Tax appeal

Make friends with tax assessors.


from Retail Traffic OnLine, September 28, 2006


"Retail property owners (and their lawyers and accountants) say that the key is not viewing the relationship with assessors as being adversarial. Explain things clearly. Be nice. Desk pounding doesn't lower assessments. Good information does. To a great extent, working on property assessment is about building a relationship with the assessors.


The important thing to remember is that assessors are public servants trying to do a job. With cities and states strapped for cash, property taxes are an obvious area to try and increase tax revenues. In 2002 for example, New York City officials jacked up property taxes 25%.


In most states, property owners have a small window — a few weeks — to work with assessors between the time they make their valuation and the day it is finalized.


A key is to be prepared ahead of time — to look through your own numbers, check trends in the market and be prepared to make a case for why the assessment may be too high.


Begin early and monitor things on an ongoing basis. It's much more productive to deal with issues early on an information basis, rather than waiting until it becomes confrontational or a litigation situation.


It comes down to a key change in the usual mindset: Most of the time, owners talk about how great their properties are. But tax time means outlining the flaws.


If a property is underperforming relative to other regional malls, explain that. A regional or super-regional mall may be the only such property that an assessor knows. It may not occur to the assessor that the local mall is a dog compared to the one a couple of counties over.


Even after the deadline, owners have recourse in getting assessments changed. They can take their case to a review board and then on to court. Litigation is a last resort, of course, and it is very expensive, both in money and time.


But tax bills can be cut without going to court. Compare the assessment with an assessor's prevailing ratios between market value and assessed value. What you look for is not whether the assessment has changed much, but whether that assessment is still fair."


The assessor will use existing leases to generate an income figure in deriving an assessed value. Have market rents fallen since leases got signed? A judge may decide that that assessed value should reflect a combination of existing leases and market rents.


Even in states with property-tax caps, it's important to watch assessments. California caps annual increases at 2% over a property's base year — when it was last assessed or upon completion of construction. Thereafter, assessed value rises at the annual statewide inflation rate up to a maximum of 2%. If a property is scheduled for redevelopment and underperforming and the value rises 2% anyway, an owner should go see the assessor.


Even sophisticated tax departments may miss some wrinkles, such as the effects of retenanting or a shift to gross leases. For example, if five shops paying $25 per square foot get replaced with a single Old Navy store paying $12.50 per square foot, the big new tenant looks pretty spiffy to the assessor — but it generates only half as much rent.
The assessor needs to know that.


For many landlords, such retenanting is defensive and therefore shouldn't lead to a higher assessment. It's maintaining what you have — stopping an erosion — not creating an increment of value. The center looks nicer, but you're not boosting your net operating income.


In the same vein, assessors' models may assume properties use net lease structures — in which tenants pay for taxes, insurance and common area maintenance. But if tenants have a gross lease — in which the owner pays those extras — an assessor may overestimate income. It's important to clarify that so the assessors' models are correct.


But owners using net lease structures need to be wary of assessments, even if they aren't bearing the brunt of the cost. Because the tax gets included in rent, letting assessments balloon means rents could be rising faster than the rest of the market. If your property is paying more taxes than a competitor it puts your leasing people at a disadvantage.


Assessments can also spike when properties change hands. Sale prices are an obvious guide for the value of property.


But property sale prices may include value beyond the worth of the real estate. Assessors won't make that adjustment unless you spell it out for them. At the time of a sale an acquiring company should break out real estate value from other items. Non-real estate items might include above-market leases such as often occur in sale-leasebacks, creditworthiness of tenants and build-to-suit improvements financed through the lease. Spell out those items in a purchase agreement that documents the number that you are happy with,that you believe is the true value of the real estate."


An independent study of regional and national capitalization rates for retail properties is also a useful tool. Such studies cost from $2,500 to $15,000. Having such a document on file helps the assessor fend off politicians who want to milk the mall. Such a study shows where a property fits income-wise in the framework of other similar properties regionally and nationally — and can buttress an owner's argument for a lower assessment.


The keys to a successful appeal are establishing credibility with the assessing authorities and proving your case."

for more information see: www.houstonrealtyadviosrs.com