tax reduction. Numerous state statutes and regulations authorize reductions in assessed value, regardless of the revaluation date, if the property has sustained any casualty damage since the last revaluation. The assessor should be informed of the loss or impending loss of a major tenant, especially if the property's future occupancy is questionable or uncertain. Contamination on or near the site also may impact the assessed value, as well as the presence of mold or the accurate description of the property as a sick building.

Although more difficult to argue successfully, ownership or management changes also may impact value, depending on the new owner or manager's status in the market and focus for the property.

Is the Assessed Property Similar to Comparable Properties? Many jurisdictions require assessors to render equitable assessments so that select taxpayers do not bear a disproportionate share of the community's tax burden. Therefore, similar properties should be assessed at comparable values per square foot, acre, or unit. If your property is not unique, research assessments of comparable properties and determine whether the same unit of measurement and value is employed. If disparities are apparent, you may have a discrimination claim against the authority responsible for the assessment and collection of taxes.

If the property is unique, you still can challenge the valuation basis, but it is more difficult to make an inequitable assessment argument.

Property-Specific Solutions

In addition to employing these general strategies, property owners should be aware of factors affecting each specific property type. If an assessor uses a computer-aided mass appraisal system to value properties, property-specific factors are not always considered and may be the basis for a value reduction.

Office Properties. Economic obsolescence in the form of competitive developments may depress the value of an office building. Owners should ask themselves the following questions.

  • Do newer, more modern office buildings surround the property?
  • Are the property's floor plates or mechanical systems less than ideal for tenants with sophisticated needs?
  • Are deferred maintenance or necessary capital improvements driving down value?
  • Is the building's assessed value greater than other office buildings with higher-quality amenities?

If the answer is yes to any of these questions, property owners should conduct a more detailed valuation analysis.

Industrial Properties. Regardless of the property's use, owners should ensure that assessments based on fair market value accurately reflect changes in industrial market conditions. For example, the features and configuration of older industrial properties may not be as efficient or functional as they once were. Multiple-story warehouses and factories usually are not as desirable as modern single-story facilities with process-oriented layouts. Mature properties centrally located in commercial districts may not command the rents of industrial parks that can accommodate heavy traffic with convenient access to major roadways.

Deferred maintenance and capital improvements may be even more significant to the value of an industrial property. Manufacturing plants and warehouses endure a great deal of wear and tear, and property owners should make assessing authorities aware of any unusual or major repairs that may be necessary. On-site or adjacent contamination also depresses value.

Retail Properties. In addition to macro market changes influencing value, retail properties are vulnerable to neighborhood demographic and tenant mix changes. Although these changes are a common consideration of real estate investment professionals, assessors don't always take them into account. Hence, owners sometimes need to remind assessors of the value difference between a shopping center housing large discount retailers and one that attracts luxury specialty stores.

The loss of an anchor tenant usually has a huge impact on a retail property's value, and assessors oftentimes erroneously assume that a departed anchor tenant easily can be replaced. They frequently don't adjust for the loss and ripple effect that an anchor's departure may have on smaller retail tenants.

As retail centers age, competitive developments, design, and functionality quickly become issues. Many major retailers require properties built to their specifications that differ markedly from those of 20 years ago. For example, supermarket design and requirements have changed dramatically; these stores now serve as banks, dry cleaners, and pharmacies in addition to places to purchase groceries. Many older grocery store properties that are either vacant or the homes of clearance centers and off-price retailers should not be in the same value categories as modern supermarkets.

Multifamily Properties. Assessors should know about any units that are committed to rental subsidies and the nature of those subsidies. Most subsidies are supposed to compensate property owners for the fair market rental value of the units, but the guideline amounts paid by the reimbursing agency may not necessarily reflect the same fair market value commanded by comparable properties as seen through the assessor's eyes.

Changes in neighborhood socioeconomic statistics and tenant mix also are good reasons to re-analyze a property's assessment. If rental rates have been decreasing or are not rising at the same rate they once did, the owner should verify that the assessor has taken these factors into consideration.

Owners also should confirm that the assessed value is not measured against other residential rental properties that may offer more or better amenities such as pools, tennis courts, clubhouses, and garages. If it is, an assessment reduction may be justified.

Hospitality Properties. In response to the slow economy, decreased revenue per available room and occupancy rates have caused many hospitality properties to be worth much less than they were 18 to 24 months ago. Assessed values with dates of value in this time span should reflect those changes.

Owners of older properties suffering from economic and physical obsolescence also should ensure that the values of their holdings are not being measured against superior assets. For example, hotels lacking certain amenities such as health clubs, Internet capabilities, and adequate meeting facilities should be valued at less per room than similar hotels providing such amenities.

Benefits of Reduced Property Taxes

When owners successfully reduce property taxes, the effects are dramatic. Minimized property taxes result in higher net operating income and enhanced property values, marketability, and appeal. If the tax expense is passed through to tenants, reducing property taxes may attract new tenants or encourage existing tenants to stay.

Owner-occupied properties also benefit from reassessing property taxes. A reduced tax burden adds to a business's profitability and increases cash flow, which enables the property owner to invest more money in the business operations, property improvements and expansions, or other investment endeavors.

Commercial property owners must be proactive to ensure that all factors influencing the ad valorem assessment of their properties have been considered by an assessor. If a property owner is unsuccessful in obtaining a reduction from the assessor, each jurisdiction has an appeal process that must be followed to obtain due process. A final option for property owners who do not have the time or experience to pursue these strategies is to engage a property tax specialist.

Elliott B. Pollack and Laura A. Bellotti

Elliott B. Pollack is chair and Laura A. Bellotti is an associate in the property valuation section of Pullman & Comley LLC in Hartford, Conn. Contact them at (860) 424-4300 or ebp@pullcom.com and lab@pullcom.com.

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