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David J. Crapo, Esq: Are You Being Taxed for your Reputation?

Nov 212011

A recent Utah Supreme Court decision may influence taxes throughout the country by clarifying whether goodwill is a component of taxable real estate value. Most states exclude intangible property from taxation, so identifying intangible components of a business can significantly reduce property tax liability.

In T-Mobile vs.Utah State Tax Commission, the Court declared that accounting goodwill is intangible property and not subject to property tax. The Court defined goodwill as “a business’ reputation, patronage, and other intangible assets that are considered when appraising the business.”

The taxing jurisdictions argued that “accounting goodwill is not intangible property but rather taxable tangible property.” They relied on a 2000 Utah Supreme Court decision in Beaver County vs. WilTel to argue that the synergistic value of a company’s intangible property, working together with the tangible property, constituted enhanced value and was taxable because the enhancement value was directly attributable to tangible property.

As the taxing jurisdictions saw it, goodwill was enhancement value, and therefore taxable.

The Court disagreed with the counties and held that goodwill constitutes intangible property and is therefore not subject to taxation. The Court stated that goodwill includes such items as “customer base, customer service capabilities, presence in geographic markets or locations, nonunion status, strong labor relations, ongoing training programs, and ongoing recruitment programs.” The Court then stated that these items “are associated with the business being conducted on the property; they are not directly attributable to tangible property.”

By clarifying the accounting of goodwill, the Utah case provides a reference point and reminder for taxpayers nationwide. To ensure that property is not over-assessed and thus overtaxed, it is important to make sure the taxing jurisdictions have made all the proper adjustments to remove intangible property. And that entails the exclusion of business value attributable to goodwill.

David J. Crapo is a partner in the Bountiful, Utah law firm of Crapo Smith, the Utah member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at djcrapo@craposmith.com.

Kevin Sullivan: A Highest and Best Use Analysis Can Reduce Property Tax Liability

Property Taxation No Responses »

Oct 182011

Property owners often assume that an assessor has valued their asset under the correct use, but performing a highest-and-best-use analysis can prepare the owner with data to recognize and dispute an over assessment.

“The Appraisal of Real Estate, 13^th Edition” describes four tests which must be performed sequentially: Is the use legally permissible, physically possible, financially feasible, and maximally productive?

In a recent case in Texas, an assessor valuing a historic home operating as a bed and breakfast treated the property as a single-family residence. Tax counsel discovered that the property was zoned for commercial use and legally could not be a single family residence.

Having failed to meet the first test for highest and best use, the assessor incorrectly appraised the property at double its market value. Using the income approach and valuing the property under the correct highest and best use, as a bed and breakfast, lowered the assessment.

In another example, an assessor applied an appropriate land value to a high-rise condo development, but then applied the same per-square-foot value to the land under a nearby, free-standing retail building, inflating the latter property’s value. The principle of consistent use states that the land and improvements on one property must be valued based on the same use.

The assessor’s mistake was failing to apply a consistent use to the property’s land and improvements. While the land value suggested a high-density use, the existing improvements could not support that value. The property was not under an interim use, therefore the highest and best use was a free-standing retail building, requiring a lower land value.

A highest-and-best-use analysis can clearly demonstrate where deficiencies may exist in an assessor’s valuation. Performing this analysis can give you the tools you need to reduce your property tax liability.

Kevin Sullivan is an Appraiser and Tax Consultant with the Austin, Texas, law firm 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. Sullivan can be reached at kevin.sullivan@property-tax.com.

Walter Wolff: Lower Your Property Taxes with High Tech Tools

Property Taxation No Responses »

Sep 192011

Property taxes represent the largest operating cost for most real estate portfolio owners. By combining powerful technology with a solid data management plan, that pesky annual tax bill can likely be cut, adding dollar-for-dollar to the bottom line.

Successful property tax appeals depend on facts. Not only are facts about the property important, but data pertaining to competing properties, equality of appraisal, intangible components, market trends and macroeconomic forces play a vital role in obtaining meaningful tax savings.

Gathering information about your own property is easy. Rent rolls, income statements and deferred maintenance lists are readily available. Unfortunately, this is where most property tax appeal reviews and preparation end.

It’s often the thorough analysis of the myriad of outside data sources available that provides the ammunition needed to maximize tax savings at assessment hearings.

These data are not always easy to access, sort, compare, format and make ready for a convincing presentation. To perform an adequate job, the property owner’s tax specialist would need to allocate many days of analysis time for each property.

Now jump into the shoes of your tax consultant, who may be handling thousands of appeals for hundreds of clients in a very tight appeal window. Chances are many stones are left unturned.

Enter technology. Appropriate software and data management processes can yield consistent appeals results on a large scale. These tools leverage a variety of state and national data sources, both public and proprietary, to the taxpayer’s advantage.

Good software seamlessly assimilates a property’s data, tax roll comparables, recent sales, income models and cost formulas. Equally as important, these efficient systems allow full analysis of each property and printing of final reports in less than 20 minutes.

The next time you meet with your tax consultant, ask for a tutorial on how they analyze your valuations and prepare for hearings. If you don’t see a judicious use of technology incorporating third-party data and work-up automation, you may be leaving something big on the table.

Walter Wolff is chief technology officer at the Austin, Texas, law firm 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. Wolff can be reached at walter.wolff@property-tax.com.

Kieran Jennings, Esq.: A Proper Property Tax Strategy Saves Money

Property Taxation No Responses »

Aug 182011

There are essentially four elements in developing a strategy to minimize property taxes: The law, dates and timing, risk and reward, and a professional team. As in many aspects of real estate, there are practical considerations and then there are details to be addressed by specialists.

Here are some points to consider in your strategy development:

1. The law that governs property taxation can vary greatly among states, and practical knowledge of tax law is not confined to simply how frequently jurisdictions reassess, but also to how, and what, is being taxed? In certain states, for instance, property is assessed as it is encumbered by its leases. As a result, a property purchased and improved with a building on leased land likely will not be assessed equally to an otherwise identical, neighboring property. Understanding the law regarding what and how property is taxed remains key to knowing how or if, to fight your property assessment.

2. Dates and timing involve more than just a knowledge of deadlines. Based on knowledge of the law, the savvy tax payer will know the best time to contest their taxes or to close a deal. Dependent upon the jurisdiction, an investor that enters into a land contract or purchases a property’s underlying business entity may be able to put off for years the event that triggers an assessment change.

3. Risk and reward need to be balanced. In a number of states, an ill-advised tax contest can result in an increased assessment.

Taxing authorities are digging in their heels and some are on the offensive. Owners of real estate that is under-assessed, yet they decide to file tax contests simply due to the weak economy may find that the local jurisdiction has hired professionals seeking to increase the assessment to meet fair market value. Quality professional advice reduces risk.

4. Your professional team, including expert witnesses and local counsel, should consist of knowledgeable tax professionals that fully understand local tax law as well as individuals that understand valuation. Local knowledge is essential.

With a carefully thought-out strategy, you can work with the motivations of the parties to drive a settlement or avoid a hot-button issue with the judge or assessor.

Kieran Jennings is a partner with the law firm of Siegel Siegel Johnson and Jennings, which focuses its practice on property tax disputes and is the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at kjennings@siegeltax.com.

Chris Dicharry, Esq.: Knowing Your Demographics Can Reduce Taxes

Property Taxation No Responses »

Jul 122011

The value of property is influenced by demographic fluctuations. Thus, when property owners receive their tax assessment each year, it is essential that they and their tax professionals carefully examine demographic changes in the markets where their properties are located.

Estimated demographics are available at any time, but the end of a census provides a unique opportunity to mine for demographic gold.

What’s Important about Demographics?

A high-end shopping mall in a metropolitan statistical area (MSA) with a decreasing population is a prime candidate for a valuation reduction. The property owner’s ability to sustain sales is declining along with the MSA’s population, particularly if those leaving the area are high-income earners.

Shifts in population, household income or other demographics affect other property types besides retail. For example, a manufacturer may not sell to local residents the way a retail center does, but it hires from that community.

As population declines, the value of a manufacturing facility in that market will likely decline. This is particularly true if the manufacturer had targeted a specific MSA to maintain skilled employment levels.

Demographics are Readily Available

Anyone with a computer or iPad can access U.S. Census Bureau data across the United States and convert the relevant information into a compelling graphic.

For example, it has been widely reported in the media that the Century III Mall in West Miflin, Pa. is struggling. A comparison of 2000 and 2010 Census data shows a decrease of 6% in the population within a 30-minute drive of the mall.

Readily available data such as this can be used to create a compelling chart documenting the losses sustained by a mall owner. Using somewhat different data, a manufacturer can document the depletion of a skilled work force.

While many factors affect value, and such raw data may not be admissible for an appeal, it is useful for presenting to the assessor convincing evidence to support an argument for a tax reduction.

Chris Dicharry is a partner in the law firm of Kean Miller LLP, the Louisiana member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at chris.dicharry@keanmiller.com.

Raymond Gray: Can Property Taxes Be Fair?

Property Taxation No Responses »

Jun 082011

In states recognized for their fair property tax systems, five characteristics account for their being called fair.

1. The tax appraisal process is separate from tax levy and collection. Giving an appraisal district sole responsibility for assessing tax values removes valuation from political influence. It also promotes transparency, because a single value is established on a property for use by all taxing units.

2. All properties are treated the same and all values are set by an easily understood standard. The valuation of property based on 100 percent of market value each year accomplishes both of these goals. It is equal because the same standard applies to all, and is understandable because property owners understand market value. Systems with ratios such as valuation at a percentage of market value or with appraisal limitation caps that artificially limit increases, invariably create unfair taxation.

3. Information and the tax process are accessible. A single notice of appraised value is mailed for each property and the protest deadline is the same across the state. An owner can challenge the proposed value by filing a simple form, administrative level hearings are informal and decisions are immediate.

4. Value is comparable within commercial property types. If an investor purchased an office building for $100 per square foot, but unsold office properties in the market remain at $80 a foot, then the taxable value for the purchased property should be $80 per square foot. An equal and uniform statute allows comparison between the tax value of $100 per square foot property and the value of comparable properties.

5. The playing field is level. Systems that allow multiple appeals in valuation cases encourage governments to negotiate in good faith. The appeal process should consist of an informal administrative hearing and then a formal appeal to district court.

Commercial property owners bear the burden of unfair taxation in states where these five characteristics are not present.

Raymond Gray is a partner with the Austin, Texas, law firm of Popp, Gray & Hutcheson L.L.P., which focuses its practice on property tax disputes and is the Texas member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at raymond.gray@property-tax.com.

Stephen H. Paul: Weighing the Value of Valuation Methods

Property Taxation No Responses »

May 042011

Appraisers can choose from three approaches to determine what a buyer would pay for a commercial property. But which approach is the most appropriate method of valuation?

The cost approach assumes that buyers will pay no more for a property than it would cost them to build an equal substitute. The appraiser calculates the cost to build the property and subtracts physical, economic, and functional depreciation.

Appraisers prefer this approach for newer properties that lack an operating history. The cost approach is also preferred for unique or specialty properties because no comparable properties may exist.

The income approach assumes that buyers will pay no more for the commercial real estate being assessed than it would cost to purchase an equally-desirable, substitute investment. The appraiser calculates the net income from the property over a given number of years, and discounts the result to its present value.

Appraisers prefer the income approach for income-producing properties that are typically bought and sold by investors. However, this approach requires accuracy in setting the interest rate and predicting future expenses.

The sales approach assumes that buyers will pay no more for the property than it would cost them to purchase an equal substitute. The appraiser locates sales of comparable properties and adjusts the prices to reflect the subject property. Although this approach may be the most accurate in that it provides a price in a particular market, finding a truly comparable property can sometimes be difficult.

Whichever approach or combination of approaches is used, the value of a property should never be higher than that calculated under the cost method. A buyer would not pay more for a property than it would cost to build, unless something else was included in the value. Anything above the value given by the cost approach must be business value, which is excluded from value calculations for property tax purposes.

Stephen H. Paul is a partner in the Indianapolis office of Baker & Daniels LLP, the Indiana member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at stephen.paul@bakerd.com.

Howard Donovan: Improve Your Odds of Winning Property Tax Disputes

Property Taxation No Responses »

Apr 062011

In ad valorem tax disputes, commercial property owners and their tax counsel often are so focused on rent rolls, occupancy, capitalization rates and other big-picture considerations that they overlook special conditions affecting value. There is “ore to be mined” in less obvious areas, however.

Here are five factors to consider in making sure a tax protest covers all the bases.

1. Subsurface Conditions. Geology can weigh heavily in determining fair market value. Common examples include old mining activity, limestone formations and sinkholes, earthquake events, flood plains and periodic flooding. The property owner may already have information along these lines, and mining maps, flood plain maps and seismic activity information are generally available.

Look for release of damages provisions that waive the right to sue if there are surface impairments. Make sure that the property has not flooded in recent years, especially if it’s near a stream, lake or low lying area. Flood plain maps are periodically updated, so current information is crucial.

2. Environmental Impairments. Obviously, the presence of asbestos, petroleum products or other types of pollutants either in the improvements or subsurface will strongly influence value. Ensure that expert reports are brought current and provided to the appraiser.

Reports should address costs of remediation, which can be used to argue that value should be reduced by the costs. Finally, keep in mind the need for confidentiality with respect to this information. See if the jurisdiction will agree not to duplicate reports and to return them after review.

3. ADA Compliance. Even after 20 years under the Americans with Disabilities Act, many properties fail to comply with the act’s provisions. The costs of compliance can be submitted as reason to reduce assessed value.

4. Easements, Restrictions and Covenants of Record. Every jurisdiction that applies the fair market value standard recognizes that title restrictions, easements and covenants affect value and strongly influence market transactions. This is true not only of the subject property, but also of any property transactions cited by the assessor as comparable sales. Examples include use restrictions, size of the improvements, density, amenities and the accompanied assessments, curb cuts, traffic signals and other factors. Verify that your file includes current copies of such covenants, and that any appraiser is aware of these items.

5. Personal Property Returns. Most large commercial buildings, malls and shopping centers have associated personal property that is critical to property operations. Yet the personal property tax return is often a forgotten part of the overall value of the property.

Personal property values are generally calculated based on the depreciated original cost method, so make certain that the useful life of the personal property is realistic. Also check to see that the tax return excludes property that has been discarded or is no longer on site. If the real estate is the subject of a recent sale, find out what dollar value was allocated to the personal property and if that number is consistent with the values the tax assessor is showing.

Howard Donovan is a partner in the Birmingham, Ala. law firm of Donovan Fingar, LLC, the Alabama member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at whd@donovanfingar.com.

Michael Guerriero: Put a Lid on Tax Caps

Property Taxation No Responses »

Mar 072011

The recession has left its mark on the budgets of state and local governments nationwide. Revenue shortfalls have forced states to slash their budgets and, oftentimes, withdraw state aid pledged to local governments.

Cities, towns and school districts are now forced to raise property taxes, their main (and sometimes only) revenue source. Struggling with escalating tax burdens, taxpayers cry out to their elected representatives to put a lid on the always rising local property tax and support property tax cap initiatives.

The tax cap is an old device that’s found new life in these hard times. At the forefront of tax cap initiatives is newly elected Gov. Andrew Cuomo of New York, who proposes to limit the property tax dollars a school district can collect annually. The bill passed the New York State Senate and now must pass the State Assembly.

New York’s bill caps tax growth at 4 percent or 120 percent of the inflation rate, whichever is less. School districts may exceed the cap with voter approval, but voters can impose an even stricter cap or bar increases entirely.

Roughly 40 states have some kind of property tax restriction. Arizona, Idaho, Kentucky, Massachusetts and West Virginia have a fixed cap of 5 percent or less. Colorado, Michigan and Montana limit growth to the inflation rate; while California, Illinois, Missouri, New Mexico, South Dakota and Washington limit growth to the lesser of a fixed percentage or the inflation rate.

Tax cap advocates say a cap forces school districts to cut wasteful spending while causing little to no harm.

Critics note that a cap simply slows down the rate of tax increases and does little to change the main drivers behind high property taxes. For example, caps cannot slow increasing costs for health care or fuel, nor do caps lessen demand for essential public services.

History has shown that tax caps simply shift the burden of funding schools to other sources, such as income tax, sales tax, fees and state aid. The bottom line is, a tax cap simply places a lid on the problem and kicks the can down the road for others to deal with.

Michael Guerriero is an associate at the law firm Koeppel Martone & Leistman LLP in Mineola, N.Y., the New York State member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at mguerriero@taxcert.com.

Raymond Gray: Start That Property Tax Review Today

Property Taxation No Responses »

Jan 312011

It may seem odd to be thinking about commercial property tax appeals in January. Yet now is the best time to begin, particularly in Texas, which has an annual reassessment cycle and where the system works quickly and rewards those who prepare early. No matter where you are, however, advance preparation will usually pay off.

First compare your 2010 value to what you think the fair market value should be. This will give you an idea of what to expect for 2011. Review appraisal district records and determine whether assessors are using the income, cost, or sales comparison approach to value.

Follow these key points to keep your review on target.

Seven Simple Steps:

Know the deadlines for administrative appeals, litigation and payment of taxes.
Verify that the taxing records for your property are correct (square footage, net rentable, classification, zoning, etc.)
Diligently reconstruct the income and expense statement to remove non-realty income. This will insure that non-taxable intangible assets, such as business value, are not part of your taxable value.
Do not assume that the purchase price is equal to property tax value, whether for a new acquisition, or when reviewing the assessor’s comparable sales.
Determine whether your property is being taxed fairly in comparison to the competition. Newly purchased or recently constructed properties often are taxed at a higher value than the competition.
Consider whether your annual operating statement reflects the market as of the valuation date. Most states value property as of a certain date.
Consistently review the performance of your property tax consultant.

The sooner this work is completed the more options you will have available. Start now and you have the time to hire the right tax counsel — and they’ll have the time to do a great job.

Raymond Gray is a partner with the Austin, Texas, law firm of Popp, Gray & Hutcheson L.L.P., which focuses on property tax disputes and is the Texas member of the American Property Tax Counsel. He can be reached at raymond.gray@property-tax.com.