A View at 10,000 Feet

Valuations

Local assessors have accepted the reality that real estate values have gone down, and most appealed real estate should be at, or close to, its low point in the assessment valuation /economic cycle by now. If you have not appealed, it is almost certain that the valuations are too high. More than one assessor has stated that he or she only gives reductions to non-homeowners if they appeal.

In the early years of the recession, late 2007 through early 2009, it was difficult to obtain assessment reductions as the downturn was not fully visible on Main Street. Many assessors told us there was no recession in their jurisdictions and rejected appeals. They struggled to hold on to old market sales as indications of current market value. By 2010, the recession was visible and taxable values began their decline.

In 2011 there was a mixed result. Some jurisdictions that held off warranted reductions made adjustments this year and others continued to mark down taxable valuations. A new pressure to increase taxable values in uncapped jurisdictions arose due to market sales activity in selected markets. This was most visible in the apartment sector as rent increased, cap rates fell and sales prices climbed.

In 2012, there will be horizontal movement in assessment values for most property types. Market sales of apartments and some upper-end office and retail properties may draw renewed assessor attention if traded at values higher than assessments. Complex assets (mixed use, manufacturing and processing), including infrequently traded assets, may still be seeking their initial low points. Economic and political uncertainties will continue to offer instability. There is concern that the recent market transactions may create a bifurcation of cap rates based on asset quality that will not be properly recognized in the property tax world. This could put upward pressure on future values for these asset classes.

Jurisdictions are aggressively looking for any market strength in order to strengthen their fallen tax bases, particularly for non-voters, as single family homes continue to face uncertainty in market demand and pricing.

The BOMA Kingsley Report states that fixed expenses dropped $.40 psf in 2010, a decrease of 8.8 percent, which was largely driven by decreases in property tax expenses.

Tax Rates

The setting of tax rates for schools and government is a localized process. At this point in the recession, most jurisdictions are aware that voters will not take increases lightly and have been working to reduce their size and services and increase overall efficiency. Job layoffs reported in 2011 have included a large number of government employees.

A large portion of the government cost structure is accredited to schools and imbedded pension and union costs. This has caused pressure to reduce or outsource other government service levels. These are often the most visible to homeowners and the most sensitive to reduce or eliminate.

Tax rates are driven by both the overall government budgets and the size of the tax base. A reduced tax base automatically increases the tax rate, assuming no budget reductions. Those assets with taxable values that have fallen by a greater percentage than the tax base pay lower taxes overall, and conversely, those that rise faster could pay disproportionally more during the recovery stage if the recovery is not broadly spread across the tax base. In effect, the first assets to regain value may subsidize the overall base until the recovery becomes broader.

The Tax Foundation found that between 2009 and 2010, real estate taxes rose in relationship to median home prices in all but two states, as shown on this map.

Some examples of shifts in 2011 include:

• Arizona values fell by 18 percent, but tax rates on average increased 15-20 percent;
• Washington values decreased by 8.5 percent and tax rates increased five to 17 percent;
• Maryland and D.C. value changes varied at the asset level, but tax rate changes ranged from flat to small decreases;
• Minnesota reported nominal tax rate increases overall, but some of our clients are facing 10 percent increases with no value decreases.

Selected State Insights

Arizona

We found that values have been run down pretty quickly with offsets in the local tax rate as indicated in the article above. A number of clients looked at acquisitions that would test those valuations, which would imply reductions are at their lowest levels.

California

Legislation Extends Change in Ownership Filing Deadlines and Increases Late Filing Penalties (S.B. 507)

The deadline to file has been moved from 45 days to 90 days. Failure to file penalties for non-residential property increase to up to $20,000.

Review and Budgeting Concerns

Since property values are trended annually based on Proposition 13, unless a one-year reduction occurs, all location assessments should be reviewed for the Proposition 8 value in a down market. Properties acquired as early as 2003-04 may qualify for a Prop 8 appeal. Many properties that have Prop 8 reductions will begin to lose them as the recovery takes hold. This could result in year-to-year comparison growth in excess of two percent.

Changes to Prop 13

Discussion continues on changing Prop 13 for commercial properties. This can be monitored directly at the California Taxpayers Association website. At this point nothing appears immediate, but the parties continue to position their causes.  

First American Commercial Real Estate Services, Inc. v. County of San Diego

In this case, the Court of Appeals of California, Fourth District, found there was no statutory basis to cancel and refund a late payment penalty of nearly $600,000 against a tax service provider that did not submit a client's $6.3 million bulk California property tax payment in a timely manner because of an internal error in formatting of a spreadsheet used in making wire transfers. The payment was inadvertently hidden on the spreadsheet and was therefore overlooked. In response to an email concerning the missing payment, the service provider wired the money to the county the morning after the deadline. The county then imposed a statutory 10 percent penalty.

Sacramento County

The gross assessed value of real estate in Sacramento County fell by $4 billion, reducing the tax revenues for cities, schools and other taxing jurisdictions by approximately $40 million. The assessor's office reviewed the market value of residential, commercial and apartment properties. Many of these reviews resulted in negative adjustments to assessed values below their Proposition 13 values.  The adjustments are referred to as Proposition 8 adjustments. Owners of commercial and apartment property who believe their market value has declined below their factored Proposition 13 value should file real estate tax appeals.  

California Senate Bill 342, 2011-12 Session

This bill will prohibit a person from charging a contingent fee for any matter involving a tax imposed under the Revenue and Taxation Code, and would impose a penalty for failing to comply with this requirement. Under the code, notwithstanding any other law, no person shall charge a contingent fee for services rendered in connection with any matter before the State Board of Equalization, Franchise Tax Board or any assessment appeals board, or any other matter involving a tax imposed under the code.

EHP Glendale vs. County of Los Angeles

This is a hotel valuation case that has been remanded for re-hearing. Valuation issues include the allocation of purchase prices to taxable and non-taxable components of the transaction. It appears the buyers did not do purchase price allocations and are now arguing for their computation and recognition. A number of hotel valuation cases are now awaiting this decision.

Colorado

The state revalues every two years on the odd year. We found that most of the Tech Center properties appeared to benefit most in the assessment process. This was perceived as a possible overreaction to the real estate cycle that will be corrected at the next revaluation. Other properties and types were found to be pretty accurately assessed, reducing the number of appeals.

Connecticut

Revaluation – 48 Municipalities (including Hartford)

Forty-eight municipalities are planning to conduct revaluations effective Oct. 1, 2011.  The municipality may contact property owners in the coming weeks to schedule physical inspections of properties. A revaluation notice containing the proposed new value of the property will be mailed in the latter part of 2011. The property owner can attend an informal hearing with the revaluation company or the assessor's office to discuss the new assessment, which should represent 70 percent of the fair market value of the property. The deadline for formally protesting an assessment to a municipality's board of assessment appeals is Feb. 20, 2012.

In 2012, the revaluation programs continue to be scheduled, including Stamford. The assessor has stated that taxes will go up for homeowners since the last assessment was completed in 2007 and captured some peak market transactions.

D.C.

New Real Property Tax Appeals Commission Established

Recently enacted D.C. legislation addressing real property tax administrative appeal matters abolishes the current Board of Real Property Assessments and Appeals and establishes in its place a new Real Property Tax Appeals Commission. The newly established Real Property Tax Appeals Commission will review real property tax assessments and classifications and also hear other related appeals. The commission is composed of a full-time chairperson, four full-time commissioners and six part-time commissioners, all of whom must be appointed by the District's mayor with advice and consent of the District's council. Once the commission is established, a commissioner will generally serve a four-year term.

Florida

Florida assessors raised values for apartments and lowered the values for office buildings, warehouses and some manufactured housing communities. Overall, the values are fair and appear to recognize the slow market recovery. 

We are also starting to see some divergence in Full Market Value and Capped Values. Full Market Values are used to compute school taxes, while Capped Values are used for the balance of the levy. Currently, for non-homestead properties, the capped value cannot increase any more than 10 percent, assuming no material changes to the property. 

There is a planned referendum for 2012 to reduce the capped value increase from 10 percent to seven percent with some discussions of dropping it to three or five percent. The actual wording is still being determined along with the date for the vote. Supporters include realtors (seeking foreign home buyers) and ICSC. The opposition includes BOMA. 

House Joint Resolution 381 lowered the Business Property Cap from 10 percent to five percent earlier this year. The Taxable Market Value is used to calculate the school tax portion and the Taxable Capped Value is used to calculate the remaining taxing entities.

Our Insights

Apartment values increased overall by about six percent and in most circumstances, (except in two cases), we were not able to appeal the value increases.

Office buildings saw an overall reduction in value and those values are below our target values. In a few cases where the properties sold in 2011, we see an opportunity to appeal the values because intangibles were recognized on the closing statements. To make the case of intangibles stronger, the next step would be to state their amounts in the purchase statements. We will see if the property appraisers and boards of review are willing to recognize the intangibles. Under Florida law, a property appraiser must recognize usual and reasonable fees and costs of sale. These fee deductions from the sales price are referred to as the First and Eight Criteria. The recognized practice is to deduct 10-15 percent from the sale price. However, many property appraisers are not willing to use ranges and require details.

A number of 2011 formal appeals are still pending at this time.

The time frame in which a taxpayer may demand reimbursement because of a payment made in error for delinquent taxes has been shortened from 24 to 12 months.

Georgia

The legislative freeze on value increases expires in 2012. Fulton County values generally remained flat. Collar counties values saw more proactive minor decreases, but often surprising increases in tax rates. Appeal activity remains high and hearings delayed.

Gov. Nathan Deal has ordered that the rate of taxation to be levied against and collected on the amounts of taxable property returned by or assessed to each taxpayer and upon the value of all property in Georgia subject to ad valorem property taxation for general purposes, including the support for county schools, is one-fourth of one mill on the assessed value of all taxable property. The total state ad valorem tax rate is 25 cents for each $1,000 of assessed value of property and is levied to meet the appropriations made by the General Assembly for Fiscal Year 2012.

Illinois

Cook County revalues CBD in 2012

The triennial system continues with the CBD section of the city scheduled for revaluation in 2012. 

Change in Assessment Ratios

The 2009 tax year, pay 2010, marked a major change in the classification ratio for non-residential property. The drop to 25 percent for commercial, industrial, retail and warehouse facilities was missed by many owners as their assessment remained unchanged, but their market value increased 34 percent or more.

Tax System Necessitates Repetitive Appeals

The assessment system frequently necessitates appeals year after year, often addressing the same system. Miss the appeal and taxes rocket a year later.

CBD Office Properties

In 2011, CBD office properties appeared to remain flat overall. However, some retail and parking operations have been targeted out of cycle, necessitating repetitive appeals.

Budget Shortages and TIFs

There are political discussions to review and limit TIFs, as well as properties applying for abatements. There are also discussions of a new business service district being extended off State Street to cover the loop that will increase operating expenses and will be collected through the property tax bill. The new administration has only begun to address a reported $700 million annual operating deficit. In Chicago, the school board just approved a $150 million dollar property tax increase.

The Collar Counties

The Collar counties are currently going through a quadrennial re-assessment cycle for 2011. Values have been coming in steadily since late in the third quarter of 2011. The values we received to date are overall flat or reduced compared with 2010. 

Suburban Insights

• Manufactured home values have been flat or reduced. 
• Apartments have seen a slow increase in values due to the strong apartment market. Recent sales are facing sale price assessments.  
• Office buildings have seen some values go down. This market segment in the suburbs has large vacancies and market sales have indicated considerably lower values.  
• Retail values have not been adjusted to the levels that current market rents or sales are indicating as assessors are under pressure to keep the values up. We have also seen new leases for mid to big box space after TIs—around or below $10 per square foot in some areas.

PTAB

PTAB received additional funding and the hope is that they will be soon able to settle cases faster than the current two- to three-year timeframe.

Indiana

Grant County Assessor v. Kerasotes Showplace Theatres, LLC, Indiana Tax Court

The Indiana property tax assessment of a 12-screen multiplex movie theater that was sold in a sale-leaseback transaction was upheld. Given that the uncontroverted testimony that sale-leaseback transactions often reflect more than just real property, the rental data from such transactions had to be approached with caution, taking care to ascertain whether the sales prices/contract rents reflected the property value alone or whether they included the value of certain other economic interests. Because the taxpayer's appraiser exercised that caution in his income approach analysis, and the assessor's appraiser did not, the taxpayer's appraisal was more probative than the assessor's appraisal.

A statewide revaluation is planned for 2012.

Iowa

Iowa ranks in the top 10 nationally for property tax levies on commercial and industrial properties. The legislature has been trying to create property tax reform to make the state more attractive for businesses. At this time, the legislature has been unable to reach a consensus.

Minnesota

We found assessors continuing to look for value increases and focusing on creating more uniformity in their tax bases. The appeal process remains cumbersome due to the extensive discovery and disclosure required in tax appeals. Tax rates increased as much as 10 percent for some locations, with four percent being common.

Montana

Lee v. Department of Revenue, Montana State Tax Appeal Board, Oct. 26, 2011

Insufficient evidence was presented to support an adjustment to the vacancy rate and the capitalization rate used to determine the value of a two-story, multi-use building with mixed retail and office space for Montana property tax purposes. The Department of Revenue used specific figures given by the owner to set the net operating income to determine the value of the property using an income approach. The taxpayer requested an adjustment to the department's net operating income to reflect a higher vacancy rate than the actual vacancy rate and collection loss. However, the department noted that when using the actual income and expense information, it was proper to use the actual vacancy rate. Additionally, there was insufficient evidence to demonstrate that any adjustment to the capitalization rate was warranted.

Nebraska

The Nebraska Department of Revenue has announced that the Nebraska real property tax credit determined for 2011 is $75.31 per $100,000 of valuation. The property tax credit will be shown on tax statements as a credit after full taxes levied (release from the Nebraska Department of Revenue, Sept. 13, 2011).

New Jersey

Chapter 91 Requests Do Not Require Noncompliance Explanations

In James-Dale Enterprises, Inc. v. Township of Berkeley Heights, the New Jersey Tax Court ruled that a New Jersey property tax assessor's request for income and expense information, commonly known as Chapter 91, does not have to include an explanation of the consequences of a taxpayer's failure to respond to the request in a timely fashion. The assessor need not explain the penalty for failing to comply with the request because Chapter 91 requires the assessor to include with the request a copy of the statute, which plainly sets forth the consequences of failing to comply with its provisions.

Our Insights

The state is nuanced at the local level. We found most of the properties we represent were at or close to the targeted values, but there were exceptions.

New York City

Class Two Residential (more than 10 units) values increased by $6.5 billion to $188.8 billion, an increase of 3.6 percent. Market values for large condominium developments increased 4.8 percent, while large cooperative apartments decreased 0.8 percent.  Class Two's billable assessed value increased 3.1 percent in Fiscal Year 2011.

Class Four Commercial Property market value grew 0.9 percent in Fiscal Year 2011.  Billable assessed value grew by 4.7 percent. Several sectors experienced declines in market value, notably hotels, factories and garages. Office building market values increased 2.2 percent, while commercial condos increased 2.8 percent.

Disclosure Provisions Required for Sale of Green Jobs-Green New York Properties

 New York property tax provisions were amended to require an entity offering to sell real property, which is subject to Green Jobs-Green New York, to provide a prospective purchaser with written notice of the property's obligations to the program, the amount of the original charge, the payment schedule, the remaining balance and the description of the energy-efficiency service performed on the property. The notice must be provided by the seller prior to accepting a purchase offer.

Property Tax Guideline Publication Issued (Publication 1000)

The New York Department of Taxation and Finance and the New York Department of State have issued a publication that explains the guidelines for the implementation of the property tax cap. The publication discusses key components of the tax cap, consolidations, dissolutions and technical information. The cap does not apply to New York City.

Exemption

A taxpayer's New York property tax exemption appeal for its assisted living facility was denied because the housing for retired senior citizens who were not poor did not constitute a charitable activity. Even though the petitioner offered discounted rates to some of its residents during the tax year at issue, the taxpayer was not providing housing to low-income individuals and, therefore, was not entitled to the exemption (Pine Harbour, Inc. v Dowling, Appellate Division of the Supreme Court of New York,  Nov. 3, 2011).