An Appraiser's Advice for Minimizing Commercial Property Tax Bills

Property taxes represent a substantial expense for owners and tenants. Property taxes can impact development by escalating holding costs of acquired land. Leasing, marketing and even tenant relations can be significantly impacted by property taxes. It affects net operating incomes of properties, and ultimately the value of commercial and investment real estate.

In general, properties should be examined each year to determine if a property has been over-assessed, and if that over-assessment can be effectively challenged. Assessing authorities have been known to make mistakes - for better or worse. Given the sheer number of separately identified real estate parcels that each county is charged to appraise indicates that the methods that the Assessors office applies, involves applying norms and generalities to individual properties. So it is the appraiser's job to bring in the specifics when the tax assessment of a piece of property is appealed.

Do Your Own Analysis

The best course for minimizing property tax liability is to evaluate each property on a case-by-case basis. Owners can check several factors to determine if a property has been over- or under-assessed. An initial step is to examine the accuracy of the physical criteria. It is not uncommon for assessors to make errors in the physical descriptions or size of site of properties. Another common mistake occurs when a property has been classified incorrectly. For example, a Class-B flex building may be classified as a Class-A building by the assessor.

One method is to determine whether a property has an equitable valuation compared with competing properties. For example, if a flex industrial building is valued at $80 per sq. ft., and a similar building across the street is valued at $70 per sq. ft., there is a good argument that the property has not been assessed equitably compared with the competition. When this situation appears, the next step is to prepare an analysis of the tax burdens of comparable properties in the subject's market. The selection of truly comparable comparables can often provide sufficient market evidence to support a tax reduction.

The second check is to examine property value using a fee-simple basis. Using standard or typical values for normal vacancies, expenses and income to come up with a value. For example, 95% occupancy might be considered a more typical occupancy rate rather than the current 100%. You should probably do both a leased-fee income approach and a fee-simple income approach and compare the values derived from those approaches to the assessed value.

A third check is to examine sales of like-kind properties. If sales per square foot of comparable buildings are being reported at values less than your assessed value per sq ft, then you may have an appeal opportunity based on the sales comparison approach.

Generally if the above steps find a clear and significant disparity between the market and the assessed values, presentation of the facts to the assessor is likely to result in an reduction of assessed value.

Assessment Issues and Arguments

When the case is not so clear, appraisers can assist with a variety of issues and arguments that can add strength to tax appeal cases. One factor often overlooked by the assessor is the impact on value of environmental contamination. Property assessment values can be reduced as a result of the recognition that the liability for cleaning up contaminated property has economic implications, which often lowers the value of a property.

Disputes often arise when the assessor applies mass appraisal techniques without taking into consideration a property's unique characteristics or circumstances. One unique component of the of many multi-family projects that is not commonly identified by the tax assessor is whether or not the rent for the units included all utilities. The basis on which the assessor's office developed an appraised value should be checked and compared not only to the subject but to the competition. In most cases, once assessors are given notice of an inequity or oversight, they are willing to adjust the appraised value accordingly.

Functional Issues

Industrial property owners are often able to appeal property tax appraisals with issues pertaining to functional obsolescence. Functional obsolescence relates to internal factors that have made a property functionally less desirable to own. Rapidly changing technology, for example, can curb the efficiency of processes, equipment, layout and design of a facility. The problem is that assessors are generally not able to keep up with how quickly manufacturing processes become obsolete.

In a mass appraisal, an assessor might take the original cost of a building and apply a various adjustment factors to arrive at a current estimate of value for the building. What that assessment does not take into account is that the actual economic life of a facility may have declined much more rapidly than the published adjustment factors show. Such functional obsolescence can often be measured by documenting excess operating costs.

A related issue for assessment is dealing with emerging technologies and new property types. Industrial facilities, for example, are being converted to telecommunications hotels - a property classification that did not exist three years ago. Another issue impacting the assessment of property is the impact that new building technology has on establishing property value. These days it is important to have access to bandwidth and fiber. Those buildings that have access will be competitive, and those that don't will be impact by greater functional obsolescence and will no longer be competitive.

Ultimately, appraisers can help keep owners and assessors by evaluating the emerging issues that affect property tax valuations. Appraisers constantly weigh factors that relate to property-specific and market criteria ranging from comparables to employment growth.

Appraisers have long recognized that hotel properties that have gone several years without a major renovation are less competitive and possess a lower value. When the appraiser can show that there is a need for significant renovation and that the assessor has not taken this into account, a lower assessment can often be obtained due to the need for renovation.

A second argument that can used to reduce the hotel's assessed value is based on the selection of an appropriate capitalization rate. Assessors tend to look at capitalization rates that are in line with other commercial properties. However, hotel properties are unique due to risks tied directly to business cycles and day-to-day occupancies rather than the overall real estate cycles. Other properties such as office and industrial properties are insulated from similar impacts through long-term leases. Reviewing the assessor's capitalization rate comparable can often be worthwhile.

Eliminating intangible values can reduce real estate taxes Identifying and quantifying intangible values, which is inherent in most large commercial and industrial properties, can significantly reduce the impact of recent sale prices on future property taxation. Intangible value has long been acknowledged by the courts in the operation of hotels which are typically recognized as being operating businesses rather than just real property.

However, in today's market, intangible value is clearly recognizable in many other property types. An example of this is a regional shopping mall, the value of which is geared largely to the operating agreements with the anchor tenants that produce the customer base for the in-line mall lessees. Gas Station, where the sales price is clearly related to the gallonage sold, are another. Also, the acquisition prices paid by REITs are directly related to their tax advantaged structure and their availability of capital. That portion of the purchase price paid for a property that is not directly allocable to land and building is not subject to taxation.

This concept reflects the critical difference between investment value and market value. The appraisal of real estate requires recognition of the differences between these two concepts. . Every REIT prospectus recognizes this with a statement that the company did not obtain appraisals of the market value of the properties and that the public offering price of the shares and the related underlying valuation of the company have been determined primarily by capitalizing estimated cash flow of the company available for distribution, rather than through a property by property valuation based upon historical cost or current market value.

It should be noted that estimating the amount of the premium paid by the REITs is an ongoing issue that ultimately will be decided by the courts.

Property Tax Solutions for Sold Properties

A property's sale price or value for refinancing is not always equal to its market value. Sale prices are often evaluated differently by taxpayers and assessors. Often assessors treat a sale price that supports their opinion of tax value as conclusive evidence of that assessment value. But, when a particular sale price does not support the assessor's opinion of value, they often claim that the sale does not represent market conditions or that one sale does not a market make.

Property owners too frequently elect to simply live with this dilemma until the sale of their property no longer controls the property's tax value. There are methodologies which can help in providing the assessor with an understanding of why the market value may be different then the sale price. First the criteria of equal-and-uniform assessment may be raised and secondly a market-rent analysis may explain the difference between sales price and market value.

Washington State has a constitutional provision mandating that taxation shall be equal and uniform. Simply put, similarly situated taxpayers should be treated similarly, or comparable properties should be valued comparably. However, there are few effective remedies to actually accomplish this. As a result, tax authorities often value a property based on its sale price without adjusting the value of comparable properties. This leaves a recently sold property at a competitive disadvantage to other properties that were not sold. Unique properties also, because of the lack of comparables, often fall into the same situation.

Often after a sale, the assessor will value the property at its sale price, which usually results in a substantial increase in taxes. An investigation should be made to see if any of the comparable properties experienced a similar increase, and did the ranking of the property, in relation to its competitors change afterward: i.e. if it was the 34th most valuable building in town before reassessment, did it remain the 34th most valuable building afterwards. By applying the equal-and-uniform provisions, a property's tax value can be reduced to that of it peers.

Many assessment authorities determine property tax value based upon a fee-simple appraisal approach, rather than a leased-fee appraisal approach. The basic distinction is that a fee-simple appraisal considers parameters such as market rent, while a leased-fee appraisal focuses on the actual or contract rent of the property. Taxpayers should evaluate the specific rent structure of the sale before electing not to pursue a reduction in value. If an evaluation determines that the sale was based on actual rent instead of market rent, a remedy for reduction may be available.

Preparing a Market-rent stratification analysis is often an effective methodology for estimating the appropriate market rent. It includes the consideration of the sizes of the rented spaces, the location of the rented spaces within the building and the type of tenant who will rent the space. Then, leases of the subject and comparables executed near the valuation date are applied to the stratification. The lease stratification analysis may provide evidence to explain why a sale price was higher than market value. By considering these solutions, taxpayers can proceed against the assessor even though the property has been recently sold or refinanced.

County Auditor Websites:

King County Assessments

Snohomish County Assessments

Pierce County Assessments